Securities Industry Ass'n v. Board of Governors

• Decision Date: 04 February 1986
• Docket Number: Civ. A. No. 80-2730.
• Citation: 627 F. Supp. 695
• Parties: SECURITIES INDUSTRY ASSOCIATION, Plaintiff, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, et al., Defendants, Bankers Trust Company, Defendant-Intervenor.
• Court: U.S. District Court — District of Columbia

627 F. Supp. 695

SECURITIES INDUSTRY ASSOCIATION, Plaintiff, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, et al., Defendants, Bankers Trust Company, Defendant-Intervenor.

Civ. A. No. 80-2730.

United States District Court, District of Columbia.

February 4, 1986.

John M. Liftin, James B. Weidner, David A. Schulz, Alejandro E. Camacho, Rogers & Wells, Washington, D.C., for plaintiff.

Michael Bradfield, Gen. Counsel, Richard M. Ashton, Associate Gen. Counsel, Kay E. Bondehagen, Board of Governors of F.R.S., Washington, D.C., for defendants.

John W. Barnum, Laura B. Hoguet, W. Michael Tupman, Craig Alan Wilson, White & Case, Washington, D.C., for defendant-intervenor.

G. Duane Vieth, Leonard H. Becker, Daniel I. Prywes, Peter K. Kautsky, Arnold & Porter, Washington, D.C., for amicus curiae Goldman, Sachs & Co.

Harvey L. Pitt, Henry A. Hubschman, David M. Miles, Fried, Frank, Harris, Shriver & Jacobson, Washington, D.C., for amicus curiae Investment Co. Institute.

Michael S. Helfer, Russell J. Bruemmer, Wilmer, Cutler & Pickering, Washington, D.C., for amici curiae America N.T. & S.A., Citibank, N.A., First Nat. Bank of Boston, First Nat. Bank of Minneapolis, NCNB Nat. Bank of North Carolina, Security Pacific Nat. Bank, and Sovran Bank, N.A.

MEMORANDUM OPINION AND ORDER

JOYCE HENS GREEN, District Judge.

Plaintiff, Securities Industry Association ("SIA"), a trade association representing the nation's securities dealers and underwriters, challenges a decision of the Federal Reserve Board ("Board") permitting Bankers Trust Company to place commercial paper with investors on behalf of issuers under certain prescribed conditions. Specifically, in its ruling of June 4, 1985, the Board determined that Bankers Trust's commercial paper placement activities did not constitute "selling," "underwriting," or "distributing" commercial paper securities for purposes of the Glass-Steagall Act, which generally prohibits banks from underwriting or dealing in securities. The SIA contends that the Board's interpretation of the Act is incorrect as a matter of law and that its ruling must therefore be set aside. The Board, along with defendant-intervenor Bankers Trust (hereinafter referred to collectively as "defendants"), oppose the SIA's motion for summary judgment and have filed cross motions for summary judgment. For the reasons set forth below, the Court concludes that Bankers Trust's commercial paper activities do indeed violate the strictures of the Glass-Steagall Act and that the Board's contrary ruling must therefore be invalidated.

I. Background

The Court is well-acquainted with the parties to this action and their dispute, which began in 1979 and has already wound its way once through the entirety of the federal judicial system. In January 1979, plaintiff SIA and A.G. Becker, Inc., a commercial paper dealer, requested that the Board prohibit Bankers Trust from selling commercial paper issued by companies not related to the bank,¹ claiming that such sales were prohibited by certain provisions of the Banking Act of 1933, commonly referred to as the Glass-Steagall Act. Section 16 of the Act, 12 U.S.C. § 24 Seventh (1982), bars national banks from dealing in securities, except purchases and sales made, without recourse, upon the order and for the account of bank customers, while section 21, 12 U.S.C. § 378(a)(1) (1982), prohibits banks from "issuing, underwriting, selling or distributing" securities. Responding to the petitions of SIA and Becker in September, 1980, the Board took the position that the financial instruments sold by Bankers Trust—prime quality third-party commercial paper with a maturity of nine months or less, sold in large denominations to sophisticated customers—were not "notes or other securities" for purposes of the Glass-Steagall Act, and that Bankers Trust's sales were therefore legal. Shortly thereafter, Becker and the SIA commenced suit in this Court, seeking review of the Board's conclusion. In a decision dated July 28, 1981, this Court ruled that commercial paper was in fact a "note or other security" within the meaning of the Act, and therefore invalidated the Board's decision. A.G. Becker, Inc. v. Board of Governors of the Federal Reserve System, 519 F.Supp. 602 (D.D.C.1981). A divided panel of the Court of Appeals reversed that judgment, adopting the Board's reasoning, A.G. Becker, Inc. v. Board of Governors of the Federal Reserve System, 693 F.2d 136 (D.C.Cir.1982), but the Supreme Court overturned the Court of Appeal's decision and reinstated this Court's holding that commercial paper is comprehended by the literal language of the statute, and that the inclusion of such financial instruments within the Act's terms is fully consistent with its purposes. Securities Industry Association v. Board of Governors of the Federal Reserve System, 468 U.S. 137, 104 S.Ct. 2979, 82 L.Ed.2d 107 (1984) ("SIA"). The Supreme Court, however, expressed no opinion as to whether Bankers Trust's placement activities constituted "underwriting," "issuing," "selling" or "distributing" within the meaning of the statute, and therefore remanded the case for determination of that question. Id. at ___, 104 S.Ct. at 2992. In an Order dated October 19, 1984, this Court remanded the case to the Board so that it might consider the "underwriting" issue in the first instance.

In order that the contentions of the parties and the conclusions of the Court may be better understood, it is necessary to set out Bankers Trust's activities in some detail. In 1978, the bank first began offering for sale third-party commercial paper, soliciting purchasers through advertisements announcing its placement services. The bank also initiated a marketing campaign aimed at issuers of commercial paper, promising to perform services competitive with securities dealers. Chief among these services was Bankers Trust's offer to extend short-term credit to commercial paper issuers to cover the unsold portions of any given issue, at interest rates equal to or near the rates borne by the paper. Following the Supreme Court's decision, the Board notified Bankers Trust by letter dated December 3, 1984, that this practice of extending back-up credit to issuers "appears to be the economic equivalent of buying some of the unsold issue with the bank's own funds, an activity that would appear to be prohibited by the Glass-Steagall Act." Statement Concerning Applicability of the Glass-Steagall Act to the Commercial Paper Placement Activities of Bankers Trust Company at 3 (June 4, 1985) ("June 4, 1985 Statement"). As this conclusion was based upon Bankers Trust's 1980 placement activities, the Board offered the bank an opportunity to provide information concerning its more recent placement methods, and also solicited comments from interested parties, including, among others, the SIA.

The bank's current activities in the commercial paper market, which are described in the Board's June 4, 1985 Statement and lie at the heart of the present dispute, differ in several material respects from its 1980 placement methods. Bankers Trust still assists issuers in placing their paper with large financial institutions, advising client issuers with respect to the rates and maturities of a proposed issue that are likely to be accepted, soliciting potential purchasers and selling the paper to them. The bank, however, no longer lends short-term funds to issuers at or near the rates of interest of the paper being placed. It does not purchase or repurchase the paper, inventory it overnight, or take any ownership interest in the paper. Nor does the bank make loans on the paper, as it used to, or take the paper as collateral for loans. Finally, the bank enters into no repurchase, endorsement or other guarantee arrangement with purchasers of the paper. June 4, 1985 Statement at 4-5.

In its June 4, 1985 Statement, the Board concluded that Bankers Trust is not engaged in "distributing" or "underwriting" securities under section 21 of the Glass-Steagall Act, because its current placement activities do not involve public offerings as that term is defined under the federal securities law. While Bankers Trust is involved in "selling" securities, the Board found that the bank does so without recourse, upon the order and for the account of its customers, and that its sales therefore fall within the "permissive phrase" of section 16 of the Act. Finally, the Board concluded that the bank's placement activities will not give rise to the hazards and financial dangers that the Glass-Steagall Act was designed to prevent, and that they therefore fall outside the scope of the Act.

Following the Board's decision, the parties filed the cross motions for summary judgment now before the Court, and various amici filed supporting memoranda. Oral argument on the motions was held on September 19, 1985.

II. Discussion

The Board, of course, is the agency charged with regulating the national banking system, and as such has primary responsibility for implementing the Glass-Steagall Act. SIA, 468 U.S. at ___, 104 S.Ct. at 2983. Courts, therefore, are to "accord substantial deference to the Board's interpretation of that Act whenever its interpretation provides a reasonable construction of the statutory language and is consistent with legislative intent." Securities Industry Ass'n v. Board of Governors, 468 U.S. 207, ___, 104 S.Ct. 3003, 3009, 82 L.Ed.2d 158 (1984) ("Schwab"). The Supreme Court has made clear, however, that the deference owed is not so great as to convert judicial review into a rubber stamp for Board decisions. Under the standard enunciated in SIA, courts are to determine for themselves the congressional intent underlying a given banking statute, and "`must reject administrative constructions of that statute ... that are inconsistent with the statutory mandate or that frustrate the policy that Congress sought to implement.'" SIA, 468 U.S. at ___, 104 S.Ct. at 2983 (quoting ...