WASHINGTON -- NationsBank may have violated the federal "anti-tying" law earlier this year by telling an Arkansas company that the bank would supply a letter of credit for an industrial revenue bond issue only if the issuer chose the bank as underwriter.

"Our proposal for a letter of credit for enhancement purposes on your ... bonds must encompass the placement business for the marketing of these bonds," J.W. Davis, senior vice president of the bank, wrote John L. Anthony, vice president of Anthony Forest Products of E1 Dorado, Ark., a family business that is partly owned by former U.S. Rep. Beryl Anthony, D-Ark.

"We would not be in a position to offer a stand alone letter of credit," Davis said in a letter dated Jan. 19.

The letter, a copy of which was obtained by The Bond Buyer, outlined three conditions that the issuer's board of directors must meet if it wants the bank to continue its "active solicitation" of a "relationship" with the Arkansas issuer.

One of the conditions was giving the bank both the letter of credit and placement business, according to the letter, which is being reviewed by the Securities and Exchange Commission.

Federal banking laws do not prohibit banks from providing multiple services to customers. But Section 106 of the federal Bank Holding Company Act of 1970 does bar banks from requiring a customer to purchase one service as a condition of obtaining another, such as credit, in what has been dubbed the "tying" of services.

Davis, who is in the Greenwood, S.C., office of NationsBank, the fourth largest bank in the country, was traveling and could not be reached for comment yesterday.

Mary Alice Rogers, spokeswoman for NationsBank, said: "Our policy is to comply with all applicable federal laws, including the anti-tying provisions of the Bank Holding Company Act. We have reviewed the matter and have no further comment."

John L. Anthony, vice president of Anthony Forest Products, which ultimately did not hire NationsBank for the deal, also was unavailable for comment.

One of the forest products company's directors is a former Democratic representative from Arkansas' Fourth Congressional District, Beryl Anthony, who left Congress in 1992 after being defeated in his bid for reelection. Anthony was a member of the House Ways and Means Committee and was a leading proponent of tax-exempt bonds in Congress, including making the issuance of IDBs permanent.

The Federal Reserve Board and the Office of the Comptroller of the Currency launched an investigation of allegations of bank tying violations in the fall of 1992. No formal enforcement actions were announced, but the regulators are believed to have taken action against Cleveland-based National City Corp. and to at least have examined the activities of First Union Corp. for possible tying violations.

The probes came as the securities industry revived long-time allegations that banks often illegally require an issuer to designate the bank as underwriter as a condition of providing a credit enhancement, particularly in the municipal arena. The Securities Industry Association sent letters to its 650 members in November 1992 asking for concrete examples of tying and said that federal banking regulators stand ready to take action if the industry can document specific examples.

The group, which received a light response to its letter, noted in the letter that firms and issuers often are unwilling to identify instances of tying because of fears of retaliation by banks that could cut off their credit.

Securities firms say tough enforcement of anti-tying laws is needed because only banks can fund their credit operations with federally insured deposits and only banks, which are the most important source of credit in the U.S. economy, can threaten an issuer's traditional source of credit.

The NationsBank letter was turned over to the SEC by an official of Alabama-based Merchant Capital Corp., who contends that tying is a common problem. Thomas Harris, senior managing director for Merchant, said that despite the excellent services that his firm provides customers, it is being edged out of deals because more and more banks pressure issuers into buying packages of services.

Harris helped launch federal regulators' investigation of National City Corp. when he sent them a copy of a term sheet from the bank that made a letter of credit contingent on an underwriting role. Harris gave the copy to SEC member Richard Roberts who has been a critic of bank tying practices.

"It's probably costing us hundreds of thousands of dollars a year in lost business," Harris said in a telephone interview yesterday. "Sometimes you know it's happened" because a banker puts it in writing, but that is rare, said Harris. "Usually, the bank just whispers it to the client," he said.

Harris contends that clients lose clout when they turn to a bank to underwrite their bonds.

"Once a client is caught in the tying net, there's no effort made by the bank from that point forward to make it a competitive deal in terms of legal fees or other issuance costs. Merchant Capital shops all the ancillary issuance costs, including legal fees, to get the most competitive quotes. Banks, however," do not, he said.

"We don't mind the competition as long as the playing field is level," Harris said. "But when Wing goes on, the deal loses its competitiveness. There is no reason to hold costs down when somebody has got a gun to the issuer's head.

"We are are a leading issuer of small IDBs in this country," Harris said. "Therefore we see more of this bank tying activity than any other investment banking firm."

But NationsBank's letter to Anthony contends that the bank will provide the "community-minded service you have grown accustomed to through the years." It also means being backed by the fourth largest bank in the U.S., the letter said, noting that the bank's 1993 record profit of $1.5 billion represents a 31% increase over the previous year.

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