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CONTENTS

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Hearings held on:

March 2, 1994

March 3, 1994

Testimony of:

Archuleta, Lena, member, board of directors, American Association of

Retired Persons

Barbash, Barry P., Director, Division of Investment Management, Securi-

ties and Exchange Commission

Broadman, Ellen, Director for Securities, Investments, and Fiduciary

Practices, Department of the Treasury

Cahouet, Frank V., chairman, Mellon Bank Corp

Colasanto, Diane, president, Princeton Survey Research Association

Crawford, Denise Voigt, Chair, Banks Securities Activities Committee,

North American Securities Administrators Association

DiMartino, Joseph S., president, Dreyfus Corp
Hill

, Alice, Assistant U.S. Attorney, Central District of California
Hodgman, William W., director, Bureau of Central Operations, Office

of Los Angeles County District Attorney

Levitt, Hon. Arthur, Jr., Chairman, Securities and Exchange Commis-

sion

Lewis, Chris, director of banking and housing policy, Consumer Federa-

tion of America

Ludwig, Hon. Eugene A., Comptroller of the Currency

McGuinn, Martin G., vice chairman, Mellon Bank Corp.

Simon, Leonard B., attorney, San Diego, Calif

Stein, Howard, chairman, Deyfus Corp

Zipperstein, Steven E., Chief Assistant U.S. Attorney, Central District

of California

Material submitted for the record by:

American Association of Retired Persons and North American Securities

Administrators Association: Bank investment products survey
Consumer Federation of America: Letter from Chris Lewis to Chairman

Dingell, March 25, 1994, submitting additional information

Oversight and Investigations Subcommittee:

Comparison table: Regulation of Broker-Dealers and Investment Ad-

visers

Correspondence with:

Comptroller of the Currency, Hon. Eugene A. Ludwig .....

Federal Deposit Insurance Corporation, Hon. Andrew C. Hove,

Acting Chairman

Federal Reserve System, Hon. Alan Greenspan, Chairman, Board

of Governors

Mellon Bank Corp., Frank V. Cahouet, chairman; and Dreyfus

Corp., Howard Stein, chairman

Securities and Exchange Commission, Hon. Arthur Levitt, Jr.,

Chairman

Operating subsidiary notice, "final order," from the Comptroller of

the Currency, May 4, 1994

Subcommittee hearing memorandum

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(III)

PROPOSED MELLON-DREYFUS MERGER

WEDNESDAY, MARCH 2, 1994

HOUSE OF REPRESENTATIVES,
COMMITTEE ON ENERGY AND COMMERCE,
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS,

Washington, DC. The subcommittee met, pursuant to notice, at 10 a.m., in room 2123, Rayburn House Office Building, Hon. John D. Dingell (chairman) presiding.

Mr. DINGELL. Today and tomorrow, this subcommittee will explore public policy issues raised by Mellon Bank's proposed acquisition of the Dreyfus Corporation, which would create the largest bank mutual fund venture in the United States. Because, in most circumstances, bank securities-related activities fall outside much of existing securities regulation, the subcommittee has serious concerns about the risk of consumer confusion, disregard of disclosure standards and suitability considerations, the creation of conflicts of interest, lack of adequate safeguards, protection of consumers, and careful and appropriate regard for the public interest.

As the SEC will testify today, bank mutual fund activity is rapidly increasing with assets in such funds increasing 29 percent since December 31, 1992, and a greater role for banks in selling mutual fund shares to the public. Many experts suggest that other large banks are watching the Mellon-Dreyfus transaction to see if and how they can climb aboard the bandwagon.

The Glass-Steagall Act, a long-standing protection from the intermingling of banking and securities activities that led to so much grief in the Great Depression, has been eroded by bank regulators and by the courts. The question before us is do we dare risk repeating the same kind of abuses that led to the enactment of GlassSteagall in the first instance. Put another way, can the bank regulators protect the investing public to the same degree that the securities regulators do? And, indeed, do they have the will, the intent, the knowledge and the skill to do so?

Some believe that this kind of transaction significantly increases the risk to investors. As one prominent mutual fund manager views it, and I now quote, “Banks are greedy little suckers who are going to hurt the public by not informing them of the risks,” involved in mutual funds. But you need not take the view that I've just quoted to see that the Federal banking law simply does not have the protections for investors afforded under the securities laws, nor do Federal bank regulators have an enviable track record of aggressive investor protection. All we have to do is look at the savings and loan scandal and the cost to the taxpayers that this

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has occasioned to understand that that fact is so. Another question: are we setting ourselves up for the same level of regulatory effectiveness that led to the savings and loan fiasco?

Other banks are presently engaged in mutual fund sales and related investment advice, but none on the scale envisioned by the Mellon-Dreyfus transaction. Presumably, no one is arguing that it is acceptable to allow this or any other transaction to be approved simply because, and I now quote, “Other banks are doing it.” Not closing the barn door because a few horses have escaped is silly. Investor protection should be, and must be, paramount. What we learned from a review of this transaction will likely argue for substantial changes in the statutory and regulatory treatment of existing bank mutual fund operations.

Today's hearing will outline the current regulatory scheme for bank securities activity and the risks to the investing public that arise from bank mutual fund operations. Tomorrow's hearing will focus on how the Comptroller of the Currency views this activity and how the parties to the Mellon-Dreyfus transaction have attempted, on a voluntary basis, to address the very real dangers that are apparent here.

The first witness here today will be the Honorable Arthur Levitt, Chairman of the Securities and Exchange Commission. We wel. come him in his first appearance before the subcommittee, and look forward to his testimony on the shortcomings of the current regulatory structure for the securities activities of banks. He will be joined by Barry Barbash, Director of the Division of Investment Management.

The second panel of witnesses will consist of prosecutors and a civil attorney involved in the Charles Keating/Lincoln Savings and Loan matter. These men and women have seen first-hand the wreckage that can result from bank sales of securities, even when paper protections were present. We are grateful to them for their work on the matter, as well as for their sharing their views on the implications of this matter to the public and to the investors.

The third panel today is going to be comprised of consumer representatives who have done what bank regulators thus far have not-actually tested the paper protections offered by banks and actually asked consumers what they do and do not understand. These witnesses will be and should be viewed by regulators and the Congress as a cautionary reality check.

The committee wants to thank all of our witnesses today for discussing matters of great importance from the standpoint of the public interest.

The Chair now recognizes my distinguished friend from Colorado, Mr. Schaefer, for such statement as he chooses to make.

Mr. SCHAEFER. Thank you, Mr. Chairman. As you stated, today's hearing of the subcommittee begins 2 days of testimony regarding the proposed merger of Mellon Bank Corporation and Dreyfus Corporation. This merger has raised a number of issues because of its size and the range of the financial and investment services that will be available to customers at Mellon Bank branches.

This subcommittee has a long-standing interest in the Nation's financial markets, and in the functional differences between the various segments of these markets. This subcommittee has held a

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number of hearings over the years on the effect of changes in the financial markets and the perceived dangers to the consumer that occur when the lines between banking and securities begin to blur a bit.

The transaction that we are beginning to examine today is not a small one. It has been valued at $1.85 billion. It is my understanding that after the merger is completed, should it be allowed to go through, Mellon Bank will be the largest bank mutual fund adviser in the country, with over 4 percent of all mutual fund assets.

The proposed merger is one of the most significant financial transactions in recent years, and while it would certainly not be the first merger of a bank and a mutual fund company, its sheer size could lead to a rush of similar mergers. The big question we need to be asking ourselves is, are there sufficient consumer safeguards under current law to safely permit a merger of this type and scope? If not, what further protections are needed to prevent customer confusion and minimize the possibility of catastrophic losses to unsophisticated investors?

As the chairman pointed out, the S&L problems, the scandal and what it has cost us to bail out through the RTC is unbelievable, and I think that none of us want to get into that situation again.

I look forward to the testimony presented in the next 2 days, and I certainly thank the chairman for holding these hearings.

Mr. DINGELL. The Chair wants to thank my good friend.
[The prepared statement of Hon. Carlos J. Moorhead follows:)

STATEMENT OF HON. CARLOS J. MOORHEAD Thank you, Mr. Chairman. The subcommittee during the next 2 days will be examining the proposed merger of Mellon Bank Corporation and the Dreyfus Corporation. This is indeed a huge transaction_valued at $1.85 billion-which, should it occur, would propel Mellon Bank into the forefront of the mutual fund business in this country.

Whether this is a good thing or a bad thing depends to a large extent on how well informed the customers of the new entity are. Will they know when they are buying mutual funds from their bank that such funds, while offering a higher rate of return than an FDIC insured bank deposit, are also riskier? I understand that Mellon and Dreyfus have taken steps to attempt to alleviate this possible confusion, and I look forward to hearing more about those efforts.

These hearings promise to add to this committee's record of closely monitoring the changes taking place in our Nation's capital markets, and I look forward to the testimony we will hear in this regard. Thank you, Mr. Chairman.

Mr. DINGELL. The Chair now wants to welcome you, Mr. Levitt, to the subcommittee.

As you know, we have been friends a long time. I have had the opportunity to know you and to respect you, and to observe your dedication to the public interest. As you know, I welcomed your selection for the Chairmanship of the SEC, and I am delighted to have you before the subcommittee. I hope you feel welcome here. Mr. LEVITT. Thank you very much.

Mr. DINGELL. And you, Mr. Barbash. Thank you for being with us. We appreciate your courtesy to us today.

Gentleman, it is the rule of the subcommittee that all witnesses be sworn and testify under oath. Do either of you object to testifying under oath? It is the right, gentlemen, of all witnesses who appear before the subcommittee to be advised by counsel since they

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