American Bancorporation, Inc. v. Board of Governors of Federal Reserve System

• Decision Date: 30 December 1974
• Docket Number: Nos. 73--1637,73--1643,s. 73--1637
• Citation: 509 F.2d 29
• Parties: AMERICAN BANCORPORATION, INC., et al., Petitioners, v. The BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent, and Northwest Bancorporation, Intervenor-Respondent. SPRINGSTED INCORPORATED et al., Petitioners, v. The BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent, and Northwest Bancorporation, Intervenor-Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 29

509 F.2d 29

AMERICAN BANCORPORATION, INC., et al., Petitioners, v. The BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent, and Northwest Bancorporation, Intervenor-Respondent.

SPRINGSTED INCORPORATED et al., Petitioners, v. The BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent, and Northwest Bancorporation, Intervenor-Respondent.

Nos. 73--1637, 73--1643.

United States Court of Appeals Eighth Circuit.

Submitted June 13, 1974.

Decided Dec. 30, 1974.

Richard H. Kyle, St. Paul, Minn., for petitioners.

Donald Etra, Atty., Dept. of Justice, Washington, D.C., for respondents.

Before GIBSON, BRIGHT and WEBSTER, Circuit Judges.

BRIGHT, Circuit Judge.

Northwest Bancorporation (Banco), a bank holding company, sought and obtained permission of the Board of Governors of the Federal Reserve System (Board) to purchase all of the voting shares of T. G. Evensen & Associates (Evensen), a close corporation that provides financial advice, primarily in bonding matters, to state and local governments in Minnesota, Iowa, Wisconsin, North and South Dakota, and Nebraska. Banco intends to expand the state and municipal finance consulting business of Evensen as its subsidiary. Competitors of Evensen and banking organizations in direct competition with Banco opposed the Board's approval of the acquisition, and, as petitioners, ¹ they now seek our review and reversal of the order of the Board here in question. Our power of review rests on 12 U.S.C. § 1848 (1970), which specifically authorizes any party aggrieved by an order of the Board to obtain review in the appropriate United States Court of Appeals.

The petitioners make the following claims:

1) During consideration of Banco's application, the Board, without complying with legal requirements, amended its regulation relating to acquisitions by bank holding companies of companies engaged in nonbanking activities, 12 C.F.R. § 225.4(a), to expressly include the activity of advising state and local governments in financial matters; and the Board relied in part on this amendment to justify the order now in question.

2) The Board unlawfully denied the opponents of Banco's proposed acquisition, the petitioners herein, a formal trial-type hearing authorized and required pursuant to law and applicable regulations.

3) The Board's decision on the merits constituted error because it was based upon an incomplete record developed without the benefit of a full evidentiary hearing.

To place these issues in a proper frame of reference, we recount the proceedings leading up to the Board's approval of the Evensen acquisition.

Banco filed its application with the Board, by way of the Federal Reserve Bank of Minneapolis, on February 22, 1972, seeking permission to acquire all the voting shares of Evensen pursuant to § 4(c)(8) of the Bank Holding Company Act, 12 U.S.C. § 1843(c)(8) (1970). That Act, as material here, prohibits a bank holding company from acquiring any interest in nonbanking organizations other than an interest in a company the activities of which the Board, after due notice and opportunity for hearing, has determined 'to be so closely related to banking or managing or controlling banks as to be a proper incident thereof.' ² After a routine investigation, the Federal Reserve Bank of Minneapolis recommended that the Board approve Banco's application.

Notice of the filing of Banco's application was published in the Federal Register ³ on March 21, 1972, the day following recommendation of approval by the Federal Reserve Bank of Minneapolis. The published notice invited interested persons to submit their views, to comment upon the appropriateness of the proposed acquisition, and, if requesting a hearing, to submit reasons justifying any hearing.

Banco filed its application pursuant to the then existing regulation of the Board which defined the following activities, among others, as so closely related to banking or managing or controlling banks as to be a proper incident thereto:

(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; * * *. (12 C.F.R. § 225.4(a)(5).)

During the pendency of the application, and at least partially in response to the application, the Board amended this regulation, effective June 6, 1972, without prior publication of notice. Petitioners charge that failure to publish advance notice of the proposed amendment to the regulation violated § 4 of the Administrative Procedure Act (APA), 5 U.S.C. § 553 (1970).

As amended, the Board's regulation as pertinent here now provides The following activities have been determined by the Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto:

(5) Acting as investment of financial adviser to the extent of (i) serving as the advisory company for a mortgage or a real estate investment trust; (ii) serving as investment adviser, as defined in section 2(a)(20) of the Investment Company Act of 1940, to aninvestment company registered under that Act; (iii) providing portfolio investment advice to any other person; (iv) furnishing general economic information and advice, general economic statistical forecasting services and industry studies, and (v) providing financial advice to State and local governments, such as with respect to the issuance of their securities; * * *. (12 C.F.R. § 225.4(a)(5) (emphasis added, footnotes omitted).)

The Board forwarded a copy of the amended regulation to attorneys for the petitioners, advising them:

This new language is not intended to be in any way an expression of the Board's views on the application of Northwest Bancorporation ('Northwest') to acquire T. G. Evensen & Associates, Inc. ('Evensen'). The Board must still consider whether the performance of Evensen's activities as an affiliate of Northwest 'can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices.'

Any additional comments you may wish to make in light of the amendment to section 225.4(a)(5) should be submitted as soon as possible.

The Board denied the petitioners' demand for a formal, trial-type hearing on Banco's application to acquire Evensen. Instead, it granted them the right to submit evidence at an oral presentation on the propriety of the acquisition under the standards set forth in § 4(c)(8) of the Bank Holding Company Act. ⁴

Following the oral presentation, held on October 17, 1972, in Minneapolis, the Federal Reserve Bank of Minneapolis revised its earlier recommendation of approval of the application and advised the Board that it (Federal Reserve Bank of Minneapolis) 'is now of the opinion that the application should be denied.' Thereafter, the Board, with one dissent, ⁵ issued an order, effective August 16, 1973, approving the acquisition of Evensen by Banco, subject to certain conditions. ⁶ With this background in mind we turn to the procedural issues raised by petitioners.

I. Amendment of the Regulation.

Section 4(b) of the APA provides that rulemaking by an agency requires advance publication of notice in the Federal Register. Notice must include a statement of the time, place, and nature of the rulemaking proceeding, reference to legal authority under which the rule is proposed, and an explanation of the terms or substance of the proposed rule or a description of the subjects and issues involved. 5 U.S.C. § 553(b). The statute exempts from the notice requirement 'interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice,' 5 U.S.C. § 553(b)(A), or rules for which the agency finds that notice and public procedure are impracticable, unnecessary, or contrary to the public interest, 5 U.S.C. § 553(b)(B). These exceptions do not apply when the statute under which the agency is proceeding itself requires notice or hearing for rulemaking. ⁷

The petitioners contend that the amendment of June 6, 1972, in the Board's regulation defining permissible nonbanking activities, 12 C.F.R. § 225.4(a)(5), constituted, as it affected the proposed acquisition of Evensen, a substantive change, necessitating compliance with the notice requirements of § 4(b) of the APA. The Board, however, contends that the amendment was interpretative only, falling within the provision for exemption from notice of § 4(b)(A) of the APA, 5 U.S.C. § 553(b)(A). To determine whether the amendment was substantive or interpretative, we must focus upon its impact on the banking industry regulated by the Board. See Shell Oil Co. v. FPC, 491 F.2d 82, 87--88 (5th Cir. 1974); National Ass'n of Ins. Agents v. Board of Governors, 489 F.2d 1268, 1270 (D.C. Cir. 1974); Akron, Canton & Youngstown R.R. v. United States, 370 F.Supp. 1231, 1236--1240 (D.Md.1974) (three-judge court); Commonwealth of Pennsylvania v. United States, 361 F.Supp. 208, 220--222 (M.D.Pa.) (three-judge court), aff'd mem., 414 U.S. 1017, 94 S.Ct. 440, 38 L.Ed.2d 310 (1973); National Motor Freight Traffic Ass'n v. United States, 268 F.Supp. 90, 96 (D.D.C.1967) (three-judge court), aff'd per curiam, 393 U.S. 18, 89 S.Ct. 49, 21 L.Ed.2d 19 (1968); Continental Oil Co. v. Burns, 317 F.Supp. 194, 197--200 (D.Del.1970). Whether the change in the regulation is substantive or interpretative may be ascertained in part by reference to the following criteria:

(1) the complexity and pervasiveness of the rules issued, (2) the drastic changes effected in existing law by the rules, (3) the degree of retroactivity and its impact and (4) the confusion and controversy engendered by practical difficulties of compliance with the new rules. (Continental Oil Co. v. Burns, supra, 317 F.Supp. at...