Herd on the Street

16 May 2003

This is a hot issue, but it is not clear why the regulator is pushing its nose into it. If tying is an issue for regulators at all, it is one for banking supervisors, not the SEC.

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The Securities and Exchange Commission is studying tying as part of its overall investigation into conflicts of interest on Wall Street. Tying is the practice where large banks make loans on condition that the recipient company uses their feebased investment banking services.

Tying has become a hot political issue since the GlassSteagall Act – which separated commercial and investment banking was abolished four years ago. In a recent survey conducted by the Association of Financial Professionals, more than half the senior financial executives polled said they had been denied credit, or had their loan terms changed, after they declined to give banks feepaying business.

Tying – if there is a specific quid pro quo – is illegal under the terms of the Bank Holding Company Act 1970. And reducing the price of credit to benefit an investment banking affiliate violates Section 23B of the Federal Reserve Act that requires transactions to be on market terms.

A number of government and regulatory agencies are currently investigating tying. These include the National Association of Securities Dealers, the Government Accounting Office, the Federal Reserve and the Comptroller of the Currency.

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