Can we rely on volunteerism? On the basis of the record today, I am not sure we can.

As we heard yesterday there are inherent problems that need to be addressed. Consumer confusion is common place despite similar types of protections. The subcommittee will ask these four officers how they plan to address these problems and what level of consumer confusion is acceptable to them as their transaction goes forward.

The Chair wants to express the appreciation to all the witnesses for appearing here today. We look forward to hearing their testi

mony.

The Chair recognizes my good friend from Colorado.

Mr. SCHAEFER. Thank you, Mr. Chairman.

You have basically said it all. This is the second day of hearing on this very important subject designed to make sure that the consumers in this country are protected. I just look forward to hearing the testimony of the various witnesses we have before us today.

I thank the Chair for allowing Mr. McMillan here today. I think he has an opening statement if the chairman will allow him to do it.

Thank you.

Mr. DINGELL. The Chair thanks the gentleman.

The Chair advises Mr. Ludwig that we do welcome you to the subcommittee. Mr. Ludwig, we are happy that you are with us.

We recognize first the Honorable Eugene A. Ludwig, Comptroller of the Currency. Mr. Ludwig, this is the first time you have appeared before this subcommittee. I know that you understand that it is the practice that all witnesses who appear here testify under oath.

Do you have any objection to so doing?

Mr. LUDWIG. Not at all.

Mr. DINGELL. The Chair advises that since you are testifying under oath that it is your right to be advised by counsel during your appearance here. Do you so desire?

Mr. LUDWIG. I do not.

Mr. DINGELL. Very well. The Chair advises you that copies of the rules of the subcommittee, rules of the House, rules of the full committee are there at the table before you, to inform you both of your rights and limits on the powers of the subcommittee as we go into the proceeding in which we are about to start.

Ms. Broadman, are you to testify, too?

Ms. BROADMAN. No, I am not here to testify.

Mr. DINGELL. We will not swear you. If you choose to testify or you are going to testify, we will have to have your testimony under oath.

Ms. BROADMAN. I would be happy to be sworn in.

Mr. DINGELL. Then maybe we just better do it that way.

Very well, if you have no objection then, please rise and raise your right hand.

[Witnesses sworn.]

Mr. DINGELL. You may each consider yourself under oath. If you will proceed with your written statement, the Chair will recognize you for that purpose.

TESTIMONY OF HON. EUGENE A. LUDWIG, COMPTROLLER OF THE CURRENCY, ACCOMPANIED BY ELLEN BROADMAN, DIRECTOR FOR SECURITIES, INVESTMENTS, AND FIDUCIARY PRACTICES

Mr. LUDWIG. Thank you, Mr. Chairman and members of the subcommittee.

I appreciate this opportunity to testify on the sale of mutual fund investments by banks and specifically on the proposed acquisition of the Dreyfus Corporation by Mellon Bank.

Both the general subject area and the particular application raise important public policy issues. You are to be commended for your efforts to focus public attention on these issues.

I have a detailed written statement that discusses bank sales of mutual funds and the Mellon Dreyfus proposal. In the interest of time, I would like to submit the written statement for the record and focus my discussion this morning on what I have done in the last 11 months to create a regulatory environment for bank mutual fund sales that protects and promotes the interest of the consumer. I will also discuss the broad characteristics of the Mellon-Dreyfus proposal within this context.

Bank trust departments have acted as investment advisers, transfer agents, and custodians for mutual funds for decades. Retail sales of proprietary mutual funds were sanctioned and underway long before I become Comptroller.

In recent years, however, this area of bank activity has seen rapid growth. More than 150 banks-national banks, State member banks, and State nonmember banks now offer their own proprietary mutual funds.

The net assets of proprietary mutual bank funds doubled between 1989 and 1991, and doubled again between 1991 and 1993, reaching $200 billion in 1993. Bank sales of third-party mutual funds those managed by firms outside the banking industry, also grew rapidly. These third-party funds account for roughly half of all bank mutual fund sales.

This growth in bank mutual fund activity raises new issues for bank regulation from both the safety and soundness perspective and from the perspective of consumer protection.

Since I took office last April I have worked hard to address those issues through a series of actions. Many of those actions have yet to bear fruit, some are bearing fruit already. In particular, I am working toward accomplishing five objectives.

First, to make sure that banks remain within the law as they offer mutual funds to the public.

Second, to make sure that customers understand that mutual fund shares purchased from banks are not federally insured.

Third, to make sure that banks handle their mutual fund operations in a way that does not threaten the safety of the bank or pose undue risk to the bank insurance fund.

Fourth, to make sure that banks address potential conflicts of interest.

And, fifth, to make sure we, the regulators, have the resources to respond to further sales growth in investment products going forward.

To advance these objectives, we have over the last 10 months taken several specific steps.

Number one, I assigned one of my two senior policy advisers to coordinate OCC efforts in the mutual fund area.

Two, within 3 months of my arrival at the OCC, we published detailed guidelines governing the retail sale of mutual funds and other nondeposit investment products by banks. This guidance emphasized consumer protection, particularly by meaningful disclo

sure.

Three, we organized a working group of all Federal regulators of banks and thrifts to develop interagency guidelines on bank retail sales of mutual funds, guidelines that the agencies released jointly last month.

Four, I urged industry leaders to find a way for banks and thrifts to police themselves in this area, and have repeatedly addressed industry groups on this topic. Partly as a result of this effort, the bank trade associations for the first time adopted joint retail investment product sales guidelines last month.

Five, we have developed a program of mutual fund examinations and have issued new examination procedures to assure that national banks comply with our guidelines. We have devoted substantial time and effort to developing the mechanism for systematic, systemic supervision and examination aimed specifically at bank mutual fund activities.

Six, we are working with the SEC in a variety of ways, including investigations and enforcement actions, information sharing, and periodic staff meetings on policy issues. Further, we have joined the SEC in a research effort, based on a comprehensive survey of households, to improve our understanding of why some consumers are confused when they purchase mutual fund shares and to learn what kinds of disclosures work best in addressing that confusion. Through the use of focus groups in this first phase of this research, we are already gaining important insights into these issues.

Seven, we have published a brochure entitled "Deposits And Investments: There is a Critical Difference" to alert bank customers to the risks in nondeposit products sold by banks. We are distributing the brochure through the Consumer Information Center. We believe more than a million copies of this brochure have now been printed.

Mr. Chairman, my efforts in this area reflect my personal commitment to keep the OCC at the forefront of bank supervision in general and to protect the consumer in particular.

I also bring those commitments specifically to the Mellon-Dreyfus proposal. Because of the importance I assign to both the supervisory and consumer protection issues attending this application, I have taken the unusual step of soliciting public comment on it, and on a similar proposal by First Union National Bank to acquire Lieber & Company and the Evergreen Asset Management Corporation.

We are currently reviewing the Mellon application. In that review, we are particularly focused on the commitments in the proposal and on the availability of appropriate safeguards to ensure that customers understand which products offered by the combined entity would be federally insured and which would not be federally

insured. We are coordinating our review with the Securities and Exchange Commission, and are specifically interested in the SEC's experience regulating Dreyfus, and in whether the SEC had any particular concerns of which we should be aware as we process Mellon's proposal.

Of course, we also want to safeguard the safety and soundness of the combined entity. We will carefully consider the controls utilized by these two entities, and we will carefully consider the adequacy of capital. I cannot tell you whether we will approve this application, but I can assure you that we will not approve it without addressing the important consumer and safety and soundness issues it raises. Let me emphasize that the issue of adequate consumer protection will be an important part of our consideration. Mr. Chairman, I have spent the last 11 months working to mobilize the OCC, the Federal bank regulatory establishment, and the banking industry itself to address the supervisory and consumer protection issues raised by the growing volume of bank mutual fund activity. We are making progress, but we still have far to go. I am fully committed to this effort and I am confident that in cooperation with the SEC, my fellow bank and thrift regulators, and industry and consumer leadership, we will overcome the challenges we face in this area.

Thank you. I welcome your questions.

[Testimony resumes on p. 295.]

[The prepared statement of Mr. Ludwig follows:]

TESTIMONY OF

EUGENE A. LUDWIG

COMPTROLLER OF THE CURRENCY

Mr. Chairman and members of the Subcommittee, I appreciate this opportunity to testify on the sale of mutual fund investments by banks and, specifically, on the proposed acquisition of the Dreyfus Corporation by Mellon Bank, N.A., a national bank supervised by the Office of the Comptroller of the Currency (the OCC). Bank sales of mutual funds, and this proposal in particular, raise public policy issues of concern to both the banking industry and the public. I commend you for your efforts to focus attention on these issues.

Last year in a major policy address, I made it clear that any decision I make regarding the activities of banks will turn on whether I have the authority to approve an activity and, where I have that authority, on whether the activity can be conducted in a safe and sound manner by banks and on whether the activity benefits consumers of financial services. I developed those criteria because I recognized that in our dynamic financial services market supervisors must regularly decide what products and services banks may offer.

I believe that bank involvement in mutual funds meets those criteria and consequently represents sound public policy. As I will describe in greater detail, such involvement rests upon clear legal authority and poses safety and soundness issues that are no more complex or demanding than others our examiners face day in and day out. Bank involvement in mutual funds also presents clear consumer benefits. It offers customers greater convenience and greater choice in shopping for mutual fund services, and it permits banks to compete on a equal footing with other providers of financial services, enhancing competition in the market for mutual funds.

Supervisory diligence will be needed if consumers are to take the full measure of these benefits, and the OCC has begun that effort. It has been clear to us for a long time that the safety of deposit insurance is inscribed on the minds of bank customers. Bank involvement in mutual funds sales puts that well-deserved sense of security to a new test, for there is a tendency among customers to believe that mutual fund products are as safe as insured deposits. They are not. Banks must take--and we will make sure they take--every step necessary to educate their customers about the true risks of mutual funds. This exercise in disclosure and public education, will help to ensure that customers are not misled, and that they make intelligent and well-educated decisions when deciding to buy or not to buy bank mutual fund products.

In my first year as Comptroller of the Currency, I have also worked to ensure that national banks conduct their business in a way that makes their products and services available to all people. Mr. Chairman, I believe that there is a link between new products and services and the ability of banks to serve the needs of all citizens. In particular, I am convinced that over the long haul locking banks away from profitable opportunities will reduce both their safety and soundness and the competitive vigor of financial markets.

As you are well aware, retail sales of mutual funds by commercial banks have grown dramatically in recent years. More than 150 banks--including national banks, state members banks, and state non-member banks--now offer their own, "proprietary" mutual funds. The net assets of proprietary bank funds doubled between 1989 and 1991, and doubled again between 1991 and 1993, reaching $200 billion in 1993. Bank sales of "third-party" mutual funds (those