SEC Favors Letting Banks Deal in Securities, With Consumer Safeguards

The head of the Securities and Exchange Commission on Wednesday said that he endorsed far-reaching legislation to permit banks to enter the securities business as long as consumers are protected adequately.

SEC Chairman David S. Ruder told the House telecommunications and science subcommittee that the commission supports the Senate-passed repeal of the Glass-Steagall Act “as long as the investor protection concerns arising from the entry of banks into securities activities are simultaneously addressed.”

Glass-Steagall is a Depression-era law that separated banking from the securities business after the 1929 financial crash.

Ruder told subcommittee Chairman Edward J. Markey (D-Mass.) that the commission has accepted the safeguards in the bill sponsored by Sen. William Proxmire (D-Wis.), chairman of the Senate Banking Committee.

But he said that under ideal conditions the SEC would solely regulate banks dealing in securities and not share the responsibility with the Federal Reserve Board.

Concession to Industry

If eventually signed into the law, the bill, which passed the Senate 94-2 on March 30, would grant banks immediate power to underwrite mortgage-backed securities, commercial paper and municipal revenue bonds. Banks would be able to deal in mutual funds and corporate bonds six months after enactment.

In a concession to the securities industry, the bill withholds power from banks to underwrite corporate stock--viewed by senators as the riskiest securities area--unless Congress authorizes that in a separate vote in April, 1991.

In conjunction with the new securities powers, the bill would erect “fire walls” limiting loans and other connections between banks and their securities affiliates to prevent risky investment activities from endangering federally insured bank deposits.

In the House, a more restrictive bill has been circulated by Banking Committee Chairman Fernand J. St Germain (D-R.I.).

Banking interests are strongly opposed to the St Germain draft, which would grant much more limited securities powers and includes stricter consumer and insurance provisions than the Senate bill.

Public Interest Stressed

Markey, who has indicated that he is in no hurry to push through the legislation, said Congress should concentrate on one special interest, the public.

“Deregulation and relaxed supervision make sense as public policy only if the unfettered market forces they would unleash work naturally to the benefit of the public,” Markey said. “This is clearly not the case with respect to either our securities markets or the banking industry.

“The plain truth is that in the absence of an adequate regulatory structure and proper supervisory vigilance, the same unchecked market forces that gave us program trading, bank failure after bank failure and continuing market instability will again have free reign,” he said.

Consumer advocate Ralph Nader, representing the Center for Study of Responsive Law, told the panel that Congress should not repeal the provisions of the law that prohibit banks and bank holding companies from underwriting and dealing with corporate securities.