CHICAGO -- Minneapolis based Dain Bosworth Inc; is discussing a possible merger or acquisiton with Chicago-based Clayton Brown & Associates, municipal bond industry sources said this week.

The sources, who are familar with ongoing discussions between the two firms, said talks into by Dain Bosworth have been taking place for several weeks.

Officials at the two firms declined to comment.

"We have a long-standing corporate policy not to comment on ruroots," said B.J. French, a Dain Bosworth spokeswoman.

"There are always rumors, and we're not going to comment on rumors," said Gerald Pelzer, Clayton Brown's president.

One source said the two firms are still in the exploration phase and are not near to reaching an agreement. The discussions began after Dain Bosworth officials expressed interest in Clayton Brown and wanted to take a close look at the firm, according to the source.

Dain Bosworth is at least the second firm in two years to express intess in Clayton Brown. In 1992, Milwaukee-based Robert W. Baird & Co. began negotiations to purchase the firm. Those negotiations ended in May of that year after Clayton Brown's management decided to keep the firm independent and eventually make it employee owned.

Employees now own 52% of the shares in Clayton Brown, while Clayton Brown, the firm's namesake founder and chairman, who once owned 70% of the firm, owns about 34%, according to a source. The remainder of the shares are held by individual employees.

Dain Bosworth is a subsidiary of the Inter-Regional Financial Group, a publicly held company, which is also the parent of Dallas-based Rauscher Pierce Refsnes Inc.

Sources speculated that a merger or acquisition of Clayton Brown would make sense because Clayton Brown and Dain Bosworth would complement each other in terms of business and geographical coverage.

Both Clayton Brown and Dain Bosworth are involved in public finance and the trading, underwriting, and distribution of tax-exempt debt.

Clayton Brown has in recent years sold part of its business. In October 1991, Clayton Brown sold its unit investment trust division to Nike Securities in Lisle, Ill. At the time, the division made up 30% of Clayton Brown's business.

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