COMMITTEE ON ENERGY AND COMMERCE JOHN D. DINGELL, Michigan, Chairman HENRY A. WAXMAN, California PHILIP R. SHARP, Indiana EDWARD J. MARKEY, Massachusetts AL SWIFT, Washington CARDISS COLLINS, Illinois W.J. "BILLY" TAUZIN, Louisiana RALPH M. HALL, Texas BILL RICHARDSON, New Mexico MIKE KREIDLER, Washington MARJORIE MARGOLIES-MEZVINSKY, CARLOS J. MOORHEAD, California ALEX MCMILLAN, North Carolina PAUL E. GILLMOR, Ohio SCOTT KLUG, Wisconsin GARY A. FRANKS, Connecticut Pennsylvania BLANCHE M. LAMBERT, Arkansas ALAN J. ROTH, Staff Director and Chief Counsel MARGARET A. DURBIN, Minority Chief Counsel and Staff Director Broadman, Ellen, Director for Securities, Investments, and Fiduciary 274 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 378 55 125 sion 4 Material submitted for the record by: American Association of Retired Persons and North American Securities 208 261 Comptroller of the Currency, Hon. Eugene A. Ludwig ..... Federal Deposit Insurance Corporation, Hon. Andrew C. Hove, 872 PROPOSED MELLON-DREYFUS MERGER WEDNESDAY, MARCH 2, 1994 HOUSE OF REPRESENTATIVES, 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 (1) 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 welcome 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 |