Amicus Brief — Board of Governors of Federal Reserve System v. Investment Co. Institute
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No. 79-927
IN THE
Supreme Court of the Anite
OCTOBER TERM, 1979 «:-..
BOARND OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,
Petitioner,
Vv.
INVESTMENT COMPANY INSTITUTE,
Respondent.
ON WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT
BRIEF OF A. G. BECKER INCORPORATED,
AMICUS CURIAE
. HARVEY L. Pitt
JAMES H. SCHROPP
KAREN A. BLEIWEISS
FRIED, FRANK, HARRIS,
SHRIVER & KAMPELMAN
600 New Hampshire Ave., N.W.
Washington, D.C. 20037
(202) 342-3703
Attorneys for A. G. Becker
Incorporated
RANDY A. HARRIS
General Counsel
A. G. BECKER INCORPORATED
2 First National Plaza
Chicago, Illinois 60603
(312) 630-5000
Of Counsel
INDEX
The Interest of A. G. Becker Incorporated ...............
PUN PUNE is ticassecoserveticenessSadlokacauadseamcenaneets
RENEE ITE © > AO hak DosR AI ROE EN MM ee
l. The Challenged Regulation and Inter-
SUI I io io dsc ois nsteacvichcthntdidnestiviat
: The Investment Company _§Institute’s
Challenge to the Board’s Regulation and
DIRGCTIETIVG PRUNING in ccsncacsscccsvesviicsisancssinedens
ECFOGUCHIOM AIG DUMNTRREY oon siicccssicccesssesicisecserncssenses
in SRE RIAL att LB NDEN PCO PRE Re PD TI” SO
THE GLASS-STEAGALL ACT, WHICH
SEPARATES COMMERCIAL BANKING
FROM THE SECURITIES BUSINESS,
PROHIBITS A BANK FROM DIRECTLY
OR INDIRECTLY SERVING AS AN IN-
VESTMENT ADVISER TO ANY IN-
VESTMENT COMPANY .............cccceeeeceeeeees
A. The Plain Language of the Glass-
Steagall Act Prohibits Banks From
Organizing, Sponsoring, or Managing
Any Investment Company....................
B. Commercial Banks are Prohibited In-
directly From Organizing, Sponsoring,
or Managing Any Investment Com-
pany through Nonbank Affiliates.........
& Banks are Confined to the Busi-
ness of Banking, and the Secu-
rities Business is Expressly Closed
to Bank Participation ....................
The Prohibitions of the Glass-
Steagall Act May Not be Circum-
vented by Indirection....................
3. The Bank Holding Company Act
Reinforces the Prohibitions of the
Glass-Steagall Act..............ccsscceeees
C. Relevant Policy Considerations Con-
firm that Bank Holding Companies
May Not Organize, Sponsor, or Man-
age Closed-End Investment Com-
DNIII ixcisncssvajanssnsipacaboancOataaabablane ess
PUIG Fi cs sscipsiseis cat vikcanssartnl ancien ndiastenvaiaiis
ho
10
10
1]
13
13
16
21
25
A-|
CITATIONS
CASES:
Aaron v. Securities and Exchange Commis-
sion, 48 U.S.L.W. 4609 (U.S., Jun. 2.
Affiliated Ute Citizens v. United States, 406
U.S. 128, rehearing denied, 408 U.S. 931
Pe hace sldsnas anc cctananiet sessed eacisiesactubeenil
Arnold Tours, Inc. v. Camp, 472 F.2d 427
EA cis Ag RED sasninciiideiidceaiiesoessnsmesceibinlnnneins
Assn’n of Bank Travel Bureaus, Inc. v.
Board of Governors, 568 F.2d 549 (C.A.
ENE. 1 SRR En Omalitie nee EArt sane LYQEE CUE e CNRS
Baker, Watts & Co. v. Saxon, 261 F. Supp.
247 (D. D.C.. 1966), affirmed sub nom.,
Port of New York Authority v. Baker,
Watts & Co., 392 F.2d 497 (C.A. D.C...
Blue Chip Stamps v. Manor Drug Stores,
421 U.S. 723, rehearing denied, 423 U.S.
IE BN a desestndscakbinecnsalionstbetanpmiawiciaesses
Board of Governors v. Agnew, 329 U.S. 441
PONE Pciiaicas ja actnsudeautahcencdnseidstainsnaiatvccons
Botany Worsted Mills v. United States, 278
Bete ee ec iene cach nals decease cnssopssuni nse
Burks v. Lasker, 441 U.S. 471 (1979)...
Chiarella v. United States, 100 S. Ct. 1108
Sk Ree Rabie Genet. AE VIER n CAPES ITO ESE
Consumer Product Safety Commission v.
GTE Sylvania, Inc., 48 U.S.L.W. 4658
Cy is I Fe bie ith achsccancaevecdencenens
E. I]. duPont de Nemours & Co. v. Collins,
Ae, Er EE Bic nsvs ccinescdcchseckacke
Page
ee.
Ernst & Ernst v. Hochfelder, 425 U.S. 185,
rehearing denied, 425 U.S. 986 (1976)......
Franklin Nat’l Bank v. New York, 347 US.
a ED. 2 TAS RRP Rie menace es ec
Independent Bankers Ass’n of Georgia v.
Board of Governors, 516 F.2d 1206 (C.A.
cg: OPH W cinnbeaciiuscenaldaddaboleicinasedpaate neds
International Brotherhood of Teamsters v.
Daniel, 439 U.S. 551 (1979) eee
Investment Company Institute v. Camp, 401
RE AE FO CPE Ricesesciencncniinnisomniainanbinaee
Mitchell v. H. B. Zachry Co., 362 U.S. 310
PD scinssieadannicescpsedicoaniphenneceinbaidianiaseetnia
Nat’l Courier Ass’n v. Board of Governors,
516 F.2d 1229 (C.A. D.C., 1975)..............
NCNB Corp. v. Board of Governors, 599
ee ae ee), | eee
New York Stock Exchange, Inc. v. Smith,
404 F.Supp. 1091 (D. D.C., 1975), va-
cated and remanded on other grounds, sub
nom., New York Exchange, Inc. v. Bloom,
562 F.2d 736 (C.A. D.C., 1977), certiora-
ri denied sub nom., New York Stock Ex-
change, Inc. v. Heimann, 435 U.S. 942
B , | TERR ies Renee rember fo onion, Parent ITED
Santa Fe Industries, Inc. v. Green, 430 U.S.
Oe © Ce Bee el a ee
Saxon v. Georgia Ass’n of Independent Ins.
Agents, Inc., 399 F.2d 1010 (C.A. 5,
i: SERS ONS ANS IRA Ree ret he ba ee rot
Securities and Exchange Commission v.
Capital Gains Research Bureau, Inc., 375
Seah. See FN Dv ciicsttosanscnicesnenteeentathtiads
Page
12
14
25
12
passim
24
Securities and Exchange Commission vy.
Sinan, 436 US. 103 ( 1978 ) .....00..cises.000.s.
Touche Ross & Co. v. Redington, 442 U.S.
ng dy Lg f SONA SAID ARS cone Tyee OE
Transamerica Mortgage Advisors, Inc. v.
Bee, GO GI. UE CGT OD inecsiceccdcsccisecccces
United States v. Naftalin, 441 U.S. 768
es achn ci 5a sissh ais rececnatulglbislensdasedesien
United States v. Nat'l Ass’n of Securities
Dealers, Inc., 422 U.S. 694 (1975)...
STATUTES, RULES AND REGULATIONS:
Bank Holding Company Act of 1956, 12
U.S.C. §1841. et seg. (1976):
Section 4(a), 12 U.S.C. § 1843(a)
rN a ay
Section 4(c)(8). 12 U.S.C.
Oe FO PO OO FIO vo evkncideasnniccendcvssess
The Banking Act of 1933 (The Glass-
Steagall Act):
Section 2(b), 12 U.S.C. §221a(b)
IN ial a as arcus in upcuassadend taceas since
Section 2(b)(2), 12 U.S.C.
ee PU IEE FO BUTI cisccesccncestcticssusides
Section 2(b)(4), 12 U.S.C.
ee Oe OE 0 BOT Biociccosicesecdnsicyessuces
Section 5, 12 U.S.C. §335 (1976) ..........
Section 16, 12 U.S.C. §24 Sixth
RIND Cadet lanincisehskcesnabiaienicnanionrsdes
IIE cenarhdisusbskasedivsea eokabekieesasnouiievens
Section 19, 48 Stat. 186. repealed, 80
NY) MMPI ancnsieyesccssocccaeudeumsaccons
Page
11,12
12.14
i)
tO
No
i)
17
17
passim
17,19
Section 20, 12 U.S.C. §377 (1976) ........
Section 21, 12 U.S.C. §378 (1976) ........
Section 21(a)( 1). 12 U.S.C.
£2; FE GER E . 2. | Avene emnrE
Section 32, 12 U.S.C. $78 (1976) ..........
Federal Reserve Act:
Section 4, 12 U.S.C. §341 Sixth
MRD ct Aikasacraceciinsveemeccnsinisesies
Investment Advisers Act of 1940, 15 U.S.C.
§80b-1. ef seg. (1976):
Section I, 15 U.S.C. §80b-1 (1976)...
Section 2(a)(11), 15 U.S.C.
SO- 200 ET) CED IO). ...csesccciccsccssenss
Investment Company Act of 1940, 15
U.S.C. §80a-1. ef seg. (1976):
Section 2(a)(20), 15 U.S.C.
SE Ee PAE FO Bessiicssssscadicceseies
Section 3(a)( 1). 18 U.S.C.
BOR= 31 BC Td 6 UD TG D oc cnperecsedecescensp.0es
Section 3(a)(3), 15 U.S.C.
= DE PES FCO FO Pickvccecisasicarscadeccies
Section 5(a)( 1), 18 U.S.C.
tr PF 0 BPW Mircececcalassccencuncastss
Section 23(b), 15 U.S.C.
I OE WPI Ry oniscicrscnckesencscsodcsaaes
Section 23(c), 15 U.S.C. §80a-23(c)
PM estas Sad diccacs canta eiseniiaea ee void:
Securities Act of 1933, 15 U.S.C. §77a et
seq. (1976):
Section 2(1), 15 U.S.C. §77b (1)
Section 3(a)(3), 15 U.S.C.
3g. 8 2 PON Gyo. | Bee eee
eee eee eeee
Page
10,17,
19,20
10,13,19,
20
16
16
v1
Rules and Regulations:
Fee) Ge. SEU G . f,) een
12 CFR §225.4(a)(5)(ii) (1980).........
WER Beco Rye. ) eeumemmmnnor
Pee. £ eee GE. — ; PReenermmi mun |
Fee | Freee id, | CPMineemen en
2 PR EF CE icone
CONGRESSIONAL DEBATES:
704mm. Tee BEL OUD SS Vivctesetcieens
77 Come: Ret, 3935 (1959 1...
FT Come Ree. BEBO 1G IS By winnesiccscnscesncrcceene
86. Cone. Rec: S61) (1980)... celina
ADMINISTRATIVE AND LEGISLATIVE MATERIALS:
Bulletin, Comptroller of the Currency, No. 2
CERES A, BAO Piso dctctsmasinesnceloaianoneaie
37 Fed. Reg. 1464 (Jan. 29, 1972)...
41 Fed. Reg. 44361 (Oct. 8, 1976)...
Federal Reserve Board Staff. Commercial
Bank Private Placement Activities
(BIE Ds ssiciencpsincsbesseldannsnebaebaseun tea eanee aeaaaas
H.R. Rep. No. 1747, 91st Cong., 2d Sess.
f BOPP vi sivlissnsianvenvecconssacendeasqeaeunenaeimans
House Committee on Interstate and Foreign
Commerce, Hearings on H.R. 10065, In-
vestment Trusts and Investment Com-
panies, 76th Cong., 3d Sess. (1940) ..........
Page
Vil
Page
House Committee on Banking and Cur-
rency. Hearings on H.R. 6778, 9\st Cong..,
Ne condsnienses Zi2ta3
Legal Division of the Board of Governors of
the Federal Reserve System, Commercial
Paper Activities of Commercial Banks: A
Legal Analysis (Jun. 28, 1979) oe. 4
S. Rep. No. 77. 73d Cong., Ist Sess.
Nee ic sscnconassesanbinesence 9.10.11,
12,19
S. Rep. No. 1095, 84th Cong., 2d Sess.
iol daishonsenseersievcessoccaveses 21
S. Rep. No. 1179. 89th Cong., 2d Sess.
asics ckatscahspuavadesncisieeresenss 21,22
S. Rep. No. 1084. 9Ist Cong., 2d Sess.
ee iccsssicncccccencvasesadenssonsss 21
Securities and Exchange Commission, Re-
port on Investment Trusts and Investment
Companies, Pt. 2, H.R. Doc. No. 70. 76th
SEL ) 18,24
Senate Committee on Banking and Cur-
rency, Hearings on S§.3580, 76th Cong..
Teen c.. cckinsasasuvenconescwenss 16
MISCELLANEOUS:
| Frankel, The Regulation of Money Man-
Nee Sn is setasssniwneses 6
Weisenberger. /nvestment Companies Ser-
Nee cckiessbndiparyernchsensenvenvesiesscssses 7,24
IN THE
Supreme Court of the United States
OCTOBER TERM, 1979
No. 79-927
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,
Petitioner.
v.
INVESTMENT COMPANY INSTITUTE,
Respondent.
ON WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT
BRIEF OF A. G. BECKER INCORPORATED,
AMICUS CURIAE
THE INTEREST OF
A. G. BECKER INCORPORATED
In 1933, responding to the well-documented securities
market abuses and excesses of commercial banks, and
again in 1956, 1966 and 1970, Congress unambiguously
prohibited commercial banks directly or indirectly from
entering into, or engaging in, the securities business.
2
Despite the ac ption of such statutory limitations, how-
ever, commercial banks repeatedly have attempted to
obtain, and federal banking regulators all too frequently
have attempted to grant, administrative approbation for
bank efforts to circumvent applicable banking law stric-
tures. !
The instant case is, unfortunately, a prime example of
this ongoing effort to rewrite an important Congressional
mandate by the use of administrative fiat; here, the Board
of Governors of the Federal Reserve System (the
Board”) has exalted form over substance by authorizing
commercial banks to form nonbank affiliates in order to
engage indirecth in conduct commercial banks are out-
lawed from pursuing directh,.
As a registered broker and dealer in securities. A. G.
Becker Incorporated (““A.G. Becker’) is directly and
adversely affected by such Board efforts to reshape the
1 See. e.g., Investment Company Institute v. Camp, 401 U.S. 617.
639 (1971) (holding invalid a regulation of the Comptroller of the
Currency (the “Comptroller”) authorizing national banks to operate
mutual funds): Ass'n of Bank Travel Bureaus, Inc. v. Board of
Governors, 568 F.2d 549, 550 (C.A. 7, 1978) (bank holding com-
panies may not operate travel agencies ); Nat’ Courier Ass'n v. Board
of Governors, 516 F.2d 1229, 1241 (C.A. D.C., 1975) (holding
invalid that part of the Board’s ruling permitting bank affiliates to
provide nonfinacially related courier services): Arnold Tours, Inc. v.
Camp. 472 F.2d 427. 438 (C.A. 1, 1972) (holding invalid the
Comptroller’s regulation permitting national banks to operate travel
agencies); Saxon v. Georgia Ass'n of Independent Ins. Agents, Inc.,
399 F.2d 1010, 1016 (C.A. 5, 1968) (holding invalid the Comptrol-
ler’s ruling permitting national banks to act as insurance agents in
places of over 5,000 population ); Baker, Watts & Co. v. Saxon, 261 F.
Supp. 247. 252 (D. D.C., 1966) affirmed sub nom., Port of New York
Authority v. Baker, Watts & Co., 392 F.2d 497, 504 (C.A. D.C., 1968 )
(holding invalid the Comptroller’s ruling permitting national banks to
underwrite municipal revenue bonds ).
3
language and meaning of the Banking Act of 1933? and
related banking legislation. A.G. Becker, in addition to
providing a broad spectrum of traditional investment
banking services, is one of this Country’s largest com-
mercial paper underwriters and dealers, assisting major
corporate issuers in raising short-term capital by selling
their commercial paper securities to various institutional
investors. Although the underwriting of commercial paper
securities traditionally has been performed by investment
bankers (but never previously by commercial banks), at
least one commercial bank subject to the Board’s jurisdic-
tion has, for the first time, commenced underwriting
commercial paper in contravention of the prohibitions of
the Glass-Steagall Act.
Consistent with its general approach toward the
enforcement of the Glass-Steagall Act, the Board has
taken no action for almost two years on two petitions
seeking Board action to halt this underwriting of securities
by commercial banks;3 indeed, notwithstanding the plain
language of the Glass-Steagall Act. and despite the fact
that commercial banks had, theretofore. never under-
written commercial paper, the Board’s chief legal officer
has publicly opined that the underwriting of commercial
2 Often referred to as the Glass-Steagall Act, the Banking Act of
1933 is codified at various sections throughout Title 12 of the United
States Code. In terms, the prohibitions of the Glass-Steagall Act
apply to national banks but, insofar as is relevant here. they also are
expressly made applicable to state member banks of the Federal
Reserve System. See 12 U.S.C. §335 (1976).
3A. G. Becker’s petition to the Board is predicated, among other
things, on Board procedures set forth in 12 CFR §§227.1, 227.2. and
262.3 (1980). Under these complaint procedures. the conduct cited
need not be illegal to warrant proscription by the Board as an
“unfair” or “deceptive” banking practice. 41 Fed. Reg. 44361 (Oct. 8.
1976).
4
paper securities is “incidental to the business of banking,”
and should not be inhibited.4
In this regard, the Board staff's opinion regarding the
underwriting of commercial paper securities by banks 1s
merely the latest in a series of conflicting and confusing
administrative pronouncements from the Board—pro-
nouncements that often conflict with each other as to the
appropriate application of governing legal principles, but
which are remarkably consistent in expanding the number
of services commercial banks are authorized to perform.$
4Legal Division of the Board of Governors of the Federal
Reserve System, Commercial Paper Activities of Commercial Banks:
a Legal Anabksis, pp. 4-6 (Jun. 28. 1979) [hereafter cited as “Legal
Analysis” }.
5 Thus, for example. in 1977 the staff of the Board issued a study
encouraging commercial banks to engage in the private placement of
unregistered investment securities. See Federal Reserve Board Staff.
Commercial Bank Private Placement Activities (1977). In that study.
the Board had to determine. inter alia, whether commercial bank
private placement activities constituted the “underwriting” of
securities. since the “underwriting” of securities by a bank is an
activity unquestionably proscribed by the Glass-Steagall Act. /d. at
87. In holding that banks cou/d engage in such private placement
activities without violating the Glass-Steagall Act, the Board con-
cluded that the private placement of securities is not “underwriting”
within the meaning of the Glass-Steagall Act, because bona fide
private placements do not constitute “underwriting” within the mean-
ing of the federal securities laws adopted at the same time as the
Glass-Steagall Act. In reaching its decision, the Board noted that.
where securities-related terms are defined in the federal securities
laws, but the same terms are not defined in the Glass-Steagall Act,
Congress’ use of the same terms in the two measures suggests that
the Securities Act [of 1933] is a compelling analogy.” Jd. at 89.
Two years later. however, the Board’s staff authorized banks to
underwrite the distribution of commercial paper based, in part, upon
the conclusion that commercial paper is not a “security” for purposes
of the Glass-Steagall Act (which does not define the term “security” ).
even though commercial paper is within the definition of the term
“security” as set forth in Sections 2(1) and 3(a)(3) of the Securities
Act. 18 U.S.C. §§77b(1) and 77¢(a)(3) (1976). Legal Analysis at
1S n. 34.
~
‘
This case, therefore, presents a question of signifi-
cance and importance to A. G. Becker—that is, whether
the Glass-Steagall Act, and the interrelated proscriptions
of the Bank Holding Company Act, may properly be
interpreted by the federal banking agencies so as to
endorse and encourage commercial banking activities
Congress sought to prohibit. Less than a decade ago, this
Court noted that the terms of the Glass-Steagall Act could
not be ignored or eviscerated by those government
agencies charged with the administration of that statute.
Investment Company Institute v. Camp, 401 U.S. 617
(1971). A.G. Becker respectfully submits this brief,
amicus curiae, in support of respondent, to express its view
that this Court’s prior teachings. and Congress’ unmista-
keable admonitions, should be applied to prevent the
Board from eroding the protections and proscriptions of
the federal banking laws.
QUESTION ADDRESSED
Did the Board of Governors of the Federal Reserve
System exceed the Board’s limited statutory authority
when it promulgated rules permitting commercial banks.
either directly or through specially-created nonbank affi-
jates. to engage in conduct expressly prohibited by the
Banking Act of 1933?
STATEMENT?
1. The Challenged Regulation and Interpretive Rul-
ing. Effective February 1, 1972, the Board issued a
6 The parties have consented to the filing of this brief. Copies of
letters indicating the parties’ consent are attached hereto as Appendix
A.
7 Since a full statement of the facts has been set forth in the brief
of the respondent, we have not restated the facts here, but rather have
set forth only those facts salient to the discussion that follows.
6
regulation authorizing any bank holding company and
both its bank and nonbank subsidiaries to serve as an
investment adviser to any and all investment companies,
including open-end investment companies.® Because the
scope of an investment adviser’s services under the
Board’s rule could include the authority to organize,
control, operate or manage any investment company,9 the
Justice Department and the Investment Company Institute
(“ICI”) opposed the Board’s determination on the ground
that such activities, if engaged in by banks or their
affiliates. would violate the Glass-Steagall Act (Pet. App.
6a-7a).19 Recognizing that “the Glass-Steagall Act provi-
sions... [are] applicable to a holding company’s activi-
ties as an investment adviser.” but unwilling to rescind its
regulation, the Board attempted to resolve the Glass-
812 CFR §225.4(a)(5)(i1) (1980). An investment company
utilizes a pool of funds contributed by its shareholders for the sole
purpose of investing in “the securities of other corporations, and issues
securities of its own.” United States v. Nat'l Ass’n of Securities
Dealers. Inc.. 422 U.S. 694, 697 (1975) (footnote omitted). This
pool of funds is obtained through the public distribution (and.
oftentimes. periodic sales) of the company’s securities to the investing
public. Each share of an investment company represents a fractional
interest in the company’s portfolio of securities. Jd. at 698. By virtue
of the Investment Company Act of 1940, investment companies are
either open-end companies or closed-end companies. As defined in
that Act. the sole difference between the two types of investment
companies is that an open-end company (often called a “mutual
fund”) stands ready to issue and redeem its shares on a continuous
basis, 1S U.S.C. §80a-5(a)( 1) (1976), while a closed-end company’s
shares are traded in the open market. | Frankel. The Regulation of
Money Managers 341 (1978).
9 The Board’s determination authorized bank holding companies
to perform any and all functions performed by an investment adviser.
including those functions within the purview of Section 2(a) (20) of
the Investment Company Act. 15 U.S.C. §80a-2(a) (20) (1976).
10 References to the Appendix filed in this Court with the Petition
for a Writ of Certiorari are cited as “Pet. App...”
Steagall Act problems engendered by its expansive rules
through the device of an interpretive ruling."
In terms, the Board’s rules permit bank holding
companies and their bank as well as nonbank subsidiaries
to serve as investment advisers to any investment com-
pany.'2 In its interpretive ruling. the Board purported to
retract so much of its rules as permitted any of the entities
subject to its jurisdiction to serve as advisers to open-end
investment companies;'3 subsequently, the Board also
“disclaim[ed]” that its rule was meant to apply to
banks.'4 These patching efforts, however, have proven
ineffectual—banks apparently continue to sponsor in-
vestment companies in reliance upon the language of the
Board’s rules.15 and several of the investment companies
so advised are conceded by the Board “technically” to be
open-end funds. '6
2. The Investment Company Institute’s Challenge to
the Board’s Regulation and Interpretive Ruling. In re-
sponse to the ICI’s petition for judicial review of the
112 CFR §225.125(b) (1980), adopted in 37 Fed. Reg. 1464
(Jan. 29, 1972).
1212 CFR §225.4(a)(5)(ii) (1980). The term “bank holding
company” is defined for purposes of the Board’s rule to include both
types of subsidiaries. 12 CFR §225.125(c) (1980).
13.12 CFR §225.125(f) (1980).
14 See Pet. App. 22a.
1S As the ICI points out in its brief. five of the ten entities
currently sponsoring closed-end investment companies are banks, not
holding companies or nonbank affiliates (Br. at 17-18, citing
Weisenberger. /nvestment Companies Service ).
16 Pet. App. 59a. Since even the Board apparently concedes that
its rule is per se invalid to the extent it authorizes banks to serve as
investment advisers to any investment company, and to the extent it
authorizes nonbank affiliates to advise open-end investment com-
panies, in this brief we discuss only that aspect of the Board’s rule that
authorizes a bank holding company to serve as an ir ‘estment adviser
to a closed-end fund.
8
Board’s action,’? a unanimous Court of Appeals for the
District of Columbia Circuit vacated the challenged regu-
lation and interpretive ruling (Pet. App. 50a). The court
of appeals noted that the Glass-Steagall Act and the Bank
Holding Company Act were designed to achieve a single
goal—the divorce of commercial banking from the secu-
rities business—a goal accomplished by the Glass-Steagall
Act’s proscriptions on the activities of commercial banks,
and the Bank Holding Company Act’s complementary
restrictions on the activities of nonbank affiliates of com-
mercial banks (id. at 28a-29a).
Noting that Congress did not perceive “that the
securities activities of bank holding companies or their
nonbank affiliates were any less insidious than those of
banks themselves or of firms with which banks were
affiliated directly rather than through a holding company
parent” (id. at 26a), the court examined the language and
legislative history of the Bank Holding Company Act and
found that that Act was “designed to further the Glass-
Steagall Act’s overarching policy...of divorcing § in-
vestment from commercial banking” (id. at 30a, footnote
omitted ).
In sum, the court’s examination of both the Glass-
Steagall Act and the Bank Holding Company Act led it
inexorably to conclude that, since the Glass-Steagall Act
was first enacted, Congress has continuously maintained a
forceful policy of preventing the evils and abuses that arise
from the involvement of commercial banks in the secu-
rities business (id. at 32a, 44a). The court concluded that,
had Congress intended to eviscerate the protections of the
Glass-Steagall Act by permitting banks to funnel their
17 The history of the Investment Company Institute’s challenges
to the Board’s regulation and ruling is set forth in the ICI’s brief
herein, at pp. 6-10.
9
securities activities through nonbank affiliates, Congress
surely would have stated so expressly in the Bank Holding
Company Act. The Board’s petition for a writ of certio-
rari ensued.
INTRODUCTION AND SUMMARY
National and state member banks, which may engage
only in those activities authorized by law, are forbidden by
the Glass-Steagall Act from engaging in the securities
business, a business Congress has expressly declared in-
cludes the sponsorship, operation and management of
investment companies. IJnvestment Company Institute v.
Camp, 401 U.S. 617, 629-630, 635-636 (1971). And, this
prohibition against banks performing investment advisory
services applies whether banks propose to do so for open-
end or closed-end investment companies, since the busi-
ness of both types of companies is defined identically in
the Investment Company Act of 1940 to constitute in-
vesting. reinvesting and trading in securities—in other
words, the securities business.
Despite its recognition of these unmistakeable impli-
cations of the Glass-Steagall Act, 12 CFR § 225.125(b)
(1980), the Board has effectively ruled that banks may do
indirectly what they are prohibited from doing directly:
the Board has authorized national and state member
banks to utilize the 1930’s-discredited device of securities
affiliates in order to circumvent the Glass-Steagall Act’s
injunction that banks may not organize, sponsor, or
manage ciosed-end investment companies. But, the plain
meaning of Sections 16, 20, 21 and 32 of the Glass-
Steagall Act leaves no room for doubt that Congress
“separate[d] as far as possible national and [Federal
Reserve System] member banks from [securities] affil-
iates of all kinds,” S. Rep. No. 77, 73d Cong.. Ist Sess. 10
10
(1933) (emphasis supplied), a conclusion this Court
reached and endorsed less than a decade ago. /nvestment
Company Institute v. Camp, supra, 401 U.S. at 629, 635.
There is thus no basis for the Board’s argument that, by
negative implication, Congress intended to permit by
indirection what this Court held Congress has so pains-
takingly “abolish[ed].” Jd. at 629.
Nor can the Board sustain its action by reference to
the Bank Holding Company Act. That Act was designed
to reinforce and supplement the Glass-Steagall Act, not to
provide a vehicle for its evisceration. Conduct otherwise
illegal cannot, and does not, constitute either banking, an
activity closely related to banking, or a proper incident of
banking. particularly where. as here, the Board itself
concedes (Br. 31-32) that the precise “conflicts of interest
and unsound banking practices” that prompted Congress
to adopt both the Glass-Steagall Act and the supplemen-
tary Bank Holding Company Act could be engendered by
the practices the Board’s ruling seeks to encourage and
foster.
DISCUSSION
THE GLASS-STEAGALL ACT, WHICH SEPARATES
COMMERCIAL BANKING FROM THE SECURITIES
BUSINESS, PROHIBITS A BANK FROM DIRECTLY
OR INDIRECTLY SERVING AS AN INVESTMENT
ADVISER TO ANY INVESTMENT COMPANY.
When Congress enacted the Glass-Steagall Act, it
“separate|d] as far as possible national and | Federal
Reserve System] member banks from [securities] affil-
iates of all kinds.”'8 Thus, as expressly embodied in
several of the provisions of the statute, Congress decreed
that investment banking and commercial banking should
be carried out separately by different, and unrelated,
institutions. Since 1933, Congress has not adopted any
statute which. in terms or otherwise, modifies, alters or
abrogates this separation between commercial and in-
vestment banking, a conclusion effectively conceded by
the petitioner. '9
The unquestioned effect of the Board’s rules and
interpretive ruling, however, is to permit banks, through
specially-created nonbank affiliates, to enter the securities
business, despite the fact that such a fundamental change
in national policy must be addressed to, and effected by.
the Congress, not the Board. See, e.g., Touche Ross & Co.
v. Redington, 442 U.S. 560, 578-579 (1979): Securities
and Exchange Commission v. Sloan, 436 U.S. 103, 116-
117 (1978). As it has had to do on prior occasions, this
Court should reaffirm the continuing vitality of the Glass-
Steagall Act, and enforce its restriction of commercial
banks to the business of banking.20
A. The Plain Language of the Glass-Steagall Act
Prohibits Banks from Organizing, Sponsoring,
or Managing Any Investment Company
In construing the Glass-Steagall Act. as with any
Statute, it is well-settled that the starting point is the
'8S. Rep. No. 77, 73d Cong.. Ist Sess. 10 (1933) (emphasis
supplied). See also, 77 Cong. Rec. 3835 (1933) (Remarks of Rep.
Steagall ): Jnvestment Company Institute v. Camp, supra, 401 U.S. at
629, 635.
19 See p. 7 and n. 16. supra.
20 See Board of Governors v. Agnew, 329 U.S. 441 (1947);
Investment Company Institute v. Camp, supra.
12
statutory language itself.2’ Here, the plain language of the
Glass-Steagall Act evidences Congress’ intent to preclude
banks from organizing, sponsoring, or managing any
investment company.
The Glass-Steagall Act contains two interrelated pro-
visions that operate to preclude banks from engaging in
the securities business: Section 16, among other things,
prohibits banks from underwriting or dealing for their
own accounts in securities and stocks, subject to very
circumscribed limitations not applicable here;22 and, Sec-
21 See, e.g., Aaron v. Securities and Exchange Commission, 48
U.S.L.W. 4609, 4613 (U.S., Jun. 2, 1980); Consumer Product Safety
Commission v. GTE Sylvania, Inc., 48 U.S.L.W. 4658, 4659 (US.,
Jun. 9, 1980): Chiarella vy. United States, 100 S. Ct. 1108, 1113
(1980); Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11,
16 (1979): Touche Ross & Co. v. Redington, supra, 442 U.S. at 568:
International Brotherhood of Teamsters v. Daniel, 439 U.S. 551, 558
(1979): Securities and Exchange Commission v. Sloan, supra, 436
U.S. at 111; Santa Fe Industries, Inc. v. Green, 430 U.S. 462. 472
(1977); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197, rehearing
denied, 425 U.S. 986 (1976); Blue Chip Stamps v. Manor Drug Stores,
421 U.S. 723, 756, rehearing denied, 423 U.S. 884 (1975) ( Powell, J..
concurring ).
22 12 U.S.C. §24 Seventh (1976). Thus, for example, Section 16
provides that a bank “shall not underwrite any issue of securities or
stock....” Jd. (emphasis supplied). Exceptions are provided which
permit a bank to underwrite certain types of governmental securities,
such as obligations of the United States and of state and local
governments. This exception has been construed narrowly to limit
banks to the underwriting of general obligation instruments only.
See, e.g., Baker, Watts & Co. v. Saxon, supra, 261 F. Supp. at 252.
And, Section 16 limits a bank “to purchasing and selling . . . securities
and stock without recourse, solely upon the order, and for the account
of, customers....” This provision has been construed to permit
banks to purchase and sell securities only at the request of existing
customers, as an accommodation service, and not for profit. New
York Stock Exchange, Inc. v. Smith, 404 F.Supp. 1091, 1097 (D.
D.C., 1975), vacated and remanded on other grounds, sub nom., New
York Stock Exchange, Inc. v. Bloom, 562 F.2d 736 (C.A. D.C., 1977),
certiorari denied sub nom., New York Stock Exchange, Inc. v. Hei-
mann, 435 U.S. 942 (1978), citing, Bulletin, Comptroller of the
Currency, No. 2 (Oct. 26, 1935). See also, S. Rep. No. 77, 73d Cong..
Ist Sess. 16 (1933).
13
tion 21 reinforces these proscriptions with an unqualified
prohibition, making it unlawful for any person or firm that
underwrites, sells or distributes securities to “engage at the
same time fo any extent whatever in the business” of
deposit banking.29
In Investment Company Institute v. Camp, supra, 401
U.S. at 625. this Court confirmed that, “[on] their face,
§§16 and 21 of the Glass-Steagall Act appear clearly to
prohibit...” a bank from sponsoring an investment com-
pany because, among other reasons, an investment com-
pany ( whether or not it is an open-end company, as in the
Camp case ) engages in “buying stock ‘for its own account’
and... ‘issuing’ and ‘selling’ ‘stock’ or ‘other securities’
evidencing...the assets of the fund.” Jd. (footnote
omitted). Sections 16 and 21 of the Glass-Steagall Act
thus demonstrate. as this Court has held, that “Congress
explicitly intended to prohibit a national [or state mem-
ber] bank from operating an investment trust.” /d. at 635
(footnote omitted ).
B. Commercial Banks are Prohibited Indirectly
From Organizing, Sponsoring, or Managing Any
Investment Company through Nonbank Affil-
iates
1. Banks are Confined to the Business of Bank-
ing, and the Securities Business is Expressly
Closed to Bank Participation.
It is axiomatic that the federal banking laws define
the business of commercial banking for national and state
23 12 U.S.C. §378 (1976) (emphasis supplied). The purpose of
Section 21 of the Glass-Steagall Act was “to make sure that we will
accomplish the separation of the investment and deposit banking.”
77 Cong. Rec. 4180 (1933) (remarks of Sen. Bulkley). Section 21
does not prohibit banks “from dealing in, underwriting, purchasing,
and selling investment securities, or issuing securities, fo the extent
permitted to national banking associations by the provisions of
{Section 16] (emphasis supplied }.
14
member banks,?4 and that the “privileges granted to [such
banks] by law” are specifically enumerated by statute.25
All commercial and industrial activities not expressly
permitted to such banks by Congress are necessarily
excluded from banking participation.26 Thus, had Con-
gress spoken no more on the subject, banks would have
been excluded from the securities business.2? Congress
has. however, done more than merely fail to authorize
bank participation in the securities business; it has
affirmatively forbidden such activities.
In the face of these Congressional declarations, the
Board has nevertheless attempted to authorize banks to
gain a foothold in the securities business by providing
investment advisory services to some investment com-
panies, on the basis of a purported distinction between
open-end and closed-end investment companies. This
distinction. based on the frequency with which the two
types of funds issue or redeem their shares, has little basis
in fact. and none in law or policy. While it is true that
open-end companies can be distinguished from closed-end
companies by the manner in which an investor normally
24 See, e.g.. Franklin Nat'l Bank v. New York, 347 U.S. 373, 375-
376 (1953).
25 12 U.S.C. §24 Sixth and Seventh (1976): 12 U.S.C. §341 Sixth
(1976).
26 See. e.g.. 77 Cong. Rec. 3835 (1933) (Remarks of Rep.
Steagall): Arnold Tours, Inc. v. Camp, supra, 472 F.2d at 435-436:
Saxon v. Georgia Ass’n of Independent Ins. Agents, Inc., supra, 399
F.2d at 1014; Baker, Watts & Co. v. Saxon, supra, 261 F. Supp. at
252. Cf. Transamerica Mortgage Advisors, Inc. v. Lewis, supra, 444
U.S. at 20; Botany Worsted Mills v. United States, 278 U.S. 282, 288
(1929).
27 Indeed. as this Court pointed out in Jnvestment Company
Institute v. Camp, supra, 401 U.S. at 629, “[e]ven before the passage
of the [Glass-Steagall] Act it was generally believed that it was
improper for a commercial bank to engage in investment banking
directly.”
15
disposes of his interest in these companies,?8 that is simply
not a relevant consideration here. Congress has expressly
declared by statute that open-end and closed-end com-
panies engage in the same general securities business
activities,29 and that the management of any investment
company is an integral part of the securities business.3°
Not only is the Board’s purported distinction between
closed-end and open-end funds negated in all material
respects by statute, the distinction the Board attempted to
draw—focusing on the differences in the way shareholders
of the two types of companies may dispose of their
shares—is unavailing and unsupportable. Closed-end
companies may, and do, issue new shares at any time, just
as is true of open-end companies: closed-end funds also
28 See p. 6 n. 8, supra.
29 Thus, subsections (1) and (3) of Section 3(a) of the In-
vestment Company Act. 15 U.S.C. §§80a-3(a)( 1) and 80a-3(a)(3)
(1976). define both open and closed-end investment companies as
those companies engaged “in the business of investing. reinvesting. or
trading in securities” (emphasis supplied ).
30 Section 2(a)(20) of the Investment Company Act, 15 U.S.C.
§80a-2(a)(20) (1976), (to which the Board looked in defining the
term “investment adviser’), Sections | and 2(a)(11) of the In-
vestment Advisers Act, 15 U.S.C. §§80b-1 and 80b-2(a)( 11) (1976).
and this Court’s opinion in Securities and Exchange Commission v.
Capital Gains Research Bureau, Inc., 375 U.S. 180, 186 (1963), make
plain the fact that providing investment advisory services to any
investment company is an important facet of the “securities industry.”
See also, United States v. Nat'l Ass’n of Securities Dealers, Inc., supra,
422 US. at 697-698: Burks v. Lasker, 441 U.S. 471, 480-481 (1979):
E. 1. duPont de Nemours & Co. v. Collins, 432 U.S. 46, 54-55 (1977).
16
may, and often do, offer to repurchase their shares, facts
Congress specifically recognized.%"
In short, the business of any investment company is
dealing in securities, and the occupation of an adviser to
any investment company is managing that business. The
management of any investment company by a bank
necessarily involves the bank in securities activities that
are forbidden to banks by the Glass-Steagall Act.
2. The Prohibitions of the Glass-Steagall Act
May Not Be Circumvented by Indirection.
By the language it employed in the Glass-Steagall
Act, Congress left no doubt that the separation it had
effected between commercial and investment banking
applies broadly to both direct and indirect bank securities
activities.
Thus, as we have seen, Section 16 of the Act prohibits
banks from engaging in “the securities business” except to
purchase and sell securities “soleh”’ upon the order. and
for the account of. customers and “in no case” for the
bank’s own account. By virtue of Section 16, banks are
also forbidden to underwrite “any” issue of securities. 12
U.S.C. §24, Seventh (1976) (emphasis supplied ). Section
21 of the Act prohibits “any person” or firm engaged in
the securities business from engaging, at the same time.
31 See Sections 23(b) and 23(c) of the Investment Company
Act, 15 U.S.C. §§80a-23(b) and 80a-23(c) (1976). which govern the
distribution and repurchase of securities by closed-end companies.
And see, e.g., H.R. Rep. No. 2639, 76th Cong., 3d Sess. 8, 21 (1940):
86 Cong. Rec. 9811 (1940) (Remarks of Rep. Cole); House Com-
mittee on Interstate and Foreign Commerce, Hearings on H.R. 10065,
Investment Trusts and Investment Companies, 76th Cong.. 3d Sess.
124-125 (1940) (Statement of Mr. Schenker): Senate Committee on
Banking and Currency. Hearings on S. 3580, 76th Cong.. 3d Sess. 294
(1940) (Statement of Mr. Smith).
17
“to any extent whatever,” in the business of commercial
banking. 12 U.S.C. §378(a)(1) (1976) (emphasis sup-
plied ).
Moreover, Congress attempted to preclude banks
from casually evading the Glass-Steagall Act by estab-
lishing stringent penalties against the use of affiliates by
banks to engage in activities forbidden to banks them-
selves. Section 20 of the Act authorizes the imposition of
fines against. and the divestiture of the rights of, com-
mercial banks that affiliate “in any manner” with com-
panies principally engaged in the distribution or “public
sale” of securities:32 the term “affiliate,” in turn, is broadly
defined in Section 2(b) of the Glass-Steagall Act to
include any direct or indirect control relationship or com-
mon ownership between a bank and a securities firm.39
To avoid the improper conflicts of interest that Con-
gress found inevitably arise from the combination of
commercial banking and the securities business, Section
32 of the Glass-Steagall Act, 12 U.S.C. §78 (1976). also
prohibits any “*{i]nterlocking managements between na-
tional or state member banks and securities firms.”34
Finally, Section 19 of the Act, prior to its repeal in 1966.
precluded a bank holding company from voting its stock
in a bank if it had “any [ownership] interest in,” or was
“participating” in the management of, a “securities com-
pany.”35 As this Court has noted in the context of a
32 12 U.S.C. §377 (1976) (emphasis supplied ).
33 As defined. the term affiliate includes “any corpo-
ration... [or] similar organization” which is a holding company of a
member bank, 12 U.S.C. §221a(b)(4) (1976) (emphasis supplied ).
or which ts a subsidiary of a company which owns a member bank, 12
U.S.C. §221a(b)(2) (1976).
34 Pet. App. 18a-19a.
35 48 Stat. 186 (repealed 1966).
18
companion regulatory scheme, each of “[t]hese proscrip-
tions... are broad and, by repeated use of the word ‘any,’
are obviously meant to be inciusive.”’36
In addition to the plain meaning of these statutory
provisions, each must be interpreted bearing in mind
Congress’ overall purpose in enacting the Glass-Steagall
Act—to separate commercial banking from the securities
business. See Investment Company Institute v. Camp,
supra, 401 U.S. at 629-630. As this Court there pointed
out:
“{I]n 1908 banks began the practice of estab-
lishing security affiliates that engaged in, inter alia,
the business of floating bond issues... . The Glass-
Steagall Act confirmed that national banks could
not engage in investment banking directly, and in
addition made affiliation with an organization so
engaged illegal. One effect of the Act was to abolish
the security affiliates of commercial banks.”37
It is apparent from the legislative history of the Act
why Congress felt that the “drastic step” of abolishing
36 Affiliated Ute Citizens v. United States, 406 U.S. 128, 151.
rehearing denied, 408 U.S. 931 (1972). See also, United States v.
Naftalin, 441 U.S. 768, 773 (1979).
37 401 U.S. at 629 (emphasis supplied; footnote omitted). One
of the types of securities affiliates abolished by the Act was affiliated
investment companies. In its 1939 study of investment companies, the
Securities and Exchange Commission reported to Congress that the
Glass-Steagall Act had achieved its objective of precluding bank
sponsorship of closed-end investment companies, which were the only
type of investment company sponsored by commercial banks or their
securities affiliates. This abolition was cited by the Commission as one
of the “most striking changes in the sponsorship of closed-end
companies” between 1929 and 1935. Securities and Exchange
Commission, Report on Investment Trusts and Investment Companies,
Pt. 2, H.R. Doc. No. 70, 76th Cong., Ist Sess. 59, 124 (Table 25)
(1939) (emphasis supplied ).
19
bank securities affiliates was necessary (401 U.S. at 629).
Not only had there been bank failures attributable to the
activities of bank securities affiliates, but Congress ‘was
[also] concerned that commercial banks in general and
member banks of the Federal Reserve System in particu-
lar had both aggravated and been damaged by stock
market decline[s] partly because of their direct and
indirect involvement in the trading and ownership of
speculative securities.”38 As noted during the Congres-
sional debates on the Glass-Steagall Act, “*[t]he numerous
sections of [the Act] are interrelated with a single pur-
pose...to sweep away the whole machinery of the in-
vestment business of member banks... .”’39
In the face of the language of the various provisions
of the Glass-Steagall Act described above, the statute’s
legislative history, and this Court’s unambiguous construc-
tion of the Act in Camp—all evidencing an intent by
Congress to prohibit banks from any affiliation with
entities engaged in the securities business—the Board
argues (Br. 19-30) that Section 20 of the Glass-Steagall
Act somehow “permits” banks to sponsor closed-end
funds through securities affiliates. The board’s argument
is unavailing.
To begin with, Section 20 contains no affirmative
grant of authority or permission for banks to do anything,
much less for banks to establish affiliates that will serve as
advisers to closed-end investment companies. But, Sec-
tions 16, 20, 21, and 32, and former Section 19, of the
38 Investment Company Institute v. Camp, supra, 401 U.S. at 630
(emphasis supplied; footnote omitted ); S. Rep. No. 77, 73d Cong., Ist
Sess. 10 (1933).
3976 Cong. Rec. 1412 (1933) (Remarks of Sen. Metcalf)
(emphasis supplied ). Accord, Investment Company Institute v. Camp,
supra, 401 U.S. at 625-626 n. 12.
20
Glass-Steagall Act, taken together, as we have seen,
prohibit banks directly or indirectly from sponsoring or
serving as investment advisers to such investment com-
panies. Moreover, the Board’s construction of Section 20
conveniently, and understandably, ignores the plain
meaning of the statute; Section 20 established severe civil
penalties for bank affiliations with companies principally
engaged in certain facets of the securities business, in-
cluding those engaged in the “public sale” of “stocks,
bonds, debentures, notes, or other securities ....” By
statute, Congress defined both closed-end and open-end
investment companies as being engaged in the business of
publicly selling and buying securities.4°
In any event, this Court has already rejected the
equivalent of the Board’s current interpretation of the
meaning of Section 20, in Investment Company Institute v.
Camp, supra, 401 U.S. at 625-626 n. 12; there, the Court
endorsed the Board’s former interpretation (apparently
now abandoned to comport with the Board’s current
litigation strategies) that a separately-structured in-
vestment company and its affiliated bank sponsor must be
treated as a “single entity” for a// purposes under the
Glass-Steagall Act.41 As this Court concluded, “there is
no danger that to characterize the bank and its fund as a
single entity will disserve the purpose of Congress.” Jd.
Unfortunately, as this case illustrates, there is every dan-
ger that the Board’s shifted posture would, indeed, ‘‘dis-
serve” and distort “the purpose of Congress.”
40 In Camp, this Court noted that the term “public sale,” used in
both Sections 20 and 32 of the Glass-Steagall Act, encompasses the
same activities included within the purview of the proscription, in
Section 21 of the Act, against the “selling” of securities by banks. 401
U.S. at 625-626 n. 12.
41401 U.S. at 625-626 n. 12. citing 12 CFR §218.111 (1970).
21
3. The Bank Holding Company Act Reinforces
the Prohibitions of the Glass-Steagall Act.
As we have seen, the Glass-Steagall Act prohibits
national and state member banks from directly or in-
directly creating. operating, controlling or managing any
investment company, and from being affiliated in any way
with any entity that does. In this case, of course, the
Board has authorized bank holding company affiliates of
banks to serve as a vehicle for circumventing these
proscriptions against the union of investment and com-
mercial banking. The Board’s rule and regulation are
valid. therefore. only if the Bank Holding Company
Act—pursuant to which the Board purported to
act—authorizes the Board to override the express stric-
tures of the Glass-Steagall Act. As we discuss below,
however, the Bank Holding Company Act contains no
such: authorization.
At the outset, it is significant to bear in mind that a
principal purpose underlying the addition of the Bank
Holding Company Act in 1956 was to supplement and
strengthen the Glass-Steagall Act, not to circumvent it.42
Through the amendments to the Bank Holding Company
Act in 1966 and 1970. Congress’ essential purpose re-
mained unchanged, as the Board concedes.43
42S. Rep. No. 1095, 84th Cong.. 2d Sess. 2. reprinted in | 1956]
U.S. Code Cong. & Ad. News 2482, 2483.
43 See 12 CFR §225.125(b) (1980). And see, e.g.. S. Rep. No.
1179, 89th Cong.. 2d Sess. 2. reprinted in | 1966] U.S. Code Cong. &
Ad. News 2385, 2386 (a purpose of the Bank Holding Company Act
is to apply to bank holding companies “the general purposes of the
Glass-Steagall Act of 1933"): S. Rep. No. 1084, 91st Cong., 2d Sess.
24, reprinted in [1970] U.S. Cong. & Ad. News 5519, 5541 (defini-
tion of “bank” in Bank Holding Company Act designed to exclude
institutions not engaged in commercial banking); House Committee
on Banking and Currency, Hearings on H.R. 6778, 91st Cong., Ist
Sess. 205 (1969) (J. Robertson, Board Vice-Chairman) (“When
Congress has clearly limited the powers of banks, they should not be
permitted to circumvent such limitations either through subsidiary
corporations or through affiliation in a holding company system.”).
22
Thus, consistent with the Glass-Steagall Act, Section
4(a) of the Bank Holding Company Act, 12 U.S.C.
§1843(a) (1976), broadly prohibits bank holding com-
panies from (1) owning the shares of any company that is
neither a bank nor a bank holding company, and (11)
engaging In any activities other than banking or managing
a bank. Section 4(c)(8) of the Bank Holding Company
Act, 12 U.S.C. §1843(c)(8) (1976), the principal reed
upon which the Board’s contested rule-making was predi-
cated, effects a limited exception from these prohibitions
for a bank holding company’s ownership of the shares of a
company the activities of which are “‘so closely related to
banking... as to be a proper incident thereto.” (Emphasis
supplied ).
On its face. Section 4(c)(8) contains no authority
empowering the Board to override the Glass-Steagall Act.
or to encourage bank holding companies to engage in the
securities business. This is not surprising. since Congress
can hardly have been expected to eviscerate the effects of
legislation it was attempting to strengthen.44 Moreover.
the significance of this omission 1s confirmed by the plain
language of Section 4(c)(8). which indicates that two
distinct tests must be satisfied before the Board may
exercise the limited authority it has been given to sanction
bank holding company activities other than banking or
managing a bank—the activity must be “‘closely related”
to banking. and it must be a “proper incident” to bank-
ing.45
44 See. S. Rep. No. 1179, supra, at 2: House Committee on
Banking and Currency. Hearings on H.R. 6778, supra, at 13, 205-207
(Remarks of Prof. Berle and Board Vice-Chairman Robertson ).
45H.R. Rep. No. 1747, 91st Cong., 2d Sess. 19-21, reprinted in
[1970] U.S. Code Cong. & Ad. News 5519, 5572-5573. This two-
tiered test “has been adopted and endorsed by every circuit to
consider the question.” See Ass'n of Bank Travel Bureaus, Inc. v.
Board of Governors, supra, 568 F.2d at 552, and cases cited therein.
23
But where, as we have seen, Congress expressly made
it unlawful for national or state member banks to or-
ganize, sponsor, or manage any investment company, it
can neither be “banking,” nor “closely related to bank-
ing,” nor a “proper incident” of banking, for banks to
avoid these legal constrictions by utilizing nonbank sister
companies to organize, sponsor or manage investment
companies.
The Board conceded as much itself, in its testimony
supporting the 1970 amendments to the Bank Holding
Company Act. Then, the agency expressed “deep con-
cern” about the “unchecked” increase of one-bank hold-
ing companies, because “*bank holding companies should
be congenerics, not conglomerates.” Indeed, the Board
acknowledged that the Bank Holding Company Act “‘lim-
ited,” rather than expanded, the activities of bank holding
companies, and “unanimously” concluded then, as the
court below does now, that the Bank Holding Company
Act “reinforced” the Glass-Steagall Act’s “essential” func-
tion of “separating banking and commerce ... .”°4®
The Board’s contrary assertion now—that the Bank
Holding Company Act somehow authorizes banks to do
indirectly what it is unlawful or improper for banks to do
directly—not only flies in the face of the statute, it also
proves too much. If the Board’s position were cor-
rect—which it is not—the Board presumably could au-
thorize banks to sponsor a whole range of securities
enterprises, such as brokerage firms, or open-end in-
vestment companies, through the vehicle of nonbank sister
46 House Committee on Banking and Currency, Hearings on H.R.
6778, supra at 196 (Statement of W. McChesney Martin, Jr., Board
Chairman) (emphasis supplied ).
24
affiliates, a result that would emasculate the very fiber and
structure of the Glass-Steagall Act.47
In short, if an activity is forbidden to a national or
state member bank, it impermissibly exalts form over
substance to argue, as the Board does, that Congress
intended the same activity to be “closely related” to
banking;48 and, it strains credulity even more to suppose
47 The Board argues in its brief ( Br. 55) that investment advisory
services are “closely related” to banking because “bank trust depart-
ments have traditionally organized and managed large collective
investment funds such as common trust funds. . . .” As this Court
has pointed out, however, while it is not improper for a bank “to pool
trust assets, Or to act as a managing agent for individual customers, or
to purchase stock for the account of its customers... the union of
these powers gives birth to [an activity] of a different character.”
Investment Company Institute v. Camp, supra, 401 U.S. at 625. The
first three enumerated activities are, as the Board notes (Br. 55),
“conventional fiduciary services”; the last, combined activity, how-
ever, is one that is not only not “related to banking.” but one which is
forbidden to banks. The Board’s articulated test is doubly pernicious,
however, since it is also a “conventional fiduciary activity” for a bank
to purchase and sell securities for the account of a customer as an
accommodation service, and the Board's test, if applied as articulated,
could permit a bank holding company affiliate to hold itself out to the
public as a securities broker. It cannot be gainsaid that banks are
prohibited from engaging in such a business, which, perforce, cannot
be “closely related” to banking.
48 An activity is “closely related” to banking if “banks generally
have in fact provided the proposed service,” or the services are so
inseparably related or similar to the services banks perform that they
can only be provided in a specialized form by banks. Nat'l Courier
Ass'n v. Board of Governors, supra, 516 F.2d at 1237 (emphasis
supplied ); NCNB Corp. v. Board of Governors, 599 F.2d 609, 613
(C.A. 4, 1979). As this Court indicated in Mitchell v. H. B. Zachry
Co., 362 U.S. 310, 319 (1960), the term “closely related,” when used
in other statutory schemes, implies elements of both necessity and
close proximity. Since the enactment of the Glass-Steagall Act, banks
have not sponsored closed-end funds (Securities and Exchange
Commission, Report on Investment Trusts and Investment Companies,
supra, pt. 2, p. 59; Br. for respondent at 72-73, citing, Weisenberger,
Investment Companies Service; under the circumstances, bank
sponsorship of closed-end funds cannot satisfy the stringent elements
of the “closely related” test.
25
that a forbidden activity can be a “proper” incident of
banking if pursued through a wholly-controlled or affil-
lated sister company.49 Not surprisingly, the Board cites
no authority for such a proposition.5°
C. Relevant Policy Considerations Confirm that
Bank Holding Companies May Not Organize,
Sponsor, or Manage Closed-End Investment
Companies
In Investment Company Institute v. Camp, supra, 401
U.S. at 630, this Court noted that the “legislative history
of the Glass-Steagall Act shows that Congress... had in
mind and repeatedly focused on the more subtle hazards
that arise when a commercial bank...enters the in-
vestment banking business either directly or by estab-
lishing an affiliate to hold and sell particular in-
49An activity that violates one provision of law cannot be
deemed to be a “proper” activity in which a bank holding company
may engage under federal banking law. Cf. Independent Bankers
Ass'n v. Board of Governors, 516 F.2d 1206, 1222 (C.A. D.C.. 1975).
50 The Board argues ( Br. 57) that /¢ can evaluate whether, in the
case of any particular application to sponsor a closed-end fund, the
grant of that application can be expected to produce public benefits
that outweigh such potential adverse effects as “undue concentration
of resources, decreased or unfair competition, or unsound banking
practices.” But, this argument ignores the fact that. where the
securities business is concerned. considerations of “competition, con-
venience, and expertise” are irrelevant, even where a convincing
argument can be made in support of allowing commercial banks to
engage in such activities. Jnvestment Company Institute v. Camp,
supra, 401 U.S. at 636.
26
vestments.’’5! After assessing the operation of investment
companies by banks in the light of these evils, this Court
there concluded that “[t]hose same hazards are clearly
present when a bank undertakes to operate an investment
fund.” Jd. at 636 (emphasis supplied ).
Although the plain meaning of the Glass-Steagall Act
and the Bank Holding Company Act evidences Congress’
intent to bar bank holding companies from serving as
investment advisers to closed-end investment companies,
and makes resort to the legislative history of the banking
statutes unnecessary, a review of the “subtle” dangers the
Glass-Steagall Act sought to avert confirms the plain
meaning, and applicability. of the statute here, and dem-
onstrates why the Board’s regulation and interpretive
ruling are inadequate to assure against a repetition of the
abuses that led to the adoption of this federal banking
legislation.
There can be no dispute, and the Board here con-
cedes (Br. 31-32). that the “conflicts of interest and
unsound banking practices of the kind” discussed in
Camp, and which the Congress sought to proscribe by
51 Among other things, the Glass-Steagall Act reflected Congress’
express concern that: (1) the close affiliation between banks and their
securities affiliates might lead to a loss of public confidence in the
bank if the fortunes of the securities affiliate flagged; (11) banks might
attempt to shore up their securities affiliates through unsound and
unsafe lending and credit practices: (iii) banks might be inclined to
lend their good names to the sales efforts of their securities affiliates;
(iv) banks might attempt to spur sales by improperly lending
customers funds to invest in securities being sold by bank securities
affiliates; (v) a conflict might arise between the promotional in-
centives of the bank and its securities affiliate. and the need for the
bank to render disinterested investment advice to its loan customers:
and (vi) the bank securities affiliates might utilize bank trust depart-
ments to unload excessive or undesirable securities holdings. /n-
vestment Company Institute v. Camp, supra, 401 U.S. at 629-634.
27
adopting the Glass-Steagall Act, may be engendered when
bank holding companies act as investment advisers to
closed-end investment companies. This concession is
compelling confirmation of the need for the application of
the Glass-Steagall Act here. Jnvestment Company Institute
v. Camp, supra, 401 U.S. at 629-636.
Moreover, the force and impact of the Board’s con-
cession 1s, if anything, heightened by the Board’s response
to these potential “conflicts of interest and unsound
banking practices.”” Rather than accept Congress’
determination that any affiliations between the banking
and securities industries be prohibited outright, the Board
arrogated to itself the power to override Congress’ man-
date, and adopted a handful of inneffectual, and legally
irrelevant, “safeguards” (Br. 31) to restrict some (but by
no means all) of the more blatant “conflicts of interest
and unsound banking practices.”52
52 The Board’s interpretative ruling does nothing to prevent a
bank holding company or its bank and nonbank subsidiaries from
aggressively promoting the securities in the advisee’s portfolio, or
from making unsound loans to those companies. For example, the
Board’s “safeguards” do not protect against imprudent securities
investments or lending by bank subsidiaries to those companies whose
securities the subsidiary investment company has purchased, and the
consequential risk to bank assets. The Board did nothing to prohibit
bank subsidiaries from selectively denying credit to competitors of
companies whose securities the fund owns. Moreover, the Board did
not prohibit a bank subsidiary from using its reputation to recommend
or promote particular stocks and securities in the investment com-
pany’s portfolio. or from making loans to customers to facilitate the
purchase of such securities. Nor did the Board prohibit a subsidiary
bank from disclosing confidential information about its customers to
its affiliated investment adviser. Finally, the Board’s ruling would
permit a bank to use its resources to achieve the kind of centralized
economic power that Congress sought to prevent. The presence of any
one of these significant problems would be sufficient reason for this
Court to affirm the decision of the court below.
28
But, had Congress sought to authorize the bank
regulatory agencies to attempt to develop, in an ad hoc
fashion, “safeguards” that might (or might not) be
sufficient to prevent the abuses with which Congress was
“concerned, there would be no need now to imply such a
remedy: Congress surely knew how to create one ex-
pressly.53 The fact that Congress did not vest the Board
with such express powers leaves the Board’s interpretive
release without any predicate in law or policy for attemp-
ting to condone illegal conduct by mildly restricting some
of the ways in which that illegal conduct can be per-
petrated.54
53 See. e.g.. Touche Ross & Co. v. Redington, supra, 442 U.S. at
5372: Blue Chip Stamps v. Manor Drug Stores, supra, 42\ U.S. at 734.
54 The Board lamely responds (Br. 57) to the court of appeals’
conclusion that the same speculative abuses discussed in Camp could
arise here. by complaining that *[t]he court does not explain why the
commercial department of a bank would behave in this way.” But.
the fact is that “Congress feared that banks might even go so far as to
make unsound loans” to companies in which their affiliates had
invested. Javestment Company Institute v. Camp, supra, 401 U.S. at
631 (emphasis supplied). We doubt that the court of appeals owes
the Board any further explanation of the rather obvious possibilities
for abusive conduct in this area: but. in any event, this Court. in citing
the same abuses in J/nvestment Company Institute vy. Camp. supra,
surely provided a full and adequate explanation.
29
CONCLUSION
When Congress enacted the Glass-Steagall Act, it
intended to, and did, separate commercial banking from
the securities business. Despite this clear mandate, the
bank regulatory agencies have repeatedly attempted to
encourage or permit banks to encroach into areas of the
securities business which the law clearly prohibits. The
court below acknowledged this fact and adhered to its
clear duty to confine banks to their legitimate activities by
declaring the Board’s regulations and interpretive ruling
invalid. For all of the foregoing reasons, this Court should
affirm the judgment of the court below.
Respectfully submitted,
Harvey L. Pitt
JAMES H. SCHROPP
KAREN A. BLEIWEISS
FRIED, FRANK, HARRIS,
SHRIVER & KAMPELMAN
600 New Hampshire
Avenue, N.W.
Washington, D.C. 20037
(202) 342-3703
RANDY A. HARRIS
General Counsel
A. G. BECKER INCORPORATED
2 First National Plaza
Chicago, Illinois 60603
(312) 630-5000
Of Counsel
July 1980
APPENDIX
A-|
ARNOLD & PORTER
1229 NINETEENTH STREET, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: ( 202) 872-6704)
CABLE: “ARFOPO™
TELEX: 89-2733
June 26, 1980
HarRVEY L. Pitt, ESQUIRE
FRIED, FRANK, HARRIS, SHRIVER
& KAMPELMAN
600 New Hampshire Avenue, N.W.
Washington, D.C. 20037
Re: Board of Governors of the
Federal Reserve System v.
Investment Company Institute
Dear Mr. Pitt:
] hereby consent on behalf of the Investment Company
Institute to your filing an amicus brief in the Supreme Court on
behalf of A.G. Becker, Incorporated in the case of Board of
Governors of the Federal Reserve System v. Investment Company
Institute.
Sincerely,
G. DUANE VIETH
A-2
United States Department of Justice
Office of the Solicitor General
Washington, D.C. 20530
May 5, 1980
JAMES H. SCHROPP, ESQUIRE
FRIED, FRANK, HARRIS, SHRIVER
& KAMPELMAN
Suite 1000
600 New Hampshire Avenue, N.W.
Washington, D.C. 20037
Re: Board of Governors of the Federal Reserve
System: v. Investment Company Institute,
No. 79-927
Dear Mr. Schropp:
In response to your letter of April 29, 1980, I hereby
consent, on behalf of the petitioner, to the filing of a brief
amicus curiae on behalf of A. G. Becker Incorporated in this
case.
Sincerely yours,
WabDeE H. McCRreEE, Jr.
Solicitor General
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.