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Bank Leumi's mutual funds came up with a clever way to bypass the law requiring investment advisers to provide objective advice about investments. They created investment vehicles that had no equivalents and marketed them under the Best Invest brand name, so the advisers could safely route bank customers to them without being accused of favoritism.

But the funds may have been too clever. The Israel Securities Authority is now demanding explanations from Leumi and from two other banks - Hapoalim and United Mizrahi - which used much the same mechanism to avoid routing customers to rival funds.

The banks have until next Wednesday to provide the Israel Securities Authority with answers.

Watchdog investigations are not new to Bank Leumi. In the summer of 2003, the ISA began investigating suspicions that the bank's advisers were not adhering to the law requiring them to grant objective advice. Judging by the extraordinary sums raised by Leumi mutual funds Psagot and Pia, which have no outstanding characteristics, the watchdog suspected the Leumi investment advisers of plugging these funds exclusively. One single fund, for instance, broke records by raising NIS 1.7 billion on its first day.

ISA chairman Moshe Terry summoned Leumi chiefs Galia Maor and Eitan Raff for a tongue-lashing, and the probe spread throughout the Leumi group and reached other banks as well. The scandal all but paralyzed the Leumi mechanism for recruiting depositors to the funds; Psagot and Pia people were banished from the branches.

Investment advisers also began selling funds run by other companies - as they were supposed to do in the first place - and the result was that Leumi's funds did badly in 2004, at least from the perspective of raising monies.

However, in the first four months of 2005, Leumi mutual funds raised a stunning NIS 2.8 billion. Almost 60 percent of that money, NIS 1.6 billion, went into just three funds: Psagot Best Invest, Pia Best Invest Solid and Best Invest Dynamic. Psagot Best Invest and Pia Best Invest Solid changed their investment policy in late 2004; the third just added the "Best Invest" to its monicker.

The trick lay in Leumi's computerized advice system, unsurprisingly called Best Invest. The system, operated by investment advisers at the branches, factors in the customer's portfolio data and the risk level he wants, and builds a recommended portfolio.

The clever trick is that the managers of these three funds adhere to the advice of the Leumi investment advisers and change the portfolio component accordingly. After his data runs through the system, the investor is therefore advised that his best bet is to invest his money in one of the Best Invest funds.

One of the ISA's claims against Bank Leumi - and some other banks - is that the advisers are not proposing the best fund possible for the customer's needs. Rather, they are recommending the best fund possible from among their own bank's offerings. With this gambit, the bank can claim there are no other funds like these.

But now the watchdog is demanding copies of all marketing material pertaining to these funds, and information on how Leumi complied with the objective advice law.