# Appendix — Securities Industry Ass'n v. Board of Governors of the Federal Reserve System > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385019_1475%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1988 - **Citation:** 486 U.S. 1059 ## Text LIBRARY - SUPREME COURT, U.S. VASHINGTON, D.C, MAR 12 1966 Nig | concn IN THE Supreme Court of the United States OCTOBER TERM, 1987 > SECURITIES INDUSTRY ASSOCIATION, —_—V— Petitioner, BOARD OF GOVERNORS OF THE —_ FEDERAL RESERVE SYSTEM, ef al., Respondents. APPENDIX TO PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND 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 ROGERS & WELLS 206 Park Avenue New York, New York 10166 (212) 878-8000 Attorneys for Petitioner Securities Industry Association APPENDIX A APPENDIX B APPENDIX C APPENDIX D TABLE OF CONTENTS Opinion of the United States Court of Appeals for the Second Circuit in Secu- rities Industry Association v. Board of Governors, No. 87-4041 and consoli- dated cases (2d Cir. Feb. 8, 1988) .... Order of the Board of Governors of the Federal Reserve System Approving Ap- plications of Citicorp, J.P. Morgan & Co. Incorporated and Bankers Trust New York Corporation to Engage in Limited Underwriting and Dealing in Certain Securities, Citicorp, 73 Fed. Se eS, Order of the Board of Governors of the Federal Reserve System Conditionally Approving Application of The Chase Manhattan Corporation to Underwrite and Deal in Certain Securities to a Lim- ited Extent, The Chase Manhattan Cor- poration, 73 Fed. Res. Bull. 607 (1987) Order of the Board of Governors of the Federal Reserve System Conditionally Approving Applications of Chemical New York Corporation to Underwrite and Deal in Certain Securities to a Lim- ited Extent and to Place Commercial Paper, Chemical New York Corpora- tion, 73 Fed. Res. Bull. 616 (1987).... PAGE la 53a 146a 1Sla APPENDIX E APPENDIX F APPENDIX G APPENDIX H Order of the Board of Governors of the Federal Reserve System Approving Ap- plication of Citicorp to Underwrite and Deal in Commercial Paper to a Limited Extent, Citicorp, 73 Fed. Res. Bull. 618 Order of the Board of Governors of the Federal Reserve System Conditionally Approving Application of Manufactur- ers Hanover Corporation to Under- write and Deal in Certain Securities to a Limited Extent and to Place Commer- cial Paper, Manufacturers Hanover Corporation, 73 Fed. Res. Bull. 620 Order of the Board of Governors of the Federal Reserve System Conditionally Approving Application of Security Pa- cific Corporation to Underwrite and Deal in Certain Securities to a Limited Extent, Security Pacific Corporation, 73 Fed. Res. Bull. 622 (1987) ........ Selected Provisions of the Banking Act of 1933 (Glass-Steagall Act), Pub. L. No. 73-66, 48 Stat. 162 (12 U.S.C. §§ 24 (Seventh), 78, 377, 378)........ PAGE 156a 160a 166a APPENDIX A UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT i Nos. 1488, 1489, 1490, 1491, 1492, 1493, 1494—August Term 1986 (Argued June 23, 1987 Decided February 8, 1988) Docket Nos. 87-4041, 87-4055, 87-4057, 87-4059, 87-4061, 87-4063, 87-4067, 87-4069, 87-4071, 87-4073, 87-4075, 87-4077, 87-4079, 87-4085 + SECURITIES INDUSTRY ASSOCIATION, Petitioner-Cross-Respondent, —_—V.— BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYS- TEM, PAUL A. VOLCKER, as Chairman of the Board of Governors of the Federal Reserve System, MAN- UEL H. JOHNSON, WAYNE D. ANGELL, ROBERT H. HELLER, and MARTHA R. SEGER, as members of the Board of Governors of the Federal Reserve System, Respondents, BANKERS TRUST NEW YORK CORPORATION, J.P. MOR- GAN & CO. INCORPORATED, and CITICCRP and THE CHASE MANHATTAN CORPORATION, MANUFACTUR- ERS HANOVER CORPORATION, and CHEMICAL NEW YORK CORP, SECURITY PACIFIC CORPORATION, Intervenors-Respondents Cross-Petitioners. + 2a Before: CARDAMONE, PIERCE and WINTER, Circuit Judges. a The Securities Industry Association petitions for review of six orders of the Board of Governors of the Federal Reserve System. The Board found that bank holding company subsidiaries already engaged entirely in under- writing and dealing in federal, state, and local govern- ment securities could underwrite and deal in, to a limited extent, municipal revenue bonds, mortgage related securi- ties, and commercial paper without contravening § 20 of the Glass-Steagall Act. Bankers Trust New York Corp., J.P. Morgan & Co., Inc., Citicorp, The Chase Manhattan Corp., Manufacturers Hanover Corp., Chemical New York Corp. and Security Pacific Corp. cross-petition for review of the Board’s limitations on the securities activi- ties of their subsidiaries. Petitions for review denied. Cross-petition for review denied in part and granted in part. ae JAMES B. WEIDNER, New York, New York (David A. Schulz, Mark Holland, Peter Kimm, Jr., Roger & Wells, New York, New York; William J. Fitzpatrick, New York, New York; Donald J. Crawford, Washington, D.C., of counsel), for Petitioner-Cross-Respondent Securities Industry Association. AOR OO A ee - DL Tween 5 ta hmm = Sh ee ‘iment iene iain iat 3a MICHAEL S. HELFER, Washington, D.C. (Christopher Lipsett, Thomas P. Olson, Wilmer, Cutler & Pickering, Washington, D.C., of counsel), Pro Hac Vice for Intervenor-Respondent Cross-Petitioner Citibank. LEWIS B. KADEN, New York, New York (Lowell Gordon Harriss, D. Scott Wise, Davis Polk & Wardwell, New York, New York, of counsel), for JIntervenor- Respondent Cross-Petitioner J.P Morgan & Co. Incorporated. RICHARD M. ASHTON, Washington, D.C., (Richard K. Willard, Assistant Attorney General, U.S. Department of Justice, Mi- chael Bradfield, General Counsel, Kay E. Bondehagen, Douglas B. Jordan, Wash- ington, D.C.; Robert M. Kimmitt, De- partment of the Treasury; Richard V. Fitzgerald, Office of the Comptroller of the Currency, Washington, D.C., of counsel), for Respondents Board of Governors of the Federal Reserve Sys- tem, et al. DAVIS POLK & WARDWELL, New York, New York, attorneys for J.P. Morgan & Co., Incorporated; White & Case, New York, New York, attorneys for Bankers Trust New York Corporation; Shearman & Sterling, New York, New York and Wilmer, Cutler & Pickering, Washington, D.C., attorneys for Citicorp; Cravath, Swaine & Moore, New York, New York, 4a : attorneys for Chemical New York Cor- ) poration; Milbank, Tweed, Hadley & McCloy, New York, New York, attorneys for The Chase’ Manhattan Corpora- | tion; Simpson Thacher & Bartlett, New . York, New York, attorneys for Manufac- turers Hanover Corporation; O’Melveny | & Myers, New York, New York, attor- neys for Security Pacific Corporation; all of counsel), filed a brief on be- half of Intervenors-Respondents Cross- Petitioners. MARTIN GLENN, O’Melveny & Myers, New York, New York (Russell A. Freeman, Dan C. Aardal, Security Pacific Corpo- ration, Los Angeles, California; Edward J. McAniff, Michael J. Fairclough, O’Melveny & Myers, Los Angeles, Cali- ! fornia; William T. Coleman, Jr., John H. | Beisner, Jacob M. Lewis, James P. Nehf, O’Melveny & Myers, Washington, D.C., of counsel), filed a brief on behalf of Intervenor-Respondent, Cross-Petitioner Security Pacific Corporation. DAVID M. MILES, Washington, D.C. (Harvey L. Pitt, Henry A. Hubschman, Fried, Frank, Harris, Shriver & Jacobson, Washington, D.C.; Matthew P. Fink, Senior Vice President and General Coun- sel, Sarah O’Neil, Associate General Counsel, Investment Company Institute, Washington, D.C., of counsel), filed a se Sa brief on behalf of Investment Company Institute as Amicus Curiae. HOGAN & HARTSON, Washington, D.C. (Neal L. Petersen, Keith R. Fisher, James G. Christiansen, Washington, D.C., of counsel), filed a brief on behalf of Bank Capital Markets Association as Amicus Curiae. JOHN J. GILL, General Counsel, Washington, D.C. (Michael F. Crotty, Associate Gen- eral Counsel-Litigation, American Bank- ers Association, Washington, D.C., of counsel), filed a brief on behalf of the American Bankers Association as Amicus Curiae. 7 CARDAMONE, Circuit Judge: We review on this appeal those provisions of the Bank- ing Act of 1933 that separated the commercial and invest- ment banking industries and are known as the Glass-Steagall Act. See Pub. L. No. 73-66, §§ 16, 20, 21, & 32, 48 Stat. 162 (1933). Demand for divorcing banking and securities activities followed in the wake of the stock market crash of 1929, which occurred, it was said, be- cause a mountain of credit rested on only a molehill of cash. The actions of the Federal Reserve Board that we review today allow commercial and investment banking to compete in a narrow market, and to that extent dismantle the wall of separation installed between them by the Glass-Steagall Act. Whether Santayana’s notion 6a that those who will not learn from the past are con- demned to repeat it fairly characterizes the consequences of the Board’s action is not for us to say. Our task is to review the Glass-Steagall Act, the legislative history that surrounded its enactment, and its prior judicial construc- tion to determine whether the Board reasonably inter- preted the Act’s often ambiguous terms. The Securities Industry Association (SIA) and seven bank holding companies petition for review of six related orders of the Board of Governors of the Federal Reserve System (Board). The orders approved the bank holding companies’ applications to utilize subsidiaries as the vehi- cle by which they can underwrite and deal in certain securities. The Board determined that the approved ac- tivities would not run afoul of § 20 of the Glass-Steagall Act, which proscribes affiliations of banks—here, the holding companies’ member bank subsidiaries—with en- tities that are “engaged principally” in underwriting and dealing in securities. At the same time, the Board limited the scope of the approved activities. The decisions allow- ing bank subsidiaries to engage in securities transactions and the limitations that were imposed are the focus of the petitions seeking review. For the reasons set forth below, we deny the petitions for review save for the bank holding companies’ cross-petition for review that seeks to elimi- nate the market share limitation. BACKGROUND I The Board’s Orders On April 30, 1987 the Board approved the applications of Citicorp, J.P. Morgan & Co., Inc., and Bankers Trust New York Corp. to engage in limited securities activities through wholly-owned subsidiaries. 73 Fed. Reserve Bull. 7a 473 (1987). At the time of the applications, the subsidi- aries were engaged entirely in underwriting and dealing in U.S. government and agency securities and those of state and municipal governments. The holding companies sought to extend their subsidiaries’ activities to underwrit- ing and dealing in municipal revenue bonds, mortgage related securities, consumer receivables related securities, and commercial paper.' With the exception of the con- sumer receivables, on which decision was deferred be- cause of an insufficient record, the Board approved the applications by a vote of three to two. Limitations on the scope of the activities more restrictive than those initially proposed by the holding companies—to be discussed more fully below—were imposed. On May 18, 1987 the Board approved the applications of four other bank holding companies, Chase Manhattan Corp., Chemical New York Corp., Manufacturers Hano- ver Corp., and Security Pacific Corp., to underwrite and deal in the same activities to the same extent approved in its April 30th order. 73 Fed. Reserve Bull. 607 (1987); id. at 616; id. at 620; id. at 622. With the exception of Chase Manhattan, each holding company then had an existing subsidiary currently engaged in underwriting and dealing in federal, state, and local government securities. Chase Manhattan’s application included a request for its subsid- iary to engage in government securities activities, which the Board approved. The Board also approved Citicorp’s supplemental application to deal in commercial paper. /d. at 618. l J.P. Morgan & Co. did not apply to underwrite or deal in consumer receivables related securities and Citicorp did not propose to engage in activities relating to commercial paper. 8a SIA, a trade association representing securities brokers, dealers, and underwriters, petitioned for review of the April 30th and May 18th orders, arguing that the ap- proved activities would violate § 20 of the Glass-Steagall Act. The holding companies cross-petitioned challenging the Board imposed limitations. We granted a stay of the orders on May 19, 1987 pending this expedited appeal. Il The Board’s Analysis The bank holding companies’ applications were made pursuant to § 4(c)(8) of the Bank Holding Company Act of 1956, which allows a bank holding company to acquire the “shares of any company the activities of which the Board . . . has determined . . . to be so closely related to banking . . . as to be a proper incident thereto.” 12 U.S.C. § 1843(c)(8) (1982). The determination that the approved securities activities are closely related to bank- ing is not contested on this appeal. Rather, since the Board’s discretion under § 4(c)(8) is limited by the Glass- Steagall Act, cf. Board of Governors of Fed. Reserve Sys. v. Investment Co. Inst., 450 U.S. 46, 76-77 (1981) UCN, the principal issue before the Board was whether the approval of the activities would contravene that Act. Section 20 of the Glass-Steagall Act forbids a member bank of the Federal Reserve System from affiliating with an organization “engaged principally” in, inter alia, underwriting or dealing in securities. 12 U.S.C. § 377 (1982). Bank holding companies have been allowed since 1978—without a court challenge by SIA—to acquire or form subsidiaries that underwrite and deal in securities representing obligations of the United States and of states and their political subdivisions. See, e.g., United Ban- corp, 64 Fed. Reserve Bull. 222 (1978); see also 12 C.F.R. i ene Nos Tal ow CRON SiS REN tt pati 9a § 225.25(b)(16) (1987) (regulation permitting such activ- ity). Section 16 of the Glass-Steagall Act expressly per- mits banks themselves to underwrite and deal in these governmental securities, known as “bank-eligible securi- ties.” 12 U.S.C. § 24 (Seventh) (1982 & Supp. IV 1986). Given the authorization in § 16 for banks to engage in bank-eligible securities activities, the Board concluded that Congress did not aim in § 20 to proscribe bank affiliates from engaging in the same activities. 73 Fed. Reserve Bull. at 478-81. It reasoned that it would be anomalous not to permit the bank’s subsidiary to engage in the activities lawfully permitted the bank. That illogical result necessarily follows if bank-eligible securities are defined as “securities” under § 20 because that section prohibits a member bank from being affiliated with an organization “engaged principally” in securities dealing. Hence, according to the Board, “securities” cannot logi- cally mean bank-eligible securities. “Securities” in § 20 must therefore only refer to those types of securities that under § 16 banks cannot themselves deal in or under- write, known as “bank-ineligible securities.” The activi- ties approved in the orders at issue on _ this appeal—underwriting and dealing in municipal revenue bonds, mortgage related securities, and commercial paper—cannot be conducted by a member bank and are therefore bank-ineligible securities activities. Establishing as a predicate that the proscription in § 20 extends only to bank-ineligible securities, the Board turned to the question of when an affiliate is “engaged principally” in such activity. Relying on its order in Bankers Trust New York Corp., 73 Fed. Reserve Bull. 138 10a (1987),’ the Board held that the term “engaged princi- pally” means any substantial activity. 73 Fed. Reserve Bull. at 482. It then concluded that subsidiaries would not be engaged substantially in bank-ineligible activities if no more than five to ten percent of their total gross revenues was derived from such activities over a two-year period, and if the activities in connection with each type of bank- ineligible security did not constitute more than five to ten percent of the market for that particular security. Jd. at 485-86. The Board then proceeded to approve gross revenue and market share levels at five percent—the low end of the acceptable range—but stated that it would review the five percent limitations within a year after the implementation of its orders. The applicants wanted, of course, to engage in higher levels of activity. On review, SIA argues that the Board erroneously construed the Glass-Steagall Act by construing the word “securities” in § 20 not to include bank-eligible securities. In other words, SIA contends that § 20 limits both bank- eligible and bank-ineligible security activities by a mem- ber bank affiliate. SIA also objects to the Board’s construction of “engaged principally.” The bank holding companies urge us to adopt the Board’s construction of § 20 with regard to “securities”, but argue, at the same time, that the Glass-Steagall Act mandates that the Board allow a higher level of bank-ineligible activity than that approved. 2 Petitions for review of this order are pending in the United States Court of Appeals for the District of Columbia Circuit. lla THRESHOLD MATTERS I The Moratorium Subsequent to the stay granted in this case, Congress enacted and the President signed into law on August 10, 1987 the Competitive Equality Banking Act of 1987, Pub. L. No. 100-86, 101 Stat. 552 (CEBA),’ the provisions of which impose a moratorium period, effective retroac- tively, prohibiting the Board from approving affiliate involvement in certain securities transactions. Section 201(b) provides that between March 6, 1987 and March 1, 1988, (2) A Federal banking agency may not authorize or allow by action, inaction, or otherwise any bank holding company or subsidiary or affiliate thereof . . to engage in the United States to any extent whatever— (A) in the flotation, underwriting, public sale, dealing in, or distribution of securities if that ap- proval would require the agency to determine that the entity which would conduct such activities would not be engaged principally in such activities... . CEBA, § 201(b), 101 Stat. at 582 (to be codified at 12 U.S.C. § 1841 note). Under § 202 the Board may issue an order during the moratorium period pursuant to its authority in existence before CEBA “if the effective date of such . . . order is delayed until the expiration of such moratorium.” 101 3 In September the panel wrote to counsel requesting them to advise whether in light of CEBA this appeal remains viable. All counsel promptly responded by early October, 1987 that in their view the appeal was not mooted by the moratorium legislation. 12a Stat. at 584 (to be codified at 12 U.S.C. § 1841 note). According to the Joint Explanatory Statement of the Conference Committee to fall within this exception an order “must contain or otherwise be subject to” a specifi- cation “that the powers in question may not be exercised before the moratorium has expired.” H.R. Conf. Rep. No. 261, 100th Cong., Ist Sess. 149 (1987), reprinted in 1987 U.S. Code Cong. & Admin. News 588, 618. Each order subject to our review was issued during the moratorium period and each approved of activities cov- ered by § 201. Nevertheless, the Board noted in its April 30th order that it was aware that Congress might impose the moratorium and that there might be an exception for orders that delay the effective date. 73 Fed. Reserve Bull. at 502. The Board then called to the applicants’ attention that subsequent legislation might require them to cease the approved activities in the event of a moratorium and also retained jurisdiction “to act to carry out the require- ments of any legislation adopted by Congress” that af- fected the activities approved under the order. /d. Identical explanations and caveats appear in the other orders relevant to this appeal. Thus, their effective date effectively was delayed in the event of a moratorium, as mandated by § 202. CEBA therefore in no way precludes our review of the substantive issues presented in these petitions. Before considering them, we discuss briefly the applicable standard of review. II Standard of Review The starting point for reviewing an agency’s construc- tion of a statute is the language of the statute. See, e.g., Federal Deposit Ins. Corp. v. Philadelphia Gear Corp., 106 S. Ct. 1931, 1934 (1986); Board of Governors of the 13a Fed. Reserve Sys. v. Dimension Fin. Corp., 474 U.S. 361, 368 (1986); Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43 (1984). An agency’s construction of unambiguous statutory language is never an issue because the clear language of the statute must be given effect by the agency and the courts. See Chevron, 467 U.S. at 842-43 (“If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.”). Only when the statutory language is ambiguous must a court inquire whether the agency’s construction is permissible. Jd. at 843. If the Board’s interpretation of the Glass-Steagall Act is reason- able its decision must be upheld. See Securities Indus. Ass’n v. Board of Governors of the Fed. Reserve Sys., 716 F.2d 92, 95 (2d Cir. 1983) (“Because the Board has both primary responsibility for implementing the Glass- Steagall Act and expert knowledge of commercial bank- ing, we must uphold its interpretation of the Act if it is reasonable.”), aff’d, 468 U.S. 207 (1984). Thus, the first question is whether § 20 is ambiguous. The Board readily concedes that the term “securities” in § 20 could be read to include not only those securities that banks are expressly permitted to underwrite or deal in, that is, bank-eligible securities, but also those that banks are not entitled to underwrite or deal in, that is, bank-ineligible securities. Unlike § 16—which expressly distinguishes bank-eligible from bank-ineligible securi- ties—§ 20 does not distinguish the terms. Hence, at least on the surface § 20 would appear to refer to both kinds of securities. But a closer examination of Glass-Steagall leads us to reject this conclusion. In the first place, the Act makes l4a three different references to the term “securities.” Section 16 distinguishes bank-eligible from bank-ineligible securi- ties. 12 U.S.C. § 24 (Seventh) (1982 & Supp. IV 1986). Repealed § 19(e), discussed infra note 4, referred to “securities of any sort.” 48 Stat. at 188 (emphasis added). And §§ 20 and 32 refer simply to “securities.” 12 U.S.C. § 377 (1982) (§ 20); 48 Stat. at 194 (codified as amended at 12 U.S.C. § 78 (1982)) (§ 32). That Congress chose three distinctively different ways to describe securities raises a red flag that cautions against declaring that the meaning of that term in § 20 is clear. Further support for the proposition that § 20 is uncer- tain is provided by the subsequent amendment to § 21 of Glass-Steagall. Section 21 originally did not expressly exempt bank-eligible securities as did § 16. A 1935 amendment made it plain that § 21 did not prevent that which § 16 permitted. See Banking Act of 1935, Pub. L. No. 74-305, § 303, 49 Stat. 684, 707. The significance of this to the issue of § 20’s ambiguity is that the amend- ment was only intended to clarify existing law, see, e.g., H.R. Rep. No. 742, 74th Cong., Ist Sess. 16 (1935); S. Rep. No. 1260, 73d Cong., 2d Sess. 2 (1934); Securities Indus. Ass’n v. Board of Governors of the Fed. Reserve Sys., 807 F.2d 1052, 1057-58 (D.C. Cir. 1986) (Bankers Trust Il), cert. denied, 107 S. Ct. 3228 (1987), and did not purport to effect any substantive change. But, if the 1935 amendment was not intended to alter the substance of § 21, it follows that the Congress that enacted Glass- Steagall did not invariably make an explicit distinction between bank-eligible and bank-ineligible securities, even when it aimed to distinguish them from one another. Based on this, we can conclude with some confidence that Congress’ reference in § 20 to “securities” is ambiguous, lSa and undertake to decide whether the Board’s interpreta- tion of securities in § 20 is reasonable and therefore entitled to deference. Of course, “deference is not to be a device that emascu- lates the significance of judicial review.” Securities Indus. Ass’n v. Board of Governors of the Fed. Reserve Sys., 468 U.S. 137, 142-43 (1984) (Bankers Trust I). One factor militating against deference to the Board’s definition of securities is its failure to address an apparent contradic- tion, discussed below, between its interpretation of § 20 and its prior view of § 32. This failure implicates two factors that courts take into consideration in deciding whether to accord deference to an administrative agency charged with implementing a statute: first, “the thor- oughness, validity, and consistency of an agency’s reason- ing,” Federal Election Comm’n v. Democratic Senatorial Campaign Comm., 454 U.S. 27, 37 (1981), and, second, the consistency of the agency’s present interpretation with its earlier pronouncements, Morton v. Ruiz, 415 U.S. 199, 237 (1974); Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944). The Board should have examined § 32 in its analysis of § 20 because—as the Supreme Court has indicated— “§§ 32 and 20 contain identical language, were enacted for similar purposes, and are part of the same statute.” Securities Indus. Ass’n v. Board of Governors of the Fed. Reserve Sys., 468 U.S. 207, 219 (1984) (Schwab). Thus, an established interpretation of the language of one section is important in interpreting the language of the other. See id. In that respect, the Board’s 120-page opin- ion is deficient. The Board’s earlier view of § 32 suggests that bank- eligible securities were included within the term “securi- 16a ties” in § 32. In 1936 the Board exempted from § 32 individuals dealing in or underwriting “bonds, notes, certificates of indebtedness, and Treasury bills of the United States.” 22 Fed. Reserve Bull. 51, 52 (1936). As SIA argues, this suggests that the Board understood that bank-eligible securities were covered by § 32, because there was otherwise no need to exempt from § 32 individ- uals involved in those securities activities. At oral argu- ment the Board’s response to SIA’s contention was that it had merely failed to explain its reasoning for the exemp- tion, and that granting the exemption from the prohibi- tions of § 32 was done only for purposes of clarity. This could be a plausible explanation, but in this instance we think it is not. Although in its current form Regulation R does exempt from § 32 individuals engaged in any securities activity permitted to banks under § 16, see 12 C.F.R. § 218.2 (1987), the exemption, as originally enacted, did not exempt a// forms of bank-eligible securi- ties, but only the obligations of the United States. Omit- ted from exemption were the general obligations of the States or their political subdivisions. See 22 Fed. Reserve Bull. at 52. From this it is obvious that the Board did not read § 32 as excluding ab initio all bank-eligible securi- ties, but rather that it exercised the authority granted it by Congress under § 32—authority not granted in § 20—to create a narrow exemption for individuals dealing in United States government obligations. In addition, in a footnote to the 1936 regulation, the Board enumerated instances in which the terms of § 32 did not apply. See 22 Fed. Reserve Bull, at 51 n.1. Plainly, the Board knew how to say when § 32 did not apply to a certain activity, and how to state that a certain activity was subject to § 32, 17a but was nevertheless exempted pursuant by the Board under its statutory authority. The Board’s orders on appeal here are not instances where the Board failed to adopt an expressly articulated position on the meaning of § 20. Cf. Investment Co. Inst. v. Camp, 401 U.S. 617, 627-28 (1971) (Camp). Nonethe- less, its failure to address—in what is an otherwise com- prehensive and reasoned decision—the significance of its prior interpretation of § 32 counsels against granting it full deference. Our own review of the history of the Glass-Steagall Act leads us nonetheless to conclude that construing § 20 as not encompassing activities by bank affiliates in bank-eligible securities is essential if Con- gress’ purpose in enacting § 20 is to be effectuated. DISCUSSION The two principal issues presented to this court are the Board’s constructions of the terms “securities” and “en- gaged principally” under § 20 of the Glass-Steagall Act. The proper interpretation of § 20 is an issue of first impression and necessitates a comprehensive examination of both the relevant legislation and the events surround- ing its enactment. I Glass-Steagall: A Statutory Overview The whole of the Banking Act of 1933, ch. 89, Pub. L. No. 73-66, 48 Stat. 162 (1933) (codified as amended in scattered sections of 12 U.S.C.), is sometimes referred to as the Glass-Steagall Act. See ICI, 450 U.S. at 53. It is perhaps more accurate to consider §§ 16, 20, 21, and 32 of the Banking Act of 1933 in particular as the Glass- Steagall Act. See Schwab, 468 U.S. at 216 & n.15. These sections, the “ ‘Maginot Line’ of the financial world,” see 18a Macey, Special Interest Groups Legislation and the Judi- cial Function: The Dilemma of Glass-Steagall, 33 Emory L.J. 1, 5 (1984) [hereinafter Glass-Steagall Dilemma} (quoting Bevis Longstreth, “Current Issues Facing the Securities Industry and the SEC,” May 4, 1982 speech to the SIA), were meant to separate commercial and invest- ment banking.* 4 The Glass-Steagall Act originally contained a fifth section— § 1%e)—which also was designed to effect a separation between commercial and investment banking. It read in pertinent part: (e) Every such holding company affiliate shall, in its application for such voting permit, (1) show that it does not own, control, or have any interest in, and is not participating in the management or direction of, any corporation, business trust, association, or other similar organization formed for the purpose of, or engaged princi- pally in, the issue, flotation, underwriting, public sale, or distribu- tion, at wholesale or retail or through syndicate participation, of stocks, bonds, debentures, notes, or other securities of any sort (hereinafter referred to as ‘securities company’); . . . Pub. L. No. 73-66, ch. 89, § 19(e), 48 Stat. 162, 188 (1933), repealed, Pub. L. No. 89-485, § 13(c), 80 Stat. 236, 242 (1966). Thus, § 19%e) was the Glass-Steagall Act provision that originally dealt with bank holding companies. Section 19%e) operated indirectly; bank holding companies were required to apply to the Reserve Board for a permit entitling them to exercise the voting rights of the shares of stock which they held in member banks. See 48 Stat. at 186. In order to ob.ain a voting permit, a bank holding company had to divest itself of ownership or control of its securities affiliate(s). The reason for this indirect method was Congress’ hesitancy to legislate in regard to state- chartered institutions. See S. Rep. No. 77, 73d Cong., Ist Sess. 10 (1933); 75 Cong. Rec. 9905 (1932) (remarks of Sen. Walcott). Yet, § 1%e) was largely ineffectual because bank holding companies simply elected not to vote the shares of their securities affiliates. See JC/, 450 U.S. at 69-70. In addition, after the enactment of the Bank Holding Company Act of 1956, which broadened the Banking Act’s definition of “affiliate,” it became doubtful whether § 1%e) was “sufficiently useful to justify [its] retention.” S. Rep. No. 1179, 89th Cong., 2d Sess. 12 (1966). The “loophole” therefore was closed by a 1966 amendment. See 80 Stat. at 242. 19a Section 16 of the Glass-Steagall Act applies to federally chartered banks and restricts their powers. In pertinent part, the statute as amended provides: The business of dealing in securities and stock by the [member bank] shall be limited to purchasing and selling such securities and stock without recourse, solely upon the order, and for the account of, cus- tomers, and in no case for its own account, and the {member bank] shall not underwrite any issue of securities or stock . . . . The limitations and restric- tions herein contained as to dealing in, underwriting and purchasing for its own account, investment secu- rities shall not apply to obligations of the United States, or general obligations of any State or of any political subdivision thereof... . 12 U.S.C. § 24 (Seventh) (1982 & Supp. IV 1986). As can be readily seen, § 16 forbids national banks from underwriting “any issue of securities or stock”* and also limits their ability to deal in securities. As noted, it expressly excepts from its coverage underwriting and dealing in the obligations of the United States or general obligations of states or their political subdivisions, which we have termed “bank-eligible securities.” Section 21 seeks to draw the same line as § 16 does for commercial banks, but from the perspective of invest- ment banks. See Bankers Trust I, 468 U.S. at 148. Section 21 as amended reads in pertinent part: 5 As it was originally written, § 16 only prohibited underwriting “securities.” See 48 Stat. at 185 (1933). One of the so-called “techni- cal” provisions of the Banking Act of 1935 amended § 16 by adding “and stock” after the references to “securities.” Banking Act of 1935, Pub. L. No. 74-305, ch. 614, tit. III, § 308(a), 49 Stat. 684, 709 (1935). 20a (a) After the expiration of one year after June 16, 1933, it shall be unlawful— (1) For any person, firm, corporation, associa- tion, 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, de- bentures, 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 de- posit, 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 institutions or private bankers from dealing in, underwriting, purchasing, and selling investment securities, or issuing securities, to the extent permit- ted to national banking associations by the provi- sions of sectiou 24 of this title... . 12 U.S.C. § 378(a)(1) (1982). Section 21 prohibits firms “engaged” in certain investment banking activities from undertaking commercial banking activities. See Bankers Trust I, 468 U.S. at 148; JCI, 450 U.S. at 62-63. As originally drafted and enacted it did not contain the § 16 proviso that allowed banks to underwrite and deal in bank-eligible securities. See Banking Act of 1933, § 21, 48 Stat. at 189. A 1935 amendment to § 21 made explicit that § 21 did not prohibit those activities permitted mem- ber banks under § 16. See Banking Act of 1935, Pub. L. No. 74-305, ch. 614, tit. II], § 303(a), 49 Stat. 684, 707 (1935). 2la Sections 32 and 20 are the Glass-Steagall Act’s “re- maining ramparts” in the line between commercial and investment banking. Glass-Steagall Dilemma, supra, at 6. Section 32 as amended reads in its entirety: No officer, director, or employee of any corpora- tion or unincorporated association, no partner or employee of any partnership, and no individual, primarily engaged in the issue, flotation, underwrit- ing, public sale, or distribution, at wholesale or retail, or through syndicate participation, of stocks, bonds, or other similar securities, shall serve the same time as an officer, director, or employee of any member bank except in limited classes of cases in which the Board of Governors of the Federal Reserve System may allow such service by general regulations when in the judgment of the said Board it would not unduly influence the investment policies of such member bank or the advice it gives its customers regarding investments. 12 U.S.C. § 78 (1982) (emphasis added). Section 32 pro- hibits personnel “interlocks” between member banks and firms that are “primarily engaged” in the business of underwriting or dealing in securities. In its original form, the section authorized the Board to permit an individual exemption from the prohibitions of § 32. See Banking Act of 1933, § 32, 48 Stat. at 194. In 1935 Congress amended § 32 to allow the Board to promulgate a general regulation to exempt “classes of cases” from the reach of § 32. See Banking Act of 1935, § 307, 49 Stat. at 709. In 1936 the Board promulgated Regulation R, which ex- empted from § 32 individuals dealing in “bonds, notes, certificates of indebtedness, and Treasury bills of the United States.” See 22 Fed. Reserve Bull. 51, 52 (1936). 22a The current version of Regulation R is found at 12 C.F.R. § 218.2 (1987). Finally, § 20—the proper interpretation of which is the principal question presented on this appeal—provides in pertinent part: After one year from June 16, 1933, no member bank shall be affiliated in any manner described in subsection (b) of section 22la of this title with any corporation, association, business trust, or other similar organization engaged principally in the issue, flotation, underwriting, public sale, or distribution at wholesale or retail or through syndicate participation of stocks, bonds, debentures, notes, or other securi- ee 12 U.S.C. § 377 (1982) (emphasis added). As discussed above, the Board concluded that § 20 only proscribes member bank affiliation with firms “engaged principally in the issue, flotation, underwriting, public sale, or distri- bution” of bank-ineligible securities, those which banks are prevented under § 16 from dealing in themselves. Throughout this opinion we have adopted, for clarity’s sake, the term “underwriting and dealing in” to refer to “the issue, flotation. . .” language in § 20. II The Meaning of “Securities” in § 20 When called upon to interpret the Glass-Steagall Act, judges “face a virtually insurmountable burden due to the vast dichotomy between the ostensible legislative intent and the actual motivations of Congress.” Glass-Steagall Dilemma, supra, at 1-2. Divining the aim of Congress in enacting § 20 is particularly formidable because the issue of the proper relationship between commercial banks and ee 23a their affiliates caused considerable disagreement among legislators and experts who participated in the develop- ment of what became the Banking Act of 1933. See generally Perkins, The Divorce of Commercial and In- vestment Banking: A History, 88 Banking L.J. 483, 505- 12 (1971) [hereinafter Banking Divorce]. Consequently, we approach the subject first by examining the legislative history of § 20, analyzing the Congressional compromise that resulted in the enactment of § 20, and then by looking at prior judicial construction of the Act. A. Legislative History 1. Envisioning § 20—Congress’ Purpose The Act’s legislative history reflects the notion that the underlying cause of the stock market crash in 1929 and subsequent bank insolvencies came about from the exces- sive use of bank credit to speculate in the stock market. See S. Rep. No. 77, 73d Cong., Ist Sess. 3-9 (1933) [hereinafter 1933 Senate Report]; see also 75 Cong. Rec. 9883-84 (1932) (remarks of Sen. Glass) (criticizing trans- formation of the Federal Reserve System from a commer- cial banking system into one used for “stock-market speculative operations”). Bank affiliates were identified as a major factor in the overextension of credit for security loans. See 1933 Senate Report, supra, at 9-10. Congress’ concern was not limited solely to how securi- ties affiliates contributed to the excesses in bank credit; its apprehension was far more fundamental and structural. Senator Bulkley, for example, repeatedly stressed that the debate over affiliates should not obscure “[t]he important and underlying question [of] whether banking institutions receiving commercial and savings deposits ought to be permitted at all to engage in the investment-security 24a business.” 75 Cong. Rec. 9910 (1932). He argued that “It]he existence of security affiliates is a mere incident to this question,” id., and reiterated that “the real question is not whether . . . banks shall be permitted to have investment-security affiliates but rather whether they should be permitted to engage in the investment-security business in any manner at all, through affiliates or other- wise,” id. at 9911. Two large problems attendant upon the involvement of a commercial bank in investment banking—either on its own or through use of an affiliate—were identified by Congress. The first was “the danger of banks using bank assets in imprudent securities investments.” JCI, 450 U.S. at 66; see also Camp, 401 U.S. at 630. The second “focused on 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 either directly or by establishing an affiliate to hold and sell particular investments.” Camp, 401 U.S. at 630. In Camp the Supreme Court described these subtle hazards: loss of public confidence in a bank if its affiliate lost money; the temptation for a bank to shore up an affiliate through unsound loans; imprudent lending to companies in which the security affiliate has invested or become interested; possible loss of a bank’s goodwill should its depositors suffer losses on investments that they purchased in reliance on the relationship between the bank and its affiliate; bank loans used for purposes of buying securities; commercial bank involvement in invest- ment banking which might facilitate the loss of disinter- ested investment advice and encourage violations of fiduciary obligations. Camp, 401 U.S. at 631-33; see ee 25a Operation of the National and Federal Reserve Banking Systems, Hearings on S. 71 Before a Subcomm. of the Senate Comm. on Banking and Currency, 7\st Cong., 3d Sess. 1063-64 (1931) [hereinafter 1/93] Hearings]; 75 Cong. Rec. 9911-12 (1932) (remarks of Sen. Bulkley). Sections 16 and 21 effectively barred commercial banks from direct engagement in investment banking, with the notable exception of government securities. Yet even before the 1929 crash, direct involvement by a bank had been considered “improper,” see Camp, 401 U.S. at 629, but bank affiliates had developed as the medium for commercial banks’ indirect entry into investment bank- ing, see id. Even though the stock market debacle laid bare the dangers arising from the activities of securities affiliates, opinion was divided on how best to mitigate those dangers. No one argued that the affiliate system had not been abused in the past, see, e.g., 193] Hearings, supra, at 298-99 (remarks of Charles E. Mitchell, Chairman, Na- tional City Bank of New York). Experts believed that an adequate check on such abuse was to establish rigorous examination requirements for affiliates, which had re- mained largely unregulated before 1929. See, e.g., id. at 117 (testimony of J.H. Case, Chairman, Board of Direc- tors of the Federal Reserve Bank of New York); id. at 192 (testimony of A.H. Wiggin, Chairman of the Governing Board, Chase National Bank); id. at 364 (testimony of O.D. Young, Chairman of the Board, General Electric Co.); id. at 405 (testimony of M.W. Traylor, Chairman of the Board, First National Bank of Chicago). Others thought that if the slate were wiped clean, affiliates should not be legal, but that in 1933 a complete divorce between commercial and investment banking was not 26a feasible given the established role of affiliates in the banking system. See, e.g., id. at 22 (testimony of J. Pole, Comptroller of the Currency); id. at 38-39 (testimony of G.L. Harrison, Governor, Federal Reserve Bank of New York); id. at 148 (testimony of A.C. Miller, Member, Federal Reserve Board). Some advocated complete separation of the commercial and investment banking industries. See, e.g., id. at 231 (testimony of B.W. Trafford, Vice Chairman, First Na- tional Bank of Boston). Senator Glass—an adherent of this view—was of the opinion that a “complete separa- tion” was both warranted and capable of being accom- plished. E.g., Operation of the National and Federal Reserve Banking Systems, Hearings on §.4115 Before the Senate Comm. on Banking and Currency, 72d Cong., Ist Sess. 42, 267 (1932) (remarks of Sen. Glass) [hereinafter 1932 Hearings]. Senator Glass’ views are significant, of course, because of his role in drafting and shaping the Banking Act of 1933, a portion of which bears his name. Cf. North Haven Bd. of Educ. v. Bell, 456 U.S. 512, 526- 27 (1982) (remarks of sponsor of language ultimately enacted “are an authoritative guide to the statute’s con- struction”). Yet, despite the Senator’s goal of complete separation, the Senate took a less drastic step. Acknowl- edging that “[i]t has been suggested. . . that the affiliate system be simply ‘abolished,’ ” the Senate rejected this as impossible and stated that its goals toward regulating affiliates were to (1) separate “as far as possible” member banks from affiliates of all kinds; (2) limit advances or loans from parent to affiliate; and (3) install satisfactory examination requirements for affiliates. 1933 Senate Re- port, supra, at 10 (emphasis added). 27a 2. Construing § 20—Congress’ Compromise Section 20 was Congress’ solution to the problem of affiliates and establishes the boundary separating banks from their security affiliates. While § 21 prohibits firms “engaged” in investment banking activities from accept- ing deposits, § 20 prohibits commercial bank affiliation with firms “engaged principally” in underwriting and dealing in securities. The inference following from this different terminology is obvious: § 20 applies a “less stringent standard” than the absolute bar between com- mercial and investment banking laid down by §§ 16 and 21. JCI, 450 U.S. at 60 n.26. Nor can the difference in terminology be attributed to oversight. Section 21 origi- nally contained the term “engaged principally.” In offer- ing the amendment that deleted “principally,” Senator Bulkley argued that “[i]t has become apparent that at least some of the great investment houses are engaged in so many forms of business that there is some doubt as to whether the investment business is the principal one.” 77 Cong. Rec. 4180 (1933). Given that one of the leading advocates of Glass-Steagall recognized that “engaged” connoted a stricter standard than “engaged principally,” it is inconceivable that the latter term could remain in § 20 by sheer happenstance. Thus, while the original impetus behind the Glass-Steagall bill on the floor of Congress may have been to sever completely the commercial and investment banking industries, it fell short of that goal—a victim of legislative compromise. Legislative history also supports the view that § 20’s use of the word “securities” did not imply a complete separation between commercial and investment banking. A colloquy between Senators Glass and Long is illuminat- ing: 28a MR. LONG. I have been told that the Senator has said that he did not think this bill would prohibit the handling of Government and State bonds by the Federal reserve banks, that the Senator’s provision against affiliates handling bonds was not intended to affect the handling of Government and State bonds. MR. GLASS. They are expressly excluded from the terms of the bill. MR. LONG. As to both affiliates and the banks? MR. GLASS. As to affiliates? We are trying to abolish the affiliates in a period of years. MR. LONG. The Senator has no objection, has he, to an affiliate handling them if they handle nothing but the Government and State Bonds under supervision, the same supervision the banks are given? MR. GLASS. I am objecting to affiliates alto- gether. I am objecting to a national banking institu- tion setting up a back-door arrangement by which it may engage in a business which the national bank act denies it the privilege of doing. If investment bank- ing is a profitable business, who does not know that such business will be set up as a separate institution, not using the money and prestige and facilities of a national bank and its deposits to engage in invest- ment activities? I want to make it impossible hereaf- ter to have the portfolios of commercial banks filled with useless speculative securities, so that when strin- gency comes upon the country these banks may not respond to the requirements of commerce. That is what is the matter with the country to-day, and it is because this bill would avert a repetition of that 29a disaster that intense and bitter opposition has been organized against it. 76 Cong. Rec. 2000 (1933). Senator Glass’ aspiration to divorce completely commercial banks from their security affiliates was never attained: § 20 only prohibits affilia- tion with firms that are “engaged principally” in forbid- den investment activity. SIA urges from the above colloquy that Senator Glass objected to affiliates’ han- dling even securities that banks themselves could under- write under the proposed legislation and that the Senator’s view carried the day in § 20 as enacted. On the contrary, we believe Senator Glass’ response to Senator Long indicates that he was primarily concerned with “back-door” arrangements between banks and their secu- rity affiliates that permitted affiliates to engage in the securities business denied by law to the bank itself. Senator Glass’ reservation did not encompass affiliate activity in a business that § 16 grants to a bank “the privilege of doing.” Further, Senator Long’s initial query indicates that the issue Of whether affiliates ought to be able to engage in bank-eligible activities to the same extent as banks them- selves was not dormant during the debates. Thus, Senator Long commented that those who had opposed some provisions in the bill “have seen some virtue in it. I particularly refer to the divorcing of the affiliates, except in so far as they handle municipal and Government bonds and securities.” 76 Cong. Rec. 2274 (1933). To make certain affiliates had the same right to deal in government obligations, Senator Long had printed and circulated an amendment to the Glass-Steagall bill to that effect. Pro- posed Amend. to S. 4412, 72d Cong., 2d Sess. (Jan. 10, 1933). Despite Senator Long’s repeated insistence that 30a § 20 would not preclude bank-eligible activities by an affiliate, this amendment was never formally raised in debate. The Banking Act of 1933 became law five months later, on June 16, 1933, and it can be plausibly urged that the bill finally agreed upon and enacted into law made his amendment unnecessary. Recognizing the power of Sena- tor Long’s position, SIA argues that statements and actions taken during debate are not entitled to much weight. See, e.g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 203 n.24 (1976). A look at subsequent events in this case illustrates the soundness of that rule. In 1935, just two years after his strong rhetoric in the Banking Act debate, Senator Glass himself supporied a proposed amendment to that law granting to commercial banks the right to underwrite securities. 79 Cong. Rec. 11,827 (1935). So much for not having “the portfolios of com- mercial banks filled with useless securities.” Thus, it seems eminently reasonable to conclude from Senator Glass’ response to Senator Long, as well as other evidence in the legislative history, that Congress’ concern was primarily with bank affiliate activities in bank- ineligible securities. Bank affiliates often “devote[d] themselves ... to perilous underwriting operations, stock speculation, and maintaining a market for the banks’ own stock often largely with the resources of the parent bank.” 1933 Senate Report, supra, at 10. Accord- ing to Senator Glass, “[w]hat the committee had foremost in its thought was to exclude from commercial banking all investment securities except those of an undoubted char- acter that would be surely liquidated; and for that reason we made an exception [in § 16] of United States securities and of the general liabilities of States and subdivisions of States.” 76 Cong. Rec. 2092 (1933). Given that Glass- 3la Steagall was a means to sever commercial banking only from more speculative, “perilous” investment activities, in which bank-eligible activities were not included, an interpretation of “securities” in § 20 that excludes bank- eligible securities from its reach is entirely consistent with Congress’ aim. The history of security affiliates in the United States also supports this view. Many banks formed security affiliates in order to handle the sale of government bonds used to finance World War I. B. Klebaner, Commercial Banking in the United States: A History 109-10 (1974); Banking Divorce, supra, at 490-91; see also 1932 Hear- ings, supra, at 29 (testimony of A.M. Pope, President, Investment Bankers’ Ass’n of Am.). Banks were “ex- pected” to aid the government in distributing war loans and were “encouraged” to aid potential investors by lending them the purchase price of government bonds. Banking Divorce, supra, at 491. It was not until the 1920’s that affiliates began to expand into private debt and equity securities activities in response to the demands of the public and business. See id. at 493-96; see also 77 Cong. Rec. 3835 (1933) (remarks of Rep. Steagall) (“Our great banking system was diverted from its original pur- poses into investment activities, and its service devoted to speculation and international high finance.”); 75 Cong. Rec. 9904-05 (1932) (remarks of Sen. Walcott) (businesses began to finance their requirements by sale of securities rather than by borrowing; growth of affiliates was “the outgrowth of the willingness of public to buy readily and without very much inquiry”). It was not the affiliate system as a concept that worried Congress, but the affiliate system as it had developed. The evil that Con- gress intended to attack was bank involvement in specula- 32a tive securities, that is, bank-ineligible securities. We cannot attribute to Congress a purpose to limit a// securi- ties activities when it consistently made clear that it was only concerned with one type. An elucidation of SIA’s suggested interpretation of § 20 shows the anomalies that an over-literal interpretation of the term “securities” in that section might bring. If bank- eligible securities are included in the prohibitions of § 20, an affiliate could “engage” (but not principally) in bank- ineligible securities activities. Alternatively, the same affil- iate could engage to the identical extent in bank-eligible securities activities. SIA’s construction would permit ei- ther, or both, types of activity—up to a certain point. Two banks could each have an affiliate, one engaged in underwriting and dealing in high-risk securities prohibited to banks, and the other engaged in the government obligations that Congress felt to be of such negligible risk that it allowed, and encouraged, banks themselves to deal in them. It is paradoxical to presume that it was Con- gress’ purpose to place both affiliates on the same foot- ing. A subsequent amendment to the Glass-Steagall Act also argues against too strict a construction of § 20. As men- tioned earlier, Congress amended § 21 in 1935 to “make it clear that [§ 21] does not prohibit any financial institu- tion or private banker from engaging in the securities business” to the extent permitted in § 16. H.R. Rep. No. 742, 74th Cong., Ist Sess. 16 (1935); see also S. Rep. No. 1007, 74th Cong., Ist Sess. 15 (1935); S. Rep. No. 1260, 73d Cong., 2d Sess. 2 (1934). SIA claims that because § 20 was also amended at the same time, see H.R. Rep. No. 742, 74th Cong., Ist Sess. 16 (1935) (amendment to § 20 regarding formalities of affiliate liquidation), the 33a failure to add to § 20 a similar proviso indicates a deliberate legislative determination that § 16 activities are within the scope of § 20. We cannot agree. First, this argument belies the clarifying nature of the amendment to § 21. See Bankers Trust II, 807 F.2d at 1057-58. Second, we decline to hold that in failing to amend § 20 in the same manner Congress planned to clarify the meaning of the term “securities” by its silence. There is evidence that the Banking Act of 1933 itself was not the driving force that caused banks to divest them- selves of their affiliates. Instead, economic conditions and Congress’ investigation into stock market practices were instrumental in bringing banks to divorce themselves voluntarily from their affiliates. See B. Klebaner, supra, at 140; Banking Divorce, supra, at 522-24. Given this voluntary divestiture, § 20 became much less of a contro- versy in practice than it had been in legislative debate. Viewed in that perspective, it is not so unusual that Congress failed to amend § 20 in order to “clarify” the intent of that section as it had with § 21. Finally, amicus Investment Company Institute (ICI) argues that repealed § 19%e)’s definition of securities— “securities of any sort”—confirms that “securities” in § 20 must mean both bank-eligible and bank-ineligible securities. To the contrary, “securities of any sort” is just as ambiguous as the word “securities” standing alone, and the phrase is vulnerable to the same construction as that advanced for § 20. Thus, the legislative history strongly supports the view that “securities” in § 20 only refers to bank-ineligible securities. 34a B. Prior Judicial Construction The compromise aspect of § 20 exposes the difficulties of fitting this case comfortably within the traditional “subtle hazards” analysis developed in Camp and used by the Supreme Court in subsequent Glass-Steagall Act cases. Under this analysis, the Court noted the hazards that Congress sought to prevent when the Act was passed and then examined whether a particular activity would implicate them. See Schwab, 468 U.S. at 220-21; Bankers Trust I, 468 U.S. at 154-60; JCI, 450 U.S. at 66-68; Camp, 401 U.S. at 630-34. By using in § 20 the language “engaged principally” rather than a more restrictive term, Congress expressed a legislative choice to tolerate at least some of those hazards. This situation is not entirely inconsistent with subtle hazards analysis—which never controlled the result in a Glass-Steagall case but only reinforced a conclusion already reached as a matter of statutory interpretation. See Bankers Trust II, 807 F.2d at 1069. Nor, for that matter, has the existence of one hazard required reversal of the Board: a hazard need not “be ‘totally obliterated’ to permit a banking practice— avoidance of the hazard ‘to a large extent’ suffices.” Jd. (quoting JC/, 450 U.S. at 67 n.39). Accordingly, in reviewing the Board’s determination that § 20 does not encompass bank-eligible securities, we give due regard not only to the hazards inherent in affiliation, but also to the manner in which Congress ultimately addressed those hazards through § 20. See Commissioner v. Engle, 464 U.S. 206, 217 (1984); South- eastern Community College v. Davis, 442 U.S. 397, 411 (1979). As the Supreme Court stated in Board of Gover- nors of the Federal Reserve System v. Dimension Finan- cial Corp., 474 U.S. 361 (1986): _——— 35a Application 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 unanimous in its intent to stamp out some vague social or economic evil; however, because its Mem- bers may differ sharply on the means for effectuating that intent, the final language of the legislation may reflect hard-fought compromises. 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. 474 U.S. at 373-74. In light of these principles, the Court’s subtle hazards analysis does not preclude the Board’s construction of § 20. As noted, Congress was not concerned with affilia- tion per se, but rather with the dangers attendant upon the entry of commercial banks into the investment bank- ing field either directly or indirectly. Yet even after ac- knowledging these perils, Congress allowed banks to underwrite and deal in bank-eligible securities under § 16, making it plain therefore that it believed the risks were not so great when banks dealt in these securities. As Senator Bulkley stressed, whether or not a bank chooses to engage in these activities itself or through an affiliate is relatively unimportant compared to the question of whether a bank should engage in them at all. Since banks are allowed under § 16 to underwrite and deal in govern- ment obligations without limitation, it would be incon- gruous for § 20 to prohibit banks from affiliating with entities that are merely “engaged principally” in those Same activities. 36a Further, the Supreme Court observed that “[i]n both the Glass-Steagall Act itself and in the Bank Holding Company Act, Congress indicated that a bank affiliate may engage in activities that would be impermissible for the bank itself.” JC7, 450 U.S. at 64. Similarly, in Schwab the Court commented that “the fact that § 16 of the Glass-Steagall Act allows banks to engage directly in [a service] suggests that the activity was not the sort that concerned Congress in its effort to secure the Nation’s banks from the risks of the securities market.” 468 U.S. at 221. The same principle necessarily applies here. As we recently stated, “the latitude the Act grants bank holding companies partially to engage in activities such as under- writing, which implicate the Act’s policies whether con- ducted by banks or by bank holding companies, suggests that bank holding companies can, under the Act, be allowed principally to engage in activities which pose the dangers the Act addressed only when conducted by banks.” Securities Indus. Ass’n v. Board of Governors of the Fed. Reserve Sys., 716 F.2d 92, 100 (2d Cir. 1983), aff'd, Schwab, 468 U.S. 207 (1984). Because underwrit- ing and dealing in government securities pose no hazards to banks themselves, a fortiori bank affiliates should be able principally to engage in the same activity. In sum, the Board’s construction of Glass-Steagall is not only reasonable, but dictated by a thorough examina- tion of the legislative history of Glass-Steagall and of the hazards that Congress sought to prevent when enacting § 20. We hold that it was not Congress’ purpose in § 20 to preclude a bank affiliate from engaging in the same activities to the same extent as a member bank and we uphold the Board’s determination that the reference in — 37a § 20 to “securities” does not encompass those securities which § 16 allows banks themselves to underwrite. Ill “Engaged Principally” We now turn to the Board’s determination of when a security affiliate is “engaged principally” in activities covered by § 20. In their applications the bank holding companies sought to comply with the “engaged princi- _ pally” standard of § 20 by proposing limitations on their underwriting and dealing in bank-ineligible securities. J.P. Morgan & Co., for example, proposed that its bank- ineligible securities activities would not exceed during any rolling two-year period 15 percent of its total business. J.P. Morgan & Co. Proposal, 50 Fed. Reg. 41,025 (1985). It proposed a combination of accounting tests to measure its compliance with the 15 percent limitation.®° The other companies proposed total volume limits of ten to 15 percent of their total business. The Board rejected these proposals. Following the analysis set forth in its Bankers Trust order, 73 Fed. 6 The limitation would be met if two of the following three tests were satisfied: (1) The dollar volume of underwriting commitments [or underwrit- ing sales if larger] and dealer sales attributable to ineligible securi- ties activities with the total dollar volume of all of JPMS’s activities; (2) The average assets acquired in connection with ineligible securi- ties activities with the average assets acquired in connection with all of JPMS’s activities; and (3) The gross income [i.e., income before expenses and taxes] from ineligible securities activities with the gross income from all of JPMS'’s activities. 50 Fed. Reg. 41,025 (1985). “JPMS” is a wholly-owned subsidiary of J.P. Morgan Securities Holdings Inc., which is itself wholly-owned by J.P. Morgan & Co. Inc. 38a Reserve Bull. 138 (1987), the Board concluded that “en- gaged principally” in § 20 denotes any “substantial” bank-ineligible activity. See 73 Fed. Reserve Bull. at 482. Measured quantitatively, the Board stated that an affiliate would not be principally or substantially engaged in bank-ineligible activities if: (1) the gross revenue from § 20 activities did not exceed five to ten percent of the affiliate’s total gross revenues (gross revenue limitation or gross revenue test); and (2) the affiliate’s activities in connection with each particular type of ineligible security did not account for more than five to ten percent of the total amount of that type of security underwritten domes- tically by all firms (or, with commercial paper, the average amount of dealer-placed commercial paper outstanding) during the previous calendar year (market share limita- tion or market share test).’ Applying this measure to the applications before it, the Board selected the lower five percent figure for both gross revenue and market share limitations. It recognized that this was a “conservative approach,” but stated that it would review the limitations within one year of the implementation of its orders. 73 Fed. Reserve Bull. at 485. The bank holding companies petition for review of this interpretation of “engaged principally.” First, they argue that the Board’s view contravenes Supreme Court prece- dent. Second, they contend that the limitation is inconsis- tent with the language, structure, and legislative intent of _— The Board was unpersuaded, as we are, that § 20 permits two or more affiliates to combine their total gross incomes for purposes of determining whether or not the affiliates are “engaged principally” in ineligible activity. 73 Fed. Reserve Bull. at 486 n.45. The reason is plain. The provisions of § 20 apply to each individual company affiliated with a member bank. 39a the Glass-Steagall Act. Finally, cross-petitioner Security Pacific Corporation argues that the Board erred in adopt- ing an inflexible percentage test instead of approaching each affiliate’s application on a case-by-case basis. The term “engaged principally” is intrinsically ambigu- ous. As discussed above, we must uphold the Board’s interpretation if it is reasonable. Unlike the facts pre- sented on the issue of the scope of § 20, the Board’s position here does not contradict its prior interpretations. Accordingly, we defer to the Board’s construction of § 20. A. Agnew The Board found that “principally” in § 20 means “substantially.” The banks urge that in Board of Gover- nors Of the Fed. Reserve Sys. v. Agnew, 329 U.S. 441 (1947), the Supreme Court decided that “principally” means something more than substantially, and therefore that the Board’s decision conflicts with Agnew. In Agnew the Board issued an order that required the removal of directors of a national bank because of their affiliation with a company which, in the Board’s view, was “primarily engaged” in_underwriting securities as prohibited by § 32 of the Act. The United States Court of Appeals for the District of Columbia reversed the Board and held that a company is not “primarily engaged” in underwriting unless the activity is its chief or principal activity—one exceeding 50 percent of the company’s business. See Agnew, 153 F.2d 785, 790-91 (D.C. Cir. 1946). The Court of Appeals rejected the Board’s argu- ment that “primarily” in § 32 could mean “substantially” or “importantly.” 40a The Supreme Court reversed, holding that “primarily” in § 32 meant “substantially.” 329 U.S. at 446. In support of that conclusion, the Court noted that Congress used three different terms in the Glass-Steagall Act to describe underwriting firms: (1) those merely “engaged” in under- writing (§ 21); (2) those “primarily engaged” in under- writing (§ 32); and (3) those “engaged principally” in underwriting (§ 20). 329 U.S. at 448. It then concluded that “[t]he inference seems reasonable to us that Congress by the words it chose marked a distinction which we should not obliterate by reading ‘primarily’ to mean ‘principally’.” Jd. Because the Board has found that a gross income level of ten percent of covered activities will trigger § 32, see Staff Opinion 3-939, 1 Fed. Reserve Reg. Serv. 389 (Dec. 14, 1981), the holding companies argue that “principally” under § 20 mandates approval of a higher level of activity, and that their proposed ten to 15 percent limitations were well within that level. The statements in Agnew regarding the meaning of “principally” are not dispositive in the instant case. For one thing the meaning of § 20 was not before the Su- preme Court in that case. See Cohens v. Virginia, 19 U.S. (6 Wheat.) 264, 398 (1821). Further, the statements con- cerning § 20 are not essential to its holding that “primar- ily” means “substantially.” See Kastigar v. United States, 406 U.S. 441, 454-55 (1972). The main focus of the Court’s analysis is on definitions of “primary,” see 329 U.S. at 446, and on the perils Congress sought to check by enacting § 32, id. at 447. In fact, the brief discussion of § 20 is used to demonstrate that “[t]here is other intrinsic evidence in the Banking Act of 1933 to support our conclusion [on the meaning of “primary”].” /d. ss ee ae t SE = 4ia Hence, we read Agnew as holding only that “primarily engaged” in § 32 means any “substantial activity.” B. “Substantially” The Board’s construction of “engaged principally” as denoting any substantial activity is reasonable. We do not conclude that because “engaged principally” in § 20 and “primarily engaged” in § 32 both denote “substantial activity” that the two terms are therefore synonymous. Substantiality is an amorphous qualitative concept that has many quantitative definitionat manifestations, see The Shorter Oxford English Dictionary 2172 (3d ed. 1973), which vary with the context in which the term is used. Hence, the Agnew dicta that “engaged principally” and “primarily engaged” do not necessarily mean the same thing, see 329 U.S. at 448-49, is not entirely circum- scribed by the Board’s interpretation. In fact, the same considerations that compelled the Court in Agnew to conclude that “primarily” in § 32 means “substantially” apply equally—if not more forcefully—here. The Supreme Court in Agnew rejected a reading that “primarily” meant “chief” or “leading” because the con- cerns that Congress addressed in enacting § 32 do not vanish if the firm’s underwriting activities are 49 percent rather than 51 percent. See 329 U.S. at 447. In both Situations, “a bank director interested in the underwriting business may use his influence in the bank to involve it or its customers in securities which his underwriting house has in its portfolio or has committed itself to take.” Jd. The banks’ argument essentially adopts the Court of Appeals holding in Agnew, that is, “principally” means “chief” or “first.” But the same reasoning that guided the Supreme Court guides us. The worries envisioned by - 42a bank affiliation with securities firms do not disappear simply because the activity is less than 50 percent of a firm’s business. An example illuminates how equating “principally” in § 20 with “chief” or “first” begets the dangers foreseen by Congress. Such an interpretation would allow a mem- ber bank to become affiliated with any large integrated securities firm. One commentator has pointed out that reading “principally” as “chief” would allow a bank to be affiliated with Merrill Lynch & Co., Inc., one of the nation’s largest investment bankers. See Plotkin, What Meaning Does Glass-Steagall Have for Today’s Financial World?, 95 Banking L.J. 404, 414-16 (1977). It cannot be supposed that the Congress that enacted Glass-Steagall would have intended that § 20 not prohibit such affilia- tions. This is not to say that “principally” cannot in some contexts mean “chief” or “first,” but rather that in § 20 the term must be given a definition that is both sensible and in harmony with legislative purpose. Moreover, the logic of the holding companies’ position is that “principally” in § 20 is a directly quantitative, not a qualitative, term. “Substantially,” on the other hand, reflects the qualitative aspects of “principally.” When Congress wanted to use a quantitative test in the Banking Act of 1933, it knew how to do it. See § 2(b), (c), 48 Stat. at 162-63 (definition of affiliate); § 13, 48 Stat. at 183 (collateral requirements for ioans to affiliates); § 16 (Sev- enth), 48 Stat. at 185 (limitations on banks’ purchase of securities for own account), § 19(b), 48 Stat. at 187 (level of assets for holding company affiliates to be maintained free of any liens); § 19(c), 48 Stat. at 187 (shareholders’ liability determination). Because in § 20 Congress de- parted from a quantitative approach, the argument that a 43a qualitative test should be controlling is all the more compelling. SIA and ICI advance several arguments against the Board’s interpretation of “principally.” They assert that “engaged principally” in § 20 at least covers any firm “formed for the purpose of” underwriting securities, relying on the Supreme Court’s statement in /C/ regard- ing repealed § 19(e) that “[a]ll companies formed for the purpose of issuing or underwriting securities would surely meet the ‘engaged principally’ test.” 450 U.S. at 70 n.43. Concededly, the subsidiaries here were formed for the purpose of engaging in securities activities. Yet, this argument is unpersuasive too. The Court’s statement in JCI is dicta and seems to indicate nothing more remarkable than that a company formed for the purpose of underwriting securities most likely would be expected to be engaged principally in that activity. Fur- ther, since § 20 does not restrict bank-eligible securities activities, SIA and ICI arguably miss the point. Compa- nies formed for the purpose of dealing in bank-eligible securities would not fall within the prohibitions of § 20.° 8 SIA and ICI point to testimony that at least one affiliate was formed for the purpose of dealing in bank-ineligible securities. The President of J.P. Morgan & Co. said during the Board hearing that the holding company established its bank-eligible securities subsidiary because it thought that there might be changes in the law allowing dealing in a wider range of securities and that they wanted to have a subsidiary in place when those changes came about. Because we hold that § 20 allows affiliates to engage to a greater extent in securities than the banks themselves, any formation of an affiliate would likely have in part a purpose to engage in those activities prohibited to banks. SIA’s argument therefore is also a back-door attempt to have us broaden the scope of § 20 to include bank-ineligible securities, an argument we have rejected. 44a To support their argument, SIA and ICI also rely on former § 19(e) of the Glass-Steagall Act. Section 19(e)— repealed in 1966— indirectly limited bank holding compa- nies’ acquisition of subsidiaries “formed for the purpose of, or engaged principally in” prohibited securities activi- ties. 48 Stat. at 188; see also supra note 4. Because § 20 and § 19(e) were intended to accomplish the same result, SIA and ICI argue that we should read the two sections as being coextensive. Even assuming that SIA and ICI are correct, § 19(e) would not have prohibited the activities here approved. It originally was intended to apply to “any affiliate formed for the purpose of, or engaged in” securities activities. See 1932 Hearings, supra, at 13 (text of proposed § 20(e)) (emphasis added). As originally conceived, any securities activity was prohibited under § 19(e). Thus, there are only two situations when the term “formed for the purpose of” had any meaning independent from “en- gaged in”: when a company had been formed for the purpose of engaging in unpermitted activities, but had (1) not yet commenced activities, or (2) ceased the activities, but might possibly resume them. Plainly, the evil that the “formed for the purpose of” standard was designed to avoid was the formation of subsidiaries ready to “engage”—but not yet engaged—in unauthorized securi- ties activities. Congress eventually added the term “principally” to “engaged” in § 19(e), presumably to have § 19(e) corres- pond with the standard laid down in § 20. We think that the original meaning of the “formed for the purpose of” language in § 19(e) was retained after this amendment to qualify the new and less restrictive standard of “engaged principally.” Thus, § 19(e) prevented subsidiaries from 45a either engaging principally in banned activities—which we have held above to be only bank-ineligible activities—or being formed for the purpose of engaging principally in such activities. Even if the proscriptions of § 20 are coextensive with those of former § 19(e), none of the subsidiaries here has been formed for the purpose of engaging principally in bank-ineligible activities. Section 19(e) therefore would not apply. Alternatively, SIA claims that Congress intended that § 20 bar underwriting or dealing activities that constitute a “regular” or “integral” part of the affiliate’s business, as opposed to “incidental” or “occasional” activities. The activities that concerned Congress did not necessarily arise only with the frequency of their repetition. In any event, the Board’s interpretation of “principally” as any “substantial” activity adequately addresses any apprehen- sion arising from the frequency or integral nature of an activity. The final argument raised by SIA is that because the Board’s interpretation of “engaged principally” necessi- tates regulation, it a@ fortiori contravenes the Glass- Steagall Act. It is true that “Congress rejected a regulatory approach when it drafted the statute.” Bankers Trust I, 468 U.S. at 153. The Board’s interpretation is one that attempts to walk the line that Cong’-ss laid down. The mere necessity of “regulation” in carrying out Glass- Steagall’s “prohibitions” is insufficient te justify rejec- tion of an otherwise reasonable interpretation of the Act. Cf. Bankers Trust II, 807 F.2d at 1067 (“The Glass- Steagall Act does impose a system of flat ‘prohibitions’ and ‘prophylactic’ measures, but this cannot obviate the need to examine particular factual situations to determine on which side of the prohibitory line they fall.”). 46a Consequently, the-Board’s view of “engaged princi- pally” as meaning any substantial activity is reasonable and consistent with Congressional purpose. C. Gross Revenue Limitation The Board determined that substantial activity, mea- sured quantitatively, constituted five to ten percent of an affiliate’s gross revenues over a two-year period. 73 Fed. Reserve Bull. at 485. It set the approved level of activity at the five percent end of this range, but stated its intent to review this level within a year after the order’s effective date. /d. One troublesome facet of the Board’s ruling is that “engaged principally” in § 20 is equally restrictive as—if not more restrictive than—“primarily engaged” in § 32. The Board has stated that if a firm’s prohibited activities constitute less than ten percent of its gross business, see Staff Opinion 3-939, 1 Fed. Reserve Reg. Serv. 389 (Dec. 14, 1981), or amount to less than ten million dollars regardless of the percentage figure, see Board Letter 3- 896, 1 Fed. Reserve Reg. Serv. 367 (May 22, 1959), the firm is not “primarily engaged” in such activities under § 32. By placing the permissible level of § 20 activity currently at only five percent of gross revenues—and never more than ten percent—the Board is employing, at least for the present, a more restrictive gross revenue test for § 20 than for § 32. This initially seems to contradict the Supreme Court’s indication that §§ 32 and 20 should be interpreted consist- ently. See Schwab, 468 U.S. at 219 (the term “public sale” should be interpreted consistently because “§§ 32 and 20 contain identical language, were enacted for similar pur- poses, and are part of the same statute.”). But with a 47a regard to “engaged principally” versus “primarily en- gaged,” §§ 20 and 32 differ; accordingly, there is justifica- tion for interpreting them slightly differently. The legislative history also supports the conclusion that the Board’s stringent quantitative interpretation of § 20 is reasonable. What became § 20 was proposed by Eugene Meyer, a governor of the Federal Reserve Board, as a substitute for the section which eventually became § 32, see 1932 Hearings, supra, at 387-88, because he believed that the language in the predecessor to § 32—in relevant respects identical to § 32—was overbroad and that it would therefore be ineffectual. See id. at 387. Meyer commented on the “difficulties in the way of accomplish- ing a complete divorce of member banks from their affiliates arising from the fact that a law intended for that purpose is likely to be susceptible of evasion or else to apply to many cases to which it is not intended to apply,” id. at 388, and tentatively suggested substituting what is now § 20 for what is now § 32. It defies logic that § 20 should be interpreted /ess restrictively than § 32, based on Meyer’s comments that § 20 was intended to be more restrictive than § 32. Further support for a stricter interpretation of § 20 than of § 32 is derived from the fact that the dangers resulting from affiliation are arguably greater than those resulting only from personnel interlocks. The public asso- ciates a member bank and its affiliate because of their common ownership and often similar names. The poten- tial for the public to associate the misfortunes of the affiliate with the bank is far greater than the association of firms with personnel interlocks, which are generally unknown to the public. 48a Given these considerations, we defer to the Board’s determination that § 20 aliows an affiliate to engage in bank-ineligible securities activities so long as those activi- ties do not exceed five to ten percent of the affiliate’s gross revenue. This range is both reasonable and consist- ent with the statute. Because of the Board’s expertise we also defer to its decision to set the gross revenue limita- tion at five percent. D. Market Share Limitation The Board’s second limitation on the subsidiaries’ bank-ineligible securities activities provides that the sub- sidiaries’ involvement in each activity may not exceed a five percent share of the total market for that activity. It reasoned that it has employed a market share limitation in determining whether a firm is “primarily engaged” in securities activities within the meaning of § 32. 73 Fed. Reserve Bull. at 484. The Board stated that “the fact that an affiliate would be a major force in a particular securities market would be an evidentiary factor suggest- ing that the affiliate is ‘engaged principally’ in underwrit- ing securities.” Jd. It also concluded that a sales volume test—currently employed under its interpretation of § 32—would be subject to manipulation and that a mar- ket share test “would provide a useful and objective proxy for sales volume.” Jd. It was concerned that sales volume could be easily inflated by use of repurchase and reverse repurchase agreements for government securities—a common practice among government securi- ties dealers—or by “churning.” Jd. The bank holding companies argue that neither § 20 nor the legislative history of the Glass-Steagall Act pro- vides a basis for the Board’s market share test. They 49a assert that § 20 mandates an inquiry only into activities within a subsidiary rather than one into the size of the subsidiary’s activity in relation to the market as a whole. A market share test, they claim, is intended sub silentio to promote competition rather than to protect against the hazards of affiliation envisioned by Congress. The Board’s justifications for imposing a market share limitation are not persuasive. It cites only two instances in which it has relied on market share data under § 32. One citation is to a 1947 internal letter from the Board to the Federal Reserve Bank of New York. The second citation is to a 1948 letter now included in a compilation of Board interpretations of Regulation R. See Fed. Reserve Reg. Serv. 4 3-895 (1948). The 1948 interpretative letter appar- ently was intended as a guide for future decisions. It is true that § 32 implicitly delegates to the Board the power to determine when a firm is “primarily engaged” in securities activities, in the same way that § 20 implicitly delegates the power to determine when a firm is “engaged principally” in securities activities. Yet Congress chose to grant the Board power to exempt individuals from § 32, but did not grant it similar power in § 20. Since Congress expressly granted the Board different regulatory power in § 32 than in § 20, it does not at all follow that the Board’s power to define the meaning of § 20 is coextensive with its power under § 32. Thus, the Board’s reliance on § 32 is not dispositive. We discern no support in § 20 for the Board’s market share limitation. In the legislative history there is evidence that before the enactment of Glass-Steagall, banks and bank affiliates had acquired an increasingly large share of securities activity in relation to investment banks. See W. Peach, The Security Affiliates of National Banks 108-10 50a (1941). For example, between 1927 and 1930 the percent- age share of commercial banks in origination of bond issues more than doubled. /d. at 109. This increasing market share of commercial banks in traditional invest- ment banking activities was not unknown to Congress. See 1931 Hearings, supra, at 299 (testimony of C.E. Mitchell, Chairman, National City Bank of New York) (presenting data). But, the fact that this was brought to Congress’s attention and that Congress did not directly address it is, if anything, a strong indication that Con- gress was not concerned about market share. Rather, by using the term “engaged principally,” Congress indicated that its principal anxiety was over the perceived risk to bank solvency resulting from their over-involvement in securities activity. A market share limitation simply does not further reduce this congressional worry. In addition, the Board has not proven on the record before us that a market share limitation is an objective proxy for a sales volume test. The Board makes no claim that the Act empowers it to limit the power of bank affiliates to compete in the securities markets open to them. Consequently, the banks’ cross-petition to elimi- nate the market share limitation is granted. E. Security Pacific’s Claims Security Pacific proposed in its application that its subsidiary engage in bank-ineligible securities activities constituting up to 15 percent of the subsidiary’s gross revenues. The Board approved a lower level of up to five percent of gross revenues, consistent with its orders ap- proving the other subsidiaries’ activities. Security Pacific argues that the Board abused its discretion in setting the lower limitation and by failing to adopt a case-by-case ae ee Sla approach to determining appropriate levels of § 20 activ- ity. The gravamen of Security Pacific’s argument is that its subsidiary should not be equated with the other bank holding company subsidiaries, all of which are based in New York. Security Pacific is located in California. The New York subsidiaries, Security Pacific argues, will be able to engage in a higher level of bank-eligible activities and, consequently, a higher level of bank-ineligible activi- ties, since bank-ineligible activity levels correspond di- rectly with the total securities activity of the subsidiary. Security Pacific claims that this mandates allowing a higher level of activity for its subsidiary. We disagree. Section 20 must be read to set down at some point a hard and fast limit on the amount of bank- ineligible securities activity, and we have determined that the Board’s limit of five to ten percent of the gross revenue is reasonable. Beyond this limit, there is no room for adjustment in order to ameliorate competitive in- equality. Within the range set by the Board there is, of course, leeway for adjustments that reflect the competitive posi- tions of certain subsidiaries. Security Pacific declined to submit evidence of special circumstances that might dis- tinguish it from the other affiliates involved and warrant approval of a level of bank-ineligible activity greater than five percent. Given this failure, the Board’s approval of a five percent level for Security Pacific was not an abuse of its discretion. Security Pacific also argues that the Board’s limitations are inconsistent with Board precedent holding that quan- titative measures should be determined on a case-by-case 52a basis. As noted above, § 20 sets down a line that cannot be crossed no matter how exceptional the circumstances, and it cannot be drawn differently in each case. CONCLUSION In sum § 20 of the Glass-Steagall Act forbids member bank affiliation with firms that are “engaged principally” in underwriting or dealing in “securities.” It was not Congress’ plan to forbid affiliates from those activities that banks themselves could engage in without limitation. The Board’s interpretation of § 20 under which govern- ment securities—those that banks may without limitation underwrite and deal in—are excluded from the prohibi- tion contained in § 20 is therefore consistent with the Congressional scheme. The Board’s qualitative and quan- titative constructions of the term “engaged principally” are reasonable, with the exception of the market share limitation. Accordingly, we deny the petitions and cross- petitions for review except with respect to the market share limitation. Petitions and cross-petitions for review are denied save for the cross-petition for review that seeks to eliminate the market share limitation, which cross-petition is granted. hen koe eee a Senedd APPENDIX B Citicorp New York, New York J.P. Morgan & Co. Incorporated New York, New York Bankers Trust New York Corporation New York, New York Order Approving Applications to Engage in Limited Underwriting and Dealing in Certain Securities Citicorp, J.P. Morgan & Co. Incorporated, and Bankers Trust New York Corporation, New York, New York (collec- tively ‘‘Applicants’’), bank holding companies within the meaning of the Bank Holding Company Act (‘‘BHC Act’’), have each applied for the Board’s approval under section 4(c)(8) of the BHC Act and section 225.21(a) of the Board’s Regulation Y, 12 C.F.R. § 225.21(a), to engage through wholly owned subsidiaries, Citicorp Securities, Inc. (‘‘CSI’’), J.P. Morgan Securities Inc. (‘‘JPMS’’), J.P. Morgan Municipal Finance Inc. (‘‘JPMMF’’), and BT Securities Corporation (‘‘BTSC’’), respectively, in underwriting and dealing in, on a limited basis, certain securities that member banks may not un- derwrite and deal in, specifically: (1) municipal revenue bonds, including so-called ‘‘pub- lic ownership”’ industrial development bonds;' l The industrial development bonds covered by the applications are only those tax exempt bonds in which the governmental issuer, or the governmental unit on behalf of which the bonds are issued, is the owner for federal income tax purposes of the financed facility (such as airports, mass commuting facilities and water pollution control facili- ties). S4a (2) mortgage-related securities (obligations secured by or representing an interest in residential real estate); (3) consumer-receivable-related securities (‘‘CRRs’’) (obligations secured by or representing an interest in loans or receivables of a type generally made to or due from con- sumers); and (4) commercial paper.” These securities (hereinafter ‘‘ineligible securities’’) may be held by member banks for investment purposes under section 16 of the Banking Act of 1933 (the ‘‘Glass-Steagall Act’’) (12 U.S.C. § 24, Seventh), but may not under that section be underwritten or dealt in by member banks. Applicants have previously received Board approval under section 4(c)(8) of the BHC Act for the above-mentioned subsid- iaries (collectively the ‘‘underwriting subsidiaries’’) to under- write and deal in U.S. government and agency and state and municipal securities that state member banks are authorized to underwrite and deal in under section 16 of the Glass-Steagall Act (hereinafter ‘‘eligible securities’’).? These eligible securities include certain municipal revenue bonds (issued for certain housing, university or dormitory purposes) as well as mortgage- related securities issued or sold by certain agencies of the fed- eral government. The proposed new underwriting and dealing activities would be provided in addition to the previously ap- proved activities, with the subsidiaries serving customers 2 J.P. Morgan has not proposed td underwrite and deal in CRRs. Citi- corp’s present application does not cover commercial paper, although it has filed a separate application with the Board to underwrite com- mercial paper. 3_—‘These activities are authorized for bank holding companies under section 225.25(b)(16) of Regulation Y. 12 C.F.R. § 225.25(b)(16). In general, member banks may underwrite and deal in obligations of the United States, general obligations of states and political subdivisions, and certain securities issued or guaranteed by government agencies. 12 U.S.C. §§ 24 Seventh, and 335. 55a through offices in New York and, in the case of Citicorp, in sev- eral other cities in the United States.* Citicorp, with total consolidated assets of $196 billion, is the largest banking organization in the nation.*® It operates eight banking subsidiaries and engages directly and through subsidi- aries in a broad range of permissible nonbanking activities. J.P. Morgan & Co. Incorporated, with total consolidated assets of $76 billion, is the fourth largest banking organization in the na- tion. It operates two subsidiary banks and engages directly and through subsidiaries in a variety of permissible nonbanking ac- tivities. Bankers Trust New York Corporation, with total con- solidated assets of $56.4 billion, is the eighth largest banking Organization in the nation. It also operates two subsidiary banks and engages directly and through subsidiaries in a variety of nonbanking activities. Notice of the applications, affording interested persons an opportunity to submit comments on the proposals, has been published (50 Federal Register 20,847 and 41,025 (1985) and 51 Federal Register 16,590 (1986)). In addition, on December 31, 1986, the Board announced that it would hold a public hearing on February 3, 1987, on the applications, and requested specific comment on certain major issues, including a framework of prudential limitations to address the potential for conflicts of interest, unsound banking practices and other adverse effects raised by the proposals. Four commenters, including the Securities Industry Associa- tion (‘‘SIA’’), a trade association of the investment banking in- dustry, and the Investment Company Institute (‘‘ICI’’), a trade association of the mutual fund industry, opposed one or more of the proposals (collectively the ‘‘protestants’’). The majority of the written comments were from banking organizations and trade associations representing segments of the banking indus- try and were in favor of the proposals. The Antitrust Division 4 _ For purposes of the Order, in accordance with common industry us- age, the term dealing refers to the business activity of holding oneself out to the public as being willing to buy and sell securities as principal in the secondary market. 5 All asset data are as of December 31, 1986. 56a of the U.S. Department of Justice and the U.S. Treasury De- partment also supported approval of the proposals. Because each of the underwriting subsidiaries that propose to underwrite and deal in the ineligible securities would be affili- ated through common ownership with a member bank, the Board must determine whether, upon consummation, the sub- sidiaries would be ‘‘engaged principally’’ in underwriting or the public sale of securities within the meaning of section 20 of the Glass-Steagall Act.° If so, the Board may not approve the appli- cations.’ In addition, the Board must determine whether the proposed activities are so closely related to banking as to be a proper incident thereto within the meaning of section 4(c)(8) of the BHC Act (12 U.S.C. § 1843(c)(8)) and are, on this basis, ac- tivities in which bank holding companies may engage. In two previous decisions, the Board considered some of the issues that are raised in the applications now before the Board. On December 24, 1986, the Board approved the application of 6 Section 20 of the Glass-Steagall Act (12 U.S.C. § 377) provides that: ‘*. . , no member bank shall be affiliated . . . with any corpora- tion. . . engaged principally in the issue, flotation, underwriting, public sale, or distribution at wholesale or retail or through syndi- cate participation of stocks, bonds, debentures, notes, or other se- ee.) 57 Because Applicants propose that certain of their officers and directors will also be officers and directors of the underwriting subsidiaries, the proposal raises an issue under section 32 of the Glass-Steagall Act (12 U.S.C. § (78) which provides that: No officer, director, or employee of any corporation. . . primarily engaged in the issue, flotation, underwriting, public sale, or distri- bution, at wholesale or retail, or through syndicate participation, of stocks, bonds, or other similar securities shall serve [at] the same time as an officer, director, or employee of any member bank ex- cept in limited classes of cases in which the Board of Governors of the Federal Reserve System may allow such service by general regu- lations when in the judgment of the said Board it would not unduly influence the investment policies of such member bank or the advice it gives its customers regarding investments. 7 See Securities Industry Association v. Board of Governors of the Federal Reserve System, 468 U.S. 207, 216 (1984) (hereinafter **Schwab’’). ree een 57a Bankers Trust New York Corporation (‘‘Bankers Trust’’) to en- gage in the placement of commercial paper issued by third par- ties as one activity of a commercial lending affiliate.* In that decision, the Board concluded that the placement activity in- volved did not constitute underwriting, distributing, or the pub- lic sale of securities for purposes of section 20. The Board further concluded that, even assuming this activity is covered by section 20, the term ‘‘engaged principally’’ in section 20 of the Glass-Steagall Act would allow the activity in an affiliate of a member bank if it is relatively insubstantial in terms of the total activity of the affiliate and the size of the market. Specifically, the Board cited the fact that since the gross revenues generated by the commercial paper activities of the affiliate would be no more than 5 percent of the affiliate’s total gross revenues and that the affiliate’s share of the total market for dealer placed commercial paper would not exceed 5 percent, the proposal would not violate section 20. In addition, the Board established a number of conditions to assure that the conduct of the activity was consistent with safe and sound banking practices and avoided conflicts of interest, concentration of resources, and other adverse effects. The Board applied this same framework of analysis in approving, on March 18, 1987, an application by The Chase Manhattan Corporation (‘‘Chase’’) to engage in un- derwriting and dealing in commercial paper in a commercial fi- nance subsidiary of the parent bank holding company.’ The Board has been guided by these two decisions in deciding the applications now before the Board. An index to this decision is contained in Appendix A to this Order. Part I. Introduction & Summary of Findings These applications raise fundamental questions concerning the scope of the Glass-Steagall Act’s restrictions on the securi- ties activities of member bank affiliates. Their resolution re- 8 73 FEDERAL RESERVE BULLETIN 138 (1987). 9 The Chase Manhattan Corporation, 73 Federal Reserve Bulletin 367 (Order dated March 18, 1987). 58a quires application of a statute adopted over 50 years ago in very different circumstances to a financial services marketplace that technology and other competitive forces have altered in a man- ner and to an extent never envisioned by the enacting Congress. Applicants’ member bank affiliates seek to activate until now dormant provisions in section 20 of the Glass-Steagall Act to participate in underwriting and dealing in certain securities, so long as they are not engaged principally in this activity. In its evaluation of the issues raised by the applications, the Board has been guided, as it must, by the terms of the statute and the underlying Congressional intent and purposes of the Act as evident in its structure and legislative history. Thus, the Board fully recognizes that Congress, through the Glass- Steagall Act, intended to separate commercial banks from gen- eral securities underwriting firms. Both the Board and the federal courts have often articulated the potential dangers to commercial banks from general underwriting activities that mo- tivated the Congress in enacting the Glass-Steagall Act. The Board remains fully sensitive to these concerns. Nevertheless, despite these dangers, the Congress drew a clear distinction between member banks and their affiliates in the Glass-Steagall Act. Except for certain specifically enumer- ated securities, including government securities, member banks were prohibited under the Glass-Steagall Act from engaging in any underwriting whatsoever. Member bank affiliates, on the other hand, were given a different statutory treatment under section 20 of the Act. Member bank affiliates are permitted to participate in other- wise impermissible securities underwriting so long as they are not ‘‘engaged principally”’’ in this activity. While prior to this time, there apparently has been no incentive to test the meaning of this authorization, the Board is now asked to apply it to spe- cific proposals to engage in certain underwriting activities. Thus, the Board’s task is to apply this explicit Congressional authorization to the proposed activities, but in a manner that gives effect to the Congressional intent in adopting the Glass- Steagall Act. Because of the precedent-setting nature of these applications, the Board has given them careful attention, ex- 59a tending over a period in excess of a year, during which time the statutory language, the legislative history, and the implications of these proposals for banking organizations and the financial markets generally have been carefully analyzed by the Board on a number of occasions. In addition, the Board conducted a hearing before the Board members on these important issues. For the reasons set out in its decisions in the Bankers Trust and Chase cases, the Board believes it is bound by the statutory language of section 20 to conclude that a member bank affiliate may underwrite and deal in the ineligible securities proposed in the applications, provided that this line of business does not constitute a principal or substantial activity for the affiliate. The Board reaffirms its conclusion in those cases that Congress intended that the ‘‘engaged principally’ standard permit a level of otherwise impermissible underwriting activity in an affiliate that would not be quantitatively so substantial as to present a danger to affiliated banks. The Board believes that it is only on this basis—that the activity would be insubstantial—that Con- gress concluded that, despite the hazards from underwriting that caused it to ban banks from engaging in underwriting, this activity would be permissible for the affiliates of member banks. The Board devoted a considerable effort to evaluation of the factors that should be used to determine the level of ineligible underwriting and dealing activity that would not exceed the substantiality threshold. Taking into account its precedent in the administration of the Glass-Steagall Act and the comments at the hearing on this issue, the Board again concluded that the principal factors that should be included in this judgment are gross revenue and market share. As explained in detail below, the Board believes that these factors are not susceptible to ma- nipulation to increase artificially levels of activity and fairly re- flect the amount of involvement of a bank affiliate in securities underwriting. With respect to the appropriate quantitative level of ineligible activity permitted under section 20, the Board concludes that a member bank affiliate would not be substantially engaged in underwriting or dealing in ineligible securities if its gross reve- 60a nue from that activity does not exceed a range of between five to ten percent of its total gross revenues. The Board also be- lieves that a similar range should apply to the market share test it believes is appropriate under section 20. This range was estab- lished by reference to the Board’s interpretations of the “‘pri- marily engaged’’ standard in section 32 of the Glass-Steagall Act. As discussed below, under these interpretations, a com- pany would not generally be considered engaged substantially in ineligible securities activity if its gross revenues from that ac- tivity did not exceed 5 percent of its total gross revenues. Where underwriting volume was not large in absolute terms, however, somewhat higher levels of revenue were permitted, but gener- ally not greater than 10 percent of total gross revenues. Applying this framework to the current applications, the Board came to the conclusion that, in view of the fact that the volume of ineligible securities activity projected by Applicants would be very large in absolute terms, the lower end of the per- missible range, 5 percent, should determine whether Appli- cants’ gross income or market share from ineligible activity would be substantial. The Board recognizes that this 5 percent threshold for measuring the concept of ‘engaged principally”’ is a conservative interpretation of the level of activity permitted by section 20. The Board believes that a conservative, step by step approach is merited in applying the provision of a statute that was intended to deal with a crisis in our banking system and that has not been extensively interpreted by the courts as applied to the applications now before the Board. In the light of experience, the Board will consider, not later than one year from the date of this Order, whether, under the framework es- tablished by the Board in this Order, somewhat higher levels of activity would be consistent with the Board’s finding that un- derwriting and dealing in ineligible securities in an affiliate of a member bank is permissible so long as the level of this activity measured by gross revenue and market share is not substantial. In addition, the three applications now before the Board raise an important issue that was not present in the Bankers Trust and Chase applications. In those two cases, the applicants pro- posed to place or underwrite commercial paper in a subsidiary 6la that was not engaged in securities underwriting activities at all. Here, the three Applicants propose to underwrite and deal in se- curities in a subsidiary that is otherwise engaged in underwriting and dealing in government securities and other securities that banks may underwrite and deal in pursuant to section 16 of the Glass-Steagall Act. Thus, in the three pending applications the Board must con- sider whether underwriting U.S. government securities and other securities that a bank may underwrite pursuant to section 16 of the Glass-Steagall Act should be considered a permissible activity for the purposes of applying section 20 of the Glass- Steagall Act to the proposed underwriting subsidiaries. If un- derwriting these securities, and particularly U.S. government securities, is considered permissible under section 20, as it is un- der section 16, an affiliate engaged principally in these activities could be then less than principally engaged in underwriting the otherwise impermissible securities proposed in the applications, including commercial paper, mortgage-backed securities and municipal revenue bonds. The answer to this question has vital significance for bank holding companies seeking to underwrite and deal in ineligible securities. Because of the operation of the net capital rules established by the Securities and Exchange Commission for broker-dealers, as a practical matter it is not feasible for bank affiliates to underwrite and deal in ineligible securities, other than commercial paper, within the confines of section 20 unless the subsidiary in which this activity takes place is engaged principally in underwriting and dealing in eligible securities—essentially U.S. government securities. The question as to whether underwriting and dealing in gov- ernment securities is included within the prohibition of section 20 of the Glass-Steagall Act depends upon an analysis of the language of the statute, the intention of Congfess and the Board’s own practice in administering the Act. The Board de- cided, in December 1986, not to resolve this question until after a hearing had given the parties an opportunity to develop fur- ther the record on this matter. 62a In the light of these considerations, the Board has concluded that U.S. government and other securities specifically made eli- gible for underwriting and dealing by member banks in section 16 should not be viewed as the kind of activity proscribed by section 20. The Board took into account, first, the fact that the Board has previously decided that a member bank affiliate is not engaged principally in impermissible activities if its sole business is underwriting and dealing in U.S. government and other eligible securities. Second, the Board considered that Congress did not intend to apply a more restrictive underwrit- ing standard to member bank affiliates than it legislated for member banks themselves. The~ Board’s conclusion with respect to the content and meaning of the authorization of section 20 to member bank af- filiates to be less than engaged principally in otherwise imper- missible underwriting activities is all the more compelling because the Buard has reached the conclusion that the activities proposed in these applications can be conducted by bank affili- ates on a safe and sound basis and without undue risk to affili- ated banks. On the contrary, the evidence seems to indicate that without this authority banking organizations will be at a disad- vantage in the competition to supply the credit necds v* he most creditworthy borrowers with access to the less costly com- mercial paper market, with a consequent continuing decline in the overall quality of bank loan portfolios. The Board has also evaluated whether the activities proposed in the applications are closely related to banking and a proper incident thereto under section 4(c)(8) of the BHC Act. 12 U.S.C. § 1843(c)(8). As stated in detail below, the Board has concluded that, because of the considerable experience of banks in underwriting and dealing in eligible securities, which are closely analogous to the proposed ineligible securities activities, and because the proposed commercial paper activities are func- tionally equivalent to traditional commercial banking func- tions, banking organizations are fully familiar with the proposed activities and have the expertise and capability to 10 See 12 C.F.R. § 225.25(b\(16). 63a carry out the proposed functions. The Board also concluded that the proposed de novo participation in this activity would have the beneficial effect of substantially increasing competi- tion, particularly in the highly concentrated commercial paper market, with the substantial expected public benefits of lower- ing financing costs as well as providing greater convenience to customers and increased efficiency in the proposed services. As noted above, Congress recognized that a member bank af- filiate that is not engaged principally in underwriting activities covered by section 20 could engage in otherwise impermissible securities underwriting even though it was aware that this activ- ity could give rise to subtle hazards that could impair public confidence in depository institutions. The Board believes Con- gress was prepared to accept these risks because they could be contained within fully acceptable limits through maintaining the corporate separateness of the underwriting firm and the af- filiated bank and through limitations on the relative size of the otherwise impermissible activities to assure their insubstantial- ity. These prudential limits have been fully implemented in the Board’s interpretation of the Glass-Steagall Act. In addition, other safeguards, both as a practical matter and under other statutory authorities, will be in place. As a practical matter, the securities which the Applicants propose to under- write and the Board is prepared to authorize are securities that member banks are eligible to purchase for their own account, are of high quality and involve minimum risk. In terms of the statutory framework, the Board notes that bank holding com- pany affiliates that engage in securities underwriting would be subject to SEC jurisdiction under the securities laws. Moreover, although not required by the Glass-Steagall Act, the Board be- lieves it is appropriate to require that member bank affiliates underwriting otherwise impermissible securities observe a num- ber of prudential considerations to assure capital adequacy and to limit both transactions and the flow of information between an underwriting subsidiary and other affiliates of the parent banking organization. These prudential considerations are ex- plained in Part III below. 64a Accordingly, the Board has concluded that, subject to the limitations established in this Order, approval of each of the three applications would not result in a violation of the Glass- Steagall Act and would be consistent with the closely related and proper incident to banking standards of section 4(c)(8) of the Bank Holding Company Act. Part II. Glass-Steagall Act A. Applicants’ Contentions The Applicants contend that the underwriting subsidiaries would not be ‘‘engaged principally’’ in underwriting securities within the meaning of section 20 of the Glass-Steagall Act be- cause the subsidiaries will limit the volume of their ineligible ac- tivity to a small percentage of their total business and so that the subsidiaries would not have a significant share of the mar- ket for any of the ineligible securities underwritten or dealt in." 11 Citicorp proposes (in the third year and thereafter) to limit the total sales volume of underwriting by CSI in ineligible municipal revenue bonds, mortgage-related securities and CRRs to no more than 10 per- cent of all securities (both eligible and ineligible) underwritten by the affiliate during the previous year. Citicorp would similarly limit the af- filiate’s dealing in ineligible securities to 10 percent of its total securi- ties dealing activity. Citicorp would also restrict the affiliate’s underwriting of each type of security to no more than 3 percent of the total amount of each type of ineligible security underwritten domesti- cally during the previous calendar year by all firms (mortgage-related securities and CRRs constitute a single category for this purpose). It would also limit the amount of each type of securities it may hold for dealing so as not to exceed this market cap. Morgan proposes to limit ineligible underwriting and dealing activity by its affiliates (JPMS and JPMMEF) in municipal revenue bonds, mortgage-related securities and commercial paper so that the activity will not, over any two-year period, account for more than 15 percent of the total consolidated eligible and ineligible securities activity of the affiliates as measured by two of the following three criteria: gross in- come, sales volume and average assets acquired in connection with the activity. Morgan would adopt the same market limitations as Citicorp, except that it proposes a 10 percent market share limitation for com- RR ee ee ee ee et wel 65a The Applicants contend that the term ‘‘engaged principally”’ in section 20 means the chief or single largest activity, and that, therefore, their underwriting subsidiaries may underwrite and deal in ineligible securities so long as this ineligible activity does not constitute more than 50 percent of the subsidiaries’ total business activity or represent its single largest business activ- ity.'* On this basis and subject to the proposed limitations on each subsidiary’s ineligible securities underwriting and dealing activity, Applicants contend their underwriting subsidiaries would be ‘‘engaged principally’’ in underwriting and dealing in eligible securities, which is permissible under section 20, and, therefore, the subsidiaries could not by definition be engaged principally in underwriting ineligible securities in violation of section 20 of the Glass-Steagall Act. Applicants further claim that, even under the broadest reading of ‘‘principally’’ as de- noting any substantial activity, their subsidiaries would not be engaged principally in ineligible securities activity under the limitations proposed in their applications. Applicants also argue that the proposed dealing activities are not covered by section 20 of the Glass-Steagall Act, which they claim is limited to activities involving the initial distribution of securities. They base this claim on the fact that section 20 does not refer to ‘‘dealing’’ per se, but to the functions of issuance, flotation, underwriting, public sale, or distribution of securi- ties. mercial paper based upon the average amount of dealer-placed com- mercial paper outstanding during the previous four calendar quarters. Bankers Trust proposes to conduct, through its affiliate BTSC, ineli- gible underwriting and dealing activity involving municipal revenue bonds, commercial paper, and mortgage- and-consumer-receivable- related securities under the same tests as proposed by Morgan. 12. The Applicants rely on a dictionary definition of the term ‘‘princi- pally’’ to mean the single largest activity and statements in the U.S. Su- preme Court decision in Board of Go [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385019_1475%3A2. Public record. Not legal advice.