WASHINGTON -- The securities industry has mounted a counteroffensive to legal maneuvering by three bank holding companies seeking Federal Reserve Board approval to Broaden their securities activities.
Relying on a novel interpretation of the law, attorneys for the New York City holding companies -- Citicorp, Bankers Trust New York Corp., and J.P. Morgan & Co. -- are trying to convince the Fed that their proposed securities activities do not violate the Glass-Steagall Act. That Depression-era statute prohibited on the mixing of commercial and investment banking.
But in comments filed with the Fed this week, two leading securities groups raised questions about that legal interpretation. They also contended that the proper forum for deciding these issues is Congress, not the regulatory agencies.
In its application, Citicorp is asking the Fed to permit its subsidiary, Citicorp Securities Inc., to underwrite municipal revenue bonds, mortgage-backed securities, and securities backed by consumer receivables. J.P. Morgan and Bankers Trust both want to place commercial paper through subsidiaries.
The Fed is scheduled to rule on these applications within 60 days.
Before Congress, the issues raised by these three applications boil down to a debate over publicly policy. But the debate at the Fed turns on legal semantics.
Citicorp is gambling on a clause in Glass-Steagall prohibiting the affiliation of banks with companies "principally" engaged in underwriting securities.
To Citicorp's lawyers, that means banks can affiliate with securities firms as long as no more than half of their business is devoted to securities prohibited to banks. In its application, Citicorp agreed to limit the new securities activity to 10% of its subsidiary's total business. Citicorp Securities currently underwrites and deals in U.S. government securities, general obligation bonds, and money market instruments.
Applause for Imagination
Banking attorneys roundly applauded argument as further evidence of the imagination of Citicorp attorneys. J.P. Morgan and Bankers Trust last spring agreed to similar limitations in an attempt to elicit Fed approval for their commercial paper operations.
But that theory won't wash with the securities industry. Representing the mutual funds industry, the Investment Company Institute argued in a letter to the Fed that these self-imposed limits would free bank holding companies to make substantial moves into the securities business as long as their securities operations were offset by higher levels of other activities in the subsidiary.
"If you accept their theory, then Citicorp could buy an investment bank and then just pack in everything else around it," said David M. Miles of Fried, Frank, Harris, Shriver & Jacobson, an attorney for Investment Company Institute.
Speaking for securities brokerage firms, the Securities Industry Association argued that Citicorp is "implicity recognizing the illegality of its prosposal" by the self-imposed restrictions the bank has set out in its application.
Beyond the narrow legal question of whether Citicorp's plans violate Glass-Steagall, the Fed will have to decide if underwriting these securities is "closely related to banking," a standard set out in the Bank Holding Company Act. The securities and banking industries are also at odds over this issue.
And the Fed must determine whether the public benefits of the activities outweigh any adverse effects. The Security Industry Association raised the specter of potential conflicts of interest, which were rejected by bankers who filed comments with the Fed.
Most banks filing comments with the Fed were supportive of the three applications. Donald L. Rogers, president of the Association of Bank Holding Companies, argued that Citicorp's proposed level of underwriting "falls …