Securities Industry Association v. Board of Governors of Federal Reserve System

Citation82 L.Ed.2d 158,468 U.S. 207,104 S.Ct. 3003
Decision Date28 June 1984
Docket NumberNo. 83-614,83-614
PartiesSECURITIES INDUSTRY ASSOCIATION, Petitioner v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM et al
CourtUnited States Supreme Court
Syllabus

BankAmerica Corp. (BAC), a bank holding company, applied to the Federal Reserve Board (Board) for approval under § 4(c)(8) of the Bank Holding Company Act of 1956 (BHC Act) to acquire a nonbanking affiliate corporation (Schwab) engaged in retail securities brokerage. Section 4(c)(8) authorizes bank holding companies, with prior Board approval, to acquire stock in other companies that are engaged in non-banking activities that the Board determines are "so closely related to banking . . . as to be a proper incident thereto." Petitioner, a national trade association of securities brokers, opposed BAC's application and participated in the administrative hearings. The Board authorized BAC to acquire Schwab, holding that a securities business, such as Schwab, that is essentially confined to the purchase and sale of securities for the account of third parties, without providing investment advice to the purchaser or seller, is "closely related" to banking within the meaning of § 4(c)(8). The Board also concluded that the acquisition would not violate § 20 of the Glass-Steagall Act, which prohibits a bank (BAC's banking subsidiary here) from being affiliated with companies "engaged principally in the issue, flotation, underwriting, public sale, or distribution" of securities. On petitioner's application for judicial review, the Court of Appeals affirmed the Board's order.

Held: The Board has authority under § 4(c)(8) of the BHC Act to authorize a bank holding company to acquire a non-banking affiliate engaged principally in retail securities brokerage. Pp. 214-221.

(a) The Board's determination that a securities brokerage business that is essentially limited to the purchase and sale of securities for the account of customers, and without provision of investment advice to purchaser or seller, is "closely related" to banking, is consistent with the language and policies of the BHC Act. There is no express requirement in § 4(c)(8) that a proposed activity must facilitate other banking operations before it may be found to be "closely related" to banking. The record substantially supports the Board's factual findings that Schwab's brokerage services were very similar to the types of services that are generally provided by banks and that banks are particularly well equipped to provide such services. Pp. 214-216.

(b) The Board's determination that a bank holding company's acquisition of such a brokerage business as Schwab's is not prohibited by § 20 of the Glass-Steagall Act, is reasonable and supported by the statute's plain language and legislative history, and deserves the deference normally accorded the Board's construction of the banking laws. The term "public sale" in § 20 should be read to refer to the underwriting activity described by the terms that surround it, and to exclude the type of retail brokerage business in which Schwab principally was engaged. This reading of the statute is further supported by the Board's similar long-standing interpretation of identical language found in another provision of the Glass-Steagall Act. Moreover, the legislative history demonstrates that Congress enacted § 20 to prohibit the affiliation of commercial banks with entities that are engaged principally in activities such as underwriting. None of the hazards of underwriting is implicated by Schwab's brokerage activities. Pp. 216-221.

716 F.2d 92, affirmed.

James B. Weidner, New York City, for petitioner.

Carter G. Phillips, Washington, D.C., for respondents.

Justice POWELL delivered the opinion of the Court.

This case presents the question whether the Federal Reserve Board has statutory authority under § 4(c)(8) of the Bank Holding Company Act of 1956, 12 U.S.C. § 1843(c)(8), to authorize a bank holding company to acquire a nonbanking affiliate engaged principally in retail securities brokerage.

I

BankAmerica Corp. (BAC) is a bank holding company within the meaning of theBank Holding Company Act.1 In March 1982, BAC applied to the Federal Reserve Board (Board) for approval under § 4(c)(8) of the Act to acquire 100 percent of the voting shares of The Charles Schwab Corp., a company that engages through its wholly owned subsidiary, Charles Schwab & Co. (Schwab), in retail discount brokerage.2 The Board ordered that formal public hearings be held before an Administrative Law Judge (ALJ) to consider the application. The Securities Industry Association (SIA), a national trade association of securities brokers, and petitioner here, opposed BAC's application and participated in those hearings.3 After six days of hearings, the ALJ recommended that BAC's application be approved. After reviewing the evidentiary record, the Board adopted, with modifications, the findings and conclusions of the ALJ and authorized BAC to acquire Schwab. 69 Fed.Res.Bull. 105 (1983). SIA petitioned the Court of Appeals for the Second Circuit for judicial review under 12 U.S.C. § 1848.

The Court of Appeals held that the Board had acted within its statutory authority in authorizing BAC's acquisition of Schwab under § 4(c)(8) of the BHC Act. The court accordingly affirmed the Board's order. 716 F.2d 92 (CA2 1983). We granted SIA's petition for certiorari, 465 U.S. 1004, 104 S.Ct. 994, 79 L.Ed.2d 227 (1984), and now affirm.

II

Section 4 of the Bank Holding Company Act (BHC Act) prohibits the acquisition by bank holding companies of the voting shares of nonbanking entities unless the acquisition is specifically exempted. The principal exemption to that prohibition is found in § 4(c)(8). That provision authorizes bank holding companies, with prior Board approval, to engage in nonbanking activities that the Board determines are "so closely related to banking . . . as to be a proper incident thereto." 12 U.S.C. § 1843(c)(8).4

Application of the § 4(c)(8) exception requires the Board to make two separate determinations. First, the Board must determine whether the proposed activity is "closely related" to banking.5 If it is, the Board may amend its regulations to include the activity as a permissible nonbanking activity.6 Next, the Board must determine on a case-by-case basis whether allowing the applicant bank holding company to engage in the activity reasonably may be expected to produce public benefits that outweigh any potential adverse effects. H.R.Conf.Rep. No. 91-1747, pp. 16-18 (1970), U.S.Code Cong. & Admin.News 1970, p. 5519.7

In this case, the Board held that the securities brokerage services offered by Schwab were "closely related" to banking within the meaning of § 4(c)(8). Relying on record evidence and its own banking expertise, the Board articulated the ways in which the brokerage activities provided by Schwab were similar to banking. The Board found that banks currently offer, as an accommodation to their customers, brokerage services that are virtually identical to the services offered by Schwab. 69 Fed.Res.Bull., at 107.8 Moreover, the Board cited a 1977 study by the Securities and Exchange Commission that found that

"bank trust department trading desks, at least at the largest banks, perform the same functions, utilize the same execution techniques, employ personnel with the same general training and expertise, and use the same facilities . . . that brokers do." Ibid.

Finally, the Board concluded that the use by banks of "sophisticated techniques and resources" to execute purchase and sell orders for the account of their customers was sufficiently widespread to justify a finding that banks generally are equipped to offer the type of retail brokerage services provided by Schwab. Id., at 108. On the basis of these findings, the Board held that a securities brokerage business that is "essentially confined to the purchase and sale of securities for the account of third parties, and without the provision of investment advice to the purchaser or seller" is "closely related" to banking within the meaning of § 4(c)(8) of the BHC Act. Id., at 117.9

B

The Board next determined that the public benefits likely to result from BAC's acquisition of Schwab outweighed the possible adverse effects. Specifically, the Board identified as public benefits the increased competition and the increased convenience and efficiencies that the acquisition would bring to the retail brokerage business. Id., at 109-110. As to possible adverse effects, the Board determined that the proposed acquisition would not result in the undue concentration of resources, decreased competition, or unfair competitive prices. Id., at 110-114.

Finally, the Board concluded that BAC's acquisition of Schwab was not prohibited by the Glass-Steagall Act.10 Id., at 114-116. The Board observed that the proposed acquisition would make Schwab an affiliate of BAC's banking subsidiary and thus subject to the provisions of the Glass-Steagall Act. It held, however, that Schwab was "not engaged principally in any of the activities prohibited to member bank affiliates by the Glass-Steagall Act," and thus concluded that the acquisition was "consistent with the letter and spirit of that act." Id., at 114.

SIA challenges the Board's order in this case on two grounds. First, it argues that the Board may not approve an activity as "closely related" to banking unless it finds that the activity will facilitate other banking operations. Second, it argues that § 20 of the Glass-Steagall Act, 12 U.S.C. § 377, prohibits a bank holding company from owning any entity that is engaged principally in retail securities brokerage and thus that the Board lacked statutory authority under § 4(c)(8) to approve BAC's acquisition of Schwab.11

III
A.

There is no express requirement in § 4(c)(8) that a proposed activity must facilitate other banking operations before it...

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