about even the fundamentals of finance. "Buy bonds if you don't want risk." she said. "All our bond funds are very conservative." In fact, bond funds can be quite risky if interest rates change. She also claimed that bond funds were an ideal way to take advantage of rising interest rates. Just the opposite is true. The value of bonds, and bond mutual funds, falls when interest rates rise. After a lengthy interview, a salesman at First Interstate Bank in Los Angeles recommended three mutual funds. He insisted that the bank's "completely safe" mutual funds would "lock in a 20 percent gain with "hardly any risk. But the funds he recommended had not returned 20 percent in years past, and they would have to be considered moderate to high in risk. At Wells Fargo Bank in Los Angeles, the salesman assured our reporter of the safety of the bank's "rock-solid. Government-guaranteed" Treasury bond fund. Indeed, the mutual fund had performed well, but it was plenty risky. The bonds in its portfolio had an average maturity of 25 years: the longer a bond fund's average maturity, the more susceptible it is to interest-rate changes. A mere one percent rise in interest rates will cause a bond with a maturity of 25 years to fall about 12 percent in value. The Wells Fargo salesman said, You can't lose money on Government-guaranteed bonds." That's only partly true. While some bonds are Government-guaranteed, that simply means the bonds will be redeemed at their stated value when they mature. It doesn't mean that a mutual fund that invests in them can't decrease in value if interest rates change. More than a dozen of the sales people suggested that insurance from the Securities Investor Protection Corp., or SIPC. was just as good as Federal Deposit Insurance Corp. (FDIC) insurance. In fact, the SIPC insures brokerage accounts for up to $500.000 each. but pays off only if the brokerage firm goes bankrupt. The SIPC doesn't insure the performance of investments. At Union Bank in Los Angeles, a saleswoman skipped mutual funds altogether. She first tried to sell our reporter an annuity, an insurance contract that promises a payment or series of payments at some future date, usually at retirement. When the reporter hesitated, the saleswoman phoned a colleague in another office CONSUMER REPORTS MARCH and handed over the receiver. That salesman pitched a unit investment trust, an investment that's something like a mutual fund but that usually carries a higher commission. Of the 40 salespeople who offered investment advice, only eight, in our judgment, made a credible effort to explain why they recommended what they did. Some others couched their advice in investment jargon that a customer with no background in f nance would have been hard-pressed to understand. At United Jersey Bank in New Jersey, for example, a salesman tossed out such terms as "inverted yield curve," "basis points," "yield to maturity," "long hedge," and "fundamental analysis." Most of the salespeople either skipped over or downplayed their commissions, which often take four to five percent off the top of a typical mutual-fund investment. Once again, only eight of the 40 salespeople we encountered outlined the fees in a manner that we judged complete and easily understood. Profiting from confusion Americans place a high degree of trust in their banks, largely because the FDIC guarantees bank account balances up to certain limits. But a 1993 survey by the Securities and Exchange Commission found that only 33 percent of the consumers questioned knew that money-market mutual funds sold by banks are not protected by FDIC insurance. And 28 percent thought that all mutual funds sold by banks are just as safe as deposits with FDIC insurance. Another 17 percent weren't sure whether bank mutual funds were insured or not. (They aren't. It's possible, if unlikely, to lose every cent that you put into a mutual fund, whether you bought it at a bank or elsewhere.) It's not surprising that the public is confused, given the expansion of bank services in recent years. Until 1987, banks were mainly limited to taking deposits, paying interest on those deposits, and making loans. Then the Government began to allow banks to sell financial products such as stocks, bonds, annuities, and mutual funds. Since then, banks have been starting and selling mutual funds at a rapid pace. BayBanks, Inc., of Boston, launched a family of mutual funds at the beginning of 1993, and by fall had attracted over $1-billion in assets. Mellon Bank of Pittsburgh announced in December that it would acquire the $80-billion Dreyfus 1994 149 ✓ Quart of milk ✓ Loaf of bread ✓Mutual fund Bank South Corp. of Atlanta, which operates banking outlets in stores like Kroger and Piggly Wiggly, has announced plans to sell mutual funds at its supermarket 150 locations. vestment products was cited as one The FDIC last summer issued an The Comptroller's guidelines call for banks to make a "conspicuous disclosure" in a prospectus or advertisement that mutual funds sold by the bank do not have FDIC insurance. Only seven of the salespeople we encountered, however, mentioned that the funds they sold were not bank deposits or were not FDIC insured. Legislation to rein in the banks has been introduced by Henry Gonzales, D-Tex, chairman of the House Banking Committee. He cited as an example of the potential for abuse the Lincoln Savings & Loan scandal of 1989. It involved thousands of people. most of them elderly, who bought uninsured bonds they believed to be federally insured because the bonds were sold inside the bank. When the savings and loan was taken over by Investigators found that tellers The House proposal would require banks to sell uninsured products in a separate part of the bank. Currently, the regulations merely require them to comply "to the extent permitted by space and personnel considerations." Few of the banks CU visited segregated their mutual-fund operations. Indeed, most of them placed fund representatives in prominent loca tions, such as near the entrance or the tellers' line. At some banks we visited, lobbies were festooned with mutual-fund advertisements. The small Wells Fargo branch at the corner of 6th ADVICE ON ADVISERS WHERE TO FIND INVESTMENT HELP If you are planning to invest in mutual funds for the first time, your best bet is to educate yourself in the basics of investing, not to put your trust or your money in the hands of someone billed as an "investment adviser." In particular, we think you should focus on no-load mutual funds, the kind that are sold directly to investors without any costly sales commissions. Information on mutual-fund investing is widely available. CONSUMER REPORTS published its most recent Ratings of funds in May (stock funds) and June (bond funds) 1993. Other magazines, such as Business Week, Forbes, and Money, also publish fund data, as do newspapers such as The Wall Street Journal and Barron's. Consumer Re ports Books will publish a basic guide for fund investors. The Consumer Reports Mutual Funds Book, in May. If you find that you need more help in choosing funds, don't sign up with the first adviser you encounter. Sound investment advice may well be as close as your neighborhood bank, but how can you tell? Unfortunately, the fact that your bank may call its salesperson a financial planner means little. Anyone can hang out a financial planner shingle and offer investment advice. Seven of the salespeople we interviewed claimed to be Certified Financial Planners, which means that they have passed a course Good financial planning should start with With those factors in mind, the adviser can present a variety of investments with varying risk levels. He or she should be willing to explain each of them to your satisfaction and to let you choose what's best for you. Insurance agents, lawyers, accountants, and tax preparers may do financial planning. Speak to several before you hand over any money. Shun those who want you to decide immediately. And don't rely on oral representations-get everything in writing. If you want to pay for investment advice, consider hiring a fee-only financial planner. Such planners charge by the hour and don't make money from commissions. That doesn't mean their advice will always be better, but at least they won't have a vested interest in selling you the products that make them the most in commissions. and Grand in downtown Los Angeles featured more than 20 large hanging signs advertising mutual funds. Wells Fargo customers can even make some mutual-fund transactions through the bank's 1700 automated teller machines. At several banks, our reporter overheard salespeople calling cus tomers whose CDs were about to expire. Those customers were urged to switch their CDs to the bank's mutual funds or other investments. A salesman at a California bank boasted, "When I tell them the kind of return they could get with mutual funds, their eyes pop out." Marketing efforts that target CD customers "can lead to abuse and therefore are of special concern," says the FDIC. The practice of calling people with maturing CDs to sell them other investments would be curtailed under the Gonzales bill. Prior written consent from the cus tomer would be required before information about his or her ac counts could be released without a court order. The bill would also prohibit tellers from making unsolicited referrals to bank customers. According to the Consumer Bankers Association, a banking-industry trade group, tellers are often given incentives for refer ring depositors to the investment salespeople. Such incentives may include cash or extra vacation time, according to another source. Customers usually aren't told whether the salesperson sitting in their bank's lobby works for the bank itself, a subsidiary of the bank. or an outside firm. If those customers buy a fund, their monthly state ments may carry the bank's name. but the bank itself may have nothing to do with the investment except to collect a commission. A bank may not only give an outside brokerage firm space in its branches, it may give the firm access to the bank's customer file, including the expiring CD lists. Bringing in outsiders who are not directly ac countable to the bank creates the greatest chance for abuse. A branch manager at a Chicago bank, who asked that his name be withheld, told our reporter that no fewer than 12 brokers had come and gone from his branch during the previous 14 months. The brokers are on commission, and my customers are marks to them," the manager said. "They don't monitor the customers' portfolio, except to try to generate another commission." CONSUMER REPORTS MARCH 1994 Re: Mellon Bank, N.A., Greensburg, PA - Control No. 93-NE-08-043 Dear Mr. Bleier: This letter responds to your notification, on behalf of Mellon Bank, N.A. and Mellon Bank (DE) (collectively, the "Bank"), of the Bank's intent to establish certain operating subsidiaries (collectively, the "Subsidiaries") to acquire most of the assets, operations, and activities of The Dreyfus Corporation. Following the acquisition, the Subsidiaries primarily will engage in investment advisory, brokerage and administrative services to the Dreyfus family of mutual funds. The Subsidiaries will not act as distributor of the mutual funds. In addition, the Bank proposes to have the Subsidiaries engage in certain other activities unrelated to mutual funds which are permissible for national banks and their operating subsidiaries, including investing and selling certain precious metals to customers; holding loans; receiving and passing payments to the parent corporation; and selling variable annuities as agent from a place of under 5000 inhabitants. The Bank's notification was filed with the Office of the Comptroller of the Currency ("OCC") on December 30, 1993, pursuant to 12 C.F.R. § 5.34. As provided in section 5.34, the OCC extended its thirty-day review period since the Bank's proposal raised issues which required additional information and time for analysis. The OCC reviewed the Bank's proposal to determine if the proposed activities were legally permissible for national bank operating subsidiaries and to ensure that the proposal was consistent with prudent banking principles and OCC policy. On February 23, 1994, the OCC published a summary of the Bank's proposed acquisition in the Federal Register, affording interested persons an opportunity to submit comments. See 59 Fed. Reg. 9017 (1994). The Federal Register notice also requested comments on another pending operating subsidiary notice. The time for filing comments on both notices expired on March 28, 1994, and the OCC has considered all comments received. 80-222 0-94-14 -2 In response to the request for comments, the OCC received a total of thirty-six comments with thirty-one commenters supporting the Bank's proposal. The majority of the comments came from community groups favoring approval of the Bank's proposal based primarily on the Bank's demonstrated commitment to the community and the expectation that the acquisition would result in customers having greater and easier access to a wide range of banking and investment products. Commenters stated this would particularly benefit persons with fixed incomes and limited mobility. Various bankers and trade associations provided favorable comments focusing on the legal precedents for approval, the changing nature of banking, customer protection matters, and maintaining bank competitiveness. Several commenters urged against adopting regulatory conditions that would unfairly burden banks relative to other participants in the mutual funds industry. The OCC received five comments critical of the Bank's proposal. Two of the comments raised general concerns about bank participation in mutual fund activities and the other three comments discussed individual complaints based on alleged age discrimination in employment by an ex-employee, the sale of property by another bank acquired by the Bank, and a loan made by the Bank for the establishment of an employee stock ownership plan. Based on the information provided in the Bank's notification letter dated December 30, 1993, accompanying legal memorandum and other written materials enclosed therein, subsequent materials listed in footnote one,' information provided by commenters, and the OCC's analysis, we conclude that the proposed activities are permissible for national banks and their operating subsidiaries and are consistent with prior opinions of the OCC. Accordingly, the Bank may implement its proposal pursuant to 12 C.F.R. § 5.34 based on the facts as described and in accordance with the submitted materials. This letter also subjects the Bank and the Subsidiaries to all the conditions set forth in this letter. The Bank's Proposal The Bank proposes to establish a wholly-owned operating subsidiary, XYZ Subsidiary, to facilitate the acquisition of most of the assets, operations and activities of The Dreyfus Corporation ("Dreyfus"). XYZ Subsidiary will merge with Dreyfus and Dreyfus will Letter from Michael E. Bleier to Michael Tiscia dated March 4, 1994; Letter from Michael E. Bleier to Michael Tiscia dated March 4, 1994 (second letter); Letter from Michael E. Bleier to Suzette Greco and Ann Jaedicke dated March 4, 1994; Letter from Michael E. Bleier to Michael Tiscia dated March 15, 1994; and the Policy Statement on Mutual Funds dated April 21, 1994 (revised). For purposes of this letter, the term "Notification" refers to each of these items as well as the Bank's notification letter, accompanying legal memorandum and other written materials enclosed therein. 2 The Dreyfus Corporation is a corporation organized and existing in good standing under the laws of the State of New York, with its principal offices located in New York, New York. Dreyfus has operated under the Dreyfus name since 1951 and has been publicly -3 continue as the surviving corporation. Dreyfus and its current subsidiaries will be divided into four groups after the acquisition: (1) those that will become operating subsidiaries of Mellon Bank, N.A.; (2) those that will become operating subsidiaries of Mellon Bank (DE);' (3) those that will become nonbank subsidiaries of Mellon Banking Corporation ("MBC"), the parent corporation of the Bank; and (4) those that will be liquidated or divested. The Bank's notice and this letter only relate to the proposed subsidiaries as listed in groups (1) and (2). The acquisitions are pursuant to an Agreement and Plan of Merger among MBC, Mellon Bank, N.A., XYZ Subsidiary and Dreyfus.3 The Subsidiaries listed in groups (1) and (2) above will be chartered under the laws of either New York or Delaware and will have offices in New York City and several other locations. None of the offices of the Subsidiaries will receive deposits, pay checks or lend money. The Dreyfus Corporation is located at 200 Park Avenue, New York, New York, and will continue to operate from that location. Following the merger, the Dreyfus management team and the Dreyfus fund managers will remain in place, and the Dreyfus name will be retained for the mutual funds it manages. The Bank represents that no director, officer or employee owned since 1965. Dreyfus serves primarily as an investment advisor and manager of mutual funds and is the sixth largest mutual fund company in the United States. Dreyfus also acts as the holding company for several other entities. › Dreyfus Service Organization, Inc. is the only current Dreyfus subsidiary proposed to become an operating subsidiary of Mellon Bank (DE). ⚫ The current subsidiaries of Dreyfus that will continue as subsidiaries of the postmerger Dreyfus are: The Dreyfus Consumer Credit Corporation; Dreyfus-Lincoln, Inc.; Dreyfus Management, Inc.; Dreyfus Personal Management, Inc.; Lion Management, Inc.; Dreyfus Precious Metals, Inc.; Dreyfus Service Corporation; Seven Six Seven Agency, Inc.; and Dreyfus Service Organization, Inc. The incoming materials provide descriptive details on the activities of each of these entities. For purposes of this letter, use of the name "Dreyfus" encompasses the holding company and these subsidiaries, unless otherwise noted. All of these entities will be bank operating subsidiaries after the merger. 5 MBC will issue shares of its common stock for each share of Dreyfus common stock. MBC will account for the transaction as a pooling of interests. The proposed merger will have a positive impact of the capital position of the Bank. The Bank notes that the principal reasons for establishing Dreyfus as a subsidiary of the Bank, rather than a subsidiary of MBC, were to provide this major increase to the Bank's capital position and to supplement the Bank's earnings with Dreyfus' earnings. "The management of the Bank has committed that Dreyfus will operate as an independent entity for at least two years subsequent to the acquisition. The Bank will be accountable for the operations of Dreyfus, as it is for all of its operating subsidiaries. MBC will provide oversight and review of the Dreyfus operations by participation on an executive |