Banks’ Right to Trade in Corporate IOUs Upheld : High Court Rejects Securities Industry’s Argument That Commercial Paper Has Destabilizing Effect

Dealing a blow to the securities industry, the U.S. Supreme Court on Monday refused to change the rules that allow commercial banks to sell short-term, large-denomination corporate IOUs, or commercial paper.

In separate actions, the high court:

- Set the stage for an important employee-discrimination ruling by agreeing to hear the appeal of a Fort Worth, Tex., bank employee who claims that she was denied promotions because she is black.

- Agreed to decide whether the Postal Service should be forced to pay interest on back pay owed to a Chesterfield, Mo., letter carrier who successfully sued the service for illegal discrimination.

In the case involving the sale of commercial paper, the Supreme Court, without comment, left intact rulings that banks are not treading illegally into the securities industry by dealing in the IOUs.

The dispute began in 1979 when the Securities Industry Assn., a trade group of underwriters, brokers and securities dealers, challenged a decision by Bankers Trust Co. of New York to enter the commercial paper field.

The Federal Reserve Board had approved the activities of Bankers Trust, ruling that commercial paper is not a “security” under federal banking law.

Bank’s Risks Discounted

The Fed was overruled by the Supreme Court in 1984, but the court didn’t foreclose banks from dealing in commercial paper. Instead, the justices sent the case back to the U.S. Circuit Court of Appeals in Washington for further study.

The appellate court ruled last December that the banks may deal in commercial paper even though the IOUs can be considered securities.

The court rejected arguments by the securities industry that allowing banks to deal in commercial paper could undermine the financial stability Congress sought to achieve by a Depression-era law limiting bank activities. It noted that Bankers Trust does not purchase commercial paper itself and does not loan money for commercial paper, or underwrite, the sale of commercial paper. “Nothing in Bankers Trust’s services puts its own resources at risk,” the appeals court said.

Securities Industry Assn. President Edward I. O’Brien said he was “disappointed the U.S. Supreme Court has decided not to hear our arguments.”

Issue Before Congress

But he added: “Even if the Supreme Court had agreed to hear the case and rule in the securities industry favor, it still would only have served as a stopgap measure, since the entire question of whether banks should be allowed to enter the price-volatile securities industry is before the Congress, which has the authority to make any changes it deems necessary in the federal law.”

In other cases, the court:

- Limited the tax benefits for a corporation’s controlling shareholders when they surrender some of their stock to improve the corporation’s financial health.

- Ruled that secured creditors may not sell the products of a financially troubled business if employees are owed back wages. The court said a 1938 law, the Fair Labor Standards Act, applies to secured creditors who take over all assets of failed businesses.

- Agreed to decide whether the University of California must provide free mail delivery on campus of labor union literature aimed at organizing university custodial workers.

- Agreed to decide whether states may enforce safety codes for hazards unrelated to radiation at federal nuclear plants.

- Ruled that civil lawsuits invoking the Racketeer Influenced and Corrupt Organizations Act, or RICO, must be filed within four years of the alleged violation.