NationsBank's joint venture with Dean Witter and Mellon Bank Corp.'s acquisition of Boston Co. represent the first times that major U.S. banking organizations have teamed up with major U.S. securities firms in providing retail mutual fund products and services to the public.

Although "networking" and other arrangements have existed between banks and securities firms for years, never before have the competing industries united on such a large scale through affiliated entities in offering mutual fund services.

The two regulatory actions permitting these historic colaborations were unremarkable by comparison and provide no cause for alarm by Congress.

Breaking No New Ground

Neither action is based on novel reading of the Glass-Steagall Act, and neither signifies a change in the law.

Both actions are fully consistent with prior agency and court interpretations of the Glass-Steagall Act and merely approve creative proposals and enterprising financial institutions under existing law.

Neither action permits banking organizations to underwrite or distribute mutual funds.

The NationsBank and Mellon rulings signify that an era has arrived in which the legal focus has shifted away from Glass-Steagall questions to supervisory concerns dealing with adequate disclosure, suitability, and other consumer-protection and compliance issues.

The two agency actions reaffirm the general permissibility of bank mutual fund activities and provide valuable guidance as to the agencies' thinking on the manner in which such activities may be conducted.

NationsBank and Dean Witter

By letter dated April 9, the Office of the Comptroller of the Currency permitted a subsidiary of NationsBank to be a 50% general partner with Dean Witter Financial Services Group in a partnership called "Nations Securities, a Dean Witter/NationsBank company."

Mutual funds sold by the partnership will include funds for which NationsBank or an affiliate acts as investment adviser-so-called "proprietary funds,:" including the NationsFunds.

The partnership will be subject to full regulation, supervision, and examination by the Comptroller's office, and the partnership's activities will be limited to those permissible for national banks under the National Bank Act.

In addition, the partnership will be registered as a broker-dealer fully subject to federal and state securities law.

Preview of Guidelines

The NationsBank letter gives a preview of guidelines expected from the Comptroller's office this summer on the mutual fund activities of national banks.

The item of most recent interest, of course, is the Comptroller's position on the name of mutual funds sold by banks.

The agency's letter takes a definitive position that one hopes would end the discussion on this subject.

The letter did not object to the use of the NationsFund name, but rather said that mutual fund products sold by the partnership may not have a name "identical" to the bank's name.

Naming and Advertising

The only surprise is that the agency chose to restrict the name at all.

It is hard to see how a mutual fund name could violate the Glass-Steagall Act or any other law. The name of a mutual fund is merely a form of advertising, and banks already can advertise their mutual fund services.

As the courts have recognized, advertising is not an activity prohibited by Glass-Steagall and cannot cause an otherwise permissible activity to become impermissible.

(In a recent letter, the Securities and Exchange Commission said it would not regard a mutual fund named for a banks as misleading provided that the prospectus cover says the shares are neither deposits or obligations of a bank nor insured by any government agency. Banks already make such disclosure.)

Overall, the NationsBank/Dean Witter letter provides a road map to permissible bank mutual fund activities. Banks should become familiar with its other guidelines.

By order dated April 21, the Fed permitted Mellon to acquire Boston Co. and thereby provide administrative services to 84 different mutual funds.

The actual effect of the Mellon order is narrow, because of the limited nature of Boston Co.'s proposed activities.

The Fed's order specifically did not authorize Mellon or Boston co. to underwrite or distribute mutual funds. Section 20 of the Glass-Steagall Act clearly prohibits this except by a nonbank affiliate that is not "engaged principally in such activities." The order does not change the law in this regard.

Mellon did not request approval to engage in distribution activities, and the mutual funds for which Boston Co. provides administrative services will have an independent distributor.

Permitted Services

The Fed order focused on the permissibility of Boston Co.'s administrative services to mutual funds.

The Fed approved a list of 17 administrative functions. These include:

* Maintaining a mutual fund's records.

* computing a fund's net asset value.

* Reviewing and arranging for payment of fund expenses.

* Advising the distributor regarding sales literature and marketing plans to assure regulatory compliance.

* Assisting funds in developing new portfolios.

These services typically are provided by investment advisers to mutual funds. The Comptroller's office has permitted national banks to provide similar services.

The Fed's order is interesting because it treated administrative services as a distinct activity under the Bank Holding Company Act.

The Fed had not previously considered them as such, even though banks and bank holding companies typically perform such activities while serving as investment advisers to mutual funds.

As Mellon noted, the Fed's rule on investment advisory activities for mutual funds can be interpreted as encompassing administrative services to the extent permitted by the Glass-Steagall Act.

Approval Needed

The Fed previously recognized that bank holding companies, as part of their full-service brokerage activities, may provide certain administrative services to mutual funds.

Nonetheless, if a bank holding company proposes to act as a mutual fund administrator without being the investment adviser-as in the case of Boston Co.-the Mellon order would seem to say that Fed approval would have to be obtained under the Bank Holding Company Act.

Mellon did not propose to provide administrative services to proprietary mutual funds that are marketed and sold primarily to Mellon's bank customers.

Nevertheless, such activities seem not to be prohibited by the Fed's other, and banks do in fact perform them. There is no Glass-Steagall reason why such services should not be provided, and the Fed order cites none.

Significant Developments

The NationsBank and Mellon orders represent significant developments for bank mutual fund activities.

These orders do not establish new law. But the affiliations they approve between banks and mutual fund provides are historic firsts.

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