Board of Governors of Federal Reserve System v. Investment Company Institute

Decision Date24 February 1981
Docket NumberNo. 79-927,79-927
Citation101 S.Ct. 973,450 U.S. 46,67 L.Ed.2d 36
PartiesBOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Petitioner, v. INVESTMENT COMPANY INSTITUTE
CourtU.S. Supreme Court
Syllabus

Section 4(c)(8) of the Bank Holding Company Act authorizes the Federal Reserve Board (Board) to allow bank holding companies to acquire or retain ownership in companies whose activities are "so closely related to banking or managing or controlling banks as to be a proper incident thereto." In 1972, the Board amended its Regulation Y, and issued an interpretive ruling in connection therewith, enlarging the category of activities that it would regard as "closely related to banking" under § 4(c)(8) by permitting bank holding companies and their nonbanking subsidiaries to act as an investment adviser to a closed-end investment company. Section 16 of the Banking Act of 1933 (Glass-Steagall Act) prohibits a bank from "underwriting" any issue of a security or purchasing any security for its own account, and § 21 of that Act prohibits any organization "engaged in the business of issuing, underwriting, selling, or distributing" securities from engaging in banking. Respondent trade association of open-end investment companies, in proceedings before the Board and on direct review in the Court of Appeals, challenged, on the basis of the Glass-Steagall Act, the Board's authority to determine that investment adviser services are "closely related" to banking. While rejecting respondent's argument that Regulation Y, as amended, violated the Glass-Steagall Act, the Court of Appeals nevertheless held that § 4(c)(8) of the Bank Holding Company Act did not authorize the regulation because the activities that it permitted were not consistent with the congressional intent in both of these Acts to effect as complete a separation as possible between the securities and commercial banking businesses.

Held : The amendment to Regulation Y does not exceed the Board's statutory authority. Pp. 55-78.

(a) The Board's determination that services performed by an investment adviser for a closed-end investment company are "so closely related to banking . . . as to be a proper incident thereto" is supported not only by the normal practice of banks in performing fiduciary functions in various capacities but also by a normal reading of the language of § 4(c)(8). And the Board's determination of what activities are- "closely related" to banking is entitled to the greatest deference. Pp. 55-58.

(b) Investment adviser services by a bank do not necessarily violate either § 16 or § 21 of the Glass-Steagall Act. The Board's interpretive ruling here prohibits a bank holding company or its subsidiaries from participating in the "sale or distribution" of, or from purchasing, securities of any investment company for which it acts as an investment adviser. Thus, if such restrictions are followed, investment advisory services—even if performed by a bank—would not violate § 16's requirements. And the management of a customer's investment portfolio is not the kind of selling activity contemplated in the prohibition in § 21, which was intended to require securities firms, such as underwriters or brokerage houses, to sever their banking connections. In any event, even if the Glass-Steagall Act did prohibit banks from acting as investment advisers, that prohibition would not necessarily preclude the Board from determining that such adviser services would be permissible under § 4(c)(8). Pp. 58-64.

(c) Since the interpretive ruling issued with the amendment to Regulation Y prohibits a bank holding company acting as an investment adviser from issuing, underwriting, selling, or redeeming securities, Regulation Y, as amended, avoids the potential hazards involved in any association between a bank affiliate and a closed-end investment company. Cf. Investment Company Institute v. Camp, 401 U.S. 617, 91 S.Ct. 1091, 28 L.Ed.2d 367. Pp. 64-68.

(d) Regulation Y, as amended, is consistent with the legislative history of both the Bank Holding Company Act and the Glass-Steagall Act. More specifically, such legislative history indicates that Congress did not intend the Bank Holding Company Act to limit the Board's discretion to approve securities-related activity as closely related to banking beyond the prohibitions already contained in the Glass-Steagall Act. Pp. 68-78.

196 U.S.App.D.C. 97, 606 F.2d 1004, reversed.

Stephen M. Shapiro, Washington, D. C., for petitioner.

G. Duane Vieth, Washington, D. C., for respondent.

Justice STEVENS delivered the opinion of the Court.

In 1956 Congress enacted the Bank Holding Company Act to control the future expansion of bank holding companies and to require divestment of their nonbanking interests.1 The Act, however, authorizes the Federal Reserve Board (Board) to allow holding companies to acquire or retain ownership in companies whose activities are "so closely related to banking or managing or controlling banks as to be a proper incident thereto." 2 In 1972 the Board amended its- regulations to enlarge the category of activities that it would regard as "closely related to banking" and therefore permissible for bank holding companies and their nonbanking subsidiaries. Specifically, the Board determined that the services of an investment adviser to a closed-end investment company may be such a permissible activity. The question presented by this case is whether the Board had the statutory authority to make that determination.

The Board's determination, which was implemented by an amendment to its "Regulation Y," permits bank holding companies and their nonbanking subsidiaries to act as an investment adviser as that term is defined by the Investment Company Act of 1940.3 Although the statutory definition- is a detailed one,4 the typical relationship between an investment adviser and an investment company can be briefly described. Investment companies, by pooling the resources of small investors under the guidance of one manager, provide those investors with diversification and expert management.5 Investment advisers generally organize and manage investment companies pursuant to a contractual arrangement with the company.6 In return for a management fee, the adviser- selects the company's investment portfolio and supervises most aspects of its business.7

The Board issued an interpretive ruling in connection with its amendment to Regulation Y. That ruling distinguished "open-end" investment companies (commonly referred to as "mutual funds") from "closed-end" investment companies. The ruling explained that "a mutual fund is an investment company, which, typically, is continuously engaged in the issuance of its shares and stands ready at any time to redeem the securities as to which it is the issuer; a closed-end investment company typically does not issue shares after its initial organization except at infrequent intervals and does not stand ready to redeem its shares." 8 Because open-end investment companies will redeem their shares, they must constantly issue securities to prevent shrinkage of assets.9 In contrast, the capital structure of a closed-end company is similar to that of other corporations; if its shareholders wish to sell, they must do so in the marketplace. Without any obligation to redeem, closed-end companies need not continuously seek new capital.10

The board's interpretive ruling expressed the opinion that a bank holding company may not lawfully sponsor, organize, or control an open-end investment company,11 but the Board perceived no objection to sponsorship of a closed-end investment company provided that certain restrictions are observed.12 Among those restrictions is a requirement that the investment company may not primarily or frequently engage in the issuance, sale, and distribution of securities; a requirement that the investment adviser may not have any ownership interest in the investment company, or extend credit to it; and a requirement that the adviser may not underwrite or otherwise participate in the sale or distribution of the investment company's securities.13

Respondent Investment Company Institute, a trade association of open-end investment companies, commenced this litigation challenging as in excess of the Board's statutory authority the determination that investment adviser services are "closely related" to banking. Both in proceedings before the Board and in a direct review proceeding in the United States Court of Appeals for the District of Columbia Circuit, respondent based this challenge on the Banking Act of 1933, commonly known as the Glass-Steagall Act, in which Congress placed restrictions on the securities-related business of banks in order to protect their depositors.14

The Court of Appeals rejected respondent's argument that Regulation Y, as amended, violated the Glass-Steagall Act, relying on the fact that the prohibitions of §§ 16 and 21 of- that Act 15 apply only to banks rather than to bank holding companies or their nonbanking subsidiaries. 196 U.S.App.D.C. 97, 606 F.2d 1004. The court nevertheless concluded that § 4(c)(8) of the Bank Holding Company Act did not authorize the regulation. The court reasoned that the legislative history of the Act demonstrates that Congress did not intend the Bank Holding Company Act to restrict the scope of the Glass-Steagall Act. Because the court read the legislative history to indicate that Congress perceived the Glass-Steagall Act as an effort to effect as complete a separation as possible between the securities business and the commercial banking business, the court read a similar intent into the Bank Holding Company Act. The Court of Appeals believed that activities permitted by the challenged regulation were not consistent with the congressional intent to effect this separation.

We granted certiorari because of the importance of the Court of Appeals holding. 444 U.S. 1070, 100 S.Ct. 1011, 62 L.Ed.2d 750. We are persuaded- that...

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