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about even the fundamentals of 6- and handed over the receiver. That nance. "Buy bonds if you don't want salesman pitched a unit investment risk," she said. "All our bond funds trust, an investment that's something are very conservative. In fact, bond like a mutual fund but that usually funds can be quite risky if interest carries a higher commission rates change. She also claimed that Of the 40 salespeople who offered bond funds were an ideal way to take investment advice, only eight, in our advantage of rising interest rates. judgment, made a credible effort to Just the opposite is true. The value of explain why they recommended bonds, and bond mutual funds, falls what they did. Some others couched when interest rates rise.

their advice in investment jargon that After a lengthy interview, a sales a customer with no background in 1man at First Interstate Bank in Los nance would have been hard-pressed Angeles recommended three mutual to understand. At United Jersey funds. He insisted that the bank's Bank in New Jersey, for example, a completely safe mutual funds would salesman tossed out such terms as 'lock in a 20 percent gain with inverted yield curve, basis points, hardly any risk." But the funds he yield to maturity." -long hedge," and recommended had not returned 20 fundamental analysis." percent in years past, and they would Most of the salespeople either have to be considered moderate to skipped over or downplayed their high in risk.

commissions, which often take four At Wells Fargo Bank in Los to five percent off the top of a typical Angeles, the salesman assured our mutual-fund investment Once again, reporter of the safety of the bank's only eight of the 40 salespeople we

rock solid. Government-guaranteed encountered outlined the fees in a Treasury bond fund. Indeed, the manner that we judged complete and mutual fund had performed well, but easily understood. it was plenty risky. The bonds in its portolio had an average maturity of

Profiting from confusion 25 years, the longer a bond fund's Americans place a high degree of average maturity, the more suscepti- trust in their banks, largely because ble it is to interest-rate changes. A the FDIC guarantees bank account mere one percent rise in interest balances up to certain limits. But a rates will cause a bond with a matu- 1993 survey by the Securities and nity of 25 years to fall about 12 per. Exchange Commission found that cent in value.

only 33 percent of the consumers The Wells Fargo salesman said, questioned knew that money-market You can't lose money on Gov- mutual funds sold by banks are not ernment-guaranteed bonds. That's protected by FDIC insurance. And 28 only partly true. While some bonds percent thought that all mutual funds are Government-guaranteed. that sold by banks are just as safe as simply means the bonds will be deposits with FDIC insurance. Ant redeemed at their stated value when other 17 percent weren't sure whether they mature. It doesn't mean that a bank mutual funds were insured or mutual fund that invests in them not. (They aren't. It's possible, if can decrease in value if interest unlikely to lose every cent that you rates change

put into a mutual fund, whether you More than a dozen of the sales bought it at a bank or elsewhere.) people suggested that insurance It's not surprising that the public is from the Securities Investor Protec- confused, given the expansion of tion Corp.. or SIPC. was just as good bank services in recent years. Until as Federal Deposit Insurance Corp. 1987, banks were mainly limited to (FDIC) insurance. In fact, the SIPC taking deposits. paying interest on insures brokerage accounts for up to those deposits, and making loans. $500.000 each, but pays off only if the Then the Government began to allow brokerage firm goes bankrupt. The banks to sell financial products such SIPC doesn't insure the performance as stocks, bonds, annuities, and of investments.

mutual funds. A L'nion Bank in Los Angeles, a Since then, banks have been startsaleswoman skipped mutual funds ing and selling mutual funds at a altogether. She first tried to sell our rapid pace. BayBanks, Inc., of Bos reporter an annuity, an insurance ton, launched a family of mutual contract that promises a payment or funds at the beginning of 1993, and series of payments at some future by tall had attracted over $1 billion in date. usually at retirement. When the assets. Mellon Bank of Pittsburgh reporter hesitated, the saleswoman announced in December that it phoned a colleague in another office would acquire the $80-billion Dreytus CONSUMER REPORTS MARCH 1994

Corp. mutual fund company

One reason for the banks' interest in funds is that tightened Federal rules on lending and increased capital requirements have forced them to look for sources of revenue other than making loans. At the same time, low rates on certificates of deposit have led to an exodus of depositors' Growth industry money from banks. Nearly a third of Banks currently all the money invested in CDs in

offer more than 1990 has since left-a net loss of

1150 mutual $191-billion in 1992 and S84-billion in

funds with nearly

$200-billion in 1993. Banks that sell mutual funds

assets. That's can keep some of that money from

up from 213 leaving, and they may be able to sell funds and $35those customers CDs again if inter- billion just five est rates rise.

years ago. Enter the regulators

No branch of the Federal Government has been eager to claim juris diction over bank sales of uninsured investments. The Securities and Exchange Commission, which oversees other types of mutual funds, hasn't claimed direct regulatory power over those sold by banks. The FDIC and the Comptroller of the Currency both say their main concern is that banks not imply that their mutual funds and other investments are FDIC insured.

There are signs that the Govern ment may be waking from its regulatory slumber. Last November. President Clinton proposed a plan to consolidate oversight of the banking industry under a single Federal board, rather than the four agencies that currently share responsibility. Lax regulation of bank sales of in

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149

vestment products was cited as one savings and loan was taken over by and Grand in downtown Los Angeles
reason for such a move.
a

the Government, more than 23.000 featured more than 20 large hanging The FDIC last summer issued an customers were left holding $255 signs advertising mutual funds. advisory to banks on mutual fund million in worthless bonds.

Wells Fargo customers can even sales. But the advisory, and similar Investigators found that tellers make some mutual fund transactions guidelines from the Comptroller of at Lincoln Savings & Loan received through the bank's 1700 automated the Currency, are simply advice, not bonuses for recommending unin- teller machines

rules. They have been widely ig. sured bonds to customers and for At several banks, our reporter Quart of milk Loaf of bread nored by the banks.

meeting the sales quotas established overheard salespeople calling cus Mutual fund

The Comptroller's guidelines call at each branch. Customers were not tomers whose CDs were about to Bank South

for banks to make a "conspicuous told that the bonds were being used expire. Those customers were urged Corp. of Atlanta, disclosure in a prospectus or adver- to finance realestate ventures that to switch their CDs to the bank's which operates tisement that mutual funds sold by entailed considerable risk.

mutual funds or other investments banking outlets the bank do not have FDIC insur- The House proposal would require A salesman at a California bank In stores like

ance. Only seven of the salespeople banks to sell uninsured products in a boasted. When I tell them the kind Kroger and

we encountered, however, mentioned Piggly Wiggly,

separate part of the bank. Currently, of return they could get with mutual that the funds they sold were not bank the regulations merely require them funds, their eyes pop out has announced plans to sell

deposits or were not FDIC insured. to comply to the extent permitted by Marketing efforts that target CD mutual funds at Legislation to rein in the banks has space and personnel considerations. customers can lead to abuse and its supermarket been introduced by Henry Gonzales, Few of the banks CU visited segre therefore are of special concern." locations. D-Tex, chairman of the House Bank- gated their mutual fund operations. says the FDIC. The practice of cal

ing Committee. He cited as an exam- Indeed, most of them placed fund ing people with maturing CDs to sel ple of the potential for abuse the representatives in prominent loca them other investments would be Lincoln Savings & Loan scandal of tions, such as near the entrance or curtailed under the Gonzales bill 1989. It involved thousands of people, the tellers' line.

Prior written consent from the cus most of them elderly, who bought At some banks we visited, lobbies tomer would be required before uninsured bonds they believed to be were festooned with mutual fund information about his or her ac federally insured because the bonds advertisements. The small Wells counts could be released without a were sold inside the bank. When the Fargo branch at the comer of 6th court order.

The bill would also prohibit telers ADVICE ON ADVISERS

from making unsolicited referrals to bank customers. According to the Consumer Bankers Association, a

banking-industry trade group. telers WHERE TO FIND INVESTMENT HELP are often given incentives for reter

ring depositors to the investment If you are planning to invest in mutual funds which means that they have passed a course salespeople. Such incentives may for the first time, your best bet is to educate of study and received a certificate. Interest- include cash or extr vacation time, yourself in the basics of investing, not to put ingły, none of the seven were among the according to another source. your trust or your money in the hands of group of salespeople whose recommenda

Customers usually aren't told someone billed as an investment adviser.' tions we would consider appropriate.

whether the salesperson sitting in In particular, we think you should focus on Good financial planning should start with their bank's lobby works for the no-load mutual funds, the kind that are sold a written list of your current assets, debts, bank itself, a subsidiary of the bank directly to investors without any costly sales and income. The adviser should ask about

or an outside firm. I those custom commissions

your goals: when you'd like to retire and ers buy a fund, their monthly state Information on mutual fund investing is with what level of income, how you plan to ments may carry the bank's name, widely available. CONSUMER REPORTS pub- finance your children's education, your tax but the bank itself may have nothing lished its most recent Ratings of funds in situation, and so on.

to do with the investment accept to May (stock funds) and June (bond funds) With those factors in mind, the adviser can collect a commission 1993. Other magazines, such as Business present a variety of investments with varying

A bank may not only give an outWeek. Forbes, and Money, also publish fund risk levels. He or she should be willing to side brokerage firm space in its data, as do newspapers such as The Wall explain each of them to your satisfaction and

branches, it may give the firm aress Street Joumal and Barron's. Consumer Re to let you choose what's best for you.

to the bank's customer file, including ports Books will publish a basic guide for Insurance agents, lawyers, accountants, the expiring CD lists. Bringing in fund investors. The Consumer Reports Mu- and tax preparers may do financial planning. outsiders who are not directly ac tual Funds Book, in May.

Speak to several before you hand over any countable to the bank create the If you find that you need more help in money. Shun those who want you to decide

greatest chance for abuse. A branch choosing funds, don't sign up with the first immediately. And don't rely on oral repre manager at a Chicago bank, who adviser you encounter. Sound investment sentations get everything in writing.

asked that his name be withheld, advice may well be as close as your neigh- If you want to pay for investment advice,

told our reporter that no fewer than borhood bank, but how can you tell?

consider hiring a fee only financial planner. 12 brokers had come and gone from Unfortunately, the fact that your bank may Such planners charge by the hour and don't his branch during the previous 14 call its salesperson a financial planner means make money from commissions. That doesn't months. The brokers are on comlittle. Anyone can hang out a financial plan- mean their advice will always be better, but mission, and my customers are ner shingle and other investment advice. at least they won't have a vested interest in marks to them, the manager said. Seven of the salespeople we interviewed selling you the products that make them the They don't monitor the customers claimed to be Certified Financial Planners. most in commissions.

portfolio, except to try to generate

another commission." 150

CONSUMER REPORTS MARCH 1994

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Re:

Mellon Bank, N.A., Greensburg, PA - Control No. 93-NE-08-043
Mellon Bank (DE), N.A., Wilmington, DE - Control No. 93-NE-08-044
Operating Subsidiary Notice - Mellon/Dreyfus Acquisition

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. $ 3.34. 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.

80-2290_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 commeats 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 onc,' information provided by commenters, and the OCC's analysis, ve 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 Jacdicke 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.

* 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 ponbank 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." 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 do 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 bolding 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, loc.; Dreyfus Personal Management, Loc.; 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 bolding company and these subsidiaries, unless otherwise noted. All of these entities will be bank operating subsidiaries after the merger.

S 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

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