New York Stock Exchange v. Bloom

• Decision Date: 31 August 1977
• Docket Number: No. 76-1235,76-1235
• Citation: 562 F.2d 736,183 U.S.App.D.C. 217
• Parties: NEW YORK STOCK EXCHANGE, INC. and Investment Company Institute, Appellants, v. Robert BLOOM, Acting Comptroller of the Currency.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 736

562 F.2d 736

183 U.S.App.D.C. 217

NEW YORK STOCK EXCHANGE, INC. and Investment Company Institute, Appellants, v. Robert BLOOM, Acting Comptroller of the Currency.

No. 76-1235.

United States Court of Appeals District of Columbia Circuit.

Argued May 4, 1977.

Decided July 19, 1977.

Rehearing Denied Aug. 31, 1977.

John E. Nolan, Jr., Washington, D. C., with whom James L. Wolf, G. Duane Vieth and James W. Jones, Washington, D. C., were on the brief, for appellants.

Harry Silver, Atty., Dept. of Justice, Washington, D. C., for appellee. Barbara Allen Babcock, Asst. Atty. Gen. and Ronald R. Glancz, Atty., Dept. of Justice, Washington, D. C., were on the brief, for appellee. Michael H. Stein and Donald Etra, Attys. for Dept. of Justice, Washington, D. C., also entered appearances for appellee.

John M. Liftin and George C. Smith, Washington, D. C., filed a brief on behalf of the Securities Industry Association as amicus curiae urging reversal.

Before WRIGHT, McGOWAN and TAMM, Circuit Judges.

Opinion for the Court filed by Circuit Judge, McGOWAN.

Concurring Opinion filed by Circuit Judge, WRIGHT.

McGOWAN, Circuit Judge:

Appellants New York Stock Exchange, Inc. (NYSE) and Investment Company Institute (ICI) sued in the District Court for declaratory and injunctive relief against two informal expressions of opinion by the Comptroller of the Currency to Security Pacific National Bank (Security Pacific) that the latter's proposed automatic stock purchasing service would not violate sections 16 and 21 of the Banking Act of 1933 (the Glass-Steagall Act), 12 U.S.C. §§ 24, 378 (1970). The District Court granted summary judgment on the merits in favor of the Comptroller, after rejecting his threshold contentions that the actions in question were not ripe for review, and that appellant lacked standing and had failed to join indispensable parties. New York Stock Exchange, Inc. v. Smith, 404 F.Supp. 1091 (D.D.C.1975). We find the challenged opinions to be unripe for judicial scrutiny.

I

Sections 16 and 21 of the Glass-Steagall Act impose strict limitations on the authority of banks to purchase, sell, issue, underwrite, distribute, or otherwise deal in stocks and securities. Section 16 provides in pertinent part:

The business of dealing in securities and stock by (a national banking) association shall be limited to purchasing and selling such securities and stock without recourse, solely upon the order, and for the account of, customers, and in no case for its own account, and the association shall not underwrite any issue of securities or stock: Provided, That the association may purchase for its own account investment securities under such limitations and restrictions as the Comptroller of the Currency may by regulation prescribe.

12 U.S.C. § 24(7) (1970). And section 21 specifies:

(a) . . . it shall be unlawful

(1) For any person, firm, corporation, association, business trust, or other similar organization, engaged in the business of issuing, underwriting, selling, or distributing, at wholesale or retail, or through syndicate participation, stocks, bonds, debentures, notes, or other securities, to engage at the same time to any extent whatever in the business of (deposit banking): Provided, That the provisions of this paragraph shall not prohibit national banks . . . from dealing in, underwriting, purchasing, and selling investment securities to the extent permitted . . . by the provisions of section 24 of this title . . . .

Id. § 378(a)(1).

On February 12, 1973, Security Pacific wrote to the Comptroller, requesting his opinion as to whether the "Automatic Investment Service" (AIS) which the bank was proposing to establish would be consistent with sections 16 and 21 of the Glass-Steagall Act. As described in Security Pacific's letter, AIS would permit the bank's checking account customers to invest, through regular monthly deductions from their accounts, in stocks individually selected by the customers from a list of the twenty-five corporations on Standard & Poor's 425 Industrial Index having the highest aggregate market value of outstanding stock. For each stock selected, the customer would be required to authorize an automatic monthly deduction of between $20 and $500, to be invested each month until the customer terminated his participation in the plan.

The proposed method for purchasing and holding shares was described by Security Pacific as follows:

Those electing to purchase stock will have their monthly deductions pooled with money of all others acquiring the same stock under the Service. Periodically, but not less frequently than once every month, the Bank will establish a cut-off date and promptly thereafter will acquire shares of each of the common stocks with all funds available, after deducting the service charge. ¹ The funds will include any dividends that have been received by the Bank on full and fractional shares that it, or its nominee, is holding in safekeeping for users of the Service.

The time between any cut-off date and the subsequent completion by the Bank of the acquisition of shares of common stock with funds obtained prior to the cut-off date will hereinafter be referred to as an "Acquisition Interval". Such Acquisition Interval shall not exceed thirty days. The price per share (including fractional shares) that will be charged each person who acquires shares of a stock during any particular Acquisition Interval will be the average price (including brokerage costs) paid by the Bank for all shares of that stock purchased by it under the Service during that Acquisition Interval. All the shares acquired under the Service will be held in the Bank's name or in the name of its nominee but the Bank will deliver, upon request, certificates representing whole shares to the owner.

Although the stock would be held in the name of the bank, each customer would have the right to vote the number of shares purchased on his behalf, and any customer wishing to withdraw from the Service would have a choice of receiving stock certificates representing the number of shares beneficially owned by him, or their cash value. The bank would have the power to "cross" sales made on behalf of customers withdrawing from the program with purchases for the account of continuing participants, thus saving the cost of brokerage.

On February 27, 1973, the Comptroller sent a brief letter to Security Pacific's counsel, responding to the February 12 inquiry. The letter stated, without any supporting analysis, the Comptroller's opinion that AIS, as set forth in Security Pacific's letter,

(1) Involves only purchases for the account of customers and not for the bank's own account; (2) That the bank in creating and managing the Service is not engaged in the business of issuing, underwriting, selling or distributing securities; and (3) That the operation of the Service by the bank is consistent with the provisions of section(s) 24 and 378 of Title 12, of the United States Code.

Learning of the existence of this letter, ICI a national association of mutual funds, and their investment advisers and principal underwriters wrote a letter and supporting memorandum, dated August 15, 1973, requesting the Comptroller to reconsider the position he had taken in his letter to Security Pacific. A similar request was filed by NYSE on September 7, 1973.

Citing interpretative rulings issued by the Comptroller's Office in the years immediately following enactment of the Glass-Steagall Act, both groups argued that the Act allows banks to purchase stocks only for pre-existing customers as a non-profit courtesy service; AIS which they characterized as a profit-oriented activity utilizing extensive advertising to attract new customers to the bank clearly would go beyond this domain. Appellants asserted, further, that AIS would present the same hazards which the Supreme Court identified in Investment Company Institute v. Camp, 401 U.S. 617, 636-38, 91 S.Ct. 1091, 28 L.Ed.2d 367 (1971), in support of its holding that operation of a collective investment fund involves a bank in activities which violate sections 16 and 21 of the Glass-Steagall Act. According to appellants, AIS like operation of a collective investment fund would "give rise to a promotional or salesman's stake in a particular investment," which "might distort its credit decisions or lead to unsound loans to the companies" whose stock has been purchased through AIS; "involve (the bank) in direct competition with aggressively promoted funds offered by other investment companies"; and "impair the bank's ability to give disinterested service as a fiduciary or managing agent." Id. at 637-38, 91 S.Ct. at 1102; see id. at 636-38, 91 S.Ct. 1091.

Upon receipt of ICI's request for reconsideration of the advisory opinion expressed in the February 27, 1973 letter to Security National, the Deputy Chief Counsel for the Office of the Comptroller wrote to respective counsel for Security Pacific, Chase Manhattan Bank (which ICI's letter had identified as a bank then providing a service virtually identical to AIS), and Investment Data Corporation (the firm which developed AIS), informing them of ICI's letter and inviting them to submit any comments which they desired to Comptroller to consider in connection with that letter. A memorandum supporting the February 27 ruling was submitted by counsel for Security Pacific, on behalf of Security Pacific and Investment Data Corporation; and opposing memoranda were submitted by ICI and NYSE.

On June 10, 1974, the Comptroller sent a letter to counsel for ICI, reaffirming his opinion that AIS is consistent with the Glass-Steagall Act. In contrast to the February 27, 1973 ruling, this letter contained a more extensive analysis of the underlying issues. The Comptroller noted, first, that AIS falls within the plain language of section 16, inasmuch as the service consists only of purchases and sales of stock upon the order, and for the account, of...