backing, full imprimatur of the bank, that stands behind it in their minds.

Mr. SCHAEFER. On the Mellon-Dreyfus merger, is this somewhat unique or is there anything about this particular merger that we should have special pause to think about?

Mr. LEVITT. Like so many things in our financial markets, I suspect that this is the beginning of a process. It is fuelled by competition. It is fuelled by problems that banks have experienced in terms of earnings, and I think what we are seeing now is probably the beginning of a rush of such kinds of mergers.

I think that parties to this particular transaction are certainly mindful of the problems that we have been talking about, and they are trying to structure this arrangement in a way which would be responsive to that, but there is no guarantee in cement.

Does that say what the next competitive acquisition will bring? Generally speaking, the first out of the gate are the ones that are the most secure, the most responsible, the most conforming to what they think our concern will be. But after that, when the rush comes from the gate, when there are 20 funds about to be acquired by different banks around the country, will we be able to focus the kind of laser-like attention on these problems that we are today?

I don't think so, and that's why I feel so strongly about the need for functional regulation, which brings a measure of consistency to this process and helps clarify the dreadful perceptions that I think are so dangerous out there.

Mr. SCHAEFER. It seems to me it is almost like initial mergers like U.S. West/Time-Warner, McCall/AT&T, Jones Intercable, and Canada Bell. I mean it's certainly not the same but the initial start was there on these mergers and so this is the initial start here on this kind of merger.

Mr. LEVITT. You're right. It rarely exists in a vacuum, and I don't think this one will either.

Mr. SCHAEFER. Thank you, Mr. Levitt and Mr. Barbash.
Mr. DINGELL. The Chair thanks the gentleman.

The gentlewoman from Pennsylvania.

Ms. MARGOLIES-MEZVINSKY. Thank you. Mr. Levitt, if you could be a little bit more specific, what are your fears after this initial rush, after this initial-what you said were perhaps the most responsible of mergers, down the pike?

Mr. LEVITT. I guess I fear the fragmentation of the regulatory process in a way that will allow many innocent Americans to be badly hurt in the process. Now what I mean by that is that the SEC has a history of anticipating monitoring and punishing individuals who take advantage of our securities activities.

Our emphasis, and I can't say it too often, is on investor protection. I don't know what the banking regulators will bring to the table in this regard, but I know that they lack the experience in terms of training, and a history of regulatory oversight in these areas. That's not something that you gain by reading a manual, and it is not something that you come by easily. It is something that is born through a history of experience.

I thought that I had seen every possible mischief-maker in the business in my 20 years in the securities industry. Since I came to the Commission, I have seen many more than I ever saw before in

my whole life. To expect a banking regulator, whose first and foremost concern is that banks must be able to open their doors tomorrow morning, to do the kinds of things that a securities regulator would do I think is not realistic, and I think when there is the inevitable conflict between the interest of the bank, the interest of the depositors, and the interest of the shareholders, of the owners of shares in the mutual funds, in my judgment, the bank regulators will come down in favor of the former rather than the latter, and that is my greatest concern.

Ms. MARGOLIES-MEZVINSKY. How many Mellon-Dreyfus type deals currently exist?

Mr. LEVITT. How many do I anticipate?

Ms. MARGOLIES-MEZVINSKY. Currently exist now.

Mr. LEVITT. None exist to this extent. This is by far and away the largest. Mellon has also acquired the Boston Company, which is part of their overall complex and a number of banks have mutual funds but none comes close to this size.

Mr. BARBASH. This deal will cause Mellon to be the largest bank mutual fund complex by four times over the next largest.

Ms. MARGOLIES-MEZVINSKY. How many situations currently exist whereby a securities entity is owned outright by a bank?

Mr. LEVITT. I don't know exactly the number of banks that sell securities. There are approximately 30 bank holding companies that have securities affiliates, so-called section 20 affiliates. But there are an increasing number, in the hundreds, of banks that market mutual funds that they either own or mutual funds that are networked.

In other words, an arrangement that is very frequently employed is a mutual fund company will come to a bank and say we'll put our people in all of your branches and we'll sell our funds through your branches and perhaps you'll have some of your sales people sell our funds in your branches.

Ms. MARGOLIES-MEZVINSKY. But that is very different. Do you anticipate that many more will come?

Mr. BARBASH. To answer your question from before, there's around 110 banks or their subsidiaries who are involved in the mutual fund business at this point.

In terms of whether we anticipate whether others will come, that is hard to say. We are surely seeing consolidation in the mutual fund area generally.

Mr. LEVITT. I think that every mutual fund, major mutual fund complex, seeing what Dreyfus has obtained in this transaction, will give serious thought to affiliation with a bank and every bank or many banks in America, seeing that one of their competitors has developed a means of diversifying their revenue stream against the problems that have afflicted banks in recent years will be looking for this exact same kind of transaction.

The history of American investment banking and the mergers and acquisitions business shows you that these things rarely occur in a vacuum. They occur as part of an overall pattern, and that pattern, I assure you, will exist in this instance as well.

Ms. MARGOLIES-MEZVINSKY. Could you just address some of the tools that are available to protect investors? Can you elaborate a little bit more specifically about those tools that are available to

the regulators to ensure that banks don't mislead their investors in a banking setting?

Mr. LEVITT. Well, I think that, first and foremost, the self-regulatory mechanism employed in the securities field is fundamental to the area of supervision. The fact that there are exchanges and an NASD out there that will conduct inspections that will bring to the Commission the attention of various kinds of malfeasance, I think, is critically important.

I think the training of salespeople is also a critical factor. Right now, every salesperson who sells a security or sells a bond must be trained, and takes a so-called section 7 examination. Because the number of products has proliferated so much in recent years, the Commission is actively working on a plan together with the NASD and a committee that they have formed to upgrade that training so that brokers must be requalified on a regular, ongoing basis and retrained on a periodic basis. That is terribly important. The enforcement mechanism that the Commission applies—a history of enforcement which is probably the finest deterrent, the most effective deterrent imaginable-is another method that the Commission has uniquely applied to the securities industry. I can assure you that securities problems are very special and very different from the kinds of problems that you would experience in the ordinary conducting the affairs of a bank.

Maybe an overarching support for the kind of regulation and supervision that I am talking about is the discipline of the marketplace, a discipline that holds accountable every transaction that takes place in a securities firm, and simply is not the case in terms of bank regulation. I believe if you substituted a bank regulator who was experienced in looking at the kinds of things they look at for a securities regulator, you simply would be applying a set of standards that are very, very different and very much less effective in my judgment for the specialized kind of regulation involved in the securities industry.

Ms. MARGOLIES-MEZVINSKY. Thank you, Mr. Levitt. Thank you, Mr. Chair, thank you.

Mr. DINGELL. The Chair thanks the gentlewoman.

Chairman Levitt, later today I am going to be transmitting to the SEC and to the four Federal bank regulators a 55-page table comparison of the regulation of broker-dealers and investment advisers under the Federal securities laws versus under the banking laws. I will be keeping this hearing record open for 30 days to allow all of the recipients of that document to review it with care and to submit any corrections that are needed.

Even in draft form, however, it points out glaring differences in substance and in approach and significant shortfalls in the protection of investors under banking laws. [See p. 906.]

Would you please outline some of the material differences in those regulatory systems for us?

Mr. LEVITT. Yes, sir. In the first place, securities' broker-dealers all must register with the Commission. Banks don't register. Even the FDIC doesn't know how many or exactly which banks are involved in securities activities.

Second, SEC registered broker-dealers are, as I mentioned before, subject to uniform comprehensive testing and qualification

standards administered by the SRO's and the process is now underway to develop a plan of continuing, ongoing qualification training as well as continuing ongoing testing. Bank employees are simply not subjected at this present time to uniform testing and qualification requirements. Every bank does its own training and it varies a great deal from bank to bank.

Broker-dealers I think importantly, are subject to comprehensive regulatory planning and a strong enforcement program. The banks right now are subject only to guidelines. As far as I know, they are not enforceable by the bank regulators, and a bank enforcement program simply does not focus on investor protection.

Another more subtle kind of difference, I think, is the fact that banks really don't have an explicit duty to supervise. So many cases of the Commission involve failure to supervise. It is really the front line of how we have brokers adhere to standards that are important in terms of investor protection.

Under SEC regulation, broker-dealers have a duty to supervise, principals and supervisors are separately examined, and we hold those supervisors responsible for the performance of the vast network of brokers that fall beneath them. This is a very fundamental difference, in my judgment.

Mr. DINGELL. Now let's go into a little hypothetical.

For purposes of this, you will have to imagine that I am not the Chairman of the Oversight Subcommittee

Mr. LEVITT. Unimaginable.

Mr. DINGELL. Instead I am Mrs. Innocent Consumer. My middle name is Guileless. I am a widow of 72 years of age and I just lost my husband of 50 years, who managed the affairs of the family, financial and otherwise. Now our family has been banking at Rock Solid Bank for 30 years and 1 day I go down to good old Rock Solid to check the balance in my account and find out what my financial situation is.

I go in to talk to the first available teller but, as I do so, I note that the name over the door has been changed to Financial Services-R-Us. I walk to the first available teller for the balance in my savings account and for the status of my CD and he calls the information up on his computer and writes it down on a piece of paper which he hands to me, and he says: "Ms. Consumer, you are one of our best and most treasured customers. I feel compelled to tell you that you could be earning a lot more interest if your money was in one of our investment products. I think you should talk to one of our salespeople about making a bigger return here." He sends me just down the hall to his associate, Mr. Frank Sly.

Now Mr. Sly has signs all over his desk, one of which is an FDIC logo with a line through it, a picture of a bank with a line through it, and a picture of a passbook with a line through it. Now goodhearted Mr. Sly tells me that I should put all my retirement money and all of the insurance that I got from my husband into mutual funds and he tells me that they are not insured by FDIC but that FDIC insurance is only up to $100,000 and these investments carry SIPC insurance of a half a million dollars plus there is a private insurance policy. This is something that comes out of another bank's advertisement-I won't tell you which one although we might have them before us to discuss it with us-and it says down

here, it says Protection Insurance SIPC, Securities Investment Protection Corporation including $100,000 in cash, up to $500,000. Then it says Equitable Casualty and Surety Company, $9.5 million, total coverage $10 million. And he says "You are only insured up to $100,000 by FDIC."

So dear Mr. Sly discusses the broad array of funds available and tells me that I would be a fool to pass up a hot emerging market fund and a sizzling Ginnie Mae bond fund.

Now being somewhat new to financial affairs, I express concerns about some of the countries and companies in the emerging market fund. I also ask him whether Mr. Greenspan's testimony about the direction of interest rates has had any impact on bond funds.

Now dear Mr. Sly looks hurt and I am touched and he reminds me that Rock Solid has always been there with me, and he writes on the brochure for the Ginnie Mae bond fund the number 13.8 percent. Now I am only getting about 2.7 percent on my CD, and this looks pretty good, and he tells me that return is guaranteed and bonds are safer than stocks.

I sign a whole pile of forms which are presented to me and I don't really understand these. I have never seen forms like these before anyhow, and I am not really given much time to read these forms, which are rich in fine print, as you might imagine.

When I received my first account statements, I had a mild heart attack. I find out for the first time that I paid a huge front-end load on the sale. I also find that the market on each of the two fundsthe hot emerging market fund and this red-hot sizzling Ginnie Mae bond fund-they both had undergone a very sharp drop in price, in value. I find that a major part of my principal has been lost.

So I rushed down to Financial Services-R-Us, which used to be Rock Solid Bank, and find a long line of customers who are there screaming for dear Mr. Frank Sly and for Mr. Frank Sly's supervisor.

Now, we find out that Mr. Frank Sly is on a long, extended holiday in South America, in Brazil to be exact, which happens to have, I note, no extradition laws with the United States, and that his supervisor is out of the office for a very long lunch, which began sometime last week.

Now, what are my rights and remedies here under the banking laws?

Mr. LEVITT. Very few.

Mr. DINGELL. Very few. Why do you say that? What can I get under the banking laws?

Mr. LEVITT. You would not be protected by SIPC because SIPC doesn't protect mutual funds, it protects securities.

Mr. DINGELL. But I have this wonderful ad here which has been put out by a bank, and, in fact, has been done so, telling me how I am protected up to $10 million. Do you mean to say I am not going to be protected by that?

Mr. LEVITT. Precisely.

Mr. DINGELL. Now, do I have a private right of action against either Mr. Frank Sly or the bank?

Mr. LEVITT. I suspect in the case of fraud you probably-you might have a private right of action.