2 advises one family of funds, the Laurel funds; in addition, its parent company recently acquired the investment adviser to The Boston Company funds. Once the pending merger is completed, Mellon Bank and its affiliates, including Dreyfus, will be the largest bank mutual fund investment adviser, with $76.8 billion in mutual fund assets under management. This represents four percent of all mutual fund assets. 3/ The Mellon/Dreyfus merger is the most striking example of the recent growth of bank involvement in the mutual fund industry. Currently 113 banks or bank subsidiaries advise 943 mutual funds 4/ and bank mutual funds have $204 billion in assets, an increase of 29% since December 31, 1992. 5/ Banks also are increasingly active in selling mutual fund shares to the public. 6/ The Mellon/Dreyfus merger underscores the Commission's longstanding concerns with the existing statutory scheme, which permits bank securities activities to take place 3/ 4/ 5/ 6/ Additional details regarding the proposed merger between Mellon and Dreyfus were See Lipper Analytical Services, Lipper Bank Related Fund Analysis (2d ed. 1993). See id. Commentators have noted, however, that a large part of this growth is from the conversion of bank trust assets to mutual funds, rather than from retail sales. See M. Moore, "As Trust Conversions Dry Up, What's Next," American Banker, July 7, 1993, at 14. Mutual fund assets overall now exceed $2 trillion, an increase of 26 percent since December 1992. See Investment Company Institute ("ICI") Press Release No. 94-02, Jan. 27, 1994, at 4. In the first half of 1992, banks reportedly accounted for one-third of all new sales of 3 outside the framework of the federal securities laws. These concerns include: the risk of investor confusion; the potential for conflicts of interest to arise between banks and their affiliated mutual funds; and the need for regulation, examination, and enforcement programs that focus on investor protection, rather than bank safety and soundness and depositor protection. 7/ Although the parties to the Mellon/Dreyfus transaction are adopting voluntary restraints to address many of these issues, 8/ there is no guarantee that they will adhere to these measures in the future if faced with economic and competive pressures. In addition, no legally mandated safeguards apply to the growing number of banks that, like Mellon, are expanding their bank mutual fund activities (if, for the time being, on a smaller scale). These banks should not have the option of declining to submit to securities regulation. For earlier statements of the Commission's views on these issues, see, e.g., See Mellon Letter; letter from Frank V. Cahouet, Chairman, President, and CEO, Under the existing statutory framework, banks are excluded from the federal regulatory scheme for broker-dealers and investment advisers. 2/ These bank exclusions date from a time when banks were insignificant participants in the securities business, and applying broker-dealer and adviser regulation to banks was therefore unnecessary. That time has passed. Banks already are major participants in the securities markets, and it is likely that bank involvement in securities activities will continue to grow as their customers move, with encouragement from the banks, from insured deposits into mutual funds and other securities products that are uninsured. 10/ Yet the bank exclusions, a historical vestige of a simpler time, continue in effect. The proposed Mellon/Dreyfus merger, by virtue of its scope alone, demonstrates that the need for consistent and comprehensive regulation of bank securities activities is more pressing than ever. Securities activities need to be subject to functional regulation: uniform rules that are consistently applied by one expert regulator to all market participants, regardless of whether they are banks or securities firms. The following points illustrate why functional regulation is necessary in the current market environment: 2/ 10/ This testimony focuses throughout on banks' direct securities activities. Bank affiliates and subsidiaries that engage in securities activities, unlike banks that engage in such activities directly, are not excluded from regulation under the federal securities laws; affiliates and subsidiaries must register with the Commission and comply with the same requirements applicable to other broker-dealers and investment advisers. The American Bankers Association has predicted that "[s]ometime in the next few months, and probably sooner rather than later, mutual fund assets will exceed total commercial bank deposits. Already mutual funds hold a bit more than $2 trillion, while bank deposits stand at about $2.4 trillion." Bankers News, vol. 2, issue 4, Feb. 15, 1994, at 7. Similarly, the San Francisco Federal Reserve Bank has identified an ongoing "secular shift" from bank intermediation of funds toward mutual fund intermediation. See "Banks Turning to Mutual Funds as Shares in Household Assets, Credit Decline," BNA Banking Daily, Dec. 21, 1993. 3 outside the framework of the federal securities laws. These concerns include: the risk of investor confusion; the potential for conflicts of interest to arise between banks and their affiliated mutual funds; and the need for regulation, examination, and enforcement programs that focus on investor protection, rather than bank safety and soundness and depositor protection. 7/ Although the parties to the Mellon/Dreyfus transaction are adopting voluntary restraints to address many of these issues, 8/ there is no guarantee that they will adhere to these measures in the future if faced with economic and competive pressures. In addition, no legally mandated safeguards apply to the growing number of banks that, like Mellon, are expanding their bank mutual fund activities (if, for the time being, on a smaller scale). These banks should not have the option of declining to submit to securities regulation. 8/ For earlier statements of the Commission's views on these issues, see, e.g., See Mellon Letter; letter from Frank V. Cahouet, Chairman, President, and CEO, 4 Under the existing statutory framework, banks are excluded from the federal regulatory scheme for broker-dealers and investment advisers. 2/ These bank exclusions date from a time when banks were insignificant participants in the securities business, and applying broker-dealer and adviser regulation to banks was therefore unnecessary. That time has passed. Banks already are major participants in the securities markets, and it is likely that bank involvement in securities activities will continue to grow as their customers move, with encouragement from the banks, from insured deposits into mutual funds and other securities products that are uninsured. 10/ Yet the bank exclusions, a historical vestige of a simpler time, continue in effect. The proposed Mellon/Dreyfus merger, by virtue of its scope alone, demonstrates that the need for consistent and comprehensive regulation of bank securities activities is more pressing than ever. Securities activities need to be subject to functional regulation: uniform rules that are consistently applied by one expert regulator to all market participants, regardless of whether they are banks or securities firms. The following points illustrate why functional regulation is necessary in the current market environment: This testimony focuses throughout on banks' direct securities activities. Bank affiliates and subsidiaries that engage in securities activities, unlike banks that engage in such activities directly, are not excluded from regulation under the federal securities laws; affiliates and subsidiaries must register with the Commission and comply with the same requirements applicable to other broker-dealers and investment advisers. The American Bankers Association has predicted that "[s]ometime in the next few months, and probably sooner rather than later, mutual fund assets will exceed total commercial bank deposits. Already mutual funds hold a bit more than $2 trillion, while bank deposits stand at about $2.4 trillion." Bankers News, vol. 2, issue 4, Feb. 15, 1994, at 7. Similarly, the San Francisco Federal Reserve Bank has identified an ongoing "secular shift" from bank intermediation of funds toward mutual fund intermediation. See "Banks Turning to Mutual Funds as Shares in Household Assets, Credit Decline," BNA Banking Daily, Dec. 21, 1993. |