Petition — Alabama Ass'n of Insurance Agents, Inc. v. Board of Governors of Federal Reserve System

Supreme Court brief1978

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Supreme Court, U. &.

FILEQ

977

IN THE

Supreme Court of the vines al

\ OCTOBER TERM, 1977

“ 77-668

ALABAMA ASSOCIATION OF INSURANCE AGENTS, INC., et al.,

Petitioners,

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,

Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

HERBERT E. MARKS

1735 New York Avenue, N.W.

Washington, D.C. 20006

(202) 833-9800

Counsel for Petitioners

Of Counsel:

WILKINSON, CRAGUN & BARKER

THOMAS E. WILSON

November 10, 1977

ae ee

WILSON - EPES PRINTING Co., INC. - RE 7-6002 - WASHINGTON. D.C. 20001

INDEX

i iacineeibianniaabatennetnannielantiin

EEE ea a

I a encaninaeaiies

I sear ianatila eee

LIE SIE TERE I aT ee

Reasons for Granting the Writ ..........................................

A. These Cases Are Cases of First Impression for

RE LEE Reterier hacen none Seen RON

B. The Decision of the Court of Appeals Regarding

the “Closely Related” Test Is in Conflict with a

Prior Decision of the Court of Appeals of

FEE EES eae nn SOC C RC OO

C. The Decision of the Court of Appeals Regarding

the Application of the “Public Benefits” Test Is

in Conflict with Prior Decisions of the Courts of

po nee

D. The Decision of the Court of Appeals Interprets

the “Public Benefits” Out of Existence _..............

a eee

TABLE OF AUTHORITIES

Cases:

American Bancorporation, Inc. Vv. Board of Gov-

ernors of the Federal Reserve System, 509 F.2d

FX Fr Eee ea

Arnold Tours, Inc. Vv. Camp, 472 F.2d 427 (1st Cir.

SIE PE EERE SES Ay ano Os Ee RRS A Oe

Independent Bankers Association of Georgia V.

Board of Governors of the Federal Reserve Sys-

tem, 516 F.2d 1206 (D.C. Cir. 1975) 2.000000.

Investment Company Institute v. Camp, 401 U.S.

gf RRIEISE ESEETSA, “saRCSIRI noc Oin O Tr

National Courier Association Vv. Board of Govern-

ors of the Federal Reserve System, 516 F.2d 1229

I a edeceeninleis

NLRB vy. Columbian Enameling & Stamping Co.,

fe RTA Se wae Seon Oe

Port of New York Authority v. Baker, Watts & Co.,

$92 F.2d 497 (D.C. Cir. 1968) ..............................

Saxon V. Georgia Association of Independent In-

surance Agents, 399 F.2d 1010 (5th Cir. 1968) ..

SEC v. Chenery Corp., 318 U.S. 80 (1943) _......... :

Service V. Dulles, 354 U.S. 363 (1957) —....0000000.

United States v. Nixon, 418 U.S. 683 (1974) _........

United States v. Philadelphia National Bank, 374

RES RAEP EERs eLS i SCe

United States v. Third National Bank, 390 U.S.

RN SS SIS REFERS PO

Universal Camera Corp. Vv. NLRB, 340 U.S. 474

ERE Ses See as Sen

Whitney National Bank v. Bank of New Orleans

& Trust Co., 379 U.S. 411 (1965) 000.

544 F.2d 1245 (Editor’s Note) 2.00.00...

Administrative Decisions:

Application of Alabama Financial Group, Inc., 39

Fed. Reg. 25,548 (1974) (FRB Docket No. IA-

TUTTE scltusnisciestisitesenttbtannteminiannnsscininiammetematlinianiniimeaeninines

Page

iii

TABLE OF AUTHORITIES—Continued

Page

Application of Barnett Banks of Florida, Inc., etc.,

40 Fed. Reg. 44,620, 44,624, 44,630 (1975) (FRB

Docket Nos. IA-6, 7, 3, 12 & 13) ..........................-. 11

Application of First National Holding Corp., 39

Fed Reg. 33,411 (1974) (FRB Docket No. IA-

OO sheila ciate dati haneitanmeneianinemneneinnnnts x

Application of Southeast Banking Corporation, 40

fe \f FS 7

es, CD DD... cs sesemrenboseeninbennneenes 17

I I CI nccnamnesncnetennantininetinonintinn 6

RG SS ae 7

Statutes and Regulations:

aus. 60) Goan Te .................... Q

Bank Holding Company Act of 1956, as amended,

12 U.S.C. §§ 1841-50, 1871-78 (1970) __............. 4

I a eeteaesncindinine 5

ge | een passim

SSSI SRE ESE ee 16, 17

I lca ia ae

I ticinlatinioes 17

OR 2

Bank Holding Company Act of 1956, as amended,

12 U.S.C. § 1843(c) (8) (Supp. III 1964) —.......... 5

National Bank Act, ch. 106, § 8, 13 Stat. 101 (1864)

(current version at 12 U.S.C. §24 (Supp. V

SUED: scncsdcseasiiiceaspbendceeuanubenssanesniunianbapenisneenatneesiandtomess 5

Board of Governors of the Federal Reserve Sys-

tem, Regulation Y, 12 C.F.R. § 225.4(a)

ESSE Sy PESO Aca a ON aD 9,10, 11

Be ey ND CO cnsceteccccttenesicccensnsnsennsencs passim

18 US.C. § 225.4(a) (10) a. 8 ......................... 17, 18

Miscellaneous:

Annual Statistical Digest, 1971-75, Federal Reserve

OR I ee 9

TABLE OF AUTHORITIES—Continued

Page

Hearings on S. 1754 Before the Subcomm. on Fi-

nancial Institutions of the Senate Banking and

Currency Comm., 91st Cong., 1st Sess. 163

CRED ~esssncnssnniiieneimeeaee 10

H.R. Rep. No. 387, 91st Cong., Ist Sess. (1969) .... 10

H.R. Rep. No 1747, 91st Cong., 2d Sess. (Con-

ference Report), reprinted in [1970] U.S. Code

Cong. & Ad. News 5561 .222..2.......2222220.20--ceeecececeeeeee 2,3,14

S. Rep. No. 1095, 84th Cong., Ist Sess. (1955) -..... 5

S. Rep. No. 1084, 91st Cong., 2d Sess., reprinted

in [1970] U.S. Cong. Code & Ad. News 5519 ...... 5

Talley, “Bank Hol ling Company Financing,” Con-

ference on Bank Structure and Competition

(Federal Reserve Bank of Chicago) (1975) ....... 11

LIST OF APPENDICES

Opinion of the United States Court of Appeals for

a csssemennivensenies

First Rehearing Decision of the United States

Court of Appeals for the Fifth Circuit —.................

Second Rehearing Decision of the United States

Court of Appeals for the Fifth Circuit

Judgment of the United States Court of Appeals

a eessnnesisasionas

Order of the Board of Governors of the Federal

Reserve System, FRB Docket IA-10 (Southern

Order of the Board of Governors of the Federal

Reserve System, FRB Docket IA-8 (First National

Recommended Decision of the Administrative Law

Judge, FRB Docket IA-10 (Southern Bancorpora-

NE EEE AA AAA

Recommended Decision of the Administrative Law

Judge, FRB Docket IA-8 (First National Holding

I aiscnretememnepneetonemmmnrensons

8la

IN THE

Supreme Court of the Auited States

OCTOBER TERM, 1977

No.

ALABAMA ASSOCIATION OF INSURANCE AGENTS, INC., et-ad.,

Petitioners,

Vv.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,

Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Petitioners, the Independent Insurance Agents of Amer-

ica, Inc., its constituent state associations and various in-

dividual member agencies in the States of Alabama and

Georgia, request that a writ of certiorari issue to review

the judgment of the United States Court of Appeals for

the Fifth Circuit in these cases.*

1 Petitioners herein were petitioners in the cases designated by

the court of appeals as Docket Nos. 74-2981, 74-3544 and 74-3843.

In those cases, the two bank holding company applicants and a com-

mittee of lender organizations intervened in support of the re-

spondent Board of Governors of the Federal Reserve System.

OPINIONS BELOW

The court of appeals issued its first decision in these

cases on June 10, 1976. That opinion is reported at 533

F.2d 224 (5th Cir. 1976), and appears at Appendix A

hereof.

On January 10, 1977, the court of appeals issued a

second decision which in part granted and in part denied

petitions for rehearing filed by both sets of parties. That

opinion was initially reported at 544 F.2d 1245 (5th Cir.

1977) (advance sheets), but was deleted from the bound

volume of the Federal Register at the instruction of the

court of appeals.’

Finally, on September 1, 1977, the court of appeals

rendered a second rehearing decision granting the respond-

ent’s petition for further rehearing. That opinion is re-

ported at 558 F.2d 729 (5th Cir. 1977), and appears at

Appendix D hereof.

The judgment of the court of appeals appears at Ap-

pendix D hereof.

JURISDICTION

The jurisdiction of the court is invoked under 28 U.S.C.

§ 1254(1).

QUESTIONS PRESENTED

Historically, there has existed in this country a rigid

separation between banking and other forms of commerce.

Such separation arises out of a concern on the part of Con-

gress that the viability of banking organizations be care-

fully protected* and a recognition by Congress that the

2 See 544 F.2d 1245 (Editor’s Note).

* See, e.g., H.R. Rep. No. 1747, 91st Cong., 2d Sess. 11-12 (quot-

ing the President) (Conference Report), reprinted in [1970] U.S.

Code Cong. & Ad. News 5561, 5562.

, in

power of banking organizations to control credit transac-

tions provides them with a unique opportunity to influence

borrowers in connection with purchases of nonbanking

services.*

The principal statutory exception which permits bank-

ing organizations to participate in limited forms of com-

merce is Section 4(c) (8) of the Bank Holding Company

Act of 1956, as amended (“Act”). The manner in which

this section is applied will determine whether the histori-

cal separation between banking and commerce will be

preserved.°

The instant cases involve approval by the Board of

Governors of the Federal Reserve System (‘Board’),

under Section 4(c) (8), of certain bank holding company

applications for authority to act as agents and brokers in

the sale of property and casualty insurance. In affirming

the Board’s orders, the court of appeals applied the statu-

tory tests of Section 4(c) (8) in a manner which (i) con-

flicts with the holdings of the courts of appeals of other

circuits, and (ii) contravenes the standards established

by Congress to keep banking separate from other forms

of commercial activity. The resolution of the issues pre-

sented by these cases will determine the future relation-

ship between banking and commerce in the economy of this

nation. As such, those issues deserve to be settled by this

Court. The questions presented are:

1. Whether the “closely related” to banking test set

forth in Section 4(c) (8) of the Act is so broad as to per-

* See id. at 18, [1970] U.S. Code Cong. & Ad. News 5569.

5 This and other courts, on numerous occasions, have been called

upon to restrain the administrative largesse of bank regulatory agen-

cies in order to preserve the historical separation between banking

and commerce. See, e.g., Investment Co. Inst. v. Camp, 401 U.S. 617

(1971); Arnold Tours, Inc. v. Camp, 472 F.2d 427 (1st Cir. 1972);

Sazon Vv. Georgia Ass'n of Independent Ins. Agents, 399 F.2d 1010

(5th Cir. 1968) ; Port of New York Auth. v. Baker, Watts & Co., 392

F.2d 497 (D.C. Cir. 1968).

mit bank holding companies to engage in any nonbanking

activity where there exists “any type connection between

banking and the nonbanking activity in question which

makes it rational to consider the proposed activity an

‘incident’ to banking” *‘—a standard which would permit

the Board to add to its list of permissible nonbanking

activities almost without limitation.

2. Whether the “public benefits” test set forth in Sec-

tion 4(c) (8) of the Act is so devoid of substance as to

permit approval of applications where (i) an applicant

failed to make clear the procedures by which the non-

banking activity would be conducted; * (ii) the Board vio-

lated its own regulation making the price at which insur-

ance is offered to the consumer an overriding consideration

in property and casualty insurance agency applications;

(iii) the Board “apparently assumed” that an applicant

would operate the proposed nonbanking activity “not pre-

cisely as its witnesses suggeésted, but in a manner that will

comply with [state] law”;* and (iv) the Board ignored

evidence in the record that approval of the applications

would result in most of the adverse effects enumerated in

the Act, including the tying of sale of insurance to exten-

sions of credit.°

STATUTE INVOLVED

The statute involved in these proceedings is the Bank

Holding Company Act of 1956, as amended, 12 U.S.C.

$$ 1841-50, 1871-78 (1970), and principally Section 4(c)

(8) thereof, 12 U.S.C. § 1843(¢) (8) (1970). The admin-

istrative regulation principally involved is Section 225.4

(a) (9) of the Board’s Regulation Y, 12 C.F.R. § 225.4

®° Appendix A, at 3la (533 F.2d 224, 244).

* Appendix A, at 49a (533 F.2d at 253).

* Appendix A, at 49a, 5la (533 F.2d at 252, 253).

® See Appendix G, at 113a; Appendix H, at 138a.

(a) (9) (1977). Section 4(c) (8) of the Act and Section

225.4(a) (9) of the Board’s Regulation Y appear at Ap-

pendix I hereof.

STATEMENT OF THE CASE

The bank regulatory legislation of this nation has long

maintained a separation between banking and other forms

of commerce. Since the establishment of the national

banking system, Congress has prohibited federal banking

associations from engaging in any activity which was not

banking or an incidental power of banks.** When Con-

gress enacted the Bank Holding Company Act and the

1970 amendments thereto, it continued and extended this

principle." Consequently, the Act generally prohibits bank

holding companies from owning the shares of any com-

pany which is not a bank.** The limited exceptions to this

prohibition are set out in Section 4 of the Act, with the

principal exception contained in subsection (c) (8). Sec-

tion 4(c) (8) essentially provides that a bank holding

company may engage in a nonbanking activity if, and

10 See National Bank Act, ch. 106, § 8, 13 Stat. 101 (1864) (cur-

rent version at 12 U.S.C. § 24 (Supp. V 1975) ).

1 §. Rep. No. 1084, 91st Cong., 2d Sess. 2-3, reprinted in [1970]

U.S. Code Cong. & Ad. News 5520-21; S. Rep. No. 1095, 84th Cong.,

Ist Sess. 11-14 (1955).

12 12 U.S.C. § 1843(a) (1970). The 1970 amendments changed the

law in several important ways. Most significantly, the Act for the

first time applied to one-bank holding companies, whereas, prior to

1970, its application had been limited to multiple-bank holding com-

panies. See S. Rep. No. 1084, 91st Cong., 2d Sess. 2, reprinted in

[1970] U.S. Code Cong. & Ad. News, 5520-21. In addition, Section

4(c)(8) of the Act was modified essentially (i) to permit approvals

of bank holding company applications without a formal hearing in

certain instances not germane here, and (ii) to establish criteria for

determining whether a particular activity is a “proper incident” to

banking or managing or controlling banks. Compare 12 U.S.C. § 1843

(c)(8) (1970) with 12 U.S.C. § 1843(c) (8) (Supp. ITI 1964).

18 Appendix I (12 U.S.C. § 1843(c)(8) (1970)).

only tf, it can make an affirmative showing that (i) the

particular activity in which it wishes to,participate is

“closely related” to banking, and (ii) its participation in

the activity can reasonably be expected to result in bene-

fits to the publie that outweigh possible adverse effects.”

In 1971, the Board promulgated Section 225.4(a) (9)

of its Regulation Y, 12 C.F.R. § 225.4(a)(9) (1977),

which purported to enumerate certain types of insurance

agency activities it considered to be “closely related” to

banking within the meaning of Section 4(c) (8) of the

Act. The Independent Insurance Agents of America,

Inc. (“ITAA”) and various of its state and local associa-

tions (collectively hereinafter referred to as the “IIAA

parties”) opposed certain bank holding company applica-

tions for insurance agency authority under the Board’s

regulation and requested that the applications be set for

hearings.

In opposing the applications, the IIAA parties argued

that Section 225.4(a) (9) failed to enumerate the precise

activities which were allegedly “closely related” to bank-

ing or to explain why the Board determined that the neces-

sary close relationship between such insurance activities

and banking existed. The IIAA parties also argued that,

even if the lines of insurance for which authority was be-

ing sought were “closely related” to banking, approval of

the bank holding company applications could not reason-

ably be expected to result in benefits to the public that

outweighed possible adverse effects.

Eventually, the Board announced that hearings would

be held on 22 of the then pending applications designated

FRB Docket Nos. IA-1 through IA-22." The applications

16 Td.

8 See id. (12 C.F.R § 225.4(a)(9) (1977)).

*® See 38 Fed. Reg. 6,441 (1978).

of Southern Bancorporation (“Southern”) and First Na-

tional Holding Corp. (“First National”) to which the

instant cases relate were among the applications set for

hearing.

In all, four separate hearings involving eight bank hold-

ing company insurance agency applications were held in

the FRB Docket IA series of cases. The remainder of the

22 original applications were either withdrawn, settled by

pretrial agreements among the parties that the results

of the cases litigated would be binding on all parties, or

delayed pending the final outcome of the cases which were

tried.”

The Administrative Law Judge issued separate recom-

mended decisions concerning the Southern and First Na-

tional applications.“ In those decisions, he determined

that approval of the applications could not reasonably be

expected to result in public benefits (such as greater con-

venience, gains in efficiency and increased competition).

To the contrary, he found that approval of the applica-

tions would be more likely to produce decreased competi-

tion and the tying of insurance sales to extensions of

17 In addition to the two cases at bar, five cases were tried in one

consolidated hearing in the State of Florida. Since that trial, one

of those applications has been rendered moot by the distress merger

of the applicant (Palmer Bank Corporation) with Southeast Banking

Corporation. See 40 Fed. Reg. 34,645 (1975).

Other Docket IA cases which have not been withdrawn involve

bank holding companies from Arizona, California, Missouri, Virginia

and Washington. Further, during the pendency of the instant cases,

additional applications have been filed with the Board by bank hold-

ing companies from California, Colorado and Pennsylvania. The

applicants in those cases have agreed with the Board that the

applications not be processed pending final disposition of the instant

cases.

18 The Administrative Law Judge recommended decisions appear

at Appendix G and Appendix H hereof.

credit, particularly in times of tight money.'’ Despite

these findings, the Administrative Law Judge did recom-

mend limited approvals of the applications.”

The Board reversed the factual determinations made by

the Administrative Law Judge (in most instances with

no reference to his contrary findings) and approved the

applications in virtually all respects.» The IIAA parties

filed petitions for review of the Board’s orders with the

United States Court of Appeals for the Fifth Circuit. In

each case, the jurisdiction of that court rested upon Sec-

tion 9 of the Act, 12 U.S.C. § 1848 (1970).”

The two cases were briefed separately, but were con-

solidated for argument. The court of appeals issued a

single opinion on June 10, 1976. Petitions for rehearing

were filed both by the IIAA parties and by the Board.

The court issued its first rehearing decision on Janu-

ary 10, 1977. That decision in part vacated, in part modi-

fied, and in part affirmed the court’s earlier decision.

Thereafter, the Board petitioned the court for further re-

hearing. On September 1, 1977, the court issued its sec-

ond rehearing decision, wherein it partly vacated its first

rehearing dezision, essentially returning the cases to the

posture they had been in after the court’s original

June 10, 1976 decision.”

18 See Appendix G, at 113a; Appendix H, at 138a.

20 The Administrative Law Judge essentially recommended that the

applications be approved only with respect to those markets where

the applicants’ banking subsidiaries controlled 15 percent or less of

total bank deposits. See Appendix G, at 114a; Appendix H, at 140a.

21 The orders of the Board appear at Appendix E and Appendix F

hereof. Such orders were originally reported at 39 Fed. Reg. 25,548

(1974) and 39 Fed. Reg. 33,411 (1974).

22 See Appendix I hereof.

28 See note 2 and accompanying text supra.

REASONS FOR GRANTING THE WRIT

A. These Cases Are Cases of First Impression for this

Court

Banking institutions are economically unique organiza-

tions since they alone are permitted to accept demand

deposits.* Bank holding companies are the largest and

most formidable of banking organizations in that they

alone are able to gather together under single ownership

and control most of the diverse components of the finan-

cial industry.” Furthermore, the capital resources of bank

holding companies are enormous—far greater than any

of the nonbanking industries they have been permitted

to enter under Section 4(c) (8) of the Act.”

The banks of this nation are the principal source of

commercial credit and, as such, they are an essential com-

ponent of the process of capital formation.” Their domi-

nance of such a vital element of the economic process

provides them with a unique opportunity to control where

borrowers purchase nonbanking services sold in connection

** See 12 U.S.C. §24 (Supp. V 1975).

*° For a list of the activities which, in the Board’s view, are per-

missible nonbanking activities for bank holding companies, see

Section 225.4(a) of Regulation Y, 12 C.F.R. § 225.4(a) (1977).

2° For example, at the end of 1975, the 1,821 bank holding com-

panies in the nation controlled 3,674 banks with commercial bank

deposits ($527.5 billion) representing 67.1 percent of total bank de-

posits. Further, the total assets of those companies ($661.3 billion)

represented 68.1 percent of total commercial bank assets. Annual

Statistical Digest, 1971-75, Federal Reserve Board, Tables 89A at

277, 89B at 279. The foregoing figures represent a dramatic in-

crease in bank holding company power since 1971 when holding

companies controlled only 2,420 banks whose total deposits ($297

billion) represented 55.3 percent of total bank deposits and whose

assets ($362.3 billion) represented 56.7 percent of total commercial

bank assets. /Jd., Table 89B at 279.

2? See United States v. Philadelphia Nat'l Bank, 374 U.S. 321, 326-

27 (1963).

with extensions of credit.** Thus, partly out of a recogni-

tion of the enormous resources of banking organizations,

and partly out of a perception of the ability of banking

organizations to control credit transactions, Congress has

historically prohibited banking organizations from engag-

ing in other forms of commerce.”

Section 4(c) (8) of the Act is the principal exception

to the general prohibition against bank participation in

nonbanking activities. For this reason, if the “closely

related” to banking standard is interpreted broadly, bank

holding companies could receive authority to engage in

nonbanking activities almost without limitation.” Simi-

28 Congress has demonstrated great sensitivity to the ability bank-

ing organizations have to “tie” the sale of nonbanking services to

extensions of credit. For example, the Conference Report associated

the 1970 amendments to the Act states:

Tie-ins occur where a customer is forced or induced to accept

other products and services along with that product which he

seeks. Such tie-ins may result from actual coercion by a seller

or from a customer’s realization that he stands a better chance

of securing a scarce and important commodity (such as credit)

by “volunteering” to accept other products or services rather

than seeking them in the competitive market place. In either

case, competition is adversely affected, as customers no longer

purchase a product or service on its own economic merits.

H.R. Rep. No. 1747, 91st Cong., 2d Sess. 18 (Conference Report),

reprinted in [1970] U.S. Code Cong. Ad. News 5569.

The Board has itself previously stated :

[Blecause of the inferior bargaining position of the debtor, he

may be suscepitble to the loan officer’s “suggestions” concerning

choice of coverage, premium rates, insurer and agent. As 4

result, the debtor easily may receive the impression that his

loan application may be more favorably considered if he follows

such suggestions.

Hearings on S. 1754 Before the Subcomm. on Financial Institutions

of the Senate Banking and Currency Comm., 91st Cong., ist Sess.

163 (1969).

2° See, e.g., H.R. Rep. No. 387, 91st Cong., Ist Sess. 2 (1969).

3° Bank holding companies have already been permitted to enter a

substantial number of nonbanking activities, and the effect has been

larly, if the “public benefits” standard of Section 4(c) (8)

is interpreted expansively, bank holding companies could

receive authorizations to engage in nonbanking activities

even though, as in the instant cases, they fail even to

enumerate the procedures by which the nonbanking activ-

ity will be conducted.** Only if the “closely related” and

“public benefit” standards of Section 4(c) (8) are inter-

preted with the precision and care contemplated by the

Act can the separation between banking and commerce be

preserved. Similarly, only if the standards set forth in

Section 4(c) (8) are interpreted in a way which makes

them truly meaningful will the adverse effects upon the

public recognized by Congress be avoided.

In its decision, the court of appeals articulated a stand-

ard for “closely related” activities that would permit the

Board to expand its list of permissible nonbanking activi-

ties almost without limitations.“ Furthermore, with re-

gard to the “public benefits” test, the court sanctioned the

dramatic. See 12 C.F.R. § 225.4(a) (1977). For example, bank hold-

ing companies now control 34 of the 100 largest mortgage companies,

27 of the largest 86 noncaptive finance companies and 13 of the

largest factoring companies in the country. See Talley, “Bank

Holding Company Financing,” Conference on Bank Structurc and

Competition (Federal Reserve Bank of Chicago), at 128 (1975). In

fact, bank holding company penetration into the mortgage insurance

industry has been so complete that a bank witness in these

cases characterized the independent mortgage company as a “dead

duck.” See Transcript, vol. 3, at 423, Application of Barnett Banks

of Florida, Inc., etce., 40 Fed. Reg. 44,620, 44,624, 44,630 (1975)

(FRB Docket Nos. IA 6, 7, 3, 12 & 13).

*! See notes 43-44 infra and accompanying text.

%2 See notes 35-38 infra and accompanying text. In this connec-

tion, it should be noted that currently there are 12 activities the

Board has declared to be “closely related” activities. See 12 C.F.R.

§ 225.4(a) (1977). Bank holding companies may, however, file appli-

cations for authorization to engage in eny activity which in their

view is “closely related” to banking, whether or not the activity

appears on the Board’s current list of permissible activities. ;

Board’s approval of future Section 4‘c) (8) applications,

even though the applicants have not committed themselves

to “one or another mode of operation.” * Consequently,

these cases have significance well beyond the parties im-

mediately involved—indeed, well beyond the property and

casualty insurance industry as a whole. They represent

precedent with respect to all nonbanking activities bank

holding companies from time to time may seek to enter in

the future. Since this Court has heretofore never passed

upon the meaning of the standards set forth in Section 4

(ec) (8), this Court should intervene in these cases (i) to

resolve the conflict that currently exists between the deci-

sion in these cases and previous decisions of other courts

of appeals,“ and (ii) to provide guidance as to the mean-

ing of the “closely related” to banking and the “public

benefits” standards of Section 4(c) (8) of the Act.

B. The Decision of the Court of Appeals Regarding the

“Closely Related” Test Is in Conflict with a Prior Deci-

sion of the Court of Appeals of Another Circuit

The meaning of the “closely related” test was considered

by the United States Court of Appeals for the District

of Columbia Circuit in National Courier Association Vv.

Board of Governors of the Federal Reserve System, 516

F.2d 1229 (D.C. Cir. 1975). At issue in that case was

the validity of a Board regulation permitting bank holding

companies to engage in certain courier services. In assess-

ing the regulation, the court determined that at least the

following relationships qualify as “closely related” under

Section 4(c) (8):

83 Appendix A, at 50a (533 F.2d at 253). For a discussion of the

significance of these and other relevant holdings of the court of

appeals, see notes 39-44 infra and accompanying text.

34 See notes 36-45 infra and accompanying text.

1. Banks generally have in fact provided the pro-

posed services.

2. Banks generally provide services that are opera-

tionally or functionally so similar to the proposed

services as to equip them particularly well to

provide the proposed service.

3. Banks generally provide services that are so in-

tegrally related to the proposed services as to re-

quire their provision in a specialized form.*°

The court of appeals in the instant’ cases specifically

applied the National Courier test to the Board’s regula-

tion permitting the sale of property and casualty insur-

ance and determined that such activity did not qualify as

an activity which is “closely related” to banking under

the National Courier standard.” Instead of determining

that the sale of property and casualty insurance is there-

fore not “closely related” to banking, the court declared

that it was “willing . . . to consider broader types of

relationships.” ** Ultimately, the court stated that the

Board should be upheld “when it articulates any type con-

nection between banking and the nonbanking activity in

question which makes it rational to consider the proposed

activity an ‘incident’ to banking.” *

This interpretation of the “closely related” standard is

in clear conflict with the construction adopted by the

Court of Appeals of the District of Columbia Circuit in

the National Courier case.

35 516 F.2d at 1237.

5° Appendix A, at 23a-24a (533 F.2d 224, 241).

3? Appendix A, at 24a (id.).

38 Appendix A, at 3la (533 F.2d at 244) (emphasis added).

C. The Decision of the Court of Appeals Regarding the

Application of the “Public Benefits” Test Is in Conflict

with Prior Decisions of the Courts of Appeals of Other

Circuits

Section 4(c) (8) of the Act states that, in determining

whether a particular activity is a “proper incident” to

banking, the Board shall consider whether the perform-

ance of the activity by the applicant can reasonably be

expected to result in benefits to the public that outweigh

possible adverse effects.”

The proper application of the “public benefits” test was

considered by the United States Court of Appeals for the

Eighth Circuit in American Bancorporation, Inc. v. Board

of Governors of the Federal Reserve System, 509 F.2d 29

(8th Cir. 1974), and the United States Court of Appeals

in the District of Columbia Circuit in Independent Bank-

ers Association of Georgia v. Board of Governors of the

Federal Reserve System, 516 F.2d 1206 (D.C. Cir. 1975) .*

In American Bancorporation, the court stated that Sec-

tion 4/¢) (8) requires the Board to scrutinize bank holding

3° There can be no doubt that Congress viewed the careful applica-

tion of the “public benefits” test as a crucial element of the imple-

mentation of Section 4(c) (8) as amended in 1970. In promulgating

the test, Congress made clear that a bank holding company seeking

to engage in a nonbanking activity “must bear the burden of proof

in showing that its carrying on of a particular nonbank activity

would produce benefits to the public that outweigh any adverse

effects.” H.R. Rep. No. 1747, 91st Cong., 2d Sess. 19 (Conference Re-

port), reprinted in [1970] U.S. Code Cong. & Ad. News 5570. In

this connection, the Board is required to carefully scrutinize Sec-

tion 4(c)(8) applications to assure that the entry into the activity

“in a given manner would be in the public interest.” Jd. (quoting

the Assistant Attorney General, Antitrust Division) (emphasis

added).

«© In both cases, the question before the courts was whether, under

the facts presented, the Board was required by Section 4(c)(8) to

hold adversary proceedings to determine whether approval of the

applications would result in benefits to the public that outweighed

possible adverse effects.

company applications “with great care” in order to deter-

mine the manner in which the applicant intends “to oper-

ate, control, and benefit from its prospective subsidiary.” *

The court in Independent Bankers held that the purpose

of the hearing required by Section 4(c) (8) of the Act is

“to discover exact!y what the specific facts of this particu-

lar proposal are.” “

In contrast, the court of appeals in the instant cases

found that one of the applications could be approved even

though the record ‘made clear that the precise procedures

by which insurance would be placed and applied for had

not been clearly established by [the applicant].”* In-

credibly, the court went on to issue a generalized invita-

tion to future Section 4(c) (8) applicants, as a matter of

policy, not to commit themselves during the application

process to “one or another mode of operation.” *

The generalized invitation by the court for Section 4

(ec) (8) applicants not to commit themselves during the

application process to “one or another mode of operation”

is in conflict with the holdings of the Court of Appeals for

both the Eighth and District of Columbia Circuits and

abrogates the Board’s responsibility under the Act to pro-

tect the public interest.

*. 509 F.2d at 38 (emphasis added).

*? 516 F.2d at 1222 (emphasis added). The court in Independent

Bankers also said that “(t]he question of ‘public benefits,’ like th

more common administrative standard of ‘public convenience and

necessity,’ can be answered only by weighing all the facts.” 516 F.2d

at 1226 (emphasis in original).

*s Appendix A, at 49a (533 F.2d at 253).

** Appendix A, at 50a (533 F.2d at 253) (emphasis added). Spe-

cifically, the court said:

Indeed, in view of the difficult adjustments involved in entering

a new business .. . it may be the wisest policy [for Section 4

another mode of operation.

D. The Decision of the Court of Appeals Interprets the

“Public Benefits” Test Out of Existence

1. Arrogation of Decision Making. Section 4(c) (8)

requires bank holding company applicants to show that

approval of their applications can reasonably be expected

to result in benefits to the public, such as greater con-

venience, gains in efficiency and increased competition,

that outweigh possible adverse effects.** In the instant

cases, the Board determined that approval of the appli-

cations would result in all three of the foregoing public

benefits. The court, however, disagreed with the Board,

striking down the Board’s findings regarding both greater

convenience and gains in efficiency.” In so doing, the court

noted that the evidence suggested that the applicants’

proposals might well result in less convenience and re-

duced efficiency.** Having determined that the Board erred

in assessing the impact of the applications with regard to

two out of three of the public benefits factors making up

the overall public interest test, the court should have

remanded the cases to the Board so that the Board could

perform again the balancing process mandated by the

Act.”

2. Violation of State Law. Section 7 of the Act, 12

U.S.C. § 1846 (1970), prohibits the Board from approv-

*S See Appendix I (12 U.S.C. § 1843(c)(8) (1970)).

** Appendix A, at 37a-4la (533 F.2d at 247-49).

48 Jd. Throughout these proceedings, the IIAA parties argued that

any gains in efficiencies the applicants may have been able to show

(and there were none) had no relevance as far as Section 4(c) (8)

was concerned unless it could be shown that the fruits of such effi-

ciencies could be passed on to consumers in the form of lower prices

or improved services. Astonishingly, the court found that, under the

Act, gains in efficiencies were relevant even though they resulted

only in “better salaries or benefits to the provider’s employees, or

the availability of greater capital for expansion of the business.”

Appendix A, at 39a-40a n.21 (533 F.2d at 248 n.21).

4° SEC v. Chenery Corp., 318 U.S. 80, 88 (1943); ef. United States

v. Third National Bank, 390 U.S. 171, 183-84 (1968).

ing any bank holding company application which would

transgress state law.” The court in the instant cases

conceded that a “strong argument” could be made that

one of the insurance agency proposals would violate state

insurance licensing statutes.*? The court then found that

the Board had ignored the state law issue entirely by mak-

ing a factual determination regarding how the applicant

would operate its insurance agency “which seems to have

little support from [the applicant’s] own witnesses.”

Despite this glaring deficiency in the Board’s decision, the

court upheld the Board in its “apparent assumption that

{the applicant] will operate not precisely as its witnesses

suggested, but in a manner that will comply with [state]

law.” * Such a holding constitutes clear reversible error.™

3. The Board Violated Its Own Regulation. When the

Board announced the promulgation of Section 225.4(a)

(9), it made the price at which insurance is offered under

the regulation an overriding consideration in determining

whether approval of an application will be in the public

interest. Specifically, the Board

“(e]xpressed the expectation that any holding com-

pany or subsidiary that acts as an insurance agency

on the basis of the new regulatory provision will ex-

ercise a fiduciary responsibility—that is, by making

its best efforts to obtain the insurance at the lowest

practicable cost to the customer.” *°

& Trust Co., 379 U.S. 411, 424-25 (1965).

51 Appendix A, at 49a (533 F.2d at 252).

52 Appendix A, at 49a (id. at 253).

53 Appendix A, at 5la (id.) (emphasis added).

54 Universal Camera Corp. Vv. NLRB, 340 U.S. 474, 488 (1951):

12 U.S.C. §$§ 1843(c)(8), 1848 (1970); see NLRB v. Columbian

Enameling & Stamping Co., 306 U.S. 292, 299-300 (1939): 12

U.S.C. § 1850 (1970).

55 36 Fed. Reg. 15,525, 15,526 (1971) (emphasis added). It should

be noted that in this respect Section 225.5(a) (9) is consistent with

In the instant cases, it was established that “direct

billed” insurance policies carry a lower price to consumers

than identical policies where the billing is performed by

insurance agents.” Neither of the applicants stated that

it would offer “direct billed’ insurance policies. Since

(i) the Board’s regulation makes the price at which in-

surance is offered to the consumer an overriding consider-

ation in property and casualty insurance agency applica-

tions, and (ii) the applicants in the instant cases did not

intend to offer insurance “at the lowest practicable cost

to [their] customer[s],” the approval of both applications

was in violation of Section 225.4(a)(9).* For this rea-

son, the court of appeals should have reversed the Board’s

orders and its failure to do so constitutes reversible error.”

4. The Court Ignored the Record. As noted previously,

the court struck down the Board’s findings regarding the

greater convenience and gains in efficiency factors of the

“nublic benefits” test. The court took such action, at least

in part, because the Board had failed to recognize that the

Administrative Law Judge had arrived at exactly opposite

Section 225.4(a)(10) of the Board’s Regulation Y wherein the pro-

jection of reduced rates is enumerated as a key factor in determining

whether approval of bank holding company applications to under-

write credit life and credit disability insurance will be in the public

interest. See 12 C.F.R. § 225.4(a)(10) n.8 (1977).

°6 See Appendix A, at 39a (533 F.2d at 248). “Direct billed” poli-

cies are personal lines insurance policies which are issued, billed and

renewed by the insurance companies rather than retail insurance

agents. Since insurance agents are required to perform fewer ad-

ministrative tasks with respect to these policies, such agents receive

lower commissions and the policies can be offered at lower premiums

to consumers.

5? Td.

5§ The practical effect of the applicants’ proposals is that consum-

ers who purchase insurance from the applicants will pay higher

prices than are otherwise available through nonaffiliated insurance

agencies.

5° United Stateay, Nixon, 418 U.S. 683, 696 (1974); Service Vv.

Dulles, 354 U.S. 368, 388-89 (1957).

conclusions from its own and because the Board had made

no effort to explain its departure from the Administrative

Law Judge’s findings.” Regarding the increased competi-

tion factor of the test, the court stated that there existed

“no unexplained conflict” between the decisions of the

Board and those of the Administrative Law Judge.“ Such

conclusion simply is not supported by the record.

In one case the Administrative Law Judge found that,

in locations where the applicant’s banking subsidiaries

controlled substantial deposits, independent insurance

agents would be subjected to “destructive competition.” @

He also found that, where large banking institutions are

permitted to compete against “mostly small [insurance

agents] . . . it is possible, even probable, that the Mom

and Pop agency will be driven into merger or out of busi-

ness entirely ....”® In the other case, the Administra-

tive Law Judge found that, in markets where insurance

agents are forced to compete with “double-barrelled fi-

nancial conglomerate[s] . . . the independent agents

would have difficulty surviving.” “* He also found that

“the clientele [of large bank holding companies] that

could possibly be subtly influenced to divert [insurance

business away] from Atlanta independent agents is so

large that many of the latter could be driven out of busi-

ness or forced to merge into larger units resulting in

decreased competitions.” *

*° See Appendix A, at 38a-39a, 40a-4la (533 F.2d at 248, 249).

®t Appendix A, at 4la (id. at 249).

62 Appendix G, at 113a.

*s Jd. In the instant cases, it was not disputed that, “in general,

{the insurance agency business is] quite inconcentrated and one in

which entry barriers are low.” Appendix A, at 47a (533 F.2d at

251).

** Appendix H, at 138a-39a.

*5 Jd. at 138a. It is important to emphasize that, in both of the

instant cases, the Administrative Law Judge found that at least

“voluntary” tying of sales of insurance to extensions of credit would

be a likely result of approval of the applications. See Appendix G,

Consequently, as in the case of the greater convenience

and gains in efficiency factors of the test, there does exist

an “unexplained conflict” between the findings of the

Board and the finding of the Administrative Law Judge

regarding increased competition. For that reason, as in

the case of the other two factors, the court should have

rejected the Board’s findings concerning increased com-

petition and reversed the Board’s orders approving the

applications. Its failure to do so constitutes reversible

error.

5. The Board's Decisions Were Not Supported By Sub-

stantial Evidence. Section 9 of the Act requires that the

evidentiary findings of the Board in Section (4) (c) (8)

proceedings be supported by “substantial evidence.” “ As

previously noted, the court invalidated the Board’s find-

ings regarding greater convenience and gains in efficiency

on the grounds that they were not supported by substan-

tial evidence. Regarding the only remaining public bene-

fits factor, increased competition, the court stated that,

“while the evidence [supporting the Board’s conclusion]

on this issue certainly can be described as vague, ... it is

enough.” * This holding squarely presents the question of

whether evidence which is merely “vague” can ever afford

‘a substantial basis of fact from which the fact in issue

can be reasonably inferred.”’* The IIAA parties submit

that it cannot.

at 113a; Appendix H, at 137a-38a. The Board’s rejection of those

findings must be considered suspect in light of its previous acknowl-

edgement that the “inferior bargaining . »sition of the debtor” may

“easily” permit him to “receive the impression that his loan applica-

tion may be more favorably considered if he follows [the loan offi-

cer’s] suggestions.”” See note 28 supra.

* See Appendix I (12 U.S.C. § 1848 (1970)).

st Appendix A, at 4la-42a (533 F.2d at 249) (emphasis added).

** NLRB vy. Columbian Enameling & Stamping Co., 306 U.S. 292,

299 (1939).

CONCLUSION

For the foregoing reasons, the petition for writ of cer-

tiorari should be granted.

Respectfully submitted,

HERBERT E. MARKS

1735 New York Avenue, N.W.

Washington, D.C. 20006

(202) 833-9800

Counsel for Petitioners

Of Counsel:

WILKINSON, CRAGUN & BARKER

THOMAS E. WILSON

November 10, 1977

Appendices

APPENDIX A

Opinion of the United States

Court of Appeals for the Fifth Circuit

UNITED STATES COURT OF APPEALS

FIFTH CIRCUIT

Nos. 74-2981, 74-3544 and 74-3843

ALABAMA ASSOCIATION OF INSURANCE AGENTS, et al.,

Petitioners,

Vv.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,

Respondent.

GEORGIA ASSOCIATION OF

INDEPENDENT INSURANCE AGENTS, et al.,

Petitioners,

Vv.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,

R-spondent.

NATIONAL ASSOCIATION OF INSURANCE AGENTS, INC.,

Petitioner,

Vv.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,

Respondent.

June 10, 1976

Petitions for Review of Orders of the Board of Gov-

ernors of the Federal Reserve System (Alabama, Georgia

and Georgia Cases respectively).

Before TUTTLE, THORNBERRY and CLARK, Cir-

cuit Judges.

THORNBERRY, Circuit Judge:

These consolidated petitions for review of orders by the

Board of Governors of the Federal Reserve System rep-

resent the culmination of a four year campaign by South-

ern Bancorporation (Southern) of Birmingham, Ala-

bama, and First National Holding Corporation (First

National) of Atlanta, Georgia, to gain entry into certain

aspects of the insurance agency business. From a broader

perspective, they represent only one of many episodes

in a huge commercial tug-of-war between the bank hold-

ing company industry on one hand and independent in-

surance agents and other insurance industry groups on

the other. This struggle has taken place not only in

the courts, but in the Congress and before the Federal

Reserve System Board of Governors as well. After care-

fully considering the efforts and accomplishments of the

contending parties before those bodies and the arguments

advanced by the able counsel in this case, we find that

substantial ground has been gained by the bank holding

companies. We uphold for the most part the Board of

Governors’ action in granting Southern and First Na-

tional permission to act as agent with respect to specified

types of insurance and leave further struggle between

insurance agen holding companies in the

i eas to the marketplace."

‘We note, however, that the legislative struggle continues even

in the matters involved in this case. The “Competition in Banking

Act of 1975”, (S. 2721) presently pending in Congress, would

impose greater restrictions on bank holding company activities

in non-banking areas than presently apply. See BNA Antitrust &

Trade Reg. Rep. No. 754, at A-14 (Mar. 9, 1976)-

I. Legislative and Procedural Background

While recognizing that the protection of savings and

the extension of credit are useful and even essential to

our economic wellbeing, we as a nation have often been

distrustful of the concentrated economic power that may

accrue to the organizations that provide those services.

This feeling has not been left at large in the streets,

the factories, and the small businesses of the land, but

has been written into the law by Congiess; the Bank

Holding Company Act, 12 U.S.C. § 1841 et seg. is an

expression of that sentiment.* In passing the Act in

1956, Congress sought both to limit the concentration of

banking resources and to implement a policy that “bank

holding companies ought not to manage or control non-

banking assets having no close relationship to banking.”

Sen.Rep. No. 84-1095, 84th Cong., 1st Sess. (1956),

1956 U.S.Code & Adm.News at p. 2482. In furtherance

of the latter objective, acquisition by holding companies

of non-banking enterprises was prospectively forbidden.

12 U.S.C. § 1843(a) (1970). But a very important ex-

ception to the general prohibition was included: it re-

mained acceptable to acquire companies “of a financial,

fiduciary, or insurance nature . . . which the [Federal

Reserve] Board . . . has determined to be so closely re-

lated to the business of banking or of managing or con-

trolling banks as to be a proper incident thereto .. .”

§4(c) (8) of the Bank Holding Company Act of 1956,

12 U.S.C. § 1843(c) (8) (1970).*

2? Having had experience with holding companies in other areas

of commerce, Congress knew of the potential of such entities to

multiply by many times the degree of concentration within an

industry and to introduce unhealthy competitive practices in differ-

ent but related industries. See, e.g., 15 U.S.C. §79 et seg. (1970)

(Public Utility Holding Company Act).

’ The statutory provision referred to was §4(c) (6) of the Act

as passed in 1956. A 1966 amendment resulted in its renumbering.

Pursuant to this provision, the Federal Reserve Sys-

tem Board of Governors (hereinafter the Board) in the

late 1950’s and 1960’s granted many individual applica-

tions by holding companies to engage in nonbanking ac-

tivities, including the sale of insurance. And when

amendments to the Act were discussed in the late 1960's,

there was significant sentiment for broadening the

Board’s discretion in the area. Whether the proponents

of liberalization succeeded will be dealt with hereinafter;

but it is clear that the Holding Company Act Amend-

ments passed in 1970 contained several changes of sig-

nificance in this case. First, Congress permitted the

Board to make the determination whether particular lines

of business were closely related to banking and thus

within the § 4(c) (8) exception by general regulation, as

well as by order in individual cases. Second, the limita-

tion of such activities to those “of a financial, fiduciary,

or insurance nature” was deleted. Third, Congress mani-

fested unhappiness with the language requiring $ 4(c)

(8) activities to be “closely related to the business of

banking’; it required in 1970 only that the business be

“closely related to banking’. Fourth, the Board was

permitted to “differentiate between activities commenced

de novo and activities commenced by the acquisition, in

whole or in part, of a going concern.” Finally, and most

significantly, a “public benefits test” was added to the

criteria under § 4(c) (8) ; it provides that:

[I]n determining whether a particular activity is a

proper incident to banking or managing or control-

nks the mam shall consider{ Whether its per-

of a Holding company can

reasonably be nal to produce benefits to the

public, such as greater convenience, increased com-

petition, or gains in efficiency, that outweigh pos-

sible adverse effects, such as undue concentration of

| resources, decreased or unfair competition, conflicts

\ of interest, or unsound banking practices.

———

See cs eae ae

The Federal Reserve Board was not slow to use its

new power to issue § 4(c)(8) regulations. After rule-

making proceedings in 1971, in which petitioner Na-

tional Association of Insurance Agents (NAIA) par-

ticipated, the Board promulgated § 225.4(a) of Regula-

tion Y, which lists several nonbanking activities deemed

sufficiently related to banking to satisfy the requirements

of § 4(c)(8). Those relating to the insurance industry

and to this appeal are set out in § 225.4(a) (9):

(a) ... The following activities have been deter-

mined by the Board to be so closely related to bank-

ing or managing or controlling banks as to be a

proper incident thereto: ...

(9) acting as insurance agent or broker in of-

fices at which the holding company or its sub-

sidiaries are otherwise engaged in business (or

in an office adjacent thereto) with respect to

the following types of insurance:

(i) Any insurance for the holding company and

its subsidiaries;

(ii) Any insurance that (a) is directly related

to an extension of credit by a bank or a bank-

related firm of the kind described in this regula-

tion, or (6) is directly related to the provision

of other financial services by a bank or such

a bank-related firm, or (c) is otherwise sold as

a matter of convenience to the purchaser, so

long as the premium income from sales within

this subdivision (ii)(c) does not constitute a

significant portion of the aggregate insurance

premium income of the holding company from

insurance sold pursuant to this subdivision (ii) ;

(iii) Any insurance sold in a community that

(a) has a population not exceeding 5,000, or

(6) the holding company demonstrates has in-

adequate insurance agency facilities.

12 C.F.R. § 225.4(a) (9) (1976).

No judicial review of this regulation was immediately

sought. On September 6, 1972, the Board issued a regu-

lation indicating its views as to the operative meaning

of § 225.4(a)(9) in several particulars. § 225.228 of

Regulation Y, 12 C.F.R. § 225.228 (1976). NAIA sought

review of that reguiation in the Court of Appeals for

the District of Columbia Circuit, but that court dismissed

the petition, holding that the regulation was merely in-

terpretive and did not have the force of law. Because

the issues thereby raised could be litigated in connection

with specific applications under the Act, the court found

the petition premature. National Ass’n of Ins. Agents,

Inc. V. Board of Governors of Federal Reserve System,

160 U.S.App.D.C. 144, 489 F.2d 1268 (1974).

Among the flurry of applications for permission to en-

gage in nonbanking activities which followed the adoption

of § 225.4(a) of Regulation Y were those of Southern

Bancorporation and First National Holding Corporation.

They were submitted separately in February of 1972, but

sought authority to sell, through subsidiaries, many of

the same types of insurance. Some of the lines, such as

credit life, credit health and accident insurance, and mort-

gage redemption insurance are not in issue here. The

applications to sell other types of insurance were and are

hotly contested. In this category are property damage

insurance on assets being financed by banks owned by the

holding company, liability insurance for borrowers from

such banks, and “convenience” insurance as defined in

Regulation Y.

The insurance industry parties in this case immediately

expressed their opposition to the Southern and First Na-

tional applications. After more than a year of prepara-

tion and preliminary skirmishing, the applications were

considered consecutively at hearings before Administra-

tive Law Judge Paul N. Pfeiffer in June, 1973. In early

1974, Judge Pfeiffer announced his findings and recom-

mended decision: although the insurance activities pro-

posed by Southern and First National were wit*in the

“closely related” standard of § 4(c) (8), as reasor. iy in-

terpreted by the Board in its regulation, the holding com-

panies had failed to meet the “public benefits” test added

to the Act in 1970 (as to all but proprietary insurance

for the holding company and its subsidiaries, and credit

life, credit health and accident, and mortgage redemption

insurance). In particular, the Administrative Law Judge

found that there did not appear to be a reasonable ex-

pectation of substantial increased convenience to the pub-

lic, that there was no basis for an expectation of operating

economies which might be passed on to the consumer, that

there were possibilities of unfair competition in the sale

of insurance through “voluntary tying” of insurance pur-

chases to bank loans; that the market power of each hold-

ing company was such that it could divert certain captive

clientele of the banks from existing independent insur-

ance agencies; and that sales of surety bonds could involve

the holding companies in conflicts of interest.

The holding companies were down, but by no means

out. They pressed their claims vigorously before the Fed-

eral Reserve Board and, in July and September of 1974,

the Board responded favorably. In its orders, the Board

noted its previous determination in § 225.4(a) (9) that

certain insurance activities were permissible within the

meaning of § 4(c) (8) of the Bank Holding Company Act.

It adhered to that determination and found that, with

minor exceptions,‘ the applications by Southern and First

*The Board excluded authorization for the sale of use and occu-

pancy insurance, and business interruption and fidelity insurance

National were within the regulation. The Board generally

accepted the basic factual findings of the Administrative

Law Judge, but drew almost directly opposite conclusions

from them. It concluded that it was reasonable to expect

that the proposed activities would likely produce benefits

to the public in convenience, efficiency, and increased com-

petition, and that there was no danger of undue concen-

tration of resources, no likelihood of conflicts of interest,

and no evidence that there would be unfair competition in

the form of coercive or voluntary tying of loans and in-

surance purchases. Accordingly, both Southern and First

National were given permission to act as broker with re-

spect to all of the lines of insurance presently in dispute.

II. Parties

The petition for review in No. 74-2981 was brought by

the National Association of Insurance Agents, the Ala-

bama Association of Insurance Agents, the Birmingham

Association of Insurance Agents, and several individual

insurance agencies. NAIA also is a petitioner in No. 74-

3544, along with the Georgia Association of Independent

Insurance Agents and several individual agencies. To-

gether the 74-2981 and 74-3544 petitioners shall be re-

ferred to hereinafter as “the NAIA parties’. All peti-

tioners are or represent individual insurance agencies

which are primarily small businesses selling insurance

policies issued by more than one underwriter.

Southern Bancorporation (formerly known as The Ala-

bama Financial Group, Inc.) is a bank holding company

headquartered in Birmingham, Alabama. Its primary

business is banking and it has subsidiaries in that busi-

ness operating in twelve Alabama cities. Several of these

subsidiaries have more than one banking office; the Bir-

mingham Trust National Bank has over twenty. Southern

because of lack of evidence. After a petition for review was filed in

the Alabama case, the Board rescinded its authorization of the sale

of mortgage guaranty insurance without Southern’s objection.

also has three nonbanking subsidiaries: AFG Data Serv-

ices, Inc., Alabama Financial Leasing, Inc., and Southern

State Life Insurance Co.

Southern is the third largest bank holding company in

Alabama, controlling approximately ten per cent of all com-

mercial bank deposits in the state. It controls about

twenty-two per cent of bank deposits in the Birmingham

metropolitan area and nearly half of deposits in the Do-

than metropolitan area and in Marion County. With the

other four largest bank holding companies in Alabama,

Southern controls approximately seventy-five per cent of

commercial bank deposits in the state.

First National Holding Corporation, unlike Southern,

is a one-bank holding company.’ Its banking subsidiary,

First National Bank of Atlanta, has over forty offices in

two counties of the Atlanta metropolitan area. It is the

second largest bank in the area, with about twenty-five

per cent of all bank deposits. The holding company also

has 162 subsidiaries engaged in various business and fi-

nancial endeavors in Georgia and neighboring states. The

most important of these for our purposes is Tharpe &

Brooks, Inc., a whally owned subsidiary which is in the

mortgage banking business. Unlike Southern, which pro-

poses to establisl. a new insurance agency to carry on the

activities, First National plans to conduct its insurance

activities through First South Insurance Agency, a Tharpe

& Brooks subsidiary.

A. Jurisdiction to Review

The jurisdiction of this court derives from 12 U.S.C.

§$ 1848, which authorizes review of a Federal Reserve

Board “order” at the instance of a person thereby ag-

grieved. On the basis of the wording of this provision,

5 As such, First National was not subject to the Bank Holding

J Company Act until the passage of the 1970 Amendments.

-* oa

10a

the Board asserts that we lack power to review § 225.4

(a) (9) of Regulation Y, which was promulgated in 1971

and not challenged at that time. The Board correctly

notes that there are significant legal differences between

orders and regulations, and argues that the finality of a

great number of Board orders under the regulation would

be cast in doubt if review of the regulation were per-

mitted at this time.

We disagree with the Board and find that it is our duty

to review not only these orders, but the regulations upon

which they are partially based. For one thing, the courts

have held that a statutory provision for review of orders

permits review of regulations, even standing alone, where

the issues are primarily legal rather than factual, and

there is an adequate record for review. See Deutsche Luft-

hansa Aktiengesellischaft v. CAB, 156 U.S.App.D.C. 191,

479 F.2d 912 (1973); City of Chicago v. FPC, 147 USS.

App.D.C. 312, 458 F.2d 731 (1971), cert. denied, 405 U.S.

1074, 92 S.Ct. 1495, 31 L.Ed.2d 808 (1972). See also Pa-

cific Gas & Elec. Co. vV. FPC, 164 U.S.App.D.C. 371, 506

F.2d 33, 47-48 (1974). This principle was-illustrated in

the recent decision in National Courier Ass’n Vv. Board of

Governors of Federal Reserve System, 170 U.S.App.D.C.

301, 516 F.2d 1229 (1975) (Couriers), in which the court

reviewed amendments to § 225.4(a) of Regulation Y un-

der the jurisdictional provision for review of “orders”

invoked here. The case before us arguably fulfills the

applicable criteria, since the issues are primarily legal—

whether the activities listed in the regulation meet the

statutory “closely related” test—and there is factual ma-

terial concerning the relationship of these activities to

banking in the voluminous record compiled in these pro-

ceedings.

More importantly, we believe that even belated review

of these regulations should not be foreclosed in the cir-

cumstances of this case. We deal here with orders that

lla

involve two basic issues concerning the holding company

applications: whether they meet the “closely related” test

and whether they meet the “public benefits” test. The

latter, by its nature, may be conclusively resolved only in

the context of specific applications,* Independent Bankers

Ass’n of Georgia v. Board of Governors of Federal Re-

serve System, 170 U.S.App.D.C. 278, 516 F.2d 1206, 1215-

16 (1975) ; American Bancorp., Inc. v. Board of Governors

of Federal Reserve System, 509 F.2d 29, 38-39 (8 Cir.

1974), while the former can be resolved either on an indi-

vidual basis or by regulation. See 12 U.S.C. § 1843(c) (8).

®* The Board of Governors, in the Georgia case, stated that “in

adopting the Insurance Regulation, [it had] found that the per-

formance by bank holding companies of those activities authorized

by such Regulation satisfied, in general, this. public benefits test.”

IV Consolidated Joint Appendix 736 (hereinafter “App.”). The

NAIA parties argue that this indicates that the Board shifted the

burden on the issue of net public benefits from the proposed activi-

ties from the applicant to the petitioners.

We agree that such a shift in the burden of proof by the Board

would be error. See Conf. Rep. No. 91-1747, 91st Cong., 2d Sess.,

(1970) (Statement of the Managers on the Part of the House, here-

inafter referred to as “Conference Report”), 1970 U.S.Code Cong.

& Adm.News at p. 5570. The variables which Congress named as

relevant to the public benefits determination are necessarily de-

pendent upon local industry and market structures, upon the par-

ticular applications, and upon other factors which will vary widely

in individual instances. While it may or may not be true that the

Board makes a “general” public benefits determination in promul-

gating regulations on the “closely related” issue, see note 19 infra,

any such determination should have no effect on the individualized

inquiry which the Board must make in ruling on specific applica-

tions.

We find no indication, however, that the Board did shift the

burden of proof to petitioners. Instead, the Board recognized that

the public benefits determination required in connection with the

specific applications was in addition to any general determination.

IV App. 736. There is nothing in either of the Board’s orders that

has been cited to us or that we have found which indicates that the

Board did not act on its apparent belief that the individual public

benefits determinations were to be additional to and separate from

the generalized findings embodied in § 225.4(a) (9).

12a

Although the Board’s decision to proceed by regulation

was clearly proper, we note that its effect is not merely

to narrow the area of contention between the parties on

the “closely related” question, but in some respects to

conclude that question in favor of the applicants.’

In light of the determinative effect of the regulation on

some issues involved in the promulgation of these orders,

it would be an “empty and useless thing” to review them

without scrutiny of the regulation as well. Doe v. CAB,

356 F.2d 699, 701 (10 Cir. 1966), quoted in International

Harvester Co. v. Ruckelshaus, 155 U.S.App.D.C. 411, 478

F.2d 615 (1973). We would partially abdicate our judi-

cial duty if we were to allow the time limit for direct re-

view to insulate forever this regulation, which has never

been judicially tested, from scrutiny as to its consistency

with Congressional mandate, all the while “reviewing”

orders based, in significant part, wholly and directly upon

it. Perhaps more importantly, that course would be unjust

to many of the petitioning parties. It may be fair to say

that NAIA, which participated in the rulemaking proceed-

ings in 1971, had a chance to challenge this regulation

within thirty days of its promulgation.* But is it fair to

* This is true, for example, of the “convenience” insurance author-

ized by § 225.4(a)(9)(ii)(c). Since the applications virtually track

the language of this rather vague authorization, refusal to review

the regulation would be tantamount to approval of the application

on this point.

*It also may not be fair, in view of the fact that NAIA sought

to raise many of these issues promptly upon the promulgation in

September, 1972, of a regulation interpreting § 225.4(a)(9) of

Regulation Y, 12 C.F.R. § 225.228. The Board in response strenu-

ously and successfully argued that review of those regulations was

at that time premature, since the issues could be raised in pro-

ceedings like this one! ational Ass'n of Ins. Agents, Inc. v. Board

of Governors of Federal Reserve System, 160 U.S.App.D.C. 144,

489 F.2d 1268 (1974).

We note also that considerations of concreteness and ripeness

counsel that organizations like NAIA be permitted to wait until

18a

say the same thing of petitioner, R. A. Brown Insurance

Agency, Inc., in Alabama, or Morris-Fallaize Insurance,

Inc., in Georgia, which may bear the economic detriments

potentially arising from these applications? We believe

not and find that, considerations of finality notwithstand-

ing, our duty to see that the Congressional mandate in

§$4(c) (8) is carried out in the individual cases which

come before us requires review of § 225.4(a) (9) of Regu-

lation Y. See Oljato Chapter of Navajo Tribe v. Train,

169 U.S.App.D.C. 195, 515 F.2d 654, 659 & n. 6 (1975);

Functional Music Inc. v. FCC, 107 U.S.App.D.C. 34, 274

F.2d 543 (1958), cert. denied, 361 U.S. 813, 80 S.Ct. 50,

4 L.Ed.2d 81 (1959).

B. Procedural Validity

We pass then to the question of whether the regulation

complied with the requirement of the Administrative Pro-

cedure Act that

the agency shall incorporate in the rules adopted a

concise general statement of their basis and purpose.

5 U.S.C. §553(c) (1970). In this case, the regulation

contained nothing that might be thought to respond to

this statutory command other than the statement that

{t]he following activities have been determined by

the Board to be so closely related to banking or man-

aging or controlling banks as to be a proper incident

thereto.

This statement does no more than conclusorily announce

the import of the regulation. It does nothing to illuminate

specific cases applying regulations arise before seeking review. In

that way, courts like this one are presented with a more adequate

record and more information as to the full ramifications of the

regulations, and with argument by adversary parties other than the

promulgating agency. All of these factors aid the court in reaching

an informed decision. See K. Davis, Administrative Law Treatise

§ 21.01 (1958).

l4a

the process by which the Board arrived at the regulation

and accordingly is of little use in fulfilling the purposes

of the statute, the facilitation of judicial review. See

Amoco Oil Co. v. EPA, 163 U.S.App.D.C. 162, 501 F.2d

722 (1974); Automotive Parts & Accessories Ass’n V.

Boyd, 132 U.S.App.D.C. 200, 407 F.2d 330 (1968); Na-

tional Resources Defense Council, Inc. v. SEC, 389 F.Supp.

689 (D.D.C. 1974). The APA provision “does not require

the agency to supply specific and detailed findings and

conclusions of the kina customarily associated with formal

proceedings”, but this limitation “does not lessen or excuse

the agency’s obligation to publish a statement of reasons

that will be sufficiently detailed to permit judicial review.”

National Nutritional Foods Ass’n v. Weinberger, 512 F.2d

688, 701 (2 Cir. 1975).

This statutory requirement, however, has not been en-

forced with the vigor that would, at first blush, seem indi-

cated. Statements with no more informative content than

the one before us have been held to pass muster. Auto-

motive Parts & Accessories Ass’n-V. Boyd, supra; New

York Freight Forw’rs & Brokers Ass’n Vv. Federal Mari-

time Comm’n, 337 F.2d 289 (2 Cir. 1964), cert. denied,

380 U.S. 910, 85 S.Ct. 893, 13 L.Ed.2d 797 (1965). And

regulations with no statement of basis and purpose at all

have been upheld where the court deemed the basis and

purpose obvious. Hoving Corp. v. FTC, 290 F.2d 803 (2

Cir. 1961).

The rationale of these decisions is not difficult to ascer-

tain. Courts must have an adequate basis to engage in

judicial review, but, as partners with the agencies in the

effectuation of Congressional will through the administra-

tive process, they do not function to strike down agency

action because of merely formal or technical flaws. Greater

Boston Tel. Corp. v. FCC, 143 U.S.App.D.C. 383, 444 F.2d

841, 851 (1970), cert. denied, 403 U.S. 923, 9i S.Ct. 2229,

29 L.Ed.2d 701 (1971); Braniff Airways v. CAB, 126

15a

U.S.App.D.C. 399, 379 F.2d 453, 465-68 (1967). For this

reason, a court must not only examine whether an agen-

cy’s promulgation of a challenged regulation complies with

the procedural requirement; it must also determine wheth-

er, in light of the nature and content of the regulation

and of the underlying legislation, the extraneous material

which may be available to explain the basis and purpose

of the agency action, and the quantum of action taken in

reliance on the regulation, any procedural flaw so subverts

the process of judicial review that invalidation of the

regulation is warranted.

We find that this case is one in which we can “discern

the path” of the Board with sufficient confidence. See

Environmental Defense Fund, Inc. v. EPA, 167 U.S.App.

D.C. 71, 510 F.2d 1292, 1804 (1975), quoting Greater

Boston Television Corp. v. FCC, 143 U.S.App.D.C. 383,

444 F.2d 841, 851 (1970), cert. denied, 403 U.S. 923, 91

S.Ct. 2229, 29 L.Ed.2d 701 (1971). The regulation at

issue is not one which purports to carry out a vague statu-

tory command through prescription of detailed standards

of conduct, or sets out a complex method of proceeding in

order to receive some type of agency approval. Cf. Na-

tional Ornament & Elec. Light Christmas Ass’n, Inc. V.

Consumer Product Safety Comm., 526 F.2d 1368, 1371-72

(2 Cir. 1975). To the contrary, the regulation makes a

single and limited factual and legal determination: that

certain insurance activities are so “closely related” to

banking as to be proper incidents thereto. For this rea-

son, it is not necessary for the agency to explain what the

purpose of the regulation is; it obviously is intended to

facilitate the process of applying for holding company

authority to engage in nonbanking activities while au-

thorizing only such activities as are permissible under the

“closely related” standard.

The basis for the agency’s designation of these particu-

lar activities as permissible is less clear. But to aid us

16a

in divining it we have not only the detailed briefs of the

several parties and amici, the pre-1970 decisions of the

Board on applications to engage in insurance activities,”

and the legislative history of the 1956 Act and the 1970

Amendments, but also the extensive record in the hearings

before the Administrative Law Judge in these cases. Cf.

Automobile Parts & Accessories Ass’n V. Boyd, supra at

338 (court may consider statement of agency in denying

rehearing) ; Environmental Defense Fund v. EPA, 167

U.S.App.D.C. 71, 510 F.2d 1292, 1304 & n. 40 (1975)

(resort to detailed factual record is permissible in lieu of

complete findings in hearing contest). Admittedly, much

of the record is not relevant to the Board’s reasoning on

the “closely related” issue and that portion which is rele-

vant is “after the fact” explication of which we have every

right to be suspicious. See Rodway v. Department of Agri-

culture, 168 U.S.App.D.C. 387, 514 F.2d 809, 816-17

(1975). But we find that there is enough here, in light

of the limited nature of the regulation and the impact of

its wholesale invalidation for non-substantive flaws, that

we can “see whether the agency, given an essentially leg-

islative task to perform, has carried it out in a manner

calculated to negate the dangers of arbitrariness and ir-

rationality.” Automotive Parts & Accessories Ass’n V.

Boyd, supra at 338.

C. Substantive Challenges

The NAIA parties generally argue that the activities

listed in § 225.4(a) (9) of Regulation Y violate § 4(c) (8)

of the Bank Holding Company Act in that they are not

sufficiently “closely related to banking.” Although their

efforts are directed most vigorously toward the portion

of the regulation which the Board has relied upon in

authorizing the sale of property and liability insurance

®* The Board ruled on 27 applications to engage in insurance ac-

tivities during this period.

17a

in these orders, we find that the very general language

of the regulation on that subject is permissible. Other

portions, however, authorize the sale of insurance that is

so clearly unrelated to banking that they must fall.

As the Board recognizes, the “closely related” standard

imposes definite limits upon its discretion to permit non-

banking activities by bank holding companies. Accord-

ingly, the Board rejected applications to engage in some

insurance activities, even before the 1970 Amendments."

However, the great majority of pre-1970 insurance appli-

cations were approved by the Board, and these constituted

most of the nonbanking activities authorized under § 4(c)

(8) prior to 1970. Among the specific types of activities

authorized were insurance for the holding company and

its employees, comprehensive property insurance, and re-

newal of insurance covering collateral on a loan after it

had been repaid.

It was against this backdrop that Congress acted in

1970. Both the Senate and House of Representatives

passed legislation which was intended in part to give

the Board greater discretion in administering the Act."

10 See, e.g., General Contract Corp., 1959 Fed.Res.Bull. 260, Trans-

america Corp., 1957 Fed.Res.Bull. 1014 (involving insurance under-

writing rather than agency).

11 Sen.Rep. No. 91-1084, 91st Cong., 2d Sess. 12 (1970), 1970 U.S.

Code Cong. & Adm.News at p. 5530 (hereinafter referred to as

“Senate Report”), provides:

First, the language of the act will be amended to allow the

Federal Reserve Board greater flexibility in determining what

nonbanking activities and acquisitions are to be permitted bank

holding companies.

The House Report, H.R.Rep. No. 91-387, 91st Cong., 2d Sess. 14

(1970) (hereinafter referred to as “House Report”), similarly

states:

The committee amendment gives the Federal Reserve Board

added flexibility in administering the Act in terms Chairman

Martin himself has suggested.

18a

In particular, both houses approved a change of the

“closely related” language of the 1956 Act to a require-

ment that nonbanking activities need be only “func-

tionally related’’ to banking.** The two bills did not

completely agree, however; the House of Representatives

included a provision specifically prohibiting holding com-

panies from engaging in six nonbanking activities, in-

cluding insurance agency activities other than those re-

lating to credit life, and credit health and accident in-

surance.

The conflict between the “functionally related” lan-

guage, which clearly was intended to broaden to some

degree the Board’s discretion in approving nonbanking

activities, and the specific prohibitions in the House bill

made for a difficult Conference Committee session. Ulti-

mately, the list of prohibited activities was deleted from

the Act, apparently in return for a retention of the pre-

1970 ‘“‘closely related’ language. Four of the seven

House conferees ** emerged to argue that the resulting

legislation should “be construed to mean that the Con-

gress was not convinced that such expansion and liberali-

zation was justified.” Conference Report, 1970 U.S.Code

Cong. & Adm.News at p. 5572. See also 116 Cong.Rec.

41952, 41961 (1970) (remarks of Rep. Patman). The

Senate conferees and the minority House conferees, how-

ever, argued that even the compromise bill which sur-

2 This language was inserted at the request of the then-Chairman

of the Federal Reserve Board, William McChesney Martin. See

Conference Report, 1970 U.S.Code Cong. & Adm.News p. 5566;

Senate Report, 1970 U.S.Code Cong. & Adm.News p. 5531.

‘S Those members of the Conference Committee signing the Con-

ference Report were Rep. Wright Patman (D-Tex.), Chairman of

the House Banking and Currency Committee, Rep. William A.

Barrett (D-Pa.), Rep. Leonor K. Sullivan (D-Mo.), and Rep. Henry

Reuss (D-Wis.). The Congressional practice in 1970 was that only

House members would write a “statement of managers” accom-

panying Conference Reports. See 116 Cong.Rec. 42422 (1970).

19a

vived the Conference represented a liberalization of the

law."

Certainly some other changes in the Act represent a

modest broadening of the Board’s discretion. The deletion

of the requirement that the nonbanking activity be of a

“financial, fiduciary, or insurance nature” and that it

relate to the “business of banking” are examples.** And

it can be argued that the belief of the majority of the

entire Conference Committee should be given precedence

over that of the slim majority of the House conferees.

Nevertheless, on balance we cannot concur in the District

of Columbia Court of Appeal’s conclusion that “it is plain

that Congress intended to expand [the Board’s] latitude

in substantial degree”. 516 F.2d at 1236. Any liberaliza-

tion of the standards effected by these minor wording

changes was largely if not wholly offset by the Con-

ference Committee’s rejection of the “functionally related

standard” and the addition of the public benefits test.

The purpose and effect of the 1972 Amendments in this

particular was quite ambiguous, and we find that no

significant change in the general range of the Board’s

discretion was effected by them.

Despite petitioners’ earnest efforts to persuade us to

this conclusion, however, we find that it avails them

little. One reason for this is that the pre-1970 law simply

#116 Cong.Rec. 41952-53 (remarks of Rep. Widnall); id. 42422,

42424 (remarks of Sen. Sparkman); id. 42431 (remarks of Sen.

Bennett).

* The latter change in particular was sought by the Board to

make it clear that nonbanking activities need not relate to the

particular banking business of the applicant but to banking in

general, thus permitting activities in areas geographically removed

from the applicant’s bank operations. See Conference Report, 1970

U.S.Code Cong. & Adm.News pp. 5566-67. There is persuasive evi-

dence that the insertion of the “functionally related” language was

intended only to accomplish this, and not to effect a general broad-

ening of permissible activities. See 116 Cong.Rec. 42434 (1970)

(letter from Arthur F. Burns, Chairman of the Federal Reserve

Board).

me |

20a

was not very restrictive in the insurance area. Peti-

tioners correctly note that approval of many pre-1970

insurance applications was grounded in part on long es-

tablished bank practices in the local area involved and

the existence of bank competitors already carrying on

insurance activities."* But, even so, the fact remains that

the Board between 1956 and 1970 rejected the first two

applications to engage in insurance activities and there-

after granted all twenty-five applications which came

before it, many without reference to local practices; this

hardly bespeaks a highly restrictive policy.

Petitioners have been able to cite nothing in the legis-

lative history to indicate disapproval of the Board’s pre-

- 1970 decisions. To the contrary, the Senate Report stated

that

the deletion of [the restriction to “financial, fiduc-

iary, or insurance” activities] shall not be construed

as indicating the committee’s intent that these ac-

tivities be no longer permitted. To the contrary,

these activities are “functionally related to bank-

ing’ and are included under the new provision

adopted by the committee to the full extent they were

permitted under the existing act, and to such addi-

tional extent as the Board may find it desirable un-

der the new criteria established.

Senate Report, 1970 U.S.Code Cong. & Adm.News at p.

5533 (emphasis supplied). Of course, the “functionally

related” language disappeared in conference, but even

the House members who held the more restrictive view

of the resulting legislation quoted the Senate Report’s

language, emphasizing that “these... are included...

to the full extent they were permitted undcr the existing

act.”” Conference Report, 1970 U.S.Code Cong. & Adm.

1° E.g., Bank Shares, Inc., 45 Fed.Res.Bull. 954 (1959); First

Bank Stock Corp., 45 Fed.Res.Bull. 917 (1959).

2la

News at p. 5565. See also 116 Cong.Rec. 41963 (remarks

of Rep. Reuss).

We have, then, a series of interpretations of the “closely

related” standard with respect to insurance activities,

over a period of fourteen years, by the agency charged

with setting the machinery of the Bank Holding Company

Act in motion. See Chemehuevi Tribe of Indians V.

FPC, 420 U.S. 395, 409-10, 95 S.Ct. 1066, 1075, 43 L.Ed.

2d 279, 290 (1975) ; Trafficante v. Metropolitan Life Ins.

Co., 409 U.S. 205, 210, 93 S.Ct. 364, 367, 34 L.Ed.2d

415, 420 (1972); FDIC v. Summer Fin. Corp., 451 F.2d

898 (5 Cir. 1971). The “great respect” that is due such

interpretations “is enhanced by the fact that Congress

gave no indication of its dissatisfaction of the agency’s

interpretation of the scope of its . . . jurisdiction when

it amended the Act.” Chemehuevi Tribe of Indians, supra.

See Saxbe v. Bustos, 419 U.S. 65, 95 S.Ct. 272, 42 L.Ed.

2d 231 (1974); Reeb v. Economic Opp’y Atlanta, Inc.,

516 F.2d 924 (5 Cir. 1975). We must be most reluctant

_then, to reach results which would repudiate pre-1970

Board decisions, particularly in view of the fact that the

Board’s expertise in this area must be presumed to ex-

ceed ours. See Brenan v. General Tel. Co., 488 F.2d 157,

160 (5 Cir. 1973).

A second reason why petitioners have a difficult bur-

den derives from our limited role in reviewing these regu-

lations. Because this regulation does not involve findings

“required by statute to be made on the record after op-

portunity for an agency hearing,” see 5 U.S.C. §§ 553,

556-57 (1970) ; Couriers, 516 F.2d at 1235 n. 6, the “sub-

stantial evidence” standard of review is not the proper

one. See United States v. Allegheny-Ludlum Steel Corp.,

406 U.S. 742, 749, 92 S.Ct. 1941, 1946-47, 32 L.Ed.2d

453, 460 (1972); Couriers, 516 F.2d at 1235 n. 7. In-

stead, we need determine only whether the Board’s find-

ings of fact are “arbitrary, capricious, an abuse of dis-

22a

cretion, or otherwise not in accordance of law”, 5 U.S.C.

$706 (1970), and determine questions of law for our-

selves. Couriers, 516 F.2d at 1235-36.

With these observations we turn to the portion of

$ 225.4(a) (9) under primary attack. It provides that a

holding company subsidiary may act as an insurance

agent or broker with respect to:

(ii) Any insurance that (a) is directly related to

an extension of credit by a bank or a bank-related

firm of the kind described in this regulation, or (b)

is directly related to the provision of other financial

services by a bank or such a bank-related firm... .

The immediately apparent fact is that these sections rep-

resent only slightly more narrow definitions than the

“closely related” language itself. They state in essence

that one type of “close” relation to banking exists when

there is a “direct” relationship of the activity to an ex-

tension of credit or other financial service. Since the es-

sential function of banking is the provision of credit or

other financial services, the primary result of the regula-

tion itself is merely to shift the inquiry from the word

“close’’ to “direct”. Such a minute change cannot be

deemed outside the Board’s discretion; if there is in-

validity in the Board’s action pursuant to this regulation,

it must be in the application of the regulation to the

particular activities authorized under it.

Other parts of § 225.4(a)(9) represent more sub-

stantial departures from the wording of the Act. The

first example is subsection (i), which permits the sale

of “any insurance for the holding company or its sub-

99 17

sidiaries”.‘’ Acting pursuant to this authorization, the

** Petitioners have not specificaliy attacked this portion of

§ 225.4(a) (9), but in view of their general contention that insurance

agency activities other than the sale of credit life, and credit, health

and accident insurance are not “closely related” to banking. Brief

23a

Board approved applications by both Southern and First

National and authorized the sale of any insurance with-

in the terms of subsection (i).

It is apparent that at least some of the insurance sales

thereby permitted will relate only tangentially to the

basic functions of banks: the protection of savings and

the provision of financial services. For example, the

regulation would authorize the sale of group health in-

surance for janitorial and maintenance employees, and

property insurance on the physical assets of banking

subsidiaries, such as bank fixtures or real property owned

by the bank. Moreover, sales of insurance to the holding

company or to nonbanking subsidiaries would be per-

mitted. In the case of First National, for instance, the

insurance subsidiary could sell insurance to Gulf Finance

Corporation of Mississippi or Woods-Tucker Leasing

Company, which has offices in Mississippi and Louisiana.

However, convenient to the holding company it is to elimi-

nate the need to pay the commissions of an unrelated

insurance broker for such insurance, the relationship of

the brokering of such insurance to banking is difficult to

discern.

We do not seek to be restrictive in determining what

types of relationships to banking are cognizable under

the Act. As the Couriers court stated, activities meeting

the following criteria seem permissible:

1. Banks generally have in fact provided the proposed

services.

2. Banks generally provide services that are. opera-

tionally or functionally so similar to the proposed

services as to equip them particularly well to pro-

vide the proposed service.

for Petitioners at 45, 49, Alabama Ass'n of Ins. Agents, Inc. V.

Board of Governors; Brief for Petitioners at 46, 51, Georgia Ass'n

of Ind. Ins. Agents v. Board of Governors, it is our duty to deter-

mine its validity.

24a

3. Banks generally provide services that are so in-

tegrally related to the proposed services as to re-

quire their provision in a specialized form.

516 F.2d at 1237. Clearly, however, brokering insurance

for even those subsidiaries of a holding company which

are banks does not come within these strictures. We have

been apprised of no general practice on the part of banks

(and certainly the Board has not articulated one) to

broker the types of insurance that they need for their

own account and we know of no evidence that they have

provided “functionally” or “integrally” related insurance

services. Certainly any past practice in which banks

have engaged in this area does not cover “any” type of

insurance which the banks or their subsidiaries might

require.

We are willing, however, to consider broader types of

relationships. For example, it cannot be doubted that

many types of insurance for banking subsidiaries are

helpful, and perhaps essential, to the success of the enter-

prise, and thus to the provision of financial services. Such

insurance may protect the physical facilities which are

necessary to banking, insure the fidelity of the employees

who are intimately involved in banking operations, or

insure the availability of necessary health care for the

employees who directly or indirectly provide financial

services. The relationship of such insurance to “bank-

ing” is in some cases quite indirect; in many cases the

bank’s need for it is no different than the need of any

business enterprise. But in view of the limited role of

this court in reviewing these regulations, we are unwill-

ing to say that the Board was wrong in finding it suf-

ficient.

As noted above, however, even this rationale cannot

justify the Board’s authorization of the holding com-

panies to broker insurance for themselves or their non-

25a

banking subsidiaries. Such insurance simply does not

contribute to the operations of those subsidiaries actually

engaged in the banking business. Perhaps it could be

argued that uninsured losses of those businesses or of the

holding company may. affect the availability of resources

to the banking subsidiary or other policies of the di-

rectors or shareholders of the holding company, who di-

rectly or indirectly control the banking subsidiaries. But

the Board has not, to our knowledge, articulated this

rationale and, in j so attenuated

.« as to even from the broad area of disc

the Board is entitled. We therefore find that the

portion of § 225.4(a) (9) (i) which authorizes the sale of

insurance for bank holding companies and nonbank sub-

sidiaries of holding companies must be invalidated, and

the portions of the orders under review which authogj

e sale of such insurance must also fall.

e regulation is (ii) (c),

which authorizes holding company subsidaries to act as

agents with respect to insurance that

is otherwise sold as a matter of convenience to the

purchaser, so long as the premium income from sales

within this subdivision (ii) (c) does not constitute a

significant portion of the aggregate insurance pre-

mium income of the holding company from insurance

sold pursuant to this subdivision (ii)....

The Board argues that this provision “permits the hold-

ing company agency to round-out its insurance offer-

ings” by, for example, permitting renewal of policies

covering an automobile after a loan from a holding

company bank on the automobile has been repaid. The

Board stresses also that, in its interpretive regulation,

12 C.F.R. § 225.128(e), it limited premiums from sales

of “convenience insurance” to less than five per cent of

the aggregate premium income of the holding company

agency, and stated specifically that this provision was

26a

not designed to permit entry into a general insurance

agency business. It further argues that, as the business

of a holding company agency increases over time, a larger

portion of its convenience insurance sales will be re-

newals of insurance on property on which indebtedness

has been fully repaid, until that is the only type of con-

venience insurance sold.

The Board may well be correct in its forecasts. And

it may be correct in assuming that such renewal in-

surance would be “closely related” to banking within the

meaning of the Act. But the fact is that the regulation

is not so restricted. It permits holding company affiliates

to sell any type of insurance under any conditions as a

“matter of convenience”, imposing no condition that the

insurance relate in any way to banking.

The court in the Couriers case was faced with a similar

provision, which authorized holding company affiliates to

furnish “courier services for non-financially-related ma-

terial upon the specific, unsolicited request of a third

party when courier services are not otherwise reasonably

available.” 12 C.F.R. § 225.129 (1974). Although the

court was willing to agree that an affiliate could engage

in such incidental activities as were reasonably necessary

to carrying out those that were closely related to bank-

ing, it stated that:

The justification for the “incidental” courier services

at issue here is, however, quite different. It is not,

as far as we can tell, that the carriage of non-

financially related material is in any way necessary

to the successful operation of the courier service af-

filiates. Rather, it is that the provision of such serv-

ice would “serve the convenience of the public”.

516 F.2d at 1240.

The court then noted that the provision of such services

might indeed be beneficial to the public, in view of the

27a

fact that bank affiliates would not likely become deeply

involved in providing such unsolicited services, and that

no bank competitor would be injured since the services

were required to be “otherwise unavailable’. The court

then made a statement with which we fully agree:

But Congress did uot instruct the Board to allow

or disallow bank involvement in non-financial ac-

tivities as may be required by the policies which

counsel a separation of commerce and banking. Hav-

ing heeded that counsel itself, it decreed the separa-

tion, and instructed the Board to enforce it.

516 F.2d at 1241.

Here, too, we believe the Board has misconstrued its

role. The Board’s function is not to promote generally

the public interest consistent with the policies of the

Bank Holding Company Act, but to determine what ac-

tivities are “closely related” to banking. While we might

agree that the sale of certain types of convenience in-

surance would help a holding company agency “round

out” its offerings to the benefit of its clients, the agency,

and the general public, the fact remains that the handling

of convenience insurance simply is not, as broadly de-

fined in the regulation, closely related or necessarily re-

lated at all to banking.

The Board, however, argues that the brokering of

convenience insurance is “a necessary activity to the

operation of an affiliated insurance agency”. To the ex-

tent that this is an assertion that it is an incidental

activity reasonably necessary to the carrying on of clearly

permissible ones, we find that it is one that, if supported,

would be legally sufficient. See 12 C.F.R. § 225.4(a)

(1976) ; cf. 12 U.S.C. § 24 (1970) (authorizing national

banks “to exercise . . . all such incidental powers as

shall be necessary to carry on the business of banking”).

But we see no possible argument that the regulation, as

28a

written, meets this standard in view of its failure to

restrict the types of insurance authorized. Moreover, as

the Board itself argues, the provision would enable an

agency to meet “peculiar additional insurance needs of

a few of its customers”; it is difficult to see how such a

power could be deemed “necessary” to the agency’s op-

eration. Although the Board may redraft § 225.4(a)

1)(c) in a way that m

standard, we must hold that provision as it stands in-

valid and reverse those portions of the orders in ques-

tion which authorize the sale of convenience insuran

A final provision which must be examined is § 225.4 (a)

(9) (iii) of Regulation Y, which permits a holding com-

pany agency to sell:

Any insurance sold in a community that (a) has a

population not exceeding 5,000, or (6) the holding

company demonstrates has inadequate insurance

agency facilities.

This provision, too, seems to authorize the handling of

insurance for the benefit of the public, despite the absence

of any discernible connection to “banking”. It is interest-

ing to note, however, that Congress has since 1916 per-

mitted national banks to engage in just such activity. 12

U.S.C. § 92 (1970). The question then arises whether the

Congressional determination that such activity is permis-

sible for national banks alone is sufficient to render it

“closely related to banking” for purposes of the Bank

Holding Company Act.

The answer to this question can be found in the legisla-

tive history of 12 U.S.C. § 92, which this court examined

in Saxon Vv. Georgia Ass’n of Ind. Ins. Agents, Inc., 399

F.2d 1010 (5 Cir. 1968). In that case, we placed empha-

sis on a letter from the Comptroller of the Currency to

the Senate Banking and Currency Committee in 1916

29a

which revealed that his primary purpose in proposing the

legislation was to give small town banks, which had diffi-

culty in deriving a sufficient profit from banking, an addi-

tional source of revenue. The Comptroller stated that:

This additional income will strengthen them and in-

crease their ability to make a fair return to their

shareholders, while the new business is not likely to

assume such proportions as to distract the officers of

the bank from the principal business of banking.

399 F.2d at 1015. It clearly appears, then, that 12 U.S.C.

§ 92 was enacted not out of a belief that there was any

significant connection between banking and the sale of

insurance in small communities, but merely because it was

believed that banks needed an additional source of income

to improve their stability and profitability. Congress thus

did not indicate that the sale of insurance in small towns

was part of “banking”, but rather that it was an unre-

lated business which would provide a source of income

that would then be available for use in the separate bank-

ing activities of small town national banks.

No one doubts that subsidiaries of holding companies

which are national banks located in small towns have the

authority to broker insurance. But to hold that other hold-

ing company subsidiaries which are not banks have such

authority as a result of 12 U.S.C. § 92 would not only

violate the Bank Holding Company Act, but would warp

the Congressional intention underlying the 1916 enact-

ment as well. Whatever benefits in terms of convenience

to the public or profit to holding companies may accrue as

the result of granting affiliates power to sell insurance in

small towns, it can hardly be argued that such authority

is necessary to protect the stability of the banking (or

other) subsidiaries of holding companies or to permit a

fair rate of return to their shareholders. The purpose of

Congress in enacting 12 U.S.C. § 92 simply does not apply

30a

to the bank holding companies, and that provision cannot

serve as the sole authorization for a determination that

insurance sales in small towns are “closely related to

banking”.

This is made even more apparent by the fact that the

Board regulation is not even restricted to holding com-

pany subsidiaries which are /ocated in small communities.

Unlike the national banks which were the object of the

1916 provision, the holding company affiliates which would

1 of these reasons, we must hold that § 225.4(a) (9) (iii)

of Regulation Y is invalid and that the portions of the

orders before us which are based upon it must also fall.

III. Application of the Regulation

We turn now to one of the most hotly contested aspects

of this case: the Board’s authorization of holding com-

pany sales of property damage and liability insurance.

The “property damage” insurance referred to would pro-

tect collateral for loans by holding company banks from

damage caused by fires, storms, accidents, and other haz-

ards. The liability insurance at issue would protect bor-

rowers from liability resulting from injury or damage to

the person or property of others in connection with prop-

erty financed by holding company banks. Thus, for exam-

ple, a bank financing and taking a security interest in an

automobile might also sell the owner-borrower collision

insurance and insurance against any liability arising from

an accident in the automobile. The Board found that both

property damage and liability insurance were “directly

related to an extension of credit” and therefore within

§ 225.4(a) (9) (ii) (a) of Regulation Y.

Petitioners argue primarily that the sale of physical

damage insurance is unauthorized because it is neither

8la

“functionally equivalent to an extension of credit” nor

“operationally integrated into the lending transaction”.

As noted earlier, we are not convinced that Congress in-

tended to so limit the universe of relevant connections

between banking and proposed nonbanking activities. To

the contrary, we believe that the Board should be upheld

when it articulates any type connection between banking

and the nonbanking activity in question which makes it

rational to consider the proposed activity an “incident”

to banking.

In approving the sale of property damage insurance, the

Board stressed the fact that such insurance is “essential

from the lender’s standpoint to assure that the value of

the collateral will not be impaired by physical damage.”

It App. 187; IV App. 732. The Board also noted that

such insurance performs “an integral function for the

borrower as well, since the presence or lack of insurance

protecting loan collateral is an essential element of the

credit evaluation.” II App. 187. Its decision, then, was

based neither on any historical practice by banks, nor

upon any process characteristic of lending transactions

which would necessitate specialized forms of the activity

at i The Board seems to have relied simply on the

fact that, in lending transactions, banks have a legitimate

need for physical damage insurance to protect the value

of the collateral and that borrowers have need for the

insurance to obtain credit. We hold that this is enough,

particularly in view of the pre-1970 authorization of simi-

lar insurance sales. See Citizens and Southern Holding

Co., 1969 Fed.Res.Bull. 673; Otto Bremer Co., 1969 Fed.

Res.Bull. 388; Otto Bremer Co., 1967 Fed.Res.Bull. 1555.

Where a product or service is regularly desired by both

parties and supports the transaction in some significant

way, we cannot say that the Board acts irrationally or

arbitrarily in deeming the furnishing of the product or

service “closely related to banking” or “directly related

to an extension of credit’’.

32a

The case for liability insurance proceeds upon the same

general lines but is significantly weaker. Liability in-

surance protetts the borrower's ability to repay a loan,

which could otherwise be destroyed by an accident or

other catastrophe. It therefore fulfills a need of both the

borrower and lender, particularly where the borrower is

an individual or a small business with limited assets.

Petitioners note, however, that liability insurance, unlike

physical damage insurance, is not required of borrowers

as a general banking practice. And the authorization at

issue is in no way limited to cases where the borrower’s

ability to repay could be significantly affected by an un-

insured liability.

This is not surprising in view of the fact that the

Board’s orders in these cases relied on an entirely dif-

ferent rationale. The Board stressed the insurance in-

dustry practice of selling liability insurance in conjunc-

tion with property damage insurance protecting an auto

mobile or other property. It concluded that

a “packaged” insurance policy, combining liability

insurance with insurance relating to physical damage

on property purchased from loan proceeds, fulfills a

legitimate need of the lender and borrower alike at

the time a loan is made. Moreover, in the case of

homeowner’s insurance, it appears that it would

not be economical for a borrower to procure separ-

ately the various coverages customarily packaged in

such a policy.

II App. 188; see IV App. 733. The Board’s rationale

therefore comes down to this: (1) borrowers, for con-

venience and, in some cases, cost reasons, want liability

insurance packaged with property damage insurance,

which itself is incident to banking; (2) the need for

liability insurance arises out of the lending transaction;

33a

(3) liability insurance to some extent protects the bor-

rower’s ability to repay the loan.

We find that these form a sufficient basis for the

brokering of liability insurance by bank holding com-

panies. The evidence amply supports the conclusion that,

from the consumer’s point of view, packaged property

damage and liability policies are more desirable than

the same policy separately sold. See II App. 273,

278, 309-10, 411-12; V App. 1228. To permit banks

to sell only property damage insurance, then, could have

the effect of substantially limiting the gains in convenience

and in increased competition which Congress sought to

promote. The sale of packaged liability insurance there-

fore may be seen as an activity “incidental” to the sale

of property damage insurance and necessary for the ef-

fectuation of the Congressional purpose with respect to

the latter activity. See 12 C.F.R. § 225.4(a) (1976);

Couriers, 516 F.2d at 1240.

_It cannot be said, moreover, that the relationship of

banking to liability insurance itself is chimerical. Al-

though banks do not customarily require it, liability in-

surance does in a significant way “support the lending

transaction”. Indeed, assurance of the borrower’s ability

to repay the loan may be more important than protection

of the collateral; repayment rather than repossession is

the bank’s primary objective. And, too, the need for the

insurance does arise directly from the purchase of prop-

erty, which is the very purpose of the loan. In attempt-

ing to answer the question whether these relationships are

sufficient to establish the connection that Congress re-

quired, we have been impressed by the pre-Amendment

decisions of the Board. In two cases decided in the year

prior to the passage in 1970 of the provision we are con-

struing, the Board granted applications authorizing the

sale of liability insurance by a bank holding company

agency, without any requirement that it be packaged with

34a

other insurance. United Virginia Bankshares, Inc., 1970

Fed.Res.Bull. 599, 600; First Security Corp., 1969 Fed.

Res.Bull. 667, 668. Yet Congress made no substantial

change in the language of the relevant provision and the

legislative history is void of any suggestion that the pre-

Amendment decisions were disapproved. In view of the

familiar presumption that the legislature is aware of

existing constructions of statutes which it reenacts,’* this

court has every reason to believe that the more limited

authorization of liability insurance in these cases was

within the intent of Congress. -2

IV. The Calculus of Public Benefits

The 1970 Holding Company Act Amendments trans-

formed the general question of whether the proposed

activity would be a “proper incident” to banking, in part

at least,*® into the more particularized inquiry of whether

18 T.1.M.E., Inc. v. United States, 359 U.S. 464, 79 S.Ct. 904, 3

L.Ed.2d 952 (1959) ; Shapiro v. United States, 335 U.S. 1, 68 S.Ct.

1375, 92 L.Ed. 1787 (1948); United States v. Douglas Aircraft Co.,

510 F.2d 1387 (Ct.Cust. & Pat. App. 1975); Kansas City v. Federal

Pac. Elec. Co., 310 F.2d 271 (8 Cir. 1962), cert. denied, 371 U.S.

912, 83 S.Ct. 256, 9 L.Ed.2d 171 (1963).

‘* As noted earlier, the Board in its order in the Georgia case

evidenced a belief that its determination in § 225.4(a) (9) that cer-

tain insurance activities are closely related to banking also served

as a determination that those activities “in general” satisfy the

public benefits test. Without ruling on the correctness or incorrect-

ness of this statement, we note that Chairman Burns of the Federal

Reserve Board indicated in a letter to the Conference Committee

his belief that the

language of the statute should make clear that there are two

tests to be satisfied in deciding whether nonbank subsidiaries

of bank holding companies should be allowed to engage in a

particular activity: (1) whether the activity is closely related

to banking, and (2) whether it is a proper incident to banking,

and that in applying the second test, the Board is to weigh the

possible benefits to the public against the risks of adverse con-

sequences. We believe that the language proposed by the House

conferees might be misconstrued to apply three tests: (1)

whether the activity is closely related, (2) whether it is a

35a

the activity “can reasonably be expected to produce bene-

fits to the public . . . that outweigh possible adverse

effects”. 12 U.S.C. § 1843(c) (8) (1970). Nonexhaustive

examples of such benefits (greater convenience, increased

competition, and gains in efficiency) and adverse effects

(undue concentration of resources, decreased or unfair

competition, conflicts of interest, and unsound banking

practices) were listed by Congress in the statute. In this

case, the Federal Reserve Board made specific findings

as to each of these factors and, overruling the Adminis-

trative Law Judge, held that each of the possible benefits

were likely to be realized if the applications were granted

and that none of the possible adverse effects were likely

to occur. The Board thus concluded that overall public

benefits very clearly outweighed possible adverse effects.

Congress in the 1956 Act clearly circumscribed our

role in reviewing the Board’s findings: “[{t]he findings

of the Board as to the facts, if supported by substantial

evidence, shall be conclusive”. 12 U.S.C. §1848. If such

support exists in the record, it is our duty to affirm even

though we might come to a diametrically opposite con-

clusion on our own. North Hills Bank v. Board of Gov-

ernors of Federal Reserve System, 506 F.2d 623 (8 Cir.

1974) ; Comm’l Nat’l Bank of Little Rock v. Board of

Governors of Federal Reserve System, 451 F.2d 86 (8

Cir. 1971); First Wisconsin Bankshares Corp. Vv. Board

of Governors of Federal Reserve System, 325 F.2d 946

(7 Cir. 1963). This is particularly true with respect to

matters relating to banking industry structure and op-

erations, areas in which the Board may be presumed to

have expertise. Commercial Nat’l Bank supra; North-

proper incident to banking, and (3) whether the benefits out-

weigh the risks.

116 Cong. Rec. 42434 (1970). The Chairman, whose suggestions on

this matter were heeded by the Committee, thus seems to have

regarded the “closely related” and “proper incident” determinations

as wholly separate.

36a

west Bancorporation v. Board of Governors of Federal

Reserve System, 303 F.2d 832 (8 Cir. 1962).

The reasons for deference to the Board’s reasoned judg-

ment in the general run of cases are magnified in the con-

text of the “public benefits” determination of § 4(c) (8).

Congress required only that public benefits “reasonably”

be expected to outweigh adverse effects. In so doing, it in-

dicated recognition of the fact that the judgments required

of the Board are necessarily imprecise and to some degree

speculative. Not only do they relate to complex future

events—often unprecedented ones—but they concern ag-

gregate rather than discrete effects. Thus, the Board

must determine not whether there will be one or more

aspects of insurance agency activity by holding company

affiliates that will tend to produce efficiency gains, but

whether, overall, such aspects will outweigh possible

sources of efficiency loss sufficiently to produce net gains.

The latter determination is much more difficult than the

former, and is one which is much less susceptible to de-

tailed evidentiary support. Unless we are to impose in-

surmountable barriers upon those who seek to take

advantage of the $4(c)(8) authorization, which was

reaffirmed by Congress in 1970, our review must be sen-

sitive to these circumstances. See, e.g., Bowman Transp.,

Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281,

292-94, 95 S.Ct. 438, 446, 42 L.Ed.2d 447, 460 (1974).

We note, however, that the Board’s rejection of the

Administrative Law Judge’s conclusions cuts the other

way. While the Board is in no way bound by those con-

clusions, e.g., Bowman Transp., Inc. v. Arkansas-Best

Freight System, Inc., supra, 419 U.S. at 297-98, 95 S.Ct.

at 447-48, 42 L.Ed.2d at 462-63, “evidence supporting a

conclusion may be less substantial when an impartial,

experienced examiner who has observed the witnesses and

lived with the case has drawn conclusions different from

the Board’s than when he has reached the same con-

37a

clusion”. Universal Camera v. NLRB, 340 U.S. 474, 496,

71 S.Ct. 456, 469, 95 L.Ed. 456, 472 (1947). Although

we are inclined to uphold the Board where it clearly ex-

plains its reasons for differing with the Administrative

Law Judge (particularly on issues upon which it may be

presumed to have particular expertise), its findings will

be vulnerable where it merely announces an opposite con-

clusion from the Administrative Law Judge without ex-

planation. See Greater Boston Television Corp. v. FCC,

143 U.S.App.D.C. 383, 444 F.2d 841, 853 (1970), cert.

denied, 403 U.S. 923, 91 S.Ct. 2229, 29 L.Ed.2d 701

(1971).

A. Greater Convenience

The Administrative Law Judge found no likelihood of

increased convenience in the Southern case and a likeli-

hood of only “minimum” increased convenience in First

National’s. The Board disagreed in both instances, rely-

ing primarily on its belief that the “one-stop shopping”

that would be made possible would save consumers an ex-

tra trip to an insurance agent and would avoid the neces-

sity of obtaining the same information from the consumer

twice—once for the loan and once for insurance. It noted

that “borrowers have often requested insurance from Ap-

plicant’s banks in the past” in support of its contention

that there is a demand for the postulated added con-

venience. The Board now argues also that the consumer

would thereby be assured that he has insurance coverage

satisfactory to the lender and that insurance and loan

payments could be combined in a single bill, resulting in

further consumer convenience.

As the NAIA parties argue, the Board’s conclusions

on this issue are cast in doubt by the fact that the licensed

insurance agents in both cases will be located at central

offices in Birmingham or Atlanta. The result is that, al-

though loan officers around the area or state can telephone

38a

such agents to make insurance arrangements at the time

loans are made, any dealings by borrower-insureds living

outside those metropolitan areas with the agents there

after will be on an impersonal and long-distance basis.

Relationships with local independent agents, on the other

hand, can be conducted on a more personal basis and

face-to-face discussion of insurance matters will be much

easier to arrange. The Board showed no recognition

whatever of the resulting decrease in convenience.

Moreover, the Board made no attempt to explain why

non-affiliated insurance agents could not effect the same

convenience through a one-stop shopping system. Loan

officers could (and if there is a genuine bank need to in-

sure that acceptable coverage be secured, they will) sug-

gest to the prospective loan customer a reputable local

agent; if the customer is willing, that agent could be tele-

phoned and could perform the same functions as the pro-

posed holding company affiliate agent.

In its brief, First National suggests that a practice of

recommending independent insurance agents to borrowers

would not be “good business policy or good ethics’’.*°

This may or may not be true, but what is clear is that the

Board made no such argument and that we have been

directed to no evidentiary support in the record for that

conclusion. The same situation exists with respect to the

claim of added billing convenience; it is one advanced

post hoe by the Board with no evidentiary support which

has been pointed out to us. See Burlington Truck Lines,

Inc. v. United States, 371 U.S. 156, 168-69, 83 S.Ct.

239, 246, 9 L.Ed.2d 207, 216 (1962) ; City of Lafayette v.

SEC, 147 U.S.App.D.C. 98, 454 F.2d 941 (1971), aff'd

sub nom. Gulf States Utilities Co. v. FPC, 411 U.S. 747,

93 S.Ct. 1870, 36 L.Ed.2d 635 (1973). Because of these

2° Southern, on the other hand, has referred customers to a num-

ber of insurance agencies upon request. II App. 229.

39a

deficiencies, and particularly because of the Board’s fail-

ure to delineate clearly the sources of its disagreement

with the conclusions of the Administrative Law Judge,

we must find that its conclusion on this point is not sup-

ported by substantial evidence.

B. Greater Efficiency

The dispute on this point centers around the insurance

industry practice of “direct billing”, by which insurance

underwriters, rather than agents, issue the policy to the

customer and bill and collect the premiums. There was

evidence that this practice results in lower commissions

to the agent and lower premiums for the consumer. Be-

cause both First National and Southern indicated that

th<y probably would not use “direct billing’, the Adminis-

trative Law Judge concluded that any possible gains

in efficiency from elimination of advertising and soliciting

expense and from combination of billing would be ne-

gated, and that therefore there was no reasonable likeli-

hood of efficiency gains.

The Board, however, concluded that reduction of ad-

vertising and solicitation expenses, the elimination of

present bank difficulties in obtaining verification of

automobile insurance renewals, the possibility of estab-

lishment of a “common pattern of operations” between

loan officers and the single insurance agency, and certain

“technical efficiencies in the data processing area” would

constitute efficiency gains resulting in a public benefit.”

21TI App. 193-94; IV App. 737. We note initially that there is

some dispute over the precise character of the efficiency gains 1 -

ferred to in the statute. The NAIA parties apparently contend that

gains in efficiency are not relevant for the purpose of the statute

unless the applicant can demonstrate that they will be passed along

to the consumer. We find no basis in the statute for this argument;

the statute requires consideration of “gains in efficiency” and appar-

ently assumes that such gains will constitute “public benefits”’.

To be sure, improved service or lower prices to the consumer

are one type of public benefit, but it is also true that a public benefit

40a

Significantly, in neither the First National nor the South-

ern order did the Board even mention the direct billing

concept or the Administrative Law Judge’s reliance there-

on.

After examination of the record, we find substantial

evidence to support the Board’s conclusions that some of

the types of efficiency gains it relied upon in the orders

were reasonably likely to result. Although the briefs

of the NAIA parties make abundantly clear that the evi-

dentiary showings in favor of these conclusions were

much weaker than they could have been, it is not our

function, nor the Board’s, to require the strongest showing

possible. Even without the professional studies, the de-

tailed projections, and the unequivocal expert testimony

that the NAIA parties deem essential, there is significant

evidentiary support for the conclusions that there will

be an avoidance of advertising and solicitation expenses,

some elimination of duplicated information gathering and

information sharing, and some efficiencies in data process-

ing.

But the Board again has failed utterly in its responsi-

bility to consider possible sources of efficiency loss and to

arrive at a reasoned evaluation of net efficiency gains.

It may well be that the Board could properly have con-

cluded that a net gain would result or that, as First

National suggests in its brief, the holding company affil-

iates would in the future adopt direct billing. But the

in a broad sense is conferred whenever a service is performed in

a new way which requires less of society’s limited human and eco-

nomic resources. The result may be lower prices to the consumer

of the service, or it may be greater dividends to the body of stock-

holders of the service provider, better salaries or benefits to the

provider’s employees, or the availability of greater capital for

expansion of the business. In the latter instances as well as the

former we believe that efficiencies reasonably can be said to result

in a public benefit: the freeing of scarce resources for beneficial

economic use.

4la

fact remains that, despite the Administrative Law Judge’s

explicit reliance upon the negative efficiency effects of

non-use of direct billing, the Board failed to so much as

mention the issue. Because of this failure, we cannot up-

hold the Board’s finding on this issue.

C. Increased Competition

Because insurance premium rates are set by insurance

underwriters and subject to state regulation, competition

on the basis of price among insurance agents is limited.

Because of this, the Administrative Law Judge found

that there was no “hard evidence” that there would be

increased competition in the Georgia case. The Board,

however, agreed with the Law Judge’s conclusion in the

Alabama case that, although price competition would be

limited, the applications would result in increased com-

petition on the basis of service. In particular, the Board

concluded that the greater convenience to consumers of

“one-stop shopping” and the availability of bank finan-

cial expertise to insurance customers would force in-

dependent agents to increase their service efforts to com-

pete with the holding company affiliates.

Here we find sufficient evidence to support the Board’s

conclusions and no unexplained conflict with the Law

Judge’s findings. To the evidence that there would be

some pressure for lower prices, we must add the

customer-attracting advantages of one-stop shopping and

the financial expertise of loan officers, for which there

is support in the record.** While the evidence on this is-

22 See, e.g., II App. 249-51, 283-84, 307-08, 311, 313; III App.

562, 592-95; IV App. 768-70, 811, 836-37, 838-39, 842-44, 863-64,

869, 880-81; V App. 1225, 1227-32, 1268, 1274-77. Even though

the finding of greater convenience could not be upheld, we must note

tae evidence in support of that conclusion as one factor tending

toward a conclusion that service competition will result. This is so

because the likelihood of increased service competition depends

42a

sue certainly can be described as vague, we find that in

light of the realities of such applications, it is enough.

We find that this conclusion is bolstered by two factors

not specifically relied upon by the Board. The first is

that the entry by both Southern and First National into

most of these lines of business will be de novo, rather

than by purchase or merger with an existing competitor.

See IIl App. 716; V App. 1230. It is quite clear that

Congress “believe[d] that an activity commenced de novo

will tend to have procompetitive effects, and conse-

quently should be viewed more favorably than the com-

mencement of an activity through the acquisition of an

existing concern”. Senate Report, 1970 U.S.Code Cong.

& Adm.News at p. 5534. See Conference Report, 1970

U.S.Code Cong. & Adm.News at p. 5568; 12 U.S.C.

§ 1843(c) (8). Additionally, we take congnizance of the

unusual competitive situation which presently obtains in

the Georgia case. Citizens and Southern Holding Com-

pany, whose bank subsidiary has the largest share in the

Atlanta banking market, already has authority to sell

many of the types of insurance at issue here. See V App.

1349-50. It may reasonably be expected, then, that grant-

ing First National’s application will result in the intro-

duction of further competition in the sub-area of bank-

related insurance sales, and indeed will better enable

First National to compete with Citizens and Southern

in the provision of banking services as well.

D. Decreased or Unfair Competition

The primary claim of the NAIA parties with respect

to this issue relates to the possibility that insurance sales

will be “tied” to bank loans, thus reducing competition

for reasons unrelated to efficiency. The claim is that loan

upon consumer perceptions of convenience and the response of in-

dependent agents to this perception, rather than the actual results

concerning increased convenience.

43a

officers may require prospective borrowers to insure

through holding company affiliates as a condition for ob-

taining a loan (coercive tying) or that prospective bor-

rowers may act on a belief that insuring through the

holding company will be helpful or necessary in obtain-

ing a loan, without being required to do so (voluntary

tying).** The Administrative Law Judge noted that co-

ercive tying was prohibited by the Holding Company Act

Amendments of 1970, 12 U.S.C. $1971 et seg.,** but

found that voluntary tying was “a distinct possibility”,

particularly in times of tight money. The Board, however,

found that there were no instances of voluntary tying

described in the record, that the percentage of loan cus-

tomers to which Tharpe & Brooks and a North Carolina

bank holding company had sold insurance were not great,

and that there were numerous other lenders, both bank

and nonbank, to whom customers could look. It ruled that

there was no reasonable likelihood of significant volun-

tary tying in either the Alabama or Georgia case and that

the Law Judge’s requirement that specific statements re-

garding tying be incorporated in loan applications was

not necessary.

The debate over voluntary tying* well illustrates the

2? As the NAIA parties note, there is a spectrum of possible

activities between overt coercive tying and purely voluntary tying.

Bank loan officers may pointedly question about the prospective

borrower’s intended insurance agent at a critical point, strongly

recommend the bank-affiliated agent prior to making the loan deci-

sion, or use other effective but indirect pressuring tactics.

#12 C.F.R. §225.4(c) extends the prohibition against coercive

tying from banks to other bank holding company subsidiaries ap-

proved under § 4(c) (8) of the Bank Holding Company Act.

** We find that the Board’s conclusion as to coercive tying is

amply supported by the evidence. Not only is coercive tying spe-

cifically prohibited by law (and both applicants have pledged to ob-

serve the law), but the Board’s Regulation Z, 12 C.F.R. § 226.4

(a) (5), (6), requires disclosure to lenders that the customer may

44a

difficulty of the judgments entrusted to the Board under

the Amendments. The Board was required to surmise

the reasonable likelihood, in the future, of occurrences

which are incapable of direct measurement even in the

past. In its attempt to do so, the Board relied on two

indirect indicia: past “penetration rates” and market

structure. A penetration rate, which in this case is the

percentage of borrowers from a particular lender who

purchase insurance from the lender’s affiliate, is an indica-

tion of the upper limit of possible voluntary tying. Since

borrowers may purchase the insurance from lenders for

other reasons, such as greater convenience, a strong per-

sonal relationship with the lender, or better price or serv-

ice, the actual rate of voluntary tying may be much lower

than the penetration rate.

A First National officer testified that its subsidiary,

Tharpe & Brooks, had experienced a penetration rate of

13.5 per cent with respect to mortgage lending. IV App.

830-31. And a North Carolina bank holding company

also reported a low penetration rate by its insurance

subsidiary operating a general insurance business. I App.

120. We agree with the NAIA parties that it would

have been helpful to have further evidence on penetration

rates, with information on rates with respect to par-

ticular types of loans, and with detailed consideration of

the relevance of the North Carolina and Tharpe & Brooks

rates to the applications at hand. But we find that this

evidence is credible, significant support for the Board’s

conclusion, particularly in view of the fact that the NAIA

parties failed to present evidence or penetration rates con-

tradicting the conclusions it suggested.

choose the person through which any insurance is to be obtained.

More importantly, the NAIA parties were able to produce no evi-

dence of coercive tying on the part of either applicant.

45a

Second, the Board considered the structure of the re-

spective lending markets, recognizing that the possibility

of voluntary tying is inversely related to the availability of

other sources of credit. In so doing, the Board responded

to the Congressional belief that “the dangers of ‘volun-

tary’ tie-ins and reciprocity are basically structural’’. Con-

ference Report, 1970 U.S.Code Cong. & Adm.News at

p. 5569. In the Alabama case, the evidence showed that

there are six to twenty banking alternatives in each of

the markets in which Southern subsidiaries operate, and

that borrowers also have access to nonbank lenders such

as finance companies, savings and loan associations, mort-

gage bankers, and credit unions. III App. 663-70. The

Board in the Georgia case also relied upon the existence

of other lenders as well as competition from over thirty

banks in the Atlanta area. V App. 1233-34, 1327, 1330.

We find these structural characteristics persuasive in sup-

port of the Board’s conclusions as to voluntary tying.

Despite the fact that there are bank subsidiaries in the

Alabama case which have leading shares in individual

market areas, and that there may be particular types of

commercial loans for which there are few alternative

lenders, there was a reasonable basis for the conclusion

that the total amount of possible voluntary tying was

not of the magnitude Congress was concerned about. This,

we believe, is the relevant inquiry, for the size of bank

holding companies in 1970, as today, is such that many

will have individual markets in which, for certain types

of loans, they will be the only practical source of credit.

To conclude that the existence of any individual in-

stances of market hegemony necessarily requires a con-

clusion that voluntary tying is likely would require a find-

ing of this adverse effect in a great number of applica-

tions. We find no evidence that Congress intended so

particularized and stringent an inquiry, and hold that

an overall estimation of the magnitude of likely tying is

46a

proper. The Board’s conclusion on this issue is supported

by substantial evidence.”

E. Undue Concentration of Resources

The NAIA parties challenge the Board’s conclusion

that the size of the projected insurance agencies, the de-

gree of concentration in the relevant banking markets,

and the existence of alternative sources of loans do not

result in an “undue concentration of resources”. It is not

immediately clear to us the extent to which the factor

of undue concentration differs from the factor of ‘“‘de-

creased or unfair competition”. Our only real clue is the

Conference Report’s statement that

[t]he dangers of undue concentration of resources

include, but are not limited to, specific competitive

effects, which are themselves relevant factors under

the Act.

1970 U.S.Code Cong. & Adm.News at pp. 5567-68. We

gather from this that Congress believed that concentra-

tion of economic resources in a single entity beyond a

certain point was harmful regardless of the proven exis-

tence of any anticompetitive effects of such concentra-

tion.

The Board’s finding on this issue must be upheld. There

ean be no doubt either that the insurance businesses of

26 The NAIA parties also argue that a finding of likely volun-

tary tying was mandated by testimony of a Southern officer that,

in commercial lending situations only, the borrower's insurance

arrangements are scrutinized prior to the closing of the loan. The

purpose of such inquiry is to make sure that the proper coverage

has been arranged, in order to prepare major loan proposals for

comprehensive scrutiny of a loan committee. The officer who

testified on this matter added that the necessary insurance often

has been obtained by the time the proposal has been brought to the

bank. In light of this fact, we cannot say that the number of in-

stances in which the possibility of voluntary tying is increased

is sufficiently large to require rejection of the Board’s conclusion.

47a

the holding company affiliates will be relatively large or

that the holding companies control a substantial amount of

the banking resources in the relevant markets. But, as

the NAIA itself emphasizes, the insurance agency busi-

ness is one that is, in general, quite unconcentrated and

one in which entry barriers are low. We note also that

neither Southern nor First National subsidiaries are the

largest banking entities in all but two of their respective

markets. In view of the Board’s presumed expertise on

this area and the fact that the determination of what

is “undue” concentration of resources was primarily com-

mitted to the Board by Congress, we find that the Board

must be upheld.

F. Conflicts of Interest

In the Alabama case, the Administrative Law Judge

found that there was a reasonable possibility of con-

flicts of interest in the sale of surety bonds; the Law

Judge believed that, since a line of credit is a prerequisite

for such a bond, holding companies might grant or with-

hold credit on the basis of whether the customer had

agreed to obtain the surety bond from their insurance

affiliate. With respect to other types of insurance in the

Alabama case, and with respect to all insurance involved

in the Georgia case, the Law Judge found that there

were no likely conflicts of interest other than those in-

herent in any sale of insurance where income is based on

the amount of insurance sold. The Board found speci-

fically that there was no credible evidence in the record

that would support the finding as to surety bonds. The

Board also found that the evidence did not indicate that

the holding company banks would make undesirable loans

to sell insurance and that regulatory supervision of banks

would limit any misconduct of that type.

We are satisfied with the Board’s conclusions on these

issues. Evidence in the record indicates that the insur-

48a

ance company affiliates will not be run on a pure profit

maximization basis, and there is no evidence which would

compel the opposite conclusion for which the NAIA par-

ties contend. Contrary to the argument of the NAIA

parties, the fact that a holding company’s interests as

lender and as insurer do not totally converge does not

require the conclusion that conflicts of interest will oc-

cur. The Board was entitled to credit the evidence that

the insurance operations will be viewed as separate from

and as an adjunct to the bank lending operations. While

it would have been helpful for the Board to respond more

fully to the Administrative Law Judge’s finding with

respect to surety bonds, it is sufficient that the Board did

recognize the Law Judge’s finding and indicate the source

of its disagreement.

In summary, we find that the Board’s conclusions with

respect to efficiency gains and greater convenience are

not supported by substantial evidence, but that its other

findings are. Accordingly, the Board properly found

one type of public benefit, in the form of increased

competition, and no adverse effects on the public in-

terest. The Board’s overall finding, that public benefits

outweigh adverse effects of granting the applications, can

therefore be upheld.

V. Other Issues

A. Georgia and Alabama Law and the Specificity of

Southern’s Proposal

The NAIA parties also contend that the Board gave

insufficient consideration to a recently passed Georgia

statute which, in essence, prohibits all lending institutions

in sizable Georgia communities from selling insurance

(other than credit life, accident, or health insurance).

Ga. Code Ann. § 56-322 (Supp. 1976). This statute, it is

argued, indicates a public policy in the state against the

49a

very type of activity which the Board was asked to ap-

prove. We find the Board’s response convincing: the stat-

ute by its own terms exempts lending institutions like

First National and its larger competitor, Citizens &

Southern Holding Company, from the prohibition through

a grandfather clause. Jd. § 56-322(d). Because of the

clear exemption of First National from the statute, it

cannot be said that either the letter or the policy of the

Georgia statute warrants rejection of the First National

application.

The NAIA parties also argue that the Board im-

properly failed to consider the effect of an Alabama

law providing that only licensed insurance agents may

take applications for insurance or place insurance for

others. Ala. Code T. 28A, §119(a) (Supp. 1974). Since

Southern’s plan contemplated that only a single agent at

its central insurance office would be licensed, there is a

strong argument that the reference of bank customers

to the agent by loan officers and the compilation of in-

surance information by the loan officers would be illegal.

The Board’s opinion did not specifically mention the li-

censing statute, but apparently assumed that the infor-

mation for insurance applications would be taken by li-

censed agents rather than by loan officers, a conclusion

which seems to have little support from Southern’s own

witnesses.

Our resolution of this issue is closely tied to that con-

cerning another NAIA claim, that the Southern proposal

was impermissibly vague and unformed. The reason for

this connection is that the testimony of Southern’s wit-

nesses made clear that the precise procedures by which

insurance would be placed and applied for had not been

clearly established by Southern. See II App. 232-35, 244;

III App. 718-19. In this area as in others, we recognize

that each side presents reasonable arguments. The NAIA

parties are entitled to have a fairly specific proposal to

50a

challenge. Only then do they have a reasonable oppor-

tunity to protect their economic interests, which obviously

are at stake, and only then can the public interests recog-

nized by Congress in the 1970 Amendments receive realis-

tic protection from the Board and the courts. Yet we

can ask of Southern and other applicants only that which

is reasonably possible. Where, as here, the holding

company seeks to enter, de novo, into a type of activity

with which it has no previous experience, it is wholly

understandable that procedures for carrying on the ac-

tivity may not have been codified in every detail. In-

deed, in view of the difficult adjustments involved in en-

tering a new business, particularly one which is heavily

regulated, it may be the wisest policy to resist an early

total commitment to one or another mode of operation.

Where the balance between these competing interests in

specificity and flexibility should be struck is itself a ques-

tion on which the Board must be considered to have some

expertise. It knows far better than this court the time

periods which applicants realistically may have to prepare

their proposals, the amount of money which they can be

expected to invest in them, and the degree of specificity

which is inherently possible in each case. Indeed, there

are no statutory or constitutional standards, other than

those of due process, by which we can make these judg-

ments. Accordingly, we believe that the matter is com-

mitted to the Board’s discretion and that we can overrule

the Board on the issue of specificity only where there is a

clear abuse of discretion or where there is a violation

of due process. In view of the general specificity of

Southern’s proposal and its lack of previous experience in

insurance agency activities, we find neither in its failure

to specify the details of proposed interaction between its

banking and insurance operations.

With respect to the particular issue of licensing, we

note that Southern acknowledged that its proposed pro-

5la

cedures were less than fully fleshed out and repeatedly

assured the Board that it would abide by all applicable

licensing requirements. See III App. 718. Confident that

the NAIA parties will scrutinize the Southern operation

to ensure such compliance, we feel constrained to uphold

the Board in its apparent assumption that Southern

will operate not precisely as its witnesses suggested, but

in a manner that will comply with Alabama law. To

deny the Board the power to make this reasonable as-

sumption would surely forfeit the benefits of the adminis-

trative process in terms of flexibility and common sense.

We see no necessity for doing so.

B. Exclusion of Testimony

The NAIA parties complain of the Administrative Law

Judge’s exclusion of portions of a 128 page written state-

ment by Harry Houghton, an expert in the area of con-

sumer finance. Part I of the statement dealt with the

unique characteristics of banking and the market envi-

ronment in which it is carried on, while Part II dealt

with the nature of credit life and health insurance and

the experience of lenders with the sale of such insurance.

The Law Judge, who was upheld by the Board, con-

cluded that the testimony was cumulative of the testi-

mony of other witnesses (including Houghton’s oral testi-

mony), was largely irrelevant to the issues in the pro-

ceedings, and primarily concerned credit life and health

insurance, which the parties agreed was a permissible

holding company activity. It was noted also that Mr.

Houghton had submitted Part I to the Board in a pre-

vious proceeding.

So long as an administrative agency is not arbitrary,

it has some discretion in determining whether to admit

expert evidence. National Airlines v. CAB, 116 US.

App. D.C. 114, 321 F.2d 380 (1963). This is particularly

true with respect to evidence like that comprising Part I

52a

of Mr. Houghton’s statement, which is general and not di-

rected to the specific controversy at hand. American

Trucking Ass’ns, Inc. v. F. C. C., 126 U.S. App. D.C. 236,

377 F.2d 121 (1968). And it is permissible to reject

that portion of the proffered evidence which has previ-

ously been accepted by the agency from the same party,

Warren Co. v. NLRB, 353 F.2d 494 (1 Cir. 1965), cert.

denied, 383 U.S. 958, 86 S.Ct. 1222, 16 L.Ed.2d 300

(1966). For all of these reasons, the exclusion of Part I

of Mr. Houghton’s testimony was clearly proper.

Although the Board was correct in noting that the

permissibility of the sale of credit life and health in-

surance was not a serious issue in these cases, the ex-

perience of lenders with that insurance was arguably

relevant to the assessment of the likely public benefits

and adverse effects of holding company activities with

respect to other types of insurance. Particularly be-

cause of the dearth of relevant data upon which tc base

that assessment, it might have been preferable for the

Administrative Law Judge to permit admission of that

part of the statement. But we are unprepared to say

that the action was so erroneous and prejudicial as to re-

quire reversal. As the NAIA parties themselves have

strenuously asserted before us, credit life and health

insurance differ from the types of insurance primarily

involved in this case in several significant ways: they

do not involve an insurance decision by the agent but

are sold at a uniform low rate and, unlike property and

liability insurance, are sold only because of an extension

of credit. Because of these differences, which limit sharp-

ly the relevance of the experience with credit insurance

to these cases, we cannot say that the Law Judge and

the Board abused their discretion in excluding Part II of

Mr. Houghton’s statement.

To summarize, we conclude that:

53a

(1) we have jurisdiction to review § 225.4(a) (9) of

Regulation Y;

(2) § 225.4(a) (9) is procedurally valid;

(3) § 225.4(a) (9) (i) (except insofar as it authorizes

the brokering of insurance for bank subsidiaries of bank

holding companies, (ii) (c), and (iii) are invalid because

of conflict with § 4(c) (8) of the Bank Holding Company

Act;

(4) § 225.4(a) (9) (ii) (a) and (6) are valid;

(5) the Board’s orders in these cases are valid insofar

as they authorize the sale of insurance for bank subsidi-

aries of the holding companies, property damage insur-

ance, liability insurance, and other types of insurance

oe arg by the Board under § 225.4(a) (9) (ii) (a)

an :

(6) the Board’s conclusion that expected public bene-

fits outweigh possible adverse effects is supported by sub-

stantial evidence;

(7) the Board did not err in its consideration of state

law or in accepting Southern’s proposal despite its lack of

specificity ;

(8) the Board did not commit reversible error in ex-

cluding portions of the statement of Mr. Houghton.

AFFIRMED IN PART AND REVERSED IN PART.

55a

APPENDIX B

First Rehearing Opinion of the

United States Court of Appeals

for the Fifth Circuit

UNITED STATES COURT OF APPEALS

FIFTH CIRCUIT

Nos. 74-2981, 74-3544 and 74-3843

ALABAMA ASSOCIATION OF INSURANCE AGENTS, et al.,

Petitioners,

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,

Respondent.

GEORGIA ASSOCIATION OF

INDEPENDENT INSURANCE AGENTS, et al.,

Petitioners,

Vv.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,

Respondent.

NATIONAL ASSOCIATION OF INSURANCE AGENTs, INC.,

Petitioner,

Vv.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,

Respondent.

Jan. 10, 1977

On Petitions for Review of Orders of the Board of

Governors of the Federal Reserve Board (Alabama,

Georgia and Georgia Cases, respectively).

56a

ON PETITIONS FOR REHEARING AND

PETITIONS FOR REHEARING EN BANC

(Opinion June 10, 1976, 533 F.2d 224, 5th Cir. 1976)

Before TUTTLE, THORNBERRY * and CLARK, Cir-

cuit Judges.

PER CURIAM:

Petitioners complain that we approved the Board’s

regulation authorizing holding company sales of property

damage and casualty insurance in connection with ex-

tensions of credit by “a bank or bank-related firm,” yet

recognized that the brokering of insurance to non-bank

holding company subsidiaries could not pass the closely-

related-to-banking test. This criticism is justified. Our

opinion is modified to approve the regulation’s authoriza-

tion for sales of property damage and casualty insurance

only as it relates to such sales to bank subsidiaries of

the holding company. Thus § 225.4(a) (9) (ii) (a) & (b)

is invalid to the extent it purports to authorize the sale

of property damage or casualty insurance with respect

to extensions of credit or the provision of other financial

services by holding company subsidiaries which are not

banks.

The Board petitions for rehearing as to that portion

of our opinion dealing with § 225.4(a) (9) (iii) (a) which

denied to holding company agencies the authority to sell

any insurance sold in a community that has a population

not exceeding 5,000. In its petition the Board represents

that substantial factual grounds exist to meet the tests

for closely-related-to-banking set out in National Courier

Association v. Board of Governors of Federal Reserve

* Judge Thornberry was a member of the panel in our opinion

of June 10, 1976, but due to illness did not participate in these

petitions for rehearing and petitions for rehearing en banc. These

cases are being decided by a quorum. 28 U.S.C. § 46(d).

57a

System, 170 U.S.App.D.C. 301, 516 F.2d 1229 (1975),

which we adopted to govern our decision here. The pe-

titioners have responded to the Board’s assertions with

contentions that the regulation does not in fact facilitate

the financing of small town banking institutions and

could permit insurance operations other than those which

the Board’s assertions assume.

Upon consideration of said petitions and responses,

we vacate the final four complete paragraphs of Part II

of our opinion and pretermit any ruling on the merits

of this issue in the present appeal. Before the Board

implements § 225.4(a) (9) (iii) (a), it must support that

part of its regulation with further findings which es-

tablish the necessary close relationship of banking to

general insurance agency activity in towns with popu-

lations not exceeding 5,000. Any such findings by the

Board should not only be concerned with whether such

full line insurance agency activity is needed to facilitate

the financing of banking, but also whether the size of

the bank holding company involved would affect the need

for such financial support and whether the present word-

ing of the regulation would permit remote insurance

agency activity not truly intended to be authorized by

the small town exception so that adequate consideration is

given to any necessity for limiting the reach of the

regulatory language.

In all other respects, the petitions for rehearing filed

by petitioners and respondent are denied; and no judge

in regular active service on the court having requested

that the court be polled on rehearing en banc (Rule 35,

Federal Rules of Appellate Procedure; Local Fifth Cir-

cuit Rule 12), the petitions for rehearing en banc are

denied. This court does not retain jurisdiction of the

appeal.

59a

APPENDIX C

Second Rehearing Opinion of the

United States Court of Appeals

for the Fifth Circuit

UNITED STATES COURT OF APPEALS

FIFTH CIRCUIT

Nos. 74-2981, 74-3544 and 74-3843

ALABAMA ASSOCIATION OF INSURANCE AGENTS, et al.,

Petitioners,

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,

Respondent.

GEORGIA ASSOCIATION OF

INDEPENDENT INSURANCE AGENTS, et al.,

Petitioners,

Vv.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,

Respondent.

NATIONAL ASSOCIATION OF INSURANCE AGENTS, INC.,

Petitioner,

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,

Respondent.

Sept. 1, 1977

On Second Petitions for Rehearing and Second Pe-

tition for Rehearing En Banc.

Before TUTTLE, TFORNBERRY, and CLARK, Cir-

‘cuit Judges.

60a

PER CURIAM:

IT IS ORDERED that the first full paragraph of the

Slip Opinion of the Court dated January 10, 1977, on

the first petitions for rehearing and first petitions for

rehearing en banc, be withdrawn and the following lan-

guage be substituted:

Petitioners point out that in approving the Board’s

regulation authorizing holding company sales of prop-

erty damage and liability insurance in connection

with extensions of credit by “a bank or bank-related

firm,” we failed to make clear whether such insur-

ance could properly be provided by non-bank holding

company subsidiaries as well as bank subsidiaries.

This observation is correct; however, we reject peti-

tioners’ contention that the sale of property damage

and liability insurance should be restricted to sub-

sidiaries which are banks. On the contrary, we find

that the provision of property damage ana liability

insurance in connection with the traditional banking-

type functions of extending credit and providing

other financial services is “closely related to bank-

ing.” Whether the banking-type services and related

insurance are provided by a bank or a non-bank

subsidiary of a bank holding company is irrelevant.

Thus, we clarify our original opinion by holding

that the Board’s regulation 225.4(a) (9) (ii) (a) &

(b), authorizing the sale of property damage and

liability insurance in connection with extensions of

credit and other financial services, is valid with re-

gard to such sales by both bank and non-bank sub-

sidiaries of bank holding companies.

In all other respects, the second petitions for rehear-

ing are DENIED and no member of this panel nor

Judge in regular active service on the Court having re-

quested that the Court be polled on rehearing en banc,

(Rule 35 Federal Rules of Appellate Procedure; Local

Fifth Circuit Rule 12) the Second Petition for Rehear-

ing En Banc is DENIED.

6la

APPENDIX D

Judgment of the United States

Court of Appeals for the Fifth Circuit

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

October Term, 1975

Nos. 74-2981, 74-3544 & 74-3843

Your No. 12 U.S.C. 1848

ALABAMA ASSOCIATION OF INSURANCE AGENTS, et al.,

Petitioners,

versus

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,

Respondent.

GEORGIA ASSOCIATION OF

INDEPENDENT INSURANCE AGENTS, et al.,

Petitioners,

versus

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,

Respondent.

NATIONAL ASSOCIATION OF INSURANCE AGENTs, INC.,

Petitioner,

versus

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,

Respondent.

62a

Petitions for Review of Orders of the Board of Gov-

ernors of the Federal Reserve System (Alabama, Georgia

and Georgia Cases respectively)

Before TUTTLE, THORNBERRY and CLARK, Cir-

cuit Judges.

JUDGMENT

These causes came on to be heard on the petitions

of Alabama Association of Insurance Agents, et al.,

Georgia Association of Independent Insurance Agents,

et al., and National Association of Insurance Agents,

Inc. for review of orders of the Board of Governors of

the Federal Reserve System and were argued by counsel ;

ON CONSIDERATION WHEREOF, It is now here

ordered and adjudged by this Court that the orders of

the Board of Governors of the Federal Reserve System

in these causes be, and the same are hereby, affirmd

in part and reversed in part;

It is further ordered that petitioners pay to respondent

and intervenors-respondents, the costs on appeal to be

taxed by the Clerk of this Court.

June 10, 1976

Issued as Mandate:

63a

APPENDIX E

Order of the Board of Governors

of the Federal Reserve System

FRB Docket IA-10

(Southern Bancorporation)

FEDERAL RESERVE SYSTEM

THE ALABAMA FINANCIAL GROUP, INC.

Order Approving Application to Engage De Novo

In Certain Insurance Agency Activities

The Alabama Financial Group, Inc.,: Birmingham,

Alabama (“Applicant”), a bank holding company within

the meaning of the Bank Holding Company Act, on Feb-

ruary 24, 1972, applied to the Federal Reserve Bank

of Atlanta for approval, under § 4(c) (8) of the Act, as

amended, and § 225.4(a) (9) of the Board’s Regulation

Y (12 CFR 225.4(a)(9)), to engage de novo in certain

insurance agency activities at various locations in Ala-

bama at which Applicant or its banking and bank-related

subsidiaries are otherwise engaged in business, through

at insurance agency subsidiary (“Agency’’) to be formed

by Applicant.

Applicant proposes through Agency to act as insurance

agent or broker with respect to:

1. All insurance for Applicant and its subsidiaries.

2. Any insurance to protect assets financed by Appli-

cant and its subsidiaries and other insurance cal-

culated to protect the lender’s ability to obtain re-

payment of loans including:

*In April, 1974, Applicant’s corporate name was changed to

Southern Bancorporation.

64a

fire and extended coverage insurance

use and occupancy insurance

business interruption insurance

liability insurance

homeowners insurance

performance bonds connected with construction

loans

boiler and machinery insurance

fidelity insurance

theft insurance

collision and comprehensive insurance

surety bonds

marine property insurance

rr ao op

errr rs

3. Any insurance the purpose of which is to provide

loan or repayment funds in the event of loss of

income or other inability to repay debt including:

a. eredit life and credit accident and health in-

surance

b. mortgage life or mortgage guaranty insurance

4. Convenience insurance within the limitations of

Regulation Y.

5. A full line of general insurance at offices located

in communities having less than 5,000 population.

Applicant proposes to sell such insurance only in con-

nection with extensions of credit or the provision of

other financial services, or as a matter of convenience

to the purchaser within the limits of Regulation Y, or in

connection with less than 5,000 population. The sale of

certain types of insurance is an activity that has been

determined by the Board to be closely related to banking

(12 CFR 225.4 (a) (9)).

Notice of the application was published in the com-

munities to be served in accordance with § 225.4(b) (1)

of the Board’s Regulation Y. Objections to the applica-

65a

tion, requesting a hearing and seeking permission to

intervene, were filed by the National Association of

Insurance Agents (“NAIA”), the Alabama Association

of Insurance Agents (“AAIA”), the Independent In-

surance Agents of Birmingha

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