The Securities Industry Association and a major securities firm, A.G. Becker, have appealed a Federal Reserve Board decision that allows Bankers Trust Co. of New York to act as a broker of commercial paper -- short-term financing instruments with which corporations raise funds from investors.
The lawsuits, filed in U.S. District Court and the U.S. Court of Appeals here, are the most recent round in what is basically a turf war between the banking industry and securities dealers.
Federal banking laws generally prohibit banks from underwriting and brokering issues of securities and stock -- a prohibition that the securities industry claims Bankers Trust is violating. The Federal Reserve Board disagreed with that interpretation when it ruled last month that commercial paper is not a security within the meaning of the federal law in question, the Glass-Steagall Act.
Banks portray the issue as increasing competition and providing more choices for the issuers of commercial paper. The securities industry, on the other hand, says that concentration of economic power is what is at stake.
Bankers Trust began dealing in commercial paper in 1978, an action that was challenged by the Securities Industry Association in 1979. In June 1979, the general counsel of the Federal Reserve Board issued an opinion that the sale of commercial paper by a commercial bank such as Bankers Trust is not prohibited by federal law. The board later reached substantially the same conclusion.
In its appeal of that decision, the Securities Industry Association asked the courts to invalidate the Fed's action and issue a cease-and-desist order against Banker's Trust.
"Clearly it's a foot-in-the-door-type problem, but the related issues of conflict of interest and all kinds of concentration of economic power are also involved in this thing," said Donald J. Crawford, senior vice president of the Securities Industry Association. j
Commercial paper means instruments with a shorter term than nine months. Because it is short-term, commercial paper is exempt from registration provisions of federal securites law.
One of the two largest underwriters of commercial paper, A.G. Becker, also has filed suit to overturn the Fed's decision, claiming that it is the victim of unlawful competition. "Bankers Trust is certainly soliciting people with whom Becker deals and may have done an offer for some of those same people," said attorney Harvey Pitt.
Bankers Trust spokesman Tom Parisi said that the business "has grown over the past two years in a satisfactory way." Bankers Trust does business for about a dozen companies, he said. Rather than underwriting, in which a certain rate of return is basically guaranteed to the issuer of the paper, Bankers Trust has acted more as a broker, bringing together the issuer and potential investors, he said.