Three years ago, Muriel B. Cottrell came to Puget Sound Bank with a portfolio of nearly $100,000 in blue-chip stocks. On the advice of a salesman with the bank's brokerage operation, the 74-year-old widow sold the stocks and invested the proceeds in a U.S. government-securities mutual fund. But Cottrell says she was misled about how much her income from the fund would fluctuate--and about how much she'd owe in fees and taxes.

Now, Cottrell is fighting back. In March, she filed a complaint with the National Association of Securities Dealers against the brokerage, hoping to recoup about $21,000--the taxes and fees she paid plus interest. "I was just as green as grass," she says.

KeyCorp, which last year bought Puget Sound Bank, declines to comment on the case. But the banking industry clearly is worried by such complaints. Assets of proprietary bank mutual funds have exploded, reaching $218 billion this year (chart). Now, the other shoe is dropping--in the form of disgruntled investors who say they never understood the risks involved. The Comptroller of the Currency reports about 40 complaints so far this year, up from 14 for all of last year. And in the wake of this spring's market correction, securities regulators in such states as Texas and Florida say they are starting to hear from bank customers who insist they didn't realize that their funds could go down.

SHORTER LEASH? If more widows such as Cottrell complain that their life savings have been jeopardized, banking officials fear, Washington could act to tighten restrictions on bank investment activities. "With a stroke of the pen, legislators could wipe out the ability of banks to compete," frets John P. Mastriani, head of KeyCorp's brokerage operations.

Commercial banks have charged into investment products in the past decade. One result: Today, almost 3,000 of the nation's 11,000 banks are marketing mutual funds, either their own or those of an outside company. Critics charge that the expansion has been too aggressive. Many bank customers have switched funds from certificates of deposit or other insured vehicles into investments they didn't realize could lose money. After all, such transactions occur in institutions backed by the federal government. Colorado Securities Commissioner Philip A. Feigin says many customers are elderly, with little experience in market investments. "How could there not be complaints?" he asks.

In some cases, banks are trying to resolve problems early--and keep them quiet. One retiree from a small town in Maine, who asked not to be identified, says his local bank paid him the $4,000 plus interest he lost on a stock-and-bond fund last year after he complained he hadn't been told of the investment's risk.

But some squabbles are going public. In April, R.C. Hilton, a Tampa realtor, ran ads in the Tampa Tribune and St. Petersburg Times seeking others who have had problems with investments at Barnett Banks. Hilton had filed a complaint in December with Florida regulators contending that a Barnett employee persuaded him to transfer $50,000 in insured funds into a mutual fund without explaining that he could lose his principal. In a letter to the agency, which found no cause for action, Hilton says he lost nearly $3,400. Hilton won't say if he plans to sue.

Barnett officials won't comment on Hilton's situation. But Barnett's chief retail-banking exec, Tom Johnson, admits that some consumers are confused. In response, Barnett now employs "mystery shoppers" to ensure that brokers adhere to disclosure requirements. "It's not good for us to have an unhappy customer," he says.

UNDERCOVER. Among other things, unhappy patrons attract political scrutiny. The Federal Deposit Insurance Corp. plans to send undercover customers into banks to determine if they are giving investors adequate information. Securities & Exchange Commission officials say they, too, are taking a closer look at banks' sales practices. And bankers are particularly nervous about a bill introduced in October by House Banking Chairman Henry B. Gonzalez (D-Tex.) that would bar the use of a bank's name and logo on most mutual-fund offerings.

Bankers argue that the industry has addressed many of the critics' concerns. Wells Fargo & Co. has placed signs showing the FDIC logo with a red slash through it on desks where uninsured investment products are sold. This month, KeyCorp will begin training all 30,000 bank employees to educate customers on the risks of uninsured products. And many banks have already separated investment-product sales from the bank lobby by glass walls.

Bankers are hoping such moves will head off a possible groundswell of resentment from consumers--as well as the growing agitation in Washington. It's too late to stop Muriel Cottrell, though. She'll keep on fighting.

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