WASHINGTON - The chairman of the House Energy and Commerce Committee has turned up the heat on the Securities and Exchanged Commission to investigate whether banks are illegally pressuring municipal issuers for a share of bond underwritings in exchanged for providing letters of credit for such deals.
At the same time, Rep. John Dingell, D-Mich., is continuing to push the SEC to decide whether bond rating agencies should be regulated.
In a letter dated July 9, Rep. Dingell gave SEC Chairman Richard Breeden until July 31 to respond to his request that the SEC staff help the House panel draft legislation to regulate rating agencies.
In another letter dated July 7, Rep. Dingell gave SEC Chairman Breeden until Aug. 14 to supply a report on whether some banks are using so-called "tying" arrangements to force issuers into giving the bank a share of a bond underwriting in exchanged for providing a letter of credit or other credit enhancement to back the deal.
Tying, according to an SEC staffer, occurs when an issuer approaching a bank for a letter of credit or other credit enhancement is told the bank will provide the service only if the issuer makes it one of the underwriters in the deal. The practice is specifically barred by the Bank Holding Company Act of 1970.
Chairman Dingell's letter came in response to two speeches last spring by Securities and Exchange Commissioner Richard Roberts, who told the Bond Club of Virginia that he had been receiving complaints about possible bank tying. Mr. Roberts said he would seek regulations, if necessary, to block such practices.
Commissioner Roberts said private lawsuits are rarely filed over these violations, partly because they are so hard to prove and because firms are reluctant to alienate bond issuers and lenders. he added that enforcement actions are rarely brought by regulators.
Mr. Roberts, in a speech before the Public Securities Association, also warned that rating agencies remain one of the only unregulated participants in the securities market
He said the firms are generally doing an excellent job. However, he added that given their enormous influence in the market and their proliferation, more formal standards are needed.
In a May 21 interview with the Bond Buyer, Chairman Breeden said the U.S. has managed without any statutes or additional SEC rules to develop the "finest rating agency capability in the entire world," and that he opposes Commissioner Roberts's proposal. At that time, Mr. Breeden also said he would outline his views shortly in a letter to Rep. Dingell.
But, Rep. Dingell said in his July 9 letter he has not yet to receive a response from Mr. Breeden and gave the SEC chairman until the end of the month to answer. He also said he will contact the SEC's other commissioners for their views on the rating agency question.
If a vote we're taken by the SEC on the issue this week, a dead heat could result because two commissioners favor additional standards for rating agencies while the other two current members oppose such a move.
Commissioner J. Carter Beese said at a May SEC meeting that he did not see a "demonstrated need at this time for increased regulation in the area of NRSROs," referring to the term "nationally recognized securities rating organizations."
Entities can currently gain status as NRSROs from the SEC under a narrow set of standards - governing firms' capitalization - that Mr. Roberts contends were never intended to be the foundation for such status.
But Commissioner Mary Schapiro began raising concerns about the possible need for more regulation of rating agencies months before Mr. Roberts's speech.
"We are relying on them enormously. I have said it at every SEC meeting where the subject of [rating agencies] has come up," Commissioner Schapiro said in an interview yesterday, noting that the SEC has built provisions into some of its rules requiring the acquisition of ratings.
"I don't think that reliance is misplaced," she said. "We have no choice. But given that, I would like to make sure that the agencies are meeting certain minimum standards," particularly since their mention in SEC rules guarantees them a certain amount of business.
She said her views on what new rules are needed are not "crystallized."
But a minimum, rating agencies should follow certain procedures to get an SEC designation, she said, adding that there should be standards guarding against conflict of interest by rating agency employees.
The SEC usually has five members, but the White House has not announced a replacement for Commissioner Edward Fleischman, a Republican, who left the agency March 30. Chairman Breeden and Mr. Beese are also Republicans. Ms. Schapiro is an independent, and Mr. Roberts is a Democrat. Federal law bars the White House from appointing any more than three commissioners from the same political party.
Regarding the bank tying issue, Mr. Dingell asked the SEC to include in its response a copy of a draft rule the agency first circulated in 1974 but later withdrew that specifically barred the procedure.
The agency withdrew the rule at the time on the grounds that "tie-in" violations are covered by existing antifraud provisions. And he asked for an explanation of why the rule was withdrawn.
Mr. Roberts did not identify the banks that have complained about tying, but Thomas Harris, senior managing director for Merchant Capital Corp., in Alabama, warned in a June 2 letter to Commissioner Roberts that the practice is common and growing rapidly.
Chairman Breeden was unavailable for comment.