Appendix — Securities Industry Ass'n v. Board of Governors of the Federal Reserve System
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: ta Te WiieeRunrene Court US
86-1429) FR
——_———
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4
Supreme Court of the United States
OCTOBER TERM, 1986
~~
SECURITIES INDUSTRY ASSOCIATION,
Petitioner,
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, ef al.,
Respondents.
APPENDIX TO PETITION FOR WRIT OF
CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE
DISTRICT OF COLUMBIA CIRCUIT
Of Counsel:
William J. Fitzpatrick
Securities Industry
Association
120 Broadway
New York, New York 10271
(212) 608-1500
Donald J. Crawford
Securities Industry
Association
1850 M Street, N.W.
Washington, D.C. 20036
(202) 296-9410
James B. Weidner
(Counsel of Record)
David A. Schulz
Mark Holland
Peter Kimm, Jr.
ROGERS & WELLS
200 Park Avenue
New York, New York 10166
(212) 878-8000
Attorneys for Petitioner
Securities Industry
Association
B BEST AVA
TABLE OF CONTENTS
Opinion of the United States Court of Appeals for the
District of Columbia Circuit in Securities Industry
Association v. Board of Governors of the Federal
Reserve System, et al., 807 F.2d 1052 (D.C. Cir. 1986)
Order of the United States Court of Appeals for the
District of Columbia Circuit extending the stay of the
District Court injunction until further order of the
court in Securities Industry Association v. Board of
Governors of the Federal Reserve System, et al., dated
PEE Des 84 ee a EE ee rea Na tates
Order of the United States Court of Appeals for the
District of Columbia Circuit staying the District Court
injunction until April 15, 1986 and establishing a
briefing schedule in Securities Industry Association v.
Board of Governors of the Federal Reserve System, et
ee a ae
Opinion of the United States District Court for the
District of Columbia in Securities Industry Associa-
tion v. Board of Governors of the Federal Reserve
System, et al., 628 F. Supp. 1438 (D.D.C. 1986).....
Opinion of the United States District Court for the
District of Columbia in Securities Industry Associa-
tion v. Board of Governors of the Federal Reserve
System, et al., 627 F. Supp. 695 (D.D.C. 1986)......
Federal Reserve System, Press Release and Statement
Concerning Applicability of the Glass-Steagall Act to
the Commercial Paper Placement Activities of Bank-
ers Trust Company, dated June 4, 1985 ............
PAGE
la
32a
33a
35a
4Sa
76a
il
PAGE
Order of the United States District Court for the District
of Columbia remanding the case to the Board for
further proceedings in A.G. Becker Incorporated v. .
Board of Governors of the Federal Reserve System, et
al., dutea Qessber YS, VOGS 6. oi occa ncceeecweneness 112a
Order of the United States Court of Appeals for the
District of Columbia Circuit remanding the case to the
District Court for further proceedings consistent with
the June 28, 1984 opinion of the Supreme Court in A.
G. Becker Incorporated v. Board of Governors of the
Federal Reserve System, et. al., dated August 6, 1984 11Sa
Opinion of the United States Supreme Court in Securi-
ties Industry Association v. Board of Governors of
the Federal Reserve System, et al., 468 U.S. 137 (1984) 117a
Opinion of the United States Court of Appeals for the
District of Columbia Circuit in A.G. Becker Incorpor-
ated v. Board of Governors of the Federal Reserve
System, et al., 693 F.2d 136 (D.C. Cir. 1982)........ 163a
Opinion of the United States District Court for the
District of Columbia in A.G. Becker Incorporated v.
Board of Governors of the Federal Reserve System, et
al., $19 F. Supp. 602 (9.30. Bi acs cickcdaen- cs 202a
Federal Reserve System, Policy Statement Concerning
the Sale of Third-Party Commercial Paper By State
Member Banks, 46 Fed. Reg. 2933 (May 26, 1981)... 228a
Federal Reserve System, Statement Regarding Petitions
to Initiate Enforcement Action, dated September 26,
ere ee ne a ee 235a
Judgment of the United States Court of Appeals for the
District of Columbia Circuit in Securities Industry
Association v. Board of Governors of the Federal
Reserve System, et al., dated December 23, 1986 .... 257a
BEST AVAILABLE
la
Opinion of the Court of Appeals,
December 23, 1986
UNITED STATES COURT OF APPEALS
FOR THE DiSTRICT OF COLUMBIA CIRCUIT
a oe
No. 86-5089
SECURITIES INDUSTRY ASSOCIATION
—_—vV.—
THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, et al.
BANKERS TRUST COMPANY, APPELLANT
—
No. 86-5090
SECURITIES INDUSTRY ASSOCIATION
—_V.—
THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, ef al.
BANKERS TRUST COMPANY, APPELLANT
i
No. 86-5091
SECURITIES INDUSTRY ASSOCIATION
—_—vV.—
THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, et al.
BANKERS TRUST COMPANY, APPELLANT
oll
2a
No. 86-5139
SECURITIES INDUSTRY ASSOCIATION
—_V.—
THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, ef a/., APPELLANTS
BANKERS TRUST COMPANY
i
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
(Civil Action No. 80-2730)
a
Argued April 4, 1986
Decided December 23, 1986
+
Richard M. Ashton, Attorney, Board of Governors of the
Federal Reserve System, with whom Richard K. Willard,
Assistant Attorney General, Anthony J. Steinmeyer, Nicholas
S. Zeppos, Attorneys, Department of Justice, Robert M.
Kimmitt, General Counsel, Department of Treasury and
Richard V. Fitzgerald, Chief Counsel, Office of Comptroller of
the Currency were on the brief for appellants, Board of
Governors of the Federal Reserve System, ef a/. in No. 86-
5139.
Paul L. Friedman, with whom John W. Barnum, Laura B.
Hoguet and James D. Miller were on the brief for appellant,
Bankers Trust Company in Nos. 86-5089, 86-5090 and 86-5091.
James B. Weidner, with whom David A. Schulz was on the
brief for appellee in Nos. 86-5089, 86-5090, 86-5091 and 86-
5139.
3a
Paul Blankenstein was on the brief for amicus curiae,
Marine Midland Bank, N.A., urging reversal.
Robert S. Rifkind was on the brief for amici curiae, New
York Clearing House Association and California Bankers
Clearing House Association, urging reversal.
Leonard H. Becker and Daniel I. Prywes were on the brief
for amicus curiae, Goldman, Sachs & Co., urging affirmance.
John J. Gill, II] and Michael F. Crotty were on the brief for
amicus curiae, American Bankers Association, urging reversal.
Michael S. Hefler, Richard F. Goodstein, Henry T. Rathbun
and Arnold M. Lerman were on the brief for amicus curiae,
Dealer Bank Association, urging reversal. Ronald J. Greene
and Kerry W. Kircher entered appearances for amicus curiae,
Dealer Bank Association.
Linda Chatman Thompson was on the brief for amicus
curiae, Morgan Guaranty Trust Company of New York, urging
reversal.
Harvey L. Pitt, Henry A. Hubschma* and David M. Miles
were on the brief for amicus curiae, Investment Company
Institute, urging affirmance.
Before:
MIKVA, EDWARDS and BORK,
; Circuit Judges.
oe
Opinion for the Court filed by Circuit Judge BORK.
as
4a
BORK, Circuit Judge:
This is an appeal from an order of the district court invali-
dating under the Glass-Steagall Act a decision of appellant
Board of Governors of the Federal Reserve System that per-
mitted appellant Bankers Trust Company, a state-chartered
commercial bank and a member of the Federal Reserve Sys-
tem, to place commercial paper issued by third parties. The
Act prohibits commercial banks from engaging in investment
banking. The Board of Governors determined that Bankers
Trust’s activities did not cross the line into investment banking,
but the district court concluded that they did. After consider-
ing the language and history of the Act and the applicable case
law, we reverse the judgment of the district court and reinstate
the Board’s decision.
“Commercial paper” comprises unsecured, large denomina-
tion promissory notes written with maturities of less than nine
months to supply the current capital needs of corporate issuers.
In privately negotiated transactions, issuers typically place
commercial paper with large, financially sophisticated institu-
tional investors (such as insurance companies or pension
funds).
Bankers Trust acts as an advisor and agent to commercial
paper issuers by advising each issuer of the interest rates and
maturities that institutional investors are likely to accept, by
soliciting prospective purchasers for commercial paper the
client decides to issue, and by placing the issue with the
purchasers. Bankers Trust does not make any general adver-
tisement or solicitation regarding any issue it is seeking to
place, and does not place any issues with individuals or the
general public.
Bankers Trust receives a commission for its services based
upon a percentage of the issuer’s total outstanding commercial
paper during a one-year period. To ensure that it acts solely as
an agent without an independent financial stake in the success
Sa
of issues it places, which would clearly involve it in investment
banking, Bankers Trust does not purchase or repurchase for its
own account, inventory overnight, or take any ownership
interest in any commercial paper it places. Nor does Bankers
Trust any longer make loans on or collateralize loans with the
paper it places (a practice it formerly followed when necessary
to remedy any deficiency in placement of an issue).
This appeal is the latest installment in a dispute that began in
1979 when the Securities Industry Association (“SIA”), a trade
association of underwriters, brokers, and securities dealers,
petitioned the Board of Governors for a ruling that it was
unlawful for Bankers Trust and other commercial banks to sell
commercial paper issued by unrelated entities. The Board ruled
against the SIA, but ultimately tlie Supreme Court, disagreeing
with the Board of Governors, held that commercial paper is
included within the category of “notes or other securities”
addressed by the Banking Act of 1933, commonly known as
the Glass-Steagall Act, and remanded the case for a determina-
tion of an unresolved issue: whether Bankers Trust’s placement
of commercial paper constituted the “underwriting” or “busi-
ness of issuing, underwriting, selling or distributing” that the
Act prohibits. Securities Indus. Ass’n v. Board of Governors.
of the Fed. Reserve Sys., 468 U.S. 137, 160 n.12 (1984) (S/A).
Upon remand, the Board of Governors found that Bankers
Trust’s placement of commercial paper constituted the “sell-
ing” of a security without recourse and solely upon the order
and for the account of customers, a practice permitted by
section 16 of the Act, 12 U.S.C. § 24 (Seventh) (1982). Federal
Reserve System, Statement Concerning Applicability of the
Glass-Steagall Act to the Commercial Paper Activities of
Bankers Trust Company (June 4, 1985) (“Board Statement”),
Joint Appendix (“J.A.”) at 195. The district court reviewed the
Board’s decision on the petition of the SIA and granted SIA
summary judgment, holding that Bankers Trust’s activities
involved the “underwriting” and “distributing” prohibited by
section 21(a)(1) of the Act, 12 U.S.C. § 378(a)(1) (1982).
Securities Indus. Ass’n v. Board of Governors of the Fed.
6a
Reserve Sys., 627 F. Supp. 695 (D.D.C. 1986). This appeal
followed.
Il.
In reviewing the Board’s decision, we owe the agency’s
determinat‘on “the greatest deference.” Board of Governors of
the Fed. Reserve Sys. v. Investment Co. Inst., 450 U.S. 46, 56
(1981) (ICI); accord Securities Indus. Ass’n v. Board of Gover-
nors of the Fed. Reserve Svs., 468 U.S. 207, 217 (1984)
(Schwab) (giving Board “substantial deference”); see also
Board of Governors of the Fed. Reserve Sys. v. Agnew, 329
U.S. 441, 450 (1947) (Rutledge, J., concurring) (“[The
Board’s} specialized experience gives [it] an advantage judges
cannot possibly have, not only in dealing with the problems
raised for [its] discretion by the system’s working, but also in
ascertaining the meaning Congress had in mind in prescribing
the standards by which [the Board] should administer it.”).
This principle is not contradicted by SJA, 468 U.S. at 143-44
(according only “little deference”), or Jnvestment Co. Inst. v.
Camp, 401 U.S. 617, 626-28 (1971) (Camp) (rejecting a defer-
ential approach).
In the latter cases, the agency :nvolved failed to present the
Court with anything to which to defer. In Camp, Justice
Stewart, writing for the majority, noted that “courts should
give great weight to any reasonable construction of a regula-
tory statute adopted by the agency charged with the enforce-
ment of that statute,” 401 U.S. at 626-27, but said the
“difficulty” was that the Comptroller of the Currency had
promulgated the challenged regulation “without opinion or
accompanying statement,” id. at 627. Without the benefit of
any “expressly articulated position at the administrative level,”
the Court refused to defer to the agency’s position, reasoning
that “[i]t is the administrative official and not appellate coun-
sel who possesses the expertise that can enlighten and rational-
ize the search for the meaning and intent of Congress.” Jd. at
627-28.
7a
In SIA, the Board had provided an opinion explaining its
view of whether commercial paper constituted “securities” for
purposes of the Glass-Steagall Act but failed to analyze the
legislative purposes behind the Act. Because of this omission,
the Court gave “little deference” to the Board’s position that
its interpretation ran afoul of none of the purposes of the Act.
468 U.S. at 143-44. The Court at the same time observed
generally that because “[t]he Board is the agency responsible
for federal regulation of the national banking system, . . . its
interpretation of a federal banking statute is entitled to sub-
stantial deference.” Jd. at 142.
In the present case, as in JCJ and Schwab, the Board has
comprehensively addressed the language, history, and purposes
of the Act that bear on whether commercial banks should be
able to place commercial paper. We consequently owe the
Board’s determination “substantial deference” or “significant
weight,” and we must look to Chevron U.S.A. Inc. v. NRDC,
467 U.S. 837 (1984), to guide our application of such principles
of review. See Investment Co. Inst. v. Conover, 790 F.2d 925,
932 (D.C. Cir. 1986). Since Congress has not clearly addressed
the question of whether activities such as those conducted by
Bankers Trust fall within the prohibitions of the Act, we must
examine whether the agency, in filling the statutory gap left by
Congress, has acted reasonably. Chevron, 467 U.S. at 843-45.
Ill.
The question in this case involves the interplay of sections 16
and 21 of the Glass-Steagall Act. These provisions implement .
what the Supreme Court has described as the Act’s “general
purpose of separating as completely as possible commercial
from investment banking,” /C/, 450 U.S. at 70. Section 16, 12
U.S.C. § 24 (Seventh) (1982), draws the line between permissi-
ble and impermissible activities for commercial banks, while
section 21(a)(1), 12 U.S.C. § 378(a)(1) (1982), draws this line
for investment banks. The Supreme Court has found that
“§ 16 and § 21 seek to draw the same line.” S/A, 468 U.S. at
149. The issue before us is whether the Board has reasonably
8a
determined that the activities of Bankers Trust do not cross
that line between commercial and investment banking.
Section 16 of the Act provides in relevant part that the
“business of dealing in securities and stock by [a commercial
bank] 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 [bank] shall not underwrite any issue of securities or
stock.” 12 U.S.C. § 24 (Seventh) (1982). Section 21(a)(1)
makes it “unlawful” 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, debentures, notes, or other securities, to engage at
the same time to any extent whatever in the business of
receiving deposits subiect to check or to repayment upon
presentation of a passbook, certificate of deposit, or
other evidence of debt, or upon request of the depositor.
12 U.S.C. § 378(a)(1) (1982). Because no one disputes that
Bankers Trust constitutes a commercial bank within the mean-
ing of these sections, we must determine, first, if the Board has
reasonably concluded that the commercial paper placement
activities of Bankers Trust fall within the permissive language
of section 16. To determine this, we must look at the question
of what the statute means by “underwrite,” for underwriting
not only triggers section 21’s prohibitions but also defeats
section 16’s permissive effect. We must, in contrast, address
the meaning of section 21’s terms “issuing, selling, or distribut-
ing” only if section 16 is inapplicable. In other words, section
21 cannot be read to prohibit what section 16 permits. See /C/,
450 U.S. at 63 (section 21 not intended to bar banking
practices permitted by section 16); see also United States v.
Menasche, 348 U.S. 528, 538-39 (1955) (rejecting an interpreta-
tion of a statutory provision that would nullify the effect of
another provision). Therefore, if we find that the Board acted
reasonably in concluding that section 16 permits Bankers
Trust’s activities, that is the end of our analysis.
9a
While this proposition seems obvious, SIA nonetheless ar-
gues that we must examine both the prohibitions of section 21
and the permissive phrase of section 16 to determine if the
Board has erred. SIA seeks to restrict the scope of section 16
by relying on language (added to section 21 in 1935) that
expressly refers to section 16 as an exception to section 21’s
restrictions, stating that “the provisions of this paragraph shall
not prohibit national banks or State banks from dealing in,
underwriting, purchasing, and selling investment securities, or
issuing securities, to the extent permitted to national banking
associations by the provisions of [section 16 of the Act].” 12
U.S.C. § 378(a)(1) (1982). SIA directs our attention to a
passage in the House Report accompanying the 1935 amend-
ments stating that this language was added to “make it clear
that [section 21] does not prohibit any financial institution or
private banker from engaging in the securities business to the
limited extent permitted to national banks under [section 16].”
H.R. Rep. No. 742, 74th Cong., Ist Sess. 16 (1935). The
Report goes on to say parenthetically that this provision
permits commercial banks to deal in or underwrite only certain
enumerated government obligations not at issue in this case.
Id. SIA has suggested that the overlap between sections 16 and
21 is restricted to this narrow context, and that we must affirm
the district court if we find, as SIA argues, that the language of
section 21 covers the transaction permitted by the Board in this
case.
SIA’s argument is wholly unpersuasive for several reasons.
First, the House Report said that the cross-reference to section
16 was being added to “make it clear” that commercial banks
could underwrite and deal in certain government obligations,
and the title of the relevant passage in that Report was
“Section 21 of the Banking Act Clarified.” H.R. Rep. No. 742,
supra, at 16. That this amendment sought merely to clarify the
relationship between section 16 and section 21 necessarily
implies that before the amendment the two provisions by their
own force had to be read together. Congress amended section
21 simply to leave no doubt of the need to read the two
sections harmoniously in a matter of particular congressional
——————S—e eee
10a
concern. Moreover, apart from this apparent purpose, the
sweeping and comprehensive language employed explicitly pro-
vides that any restriction on the activities of a commercial bank
that may arise because of the prohibitions of section 21 is
relieved insofar as the activity is permitted by section 16. This
unambiguous language controls our reading of the statute.
We reject SIA’s position for a second and independently
decisive reason.- H section 21 prohibited what section 16 explic-
itly permits, section 21 would render section 16’s permissive
language entirely nugatory—an absurd result. Section 16 al-
lows a commercial bank to sell securities “without recourse,
solely upon the order, and for the account of, customers, and
in no case for its own account.” Section 21, in sharp contrast,
flatly prohibits a commercial bank from “selling” securities. If
we permitted the restrictions of section 21 to control, the
“selling” of securities would be entirely proscribed, despite the
explicit permission contained in the statute. If, on the other
hand, we read section 16’s permissive provisions as an excep-
tion to section 21, the restriction on selling in section 21 would
retain its force for all activities not permitted by section 16. We
must therefore read section 21’s operative terms (issuing,
underwriting, selling, distributing) to exclude any activity sec-
tion 16 allows. (We discuss below the prohibition of underwri
ing by a commercial bank contained in section 16 itself.)
Finally, because the Supreme Court has stated that sections
16 and 21 “seek to draw the same line” between commercial
and investment banking, SJA, 468 U.S. at 149, those activities
of commercial banks that section 16 places on the acceptable
commercial banking side of the line cannot be placed by
section 21 on the impermissible investment banking side of the
line. Thus, if the Board reasonably found that section 16
permits Bankers Trust’s activities, our inquiry ends there.
IV.
We believe that the Board’s determination is reasonable. The
Board found that Bankers Trust’s activities {ll within section
16’s requirement that “[t]he business of dealing in securities
and stock by the [bank] shall be limited to purchasing and
lla
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 [bank] shall not underwrite any issue
of securities or stock.” 12 U.S.C. § 24 (Seventh) (1982). While
the district court did not dispute the Board’s finding that
Bankers Trust’s activities “fit neatly within the literal language
of section 16’s permissive phrase,” and relied instead on an
analysis of the legislative purposes of the Act to reverse the
Board’s holding, see Securities Indus. Ass’n v. Board of
Governors, 627 F. Supp. at 701-02, SIA vigorously disputes on
several grounds the conclusion that the bank’s activities come
within the permissive language of that section. We take up
these arguments in turn.
A.
SIA argues that section 16’s permissive language does not
apply to the activities of Bankers Trust because the section 16
exception applies only to “the business of dealing in securities
and stock,” while SIA asserts that the term “dealing” is
typically understood to encompass the purchasing-and selling
of securities only in the secondary trading market. In support
of this argument, SIA cites the definition of “dealer” con-
tained in the Securities Act of 1933. In fact, the Securities Act
undercuts SIA’s position by defining a “dealer” as “any person
who engages as agent, broker, or principal, in the business of
offering, buying, selling, or otherwise dealing or trading in
securities issued by another person,” without any exclusion of
the primary offering market. 15 U.S.C. § 77b(12) (1982).
Moreover, the so-called “dealer’s exemption” to registration of
securities under the Securities Act makes it clear that one may
be a dealer under that statute in both secondary and primary
markets. This exemption from registration, contained in sec-
tion 4(3) of the Securities Act, 15 U.S.C. § 77d(3) (1982),
applies to “transactions by a dealer (including an underwriter
no longer acting as an underwriter in respect of the security
involved in [the] transaction).” This language necessarily im-
plies that one may be a dealer—‘“in the business of offering,
buying, selling, or otherwise dealing or trading in securities” —
12a
and still act as an underwriter—one who unquestionably may
participate in the primary or new issue market. Congress’
ordinary understanding of “the business of dealing” clearly
was not restricted to secondary trading; SIA’s argument on this
point is unsupportable.
B.
SIA also contends that the Board erred in concluding that
the activities of Bankers Trust are “upon the order . . . of
. . customers,” claiming that Congress imposed this restric-
tion to make it clear that banks could perform the transactions
permitted by section 16 only as an accommodation to the
existing customers of the bank. In support of this proposition,
SIA relies most exclusively on the Supreme Court’s recent
opinion in Schwab, in which SIA unsuccessfully challenged a
bank holding company’s retail brokerage operations under
section 20 of the Glass-Steagall Act. See 12 U.S.C. § 377
(1982) (prohibiting bank affiliation with any firm “engaged
principally in the issue, flotation, underwriting, public sale, or
distribution” of securities). In approving the retail brokerage
operation, run by a non-bank affiliate of the bank holding
company as an accommodation to the affiliate’s customers, the
Court relied in part on the fact that section 16 “allows banks to
engage directly in the kind of [retail] brokerage activities at
issue here, to accommodate [their] customers.” 468 U.S. at
221. SIA suggests that this statement amounted to an interpre-
tation of section 16 requiring banks to provide securities
services under the relevant language only as an accommodation
to the bank’s preexisting customers. This argument misses the
mark. While the Court did state that section 16 permitted retail
brokerage as an accommodation to customers of the bank’s
other services, it specifically left open the question whether
such securities brokerage, if more broadly available, would still
satisfy that provision. Jd. at 219 n.20. Thus, the Court did not,
as we must, decide whether section 16 allows the placement of
securities only as an accommodation to existing customers of
other bank services.
l3a
While the meaning of “upon the order... of . . . cus-
tomers” is decidedly ambiguous, we defer, as Chevron re-
quires, to the Board’s reasonable conclusion that section 16
should not be given such a narrow reading. The Board below
correctly observed that “[n]othing in the literal terms of section
16 requires a preexisting customer relationship.” Board State-
ment at 16, J.A. at 210. According to SIA, however, the
legislative history makes it clear that Congress had such a
relationship in mind when it included the language “upon the
order, and for the account of, customers.” In support of its
thesis, SIA directs to us a remark in the committee reports that
the purpose of section 16 was to permit “[nJational banks to
purchase and sell investment securities for their customers to
the same extent as heretofore.” S. Rep. No. 77, 73d Cong., Ist
Sess. 16 (1933); H.R. Rep. No. 150, 73d Cong., Ist Sess. 3
(1933). Because the Supreme Court in Schwab stated that
“TbJanks long have arranged the purchase and sale of securities
as an accommodation to their customers,” and that section 16,
read in conjunction with the above-cited legislative history,
“expressly endorsed this traditional banking function,” 468
U.S. at 215, SIA contends that section 16 was intended only to
permit such services as had been traditionally performed as an
accommodation to preexisting customers of the bank.
SIA again reads too much into Schwab. Congress, in enact-
ing section 16, may well have intended to endorse traditional
banking services as they existed before 1933. This does not
mean, however, that section 16 permits the transactions cov-
ered by its language only to the extent that identical transac-
tions occurred prior to the enactment of Glass-Steagall. Since
nothing in the language or legislative history of section 16 even
remotely suggests that the Act meant to freeze particular
functions in place as of 1933, we decline to read that meaning
into the Act.
Moreover, the history of commercial banking shows that,
prior to the Glass-Steagall Act, banks offered the securities
brokerage services at stake in Schwab both to existing cus-
tomers and to persons with no preexisting relationship to the
banks. See Securities Indus. Ass’n v. Comptroller of the
l4da
Currency, 577 F. Supp. 252, 255 (D.D.C. 1983), aff’d per
curiam, 758 F.2d 739, 740 (D.C. Cir. 1985) (affirmed “gener-
ally for the reasons stated” by district court), cert. denied, 106
S. Ct. 790 (1986); see also Greenfield v. Clarence Sav. Bank, 5
S.W.2d 708, 708-09 (Mo. Ct. App. 1928) (transaction in which
plaintiff, having no account with the bank, “went there with
the sole purpose of purchasing bonds as an investment”);
Smith, Stock Market Service Comes High, Am. Bankers A.J.
965 (Apr. 1929) (bank will “buy and sell securities for its
customers and the public in general”). Thus, we may not
construe “upon the order. . . of . . . customers” to require a
preexisting relationship between the bank and the user of the
services permitted under section 16, since Congress intended
that language to ratify banking practices that served at least
some persons without any relationship to the bank except as
“customers” of the services permitted by section 16.
Despite the conclusion that section 16 requires no preexisting
customer relationship as a matter of law, we still must inquire
whether the Board reasonably concluded that Bankers Trust
places commercial paper solely on the order of the issuer. The
Board stated that “[A]ccording to Bankers Trust’s submission,
the issuer, not the bank, decides whether to raise funds by
issuing commercial paper and, if so, in what amount.” Board
Statement at 15-16, J.A. at 209-10. The Board concluded that
this meant that “the bank places commercial paper solely on
the request and on the order of its customer, the commercial
paper issuer.” Jd. at 18, J.A. at 212. SIA counters that the
banks solicits the business of issuers and gives financial advice
about the terms and timing of the potential issue of commer-
cial paper. Neither point upsets the Board’s conclusion.
SIA offers no support for its claim that Bankers Trust
recruits or solicits the business of issuers beyond the assertion
that the bank “touts” its placement services in advertisements. !
l SIA directs us to an advertisement in which Bankers Trust claims
credit for “initiat{ing]” an issuer’s commercial paper placement program to
show that the bank’s placement activities are not solely upon the order of
customers. SIA may not seek by this proffer of facts not before the Board to
refute the Board’s factual premise that the issuer decides whether and in what
ee
lSa
“Touting” is not enough to render the Board’s conclusion
unreasonable. Although the bank may generally solicit cus-
tomers for its placement services by making it known that such
services are available, either in the so-called “tombstone ads”
or in more general advertisements (for example, “What do you
get when you combine an investment bank with a commercial
bank? Bankers Trust Company”), any given placement of
commercial papers still takes place solely on the order of the
customer. We illustrate by analogy. The Supreme Court in
Schwab stated that section 16 permitted banks to engage in
retail brokerage operations at least to their own customers.
Even if we assume that a bank makes its retail brokerage
operations available only to its depositors, it still must find
some way to let them know that these services are available. It
would strain credulity to assert that the circulation of a
brochure or the running of an advertisement to publicize the
availability of these services would mean that the brokerage
services performed are now barred since no longer performed
solely upon the order of the customer.
amount to raise funds by offering commercial paper. While the case comes to
us On a review of a grant of summary judgment in which the district court
relied on facts, like the foregoing, that were not before the Board, such
reliance was improper. The question before us is whether, upon the facts
supplied to the Board by Bankers Trust or by the Board’s own assumptions,
the Board reasonably determined the applicability of the relevant provisions
of the Glass-Steagall Act. To the extent that the parties attempt to introduce
new facts not before the Board, they mistake the function and scope of our
review. Even if the facts upon which the Board relied are not accurate, this
does not affect our review of the Board’s decision; any inaccuracy will
properly be remedied by the Board’s enforcement of the Act on the facts that
exist at that point.
Moreover, even if Bankers Trust did “initiate” the particular issuer’s
commercial paper program, as stated in the advertisement, it is not at all
clear that this would defeat the exemption. If the customer decided to inquire
about commercial paper and, on a rational assessment of the facts and advice
supplied by the bank, decided to place successive issues of paper using
Bankers Trust as its agent, the sale of those issues would still be solely upon
the order of the issuer, even though Bankers Trust might fairly claim that as
advisor and agent, it “initiated” the program.
l6a
Nor ars we convinced that the rendering of financial advice
itself removes Bankers Trust’s placements from the category of
transactions made solely upon the order of customers. Nothing
in section 16 suggests that the bank may not advise issuers who
have decided that they may or do want to raise money by
issuing commercial paper. If a customer asks the advice of
Bankers Trust but makes it own decision about whether and in
what amount to issue commercial paper, the transaction is
made solely on the order of that customer. Consider, by
contrast, a case in which an investment bank decides that the
market if favorable to the refinancing of a bond issue or the
conversion of debt to equity and initiates discussions with its
customer leading up to the eventual transaction. In such a
situation, the initiative of the investment banker itself creates
the very demand for the particular transaction. This is a far cry
from the type of passive advice that Bankers Trust renders
after the issuer has decided that it needs to raise capital and
must only decide the best way to do it. Indeed, the legislative
history provides support for just this distinction, evincing a
concern about bankers who found it “necessary . . . to seek
for customers to become makers of issues of securities when
the needs of those customers for long-term money were not
very pressing.” 75 Cong. Rec. 9911 (1932) (remarks of Sen.
Bulkley). We cannot conclude that the Board acted unreason-
ably in deciding that the danger identified by Senator Bulkley
does not characterize the financial advice rendered by Bankers
Trust.
SIA also argues that, because section 16 applies both to
“purchasing and selling” of securities, the solicitation of buy-
ers of commercial paper by Bankers Trust means that its
activities are not “upon the order... of . . . customers.”
This argument is meritless. Since Bankers Trust acts as sales
agent for the issuer, it is clearly engaged in “selling” securities
for its customers and necessarily finds and solicits buyers for
those securities, buyers who may be customers of other bank
services. This does not mean, however, that Bankers Trust is
“purchasing” securities for those investors who buy the paper.
The buyers decide upon and make their own purchases, while
17a
Bankers Trust has an explicit policy against purchasing for any
account that it manages, advises, or serves as trustee—the only
accounts for which the bank would even have the authority to
make such purchases.”
Moreover, no sensible construction of the statute could say
that otherwise permissible selling activities cannot involve the
solicitation of buyers. The seller’s very purpose in engaging a
selling agent and paying a commission is to acquire that agent’s
superior ability to place the product with buyers. If placement
of the product with buyers did not require any solicitation of
buyers, no rational business would pay another firm to do
what it could without cost to itself: passively wait for orders.
This construction of “upon the order. . . of . . . customers,”
therefore, would lead to the absurd statutory result of allowing
a seller-agent relationship to arise only in circumstances that
not only would never actually exist but that also would strip
the relationship itself of its purpose. The Board’s rejection of
such a construction appears eminently reasonable.
i
The final assault on the Board’s conclusion that the activities
of Bankers Trust fit within the terms of section 16 suggests that
these activities amount to “underwriting” and thus divest
Bankers Trust of its exemption. Although the Act and its
legislative history are barren of any definition of the term
“underwriting,” the parties and the district court have spent
much effort considering whether the term “underwriting”
includes agency, as well as principal, transactions, and whether
“- Interpreting § 16 to allow solicitation of buyers by Bankers Trust
does not nullify the existence of the term “purchasing” in that section. If the
bank had a service designed to provide buyers, for a fee, with the securities
they desired, the bank would obviously be purchasing the securities for those
buyers, and the bank might be precluded from soliciting any particular order
from them. In the case of placing commercial paper, the bank is in the
business of “selling” securities. The bank is the agent of the issuer, who pays
the bank’s commission; since the bank is not “purchasing” securities on
behalf of or for the buyers, its solicitation of their purchases does not even
implicate § 16.
7
18a
what is commonly called “best efforts” underwriting, in which
the selling group assumes none of the risk of its failure fully to
distribute the issue, amounts to statutory underwriting for
purposes of the exemption.’ These efforts were needless, since
we find that the Board reasonably concluded that an “under-
writing” defeats the section 16 exemption only if it includes a
public offering; private placements therefore do not for this
purpose constitute statutory “underwriting.” The Board’s reli-
ance on the distinction between public offerings and private
placements is reasonable because the distinction derives sup-
port from congressional intent embodied in contemporaneous
securities legislation and reasonably relates to concerns that the
Glass-Steagall Act sought to meet.
1. Contemporaneous Securities Legislation—The Glass-
Steagall Act nowhere defines “underwriting,” and the legisla-
tive history contains nothing to clarify the term. When in SJA
the Supreme Court reviewed the case we now consider on
remand, similar ambiguity surrounded the definition of the
terms “security” and “note.” The Court in SJA made it very
plain that the meaning of a term in other legislation passed
roughly at the same time as the Glass Steagal! Act with the
shared purpose of restoring confidence in the nation’s financial
3 We do not believe that § 16 gives unlimited rein to banks in the
performance of agency transactions, as Bankers Trust suggests. We instead
read the restriction against underwriting contained in § 16 as an independent
restriction on the bank’s securities operations that applies even to agency
transactions. While some have questioned whether a best efforts underwrit-
ing, performed solely on an agency basis, is technically an “underwriting,”
see | L. Loss, Securities Regt sn 172 (2d ed. 1961), this point seems to
relate to underwriting in its strict sense of insurance against risk, and not as a
term of art in the securities industry. The securities industry and the
Securities Act of 1933, 15 U.S.C. § 77b(11) (1982), treat “best efforts”
participation in a distribution as “underwriting.” Thus, we cannot read
§ 16’s proscription against underwriting as merely addressing the distinction
between principal and agert. Such a construction would make little sense,
since the main phrase of § 16 makes it abundantly clear that the bank may
engage only in agency, not principal, transactions in securities. We need not
decide this question, however, since the prohibition against underwriting does
not appear to cover the kind of private offering activities at stake here. See
infra pp. 20-27.
19a
markets provided “considerable evidence” of the “ordinary
meaning” Congress attached to the same term in the Glass-
Steagall Act itself. STA, 468 U.S. at 150. The statutes to which
the Court resorted in discerning congressional understanding
of the term “security” were the Securities Act of 1933, 15
U.S.C. § 77a et seq. (1982), the Securities Exchange Act of
1934, 15 U.S.C. § 78a et seq. (1982), and the Public Utility
Holding Company Act of 1935, 15 U.S.C. § 79 et seq. (1982).
SIA, 468 U.S. at 150. In each of these statutes, the sweeping
definition of “security” encompasses commercial paper; the
Court accordingly found that when Congress meant to exempt
commercial paper from the strictures of one of these statutes,
it expressly so provided. Jd. at 150-51. Congress, the Court
concluded, understood “that, unless modified, the use of the
term security encompasse[d] [commercial paper].” /d. at 151.
Only the Securities Act of 1933 defines the term “under-
writer” (although the Securities Exchange Act of 1934 provides
useful evidence on the meaning of that term as used in the
Securities Act). While the evidence of the ordinary congres-
sional cognizance of the term “underwrite” or “underwriter”
thus comes from only one piece of similar legislation, that
legislation, the Securities Act of 1933, is the closest to Glass-
Steagall in time and purpose of the various statutes relied on in
SIA. The Securities Act and the Glass-Steagall Act were signed
into law within three weeks of each other and both statutes
were among the legislative reforms that marked President
Roosevelt’s first hundred days in office. Thus, while the
precise purposes of the Securities Act may differ, both emerged
from the same effort to restructure the American financial
markets; absent any contrary indication, we must consider
Congress’ understanding of the financial terms it used in one
statute highly relevant to discovering the meaning attached to
similar but ambiguous terms in the other. With that rule in
mind, we turn to the Securities Act of 1933.
SIA contends that the significance of the Securities Act for
this case is that it provides an express exemption from registra-
tion for “transactions by an issuer not involving any public
offering.” 15 U.S.C. § 77d(2) (1982). SIA asserts that this
20a
exemption demonstrates Congress’ ability knowingly to pro-
vide an exemption from statutory requirements for private
offerings; Congress failure so to provide in section 16 of the
Glass-Steagall Act means that the Board acted unreasonably
when by interpreting the term “underwrite” it effectively read
such a private offering into the Act. This point would have
considerable force, except that the history of the Securities
Act’s exemption betrays SIA’s argument and, in fact, estab-
lishes the converse—that Congress did understand the concept
of underwriting to connote involvement in a public offering of
securities.
The Securities Act in section 2(11) defines an “underwriter”
as “any person who has purchased from an issuer with a view
to, or offers or sells for an issuer in connection with, the
distribution of any security, or participates or has a direct or
indirect participation in any such undertaking, or participates
or has a direct participation in the direct or indirect underwrit-
ing of any such undertaking.” 15 U.S.C. § 77b(11) (1982). An
“underwriter” thus cannot exist unless a “distribution” exists.
As originally introduced in the House bill that was to
become the Securities Act of 1933, the exemption relied on by
SIA applied to “transactions by an issuer not with or through
an underwriter.” See H.R. 5480, 73d Cong., Ist Sess. § 4(1)
(1933). The House Committee added to this language the
phrase “and not involving any public offering.” H.R. Rep. No.
85, 73d Cong., Ist Sess. 1 (1933). While the deliberate inclu-
sion of both “not with or through an underwriter” and “not
involving a public offering” would ordinarily support the
conclusion that Congress viewed the coverage of the two
phrases as being different, other legislative history shows that,
in fact, both phrases had the same coverage. In interpreting the
statute contemporaneously with its passage, the Federal Trade
Commission, the agency originally charged with administering
the securities laws, observed that a statutory “distribution”
necessarily involved a “public offering,” thus making it clear
that one could not be an “underwriter” in the absence of a
public offering. See H.R. Conf. Rep. No. 1838, 73d Cong., 2d
Sess. 41 (1934). Acknowledging the correctness of the Commis-
bikes
2la
sion’s interpretation, the same Congress that had passed the
Securities Act of 1933 eliminated as “superfluous” the lan-
guage “not with or through an underwriter” when it amended
the Securities Act in Title II of the Securities Exchange Act of
1934. Id.; see ch. 404, § 203(a)(1), 48 Stat. 881, 906 (1934); see
also 1 L. Loss, Securities Regulation 551 & n.307 (2d ed. 1961)
(distribution “more or less synonymous with” public offering).
While by no means conclusive, this history offers support for
the reasonableness of the Board’s view that Congress under-
stood “underwriting” (and, for that matter, “distribution”) of
securities to connote a public offering, and that the private
offerings of commercial paper effected by Bankers Trust do
not come within the Glass-Steagall Act’s meaning of “under-
writing.” At the least, it refutes SIA’s contention that the
Securities Act undercuts the Board’s conclusion in this regard.
One further Securities Act argument made by SIA deserves
only brief mention. SIA contends that the Board acted inap-
propriately in “importing” the public offering/private place-
ment distinction from the Securities Act without requiring
adherence to the regulations adopted by the Securities and
Exchange Commission in enforcing that distinction. This argu-
ment is wholly meritless; the Board properly determined that
the SEC regulations simply were not germane to the question
at hand. The Board has not, as SIA asserts, sought to “im-
port” a statutory exemption from the Securities Act, but
merely has looked to the use of terms in a contemporaneous
financial regulatory statute to assist it in discerning what
Congress meant when it used similar terms ambiguously in the
Glass-Steagall Act. This resort to legislative history does not
compel the Board to adopt every subsequent aspect of the
Securities Act’s enforcement.
But even if this were not so, the relevant SEC rules, collec-
tively known Regulation D, do not purport to be a definitive
interpretation of what constitutes a non-public offering but
merely constitute a “safe-harbor” that guarantees non-public
offering status to an issue that complies with their terms.
Securities offerings not in compliance with Regulation D may
22a
nonetheless be exempt from registration as “not involving any
public offering.” See 17 C.F.R. § 230.501 (Preliminary Note 3)
(1985) (issuer’s failure to satisfy Regulation D “shall not raise
any presumption that the exemption provided by section 4(2)
of the [Securities] Act is not available”).
The Board’s responsibility in this case was to arrive at a
reasonable determination of what should constitute a private
offering under the Glass-Steagall Act. The Board found Bank-
ers Trust’s activities to constitute a private offering because (1)
the bank “places commercial paper by separately contacting
large financial and non-financial institutions,” (2) the bank
“does not place commercial paper with any individuals,” (3)
“the maximum number of offerees and purchasers of commer-
cial paper placed by the bank in any given case is relatively
limited,” (4) the bank “makes no general solicitation or adver-
tisement to the public” with respect to the placement of
particular paper (though it does advertise its activities in
business publications to publicize its availability as an agent to
issuers), and (5) “the commercial paper placed with the bank’s
assistance is issued in very large average minimum denomina-
tions, which are not a likely investment of the general public.”
Board Statement at 29-30, J.A. at 223-24. Such considerations
properly determine what distinguishes a private from a public
offering of securities; we shall shortly see that they also have a
strong relationship to one of the principal concerns that ani-
mated the Glass-Steagall Act.
2. Legislative Purposes—As the Supreme Court has amply
documented, the legislative history of the Glass-Steagall Act
shows that, besides “the obvious risk that a bank could lose
money by imprudent investment of its funds in speculative
securities,” Congress sought to address “ ‘the more subtle
hazards that arise when a commercial bank goes beyond the
business of acting as fiduciary or managing agent and enters
the investment banking business.’ ” S/JA, 468 U.S. at 145
(quoting Camp, 401 U.S. at 630). The hazards identified by the
Court included danger to the impartiality of the bank as a
dispenser of financial advice. For example, “Congres. con-
23a
cluded that it was unrealistic to expect a banker to give
impartial advice about [whether and how best to issue equity or
debt securities] if he stands to realize a profit from the
underwriting or distribution of securities.” SJA, 468 U.S. at
146 (citing 75 Cong. Rec. 9912 (1932) (remarks of Sen.
Bulkley)). Moreover, the Court pointed to congressional fears
that commercial-bank involvement in investment banking
might lead to the use of a bank’s credit facilities to “shore up a
company whose securities the bank sought to distribute” or to
facilitate the purchase of securities of the bank’s commercial
customers. See id. at 146-47. Congress, in sum, did not believe
that bankers could act as proper fiduciaries if faced with the
“pressures” of “involvement in the distribution of securities.”
Id. at 146.
Congress recognized that these pressures largely resulted
from the heavy fixed costs incurred by commercial banks in
running investment banking operations. In the period immedi-
ately preceding the financial collapse that precipitated the
enactment of Glass-Steagall, the distribution of an issue of
securities took place through an elaborate syndication involv-
ing various tiers of purchase, banking, and selling groups
managed by an originating banker who handled the negotia-
tions with the issuer. See 1 L. Loss, Securities Regulation 164-
66 (2d ed. 1961). The precise details of the distribution process,
as it then existed, are not important for our purposes. What is
important is that “a large number of the leading originators of
securities, particularly the security affiliates of commercial
banks,” developed “large selling organizations” in this period.
Gourrich, /nvestment Banking Methods Prior to and Since the
Securities Act of 1933, 4 Law & Contemp. Probs. 44, 49
(1937). Indeed, the “bank affiliates were particularly active in
constructing substantial retail organizations” to distribute the
securities to which they had committed themselves as origina-
tors or members of a purchase group. /d. at 48 n.8.
Congress was well aware of these developments. The heavy
overhead incurred by banks to carry these large retail opera-
tions caused much of the congressional concern about “subtle
hazards” that animated the sponsors of the Glass-Steagall Act.
24a
As one of the principal sponsors stated:
In order to be efficient a securities department had to be
developed; it had to have salesmen; and it had to have
correspondent connections with smaller banks throughout
the territory tributary to the great bank. Organizations
were developed with great enthusiasm and efficiency. The
distribution of the great security issues needed for the
development of the country was facilitated, and the coun-
try developed. But the sales departments were subject to
fixed expenses which could not be reduced without the
danger of so disrupting the organization as to put the
institution at a disadvantage in competition with rival
institutions. These expenses would turn the operation very
quickly from a profit to a loss if there were not sufficient
originations and underwritings to keep the sales depart-
ments busy.
It was necessary in some cases to seek for customers to
become makers of issues of securities when the needs of
those customers for long term money were not very
pressing. Can any banker, imbued with the consciousness
that his bond-sales department is, because of lack of
securities for sale, losing money and at the same time
losing its morale, be a fair and impartial judge as to the
necessity and soundness for a new security issue which he
knows he can readily distribute through channels which
have been expensive to develop but which presently stand
ready to absorb the proposed security issue and yield a
handsome profit on the transaction?
It is easy to see why the security business was overdevel-
oped and why the bankers clients and country bank
correspondents were overloaded with a mass of invest-
ments many of which have proved most unfortunate.
75 Cong. Rec. 9911 (1932) (remarks of Sen. Bulkley).
The distinction between public and private offerings meshes
well with the congressional goal of eliminating the “subtle
hazards” of conflicts of interest and abuse of fiduciary rela-
25a
tionships in banking. Senator Bulkley’s remarks show a con-
cern with the development of a vast selling apparatus necessary
to participate in the distribution of “great security issues
needed for the development of the country” and mirror the
unchallenged evidence in the literature that banks in the early
twentieth century were building that type of large selling
organization.
In light of the specific congressional focus on the large fixed
costs that accompanied retail participation in public distribu-
tions, it seems highly plausible that one line Congress might
have drawn in adopting the permissive language of section 16
of the Glass-Steagall Act was at the point of public offering, a
line which could well explain the prohibition against underwrit-
ing. While regular involvement in private offerings of securities
undoubtedly produces some fixed costs and some attendant
pressures, it seems reasonable to think that Congress might
have found these relatively minor expenses acceptable when
compared with the much heavier fixed burden of having a far-
flung retail network to distribute securities to the public.
Although implementation of this distinction through the prohi-
bition of commercial-bank underwriting would not address all
the “subtle hazards” with which Congress was concerned (for
example, it would do nothing to meet the fear that a bank
would sell securities for an issuer to help the issuer repay loans
to the bank), the prohibition of underwriting is only one of the
limitations that section 16 imposes on banks that desire to deal
in securities. We believe that the distinction between public and
private offerings as drawn by the Board reasonably interprets
the prohibition of underwriting and reasonably relates to the
elimination of some of those hazards.
V.
While SIA has not met its burden of refuting the reasonable-
ness of the Board’s conclusion that Bankers Trust’s activities
fit within the literal terms of section 16, SIA mounts a final,
sweeping challenge to the reasonableness of the Board’s inter-
pretation of the Act. SIA asks the court to analyze the
El
26a
activities approved by the Board to determine whether they
pose the “subtle hazards” that the Act seeks to eliminate. The
district court relied on the potential for these hazards to
conclude that, while the activities of Bankers Trust come
within the literal terms of section 16, those terms should be
construed narrowly to exclude an otherwise permissible ar-
rangement that frustrates the policies of the Act. In other
words, although the language and history of the specific
provisions support the reasonableness of the Board’s construc-
tion of those provisions, the Board might nonetheless be
obligated to adopt a different construction if the background
policies of the Act as interpreted by the Supreme Court in cases
like Camp and SIA conflict with that construction and render
it unreasonable. This admittedly seems at odds with the recent
statement by the Supreme Court that
[a]pplication of “broad purposes” of legislation at the
expense of specific provisions ignores the complexity of
the problems Congress is called upon to address and the
dynamics of legislative action. Congress may be unani-
mous in its intent to stamp out some vague social or
economic evil; however, because its Members may differ
sharply on the means for effectuating that intent, the final
language of the legislation may reflect hard fought com-
promises. Invocation of the “plain purpose” of legislation
at the expense of the terms of the statute itself takes no
account of the processes of compromise and, in the end,
prevents the effectuation of congressional intent.
Board of Governors of the Fed. Reserve Sys. v. Dimension
Fin. Corp., 106 S. Ct. 681, 689 (1986). But the Supreme
Court’s Glass-Steagall Act cases uniformly consider “subtle
hazards” and examine background purposes of the Act. Until
the Court indicates that it no longer employs this analysis to
interpret the Glass-Steagall Act, we too must take such consid-
erations into account. We theiefore turn to that analysis.
We believe that the district court erred in concluding that the
private placement of commercial paper by Bankers Trust cre-
ates the kind of “subtle hazards” that would require the Board
27a
to construe section 16 narrowly to exclude that activity. Since
the Supreme Court has already undertaken a “subtle hazards”
analysis with respect to commercial paper, albeit without the
benefit of the Board’s analysis of that issue, we know precisely
the concerns the Court has identified in this area. What we
must decide is whether the practices of Bankers Trust at issue
here sufficiently differ from those in the last round of this
litigation to justify concluding that the hazards identified are
no longer present, or whether the Board has presented new
considerations that were not before the Court in SJA and that
meet the concerns expressed by the Court.
Initially, it bears noting that the most obvious hazard
reached by the Act—the investment of bank funds in specula-
tive securities—is not at issue in this case. Bankers Trust does
not purchase the commercial paper of its customers; it does not
inventory the paper overnight; and it makes no loans to
provide financing to an issuer when an offering of paper falls
short of its goal. Nothing in Bankers Trust’s services puts its
Own resources at risk.
This takes us directly to the “subtle hazards” analysis, which
catalogues the various conflicts of interest and dangers that
may result from a commercial bank’s dealing in “particular”
securities. The first set of potential conflicts involves the bank
in its role as a lender, raising the dual specter of the bank’s
making loans to the issuer (to ensure the success of its issue) or
to the purchasers of commercial paper placed by the bank.
SIA, 468 U.S. at 146-47, 156-57. The Board’s analysis ade-
quately answers those concerns.
To avoid any danger of making unsound loans to an issuer,
Bankers Trust has, since the Supreme Court decided S/A,
adopted a policy of providing no back-up credit or guarantees
to facilitate the acceptance of commercial paper; any line of
credit now granted to an issuer must have “substantially
different timing, terms, conditions and maturities from the
commercial paper being placed.” Board Statement at 40, J.A.
at 234. SIA does not dispute the salutary nature of this change,
but argues that the Board’s reliance on such representations
amounts to “regulation” in a statute that Congress meant to
28a
operate through “flat prohibitions.” This argument is without
merit. The Glass-Steagall Act does impose a system of flat -
“prohibitions” and “prophylactic” measures, see SIA, 468
U.S. at 147-48, 157, but this cannot obviate the need to
examine particular factual situations to determine on which
side of the prohibitory line they fall. Although the Act may
seek to prevent even “potential” conflicts, see JCI, 401 U.S. at
637-38, this does not foreclose the Board from deciding that
the realities of a situation make even the potential for conflict
substantially unlikely. Bankers Trust has made representations
about the conduct of its loan department that seem to meet the
congressional concerns identified by the Supreme Court; it is
perfectly appropriate for the Board to credit the bank’s new
policies. Moreover, we do not believe that the Board’s assump-
tion that Bankers Trust will keep adequate records to substanti-
ate its contentions transforms the Board’s decision into an
instance of “regulation.” If a member of the industry were to
file charges with the Board, claiming that Bankers Trust was
not adhering to its stated policies, the availability of Bankers
Trust’s records would facilitace the Board’s investigation of
that charge. It is in no way an impermissible “regulation” to
require Bankers Trust to keep adequate records.
The Board has also advanced an argument not considered by
the Court in SJA to explain why the arrangement adopted by
Bankers Trust will not lead to the lending of money to “shore
up” customers of the bank’s commercial paper service. The
Board points out that the profit from the placement of com-
mercial paper is small, amounting to a commission on the
order of one eighth of one percent of the total amount of the
issuer’s commercial paper, computed on an annualized basis.
The rewards from these commissions are so small compared to
the cost of the loans the bank would have to write to make an
unsound issuer’s paper more attractive to the market that
writing such loans would not be worth the risk. Board State-
ment at 40-41, J.A. at 234-35. A judgment such as this, that
the economic realities of the financial marketplace would
preclude banks from making loans to shore up troubled issu-
29a
ers, is precisely the kind of exercise of delegated expertise that
deserves our full deference.
The Board has also concluded that there is no appreciable
risk of the bank’s placing commercial paper to enable a debtor
of the bank to repay its loans. The Board’s opinion reasons
that an issuer unable to repay bank loans will probably be
unable to raise money in the commercial paper market in any
case; Bankers Trust furthermore has adopted a policy of not
providing letters of credit or guarantee arrangements to make
such paper more attractive. Board Statement at 44, J.A. at
238. Moreover, the antifraud provisions of the securities laws
would compel the disclosure of the intended use of the pro-
ceeds to satisfy a potentially bad debt owed to the bank,
providing an obvious disincentive to such a transaction. /d.
Finally, empirical evidence indicates that the proceeds of pri-
vate placements by banks have not been used to pay off anv
loans involving a material risk of nonpayment. /d. at 45, J.A.
at 239. The Board’s findings as to these factors, which the SJA
Court apparently did not consider, are reasonable and accord-
ingly receive our deference.
As for the second “subtle hazard,” the possibility of the
bank’s making self-interested loans to finance the purchase of
commercial paper it helps issue, the Board provides a persua-
sive argument, again not before the Supreme Court in S/A,
that no such hazard arises here. Turning again to an analysis of
financial markets, the Board asserts that it is wholly impracti-
cal for a commercial bank to make such loans because the
yields on commercial paper are generally lower than the inter-
est rates the loans would have to bear. Board Statement at 41
n.39, J.A. at 235 n.39. In the absence of any evidence that this
conclusion is wrong, the Board is again entitled to our defer-
ence.
Another category of concerns involves the bank’s role as a
disinterested financial advisor to its customers. First, there is
the potential that the bank will give unsound financial advice
to the issuer in order to reap the profits from placement of the
issuer’s commercial paper. See SIA, 468 U.S. at 146. The
Board found any such risk to be insignificant because the
30a
profit from such placements is so low that the bank has no
incentive to offer deliberately unsound advice. Board State-
ment at 46, J.A. at 240. This rationale, not considered by the
Supreme Court, seems consistent with the notion that much of
the concern with banks’ giving self-interested advice was based
on the banks’ need to meet the fixed costs of far-flung
distribution networks. See supra pp. 25-27. When the rewards
and incentives are lower, the potential benefits from rendering
unsound and self-interested advice seem likely to be out-
weighed by the damage to the bank’s reputation and goodwill
that would arise from giving bad advice. The Board’s conclu-
sion that bad advice will not result from the scheme at issue
here is rational.
The role of disinterested financial advisor to depositors
presents different concerns. Congress feared that depositors
purchasing securities through their bank might lose confidence
in their bank if an issuer using the bank’s securities services
defaulted on their securities. SJA, 468 U.S. at 155-56. Al-
though Bankers Trust has prevented any conflict of interest
concerning any account managed or advised by the bank or its
affiliates or for any account in the bank’s trust department by
adopting a flat rule that it will purchase none of the commer-
cial paper it places for these accounts, Board Statement at 45,
J.A. at 239, Bankers Trust does otherwise place commercial
paper with its depositors. The Board argues that because the
depositors who purchase commercial paper are large, sophisti-
cated business institutions, they would be unlikely to blame
their bank for what really amounts to their own error in
judgment, while any harm to the bank that did result would
not affect its public reputation. Jd. at 42-43, J.A. at 236-37.
Though this assessment seems entirely realistic, the Supreme
Court in S/JA clearly rejected these arguments, stating that the
Act makes no distinctions on the basis of financial expertise
and that the loss of confidence of a few large depositors might,
in fact, prove “especially severe.” SJA, 468 U.S. at 156, 159.
While the Board also argues that an empirical study has
indicated no harm to the reputation of commercial banks from
their private placements of securities, Beard Statement at 42,
3la
J.A. at 236, nowhere does the Board’s analysis indicate that
the study specifically addressed the effect of issuer defaults on
depositor/purchaser confidence in commercial banks.
We believe, however, that despite the existence of this one
“subtle hazard,” we must still affirm the Board. There are
several reasons for that conclusion. First, the “subtle hazards”
addressed in Camp and returned to in JCI, Schwab, and SIA
have never alone caused the Supreme Court-to hold that Glass-
Steagall permits or prohibits any particular banking practice.
Rather, analysis of the hazards in those cases simply reinforced
the Court’s conclusion that, as a matter of statutory interpreta-
tion, Glass-Steagall permitted or prohibited the questioned
practice. Moreover, the Court has concluded that “subtle
hazards” counsel prohibition of a banking practice only when
the practice gave rise to each and every one of the hazards. See
SIA, 468 U.S. at 154-59; Camp, 401 U.S. at 630-34, 636-38.
Nor must a hazard be “totally obliterated” to permit a banking
practice—avoidance of the hazard “to a large extent” suffices.
See ICI, 450 U.S. at 67 n.39. Finally, our conclusion is
reinforced by our view that the “subtle hazards” analysis as a
whole is a specific instance of the Chevron principle that
requires our deference to an agency’s reasonable construction
of its statute’s ambiguities, see Investment Co. Inst. v. Con-
over, 790 F.2d 925, 931-33, 935-36 (D.C. Cir. 1986) (applying
Chevron to agency interpretation of Glass-Steagall), since an
agency’s statutory interpretation that impairs one of the stat-
ute’s purposes but not others may surely nonetheless be reason-
able. (Indeed, the binding force of the Supreme Court’s
“subtle hazards” analysis in SJA is unclear, since, as we have
already noted, supra pp. 6-7, the Board failed to offer the
Court any rationale concerning those hazards to which the
Court could defer. See SIA, 468 U.S. at 155; see also ICI, 450
U.S. at 68 (distinguishing Camp on this ground)). We think, in
short, that the Board reasonably concluded not only that
Bankers Trust’s placements of commercial paper meet the
literal requirements of section 16, but also that those place-
ments are consistent with the panoply of the Act’s purposes.
We therefore reverse the district court’s order and reinstate
the Board’s decision.
It is so ordered.
32a
Order of the Court of Appeals,
April 14, 1986
THE UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT
No. 86-5089
September Term, 1985
ae
SECURITIES INDUSTRY ASSOCIATION
—_—VvV.—
THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, ef al.
BANKERS TRUST COMPANY,
Appellant
AND CONSOLIDATED CASES
i
Filed April 14, 1986
BEFORE:
Mikva*, Edwards and Bork,
Circuit Judges
aos
ORDER
It is ORDERED by the court that the stay of the district court
order which permanently enjoined Bankers Trust Company
from sales of third-party commercial paper in the manner
described in the June 4, 1985 Statement of the Board of
Governors of the Federal Reserve System, is extended unti!
further order of this court.
Per Curiam
° Circuit Judge Mikva did not participate in this order.
33a
Order of the Court of Appeals,
February 28, 1986
THE UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT
September Term, 1985
No. 86-5089
ae
SECURITIES INDUSTRY ASSOCIATION
—_—V.—
THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, et al.
BANKERS TRUST COMPANY,
Appellant
AND CONSOLIDATED CASES
-
Filed February 28, 1986
BEFORE:
WRIGHT, MIKVA AND BORK,
Circuit Judges
oe
ORDER
Upon consideration of the Motion of Bankers Trust Com-
pany for a Stay Pending Appeal and to Vacate Injunction, the ~
responses thereto, and the briefs in support of the motion filed
by parties participating as amici curiae, it is
}
34a
ORDERED by the court that the district court order issued
February 18, 1986, which permanently enjoined Bankers Trust
Company from sales of third-party commercial paper in the
manner described in the June 4, 1985 Statement of the Board
of Governors of the Federal Reserve System, is stayed until
April 15, 1986, unless sooner dissolved by the panel chosen to
decide the merits of the case. It is
FURTHER ORDERED by the court, on its own motion, that
the appeal is expedited and the following briefing schedule is
established:
Appellants’ brief, March 10, 1986
briefs of supporting amici,
if any, and joint appendix
Appellee’s brief and briefs March 17, 1986
of supporting amici, if any
Reply brief, if any March 21, 1986
The Clerk is directed to schedule oral argument on the first
day of the April sitting.
All parties are directed to personally serve and file all briefs.
Per Curiam
35a
Opinion and Order of the District Court,
February 18, 1986
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
Civil Action No. 80-2730
aoe
SECURITIES INDUSTRY ASSOCIATION,
Plaintiff,
Vv.
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, et al.,
Defendants,
BANKERS TRUST COMPANY,
Defendant-Intervenor.
+
OPINION AND ORDER
JOYCE HENS GREEN, District Judge
Before the Court is plaintiff Securities Industry Associa-
tion’s (“SIA’s”) motion to enjoin defendant-intervenor Bank-
ers Trust Company from further sales of commercial paper on
_ behalf of third-party issuers. On February 4, 1986, this Court
issued a Memorandum Opinion and Order (“February 4 Opin-
ion”) holding that such sales violated the Glass-Steagall Act.
SIA filed this motion on February 6, following public state-
ments by Bankers Trust that it intended to continue its place-
ment services while it appealed the decision. See Wall St. J.,
Feb. 5, 1986, at 2, col. 2. Bankers Trust filed its opposition and
a cross-motion for a stay of the February 4 Opinion on
February 10. The Court heard oral arguments on the motions
36a
on February 12. For the reasons set forth below, the Court
grants plaintiff’s motion for an injunction, but stays its effect
until March 1, 1986, and denies Bankers Trust’s motion for a
stay of the February 4 Opinion.
At the outset, Bankers Trust raises a jurisdictional objection
to the issuance of an injunction, which merits little discussion.
The bank contends that this Court lacks personal jurisdiction
over it because it intervened only for the limited purpose of
defending the legality of defendant Federal Reserve Board’s
June 4, 1985 Statement, and for no other purpose. Bankers
Trust’s Opposition at 10. This argument is incorrect both as a
matter of fact and law. In its motion to intervene, Bankers
Trust did not limit its participation to the academic exercise of
defending the Board’s J’ ne 4, 1985 Statement. The bank stated
that its intervention in the case was necessary “[i]n order to
defend the legality of its service,” Motion of Bankers Trust
Company for Leave to Intervene as of Right at 2 (emphasis
supplied), and noted that “[t]he controversy between the Board
and the securities industry is based on the activities of Bankers
Trust and thus directly and substantially affects [its] business.
Bankers Trust stands to gain or lose from this Court’s deci-
sion.” Id. at 3 (emphasis supplied). Moreover, the bank simply
could not have limited this Court’s jurisdiction over it in the
manner it suggests. As an intervenor of right, Bankers Trust
became “a full participant in the lawsuit and is [to be] treated
just as if it were an original party.” Schneider v. Dumbarton
Developers, Inc., 767 F.2d 1007, 1017 (D.C. Cir. 1985). It
assumed the risk that it would not prevail and that an order
adverse to its interests would be entered. /d., 7A C. Wright &
A. Miller, Federal Practice & Procedure § 1920 at 611 (1972).
Indeed, the possibility that plaintiff would obtain relief against
it was the price Bankers Trust paid for its intervention. District
of Columbia v. Merit Systems Protection Board, 762 F.2d 129,
132 (D.C. Cir. 1985). The Court, therefore, concludes that it
has personal jurisdiction over Bankers Trust sufficient to
enjoin its commercial paper sales activities. '
l Bankers Trust also filed a notice of appeal on February 10, 1986.
While a notice of an appeal ordinarily divests a district court of jurisdiction
0 ll
37a
Bankers Trust next argues that use of Rule 59(e) is an
improper procedural device to expand the scope of relief
sought in SIA’s original complaint. The bank cites White v.
New Hampshire Department of Employment Security, 455
U.S. 445, 450-51 (1982), a case in which the Supreme Court
stated that Rule 59(e) only permits courts to rectify mistakes or
reconsider matters properly encompassed in a decision on the
merits and argues that SIA, in moving for an injunction, is
seeking something entirely new. White, however, involved a
motion under Rule 59(e) for an award of attorney’s fees—a
matter clearly beyond those encompassed in the decision on the
merits. Here, SIA seeks an injunction to give effect to the
Court’s February 4 ruling that Bankers Trust’s commercial
paper activities violate federal law. A court’s authority to issue
injunctions in aid of its decrees is unquestioned. See United
States v. New York Telephone Co., 434 U.S. 159, 172-73
(1977); Dugas v. American Surety Co., 300 U.S. 414, 428
(1937); Marshall v. Local Union No. 639, International Broth-
erhood of Teamsters, 593 F.2d 1297, 1302 (D.C. Cir. 1979).
Courts necessarily have the power to enter “such orders as may
be necessary to enforce and effectuate their lawful orders and
judgments, and to prevent them from being thwarted and
interfered with by force, guile, or otherwise.” Mississippi
Valley Barge Line Co. v. United States, 273 F. Supp. 1, 6 (E.D.
Mo. 1967), aff’d sub nom. Osbourne v. Mississipi Valley Barge
Line Co., 389 U.S. 579 (1968). Bankers Trust has made clear
its intent to continue to sell commercial paper, notwithstanding
this Court’s ruling that those sales are illegal under the Glass-
and confers it on the court of appeal, see Griggs v. Provident Consumer
Discount Co., 459 U.S. 56, 58 (1982), that rule does not obtain in a case such
as this one, where a party has filed a timely motion under Rule 59 to amend a
judgment. See Fed. R. App. P. 4(a); 9 J. Moore’s, Moore’s Federal Practice
¢ 203.11 (1985). In addition, district courts retain jurisdiction to issue orders
regarding bonds, or to modify, restore or grant injunctions. Venen v. Sweet,
758 F.2d 117, 120 n.2; Fed. R. App. P. 7 and 8. Accordingly, Bankers Trust's
notice of an appeal in no way undermines this Court’s jurisdiction to act on
plaintiff’s motion for an injunction, and it is therefore unnecessary to rule
on plaintiff's motion to declare Bankers Trust’s filing of the appeal null and
void.
38a
Steagall Ac. An order enjoining further sales is obviously in
aid of the Court’s February 4 judgment and is accordingly
proper under Rule 59(e).
Bankers Trust’s final procedural objection to issuance of an
injunction-is-that the Glass-Steagall Act does not create a
private cause of action and thus a private party such as SIA
cannot use it to enjoin the bank. The Court, however, need not
reach the question of whether the Act creates an implied right
of action, as its authority to issue an injunction does not derive
from that statute, but rather from its inherent power to enter
orders in aid of its decree. Moreover, this action was brought
under the Declaratory Judgment Act, 28 U.S.C. §§ 2201 and
2202. Section 2202 of that Act “empower[s] . . . district
court[s] to grant supplemental relief, including injunctive re-
lief.” 28 U.S.C. § 2202; see also Edward B. Marks Music
Corp. v. Charles K. Harris Music Pub. Co., 255 F.2d 518, 522
(2d Cir.), cert denied, 358 U.S. 831 (1958). Whether or not the
Glass-Steagall Act creates a private cause of action, therefore,
is simply irrelevant for purposes of determining whether this
Court may enjoin Bankers Trust’s sales activities.
Turning then to the appropriateness of an injunction, the
Court is aided by its earlier conclusion that Bankers Trust’s
activities violate the Glass-Steagall Act. See February 4 Opin-
ion. That Act embodies Congress determination that a com-
plete separation of commercial from investment banking
necessarily inures to the benefit of the public. See Securities
Industries. Association v. Board of Governors, __._ U.S.
: , 104 S. Ct. 2979, 2985 (1984). The Court, of
course, is not to second-guess the wisdom of that judgment.
Having found that Bankers Trust’s sales of third-party com-
mercial paper contravene the flat prohibitions of the Act, it
follows that these sales are detrimental to the public good.
Against this presumption of public harm, the bank offers
essentially two arguments as to why an injunction should not
issue, or, if one does, why it should be stayed: (1) that an
injunction would cause even greater harm by disrupting the
financial markets; and (2) that an injunction would cause
irreparable harm to the bank itself. With respect to the first of
39a
these contentions, the bank has offered little evidence to
support its prediction that far reaching turmoil will issue if its
activities are enjoined, and indeed, some of the bank’s own
statements belie such an assertion. Bankers Trust submitted the
affidavit of Kevin P. Burke, Vice President of its Commercial
Paper Group, who stated that all of the approximately 50
commercial paper issuers that the bank serves have expressed
concern about the disruption to the commercial paper market
posed by the Court’s February 4 Opinion. Burke Affidavit at
€ 4. Attached to the affidavit, however, are five presumably
representative letters from the bank’s commercial paper cli-
ents, not one of which contains any prediction of dire conse-
quences for the commercial paper market generally.2 More
importantly, in arguing that its activities pose little harm to the
interests of SIA, Bankers Trust concedes that it accounts for
only 2.5 percent of the commercial paper market. Burke
Affidavit ¢ 9. It is difficult to see how an injunction against
the bank would “create undesirable turmoil in the market for
commercial paper” with “far-reaching repercussions,” given its
small share of the market. In addition, nearly half of Bankers
Trust’s clients already use more than one commercial paper
dealer, Weidner Affidavit, Exh. B, and thus could transfer
their business without excessive disruption of their short term
financing needs.
The bank’s second argument is that it will be irreparably
harmed if this Court enjoins its activities. An injunction, it
contends, will destroy the client base it has built up over the
past seven years, since its present customers will not return to it
even if the Court of Appeals subsequently finds its services to
be legal under the Glass-Steagall Act. In short, the bank claims
that an injunction will effectively strip it of its right to an
appeal. In advancing this argument, both in opposition to the
injunction and in support of its motion for a stay, Bankers
2 The letters, although written by five different companies, state in
virtually identical language that each conpany would be forced to switch to
another commercial paper placement agent if Bankers Trust is enjoined, and
that each would be unlikely to return tothe bank’s services in the event the
Court of Appeals upholds the legality of the bank’s activities. The letters
appear to reflect more the concerns of th: bank itself than those of its clients.
40a
Trust relies extensively on Washington Metropolitan Area
Transit Commission v. Holiday Tours, Inc., 559 F.2d 841 (D.C.
Cir. 1977), a case in which the Court of Appeals emphasized
that a stay may be appropriate even where the district court
finds that the movant has little likelihood of success on the
merits. Injunctive relief pending appeal, the Court stated, is
appropriate in order to maintain the status quo where serious
legal issues are presented, little if any harm would befall the
public in the interim, and denial of such relief would cause
irreparable harm to the movant. /d. at 844. These same factors
are present here, Bankers Trust claims, and counsel against an
injunction, or in favor of a stay, while an orderly appeal is
taken.
In Holiday Tours, however, the Court noted that the case
before it was not one “where the Commission has ruled that
the service performed by appellant is contrary to the public
interest.” Jd. at 843. That is decidedly not the situation here.
Bankers Trust’s activities have been found to violate federal
law, and thus are most definitely contrary to the public
interest. At bottom, the bank is making the extraordinary
request that this Court maintain a status quo that the Court
has concluded is illegal. Under these circumstances, Bankers
Trust’s showing of irreparable harm would have to be over-
whelming indeed in order to justify a stay.
To be sure, Bankers Trust will suffer considerable harm if its
placement services are enjoined; at present, it has outstanding
over $4 billion of commercial paper that it has placed on
behalf of issuers. However, the bank has not demonstrated that
the harm it will suffer if an injunction issues will be irrepara-
ble. It does not indicate how much income it stands to lose if
enjoined from further sales,’ or what the effect of such a loss
of revenues would have on its overall net worth. It is clear,
however, that an injunction would not put Bankers Trust out
of business. Accordingly, the bank could resume its services if
the Court of Appeals ultimately decides they are legal. While
3 Bankers Trust earns a commission on the paper it places, and thus the
$4 billion of commercial paper it has outstanding does not translate
into an equivalent amount of income.
4la
this would no doubt entail certain start-up costs, the mere
existence of such expenses hardly justifies allowing the bank to
engage in activities that this Court has concluded violate
federal law. In addition, Bankers Trust’s placement services
have been the subject of legal challenge almost since their
inception. The bank has forged ahead, however, despite the
very real possibility that its activities might be barred under the
Glass-Steagall Act, and has generated revenues over a seven-
year period from placement services that have now been judged
illegal. The bank attempts to portray itself as an innocent
victim about to suffer irreparable injury, but it made a con-
scious choice to engage in business the legality of which was
strongly questioned, and has profited for seven years as the
Federal Reserve Board and the courts have sought to resolve
that question. Bankers Trust cannot now argue that past illegal
activities, all being undertaken in good faith, somehow justify
future violations of law.
In short, the bank has failed to demonstrate that the injury it
will suffer if a stay is not granted, or if an injunction issues, is
so great that this Court must permit it to undertake activities
this Court has found to be illegal.
Finally, Bankers Trust argues that injunctions should not
issue as a matter of course in every case where a court finds a
violation of federal law, and that the application of traditional
equitable principles in this case—namely, the balancing of
hardships to the parties and the availability of legal remedies—
militate against an injunction here. The bank is correct that a
finding of a statutory violation does not lead automatically to
the issuance of an injunction. Weinberger v. Romero-Barcelo,
456 U.S. 305, 313 (1982). It is also true, however, that in a
number of cases courts have found it unnecessary to inquire
into the traditional requirements for injunctive relief when
statutory violations are involved. See United States v. City of
San Francisco, 310 U.S. 16, 31 (1940) (equitable doctrines do
not deprive courts of power to enforce declared congressional
policy); National Wildlife Federation v. Andrus, 440 F. Supp.
1245, 1256 (D.D.C. 1977) (clear and substantial violation of
Statute lessens need to balance other equitable factors); Com-
42a
munity Nutrition Institute v. Butz, 420 F. Supp. 751, 754
(D.D.C. 1976) (where federal statute violated, cour: need not
inquire into traditional requirements for equitable relief); Si-
erra Club v. Coleman, 405 F. Supp. 53, 54 (D.D.C. 1975)
(same). A review of the various cases makes clear that, where
federal statutes are violated, the guiding principle for deter-
mining the propriety of equitable relief is whether an injunc-
tion is necessary to effectuate the congressional purpose behind
the statute. Put another way, in such cases, the equities to be
balanced are not simply those of the private litigants, but also
the interests of the public as defined by Congress. Thus, in
Weinberger v. Romero-Barcelo, the Supreme Court ruled that
the Federal Water Pollution Control Act did not mandate an
injunction against naval activities undertaken without compli-
ance with certain permit requirements, since the disirict court
had found that the activities in question did not pollute the
waters. The purpose of the statute, the Court stated, was to
maintain “[t]he integrity of the Nation’s waters, . . . not the
permit process.” 456 U.S. at 314. Similarly, in Realiy Income
Trust v. Eckerd, 564 F.2d 447 (D.C. Cir. 1977), the Court of
Appeals for this circuit refused to enjoin constriction of
certain buildings where the agency had failed to file an envi-
ronmental impact statement (EIS) within the time periods
prescribed by the National Environmental Protectior Act. An
injunction would serve no remedial purpose, the court con-
cluded, since a final EIS had been submitted and 2valuated
before any construction had begun. 564 F.2d at 456-57. Con-
versely, in Tennessee Valley Authority v. Hill, 437 U.S. 153
(1978), the Supreme Court declined to balance the equities and
hardships of an injunction issued against completicn of the
multi-million dollar Tellico Dam, where operation of the dam
would bring about the extinction of the Snail Darter fish, in
violation of the Endangered Species Act. Effectuation of
Congress clear intent, the Court found, required issuance of
the injunction, regardless of the costs involved. Jd. at 193-94.
So also in United States v. City of San Francisco, the Cou:t
refused to weigh the hardships to the parties and affirmed a
district court’s injunction against the city’s sales of electric
43a
power to a private utility. In granting San Francisco certain
lands and rights of way in order to enable it to generate
hydroelectric power, Congress had expressly prohibited the city
from transferring the right to sell the power to a private
corporation. “[E]quitable doctrines,” the Court stated, “do
not militate against the capacity of a court of equity to make a
declared policy of Congress effective.” /d., 310 U.S. at 31.
As discussed at length in the February 4 Opinion, the statute
involved here, the Glass-Steagall Act, lays down a series of flat
prohibitions designed to forestall a host of “subtle hazards”
and to eliminate potential conflicts of interest that Congress
believed might arise if commercial banks underwrite or other-
wise promote the sale of securities. This Court has found that
Bankers Trust’s activities contravene those prohibitions and
that precisely those promotional pressures that Congress
sought to root out of the commercial banking industry inhere
in its sales of commercial paper. This is not a case, therefore,
where the violation at issue does not implicate the core con-
cerns underlying the statute, or where alternative regulatory
measures are available to protect the public interest. Here an
injunction is essential “to make a declared policy of Congress
effective.” In other words, Congress has dictated the balance
of equities by determining that the public interest requires a
complete separation of commercial and investment banking.
This Court need not look further.
Accordingly, for all the foregoing reasons, it is hereby
ORDERED that Bankers Trust Company be and it hereby is
permanently enjoined from sales of third-party commercial
paper in the manner described in the June 4, 1985 Statement
issued by defendant Board of Governors of the Federal Re-
serve System.
IT IS FURTHER ORDERED that the effect of this Opinion and
Order be and it hereby is stayed until March 1, 1986, in order
to allow the bank a reasonable amount of time to discontinue
its commercial paper placement services in an orderly fashion
and to apply to the Court of Appeals fer a stay of the
injunction and the February 4, 1986 Opinion pending appeal.
44a
IT IS FURTHER ORDERED that plaintiff Securities Industry
Association shall post with the Clerk of the Court a bond of
one hundred thousand dollars ($100,000), in cash or surety,
within 48 hours of issuance of this injunction, failing which the
injunction shall stand immediately dissolved.
IT IS FURTHER ORDERED that Bankers Trust Company shall
post with the Clerk of the Court a bond of one hundred
thousand dollars ($100,000), in cash or surety, within 48 hours
of issuance of this Order, failing which the stay shall stand
immediately dissolved.
It is, this 18th day of February, 1986 at 3:40 p.m.
SO ORDERED.
/s/ Joyce Hens Green
JOYCE HENS GREEN
United States District Judge
45a
Opinion and Order of the District Court,
February 4, 1986
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
Civil Action No. 80-2730
+
SECURITIES INDUSTRY ASSOCIATION,
Plaintiff,
—_—V.—
BOARD OF GOVERNORS OF THE FEDERAL
RESERVE SYSTEM, et al.,
Defendants,
’
BANKERS TRUST COMPANY,
Defendant-Intervenor.
2 os
MEMORANDUM OPINION AND ORDER
JOYCE HENS GREEN, District Judge.
Plaintiff, Securities Industry Association (“SIA”), a trade
association representing the nation’s securities dealers and
underwriters, challenges a decision of the Federal Reserve
Board (“Board”) permitting Bankers Trust Company to place
commercial paper with investors on behalf of issuers under
certain prescribed conditions. Specifically, in its ruling of June
4, 1985, the Board determined that Bankers Trust’s commer-
cial paper placement activities did not constitute “selling,”
“underwriting,” or “distributing” commercial paper securities
for purposes of the Glass-Steagall Act, which generally pro-
hibits banks from underwriting or dealing in securities. The
SIA contends that the Board’s interpretation of the Act is
46a
incorrect as a matter of law and that its ruling must therefore
be set aside. The Board, along with defendant-intervenor
Bankers Trust (hereinafter referred to collectively as “defend-
ants”), oppose the SIA’s motion for summary judgment and
have filed cross motions for summary judgment. For the
reasons set forth below, the Court concludes that Bankers
Trust’s commercial paper activities do indeed violate the stric-
tures of the Glass-Steagall Act and that the Board’s contrary
ruling must therefore be invalidated.
1. BACKGROUND
The Court is well-acquainted with the parties to this action
and their dispute, which began in 1979 and has already wound
its way once through the entirety of the federal judiciai system.
In January 1979, plaintiff SIA and A.G. Becker, Inc., a
commercial paper dealer, requested that the Board prohibit
Bankers Trust from selling commercial paper issued by com-
panies not related to the bank,' claiming that such sales were
prohibited by certain provisions of the Banking Act of 1933,
commonly referred to as the Glass-Steagall Act. Section 16 of
the Act, 12 U.S.C. § 24 Seventh (1982), bars national banks
from dealing in securities, except purchases and sales made,
without recourse, upon the order and for the account of bank
customers, while section 21,: 12 U.S.C. § 378(a)(1) (1982),
prohibits banks from “issuing, underwriting, selling or distrib-
uting” securities. Responding to the petitions of SIA and
»
l The Court offers, as it did in its previous disposition of this case, the
following definition of commercial paper, found in Comment, The
Commercial Paper Market and the Securities Acts, 39 U. Chi. L. Rev.
362, 363-64 (1972):
Commercial paper consists of unsecured, short-term promissory
notes issued by sales and personal finance companies; by manufac-
turing, transportation, trade and utility companies; and by the
affiliates and subsidiaries of commercial banks. The notes are
payable to the bearer on a stated maturity date. Maturities range
from one day to nine months, but most paper carries an original
maturity between thirty and ninety days. When the paper becomes
due, it is generally rolled over—that is, reissued—to the same or a
different investor at the market rate at the time of maturity.
———EEeEeEeE=EeEeEeEeEeEeEeOO
47a
Becker in September, 1980, the Board took the position that
the financial instruments sold by Bankers Trust—prime quality
third-party commercial paper with a maturity of nine months
or less, sold in large denominations to sophisticated cus-
tomers—were not “notes or other securities” for purposes of
the Glass-Steagall Act, and that Bankers Trust’s sales were
therefore legal. Shortly thereafter, Becker and the SIA com-
menced suit in this Court, seeking review of the Board’s
conclusion. In a decision dated July 28, 1981, this Court ruled
that commercial paper was in fact a “note[ ] or other secu-
rit[y]” within the meaning of the Act, and therefore invalidated
the Board’s decision. A.G. Becker, Inc. v. Board of Governors
of the Federal Reserve System, 519 F. Supp. 602 (D.D.C.
1981). A divided panel of the Court of Appeals reversed that
judgment, adopting the Board’s reasoning, A.G. Becker, Inc.
v. Board of Governors of the Federal Reserve System, 693 F.2d
136 (D.C. Cir. 1982), but the Supreme Court overturned the
Court of Appeal’s decision and reinstated this Court’s holding
that commercial paper is comprehended by the literal language
of the statute, and that the inclusion of such financial instru-
ments within the Act’s terms is fully consistent with its pur-
poses. Securities Industry Association v. Board of Governors
of the Federal Reserve System, _____ U.S. , 104 S. Ct.
2979 (1984) (“SIA”). The Supreme Court, however, expressed
no opinion as to whether Bankers Trust’s placement activities
constituted “underwriting,” “issuing,” “selling” or “distribut-
ing” within the meaning of the statute, and therefore remanded
the case for determination of that question. /d. at , 1045S.
Ct. at 2992. In an Order dated October 19, 1984, this Court
remanded the case to the Board so that it might consider the
“underwriting” issue in the first instance.
In order that the contentions of the parties and the conclu-
sions of the Court may be better understood, it is necessary to
set out Bankers Trust’s activities in some detail. In 1978, the
bank first began offering for sale third-party commercial
paper, soliciting purchasers through advertisements announc-
ing its placement services. The bank also initiated a marketing
campaign aimed at issuers of commercial paper, promising to
48a
perform services competitive with securities dealers. Chief
among these services was Bankers Trust’s offer to extend short-
term credit to commercial paper issuers to cover the unsold
portions of any given issue, at interest rates equal to or near
the rates borne by the paper. Following the Supreme Court’s
decision, the Board notified Bankers Trust by letter dated
December 3, 1984, that this practice of extending back-up
credit to issuers “appears to be the economic equivalent of
buying some of the unsold issue with the bank’s own funds, an
activity that would appear to be prohibited by the [Glass-
Steagall] Act.” Statement Concerning Applicability of the
Glass-Steagall Act to the Commercial Paper Placement Activi-
ties of Bankers Trust Company at 3 (June 4, 1985) (“June 4,
1985 Statement”). As this conclusion was based upon Bankers
Trust’s 1980 placement activities, the Board offered the bank
an opportunity to provide information concerning its more
recent placement methods, and also solicited comments from
interested parties, including, among others, the SIA.
The bank’s current activities in the commercial paper mar-
ket, which are described in the Board’s June 4, 1985 Statement
and lie at the heart of the presejt dispute, differ in several
material respects from its 1980 placement methods. Bankers
Trust still assists issuers in placing their paper with large
financial institutions, advising client issuers with respect to the
rates and maturities of a proposed issue that are likely to be
accepted, soliciting potential purchasers and selling the paper
to them. The bank, however, no longer lends short-term funds
to issuers at or tiear the rates of interest of the paper being
placed. It does not purchase or repurchase the paper, inventory
it overnight, or take any ownership interest in the paper. Nor
does the bank make loans on the paper, as it used to, or take
the paper as collateral for loans. Finally, the bank enters into
no repurchase, endorsement or other guarantee arrangement
with purchasers of the paper. June 4, 1985 Statement at 4-5.
In its June 4, 1985 Statement, the Board conciuded that
Bankers Trust is not engaged in “distributing” or “underwrit-
ing” securities under section 21 of the Glass-Steagall Act,
because its current placement activities do not involve public
49a
offerings as that term is defined under the federal securities
law. While Bankers Trust is involved in “selling” securities, the
Board found that the bank does so without recourse, upon the
order and for the account of its customers, and that its sales
therefore fall within the “permissive phrase” of section 16 of
the Act. Finally, the Board concluded that the bank’s place-
ment activities will not give rise to the hazards and financial
dangers that the Glass-Steagali Act was designed to prevent,
and that they therefore fall outside the scope of the Act.
Following the Board’s decision, the parties filed the cross
motions for summary judgment now before the Court, and
various amici filed supporting memoranda. Oral argument on
the motions was held on September 19, 1985.
Il. DISCUSSION
The Board, of course, is the agency charged with regulating
the national banking system, and as such has primary responsi-
bility for implementing the Glass-Steagall Act. S/JA, U.S.
at____, 104 S. Ct. at 2983. Courts, therefore, are to “accord
substantial deference to the Board’s interpretation of that Act
whenever its interpretation provides a reasonable construction
of the statutory language and is consistent with legislative
intent.” Securities Industry Ass’n v. Board of Governors,
U.S. 5 oe or 3003, 3009 (1984) (“Schwab”). The
Supreme Court has made clear, however, that the deference
owed is not so great as to convert judicial review into a rubber
stamp for Board decisions. Under the standard enunciate& in
SIA, courts are to determine for themselves the congressional
intent underlying a given banking statute, and “ ‘must reject
administrative constructions of [that] statute . .. that are
inconsistent with the statutory mandate or that frustrate the
policy that Congress sought tp implement.’ ” SJA, ____ U.S.
at , 104S. Ct. at 2983 (quoting Federal Election Comm’n
v. Democratic Senatorial Campaign Comm’n, 454 U.S. 27, 32
(1981)).
The Glass-Steagall Act was passed in 1933, in response to the
banking collapse that ushered in the Great Depression of the
1930’s. The Act reflected the widely-held view that the depth of
|
50a
the nation’s financial crisis was attributable in large measure to
the extensive participation of commercial banks in speculative
investment banking activities. In order to restore public confi-
dence in commercial banks as depository institutions, and to
prevent future financial disasters, Congress sought “[t}hrough
flat prohibitions . . . to ‘separat[e] as completely as possible
commercial from investment banking.’ ” SJA, ___._ U.S. at
____, 104 §. Ct. at 2985 (quoting Board of Governors v.
Investment Company Institute, 450 U.S. 46, 70 (1981)
(“ICT’)). The two principal prohibitions designed to effect
such a separation are found in sections 16 and 21 of the Act.
Section 21 prevents persons or firms involved in investment
banking activities from engaging in commercial banking by
making it illegal for any person “engaged in the business of
issuing, underwriting, selling or distributing ... stocks,
bonds, debentures, notes or other securities to engage in the
business of receiving deposits . . . .” 12 U.S.C. § 378.* Sec-
tion 16 enforces this prohibition from the other side of the
equation. It provides that “[t]he business of dealing in securi-
ties and stock by [member banks] shall be limited to purchas-
ing 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. . . .” 12 U.S.C. § 24 Seventh.
As Bankers Trust is a member bank in the business of -eceiving
2 Section 21 provides, in pertinent part:
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, 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:
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, underwriting, purchasing,
and selling investment securities, or issuing securities, to the extent
permitted to national banking associations by the provisions of
section 24 of this title. . . 2
Sla
deposits, both sections apply to its activities. SJA, ___ U.S. at
, 104. S. Ct. at 2986.
A. Bankers Trust’s Activities As “Selling” Commercial Paper
There can be no dispute that Bankers Trust “sells” commer-
cial paper on behalf of issuers, and that its activities are
therefore embraced by the literal terms of section 21, which
broadly prohibits banks from “selling” securities. In its June 4,
1985 Statement, the Board took the position that because
section 16 authorizes banks to engage to some extent in selling
securities, section 21 should not be read as prohibiting sales
activities expressly permitted by section 16. June 4, 1985
Statement at 9. Plaintiff challenges this construction of the
Act. Noting that the terms of the statute are to be given their
literal meaning, /C7, 450 U.S. at 65, plaintiff argues that the
term “selling” comprehends all sales activities—be they princi-
pal or agency transactions, private or public sales and thus
carves out no exception for sales authorized under section 16.
Bankers Trust’s activities are unlawful if prohibited by either
section of the Act, SJA, U.S. at , 1048S. Ct. at 2986,
plaintiff claims, and thus because they fall within the plain
meaning of section 21’s broad prohibition, the bank’s activities
are illegal.
In advancing such an argument, however, the SIA ignores
the Supreme Court’s observation that sections 16 and 21 “seek
to draw the same line.” Jd. Indeed, section 21 expressly states
that its provisions “shall not prohibit national banks. . . from
dealing in, underwriting, purchasing, and selling investment
securities to the extent permitted by the provisions of section
24 of this title.” 12 U.S.C. § 378(a)(1). Paragraph seventh of
Section 24, of course, is the codification of section 16 of the
Glass-Steagall Act. Thus, section 21 would appear to incorpo-
rate by express reference the sales exception created by section
16. Even were this not the case, plaintiff’s construction of the
Act flies in the face of the maxim that the provisions of a
statute should be read consistently with one another in order to
give meaning to each, since Congress is presumed not to draft
52a
superfluous or insignificant language. United States v. Men-
asche, 348 U.S. 528, 538-39 (1955); Zeigler Coal Co. v. Kleppe,
536 F.2d 398, 406 (D.C. Cir. 1976). Under plaintiff’s reading of
the Act, section 16’s carefully drafted exception to the general
prohibition on the sale of securities would be rendered com-
pletely nugatory by section 21. Congress most certainly could
not have intended such a result. The Court, therefore, finds
that the Board’s construction of section 21, which gives effect
to section 16’s permissive phrase, is both consistent with
congressional intent and reasonable.
1. Section 16’s Permissive Phrase
The relevant inquiry then, is whether Bankers Trust’s sales
activities fit within section 16’s permissive phrase. In the
Board’s view, the bank’s current placement methods satisfy
each of the criteria set out in the section: the Board concluded
that (1) the bank does not purchase the commercial paper for
its Own account or extend credit to the issuer in a manner that
is the functional equivalent of purchasing the paper; (2) the
bank does not assume any market risk for, or in any way
guarantee, the paper it places; and finally (3), the bank places
the paper solely upon the order of its customer, the commercial
paper issuer. June 4, 1985 Statement at 10. Plaintiff takes issue
- with each of these conclusions.
The first of these disputed findings raises several trouble-
some questions, particularly in light of the procedural posture
of the case. In concluding that Bankers Trust does not pur-
chase the securities for its own account, the Board relied upon
the bank’s submission that it no longer provides back-up credit
to issuers to cover unsold portions of a commercial paper
issue, and that where the bank does provide credit to an issuer,
it does so as part of its ordinary commercial lending functions,
in a manner unrelated to and independent of the bank’s efforts
to place the issuer’s paper. June 4, 1985 Statement at 11-13.
Indeed, the Board explicitly stated that its analysis of the
bank’s activities “is premised on the assumption that Bankers
Trust does not provide its letter of credit to support a particu-
lar issue of commercial paper placed by the bank.” Jd. at 14
53a
n.13. As plaintiff notes, banks have a strong incentive to offer
such credit to issuers, not only because they earn a fee on the
loan, but because the credit enhances the marketability of the
paper the bank is attempting to sell. See SJA, _____ US. at
, 104 S. Ct. at 2989. The Board’s answer to this concern,
however, is to further assume that where the bank extends
credit to an issuer, “it would do so under different terms, at
different times, and for different purposes”; that the bank
would keep appropriate records to demonstrate the indepen-
dence of the loan and the issue of commercial paper; and that
the bank would assure itself that any funds advanced would
not be used to pay any paper placed by the bank or to cover
any unsold portion of an issue. June 4, 1985 Statement at 13.
Plaintiff seriously challenges the validity of these assumptions,
pointing to several advertisements and commercial paper rating
service evaluations explicitly acknowledging that Bankers Trust
backed certain issues through letters of credit.’ These public
announcements appeared prior to the Board’s ruling and have
continued since, see n.3 supra; the most recent prompted a
letter from the Board to the Court, explaining that the transac-
tion at issue appeared to have been initiated prior to both the
Board’s ruling and the Board’s December 1984 letter to the
bank, and that in any event, the Board was investigating the
matter and would take remedial action if necessary to ensure
that the bank is no longer extending credit to back the paper it
3 Plaintiff attached to its Memorandum in Opposition to Defendants’
Cross-Motion for Summary Judgment and in Support of Plaintiff’s Motion
for Further Summary Judgment, a “tombstone” advertisement that ap-
peared in the February 28, 1985 Wall Street Journal which stated that
Bankers Trust “initiated this program, provides letter of credit support, and
acts as financial advisor, trustee and exciusive sales agent” for Renault
Industrias Mexicana’s commercial paper program. In a letter to the Court
dated October 10, 1985, plaintiff’s counsel also attached Moody’s Commer-
cial Paper Record (October 1985) which rates the same commercial paper as
prime “based solely on the support provided by a letter of credit issued by
Bankers Trust Company.” At oral argument, however, counsel for Bankers
Trust stated unequivocally that the bank no longer bears letter of credit risk
on the Renault Industrias Mexicana transaction. Transcript of September 19,
1985 hearing at 51.
S4a
places. Letter from Richard N. Ashton, counsel for the Board,
to the Court (November 12, 1985).
This case, of course, is presently before the Court on cross-
motions for summary judgment. Were the Court otherwise
persuaded that the Board’s ruling is correct and should be
upheld, these public announcements, particularly those pub-
lished since the Board’s ruling, would preclude summary judg-
ment for defendants, as they clearly raise questions of material
fact. There can be no doubt that the Board’s assumptions
regarding the bank’s lending practices are material to the case
—they lie at the heart of the Board’s determination that the
bank no longer purchases the securities for its own account or
Otherwise assumes any market risk in connection with the
paper. The public announcements cast serious doubt upon the
validity of those assumptions and raise a host of factual
questions—e.g., do the announcements refer to transactions
pre-dating the Board’s ruling or its letter of December 1984?
can the Board adequately monitor the bank’s lending practices
to assure compliance with the ruling? could or should the bank
have withdrawn the commercial paper issues in question fol-
lowing the Board’s December 1984 letter?—that this Court is
not prepared to answer on the basis of declarations made in the
parties’ papers. Because the Court is of the view that the
Board’s ruling is invalid for other reasons, however, it need not
address such questions here.* For present purposes, therefore,
the Court accepts as valid the Board’s conclusion that Bankers
Trust does not purchase, through loans or otherwise, the
commercial paper it places.
4 The public statements, and the Board’s leiter of November 12, 1985, in
particular, are significant not only for their bearing on the validity of the
Board’s assumptions, but because they shed considerable light on the nature
of the Board’s ruling. In the previous round of this litigation, the Supreme
Court admonished the Board for attempting to erect a regulatory framework
under the Glass-Steagall Act, where the Act itself established flat prohibi-
tions. “Congress,” the Court stated, “rejected a regulatory approach when it
drafted the statute, and it has adhered to that rejection ever since.” S/JA,
, U:S. at ,104 S. Ct. at 2988. The Board’s recent letter strongly
suggests that it is again attempting to regulate the commercial paper place-
ment activities of Bankers Trust through bank examinations and investiga-
tions.
55a
Plaintiff next contends that regardless of whether the bank
actually purchases the paper it places, it nevertheless assumes
certain market risks in connection with its sale of the paper and
therefore fails to satisfy the “without recourse” requirement of
section 16. This is so, plaintiff argues, because in selling
commercial paper the bank makes a number of implied repre-
sentations concerning the creditworthiness of the paper; breach
of these implied representations, plaintiff contends, creates
potential liability under the federal securities laws, thereby
permitting the purchaser of the paper to seek redress from the
bank. This Circuit, however, has already rejected in a different
context the SIA’s claim that such contingent liability violates
the “without recourse” provision of section 16. The ordinary
commercial meaning of the phrase “without recourse”- simply
“ ‘prohibits banks from assuming the liability of endorser or
maker with respect to the securities,’ ” but does not embrace
incidental liability under the securities laws. Securities Industry
Ass’n v. Comptroller of the Currency, 577 F. Supp. 252, 257
(D.D.C. 1983) (quoting Jn re Bank America Corp., 69 Fed.
Res. Bull. 105, 115 n.50 (1983)), aff’d per curiam, 758 F.2d 739
(D.C. Cir. 1985). See also Securities Industry Ass’n v. Board of
Governors, 716 F.2d 92, 100 n.4 (2d Cir. 1983) (bank’s broker-
age activities do not violate section 16 merely because bank
faces incidental liability to third party if brokerage customer
breaches agreement to buy or sell security), aff’d, U.S.
___, 104 S. Ct. 3003 (1984). Thus, if the Board’s underlying
assumptions about the bank’s lending practices are accepted,
Bankers Trust sells the commercial paper without recourse for
purposes of the Act.
Section 16’s final requirement is that the bank sell the
securities “upon the order” of its customers. In the Board’s
view, Bankers Trust’s activities comport with this requirement
because (1) it is the issuer, not the bank, who decides whether
to issue commercial paper and in what amount; (2) the issuer is
clearly a customer of the bank; and (3) nothing in the statute
requires that the customer have a pre-existing relationship with
the bank. June 4, 1985 Statement at 16.
56a
2. The Act’s Legislative History
Having determined that Bankers Trust’s activities fit neatly
within the literal language of section 15's permissive phrase,
the Board turned to the Act’s legislative history, and concluded
that the “placement of securities with a limited number of
purchasers by a bank, acting solely as agent of an issuer, was
not identified as a source of congressional concern.” Jd. at 18
(footnote omitted). The Board noted that nothing in the
legislative history specifically prohibits banks from participat-
ing in the initial flotation of securities, and thus it found no
reason not to apply the statutory language literally. The fact
that banks never engaged in such activities prior to passage of
the Act, or in the fifty years following its enactment, is in the
Board’s view insignificant, and simply reflects the previous
lack of economic incentive to provide such services. Jd. at 20.
It is here that the Court parts company with the Board. As
plaintiff notes, the Glass-Steagall Act sets out a series of “flat
prohibitions,” SJA, US. at , 1048S. Ct. at 2985, and
it is against this framework that section 16’s narrow exception
is to be gauged. The Board, by contrast, starts its analysis from
an entirely different perspective: rather than asking whether, in
view of the statute’s prohibitions, the legislative history sup-
ports the authorization that the Board has found in section 16,
the Board instead looks to see whether there are any statements
in the debates or hearings on the bill that demonstrate congres-
sional disapproval of such an authorization. The Board has
thus asked the wrong question and in so doing, plaintiff
submits, has “transform[ed] a narrow exception addressed to a
completely different activity into an expansive authorization
that defeats the prohibition intended.” Plaintiff’s Motion at
26. The Court agrees.
As noted previously, Congress designed the Glass-Steagall
Act “to separat[e] as completely as possible commercial from
investment banking.’ ” S/JA, US. at , 104 S. Ct. at
2985 (quoting /C/,-450 U.S. at 70). Such a separation was
necessary, Congress believed, not only to protect bank assets
from imprudent securities investments, but also to forestall the
S7a
mere subtle hazards that arise when a bank is cast in the role of
sole promoter for specific securities. In Congress’ view “the
promotional incentives of investment banking and the invest-
ment banker’s pecuniary stake in the success of particular
investment @pportunities was destructive of prudent and disin-
terested commercial banking and of public confidence in the
commercial banking system.” /nvestment Company Institute v.
Camp, 401 U.S. 617, 634 (1971) (“Camp”). Senator Bulkley,
one of the Act’s principal sponsors, noted that
the banker who has nothing to sell to his depositors is
much better qualified to advise disinterestedly and to
regard diligently the safety of depositors than the banker
who uses the list of depositors in his savings department
to distribute circulars concerning the advantages of this,
that, or the other investment on which the bank is to
receive an Originating profit or an underwriting profit or a
distribution profit or a trading profit or any combination
of such profits.
75 Cong. Rec. 9912 (1932). In addition to the conflicts of
interest that result when a bank acts as both promoter of
securities and investment adviser to its depositors, Congress
feared the promotional pressures that might lead banks to
misuse their credit facilities in order to advance their invest-
ment banking activities. Thus, Congress expressed concern
that banks might extend credit to shore up a company for
which they distribute securities; or that banks would be
tempted to make imprudent loans either to companies in whose
securities they have a promotional stake or to purchasers of
those securities; or that banks might pressure companies to
which they have made loans to issue securities through the
banks’ distribution systems. See SJA, _____ US. at , 104
S. Ct. at 2985; Camp, 401 U.S. at 633. In short, Congress
viewed certain investment banking activities as “fundamentally
incompatible with commercial banking” and therefore created
“a broad structur[e] that would surround the banking business
with sound rules which recognize the imperfection of human
nature that our bankers may not be led into temptation, the
58a
evil effect of which is sometimes so subtle as not to be easily
recognized by the most honorable man.’ ” S/A, U.S. at
, 104.S. Ct. at 2985 (quoting Sen. Bulkley, 75 Cong. Rec.
9912).
It is against the backdrop of these congressional concerns
that the scope of section 16’s sales authorization is to be
determined. Given the structure of the statute. that authoriza-
tion is necessarily a narrow one. Section 2, bans alli “selling”
of securities by persons who receive deposits, while section 16
bars banks from dealing in securities except for sales and
purchases made, without recourse, upon the order and for the
account of customers. As the Supreme Court has elsewhere
noted, section 16’s permissive phrase “accurately describes
securities brokerage.” Schwab, U.S. at , 104 S. Ct.
at 3011 n.20. It permits banks, acting as agents, to “arrange[ ]
the purchase and sale of securities as an accommodation to
their customers.” /d. at _, 104 S. Ct. at 3008. Thus, in
Schwab, the Supreme Court upheld a Board decision permit-
ting a bank holding company to acquire a non-banking affili-
ate engaged in retail securities brokerage, and this Circuit has
ruled that national banks may purchase or establish discount
securities brokerage subsidiaries. Securities Industry Ass’n v.
Comptroller of the Currency, 577 F. Supp. 252 (D.D.C. 1983),
aff’d per curiam, 758 F.2d 739 (D.C. Cir. 1985). Retail broker-
age activities by banks do not raise the specter of those subtle
hazards that the Glass-Steagall Act is designed to prevent: the
profits of one selling in the retail or secondary market turn on
the volume of shares sold, not on the purchase or sale of a
particular security; the broker-bank has no “salesman’s stake”
in the securities it trades, and it cannot increase its profitability
by extending credit to issuers of particular securities, nor by
improperly favoring particular securities in the management of
depositors’ assets. Schwab, U.S. at , 104 S. Ct. at
3011. Banks had engaged in retail brokerage sales prior to
passage of the Act, and Congress, apparently convinced that
the evils associated with investment-banking activities did not
inhere in such activities, drafted section 16 to permit banks “to
purchase and sell investment securities for their customers to
ee
59a
the same extent as heretofore.” S. Rep. No. 77, 73d Cong., Ist
Sess. 16 (1933) (quoted in Schwab, iy — 7 %
Ct. at 3008 n.13).
Bankers Trust’s placement of commercial paper is of a
wholly different character. The bank does not sell in the
secondary market as a broker, but assists in the initial flotation
of securities in the primary market. It most definitely has a
“salesman’s stake” in the securities it sells—it earns its fee
based on its success in placing a given issuer’s paper, and
indeed, its ability to attract new customers/issuers depends on
how successful it is in marketing its customers securities.
Unlike the typical broker, Bankers Trust is not indifferent to
the identity of the securities it sells; on the contrary, the
profitability of its placement services hinges on “the purchase
or sale of particular securities.” Schwab, _____ U.S. at ,
104 S. Ct. at 3011 (emphasis supplied). The bank is therefore
inevitably cast in the role of promoter for specific securities,
and precisely those promotional evils that Congress sought to
root out of the commercial banking world are present in its
activities.
The very history of this litigation, in fact, serves to illustrate
the point. From 1978 until, presumably, December 1984, when
the Board directed Bankers Trust to discontinue the practice,
the bank extended credit to issuers in order to enhance the
marketability of its commercial paper.° In Schwab, by contrast,
the Supreme Court found that promotional pressures did not
inhere in retail brokerage services because a bank “cannot
increase [its] profitability by . . . extend[ing] credit to issuers
of particular securities.” /d. at , 104 S. Ct. at 3011
(emphasis supplied). Obviously, Bankers Trust can, and for six
years did, increase the profitability of its placement services
through various credit extensions to issuers. Thus, while retail
brokerage services lack certain promotional pressures as a
matter of simple economics—i.e. because there is no financial
5 See, e.g., Moody’s Commercial Paper Record (October 1985) (ex-
plaining that Prime-1 rating for Renault Industrias Mexicana S.A. “is based
solely on the support provided by a letter of credit issued by Bankers Trust”
and “does not necessary reflect the credit worthiness of the issuer in any
other issue. . .”).
60a
incentive to distort lending practices—the Board had to suggest
a number of regulatory guidelines in its June 4, 1985 Statement
in order to curb those pressures that are undeniably present in
Bankers Trust’s activities. Accordingly, the Board assumed that
if the bank advances funds or credit to an issuer, it will do so
under different terms, at different times and for different
purposes, than if the bank meant to support a specific issue of
commercial paper; that the bank will keep adequate records to
demonstrate the independence of loans from commercial paper
issues; and that the bank will monitor loans to issuers to make
certain they are not used to cover unsold portions of any issue.
June 4, 1985 Statement at 13. It is readily apparent, however,
that these safeguards are not and cannot be self-enforcing;
indeed, in its November 12, 1985 letter to the Court, the Board
admits that an investigation into the bank’s credit and lending
practices is necessary to determine, nearly one year after its
December 1984 letter, if Bankers Trust is extending credit to
commercial paper issuers. Such an investigation is a tacit
concession that promotional pressures absent from retail brok-
ering arise naturally in sales activities such as Bankers Trust’s.
In light of the concerns that prompted passage of the Glass-
Steagall Act, the statute’s broad prohibitions, the rather lim-
ited exception created by section 16, and the promotional
pressures that necessarily inhere in Bankers Trust’s sales activi-
ties, the Board’s assertion that there is nothing in the Act’s
legislative history “indicating that secondary market brokerage
activities were the on/v functions intended to be authorized [by
section 16] or that the statutory terms should not be read
literally,” June 4, 1985 Statement at 19 (emphasis in original),
rings more than a little hollow. By looking to see only whether
the bank’s sales activities fit within the literal terms of the Act,
and ignoring the structure and spirit of the law, the Board has,
as plaintiff suggests, turned the statute on its head. What little
legislative history there is concerning the permissive phrase of
section 16 indicates that Congress intended to allow banks to
continue the traditional retail brokerage services they had
provided prior to passage of the Act. Yet the Board finds in
this narrow exception authorization for sales activities of a
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6la
completely different nature, apparently unheard of in 1933,°
and fraught with the very promotional pressures Congress
found so injurious to commercial banking.
3. The Board’s Analysis of the “Subtle Hazards”
Perhaps recognizing the unpersuasiveness of its legislative
history analysis, the Board elsewhere in its ruling examines the
“subtle hazards” that Congress sought to eliminate by passing
the Act, and finds that they are not likely to arise when banks
sell commercial paper as the agents of issuers. The Board
notes, therefore, that while a misuse or distortion of the bank’s
credit operations “is of particular concern,” June 4, 1985
Statement at 39, it concludes that impairment of the bank’s
objectivity is “not significant” because the bank will take
adequate steps to assure that its credit facilities are not improp-
erly used, and because the financial gains from the bank’s sales
activities are too small in relation to its lending operations to
lead the Board to believe that the former will influence the
latter. Jd. at 40. Similarly, the Board does not envisage signifi-
cant damage to the public’s confidence in commercial banks as
a result of placement activities such as Bankers Trust’s. This is
so, in the Board’s view, because the investing and depositing
public will be fully apprised of the bank’s activities and the
bank’s loans will be independent of its sales operations. More-
over, because the bank sells paper to only a limited number of
institutions, it is likely that the investors will amount to only a
small fraction of the bank’s depositors, and therefore even if
they withdraw funds following a loss on commercial paper
“the loss of business would not likely have an effect on the
bank’s safety or soundness.” /d. at 42. In addition, the sophis-
ticated investors that Bankers Trust sells to are likely, the
Board believes, to view any loss on the commercial paper as at
6 In SIA, the Court noted that the history of commercial bank
involvement with commercial paper prior to the Act's passage is not well-
documented, but that to the extent banks did participate, they did so as
discounters rather than dealers. U.S. at , 104S. Ct. at 2992. The
commercial-banking industry's failure to deal in commercial paper since the
Act was passed, the Court observed, suggests that banks understood such
activity to be prohibited by the statute. /d.
62a
least partly their own fault. /d. at 43. Finally, the Board
anticipates that the bank’s role as disinterested financial ad-
viser to its depositors will not be compromised by its sales
operations, and similarly, that the bank is unlikely to pressure
its corporate clients into using its placement services. The bank
does not purchase commercial paper for its trust department,
and, in the Board’s view, the promotional incentives inherent
in the bank’s sales activities are “not significant” and thus
unlikely “to subject the bank to this kind of conflict of
interest.” Jd. at 46.
The Board’s evaluation of the “subtle hazards” issues is
flawed in several key respects. To begin with, the Board
assumes that the “pecuniary stake” identified by the Supreme
Court in SJA as the source of impermissible promotional
pressures was “undoubtedly linked” to the bank’s investment
of its own funds in the commercial paper it sold. /d. at 35. The
fact that Bankers Trust may no longer purchase the paper
through loans or credit extensions, the Board believes, elimi-
nates this pecuniary stake altogether. While it is true that some
_ of the congressional concerns discussed by the Supreme Court
involved the bank’s actual purchase of securities, such activi-
ties are hardly the exclusive source of promotional incentives.
As noted above, Bankers Trust, as a seller in the primary
market, is of necessity a promoter of specific securities. The
Board concedes that the commercial paper market is “highly
competitive,” id. at 36, and that Bankers Trust’s placement
services are “designed primarily to maintain the bank’s rela-
tionship with its best commercial lending customers, which in
the recent past have increasingly sought to satisfy their short-
term funding needs in the commercial paper market, rather
than through loans from the bank.” /d. at 37. It is obvious,
then, that whether or not the bank purchases the commercial
paper, it has a very significant “salesman’s stake” in the paper
it sells: in order to maintain its relationship with its most
important commercial customers, the bank must place securi-
ties in a highly competitive market. The promotional pressures
in such a situation are self-evident. In the face of these facts,
the Board’s conclusion that “the promotional incentive inher-
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63a
ent in the [bank’s] commercial paper activity is not signifi-
cant,” June 4, 1985 Statement at 46, is simply untenable.’
In addition, the Board’s analysis is premised on the mistaken
supposition that Congress sought only to eliminate “likely”
hazards or conflicts of interests. The Board acknowledges, for
example, that personnel in the bank’s credit department will in
all likelihood be aware of the bank’s role in placing a borrow-
er’s paper, thereby recognizing a potential conflict between the
bank’s role as lender and promoter. Nevertheless, it dismisses
this conflict as unlikely. June 4, 1985 Statement at 39-40.
Similarly, the Board recognizes that the bank’s reputation
could be harmed if the issuer of the paper were to default, but
concludes that the damage would not be significant. /d. at 41-
42. In like manner, the Board disposes of several other congres-
sional concerns such as the possible lack of disinterested
financial advice to depositors, or the danger that companies
might issue paper to raise money in order to repay outstanding
loans to the bank. In each case, the Board concedes that such
dangers are possible but ultimately unimportant because, in the
7 The Board, in its submissions to this Court, make much of the fact
that in Schwab the Supreme Court stated in a footnote that “[aJll these subtle
hazards are attributable to the promotional pressures that arise from .
purchas[ing] and selifing] particular investments on their own account,”
U.S. at , 104 S. Ct. at 3011 n.23 (emphasis supplied). Defend-
ants read this statement as a determination by the Supreme Court that
underwriting alone gives rise to the hazards Congress sought to forestall.
Such a reading, however, is unwarranted. To begin with, in Schwab the
Supreme Court did not have before it activities such as Bankers Trust’s here,
and thus had no reason to consider the hazards that might arise when banks
sell securities in the primary market without actually purchasing them.
Moreover, the Court’s textual analysis in Schwab does not suggcst that
underwriting is the exclusive source of deleterious promotional pressures. As
discussed previously, the Court in Schwab identified a number of promo-
tional hazards that were absent from Schwab’s activities that are clearly
present thus, unlike Schwab, Bankers Trust’s profits do depend on the
purchase or sale of particular securities; and Bankers Trust cou/d enhance the
profitability of its services by extending credit to issuers of particular
securities, see note 5 supra and accompanying text, or by favoring particular
securities in the management of depositors assets. See Schwab, U.S. at
, 104 S. Ct. at 3011.
64a
Board’s view, they are unlikely. The Board’s assessment of
these likelihoods, however, whether accurate or not, simply
misses the mark. As the Supreme Court made abundantly clear
in SIA, Congress drafted the law to eliminate potential con-
flicts of interest, not simply those that were especially likely to
occur. Congress, the Supreme Court noted, was concerned
“that a bank’s salesman interest in an offering ‘might impair
its ability to function as an impartial source of credit,’ ”
U.S. at , 104 S. Ct. at 2989 (quoting Camp, 401 U.S. at
631) (emphasis supplied), and that banks “might use their
relationships with depositors to facilitate distribution of securi-
ties in which the bank has an interest.” Jd. at , 104 S. Ct.
at 2989-90 (emphasis supplied). In SJA, the Board argued that
these congressional concerns were not implicated by the bank’s
activities because of the extremely low rate of default on prime
quality commercial paper—i.e. that the hazards identified by
Congress were not /ikely to arise. The Supreme Court rejected
this actuarial analysis in no uncertain terms, stating that “the
Act’s underwriting prohibition displays no appreciation for the
features of a particular issue; the Act just prohibits commercial
banks from underwriting any of them.” /d. at , 1048S. Ct.
at 2990. Indeed, the Court noted that the law’s prohibitions
“reflect{ ] Congress’ conclusion that the mere existence of a
securities operation, ‘no matter how carefully and conserva-
tively run, is inconsistent with the best interests’ of the bank as
a whole.” Jd. at , 104S. Ct. at 2990-91 (quoting remarks
of Sen. Bulkley, 75 Cong. Rec. 9913 (1932) (emphasis sup-
plied). Notwithstanding these unequivocal pronouncements,
the Board has once again undertaken an ad hoc analysis of
probabilities and likelihoods. Neither the Act, nor the Supreme
Court’s explication of the Act, grant the Board a mandate to
weigh the likelihood of a given hazard in light of the concerns
that prompted passage of the Act. On the contrary, the Act is
premised on a recognition of the “imperfection of human
nature,” and was designed to eliminate all potential conflicts of
interest or other hazards so that bankers might not be “led into
temptation,” no matter how subtle or imperceptible hose
temptations might be. 75 Cong. Rec. 9912 (remarks of Sen.
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65a
Bulkley). Having identified such potential hazards in Bankers
Trust’s sales activities, the Board was obligated to invalidate
those activities.
In sum, the Court finds that Bankers Trust’s sales activities
do not fit within the narrow authorization provided by section
16. The bank’s flotation of securities in the primary market is
replete with precisely those pernicious promotional pressures
that Congress sought to eliminate from the commercial bank-
ing industry. The Board’s attempt to shoehorn such sales
activity into section 16’s permissive phrase, by regulating the
most immediate promotional incentives and dismissing the
more subtle as unlikely or insignificant, is inconsistent with
Congress’ desire to separate as completely as possible commer-
cial and investment banking and must therefore be invali-
diated.
B. Distributing or Underwriting Securities
The Board, having concluded that Bankers Trust’s place-
ment of commercial paper constituted authorized “selling” of
securities within the meaning of section 16, next analyzed those
activities to determine whether the bank was “distributing” or
“underwriting” securities for purposes of section 21, which
prohibits banks from engaging in such activities. Unlike its ban
on “selling,” section 21’s prohibition on “distributing” or
“underwriting” securities is total, because the Act does not
provide the narrow exceptions to these statutory terms that
section 16 creates for the term “selling.” While the Board
conceded that Bankers Trust’s placement activities are compre-
hended by the plain meaning of the terms “distributing” and
“underwriting,” it eschewed the statutory literalism it found so
compelling in interpreting section 16’s permissive phrase, and
instead read the distribution and underwriting prohibitions as
applying only to public offerings. In so ruling, the Board relied
by way of analogy on the federal securities laws, which exempt
certain non-public offerings from registration requirements.
Having thus imported exceptions from the securities laws not
found in the Glass-Steagall Act itself, the Board determined
that Bankers Trust’s sales were not directed at the general
public, and therefore did not run afoul of the underwriting and
66a
distribution prohibitions. Plaintiff strenuously objects to both
the Board’s analysis and- its conclusions.*
1. Underwriting
As the Board explained in its ruling, underwriting typically
takes one of two forms. In a “firm commitment” underwrit-
ing, a person purchases securities from an issuer and then
resells them, thereby assuming the risks of fluctuation in the
value of the securities. In a “best efforts” underwriting, a
person offers securities to third parties as agent for the issuer. |
L. Loss, Securities Regulation 163-72 (2d ed. 1961). As Bank-
ers Trust no longer purchases, either directly or through exten-
sions of back-up credit, the securities it sells (an assumption
which, as noted previously, this Court accepts for present
purposes) the bank is not engaged in “firm commitment”
underwriting. Plaintiff contends, however, that because the
bank sells commercial paper as the agent of issuers, and
receives a commission for its promotional efforts directly
related to its success in placing the paper, it is clearly engaged
in “best efforts” underwriting. The Board does not dispute
that “best efforts” distribution constitutes underwriting under
the federal securities laws, June 4, 1985 Statement at 23 n.23,’
but maintains that “[t]he terms ‘underwriting’ and ‘distribut-
ing,’ as described by the Supreme Court in the Schwab decision
8 The Court’s determination that Bankers Trust’s activities do not fall
within section 16’s permissive phrase, and are therefore barred by section
21’s ban on the “selling” of securities, is sufficient to dispose of this case.
Given the prior history of this litigation, however, with its series of reversals,
the fact that plaintiff’s challenge to the bank’s practices is quickly approach-
ing its seventh year and the importance of this matter to the nation’s
financial markets generally, prudence and justice dictate that the Court
address the Board’s rulings on the distribution and underwriting issues.
9 In Schwab, the Supreme Court noted that “best efforts” distribution
is not technically an underwriting, but did not reach the question of whether
such distribution constitutes underwriting for purposes of the Glass-Steagall
Act, since such activity was not before the Court. U.S. at , 104
S. Ct. at 3010 n.17. In its ruling, the Board acknowledged, however, that it is
well-settled that “best efforts” distribution is underwriting for purposes of
the federal securities laws.
eee
67a
and as defined in the Securities Act of 1933, typically refer to
the process by which securities are offered to the public.” Jd. at
a.
It is true, as the Board claims, that the term “underwriting”
commonly refers to the distribution of securities to the public.
Thus, in Schwab, the Supreme Court noted that “Tijn the
typical distribution of securities, an underwriter purchases
securities from an issuer... . [and distributes] . . . these
securities to the public.” U.S. at , 1048S. Ct. at 3010
n.17. In a “best efforts” underwriting, the Supreme Court
observed, “large blocks of specific issues of securities are
offered to the public by the investment banker acting as agent
for the issuer.” Jd. See also 1 L. Loss, Securities Regulation 164
(2d ed. 1961) (in “firm commitment” underwriting, issuer sells
to underwriter, who sells to dealers, who in turn sell to public);
Securities Act Rule 144, 17 C.ER. § 230.144 {preliminary note)
(underwriter includes investment banker who arranges for
public sale of issuer’s securities, as well as nonprofessionals
who act as link in chain through which securities brought to
public). Noting that in SA the Supreme Court looked to the
federal securities laws to determine the meaning of the phrase
“notes, or other securities” in the Glass-Steagall Act, the
Board sees “no convincing reason why this same principle
should not apply in construing the terms underwriting and
distributing in sections 16 and 21.” Defendants’ Motion for
Summary Judgment at 26.
The difficulty with the Board’s argument is that while both
Statutes were designed to prevent the abuses that precipitated
the Great Depression, the two attack different problems and as
a result have differing objectives. The federal securities laws
were enacted “to prevent fraud and to protect the interests of
investors.” United Housing Foundation, Inc. v. Forman, 421
U.S. 837, 849 (1975) (emphasis supplied). Thus, the public or
private nature of a securities offering is of crucial importance
under the federal securities laws, since a private distribution
does not implicate one of the securities laws’ core concerns:
protecting the relatively unsophisticated, nonprofessional,
public investor. The Glass-Steagall Act, on the other hand, was
designed to preserve the integrity of the commercial banking
industry by eliminating the potential conflicts of interest that
68a
arise when banks act as promoters of specific securities. Those
conflicts of interest arise regardless of whether the bank
engages in a best efforts underwriting campaign aimed at the
general public, or sells only to large institutional investors; the
promotional pressures which inhere in such activities are in no
way diminished by the fact that the bank places commercial
paper with the financially sophisticated.'? The Supreme Court
recognized as much in SJA, when it rejected the Board’s earlier
argument that commercial paper is not a note or other security
because it is sold only to sophisticated investors. The Court
noted that
the Act leaves little room for such an ad hoc analysis. In
its prohibition on commercial bank underwriting, the Act
admits of no exception according to the particular invest-
ment expertise of the customer. The Act’s prohibition on
underwriting is a flat prohibition that applies to sales to
both the knowledgeable and the naive.
pear, , 104 S. Ct. at 2991 (emphasis supplied)."'
10 Indeed, to the extent that the sophistication of the purchaser is
relevant at all under the Glass-Steagall Act, it would appear that sales to
financially astute investors in what the Board concedes is a highly competi-
tive market would increase the promotional pressures on the bank. Such
investors purchase on the basis of thorough financial analysis rather than
advertising slogans, and would therefore be more likely to purchase securities
that are backed by the bank’s own credit, see note 5 supra, thereby increasing
the bank’s economic incentives to enhance the marketability of specific issues
through distortions of its credit practices, however subtle or seemingiy
innocuous.
11 In its ruling, the Board dismissed the importance of this observation
by the Supreme Court by noting that, had the Court determined that all
placement activities involving a limited number of investors were barred by
the Act, “it would have been unnecessary for the Court to remand the case
for a ruling on the underwriting issue.” June 4, 1985 Statement at 27. Such
an observation, however, is hardly an adequate substitute for a principled
analysis of the public/private distinction which the Board draws yet fails to
justify in light of the Act’s concerns. Indeed, were the Board’s logic
accepted, Bankers Trust’s prior practice of extending back-up credit to
issuers could also be upheld, since the Supreme Court did not invalidate such
practices outright, but instead remanded the case. The Board obviously
found the Court’s statements concerning the bank’s credit practices control-
69a
In short, the federal securities laws do not provide the
compelling analogy the Board finds in them. Bankers Trust’s
sales activities are a form of best efforts underwriting aimed at
large institutional investors, and accordingly fall within section
21’s prohibition on underwriting. The Board’s attempt to
narrow the reach of this statutory language by importing
limitations found in the securities laws is simply unpersuasive
in light of the differing objectives of the Glass Steagall Act,
and the fact that the hazards which prompted passage of that
Act are just as likely to occur in sales to private institutions as
in sales to the general public.
2. Distribution
The Board’s conclusion that Bankers Trust has not engaged
in prohibited distribution of securities is equally flawed. In-
deed, its interpretation of this particular statutory term high-
lights the inconsistency of its analysis. The Board states that
the term “distribution” has been “traditionally . . . viewed as
synonymous with a public offering of securities,” (June 4, 1985
Statement at 24 (footnote omitted)), and notes that “section
4(2) of the Securities Act (15 U.S.C. § 77d{2)) exempts from
the registration and prospectus delivery requirements of the
[securities laws] those transactions that do not involve a public
offering.” Jd. The Board then goes on to find that Bankers
Trust does not engage in a public offering of commercial paper
“in the ordinary sense of the term,” and therefore does not
distribute securities for purposes of the Glass-Steagall Act.
In so ruling, however, the Board fails to account for a
significant difference between the two statutes: the Securities
Act contains an express exemption for securities distribution
through a non-public offering, while the Glass-Steagall Act
provides no similar qualification. This discrepancy is signifi-
cant in at least two respects. First, it indicates that, contrary to
what the Board might believe, the term “distribution” in the
ling and advised the bank to discontinue them. It offers no reasoned
explanation as to why those Supreme Court observations are to be given the
weight of law, while the Court's statements concerning the nature of the
purchasers can be disregarded as inconsequential dicta.
70a
Securities Act does not mean only “public offerings”; if that
were true, then the exemption for non-public offerings would
be entirely superfluous, since by definition such offerings
would not be “distributions,” and thus would not be covered
by the statute in the first place.'* Second, the Securities Act
exemption demonstrates that Congress was aware of the some-
times different nature of public and non-public distributions of
securities, and that when it deemed those differences relevant
to a given statute’s purpose, it drew appropriate distinctions
between the two types of offerings. The Glass-Steagall Act
contains no such distinctions, however, compelling the conclu-
sion that the statute prohibits banks from a// distributions, be
they public or non-public. In light of these different statutory
structures, the Board’s attempt to create an exemption for non-
public distributions where none was provided nor apparently
intended, simply cannot be upheld.
The Board’s efforts to engraft the Securities Act exemption
onto the Glass-Steagall Act fail for yet another reason. Having
limited the unqualified terms of the Glass-Steagall Act by
analogizing to the securities laws, the Board immediately
encounters difficulty because Bankers Trust’s activities do not
satisfy all the requirements of the Securities and Exchange
Commission’s (“SEC’s”) Regulation D, which sets out the
conditions that must be met in order for an offering to qualify
for the private placement exemption of the Securities Act.”
Forced to back away from its “compelling analogy” and to
acknowledge that the Glass-Steagall Act and securities laws
were designed to accomplish different objectives, the Board
concedes that the interpretation of terms used in the Securities
12 The Securities and Exchange Commission (“SEC”), the agency
charged with primary responsibility for interpreting and enforcing the securi-
ties laws, has rejected the view that no distribution occurs simply because an
offering is exempt from registration under the Securities Act. See Securities
Exchange Act Release No. 34-22205, 50 Fed. Reg. 28385, 28392 n.58 (July
12, 1985).
13 The bank advertises its services, thereby violating SEC Rule 502(c)
which prohibits general solicitation. 17 C.F.R. § 230.502(c). The bank also
places no restrictions on the resale of the paper it sells, violating Rule 502(d).
17 C.F.R. § 230.502(d).
Tla
Act should not be controlling for all purposes of the Glass-
Steagall Act. June 4, 1984 Statement at 24-25. Having recog-
nized the different purposes of the two statutes, however, the
Board does not then ask whether the public/non-public distinc-
tion which it finds in the securities laws is relevant to the Glass-
Steagall Act. Instead, it dismisses those provisions of
Regulation D that Bankers Trust fails to satisfy as not “ger-
mane to the core concerns of the . . . Act.” Jd. at 31. This
pick-and-choose approach to statutory construction is insup-
portable. The Board cannot have it both ways, drawing on
those provisions of the securities laws that support its decision
and rejecting other, less favorable features of those laws as
irrelevant. Had the Board looked to see whether the non-public
exemption was “germane” to the Glass-Steagall Act, it would
have found, as the Court noted previously, that the promo-
tional pressures Congress sought to eliminate are equally
present in non-public as well as public distributions. The
limitations the Board attempts to impose on the terms of the
Statute are not only not germane to the Act, they are inconsis-
tent with its core concerns. The Board, however, only inquired
into the relevance of those provisions that ran counter to its
conclusions, thus undermining the validity of its decision."
Moreover, the Board once again looked to the nature of the
purchasers in order to determine whether Bankers Trust is
engaged in impermissible distribution of securities. As noted
above, the Supreme Court has rejected this consideration as
irrelevant to the Glass-Steagall Act, which bars banks from all
distributions, and draws no distinctions based on the invest-
ment expertise of those to whom the securities are offered.
SIA, U.S. at , 104 S. Ct. at 2991. The rejection is
14 In addition to illustrating the inconsistency of its analysis, the
Board’s dismissal of certain portions of Regulation D raises serious questions
concerning the respective roles of the Board and the SEC in regulating the
securities industry. Congress gave the Board no regulatory authority under
the Glass-Steagall Act, S/A, U.S. at , 104 S. Ct. at 2989, and
extensive rule-making authority to the SEC under the Securities Act of 1933.
The Board in its ruling not only authorizes bank securities operations, it also
appropriates the SEC’s authority to define what constitutes a “private
placement” of securities. It is extremely doubtful that Congress could have
envisioned any such regulatory reversal.
72a
perfectly consistent with the Act’s purposes, for as discussed
previously, the promotional incentives that inhere in Bankers
Trust’s sales are as great, if not greater, than the pressures that
would arise if the banks were to sell securities to the general
public. See note 10, supra and accompanying text; see also
A.G Becker, Inc. v. Board of Governors, 693 F.2d 136, 154
(D.C. Cir. 1982) (Robb, J., dissenting), rev’d, U.S. ,
104 S. Ct. 2979 (1984) (bank depositors who are financially
able to purchase commercial paper in large denominations
likely to be among bank’s most important clientele; loss of
their goodwill due to losses on paper sold by bank could be
detrimental to bank’s operations). The Board’s reliance on this
feature of the bank’s activities, therefore, provides no support
for its conclusion that Bankers Trust does not engage in
distributing securities.
Finally, the Board’s determination that the bank’s activities
do not constitute distribution of securities within the meaning
of the Glass-Steagall Act reveals again the regulatory approach
the Board has adopted. Commenters before the, Board argued
that because of the short-term maturity of the paper the bank
sells, Bankers Trust will be forced to assist in “rolling over” the
paper, and therefore its sales efforts cannot realistically be
viewed as one-time private placements of securities. In re-
sponse, the Board stated that the frequent nature of these
activities, standing alone, does not necessarily convert a private
offering into a public one, and went on to add ihat “if the
bank’s activities become directed toward marketing securities
to an ever-broadening class of customers, the character of the
offering could eventually change from nonpublic to public and
the provisions of the Act could then apply.” June 4, 1985
Statement at 32. Noi surprisingly, the Board offers no sugges-
tion as to how it will determine if and when the bank’s
marketing efforts have crossed the magic threshold from pri-
vate to public offerings. Whatever criteria the Board will apply,
they certainly will not derive from the statute itself, since the
Act draws no distinction between public and private distribu-
tions. The Board therefore will have to draft guidelines or rules
to demarcate the boundaries between permissible and imper-
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73a
missible offerings of securities, and in addition, will be forced
to monitor the sales activities of banks to assure adherence to
such guidelines.
The Supreme Court, however, has made clear that “[all-
though. . . guidelines may be a sufficient regulatory r
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