Securities Industry Association v. Board of Governors of the Federal Reserve System
| Decision Date | 28 June 1984 |
| Docket Number | No. 82-1766,82-1766 |
| Citation | 82 L.Ed.2d 107,104 S.Ct. 2979,468 U.S. 137 |
| Parties | SECURITIES INDUSTRY ASSOCIATION et al., Petitioners, v. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM et al |
| Court | U.S. Supreme Court |
Section 16 of the Banking Act of 1933 (Act), commonly known as the Glass-Steagall Act, prohibits commercial banks from underwriting "securities or stock," and § 21 prohibits them from marketing "stocks, bonds, debentures, notes, or other securities." When Bankers Trust Co., a state commercial bank that is a member of the Federal Reserve System, began serving as agent for several of its corporate customers and marketing their commercial paper, petitioners (a national securities-industry trade association and a dealer in commercial paper) petitioned the Federal Reserve Board for a ruling that such activities were unlawful under §§ 16 and 21. Taking the position that if a particular kind of financial instrument evidences a transaction that is more functionally similar to a traditional commercial banking operation than to an investment transaction, then the instrument should not be viewed as a "security" for purposes of the Act, the Board concluded that commercial paper more closely resembles a commercial bank loan than an investment transaction and that it is not a "security" or "note" within the meaning of the Act and hence falls outside its proscriptions. The District Court disagreed, but the Court of Appeals deferred to the Board's interpretation and reversed the District Court's judgment.
Held: Because commercial paper falls within the plain language of the Act, and because the inclusion of commercial paper within the terms of the Act is fully consistent with its purposes, commercial paper is a "security" under the Act and therefore is subject to its proscriptions. Pp. 142-160.
(a) Although the Board's interpretation of the Act is entitled to substantial deference, this case presents considerations that counsel against giving full deference to that interpretation. The Board at the administrative level took the position that commercial paper was not a "security" within the meaning of the Act and that therefore it was unnecessary to examine the dangers that the Act was intended to eliminate, but before this Court the Board insisted that Bankers Trust's activities involved none of such dangers. Post hoc rationalizations by counsel for agency action are entitled to little deference. Pp. 142-144.
(b) In enacting the Act, Congress' worries about commercial-bank involvement in investment-bank activities reflected two general concerns. The first of these concerns was that a commercial bank might experience large losses from investing its funds in speculative securities. In addition to this concern, however, Congress focused on the conflicts of interest that arise when a commercial bank goes beyond the business of acting as a fiduciary or managing agent and develops a pecuniary interest in marketing securities. The Act's design reflects the congressional perception that some commercial-and investment-banking activities are fundamentally incompatible and justify a strong prophylaxis. Pp. 144-148.
(c) There is nothing in the language of either § 16 or § 21 to suggest a narrow reading of the word "securities," i.e., that because the word appears in a phrase that includes "stocks, bonds, [and] debentures," the Act's prohibitions apply only to "notes [and] other securities" that resemble the enumerated instruments. To the contrary, the breadth of the term "securities" is implicit in the fact that the antecedent language encompasses not only equity securities but also securities representing debt. While the Act does not define the terms "notes" or "other securities," there is considerable evidence, particularly with respect to other Acts enacted at the same time that do define "security" to include commercial paper, to indicate that the ordinary meaning of the terms "securities" and "notes" as used in the Act encompasses commercial paper. The Board's interpretation effectively converts a portion of the Act's broad prohibitions into a system of administrative regulation, since by concluding that commercial paper is not covered by the Act, the Board in effect has obtained authority to regulate the marketing of commercial paper under its general supervisory power over member banks. Pp. 148-154.
(d) By focusing entirely on the nature of the financial instrument and ignoring the bank's role in the transaction, the Board's "functional analysis" misapprehends Congress' concerns with commercial-bank involvement in marketing securities. The facts that commercial paper is relatively low risk, that commercial banks traditionally have acquired commercial paper for their own accounts, or that commercial paper is sold largely to "sophisticated" investors, do not justify the Board's interpretation of the Act. There is little evidence to suggest that Congress intended the Act's prohibitions on underwriting to depend on the safety of particular securities. The authority to discount commercial paper is very different from the authority to underwrite it, and the Act admits of no exception to the prohibition on commercial-bank underwriting according to the particular investment expertise of the customer. Pp. 154-160.
224 U.S.App.D.C. 21, 693 F.2d 136 (1982), reversed and remanded.
Harvey L. Pitt, Washington, D.C., for petitioners.
Louis F. Claiborne, Washington, D.C., for respondents.
This case involves a challenge to the efforts of a state commercial bank to enter the business of selling third-party commercial paper. The Board of Governors of the Federal Reserve System (Board) concluded that such activity by state member banks is not prohibited by the Banking Act of 1933, ch. 89, 48 Stat. 162 () because commercial paper is neither a "security" nor a "note" within the meaning of that Act and therefore falls outside the Act's proscriptions. The District Court disagreed with the Board, but the Court of Appeals deferred to the Board's interpretation and reversed the judgment of the District Court. Because commercial paper falls within the plain language of the Act, and because the inclusion of commercial paper within the terms of the Act is fully consistent with the Act's purposes, we conclude that commercial paper is a "security" under the Glass-Steagall Act, and we reverse the judgment of the Court of Appeals.
During 1978 Bankers Trust Company (Bankers Trust), a New York-chartered member bank of the Federal Reserve System, began serving as agent for several of its corporate customers in placing their commercial paper 1 in the commercial-paper market. Petitioners, the Securities Industry Association (SIA), a national securities-industry trade association, and A.G. Becker Inc. (Becker), a dealer in commercial paper, informally expressed concern to the Board about Bankers Trust's commercial-paper activities. SIA and Becker subsequently petitioned the Board for, among other things, a ruling that Bankers Trust's activities are unlawful under §§ 16 and 21 of the Act, 12 U.S.C. §§ 24 Seventh and 378(a)(1). Section 16 prohibits commercial banks from underwriting "securities or stocks," while § 21 prohibits them from marketing "stocks, bonds, debentures, notes, or other securities." Petitioners asserted that Bankers Trust's activities violated both § 16 and § 21.
On September 26, 1980, the Board responded to petitioners' request for enforcement of §§ 16 and 21 against Bankers Trust. See Federal Reserve System, Statement Regarding Petitions to Initiate Enforcement Action (1980), App. 122A (Board Statement). The Board acknowledged that Congress enacted the Act to prevent commercial banks from engaging in certain investment-banking activities, but explained that Congress did not intend the Act's prohibitions to cover every instrument that could be characterized as a "note" or "security." The Board expressed concern that such a broad interpretation might preclude commercial banks from maintaining many of their traditional activities. Accordingly, the Board took the position that "if a particular kind of financial instrument evidences a transaction that is more functionally similar to a traditional commercial banking operation than to an investment transaction, then fidelity to the purposes of the Act would dictate that the instrument should not be viewed as a security." Id., at 135A. Applying this "functional analysis" to commercial paper, the Board concluded that such paper more closely resembles a commercial bank loan than an investment transaction and that it is not a "security" for purposes of the Glass-Steagall Act. Because of this determination, the Board did not consider whether Bankers Trust's involvement with commercial paper constitutes "underwriting," within the meaning of the Act.
Petitioners challenged the Board's ruling in the United States District Court for the District of Columbia under, inter alia, the judicial-review provisions of the Administrative Procedure Act, 5 U.S.C. § 701 et seq., claiming that the ruling was contrary to law. The District Court reversed the ruling, finding that commercial paper falls within the scope of § 21's reference to "notes . . . or other securities." A.G. Becker Inc. v. Board of Governors of Federal Reserve System, 519 F.Supp. 602, 612 (1981). The court also found error in the Board's "functional analysis" because it focused exclusively on the role that commercial paper plays in the financial affairs of the issuer. This approach ignored the commercial bank's role in the transaction, which the District Court concluded is a central concern of the Act. Id., at 615-616.
The United States Court of Appeals for the District of Columbia Circuit, by a divided vote, reversed the judgment of the District Court. A.G. Becker Inc. v. Board of Governors...
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