WASHINGTON -- Mellon Bank Corp.'s landmark acquisition of Dreyfus Corp. cleared its final regulatory hurdle on Wednesday.

In a 22-page letter, the Office of the Comptroller of the Currency paved the way for Mellon to make the nation's sixth largest mutual fund company a subsidiary of its lead bank, Mellon Bank, Pittsburgh.

In approving the deal, the Comptroller's office imposed 13 conditions on the bank, and said it will be watching closely to ensure that they are obeyed.

Regulatory Constraints

For example, Dreyfus must receive OCC approval before beginning any new business activities, and Mellon is barred under most circumstances from lending money to Dreyfus. The conditions, while detailed, are not expected to pose problems for Mellon.

The OCC's action culminates five months of regulatory and political scrutiny of the deal.

When the deal is closed - probably in June or July - Mellon's mutual fund assets will soar from $3.7 billion to $71 billion. That would catapult Mellon into fifth place among mutual fund management companies, according to Lipper Analytical Services, Summit, N.J.

Industry executives declared the regulatory approval a milestone in the banking industry's push to expand their presence in the securities business.

"Over time banks will own the majority of the mutual fund and regional brokerage business, and this will be viewed as one of the first major steps in that evolution," said James McCormick, president of First Manhattan Consulting Group, New York.

Closely Watched

Mellon and Dreyfus stunned Wall Street last Dec. 6 with their plan to combine, in an all-stock transaction valued at $1.85 billion.

Though it is not the first bank acquisition of a mutual fund company, it is by far the biggest, the most complex, and the most closely watched.

Two leading critics - Chairman John D. Dingell, D.-Mich., of the House Energy and Commerce Committee and Chairman Henry B. Gonzalez, D.-Texas, of the House Banking Committee - had repeatedly voiced doubts about banking regulators' ability to insulate the bank and its depositors from the mutual fund company.

On Wednesday, Rep. Gonzalez commended the OCC's "good-faith effort in imposing conditions on the Mellon-Dreyfus merger," but said he still has concerns. Rep. Dingell would not comment immediately.

Partners Reviewing Letter

In separate statements, Mellon and Dreyfus officials said they were still reviewing the approval letter, but were pleased to learn that the Comptroller's office had sanctioned the merger.

From the time they announced their merger plans, Mellon and Dreyfus executives have maintained that the deal presented no new legal questions. An OCC lawyer who worked on the approval agreed.

"It's really the size of the transaction that made it novel," she said. "All this has been approved before."

Indeed, much of the legal analysis had been completed three weeks ago, when the OCC approved First Union Corp.'s bid for Lieber & Co., manager of the $3.1 billion-asset Evergreen Funds.

Industry observers said the OCC's approval of the Mellon and First Union deals provides banks with a framework for structuring future transactions.

"It's a rare bank among the top 50 that isn't scanning for opportunities to buy into the investment management community," said Mr. McCormick of First Manhattan.

"To the extent that it allows other banks to look more closely at other relationships that may go through, it's very important," added Avi Nachmany, a partner with Strategic Insight, a mutual fund consulting firm in New York.

Though the conditions posed on Mellon aren't thought to be onerous, they are unusually detailed.

For instance, the OCC directed Mellon to submit a plan detailing the post-merger management reporting structure and organization chart. The agency also asked Mellon for a plan explaining how the holding company will oversee Dreyfus's audit and compliance.

"We expect we will get an action plan acceptable to us," an agency lawyer said.

The OCC also directed Dreyfus and Mellon to disclose to their entire customer bases - 900,000 accountholders and 1.1 million depositors, respectively - that the money they have invested in mutual funds is not insured by the Federal Deposit Insurance Corp.

Mellon earlier agreed to retain the Dreyfus name to reduce any confusion among the bank's customers.

Meanwhile, the deal appears to be progressing.

"We'll be moving ahead for a closing in June or July," said H. Rodgin Cohen, a law partner with Sullivan & Cromwell, which represented Mellon in the deal.

Shareholders' Turn

The deal still faces votes by shareholders of Mellon, Dreyfus and the individual funds. Proxy materials were filed late last month with the Securities and Exchange Commission.

The SEC's review of this data should be complete by the end of May, and a vote scheduled soon after, Mr. Cohen said.

Though the OCC briefed lawmakers before issuing the approval letter on Wednesday afternoon, the agency expects no let up in the political pressure.

"We expect to get a lot of heat no matter what," one agency official said.

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