Securities Industry Ass'n v. Board of Governors of Federal Reserve System

• Decision Date: 07 July 1987
• Docket Number: No. 86-1412,86-1412
• Citation: 821 F.2d 810
• Parties: , 56 USLW 2030, Fed. Sec. L. Rep. P 93,294 SECURITIES INDUSTRY ASSOCIATION, Petitioner, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, et al., Respondents, National Westminster Bank PLC and NatWest Holdings Inc., Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 810

821 F.2d 810

261 U.S.App.D.C. 322, 56 USLW 2030, Fed.

Sec. L. Rep. P 93,294

SECURITIES INDUSTRY ASSOCIATION, Petitioner, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, et al., Respondents, National Westminster Bank PLC and NatWest Holdings Inc., Intervenor.

No. 86-1412.

United States Court of Appeals, District of Columbia Circuit.

Argued March 13, 1987.

Decided July 7, 1987.

James B. Weidner, with whom David A. Schulz and William J. Fitzpatrick, New York City, were on the brief for petitioner.

Richard M. Ashton, Atty., Bd. of Governors of the Federal Reserve System, with whom Richard K. Willard, Asst. Atty. Gen., Dept. of Justice and Kevin J. Handly, Atty., Bd. of Governors of the Federal Reserve System, Washington, D.C., were on the brief for respondents.

Richard F. Ziegler, New York City, for intervenor.

John J. Gill, III and Michael F. Crotty, Washington, D.C., were on the brief for amicus curiae, American Bankers Ass'n, urging affirmance of the Board of Governors' decision.

J. Michael Luttig, McLean, Va., was on the brief for amicus curiae, New York Clearing House Ass'n, urging affirmance of the Bd. of Governors' decision.

Before BORK and SILBERMAN, Circuit Judges, and MARKEY, ^* Chief Judge.

Opinion for the Court filed by Circuit Judge BORK.

BORK, Circuit Judge:

Section 20 of the Glass-Steagall Act ¹ prohibits the affiliation of member banks of the Federal Reserve System with corporations "engaged principally in the issue, flotation, underwriting, public sale, or distribution" of securities. 12 U.S.C. Sec. 377 (1982). The issue here is whether the Board of Governors of the Federal Reserve System reasonably concluded that the combined provision of securities brokerage services and investment advice by a member bank's affiliate does not implicate section 20's prohibition of the "public sale" of securities. We find that the Board's decision is a reasonable interpretation of the language and legislative history of the Act and is consistent with prior precedent. We therefore deny the petition for review.

I.

In August 1985, National Westminster Bank PLC and its subsidiary NatWest Holdings, Inc. (collectively "NatWest") submitted an application to the Board pursuant to section 4(c)(8) of the Bank Holding Company Act of 1956, as amended, 12 U.S.C. Sec. 1843(c)(8) (1982), ² for permission to provide investment advice and securities brokerage services to institutional customers through a newly formed subsidiary, County Services Corporation ("CSC"). ³

As proposed by NatWest, CSC's brokerage services would be restricted to buying and selling securities solely as agent for the account of customers. CSC would execute transactions only at the request of its customers and would not exercise any discretion with respect to a customer's account. Joint Appendix ("J.A.") at 63. CSC would not act as principal or as underwriter and would not bear any financial risk with respect to any security it brokers or recommends. Id. at 102. Generally, CSC would receive all of its compensation, including that for investment advice, in the fees for securities transactions it executes for customers. Id. at 10-11. CSC would charge separate fees for investment advice and brokerage services upon request of a customer. Id. at 11.

NatWest's application also provided that CSC would hold itself out as a corporate entity separate and distinct from NatWest and would have its own assets, liabilities, books and records. J.A. at 12. NatWest and CSC would not share customer or depositor lists or confidential information. Id. ⁴

In an order dated June 13, 1986, the Board approved the application. National Westminster Bank PLC, 72 Fed.Res.Bull. 584 (1986). The Board determined first that CSC's proposed activities are closely related to banking and that the proposal may reasonably be expected to result in public benefits that outweigh possible adverse effects so that the activities are a "proper incident" to banking within the meaning of section 4(c)(8) of the Bank Holding Company Act. Id. at 584-91. The Board then concluded that NatWest's acquisition of CSC would not violate the Glass-Steagall Act because the combination of investment advice and execution services does "not constitute a 'public sale' of securities for purposes of sections 20 and 32 of the ... Act." Id. at 592. ⁵ The Securities Industry Association ("SIA"), a trade association of underwriters, brokers and securities dealers, then petitioned for review of the Board's decision. SIA challenges only the Board's determination that provision of the proposed services would not violate section 20 of the Glass-Steagall Act.

II.

Because the Board engaged in a comprehensive review of the language and legislative history of section 20, and provided a detailed and reasoned explanation for its conclusion that the proposed activities do not fall within that provision's prohibitions, its decision is entitled to "substantial deference." Securities Indus. Ass'n v. Board of Governors of the Fed. Reserve Sys., 807 F.2d 1052, 1056 (D.C.Cir.1986) ("Bankers Trust II "), cert. denied, --- U.S. ----, 107 S.Ct. 3228, 97 L.Ed.2d 734 (1987); see Securities Indus. Ass'n v. Board of Governors of the Fed. Reserve Sys., 468 U.S. 207, 217, 104 S.Ct. 3003, 3009, 82 L.Ed.2d 158 (1984); Board of Governors of the Fed. Reserve Sys. v. Investment Co. Inst., 450 U.S. 46, 56, 101 S.Ct. 973, 981, 67 L.Ed.2d 36 (1981). Since Congress has not addressed the issue of whether the combined provision of brokerage services and investment advice is a "public sale" within the meaning of section 20, we must uphold the Board's interpretation if it is a reasonable construction of the statute. INS v. Cardoza-Fonseca, --- U.S. ----, 107 S.Ct. 1207, 1221-22, 94 L.Ed.2d 434 (1987); Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843-45, 104 S.Ct. 2778, 2781-83, 81 L.Ed.2d 694 (1984); Investment Co. Inst. v. Conover, 790 F.2d 925, 932 (D.C.Cir.1986), cert. denied, --- U.S. ----, 107 S.Ct. 421-22, 93 L.Ed.2d 372 (1986).

In determining the meaning of section 20 of the Act, which prohibits member bank affiliation with any corporation "engaged principally in the issue, flotation, underwriting, public sale, or distribution" of securities, we are not without guidance. In Securities Indus. Ass'n v. Board of Governors of the Fed. Reserve Sys., 468 U.S. 207, 104 S.Ct. 3003, 82 L.Ed.2d 158 (1984) ("Schwab "), the Supreme Court addressed the issue of whether the provision of "discount" brokerage services--the provision of execution services without investment advice--violated section 20 and concluded that the term "public sale" must be read in conjunction with the terms surrounding it. The Court then held that discount brokerage did not fall within the term "public sale":

None of the[ ] terms [in section 20] has any relevance to the brokerage business at issue in this case. Schwab does not engage in issuing or floating the sale of securities, and the terms "underwriting" and "distribution" traditionally apply to a function distinctly different from that of a securities broker. An underwriter normally acts as principal whereas a broker executes orders for the purchase or sale of securities solely as agent.

468 U.S. at 217-18, 104 S.Ct. at 3009 (footnotes omitted). The Court thus upheld the Board's determination that "the business of purchasing or selling securities upon the unsolicited order of, and as agent for, a particular customer does not constitute the 'public sale' of securities for purposes of section 20," id. at 221, 104 S.Ct. at 3011 (internal quotation omitted). The Court did not reach the question presented in this petition of whether the combined provision of brokerage services and investment advice is the "public sale" of securities.

The Court has, however, addressed the question of whether the independent provision of investment advice violates the prohibitions in the Act. In Board of Governors of the Fed. Reserve Sys. v. Investment Co. Inst., 450 U.S. 46, 101 S.Ct. 973, 67 L.Ed.2d 36 (1981) ("ICI "), the Court held that "[t]he management of a customer's investment portfolio--even when the manager has the power to sell securities owned by the customer--is not the kind of selling activity Congress contemplated when it enacted Sec. 21," id. at 63, 101 S.Ct. at 985, because when the advisor acts in this situation it is "for the account of its customer--not for its own account." Id. at 66 n. 37, 101 S.Ct. at 987 n. 37. ⁶

Thus, because the Court has upheld against Glass-Steagall challenges the independent provision of CSC's proposed services, the only issue presented here is whether the combined provision of investment advice and securities brokerage services transforms these separately permissible activities into a "public sale" within the meaning of section 20. The Board concluded that they did not because

[i]n providing investment advice in connection with the execution of securities transactions, CSC would act solely as agent for its customers and would not act as a principal (i.e., with its own funds) in buying and selling securities. CSC would not, like many securities firms, make a market in securities with its own funds. Nor would CSC offer securities to the public as agent for the issuer of securities.

72 Fed.Res.Bull. at 592 (footnote omitted). We believe that this is a reasonable interpretation of the term "public sale" as defined by the Court in Schwab. The addition of investment advice to brokerage activities does not implicate any of the activities which the Schwab Court described as traditionally associated with underwriting.

As was the case in Schwab, CSC will have no relationship with the issuer other than that related to the execution of transactions as agent for the customer. CSC will not purchase the issuer's securities for sale to the public, see Schwab, 468 U.S. at 217-18 n. 17, 104 S.Ct. at 3009 n. 17, but instead will "execute[ ] orders for the purchase...