WASHINGTON - Securities and Exchange Commission Chairman Richard Breeden says Congress should consider enacting legislation that gives redress in courts to securities firms damaged by illegal bank "tying."

Breeden made the recommendation in a letter to Rep. John Dingell, D-Mich., chairman of the House Energy and Commerce Committee, that was released late Wednesday.

Dingell had asked Breeden this summer for his views on allegations by securities firms that some bank dealers are linking the provision of letters of credit to being named underwriter of a deal. The practice is barred by the Bank Holding Company Act of 1970.

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 firm, shows a "suspiciously high correlation" between the provision of credit enhancement and underwriting services by bank affiliates.

Fed Chairman Alan Greenspan Oct. 2 wrote Rep. Dingell that his staff has requested information from a number of underwriting units of bank holding companies to see whether they are illegally tying their loans to underwriting assignments.

"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," Breeden writes. "To date, I am not aware of any such cases that have been brought by the bank regulatory agencies. "

In addition, he said, current law permits a bank customer to sue a bank for illegal tying. However, firms competing with the bank cannot sue, even though they are often the ones most affected by tying.

"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," he said.

Breeden noted that the SEC had considered enacting a rule to curb certain tying practices by participants in securities distributions, but that did not address tie-in arrangements imposed on issuers.

He said such tie-in arrangements can be addressed only by Congress imposing "firewalls" between insured depository institutions and their uninsured affiliates. Bank powers legislation considered by Congress last year would have addressed the issue, but died in a series of votes on the House floor.

One provision, dubbed a "timeout 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 focuses 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.

It concludes that of 66 deals, one or more of the five banks was either lead 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.

Bankers Trust was sole underwriter and provider of credit enhancement in 72% of the deals, Chemical in 66%, Citibank in 53%, and J.P. Morgan in 30%, Morgan Stanley contends. The study does not refer to Chase's percentage. Chase exited the municipal underwriting business in 1991.

And the trend is accelerating, Morgan Stanley says. Using J.P. Morgan as a test case, the results show an increase in joint activities between J.P. Morgan Securities and Morgan Guaranty. Of 49 municipal issues for which Morgan Guaranty provided credit enhancement from 1987 to 1992, 20 of them, or 41%, were deals in which J.P. Morgan co-managed the underwriting, the survey contends. Eight of those 20 joint transactions occurred before March 1990, with 12 occurring after, the firm contends.

The firms cited by Morgan Stanley strongly rejected its conclusions.

"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. "It's against the law. The allegations are unsubstantiated. It's insulting to clients.

"If a client has the creditworthiness to tap the public markets, then they have numerous alternatives for lending resources," 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."

Asked whether Bankers Trust has been contacted by the Federal Reserve Board, he said "we don't comment on communications with regulators" as a matter of policy.

Officials at Chemical could not be reached for comment.

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?" she asked.

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