Securities Industry Ass'n v. Clarke

• Decision Date: 08 September 1989
• Docket Number: 1125,D,Nos. 1124,s. 1124
• Citation: 885 F.2d 1034
• Parties: , Fed. Sec. L. Rep. P 94,562 SECURITIES INDUSTRY ASSOCIATION, Plaintiff-Appellee, v. Robert L. CLARKE and Office of the Comptroller of the Currency, Defendants-Appellants, v. SECURITY PACIFIC NATIONAL BANK, Intervenor-Defendant-Appellant. ockets 89-6027, 89-6029.
• Court: U.S. Court of Appeals — Second Circuit

Page 1034

885 F.2d 1034

58 USLW 2167, Fed. Sec. L. Rep. P 94,562

SECURITIES INDUSTRY ASSOCIATION, Plaintiff-Appellee, v. Robert L. CLARKE and Office of the Comptroller of the

Currency, Defendants-Appellants, v. SECURITY PACIFIC NATIONAL BANK, Intervenor-Defendant-Appellant.

Nos. 1124, 1125, Dockets 89-6027, 89-6029.

United States Court of Appeals Second Circuit.

Argued May 23, 1989.

Decided Sept. 8, 1989.

Helen M. Toor, Asst. U.S. Atty., S.D. New York, New York City (Benito Romano, U.S. Atty. S.D. New York, Steven E. Obus, Asst. U.S. Atty., S.D. New York, New York City, L. Robert Griffin, Rosa M. Koppel, Office of the Comptroller of the Currency, Washington, D.C., of counsel), for appellants Robert L. Clarke and Office of the Comptroller of the Currency.

Kenneth L. Bachman, Jr., Washington, D.C. (Matthew D. Slater, Cleary, Gottlieb, Steen & Hamilton, Washington, D.C., Robert L. Tortoriello, Richard F. Ziegler, Cleary, Gottlieb, Steen & Hamilton, New York City, Russell A. Freeman, Maurice K. DeWolff, Dan C. Aardal, Security Pacific National Bank, Los Angeles, Cal., of counsel), for intervenor-appellant Security Pacific Nat. Bank.

James B. Weidner, New York City (David A. Schulz, Mark Holland, R. Scott Henderson, Rogers & Wells, New York City, William J. Fitzpatrick, Securities Industry Ass'n, New York City, Donald J. Crawford, Securities Industry Ass'n, Washington, D.C., of counsel), for appellee Securities Industry Ass'n.

Lewis B. Kaden, Edward J. Kelly, III, Jeffrey D. Berman, Davis Polk & Wardwell, New York City, for amicus curiae New York Clearing House Ass'n.

John J. Gill, Gen. Counsel, Michael F. Crotty, Associate Gen. Counsel, American Bankers Ass'n, Washington, D.C., for amicus curiae American Bankers Ass'n.

Michael S. Helfer, Christopher R. Lipsett, Wilmer, Cutler & Pickering, Washington, D.C., for amicus curiae Bank Capital Markets Ass'n.

Before VAN GRAAFEILAND, MESKILL and WINTER, Circuit Judges.

MESKILL, Circuit Judge:

Plaintiff-appellee Securities Industry Association (SIA) brought the instant action in the United States District Court for the Southern District of New York, Duffy, J. SIA's suit challenged a decision of Robert L. Clarke, the Comptroller of the Currency (the Comptroller). The Comptroller determined that the sale of mortgage pass-through certificates by intervenor-defendant-appellant Security Pacific National Bank (SPN Bank) was not in violation of those sections of the Banking Act of 1933, ch. 89, Pub.L. No. 73-66, 48 Stat. 162 (1933) (codified as amended in scattered sections of 12 U.S.C.), commonly referred to as the Glass-Steagall Act. See Securities Industry Ass'n v. Board of Governors, 839 F.2d 47, 54-56 (2d Cir.), cert. denied, --- U.S. ----, 108 S.Ct. 2830, 100 L.Ed.2d 931 (1988) (Citicorp ). The district court granted SIA's Fed.R.Civ.P. 56 motion for summary judgment, rejecting the statutory analysis of the Comptroller's decision. Securities Industry Ass'n v. Clarke, 703 F.Supp. 256 (S.D.N.Y.1988).

We vacate the judgment of the district court and remand with instructions to dismiss the complaint.

BACKGROUND

A. Mortgage Pass-Through Certificates

Mortgage pass-through certificates are used by banks as a mechanism for selling mortgage loans. A number of mortgage loans previously originated by a bank are placed in a pool. The bank then transfers the pool to a trust. In exchange for the pool, the trustee transfers to the bank pass-through certificates. These certificates represent fractional undivided interests in the pool of mortgage loans. The certificates may then be sold publicly or privately.

After sale of the certificates, the mortgage loans are often serviced by the originator-bank. In such a case, the bank collects the loan payments and "passes through" the principal and interest on a pro rata basis to the certificate holders. In doing so, the bank may deduct service or other fees.

Use of this mechanism has important benefits for banks, benefits that have resulted in its increasing popularity and use. Because residential mortgage loans typically are of long duration, banks traditionally have bought and sold the loans to facilitate management of their assets and liabilities. Use of the pass-through certificate mechanism makes the sale of these loans easier. Individual loans do not have to be sold separately, and buyers may find it more efficient and less risky to purchase interests in a pool of mortgages instead of single mortgages.

B. The January 23, 1987 Offering of SPN Bank

A Prospectus and Prospectus Supplement dated January 23, 1987 described the offering of approximately $194 million of Security Pacific Mortgage Pass-Through Certificates, Series 1987-B.

The Prospectus provided for the creation of a pool consisting of conventional, fixed-rate residential mortgage loans. "Each Mortgage Loan [would] be selected by [SPN Bank] for inclusion in the Mortgage Pool from among those originated by [SPN Bank] in the ordinary course of [SPN Bank's] lending activities as carried on in its offices in California." Certain characteristics of the mortgages to be selected were specified.

The Prospectus provided that, at the time of issuance of the series, "[SPN Bank] will assign the Mortgage Loans in the Mortgage Pool evidenced by that series to the Trustee.... The Trustee will, concurrently with such assignment, authenticate and deliver Certificates evidencing such series to [SPN Bank] in exchange for the Mortgage Loans." The freely transferable certificates would represent fractional undivided interests in the Trust Fund.

Limited credit support for the issue was to be provided either by (1) an irrevocable letter of credit issued by SPN Bank, (2) a limited guaranty issued by an entity other than SPN Bank, or (3) third-party mortgage insurance purchased by SPN Bank in The Prospectus provided for distribution of the certificates by any of three methods: "1. By negotiated firm commitment underwriting and public reoffering by underwriters; 2. By placements by [SPN Bank] with institutional investors through agents; and 3. By direct placements by [SPN Bank] with institutional investors."

its role as servicer of the mortgage loans. If SPN Bank provided its own letter of credit, the coverage was to be no more than ten percent of the initial aggregate principal balance of the mortgage pool. Any risk of delinquency or default not covered by these mechanisms of credit support would be borne by the certificate holders.

After the sale of the certificates, SPN Bank was to continue to service the mortgage loans on behalf of the certificate holders for a contractually specified fee. As part of its ongoing responsibilities, SPN Bank would "monthly distribute[ ] to certificate holders the payments received from the mortgagors (net of its servicing fee) based on their pro rata interest in the mortgage loans."

The Prospectus Supplement for Series 1987-B described various characteristics of the mortgages selected for inclusion in the pool for that particular issue. The Supplement also specified that the trustee was to be Union Bank, a California bank. Credit support was to be provided by SPN Bank's parent, Security Pacific Corporation, in the form of a limited guaranty of no more than ten percent of the aggregate principal balance of the mortgage loans. With respect to distribution of this issue, the Supplement provided, in pertinent part:

Subject to the terms and conditions of [an] Underwriting Agreement ... among [SPN Bank, its parent Security Pacific Corporation and Kidder, Peabody & Co., Inc.], under which [SPN Bank] and Kidder Peabody ... will act as [the U]nderwriters ..., the Certificates are being purchased from [SPN Bank] by the Underwriters upon issuance. Distribution of the Certificates is being made by the Underwriters from time to time in negotiated transactions or otherwise at varying prices to be determined at the time of sale.

On February 23, 1987, the sale of certificates for Series 1987-B closed and the certificates were delivered to their purchasers.

C. SIA's Challenge to SPN Bank's Offering

SIA is a national trade association. According to its complaint, its members include "over 500 organizations responsible for more than 90 percent of the securities brokerage and investment banking business of the nation." Its members are in the businesses of "retail and institutional securities brokerage, investment advisory services, securities trading and market making, underwriting and other investment banking functions and related activities." In an April 2, 1987 letter, SIA wrote to the Comptroller, expressing its "concern" about SPN Bank's Prospectus and Prospectus Supplement for the Series 1987-B issue of mortgage pass-through certificates. ¹ SIA stated its belief that SPN Bank's participation in the transaction constituted a violation of the Glass-Steagall Act. The letter asked the Comptroller to review the transaction and "declare the bank's involvement in it to be contrary to the Glass-Steagall Act."

The Comptroller responded to SIA's request by issuing a twenty page letter dated June 16, 1987. Letter from Robert L. Clarke to Russell A. Freeman, O.C.C. Interpretive Letter No. 388, Fed.Banking L.Rep. (CCH) p 85,612, 6 O.C.C. Qtrly.J. No. 4, at 41. The letter was addressed directly to SPN Bank because, as the Comptroller explained, the Office of the Comptroller of the Currency (OCC) "is the primary regulator of [SPN] Bank's activities." A copy of the letter was sent to SIA. The Comptroller found that SPN Bank's offering did the Bank's program, as described in the Prospectus and Prospectus Supplement dated January 23, 1987, is squarely based on long-standing precedent that is fully supported by applicable law and subsequent court decisions interpreting these laws. In pooling its mortgage loans and selling interests therein, the Bank is merely engaging in a permitted sale of its mortgage assets. We cannot conclude that the Glass-Steagall Act is intended to...