The immediate problem with this is magic. As people who write about RPGs set in Middle-Earth never tire of emphasising, Tolkien's magic is nothing like D&D magic. It is rare and mysterious, where D&D magic is relatively common and systematic. It also has an air of danger about it for the caster - there is a strong sense that magic is intrinsically corrupting, and certainly not to be dabbled with.
But one wouldn't want to overcomplicate the blissful simplicity of Basic D&D with new systems. And at the same time one would, I think, want PCs to have access to magic of various kinds. I would simply introduce some restrictions:
- PCs cannot be magic-users - although they can be clerics, druids or elves and use magic accordingly
- There are magic-users, but becoming one involves becoming corrupted, and the PCs ought to be the Goodies in a Middle-Earth game
- Whenever clerics, druids or elves use magic, there is a chance that this is noticed by servants of Morgoth, increasing with the level of the spell cast - and there would be a table for determining which such servants came to investigate (there was something along these lines in MERP)
- There are magic items, but their use is always associated with some risk of becoming enthralled to Sauron, one of the Blue Wizards, the former owner, some malevolent entity, etc. (perhaps a 1% daily risk of becoming 'turned' and taken over by the DM as an NPC)
The last of these is hardest to systematise, but perhaps it is better that way - it would give the DM room to get creative.