A.G. Becker Inc. v. Board of Governors of Federal Reserve System
| Decision Date | 02 November 1982 |
| Docket Number | 81-2058,Nos. 80-2258,81-2070,81-2096 and 80-2314,81-1493,s. 80-2258 |
| Citation | 693 F.2d 136,224 U.S.App.D.C. 21 |
| Parties | , Fed. Sec. L. Rep. P 98,850 A.G. BECKER INCORPORATED, Petitioner, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, et al., Respondents. A.G. BECKER INCORPORATED, a Delaware Corporation v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, an Agency of the United States, et al., Appellants. A.G. BECKER, INC., Appellant, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, et al. SECURITIES INDUSTRY ASSOCIATION v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, et al., Appellants. A.G. BECKER INCORPORATED, a Delaware Corporation, Appellant, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, an Agency of the United States, et al. SECURITIES INDUSTRY ASSOCIATION, Petitioner, v. The BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, et al., Respondents. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Petition for Review of an Order of the Board of Governors of the Federal Reserve System (Nos. 80-2258, 80-2314).
Appeal from the United States District Court for the District of Columbia (D.C.Civil Action Nos. 80-02614, 80-02175, 80-02730) (Nos. 81-2070, 81-1493, 81-2058, 81-2096).
Richard M. Ashton, Washington, D.C., with whom Michael Bradfield, Washington, D.C., was on the brief for Bd. of Governors of the Federal Reserve System, et al., appellants Nos. 81-2058 and 81-2070 and appellants/respondents in Nos. 80-2258, 80-2314, 81-1493, and 81-2096, James V. Mattingly, Jr., Washington, D.C., also entered an appearance for the Bd. of Governors of the Federal Reserve System, et al.
James B. Weidner, New York City, with whom John M. Liftin, Washington, D.C., was on the brief for Securities Industry Ass'n, petitioner in No. 80-2314 and appellee in No. 81-2058. Janet R. Zimmer, Washington, D.C., also entered an appearance for Securities Industry Ass'n.
Harvey L. Pitt, Washington, D.C., with whom Henry A. Hubschman and Andrea Newmark, Washington, D.C., were on the brief for A.G. Becker Inc., petitioner in No. 80-2258, appellants in Nos. 81-2096 and 81-1493, and appellee/respondent in No. 80-2070. James H. Schropp, Washington, D.C., also entered an appearance for A.G. Becker Incorporated.
Robert S. Rifkind, New York City, entered an appearance for New York Clearing House Ass'n, amicus curiae in Nos. 81-1493, 81-2258 and 81-2096.
Charles F.C. Ruff, U.S. Atty., Royce C. Lamberth, Kenneth M. Raisler, William H. Briggs, Jr., Asst. U.S. Attys., Washington, D.C., also entered an appearance for appellee/respondent in No. 81-1493.
John W. Barnum and W. Michael Tupman, Washington, D.C., entered appearances for Bankers Trust Co., amicus curiae in Nos. 80-2314, 81-2058, 80-2258, 81-1493, 81-2096 and 81-2070.
Leonard H. Becker, Steven A. Musher and Joseph McLaughlin, Washington, D.C., entered appearances for Goldman, Sachs and Co., amicus curiae in Nos. 80-2314, 81-2058, 80-2258, 81-1493, 81-2096 and 81-2070.
Paul Gorson and Russell Stevenson, Washington, D.C., entered appearances for Securities and Exchange Com'n, amicus curiae in Nos. 81-2096 and 81-2058.
Before TAMM and WILKEY, Circuit Judges and ROBB, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge WILKEY.
This case calls upon us to decide whether the Federal Reserve Board acted lawfully in permitting the Bankers Trust Company, a state member bank of the Federal Reserve System, 1 to act as agent in the sale of commercial paper. After Bankers Trust began marketing commercial paper, A.G. Becker, Inc., a broker-dealer in securities, and the Securities Industry Association ("SIA"), an organization representing over five hundred securities brokers and dealers, requested the Board to declare Bankers Trust's activities illegal and to bring appropriate enforcement action. Becker and the SIA contended that Bankers Trust was in violation of sections 16 and 21 of the Glass-Steagall Act ("the Act"), which prohibit commercial banks, with certain exceptions from buying, selling, or underwriting "securities." 2 The Federal Reserve Board determined, however, that the commercial paper marketed by Bankers Trust was not a "security" within the meaning of the Act. 3 Becker and the SIA then brought suit in the district court, which held the Board's determination to be invalid. 4 The Board appealed, and we reverse.
"Commercial paper" refers to prime quality, negotiable promissory notes bearing very short maturities--generally 30 to 90 days. 5 Large, financially strong corporations use commercial paper to obtain funds for current needs. Commercial paper is sold, in denominations averaging one million dollars or more, to large, sophisticated purchasers--money market mutual funds, bank trust departments, insurance companies and pension funds. 6
Bankers Trust began placing third party commercial paper in 1978. 7 Its issuers had the highest rating from at least one of the rating services for commercial paper issuers; its customers were part of the bank's established base of institutional investors, who regularly purchase short term instruments from the bank. The bank offered to act as financial adviser to issuers of paper sold by the bank, and to extend credit to them, though for only a small portion of the unsold amount of the issue. It did not commit itself to purchase unsold paper, but it did purchase in the secondary market commercial paper of issuers for which it had acted. Bankers Trust was the first commercial bank to enter the commercial paper market in competition with the investment banks; other commercial banks awaited the outcome of subsequent legal proceedings.
Becker and the SIA requested the staff of the Federal Reserve Board to review the legality of Bankers Trust's activities. The Board's general counsel, after extensive discussion with Becker, SIA, Bankers Trust and the SEC, issued an opinion declaring that commercial banks may lawfully act as agent for the issuer in the sale of commercial paper, "provided that the sales ... are limited to purchasers to whom commercial banks normally sell participations in loans." 8 Becker and the SIA then requested the Federal Reserve Board to review the decision of its general counsel and to proscribe the commercial paper activities of member banks. After considering submissions by interested parties and conducting an on-site investigation of Bankers Trust's activities, the Board ruled that Bankers Trust's participation in the commercial paper market did not violate the Glass-Steagall Act or contravene public policy. 9
In a carefully reasoned opinion the Board first concluded that there was no indication in the language or legislative history of the Glass-Steagall Act that Congress considered commercial paper to be a "security," in which banks were forbidden to deal. 10 The Board noted that banks had traditionally traded in commercial paper, and that the Act had been intended to strengthen banks in the exercise of traditional banking functions. The Board then turned to a "functional" analysis of the statutory terms, and concluded that, because commercial paper embodies short-term loans from a few sophisticated lenders to financially strong borrowers, it resembled a loan rather than a security for the purpose of the Glass-Steagall Act. 11 Because the Board ruled that commercial paper was not a "security," it did not reach the issue whether Bankers Trust was "issuing, underwriting, selling, or distributing" securities within the meaning of the Glass-Steagall Act. 12
Subsequently, the Board issued guidelines to ensure that sale of third party commercial paper did not give rise to "unsafe or unsound practices." 13 These guidelines permitted banks to sell only prime quality third party commercial paper with maturity of nine months or less and in denominations of over $100,000. Banks could sell only to "financially sophisticated customers," and were forbidden to advertise to the general public. Sales to the bank's fiduciary accounts, parent holding companies and nonbank affiliates were also forbidden. Moreover, banks were required to maintain credit analyses of issuers, to limit the amount of paper sold for any issuer, and to maintain detailed records of sales, purchases and lines of credit extended. Finally, various disclosure requirements were imposed.
SIA and Becker sought review in the district court of the Board's ruling that commercial paper was not a "security." That court concluded that the Act's "plain language" barred commercial banks from trading in commercial paper. 14 It also found that the "broad framework" of the Act evinced Congress' intent to institute a sweeping prohibition of commercial banks' engaging in investment banking activities. 15 Finally, in response to the Board's "functional" analysis of commercial paper, the court averred that "[o]ne factor ... compels the conclusion that the commercial paper at issue here is [a security], and that crucial aspect is the role of Bankers Trust in the transaction." 16 For these reasons, the district court issued a declaratory judgment that the Board's ruling was contrary to law. 17
We reverse. The district court gave insufficient weight to the expertise of the Federal Reserve Board--as the agency responsible for administering the nation's banking system--in interpreting the provisions of the Glass-Steagall Act. Moreover, the language of the Act, its legislative history and the policies underlying it all support the Board's conclusions that commercial paper is not a "security" under the Act. We discuss each of these findings in turn.
The Supreme Court recently had occasion again to delineate the standard to be applied in the review of an agency's interpretation of a statute which it is charged to implement. The task of the reviewing court is ...
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