Preparing for a muni-less future. (Black investment banks look for alternative business to municipal bonds)(The B.E. 100s)

As the municipal bond market dries up, forms are finding a new way to boost business--by adding corporate finance and asset management arms to their existing operations

BLACK-OWNED INVESTMENT BANKS HAVE all the hallmarks of a dying breed as access to their traditional markets, such as the municipal bond and mortgage-backed securities markets, come under assault on a number of fronts.

Last year marked the first full year of a ban on political contributions in the municipal industry, an attempt by federal regulators to end what has been called "pay to play." But many interpreted the new regulations as a way to shut the door on minority-owned and small businesses that were seeking access to municipal decision makers.

Affirmative action is also weighing heavily on the industry. A move is underway in the Golden State to put a proposition on the ballot in November to ban affirmative action programs. The California Civil Rights Initiative seeks to end preference goals that call for minority-owned investment banking firms to receive 15% participation on state debt underwritings.

Meanwhile, municipal volume continued to wane, slipping 3% from the previous year to the lowest level in the past five years. Several large firms, such as CS First Boston, Chemical Bank and Lazard Freres, have closed out their municipal business.

Black-owned firms are feeling the financial pressure of mounting legal fees brought on by continuing government and regulatory investigations into their business activities. "It's certainly a hostile environment," says Raymond J. McClendon, vice-chairman and chief operating officer of Pryor, McClendon, Counts & Co. (PMC). "It's certainly more costly to do business because of the zeal of the regulators."

PMC was among several underwriters under investigation by the SEC for possible fraud. The firm found the scrutiny costly and bad for business. But the major Wall Street investment banking firms, also known as bulge-bracket firms, felt little impact from the SEC probes.

"Larger firms can survive because their customers are deeper, much longer-term relationships. Nobody looks any differently at the CEO of a major bulge-bracket firm if they're having problems in the muni business. But it affected us …