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to register with the SEC. Why is a bank different in this matter than an insurance company or registered broker-dealer? What is it that requires—what unique character in the bank requires them to be treated differently than an insurance company or registered broker-dealer in the securities business?
Mr. LUDWIG. In respect to national banks, you've got a national charter and, in essence, national registration. Why on earth would you want to have them registered twice? I mean, I can understand the benefit of registering a company that is otherwise unknown as a broker-dealer with the SEC because otherwise it's just simply out there. The banks are already, if you will, federally-registered by reason of obtaining a national charter.
Mr. DINGELL. That's the best reason you could give, that they've already registered with you folks. I think you've conceded that you've not done as good a job of regulating them on these matters as you could.
Ms. BROADMAN. May I make a brief point? For registered banks under the 1934 Act, the OCC has cross-referenced the SEC rules. So the same rules apply. With respect to bank offerings, our rules are similar, but we have put out for public comment and we are in the process of rewriting our rules so that they are comparable to the SEC rules, as well. So that there is similarity here. I think the OCC has recognized the value of a level playing field.
Mr. DINGELL. This is all very good, but we've agreed that, first of all, one, the rules that you apply are quite different in the instances that I've alluded to frontrunning, insider trading and that sort of thing, suitability. As a matter of fact, from what I could read with regard to the applications that I gather you're receiving, they are different between banks.
Mr. LUDWIG. It's not so much that the rules are different between banks. But if you're going to have an acquisition situation where you're dealing with different facts and circumstances in terms of safety and soundness responsibilities, I don't think you can guarantee a one-size-fits-all approval. I don't think it can be.
Mr. DINGELL. All investment advisers and all broker-dealers who are registered with the SEC have to comply with the same rules. So what we're seeing here is the situation where Mellon-Dreyfus and First United Bank and Evergreen and Lieber are going to be complying possibly with different rules, or, if they are complying with the same rules, they may very well be complying with different rules than all the other 65 or so cases to which we've referred in the past and may very well perhaps be confronting, again, different rules than others will be confronting.
Mr. LUDWIG. As I say, I can see that there is value in identifying a core set of rules by way of the commitments that have been given which ought to apply on a consistent basis across institutions. But as you well know, a bank acquiring a subsidiary engaged in investment-related activities is a serious business. It's serious for the investee, for the public, and serious for the safety and soundness of the institution. We would not want to lock ourselves into a onesize-fits-all set of rules.
Mr. DINGELL. Are you telling me, then, that you want to have different rules for everybody or perhaps that you wish to have the ability to establish different rules for everybody?
Mr. LUDWIG. I don't believe that the rules are materially different now, and they wouldn't be materially different on a goingforward basis in terms of the responsibilities of the institution.
Mr. DINGELL. You're telling me you don't regard these rules as materially different, but you are having different rules. They're either identical or they are materially different.
Mr. LUDWIG. They can be different, but not materially different.
Mr. DINGELL. Or not materially different. But not materially different doesn't mean not different.
Mr. LUDWIG. It doesn't mean not different.
Mr. LUDWIG. It's something I'd like to go back and think about. I think I could give you a hypothetical case where you wouldn't want to permit an acquisition or you would want to so condition it, given the state of the bank's financial picture, or other reasons that would not necessarily go to the questions of how investment products are sold or what kind of suitability requirements are applied. The reasons would go to the individuality of the institution.
Mr. DINGELL. Here we've got poor, dear Widow Goodbody going in and if she goes into one bank, she's going to be addressing one set of suitability rules. If she goes into another, she's got to be addressing another set of suitability rules. If she goes into 40 or 50 banks, probably she's going to face a different rule in each and every one of them.
I wonder if that's in the best interest of the Widow Goodbody.
Mr. DINGELL. It's in the interest of the banks, I'm sure, but is it in the interest of poor Widow Goodbody?
Mr. LUDWIG. Well, as I've said, we want to make sure the suitability rules here are at least as good as the NASD rules.
Mr. DINGELL. I applaud you for the fact that you want to be careful, but during the time that you and I are sitting here talking, banks are selling a fairly good part of their $2 billion sales in their mutual funds and other financial instruments.
Mr. LUDWIG. What if you had a bank-in fact, we do have banks that really will go quite far on their own to have what you might call exceptional suitability and other standards which far exceed the norm. We'd want to encourage that, as well. We want to encourage that, as well.
Mr. DINGELL. I do, too. But, again, you have some that are meeting extraordinarily high standards and then you have some that may be meeting less than extraordinarily high standards.
Mr. LUDWIG. And we intend to go after the ones that are meeting less than adequate standards, as I mentioned, and make sure that they are meeting
Mr. DINGELL. You've got 3,400 banks. You've looked at 300 of them.
Mr. LUDWIG. Three hundred.
Mr. DINGELL. And you've got 3,100 unlooked at. You don't really know what you found in the 300 that you've looked at and you don't have any idea what's going on in the other 3,100.
Mr. LUDWIG. I don't admit that we don't know what we found in the 300.
Mr. DINGELL. Pardon?
Mr. LUDWIG. I don't admit that we don't know what we found in the 300. Indeed, we're prepared to submit to you any changes that we've asked for in those institutions in terms of their practices.
Mr. DINGELL. The difference between us is you're a very trusting fellow and I'm not. I like to be sure that where I'm talking about Widow Goodbody and the other folks I'm supposed to look at here that the Widow Goodbody, when she walks in, she's going to know she's going to get something suitable.
You're telling me that you're telling them to sell them something suitable and then they will sell her something that they think is suitable. Now, it may be suitable to Widow Goodbody's financial interest or it may be suitable to the commission of the seller.
Now, does she-we've talked about this does the Widow Goodbody under your rules and regulations have the right of rescission?
Mr. LUDWIG. As I mentioned, there have been 14 cases in the last year out of
Mr. DINGELL. Fourteen.
Mr. LUDWIG. Out of 15,000 complaints, we only had 14 in the mutual fund area, and of those 14, 7 were associated
Mr. DINGELL. Does she have a right of rescission under your rules? Yes or no?
Mr. LUDWIG. I'm sorry. Maybe I wasn't clear. Of the 15,000 complaints, 14 were in the mutual fund area. Seven of them involved rescission for the
Mr. DINGELL. How many of them got rescission?
Mr. DINGELL. Is that because of the rule or because you and your folks at OCC, out of the goodness of your heart, went to the bankers and said you might have problems if you don't give her her money back? Is it because you had a clear rule or not? Do you have a clear rule on this?
Mr. LUDWIG. We can order rescission.
Mr. LUDWIG. We can order rescission. Our rules permit us to order rescission.
Mr. DINGELL. If they permit you to order it, but she has no right on her own to rescind. She's got to come hat in hand to you.
Mr. LUDWIG. Yes.
Mr. DINGELL. She's got to come hat in hand to you to get you to order
Mr. LUDWIG. If it's fraud, she can bring a private right of action.
Mr. DINGELL. Without fraud, on just the question of suitability, does she have the private right of action?
Mr. LUDWIG. If it isn't fraud, she brings the case to us, and we've found that, as I mentioned, in those cases, at least, it's been an effective remedy.
Mr. DINGELL. So she's got to come to you instead of going to the courts.
Mr. LUDWIG. Other than in fraud cases right now, I think that's correct.
Mr. DINGELL. On fraud cases, she can go to the courts, right?
Mr. DINGELL. And what happens? Will you put in the record the specific rules that you have with regard to the rights of somebody who is aggrieved by fraud?
Mr. LUDWIG. Yes, sir.
Mr. LUDWIG. In the banking context, certainly where there's a subsidiary, she would be covered by the securities laws and applicable right to arbitration.
Mr. DINGELL. Not if they're not registered with the SEC.
Mr. DINGELL. Are these cases that you're referring to all cases in which the rights that the aggrieved party has because she is dealing with a registered broker-dealer or because you have some specific provision in your statute?
Mr. LUDWIG. No. In the 14 cases, I can't tell you, frankly, whether or not they involved registered broker-dealers. But I can tell you that it would make no difference to us; the complaints are handled the same and the remedies would be meted out the same from the perspective of our complaint process.
Mr. DINGELL. So there is no right of arbitration. I want you to cite to us the specific provisions in your rules and in your statutes and in your regulations which confer rights on the persons that I have described as being aggrieved in these particular instances.
Mr. LUDWIG. I will definitely do that.
Mr. DINGELL. So we can have that for the record. Mr. Ludwig, we thank you very much for being with us. We appreciate your kindness. We will probably have some other inquiries. Since you're going to be broadly in the securities business, I suspect we'll be seeing quite a bit of each other.
Mr. LUDWIG. I expect that. Somehow I'm not surprised.
Mr. DINGELL. I'm sure we will both enjoy it and look forward to our visits which will occur, I think, fairly regularly.
Mr. LUDWIG. I'm not surprised.
Mr. DINGELL. Mr. Ludwig, we want to thank you and we should probably both learn these new statutes that we are going to have to learn. I know you're going to have to learn the securities statutes and I would suggest that we should commence doing so with all vigor, because, as I've indicated, I think we will, now that you're in the securities business, see rather more of you and we look forward to it.
Mr. LUDWIG. Thank you, sir.
Mr. DINGELL. We thank you. The next witnesses are a panel composed of Mr. Frank Cahouet, Mr. Martin G. McGuinn, Mr. Howard Stein, and Mr. Joseph DiMartino. Gentlemen, we thank you for being with us. We apologize for keeping you so long, but
as you know, this has been a matter which has been carried forward with great enthusiasm by both Mr. Ludwig and myself.
We thank you for being with us. You have heard the fashion in which the committee conducts its business. Do any of you object to testifying under oath?
Mr. DINGELL. Very well. The Chair would also inquire do any of you desire to be advised by counsel, given the fact that you are testifying under oath?
Mr. DINGELL. The Chair would observe that copies of the rules of the subcommittee, the rules of the committee and the rules of the House are there to advise you of your rights and limitations on the power of the committee.
Gentlemen, if you have no reservations about testifying under oath, if you would, please, each rise and raise your right hand.
Mr. DINGELL. Gentlemen, you may each consider yourself under oath. We will recognize you for such statement as you choose to give. You may submit your statements in such order as you choose. One of you may testify on behalf of all or several or you may each proceed in your order. We leave the choice of your statement to you, gentlemen, with our good wishes. TESTIMONY OF FRANK V. CAHOUET, CHAIRMAN, MELLON
BANK CORP., ACCOMPANIED BY MARTIN G. MCGUINN, VICE CHAIRMAN; AND HOWARD STEIN, CHAIRMAN, DREYFUS CORP., ACCOMPANIED BY JOSEPH S. DIMARTINO, PRESIDENT
Mr. CAHOUET. Mr. Chairman, Mr. Stein and I would like to make opening statements, with your permission.
Mr. DINGELL. Very well.
Mr. CAHOUET. And Mr. McGuinn, on my left, is Vice Chairman and he is in charge of the retail group within the bank. Mr. DiMartino is the President of Dreyfus Corporation.
To begin my statement, my name is Frank V. Cahouet and I am Chairman, President and Chief Executive Officer of Mellon Bank Corporation and Mellon Bank. I appreciate this opportunity to respond to your questions regarding our proposed transaction with the Dreyfus Corporation.
I want to emphasize three basic points at the outset. First, Mellon shares the concerns that the chairman and other members of this subcommittee have expressed regarding depositor and investor protection and bank safety and soundness. Second, Mellon has put into place comprehensive policies and procedures which are designed to address those concerns. We have done so not only as a matter of compliance, but also because of our 125-year track record of building lasting customer relationships.
Third, Mellon and Dreyfus share a compatible culture and tradition of conservatism and concern for the consumer. Together we are uniquely well positioned to complete this transaction in a manner that assures consumers' best interests.
Given our carefully planned approach to this union between Mellon and Dreyfus, we respectfully submit that the proposed trans