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FINRA

 

FOR RELEASE
CONTACTS:
Thursday, September 19, 2002
Nancy A. Condon 202-728-8379
Michael Shokouhi 202-728-8304


NASD Advises Securities Firms on Tying Arrangements

Washington, D.C. — NASD today advised its member firms that the practice of tying commercial loans to investment banking business violates federal statutes and NASD’s rule requiring its members to adhere to just and equitable principles of trade.

 

“We are receiving reports and hearing concerns from some of our members that the practice of tying commercial credit to investment banking is becoming more widespread,” said Robert Glauber, NASD Chairman and CEO. “As underwriting and IPO business remains low, the temptation to generate business by tying increases.”

 

The Bank Holding Company Act Amendments of 1970 (BHCA) forbids banks from extending credit on the condition that the borrower must engage in some other business with the bank. In light of the unique role that banks play and the potential for controlling a company’s credit, Congress perceived tying transactions involving credit as “inherently anti-competitive, operating to the detriment of banking and non-banking competitors alike; thus the anti-tying provisions were intended to regulate conditional transactions in the extension of credit by bank more stringently than had the Supreme Court under the general antitrust statutes.”

 

NASD’s investigation into bank tying arrangements indicate that tying commercial bank loans to investment banking services most commonly arises in the following scenarios:

  • bridge loans in which the loan is intended to be repaid out of the proceeds of a bond offering;
  • backup credit facilities that support a company’s issuance of commercial paper; and
  • syndicated loans.

Access to these types of credit at commercial rates is critical to many companies and may provide a bank with the opportunity to require a company to purchase additional investment banking services, such as investment grade debt underwriting. In addition, illegal tying arrangements may involve structuring commercial credit transactions to support investment banking activities, such as providing federally insured bridge loans to support a merger or acquisition transaction managed by the investment bank.

 

NASD cautions members that it would violate just and equitable principles of trade for any firm to aid and abet a violation of the BHCA by an affiliated bank. This type of violation would occur if the firm charged a company for investment banking services when it knew or had reason to know that the purchase of those services had been tied to the provision of commercial credit, in violation of the federal banking laws.

 

NASD also is concerned that tying may occur with respect to other services, such as pension management services.

 

NASD is the leading private-sector provider of financial regulatory services, dedicated to bringing integrity to the markets and confidence to investors through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information please visit www.nasd.com.