Investment Co. Institute v. Conover, 85-5019
| Decision Date | 20 May 1986 |
| Docket Number | No. 85-5019,85-5019 |
| Citation | 790 F.2d 925 |
| Parties | , 54 USLW 2613, Fed. Sec. L. Rep. P 92,731, 7 Employee Benefits Ca 1566 INVESTMENT COMPANY INSTITUTE, Appellant, v. C.T. CONOVER, Comptroller of the Currency, et al. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Harvey L. Pitt, with whom Henry A. Hubschman and David M. Miles, Washington, D.C., were on brief, for appellant.
L. Robert Griffin, Atty., Office of the Comptroller, with whom Richard K. Willard, Asst. Atty. Gen., and Richard V. Fitzgerald, Chief Counsel, Office of the Comptroller, Washington, D.C., were on brief for appellees, C.T. Conover, et al.
Arnold M. Lerman, with whom Michael S. Helfer, Christopher R. Lipsett and Daniel M. Drory, Washington, D.C., were on brief, for appellee, Citibank.
John J. Gill and Michael F. Crotty, Washington, D.C., were on brief for amicus curiae, American Bankers Ass'n urging affirmance.
Before: SCALIA and STARR, Circuit Judges, and McGOWAN, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge STARR.
This case brings us once more into the legal battle between the banking and securities industries over the former's movement into business domains which the latter considers its own. The Investment Company Institute is a national association of investment companies, investment advisors and underwriters. The Institute brought an action for declaratory and injunctive relief in the District Court, challenging a decision by the Comptroller of the Currency allowing Citibank to establish and market a "Collective Investment Trust" for assets of Individual Retirement Accounts, commonly known as "IRAs." The Institute contended that Citibank's Trust is functionally equivalent to a mutual fund, and that Citibank could not operate the Trust without running afoul of the 1933 Glass-Steagall Act. That Act was designed to preserve public confidence in commercial banks like Citibank by keeping them out of the securities business.
The District Court granted the Comptroller's motion for summary judgment, Investment Co. Institute v. Conover, 596 F.Supp. 1496 (D.D.C.1984), and the Institute appealed. The sole issue before us is whether "units of beneficial interest," or shares, in Citibank's Trust constitute "securities" within the meaning of sections 16 and 21 of the Glass-Steagall Act, 12 U.S.C. Secs. 24 (Seventh), 378(a)(1) (1982) ("the Act"). The Comptroller concluded that the units are not "securities" for purposes of the Act, and that Citibank could therefore lawfully offer the units to the public. The District Court agreed with the Comptroller, thereby disagreeing with the then only other judicial decision on this issue, Investment Co. Institute v. Conover, 593 F.Supp. 846 (N.D.Cal.1984) (Schwarzer, J.), appeal pending, Nos. 84-2622/2623 (9th Cir.). 1 Guided by the deference principles enunciated in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), we uphold the Comptroller's interpretation of the Act and affirm.
An understanding of the specific dispute before us requires familiarity with a portion of the elaborate federal statutory scheme governing national banking activities and the newer provision of federal law permitting IRAs, an acquaintance with the structure of Citibank's Trust, and an appreciation of the procedural history of this case.
Enacted in the shadows of the 1929 stock market crash and the ensuing banking collapse, the Glass-Steagall Act prohibits national banks from engaging in the securities business. Section 16 of the Act forbids national banks to underwrite or deal in "securities or stock." 12 U.S.C. Sec. 24 (Seventh). 2 Section 21 in turn prohibits anyone in the business of underwriting, selling, or distributing "stocks, bonds, debentures, notes or other securities" from taking deposits. 12 U.S.C. Sec. 378(a)(1). 3 The term "securities," however, is left undefined by the Act. The leading Supreme Court case construing that term, Investment Co. Institute v. Camp, 401 U.S. 617, 91 S.Ct. 1091, 28 L.Ed.2d 367 (1971), overturned an earlier ruling by the Comptroller allowing Citibank to operate a "collective investment fund." Camp held, in brief, that the "units of participation" in Citibank's fund constituted "securities" within the meaning of the Act because, in the Court's view, contributions to Citibank's fund were made for "investment" purposes rather than true fiduciary purposes, and because Citibank's arrangement would likely pose several of the hazards to the banking system that Glass-Steagall was designed to eliminate. See 401 U.S. at 630-38, 91 S.Ct. at 1098-1102.
Also of relevance in this case is the Employee Retirement Income Security Act (ERISA), enacted by Congress at 1974. Among other things, ERISA added a provision to the Internal Revenue Code permitting qualified individuals to deduct investments in IRAs from taxable income up to a specified amount, currently $2,000 annually. 26 U.S.C. Sec. 408(a)(1) (1982). Such contributions, together with earnings on IRA assets, are not taxed until distribution or withdrawal, id. Sec. 408(d)(1), but a ten percent tax penalty is imposed if the account holder withdraws the funds before reaching the age of 59 1/2, id. Sec. 408(f)(1). Section 408(a)(2), moreover, requires specific approval by the Secretary of the Treasury before a bank or other institution may serve as trustee for IRA trust assets. These assets may only be commingled in a common investment fund or trust fund. Id. Sec. 408(a)(5).
In 1982, Citibank established a common trust fund for IRA investors. A common trust fund is a device, long known to the banking industry, by which a bank commingles the assets of individual trusts and invests those assets collectively. The assets of each participating trust are exchanged for an undivided ownership interest in the common trust fund, with the ownership interest being proportionate to the assets contributed by each trust to the fund's total assets. This device obviously permits each participating trust to enjoy greater diversification and wider investment opportunities than would otherwise exist. It also permits banks, acting as trustees, to manage trusts that are too small to be managed individually. National banks have operated such funds since at least 1936, when the Federal Reserve Board specifically authorized their establishment. See 1 Fed. Reg. 417, 420 (1936) ( Regulation F).
Styled a "Collective Investment Trust," the Citibank trust fund at issue here consists of four separate investment portfolios into which an individual may instruct Citibank to place his or her IRA trust assets. This is accomplished by means of a written trust agreement, which is freely revocable save for the ten percent penalty imposed by I.R.C. Sec. 408. An individual's ownership interest in the entire trust fund is expressed in terms of "units of beneficial interest," which are available only to Citibank IRA-holders and are non-transferable. IRA assets may, however, be freely transferred among the four portfolios, as well as among any of Citibank's other IRA programs. Citibank serves as trustee and investment advisor to the trust fund and receives a monthly fee based in part on the net value of the fund's portfolios. In order to comply with SEC requirements, however, Citibank has placed the fund under the ultimate control of an independent five-member "supervisory committee," which essentially serves as a board of directors. Citibank has marketed its fund as an alternative to, or a competitor of, similar programs now being offered by mutual funds.
Citibank first sought approval of its Collective Investment Trust from the Securities and Exchange Commission, which has in the past opined that ownership interests in collective trust funds are "securities" for purposes of the federal securities laws. Although not conceding the correctness of the SEC's interpretation, Citibank registered the Trust as an investment company under the Investment Company Act of 1940, and registered the units of beneficial interest as securities under the 1933 Securities Act. 4
Citibank then sought approval of the Trust from the Comptroller of the Currency, who has statutory responsibility for regulating fiduciary activities of national banks. 12 U.S.C. Sec. 92a (1982). Citibank asked the Comptroller to determine that its operation of the Trust did not violate the Glass-Steagall Act; it also asked for exemptions from those regulations that Citibank feared might conflict with requirements imposed by the SEC pursuant to the Investment Company Act.
On October 28, 1982, the Comptroller issued a final ruling approving the Citibank Trust. J.A. at 174. The Comptroller found Citibank's operation of the Trust to be authorized by applicable trust regulations and granted the requested exemptions. Importantly for present purposes, the Comptroller provided a lengthy analysis of the applicability of the Glass-Steagall Act to the Trust, concluding that "there is no Glass-Steagall Act impediment to a bank collectively investing IRA trust assets." Id. at 180.
Much of the Comptroller's discussion of the Glass-Steagall Act centered on the Supreme Court's 1971 decision in Camp. After noting certain "general similarities" between the present Trust and the Citibank fund at issue in Camp, the Comptroller offered two reasons why the units of beneficial interest in the Trust should not be considered "securities" for purposes of Glass-Steagall. First, unlike the arrangement in Camp, Citibank receives the IRA assets in trust rather than in a "managing agent" capacity. The Comptroller observed that, as Camp had recognized, national banks have long enjoyed authority to commingle funds received in trust. See id. at 179. In light of this long established authority, the Comptroller concluded that "when, as in the present case, the 'secur...
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