Citicorp, which has often pioneered financing innovations in the past, today announced that is has formed a broker-dealer subsidiary that will be used to raise capital for the bank holding company.
The move immediately stirred controversy with the brokerage community which has been fighting bank encroachment into the securities business.
The initial offering to be made by Person-to-Person Investments Inc., which is registered as a broker-dealer with Securities and Exchange Commission, will be $25 million in Citicorp "rising rate" notes - called thus because their interest rate increases the longer an investor holds on to them.
The rate on the notes increases from 6.5 per cent in the first year up to 9.5 per cent in the fifth year on a minimum investment of $500, with notes available in multiples of $100 above this mount up to a maximum of $25,000.
They will be available only to residents of Arizona and Colorado.
The Glass-Steagall Act was passed by Congress in the 1930s to separate banking from the securities business.
But a spokesman for Citicorp, parent to the country's second largest bank, Citibank, said the act "does not prohibit a bank holding company from issuing and selling its own securities either directly or through a subsidiary and that's what we're doing."
The Securities Industry Association, which represents the country's major brokerage firms, did not dispute this but issued a statement saying it "believes strongly that the public interest continues to require the separation of the securities business in the corporate investment banking and equities area from commercial banking, as mandated by the Glass-Steagall Act."
The notes themselves might cause some dispute because they are somewhat similar to bank certificates of desposit. The rates payable certificates of deposit below $100,000 in size are limited by the Federal Reserve Board's Regulation Q.
Citicorp says they are not deposits and therefore not subject to Regulation Q. The notes are redeemable annually. Investors have three options on how they get their interest payments. It can accumulate to maturity and be compounded, it can be paid quarterly, or on purchases of $10,000 or more interest can be paid monthly. The notes are not insured by any federal agency, as bank deposits are.