A few years ago, the legal obstacles to a merger between banks and mutual fund companies were considered formidable. Not anymore.

Mellon Bank Corp.'s agreement to buy Dreyfus Corp. barely raised an eyebrow in legal circles Monday. Recent regulatory rulings have eased the way for such marriages.

Banks that acquire fund companies still have to turn over the job of marketing the funds to an unaffiliated distribution company, but that is a relatively minor matter.

Dreyfus now distributes its own funds. After the acquisition is completed, Mellon will contract that service out to a vendor, said bank vice chairman W. Keith Smith.

Mellon uses Frank Russell Investment Management Co., based in Tacoma, Wash., to distribute its proprietary Laurel funds. The bank has not decided if Frank Russell will now handle Dreyfus distribution, Smith said.

The comptroller of the currency will be asked to approve the transaction, in which Dreyfus will operate as a separate unit of Mellon. If Dreyfus retains its savings bank and trust company, Federal Reserve approval would also be necessary.

Mellon has already had informal discussions with regulators and "no one said don't do it," said H. Rodgin Cohen of Sullivan & Cromwell, who is representing Mellon.

Cohen does not expect regulatory obstacles, since other banks have received nods from the Comptroller's office to buy fund companies, albeit much smaller ones. The Mellon-Dreyfus deal is "a landmark agreement based on size and scope, but there are no new legal principles here," Cohen said.

In its acquisition this year of Boston Co., a provider of mutual fund services, Mellon sold off activities impermissible under federal law, noted Melanie L. Fein, a partner at Arnold & Porter.

Section 20 of the Glass-Steagall Act bars member banks of the Federal Reserve from affiliating with companies "principally engaged" in the underwriting or distribution of securities.

The Fed has broadened its interpretation and now permits up to 10% of an affiliated unit's revenues to come from otherwise impermissible activities.

"If they have anything that brings them outside that 10% limit, they would probably spin it off," said Richard Whiting, general counsel for The Bankers Roundtable, a big-bank trade group.

Karen Talley and Robert M. Garsson are reporters with the American Banker, a sister publication of The Bond Buyer.

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