American Bankers Ass'n v. S.E.C.

• Citation: 804 F.2d 739
• Decision Date: 17 November 1986
• Docket Number: No. 85-6055,C,85-6055
• Parties: , 55 USLW 2249, Fed. Sec. L. Rep. P 92,975 AMERICAN BANKERS ASSOCIATION, Appellant, v. SECURITIES AND EXCHANGE COMMISSION, et al. iv A 85-02482.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

Page 739

804 F.2d 739

256 U.S.App.D.C. 194, 55 USLW 2249, Fed.

Sec. L. Rep. P 92,975

AMERICAN BANKERS ASSOCIATION, Appellant, v. SECURITIES AND EXCHANGE COMMISSION, et al.

No. 85-6055, Civ A 85-02482.

United States Court of Appeals District of Columbia Circuit.

Argued Sept. 10, 1986.

Decided Nov. 4, 1986.

As Amended Nov. 4 and Nov. 17, 1986.

Appeal from the United States District Court for the District of Columbia (Civil Action No. 85-02482).

Michael F. Crotty, with whom John J. Gill, III, Washington, D.C., was on the brief, for appellant.

Paul Gonson, Sol., S.E.C., with whom Linda D. Fienberg, Associate Gen. Counsel, Larry R. Lavoie, Anne E. Chafer, Asst. Gen. Counsels, John E. Birkenheier and Batya Roth, Attys., S.E.C., Washington, D.C., were on the brief, for appellees.

Michael S. Helfer, David M. Becker and Kerry W. Kircher, Washington, D.C., were on the brief, for amici curiae, urging reversal.

Before WALD, Chief Judge, MIKVA, Circuit Judge, and LEIGHTON, ^* Senior District Judge.

Opinion for the Court filed by Chief Judge WALD.

WALD, Chief Judge:

This appeal involves the single critical question of whether the Securities and Exchange Commission (SEC) has authority under the Securities Exchange Act of 1934 (1934 Act) to regulate banks as "broker-dealers." After instituting notice and comment rulemaking procedures, the SEC adopted Rule 3b-9 which requires banks engaging in the securities brokerage business for profit to register as broker-dealers under the 1934 Act. See Securities Exchange Act Release No. 34-22205, 50 Fed.Reg. 28,385 (July 12, 1985).

In this action, the American Bankers Association (ABA) seeks a declaratory judgment that Rule 3b-9 is invalid under the 1934 Act and an injunction prohibiting the SEC from enforcing the Rule against its member banks. On cross-motions for summary judgment, the United States District Court for the District of Columbia ruled for the defendant and dismissed the ABA's complaint. This appeal followed. Because Rule 3b-9 contravenes the intent of Congress, unambiguously expressed in the language of the 1934 Act, and confirmed in the Act's legislative history, we reverse the decision of the District Court and order it to declare Rule 3b-9 unlawful and to enjoin the Rule's operation against the member banks.

I. BACKGROUND OF THE SEC'S DECISION TO REGULATE BANKS

The current controversy arises over fifty years after Congress passed the Securities Exchange Act because of a change in the administrative interpretation of the Banking Act of 1933, commonly referred to as the Glass-Steagall Act. Section 16 of the Glass-Steagall Act curtailed the corporate powers of national banks. ¹ In relevant part, Sec. 16 provides:

The business of dealing in securities and stock by the [national bank] shall be limited to purchasing and selling such securities and stock without recourse, solely upon the order, and for the account of, customers, and in no case for its own account, and the [national bank] shall not underwrite any issue of securities or stock: Provided: That the [national bank] may purchase for its own account investment securities under such limitations and restrictions as the Comptroller of the Currency may by regulation prescribe.

12 U.S.C. Sec. 24 (Seventh). ² Section 21 of the Glass-Steagall Act delineated the general boundary between commercial and investment banking activities:

[I]t shall be unlawful ... for any person, firm, corporation, association, business trust, or similar organization, engaged in the business of issuing, underwriting, selling, or distributing, at wholesale or retail, or through syndicate participation, stocks, bonds, debentures, notes, or other securities, to engage at the same time to any extent whatever in the business of receiving deposits subject to check or to repayment upon presentation of a passbook, certificate of deposit, or other evidence of debit, or upon request of the depositor: Provided, that the provisions of this paragraph shall not prohibit national banks or State banks or trust companies (whether or not members of the Federal Reserve System) or other financial institutions or private bankers from dealing in, underwriting, purchasing and selling investment securities, or issuing securities, to the extent permitted to national banking associations by the provisions of section 24 of this title....

12 U.S.C. Sec. 378(a)(1). ³

The Comptroller of the Currency, charged with the duty of regulating the corporate powers of national banks, took the lead in interpreting these provisions of the Glass-Steagall Act for enforcement purposes. In 1936, the Comptroller construed the Glass-Steagall Act to limit brokerage activities by national banks to purchase and sale transactions for "actual customers of the bank, which customer relationship exists independently and apart from the particular transaction in which the bank buys or sells upon the order and for the account of such 'customer.' " 1 Bulletin of the Comptroller of the Currency p 36 (October 26, 1936). The Comptroller also ruled that a national bank "is not authorized to retain any commission, rebate, or discount obtained from others in purchasing for a customer [securities or stock] unless it does not exceed the cost of handling the transaction." Id. p 10. The Comptroller justified limiting the charge for brokering a customer's securities or stock on the grounds that the purpose of Sec. 16 of the Glass-Steagall Act was "to prevent national banks from engaging in the brokerage business for profit." Id. Thus, under the Comptroller's original interpretation of the Glass-Steagall Act, a national bank could engage in brokerage activities only as "an accommodation agent" for the convenience of existing customers of the bank's traditional banking services. Id. p 35. For example, a bank could purchase or sell securities for a trust account that it managed, but it could not make any money on its trades for that account.

This original administrative construction of the Glass-Steagall Act has been dismantled piecemeal over the last fifty years. First, in 1957, the Comptroller repudiated the requirement that national banks receive no profit from the brokerage transactions that they perform for the convenience of their customers. See Digest of Opinions of the Comptroller of the Currency p 220A (August 1957 Edition) (quoted in [1973-1978 Transfer Binder] Fed. Banking L.Rep. (CCH) p 96,272 at 81,357). Nevertheless, at that time, the Comptroller retained the notion that banks could not perform "functions [that] would amount to engaging in the brokerage ... business ... beyond the permissible scope of limited accommodation services." Id. Moreover, the Comptroller in 1957 explicitly reiterated its earlier requirement that bank brokerage services "must be limited to actual customers of the bank--that is, the customer relationship must exist independently of the particular securities transaction." Id.

Then, in 1974, the Comptroller interpreted Glass-Steagall to allow banks to offer and advertise computer-assisted stock purchasing services. See Comptroller of the Currency Opinion Letter (June 10, 1974), reprinted in [1973-1978 Transfer Binder] Fed. Banking L.Rep. (CCH) p 96,272 at 81,353. Answering the argument that these services, and in particular, dissemination of advertising about them, controverted the concept of "limited accommodation services," the Comptroller noted that "the 'accommodation' concept is not contained in the statute." Id. at 81,360. Because, however, the automatic investment service was limited to customers of the bank's checking accounts, the Comptroller did not explicitly address whether bank could offer and advertise brokerage services for nonbanking customers.

Finally, in 1982, the Comptroller abandoned its interpretation that Sec. 16 of the Glass-Steagall Act limited bank brokerage activities to customers of traditional banking services by allowing a national bank to establish a subsidiary to offer retail discount brokerage services, to banking and nonbanking customers alike, at branch offices of the bank. See In re Security Pacific National Bank (August 26, 1982), reprinted in [1982-1983 Transfer Binder] Fed. Banking L.Rep. (CCH) p 99,284 at 86,255. ⁴ The Comptroller has subsequently made clear that its new interpretation of Sec. 16 applies to the brokerage activities of a bank itself in addition to those of a bank subsidiary. See, e.g., Comptroller of the Currency Opinion Letter No. 363 (May 23, 1986); see also 50 Fed.Reg. 31,605 (August 5, 1985) (withdrawing proposed rule which would require national banks engaging in discount brokerage services to do so through a nonbanking subsidiary). Both the Board of Governors of the Federal Reserve Board and the Federal Deposit Insurance Corporation, acting pursuant to their respective authority to interpret the Glass-Steagall Act, have also recently interpreted Secs. 16 and 21 to allow banks to engage in brokerage services for nonbanking customers. See Federal Reserve Board's Statement Concerning Applicability of the Glass-Steagall Act to the Commercial Paper Placement Activities of Bankers Trust Company (June 4, 1985); ⁵ FIDC General Counsel's Opinion No. 6, 48 Fed.Reg. 22,989 (May 23, 1983).

The SEC never attempted to apply its broker-dealer regulations to banks that engaged in profitless accommodation transactions. Nor did the SEC attempt to regulate banks as broker-dealers after either the 1957 or the 1974 revisions in the Comptroller's interpretation. The dramatic surge of banks into the discount brokerage business, resulting from the post-1980 administrative reinterpretations of Glass-Steagall, however, prompted the SEC to subject banks engaging in brokerage business to the same broker-dealer regulation as nonbank brokers. ⁶

Thus, in 1985, the SEC issued Rule 3b-9. The Rule regulates as a broker-dealer a bank that either "[p]ublicly solicits brokerage business for which it receives transaction-related...