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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."


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." 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 related to banking," the Federal Reserve Board and the courts have considered whether:

1) banks generally have, in fact, provided the



banks generally provide services that are
operationally or functionally so similar to the
proposed service as to equip them particularly
well to provide the proposed service; or


banks generally provide services that are so
integrally related to the proposed service as
require their provision in a specialized form.
See National Courier Ass'n v. Board, 516 F.2d 1229
(D.C.Cir. 1975).


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. 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. 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. 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.


The FDIC advised the Subcommittee in a letter dated February 25, 1994 that:

There are approximately 13,400 FDIC-insured depository institutions with approximately $4,600 billion in assets. (A.2.)

The FDIC is not able at this time to precisely
state the number of banks and affiliates engaged in
securities sales or advisory activities. Our regions
indicate that one-third or more of state nonmember
banks may be doing so. Changes in to the bank Call
Reports are being made to collect this information.

There is no application or notice required of insured nonmember banks before they engage in securities activities directly in a bank. (A.3.)

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.)

[graphic][merged small]


investigation of 40 banks

in five states found bad investment advice and outright lies about safety.



ome 3500 banks across the U.S. now sell mutual funds. And many of those banks sell them aggres sively. Through the third quarter of 1993, the money invested in bank mutual funds was growing 40 percent a year-almost twice as fast as the fund industry in general.

Banks aren't just selling mutual funds. They're also advising customers on what to buy. Banks may sell

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 certificate 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," "financial 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 stum


bled badly on the basics. At a minimum, an investment adviser needs to know something about the level of risk that a client is comfortable with. But only 16 of the 40 salespeople bothered to ask any questions that would have led in that direction. On the occasions when he was asked, the reporter portrayed himself as a conservative investor who wanted to get a bit more than prevailing CD rates without taking any chances. To their credit, the salespeople who went to the trouble to probe generally made appropriate investment recommendations.

Of the 24 salespeople who didn't ask about risk, two-thirds made recommendations that included a substantial investment in aggressivegrowth stock funds. Such funds are among the most risky investments; the possibility of losing money, at least over the short term, is high. Whatever their long-term potential, they are inappropriate for anyone who shuns risk.

Half of all the salespeople also failed to ask what other investments the reporter had. To make an informed recommendation, an investment counselor needs to know what else a client owns in order to get a picture of how risky that client's col lective portfolio may be. That's a basic tenet of financial planning.

All told, only six of the 40 sales people asked for what we would consider essential information and recommended investments that were appropriate, balanced, and relatively low in risk. Such investments might include short-term bond funds, muni

cipal bond funds, asset allocation funds, money-market funds, and perhaps some conservative stock mutual funds. If our six out of 40 salespeople are representative, the odds of getting good advice at a bank that sells mutual funds are worse than 1 in 6.

It's 'guaranteed

The sales presentations our re porter witnessed were peppered with incorrect and misleading statements. Many of the salespeople represented their investments as a sure thing. whatever those investments turned out to be.

"You'll get 10 percent guaranteed," said a salesman at Chase Manhattan Bank in New York, as he handed over prospectuses for three stock and bond mutual funds. When pressed for details of this guarantee, he retreated to: "Our funds have never lost money over a one-year period." (That's true, although the Chase funds have only been in existence for about five years, not long enough to have weathered a sustained down market.)

About one salesperson in four cited the returns of that bank's mutual funds without including the effect of commissions. One sales man, for example, touted a Government bond fund that he claimed had a one-year return of 8.7 percent. The prospectus, however, showed that after subtracting the commis sion, the one-year return shrank to just 4.2 percent, about the same as then-prevailing CD rates.

At Shawmut Bank in New Haven, Conn., a saleswoman was mistaken CONSUMER REPORTS MARCH 1994

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