Petition — New York Stock Exchange, Inc. v. Heimann
Supreme Court brief1978
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No. 77. |
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IN THE
Supreme Court of the United States
OCTOBER TERM, 1977
NEW YORK STOCK EXCHANGE, INC. AND
INVESTMENT COMPANY INSTITUTE,
Petitioners
V.
JOHN G. HEIMANN, COMPTROLLER OF THE CURRENCY
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS FOR
THE DISTRICT OF COLUMBIA CIRCUIT
HENRY P. PooLe
Vice President and
General Counsel
New York Stock Exchange, Inc.
Eleven Wall Street
New York, New York 10005
MATTHEW P. FINK
General Counsel
Investment Company Institute
1775 K Street, N.W.
Washington, D.C. 20006
Of Counsel
JOHN E. NOLAN, JR.
WILLIAM C. KELLY, In.
STEPTOE & JOHNSON
1250 Connecticut Avenue, N.W.
Washington, D.C. 20036
Attorneys for the New York
Stock Exchange, Inc.
G. DUANE VIETH
JAMES W. JONES
ARNOLD & PORTER
1229 Nineteenth Street, N.W.
Washington, D.C. 20036
Attorneys for the Investment
Company Institute . |
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CITATIONS
Cases:
Abbott Laboratories v. Gardner, 387 U.S. 136
. A 4, 5
Arnold Tours, Inc. v. Camp, 472 F.2d 427 (Ist
Cir.), aff'g 338 F. Supp. 721 (D. Mass. 1972) 7
Baker, Watts & Co. v. Saxon, 261 F. Supp. 247
(D. D.C. 1966), aff'd sub nom. Port of New York
Authority v. Baker, Watts & Co., 392 F.2d 497
r . nceaincindtaate 7, 8
Commissioner v. Noel Estate, 380 U.S. 678 (1965) 8
First Nat'! Bank v. Dickinson, 396 U.S. 122
(196995 7
Helvering v. Winmill, 305 U. S. 79 (1988) ................ 8
Independent Bankers Ass’n of America v. Smith,
534 F.2d 921 (D.C. Cir.), cert. denied sub nom.
Bloom v. Independent Bankers Ass’n of America,
r, . 7
II
CITATIONS—Continued
Page
Investment Co. Institute v. Camp, 401 U.S. 617
c 6, 7
N. L. R. B. v. Bell Aerospace Co., 416 U.S. 267
P77. . 8
National Retailers Corp. v. Valley Nat'l Bk., 411
A § Fe '. 8 | 8
Saxon v. Georgia Ass’n of Independent Ins. Agents,
Inc., 399 F.2d 1010 (5th Cir. 1968) -................ 7
United States v. Leslie Salt Co., 350 U.S. 383
ESTAR ASS atin eee On ene 8
Zemel v. Rusk, 381 U.S. 1 (1965) -............_.. 8
Statutes and Regulations:
Securities Exchange Act of 1934
Section 3 (a) (4) (15 U.S.C. § 78c(a) (4) ) -...... 9
Glass-Steagall Act
Section 16 (12 U.S.C. § 24572 2. 3, 4, 5, 6, 7, 8
Section 20 (12 U.S.C. 63777 6
III 6
Miscellaneous:
1933 Annual Report of the Comptroller of the Cur-
1 —U—“]— — 7
Comptroller of the Currency, Digest of Opinions
§ 220A (1948), § 220A (1957), § 220 (1960) 7
Comptroller of the Currency, Interpretative Rul-
ings with Respect to Section 5136, U.S. R. S.
c nae tiidtaidiaaiatains 7
Hearings on H.R. 7852 and H.R. 8720 before the
House Committee on Interstate and Foreign
Commerce, 73d Cong., 2d Sess. (19243) 9
In THE
Supreme Court of the United States
OCTOBER TERM, 1977
No. 77-
NEW YORK STOCK EXCHANGE, INC. AND
INVESTMENT COMPANY INSTITUTE,
Petitioners
V.
JOHN G. HEIMANN, COMPTROLLER OF THE CURRENCY
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS FOR
THE DISTRICT OF COLUMBIA CIRCUIT
The New York Stock Exchange, Inc., and the Invest-
ment Company Institute petition for a writ of certiorari
to review the judgment of the United States Court of
Appeals for the District of Columbia Circuit in this case.
OPINIONS BELOW
The rulings of the Comptroller of the Currency (Ap-
pendix A) are unreported. The opinion of the district
court (Appendix B, infra, pp. 32a) is reported sub
nom. New York Stock Exchange v. Smith, at 404 F.
Supp. 1091 (D.D.C. 1975). The opinion of the Court of
Appeals (Appendix C, infra, pp. 53a) is not yet re-
ported.
2
JURISDICTION
The judgment of the Court of Appeals was entered on
July 19, 1977 (Appendix C, infra, p. 53a). A timely
Petition for Rehearing and Suggestion for Rehearing En
Banc was denied by the Court of Appeals on August 31,
1977 (Appendix D, infra, p. 70a-71a). The jurisdiction of
this Court is invoked under 28 U.S.C. § 1254(1).
QUESTIONS PRESENTED
1. Whether petitioners are entitled to judicial review
of rulings of the Comptroller of the Currency interpret-
ing §16 of the Glass-Steagall Act, 12 U.S.C. § 24.
2. Whether the Comptroller of the Currency erred in
ruling that §16 of the Glass-Steagall Act, 12 U.S.C.
§ 24, which allows national banks to purchase and sell
securities “solely upon the order, and for the account
of, customers,” permits them to offer a brokerage type
service known as Automatic Investment Service to the
public.
STATUTES INVOLVED
The pertinent provisions of § 16 of the Glass-Steagall
Act, 12 U.S.C. § 24, are set forth in Appendix E, infra,
p. 72a.
STATEMENT
On February 27, 1973, in response to a request from
a national bank, the Comptroller of the Currency
(“Comptrelier”) issued a one-page letter ruling that na-
tional banks are permitted under §16 of the Glass-
Steagall Act (“Act”) to offer to the public a brokerage type
service called Automatic Investment Service (“AIS”).
Under AIS, a participant selects one or more common
stocks from a list of twenty-five stocks selected because
they are the highest volume stocks on Standard & Poor’s
425 Industrial Index. The participant authorizes the bank
to make monthly purchases of that stock for him. The bank
pools the orders, purchases the stock, and deducts from
the participant’s account the cost (including brokerage
fees) of the stock and a service charge. AIS is adver-
tised to the general public and not solely to pre-existing
customers of the bank.’
At the request of the New York Stock Exchange and
the Investment Company Institute, petitioners herein,
the Comptroller agreed to reconsider his ruling. On June
10, 1974, after reviewing submissions from petitioners
and others interested in the banking and securities indus-
tries, the Comptroller issued a second ruling in the form
of a 23-page letter discussing in detail the issues raised
in the submissions.
The Comptroller’s letter rendered an “Opinion” that
§ 16 of the Act permits national banks to purchase and
sell stock as agents for their customers through the AIS
device; to make a profit in so doing; and to advertise
the availability of this service. Appendix A, infra, pp.
21a-22a. The Comptroller then addressed “Policy Consid-
erations” with respect to abuses which might develop from
the operation by national banks of AIS services, con-
cluding that:
Since our opinion is that Section 16 on its face
clearly and unambiguously permits AIS service, such
considerations are matters more relevant to future
supervisory vigilance than to the statutory interpre-
tation which is the subject of this letter. Appendix
A, infra, p. 22a.
1 AIS has been promoted extensively with television advertise-
ments during National Football League games and in magazines
and newspapers of general circulation. See the Joint Appendix filed
in the Court of Appeals at 140, 144-53, 167.
4
Petitioners sought judicial review in the District Court
of the Comptrolier’s February 27, 1973, and June 10,
1974, rulings with respect to §16. The District Court
held that petitioners have a right of judicial review. On
the merits, the District Court concluded that the Comp-
troller had properly interpreted § 16 of the Act.
On appeal, the United States Court of Appeals for
the District of Columbia Circuit, characterizing the Comp-
troller’s rulings as “tentative and provisional,” held that
petitioners have no right of judicial review and ordered
the complaint dismissed. Appendix C, infra, p. 68a.
REASONS FOR GRANTING THE WRIT
1. The decision of the Court of Appeals denying ju-
dicial review of the Comptroller’s rulings is in conflict
with the landmark decision of this Court in Abbott
Laboratories v. Gardner, 387 U.S. 136 (1967).
Abbott Laboratories established that authoritative
agency constructions of Federal statutes are ripe for
judicial review. In that case, drug manufacturers sought
judicial review of regulations issued by the Commis-
sioner of Food and Drugs requiring that the labels on
trade name drugs also indicate the “established names”
of the drugs. In analyzing the propriety of judicial re-
view, this Court instructed:
The problem is best seen in a twofold aspect, re-
quiring us to evaluate both the fitness of the issues
for judicial decision and the hardship to the parties
of withholding court consideration. 387 U.S. at 149.
On the facts before it, the Court held that the issue was
fit for judicial decision, stating that “the issue tendered
is a purely legal one: whether the statute was properly
construed by the Commissioner. . . 387 U.S. at 149.
With respect to the hardship of withholding considera-
5
tion, the Court found that the Commissioner’s regulations
had been “felt in a concrete way by the challenging
parties.” 387 U.S. at 148-49.
In the present case, the Court of Appeals denied ju-
dicial review of an agency ruling on a “purely legal“
question—whether § 16 of the Act was properly construed
by the Comptroller. The District Court recognized that
“(t]here is no doubt that the case at bar presents a
‘purely legal’ question only, the validity of the Comp-
troller’s construction of the Glass-Steagall Act.” 404 F.
Supp. at 1095; Appendix B, infra, p. 38a. Moreover,
petitioners have felt the effects of the Comptroller’s rul-
ings in a concrete way” as national banks have developed
AIS plans through widespread advertising and have pro-
moted them at the expense of the business of the mem-
bers of the New York Stock Exchange and the Invest-
ment Company Institute. The District Court explicitly
found that “the petitioners will suffer substantial hard-
ship if the court withholds consideration of the Comp-
troller’s letter at this time.” Jd. As the District Court
also noted, the impact of denying judicial review is par-
ticularly severe here, because petitioners cannot challenge
the Comptroller’s rulings by disobeying them. Id.
The Court of Appeals’ effort to distinguish the present
ease from Abbott Laboratories by characterizing the
Comptroller’s rulings as “tentative and provisional” is
unavailing. The Comptroller intended to and did engage
in “statutory construction” and concluded that “Section
16 clearly and unambiguously permits AIS Service... .”
Appendix A, infra, p. 22a. Whatever subsequent events
2 The opinion of the Court of Appeals endorses the novel notion
that the right of judicial review can be defeated merely by the
suggestion that appellants can bring private actions against national
banks which offer AIS. Appendix C, infra, p. 65a-66a. Apart from
the absence of support in the cases decided by this Court for denying
judicial review on this basis, the initiation of multiple private
actions would burden the courts and the parties unnecessarily.
6
may show about the effectiveness of AIS plans or about
the need for supervision of those plans by the Comptrol-
ler, they will teach nothing about whether Congress in-
tended in § 16 of the Act to prohibit banks from engag-
ing in activities such as AIS.
2. The Comptroller’s rulings breach the wall of separa-
tion between commercial banking and the securities busi-
ness which Congress erected in the Glass-Steagall Act.
Whether the Comptroller correctly interpreted §16 of
the Act is an important question of Federal law which
should be settled by this Court.
A substantial purpose of the Glass-Steagall Act was
to insure public confidence in national banks by limiting
their involvement in the securities business. The core
of the separation is contained in § 16, 12 U.S.C. § 24,
which provides in pertinent part that “[t]he business
of dealing in securities and stock by [national banks]
shall be limited to purchasing and selling such securities
and stock without recourse, solely upon the order, and for
the account of, customers ....” The separation is re-
flected as well in § 20, 12 U.S.C. § 377, which prohibits
“affiliation” of national banks with organizations engaged
principally in the securities business, and in § 32, 12
U.S.C. § 78, which prohibits any person engaged prin-
cipally in the securities business from serving concur-
rently as an officer, director, or employee of a national
bank.
The Comptroller’s contemporaneous interpretation of
§ 16 faithfully carried out the purposes of the Act, which
this Court has characterized as “a prophylactic measure.”
Investment Company Institute v. Camp, 401 U.S. 617,
639 (1971). Among the restrictions contemporaneously
imposed by the Comptroller were that banks could only
buy and sell securities as an “accommodation” to cus-
tomers; that this customer relationship had to exist inde-
7
pendently of the securities transaction; and that banks
could not engage in such accommodation transactions for
profit. See 1933 Annual Report of the Comptroller of the
Currency (1934); Comptroller of the Currency, Inter-
pretative Rulings with Respect to Section 5136, U.S.R.S.
(1936) ; Comptroller of the Currency, Digest of Opinions
§ 220A (1948), § 220A (1957), § 220 (1960).
The rulings challenged here represent a reversal of
the Comptroller’s long-standing position. Under the terms
of the new rulings, national banks not only may offer
AIS to their regular customers, but also may advertise
AIS to attract new customers and may operate AIS not
merely as an accommodation but as a profit-making ven-
ture. Appendix A, infra, p. 21a-22a.
This permissive view of § 16, premised on the Comp-
troller’s policy views that “AIS will be a pro-competitive
force” and will provide a “convenient means within
reach of . . . many bank customers,” Appendix A, infra,
p. 23a, is sharply at odds with the Act. As this Court
admonished in Investment Company Institute v. Camp,
supra, “policies of competition, convenience, or expertise”
are outweighed by the “ ‘hazards’ and ‘financial dangers’
that arise when commercial banks engage in the activities
proscribed by the Act.” 401 U.S. at 630.°
The Comptroller has attempted repeatedly in recent years to
broaden the powers of national banks in the face of statutory limi-
tations and has been rebuffed repeatedly by the courts. See, e.g.,
Investment Co. Institute v. Camp, 401 U.S. 617 (1971) (sponsoring
and operating a mutual fund); Independent Bankers Ass’n of
America V. Smith, 534 F.2d 921 (D.C. Cir.), cert. denied sub nom.
Bloom v. Independent Bankers Ass'n of America, 429 U.S. 862
(1976) (providing customer-bank communication terminals); First
Nat'l Bank v. Dickinson, 396 U.S. 122 (1969) (setting up armored
car service and deposit receptacles); Arnold Tours, Inc. v. Camp,
472 F.2d 427 (ist Cir.), affe 338 F. Supp. 721 (D. Mass. 1972)
(acting as travel agent); Saxon v. Georgia Ass’n of Independent
Ins. Agents, Inc., 399 F.2d 1010 (5th Cir. 1968) (selling life insur-
ance) ; Baker, Watts & Co. v. Saxon, 261 F. Supp. 247 (D.D.C. 1966),
8
Moreover, the Comptroller's new interpretation flies in
the face of Congressional inaction amounting to endorse-
ment of his original interpretation. This Court has re-
cently held, in rejecting an attempt by the N.L.R.B. to
reverse its prior construction of a statutory provision,
that:
[A] court may accord great weight to the long-
standing interpretation placed upon a statute by an
agency charged with its administration. This is es-
pecially so where Congress has re-enacted the statute
without pertinent change. In these circumstances,
congressional failure to revise or repeal the agency’s
interpretation is persuasive evidence that the inter-
pretation is the one intended by Congress. f
N. L. R. B. v. Bell Aerospace Co., 416 U.S. 267, 274-75
(1974) (footnote omitted)“ In the present case, although
the pertinent paragraph of § 16 has been amended twenty-
one times since 1933, Congress has done so without dis-
turbing the Comptroller’s contemporaneous, restrictive in-
terpretation of the statutory phrase “solely upon the order,
and for the account of, customers.” This is “persuasive
evidence” that the Comptroller’s long-standing interpreta-
tion is “the one intended by Congress” and that the Comp-
troller’s decision to reverse his interpretation usurps the
legislative role properly left to Congress.
In addition to their economic impact on the commer-
cial banking and securities industries, the Comptroller’s
rulings also have major consequences for the investing
public. Because banks were thought to be barred by the
Act from dealing in securities, Congress specifically ex-
aff'd sub nom. Port of New York Authority v. Baker, Watts & Co.,
392 F.2d 497 (D.C. Cir. 1968) (selling municipal revenue bonds) ;
National Retailers Corp. v. Valley Nat'l Bk., 411 F. Supp. 308 (D.
Ariz. 1976) (offering data processing services).
* See also Zemel v. Rusk, 381 U.S. 1 (1965) ; Commissioner v. Noel
Estate, 380 U.S. 678 (1965); United States v. Leslie Salt Co., 350
U.S. 383 (1956) ; Helvering v. Winmill, 305 U.S. 79, 83 (1938).
empted them from the definition of “broker” contained
in §3(a)(4) of the Securities Exchange Act of 1934,
15 U.S.C. § 78c(a) (4).° The comprehensive system of
regulation administered by the Securities and Exchange
Commission, which protects investors from improper
practices on the part of the securities industry, does not
protect investors from AIS abuses by national banks.
A national bank need not determine the suitability of the
stock for the investor, need not disclose adverse informa-
tion concerning the companies whose stock it buys under
AIS, and need not obtain the best available price, the
best execution or prompt delivery.
So significant a revision in the respective roles as-
signed by Congress to the banking and securities indus-
tries merits review by this Court.
o See Hearings on H.R. 7852 and H.R. 8720 before the House
Committee on Interstate and Foreign Commerce, 73d Cong., 2d
Sess., at 86 (1934).
10
CONCLUSION
The petition for a writ of
HENRY P. POOLE
Vice President and
General Counsel
New York Stock Exchange, Inc.
Eleven Wall Street
New York, New York 10005
MATTHEW P. FINK
General Counsel
Investment Company Institute
1775 K Street, N.W.
Washington, D.C. 20006
Of Counsel
November 1977
certiorari should be granted.
Respectfully submitted,
JOHN E. NOLAN, JR.
WILLIAM C. KELLY, JR.
STEPTOE & JOHNSON
1250 Connecticut Avenue, N.W.
Washington, D.C. 20036
Attorneys for the New York
Stock Exchange, Inc.
G. DUANE VIETH
JAMES W. JONES
ARNOLD & PORTER
1229 Nineteenth Street, N.W.
Washington, D.C. 20036
Attorneys for the Investment
Company Institute
Appendices
la
APPENDIX A
THE ADMINISTRATOR OF NATIONAL BANKS
WASHINGTON, D.C. 20220
[SEAL]
Office of the
Comptroller of the Currency
February 27, 1973
Edward J. McAniff, Esquire
O’Melveny & Myers
611 West Sixth Street
Los Angeles, California 90017
Dear Mr. McAniff:
In your letter of February 12, 1973 you request a
ruling on behalf of Security Pacific National Bank that
its proposed Automatic Investment Service is consistent
with Sections 24 and 378 of Title 12 of the United States
Code.
In its essential elements the Service would provide
periodic pooled purchases of common stocks ordered from
a limited list by and for the account of customers who
would authorize regular monthly deductions from their
checking accounts for that purpose. The stocks purchased
would be held in the name of the bank or its nominee
for the account of the customer. Each person acquiring
stock would receive a monthly statemert indicating the
amount designated for purchase, the number of full and
fractional shares purchased to four decimal places, the
price per share, the date of acquisition and the total
shares owned by him.
We have reviewed the provisions of the proposed Serv-
ice as set forth in your letter and outlined in part above
and have concluded that the Service: (1) Involves only
2a
purchases for the account of customers and not for the
bank’s own account; (2) That the bank in creating and
managing the Service is not engaged in the business of
issuing, underwriting, selling or distributing securities
and (3) That the operation of the Service by the bank
is consistent with the provisions of Section 24 and 378
of Title 12, of the United States Code.
Sincerely yours,
/s/ William B. Camp
WILLIAM B. CAMP
Comptroller of the Currency
8a
[SEAL]
THE ADMINISTRATOR OF NATIONAL BANKS
WASHINGTON, D.C. 20220
June 10, 1974
Mr. G. Duane Vieth
Arnold and Porter
1229 Nineteenth Street, N.W.
Washington, D.C. 20036
Dear Mr. Vieth:
This is in reference to your letter of August 15, 1973,
and to the succeeding correspondence and meetings be-
tween us on the subject of the Automatic Investment
Service (AIS) being offered by some national banks.
In February 1973 counsel for Security Pacific National
Bank (Security Pacific) requested the views of this of-
fice whether a proposed AIS would be consistent with the
national banking laws and particularly with Sections 16
and 21 of the Glass-Steagall Act, 12 U.S.C. Sections 24
and 378, as amended (G-S Act).
Description of AIS
The proposed AIS offers checking account customers of
the bank the opportunity to purchase any of an initial
list of twenty-five common stocks, by an automatic
monthly charge within a range of $20 to $500 to their
checking accounts. The participant chooses his stock or
stocks from a list of the twenty-five largest corporations
listed in Standard and Poor’s 425 Industrial Index as
determined by the market value of outstanding stock.
The bank makes the deductions, effects purchases for the
customer’s account through a broker, keeps the stock in
safekeeping, and provides monthly statements. The bank
does not participate in the selection of the stocks to be
4a
included in the list (except insofar as the initial selec-
tion of the Standard and Poor’s Index was made by the
bank) and does not give investment advice to the par-
ticipants. The participant is advised to make an inde-
pendent investigation of the merits and suitability of the
available stocks.
The bank charges a per transaction fee of 5 percent of
the amount invested in each stock, but this fee is limited
to $2.00 ($3.00 under some plans). In addition, each
participant pays his pro rata share of the brokerage
commissions. Participants have full rights as sharehold-
ers and receive shareholder material directly from the
company. |
Those electing to purchase stock have their monthly
deductions pooled with money of all others acquiring
the same stock under the Service. Periodically, but not
less frequently than once every month, the bank estab-
lishes a cut-off date and promptly thereafter acquires
shares of each of the common stocks with all funds
available, after deducting the service charge. The funds
include any dividends that have been received by the
bank on full and fractional shares that it, or its nom-
inee, is holding in safekeeping for users of AIS. The
time between any cut-off date and the subsequent com-
pletion by the bank of the acquisition of shares of common
stock with funds obtained prior to the cut-off date is re-
ferred to as an “acquisition interval.” Such acquisition
interval shall not exceed thirty days. The price per share
(including fractional shares) charged each person who
acquires shares of a stock during any particular acquisi-
tion interval is the average price (including brokerage
costs) paid by the bank for all shares of that stock
purchased by it under the Service during that acquisi-
tion interval. All the shares acquired under the Service
are held in the bank’s name or in the name of its nom-
inee but the bank wil! deliver, upon request, certificates
5a
representing whole shares to the owner. There is no
charge for delivery of certificates evidencing ownership
of one hundred shares or more. For certificates in the
amount of 99 or fewer shares there is a charge of $4
per certificate where the delivery is other than in con-
nection with termination of an account.
A participant may terminate the Service at any time
either completely or as to one or more stocks. The bank
will deliver certificates representing the full shares
owned and cash for fractional shares or will sell the full
shares if so requested.
Pertinent Statutes
The provisions of the banking laws applicable to the
proposed AIS appear in Title 12 of the United States
Code as portions of Sections 24 and 378. The pertinent
portion of Section 24 reads as follows:
The business of dealing in securities and stock by
the association shall be limited to purchasing and
selling such securities and stock without recourse,
solely upon the order, and for the account of, cus-
tomers and in no case for its own account, and the
association shall not underwrite any issue of securi-
ties or stock.
Section 378 prohibits persons engaging in the busi-
ness of issuing underwriting, selling or distributing se-
curities from engaging in the business of receiving de-
mand or time deposits and provides criminal penalties for
the violation of any of its provisions. It contains a pro-
viso, however, which states that its provisions shall not
prohibit national banks or other banks, financial institu-
tions or private bankers “from dealing in, underwriting,
purchasing, and selling investment securities to the ex-
tent permitted to national banking associations by the pro-
visions of Section 24 of this title.
6a
The Comptroller reviewed the provisions of the pro-
posed service in the light of the pertinent provisions of
Sections 24 and 378 and concluded in a letter dated
February 27, 1973 that (1) the AIS involves only pur-
chases for the account of customers and not for the bank’s
own account; (2) the bank in creating and managing the
AIS is not engaged in the business of issuing, under-
writing, selling or distributing securities; and (3) the
operation of AIS by the bank is consistent with the pro-
visions of Sections 24 and 378 of Title 12 of the United
States Code.
Investment Company Institute Request
for Reconsideration
On August 15, 1973 counsel for Investment Company
Institute (ICI), a national association of the mutual
fund industry, requested that the Comptroller reconsider
the position taken in the letter of February 27, 1973 and
issue a revised opinion or ruling concluding that the op-
eration by a national bank of an AIS which includes a
stock purchase plan is prohibited by Sections 24 and
378 of Title 12 of the United States Code. This request
was accompanied by a supporting memorandum which
mentioned that two banks were operating AIS.
Copies of the request of ICI and of the memoranda
were sent by the Comptroller’s Office to counsel for the
two banks and to counsel for Investment Data Company
which had developed the AIS under consideration. Coun-
sel were invited to submit to the Comptroller their com-
ments on the request for reconsideration and to send a
copy of any such comments to counsel for TCI. The latter
was advised of the invitation.
On October 12, 1973 memoranda in support of the
opinion of the Comptroller were received from counsel
for the two banks. On October 29, 1973 a reply memo-
randum was submitted by counsel for ICI. On November
— — ee
7a
20 a supplemental memorandum responding to certain
contentions made in the reply memorandum was sub-
mitted by counsel for the banks.
Meanwhile the President of the New York Stock Ex-
change expressed in a letter of September 7, 1973 the
concern of the Exchange with the activities of national
banks which were selling stocks listed on the Exchange
under AIS. The President of the Exchange requested
that the Comptroller’s opinion be reviewed in the light
of the practices which have developed since it was issued.
He was advised that attorneys for ICI had made a simi-
lar request supported by a legal memorandum and he was
invited to submit any legal briefs or other material he
might care to submit in support of his position.
On February 22, 1974 the President of the New York
Stock Exchange requested that the Comptroller defer an-
nouncing an opinion or ruling until the Exchange had
an opportunity to submit additional material. The Comp-
troller acceded to this request stating in his reply and a
press release that he would delay the issuance of his
response to ICI until April and requested that the Ex-
change's material be submitted by March 22. On March
22, 1974 the President of the Exchange submitted a
legal memorandum in support of a request that the Comp-
troller rule that the operation of an AIS by a national
bank is unlawful.
Legislative History
Banking Act of 1927
Prior to the enactment of the McFadden Act (1927),
44 Stat. 1226, national banks engaged in the investment
securities business under their incidental corporate pow-
ers to conduct the banking business. Congress in enact-
ing the McFadden Act chose to recognize, confirm and
regulate an existing banking service or business instead
8a
of granting a new power. 69th Cong. Ist Sess. No. 83,
January 12, 1926 pp. 2, 3, 4; No. 473 March 25, 1966
pp. 6, 7.
Section 2(b) of the McFadden Act amended the law
relating to the corporate powers of national banks by
adding at the end of paragraph Seventh of R.S. 5136,
12 U.S.C. 24 in part as follows:
That the business of buying and selling investment
securities shall hereafter be limited to buying and
selling without recourse marketable obligations
commonly known as investment securities under such
further definition of the term ‘investment securities
as may by regulation be prescribed by the Comp-
troller of the Currency, ...
Section 2(b) also established a limitation on holdings
of the securities of any one obligor of not to exceed 25
percent of the capital and surplus of the bank. That
limitation was not to apply however to obligations of the
United States, general obligations of any state or of any
political subdivision thereof.
Banking Act of 1933
Section 16 of the G-S Act (1933), 48 Stat. 184 again
amended the law relating to the corporate powers of
national banks by adding as the second sentence of para-
graph Seventh the following:
The business of dealing in investment securities
by the association shall be limited to purchasing and
selling such securities without recourse, solely upon
the order, and for the account of, customers and in
no case for its own account, and the association
shall not underwrite any issue of securities.
Section 16 also authorized a national bank to purchase
investment securities but not shares of stock for its own
— —
9a
account subject to certain limitations and restrictions and
ended by providing in pertinent part as follows:
The limitations and restrictions herein contained as
to dealing in, underwriting the purchasing for its
own account, investment securities shall not apply to
obligations of the United States or general obliga-
tions of a state or of any political subdivision there-
...
The legislative reports accompanying the G-S Act have
the following comment on the language which later be-
came Section 16.
National banks are to be permitted to purchase and
sell investment securities for their customers to the
same extent as heretofore, but hereafter they are to
be authorized to purchase and sell such securities
for their own account only under such limitations
as the Comptroller of the Currency may prescribe,
subject to certain definite maximum limits as to
amount. 72nd Cong. Ist Sess., Senate Report No.
585, April 22, 1932, p. 15; 73rd Cong. Ist Sess.,
Senate Report No. 77, May 15, 1933, p. 16; 73rd
Cong. Ist Sess., House Report, No. 150, May 19,
1933, p. 3.
Section i6 divided the securities business which banks
are authorized to transact into three categories:
(1) Agency—in which the bank may purchase and
sell securities, but only as an agent for the account of a
customer;
(2) Investment portfolio—in which the bank may pur-
chase for its own account defined investment securities
subject to limitations and restrictions, and
(3) Unlimited and unrestricted—in which the bank
may deal in, underwrite and purchase for its own ac-
10a
count obligations of the United States and the general
obligations of states and municipalities.
Each of these categories, carefully defined in the cor-
porate powers section of the banking law, are by that
very fact part of the business of banking which banks
may promote and carry on for the purpose of making
a profit.
In the agency category the authority of a bank to
deal in securities is limited to transactions for customers
and not for the account of the bank. As a result, the
bank will be unable to make an inventory profit or to
suffer an inventory loss on such transactions. Its profit,
if any, must come from charges for services performed.
In the other two categories inventory profits and losses
are possible but the classes of securities which may be
involved are restricted and some of them are subject to
other limitations. The reform intended was to reduce the
risk that inventory losses in speculative securities might
jeopardize the stability of banks and the banking sys-
tem. The existence of these categories indicates, however,
that Congress, in Glass-Steagall, left to banks a definite
authority to participate in the securities business.
Section 21(a) of the G-S Act, 48 Stat. 189; 12 U.S.C.
378 made it unlawful (1) for any person, firm, corpora-
tion, association, business trust, or other similar organi-
zation, engaged in the business of issuing, underwriting,
selling, or distributing, at wholesale or retail, or through
syndicate participation, stocks, bonds, debentures, notes,
or other securities, to engage at the same time to any
extent whatever in the business of receiving deposits
subject to check or to repayment upon presentation of
a passbook, certificate of deposit, or other evidence of
debt, or upon request of the depositor... .
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lla
Banking Act of 1935
Section 303(a) of the Banking Act of 1935, 49 Stat.
707 added the following proviso at the end of paragraph
(1) of subsection (a) of section 21 of the G-S Act:
Provided, That the provisions of this paragraph
shall not prohibit national banks or State banks or
trust companies (whether or not members of the
Federal Reserve System) or other financial institu-
tions or private bankers from dealing in, under-
writing, purchasing, and selling investment securi-
ties to the extent permitted to national banking as-
sociations by the provisions of section 5136 of the
Revised Statutes, as amended (U.S.C., title 12, sec.
24).
The proviso was added to make it clear that Section 21
(a) (1) does not prohibit banks, bankers or financial
institutions from engaging in securities activities to the
limited extent permitted to national banks under section
5136 of the Revised Statutes. 74th Cong., Ist Sess., H.
Rept. No. 742, April 19, 1935, p. 16; S. Rept. No.
10007, May 13, 1935, p. 15.
Section 308(a) of the Banking Act of 1935, 49 Stat.
709, amended the second sentence of paragraph Seventh,
R.S. 5136, 12 U.S.C. 24, to read as follows:
The business of dealing in securities and stock
by the association shall be limited to purchasing
and selling such securities and stock without re-
course, solely upon the order, and for the account
of, customer, and in no case for its own account,
and the association shall not underwrite any issue
of securities or stock.
The purpose of the amendment was to make clear that
national banks and other member banks may purchase
and sell stock for the accounts of their customers but
not for their own accounts. 74th Cong., Ist Sess., H.
Rept. No. 742, p. 18.
12a
The Early Comptroller's Opinions
The Comptroller in a published Interpretive Ruling
in 1936, took the position that a bank could not make a
profit on its agency business. Since the Act only em-
powered the Comptroller to make rules concerning the
purchase of securities for its own account and not for the
account of others, that ruling (like this letter) con-
stituted oniy an administrative interpretation of statute,
and not a legislative regulation.
The office continued to advise national banks to pro-
vide agency services at cost until 1948. Paragraph 220
of the Digest of Opinions issued that year after reciting
the previous rule that the service must be confined to
acting as “accommodation agent for the convenience of
customers,” stated that “accordingly compensation must
not substantially exceed the aggregate cost of handling
of such transactions... [Underlining supplied.
In 1953, the Citizens and Southern National Bank of
South Carolina wrote the Comptroller and asked whether
it could enter into an arrangement with a local stock-
broker whereby an individual could arrange to have a
set amount taken out of his account once each month and
paid to the stockbroker two days later for the purchase
of whole shares to be selected by the broker.
The Comptroller replied that there was no objection
to the proposed plan, provided that the bank’s compensa-
tion did not exceed its cost.
This evidently remained the office position until 1957
when the “no-profit” condition was dropped. Paragraph
220A of the August 1957 edition of the Digest of Opin-
ions read as follows:
13a
220A. BUYING AND SELLING SECURITIES ON
BEHALF OF CUSTOMERS
Although R.S. 5136 prohibits national banks from
dealing in securities (except so-called ‘exempt’ se-
curities) for their own account, it permits them to
purchase and sell securities (including stock) for the
account of their customers. However, the activities
of the bank in this capacity are confined to those
of an accommodation agent for the convenience of
customers.
In view of the express authorization in R.S. 5136
to purchase and sell securities and stock for the
account of customers, a national bank may receive
compensation upon the performance of such a serv-
ice. However, since the bank is acting as an ac-
commodation agent for customers, it may not re-
tain commissions, discounts, or rebates obtained
from brokers or dealers unless authorized so to do by
the customers for whom it acts as agent.
The transactions permitted by this sentence of
R. S. 5136 do not include (a) acting as agent to
sell securities which are obligations of the bank’s
customers, (b) employing solicitors to purchase or
sell securities for the bank’s customers, or (c) per-
forming services as an active middleman in bring-
ing together borrower or issuer, and lender or
purchaser, for a fee or commission. Performance
of such functions would amount to engaging in the
brokerage or investment banking business, which are
beyond the permissible scope of limited accommoda-
tion services.
A national bank may not purchase securities for
a customer unless payment therefor has been re-
ceived by the bank, or the customer has credits or
collateral with the bank sufficient to cover the trans-
l4a
action and the bank is definitely authorized to charge
the cost against such credits or collateral. In other
words, the bank must not assume any risk in such
transactions.
When it purchases or sells securities on behalf of
its customer, a national bank should disclose that it
is acting as agent and not as principal. Services
in this field must be limited to actual customers of
the bank—that is, the customer relationship must
exist independently of the particular securities
transaction.
In 1961 the Digest of Opinions was replaced by the
Interpretive Rulings section of the Comptroller's Man-
ual for National Banks. The Manual contained no rul-
ing and continues to contain no ruling on the subject
of former paragraph 220A.
The original “no-profit” position apparently stemmed
from certain statements made by the Comptroller to
Congress in 1934 and 1935 in support of a request for
a clarifying amendment to Section 16. Section 16, as
first passed in 1933, permitted national banks to pur-
chase and sell “investment securities” for their customers
without making clear that this included stocks as well
as the debt securities which were permissible “invest-
ment securities” for banks’ own portfolios. The Comp-
troller, in asking for the clarifying amendment, stated:
Section 307(a), which is also new, in part, makes
it clear that section 16 of the Banking Act of 1933
was not intended to prohibit national banks or mem-
ber banks from buying or selling stocks solely for
the account of their customers and as an accom-
modation thereto and not for their own account.
This is extremely important, particulary in com-
munities remote from financial centers, and since
there is involved no investment by the bank of its
15a
own funds, no objection can be seen thereto. The
amendment further limits national banks in purchas-
ing investment securities for their own account
Hearings on H. R. 5857 Before the House Committee
on Banking and Currency, 74th Cong., Ist Sess.
663 (1935).
The requested amendment was made in 1935 and
expressly authorized agency dealings in stocks as well
as bonds. The pertinent amendment reads as follows,
with deleted material in square brackets and added ma-
terial underscored :
The business of dealing in [investments] securi-
ties and stock by the association shall be limited to
purchasing and selling such securities and stock
without recourse, solely upon the order, and for
the account of, customers, and in no case for its
own account, and the association shall not under-
write any issue of securities or stock: Provided,
That the association may purchase for its own ac-
count investment securities under such limitations
and restrictions as the Comptroller of the Currency
may by regulation prescribe ....” H.R. Rep. No.
742, 74th Cong., Ist Sess. 65 (1935).
The sole purpose of the amendment was described in
a single sentence in the House Report accompanying the
bill which so amended Section 16 in 1935:
SECTION 307(b). PURCHASE OF STOCK FOR
ACCOUNT OF CUSTOMERS
Section 307(b) would amend section 5136 of the
Revised Statutes so as to make it clear that na-
tional banks and other member banks may purchase
and sell stocks for the account of their customers
but not for their own accounts. H.R. Rep. No. 742,
74th Cong., Ist Sess. 18 (1935).
16a
In its Annual Report covering the year 1935, the
Federal Reserve Board's entire comment on the amend-
ing legislation reads as follows:
Purchase of stocks for account of customers.—
It was made clear, in conformity with previous rul-
ings of the Comptroller of the Currency and the
Board, that national and other member banks may
purchase and sell stocks for the account of their
customers but not for their own accounts. 1935
Annual Report of the Board of Governors of the
Federal Reserve System 56 (1936).
The office position from 1936 to 1957 was that it was
inconsistent with the idea of an “accommodation” serv-
ice for a bank to make a profit on such service. These
old rulings did not reveal the rationale for concluding
that a bank service, expressly authorized by Congress,
could not be marketed in the usual fashion. This view,
like many others expressed by bank regulators, in the
immediate post-depression decades, was designed to be
ultra-conservative and to confine banks as narrowly as
possible in their activities. However, in this regard, the
office apparently went further in the direction of con-
servatism than did the Congress, since neither the word
nor the idea of the “accommodation” limitation appears
in the statute or in any committee or floor comments.
Even if we assume that the Congress, in responding to
the 1934 and 1935 Comptroller recommendations using
the word “accommodation,” adopted the concept, nowhere
in either the Comptroller’s recommendations or in the
Committee reports is there any indication that “accom-
modation” meant “no profit” or “at cost.” That idea
came later probably as part of the tendency of the Comp-
troller’s office in those years to limit various bank ac-
tivities by restricting advertising or charges.
—
17a
By August 1957, enough water had apparently flowed
over the dam to permit a Deputy Comptroller to advise
a banker as follows:
Mr. Duane R. Zimmerman
Assistant Cashier
The First National Bank
Mainelander, Wisconsin
Dear Mr. Zimmerman:
This is to advise in reply to your letter of August
1, 1957, concerning service charges for the purchase
or sale of stocks and bonds for the account of cus-
tomers, that adoption of the proposed schedule of
charges for such services, as outlined in your letter,
is a matter for determination by the Board of Direc-
tors of your bank.
Very truly yours,
L. A. Jennings
Deputy Comptroller of the Currency
A pertinent inquiry in determining whether Congress
envisioned the imposition of charges by banks in per-
forming agency transactions is whether such charges
were imposed prior to 1933, inasmuch as Section 16 was
intended to preserve the practice “as heretofore.” Cases
cited by bank counsel and the records of the office in-
dicate that such charges were commonplace before the
Act and continued to be made thereafter. An S.E.C.
study in 1963 described the practice as follows:
Also participating in the third market as inter-
mediaries for public customers are commercial banks
representing individuals with whom the bank en-
joys only an agency relationship. A NYSE trans-
action study in 1955 reported 20.4 percent of com-
mercial bank share volume on the Exchange was of
18a
this type. A leading market maker, doing a con-
siderable volume of business with commercial banks,
expressed the opinion to the study that approxi-
mately the same portion of bank volume on the third
market today consists of this type of transactions.
The banks appear to charge from $5.00 per trans-
action to, in some cases, the full NYSE minimum
commission charge plus a small transaction charge.
The Special Study made no exhaustive study of the
matter and obtained details on such charges from
only a few banks. It found that one large metro-
politan bank charges its custodial and investment
advisory accounts on each security transaction,
wherever executed, an activity fee of $2.50, and on
each over-the-counter principal transaction, includ-
ing third market transactions, an additional special
charge equal to the NYSE minimum commission.
This bank states it trades on the third market only
when it can secure a price equal to the last sale on
the NYSE. Report of Special Study of Securities
Markets of the Securities and Exchange Commission,
H.R. Doc. No. 95, Pt. 2, 88th Cong., Ist Sess., 884-
885 (1963).
The “New Security” Argument
The Exchange (but not ICI) makes the argument that
AIS somehow involves the bank in the issuance of a
separate “security” distinct from the underlying stock.
The argument is that during the “Acquisition Interval”
the purchaser has an undivided interest in the pooled
purchase funds and an interest n an undetermined num-
ber of shares of a specific stock to be purchased. These
“interests” are said to constitute a “security” which the
bank is merchandising, contrary to the provisions of
Section 21 of the G-S Act, 12 U.S.C. § 378, as interpreted
by the Supreme Court in ICI v. Camp, 401 U.S. 617
(1971).
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19a
We cannot agree that ICI v. Camp covers the facts in
this case. There are more differences than similarities
between the two fact patterns.
In Camp the customer bought a “unit of participation”
which represented a proportionate interest in a collective
group of assets (the Fund). The Fund was registered as
an investment company under the Investment Company
Act of 1940 and the units of participation were regis-
tered as securities pursuant to the Securities Act of 1933.
The Fund was supervised by a five-member committee
elected annually by the participants pursuant to the In-
vestment Company Act of 1940. The actual custody and
investment of fund assets were carried out by the bank
as investment advisor pursuant to an agreement with
the Fund.
The court found that this structure was similar to a
mutual fund and that therefore the “units of participa-
tion” were legally similar to “securities” which a bank
could not market without violating Section 21 of the G-S
Act.
None of the characteristics of the Fund in Camp are
present in AIS. There is no separate fund or entity which
requires registration under the Investment Company Act
of 1940. Since there is no separate “fund,” there can be
no separate “security” being issued by the “fund.” There
is no management committee because there is thing to
manage. There is no investment advisory arrangements
or fees for the same reason. There are no separate “se-
curities” to register under the 1933 Act. These conclu-
sions have been tacitly confirmed by the SEC staff since
they have issued “no-action” letters with respect to AIS
and similar plans.
The only “securities” involved in AIS are the shares
of the twenty-five issuers. These shares are purchased by
the bank as agent pursuant to the permission granted in
20a
Section 16 of the G-S Act and are not sold or underwrit-
ten in violation of Section 21 of the G-S Act.
The Exchange argues that the customer’s interest in
the uninvested funds during the “acquisition interval”
constitutes a separate “security” and that the customer’s
interest in fractions of shares credited to his account may
constitute a “separate security.”
We think these are strained constructions of the appli-
cable acts. The customers’ interests in uninvested cash
and fractional shares are mere book entries, incidental
to the main agency transactions. Our view is evidently
shared by others in the securities business, since the New
York Stock Exchange’s own Monthly Investment Plan,
Merrill Lynch’s Shareholder Plan, and Putnam’s VIP
Plan all credit fractional shares to participants’ accounts,
without being considered as mutual funds.
Opinion
The words of the statute, taken in their ordinary mean-
ing, clearly permit member banks to purchase and sell
stock as agent for customers. We do not think it makes
any difference whether the customer accumulates the
money to make a purchase outside the bank or within
the bank pursuant to an AIS. The principle of the AIS
is not new. Many banks in years past have entered into
arrangements with customers or brokers whereby the cus-
tomer would make systematic payments toward stock
purchases. The essentially new thing about AIS is the
use of a computer to keep track of the customer’s account.
The ICI brief recognizes that Section 16 permits agency
transactions, but maintains strongly that the permission
covers only customer-initiated transactions carried out by
the bank at its cost or below. ICI strongly contends that
Congress did not intend for banks to promote agency
services with the hope of making a profit. According to
21a
the volume of sales reported in response to the Patman
questionnaire, it appears unlikely that any bank to date
has in fact made any profit on its AIS. However, our
February 1973 opinion was not limited to at-cost service,
and the discussion herein assumes that the banks hope
and intend to ultimately make a profit on AIS.
There is no doubt that the earlier position of this office
supported the view of ICI. These opinions covered the
period from 1935 through 1957 and are discussed in de-
tail above. These opinions understandably reflected the
great caution of banking regulations in the years imme-
diately following the 1931-2 debacle. By 1957, the office
had recognized that fundamental changes in the economic
and regulatory structure had made it safe for banks to
expand somewhat the scope of their activities. In 1974
there can be no doubt that banks can and should offer
many new valuable financial services to the public, with-
out jeopardizing the safety of depositors.
There is no doubt that a national bank, like any busi-
ness corporation, is authorized by law to make a profit on
any part of its authorized business.
‘The ICI objects to the advertising of AIS and argues
that it is inconsistent with the concept of an “accommoda-
tion“ service stressed by the office in the pre-1957 opin-
ions. As stated above, the “accommodation” concept is
not contained in the statute and we now believe the pre-
1957 office opinions to be erroneous.
Secondly, there is no necessary inconsistency between
a service being at the same time an “accommodation” for
customers and a service of potential profit for the pro-
vider. Various service industries commonly advertise the
extent to which they go to “accommodate” their custom-
ers, with no connotation of profitless activity.
Finally, the U. S. Supreme Court has held that a na-
tional bank may advertise any service it may legally
22a
provide, even in the face of a state statute which appar-
ently prohibited state-chartered banks from advertising
such service. Franklin National Bank of New York, 347
U.S. 373 (1954).
Policy Considerations
1. Potential Abuses
The ICI and New York Stock Exchange suggest a num-
ber of potential abuses which they believe could arise out
of the operation by banks of AIS. The questions asked
by Chairman Patman in his February 1, 1974 letter also
suggest such possibilities. Since our opinion is that Sec-
tion 16 on its face clearly and unambiguously permits
AIS service, such considerations are matters more rele-
vant to future supervisory vigilance than to the statu-
tory interpretation which is the subject of this letter.
Since it is argued, however, that some of these potential
abuses may have been in the minds of the framers of the
G-S Act, we have considered each suggested problem.
A. Impairment of bank’s ability to give disinterested
investment advice.
ICI argues that:
A bank which is aggressively promoting a stock-
buying service can hardly be expected to render dis-
interested investment advice to potential purchasers
of corporate stocks, particularly when the bank will
profit by inducing such a customer to participate in
the bank’s plan.
This contention does not withstand analysis. One of
the salient features of the AIS is that the bank expressly
disclaims any responsibility for the purchaser’s invest-
ment decisions. In fact the SEC staff, as a condition to
issuing a “no action” letter to Security Pacific required
that the brochure make clear that the bank was making
no recommendations as to the suitability of any invest-
ment. It is true that the customer must choose from the
twenty-five largest corporations by market value of out-
standing stock listed in Standard and Poor's 420 ndus-
trial Index, but this general guidance could hardly be
argued to constitute investment advice“ as that term is
generally used. The use of the Standard and Poor's Index
certainly provides as much assurance against partiality
as one could reasonably expect. The fact that the bank
does not purport to give any investment advice to the
AIS customer is carefully made express in the promo-
tional literature as well as the contracts.
Contrary to the ICI “disinterested advice” contention,
one of the strongest points in favor of AIS, is that it
provides a convenient means within reach of the many
bank customers who cannot afford individual trust de-
partment or brokerage services to participate in equity
investment with a minimum of risk of loss due to agent
insolvency.
B. Bank will be tempted to make unsound loans to com-
panies on the AIS list.
The ICI, in its brief, argues that the AIS should be
prohibited because banks would be tempted to make un-
sound loans to companies on the AIS list. We do not find
this persuasive for the following reasons:
First, the periodic examination process is sufficient
to detect such a pattern of lending and to prevent its
recurrence. Secondly, the argument proves too much since
its acceptence [sic] would proscribe commercial side lend-
ing to any corporation, recommended for investment pur-
poses, by the trust department. While a few have recom-
mended such complete divorcement, the weight of regu-
latory opinion is that the probability of abuse can be
obviated by the examination process and enforcement of
existing trust law. In this regard the office has recently
24a
published for comment a proposed regulation which would
establish policies to prevent improper use of insider in-
formation to affect investment decisions. Federal Regis-
ter, April 24, 1974.
Thirdly, there would not be any reason for a bank
to unduly favor an issuer on the AIS list since the bank
undertakes no responsibility for the performance of AIS
stocks and cannot be blamed or credited for such per-
formance.
C. Bank competition from AIS will harm or destroy
nonbank dealers.
The principal purpose of the G-S Act was to protect
the solvency of banks. See Russell v. Continental Illinois
Bank and Trust Co., 479 F.2d 131, 133-134 (7th Cir.
1973), cert. denied, 42 U.S.L.W. 3306 (U.S. Nov. 20,
1973). It was not to protect securities dealers from com-
petition.
Even if this were a valid consideration, there is no
reason to believe that nonbank dealers cannot compete
with banks in offering AIS plans. In fact similar plans
are now being offered by some member brokers of the
New York Stock Exchange under its monthly investment
plan, F. L. Putman & Co. under the name “Voluntary
Investment Plan” (“VIP”) and by another brokerage
house under the name “Personalized Investment Plan”
(“PIP”). See CCH Fed. Sec. L. Rep. 1972-1973, Dec.
# 78,850.
AIS appears to be an imaginative way to enable per-
sons with modest incomes to systematically invest in
stocks. Because of the rigidities of their fee structure
and for other reasons, small purchasers have been dis-
couraged from using stock brokers, despite tremendous
promotional efforts.
25a
We believe that it is definitely in the public interest
for banks to attempt to tap new markets for capital
securities. In the long run, banks and nonbank dealers
alike will benefit by the broadening of markets. The AIS
customer is not likely to be taken from the odd-lot whole
share customers of the regular broker. If anything, the
movement is likely to be the other way. The participant
whose interest in the market is awakened by AIS, is
more likely to graduate to whole shares and the prestige
of having his own “stockbroker.”
D. The operation of AIS raises potential conflicts of
interest, most significantly between the bank and
its AIS investors.
The New York Stock Exchange emphasizes this con-
tention and Chairman Patman’s questions also are di-
rected at this possibility.
The Exchange argues that the bank may overly ex-
tend the time between deposit and purchase, in order to
get the benefit of the “float.” However, an examination
of the AIS plan documents reveals that this “acquisition
interval“ cannot exceed thirty days and is fully dis-
closed to the customer. The operation of the “acquisition
interval” is described above under “Description of AIS.”
The procedure set forth appears adequate to protect
against abuse of the “float.” There will also be the safe-
guard of the regular trust examiner’s inspection. Pos-
sible abuse of “float” is a standard item on examiner’s
check lists and AIS presents no unique problems in this
regard.
Another alleged conflict concerns the timing of buy and
sell orders between AIS and other trusts administered
by the bank. What if AIS customers are buying stocks
which the bank as trustee is selling?
The problem is not in any way unique to AIS. Any
agent, whether bank or broker, constantly handles buy
26a
and sell orders for different principals, sometimes simul-
taneously. The position of the AIS bank is very similar
to that of a broker who also acts as investment advisor
to a mutual fund. The broker may be advising the fund
to sell stock, while at the same time executing orders
from customers to buy stock. As long as no party is act-
ing on inside information, not publicly available, the
situation does not violate any rules.
Of course there cannot be any transactions directly be-
tween the AIS and trust accounts in the bank, and the
answers to the Patman questionnaire indicate that no
AIS bank permits this.
E. AIS customers will not enjoy the protection of SIPC.
The Exchange contention that lack of coverage under
the Securities Investor Protection Act of 1970 (SIPC)
will disadvantage AIS customers is without merit. The
actuarial risk of loss through agent insolvency is greater
where the agent is a nonbank than where it is a bank.
Assuming that the Exchange reference is to the com-
parative legal position of claimants against an insolvent
agent, the bank customer probably fares better. The
$50,000 SIPC protection is broken down to $20,000 of
protection for cash and up to $30,000 additional for
securities in the custody of the broker. The AIS cus-
tomer will have his uninvested cash in a deposit account
covered by FDIC insurance to $20,000. Legislation is now
pending which would increase such coverage. His in-
vested money will be represented by identifiable shares
which as trust assets will definitely not be part of the
estate of the insolvent bank. Banks are not permitted to
pledge or otherwise use customer securities in any way,
as are broker-dealers in some circumstances. There is
therefore little likelihood of conflicting claims against
such assets in case of bank insolvency, whereas cus-
tomers’ securities have been lost or contested in broker
insolvencies.
27a
F. The AIS investors are deprived of safeguards pro-
vided to other investors by the Federal Securities
Laws.
The contention has been made strongly by the securi-
ties industry that AIS customers are denied the benefit of
many important statutory protections because banks are
exempt from certain laws applicable to nonbank brokers.
We conclude that, based on past experience, the risk
of loss to customers due to agent dishonesty or insol-
vency is probably greater where the agent is a non-
bank than where the agent is a bank, despite the fact
that banks are exempt from some SEC regulation. The
ICI and Securities and Exchange contention overlooks
the fact that banks are subject to their own body of
lav’ and regulation, different but certainly no less strict
than broker regulation. Every national bank, by law
(12 U.S.C. § 481) is subject to exhaustive examination
twice in each calendar year (unless one examination in
a two year period is waived by the Comptroller). In ad-
dition the trust department is subject to a separate
examination once a year.
Every national bank must make at least four reports
of condition to the Comptroller disclosing in detail its
resources and liabilities, and such other reports as the
Comptroller shall request. 12 U.S.C. §§ 161, 164.
Funds deducted from checking accounts and awaiting
investment under AIS are deposited in special accounts
which are eligible for FDIC insurance protection. 12
U.S.C. § 1813 (1) (3) and (m).
Securities held for AIS customers are segregated, do
not constitute assets of the bank, and will not be sub-
ject to any prior claims in case of bankruptcy. Banks
are also required to take specific security precautions with
respect to cash and securities, including securities de-
vices, procedures, and reports to the Comptroller with
28a
respect thereto. 12 U.S.C. §§ 1881-1884; 12 C. F. R. Part
21.
Whenever the appropriate federal banking agency is
of the opinion that an insured bank has or is about to
engage in an unsafe or unsound practice in conducting
the business of such bank or is violating or has violated
an applicable law, rule, or regulation, such bank, sub-
ject to certain procedural requirements, may be ter-
minated as an FDIC insured bank, a cease-and-desist
order may issue, and/or appropriate directors or of-
ficers involved may be suspended or removed. 12 U.S.C.
§ 1818; 12 C. F. R. § 19.1, et seg.
The ICI and Exchange briefs are not very specific or
persuasive on what securities law safeguards the AIS
customer will lack. Mentioned are:
(1) The lack of a “know your customer” or “suit-
ability” requirement.
We are not convinced that these requirements are very
meaningful in actual broker practice. In any event the
imposition of such tests is not appropriate to the AIS
situation where the agent expressly and clearly disavows
any role in the customer’s selection process.
(2) Disclosure requirements of the 1933 and 1934
Acts.
The Exchange brief does not spell out what protections
of these acts are denied AIS customers. The AIS cus-
tomer is in the same position with regard to these stat-
utes, as he would be if he were dealing with a broker.
The registration, reporting, proxy and prospectus re-
quirements of both acts apply fully to the issuers of
the securities the AIS customer selects and he will have
as much access to such information as a purchaser from
a broker. In addition, the important antifraud provi-
sions of these laws apply to banks as well as nonbanks.
29a
This office recently published a proposed set of regula-
tions which will require national banks with major trust
business to disclose their holdings and significant trans-
actions in trust assets. These same regulations will pro-
hibit the use of nonpublic information in making trust
department decisions. Federal Register, April 24, 1974.
Contrary to the Exchange argument, the pending regu-
lations will provide national bank AIS investors with
disclosures about their fiduciary not generally available
to broker-dealer customers.
Potential Benefits
We believe that AIS could, if accepted by the public,
constitute a significant improvement in the capital mar-
keting mechanism of this country. It provides a means
by which the small investor can obtain maximum benefit
from the economies of automation. It is appropriate
that banks should provide this service since it is merely
an extension of the traditional agency services provided
for well-to-to investors. It will undoubtedly appeal to
many people who have never invested in stock before
and, thus to the extent it is successful, provide new
sources of capital which are badly needed.
The expansion of AIS will be a pro-competitive force
in a business which has been criticized for unduly rigid
pricing patterns and restrictions to entry. We believe
such competition will be constructive and not destructive
of nonbank competitors. There is no obstacle to brokers
offering AIS and in fact the first plans were offered by
brokers. It is very possible that in years to come the
brokers will find that the entry of banks into AIS
broadened interest in the securities market to the great
advantage of all competitive suppliers in it. This has
been the result in some other fields which banks have
entered in recent years such as equipment leasing.
We do not believe that the mere possibility that con-
flicts of interest or other suggested abuses might occur
30a
provides a sufficient regulatory reason to abort in its
infancy a legal activity with as much promise for public
benefits as AIS. The mere potential for conflicts of in-
terest exists in banking just as it does in virtually every
business endeavor. It is no more reasonable to assume
that banks will violate the laws, regulations and policies
which govern their conduct than it is to assume that
brokerage houses will do . There are numerous op-
portunities for conflicts of interest to arise in such
brokerage firms where research, underwriting and mer-
chandizing often occur “under one roof” and in smaller
houses, even under the supervision of one person.
While such potential conflicts of interest deserve exam-
ination, unless there is actual or immediate threatened
abuse, regulatory prohibitions are not justified. We are
not unmindful of the potential for ab ise, but until such
time as abuse develops, we should not strain the meaning
of 12 U.S.C. § 24 to stifle banks’ competition in the free
market for the patronage of American investors.
3la
Conclusion
The clear wording of the G-S Act permits banks to
offer the Automated Investment Service to their custom-
ers. There is nothing in the Act which implies that banks
cannot commercially promote any service which they may
lawfully provide. The interests of the public will be
served better by having this service available than not,
and there is no reason to believe that the securities in-
dustry will be damaged thereby. It appears more likely
that the development of AIS will make significant posi-
tive contributions to the capital markets and to the
securities business generally. For these reasons, we af-
firm the conclusions contained in our February 27, 1973,
letter to Security Pacific National Bank.
Sincerely,
s, James E. Smith
JAMES E. SMITH
Comptroller of the Currency
32a
APPENDIX B
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
Civil Action No. 74-1405
[Filed Dec. 5, 1975]
NEW YoRK STOCK EXCHANGE, INC.,
and
INVESTMENT COMPANY INSTITUTE,
Plaintiffs,
V.
JAMES E. SMITH, Comptroller of the Currency,
The Department of the Treasury,
Defendant.
MEMORANDUM OPINION
Plaintiffs seek a judgment declaring invalid a ruling
of the Comptroller of the Currency holding that automatic
stock purchasing services offered by national banks do
not violate sections 16 and 21 of the Glass-Steagall Act,
12 U.S.C. 8s 24, 378 (1970). The matter is now before
the court on cross motions for summary judgment, pur-
suant to rule 56 of the Federal Rules of Civil Procedure.
Defendant also urges that the case be dismissed on the
grounds that plaintiffs lack standing to sue, the ruling
in question is not reviewable, and necessary parties have
not been joined. The court finds that plaintiffs have satis-
fied all threshold requirements, but that defendant is en-
titled to summary judgment on the merits.
— l
33a
I
This action is brought by the New York Stock Ex-
change (NYSE), a national securities exchange, and the
Investment Company Institute (ICI), an association of
open-end investment companies and their investment ad-
visors and principal underwriters. Defendant James E.
Smith, the Comptroller of the Currency, is responsible
for the supervision and regulation of the national bank-
ing system. On June 10, 1974, he issued an opinion letter
stating that sections 16 and 21 of the Glass-Steagall Act
do not prohibit national banks from offering customers
automatic stock purchasing services.
The plan approved in the Comptroller’s letter, called
Automatic Investment Service (AIS), permits checking
account customers tc designate a sum of money between
$20 and $500 to be deducted automatically from their
account each month and invested in one of 25 selected
securities. The 25 stocks available are those having the
highest aggregate market value of outstanding stock on
Standard & Poor’s 425 Industrial Index. Advertising
brochures and the contracts between AIS customers and
their banks state that the banks make no recommenda-
tion as to the merits of any individual stock or to the
group of stocks as a whole. The plans are extensively
advertised, however, and the stocks are often referred to
as “bluechip.”
When an AIS customer orders a stock, the bank has
30 days in which to complete the transaction. The bank
does not promise to obtain the best possible price dur-
ing the 30 days, only to execute the order before the end
of that period. Until it purchases the securities ordered,
the bank holds the customer’s money in a common AIS
account, interest free. The actual price charged against
the customer’s account is the average price paid by the
bank for all shares of the same stock bought during the
34a
30 days, plus a pro rata share of the broker’s commis-
sions and a service charge.“ When the amount designated
for investment will not purchase an additional whole
share at the average price, the customer is credited with
a fractional share. Because all purchases of a single se-
curity are aggregated, no single purchase can be identi-
fied as being made for any particular customer.
Stocks purchased under AIS are held in the name of
the purchasing bank, but the customer has full bene-
ficial ownership. The customer can vote the shares and
will directly receive any dividends paid on them. A cus-
tomer can withdraw from the plan at any time and re-
ceive his stock certificates or their cash value. If a cus-
tomer wishes to sell only a portion of his holdings, the
bank will also execute the transaction for him. When
holdings acquired under AIS are liquidated, the bank will
often “cross” the sell order with a buy order from an-
other AIS customer. Internal crosses allow the bank to
avoid paying a broker’s fee on the transactions and en-
sure that the money will not be needed for the full 30
days.
The letter of June 10, 1974, numbered 27 pages in
length and represented the culmination of a substantial
deliberative effort by the Comptroller. Consideration of
AIS began on October 30, 1972, when the Security Pa-
cific National Bank requested the Comptroller’s opinion
of the plan’s legality. Following the issuance of a letter
approving AIS, both ICI and NYSE requested the Comp-
troller to reconsider his position. Briefs exploring the
legal merits of AIS were submitted by NYSE, ICI, and
several national banks. After reviewing these documents,
A major attraction of the plan for small investors is that the
total cost of a transaction, including the bank’s fee, is lower than
that the customer would incur if he went to a broker since the bank
can take advantage of the lower commission rates charged on large
orders.
—— ESE
35a
which contained virtually all the arguments presented
by the parties now before the court, the Comptroller
issued the June 10 letter.
II
Defendant urges upon the court several preliminary
arguments which, if correct, would prevent adjudication
of the merits of plaintiffs’ complaint. Specifically, de-
fendant contends that plaintiffs lack standing, that the
letter in issue is not a reviewable agency action and,
consequently, no justiciable case or controversy exists,
and that plaintiffs have failed to join indispensable
parties. The court finds no merit in any of these con-
tentions.
Defendant’s first argument is that plaintiffs lack stand-
ing to bring this suit.* That the plaintiffs have standing
to sue was conclusively established by the Supreme Court
in Association of Data Processing Service Organizations,
Inc. v. Camp, 397 U.S. 150 (1970), and Investment Com-
pany Institute v. Camp, 401 U.S. 617 (1971). In Data
Processing, the Court held that competitors of businesses
aided by agency action suffered sufficient injury to ef-
fectively challenge that action. The Court also found that
Congress, when passing the Glass-Steagall Act, arguably
intended to protect nonregulated parties from competi-
tion by national banks. In Investment Company Insti-
tute, which concerned the operation of investment funds
by national banks, the Court held that one of the very
plaintiffs in the instant case was arguably within the
zone of protection carved out by the Glass-Steagall Act.
? Defendant, while contending that neither plaintiff has standing,
has moved to dismiss only against NYSE. The reason stated by
defendant for this distinction is that he can prove lack of injury to
ICI’s members only after discovery. ICI alleges competitive injury
to its members in the complaint, however, and the court finds the two
plaintiffs impossible to separate.
36a
The potential competitive injury to NYSE and ICI in the
case at bar is indistinguishable from that suffered by
ICI in Investment Company Institute. Defendant’s ar-
gument that NYSE and ICI actually benefit from the
operation of AIS because it attracts new investors to
the market lacks substance. If plaintiffs did not feel
substantially threatened by AIS, they would not have
undertaken this burdensome litigation.
A more substantial issue raised by defendant is the
power of the court to review the opinion letter in ques-
tion. Defendant submits that the opinion letter is not
subject to review under section 10 of the Administrative
Procedure Act, 5 U.S.C. § 704 (1970), because it is not
legally binding on any party or the Comptroller’s Office
and because the plaintiffs conduct is not directly af-
fected by the Comptroller’s interpretation of the statute.’
The propriety of reviewing a statutory interpreta-
tion by an agency responsible for administering the act
has been explored at length by the Supreme Court in
Abbott Laboratories, Inc. v. Gardner, 387 U.S. 136
(1967), and by the Court of Appeals for the District
of Columbia Circuit in National Automatic Laundry
and Cleaning Council v. Shultz, 443 F.2d 689 (D.C. Cir.
1971) and Continental Air Lines, Inc. v. CAB, 522 F.2d
107 (D.C. Cir. 1975) (en bane). Abbott Laboratories
established that in deciding whether an agency ruling is
ripe for judicial review a court must “evaluate both
the fitness of the issues for judicial decision and the
hardship to the parties of withholding court considera-
tion.” 387 U.S. at 148-49. Further, doubt as to jus-
ticiability must be resolved in favor of the plaintiff since
* Investment Company Institute v. Camp involved an attack upon
a regulation promulgated by the Comptroller rather than upon an
opinion letter by the Comptroller and, thus, does not control the
issue of justiciability in the case at bar. See 401 U.S. at 619-20.
37a
the Administrative Procedure Act “embodies the basic
presumption of judicial review. . Id. at 140.
The fitness of a particular ruling for judicial review
depends upon its finality and the court’s ability to dis-
cern and resolve the legal issues the ruling presents.
See Toilet Goods Ass’n v. Gardner, 387 U.S. 158, 162-63
(1967) ; National Automatic Laundry and Cleaning Coun-
cil v. Shultz, supra, at 694. An opinion letter signed by
the head of an agency, not indicating on its face that it
is tentative, and growing out of substantial deliberation
is “presumptively final” for purposes of judicial review.
National Automatic Laundry and Cleaning Council v.
Shultz, supra, at 701-02. This is so even though the
opinion legally could be reconsidered by the agency at
any time. Thus, in Continental Air Lines the court of
appeals reviewed the merits of a CAB order which was
not legally binding on the agency. See 522 F.2d at 123,
124-25. The agency action reviewed in NALCC similarly
did not bind the agency, and, in fact, was an opinion
letter interpreting a portion of the statute administered
by the agency. See 443 F.2d at 692, 702. Opinion letters
signed by an agency head are also “presumptively final”
even though they have no legal effect on parties subject
to agency regulation; the opinion need only affect those
subject to regulation and their competitors as a practical
matter. See Continental Air Lines, Inc. v. CAB, supra,
at 124-25, citing Bantam Books, Inc. v. Sullivan, 372
U.S. 58 (1963). In the instant case, the opinion letter
is signed by the agency head, shows no indication of
being tentative, follows substantial deliberation, and, as
a practical matter, encourages national banks to insti-
tute AIS programs. It thus appears that the letter is
sufficiently final to permit judicial review of its merits.
The letter in issue is also fit for judicial review in
all other respects since the court can discern and re-
solve the legal issues involved. The principal factor con-
sidered in judging this aspect of an action’s fitness for
review is whether the case turns on a “purely legal”
question. See Abbott Laboratories, Inc. v. Gardner, supra,
at 149; Continental Air Lines, Inc. v. CAB, supra, at
126; National Automatic Laundry and Cleaning Council
v. Shultz, supra, at 695. There is no doubt that the case
at bar presents a “purely legal“ question only, the
validity of the Comptroller’s construction of the Glass-
Steagall Act. Further, it is a legal question properly
before this court since the Supreme Court has stated
that Congress did not intend to preclude judicial review
of actions taken by the Comptroller in furtherance of
his obligations under the Act. See Investment Company
Institute v. Camp, supra, at 620; Association of Data
Processing Service Organizations, Inc. v. Camp, supra, at
157.
Considering the second prong of the test set out in
Abbott Laboratories, the court finds that the plaintiffs
will suffer substantial hardship if the court withholds
consideration of the Comptroller’s letter at this time.
National banks are presently offering AIS to customers
as a direct result of the Comptroller’s ruling, thereby in-
juring the plaintiffs who, heretofore, were free of bank
competition in the securities field. Defendant argues
that plaintiffs are not directly subject to regulation by
the Comptroller and thus are not facing the dilemma of
obeying a questionable ruling or accepting the conse-
quences of violating it. This, of course, was precisely
the position of the plaintiffs in Continental Air Lines
and NALCC and it was because the plaintiffs faced
such a dilemma that the courts in those cases determined
that withholding review would cause hardship. See 522
F.2d at 126; 443 F.2d at 696. The plaintiffs in Conti-
nental Air Lines and NALCC faced a “Hobson’s choice”
for a simple reason, they were adversely affected by the
agency action. The position of plaintiffs in the case at
39a
bar is the other side of this coin. The agency action
benefited those directly regulated by the statute; only
non-regulated parties, like the plaintiffs are hurt by the
Comptroller’s letter and, consequently, only non-regulated
parties would seek to challenge the letter. Prohibiting
review in this case because plaintiffs are not faced with
the prospect of having to disobey a regulation would
undermine the Supreme Court’s holding in Data Process-
ing that competitors of parties directly affected by agency
action have standing to challenge such action. Indeed, the
need for review is even stronger in the instant case
than it was in Continental Air Lines or NALCC since
the agency actions attacked in Continental and NALCC
would come under judicial scrutiny when a party chose
to disobey the agency, but the action attacked by piain-
tiffs here will never come under review if this case is
dismissed.
Having examined the Comptroller’s letter here under
attack in light of the principles set forth in Abbott
Laboratories, NALCC, and Continental Air Lines, the
court is convinced that judicial review is appropriate.
The factors justifying review in the instant case are
well summarized by the following passage from NALCC:
When a general, interpretative ruling signed by the
head of an agency has been crystalized following
reflective examination in the course of the agency’s
interpretative process, and is accordingly entitled to
deference not only as a matter of fact from staff
and citizenry expected to conform but also as a
matter of law from a court reviewing the question,
there coexist both multiple signposts of authoritative
determination, finality and ripeness, and a concomi-
tant indication that the resultant pointing toward
prompt judicial review will benefit the total ad-
ministrative process by resolving uncertainties with-
out intolerable burden or disruption.
443 F.2d at 702.
40a
Defendant’s third preliminary argument, that indis-
pensable parties have not been joined, is really no more
than a reformulation of the reviewability argument. De-
fendant reasons that since the letter in question is mere-
ly advisory, the court can grant meaningful relief only
if the banks now offering AIS are before it. The court
can, however, order the Comptroller to revoke or modify
his interpretation of the statute and such relief would
have a significant practical, if not legal, impact on the
use of AIS. In Commercial State Bank of Roseville v.
Gidney, 174 F. Supp. 770 (D. D. C. 1959), aff'd, 278 F.2d
871 (D.C. Cir. 1960), the court expressly held that a
party challenging the action of the Comptroller taken
pursuant to the Glass-Steagall Act need not join the
national bank directly affected by the ruling under at-
tack. Since the court can review the Comptroller’s
decision in the case at bar, no other party’s presence is
required.
III
The principal substantive issue presented by this liti-
gation is whether the Comptroller properly construed the
Glass-Steagall Act as permitting national banks to pur-
chase securities for their customers on a continuous and
wide-spread basis. Section 16 of the Act provides, in
relevant part,
The business of dealing in securities and stock by
{a national bank] shall be limited to purchasing and
selling such securities and stock without recourse,
solely upon the order, and for the account of, cus-
tomers, and in no case for its own account, and
ſa national bank] shall not underwrite any issue of
securities or stock. .. .
12 U.S.C. § 24 (1970). Section 21 of the Act provides
that conduct exceeding the limits set out in section 16
shall be illegal.“
* Section 21 provides:
4la
At the outset, the court notes that it gives “great
weight” to the Comptroller’s ruling. Investment Com-
pany Institute v. Camp, 401 U.S. 617, 626-27 (1971).
The Supreme Court has consistently held that reasonable
constructions of regulatory statutes by the agencies
charged with enforcement of those statutes are to be re-
spected by reviewing courts. See, e.g., Investment Com-
pany Institute v. Camp, supra; Zemel v. Rusk, 381 U.S.
1, 11 (1965) ; Udall v. Tallman, 380 U.S. 1, 16 (1965).
Unlike Investment Company Institute, where the Comp-
troller promulgated a controversial regulation without
opinion or accompanying statement, this court has the
benefit of a comprehensive and well-reasoned explana-
tion of his ruling by the Comptroller. The various
briefs submitted to the Comptroller at his request pre-
sented most of the arguments and legal theories ad-
vanced by the plaintiffs before this court, and the Comp-
troller’s rejection of these arguments will be respected,
even if the court would have reached a different result
were this a question of first impression. See Udall v.
Tallman, supra.
An analysis of the legal issues involved in the Comp-
troller’s construction of the Glass-Steagall Act indicates
that his final opinion was eminently reasonable. Cer-
(a) After the expiration of one year after June 16, 1933, it
shall be unlawful—
(1) For any person, firm, corporation, association, business
trust, or other similar organization, engaged in the business of
issuing, underwriting, selling, or distributing, at wholesale or
retail, or through syndicate participation, stocks, bonds, deben-
tures, notes, or other securities, to engage at the same time to
any extent whatever in the business of receiving deposits sub-
ject to check or to repayment upon presentation of a passbook,
certificate of deposit, or other evidence of debt, or upon re-
quest of the depositor: Provided, That the provisions of this
paragraph shall not prohibit national banks . . . from dealing
in, underwriting, purchasing and selling investment securities,
or issuing securities to the extent permitted . . by section 24
of this title
12 U.S.C. § 378(a) (1970).
42a
tainly the language of section 16, when read literally,
supports the Comptroller’s construction of the Act. Sec-
tion 16 permits national banks to purchase and sell se-
curities if (1) the bank acts as agent for a customer,
(2) the transactions are without recourse, (3) the trans-
actions are initiated solely upon the order of the cus-
tomer, and (4) the transactions are for the account of
the customer and not for the bank’s account. AIS con-
forms to this language since (1) participants must be
checking account customers of the bank, (2) the bank
makes no warranty as to the quality of the investment,
(3) no sales or purchases are executed unless directed
by the customer, and (4) the customer has full beneficial
ownership of the securities.
Although AIS appears to meet the letter of the Glass-
Steagall Act, plaintiffs argue forcefully that it fails to
meet the Act’s spirit. Plaintiffs contend that in carving
out this narrow exception to the general ban on par-
ticipation in securities related activities by national
banks, Congress never intended to authorize a large-scale,
computerized service. Further, plaintiffs note that cer-
tain bank brochures advertising AIS inform prospective
participants that checking accounts are free, thus ren-
dering compliance with the statutory requirement of a
customer relationship highly technical. In short, plaintiffs
assert that Congress granted the banks narrow authority
to continue a service provided to established customers
as a courtesy, but that AIS far exceeds this authority
insofar as it is used to attract customers to banks in
the first place.
Plaintiffs’ interpretation of the Act is supported by
early opinions of the Comptroller, which construed sec-
tion 16 as allowing banks to purchase and sell stocks
for customers’ accounts only where the service was an
“accommodation”, the customer relationship existed in-
dependently of the service, the bank did not engage in the
brokerage business, and the bank made no profit on the
48a
transactions. See 1 Bulletin of the Comptroller of the
Currency, No. 2, Oct. 26, 1935, at 2-3 (summary of
previous interpretations). While administrative inter-
pretations of a statute made contemporaneously with its
enactment are often relied upon by courts in resolving
ambiguity as to legislative intent, NLRB v. Bell Aero-
space, 416 U.S. 267 (1974); National Lead Company v.
United States, 252 U.S. 140 (1920), such interpretations
are always subject to revision. In fact, a 1957 inter-
pretation issued by the Comptroller removed the pro-
hibition against making a profit on securities bought and
sold for customers. See Digest of Opinions, {220A
(1957). The Comptroller now takes the position that
the earliest construction of section 16 announced by his
predecessors embodied an overcautious approach to bank
regulation reflecting the atmosphere of the years im-
mediately after the 1929 market crash rather than the
legislative history of the Act.
The legislative history of section 16 indicates that
Congress intended to leave untouched the agency prac-
tice of banks as it had previously developed. The Senate
Report submitted by Senator Glass explained section 16
as follows:
Section 16.—Undertakes to broaden the national
banking laws by giving national banks all powers
possessed by State banks of deposit and discount
organized in the States in which such national banks
are located, except insofar as they may be prohibited
by Federal legislation. National banks are to be
permitted to purchase and sell investment securities
for their customers to the same extent as hereto-
fore, but hereafter they are to be authorized to pur-
chase and sell such securities for their own account
only under such limitations and restriction as the
Comptroller of the Currency may prescribe, subject
to certain definite maximum limits as to amount.
44a
The limitations as to dealing in investment securi-
ties are not to take effect until two years after the
approval of the act.
S. Rep. No. 77, 73d Cong., Ist Sess. 16 (1933) [emphasis
added].
Prior to the passage of the Glass-Steagall Act, banks
purchased and sold securities for the accounts of cus-
tomers in a manner which, while perhaps not as ex-
tensive as AIS, considerably exceeded the narrow limits
proscribed by the Comptroller’s early interpretations of
section 16. Banks customarily charged the account of
their customers for purchases rather than have the cus-
tomer make a special deposit or draw a check to cover
the purchase price, charged a service fee for the trans-
actions, and dealt in both debt and equity investments.
See, e.g., Blakey v. Brinson, 286 U.S. 254 (1932); Me-
Nair v. Davis, 68 F.2d 935 (5th Cir.), cert denied, 292
U.S. 674 (1934); Block v. Pennsylvania Exchange Bank,
253 N.Y. 227, 170 N.E. 900 (Ct. App. 1930). The
court regards AIS as consistent with the traditional
agency role of commercial banks and, thus apparently
within the scope of the section 16 exemption. The court
would condemn AIS only if, despite its similarity to his-
torical agency activities, it engenders additional threats
to bank solvency, threats which section 16 was intended
to blunt.“
The prohibition against banks dealing in securities for
their own account contained in section 16 was intended
to eradicate certain practices which undermined bank
Section 16 was amended in 1935. Act of August 23, 1935, § 308,
49 Stat. 709. As originally enacted, section 16 could be construed
as allowing banks only to purchase debt securities for their cus-
tomers. Such an interpretation would have been out of line with
historical agency activity by banks and the 1935 amendment made
it clear that both debt and equity securities were within the sec-
tion’s exemption.
45a
solvency and heightened the impact of the 1929 market
crash. The summary appended to the 1931 Congres-
sional hearings on the relationship between commercial
banks and the securities markets reveals that three ma-
jor areas of bank activity generated the most concern.
According to the summary,
The chief points of contact between the commer-
cial banks and the security markets [which should
be eliminated] may be summarized as follows:
(1) Security Loans: These include loans made to
brokers and dealers, as well as to other borrowers,
and may be made for a variety of purposes.
Such loans amounted in June, 1930, to approximately
19 per cent of the total of commercial banking
assets.
(2) Investments: Bonds have long constituted a
component element of banking assets in this country,
but only during and since the World War have
bond investments of banks expanded rapidly. The
opening of thrift and savings departments of com-
mercial banks tended to stimulate to a large extent
the expansion of bond holdings of the banks. On
June 30, 1930, investments amounted to 22 per cent
of the total commercial banking assets in this
country. Included in this total are securities bought
under repurchase agreements from these sellers,
which are more like loans than investments in na-
ture.
(3) Security affiliates: In order to operate in
the securities markets in various capacities without
the restrictive influences of existing statutes, a num-
ber of banks have established affiliates which enjoy
identity of ownership and management with the
bank, but are incorporated separately under State
law and can freely operate as security companies.
46a
The activities of these affiliates in the major fi-
nancial centers have assumed a very large scope in
the case of many individual institutions, and they
have hitherto attracted far less attention than their
importance would deserve.
Hearings Pursuant to S. Res. No. 71 Before a Sub-
committee of the Senate Committee on Banking and
Currency, 71st Cong. 3d Sess. 999 (1931).
The problems created by the loans, investments, and
affiliates described in the subcommittee summary were
thoroughly explored by the Supreme Court in Investment
Company institute v. Camp, 401 U.S. 617 (1971). In
Investment Company Institute, the Court decided that
shares in a bank-managed investment fund sold to bank
customers constituted securities within the meaning of
section 16 since maintenance of the fund gave rise to the
same hazards the Glass-Steagall Act was designed to
curb. Consequently, banks offering shares in these funds
violated the Act’s mandate that banks “shall not under-
write any issue of securities or stock.” 12 U.S.C. § 24
(1970).
In arriving at the eonclusion that maintenance of in-
vestment funds by banks conflicted with the purposes of
section 16, the Court identified several undesirable ef-
fects of the program. Especially troublesome to the
majority were the facts that the funds gave banks a
salesman’s interest in certain investments, the banks
would have a salesman’s interest in the funds’ perform-
ance, and the banks’ prestige and credibility were threat-
ened. Less significant dangers cited by the Court were
that banks might lend money to corporations in which
the fund had invested, to the fund itself, or to customers
of the fund without the objectivity necessary to make
sound banking judgments, banks might divert talent and
resources from commercial banking to management of
47a
the investment funds, and banks might lose the good
will of customers who lost money by investing in the
funds. See 401 U.S. at 636-38. By contrast, the Court
stated, These are all hazards that are not present when
a bank undertakes to purchase stock for the account of
its individual customers.. Id. at 638.
This court is of the opinion that AIS, which does not
create a separate bank-managed affiliate, but merely fa-
cilitates the purchase vf securities for the account of cus-
tomers, substantially avoids the hazards Congress feared
when it enacted the Glass-Steagall Act. AIS banks do
not have a salesman’s stake in certain investments, only
in a service. While banks selling shares in an invest-
ment fund are under pressure to raise capital and to in-
crease the fund’s total profit, of which they receive a
set percentage, AIS banks merely sell a service to cus-
tomers who have independently chosen a form of in-
vestment. Banks which offer to deduct automatically
from a customer’s account utility bills or mortgage pay-
ments are not selling electricity or mortgages; banks
offering to deduct security purchases are not selling
securities.
Banks offering AIS do not have a salesman’s inter-
est in the securities’ performances. Since the banks do
not manage the customers’ investments, they need not
prove that they perform better than anyone else. This
is quite different from the situation in Investment Com-
pany Institute, where banks were compelled to outper-
form mutual funds. Under AIS, banks are in competi-
tion with investment brokers only in terms of conveni-
ence, cost, and dependability. This sort of competition
does not engender the threats to bank solvency which
concerned the drafters of the Glass-Steagall Act because
it is independent of any investment decision.
Perhaps the most critical distinction between AIS and
the practices barred by the Glass-Steagall Act is that AIS
48a
does not threaten the prestige or credibility of banks. In
managing the portfolio of an investment affiliate, banks
employ the same type of judgment used in the day to day
conduct of their commercial banking business. Thus, poor
performance of an investment fund brings a bank’s repu-
tation directly into question. AIS involves no such day
to day management and cannot in any way impugn a
bank’s ability to conduct its commercial banking functions.
AIS also fails to generate any of the secondary hazards
cited by the Supreme Court in Investment Company In-
stitute. The corporations whose securities are offered un-
der the plan are solvent by definition and, thus, there is
no need for banks offering AIS to lend them funds for
the protection of customers’ investments. Further, AIS
contracts specify that customers participating in the plan
cannot receive loans from the bank for any reason and
that no purchase will be made on credit. Banks offering
AIS cannot be tempted to make loans to shore up an
investment affiliate since none is created. AIS banks
need not divert resources from their commercial banking
functions to management of AIS since the system is fully
computerized. Finally, AIS will not jeopardize customer
good will because those whose investments go sour will
have only their own judgment to blame, not the bank’s.
Plaintiffs argue that AIS, because of its unique con-
struction, poses certain additional hazards not found in
Investment Company Institute. First, plaintiffs allege
that banks can abuse the funds held by them interest-
free during the thirty day “float”. While it is true that
it is in the banks’ interest to hold the funds as long as
possible but that customers might benefit from early
execution of their orders, customers are fully apprised
of this potential conflict when they choose to participate
in AIS. Further, abuse of the float by banks will come
49a
under the scrutiny of federal examiners. All fiduciary
services by banks give rise to potential conflicts of inter-
est resembling those created by AIS, and examiners are
trained to detect them. Bank investment activity, how-
ever, creates a qualitatively different type of conflict
which is generally beyond the scope of an examiner’s
scrutiny.
Plaintiffs maintain that customers purchasing securi-
ties under AIS are deprived of certain protective meas-
ures imposed on broker-dealers under the Securities Ex-
change Act of 1934, 15 U.S.C. 88 77-78 (1970). The Act
specifically excludes banks from regulation since banks
are prohibited from dealing in securities. S3 (a) (4), 15
U.S.C. § 78¢ (a) (4) (1970). One protection allegedly
deprived purchasers is the obligation on broker-dealers
to investigate the suitability of any investment it recom-
mends to individual customers. Banks offering AIS, how-
ever, state explicitly that they make no recommendation
concerning any investment. Indeed, as the Comptroller’s
letter points out, members of the NYSE offering com-
parable investment services do not consider themselves
to be recommending investments and, therefore, do not
feel obligated to make suitability investigations. Thus,
investors purchasing securities from parties regulated
by the Securities Exchange Act receive no better advice
than AIS customers.
Plaintiffs state that brokers subject to the 1934 Act
must disclose adverse information concerning securities
they sell. To the extent this is true, AIS customers
should receive the information. Banks offering AIS must
purchase stocks through brokers and, thus, would be en-
titled to full disclosure. As agents, the banks would then
be obligated to pass such information on to their princi-
pals, the customers. Although the banks themselves may
be privy to inside information they need not disclose,
the AIS customer will receive no less information than
an investor who deals directly with a securities broker.
50a
Brokers subject to the Securities Exchange Act must
obtain the best execution” for their customers and de-
liver the security promptly. AIS customers are fully in-
formed that they are not receiving this type of service.
The benefit received for giving up these features is lower
commission charges. Customers willing to pay for best
execution and prompt delivery will not use AIS.
Plaintiffs’ final point is that AIS customers do not
receive the protections provided in the Securities In-
vestor Protection Act of 1970, 15 U.S.C. §§ 780, 78aaa-
78lll (1970). SIPA establishes accelerated procedures
under which a customer can recover property left with a
broker who has subsequently become insolvent and pro-
vides insurance on non-identifiable customer property up
to $50,000, of which $20,000 can represent cash. AIS
customers are similarly protected by the Federal De-
posit Insurance Act, 12 U.S.C. §§ 264, 1728, 1811-31
(1970). FDIC insurance is now $40,000 for each de-
positor’s account. The pooled fund held for 30 days could
be considered either a part of each individual customer’s
account or a trust fund. In either event, the customer’s
cash is insured up to $40,000. Securities retained by an
insolvent bank would be immediately identifiable due to
AIS’s computerized accounting, and, thus, would not be
subject to claims of the bank’s creditors.
In addition to arguing that AIS violates the Glass-
Steagall Act for the reasons set forth in Investment
Company Institute and for the further reasons just dis-
cussed, plaintiffs maintain that AIS constitutes a security
as defined by the Supreme Court in SEC v. W. J. Howey
Co., 328 U.S. 293 (1946) and subsequent cases inter-
preting the Securities Act of 1933, 15 U.S.C. § 77 (1970).
This argument has no place in this litigation. The
Supreme Court’s opinion in Investment Company Insti-
tute was devoted principally to defining the term “secu-
51a
rity” as used in the Glass-Steagall Act, and not once does
the opinion make reference to Howey or its progeny.
The Securities Act has a different legislative history and
different underlying policies from the Glass-Steagall Act.
The material question in the instant case is whether
AIS comports with the policies of the Glass-Steagall Act,
and the court believes that question has been adequately
analyzed above.
The court concludes that the Comptroller’s interpreta-
tion of the Glass-Steagall Act is both reasonable and cor-
rect as a matter of law, and, consequently will grant
summary judgment for the defendant. An appropriate
judgment accompanies this Memorandum Opinion.
/8/ Thomas A. Flannery
THOMAS A. FLANNERY
United States District Judge
Date: December 5, 1975
52a
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
Civil Action No. 74-1405
NEW YORK STOCK EXCHANGE, INC., and
INVESTMENT COMPANY INSTITUTE,
8 Plaintiffs,
JAMES E. SMITH, COMPTROLLER OF THE CURRENCY,
THE DEPARTMENT OF THE TREASURY,
Defendant.
[Filed Dec. 5, 1975, James F. Davey, Clerk]
JUDGMENT
Upon consideration of the parties’ cross-motions for
summary judgment, it appearing that there exists no
genuine issue of material fact, and that defendant is en-
titled to judgment as a matter of law, and for the rea-
sons stated in the Memorandum Opinion filed with this
Judgment, it is by the court this 5th day of December,
1975
ORDERED, ADJUDGED, and DECREED that plain-
tiffs’ motion for summary judgment should be, and the
same hereby is, denied; and it is further
ORDERED, ADJUDGED and DECREED that de-
fendant’s motion for summary judgment should be, and
the same hereby is, granted; and it is further
‘ORDERED, ADJUDGED, and DECREED that judg-
ment be entered for defendant.
/s/ Thomas A. Flannery
THOMAS A. FLANNERY
United States District Judge
53a
APPENDIX C
UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT
No. 76-1235
NEW YORK STOCK EXCHANGE, INC. and
INVESTMENT COMPANY INSTITUTE, APPELLANTS
V.
ROBERT BLOOM,
ACTING COMPTROLLER OF THE CURRENCY
Appeal from the United States District Court
for the District of Columbia
(Civil Action No. 74-1405)
Argued May 4, 1977
Decided July 19, 1977
Before WRIGHT, MCGOWAN and TAMM, Circuit Judges.
Opinion for the Court filed by Circuit Judge MCGOWAN.
Concurring Opinion filed by Circuit Judge WRIGHT.
McGowaN, Circuit Judge: Appellants New York Stock
Exchange, Inc. (NYSE) and Investment Company Insti-
tute (ICI) sued in the District Court for declaratory and
injunctive relief against two informal expressions of
opinion by the Comptroller of the Currency to Security
54a
Pacific National Bank (Security Pacific) that the latter’s
proposed automatic stock purchasing service would not
violate sections 16 and 21 of the Banking Act of 1933
(the Glass-Steagall Act), 12 U.S.C. §§ 24, 378 (1970).
The District Court granted summary judgment on the
merits in favor of the Comptroller, after rejecting his
threshold contentions that the actions in question were
not ripe for review, and that appellant lacked standing
and had failed to join indispensable parties. New York
Stock Exchange, Inc. v. Smith, 404 F. Supp. 1091 (D.D.C.
1975). We find the challenged opinions to be unripe for
judicial scrutiny.
I
Sections 16 and 21 of the Glass-Steagall Act impose
strict limitations on the authority of banks to purchase,
sell, issue, underwrite, distribute, or otherwise deal in
stocks and securities. Section 16 provides in pertinent
part:
The business of dealing in securities and stock by
[a national banking] association shall be limited to
purchasing and selling such securities and stock with-
out recourse, solely upon the order, and for the ac-
count of, customers, and in no case for its own ac-
count, and the association shall not underwrite any
issue of securities or stock: Provided, That the asso-
ciation may purchase for its own account investment
securities under such limitations and restrictions as
the Comptroller of the Currency may by regulation
prescribe.
12 U.S.C. § 24(7) (1970). And section 21 specifies:
(a) ...it shall be unlawful—
(1) For any person, firm, corporation, association,
business trust, or other similar organization, engaged
in the business of issuing, underwriting, selling, or
distributing, at wholesale or retail, or through syndi-
55a
cate participation, stocks, bonds, debentures, notes,
or other securities, to engage at the same time to
any extent whatever in the business of [deposit bank-
ing]: Provided, That the provisions of this para-
graph shall not prohibit national banks . . . from
dealing in, underwriting, purchasing, and selling in-
vestment securities to the extent permitted. . by
the provisions of section 24 of this title
Id. § 378(a) (1).
On February 12, 1973, Security Pacific wrote to the
Comptroller, requesting his opinion as to whether the
“Automatic Investment Service“ (AIS) which the bank
was proposing to establish would be consistent with sec-
tions 16 and 21 of the Glass-Steagall Act. As described
in Security Pacific’s letter, AIS would permit the bank’s
checking account customers to invest, through regular
monthly deductions from their accounts, in stocks individ-
ually selected by the customers from a list of the twenty-
five corporations on Standard & Poor’s 425 Industrial
Index having the highest aggregate market value of out-
standing stock. For each stock selected, the customer
would be required to authorize an automatic monthly
deduction of between $20 and $500, to be invested each
month until the customer terminated his participation in
the plan.
The proposed method for purchasing and holding shares
was described by Security Pacific as follows:
Those electing to purchase stock will have their
monthly deductions pooled with money of all others
acquiring the same stock under the Service. Peri-
odically, but not less frequently than once every
month, the Bank will establish a cut-off date and
promptly thereafter will acquire shares of each of
the common stocks with all funds available, after
56a
deducting the service charge. The funds will in-
clude any dividends that have been received by the
Bank on full and fractional shares that it, or its
nominee, is holding in safekeeping for users of the
Service. The time between any cut-off date and the
subsequent completion by the Bank of the acquisition
of shares of common stock with funds obtained prior
to the cut-off date will hereinafter be referred to as
an “Acquisition Interval”. Such Acquisition Interval
shall not exceed thirty days. The price per share
(including fractional shares) that will be charged
each person who acquires shares of a stock during
any particular Acquisition Interval will be the aver-
age price (including brokerage costs) paid by the
Bank for all shares of that stock purchased by it
under the Service during that Acquisition Interval.
All the shares acquired under the Service will be
held in the Bank’s name or in the name of its nomi-
nee but the Bank will deliver, upon request, certifi-
cates representing whole shares to the owner.
Although the stock would be held in the name of the bank,
each customer would have the right to vote the number
of shares purchased on his behalf, and any customer
wishing to withdraw from the Service would have a choice
of receiving stock certificates representing the number
of shares beneficially owned by him, or their cash value.
The bank would have the power to “cross” sales made on
behalf of customers withdrawing from the program with
purchases for the account of continuing participants, thus
saving the cost of brokerage.
1 The letter stated that the service charge would be 5% of the
amount invested, up to a maximum of $2.00 per month. In addition,
each participant would be charged a pro rata share of the broker-
age costs on the shares acquired.
57a
On February 27, 1973, the Comptroller sent a brief
letter to Security Pacific’s counsel, responding to the
February 12 inquiry. The letter stated, without any sup-
porting analysis, the Comptroller’s opinion that AIS, as
set forth in Security Pacific’s letter,
(1) Involves only purchases for the account of cus-
tomers and not for the bank’s own account; (2) That
the bank in creating and managing the Service is
not engaged in the business of issuing, underwriting,
selling or distributing securities; and (3) That the
operation of the Service by the bank is consistent
with the provisions of sections] 24 and 378 of Title
12, of the United States Code.
Learning of the existence of this letter, ICI—a national
association of mutual funds, and their investment ad-
visers and principal underwriters—wrote a letter and
supporting memorandum, dated August 15, 1973, request-
ing the Comptroller to reconsider the position he had
taken in his letter to Security Pacific. A similar request
was filed by NYSE on September 7, 1973.
Citing interpretative rulings issued by the Comptroller’s
Office in the years immediately following enactment of the
Glass-Steagall Act, both groups argued that the Act allows
banks to purchase stocks only for pre-existing customers
as a non-profit courtesy service; AIS—which they charac-
terized as a profit-oriented activity utilizing extensive ad-
vertising to attract new customers to the bank—clearly
would go beyond this domain. Appellants asserted, fur-
ther, that AIS would present the same hazards which the
Supreme Court identified in Investment Company In-
stitute v. Camp, 401 U.S. 617, 636-38 (1971), in support
of its holding that operation of a collective investment
fund involves a bank in activities which violate sections
58a
16 and 21 of the Glass-Steagall Act. According to appel-
lants, AIS—like operation of a collective investment fund
—would “give rise to a promotional or salesman’s stake
in a particular investment,” which “might distort its
credit decisions or lead to unsound loans to the companies”
whose stock has been purchased through AIS; “involve
[the bank] in direct competition with aggressively pro-
moted funds offered by other investment companies”; and
“impair the bank’s ability to give disinterested service as
a fiduciary or managing agent.” Id. at 637-38; see id.
at 636-38.
Upon receipt of ICI’s request for reconsideration of the
advisory opinion expressed in the February 27, 1973
letter to Security National, the Deputy Chief Counsel for
the Office of the Comptroller wrote to respective counsel
for Security Pacific, Chase Manhattan Bank (which ICI’s
letter had identified as a bank then providing a service
virtually identical to AIS), and Investment Data Corpora-
tion (the firm which developed AIS), informing them of
ICI’s letter and inviting them to submit any comments
which they desired to the Comptroller to consider in con-
nection with that letter. A memorandum supporting the
February 27 ruling was submitted by counsel for Se-
curity Pacific, on behalf of Security Pacific and Invest-
ment Data Corporation; and opposing memoranda were
submitted by ICI and NYSE.
On June 10, 1974, the Comptroller sent a letter to coun-
sel for ICI, reaffirming his opinion that AIS is consistent
with the Glass-Steagall Act. In contrast to the February
27, 1973 ruling, this letter contained a more extensive
analysis of the underlying issues. The Comptroller noted,
first, that AIS falls within the plain language of section
16, inasmuch as the service consists only of purchases and
sales of stock upon the order, and for the account, of bank
59a
customers. After reviewing the legislative history of the
Act, the Comptroller concluded, moreover, that Congress
did not intend to prohibit profit or advertising with respect
to such agency transactions, and that earlier interpreta-
tive rulings to the contrary resulted from the conservatism
of the times and were simply erroneous.
As to the hazards alluded to by the Supreme Court in
ICI v. Camp, supra, the Comptroller expressed only a ten-
tative and provisional position:
We are not unmindful of the potential for abuse,
but until such time as abuse develops, we should not
strain the meaning of 12 U.S.C. § 24 to stifle banks’
competition in the free market for the patronage of
American investors.
The Comptroller analyzed, among others, the contentions
that AIS would impair the bank’s ability to give disin-
terested investment advice, tempt the bank to make un-
sound loans to companies whose stock was purchased, and
create conflicts of interest between the bank and its cus-
tomers. In each case, however, he concluded that the al-
leged danger was not sufficient, without more experience
of actual operation, to make AIS inconsistent with the
Glass-Steagall Act.
Appellants filed an action in the District Court on Sep-
tember 24, 1974. Their complaint requested (1) a de-
claratory judgment that AIS is unlawful under sections
16 and 21 of the Glass-Steagall Act, and that the Comp-
troller’s informal opinion of June 10, 1974 was conse-
quently in excess of his statutory authority, (2) an in-
junction requiring the Comptroller to withdraw his June
10, 1974 ruling and to refrain from “approving” the
operation of AIS by any commercial bank, and (3) an
injunction forbidding the Comptroller from “continuing
60a
in effect” any “approvals” which may ha i
to other banks. ain
The Comptroller moved to dismiss on the grounds that
indispensable parties—the banks offering Al Shad not
been joined; the informal opinions of February 27, 1973
and June 10, 1974 were not ripe for review; and NYSE
lacked standing to sue.* The Comptroller moved, in the
alternative, for summary judgment on the ground that his
opinions were consistent with the Glass-Steagall Act; and
appellants filed a cross-motion for summa judgm
on the merits. aol me
The District Court found that both appellants h
standing, 404 F. Supp. at 1093, and — see —
contention that indispensable parties had not been joined
id. at 1096. The court recognized that the ripeness of
the informal rulings was a “more substantial issue,“ id.
at 1094, but, relying heavily on National Automatic
Laundry and Cleaning Council v. Shultz, 443 F.2d 689
(D.C. Cir. 1971) (NALCC), and Continental Air Lines
Ine. v. CAB, 522 F.2d 107 (D.C. Cir. 1975) (en banc), it
held that judicial review was appropriate. With respect
to the fitness of the issues for judicial decision, the court
observed that an opinion letter similar in form to the ones
in question here was found sufficiently final for review in
NALCC, and expressed its judgment that the instant case
a Le my ot question only,” 404 F. Supp. at
, quoting ott oratories V.
136, 149 (1967). W
n While conceding that appellants are not facing the
dilemma of obeying a questionable ruling or accepting the
consequences of violating it,” the position in which the
* Although the Comptroller asserted in the District Cou
rt tha
neither appellant had standing to sue, its motion to dismiss —
directed only against NYSE for the reason that he could prove lack
of injury to ICI’s members only after discovery.
6la
plaintiffs in Continental Air Lines and NALCC found
themselves, the District Court concluded that the need for
review is even stronger in the instant case than it was in
Continental Air Lines or NALCC since the agency actions
attacked in [those cases] would come under judicial scru-
tiny when a party chose to disobey the agency, but the
action attacked by plaintiffs here will never come under
review if this case is dismissed.” 404 F. Supp. at 1095.
Having thus disposed of the preliminary issues, the Dis-
trict Court turned to the “substantive” question of
whether the Comptroller’s advisory opinions reflected an
accurate interpretation of the Glass-Steagall Act. After
considering at some length the competing contentions of
the parties, the court upheld the Comptroller’s view. /d.
at 1096-1101.
Appellants now urge us, on the basis of essentially the
same arguments which they made to the Comptroller
and then in t..e court below, to reverse the District Court
and to hold that AIS contravenes the Act. For his part,
the Comptroller again asserts that this issue should not
be reached, citing alternative grounds of ripeness and
standing.’ If we do reach the substantive question, the
Comptroller of course requests that we affirm the judg-
ment of the District Court. Since we agree with the
Comptroller’s contention that the informal rulings at-
tacked by appellants are not ripe for review, we express
no judgment on the other issues argued before us.
II
The general principles governing the ripeness of admin-
istrative action for review are now well-established. As
the en banc opinion of this court in Continental Air
Lines, Inc. v. CAB, 522 F.2d 107, 124 (D.C. Cir. 1975),
The Comptroller has not pressed the claim that the suit should
be dismissed for failure to join indispensable parties.
62a
observed, before holding a formal policy statement by
the CAB to be ripe for review:
The law of ripeness, once a tangle of special rules
and legalistic distinctions, is now very much a matter
of practical common sense. Abbott Laboratories,
Inc. v. Gardner, 387 U.S. 136 (1967), dominates the
field. It teaches that
the ripeness doctrine|’s] . . . basic rationale is
to prevent the courts, through avoidance of pre-
mature adjudication, from entangling them-
selves in abstract disagreements over adminis-
trative policies, and also to protect the agencies
from judicial interference until an administra-
tive decision has been formalized and its effects
felt in a concrete way by challenging parties.
The same case prescribes a methodology for deciding
whether a particular agency action is ripe for re-
view :
The problem is best seen in a twofold aspect,
requiring us to evaluate both the fitness of the
issues for judicial decision and the hardship to
the parties of withholding court consideration.
Id. at 148-49.
The label an agency attaches to its action is not
determinative. The action may be reviewable even
though it is merely an announcement of a rule or
policy that the agency has not yet put into effect.
Indeed, agency action may be reviewable even though
it is never to have any formal, legal effect. What is
required is that the interests of the court and agency
in postponing review until the question arises in some
more concrete and final form, be outweighed by the
interest of those who seek relief from the challenged
action’s “immediate and practical impact” upon them.
63a
The former interests are encompassed within the
first half of the Abbott Laboratories “twofold as-
pect,” the “fitness of the issues for judicial decision,”
while the latter interests are expressed in the second
part, the “hardship to the parties of withholding
court consideration.”
522 F.2d 124-25 (footnotes omitted) (emphasis in
original). We proceed here, as we did in Continental
Air Lines, by examining in turn the two aspects of
ripeness outlined in Abbott Laboratories.
With respect to the fitness of the issues for judicial de-
cision, we note first that appellants are challenging in-
formal opinion letters rather than formal rules or policy
statements. Although the letters were signed by the
agency head, and the second ruling followed consideration
of adversary legal memoranda, the form of the Comp-
troller’s action in fact reflected the tentative nature of
his interpretative conclusion. Unlike the opinion letter in
National Automatic Laundry and Cleaning Council v.
Shultz, 443 F.2d 689 (D.C. Cir. 1971), in which a gen-
eral question of statutory construction had been con-
clusively resolved on the basis of the legislative history
alone, the Comptroller in the instant case expressly re-
served the possibility that his opinion, which extended
only to the permissibility of the particular service pro-
posed by Security Pacific, might change if and when he
was presented with concrete evidence that AIS involves
the hazards which the Glass-Steagall Act was intended
to prevent. To be sure, the Comptroller did state what
would appear to be relatively final positions regarding the
consistency of AIS with the language of the Act, and his
disagreement with the reading of the Act’s legislative
history which had been implicit in the narrower inter-
pretative rulings issued by his predecessors, but these
positions would in no way be incompatible with a future
finding, based on evidence of AIS’s actual operations,
64a
that it generates hazards sufficient to create a violation
of the Act. |
By the same token, we cannot agree with the district
Court that the question decided by the Comptroller was
“purely legal.” No doubt determining the general in-
terest of Congress from the language and history of the
Act is a matter of law, but an assessment of the factual
consequences of AIS to determine whether it falls with-
in the scope of the congressional concerns requires resolu-
tion of factual issues, and an application of law to fact.
While appellants contest, at the outset, the Comptroller’s
reading of the legislative history, a substantial part of
their argument at all stages of this case has revolved
around their disagreement with the Comptroller’s esti-
mate of the factual implications of AIS. To this extent,
judicial review of appellant’s claims would be aided by
further factual development. Compare Abbott Labora-
tories v. Gardner, supra, 387 U.S. at 149.
Given these shortcomings with regard to the fitness of
the issues for judicial decision, it would take a substantial
showing of hardship to the parties to convince us that
the Comptroller’s actions are ripe for review. No such
showing has been made.
In Abbott Laboratories, NALCC, and Continental Air
Lines, the alternatives to immediate review were quite
severe: the parties either would have had to accept the
adverse consequences of complying with the agency rul-
ings in question, or risk serious penalties for noncompli-
ance in order to obtain review at a later time. In each
of the cases, this direct and immediate impact on the
parties was an important factor in finding the rulings
ripe for review. See 387 U.S. at 152-53; 522 F.2d at
126-28; 443 F.2d at 696-97. Here, in contrast, appellants’
conduct is not directly regulated by the agency action at
issue and consequently they are not facing a Hobson's
choice” between burdensome compliance and risky non-
65a
compliance. Nonetheless, on the assumption that denial
of review now would mean that appellants’ claim would
never come under judicial scrutiny, the District Court
concluded that the need for review is even stronger in
the instant case than it was in Continental Air Lines or
NALCC. Believing, as we do, that the District Court’s
assumption was erroneous, we must disagree with its
conclusion as to the necessity of review at this time.
Appellants concede, and the Comptroller agrees, that
they could bring a private action for injunctive relief,
advancing the same substantive claim they have made
here directly against any national bank which offers AIS
to its customers. Although we have been unable to find
any case law squarely on point, and in any event are
without power to make an authoritative ruling on the
issue since it is not currently before us, we have no
reason to believe that appellant would not have a pri-
vate right of action for injunctive relief under the
Glass-Steagall Act.‘ The express language of the statute
*In Investment Co. Institute v. Camp, 401 U.S. 617 (1971),
ICI brought suit solely against the Comptroller, challenging, first,
a regulation promulgated by the Comptroller purporting to au-
thorize operation of collective investment funds by banks and,
second, the Comptroller’s approval of First National City Bank’s
individual application to operate such a fund. When ICI prevailed
in the District Court, 274 F. Supp. 624 (D.D.C. 1967), First Na-
tional City Bank was granted leave by that court to intervene for
the purposes of appeal, see J.A. 286-87 in First National City Bank
v. Investment Co. Institute, 420 F.2d 83 (D.C. Cir. 1969), rev’d sub
nom. ICI v. Camp, supra, and was a participating party in both
this court and in the Supreme Court. Under the circumstances, none
of the decisions in the case had occasion to address the question of
whether ICI could have brought an action directly against First
National City Bank.
In Russell v. Continental Illinois Nat’] Bank & Trust Co., 479 F.2d
131 (7th Cir.) (Stevens, J.), cert. denied, 414 U.S. 1040 (1973), the
Seventh Circuit held only that investors in a mutual fund operated
by a bank did not have a private right of action for damages against
the bank under the Glass-Steagall Act. The case did not involve a
claim for injanctive relief; moreover, in concluding that investors in
66a
neither authorizes nor precludes such an action, but un-
der the standards set forth in recent Supreme Court de-
cisions we would suppose, first, that an implied right
of action for injunctive relief would exist for appropri-
ate parties and, second, the appellants would qualify as
proper plaintiffs.“
Appellants contend that it would be unduly burden-
some to bring a multitude of private actions against in-
dividual banks offering AIS. But it is not at all clear,
especially in light of the very limited number of banks
offering AIS or its equivalent, that a single successful
private action would not be just as effective, in convinc-
ing the Comptroller to change his position on AIS, as a
reversal in the instant case. And, in any event, we do
bank-operated mutual funds were not within the class of persons
intended to be protected by the statute, the court specifically dis-
tinguished the interests of such investors from the interests of ICI
and its members, which the Supreme Court found sufficient to create
standing to bring an action against the Comptroller in ICI v. Camp,
supra. See 479 F.2d at 133.
Both of these questions apparently would be governed by the
general criteria set forth in Cort v. Ash, 422 U.S. 66 (1975), and
reaffirmed in Piper v. Chris-Craft Indus., Inc., 97 S.Ct. 926, 947-49
(1977) ;
First, is the plaintiff “one of the class for whose especial benefit
the statute was enacted,” . . —that is, does the statute create
a federal right in favor of the plaintiff? Second, is there any
indication of legislative intent, explicit or implicit, either to
create a remedy or to deny one? Third, is it consistent with the
underlying purposes of the legislative scheme to imply such a
remedy for the plaintiff? And finally, is the cause of action one
traditionally relegated to state law, in an area basically the
concern of the states, so that it would be inappropriate to infer
a cause of action based solely on federal law?
422 U.S. at 78 (citations omitted) (emphasis in original).
The Supreme Court’s holding in ICI v. Camp, 401 U.S. at 620-21,
“that Congress did legislate against the competition” which ICI
challenged in that case, see note 4 supra, while not dispositive of
the first issue, strongly suggests that appellants are part of the
class for whose “especial benefit” the Glass-Steagall Act was passed.
67a
not consider the inconvenience of having to initiate more
than one suit to be a hardship sufficient to justify re-
view in the current circumstances. Cf. National As-
sociation of Insurance Agents v. Board of Governors, 489
F.2d 1268, 1271 (D.C. Cir. 1974).°
What appellants would have the courts do in this case
is to determine the correctness of an informal statement
by the Comptroller to the effect that he would not now
take any action if Security Pacific goes forward with its
proposed AIS, although he might take a different view
of its compatibility with the Glass-Steagall Act at some
point in the future after there has been some experience
with its actual operation.’ This is sought to be done at
the instance of parties who, although very possibly pos-
s We note, in this regard, the command of the Administrative
Procedure Act that “final agency action for which there is no other
adequate remedy in a court [is] subject to judicial review.” 5 U.S.C.
§ 704 (1970) (emphasis supplied).
There is language in Medical Committee for Human Rights v.
SEC, 432 F.2d 659 (D.C. Cir. 1970) (holding an SEC “no action”
letter passed upon by the Commission to be reviewable), cert.
granted, 401 U.S. 973, vacated as moot, 404 U.S. 403 (1972), sug-
gesting that the availability of a private right of action should
carry relatively little weight in evaluating ripeness. See id. at 667-
68, 672. Whatever the force of that suggestion in the context of
the proxy fight involved in that case, we are not persuaded that the
bank competitors seeking review here would suffer hardship if they
were forced to bring a private action instead. At any rate, the
precedential value of this court’s decision in Medical Committee was
substantially diminished by the action of the Supreme Court in
taking the case for review on the merits, which did not come about
only by reason of the intervention of mootness.
Under 12 U.S.C. § 1818 (b) (1970), the Comptroller has author-
ity to initiate cease-and-desist proceedings against any national
bank which he believes to be engaging in a violation of the banking
laws. It is conceivable that failure by him to exercise this authority
would, in appropriate circumstances, be reviewable at the instance
of interested parties under the standard of 5 U.S.C. § 706(2)(A)
(“arbitrary, capricious, and abuse of discretion, or otherwise not in
accordance with law”). See Dunlop v. Bachowski, 421 U.S. 560
(1975).
—
68a
sessed of standing to litigate the question in some cir-
cumstances, are not themselves subject to regulation by
the Comptroller and who will be under no compulsion
to do, or to refrain from doing, anything by reason of
the advisory opinion in question. Neither is there now
before the court any bank currently providing AIS or
purporting to do so.
The record made in such a lawsuit would be barren
indeed with respect to information highly relevant to,
and informative of, the applicability of the statutory
provisions in question. As indicated above, appellants
have other avenues open to them for more meaningful
and authoritative judicial resolution of the validity of
AIS.
Since the agency action challenged here is not ripe for
review, the decision of the District Court is vacated, and
the case is remanded with instructions to dismiss the
complaint.
It is so ordered.
69a
WRIGHT, Circuit Judge, concurring: I concur in the
court’s opinion. Because I believe that Judge McGowan
is correct in suggesting that the appellants do have a
private right of action under the Glass-Steagall Act
against banks using Automatic Investment Services, ap-
pellants should first be required to put the issue in more
concrete form by exploring that avenue of potential re-
lief. However, if it is ultimately held that appellants
lack a private right of action, prudential concerns inher-
ing in the “hardship to the parties of withholding court
consideration“ would, in my judgment, remove any
doubt as to the ripeness of a subsequent suit by appel-
lants against the Comptroller. There should be some
means to obtain review of the Comptroller’s interpreta-
tion of the statute.*
1 Abbott Laboratories, Inc. v. Gardner, 387 U.S. 136, 149 (1967).
2 See Dunlop v. Bachowski, 421 U.S. 560, 567 (1975); Abbott
Laboratories, Inc. v. Gardner, supra note 1, 387 U.S. at 139-140;
Stark v. Wickard, 321 U.S. 288, 307-308 (1944).
70a
APPENDIX D
UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT
SEPTEMBER TERM, 1976
No. 76-1235
Civil Action 74-1405
Filed Aug. 31, 1977
NEw YORK STOCK EXCHANGE, INC., AND
INVESTMENT COMPANY INSTITUTE,
Appellants
V.
JAMES E. SMITH, Comptroller of the Currency,
The Department of the Treasury
BEFORE: Wright, McGowan and Tamm, Circuit
Judges
ORDER
On consideration of the petition for rehearing filed by
appellants, it is
ORDERED by the Court that appellants’ aforesaid pe-
tition is denied.
Per Curiam
For the Court:
/s/ George A. Fisher
GEORGE A. FISHER
Clerk
71a
UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT
SEPTEMBER TERM, 1976
No. 76-1235
Civil Action 74-1405
[Filed Aug. 31, 1977]
NEw YORK STOCK EXCHANGE, INC., AND
INVESTMENT COMPANY INSTITUTE,
Appellants
V.
JAMES E. SMITH, Comptroller of the Currency,
The Department of the Treasury
BEFORE: Bazelon, Chief Judge, Wright, McGowan,
Tamm, Leventhal, Robinson, MacKinnon,
Robb and Wilkey, Circuit Judges
ORDER
The suggestion for rehearing en banc filed by appel-
lants, having been transmitted to the full Court and no
Judge having requested a vote with respect hereto, it is
ORDERED by the Court, en banc, that appellants’
aforesaid suggestion for rehearing en banc is denied.
Per Curiam
For the Court:
/s/ George A. Fisher
GEORGE A. FISHER
Clerk
72a
APPENDIX E
Section 16 of the Glass-Steagall Act (12 U.S.C. § 24)
provides in pertinent part:
The business of dealing in securities and stock by
the [national banking] association shall be limited
to purchasing and selling such securities and stock
without recourse, solely upon the order, and for the
account of, customers, and in no case for its own
account, and the association shall not underwrite
any issue of securities or stock. .. .
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.