Investment Co. Institute v. Board of Governors of Federal Reserve System

• Decision Date: 14 January 1977
• Docket Number: No. 75-1822,75-1822
• Citation: 551 F.2d 1270,179 U.S. App.D.C. 311
• Parties: , 179 U.S.App.D.C. 311 INVESTMENT COMPANY INSTITUTE, Appellant, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM et al.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1270

551 F.2d 1270

40 A.L.R.Fed. 573, 179 U.S.App.D.C. 311

INVESTMENT COMPANY INSTITUTE, Appellant, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM et al.

No. 75-1822.

United States Court of Appeals, District of Columbia Circuit.

Argued Sept. 24, 1976.

Decided Jan. 14, 1977.

G. Duane Vieth, Washington, D.C., with whom James W. Jones and Leonard B. Simon, Washington, D.C., were on the brief, for appellant.

Anthony J. Steinmeyer, Atty., Dept. of Justice, Washington, D.C., with whom Rex E. Lee, Asst. Atty. Gen., Earl J. Silbert, U. S. Atty., and Ronald R. Glancz, Atty., Dept. of Justice, Washington, D.C., were on the brief, for appellees.

Before McGOWAN, LEVENTHAL and ROBB, Circuit Judges.

Opinion for the court by Circuit Judge McGOWAN.

Separate concurring opinion by Circuit Judge LEVENTHAL.

McGOWAN, Circuit Judge.

In this appeal from the District Court, we are once again called upon to determine whether a litigant has selected an appropriate forum for judicial review of an administrative regulation, given a statute providing for direct review of agency "orders" in the courts of appeals. Appellant Investment Company Institute, a national association of open-end investment companies (commonly referred to as "mutual funds"), brought this action in the District Court, seeking declaratory and injunctive relief against a regulation and interpretative ruling, 12 C.F.R. §§ 225.4(a)(5)(ii), 225.125 (1976), promulgated by the Federal Reserve Board under section 4(c)(8) of the Bank Holding Company Act of 1956, as amended, 12 U.S.C. § 1843(c)(8) (1970). Appellant claims that the regulation and ruling violate sections 16 and 21 of the Banking Act of 1933 (popularly known as the Glass-Steagall Act), 12 U.S.C. §§ 24, 378 (1970), and, as a result, exceed the Board's authority under section 4(c)(8) of the Bank Holding Company Act.

The District Court, by order and memorandum opinion dated July 30, 1975, dismissed the complaint for lack of subject matter jurisdiction, holding that section nine of the Bank Holding Company Act, 12 U.S.C. § 1848 (1970) which vests jurisdiction in the courts of appeals to review Board "orders" under the Act provides the exclusive means for obtaining review of a Board regulation supported by a comprehensive administrative record. For the reasons set forth hereinafter, we affirm. However, since this court's exclusive jurisdiction was not clearly established as of the time suit was being considered, appellant is not estopped from reasserting its claim in a court of appeals, if the Board should deny a future petition by appellant to amend or repeal the rules at issue.

I

The Bank Holding Company Act of 1956 generally prohibits bank holding companies from owning shares in companies which are not banks. 12 U.S.C. § 1843(a) (1970). Section 4(c)(8) of the Act provides an exception to this general ban for

shares of any company the activities of which the (Federal Reserve) Board after due notice and opportunity for hearing has determined (by order or regulation) to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

12 U.S.C. § 1843(c)(8) (1970). The originally enacted version of this section allowed the Board to make the "closely related" determination only by order, on a case-by-case basis, after a full adjudicatory hearing. See Act of May 9, 1956, C. 240, § 4(c)(6), ¹ 70 Stat. 137. Correspondingly, the judicial review provision of the Act, section 9, provided for review of Board "orders" in the courts of appeals. A 1970 amendment added the language to section 4(c) (8) empowering the Board to act "by order or regulation," ² but made no change in section 9 of the Act. ³

On May 20, 1971, the Board exercised its new rule-making authority by promulgating section 225.4 (originally designated section 222.4) of Regulation Y, 12 C.F.R. § 225.4, listing several activities deemed to be "closely related" to banking. One of these activities was:

(5) Acting as investment or financial adviser, including (i) serving as the advisory company for a mortgage or a real estate investment trust and (ii) furnishing economic or financial information; * * *

36 Fed.Reg. 10777 (1971) (footnote omitted). The Board noted, however, that "(a)cting as investment adviser to an open-end investment company . . . is not regarded . . . as within the description of this activity." See id. (footnote to regulation). This caveat reflected the Board's concern over a recent decision by the Supreme Court in Investment Company Institute v. Camp, 401 U.S. 617, 91 S.Ct. 1091, 28 L.Ed.2d 367 (1971), in which the Court had struck down those portions of a regulation promulgated by the Comptroller of the Currency which purported to authorize banks to establish and operate collective investment funds virtually indistinguishable from conventional mutual funds. See id. at 625, 91 S.Ct. 1091. The Court had found those provisions to be in violation of section 16 of the Glass-Steagall Act which, generally speaking, forbids a national bank from buying stock "for its own account" or underwriting any issue of securities or stock, as well as of section 21 of the Act, which prohibits any company "engaged in the business of issuing, underwriting, selling, or distributing" securities to engage at the same time in the business of banking. See 12 U.S.C. §§ 24, 378(a)(1) (1970).

Upon further consideration, the Board determined that the holding in ICI v. Camp, supra, did not foreclose expansion of investment adviser activities. Thus, on August 25, 1971, the Board following the rulemaking procedures prescribed by section 4 of the Administrative Procedure Act, 5 U.S.C. § 553 invited public comment on a proposal to amend § 225.4 of Regulation Y to encompass the following:

(5) Acting as investment or financial adviser, including (i) serving as the advisory company for a mortgage or a real estate investment trust; (ii) serving as investment adviser to an investment company registered under the Investment Company Act of 1940 ; and (iii) furnishing economic or financial information.

36 Fed.Reg. 16695 (1971), as corrected, 36 Fed.Reg. 17514 (1971) (emphasis supplied). Numerous written comments were received in response to this notice of proposed rulemaking. Appellant filed two memoranda arguing that the regulation would allow bank holding companies to sponsor, create, promote and manage mutual funds in violation of sections 16 and 21 of the Glass-Steagall Act, as construed in ICI v. Camp, and therefore would not be an appropriate exercise of the Board's authority under section 4(c)(8) of the Bank Holding Company Act. In addition, appellant requested that a public hearing be held to consider the proposed amendment. This request was granted, and a hearing took place on November 12, 1971, with appellant and other interested parties participating.

On January 20, 1972, the Board entered an order amending Regulation Y, effective February 1, 1971, with only a slight modification in language from the proposal addressed at the hearing. The new regulation approved the following activity as "closely related" to banking:

(5) Acting as investment or financial adviser, including (i) serving as the advisory company for a mortgage or a real estate investment trust; (ii) serving as investment adviser, as defined in § 2(a)(20) of the Investment Company Act of 1940, to an investment company registered under that Act ; and (iii) furnishing economic or financial information;

See 37 Fed.Reg. 1463 (1971) (footnote omitted) (emphasis added). ⁴ By order of the Board of Governors on the same date, an interpretative ruling was issued, expressing the Board's view on the scope of the amended regulation in light of the restrictions imposed by the Glass-Steagall Act and the Supreme Court's decision in ICI v. Camp. See 37 Fed.Reg. 1464 (1971), now codified at 12 C.F.R. § 225.125 (1976). In addition to prohibiting several practices which might directly contravene the Glass-Steagall Act, this ruling established a distinction between "open-end" and "closed-end" investment companies. ⁵ The Board read ICI v. Camp only to bar bank holding companies from sponsoring, organizing, or controlling open-end investment companies (i. e., mutual funds):

(e) The Board recognizes that presently most mutual funds are organized, sponsored and managed by investment advisers with which they are affiliated and that their securities are distributed to the public by such affiliated investment advisers or subsidiaries or affiliates thereof. However, the Board believes that (i) the Glass-Steagall provisions do not permit a bank holding company to perform all such functions, and (ii) it is not necessary for a bank holding company to perform all such functions in order to engage effectively in the described activity. (f)In the Board's opinion, the Glass-Steagall Act provisions, as interpreted by the U. S. Supreme Court, forbid a bank holding company to sponsor, organize or control a mutual fund. However, the Board does not believe that such restrictions apply to closed-end investment companies as long as such companies are not primarily or frequently engaged in the issuance, sale and distribution of securities. * * *

12 C.F.R. § 225.125(e), (f) (1976) (emphasis supplied). Neither appellant nor any other interested party sought judicial review in a court of appeals of the amended regulation or the interpretative ruling within the thirty-day limit set forth in section 9 of the Bank Holding Company Act, see note 3 supra.

On December 12, 1973, appellant submitted to the Board a petition for reconsideration and rescission of section 225.4(a)(5)(ii) of Regulation Y, the portion of the amended regulation allowing bank holding companies to serve as investment advisers to registered investment companies. In a memorandum attached to the petition, appellant questioned the Board's distinction between open-end and closed-end investment companies and reiterated its...