Mr. LUDWIG. I don't admit that we don't know what we found in the 300. Indeed, we're prepared to submit to you any changes that we've asked for in those institutions in terms of their practices.

Mr. DINGELL. The difference between us is you're a very trusting fellow and I'm not. I like to be sure that where I'm talking about Widow Goodbody and the other folks I'm supposed to look at here that the Widow Goodbody, when she walks in, she's going to know she's going to get something suitable.

You're telling me that you're telling them to sell them something suitable and then they will sell her something that they think is suitable. Now, it may be suitable to Widow Goodbody's financial interest or it may be suitable to the commission of the seller.

Now, does she--we've talked about this does the Widow Goodbody under your rules and regulations have the right of rescission?

Mr. LUDWIG. As I mentioned, there have been 14 cases in the last year out of

Mr. DINGELL. Fourteen.

Mr. LUDWIG. Out of 15,000 complaints, we only had 14 in the mutual fund area, and of those 14, 7 were associated

Mr. DINGELL. Does she have a right of rescission under your rules? Yes or no?

Mr. LUDWIG. I'm sorry. Maybe I wasn't clear. Of the 15,000 complaints, 14 were in the mutual fund area. Seven of them involved rescission for the-

Mr. DINGELL. How many of them got rescission?

Mr. LUDWIG. Seven of them.

Mr. DINGELL. All of them.

Mr. LUDWIG. Seven.

Mr. DINGELL. Is that because of the rule or because you and your folks at OCC, out of the goodness of your heart, went to the bankers and said you might have problems if you don't give her her money back? Is it because you had a clear rule or not? Do you have a clear rule on this?

Mr. LUDWIG. We can order rescission.

Mr. DINGELL. Pardon?

Mr. LUDWIG. We can order rescission.

Mr. DINGELL. You what?

Mr. LUDWIG. We can order rescission. Our rules permit us to order rescission.

Mr. DINGELL. If they permit you to order it, but she has no right on her own to rescind. She's got to come hat in hand to you.

Mr. LUDWIG. Yes.

Mr. DINGELL. Is that right?

Mr. LUDWIG. If it's fraud, she can bring an action.

Mr. DINGELL. She's got to come hat in hand to you to get you to order――

Mr. LUDWIG. If it's fraud, she can bring a private right of action. Mr. DINGELL. Without fraud, on just the question of suitability, does she have the private right of action?

Mr. LUDWIG. If it isn't fraud, she brings the case to us, and we've found that, as I mentioned, in those cases, at least, it's been an ef fective remedy.

Mr. DINGELL. So she's got to come to you instead of going to the

courts.

Mr. LUDWIG. Other than in fraud cases right now, I think that's

correct.

Mr. DINGELL. On fraud cases, she can go to the courts, right?
Mr. LUDWIG. Yes.

Mr. DINGELL. Now, does she have the right to come to you, too?
Mr. LUDWIG. She does have the right to come to us, as well.

Mr. DINGELL. And what happens? Will you put in the record the specific rules that you have with regard to the rights of somebody who is aggrieved by fraud?

Mr. LUDWIG. Yes, sir.

Mr. DINGELL. Does she have the right to arbitration?

Mr. LUDWIG. In the banking context, certainly where there's a subsidiary, she would be covered by the securities laws and applicable right to arbitration.

Mr. DINGELL. Not if they're not registered with the SEC.

Mr. LUDWIG. That's what I said. When you get into the bank

Mr. DINGELL. Are these cases that you're referring to all cases. in which the rights that the aggrieved party has because she is dealing with a registered broker-dealer or because you have some specific provision in your statute?

Mr. LUDWIG. No. In the 14 cases, I can't tell you, frankly, whether or not they involved registered broker-dealers. But I can tell you that it would make no difference to us; the complaints are handled the same and the remedies would be meted out the same from the perspective of our complaint process.

Mr. DINGELL. So there is no right of arbitration. I want you to cite to us the specific provisions in your rules and in your statutes and in your regulations which confer rights on the persons that I have described as being aggrieved in these particular instances. Mr. LUDWIG. I will definitely do that.

Mr. DINGELL. So we can have that for the record. Mr. Ludwig, we thank you very much for being with us. We appreciate your kindness. We will probably have some other inquiries. Since you're going to be broadly in the securities business, I suspect we'll be seeing quite a bit of each other.

Mr. LUDWIG. I expect that. Somehow I'm not surprised.

Mr. DINGELL. I'm sure we will both enjoy it and look forward to our visits which will occur, I think, fairly regularly.

Mr. LUDWIG. I'm not surprised.

Mr. DINGELL. Mr. Ludwig, we want to thank you and we should probably both learn these new statutes that we are going to have to learn. I know you're going to have to learn the securities statutes and I would suggest that we should commence doing so with all vigor, because, as I've indicated, I think we will, now that you're in the securities business, see rather more of you and we look forward to it.

Mr. LUDWIG. Thank you, sir.

Mr. DINGELL. We thank you. The next witnesses are a panel composed of Mr. Frank Cahouet, Mr. Martin G. McGuinn, Mr. Howard Stein, and Mr. Joseph DiMartino. Gentlemen, we thank you for being with us. We apologize for keeping you so long, but

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as you know, this has been a matter which has been carried forward with great enthusiasm by both Mr. Ludwig and myself.

We thank you for being with us. You have heard the fashion in which the committee conducts its business. Do any of you object to testifying under oath?

[No response.]

Mr. DINGELL. Very well. The Chair would also inquire do any of you desire to be advised by counsel, given the fact that you are testifying under oath?

[No response.]

Mr. DINGELL. The Chair would observe that copies of the rules of the subcommittee, the rules of the committee and the rules of the House are there to advise you of your rights and limitations on the power of the committee.

Gentlemen, if you have no reservations about testifying under oath, if you would, please, each rise and raise your right hand. [Witnesses sworn.]

Mr. DINGELL. Gentlemen, you may each consider yourself under oath. We will recognize you for such statement as you choose to give. You may submit your statements in such order as you choose. One of you may testify on behalf of all or several or you may each proceed in your order. We leave the choice of your statement to you, gentlemen, with our good wishes.

TESTIMONY OF FRANK V. CAHOUET, CHAIRMAN, MELLON BANK CORP., ACCOMPANIED BY MARTIN G. McGUINN, VICE CHAIRMAN; AND HOWARD STEIN, CHAIRMAN, DREYFUS CORP., ACCOMPANIED BY JOSEPH S. DiMARTINO, PRESIDENT

Mr. CAHOUET. Mr. Chairman, Mr. Stein and I would like to make opening statements, with your permission.

Mr. DINGELL. Very well.

Mr. CAHOUET. And Mr. McGuinn, on my left, is Vice Chairman and he is in charge of the retail group within the bank. Mr. DiMartino is the President of Dreyfus Corporation.

To begin my statement, my name is Frank V. Cahouet and I am Chairman, President and Chief Executive Officer of Mellon Bank Corporation and Mellon Bank. I appreciate this opportunity to respond to your questions regarding our proposed transaction with the Dreyfus Corporation.

I want to emphasize three basic points at the outset. First, Mellon shares the concerns that the chairman and other members of this subcommittee have expressed regarding depositor and investor protection and bank safety and soundness. Second, Mellon has put into place comprehensive policies and procedures which are designed to address those concerns. We have done so not only as a matter of compliance, but also because of our 125-year track record of building lasting customer relationships.

Third, Mellon and Dreyfus share a compatible culture and tradition of conservatism and concern for the consumer. Together we are uniquely well positioned to complete this transaction in a manner that assures consumers' best interests.

Given our carefully planned approach to this union between Mellon and Dreyfus, we respectfully submit that the proposed trans

action will, one, be beneficial for consumers; two, will provide to purchasers of Dreyfus mutual funds substantial protections that extend beyond industry practice; and, three, will result in a stronger Mellon, better able to play its rightful role for customers and shareholders and within the economy.

Let me discuss each of those conclusions in greater detail. Consumer benefits. The Mellon-Dreyfus transaction is beneficial to the consumers because it responds to what many consumers have said they want, a convenient, single source of financial services, preferably a bank which offers mutual funds.

Indeed, the 23 percent annual growth rate in mutual fund assets over the last 12 years as compared to a 6.3 percent growth rate in bank deposits clearly attests to the fact that mutual funds have become an investment vehicle of preference. Mellon's three-State branch network, when coupled with Dreyfus' extensive teleservicing capabilities, has a potential to greatly enhance convenience of access for both Mellon and Dreyfus customers and potentially for millions of other customers.

This transaction also means that professional financial advice will be easier to obtain for those customers at a time when they must make ever more complex personal financial decisions which, in the past, have been made frequently by their employers, notably with respect to retirement planning.

The extraordinary growth in 401K defined contribution plans to the current level of approximately $480 billion in total assets is compelling evidence of this trend. Finally, the operating synergies between Mellon and Dreyfus, coupled with Mellon's well known technological capacity and expertise, virtually assure Mellon and Dreyfus customers of state-of-the-art products and services at competitive prices.

Consumer protection. Because we share your concern for depositor and investor protection, Mellon's policy statement on mutual funds previously provided to this subcommittee and other applicable policies and procedures go well beyond current bank practice and conform substantially to the requirements of H.R. 3447.

Our responses to earlier questions posed by this subcommittee, as well as our accompanying written statement, detail the many consumer protection provisions we have in place. In general, they are designed to ensure, first, that all of our employees who provide financial advice or sell mutual funds are well qualified and properly trained to discharge their responsibilities.

This includes a requirement that all employees of Mellon who recommend or sell mutual funds in Mellon Bank branches are registered with the National Association of Security Dealers and are, therefore, subject to NASD regulation. These duties range from determining the suitability of an investment for a particular customer to providing timely, accurate disclosures, and, second, that the investment risk, lack of deposit insurance and the distinction between bank deposits and mutual fund shares are disclosed to purchasers of mutual fund shares through the bank.

I would also emphasize that the Dreyfus name will be retained and that the Mellon name will not be used on any mutual funds. Bear in mind that separate from the statutory and regulatory requirements with which we must comply, our proactive stance on

consumer protection makes especially good business sense for us. We are, after all, a financial services company whose reputation and return to shareholders rests on our ability to attract and maintain long-term customer relationships.

When we announced this transaction in December, we said we need to make it a model that others could emulate in the future. The thorough employee training and consumer protections that we have created are the very foundation of that model.

A stronger Mellon Bank and Mellon Bank Corporation. Mellon Bank Corporation is today a diversified financial services company with a bank at its core. Our business strategy has been targeting this type of organization for the past 7 years because we believe it positions us well to compete in an industry that is changing profoundly.

The combination of Mellon and Dreyfus is not only a logical next step in pursuing that business strategy, but greatly strengthens both the corporation and Mellon Bank in several important ways. The transaction adds greater stability to Mellon's revenue base by bringing fee-based revenue which is known to be less volatile than interest revenue to 52 percent of our total revenue stream and it strengthens our balance sheet by improving significantly our capital ratios.

In addition, this fee-based income further strengthens the quality of our earnings. The transaction also builds on certain of Mellon's key strengths and past investments for the benefit of our customers. For example, it will utilize more effectively both our retail delivery system of more than 400 branch offices and our technological capacity and expertise, both long recognized strengths for Mellon.

In addition, the combined Mellon-Dreyfus will be the second largest investment advisory firm in the Nation, combining two firms with extensive experience and outstanding reputations in money management and customer service. This, in turn, will enable us to attract and keep the best investment and management expertise to such firms.

At the same time, Mellon has put into place a number of procedures and policies that are designed to ensure the safety and soundness of the bank. As detailed in our written submissions, they include commitments to apply sections 23(a) and 23(b) of the Federal Reserve Act to transactions between Mellon and Dreyfus and to refrain from a series of transactions that could create a conflict of interest.

Overall, the combination of Mellon and Dreyfus creates a new financial institution, stronger than either could be alone, one that, as to financial marketing and management capabilities, is uniquely able to meet changing consumer demands into the 21st Century.

In conclusion, it is important to remember as we consider this transaction that banks play a key role in the economic infrastructure of this Nation. Bank lending to consumers in small businesses and bank support of their local communities are unique and critical elements of a healthy U.S. economy.

But Mellon and other banks can continue to provide that essential economic fuel only if we are permitted to sell to consumers the services and products they need at times and places convenient to