430 F.3d 457 (D.C. Cir. 2005), 04-5257, American Bar Ass'n v. F.T.C.

Docket Nº:04-5257, 04-5258.
Citation:430 F.3d 457
Case Date:December 06, 2005
Court:United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit

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430 F.3d 457 (D.C. Cir. 2005)




Nos. 04-5257, 04-5258.

United States Court of Appeals, District of Columbia Circuit.

December 6, 2005

Argued May 5, 2005

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Appeals from the United States District Court for the District of Columbia, No. 02cv00810, No. 02cv01883

Stephanie R. Marcus, Attorney, U.S. Department of Justice, argued the cause for appellant. With her on the briefs were Gregory G. Katsas, Acting Assistant Attorney General, Mark B. Stern, Attorney, Kenneth L. Wainstein, U.S. Attorney, Brian J. Sonfield, Assistant U.S. Attorney, John D. Graubert, Acting General Counsel, Federal Trade Commission, John F. Daly, Deputy General Counsel, and Michael D. Bergman, Attorney. R. Craig Lawrence and Michael J. Ryan, Assistant U.S. Attorneys, entered appearances.

David L. Roll argued the cause for appellee American Bar Association. With him on the brief was Rhonda M. Bolton.

Steven C. Krane argued the cause and filed the brief for appellee New York State Bar Association.

Peter Buscemi was on the brief for amici curiae State and Local Bar Associations in support of appellees.

George T. Patton, Jr. and Bryan H. Babb were on the brief for amicus curiae The Conference of Chief Justices in support of appellee American Bar Association.

Before: Ginsburg, Chief Judge, and Sentelle and Roberts, 1 Circuit Judges.


Sentelle, Circuit Judge:

The Federal Trade Commission ("FTC" or "the Commission") appeals from an order of the District Court granting summary judgment in consolidated cases brought by the appellees American Bar Association and the New York State Bar Association (collectively, "ABA" or "the Bar Associations"). The Bar Associations sought a declaratory judgment that the FTC's decision that attorneys engaged in the practice of law are covered by the Gramm-Leach-Bliley Act ("GLBA" or "the Act") exceeded the statutory authority of the Commission and was therefore invalid as a matter of law. Because we agree with the District Court that the Commission's attempt to regulate the practice of law under the Act fell outside

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its statutory authority, we affirm the judgment under review.

I. Background

A. Statutory Framework

Effective November 12, 1999, Congress enacted the Gramm-Leach-Bliley Financial Modernization Act, Pub. L. No. 106-102, 113 Stat. 1338. The Act declared it to be "the policy of the Congress that each financial institution has an affirmative and continuing obligation to respect the privacy of its customers and to protect the security and confidentiality of those customers' nonpublic personal information." 15 U.S.C. § 6801 (a). To further that goal, Congress enacted broad privacy protective provisions, described by one Member of the House of Representatives as "represent[ing] the most comprehensive federal privacy protections ever enacted by Congress." 145 Cong. Rec. H11, 544 (daily ed. Nov. 4, 1999) (statement of Rep. Sandlin).

The privacy provisions empowered the Federal Trade Commission, along with other federal regulatory agencies, to "prescribe . . . such regulations as may be necessary to carry out the purposes of this subchapter with respect to the financial institutions subject to their jurisdiction under section 6805 of this title." 15 U.S.C. § 6804(a)(1). The cited section, 6805, outlines the institutions and persons subject to the jurisdiction of "Federal functional regulators," and in section 6805(a)(7) assigns enforcement "[u]nder the Federal Trade Commission Act . . . [to] the Federal Trade Commission for any other financial institution or other person that is not subject to the jurisdiction of any agency or authority under" the preceding paragraphs of the subsection. The definitional section of the statute, section 6809, defines "financial institution" as "any institution the business of which is engaging in financial activities as described in section 1843(k) of Title 12." Id. § 6809(3)(A). Other subsections of section 6809 create exceptions and modifications to the general definition of "financial institution." See id. § 6809(3)(B)-(D).

Title 12 U.S.C. § 1843(k), referenced in section 6809(a), is a part of the Bank Holding Company Act of 1956, Pub. L. No. 109-41, 70 Stat. 133 (codified as amended at 12 U.S.C. §§ 1971-1978, 1841-1850) ("BHCA"). The BHCA, in section 1843, limits the ability of the bank holding companies regulated under that statutory scheme to hold interests in nonbanking organizations. Specifically, section 1843(a) provides that

[e]xcept as otherwise provided in this chapter, no bank holding company shall . . . 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 banks and other subsidiaries authorized under this chapter or of furnishing services to or performing services for its subsidiaries, and (B) those permitted under [other subsections of the statute].2

12 U.S.C. § 1843(a). However, section 1843(k) limits the effect of the general prohibition created by section 1843(a) by providing that

[n]ot withstanding subsection (a) of this section, a financial holding company may engage in any activity, and may acquire and retain the shares of any company engaged in any activity, that the [Federal Reserve] Board . . . determines

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(by regulation or order)-- (A) to be financial in nature or incidental to such financial activity; or (B) is complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.

Id. § 1843(k)(1).

The BHCA declares to be financial in nature activities listed in section 1843(k)(4), to wit:

(A) Lending, exchanging, transferring, investing for others, or safeguarding money or securities.

(B) Insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker for purposes of the foregoing, in any State.

(C) Providing financial, investment, or economic advisory services, including advising an investment company (as defined in [section 80a-3 of Title 15]).

(D) Issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly.

(E) Underwriting, dealing in, or making a market in securities.

Id. § 1843(k)(4).

Following the list of activities that "shall be considered" financial in nature, the BHCA enacted the following category of activity, which is most pertinent to the current case:

(F) Engaging in any activity that the Board has determined, by order or regulation that is in effect on November 12, 1999, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto (subject to the same terms and conditions contained in such order or regulation, unless modified by the [Federal Reserve] Board).

The phrase "order or regulation that is in effect on November 12, 1999" adopts a Federal Reserve Board ("Board") regulation published at 12 C.F.R. § 225.28 (2000), commonly known as Regulation Y. Regulation Y, as is to be expected, deals with the subject matter of section 1843 (k), that is, "nonbanking activities and acquisitions by bank holding companies": It lists "permissible nonbanking activities." That list is described in the regulation as activities that are

(a) Closely related nonbanking activities. The activities listed in paragraph (b) of this section are so closely related to banking or managing or controlling banks as to be a proper incident thereto, and may be engaged in by a bank holding company or its subsidiary in accordance with the requirements of this regulation.

12 C.F.R. § 225.28(a). We set forth the entire text of the relevant subsection in the footnote below not because it is all in itself relevant, but in order to demonstrate the depths plumbed by the Commission in order to find authority to undertake the regulation of the practice of law, which we will discuss further, infra.3

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To recapitulate: The GLBA contains extensive privacy protection provisions that apply to "financial institutions." In section 6809, the Act defines "financial institution" as "any institution the business of which is engaging in financial activities as described in section 1843(k) of Title 12." The referenced section of Title 12 is contained in the BHCA. Specifically, that section identifies institutions engaged in nonbanking activities that are financial in nature, such that bank holding companies may retain ownership interests in institutions engaged in their pursuit. The section of the BHCA defining those activities incorporates by reference Regulation Y, which offers an extensive list of examples of such "financial activities" so closely related to banking as to be permissible.

B. The Commission's Interpretation

Upon the passage of the Act, the FTC, pursuant to the authority granted it in 15 U.S.C. § 6805(a)(7), undertook a rulemaking. In May 2000, the FTC concluded the rulemaking and issued regulations published at 65 Fed. Reg. 33,646 (codified at 16 C.F.R. pt. 313). Although the FTC relied in the first instance on Congress's definition of "financial institution" as "an institution the business of which is engaging in financial activities," the Commission restated the definition: "An institution that is significantly...

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