WASHINGTON - Financial services lobbyists who attacked proposed merchant banking regulations with rhetorical sledgehammers last year will ascend Capitol Hill with screwdrivers on Wednesday to tinker further with the rules.

Robert J. Kabel, a lawyer with Manatt, Phelps, & Phillips here who is scheduled to testify on behalf of the Bank Private Equity Coalition - a lobbying group supported by J.P. Morgan Chase & Co., FleetBoston Financial Corp., Deutsche Bank, and Norwest Venture Capital - said these large banking companies still contend the regulations contradict the Gramm-Leach-Bliley Act's intent to ease restrictions on their investment powers.

"The more we can impress upon the members of Congress who look at these issues that the appropriate federal regulatory implementation of the merchant banking provisions really goes to the heart of whether Gramm-Leach-Bliley will work as it was intended, the better," he said.

In a joint hearing before the capital markets and financial institutions panels of the House Financial Services Committee, Federal Reserve Governor Laurence H. Meyer and Comptroller of the Currency John D. Hawke Jr. are expected to defend the rules implementing the merchant banking provisions of the Gramm-Leach-Bliley Act.

The lawmakers holding the hearing, though, are sympathetic to the industry's argument.

In a statement released Monday, Rep. Spencer Bachus, R-Ala., chairman of the subcommittee on financial institutions, praised regulators for altering their original proposals, but said Wednesday's hearing is still necessary to address remaining "areas of concern."

Noting that bank holding companies have engaged profitably in limited merchant banking activities for years, Rep. Bachus said that it was not clear to him that restrictive new regulations are necessary to maintain the industry's safety and soundness.

"Finally," he said, "I am concerned that the new rules will go into effect without any input from the new administration and can only be changed by legislation or repeal by the issuing agency."

A spokesman for Rep. Richard H. Baker, R-La., chairman of the capital markets subcommittee, said his boss was pleased by the changes the agencies made to their original rules but is still not convinced that they accurately reflect Congress' intent in Gramm-Leach-Bliley.

"In general what he is going to be looking for is to see if any of these rules go against the spirit of Gramm-Leach-Bliley, which was to make way for companies to participate in activities they heretofore have not been able to," the spokesman said. "For instance, if securities firms would be loath to venture toward [becoming] financial holding companies because of these rules, it would be something the congressman would be interested in looking at."

The law, which allowed financial holding companies to make equity investments in nonfinancial companies, prompted a pair of implementing rules from federal regulators. One, governing the operational requirements for firms that make merchant banking investments, was issued jointly by the Fed and the Treasury Department. The financial services industry criticized it as overly restrictive, and a final version that incorporated many of the industry's recommended changes was adopted in January.

The second rule, which sets capital requirements on merchant banking investments, was proposed by the Fed alone. It was so heavily criticized that the central bank withdrew it and released a second proposal in January, which is still open for comment.

Mr. Kabel said that his testimony will focus on two elements: restrictions on cross-marketing between financial institutions and the companies they invest in, and the intersection of the Fed's capital proposal with pending changes to international capital standards laid out in proposed revisions to the Basel Accord.

The final rule would bar depository affiliates of financial holding companies from marketing services through companies in which the holding company has made a merchant banking investment. One primary objection to that element of the rule is that, because the law specifically allows such marketing arrangements by insurance firms, it places banks at a disadvantage.

"I can't conceive that there is a safety and soundness reason for discriminating against the banks," Mr. Kabel said. "We are hoping they look at it and change their minds. Otherwise, we'll be looking for a legislative fix."

Mr. Kabel will also try to convince the panel that a separate capital rule for merchant banking investments is unnecessary, especially since revised international capital standards will take such investments into account.

"We still don't understand the need for separate capital rules for merchant banking," he said. "This is the only asset class separated out for special treatment."

Others scheduled to testify are John P. Whaley, a partner with Norwest Equity Partners and Norwest Venture Partners, who will appear on behalf of the American Bankers Association Securities Association, and Peter T. Grauer, managing director with Credit Suisse First Boston Private Equity, on behalf of the Securities Industry Association and the Financial Services Roundtable.

Richard M. Whiting, executive director of the Financial Services Roundtable, said that in addition to the issues raised by Mr. Kabel, his group would press for an easing of other elements of the rules. Among the issues he expects to see raised are limits on how long merchant banking investments can be held, and restrictions on how closely holding companies can involve themselves in the management of companies they invest in.

Neither the Fed nor the Comptroller's Office would reveal the testimony their representatives will deliver, but a Fed representative said Mr. Meyer will address issues such as the cross-marketing restrictions and the intersection of the Fed's rule with the Basel Accord.

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