Investment Co. Institute v. Board of Governors of Federal Reserve System, No. 77-1862

• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)
• Writing for the Court: Before McGOWAN and WILKEY; Opinion for the court filed by McGOWAN; McGOWAN
• Citation: 606 F.2d 1004,196 U.S.App.D.C. 97
• Parties: , Fed. Sec. L. Rep. P 96,813 INVESTMENT COMPANY INSTITUTE, Petitioner, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent.
• Docket Number: No. 77-1862
• Decision Date: 16 July 1979

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606 F.2d 1004 196 U.S.App.D.C. 97, Fed. Sec. L. Rep. P 96,813 INVESTMENT COMPANY INSTITUTE, Petitioner,
v.
BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent. No. 77-1862. United States Court of Appeals,
District of Columbia Circuit. Argued Oct. 18, 1978.
Decided March 30, 1979.
Rehearing Denied July 16, 1979.

G. Duane Vieth, Washington, D. C., with whom Paul S. Ryerson, Washington, D. C., was on the brief, for petitioner.

Richard M. Ashton, Atty., Board of Governors of the Federal Reserve System, Washington, D. C., a member of the bar of the Court of Appeals of Maryland pro hac vice by special leave of the Court with whom Barbara Allen Babcock, Asst. Atty. Gen. and Ronald R. Glancz, Atty., Dept. of Justice, Washington, D. C., were on the brief, for respondent.

James W. Jones, Washington, D. C., entered an appearance for petitioner.

Robert Kaplan, Atty., Dept. of Justice, Washington, D. C., entered an appearance for respondent.

Before McGOWAN and WILKEY, Circuit Judges, and GASCH, ^* United States District Judge for the District of Columbia.

Opinion for the court filed by McGOWAN, Circuit Judge.

McGOWAN, Circuit Judge:

This direct review proceeding raises the question of whether federal banking legislation prohibits bank holding companies or their non-bank subsidiaries from acting as investment advisers to closed-end investment companies. Respondent Board of Governors of the Federal Reserve System (the Board) promulgated a regulation and accompanying interpretive ruling purporting to authorize such activity. Petitioner, a national association of mutual funds, ¹ charged, both in the administrative proceedings and before this court, that the Board's action is (1) inconsistent with sections 16 and 21 of the Banking Act of 1933, 12 U.S.C. §§ 24 (Seventh), 378 (Glass-Steagall Act); ² and (2) unauthorized by section 4(c)(8) of the Bank Holding Company Act of 1956. ³

While we disagree with petitioner's argument as to the effect of the Glass-Steagall Act, our independent review of federal banking legislation convinces us that petitioner is entitled to relief under the Bank Holding Company Act. Because the statutory considerations that we have identified are somewhat different from those articulated by petitioner during the administrative proceedings, the Board was not pressed in those proceedings to develop at any length its views on these questions. However, although we normally pay considerable deference to the Board's interpretation

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of its organic statutes, Board of Governors v. First Lincolnwood Corp., 439 U.S. 234, 248, 99 S.Ct. 505, 513, 58 L.Ed.2d 484 (1978), we think it unnecessary in the present case to remand to the Board for further evaluation of the considerations we have here identified. For we find that the statutory materials which are as accessible to this court as they are to the Board compel the result we reach herein; and we vacate the regulation and interpretive ruling under review. I

Section 4(a) of the Bank Holding Company Act, 12 U.S.C. § 1843(a), generally prohibits bank holding companies, I. e., companies that own or control one or more commercial banks, ⁴ from engaging in non-banking activities either directly or through a subsidiary company. However, section 4(c)(8) of the Act, 12 U.S.C. § 1843(c)(8), exempts from this prohibition subsidiaries whose activities are "so closely related to banking or managing or controlling banks as to be a proper incident thereto." ⁵ Bank holding companies are permitted to engage directly in activities authorized for subsidiaries by section 4(c)(8) by virtue of section 4(a)(2)(B) of the Act, 12 U.S.C. § 1843(a) (2)(B). The Board, acting pursuant to authority delegated in section 4(c)(8), has heretofore identified a number of activities as "closely related to banking," and therefore permitted to bank holding companies and their non-bank subsidiaries, in its Regulation Y, 12 C.F.R. § 225.4.

On August 12, 1971, the Board issued notice of a proposed amendment to Regulation Y ⁶ authorizing bank holding companies and their non-bank subsidiaries to serve as investment advisers to any investment company registered under the Investment Company Act of 1940, 15 U.S.C. §§ 80a-1 Et seq. An investment company is a corporation or trust whose business is the investment and reinvestment of the pool of funds contributed by its shareholders. See section 3(a) of the Investment Company Act, 15 U.S.C. § 80a-3(a). An investment adviser is a company that, in addition to rendering investment advice, typically organizes, manages and controls an affiliated investment company. ⁷

The Board received numerous written comments on its proposal and, at the request of petitioner herein, held a public hearing in which petitioner and other parties

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presented further views. On January 28, 1972, the Board adopted the proposed regulation with certain minor clarifications. 12 C.F.R. § 225.4(a)(5)(ii), 37 Fed.Reg. 1463 (1972). As amended, the regulation provides in pertinent part:

(a) Activities closely related to banking or managing or controlling banks. . . . 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) . . . (ii) serving as investment adviser, as defined in section 2(a)(20) of the Investment Company Act of 1940, to an investment company registered under that Act . . . .

The Board apparently intended, when it proposed this regulation, that it would apply equally to the two main varieties of investment companies, closed-end and open-end. ⁸ An open-end company (also commonly called a "mutual fund") is continuously engaged in issuing its shares and stands ready at any time to redeem them; a closed-end company typically does not issue shares after its initial offering except at infrequent intervals, and does not stand ready to redeem them. 12 C.F.R. § 225.125(c), 37 Fed.Reg. 1464 (1972). ⁹ During the course of the administrative proceedings, however, several participants, including petitioner herein ¹⁰ and the Department of Justice, ¹¹ objected to permitting bank holding companies or their subsidiaries to advise Open-end investment companies.

In response to these comments, the Board supplemented its regulation with a simultaneously issued interpretive ruling. 12 C.F.R. § 225.125, 37 Fed.Reg. 1464 (1972). The Board concluded that the provisions of the Glass-Steagall Act, particularly as interpreted by the Supreme Court in Investment Company Institute v. Camp, 401 U.S. 617, 91 S.Ct. 1091, 28 L.Ed.2d 367 (1971), ¹² prohibited bank holding companies from sponsoring, organizing, or controlling (hereinafter, "operating") Open-end investment companies. 12 C.F.R. § 225.125(f). ¹³ Because

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of their lower level of securities activity, however, See note 9 and accompanying text Supra, the Board found that Closed-end investment companies are not subject to these prohibitions "so long as (they) are not primarily or frequently engaged in the issuance, sale, and distribution of securities." 12 C.F.R. § 225.125(f).

The interpretive ruling imposed a number of other restrictions on investment advisory activities by bank holding companies. These limitations were designed, generally, to prevent association in the public mind of the investment company and the bank holding company, See 12 C.F.R. §§ 225.125(f), (h); to forbid the bank holding company's subsidiary bank from extending credit to the investment company, purchasing, selling or distributing its shares, or accepting its securities as collateral for a loan to purchase other of its securities, See 12 C.F.R. §§ 225.125(g), (h); and to prohibit unfair sales practices directed toward customers of the bank subsidiary, See 12 C.F.R. § 225.125(h). ¹⁴

After an initial jurisdictional misstep, ¹⁵ petitioner brought this challenge to an order

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of the Board rejecting its petition for reconsideration and rescission of 12 C.F.R. § 225.4(a)(5)(ii). ¹⁶ The case presents a variation on a recurring theme in modern banking law: the tension between federal regulatory statutes designed in part to limit bank activities, and attempts by banks often sanctioned by federal banking authorities to compete in broader lines of business. ¹⁷ To our knowledge, it is the first case in which a court has been asked to determine the permissibility of activities in the Securities area by bank holding companies and their non-bank subsidiaries. II

Respondent argues, as a threshold matter, that petitioner lacks standing to bring this suit. In the field of banking legislation, however, Congress has evidenced its concern to give broad rights of judicial review to parties alleging competitive injury as a result of decisions by federal banking authorities. Thus, the Supreme Court has found standing in parties challenging regulations by the Comptroller of the Currency authorizing national banks to enter into competitive lines of business. Investment Company Institute v. Camp, 401 U.S. 617, 620-21, 91 S.Ct. 1091, 28 L.Ed.2d 367 (1971); Association of Data Processing Service Organizations, Inc. v. Camp, 397 U.S. 150, 152-56, 90 S.Ct. 827, 25 L.Ed.2d 184 (1970).

The same congressional concern to grant rights of judicial review to competitors is present when challenge is made to a decision of the Federal Reserve's Board of Governors. Section 9 of the Bank Holding Company Act provides that "(a)ny party aggrieved by an order of the Board" is entitled to judicial review thereof. 12 U.S.C. § 1848. Congress unambiguously demonstrated its intent that standing be liberally granted in a 1970 amendment to the Act that further defined the class of parties aggrieved to include those who would become competitors as a result of a bank holding company's entering a nonbanking business pursuant to order of the Board. 12 U.S.C. § 1850. As noted in the Conference Committee Report to the 1970 Amendments, the purpose of...