In preparation for the pending acquisition by Mellon Bank Corp., the Dreyfus Funds are in the final stages of selecting an outside firm to manage their distribution activities.
Directors of the funds are expected to award the distribution contract next week to Boston Institutional Services Inc. of Massachusetts, wrapping up a process that began in March.
Assuming it wins the contract, Boston Institutional will solidify its leadership among mutual fund distributors. At the same time, Mellon will have fulfilled a legal requirement for its ground-breaking acquisition of New York-based Dreyfus Corp., the nation's sixth-largest mutual fund company.
Currently, Dreyfus Corp. acts as a distributor for the 130 Dreyfus mutual funds, which collectively have $70 billion of assets. The fund family is nearly four times the size of the largest bank proprietary mutual fund business, managed by PNC Bank Corp., which, like Mellon, is based in Pittsburgh.
But in the mutual fund business, regulators and courts have interpreted the Glass-Steagall Act as requiring banks to tap outside firms -- known as distributors -- to arrange all mutual fund sales agreements with banks and broker-dealers.
Mellon expects to conclude its acquisition of Dreyfus by the end of the third quarter, in an exchange of stock valued at $1.85 billion.
The Comptroller of the Currency has required Dreyfus to start using an outside distributor before the deal closes.
A Dreyfus spokeswoman said that Mellon and Dreyfus have recommended to the 15 boards of directors of the Dreyfus Funds that they accept a new Boston Institutional unit, called Premier Distributor Inc., as the funds' distributor.
William J. Nutt, Boston Institutional's chairman, said he expected the deal to be approved, and to be a boon for his firm.
"This is a very visible, very attractive client," he said. Neither he nor officials at Mellon and Dreyfus would disclose the terms of the deal.
In regulatory filings, Mellon has said that its distributor will manage all "distribution agreements" for the Dreyfus funds, which means that Mellon -- and any other bank or broker-dealer that wishes to market the Dreyfus Funds -- will have to contract with the outside distributor.
The distributor also will confirm sales, manage the collection and distribution of commissions, print and distribute prospectuses, and handle other administrative chores.
A Dreyfus spokeswoman said the deal would have no effect on the funds' shareholders or their investment policies. Furthermore, the extra cost of tapping an outside distributor is expected to be nominal.
Industry experts added that the deal, while prestigious, might not even bring much money to Boston Institutional.
"My ears in the industry tell me that [mutual fund distribution] is not a money maker," said Geoffrey H. Bobroff, a mutual fund consultant in Denver.
"The services might or might not generate profitability, depending upon [whether the firm has] critical mass," added Richard Stierwalt, chief executive of Concord Financial Group, a leading mutual fund administrator and distributor in New York that had initially expressed interest in the Dreyfus contract.
But Mr. Nutt said the deal will be profitable for Boston Institutional, and that the firm aims to expand its distribution business.
Formerly, Boston Institutional was part of Boston Co., where Mr. Nutt was president until Mellon bought the bulk of the company last year.
Mr. Nutt teamed with senior managers to buy out the Boston Institutional broker-dealer piece last year. In April, they added another former Boston Co. unit, Funds Distribution Inc.
Funds Distribution had been the distributor for The Boston Co.'s $1.4 billion mutual fund family. The firm added Mellon's Laurel funds in April, when the bank merged the two families, which had $3.6 billion of assets at the end of March, according to Lipper Analytical Services, Summit, N.J.