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Association of Securities Dealers (NASD), and all fifty states as a broker-dealer, and Dreyfus Management Inc. is registered with the SEC and several states as an investment adviser. Based upon assets under management, Dreyfus, the sixth largest mutual fund organization in the country, manages 130 mutual fund portfolios with approximately 2 million shareholder accounts and $72.2 billion in assets.
Ranked by asset size, Mellon is the 21st largest bank holding company in the United States. Mellon Bank, its lead banking subsidiary, is currently 22nd among banks in mutual fund assets under management. If the merger is completed as proposed, Dreyfus will become a direct operating subsidiary of Mellon Bank. Mellon states that a principal reason for adoption of this structure is to enable Mellon Bank "to use, for regulatory and accounting purposes, both the strong capital base that Dreyfus has accumulated and Dreyfus' significant earnings." Dreyfus brings to Mellon Bank approximately $800 million in equity capital without any debt liabilities. Mellon Bank already advises one family of funds, the Laurel funds; in addition, last year, its parent company 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. THE TRANSACTION
On December 30, 1993, Mellon Bank and Mellon Bank (DE) National Association filed a Notice with the comptroller of the Currency (OCC) pursuant to 12 CFR section 5.34 of their intention to establish operating subsidiaries in connection with the acquisition of Dreyfus and its subsidiaries. Necessary applications have also been filed by Mellon with the Board of Governors of the Federal Reserve System (Federal Reserve Board) and the office of Thrift Supervision. · An application will be filed with the New York State Banking Department. Mellon also has made Hart-scott-Rodino filings with the Department of Justice and the Federal Trade Commission.
The details of the proposed merger are set forth in the
offer, with Dreyfus shareholders to receive
2. Dreyfus will retain its headquarters in New
York City and will be operated as an
regulated by the SEC for at least two years.
independent, third party distributer.
proposed merger. The acquisition or establishment of an "operating subsidiary" by a national bank, such as Mellon Bank, is subject to 12 CFR section 5.34, the occ's so-called "op-sub" rule. The rule currently provides that:
All federal banking laws and regulations
The occ may impose legal and supervisory
12 CFR section 5.34 also establishes procedures to be followed when a national bank proposes to acquire an operating subsidiary: 1. The occ reviews the bank's proposal to
determine if the proposed activities exceed
In contrast with the Federal Reserve Board's
3. Thus, third parties generally are not invited
to comment on proposals by national banks to
has been acted upon by the occ.
within 30 days of filing its notice unless
otherwise advised by the occ. It has been reported that the occ is considering revisions to 12 CFR section 5.34 which would expand the range of securities activities which national banks could engage in through operating subsidiaries. See "OCC to Loosen Shackles of Bank Securities Units," American Banker's Washington Watch (Dec. 6, 1993).
Mellon's application with the occ included a Policy Statement on Mutual Funds that provides "guiding principles" for sales of mutual funds by Mellon, its bank subsidiaries and its other subsidiaries; relationships between these entities and mutual funds for which they provide advisory services; and relationships between Mellon bank subsidiaries and Dreyfus, as a subsidiary of Mellon Bank, the principal Mellon bank. The Policy Statement contains a number of "voluntary commitments" aimed at: (1) providing customers with disclosures of the benefits and risks of investing in mutual fund shares, and particularly ensuring that customers are clearly informed that such shares are not insured by the Federal Deposit Insurance Corporation (FDIC) and are not bank obligations; (2) assessing the suitability of mutual funds that a Mellon company recommends; (3) ensuring the safety and soundness of both the Mellon banks and Mellon-advised funds; (4) preventing conflicts of interest; (5) maintaining separation between Mellon companies and Mellon-advised funds; and (6) maintaining separation between Mellon banks and Dreyfus. These undertakings are based on H.R. 3447, the Securities Regulatory Equality Act, a functional regulation bill which was introduced on November 4, 1993 by Representatives Dingell, Moorhead, Markey and Fields. (on October 19, 1993, Representatives Schumer and Gonzalez introduced H.R. 3306, the Depository Institution Retail Investment Sales and disclosure Act, to regulate the retail sale of nondeposit investment
products by insured depository institutions to prevent customer confusion about the uninsured nature of the products.)
The proposed Mellon-Dreyfus merger presents the most striking example thus far of bank involvement in the mutual fund industry. It is estimated that about 40 million Americans (representing 27 percent of households) own shares in at least one mutual fund. Currently 113 banks or bank subsidiaries advise 943 mutual funds and bank mutual funds have $204 billion in assets, an increase of 29% since December 31, 1992. Banks also are increasingly active in selling mutual fund shares to the public. In the first half of 1992, banks reportedly accounted for one-third of all new sales of money market funds and 14 percent of all new sales of long-term funds. More generally, nearly one-quarter of America's banks do some sort of brokerage business.
For decades, the so-called Glass-Steagall Act constituted a bar against banks engaging in most securities activities. Over the last two decades, however, the federal bank regulators have expansively interpreted the Glass-Steagall Act to permit banks to engage in a wide range of brokerage and other securities activities, including sales of mutual funds and other securities to the investing public. In the prevailing interest rate environment, bank customers with maturing certificates of deposit reportedly have been investing their funds in record numbers in mutual funds. A survey conducted by the SEC in November 1993 showed that 66 percent of bank fund shareholders believe that money market mutual funds sold through banks are federally insured, while 28 percent of respondents believe that all mutual funds sold through banks are "federally insured like savings accounts and cds." These developments have raised a number of concerns including the risk of customer confusion, disregard of disclosure standards and suitability considerations, the creation of conflicts of interest, and the lack of adequate safeguards. Şee "Should You Buy Mutual Funds From Your Bank," Consumer Reports (March 1994) (attached).
The SEC currently regulates all mutual funds under the Investment Company Act, including bank advised funds. Due to statutory provisions that exclude banks from the regulatory requirements that apply to investment advisers and brokerdealers, however, the SEC has only limited ability to regulate the banks that advise and/or sell interests in such, mutual funds. It has been suggested that these bank exclusions should be eliminated in light of the dramatic increase in bank securities activities over the past decade, and especially since banks are
among the largest participants in the securities business (as illustrated by the Mellon-Dreyfus merger).
Last year, the four federal banking regulators issued separate "guidelines" designed to address safety and soundness and customer confusion issues raised by bank securities and mutual fund sales. In response to sharp criticism of the conflicting. "guidelines," two weeks ago, the banking agencies issued a joint Interagency Statement on Retail Sales of Nondeposit Investment Products intended to consolidate, standardize, and supersede the earlier separate guidance. The Statement is hortatory in nature and leaves a great deal of leeway to the banks as to interpretation and implementation.
The document notes that: "failure of a depository institution to establish and observe appropriate policies and procedures consistent with this statement in connection with sales activities involving nondeposit investment products will be subject to criticism and appropriate corrective action." (emphasis supplied) While the Statement indicates that "compliance procedures should provide for a system to monitor customer complaints and their resolution," federal banking laws do not contain private rights of action for investors and there is no banking law counterpart to the securities arbitration scheme for bank securities investors. Bank securities sales personnel are not tested for competence, nor are they subject to an examination and disciplinary program, such as the program administered by the NASD, that focuses on the potential for abuse that exists in connection with retail securities activities. On February 1, 1994, six national banking trade associations released joint "guidelines" pertaining to the sale of mutual funds and other noninsured products in banks.
On December 20, 1993, Chairmen Dingell and Gonzales jointly wrote to Mellon and Dreyfus, the occ, and the sec, and on January 26, 1994 again to the occ requesting documents and responses to the serious questions raised by the proposed transaction. The Subcommittee sent investigative letters to Mellon and Dreyfus and to the OCC on January 28, 1994, to the FDIC and the Federal Reserve Board on February 14, 1994, and to the SEC and to the OCC on February 23, 1994. copies of these letters and the responses thereto are appended to this memorandum.
Among other things, the Gonzalez-Dingell letters criticized the lack of public notice. On February 24, 1994, in what the wall Street Journal labeled "an unusual move," the occ published in the Federal Register a request for public comment on two notices filed by national banks of their proposed establishment of operating subsidiaries that will engage in mutual fund