Bankers have blasted as unnecessary and discriminatory rules proposed by the Securities and Exchange Commission governing sales practices at their retail brokerages.
In letters filed with the SEC over the last two months, bankers pleaded with the agency to withdraw the bank broker-dealer rules it published for comment in March. Overwhelmingly, bankers argued that it is unnecessary for securities regulators to implement requirements specific to banks, since banking regulators have already done so.
"I'm concerned with whether (securities regulators) are already overstepping" what the Office of the Comptroller of the Currency has done, said Richard K. Hawes, president of First NBD Investment Services, Chicago. In 1994, the Comptroller's Office and the three other banking agencies issued guidelines on the sale of nondeposit products.
The SEC received about 90 comments to its March proposal, which is an amended version of bank broker-dealer rules filed in late 1995 by the National Association of Securities Dealers, a self-regulatory organization that oversees the country's broker-dealers.
First proposed by the NASD in December 1994, the rules have undergone many revisions. The comments to the SEC were the industry's latest effort to influence the rules, which could be enacted as early as yearend.
But bankers and their lawyers contend that more regulation of their broker-dealers is necessary. Existing NASD rules that cover all brokerage activities, coupled with bank regulators' guidelines, are enough to do the job, they say.
Indeed, if the SEC proceeds, one attorney said, the banking industry is likely to seek relief in the courts.
"I think the principles involved here are so fundamental, ... that if the aspects of the rule that have the effect of directly regulating bank activities aren't changed, it would almost certainly result in a legal challenge from the banking industry," said Robert M. Kurucza, a partner at the Washington law firm of Morrison & Foerster and general counsel to the Bank Securities Association.
In their comment letters, bankers said the rules still discriminated against them. They remain particularly disturbed by restrictions on referral fees and the sharing of confidential customer information between banks and their brokerage affiliates.
Such rules, if they are needed at all, should apply to all broker- dealers - not just those affiliated with banks, they say. For instance, they ask, why should bank customers have to authorize information-sharing when nonbank brokerage customers do not.
"Have we developed a false protection if we have our customers sign and say we can cross-market to them but on the opposite side, the Amexes or Merrill Lynches are doing this without regard?" Mr. Hawes asked.
"The NASD is attempting to single out banks for more restrictive regulations than the rest of the brokerage industry," added Kerry B. Alberti, head of Marine Midland Bank's broker dealer.
The NASD's bank broker-dealer committee is scheduled to meet in July to review the comments. Any major revisions to the rule would have to be approved by the board of directors of the NASD's regulation unit and then by the association's board of governors.
But the final decision on any rule rests with the SEC. Changes are more likely than an outright withdrawal.
"It would be unusual for the SEC to totally reject in its entirety a proposal like this that is the result of a major NASD initiative," said Donald L. Smith, law partner at Kirkpatrick & Lockhart, Washington.
But bankers could go to court to block the securities regulators, as they did in the 1985 when the SEC enacted a rule compelling bank brokers to register with the NASD.
"If the SEC approves an NASD rule that unlawfully intrudes on the direct activities of banks, then I believe it will be held invalid (by the courts) in the same way that the ill-fated attempt by the SEC to ignore the bank exclusion for registration of bank-broker dealers was in the 1980s," Mr. Kurucza said.