Securities Industry Ass'n v. Board of Governors of Federal Reserve System, s. 1488-1494
| Decision Date | 08 February 1988 |
| Docket Number | D,Nos. 1488-1494,s. 1488-1494 |
| Citation | 839 F.2d 47 |
| Parties | , 56 USLW 2510, Fed. Sec. L. Rep. P 93,615 SECURITIES INDUSTRY ASSOCIATION, Petitioner-Cross-Respondent, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Paul A. Volcker, as Chairman of the Board of Governors of the Federal Reserve System, Manuel H. Johnson, Wayne D. Angell, Robert H. Heller, and Martha R. Seger, as members of the Board of Governors of the Federal Reserve System, Respondents, Bankers Trust New York Corporation, J.P. Morgan & Co. Incorporated, and Citicorp and The Chase Manhattan Corporation, Manufacturers Hanover Corporation, and Chemical New York Corp., Security Pacific Corporation, Intervenors-Respondents Cross-Petitioners. ockets 87-4041, 87-4055, 87-4057, 87-4059, 87-4061, 87-4063, 87-4067, 87-4069, 87-4071, 87-4073, 87-4075, 87-4077, 87-4079 and 87-4085. |
| Court | U.S. Court of Appeals — Second Circuit |
James B. Weidner, New York City (David A. Schulz, Mark Holland, Peter Kimm, Jr., Roger & Wells, William J. Fitzpatrick, New York City, Donald J. Crawford, Washington, D.C., of counsel), for petitioner-cross-respondent Securities Industry Ass'n.
Michael S. Helfer, Washington, D.C. (Christopher Lipsett, Thomas P. Olson, Wilmer, Cutler & Pickering, Washington, D.C., of counsel), Pro Hac Vice for intervenor-respondent cross-petitioner Citibank.
Lewis B. Kaden, New York City (Lowell Gordon Harriss, D. Scott Wise, Davis Polk & Wardwell, New York, New York, of counsel), for intervenor-respondent cross-petitioner J.P. Morgan & Co. Inc.
Richard M. Ashton, Washington, D.C., (Richard K. Willard, Asst. Atty. Gen., U.S. Dept. of Justice, Michael Bradfield, General Counsel, Kay E. Bondehagen, Douglas B. Jordan, Washington, D.C., Robert M. Kimmitt, Department of the Treasury, Richard V. Fitzgerald, Office of the Comptroller of the Currency, Washington, D.C Davis Polk & Wardwell, New York City, of counsel, for J.P. Morgan & Co., Inc.
of counsel), for respondents Bd. of Governors of the Federal Reserve System, et al.
White & Case, New York City, of counsel, for Bankers Trust New York Corp.
Shearman & Sterling, New York City, and Wilmer, Cutler & Pickering, Washington, D.C., of counsel, for Citicorp.
Cravath, Swaine & Moore, New York City, of counsel, for Chemical New York Corp.
Milbank, Tweed, Hadley & McCloy, New York City, of counsel, for The Chase Manhattan Corp.
Simpson Thacher & Bartlett, New York City, of counsel, for Mfrs. Hanover Corp.
O'Melveny & Myers, New York City, of counsel, for Sec. Pacific Corp.
Martin Glenn, O'Melveny & Myers, New York City (Russell A. Freeman, Dan C. Aardal, Sec. Pacific Corp., Los Angeles, Cal., Edward J. McAniff, Michael J. Fairclough, O'Melveny & Myers, Los Angeles, Cal., William T. Coleman, Jr., John H. Beisner, Jacob M. Lewis, James P. Nehf, O'Melveny & Myers, Washington, D.C., of counsel), filed a brief on behalf of intervenor-respondent, cross-petitioner Sec. Pacific Corp.
David M. Miles, Washington, D.C. (Harvey L. Pitt, Henry A. Hubschman, Fried, Frank, Harris, Shriver & Jacobson, Washington, D.C., Matthew P. Fink, Senior Vice President and General Counsel, Sarah O'Neil, Associate General Counsel, Inv. Co. Institute, Washington, D.C., of counsel), filed a brief on behalf of Inv. Co. Institute as amicus curiae.
Hogan & Hartson, Washington, D.C. (Neal L. Petersen, Keith R. Fisher, James G. Christiansen, Washington, D.C., of counsel), filed a brief on behalf of Bank Capital Markets Ass'n as amicus curiae.
John J. Gill, General Counsel, Washington, D.C. (Michael F. Crotty, Associate General Counsel-Litigation, American Bankers Ass'n, Washington, D.C., of counsel), filed a brief on behalf of the American Bankers Ass'n as amicus curiae.
Before CARDAMONE, PIERCE and WINTER, Circuit Judges.
We review on this appeal those provisions of the Banking Act of 1933 that separated the commercial and investment banking industries and are known as the Glass-Steagall Act. See Pub.L. No. 73-66, Secs. 16, 20, 21, & 32, 48 Stat. 162 (1933). Demand for divorcing banking and securities activities followed in the wake of the stock market crash of 1929, which occurred, it was said, because a mountain of credit rested on only a molehill of cash. The actions of the Federal Reserve Board that we review today allow commercial and investment banking to compete in a narrow market, and to that extent dismantle the wall of separation installed between them by the Glass-Steagall Act. Whether Santayana's notion that those who will not learn from the past are condemned to repeat it fairly characterizes the consequences of the Board's action is not for us to say. Our task is to review the Glass-Steagall Act, the legislative history that surrounded its enactment, and its prior judicial construction to determine whether the Board reasonably interpreted the Act's often ambiguous terms.
The Securities Industry Association (SIA) and seven bank holding companies petition for review of six related orders of the Board of Governors of the Federal Reserve System (Board). The orders approved the bank holding companies' applications to utilize subsidiaries as the vehicle by which they can underwrite and deal in certain securities. The Board determined that the approved activities would not run afoul of Sec. 20 of the Glass-Steagall Act, which proscribes affiliations of banks--here, the holding companies' member bank subsidiaries--with entities that are "engaged principally" in underwriting and dealing in securities. At the same time, the Board limited the scope of the approved activities. The decisions allowing bank subsidiaries to engage in securities transactions and the limitations that were imposed are the focus of the petitions seeking review. For the reasons set forth below, we deny the petitions
for review save for the bank holding companies' cross-petition for review that seeks to eliminate the market share limitation.
On April 30, 1987 the Board approved the applications of Citicorp, J.P. Morgan & Co., Inc., and Bankers Trust New York Corp. to engage in limited securities activities through wholly-owned subsidiaries. 73 Fed.Reserve Bull. 473 (1987). At the time of the applications, the subsidiaries were engaged entirely in underwriting and dealing in U.S. government and agency securities and those of state and municipal governments. The holding companies sought to extend their subsidiaries' activities to underwriting and dealing in municipal revenue bonds, mortgage related securities, consumer receivables related securities, and commercial paper. 1 With the exception of the consumer receivables, on which decision was deferred because of an insufficient record, the Board approved the applications by a vote of three to two. Limitations on the scope of the activities more restrictive than those initially proposed by the holding companies--to be discussed more fully below--were imposed.
On May 18, 1987 the Board approved the applications of four other bank holding companies, Chase Manhattan Corp., Chemical New York Corp., Manufacturers Hanover Corp., and Security Pacific Corp., to underwrite and deal in the same activities to the same extent approved in its April 30th order. 73 Fed.Reserve Bull. 607 (1987); id. at 616; id. at 620; id. at 622. With the exception of Chase Manhattan, each holding company then had an existing subsidiary currently engaged in underwriting and dealing in federal, state, and local government securities. Chase Manhattan's application included a request for its subsidiary to engage in government securities activities, which the Board approved. The Board also approved Citicorp's supplemental application to deal in commercial paper. Id. at 618.
SIA, a trade association representing securities brokers, dealers, and underwriters, petitioned for review of the April 30th and May 18th orders, arguing that the approved activities would violate Sec. 20 of the Glass-Steagall Act. The holding companies cross-petitioned challenging the Board imposed limitations. We granted a stay of the orders on May 19, 1987 pending this expedited appeal.
The bank holding companies' applications were made pursuant to Sec. 4(c)(8) of the Bank Holding Company Act of 1956, which allows a bank holding company to acquire the "shares of any company the activities of which the Board ... has determined ... to be so closely related to banking ... as to be a proper incident thereto." 12 U.S.C. Sec. 1843(c)(8) (1982). The determination that the approved securities activities are closely related to banking is not contested on this appeal. Rather, since the Board's discretion under Sec. 4(c)(8) is limited by the Glass-Steagall Act, cf. Board of Governors of Fed. Reserve Sys. v. Investment Co. Inst., 450 U.S. 46, 76-77, 101 S.Ct. 973, 992, 67 L.Ed.2d 36 (1981) (ICI ), the principal issue before the Board was whether the approval of the activities would contravene that Act.
Section 20 of the Glass-Steagall Act forbids a member bank of the Federal Reserve System from affiliating with an organization "engaged principally" in, inter alia, underwriting or dealing in securities. 12 U.S.C. Sec. 377 (1982). Bank holding companies have been allowed since 1978--without a court challenge by SIA--to acquire or form subsidiaries that underwrite and deal in securities representing obligations of the United States and of states and their political subdivisions. See, e.g., United Bancorp, 64 Fed.Reserve Bull. 222 (1978); see also 12 C.F.R. Sec. 225.25(b)(16) (1987) (). Section 16 of the Glass-Steagall Act expressly permits banks themselves to underwrite and Given the authorization in Sec. 16 for banks to engage in bank-eligible securities activities, the Board concluded that Congress did not aim in Sec. 20 to proscribe bank affiliates from engaging in the same activities. 73 Fed.Reserve Bull. at...
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