The Securities and Exchange Commission last week sent a letter to Rep. John D. Dingell explaining that municipal bonds backed by Executive Life Insurance Co. guaranteed investment contracts essentially slipped through a regulatory crack.

If anyone could have informed investors of the crucial relationship between junk bonds and municipal GICs, the letter stated, it was Standard & Poor's Corp., which rated the nine taxable issues AAA until January 1990.

Responding to a June inquiry from the Michigan Democrat, Richard C. Breeden, chairman of the SEC, said information was available to investors regarding both the junk-bond investment practices of Executive Life and the intent of issuers to invest with Executive Life, but that a connection between the two events was not made.

In a March 1986 SEC filing, parent company First Executive said it was "investing a substantial portion of its assets" in corporate junk. And in the offering statements of the taxable GIC-backed issues, it was clear Executive Life would receive the bond proceeds. "Moneys-...shall be invested to the fullest extent possible in the investment agreement," Mr. Breeden's letter quoted.

At the same time, Mr. Breeden dismissed Rep. Dingell's earlier implications that the SEC should have caught the problem before it blossomed into a $1.93 billion default and the largest life insurance conservatorship in history. Rep. Dingell is chairman of the House Energy and Commerce Committee.

"No connectiion was made in [an] official statement between the disclosed intent to invest the proceeds with Executive Life and First Executive's policies of investing in high-yield securities," Mr. Breeden's letter says. "Had the offering documents for the [GIC-backed] municipal securities been subject to commission review at the time of issuance, this circumstance may have been explored.

"It is doubtful," the letter continues, "that S&P, in awarding its AAA rating ... was unaware of First Executive's investments in high-yield securities, and it appears that purchasers of the municipal securities relied heavily on these ratings in making their investment decisions."

The SEC, on the other hand, has had ample opportunities to oversee GICs if it so wished. But the agency issued several letters in the mid-1980s in connection withu GIC-backed municipal bond deals saying it would not take enforcement action if the bonds were not registered with the agency.

All told, there are 16 municipal issues with Executive Life GICs -- nine taxable deals sold in 1986, six tax-exempt issues sold in 1989, and one tax-exempt deal sold in 1985.

The 1986 bonds include: a $400 million Memphis Health, Education & Housing Facility Board offering; a $300 million multifamily housing issue sold by the Adams County, Colo., Industrial Development Authority; a $300 million Southeast Texas Housing Finance Corp. issue; a $200 million El Paso Housing Finance Corp. issue; two $150 million Louisiana Agricultural Finance Authority offerings; a $150 million Louisiana Housing Finance Authority issue; and two Nebraska Investment Finance Authority deals, each $100 million.

The six 1989 deals are two St. Paul, Minn., Housing and Redevelopment Authority multifamily housing revenue bonds insured by the Federal Housing Administration, together totaling $11.28 million; a 1989 $7.63 million Tucson, Ariz., multihousing, variable-rate issue, also insured by the FHA; and three small California issues sold by Simi Valley, Whittier, and Temecula Valley Unified School District, totaling $47.41 million.

The 1985 deal, originally insured by Bond Investors Guaranty, is an $11.9 million borrowing by Eureka, Mo., Municipal Bond Investors Assurance Corp. now guarantees the issue.

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