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Are you now working at a paid job full time, part time, or are you not employed?

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27a. Are there any children under the age of 18 who live in your household?

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27b. And, how many adults age 18 or older, including yourself, live in your household?

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Approximately what is your annual total family income BEFORE taxes-- just tell me when I get to the right category.

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Thank you very much for your time. Have a nice (day/evening).

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Mr. LEWIS. I am Chris Lewis, Director of Banking and Housing Policy with the Consumer Federation of America. And CFA greatly appreciates the opportunity today to testify before the subcommittee on the subject matter of bank sales of mutual funds and other uninsured investment instruments and the proposed merger of the Mellon Bank Corp. and the Dreyfus Corp.

This merger, as I note in my written statement, now pending before various banking regulatory agencies, raises a number of critical public policy concerns. And chief among them from the perspective of the CFA is the certain increase, we believe, in consumer confusion about the degree of risk of investment products sold on the premises of insured institutions.

As one trade publication recently noted, the proposed merger “highlights all that's troubling about banks in the mutual fund business."

And, Mr. Chairman, we obviously appreciate the seriousness with which you and other members of the subcommittee and the full committee view the legal and public interest implications of this merger, and banks continued entry into the securities busi


Over the past two decades, creative interpretations of the GlassSteagall Act by banking regulators have permitted vastly expanded bank involvement in the mutual fund and other securities lines of business. We believe that the current head-long rush of the banking industry into the retail mutual fund business must be placed in perspective.

First, we know of no clamor by consumers for further expansion by banks into the mutual fund business. We monitor consumer demands nationwide and the organization is not aware of a consumer push for more mutual fund outlets, either operated by banks or other entities.

Second, we are aware that the banking industry enjoyed record profits last year as in the previous year. And there seems to be no emergency need to open new lines of business to protect the earnings of the banking industry.

Third, we are aware, as other witnesses have just testified, that there is widespread confusion among the public about the nature of risk associated with investment products, including mutual funds, peddled by banks.

Fourth, the Congress, through bills introduced by yourself and the chairman of the Banking Committee, is attempting to establish specific statutory guidelines to end the confusion among the banks, among the regulators, and most importantly among the investing public.

As others have testified, we believe, Mr. Chairman, that the banks' mutual fund sales practice currently at play in the marketplace are all too often designed to lead the unsuspecting customer into believing that good old Uncle Sam and the taxpayers are guaranteeing the investments.

In short, we believe the protective shield to the FDIC, long symbol of security for millions of American consumers, is being tarnished by bankers hell bent on becoming big time players in Wall Street's mutual funds markets.

The banking industry as well as the Congress and the American public, we believe, should want that shield protected. Certainly, the full faith and credit of the U.S. taxpayers symbolized by the FDIC logo should not be utilized by banks as a means, directly or indirectly, of duping consumers into believing that investments in the stock market are risk free.

And I do note in my written statement that we believe the facts are clear that we have a very serious problem here and that we do not need to go about studying whether or not there is a problem here. We do have a problem, we have a very serious problem. Which leads us to ask, what are the banking regulators doing to address this problem?

And I note in my statement that last month the Washington Post quoted data from the American Bankers Association, data that noted that the four agencies had produced four different answers about the seriousness of the confusion created by mutual funds bearing the identical or similar name of an insured bank. Two weeks ago, the banking agencies faced with mounting publicity and with the prospect of action by this and other committees finally decided that they were all part of the same government and came up with an interagency statement on retail sales of nondeposit investment products.

We believe that what has emerged in this "policy statement" is a set of lowest common denominators with "should" not "shall" the operative verb. And in a number of critical areas the interagency statement does not correct egregious practices.

Rather, and unfortunately it institutionalizes them. For example, on page 8 of the interagency statement, the regulators endorse the use of promotional brochures and advertising where both uninsured and insured products are advertised together beside one another. The agencies only suggest that the material "clearly segregate the information."

But we don't know what this means, nor does the interagency guidance statement provide any detail what this means. Two spaces between the two distinctly different products, or on separate pages of the same brochure? It is unclear and we believe that this is very reckless guidance.

The two products, insured and uninsured, should not appear in the same advertisement or in the same promotional brochure.

On the critical matter of the separation of personnel, the agencies provide a road map, we believe, for the banks to make full utilization of personnel across the lines of insured and uninsured products. The interagency statement allows personnel, which handle insured deposits, to recommend investment products.

The previous panel talked at great length about the conflicts of interest of having tellers and other personnel that handle insured products recommend the subdebt of ACC and Lincoln Savings.

And if this is not enough, the interagency statement permits tellers to be paid "nominal fees" to encourage the referral of customers for nondeposit investment products. And now, we wonder, does the teller urge the consumer to play it safe or to forego government insurance and invest in some of those securities being sold across the lobby. Given human nature and the generally low pay of tellers,

you can make a pretty sure bet that the payment of referral fees cannot but steer the savings of consumers in the direction of risk.

In short, we believe the regulators at this point have failed to face up to the full realities of the problem in the marketplace. While the banks have roared forward and while the consumer has been left in a sea of confusion about the status of government insurance, the regulators continue to encourage questionable practices by the banking industry, dangerous practices that put hardearned savings of consumers at risk.

And we believe, Mr. Chairman, given that the Congress has created the deposit insurance system, the Congress has an obligation to enact safeguards to protect not only the consumer but the integrity of the FDIC shield.

Thanks to the Congress's support of FDIC deposit insurance, consumers don't think twice about the safety of savings once placed in the hands of a banker. The bankers know that and have enjoyed the competitive advantages of a taxpayer-backed insurance system. It is the Congress, we believe, that must take responsibility and enact legislation that will ensure that there can be no commingling in practice or perception of insured and uninsured activities of banks.

My statement highlights the elements of consumer protections that we have endorsed with our consumer and regulatory colleagues here with us today. I won't elaborate on them orally, except to note that we do strongly endorse the need for functional regulation of the securities activities of banks which is the principal thrust of your legislation, H.R. 3447.

And, until proven protections are in place, and I emphasize proven, we need to make sure that the safeguards are working. We believe that it would be reckless for banking regulators to add to the problem by allowing banks to further expand into the securities business as is proposed by the current Mellon-Dreyfus merger.

We call, therefore, Mr. Chairman, for a moratorium on further expansion of bank operations into the mutual fund and related securities businesses, unless and until the Congress has a chance to enact strong statutory safeguards, second that the banking and securities regulators come up with consistent, coordinated and proven approaches to address the province of consumer confusion and, thirdly, that the banking industry itself get its act together and eliminate the practices, however subtle, that permit visions of government insurance to dance in the public's mind.

And I would be glad to answer any questions.
[The prepared statement of Mr. Lewis follows:]

Consumer Federation of America











MARCH 2, 1994

The Consumer Federation of America appreciates the opportunity to testify before the Subcommittee today on the subject of bank sale of mutual funds and the proposed merger of Mellon Bank Corporation and the Dreyfus Corporation.

This merger -- now pending before the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve and the Office of Thrift Supervision -- raises a number of critical public policy concerns among them the certain increase of consumer and investor confusion about the nature of risk of investment products sold on the premises of insured depository institutions.

As one trade publication recently noted, the proposed merger "highlights all that's troubling about banks in the mutual fund business".1

The significance of this transaction for consumer protection

1 American Banker, February 8, 1994, p. 26.

1424 16th Street, N.W., Suite 604 Washington, D.C. 20036 • (202) 387-6121

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