Securities Industries Ass'n v. Clarke, 87 Civ. 4504 (KTD).

• Citation: 703 F. Supp. 256
• Decision Date: 19 December 1988
• Docket Number: No. 87 Civ. 4504 (KTD).,87 Civ. 4504 (KTD).
• Parties: SECURITIES INDUSTRIES ASSOCIATION, Plaintiff, v. Robert L. CLARKE and Office of the Comptroller of the Currency, Defendants, and Security Pacific National Bank, Intervenor-Defendant.
• Court: U.S. District Court — Southern District of New York

703 F. Supp. 256

SECURITIES INDUSTRIES ASSOCIATION, Plaintiff, v. Robert L. CLARKE and Office of the Comptroller of the Currency, Defendants and Security Pacific National Bank, Intervenor-Defendant.

No. 87 Civ. 4504 (KTD).

United States District Court, S.D. New York.

December 19, 1988.

Rogers & Wells, New York City (James B. Weidner, David A. Schulz, Mark Holland, Peter Kimm, Jr., of counsel), for plaintiff.

Rudolph W. Giuliani, U.S. Atty., S.D. N.Y., New York City (Steven E. Obus, Asst. U.S. Atty., Eugene M. Katz, L. Robert Griffin, Rosa M. Koppel, Office of the Comptroller of the Currency, of counsel), for defendants.

Cleary, Gottlieb, Steen & Hamilton, New York City (Robert L. Tortoriello, Richard F. Ziegler, of counsel), Cleary, Gottlieb, Steen & Hamilton, Washington, D.C. (Kenneth L. Bachman, Mitchell S. Dupler, Matthew D. Slater, of counsel) and Security Pacific National Bank, Los Angeles, Cal. (Russell A. Freeman, Maurice K. DeWolff, Dan C. Aardal, of counsel), for intervenor-defendant.

Davis Polk & Wardwell, New York City (Robert B. Fiske, Jr., Bruce W. Nichols, of counsel), for New York Clearing House Ass'n, amicus curiae.

MEMORANDUM & ORDER

KEVIN THOMAS DUFFY, District Judge:

This action is an appeal from a decision of Robert L. Clarke, Comptroller of the Currency ("the Comptroller") interpreting the Glass-Steagall Banking Act of 1933, Pub.L. No. 73-66, 48 Stat. 162 (codified as amended in scattered sections of 12 U.S.C.) ("the Act"). Defendant Comptroller and intervenor defendant Security Pacific National Bank ("SPN Bank") move for dismissal pursuant to Fed.R.Civ.P. 12(b)(1) or, in the alternative, for summary judgment pursuant to Fed.R.Civ.P. 56. The Comptroller also moves for dismissal pursuant to Fed.R.Civ.P. 8(c). New York Clearing House Association supports defendants' motions as amicus curiae. Plaintiff Securities Industry Association ("SIA") cross-moves for summary judgment pursuant to Fed.R.Civ.P. 56. For the following reasons SIA's motion for summary judgment is granted.

FACTS

In 1987 SPN Bank issued a prospectus and prospectus supplement describing a public offering of shares of private mortgage-backed pass-through certificates. The certificates, registered with the Securities Exchange Commission, represent an undivided percentage ownership in a trust that, in turn, represents a set pool of SPN Bank's conventional mortgage receivables. Once a group of mortgages are designated to a pool, the pool is fixed and the assignment to the pool trust is without recourse against SPN Bank. A separate bank serves as the pool trustee. The trust receives the principal and interest payments as they come due and will "pass-through" that income to the certificate holders. SPN Bank will service the individual mortgage loans held by the trust and distribute the monthly payments of income and principal, less a service charge earned by the bank, to the certificate holders.

Limited credit support for the certificates may be provided through one or more of the following: a SPN Bank standby letter of credit not to exceed ten percent of the initial principal balance of the pool, a limited guarantee by an entity other than SPN Bank, and third-party mortgage insurance on the lives of the borrowers obtained by SPN Bank. The remaining risks of nonpayment of the mortgage loans are to be borne by the certificate holders. SPN Bank retains none of the risks associated with the underlying mortgages except where it provides its own letter of credit. Neither the certificates nor the underlying mortgage loans are insured or guaranteed by the Federal Deposit Insurance Corporation.

An underwriting agreement for the certificates was entered into between Kidder, Peabody & Co. ("Kidder") and SPN Bank. Under this agreement, SPN Bank will sell a portion of the certificates to the public, with the remainder to be sold by underwriters. Affidavit of M. Sava B. Thomas in Support of Defendants' Motion to Dismiss or in the Alternative for Summary Judgment ("Thomas Aff."), ¶ 9. The Prospectus Supplement also provides that both Kidder and SPN Bank will be underwriters for the certificates and "may, from time to time, buy and sell" the SPN Bank mortgage-backed certificates. Thomas Aff., Exh. A at S-7.

SIA is a trade association representing securities brokerage and investment banking organizations. Kidder is a member of SIA. SIA alleges that the form of SPN Bank's offering violates the national banking laws and that, by approving the offering, the Comptroller has permitted SPN Bank to violate those laws and to compete with and injure SIA's members.

The Comptroller's Decision

In April 1987 SIA wrote to the Comptroller requesting review of the legality of SPN Bank's offering. In an opinion letter dated June 16, 1987, ("SPN Bank Letter") the Comptroller found that SPN Bank's offering does not violate the national banking laws. The Comptroller's opinion is based, in essence, on the conclusion that "the transaction in question, represents nothing more than the ... sale of bank assets." SPN Bank Letter at 6.

The SPN Bank Letter notes initially that the SPN Bank offering is substantially similar in form to mortgage asset sales devices used by other banks and approved by the Comptroller since the mid-1970's. Focusing on the sale of the SPN Bank's mortgages rather than the securities form of the offering, the Comptroller determines both that the transaction underlying the SPN Bank sales device is expressly permitted by the national banking laws and that the sales device designed by SPN Bank is not prohibited by the Glass-Steagall Act.

Express permission for a national bank's sale of its mortgage assets is found in such bank's: (1) statutory authority to carry on the business of banking such as negotiating promissory notes and other evidences of debt, (2) statutory authority to make and sell mortgage loans, and (3) legal incidents of ownership in general. SPN Bank Letter at 6-7 (quoting, respectively, 12 U.S.C. §§ 24 (Seventh); 12 U.S.C. § 371(a); Blacks Law Dictionary 997 (rev. 5th ed.1979)). In this context, the Comptroller emphasizes that the specific positive effects on the banking industry that are served by allowing a bank to sell its mortgage assets, especially important given the current troubled condition of the banking industry and the national economy, include both liquidity of the bank's mortgage portfolio and management of maturity mismatch problems. SPN Bank Letter at 7.

Concluding that national banks have the authority to sell their mortgage assets, the Comptroller finds that the issuance of mortgage-backed certificates is a permissible means of accomplishing such a sale. SPN Bank Letter at 7. This conclusion is unchanged under the Comptroller's analysis of the certificate form as either a "new way" of performing a permitted bank activity or as an activity authorized as an incidental banking power. If the certificates fit in the former category, then the Comptroller finds that there is no need for separate authorization of the form. SPN Bank Letter at 7-8. If the certificates fit in the latter category, then the Comptroller finds that the form is authorized under even the most restrictive test enunciated by the courts. SPN Bank Letter at 9.

Although the Comptroller's analysis could end at this point, having determined that the offering of mortgage-backed securities is within SPN Bank's power under the national banking laws, the Comptroller further concludes that the certificates are not prohibited by the Glass-Steagall Act. This decision is based on the Comptroller's finding that the SPN Bank certificates are not within the definition of "securities" under the Glass-Steagall Act because, unlike mutual funds, the pooling of the underlying mortgages does not alter the fact that ownership of the certificates is substantially the same as owning those mortgages. Thus, the SPN Bank certificates are viewed by the Comptroller as assets that a bank may market, comparable to individual retirement fund assets ("IRAs") rather than to participation units in a collective fund for managed agency accounts. SPN Bank Letter at 10-11.

Even if the certificates are somehow determined to be securities, the Comptroller finds that the Glass-Steagall Act prohibitions, specifically §§ 16 and 21, remain inapplicable because SPN Bank is not an "underwriter." This finding is based on the determination that SPN Bank is selling its own assets rather than those of another issuer and that its power to issue its own securities encompasses the power to distribute and sell those securities to the public. SPN Bank Letter at 12-18.

Finally, the Comptroller finds that SPN Bank's program does not raise any of the hazards that the Glass-Steagall Act was intended to prevent because there is no danger of SPN Bank investing in speculative securities and there is no risk of SPN Bank's promotional interests interfering with its ability to act as an impartial source of credit or to render disinterested investment advice. The Comptroller supported this determination with the specific findings that: SPN Bank has no promotional interest in customer's securities and therefore no temptation to make unsound loans to influence the success of the offering; there is no possibility that SPN Bank would improperly advise a customer to profit from the distribution process or to use the proceeds to obtain repayment on outstanding loans; the possibility that the bank will retain ten percent of the risk is insufficient to cause unsound lending practices; SPN Bank's mortgage lending practice will not be affected; SPN Bank is unlikely to make unsound loans to deposit customers to encourage purchase of the certificates; and there is no risk that SPN Bank's reputation will suffer as a result of its identification with the certificates. SPN Bank Letter at 18-20.

DISCUSSION

In reviewing an administrative agency's interpretation of a statute that is within the agency's...