WASHINGTON - A member of the Securities and Exchange Commission yesterday called for comprehensive legislation to allow banks to expand their municipal bond and other securities activities as long as investors are adequately protected.

Commissioner Richard Roberts added his support to Federal Reserve chairman Alan Greenspan's call last week for reform of the Glass-Steagall Act of 1933, which sets up barriers to bank participation in the municipal bond and other securities markets.

"Today's market realities call out for an overhaul of the existing regulatory system, particularly with respect to bank securities activities," Roberts said at a meeting here of the Financial Services Council, an industry coalition of banks and other financial services companies. Bank securities activities are beneficial because they add to competition in the marketplace, he said.

But all securities activities should be subject to one set of uniform rules that are consistently applied by the SEC, regardless of whether firms are banks or registered broker-dealers, to protect investors, Roberts said.

So while securities and banking regulators agree on the need for reform, how to do it is a question that has divided the banking and securities communities and stymied legislation for years, Roberts said.

"There are some indications that things are heating up" in the debate over Glass-Steagall reform, but "it remains to be see how far it will go" in the next Congress, he said.

The Glass-Steagall Act permit banks to underwrite general obligation bonds, but prohibits direct b underwriting of more lucrative revenue bonds, including private-activity bonds. About N banks have set up subsidiaries under Section 20 of the act to underwrite revenue bonds, but many banks are shut out of this activity because they cannot meet a financial test set in 1987 by the Federal Reserve Board.

Section 20 affiliates are securities firms, not banks, that are registered with the SEC and owned by bank holding companies. The Fed has said that a bank may not affiliate with a firm that is engaged principally in the underwriting of non-bank-eligible securities, including municipal bonds. The Fed deemed a firm to be not "engaged principally" if less than 10% of total revenues comes from such underwriting.

Both Congress and the commission are concerned that investors are receiving "dissimilar information" from banks and securities firms about similar products sold by both such as derivatives, Roberts said. House hearings have been held and legislation has been introduced addressing mutual funds, and General Accounting Office studies have been started to examine bank securities regulation, Roberts said.

But a larger, more comprehensive effort is needed to develop legislation that would place any bank activity in the securities market under federal securities law, he said.

SEC chairman Arthur Levitt Jr. has testified in support of a "functional regulation" bill sponsored by House Energy and Commerce Committee chairman John Dingell, D-Mich. The bill is designed to make sure federal regulation of financial services providers, including banks, is determined by the nature of the business activities and not by what kind of entity conducts the business. That would allow bank securities activities to be regulated by the SEC, rather than banking agencies.

Roberts said he supports, with qualifications, legislation introduced in mid-August by Rep. Stephen Neal, D-N.C., that would allow federally insured depository banks to affiliate with financial, insurance, and other nonfinancial businesses through the auspices of diversified financial services holding companies. These holding companies would replace bank holding companies, and any of their securities subsidiaries would be regulated by the SEC, according to Neal.

But Roberts said he is concerned that while the Neal bill purports to include a "functional regulation" approach, he cannot find specific provisions that would do so. "That is a problem."

Roberts suggested combining the Dingell and Neal bills, which he said would gamer the "strong support" of the SEC.

The commissioner said that any bill should protect against bank tying arrangements under which some banks, because of "overaggressive," employees, have allegedly tied provision of credit enhancement to giving the bank the underwriting business of a municipal bond issue. Banking regulators rarely bring enforcement actions in this area, Roberts said.

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