Citicorp v. Board of Governors of Federal Reserve System
| Decision Date | 10 June 1991 |
| Docket Number | D,No. 953,953 |
| Citation | 936 F.2d 66 |
| Parties | CITICORP, Petitioner, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent, American Council of Life Insurance, Independent Insurance Agents of America, Inc., National Association of Casualty and Surety Agents, National Association of Life Underwriters, Inc., National Association of Professional Insurance Agents, National Association of Surety Bond Producers, Professional Insurance Agents of Pennsylvania, Maryland, and Delaware, Inc., Independent Insurance Agents of Delaware, Delaware Association of Life Underwriters, State of Delaware, and Delaware Bankers Association, Intervenors. ocket 90-4124. |
| Court | U.S. Court of Appeals — Second Circuit |
Michael S. Helfer, Washington, D.C. (David S. Swayze, Joseph A. Fillip, Jr., Wilmington, Del., Carl T. Solberg, George G. Baxter, III, Alan F. Liebowitz, New York City, Christopher R. Lipsett, Murray A. Indick, Wilmer, Cutler & Pickering, Washington, D.C., on the brief), for petitioner.
Jacob M. Lewis, Civ. Div., Dept. of Justice (Stuart M. Gerson, Asst. Atty. Gen., Anthony J. Steinmeyer, Civ. Div., Dept. of Justice, J. Virgil Mattingly, Gen. Counsel, Richard M. Ashton, Associate Gen. Counsel, Katherine H. Wheatley, Federal Reserve Bd., Washington, D.C., on the brief), for respondent.
A. Gilchrist Sparks, III (Michael Houghton, S. David Peress, Morris, Nichols, Arsht & Tunnell, and Marsha Kramarck, Deputy Atty. Gen., Wilmington, Del., on the brief), for intervenors Delaware Bankers Ass'n and State of Del.
David Overlock Stewart (Martin E. Lybecker, Alan G. Priest, Raymond C. Ortman, Jr., Ropes & Gray, Washington, D.C., on the brief), for intervenor American Council of Life Ins.
Jonathan B. Sallet (Ann M. Kappler, Jenner & Block, Washington, D.C., on the brief), for remaining intervenors.
John L. Warden, H. Rodgin Cohen, Lisamichelle Davis, Sullivan & Cromwell, New York City, submitted a brief for amicus curiae New York Clearing House Ass'n.
John D. Hawke, Jr., Melanie L. Fein, Pauline B. Heller, David F. Freeman, Jr., Arnold & Porter, Washington, D.C., submitted a brief for amicus curiae Conference of State Bank Supervisors.
John J. Gill, Michael F. Crotty, American Bankers Ass'n, James T. McIntyre, Jr., McNair Law Firm, Richard M. Whiting, Ass'n of Bank Holding Companies, Wendy B. Samuel, David E. Danovitch, Charlotte M. Bahin, Nat. Council of Sav. Institutions, Washington, D.C., Marcia Z. Sullivan, Consumer Bankers Ass'n, Arlington, Va., and Lawrence R. Uhlick, Institute of Intern. Bankers, New York City, submitted a brief for amici curiae American Bankers Ass'n, Ass'n of Bank Holding Companies, Ass'n of Reserve City Bankers, Consumer Bankers Ass'n, Ass'n of Banks in Ins. Institute of Intern. Bankers, and Nat. Council of Sav. Institutions.
Before LUMBARD, NEWMAN, and ALTIMARI, Circuit Judges.
Once again we consider an aspect of the broad issue of the extent to which banks are authorized to engage in nonbanking activities. That issue was before us just two years ago in Independent Insurance Agents of America, Inc. v. Board of Governors, 890 F.2d 1275 (2d Cir.1989) (Merchants II ), cert. denied, --- U.S. ----, 111 S.Ct. 44, 112 L.Ed.2d 21 (1990). We there ruled, in agreement with the Federal Reserve Board ("the Board" or "the Fed"), that the Bank Holding Company Act ("BHCA" or "the Act") did not preclude bank subsidiaries of a bank holding company from selling insurance. The question now before us is the one left open in Merchants II--whether the BHCA extends the regulatory authority of the Fed to the subsidiary of a holding company's bank subsidiary.
The question arises on a petition for review filed by Citicorp challenging the Board's September 5, 1990, order. That order requires one of Citicorp's bank subsidiaries, Citibank Delaware, to terminate insurance activities that the bank subsidiary was conducting through its operating subsidiary, Family Guardian Life Insurance Co. ("Family Guardian"). Though mindful of the deference due an agency's construction of the statute it is administering, we conclude that, once the BHCA has been construed to leave the regulation of a holding company's subsidiary banks to their chartering authorities, the Act cannot sensibly be interpreted to reimpose the authority of the Fed on a generation-skipping basis to regulate the subsidiary's subsidiary. We therefore grant the petition for review and vacate the Board's order.
Before introducing the facts, it will be helpful to outline briefly the pertinent statutory provisions of the BHCA, the construction placed on those provisions at the Board's urging by this Court in Merchants II, the Board's regulation concerning operating subsidiaries, and the pertinent aspects of the Delaware regulatory framework.
The Statutory Framework. The principal regulatory powers of the Fed concerning bank holding companies are set forth in sections 3 and 4 of the Act. 12 U.S.C. Secs. 1842, 1843 (1988). Section 3 requires Board approval of the acquisition of ownership or control of any bank by a bank holding company, with narrow exceptions not here relevant. Section 3 sets forth factors governing acquisition approval, focusing on the competitive effect of the proposed acquisition, the financial and managerial resources of both the holding company and the acquired bank, and the convenience and needs of the community served. Id. Sec. 1842(c).
Section 4 of the Act, the provision ultimately at issue in this litigation, contains two sets of prohibitions. First, it specifies, in what might be called the "ownership clause," that a bank holding company may not "retain direct or indirect ownership or control of any voting shares of any company which is not a bank or bank holding company." Id. Sec. 1843(a)(2). Second, it provides, in what might be called the "activities clause," that a bank holding company may not "engage in any activities other than (A) those of banking or of managing or controlling banks ... and (B) those permitted under [section 4(c)(8) of the Act]...." Id. Section 4(c)(8) sets forth the so-called "closely related to banking" exception to the nonbanking prohibition of the ownership and activities clauses. In relevant part, section 4(c)(8) states that the section 4(a) nonbanking prohibitions shall not apply to
shares of any company the activities of which the 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, but for purposes of this subsection it is not closely related to banking or managing or controlling banks for a bank holding company to provide insurance as a principal, agent or broker....
The Decision in Merchants II. In 1989 the Board approved an application by Merchants National Corporation, a bank holding company, to permit two of its Indiana bank subsidiaries to engage in insurance activities. Merchants National Corp., 75 Fed.Res.Bull. 388 (1989). That ruling was vigorously challenged in this Court by insurance interests who contended that the BHCA was intended to accomplish a nearly complete separation of banking and nonbanking activities by precluding bank holding companies and all entities within their systems from engaging in nonbanking activities, other than the "closely related to banking" activities specifically identified in section 4(c)(8) of the Act. The Board took the position that Congress had not gone so far. In the Board's view, Congress had precluded nonbanking activities by bank holding companies themselves but had not wished to displace the traditional authority of state and national bank chartering bodies to determine what nonbanking activities could appropriately be engaged in by banks that are subject to their regulatory authority, even though such banks were owned by a bank holding company under the jurisdiction of the Fed.
The dispute between the Board and the banking interests, on the one hand, and the insurance interests, on the other hand, was a substantial one. Ultimately, we ruled in favor of the Board. Merchants II, 890 F.2d at 1284. We acknowledged that the statute was not entirely clear and that arguments supporting each of the contending positions could plausibly be based on some of the language of the Act, some aspects of the structure of the Act, and some passages from the legislative history. Id. at 1281-84. After canvassing the available evidence, we concluded that the construction urged by the Board was a "reasonable interpretation" of the Act, "one that confides decisions concerning the scope of insurance and other nonbank activities of bank subsidiaries to their national and state chartering authorities." Id. at 1284.
In Merchants II we noted the Board's additional position that, although the Act denied the Board authority to preclude bank subsidiaries of a bank holding company from engaging in nonbank activities, it nonetheless empowered the Board to preclude the subsidiaries of bank subsidiaries from engaging in nonbank activities. Though the insurance interests pressed upon us the "apparent awkwardness and perhaps illogic," id. at 1282, of the Board's generation-skipping approach, we confined our ruling to approval of the Board's construction of the Act to permit nonbank activities by bank subsidiaries (the first generation after the holding company), and left for another day the issue of whether the Act could simultaneously be construed to bar nonbank activities by a subsidiary's subsidiaries (the second generation). That day has now arrived.
The Board's Operating Subsidiary Rule. Long before the administrative and judicial rulings in Merchants II, the Board had issued Regulation Y, the so-called "operating subsidiary rule," which purports to govern the activities of subsidiaries of a bank holding company. See 12 C.F.R. Pt. 225 (1990) ...
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