WASHINGTON - The drive to uncover examples of illegal bank "tying" in the municipal securities market intensified yesterday as the Securities Industry Association asked its 650 members to supply concrete evidence of the practice to regulators.
"I am writing to seek your help to stop illegal tying of products and services by commercial banking organizations that compete unfairly with the securities industry", Austin Koenen, chairman of SIA's investment banking committee, said in a two-page letter to association members.
"We need your help to provide specific instances of abuses or illegalities to the federal regulators," said Koenen, a managing director with Morgan Stanley & Co. He said the SIA will "channel" the information to regulators confidentially.
Bank tying, which is barred under the Bank Holding Company Act of 1970, occurs when a bank illegally links one service to another. It can occur in the municipal bond area when a bank refuses to provide a credit enhancement unless it is made an underwriter of a deal.
The SIA is particularly concerned about tying because the vast majority of its members are securities firms, while only 10% are dealer banks. However, the Public Securities Association, whose membership is one-third banks, has made a conscious effort not to take a position on the tying issue.
Angry regional municipal firms have charged they are being increasingly squeezed out of deals because of the practice. But Koenen said they often do not come forward with their complaints because of fears that banks will respond by cutting off credit.
The issue hit the spotlight earlier this year when Securities and Exchange Commissioner Richard Roberts forwarded a set of complaints about tying from regional dealers to the office of the comptroller of the currency, which launched an investigation.
The Federal Reserve Board also is investigating tying, according to an Oct. 2 letter from Fed Chairman Alan Greenspan to John Dingell, D-Mich., chairman of the House Energy and Commerce Committee, which is monitoring the issue.
The SIA is looking for examples of tying in both the municipal and corporate securities markets.
"We need to provide the regulators with specific instances ... if the practice is to be stopped," Koenen said. "Our SIA Washington staff [is] available to help you channel ... information to the appropriate federal banking agency in a way that will not jeopardize your firm's or your clients' business relationships."
Koenen said federal banking regulators "stand ready" to take action if the industry can document specific examples of illegal tying activities. He cited Commissioner Roberts' recent statement, in a speech to the SIA, that the securities industry now has a "window of opportunity to, in effect, put up or shut up."
"The problem," Koenen said, repeating a concern raised recently by Greenspan, "is that the information on tying has been "relatively general in nature.'"
He added that senior officials of the office of the comptroller of the currency said their review is "unlikely to result in any concrete action unless they receive complaints regarding a specific bank or deal, or if an issuer is willing to state that it was coerced into using the services of the securities affiliate as a condition of obtaining bank credit."
Heather Ruth, president of the PSA, said, "It's a Glass-Steagall issue and we at the PSA do not comment on any of those issues." She was referring to the Glass-Steagall Act of 1933, which separated commercial and investment banking activities.
Morgan Stanley and several other Wall Street firms have warned recently that tying arrangements seem to be on the rise in both municipal and non-municipal offerings.
Philip Lacovara, general counsel at Morgan Stanley, said recently that his firm sent several examples of municipal deals that appear to involve tying arrangements to the Federal Reserve.