WASHINGTON -- The Federal Reserve Board ruled yesterday that the securities affiliate of Norwest Corp. can underwrite and deal in unrated municipal revenue bonds, a move that would benefit small issuers as well as banks, according to a banking official.

The Fed also agreed to allow subsidiaries of Norwest Corp. to "crossmarket" for the first time both banking and securities services to customers as long as certain disclosures are made.

The actions will "open the door" for other banks to engage in such activities, a Norwest spokeswoman said.

Small issuers will benefit from the ability of the affiliate, Norwest Investment Services Inc., to underwrite unrated municipal revenue bonds because bank competition with other securities firms will help keep borrowing costs down, said William Gabler, senior vice president and manager of public finance for Norwest Investment Services.

The Fed action applies to governmental entity bonds -- not private-activity bonds -- of up to $7.5 million, Gabler said.

In many cases, small issuers cannot afford the price of a bond rating, which can cost up to $10,000, Gabler said. But these issuers may have good revenue sources for worthy projects, and Norwest wants to compete for their business, he said. Norwest's service territory encompasses the Southwestern, Rocky Mountain, and Midwestern states, he said.

The Fed granted Norwest Corp. the power to set up the securities affiliate in 1990 under Section 20 of the Glass-Steagall Act of 1933, which separates commercial from investment banking. Under the act, banks generally can underwrite general obligation bonds, but not municipal revenue bonds.

The Fed has allowed about 30 banks to establish such affiliates subject to regulatory conditions, including the requirement that banks underwrite and deal only in bonds rated as investment grade, Gabler said.

"We have demonstrated to the Fed that we have underwriting criteria and procedures in place that assure that we will use care in underwriting those bonds" of up to $7.5 million, Gabler said.

In granting Norwest Section 20 status, the Fed also prohibited the banking company from marketing its banking and securities services to customers because the agency wanted to ensure the public "does not link the economic fortunes of a financial institution with a Section 20 company," the Fed told Norwest in a Dec. 5 letter.

But in a 1989 case involving J.P. Morgan & Co. Inc., the Fed said this prohibition is not "complete" and that banks can act as riskless principal or broker for customers in buying and selling bank-eligible securities underwritten or held in a dealing portfolio by a Section 20 affiliate, the letter said.

The Fed said Norwest subsidiaries may engage in cross-marketing as long as Norwest meets earlier commitments to make certain disclosures and to ensure that subsidiary banks will not have any control over the parent company.

For example, if Norwest is the adviser to a particular mutual fund and the fund is mentioned in materials provided to bank customers or during educational seminars, Norwest will inform the customers of the particular fee arrangement betweeen the bank and the fund. Norwest also made several commitments addressing conflicts of interest and customer confusion that could arise when bank employees participate in seminars dealing with securities services.

Previously, a Norwest company could refer a customer to an affiliate but could not try to sell services of other subsidiaries in marketing materials, the Norwest spokeswoman said.

Under yesterday's orders, Norwest will be able to provide marketing materials to banking customers about its securities and other services, the spokeswoman said. "The firewalls are still in place" between commercial and investment banking responsibilities, but the bank subsidiaries now have more marketing flexibility to build up


Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.