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What I sense you're telling me here, in spite of what you said earlier, is there is nothing in your rules that restricts the ability of the bank to drain the capital from a broker-dealer subsidiary right down to the bare minimum required by the securities laws. Is that right?

In other words, as long as they meet the bare minimum that's required by the SEC, they can pump all the capital they want out of that.

Mr. LUDWIG. Isn't that the case now with respect to the current ownership? If the current ownership wanted to take capital out, they would have to comply with the SEC rules. After the transaction, they would have to comply with the SEC rules, as well.

Mr. DINGELL. I'm not going to quarrel with you about that. In any event, to the extent that a subsidiary has capital in excess of regulatory minimum, the bank is then free to take it and use it for its own purposes, isn't it? And it can declare dividends from it. It can make further investments with it. It can do whatever it wants with those moneys above the bare minimum. Is that right?

Mr. LUDWIG. Well, I don't want to prejudge what we will do with the application. I would say that for a subsidiary of a bank, we look at the capital on a consolidated basis. In terms of setting the capital standards for the banking organization, we take into consideration a variety of activities that can be engaged in by the bank and a subsidiary, so that the combined entity is well capitalized.

We have very detailed rules on capitalization of banking organizations. They are very detailed and we'd be happy to submit them for the record.

Mr. DINGELL. Let's go back to 1818 issues that we had been discussing before. Am I fair to infer that this is a charter to protect and amend—and a power to protect the banks? I'm still curious about where in 1818 we find anything which mandates you to protect the investor or the consumer of nonbank services here.

Mr. LUDWIG. Well, 1818 applies to the banking organization.
Mr. DINGELL. Pardon?

Mr. LUDWIG. Our 1818 authority applies to the banking organization, including the operating subsidiary. As I've mentioned before, that 1818 authority says that you can't violate law, you can't operate in an unsafe and unsound manner.

Mr. DINGELL. That means operate a bank in an unsafe or unsound manner.

Mr. LUDWIG. Banking organization.

Mr. DINGELL. Where does it say that you don't engage in insider trading, manipulation, frontrunning or other practices that would be prohibited by the securities laws?

Mr. LUDWIG. As I said, if you violate the securities laws, you are violating 1818 and we would feel free to use our entire panoply of powers against the institution.

Mr. DINGELL. Mr. Ludwig, are you familiar with the Policy Statement on Mutual Funds filed by Mellon Bank as a part of its notice or application with you?

Mr. LUDWIG. Yes, sir.

Mr. DINGELL. The document referred to says it provides a number of guiding principles designed to ensure consumer protection,

prevent conflicts of interest, provide for the safety and soundness of both Mellon Bank subsidiaries and the funds. Isn't that so?

Mr. LUDWIG. That sounds right to me, yes. Here it is. Yes.

Mr. DINGELL. The general areas covered by the Policy Statement include: independence of the mutual fund boards; independence of the fund; relationship between Mellon and the advised funds (including extensions of credit and purchases of securities); conflicts of interest; consumer protection (with particular emphasis on suitability and ensuring that the customer understands that mutual fund shares are not FDIC-insured or bank obligations); SEC regulation; board of directors and management oversight; and compliance reviews.

Now, the American Heritage dictionary that we've been referring to defines "voluntary" as "acting on one's own free will or one's own initiative" and "acting or performed without external persuasion or compulsion or without legal obligation.”

Accordingly, then, is this statement, which is essentially a voluntary document and which defines itself as being voluntary, a document which carries with it the force and effect of law and is it a regulatory document?

Mr. LUDWIG. Let me answer that a couple of ways. Were we to accept this statement or a statement like it, we would enforce violations of this statement.

Mr. DINGELL. How can you do that? This is a voluntary statement.

Mr. LUDWIG. We can include it as a condition of our approval. But even if it's given by a bank voluntarily, and it was the basis of our approval, we would view a violation of it as something that we would

Mr. DINGELL. You're saying then that you are going to require this to be a condition of approval.

Mr. LUDWIG. I am saying that when we come out with our application or give approval, if we do, we will quite possibly include conditions. The conditions may be more extensive than this, they may be these, they may be whatever. But whatever is included as the basis of that approval we will expect to be enforceable.

We are certainly not going to approve something on the basis of representations that we don't believe are enforceable.

Mr. DINGELL. But we've been talking about 1818(b)(1). Mr. Ludwig, that provision states in relevant part that you are authorized to seek cease and desist orders based on, and I quote, "reasonable cause to believe that the bank or any director, officer, employee, agent, or other person participating in the conduct of the affairs of such bank is about to violate a law, rule, or regulation, or any condition imposed in writing by the Agency in connection with the granting of any application or other request by the bank or any written agreement entered into with the Agency.”

Now, I want to ask you a series of questions about what I've just read and I would request that you answer just yes or no. Are voluntary commitments a law?

Mr. LUDWIG. They're not a law.
Mr. DINGELL. Are voluntary commitments rules or regulations?
Mr. LUDWIG. Not rules or regulations.
Mr. DINGELL. Beg your pardon?

Mr. LUDWIG. They're not rules or regulations.

Mr. DINGELL. Mellon's testimony says they're “willing to have the commitments set forth therein converted into conditions of regulatory approval should the OCC so desire.” Your testimony states: “if we were to approve the Notice, the written conditions the OCC, at a minimum, would likely impose would cover the voluntary commitments set forth in the Policy Statement.”

Now, that leaves us the great big question. Are you going to impose the Policy Statement's voluntary commitments as conditions imposed in writing by the OCC in connection with the granting of the Mellon-Dreyfus application, should you decide to approve the transaction?

Mr. LUDWIG. I don't mean not to be forthcoming. I think I've been clear about our seriousness in enforcing the application and conditions of its approval, but I really don't want to make statements about our application. I can assure you that we take it seriously and we might well impose conditions. But when we have an application before us and I'm the judge, it seems to me that I've just got to not prejudge it and give you that kind of assurance.

Mr. DINGELL. You have in a number of instances-for example, in the case of First Union, at least initially, not put these matters out for public comment. Does that represent a change in policy when you now have First Union essentially out for comment, as well as Mellon-Dreyfus out for public comment? Is that a practice that you're going to continue from now on?

Mr. LUDWIG. I'm glad you raised that question. I committed when I came in to review all our rules and regulations from A to Z. We're in the process of revising our entire rule book. One of the areas we're revising is Part 52 that deals with this kind of issue.

We have under consideration had under consideration when this came in-putting this kind of application out for public comment. To be honest, we might not have done so because we're in the process of revising the rules.

You and Chairman Gonzalez raised the issue of whether or not this should be out for public comment. Given the magnitude and the complexity of these transactions, it seemed to us that although it was on a sui generis basis because we haven't revised our rules yet, it made sense to go ahead and do it. Incidentally, I misstated myself. It's Part 5, not Part 52, we're changing.

But we realized the benefit of public comment in complex and large situations and we are revising our rules with that in mind. That's one of the reasons we decided that it made some sense in this case to go ahead and put it out for public comment.

Mr. DINGELL. I would note that we find ourselves in a situation where others previously have not been required to meet this kind of an open process and that others in the future may or may not be required to meet this kind of open process.

I'm curious. Is an open process desirable or undesirable in this instance?

Mr. LUDWIG. I think an open process is very desirable. Let me say the interesting thing about our rules is that we really have quite a bit of transparency in terms of the public. Everything is available to the public in bulletins and FOIA requests, et cetera.

One of the problems with our rules is that there are disclosures here and disclosures there and they're not made in a coherent fashion. One of the things we want to change is to make them accessible to the public, so that the public disclosures are easily identifiable. This kind of open comment period, I think, is desirable in complex and large situations like this.

We're working hard to change our rules so that we do, indeed, address this kind of issue.

Mr. DINGELL. Let's look at this, because heretofore you have announced these by bulletin, have you not? Essentially, you put out a bulletin.

Mr. LUDWIG. That's right.

Mr. DINGELL. What has preceded that bulletin in the way of public rulemaking?

Mr. LUDWIG. We historically give public notice after an application is filed.

Mr. DINGELL. I'm sorry?

Mr. LUDWIG. We historically have given public notice after an application is filed.

Mr. DINGELL. How much detail has that had?
Mr. LUDWIG. It is not very detailed.
Mr. DINGELL. Has it identified the applicant?
Mr. LUDWIG. Yes.
Mr. DINGELL. It has. In all cases?

Mr. LUDWIG. I believe that's correct. I'd have to get back to you, but I'm virtually certain that's correct.

Mr. DINGELL. Does it identify the powers being sought?

Mr. LUDWIG. Currently it does not and it's one of the areas of change that we will be considering. There's no doubt about it. That's one of the reasons we're looking at changing this whole area. If we thought it was perfect, we wouldn't be changing.

Mr. DINGELL. What does it just say, then? It says so and so has made an application to the OČC, but it doesn't say what the application is for. Is that right?

Mr. LUDWIG. That's correct.

Mr. DINGELL. What does the announcement, the bulletin which announces what's been done, say? Does it identify the applicant?

Mr. LUDWIG. Well, where there are novel and important cases, not only does the bulletin go into some description, but also the interpretive letters are often made quite public. That is, they're all public, but they're also published.

Mr. DINGELL. What is a novel or important question that's decided? In other words, some are going to be publicly announced and some are not going to be publicly announced. I'm trying to find out which ones are going to be announced publicly because they're novel and important and which ones are not.

Mr. LUDWIG. Where they depart materially from past-
Mr. DINGELL. Pardon?

Mr. LUDWIG. Where they depart materially from past precedent would be the basis on which one would conclude that they were novel.

Mr. DINGELL. Isn't this the public's business?
Mr. LUDWIG. Pardon me?

Mr. DINGELL. This is public business. You're saying a bank can do this or a bank can't do that.

Mr. LUDWIG. Let me say that all the approvals and all the interpretations are publicly available. The issue is not whether they're publicly available. The issue is whether or not we have the kind of mechanism in place that incorporates public comment and where the documents are easily accessible to the public, and that's why we're changing. That's why we're in the process of revising.

Mr. DINGELL. Let me ask you. Are you subject to the Administrative Procedures Act?

Mr. LUDWIG. Absolutely.
Mr. DINGELL. You are?
Mr. LUDWIG. Absolutely.

Mr. DINGELL. The Administrative Procedures Act, when you take a regulatory act of this kind, requires, first of all, notice; second of all, opportunity for comment; and, in many instances, it mandates a hearing and a public process. Then it mandates that you should announce your process or, rather, the result of your process in an opinion which is subject to judicial review.

How have you been able over the years, then, not to comply with those requirements?

Mr. LUDWIG. The op sub notices are not subject to the APA. Mr. DINGELL. Pardon? Mr. LUDWIG. The op sub notices are not strictly subject to the APA. It's one of the reasons we're changing in this area.

Mr. DINGELL. These are functioning under an exception from the APA.

Mr. LUDWIG. Let me get back to you in writing on that question in some detail.

Mr. DINGELL. All right. Mr. Ludwig, I note that there is a vote on the floor. We have much more to do here. Would it meet your approval if we were to recess for, let's say, 1 hour so everybody can get some lunch and come back at 2:00?

Mr. LUDWIG. Sure.

Mr. DINGELL. Then that's what we will do. We will return at 2:00. In the meantime, the committee will stand in recess.

(Whereupon, at 1:02 p.m., the subcommittee was recessed, to reconvene this same day at 2 p.m.)


Mr. DINGELL. Mr. Ludwig, last evening you delivered to the subcommittee a letter dated March 3 in response to an investigative letter of February 23 by the subcommittee. That document included a list of all approvals. I counted 65 granted since 1985, the year your database began collecting such information for national banks to engage in investment advisory services through operating subsidiaries.

The list includes both acquired and de novo operations in the national bank operating subsidiaries. I want to thank you for this information.

You have put out for public comment, as we have noted earlier, Mellon's proposed acquisition of Dreyfus and First Union's proposed acquisition of Lieber and Evergreen. Will you apply the same requirements to everyone? Because as of this particular minute,

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