Securities Industry Ass'n v. Board of Governors of Federal Reserve System, 87-1169
| Decision Date | 27 May 1988 |
| Docket Number | No. 87-1169,87-1169 |
| Citation | 847 F.2d 890 |
| Parties | , 56 USLW 2693, Fed. Sec. L. Rep. P 93,775 SECURITIES INDUSTRY ASSOCIATION, Petitioner, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, et al., Respondents, Chase Manhattan Corp., Intervenor. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
James B. Weidner, with whom David A. Schulz and William J. Fitzpatrick, New York City, were on the brief, for petitioner.
Richard M. Ashton, Associate General Counsel, Board of Governors of the Federal Reserve System, with whom Richard K. Willard, Asst. Atty. Gen., Washington D.C., at the time the brief was filed, was on the brief, for respondents. James A. Michaels, Counsel, Board of Governors of the Federal Reserve System, Washington, D.C., also entered an appearance for respondents.
Richard C. Tufaro and Robert B. Adams, New York City, were on the brief for intervenor. D. Stephen Mathias, Washington, D.C., also entered an appearance for intervenor.
Before EDWARDS, BUCKLEY, and SENTELLE, Circuit Judges.
Opinion for the court filed by Circuit Judge BUCKLEY.
The Securities Industry Association petitions for review of an order of the Board of Governors of the Federal Reserve System. In this latest in a series of cases in which commercial banks have sought to participate in various aspects of the securities business, the Board permitted a commercial bank affiliate to engage to a limited extent in underwriting and dealing in commercial paper. As we conclude that the agency reasonably interpreted the governing statute, we deny the petition for review.
The Banking Act of 1933, commonly known as the Glass-Steagall Act ("Act"), restricts the securities-related business of commercial banks in order to protect depositors. See Banking Act of 1933, ch. 89, 48 Stat. 162 (1933). The Act applies both to national banks, organized under 12 U.S.C. Sec. 21 (1982), and to state-chartered banks that are members of the Federal Reserve System ("state member banks"). See 12 U.S.C. Sec. 221 (1982). Both are restricted in their direct securities dealings by section 16 of the Act:
The business of dealing in securities and stock by [a national bank] 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 [a national bank] shall not underwrite any issue of securities or stock: Provided, That [a national bank] 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. Sec. 24 (Seventh) (1982) (as currently amended). See also Act Sec. 5(c), 12 U.S.C. Sec. 335 (1982) ().
Section 21 of the Act bars those involved in the securities business from also engaging in banking:
it shall be unlawful--
(1) For any person, firm, ... or other similar organization, engaged in the business of issuing, underwriting, selling, or distributing, ... securities, to engage at the same time to any extent whatever in the business of receiving deposits....
12 U.S.C. Sec. 378(a) (1982). It is generally assumed that "Sec. 16 and Sec. 21 seek to draw the same line[;] ... the underwriting prohibitions described in the two sections are coextensive...." Securities Industry Ass'n v. Board of Governors, 468 U.S. 137, 149, 104 S.Ct. 2979, 2985, 82 L.Ed.2d 107 (1984) ("Bankers Trust I "); see also Securities Industry Ass'n v. Board of Governors, 807 F.2d 1052, 1057 (D.C.Cir.1986) (), cert. denied, --- U.S. ----, 107 S.Ct. 3228, 97 L.Ed.2d 734 (1987) ("Bankers Trust II ").
Although commercial banks may deal directly in securities only to the limited extent allowed by section 16, they are permitted to affiliate with other entities that deal in securities to a somewhat greater extent. The governing provision is section 20 of the Act:
no member bank shall be affiliated ... with any corporation, ... or other similar organization engaged principally in the issue, flotation, underwriting, public sale, or distribution ... [of] securities....
12 U.S.C. Sec. 377 (1982) (emphasis added). An "affiliate" is defined as a firm that a bank effectively controls, that effectively controls the bank, or that is subject along with the bank to effective common control. See 12 U.S.C. Sec. 221a(b) (1982).
At issue in this case is the extent to which a bank affiliate may underwrite and deal in securities.
The Chase Manhattan Corporation ("Chase") seeks permission for its affiliate, Chase Commercial Corporation ("Chase Commercial"), to underwrite and deal in commercial paper, to wit, short-term promissory notes and other negotiable instruments issued by commercial borrowers. Because commercial paper is a "security" under section 20 of the Act, Bankers Trust I, 468 U.S. at 150, 104 S.Ct. at 2986, Chase Commercial would be engaging in activities controlled by the section.
Chase has agreed to limit its affiliate's commercial paper dealings to less than five percent of its gross revenue ("revenue limit"). Chase Commercial has also agreed to limit the amount of commercial paper that it underwrites or places in a given year to five percent of the average amount of dealer-placed commercial paper outstanding during the prior year ("market share limit"). Thus, the only question posed is whether these limitations on Chase Commercial's dealings are sufficient to ensure that it is not "principally engaged" in activity proscribed by section 20.
In the decision under review, Chase Manhattan Corp., 73 Fed.Res.Bull. 367 (1987), the Board approved Chase's request that its affiliate be permitted to underwrite and deal in commercial paper within the limits recited above. In doing so, the Board relied on and incorporated its ruling in Bankers Trust New York Corp., 73 Fed.Res.Bull. 138 (1987). Thus our analysis will deal with the agency's reasoning in the latter case.
Bankers Trust only sought permission for its affiliate to place commercial paper, that is to say, to solicit buyers on behalf of the issuers of commercial paper. Even though this court had held that placing commercial paper as an agent of the issuer was not subject to the limitations imposed by section 20, Bankers Trust II, 807 F.2d at 1058, the Board considered whether distribution and underwriting would also be permissible. It did so because similar applications were pending that clearly would involve section 20 activity.
The Board rejected Bankers Trust's argument that an affiliate is not "engaged principally" in underwriting and dealing in securities unless those activities account for more than fifty percent of its total business, or are at least its single largest activity. The Board interpreted "principally" in section 20 as meaning "substantially," and determined that a company could have more than one activity in which it was engaged principally. This conclusion was premised on the ordinary meaning of "principally," the legislative history and purposes of the Act, and the Supreme Court's interpretation of a related provision of the Act limiting common directorates between banks and companies engaged "primarily" in securities. 73 Fed.Res.Bull. at 140-46.
The Board rejected the opposing interpretation of section 20 proposed by the Securities Industry Association ("SIA"), a trade association representing a major segment of the nation's securities brokerage and investment banking business; namely, that an affiliate is "engaged principally" in section 20 activity whenever such activity is regular and non-incidental. The Board concluded that an activity is "principal" if it is substantial, and that because Bankers Trust had promised to abide by the five percent revenue and market share limits later adopted by Chase, its affiliate's section 20 activity would be insubstantial. Id.
The Board noted that even if an affiliate's activity is not prohibited by the Act, it may still be impermissible under the Bank Holding Company Act ("BHCA"), 12 U.S.C. Sec. 1841 et seq. (1982). In pertinent part, the BHCA prohibits a bank holding company from owning or controlling voting shares of any company that is not a bank, 12 U.S.C. Sec. 1843(a)(1) (1982), unless the Board determines that the company's activities are "so closely related to banking ... as to be a proper incident thereto." Id. at Sec. 1843(c)(8). In making its determination, the Board first considers whether the activity, generally considered, is closely related to banking. It then asks whether, in the particular case, the activity may reasonably be expected to produce public benefits (e.g., convenience, competition, efficiency) that outweigh possible adverse effects (e.g., undue concentration of resources, decreased or unfair competition, conflicts of interests, unsound banking practices). See id.
The Board applied this method to Bankers Trust's application and concluded that the proposed placement of commercial paper by Bankers Trust's affiliate was permissible under the BHCA, as it was closely related to banking and a proper incident to banking. 73 Fed.Res.Bull. at 146-53. SIA appealed to this court, but the case (docket No. 87-1035) was dismissed pursuant to stipulation.
Meanwhile, Chase applied for permission for its affiliate, Chase Commercial, to deal in commercial paper under conditions similar to those approved by the Board in connection with Bankers Trust's application. Unlike Bankers Trust's affiliate, however, Chase Commercial proposed to purchase commercial paper from the issuer for resale (i.e., underwrite), and to buy and sell commercial paper in the secondary market (i.e., deal). Chase Commercial promised to abide by the same revenue and...
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