Securities Industry Will Sue Fed : Group Wants to Keep Banks Out of Bonds Business

In its latest move to protect its turf, the Securities Industry Assn. said today it will sue the Federal Reserve Board to prevent affiliates of bank holding companies from underwriting corporate stock and bonds.

Last month the Fed said it will allow bank affiliates to underwrite corporate bonds, eroding the strict division of labor between the banking and securities industries laid out in the Glass-Steagall Act of 1933.

The Securities Industry Assn., a trade group made up of firms that underwrite and trade fixed-income securities and stock, said it will try to persuade the courts that the Fed overreached its authority in letting bank affiliates underwrite corporate bonds.

“We believe the nation’s law should be amended, if necessary, by Congress, not by regulatory and administrative organizations, such as the Federal Reserve,” the SIA said.

An SIA spokesman said the trade association’s board of directors made the decision at a special meeting this morning. The group said it will file its suit by mid-month in the U.S. Court of Appeals for the District of Columbia.

In deciding to allow banking companies to raise money for corporations in the bond markets, the Fed set strict limits on such activities. The central bank also said it will consider in a year whether to let bank affiliates underwrite corporate equity securities like common stock.

But the SIA called the Fed’s action “a dangerous piecemeal undermining of the safety barriers” of the Glass-Steagall Act.

Wrong Interpretation Alleged

The group said the Fed wrongly interpreted Glass-Steagall, which it said expressly prohibits banks from underwriting corporate debt and equity.

Glass-Steagall, approved in the aftermath of the 1929 crash, prohibits commercial banks from owning brokerage houses and separates commercial banking from investment banking activities.

The act was designed to insulate bank depositors from the risks involved in having banks deal in securities and to prevent a banking collapse like the one in the Depression.

After the Depression, regulators learned that some banks had sold corporate securities at inflated prices, allowing companies to use the money to repay bank loans. Glass-Steagall was crafted in part to prevent such conflicts of interest.