Compliance: Banks Like Plan to Ease Curb On Section 20 Subsidiaries

Bankers have endorsed a Federal Reserve proposal to more than double the revenue that holding company subsidiaries may earn from underwriting and dealing in commercial securities.

Writing in comment letters, industry officials said the Fed's plan would increase competition, strengthen the industry, and cut costs.

"There is no credible dispute that increased participation in the securities markets by section 20 companies would produce clear benefits to the public," wrote Richard B. Roberts, chairman of the ABA Securities Association and executive vice president at Wachovia Corp.

But the Fed heard from people outside the industry as well.

Rep. Charles E. Schumer, D-N.Y., urged the central bank to delay action until lawmakers can repeal the Glass-Steagall Act, a Depression-era law that separates investment from commercial banking.

"Congressional inaction does not justify extralegislative action that, while technically legal, falls far short of the kind of reasoned consensus such far-reaching measures should require," Rep. Schumer wrote.

But it was the fact that Congress had not acted on financial modernization this year that prompted the Fed in August to propose raising the share of its revenue a section 20 affiliate could earn from commercial securities underwriting to 25%, from 10%. Separately, the Fed proposed eliminating several firewalls separating commercial banks and their section 20 units.

The Fed's revenue proposal would increase competition by encouraging midsize banks to create section 20 subsidiaries to serve their small- business customers, Hibernia Corp. senior executive vice president Scott P. Howard wrote.

"We have observed the difficulties that small and medium-sized businesses, who have longstanding borrowing relationships with us, have had in their attempts to secure capital market financing to fund growth," he said. "We believe that by encouraging smaller institutions to establish section 20 subsidiaries, the Board of Governors will promote competition and significantly enhance the growth" of small and midsize businesses.

Thomas A. Volz, vice president at First National Bank of Commerce in New Orleans, agreed and wrote that increased competition would lead to lower prices.

"The end result ... is a more competitive new issue market with a resultant lower borrowing cost for the issuers," he wrote.

The proposal also would strengthen the U.S. banking system by letting domestic institutions compete globally for underwriting business, Douglas A. Warner, chairman of J.P. Morgan & Co., wrote in a comment letter filed by the Bankers Roundtable. He noted that U.S. banks are losing business to German and Swiss institutions that are not subject to revenue restrictions.

BankAmerica Corp. spent more than $2 million last year complying with the limit, according to general counsel Michael J. Halloran. That money could have been better spent elsewhere in the bank, he said. "These section 20 issues are of singular importance" to BankAmerica's bottom line, he wrote.

No securities firm or trade group filed a comment on the proposal. But the Securities Industry Association wrote in an earlier letter that the Fed's proposal, if adopted, could sink financial modernization legislation for good. It urged the Fed to give Congress more time to overhaul the law.

Wachovia's Mr. Roberts, however, said the Fed has the authority to raise the limit now, and he noted that the federal courts have ruled the central bank can adopt any "reasonable" limit on securities underwriting revenue.

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