National Ass'n of Sec. Deal., Inc. v. SECURITIES & EXCH. COM'N

• Decision Date: 01 July 1969
• Docket Number: 21662.,No. 20164,21661,20164
• Parties: NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent, First National City Bank, Intervenor. FIRST NATIONAL CITY BANK, Appellant, v. INVESTMENT COMPANY INSTITUTE et al., Appellees. COMPTROLLER OF the CURRENCY, William B. Camp, Appellant, v. INVESTMENT COMPANY INSTITUTE et al., Appellees.
• Court: U.S. Court of Appeals — District of Columbia Circuit

420 F.2d 83 (1969)

NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent, First National City Bank, Intervenor.

FIRST NATIONAL CITY BANK, Appellant, v. INVESTMENT COMPANY INSTITUTE et al., Appellees. COMPTROLLER OF the CURRENCY, William B. Camp, Appellant, v. INVESTMENT COMPANY INSTITUTE et al., Appellees.

Nos. 20164, 21661, 21662.

United States Court of Appeals District of Columbia Circuit.

Argued January 4, 1967.

Argued November 27, 1968.

Decided July 1, 1969.

Petitions for Rehearing Denied August 15, 1969.

Certiorari Granted March 23, 1970.

Mr. Joseph B. Levin, with whom Mr. Marc A. White, Washington, D. C., was on the brief, for petitioner in No. 20,164.

Mr. Archibald Cox, Washington, D. C., with whom Mr. Stephen Ailes, Washington, D. C., was on the brief for appellant in No. 21,661.

Mr. Alan S. Rosenthal, Atty., Department of Justice, with whom Asst. Atty. Gen. Edwin L. Weisl, Jr., Messrs. David G. Bress, U. S. Atty. at the time the brief was filed, and Robert C. McDiarmid, Atty., Department of Justice, were on the brief, for appellant in No. 21,662. Mr. Irwin Goldbloom, Atty., Department of Justice, also entered an appearance for appellant in No. 21,662.

Mr. John A. Dudley, Asst. Director, Division of Corporate Regulation, Securities and Exchange Commission, with whom Messrs. Philip A. Loomis, General Counsel, David Ferber, Solicitor, and Leonard S. Machtinger, Atty., Securities and Exchange Commission, were on the brief, for respondent in No. 20,164.

Mr. G. Duane Vieth, with whom Mr. Charles R. Halpern, Washington, D. C., was on the brief, for appellees in Nos. 21,661 and 21,662. Mr. Melvin Spaeth also entered an appearance for appellees in Nos. 21,661 and 21,662.

Mr. Samuel E. Gates, New York City, with whom Mr. Stephen Ailes, Washington, D. C., was on the brief, for intervenor in No. 20,164. Mr. Henry C. Ikenberry, Jr., Washington, D. C., also entered an appearance for intervenor in No. 20,164.

Before BAZELON, Chief Judge, WILBUR K. MILLER, Senior Circuit Judge, and BURGER, Circuit Judge.

No. 20164 Argued January 4, 1967.

Nos. 21661-2 Argued November 27, 1968.

Certiorari Granted March 23, 1970. See 90 S.Ct. 1114.

PER CURIAM:^*

In these appeals the mutual fund industry levels a two-pronged attack on a national bank's authority to operate a collective investment fund as a service of its trust department. The fund is a commingled managing agency account, similar in most respects to an open-end mutual fund. First National City Bank's Commingled Investment Account (the Account) and other bank-sponsored funds likely to follow will compete with mutual funds and with those who market their shares. Competitors claiming that the Account is unlawful are the Investment Company Institute (ICI), an association of mutual funds and their investment advisers and underwriters; and the National Association of Securities Dealers (NASD), whose members sell shares in open and closed-end mutual funds.

The Account was registered with the Securities and Exchange Commission as an investment company under the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq., and approved by the Comptroller of the Currency as a bona fide fiduciary activity authorized for national banks by § 92a of the Federal Reserve Act of 1913, 12 U.S.C. § 92a. The NASD intervened before the Securities and Exchange Commission to oppose the grant to the Account of exemptions from certain provisions of the Investment Company Act, and now seeks to set aside the Commission's orders granting them.¹ The ICI sued the Comptroller of the Currency and First National City Bank (the Bank) in the United States District Court for the District of Columbia for a declaratory judgment invalidating so much of the Comptroller's Regulation 9, 12 C.F.R. § 9.18, as permits national banks to operate this type of account. Upon cross-motions for summary judgment, the District Court invalidated portions of the regulation and required the Comptroller to rescind approval of the Account. Investment Company Institute v. Camp, 274 F.Supp. 624 (1967). From that judgment, the Comptroller and the Bank appeal.

Each appeal raises difficult questions of competitors' standing. While a majority of the court has reservations about standing, these doubts have been resolved in favor of reaching the merits in cases of this consequence. On the merits, we are agreed that the actions taken by the Securities and Exchange Commission and the Comptroller are fully consonant with the statutes committed to their regulatory jurisdictions. Accordingly, we affirm the orders of the Securities and Exchange Commission and reverse on the merits the judgment of the District Court in favor of the Investment Company Institute. It is so ordered.

The opinion of Judge BURGER, in which Judge MILLER concurs, and the opinion of Chief Judge BAZELON, which follow, set forth the reasons for our action:

BAZELON, Chief Judge (concurring):

First National City Bank's plan to operate a collective investment fund has generated complex and controversial issues for resolution by the Comptroller of the Currency and the Securities and Exchange Commission. Because this innovation in banking will create massive competition for the mutual fund industry, its members have brought the dispute to court. For the reasons stated at the conclusion of this opinion, I believe that representatives of the mutual fund industry have standing to adjudicate the important legal questions aired at length before the administrative agencies.

On the merits, the cases together present an interplay of administrative decisions designed to serve different but complementary regulatory aims. The Bank's plan straddles two sets of statutes. The result is a complicated, if sometimes awkward, accommodation of the requirements of each. Petitioners below claim that this accommodation compromises the vital protection to investors and bank customers afforded by the securities and banking laws, and creates a dangerous blend of securities dealing and commercial banking. From an analysis of the relevant statutes and their legislative history, I conclude that the Account, subject to the mutually reinforcing regulations imposed by the Comptroller and the Commission, was established in accordance with law.

I INTRODUCTION

Since 1962, the Comptroller has exercised authority under § 92a of the Federal Reserve Act to grant national banks, by special permit, the authority to exercise trust and other fiduciary powers,¹ namely:

* * * to act as trustee, executor, administrator, registrar of stocks and bonds, guardian of estates, assignee, receiver, committee of estates of lunatics, or in any other fiduciary capacity in which State banks, trust companies, or other corporations which come into competition with national banks are permitted to act under the laws of the State in which the national bank is located.

Section 92a (j) authorizes the Comptroller to issue such rules as he deems necessary to enforce the proper exercise of those powers. In April 1963 the Comptroller issued revised Regulation 9, 12 C.F.R. § 9.18, which authorized for the first time the commingling of managing agency accounts under national banks' fiduciary powers.

The background of Regulation 9 needs brief mention. Since the thirties, banks have been authorized to act as managing agents to purchase and sell stock for a single principal, 1934 Fed.Reserve Bull. 609, but the cost of bank management made it prohibitive to offer this service to investors without very substantial assets. For example, the Bank's minimum for an individual managing agency account is $200,000. Prior to 1963, national banks were authorized by the Federal Reserve Board to commingle and invest customers' funds only if held in its capacities as trustee, executor, administrator, or guardian, and funds held as part of a tax-exempt pension and profit sharing or stock bonus plan of employers for the benefit of employees. Regulation F, 12 C.F.R. § 206 (1959 Rev.). The Federal Reserve Board, moreover, had consistently taken the view that common trust funds should not be used as a medium to attract customers primarily seeking investment management of their funds.² After the responsibility for regulating bank trust powers was transferred to the Comptroller, that office concluded, after study, that existing regulations should be broadened to extend the advantages of collective investment to managing agency accounts.

The Bank proposed the establishment of a commingled managing agency account pursuant to the revised regulation.³ Under the Bank's plan, a customer deposits a minimum of $10,000 under a broad authorization permitting the Bank to invest the funds with those of other participants in the plan. The customer is a principal, and the Bank, his managing agent. The customer receives an undivided interest in the fund, expressed as a "unit of participation." These units are redeemable at net asset value, and are not transferable except to other participants in the plan. No sales load or redemption charge can be imposed.

The Account is registered as an investment company under the Investment Company Act, and the units of participation are registered as securities under the Securities Act of 1933, 15 U.S.C. § 77a et seq. (1964). The Bank is both investment adviser to the Account and statutory underwriter for the units of participation issued. The Account is subject to a Committee with the powers of a board of directors, whose members are elected annually by the participants. The Bank sought and received exemptions from provisions in the Investment Company Act which would have required that a majority of the Committee be unaffiliated with the Bank. The Securities and Exchange Commission required that at least two of the five Committee members must be persons unaffiliated with the Bank, but the other three will normally be officers of its Trust and Investment Division...