When the Federal Reserve Board proposed anti-tying guidance in August 2003 it seemed to be a solution in search of a problem.
Federal regulators, bankers, and what was then called the General Accounting Office all said bank customers were not being coerced into buying multiple, linked products.
But now that the Fed has left the proposal hanging for nearly three years, bankers and their lawyers are complaining that the uncertainty over which products may be bundled and offered at a discount is holding back business.
"The cost to the public is in a lack of innovation," said Oliver Ireland, a former Fed lawyer who is now a partner at Morrison & Foerster LLP in Washington. "Somebody comes up with a new product group, a new way to deliver services, and you can't get a clear answer on whether it is tying."
Karen J. Canon, associate general counsel for U.S. Bancorp of Minneapolis, said bank employees "hear about tying and think that they cannot do something that is perfectly permissible."
"I try to educate people, but there are 60,000 employees, so it is difficult to keep everyone up to speed," Ms. Canon said.
Does the Fed intend to finalize these 2003 guidelines, or simply abandon the proposal? The central bank is not saying.
Fed spokeswoman Deborah Lagomarsino said Monday that the staff was still working on the proposal. She could not say whether or when a final rule might be issued. But the tying issue was not on the Fed's most recent semiannual agenda.
John Walker, an attorney with Simpson Thacher & Bartlett LLP in New York, represents five large banks that tried - and failed - to negotiate a compromise with Fed staff that would carve out an exemption from the anti-tying rules for large, sophisticated borrowers.
The talks, which involved Citigroup Inc., Bank of America Corp., Deutsche Bank AG, UBS, and JPMorgan Chase & Co. - took place over two years and broke down in October 2005, he said.
"To our great disappointment, the Fed staff is going to go back to the original proposal but will not create this exemption," Mr. Walker said. "For the banks who have worked so hard on this, it is a very disappointing outcome."
The Fed, he said, found it difficult to define what constituted a large borrower. Mr. Walker said he expects a final rule will eventually be issued and that it will track the 2003 proposed guidance.
Under that proposal, the Fed said banks could condition the sale of a traditional product - like a loan - on the purchase of another traditional product. But a traditional bank product could only be tied to a nontraditional product - like securities underwriting - if the customer picked it from a preapproved list or specifically requested it.
To illustrate the problem, one bank executive posed a question: Could a bank lending to a company in the oil and gas industry require the company to buy a derivative to offset some of the credit risk.
"It's not clear today if we could do that," said the bank executive, who requested anonymity, citing ongoing conversations with the Fed.
Mr. Ireland said the products his clients are delaying while the anti-tying rules remain in limbo are retail-oriented, but he declined to describe them in detail.
"I have a couple of clients right now who have questions about what they have been doing in the past and whether they can go in a new direction with some products," he said. "They don't know if they can do it or not and so it is just sitting there."
U.S. Bancorp's Ms. Canon said she gets "a couple of calls on this a month" from bank associates asking about the tying question. She said it is hard to say how much uncertainty over tying affects business because "this is one of those soft costs that is very difficult to quantify."
Interest in the anti-tying issue has subsided in recent years, but it was a topic of serious debate among regulators and lawmakers around the time that the Fed issued its guidance.
Rep. John D. Dingell, D-Mich., the top ranking Democrat on the House Energy and Commerce Committee, pressed regulators over the practice and ordered a federal study on tying practices. In October 2003 the GAO (now known as the Government Accountability Office) concluded a yearlong investigation without uncovering clear instances of illegal tying.
That November, the Justice Department asked the Fed to back off its proposed rules, saying the plan would constrict pro-competitive discounts for customers buying multiple products.
Critics, including credit unions and a group representing borrowers, disagreed in comment letters in 2003. The Credit Union National Association told the Fed that banks were using tying to gain a competitive advantage while the Association for Financial Professionals cautioned the Fed's guidance might not do enough to ensure customers were not coerced.
Since then, the tying issue has largely faded from view.
The Fed issued its first and last fine for illegal tying in August 2003 when it charged a U.S. branch of a Dusseldorf banking company, WestLB AG, $3 million for requiring that some corporate borrowers name the bank as co-manager of syndicates for future offerings of debt securities.
With cumbersome issues like the Basel II capital rules, some bankers speculated the Fed may be stretched too thin to tackle a contentious issue like tying.
But Beth Climo, executive director of the ABA Securities Association, said the status quo could be preferable to a final decision that the banking industry would not like.
"This might be a case where silence is better than guidance," she said.
