Investment Co. Institute v. Federal Deposit Ins. Corp., s. 84-1616

• Decision Date: 07 April 1987
• Docket Number: Nos. 84-1616,85-5769,s. 84-1616
• Citation: 815 F.2d 1540
• Parties: , 55 USLW 2554, Fed. Sec. L. Rep. P 93,063, Fed. Sec. L. Rep. P 93,197 INVESTMENT COMPANY INSTITUTE and Securities Industry Association, Petitioners, v. FEDERAL DEPOSIT INSURANCE CORPORATION, et al., Respondents. INVESTMENT COMPANY INSTITUTE, et al., Appellants, v. FEDERAL DEPOSIT INSURANCE CORPORATION, et al.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1540

815 F.2d 1540

259 U.S.App.D.C. 339, 55 USLW 2554, Fed.

Sec. L. Rep. P 93,063,

Fed. Sec. L. Rep. P 93,197

INVESTMENT COMPANY INSTITUTE and Securities Industry

Association, Petitioners, v. FEDERAL DEPOSIT INSURANCE CORPORATION, et al., Respondents.

INVESTMENT COMPANY INSTITUTE, et al., Appellants, v. FEDERAL DEPOSIT INSURANCE CORPORATION, et al.

Nos. 84-1616, 85-5769.

United States Court of Appeals District of Columbia Circuit.

Argued April 18, 1986.

Decided April 7, 1987.

Petition for Review of an Order of the Federal Deposit Insurance Corp. and Appeal from the United States District Court for the District of Columbia (D.C. Civil Action No. 84-3875).

Harvey L. Pitt, Washington, D.C., with whom Henry A. Hubschman and David M. Miles, Washington, D.C., were on the brief, for petitioners in No. 84-1616 and appellants in No. 85-5769.

Theodore C. Hirt, Atty., Dept. of Justice, Washington, D.C., with whom Richard K. Willard, Asst. Atty. Gen., Joseph E. diGenova, U.S. Atty., John C. Murphy, Jr., Gen. Counsel, Federal Deposit Ins. Corp., Ronald Glancz, Asst. Gen., Counsel, Federal Deposit Ins. Corp., and Anthony J. Steinmeyer, Atty., Dept. of Justice, Washington, D.C., were on the brief, for respondents in No. 84-1616 and appellees in No. 85-5769.

Michael S. Helfer, Washington, D.C., was on the brief for amicus curiae Dealer Bank Ass'n, urging affirmance.

John T. Gill, III, Johanna M. Sabol, and Michael F. Crotty, Washington, D.C., were on the brief for amicus curiae American Bankers Ass'n, urging affirmance.

Before STARR and SILBERMAN, Circuit Judges, and WRIGHT, Senior circuit judge.

Opinion for the court per curiam.

PER CURIAM:

Petitioners/appellants Investment Company Institute (ICI) and Securities Industry Association (SIA) challenge regulations of the Federal Deposit Insurance Corporation (FDIC) governing the activities of insured banks that are not members of the Federal Reserve System. Petitioners principally argue that insofar as FDIC regulations allow nonmember insured banks to have subsidiary or affiliate relationships with firms engaged in securities work, those regulations violate the command of Sec. 21 of the Banking Act of 1933 (Glass-Steagall Act), 12 U.S.C. Sec. 378 (1982), that securities firms shall not engage in receiving deposits "to any extent whatever." We cannot agree. The clear language of the Glass-Steagall Act demonstrates that Congress intended to differentiate between the activities of banks and the activities of banks' subsidiaries and affiliates. As we see no provision in the Act, including Sec. 21, that prohibits subsidiaries or affiliates of nonmember insured banks from engaging in securities work, and because we find unmeritorious petitioners' arguments under Secs. 2 and 2 of the Federal Deposit Insurance Act, 12 U.S.C. Secs. 1816, 1818 (1982), we affirm the District Court's grant of summary judgment for the defendants, see ICI v. FDIC, 606 F.Supp. 683 (D.D.C.1985), and dismiss the petition for review of the regulation.

I. BACKGROUND

Federal regulation effectively divides the United States commercial banking community into three major categories. ¹ Banks that choose to become members of the Federal Reserve System fall under the jurisdiction of the Board of Governors of the Federal Reserve System. See 12 U.S.C. Secs. 221, 248 (1982). National banks come within the jurisdiction of the Comptroller of the Currency. See id. Finally, insured state banks that are not members of the Federal Reserve System operate under the watchful eye of the FDIC. See id. Secs. 1811, 1815. Although the FDIC insures the deposits of all three categories, id. Sec. 1811, it regulates directly only the third group. See generally id. Sec. 1815. The Glass-Steagall Act seeks to draw a sharp line between the activities of these three categories of commercial banks and the activities of investment banks and other securities firms. Id. Secs. 24, 78, 377, 378; Board of Governors v. Investment Company Institute, 450 U.S. 46, 63, 101 S.Ct. 973, 985, 67 L.Ed.2d 36 (1981) ("Board of Governors ").

This case explores the periphery of the separation of the banking and securities industries mandated by the Glass-Steagall Act. As the condition and character of the two industries have shifted over the past fifty years, the separation policy has shifted as well. Its changing shape has promoted particularly significant and protracted litigation in recent years, see, e.g., Securities Industry Ass'n v. Board of Governors, 468 U.S. 137, 104 S.Ct. 2979, 82 L.Ed.2d 107 (1984) ("Becker ") (commercial paper is a security under the Glass-Steagall Act); Securities Industry Ass'n v. Board of Governors, 468 U.S. 207, 104 S.Ct. 3003, 82 L.Ed.2d 158 (1984) ("Schwab ") (Board may allow bank holding company to acquire affiliate engaged in securities brokerage); Securities Industry Ass'n v. Board of Governors, 807 F.2d 1052, 1058 (D.C.Cir.1986) (Board may allow banks to sell third-party commercial paper), and has prompted this court to call upon Congress to clarify its precise contours. American Bankers Ass'n v. SEC, 804 F.2d 739, 755-56 (D.C.Cir.1986) (SEC has no authority to regulate securities activities of banks).

The specific issue presented here is the extent to which Congress intended to bar subsidiaries and affiliates of insured nonmember banks from engaging in the securities business. In September 1982 the FDIC published in the Federal Register a policy statement that found the Glass-Steagall Act "does not prohibit an insured nonmember bank from establishing an affiliate relationship with or organizing or acquiring a subsidiary corporation that engages in the business of issuing, underwriting, selling, or distributing stocks, bonds, debentures, notes, or other securities." 49 Fed.Reg. 46709 (Nov. 28, 1984). See 47 Fed.Reg. 38984 (Sept. 3, 1982). The FDIC did note, however, that the securities activities of such affiliates or subsidiaries might raise questions of "unsafe or unsound banking practices" and practices not "consistent with the purposes of" deposit insurance under Secs. 2 and 2 of the Federal Insurance Act (FDIA), 12 U.S.C. Secs. 1816, 1818 (1982). Id. ²

In November 1984, after notice and comment proceedings, the FDIC adopted a final rule regulating the securities activities of affiliates and subsidiaries of insured nonmember banks under Secs. 2 and 2 of the FDIA. 49 Fed.Reg. 46709 (Nov. 28, 1984), regulations codified at 12 C.F.R. Sec. 337.4 (1986). Although the rule does not prohibit such securities activities outright, it does restrict that activity in a number of ways. Banks may only maintain "bona fide" subsidiaries that engage in securities work. The rule defines "bona fide subsidiary" so as to limit the extent to which banks and their securities affiliates and subsidiaries may share company names or logos, as well as places of business. 12 C.F.R. Sec. 337.4(a)(2)(ii), (iii); 49 Fed.Reg. at 46710. The definition also requires banks and subsidiaries to maintain separate accounting records and to observe separate corporate formalities. 12 C.F.R. Sec. 337.4(a)(2)(iv), (v). The two entities cannot share officers, and must conduct business pursuant to independent policies and procedures, including the maintenance of separate employees and payrolls. Id. Sec. 337.4(a)(2)(vi), (vii), (viii); 49 Fed.Reg. at 46711-12. Finally, and perhaps most importantly, the rule requires a subsidiary to be "adequately capitalized." 12 C.F.R. Sec. 337.4(a)(2)(i).

Petitioners Investment Company Institute and Securities Industry Association, representing mutual fund companies and investment bankers, simultaneously filed a petition for review in this court and an action to enjoin the regulation in the United States District Court for the District of Columbia. They argue that the rule violates Sec. 21 of the Glass-Steagall Act, 12 U.S.C. Sec. 378 (1982), and Secs. 2 and 2 of the Federal Deposit Insurance Act. 12 U.S.C. Secs. 1816, 1818 (1982). We stayed our proceedings until the District Court had ruled on the matter. Order of February 19, 1985. District Judge Gesell, on cross-motions for summary judgment, upheld the FDIC's regulations and dismissed the ICI and SIA action. ICI v. FDIC, 606 F.Supp. 683 (D.D.C.1985). We consider now both the appeal from that judgment (No. 85-5769), and the original petition for review of the FDIC rule (No. 84-1616).

II. PETITIONERS' STANDING UNDER THE GLASS-STEAGALL ACT AND THE FEDERAL DEPOSIT INSURANCE ACT

Before we address the merits of petitioners' challenge, we must examine the standing of securities industry plaintiffs to challenge the FDIC rule at issue. At the outset, we note that petitioners have shown sufficient "injury in fact" from these regulations for standing purposes. The FDIC will deal petitioners competitive injury by allowing insured nonmember banks to enter the securities field indirectly through subsidiaries and affiliates. See, e.g., Hardin v. Kentucky Utilities Co., 390 U.S. 1, 6, 88 S.Ct. 651, 654, 19 L.Ed.2d 787 (1967); Chicago Junction Case, 264 U.S. 258, 44 S.Ct. 317, 68 L.Ed.2d 667 (1924); see also ICI v. FDIC, 606 F.Supp. at 684 (FDIC regulation "plainly threatens" economic injury to securities firms).

But the standing inquiry, of course, does not end with "injury in fact." Competitive injury alone does not confer standing. Hardin, 390 U.S. at 5-6, 88 S.Ct. at 654-55. Once we find such injury, we must turn to the "prudential" or "zone of interests" standing test enunciated by the Supreme Court in Association of Data Processing Services v. Camp, 397 U.S. 150, 153, 90 S.Ct. 827, 830, 25 L.Ed.2d 184 (1970). If the interest the petitioner seeks to protect is "arguably within the zone of interests to be protected or regulated by the statute or constitutional guarantee in question," petitioner has standing.

The Supreme Court recently clarified the meaning of the "zone of interests" standing test in its opinion in Clarke v. Securities Industry Ass'n, --- U.S. ----...