Indep. Community Bankers of Am. v. Bd. of Gov's.

• Decision Date: 02 November 1999
• Docket Number: No. 98-1482,98-1482
• Citation: 195 F.3d 28
• Parties: (D.C. Cir. 1999) Independent Community Bankers of America, Petitioner v. Board of Governors of the Federal Reserve System, Respondent Citigroup, Inc., Intervenor
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 28

195 F.3d 28 (D.C. Cir. 1999)

Independent Community Bankers of America, Petitioner v. Board of Governors of the Federal Reserve System, Respondent

Citigroup, Inc., Intervenor

No. 98-1482

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 1, 1999

Decided November 2, 1999

On Petition for Review of an Order of the Board of Governors of the Federal Reserve System

Charles D. Reed argued the cause for petitioner. With him on the briefs were Roger J. Lerner, and Robert J. McManus.

Katherine H. Wheatley, Assistant General Counsel, Board of Governors of the Federal Reserve System, argued the cause for respondent. With her on the brief were James V. Mattingly, Jr., General Counsel, and Richard M. Ashton, Associate General Counsel.

Douglas M. Kraus argued the cause and filed the brief in support of respondent for intervenor Citigroup, Inc.

Sarah A. Miller was on the brief for amicus curiae American Bankers Association Securities Association.

Before: Edwards, Chief Judge, Wald and Williams, Circuit Judges.

Opinion for the Court filed by Circuit Judge Williams.

Williams, Circuit Judge:

Travelers Group, Inc. applied to the Board of Governors of the Federal Reserve System to become a bank holding company. Under 3(a)(1) of the Bank Holding Company ("BHC") Act, 12 U.S.C. 1842(a)(1) (1994), Travelers needed Board approval before it could proceed with its plan to acquire all of the voting stock of an existing bank holding company, Citicorp, Inc., and thereby add all of Citicorp's banking and nonbanking subsidiaries to its group of companies. After completing this transaction Travelers planned to rename itself Citigroup, Inc. The Board approved Travelers's application on the condition that the new enterprise divest itself of its insurance business within two years, so as to comply with 4(a)(2) of the BHC Act, 12 U.S.C. 1843(a)(2) (1994). And it found the acquisition in compliance with 20 of the Glass-Steagall Act, 12 U.S.C. 377 (1994), as none of Citigroup's affiliates would derive more than 25% of its gross revenues from bank ineligible securities. See Order Approving Formation of a Bank Holding Company and Notice to Engage in Nonbanking Activities, 84 Fed. Res. Bull. 985, 985 (1998), reprinted in J.A. 1, 3-4 ("1998 Order").

The Independent Community Bankers of America ("ICBA"), representative of 5300 "community banks," i.e., relatively small and local ones, petitions for review of the Board's approval order. It claims that Citigroup's obligation to dispose of its insurance business within two years, as specified by 4(a)(2) of the BHC Act, is not good enough. As to Glass-Steagall, ICBA says that the Board's construction of 20--imposing only a proportional limit on revenues from ineligible activities--is too loose, and should be supplemented either with some absolute volumetric limit so as to prevent creation of a diversified financial services behemoth, or with a case-specific risk analysis, or both. ICBA objected to the acquisition in the Board's proceedings, as required for standing to challenge the action in court. Jones v. Board of Governors of the Fed. Reserve Sys., 79 F.3d 1168, 1170-71 (D.C. Cir. 1996). We have jurisdiction to review under 12 U.S.C. 1848 (1994). We find the Board's interpretation and application of the statutes reasonable, and therefore affirm.

* * *

Section 4 of the BHC Act, 12 U.S.C. 1843, limits the permissible financial activities for bank holding companies:

Except as otherwise provided in this chapter, no bank holding company shall --

...

(2) after two years from the date as of which it be-comes a bank holding company, ... retain direct or indirect ownership or control of any voting shares of any company which is not a bank or bank holding company or engage in any activities other than (A)those of banking or of managing or controlling bank sand other subsidiaries authorized under [the BHC Act]..., and (B) those permitted under [section 4(c)(8) of the BHC Act]....

The Board is authorized ... to extend the two year period ... for not more than one year at a time ... but no such extensions shall in the aggregate exceed three years.

12 U.S.C. 1843(a) (1994) (emphasis added).

Travelers, the acquiring entity, was engaged in various activities, mainly insurance, not allowed for bank holding companies under exceptions (A) and (B). Accordingly, the emerging bank holding company could not lawfully "retain" stock in any subsidiary conducting that business for more than two years after the transaction by which it became a bank holding company. The Board thus made its approval of the Travelers-Citicorp transaction contingent on a commitment that Citigroup would conform to the two-year divestiture requirement. ICBA offers a series of arguments designed to prove that this literal compliance with 4(a)(2) is inadequate.

Section 5(b) of the BHC Act and Board practice. First, ICBA urges that 5(b) of the BHC Act, 12 U.S.C. 1844(b) (1994), a general grant of power to issue regulations and orders so as to carry out the purposes of the Act,¹ requires the Board to reject applications that would frustrate its purpose. Here, ICBA claims, Citigroup is thwarting the purposes of the BHC Act because it has no bona fide intent to divest itself of its insurance activities. Instead, it is using its temporary power to mix large-scale insurance and banking to put pressure on Congress to amend the BHC Act to allow that mix. ICBA also claims Citigroup will use the two years to gain competitive advantage over other financial corporations.

ICBA is correct that Citigroup and the Board are in favor of amending the BHC Act. The officers of Citicorp and Travelers have openly said that they hope that Citigroup's structure will encourage Congress to amend the BHC Act. See Trading Places: Travelers/Citicorp Press Conf., CNNfn (CNN television broadcast, Apr. 6, 1998), available in LEXIS, NEWS library, ALLNEWS File (quoting Sanford Weill, Chairman and CEO of Travelers). And the Board has sent a unanimous letter to Congress supporting amendment of the BHC Act to permit the combination of banking and insurance activities. See id. (quoting John Reid, CEO of Citicorp). (Recent news reports indicate, in fact, that Citigroup and the Board may be about to have their way. See Michael Schroder, "Glass-Steagall Compromise Is Reached: Lawmakers Poised To Pass Banking-Law Overhaul After

Perhaps ICBA means to argue that the contingent character of Citigroup's intent--the intent to comply with the law unless Congress amends the BHC Act--so deeply reduces the probability of compliance that its commitment should be disregarded. But the statute does not assign any role to the emerging entity's reluctance to divest; and if Citigroup ignores the Board's order (and the statutory mandate), the Board has adequate tools to force it into compliance and punish its misbehavior. See, e.g., 12 U.S.C. 1847 (1994).

ICBA is on similarly thin ice with its charge that Citigroup seeks an unfair competitive advantage. As part of its conditional approval, the Board secured commitments from Citigroup designed to prevent it from leveraging its grace period into a competitive advantage or creating corporate relationships that could not be easily unwound. See 1998 Order at 86-93.

So we are rather uncertain just what "purpose" of the BHC Act ICBA believes will be thwarted by the Board's adherence to its language. But even if there is some such frustrated purpose, there is no basis for ICBA's assumption that the Board could have freely used the general terms of 5(b) to trump specific statutory language. ICBA points to instances where, in ICBA's view, the Board did so. See, e.g., Citicorp (South Dakota), 71 Fed. Res. Bull. 789 (1985); Wilshire Oil Co. v. Board of Governors of the Fed. Reserve Sys., 668 F.2d 732, 733 (3d Cir. 1981). But the Board in those cases found that the proposed transaction had no purpose other than to evade the BHC Act's provisions. See Citicorp, 71 Fed. Res. Bull. at 789 (ordering that Citicorp could not acquire a state chartered South Dakota bank to take advantage of a state law allowing out-of-state bank holding companies to engage in large-scale insurance activities so long as they did not compete with South Dakota insurance or banking interests);Wilshire Oil, 668 F.2d at 733 (upholding the Board's ruling that a bank holding company could not opt out of the BHC Act by making a small change to its withdrawal policy that it had no intent to enforce).² Here the Board specifically found that the merger was not an attempt to evade the prohibitions of the BHC Act. 1998 Order at 11.

More importantly, since those decisions the Supreme Court has ruled that the Board cannot use 5(b) to bend its statutorily granted authority. Board of Governors of the Fed. Reserve Sys. v. Dimension Fin. Corp., 474 U.S. 361, 373 n.6 (1986). The Eleventh Circuit has applied the Dimension decision to overturn a Board ruling factually similar to the one in Wilshire. See Florida Dep't of Banking & Finance v. Board of Governors of the Fed. Reserve Sys., 800 F.2d 1534 (11th Cir. 1986). Here, too, the Board cannot exercise nonexistent authority to alter the statutory text.

ICBA is also incorrect that the Board is bound by its cases decided under 4(c)(9) of the BHC Act, 18 U.S.C. 1843(c)(9), which allows the Board to exempt foreign bank holding companies from the Act upon determining that an exemption would not be substantially at variance with the Act's purposes.³ In Fortis, 1994 Fed. Res. Interp. Ltr. LEXIS 313, and a related line of letter rulings, the Board granted exemptions, but imposed substantial restrictions on Fortis's and the other companies' insurance activities. ICBA asks why not here? But the Board distinguished those cases as being based on the foreign bank holding companies' unique ability to expand their insurance businesses during any period of exemption, and on the Board's broad discretionary power under 4(c)...