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activities: the Mellon Notice discussed above, and the Notice filed by First Union National Bank of North Carolina on November 1, 1993 with respect to First Union's intent to acquire two affiliated investment advisory companies, Lieber & Company, and Evergreen Asset Management Corporation. Comments are due by March 28, 1994.
The two chairmen also raised concerns about the adequacy and enforceability of the voluntary commitments. The OCC can seek cease-and-desist orders under 12 U.S.C. section 1818(b) based on violations of "law, rule, or regulation, or any condition imposed in writing by the agency in connection with the granting of an application." (emphasis supplied) Thus, the Mellon-Dreyfus Policy Statement is unenforceable unless its terms are imposed by the occ as written conditions in a letter approving the merger. If a policy guideline is not set forth as a condition imposed in writing, the occ may initiate cease and desist proceedings, only if the violation of the guideline constitutes "an unsafe or unsound banking practice."
GLASS-STEAGALL ANALYSIS/PERMISSIBLE ACTIVITIES
The Glass-Steagall Act prohibits a bank from engaging in "the business of issuing, underwriting, selling, or distributing, at wholesale or retail, or through syndicate participation, stocks...or other securities." (Sections 16 and 21 of the GlassSteagall Act, 12 U.S.C. 24 (seventh) & 378). The Supreme Court has indicated that this also includes a prohibition on engaging in the "public sale" of securities. Thus, the relevant inquiry under the Glass-steagall Act is whether, under the proposal, Mellon Bank would, through its proposed Dreyfus operating subsidiaries, be engaged in any of these prohibited activities.
The National Bank Act permits national banks to conduct "all such incidental powers as shall be necessary to carry on the business of banking". 12 U.S.c. 24 (Seventh). This provision has been interpreted by the courts to permit national banks to conduct activities that are "convenient or useful in connection with the performance of one of the bank's established activities pursuant to its express powers under the National Bank Act." MOM Leasing Corp. V. Seattle First National Bank, 563 F.2d 1377 (9th Cir. 1977). The occ's rules regarding the establishment of an operating subsidiary limit the operating subsidiary to activities that a national bank is permitted to conduct directly. (12 CFR 5.34).
The Bank Holding Company Act provides that the Federal Reserve Board may authorize bank holding companies to invest in companies that engage in activities that are "so closely related to banking as to be a proper incident thereto." (12 U.S.c.
1843 (c) (8)). In considering whether an activity is "closely
operationally or functionally so similar to the
well to provide the proposed service; or
integrally related to the proposed service as
Arthur Levitt, Chairman, SEC, accompanied by Barry P. Barbash, director, Division of Investment Management, sec, will testify on the current regulatory structure governing the securities activities of banks and the functional regulation issues that are highlighted by the proposed transaction. Currently, investors who purchase securities directly from banks are not protected by the securities regulatory scheme administered by the sec, and federal banking law does not provide a comparable regulatory scheme focused on investor protection. The SEC will urge congress to eliminate the existing regulatory gaps.
A panel of State and federal prosecutors and a civil attorney involved in the trial of Charles H. Keating, Jr. and Lincoln savings and Loan in Southern California will testify. The witnesses -- William W. Hodgman, a prosecutor for the State of California, Steven E. Zipperstein and Alice Hill, prosecutors from the U.S. Attorney's office, and Len Simon, a civil attorney from the San Diego law firm of Milberg Weiss Bershad Hynes & Lerach -- will highlight some of the consumer protection issues stemming from the Lincoln case. The witnesses will describe the methods and procedures used by the parent company of Lincoln (American continental Corporation) to sell bonds through direct affiliation with Lincoln, and also detail some of the many consumer problems that resulted from that affiliation. Moreover, the witnesses will detail how customers were misled, both intentionally and unintentionally, into thinking that the bonds they were purchasing were federally insured and risk-free, despite written disclosures about the true nature of these investments.
A panel comprised of consumer groups will testify on the growing evidence of consumer confusion and the lack of effective safeguards in connection with mutual funds and other securities products advised on or sold by banks and their affiliates. Lena Archuleta, a member of the Board of Directors of the American Association of Retired Persons (AARP), will testify on how a vulnerable segment of the population such as retired persons can be misled into shifting from low-yield insured investments to higher-yield, riskier investments without fully understanding the risks involved. Ms. Archuleta will be accompanied by Diane Colasanto, from Princeton Survey Research Associates, who will present the results of a survey conducted jointly by AARP and the North American Securities Administrators Association (NASAA) which points to a significant level of consumer confusion. The President of NASAA, Mr. Craig Goettsch, will testify on some of the practices that various banks across the country currently employ in their lobbies to market securities and other uninsured products, and the ways in which consumers can be misled into thinking that these investments are federally insured when in fact they are not. Lastly, Mr. Chris Lewis, Director of Banking and Housing Policy at the consumer Federation of America (CFA), will testify on the CFA's concerns regarding the direct involvement of banks in the selling of securities and the numerous consumer protection issues raised by such activities.
Frank v. Cahouet, Chairman, CEO and President, Mellon Bank Corporation, Martin G. McGuinn, Vice Chairman, Mellon Bank Corporation, Howard Stein, Chairman and CEO, The Dreyfus Corporation, and Joseph S. Dimartino, President and Chief Operating Officer, The Dreyfus Corporation, will testify on the terms and conditions of the merger, their respective rationales for the transaction, the regulatory approvals required, the Glass-Steagall analysis, and the proposed protections with respect to bank safety and soundness, customer confusion, conflicts of interest, and investor protection. The parties will testify that this transaction is responsive to the demands of their customers and the marketplace, and is a natural and lawful step in the evolution occurring within the financial services industry.
Eugene A. Ludwig, Comptroller of the currency, will testify on the legal and policy issues raised by the proposed acquisition. Mellon represents that, should the proposed transaction be permitted, Dreyfus would engage only in mutual fund activities the occ has previously found to be permissible for national banks and their operating subsidiaries and would discontinue all other mutual fund activities. The occ must review Mellon's filing to determine if the proposed activities are, in fact, permissible for national banks and their operating subsidiaries. In addition, the occ must analyze the risks and other concerns that
may arise because of the magnitude and complexity of the proposed transaction. The occ has indicated that it would approve the transaction only if all safety and soundness, customer protection, conflict of interest, and related concerns had been fully considered and addressed. The occ's testimony on the transaction, and that of First Union-Evergreen, will be constrained by the fact that occ has sought public comment thereon and has not made final decisions and taken final agency actions thereon. OTHER STATEMENTS
The FDIC advised the Subcommittee in a letter dated February 25, 1994 that:
There are approximately 13,400 FDIC-insured
The FDIC is not able at this time to precisely
There is no application or notice required of
The FDIC has no aggregate data concerning the securities activities of insured institutions for which the FDIC is not primary supervisor. (A.3.)
FDIC examinations of bank sales of securities focus on the bank's policies and procedures. The FDIC does not use testers to check on actual bank practices in dealing with customers. (A.1.b.)
FDIC has taken no formal enforcement actions to date concerning bank securities activities. Examiners who find violations ask banks to improve disclosures and better document polices and procedures. (A.3.)
SHOULD YOU BUY MUTUAL FUNDS FROM YOUR BANK?
ome 3500 banks across
the U.S. now sell mutual investigation
funds. And many of those of 40 banks
banks sell them aggres in five states 1993, the money invested in bank
sively. Through the third quarter of found bad mutual funds was growing 40 per
cent a year-almost twice as fast as investment
the fund industry in general. advice and Banks aren't just selling mutual
funds. They're also advising customoutright lies
ers on what to buy. Banks may sell about safety. funds from an independent company
such as Fidelity. Colonial, or Franklin. Or, as about 125 banks now do. they may offer their own line of mutual funds.
For this report, we put the banks' recommendations to the test. A CU reporter, representing himself as a customer with money from a matur. ing certibcate of deposit to invest, sat down with 40 investment salespeople at banks in California. Connecticut, Illinois, New Jersey, and New York. He found that although banks endow their salespeople with authoritative titles investment counselor, finan cial planner,' and the like, customers rarely get a detailed, thoughtful, appropriate financial plan. The investment advice our reporter received was often inappropriate, sometimes wildly so. The big picture
Our reporter gave each bank's salesperson the same basic set of facts. He had $50,000 in CD money coming due and didn't know much about investing. He did not say that he was conducting a survey.
As a group, the salespeople stum148
bled badly on the basics. At a mini- cipal bond funds, asset allocation mum, an investment adviser needs to funds, money-market funds and per know something about the level of haps some conservative stock mutual risk that a client is comfortable with. funds. If our six out of 10 salespeople But only 16 of the 40 salespeople are representative, the odds of get bothered to ask any questions that ting good advice at a bank that sells would have led in that direction. On mutual funds are worse than I in e the occasions when he was asked, the reporter portrayed himself as a
It's quartos conservative investor who wanted to The sales presentations ou re get a bit more than prevailing CD porter witnessed were peppered with rates without taking any chances. To incorrect and misleading statements their credit, the salespeople who Many of the salespeople represented went to the trouble to probe ner their investments as a sure thing ally made appropriate investment whatever those investments urned recommendations.
out to be. Of the 24 salespeople who didn't You'll get 10 percent guaranteed ask about risk, two-thirds made rec- said a salesman at Chase Manhattan ommendations that included a sub Bank in New York, as he handed stantial investment in aggressive over prospectuses for three stock and growth stock funds. Such funds are bond mutual funds. When pressed among the most risky investments: for details of this guarantee, he re the possibility of losing money, at treated to: "Our funds have bever least over the short term, is high. lost money over a one-year period." Whatever their long-term potential, (That's true, although the Chase they are inappropriate for anyone funds have only been in existence for who shuns risk.
about five years, not long enough to Half of all the salespeople also have weathered a sustained down failed to ask what other investments market) the reporter had. To make an in- About one salesperson in four formed recommendation, an invest- cited the returns of that bank's ment counselor needs to know what mutual funds without including the else a client owns in order to get a effect of commissions. One sales picture of how risky that client's cot man, for example, touted a Gor lective portfolio may be. That's a ernment bond fund that he claimed basic tenet of financial planning. had a one-year return of 8.7 percent
All told, only six of the 40 sales The prospectus. however, showed people asked for what we would that after subtracting the commis consider essential information and sion, the one-year return shrank to recommended investments that were just 4.2 percent, about the same as appropriate. balanced, and relatively then-prevailing CD rates. low in risk. Such investments might At Shawmut Bank in New Haven include short-term bond funds, muni Conn., a saleswoman was mistaken
CONSUMER REPORTS MARCH 1994