Mellon Financial Group's Dreyfus Corp. has started distributing its own mutual funds, and may be the first bank-owned mutual fund group to have done so, taking advantage of a wrinkle in the Gramm-Leach-Bliley Act.

Before the measure became law, banking companies could manage mutual funds and act as custodians transfer agents or wholesalers for them but had to outsource distribution.

The Securities and Exchange Commission classified distribution, which involves underwriting and establishing the fund, as a form of securities issuance, and therefore off-limits for banking companies under Glass-Steagall.

But the $130 billion-asset Dreyfus Funds pulled the function in-house this week, a spokeswoman said.

Dreyfus may be one of the few bank-run companies taking advantage of financial reform. In doing so it is drawing on a distinct advantage.

Dreyfus distributed its own mutual funds before it Mellon bought it in 1994, said Margaret Warner Chambers, senior vice president and general counsel of Funds Distributor Inc., the Boston-based company that had distributed Dreyfus' funds.

"Fund companies who had their own distributor before becoming a bank affiliate will probably go back" to performing that function in-house, Ms. Chambers said.

But for other banks, it may make more sense to keep fund distribution with a third party, she said.

"There are a lot of organizations that don't want to build that infrastructure," Ms. Chambers said.

Chase Manhattan Corp., Bank of America Corp., and KeyCorp all said they would stick with an outside distributor for the foreseeable future, and a review of SEC filings of other bank-owned fund complexes failed to turn up any besides Dreyfus that had brought distribution in-house.

The cost of using an outside distributor is difficult to quantify, since it depends on what services the distributor provides, observers said. Third-party fund distributors typically provide a suite of ancillary functions, such as accounting, record keeping, and marketing.

Since most banks would have to add employees and invest in expanded technology platforms to perform those functions in-house, third-party distributors are less expensive for most banks, said Dennis Gallant, a consultant at Boston-based Cerulli Associates.

"People are looking to reduce in-house services, not create them," said Richard J. Buoncore, the chief executive officer of Cleveland-based KeyCorp's asset management arm.

Spears, Benzak, Salomon & Farrell - the New York-based asset manager that KeyCorp bought in 1995 - distributed its own funds, he said, but fund distributors have economies of scale that KeyCorp's $19 billion fund complex cannot achieve, Mr. Buoncore said.

"We want to manage money, so the less we can do of the other stuff, the better," he said.

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