Securities Industry Ass'n v. Board of Governors of Federal Reserve System

• Decision Date: 23 January 1984
• Docket Number: No. 1372,D,1372
• Citation: 716 F.2d 92
• Parties: SECURITIES INDUSTRY ASSOCIATION, Petitioner, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, et al., Respondents, and BankAmerica Corporation, Intervenor. ocket 83-4019.
• Court: U.S. Court of Appeals — Second Circuit

Page 92

716 F.2d 92

SECURITIES INDUSTRY ASSOCIATION, Petitioner, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, et al., Respondents, and BankAmerica Corporation, Intervenor.

No. 1372, Docket 83-4019.

United States Court of Appeals, Second Circuit.

Argued May 23, 1983.

Decided July 15, 1983.

As Amended Sept. 20, 1983.

Certiorari Granted Jan. 23, 1984.

See 104 S.Ct. 994.

James B. Weidner, New York City (Rogers & Wells, New York City, John M. Liftin, Harry M. Yohalem, David A. Schulz, Mark Holland, Bruce E. Braverman, and Donald J. Crawford, Washington, D.C., William J. Fitzpatrick, New York City, of counsel), for petitioner Securities Industry Assn.

Gary D. Wilson, Washington, D.C. (Wilmer, Cutler & Pickering, Washington, D.C., Arnold M. Lerman, Alan S. Tenenbaum, and H. Helmut Loring, William S. MacKay, Janice Decker, San Francisco, Cal., of counsel), for intervenor BankAmerica Corp.

Richard M. Ashton, Atty., Board of Governors of the Federal Reserve System, Washington, D.C. (Michael Bradfield, Gen. Counsel, Kevin J. Handly, Atty., Board of Governors, and J. Paul McGrath, Asst. Atty. Gen., Civ. Div., Dept. of Justice, Washington, D.C., of counsel), for respondents Board of Governors of the Federal Reserve System.

Robert S. Rifkind, New York City (Cravath, Swaine & Moore, Stephen S. Madsen, and Deborah S. Prutzman, Vice President and Counsel, The New York Clearing House Ass'n, New York City, of counsel), for The New York Clearing House Ass'n, amicus curiae.

Before FEINBERG, Chief Judge, and LUMBARD and WINTER, Circuit Judges.

LUMBARD, Circuit Judge:

On January 7, 1983 the Federal Reserve Board authorized the BankAmerica Corporation, a bank holding company, to acquire the Charles Schwab Corporation, the sole owner of Charles Schwab & Co., the nation's largest "discount" brokerage firm. The Securities Industry Association (SIA), a national trade association representing over 540 securities brokers, dealers, and investment banking companies, petitions for judicial review of the Board's order. SIA contends that the acquisition approved by the Board violates both the Glass-Steagall Act and the Bank Holding Company Act. We find, however, that neither of those Acts prohibits a bank holding company from engaging in retail brokerage, and that the Board acted well within its discretion in approving BankAmerica's application. We therefore deny SIA's petition for review and affirm the order of the Board.

The BankAmerica Corporation (BAC), with total assets of $120.5 billion, is the second largest bank holding company in the United States. BAC's most important subsidiary is the Bank of America (Bank) which, with domestic deposits of $52 billion, is the nation's largest commercial bank. Charles Schwab & Co. (Schwab) is principally engaged in retail securities brokerage. Schwab buys and sells securities solely as agent, on the order and for the account of its customers. Schwab offers its brokerage customers incidental services including margin loans, securities custodial services, and "sweep" accounts in which net balances awaiting investment are deposited in a money market fund not affiliated with Schwab. Schwab does not, however, offer its customers investment advice and, with minor exceptions not here relevant, does not underwrite or deal in securities. Schwab and similar firms are called "discount brokers" because the commissions they charge typically are significantly lower than those charged by full-service brokerage firms which offer investment advice. Schwab, headquartered in San Francisco, operates nationwide with offices in 26 states and the District of Columbia. Although, by revenue, Schwab currently holds 9% of the discount brokerage market, it holds less than 1% of the total retail brokerage market.

On March 8, 1982 BAC applied to the Federal Reserve Board for permission to acquire 100% of the stock of Schwab's parent corporation. BAC filed its application under Sec. 4(c)(8) of the Bank Holding Company Act, 12 U.S.C. Sec. 1843(c)(8) (1976), which authorizes the Board to approve a bank holding company's acquisition of a subsidiary if the subsidiary's activities are "closely related" to banking and if the public benefits reasonably to be expected from the acquisition outweigh possible adverse effects. The Board published notice of BAC's application in the Federal Register, 47 Fed.Reg. 16,104 (1982), and requested comments from interested parties. The Antitrust Division of the Department of Justice, the Comptroller of the Currency, and the Securities and Exchange Commission all filed comments in support of the application. SIA opposed the application and requested the Board to conduct a formal hearing. An administrative law judge held an evidentiary hearing in September, 1982, and on November 12, 1982, issued his decision recommending that the acquisition be approved. The judge found the proposed acquisition to be consistent with both the Glass-Steagall Act and the Bank Holding Company Act. On January 7, 1983 the Board adopted the judge's findings and conclusions, with modifications, and authorized BAC to acquire Schwab. 69 Fed.Res.Bull. 105 (1983). SIA petitions for review under 12 U.S.C. Sec. 1848 (1976).

I. Glass-Steagall Act

Those provisions of the Banking Act of 1933 that mandated a separation of the commercial and investment banking industries are known as the Glass-Steagall Act. See Pub.L. No. 73-66, Secs. 16, 20, 21, & 32, 48 Stat. 162 (1933). SIA claims that the Glass-Steagall Act prohibits bank holding company subsidiaries from conducting a retail brokerage business. Although SIA's claim raises an issue of law which we have the ultimate responsibility to decide, see 5 U.S.C. Sec. 706 (1976), the Board's thorough opinion rejecting the claim is entitled to substantial deference. Because the Board has both primary responsibility for implementing the Glass-Steagall Act and expert knowledge of commercial banking, we must uphold its interpretation of the Act if it is reasonable. See Board of Governors v. Investment Co. Ins., 450 U.S. 46, 56 n. 21, 101 S.Ct. 973, 981 n. 21, 67 L.Ed.2d 36 (1981), quoting Board of Governors v. Agnew, 329 U.S. 441, 450, 67 S.Ct. 411, 415, 91 L.Ed. 408 (1947) (Rutledge, J., concurring); Investment Co. Inst. v. Camp, 401 U.S. 617, 626-27, 91 S.Ct. 1091, 1097, 28 L.Ed.2d 367 (1971); A.G. Becker Inc. v. Board of Governors, 693 F.2d 136, 140-41 (D.C.Cir.1982). We conclude that the Board's interpretation was reasonable and entirely consistent with the Act's language and policy.

Only one of the Glass-Steagall Act's four provisions is directly applicable to bank holding companies. That provision, Sec. 20, 12 U.S.C. Sec. 377 (1976) states (N)o member bank shall be affiliated in any manner ... with any corporation, association, business trust, or other similar organization engaged principally in the issue, flotation, underwriting, public sale, or distribution at wholesale or retail or through syndicate participation of stocks, bonds, debentures, notes, or other securities ...

(emphasis supplied). As a bank holding company's various subsidiaries are bank affiliates for purposes of Sec. 20, see 12 U.S.C. Sec. 221a(b) (1976), BAC's acquisition of Schwab will make Schwab an affiliate of Bank. Section 20 therefore prohibits the acquisition if Schwab is "engaged principally" in any of the activities listed in the statute. Although SIA concedes that Schwab is not engaged in the issue, flotation, underwriting, or distribution of securities, it argues that Schwab's retail brokerage business does constitute the "public sale" of securities.

SIA's interpretation of "public sale" to include brokerage is rebutted by the "familiar principle of statutory construction that words grouped in a list should be given related meaning." Third Natl. Bank in Nashville v. Impac, Ltd., 432 U.S. 312, 322, 97 S.Ct. 2307, 2313, 53 L.Ed.2d 368 (1977) (footnote omitted). See also General Elec. Co. v. OSHRC, 583 F.2d 61, 65 (2d Cir.1978). The terms "issue," "flotation," "underwriting," and "distribution" all refer to the widespread marketing of specific issues of new securities in which the dealer trades as principal for his own profit. See generally 1 L. Loss, Securities Regulation 159-72 & 547-53 (2d ed. 1961). Such activities greatly differ from retail brokerage, in which the broker trades as an agent for commission, not as a principal for profit, and does not transfer title. Thus if "public sale" is to be given a meaning similar to that of the terms that surround it, it cannot be read to encompass retail brokerage. Moreover, if Congress had intended Sec. 20 to cover brokerage, it presumably would have used words more precise than "public sale." Section 16 of the Act, 12 U.S.C. Sec. 24(7) (1976), authorizes banks to engage in "purchasing and selling ... securities and stocks without recourse, solely upon the order, and for the account of, customers." Congress' use in Sec. 16 of language that specifically refers to brokerage, ¹ and its omission of similar terms from Sec. 20, suggests that Congress did not intend Sec. 20 to cover brokerage. See FTC v. Sun Oil Co., 371 U.S. 505, 514-15, 83 S.Ct. 358, 364, 9 L.Ed.2d 466 (1963) (terms carefully employed by Congress in one place, and excluded in another, should not be implied where excluded).

The Board's ruling that Sec. 20 does not encompass brokerage is supported by its long-standing interpretation of a different provision of the Glass-Steagall Act, Sec. 32, 12 U.S.C. Sec. 78 (1976). Section 32 prohibits managerial or other interlocks between member banks and any entity primarily engaged in "the issue, flotation, underwriting, public sale, or distribution" of securities. Section 32's list of prohibited activities is precisely that found in Sec. 20. In January, 1936, shortly after the Banking Act of 1935 revised Sec. 32 into its present form, the Board ruled that "(a) broker who is engaged solely in executing orders for the purchase and sale of...