The Honorable Eugene A. Ludwig

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6b. and c. The OCC states that it will pursue formal enforcement actions against bank sales personnel only if such actions threaten the safety and soundness of the bank or involve a violation of law. How will bank customers be able to obtain redress if the OCC does not pursue violations of the Interagency Guidelines, and no avenue exists for customer private rights of action or arbitration of bank customer disputes?

7. Please explain what the OCC means by an "appropriate suitability requirement" and how it differs from the NASD's suitability requirements.

9.

Please state whether any of the distributor's activities will be subcontracted to Mellon or Mellon subsidiaries or affiliates. Since the distributor is not itself selling mutual fund shares, who is underwriting the issuance of Dreyfus' mutual fund shares?

Thank you for your March 2, 1994 letter in which you ask certain follow up questions to our February 25, 1994 letter concerning the proposed acquisition by Mellon Bank, N.A. ("Mellon") of Dreyfus Corporation ("Dreyfus"). We have endeavored to provide you with the requested information. The numbered answers below correspond to the questions in your letter.

1a.

You have asked the OCC to compare the Federal Reserve's capital treatment of Section 20 subsidiaries with the OCC's capital treatment of securities subsidiaries. In particular, with respect to both methods, you would like to know whether the parent's capital investment in the subsidiary is included in meeting the parent bank or holding company's regulatory capital standards. You further ask us to explain the differences in these two methods, including the impact of double leverage, if any. Finally, you ask us to discuss how the FDIC treats a bank's investment in a subsidiary for capital purposes.

For operating subsidiaries that engage only in bank permissible activities, the Federal Reserve, the FDIC, and the OCC require the institutions they regulate to consolidate the assets and liabilities of its operating subsidiary and to hold capital against the consolidated assets as provided by GAAP. Thus, the OCC, Federal Reserve, and FDIC also permit the parent bank to count its investment in such a subsidiary toward meeting the higher capital requirement that results from the consolidation of assets. There is no double leverage in the sense of failing to include assets corresponding to capital while including the capital itself in any of the bank capital tests. There is also no double leverage in the sense of using a subsidiary's capital simultaneously to address distinct risks arising from the activities of a subsidiary and its parent. Consolidated bank capital standards assume banks are engaged in all permissible activities, including securities activities.

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The Federal Reserve and the FDIC apply a different rule to securities subsidiaries that engage in underwriting. The Federal Reserve applies the risk-based capital test to a holding company under two different standards. It applies the test to the parent with the assets and capital of its Section 20 subsidiary included (including the parent's investment in the subsidiary) and applies the test again after subtracting the subsidiary's asset and capital from the parent's balance sheet. In addition, the holding company, including the capital investment in the Section 20 subsidiary, must meet the minimum leverage test.

The Federal Deposit Insurance Corporation ("FDIC") applies both the risk-based and leverage capital test to nonmember state banks without consolidating assets and capital of bona-fide securities subsidiaries that engage in underwriting. Twelve U.S.C. § 325.5(c) provides that the assets and liabilities of a securities subsidiary of a state bank shall not be consolidated with its bank parent and any investment therein shall be deducted from the parent's Tier 1 capital and total assets. The deduction of the parent's investment in the subsidiary is linked to the nonconsolidation of the subsidiary's assets and liabilities.

1b. You ask whether the capital of Dreyfus' broker-dealer subsidiary would be legally separate from the capital of the parent bank. You also question under what circumstances the OCC would permit Mellon to withdraw capital from a registered broker-dealer subsidiary.

Upon acquisition, the capital of a national bank operating subsidiary is consolidated with that of the parent bank for reporting purposes. While the capital of the two entities may be held in separate accounts, those capital accounts are not totally segregated. Once a national bank acquires an operating subsidiary, excess capital of either the bank or the subsidiary may be moved to the other as necessary. Nevertheless, the national bank is required to ensure that both the bank itself and its operating subsidiary meet their regulatory capital requirements. Thus, a national bank would not be permitted to withdraw capital from the subsidiary and leave it undercapitalized for regulatory purposes. Such an action would constitute a violation of law or regulation, an unsafe and unsound practice, and a violation of a written commitment (if such a condition were included in the approval letter). In other words, the operating subsidiary must maintain the same minimum capital it is required to hold on a stand-alone basis.

2.

You question whether the enhanced controls discussed in our letter should be based on the unique circumstances of a bank's mutual funds business or more uniform standards.

The OCC requires national banks in the mutual funds business to comply with applicable uniform guidelines and controls as well as others specifically tailored to the institution and the level of business. For example, the Interagency Statement on Retail Sales of Nondeposit Investments ("Interagency Statement") sets forth the uniform guidelines and controls required of national banks participating in the mutual funds business. In addition, the OCC has required particular procedures and controls necessary to implement these guidelines that vary according to the nature of the bank's mutual fund sales activities. Thus, the OCC relies on both uniform

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and bank specific controls to provide for effective and efficient regulation of national bank mutual fund sales activities. The OCC routinely reviews, and is currently reviewing the conditions of approval it imposes on similar operating subsidiary applications to determine which conditions the agency should consider imposing uniformly through rulemaking without unduly increasing regulatory burden.

3. You ask the OCC to support and explain the statement that Dreyfus would be "the bank. agent, or other person participating in the affairs of such bank" within the scope of 12 U.S.C. § 1818(b).

Twelve U.S.C. § 1818(b) gives the OCC jurisdiction to initiate cease and desist proceedings against "any insured depository institution, depository institution which has insured deposits, or any institution-affiliated party." This language replaced the "participating in the affairs of the bank" language after the enactment of the Financial Institution, Reform, Recovery and Enforcement Act of 1989.

This broad jurisdiction authorizes the OCC to initiate enforcement proceedings against a national bank if the bank or its operating subsidiary participates in a violation of law, an unsafe or unsound practice, or a violation of a written agreement. In this sense, operating subsidiaries are treated as divisions or departments of their parent insured depository institutions. OCC regulations provide that "[u]nless otherwise provided by statute or regulation, all provisions of the Federal banking laws applicable to the operations of the parent bank shall be equally applicable to the operations of its operating subsidiary." 12 C.F.R. § 5.34(d)(2). Operating subsidiaries also are subject to the examination and supervision of the OCC. 12 C.F.R. § 5.34(d)(3). If, therefore, the OCC determines that the subsidiary has operated in an unsafe and unsound manner or has violated the law or a written condition, then the OCC may order the bank to take remedial action under 12 U.S.C. § 1818, including disposal of the subsidiary. See 12 C.F.R. § 5.34(d)(3).

4.

You ask whether it is conceivable that the OCC would determine that underwriting was a financial service "incidental to banking," and whether it would follow that the Glass-Steagall Act would not apply to bank underwriting activities.

The Glass-Steagall Act specifically provides that national banks "shall not underwrite any issue of securities or stock." 12 C.F.R. § 24(7). This specific prohibition makes it clear that such underwriting is not a permissible banking activity. In contrast, the sale of annuities, which the OCC argues is incidental to the business of banking, is not specifically proscribed by GlassSteagall. Indeed, we note that the Glass-Steagall Act expressly permits banks to sell securities as agent. See 12 U.S.C. § 27(7).

6.

You ask whether the OCC alerts the SEC prior to examining bank operating subsidiaries registered as broker-dealers and whether we routinely share examination results.

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The OCC has invited the SEC to participate in joint examinations of banks' operating subsidiaries involved in mutual fund sales activities. The OCC and SEC staffs have

discussed developing general guidelines for handling these examinations. The OCC shares examination information and materials with the SEC upon request and refers violations of law identified during examinations to the SEC as appropriate.

6a.

You have asked the OCC to provide examination guides for compliance with Sections 23A and 23B and explain how Mellon's voluntary compliance with those sections will be examined for and enforced.

We have attached for your review those sections of the Comptroller's Handbook for National Bank Examiners that discuss compliance with Sections 23A and 23B of the Federal Reserve Act. If OCC examiners reviewing transactions between the bank and its subsidiary identify noncompliance with the voluntary commitments made in connection with an operating subsidiary approval, the OCC could initiate enforcement action to correct problems, including formal enforcement action for the violation of the written condition or an unsafe or unsound practice. Mellon has represented that it would not object if its voluntary commitments, such as the commitment to comply with Sections 23A and 23B, were included as conditions of approval. If the OCC were to approve this proposed acquisition, it would likely include, at a minimum, the written conditions set forth in the policy statement.

6b&c. You have asked how bank customers will obtain redress for violations of the Interagency Statement.

The OCC has previously stated that it will take action to correct violations of the Interagency Statement or other compliance problems identified during an examination. The OCC would consider initiating formal action if the misconduct constituted a violation of law, an unsafe or unsound practice, or a violation of a written commitment. For less serious violations, the OCC would use informal enforcement remedies, such as obtaining management's written commitment to correct the identified problem. Further noncompliance could then subject the bank to formal action.

While the Interagency Statement does not include a private right of action, customers seeking redress have other ways to seek relief. If the violation of the Interagency Statement constitutes fraud, for example, the customer may have a private right of action under section 10(b) of the Securities Exchange Act of 1934. The customer may also forward the complaint to the OCC for investigation and possible enforcement action. If the OCC initiates formal enforcement action based on a customer complaint, the OCC has broad remedial authority, including the authority to seek reimbursement for the aggrieved customer(s) in appropriate circumstances.

Trade associations for the banking industry recently joined together to publish guidelines on retail investment sales by banks. Those guidelines provide that banks may wish to resolve disputes with customers involving securities transactions through arbitration. The publication