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advises one family of funds, the Laurel funds; in addition, its parent company recently acquired the investment adviser to The Boston Company funds. Once the pending merger is completed, Mellon Bank and its affiliates, including Dreyfus, will be the largest bank mutual fund investment adviser, with $76.8 billion in mutual fund assets under management. This

represents four percent of all mutual fund assets. 31

The Mellon/Dreyfus merger is the most striking example of the recent growth of bank involvement in the mutual fund industry. Currently 113 banks or bank subsidiaries advise 943 mutual funds 4/ and bank mutual funds have $204 billion in assets, an increase of 29% since December 31, 1992. S/ Banks also are increasingly active in selling mutual

fund shares to the public. 61

The Mellon/Dreyfus merger underscores the Commission's longstanding concerns with the existing statutory scheme, which permits bank securities activities to take place

31

Additional details regarding the proposed merger between Mellon and Dreyfus were
set forth in a letter from Chairman Arthur Levitt to Chairmen John D. Dingell and
Henry B. Gonzalez (January 7, 1994), enclosing a memorandum from the Division of
Investment Management and Office of General Counsel (collectively, the "Mellon
Letter.")

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31

See Lipper Analytical Services, Lipper Bank Related Fund Analysis (2d ed. 1993).
See id. Commentators have noted, however, that a large part of this growth is from
the conversion of bank trust assets to mutual funds, rather than from retail sales. See
M. Moore, "As Trust Conversions Dry Up, What's Next," American Banker, July 7,
1993, at 14. Mutual fund assets overall now exceed $2 trillion, an increase of 26
percent since December 1992. See Investment Company Institute ("ICI") Press
Release No. 94-02, Jan. 27, 1994, at 4.
In the first half of 1992, banks reportedly accounted for one-third of all new sales of
money market funds and 14 percent of all new sales of long-term funds. See ICI,
"Mutual Fund Statistics for the Bank Distribution Channel," May 1993; "Banks
Tuming to Mutual Funds as Shares in Household Assets, Credit Decline," BNA
Banking Daily, Dec. 21, 1993. More generally, "nearly one-quarter of America's
14,000-odd banks do some sort of brokerage business." The Economist, Nov. 6,
1993, at 105, 106.

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outside the framework of the federal securities laws. These concerns include: the risk of investor confusion; the potential for conflicts of interest to arise between banks and their

affiliated mutual funds; and the need for regulation, examination, and enforcement programs

that focus on investor protection, rather than bank safety and soundness and depositor protection. // Although the parties to the Mellon/Dreyfus transaction are adopting voluntary restraints to address many of these issues, g/ there is no guarantee that they will adhere to these measures in the future if faced with economic and competive pressures. In addition, no legally mandated safeguards apply to the growing number of banks that, like Mellon, are expanding their bank mutual fund activities (if, for the time being, on a smaller scale). These banks should not have the option of declining to submit to securities regulation.

71

For earlier statements of the Commission's views on these issues, see, es,
testimony of Chairman Breeden Before the Subcommittee on Telecommunications and
Finance of the House Committee on Energy and Commerce Conceming H.R. 797
(June 20, 1991); testimony of Chairman Breeden Before the Senate Committee on
Banking, Housing and Urban Affairs Concerning S. 543 and S. 713 (May 7, 1991);
testimony of Chairman Breeden Before the Subcommittee on Financial Institutions
Supervision, Regulation and Insurance of the House Committee on Banking, Finance
and Urban Affairs Concerning H.R. 1505, H.R. 6, and H.R. 15 (April 30, 1991);
statement of Chairman Ruder Before the Subcommittee on Telecommunications and
Finance of the House Committee on Energy and Commerce Concering Financial
Services Reform and Modification or Repeal of the Glass-Steagall Act (April 13,
1988); statement of Chairman Ruder Before the Subcommittee on Telecommunica-
tions and Finance of the House Committee on Energy and Commerce Conceming the
Reform of the Nation's Banking and Financial System (Dec. 9, 1987); statement of
Chairman Ruder Before the Senate Committee on Banking, Housing and Urban
Affairs Concerning Repeal of the Glass-Steagall Act, S. 1886, and S. 1891 (Dec. 3,
1987); testimony of Chairman Ruder Before the Subcommittee on Telecommunica-
tions and Finance of the House Committee on Energy and Commerce Conceming
Structure and Regulation of the Financial Services Industry (Oct. 5, 1987);
Memorandum of the SEC to the Subcommittee on Telecommunications and Finance
of the House Committee on Energy and Commerce Conceming Financial Services
Deregulation and Repeal of the Glass-Steagall Act (April 11, 1988).
See Mellon Letter; letter from Frank V. Cahouet, Chairman, President, and CEO,
Mellon Bank Corporation, and Howard Stein, Chairman and CEO, The Dreyfus
Corporation, to Chairman John D. Dingell (Feb. 18, 1994).

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Under the existing statutory framework, banks are excluded from the federal egulatory scheme for broker-dealers and investment advisers. 2! These bank exclusions late from a time when banks were insignificant participants in the securities business, and applying broker-dealer and adviser regulation to banks was therefore unnecessary. That time has passed. Banks already are major participants in the securities markets, and it is likely that bank involvement in securities activities will continue to grow as their customers move, with encouragement from the banks, from insured deposits into mutual funds and other securities products that are uninsured. 10 Yet the bank exclusions, a historical vestige of a simpler time, continue in effect.

The proposed Mellon/Dreyfus merger, by virtue of its scope alone, demonstrates that the need for consistent and comprehensive regulation of bank securities activities is more pressing than ever. Securities activities need to be subject to functional regulation: uniform rules that are consistently applied by one expert regulator to all market participants, regardless of whether they are banks or securities firms. The following points illustrate why functional regulation is necessary in the current market environment:

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This testimony focuses throughout on banks' direct securities activities. Bank affiliates and subsidiaries that engage in securities activities, unlike banks that engage in such activities directly, are not excluded from regulation under the federal securities laws; affiliates and subsidiaries must register with the Commission and comply with the same requirements applicable to other broker-dealers and investment advisers.

10

The American Bankers Association has predicted that "[s]ometime in the next few months, and probably sooner rather than later, mutual fund assets will exceed total commercial bank deposits. Already mutual funds hold a bit more than $2 trillion, while bank deposits stand at about $2.4 trillion." Bankers News, vol. 2, issue 4, Feb. 15, 1994, at 7. Similarly, the San Francisco Federal Reserve Bank has identified an ongoing "secular shift" from bank intermediation of funds toward mutual fund intermediation. See "Banks Tuming to Mutual Funds as Shares in Household Assets, Credit Decline," BNA Banking Daily, Dec. 21, 1993.

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outside the framework of the federal securities laws. These concerns include: the risk of investor confusion; the potential for conflicts of interest to arise between banks and their affiliated mutual funds; and the need for regulation, examination, and enforcement programs that focus on investor protection, rather than bank safety and soundness and depositor protection. // Although the parties to the Mellon/Dreyfus transaction are adopting voluntary restraints to address many of these issues, 8/ there is no guarantee that they will adhere to these measures in the future if faced with economic and competive pressures. In addition, no legally mandated safeguards apply to the growing number of banks that, like Mellon, are expanding their bank mutual fund activities (if, for the time being, on a smaller scale). These banks should not have the option of declining to submit to securities regulation.

71

For earlier statements of the Commission's views on these issues, see, e.g.,
testimony of Chairman Breeden Before the Subcommittee on Telecommunications and
Finance of the House Committee on Energy and Commerce Conceming H.R. 797
(June 20, 1991); testimony of Chairman Breeden Before the Senate Committee on
Banking, Housing and Urban Affairs Concerning S. 543 and S. 713 (May 7, 1991);
testimony of Chairman Breeden Before the Subcommittee on Financial Institutions
Supervision, Regulation and Insurance of the House Committee on Banking, Finance
and Urban Affairs Concerning H.R. 1505, H.R. 6, and H.R. 15 (April 30, 1991);
statement of Chairman Ruder Before the Subcommittee on Telecommunications and
Finance of the House Committee on Energy and Commerce Conceming Financial
Services Reform and Modification or Repeal of the Glass-Steagall Act (April 13,
1988); statement of Chairman Ruder Before the Subcommittee on Telecommunica-
tions and Finance of the House Committee on Energy and Commerce Conceming the
Reform of the Nation's Banking and Financial System (Dec. 9, 1987); statement of
Chairman Ruder Before the Senate Committee on Banking, Housing and Urban
Affairs Concerning Repeal of the Glass-Steagall Act, S. 1886, and S. 1891 (Dec. 3,
1987); testimony of Chairman Ruder Before the Subcommittee on Telecommunica-
tions and Finance of the House Committee on Energy and Commerce Concerning
Structure and Regulation of the Financial Services Industry (Oct. 5, 1987);
Memorandum of the SEC to the Subcommittee on Telecommunications and Finance
of the House Committee on Energy and Commerce Conceming Financial Services
Deregulation and Repeal of the Glass-Steagall Act (April 11, 1988).
See Mellon Letter; letter from Frank V. Cahouet, Chairman, President, and CEO,
Mellon Bank Corporation, and Howard Stein, Chairman and CEO, The Dreyfus
Corporation, to Chairman John D. Dingell (Feb. 18, 1994).

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4

Under the existing statutory framework, banks are excluded from the federal regulatory scheme for broker-dealers and investment advisers. 9/ These bank exclusions date from a time when banks were insignificant participants in the securities business, and applying broker-dealer and adviser regulation to banks was therefore unnecessary. That time has passed. Banks already are major participants in the securities markets, and it is likely that bank involvement in securities activities will continue to grow as their customers move, with encouragement from the banks, from insured deposits into mutual funds and other securities products that are uninsured. 10/ Yet the bank exclusions, a historical vestige of a simpler time, continue in effect.

The proposed Mellon/Dreyfus merger, by virtue of its scope alone, demonstrates that the need for consistent and comprehensive regulation of bank securities activities is more

pressing than ever. Securities activities need to be subject to functional regulation: uniform

rules that are consistently applied by one expert regulator to all market participants, regardless of whether they are banks or securities firms. The following points illustrate why functional regulation is necessary in the current market environment:

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This testimony focuses throughout on banks' direct securities activities. Bank affiliates and subsidiaries that engage in securities activities, unlike banks that engage in such activities directly, are not excluded from regulation under the federal securities laws; affiliates and subsidiaries must register with the Commission and comply with the same requirements applicable to other broker-dealers and investment advisers.

10/

The American Bankers Association has predicted that "[s]ometime in the next few months, and probably sooner rather than later, mutual fund assets will exceed total commercial bank deposits. Already mutual funds hold a bit more than $2 trillion, while bank deposits stand at about $2.4 trillion." Bankers News, vol. 2, issue 4, Feb. 15, 1994, at 7. Similarly, the San Francisco Federal Reserve Bank has identified an ongoing “secular shift" from bank intermediation of funds toward mutual fund intermediation. See "Banks. Tuming to Mutual Funds as Shares in Household Assets, Credit Decline,“ BNA Banking Daily, Dec. 21, 1993.

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