WASHINGTON -- Richard Breeden, chairman of the Securities and Exchange Commission, said Congress should consider giving the right to sue to securities firms harmed by illegal bank "tying" arrangements.
Some brokerage houses have accused banks of tying credit to certain forms of underwriting, barred by the Bank Holding Company Act of 1970.
Mr. Breeden made his recommendation in a letter to Rep. John Dingell, D-Mich., chairman of the House Energy and Commerce Committee.
Data from Morgan Stanley
The issue heated up this summer when Morgan Stanley & Co. sent data on the activities of five banks to the Federal Reserve Board in response to another rule proposal.
The data, according to Philip Lacovara, managing director and general counsel of the investment bank, alleged a "suspiciously high correlation" between the provision of letters of credit and underwriting services by bank affiliates.
"Current law does not give the SEC the means to police bank tying arrangements, but it does give the banking regulators authority to address such abuses," Mr. Breeden wrote. "To date, I am not aware of any such cases that have been brought by the bank regulatory agencies."
He said current law permits a bank customer to sue a bank for illegal tying. But firms competing with the bank cannot sue, even though they may be affected most by tying.
Clout for Underwriters?
"It may be that Congress should consider giving firms that have been damaged the same right bank customers now have to bring actions to enforce the anti-tying laws," Mr. Breeden said.
He said such tie-in arrangements could be addressed only if Congress put "firewalls" between insured depository institutions and their uninsured affiliates. Bank-powers proposals that died in Congress last year would have addressed the issue.
One provision, dubbed a "time-out firewall," would have barred a bank from making loans to customers for 90 days after a bank affiliate underwrote a deal for the same customers.
Meanwhile, Morgan Stanley's survey focused on negotiated municipal revenue and industrial revenue issues between January 1987 and May 1992 that were handled by J.P. Morgan Securities Inc. Bankers Trust Co., Citicorp, Chemical Bank, and Chase Manhattan Corp.
In 66 deals, one or more of the banks was either lead manager or co-manager while also providing a letter of credit or other credit enhancement for the issuer. In 34 of the 66 deals, one of the banks was sole underwriter and exclusive provider of credit enhancement.
"That's nonsense. We don't tie lending or any other business to our underwriting business, period," said Joseph Evangelisti, a spokesman for J.P. Morgan & Co. "It's against the law. The allegations are unsubstantiated. It's insulting to clients.
Options Are Cited
"If a client has the creditworthiness to tap the public markets, then they have numerous alternatives for lending resources," Mr. Evangelisti said. "If they can tap the public markets, they can go to any money-center on the Street and get a loan."
Thomas Parisi, managing director at Bankers Trust, called the allegations of illegal tying "entirely false."
"As our clients are well aware, the credit products of Bankers Trust Co. and the securities products of B. T. Securities Corp. are each offered on their own merits against the many competing products that our clients typically have at their disposal," he said. "Any suggestion to the contrary is entirely false and should be seen as a continuation of the Securities Industry Association's campaign to rid itself of banking affiliate competition."
Amy Dates, a spokeswoman for Citicorp, said, "Customers have a wide choice of financial services providers and they would not stand for tying, which they and we know are illegal.
"Could it be that our success in markets previously considered investment bank preserves is the real reason for their complaints.?"