Petition for a Writ of Certiorari — Investment Company Institute v. Camp

Supreme Court brief1971

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TABLE OF CONTENTS

Page

a eee dae deat 1

ee Shee, Chee oe cube chentéa ued as 2

QUESTION PRESENTED ............. cece eee ee eeeeees 2

STaTUTES AND REGULATION INVOLVED ..............05- 2

See a in Dek Cisne c eG ehekence dans bubs 3

Reasons ror GRANTING THE WRIT .........-......-2.- 11

I. Tue Questions PRESENTED ARE OF Magor PuBLic

i; .t60.) ceGeecobs teat nadadccdek Kaos 11

II]. THe QuEsTions PRESENTED ARE SUBSTANTIAL .... 16

The Glass-Steagall Act Prohibits Entry by Com-

mercial Banks Into the Mutual Fund Business .. 19

A. ‘‘Units of Participation’’ are ‘‘Securities’’

within the meaning of the Glass-Steagall Act 20

B. In operating commingled investment funds,

banks are engaged in the business of issuing,

selling, distributing, underwriting and deal-

noo. hebaeeacesseaeheceesas 22

C. A strict interpretation of the prohibitions of

Glass-Steagall is consistent with Congress’

intent in separating commercial banking from

Sy OES SUNN 5a 6 56s scaSeceuns acess 27

EE Re eee Parr ee Tee eee ee ee 31

Appendix A: Opinion of the Court of Appeals ...... la

Appendix B: Opinion of the United States District

pene, Daatrect of Catemebie .... 52. cnn sccccccss 5la

Appendix C: Judgment of the Court of Appeals ..... 94a

Appendix D: Order of the Court of Appeals Denying

EE ciceave nwehees s4bens SENSE R THO Cees 95a

Appendix E: Statutes and Regulation Involved ..... 95a

ii Table of Contents Continued

TABLE OF AUTHORITIES CITED

CasEs: Page

tion filed, May 19, 1969, Supreme Court Doe. No.

aaa ean ua FOR tk EWA KE Us uUR Gs kek kaka ca

STATUTES:

Internal Revenue Code of 1954, Section 584 .........

Investment Company Act of 1940, 54 Stat. 789 (1940),

as amended, 15 U.S.C. § 80a-1, et seq. (1964) ....

National Banking Act of 1933, 48 Stat. 162 et seq.

(1933), as amended, now codified at U.S.C., Title 12

GE cha cheep ihe atk ee kab o skh cok ekens

’

Section 16, 12 U.S.C. § 24 ........... 2, 6, 7, 19, 20

Section 20, 12 U.S.C. 8377 ............. 2, 6, 7, 20

Table of Contents Continued iii

Page

Section 21, 12 U.S.C. § 378 .........5.- 2, 6, 7,19

Section 32, 12 U.S.C. § 78 .......506s 2, 6, 7, 20, 29

| Section 5(c), 12 U.S.C. § 335 «0... . cece eee 20

Public Law 87-722, 76 Stat. 668 (1962), codified at 12

U.S.C. §92a (1964) ........cceeeeeeeeeeees 2, 5, 6, 26

Securities Act of 1933, 48 Stat. 74 (1933), as amended,

15 U.S.C. § 77a et seq. (1964) .......cceeeevves 6

98 U.S.C. § 1254(1) (1964) ......... ce ceeeeeeeeeene 2

UT so) Be. | | Serres 2

(loNGRESSIONAL MATERIALS:

Hearings on Amendment No. 438 to S. 1659 before the

Senate Banking and Currency Committee, 90th

Cong., Ist Sess. (1967) .......... eee ee eee renee 18

Hearings on Bank and Insurance Company Collective

Investment Company Act Amendments of 1967,

H.R. 14742, before the House Committee on Inter-

state and Foreign Commerce, 90th Cong., 2d Sess.

FTIR) cans ven censcvsentesnsensusscssavecers 8

Hearings Pursuant to S. Res. 71 Before a Subcommit-

tee of the Senate Committee on Banking and Cur-

rency, 71st Cong., 3rd Sess., (Appendix) (1931)..

’ :

Hearings on S. 2704 Before a Subcommittee of the

Senate Committee on Banking and Currency, 89th

Cong., 2d Sess. (1966) ..........00eees 8, 14, 18, 21, 26

75 Cong. Rec. 9909-9910 (May 10, 1932) ...........+- 30

75 Cong. Rec. 9912 (May 10, 19382) .......-..-0-05s 13, 28

114 Cong. Ree. $9497 (Daily ed. July a ren 17

115 Cong. Ree. H10554, H10559 (Daily ed. November 5,

err Terre 17

H. Rep. No. 2337, 89th Cong., 2d Sess. (1966) ......-. 8

S. Rep. No. 1455, 73rd Cong., 2d Sess. (1934) ... .4, 28, 30

S. Rep. No. 2039, 87th Cong., 2d Sess. (1962) .......

S. Rep. No. 1351, 90th Cong., 2d Sess. (1968) .......

~~ Sosa a Kedtin twat CE TE Tee mee “

iv Table of Contents Continued

FEpERAL REGULATIONS: Page

Comptroller of the Currency Regulation 9, 12 C.F.R.

Gaak inks Ge Vabucchklnuseeeaweteee so ;

12 C.F.R.

8) Se are ee 13, 14, 23, 25

EE Wad onc 6 awe hg hacked Ue eee eee ake 13

EE Seca) Cn ckkeneeaes anekohes 13, 30

Ee ee Leb avalas baeeswens 13

RE PET ee ere ee 13, 14

I ies. Jay to Gas Nes bene sd ckka kas 18

26 Fed. Reserve Bull. 393 (1940) ................... 27

27 Fed. Reserve Bull. 399 (1941) ................... 14

42 Fed. Reserve Bull. 228 (1956) ................... 4, 27

MISCELLANEOUS:

Comment, Banks, Trusts and Investment Companies:

The Commingled Investment Fund, 115 U. Pa. L.

ih i Ce hae Owen cine ake wa cuca eek 12

Comment, Regulation of Bank-Operated Collective In-

vestment Funds—Judicial or Legislative Resolu-

tion of an Administrative Controversy, 73 Yale

Ree EE nc chs cuatuvasseat¥acess¥eess 12

Marin, Common Trust Funds—Development and Fed-

eral Regulation, 83 Bank. L. J. 565 (1966) ...... 12

New York Times, April 30, 1967 ...............0008. 8

Prospectus for Commingled Investment Account of

First National City Bank, dated September 22, :

A ee Sr et ere et eee 2:

Report of the Securities and Exchange Commission

on the Public Policy Implications of Investment

Company Growth submitted to the House Com-

mittee on Interstate and Foreign Commerce, H.

Rep. No. 2337, 89th Cong., 2d Sess. (1966) ...... 8

SEC File 8-11-1385, Form N. 1-R, Annual Report of

Management Investment Company of the Com-

mingled Investment Account of First National

City Bank for Fiscal Year Ended August 31, 1967 23

The American Banker, February 5, 1963 ............ 12

PSE MEWS EE RD 2.3 Z ¥ ages Sa et a eee Tr eee

- 5 . i A ee ee ee a ne ee Pe EL ‘ 2

a cae Se et = URL 5

IN THE

Supreme Court of the United States

OctToBeR TERM, 1969

No.

INVESTMENT COMPANY INSTITUTE ET AL., Petitioners,

Vv.

Wru1AM B. Camp, Comptroller of the Currency ;

First NATIONAL City BANK, Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE DISTRICT OF COLUMBIA CIRCUIT

Petitioners—Investment Company Institute, an as-

sociation of mutual funds and their investment ad-

visors and principal underwriters, and a number of

individual Institute members—pray that a Writ of

Certiorari be issued to review the judgment of the

United States Court of Appeals for the District of

Columbia Cireuit in the above-captioned case.

OPINIONS BELOW

The opinion of the Court of Appeals is not yet re-

ported. It is reprinted as Appendix A hereto, pp.

la to 50a, infra. The opinion of the District Court

LUE EAR RES SIREN: PATRONS IN eet

for the Distriet of Columbia is reported at 274 F.

Supp. 624 (1967) and is reprinted as Appendix B

hereto, pp. 5la to 94a, infra.

JURISDICTION

The judgment of the Court of Appeals was entered

on June 21, 1969. (Appendix C, p. 94a, infra). A

timely Petition for Rehearing was denied on August

15, 1969. (Appendix D, p. 95a, infra). The jurisdic-

tion of this Court is invoked pursuant to 28 U.S.C,

§ 1254(1) (1964). The basis of jurisdiction in the

District Court was 28 U.S.C. § 1331 (1964).

QUESTION PRESENTED

Whether Regulation 9 of the Comptroller of the

Currency, and his specifie rulings thereunder authoriz-

ing national banks to sponsor and promote collective

investment funds, which are functionally indistin-

guishable from mutual funds, (a) violate those pro-

visions of the Glass-Steagall Act which were designed

to separate commercial banking from the securities

business and to prohibit commercial banks from is-

suing, selling, distributing, and underwriting securi-

ties, and (b) exceed the permissible scope of the bona

fide fiduciary activities of national banks which the

Conaptroller is empowered to authorize under Sec-

tion 92a, 12 U.S.C.

STATUTES AND REGULATION INVOLVED

The statutory provisions involved, 15 U.S.C. §§ 24,

377, 378, 78 (1964) (hereinafter designated as ‘the

Glass-Steagall Act’’) and 12 U.S.C. § 92a (1964) are

set forth in Appendix E, pp. 95a to 98a, infra. Also

set forth in Appendix E are the pertinent parts of the

—

Comptroller’s Regulation 9, 12 C.F.R. §9 (1967), pp.

98a to 106a, infra.

STATEMENT

Petitioner Investment Company Institute (herein-

after the ‘‘Institute’’) is a national association repre-

senting 177 open-end management investment com-

panies (popularly known as ‘*mutual funds’’) and their

88 investment advisers and 78 principal underwriters.

The mutual fund members of the Institute have assets

of more than $36 billion, representing about 94 percent

of the assets of all such companies in the United States ;

they have approximately 3.5 million shareholders.’ In

addition, Petitioners include several investment ad-

visers and principal underwriters of individual mutual

funds, all of whom are members of the Institute.’

Since the days of the Great Depression, the securities

business in which Institute members engage has been

kept completely independent and apart from the com-

mercial banking business. In order to prevent a re-

eurrence of the disastrous results which attended the

intermingling of commercial and investment banking

activities prior to the Depression, in 1933 Congress

passed the Glass-Steagall Act to erect a wall of sepa-

ration between commercial banking and the securities

'These figures are based on the record of this case when filed

in April, 1966. Current data indicates that the Institute repre-

sents 274 mutual funds, 127 investment advisers and 109 principal

underwriters, The assets of the mutual fund members of the Insti-

tute total more than $50 billion and these funds have approximately

5 million shareholders,

* These individual Petitioners are Investors Diversified Services,

lne.; Investors Management Company, Inc.; Hugh W. Long &

Company, Inc.; Wellington Management Company; and Welling-

ton Company, Inc.

—_—_—e SERS aRT

business.* This case involves an attempt by the Comp.

troller of the Currency to breach that wall, for the first

time, by authorizing national banks to reenter the

securities business through the promotion of com.-

mingled investment funds and the issuance and sale of

securities in these funds which are functionally in-

distinguishable from mutual fund shares.‘

Although commercial banks have in the past made

repeated efforts to expand into the mutual fund busi-

ness under the guise of exercising their traditional

fiduciary powers, for more than two decades the Fed-

eral Reserve Board (hereinafter the ‘‘ Board’’)—which

until 1962 had regulatory responsibility over the fidu-

ciary activities of national banks—consistently re

jected such efforts. The Board repeatedly held that a

bank’s promotion of a common trust fund as a specula-

tive investment device was not a bona fide fiduciary

activity.°

“The Banking Act of 1933, enacted on June 16, 1933, was

promulgated to effect @ complete severance of the commercial and

investment banking functions and to eradicate many of the abuses

disclosed at the hearings before the Senate subcommittee.’’ S. Rep.

No. 1455 on ‘‘Stock Exchange Practices,’’ 73rd Cong., 2d Sess,

(1934), p. 185 (emphasis supplied).

‘Former Comptroller James J. Saxon promulgated the regula.

tions in question here. He was succeeded by Respondent William

B. Camp.

*The Board has always made it perfectly clear that a bank’s

authority to operate a common trust fund for bona fide fiduciary

purposes, ie., a commingled fund made up of assets held by the

bank in its traditional role as ‘‘trustee, executor, administrator, or

guardian,’’ did not extend to the operation of such funds as specu-

lative investment devices. See, Section 584, Internal Revenue Code.

The Board warned against the merchandising of such funds as

speculative investments, because the use of aggressive advertising

might turn a common trust fund into a mutual fund device. 42

Fed. Reserve Bull, 228 (1956). See infra, p, 27.

we .

ATT NE ENT TTT ia

—

However, in 1962, Congress transferred regulatory

responsibility over fiduciary activities of national banks

from the Board to the Comptroller. Public Law 87-

722, 76 Stat. 668 (1962), codified at 12 U.S.C. § 92a

(1964). In doing so, Congress made clear that it in-

tended no change in the existing statutory law con-

cerning the permissible fiduciary activities of national

banks.°

Nevertheless, promptly after receiving these re-

sponsibilities, the Comptroller promulgated regula-

tions authorizing national banks with fiduciary powers

to maintain collective investment funds as investment

media and to offer shares in such funds to the pub-

lic.’ 12 C.F.R. § 9.18, amended on February 5, 1964,

®§, Rep. No. 2039, 87th Cong., 2d Sess. (1962), p. 1: ‘*No change

would be made from the substantive provisions of section 11(k)

other than the transfer of authority, so that there is no alteration

of existing law regarding national banks acting in fiduciary capac-

ities”? (Emphasis supplied.)

7 In this same period, the Comptroller also promulgated a num-

ber of other controversial regulations permitting commercial banks

to undertake additional non-banking activities. A number of these

regulations have been declared unlawful. See, Baker, Watts &

Co. v. Saron, 261 F.Supp. 247 (D.D.C. 1966), aff'd sub nom. Port

of New York Authority v. Baker, Watts & Co., 129 U.S. App. D.C,

173, 392 F.2d 497 (1968); Georgia Ass’n of Independent Ins.

Agents, Inc, v. Savon, 268 F.Supp. 236 (N.D. Ga. 1967), aff'd, 399

F.2d 1010 (5th Cir, 1968). The Comptroller neither appealed the

adverse District Court decision in the former case nor filed a peti-

tion for certiorari in the latter. Several other cases challenging the

Comptroller’s new regulations are still in litigation, Association of

Data Processing Service Organizations, Inc. v. Camp, 406 F.2d 837

(Sth Cir, 1969), cert. granted, 37 U.S.L.W. 3493, June 23, 1969;

Arnold Tours, Inc. v. Camp, 408 F.2d 1147 (1st Cir. 1969), cert.

petition filed, June 11, 1969, Supreme Court Doe. No. 128. The

latter case was consolidated for decision in the Court of Appeals

with two other cases in which petitions for certiorari have been

filed individually, Wingate Corp. v. Industrial National Bank,

cert, petition filed, May 19, 1969, Supreme Court Doe. No. 129;

Wingate Corp. v. Camp, cert. petition filed, June 11, 1969, Supreme

Court Doe, No. 225.

29 Fed. Reg. 1719. Pursuant to these regulations,

Respondent First National City Bank (hereinafter

the ‘‘Bank’’) submitted and had approved a plan for

the operation of a collective investment fund, the so-

called ‘‘Commingled Investment Account’’ (herein-

after the ‘‘ Account’’).®

Petitioners brought this suit against the Comptroller

to have the challenged portions of the Regulation and

the specific rulings thereunder declared unlawful and

further action thereunder enjoined. The complaint

charged that the Comptroller acted beyond his statu-

tory power in authorizing collective investment funds

in that Regulation 9:

(a) permits bank activity which violates four

specific prohibitions of the Glass-Steagall Act

which prohibit commercial banks from “‘issuing,

underwriting, selling or distributing . . . securi-

ties.’’; and

(b) authorized banks to engage in securities ac-

tivities which were clearly outside the bona fide

fiduciary activities permitted national banks by

Section 92a of the National Banking Act.

*In addition, the Account registered with the Securities and

Exchange Commission as an investment company under the In-

vestment Company Act of 1940, 15 U.S.C. § 80a-1 (1964) ; partici-

pations in the Account are registered as securities under the Securi-

ties Act of 1933, 15 U.S.C. § 77a et seq. (1964). Other national

banks may establish collective investment funds similar to the Ac-

count without obtaining specific authorization from the Comp-

troller. Joint Appendix (hereafter ‘‘J.A.’’), p. 107. The Joint

Appendix filed in the Court of Appeals is included in the desig-

nated record here.

* Pub. L. No. 87-722, 76 Stat. 668 (1962), 12 U.S.C. § 92a (1964).

The provisions of the Glass-Steagall Act to which reference is made

are §§ 16, 20, 21, 32, 48 Stat. 162 et seq. (1933), as amended, 12

U.S.C. §§ 24, 377, 378, 78 (1964).

—

The District Court, in an extensive and detailed

opinion, coneluded that the Comptroller’s regulations

authorize commercial banks to enter the mutual fund

business and thereby to engage in the securities ac-

tivities prohibited by Sections 16, 20, 21 and 32 of the

Glass-Steagall Act; that the ‘units of participation”’

:y the Bank’s Account are ‘securities’? within the

meaning of the relevant provisions of Glass-Steagall ;

that in promoting and marketing these securities, banks

engage in the business of issuing, underwriting, dis-

tributing and selling securities in violation of Glass-

Steagall; and finally, that Congress, not the courts,

is the appropriate forum to determine whether the

stringent prohibitions of Glass-Steagall should be al-

tered.

In a per curiam opinion, the Court of Appeals re-

versed the decision of the District Court." The Court’s

opinion contained no discussion of the merits, but

stated that the two concurring opinions—one by Chief

Judge Bazelon and the other by Judge (now Chief

Justice) Burger, in which Senior Judge Miller con-

curred—set forth the basis of the Court’s action. As

we point out below, the majority concurring opinion

did not deal at all with the critical issues of statutory

construction.

> * * * > * *

To put this matter in perspective, it is necessary

to review briefly the operation and structure of a col-

lective investment fund of the type authorized by the

Comptroller. There is no real controversy as to the

The per curiam opinion stated that ‘‘while a majority of the

Court has reservations about standing, these doubts have been re-

solved in favor in reaching the merits in cases of this consequence.”’

Infra, p. 3a.

—_——— Sith SARA AERA

AER, ATEN GMT EP RET ORNL RR

basie facts, as the Comptroller has acknowledged

below.

In all significant respects, the collective investment

funds authorized by the challenged regulations, and

exemplified by First National City Bank’s Account,

are the functional equivalents of mutual funds." Their

purpose is identical; their structure is identical; and

the legal relationship of the investor to the fund is

identical.”

An investor becomes a participant in the Bank’s

Account by tendering a sum—under present regula-

"Chief Judge Bazelon acknowledged that, while several dif-

ferences are present, ‘‘the Account is the functional equivalent

of an open-end mutual fund.”’ (Infra, p. 7a.) There is virtually

unanimous agreement by all informed sources that the challenged

regulations of the Comptroller permit the creation of an invest-

ment device virtually indistinguishable from a mutual fund. The

Chairman of the Securities and Exchange Commission has said

that bank-sponsored collective investment funds are ‘‘essentially

the same as mutual funds.”’ Hearings on Bank and Insurance

Company Collective Investment Company Act Amendments of

1967, H.R. 14742, before the House Committee on Interstate and

Foreign Commerce, 90th Cong., 2d Sess. (1968), p. 122. The Chair-

man of the Federal Deposit Insurance Corporation has acknowl-

edged that the challenged regulations authorized ‘‘bank entry in

the mutual fund business.’’ Hearings on S. 2704 before a Sub-

committee of the Senate Committee on Banking and Currency, 89th

Cong., 2d Sess. (1966), p. 276 (hereinafter referred to as the ‘‘1966

Hearings.’’) Members of Congress and the press have all made

clear that what is at stake is bank entry in the mutual fund busi-

ness. See, e.g., S. Rep. No. 1351 on S. 3724, 90th Cong., 2d Sess.

(1968), pp. 10, 11, 22; New York Times, April 30, 1967, see, 3, p. 1.

For a general description of the structure and operation of

open-end management investment companies, or ‘‘mutual funds”’

as they are commonly known, see Report of the Securities and

Exchange Commission on the Public Policy Implications of In-

vestment Company Growth submitted to the House Committee on

Interstate and Foreign Commeree, H. Rep. No. 2337, 89th Cong.,

2d Sess. (1966).

—_—

tions, $10,000 or more—to the Bank pursuant to a

short, standardized form which accompanies a sales

flyer, apparently sent out broadside to all bank cus-

tomers, announcing the creation of the Account. The

promotional literature is accompanied by a copy of the

prospectus for the fund. (J.A. 192) In that sales

instrument the Bank describes the ‘‘opportunity for

long-term growth of principal and of income”’ by in-

vesting in the Bank’s fund. It advises the prospective

investor that, ‘‘You should give careful consideration

to these factors in deciding whether the Commingled

Account provides a suitable investment medium for

you.”? If the prospective investor has any questions,

he is invited to telephone the Bank. (J.A. 192)

Further, the potential investor is told that be can

invest in the Account merely ‘‘by completing the tear-

out authorization form on page 13 of the Prospectus

and forward[ing] it with his check’’ to the Bank.

(J.A. 192) Upon receipt, the investment is auto-

matically deposited in the Bank’s Account and is avail-

able, as part of a pool of assets, for the purchase of

portfolio securities in furtherance of the Account’s

investment policy.

Following the standard practice of mutual funds,

at the time the investor tenders his money to the bank

officer for investment in the Account, a security-

denominated a ‘‘unit of participation’’—is issued to

the investor which represents the investor’s share in

the assets of the Account.”* As is true of shares in a

mutual fund, the ‘‘unit of participation’? permits the

13 Many mutual funds are non-corporate in form and issue securi-

ties denominated by a variety of names such as ‘“‘beneficial in-

terests’’ and ‘‘participatory agreements’’ (J.A. 236).

NEEL EEA RE ERT do Be aan) RTS

—

investor and the Bank to determine conveniently the

investor’s proportionate interest in the Account. An

investor may redeem his ‘‘units of participation”’ in

the Account for cash as he wishes, a feature which is,

of course, the hallmark of an open-end mutual fund.

The management structure of the Bank’s Account

parallels that of a mutual fund. The operation of the

Account is supervised by a Committee of five persons,

who occupy ‘‘a position equivalent to that occupied by

the board of directors of a mutual fund.’’ Infra, p.

59a. The Bank provides the Account with investment

management services, in return for a stated manage-

ment fee pursuant to an investment advisory contract

entered into annually by the Committee and the Bank.

The management fee increases as the size of Account

increases; the Bank’s fee is one half of one percent

of the total net asset value of the Account. Jbid.

The Bank acts as underwriter of the units of partici-

pation pursuant to a contract executed between the

Account and the Bank. Ibid. Under that contract, the

Account agrees that participations will at all times be

available for purchase upon the request of appropriate

personnel of the Bank. Sales of units of participation

are handled exclusively by employees and officers of

the Bank and are made without commission or sales

load. Mutual funds similarly execute underwriting

contracts with distributors, who sell the shares to the

public, generally with a sales commission (or load),

but in many cases for no commission, (7.e., in the case

of so-called ‘no-load funds”). Infra, p. 55a.

The Bank’s reports to participants in the Account

highlight the speculative nature of the Bank’s invest-

ment efforts and its aggressive attempts to market its

Op SRT RR eta MBO aE Nt HR DY NIE DINERO RET EN LSE TTI AT AY

fund. The six-month report to participants in April,

1967 noted that, ‘* Investing in common stocks and con-

vertible securities for long-term growth of both capital

and income is our stated investment policy.’ In earry-

ing out that policy, the report noted that, ‘‘We have

invested your funds in ten major industries with em-

phasis in the office equipment, electrical and electronics,

drug and cosmetic, and airline groups.’’ (J.A. 202)

Moreover, the Bank compares the performance of its

Account with the Dow-Jones Industrial Average, a

method of dramatizing investment results frequently

used by mutual funds. Thus, the Bank noted that in

one period, while the Dow-Jones had increased only 6.5

percent, the Account increased 24.3 percent. (J.A. 202)

These facts demonstrate beyond doubt that First

National City Bank is operating and promoting its

Account in the same way as any other mutual fund.

REASONS FOR GRANTING THE WRIT

I. THE QUESTIONS PRESENTED ARE OF MAJOR PUBLIC

IMPORTANCE

There is virtually unanimous agreement as to the

importance of the questions presented by this case.

This was explicitly recognized by the Court of Appeals

in its per curiam opinion which noted that, although

a majority of the Court had reservations about Peti-

tioners’ standing to sue, their ‘‘doubts have been re-

solved in favor of reaching the merits in [a case] of

this consequence.’’ (Infra, p. 37a.) And, in his sepa-

rate opinion, Judge (now Chief Justice) Burger ex-

plained he had concluded that Petitioners had stand-

ing ‘“‘in order to make a majority holding for review

of the merits of a subject of such importance.’’ Judge

Burger expressed the hope that ‘‘consideration of the

merits ... at our level may be useful to further judicial

review.’ '' (Infra, p. 31a.)

First, the decision below opens the first breach in

the Glass-Steagall wall of separation which Congress

erected in 1933 between commercial banking and the

securities business. It reverses a consistent course of

judicial and administrative interpretation of the Glass-

Steagall Act over the last 35 years. On the only prior

oceasion when the Glass-Steagall Act has been con-

sidered here, this Court interpreted the Act in such

a way as to resolve all doubts against potential inter-

mingling of commercial banking and the securities busi-

ness, characterizing the Act a ‘‘preventive or prophy-

lactic measure.’’? Board of Governors v. Agnew, 329

U.S. 441, 449 (1947). Indeed, to prove a violation of

the Act, the Court held that there was no need to demon-

strate that commercial banks were, in fact, guilty of

conflicts of interest or other improper dealings in their

securities activities.” The Court found that the critical

1*The controversial nature of the challenged regulations and

the importance of the present case have also been recognized and

commented upon in the banking industry and in learned journals.

See, e.g., Henderson, Widening of Commercial Banks’ Functions

Advocated by Saxon in Two Distinct Areas, The American Banker,

Feb. 5, 1963; Marin, Common Trust Funds—Development and

Federal Regulation, 83 Bank. L. J. 565 (1966) ; Comment, Banks,

Trusts and Investment Companies: The Commingled Investment

Fund, 115 U. Pa. L. Rev. 1276 (1967) ; Comment, Regulation of

Bank-Operated Collective Investment Funds—Judicial or Legis-

lative Resolution of an Administrative Controversy, 73 Yale L. J.

1249 (1964).

1 As Senator Bulkley, a major spokesman for the Act, explained

prior to its passage :

‘It is not, of course, contended that the abuses here inti-

mated are never avoided by the good conscience of the bankers.

On the contrary, I believe they are avoided generally by good

bankers. Certainly they are avoided much more often than

EPS OM REL SUP OTH Et STRATE BATRA DIO ENE NO TARE NE MEARE AACE ITABIPS ASSET ES ae

ull

element was the threat of conflict of interest or im-

proper dealing which was raised simply by engaging

in the proseribed activities."

The Federal Reserve Board likewise has interpreted

the provision of the Act which it administers (Section

32) for almost thirty years so as to insulate a broad

variety of securities activities, including the operations

of mutual funds, from commercial banking.'"* Upon

they occur. Yet the danger is always there, and must be

there as long as human nature remains human nature. .

[W]e must surround the banking business with sound rules

which recognize the imperfection of human nature [so] that

our bankers may not be led into temptation, the evil effect of

which is sometimes so subtle as not to be easily recognized by

the most honorable man.”’ 75 Cong. Rec. 9912 (May 10, 1932).

16 A stringent interpretation of the prohibitions of the Glass-

Steagall Act has been applied in rejecting other contentions of

the Comptroller for a relaxed reading of the Act. Port of New

York Authority v. Baker, Watts & Co., 129 U.S. App. D.C. 173,

392 F.2d 497 (1968).

'™ The Board has applied the prohibitions of Section 32 of the

Glass-Steagall Act to bar interlocks between commercial banks and

a variety of organizations which were engaged in the issuance,

sale, distribution or underwriting of securities, such as:

(i) open-end investment companies (or mutual funds) 12

C.F.R. § 218.101 (1951) ;

(ii) corporations engaged in selling or underwriting mutual

funds shares, 12 C.F.R. § 218.107(e) (1963);

(iii) investment advisers which control sales distribution sub-

sidiaries, 12 C.F.R. § 218.107 (1963) ;

(iv) real estate investment companies frequently issuing a sub-

stantial amount of stock relating to their capital, 12 C.F.R.

§ 218.104(b) (1961) ;

(v) corporations in special circumstances in the process of

organization and selling their own stock, 12 C.F.R. § 218.105

(1961); and

(vi) closed-end investment companies in process of organization,

12 C.F.R. §§ 218.102 (1960), 218.104 (1961).

ES FOLGE DELI PERN ES RANE SRI

repeated oceasions, the Board has specifieally barred

interlocking directorates between commercial hanks

and mutual funds on Glass-Steagall grounds."*

SECOND, this is no mere technical issue, but one of

great economic significance. The opinion below opens

the way for full seale entry by commercial banks into

the mutual fund business. It points to the ‘‘other bank-

sponsored funds likely to follow [which] will compete

with mutual funds and with those who market their

shares.”’ (Infra, p. 2a.) The Comptroller has pre-

dicted that, in the next decade, commercial banks op-

erating under the challenged regulations ‘‘might cap-

ture as much as $2 billion of mutual fund business.”’ ™

In this connection, Chief Judge Bazelon has noted:

‘The major consequences of expanded investment

service by banks will be a quantitative change in

18 The Federal Reserve Board has consistently ruled that Section

32 prohibits interlocking directorates between member banks and

mutual funds. In 1951, for example, the Board held:

“*. .. it is the opinion of the Board that if such [an open-end

investment] company is issuing or offering its redeemable stock

for sale, it is ‘primarily engaged in the issue . . . public sale, or

distribution, . . . of securities’ and that section 32 of the Bank-

ing Act of 1933 as amended, prohibits an officer, director or

employee of any such company from serving at the same time

as an Officer, director or employee of any member bank.’’ 12

C.F.R. § 218.101 (1951).

In 1941, the Board made a definitive ruling on this point, 27

Fed. Reserve Bull. 399 (1941), and has stringently adhered to

this position. See, e.g., 12 C.F.R. § 218.107 (1963). In the Board’s

December 15, 1965 Memorandum it stated :

‘‘Ordinary open-end investment companies or mutual funds

have been regarded by the Board as subject to Section 32. Ac-

cordingly, the Board consistently has taken the view that in-

terlocking relationships described in the statute between such

funds and member banks are prohibited... .’’ 1966 Hearings,

p. 585.

19 Infra, p. 49a n.10.

the volume of securities bought, sold, and held by

banks. While substantial transactions in securi-

ties by banks may be essential for the modern man-

agement of their customers’ money, an increase in

their already massive securities holdings for the

account of customers has some disquieting conse-

quences for the underpinnings of corporate ac-

countability and competition in economy at large.”’

(Infra, p. 16a.)

TuirD, the decision of the Court of Appeals casts

serious doubt whether the Glass-Steagall Act will re-

main an effective and viable bar to commercial banks’

engaging in traditional mutual fund activity and other

securities activities. Because of the functional iden-

tity of ‘‘units of participation’’ with shares in tradi-

tional mutual funds, the decision raises the question

whether such mutual fund shares are ‘‘securities”’

under the terms of the Glass-Steagall Act. Further,

because of the distorted construction below limiting the

prohibition against ‘‘underwriting’’ to those under-

writings which involve a distribution profit, there is

serious doubt whether distributing and selling ‘‘no

load’? mutual funds fall within the strictures of the Act.

(See infra, pp. 24-25.) Also, the Federal Reserve

Board’s well-established rulings that mutual funds are

engaged in ‘‘issuing’’ their own shares within the mean-

ing of the Act (see infra, p. 23) have been virtually

obliterated by the decision below. Finally, the Court

of Appeals’ willingness to include speculative securi-

ties activity by banks as permissible ‘‘fiduciary activi-

ties,’’ even though admittedly ‘‘new and free wheel-

ing,’’*’ easts serious doubt on what, if any, limitations

remain upon commercial bank expansion.

* Infra, p. 9a.

These important, unanswered questions relating to

the Glass-Steagall Act and to Section 92(a) are all the

more uncertain because there is no opinion of the court

below dealing with these issues. The brief per curiam

order casts no light on these questions; the majority

concurring opinion disregarded all the questions of

statutory construction and improperly treated this

matter, in three short paragraphs, as a case involving

review of the discretionary action of a federal agency;

and only one judge on the Court of Appeals panel even

attempted to deal with these difficult issues. It seems

self-evident that any relaxation of the express prohibi-

tions of this seminal legislation deserves a full-scale,

definitive analysis and exposition. For these reasons

alone, this Court should grant certiorari.

Il. THE QUESTIONS PRESENTED ARE SUBSTANTIAL

The decision below, permitting banks to reenter the

securities business, distorts the clear prohibitions of

the Glass-Steagall Act and vitiates the intent of Con- |

gress. This result is without support in judicial pree-

edents or the text or history of the statute. Moreover,

the conclusion of the Court of Appeals, if permitted to

stand, will blur the sharp and comprehensive restric-

tions on commercial bank activity contained in the

Glass-Steagall Act and Section 92a of the National

Banking Act and thus could lay the way open for a

return to the banking abuses which characterized the

economy in the period immediately preceding the

financial panic and the Great Depression.

As we have noted above, despite the significance of

the issues involved here and the broad implications of

its decision, there is, surprisingly, no definitive opinion

of the Court of Appeals dealing with the merits of

the case”’ The concurring opinion of the two-judge

majority consisted basically of an abstract discussion

of the question of Petitioners’ standing to sue, which

issue ultimately was resolved in Petitioners’ favor. In

its abbreviated reference to the merits, the majority

did not deal at all with the statutory construction issues

relating to the Glass-Steagall prohibitions. Rather, it

approached the case as one involving a challenge to the

discretionary action of a federal agency and resolved

the entire matter with the terse observation that several

government agencies had given ‘‘careful and compre-

hensive study to all aspects of [the] problem’’; that

these agencies ‘‘with their accumulated expert experi-

ence have decided [the] issues’’ in question; and, that

their decisions ‘‘are entitled to substantial deference

and on this record I see no reason for disturbing their

conelusions.”” (Infra, p. 50a.)™*

Of course, as the decisions of this Court have made

clear, the standard of review adopted by the majority

21 There was no discussion of the merits at all in the brief per

curiam order.

2 The majority concurring opinion stated that the court’s power

to review was

‘‘narrow and limited; it does not include the power to decide

whether the public will be better served by one or the other

modes of investment funds so as to achieve diversification,

yield, safety or low cost. All that is the primary responsibil-

ity of the special regulatory bodies established by Congress

for that purpose.’’ (Infra, pp. 49a to 50a.)

Petitioners’ complaint, of course, did not raise these policy ques-

tions or debate the wisdom of commercial bank entry into the

mutual fund business. The repeal of the Glass-Steagall prohibi-

tions, if presently justified on such ‘‘policy’’ grounds, is a matter

for Congress. See 115 Cong. Ree. H10554, H10559 (Daily ed.

November 5, 1969) ; 114 Cong. Ree. 59497 (Daily ed. July 26, 1968).

coneurring opinion is inappropriate in cases charging

that administrative action is in excess of statutory

authority.“ Moreover, the fact is, except for the un.

published conclusions of the Comptroller's office, the

various regulatory agencies referred to have not re-

solved Glass-Steagall issues presented in this case,

On the contrary, these agencies raised, but expressly

declined to rule on, critical Glass-Steagall questions."

Although the minority concurring opinion below

addressed itself to the merits of the Glass-Steagall

issue, that opinion glossed over the difficult question

*3** Administrative determinations must have a basis in law and

must be within the granted authority. ... An agency may

not finally decide the limits of its statutory power. That

is a judicial function.’’ Social Security Board v. Nierotko,

327 U.S. 358, 369 (1946) (footnote omitted).

See, also NLRB v. Brown Food Stores, 380 U.S. 278, 292 (1965);

NLRB vy. Insurance Agents’ International Union, AFL-CIO, 361

U.S. 477, 499-500 (1966) ; Phillips Petroleum Co. v. Wisconsin, 347

U.S. 672, 677-78 (1954); See, also, Elgin, Joliet & Eastern Ry,

v. Benj. Harris & Co., 245 F. Supp. 467, 472 (N.D. Ill. 1965).

** The Federal Reserve Board stated that it ‘‘expressed no posi-

tion with respect to whether [Section 21 of the Glass-Steagall Act]

might be held applicable to the establishment or operation of the

proposed ‘commingled investment account.’’’ 12 C.F.R. § 218.111

(1965). The Securities and Exchange Commission considered the

Account solely from the point of view of the securities laws subject

to its jurisdiction ; it had no authority to deal with, and made clear

it entertained no view upon, the legality under the Glass-Steagall

Act of commercial bank entry into the mutual fund business.

(See, e.g., Hearings on Amendment No. 438 to S. 1659 before the

Senate Banking and Currency Committee 90th Cong., Ist Sess.

(1967) p. 1296.) And, the Department of Justice advised the Sub-

committee on Banking and Currency and the Securities and Ex-

change Commission that ‘‘it is not clear . . . whether the implemen-

tation of the bank’s proposal would be a criminal violation’? of

Section 21 of the Glass-Steagall Act. (1966 Hearings p. 588.)

The view of none of the agencies can be considered regulatory

approval of the Bank’s activities under the Glass-Steagall Act.

ee ——E ~~ Pe

—

| of statutory interpretation and misread the extent of

Congress’ concern in enacting Glass-Steagall.

The Glass-Steagall Act Prohibits Entry by Commercial

Banks Into the Mutual Fund Business.

To separate commercial banking from the securities

business, Congress enacted four interrelated prohibi-

tions in the Glass-Steagall Act. The keystone pro-

vision is Section 21. That Section prohibits a com-

pany from engaging simultaneously in two specified

lines of business—the first is ‘‘issuing, underwriting,

selling or distributing . . . securities’’; the second is

“receiving deposits subject to check or to repayment

upon presentation of a passbook, certificate of deposit,

or other evidence of debt, or upon request of the de-

positor ...,°’ ¢.e., the business of commercial banking.

This Section applies across the board to all types of

commercial banks—national and state-chartered ; mem-

ber and non-members of the Federal Reserve System.

Section 21 forces a choice: an enterprise can engage

in commercial banking or it can engage in issuing,

underwriting, selling and distributing securities.

Under Section 21, it cannot do both.*

The basic prohibitions of Section 21 were supple-

mented with a number of other protective provisions.

In enumerating the corporate powers of national banks

in Section 16, Congress included a proviso inter ed to

* One court has characterized Section 21 as prescribing ‘‘com-

plete separation’’ of commercial banking from any dealing in se-

curities :

‘“When Congress meant complete separation, it said so, in this

[Section of the] Act, in unmistakable terms. It knew what

terms to use, and used them.’’ Agnew v. Board of Governors,

80 U.S. App. D.C. 377, 385, 153 F.2d 785, 793 (1945), rev’d

on other grounds, 329 U.S. 441 (1947).

= ——

preclude any construction of these powers which woul

permit national banks to underwrite or deal in seq,

rities.“ 12 U.S.C. § 24. Moreover, Congress made cer.

tain that banks did not accomplish indirectly what the;

were forbidden to do directly. Section 32 prohibit

directors, officers or employees of national or stat:

member banks of the Federal Reserve System fron

holding similar positions in enterprises primarily e.

gaged in the issue, flotation, underwriting, publie sale

or distribution of stocks, bonds, or similar securities:

Section 20 is a parallel provision designed to prohibit

interlocks or affiliations between member banks, on th:

one hand, and companies engaged principally in the

securities business on the other. These provisions w.- ’

equivocally prohibit the establishment of a bank. —

sponsored mutual fund in the guise of a comminglei —

investment fund.

A. “Units of Participation” are “Securities” within the meaning

of the Glass-Steagall Act.

The basic issue of statutory interpretation is whether

“units of participation” are ‘‘securities’’ within the

meaning of the Glass-Steagall Act. The Government

has based its defense of the Comptroller’s regulations

essentially upon the proposition that such units are

not ‘‘securities.”” That position is clearly wrong, a

found by the District Court, the only court to rule

squarely on this issue.”

*8 Cf. Section 5(c), 12 U.S.C. § 335, similarly limiting the power

of state member banks of the Federal Reserve System.

* The majority concurring opinion did not deal with this

issue. The minority concurring opinion appears to proceed

on the assumption that the “‘units of participation’’ are not

“‘securities,’’ although it does not, in terms, so hold. (See, infra.

p. 50a.)

The Act refers to ‘‘securities’’ in a context which

makes clear that the term should not be narrowly

construed. The language itself—in Sections 20 and 21

“stocks, bonds, debentures, notes or other securities ’’—

commands a broad reading that will not frustrate the

policies of the Act.**

Bank regulatory officials themselves have made clear

that “units of participation’? in the Account are

“securities”? within the meaning of the Glass-Steagall

Act, just as they have ‘consistently taken the position

that participations or shares in... [a] mutual fund

are ‘securities’ for the purpose of Section 32’’ of the

Glass-Steagall Act. 1966 Hearings, p. 583. The Fed-

eral Reserve Board held specifically in connection with

commingled investment accounts, that

“Participation or interests in accounts [should]

be regarded as ‘securities’ under Section 32 [of

the Glass-Steagall Act].’’ (Jd., p. 584.)

In reaching such a result, neither the District Court

nor the Federal Reserve Board construed the term

“securities”? in the Glass-Steagall Act in an overly-

broad way which would cover new or unique types of

corporate instruments. Quite simply, the ‘‘units of

participation’? are ‘‘securities’’ because they repre-

sent a pro rata interest in an investment media—the

Thus, the Glass-Steagall Act, in an authoritative opinion of

the Federal Reserve Board, has been held to be

. sufficiently broad to comprehend securities which, while

neither stocks or bonds, have attributes which cause them to

be ‘similar’ to or somewhat like, either bonds or stocks.’” 1966

Hearings, p. 584.

EES TEE TE AA Le PE TE

Account—and possess all the indicia of such common-

place securities as shares in a mutual fund.”

B. In operating commingled investment funds, banks are en.

gaged in the business of issuing, selling, distributing,

underwriting an.' dealing in securities.

The second critical issue of statutory interpretation

is whether a bank-sponsored commingled investment

fund will be engaged in any of the activities proscribed

by the Act—‘‘issuing, selling, distributing or under-

writing’’ the securities of the fund.”

The Bank’s Account, like any ‘‘open-end’’ mutual

fund, will be substantially engaged in ‘‘issuing”’ its

2° Petitioners do not contend that the meaning of ‘‘securities”

in the Glass-Steagall Act is necessarily the same as its meaning in

the Securities Act of 1933. Nevertheless, it is relevant to note that

both reform statutes were passed after the same extended series

of hearings before the Senate Banking and Currency Committee,

in which the finding was made that the activities of national banks

were closely connected to the failure of the securities market. It

is difficult to believe that the same term— ‘‘securities’’—would

have a radically different meaning in the two Acts without any

indication whatever in the legislative history of either statute that

such a difference was intended.

%* The only specific prohibition of Glass-Steagall which the

minority concurring opinion discussed was whether a bank sponsor-

ing a commingled investment fund would be engaged in ‘‘under-

writing.’’ The opinion did not discuss at all whether the bank’s

activities would constitute ‘‘issuing’’, ‘‘selling’’, or ‘‘ distributing”

within the meaning of the Act. Chief Judge Bazelon apparently

avoided dealing with the explicit prohibitions of Section 21 be-

cause he considered that section merely an appendage of Section

16 of the Glass-Steagall Act and concluded that the specific pro-

hibitions of Section 21 added little to the provisions of Section 16.

There is no justification or legislative support—and none is cited—

for so diluting the express prohibitions of Section 21, which extend

far more broadly than Section 16. The latter section primarily

confers corporate powers on national banks; it deals only peripher-

ally with the prohibitions of the Glass-Steagall amendments.

NTS PUT NE RRR UN NE BORAT SL OPT ATE AIEEE

own securities, as that term is used in Glass-Steagall.

Units of participation in the Account are continuously

available at the Bank and are ‘‘issued’’ to persons

investing in the Account.*' The Account’s redemption

provisions provide a constant motivation for the Bank

to continue to issue and sell participations in the Ac-

count to prevent a reduction in its size.“

| The Federal Reserve Board has repeatedly ruled

that such regular and systematic issuance of its shares

by a mutual fund—precisely the same activity as that

engaged in by the Account—constitutes ‘‘issuing”’

securities within the meaning of the Glass-Steagall

Act. Indeed, the Board has ruled that such activity

constitutes a primary engagement of a mutual fund.

The Board explained that:

“se

. it is apparent that the more or less con-

tinued process of redemption of the stock issued by

fa mutual fund] would restrict and contract [the

fund’s] activities if it did not continue to issue

its stock. Thus, the issuance and sale of its stock

is essential to the maintenance of the [fund’s] size

and to the continuance of operations without sub-

stantial contraction, and therefore the issue and

sale of its stock constitutes one of the primary

activities of such a [fund].’’ 12 C.F.R. § 218.101

(1951).

31 By the end of its first fiscal year, August 31, 1967, the Ac-

count had issued more than 879,000 units of participation. See

SEC File 811-1385, Prospectus for Commingled Investment Ac-

count of First National City Bank, dated September 22, 1967, p.

3; SEC File 811-1385, Form N-IR, Annual Report of Manage-

ment Investment Company of the Commingled Investment Account

of First National City Bank for Fiscal Year Ended August 31,

1967.

® During its first full fiseal year, more than 10,000 units of

participation in the Account were redeemed. Ibid.

FELIS EAE REISE EE 8 PEE RL YP PLC AIEEE LARRY ARTS RE DRE

Section 21, of course, prohibits a bank absolutely from

engaging in the business of issuing securities—whether

or not that activity is a primary function of the bank.

Apart from issuing securities in operating its Ac-

count, the Bank is also engaged in the business of

selling, distributing, underwriting, and dealing in

securities, each of which is independently proscribed

by the Glass-Steagall Act. The Account itself has

stated that its ‘‘units of participation will be lawfully

offered by [the Account] through the offices of First

National City Bank in New York.”’ (J.A. 140) First

National City Bank, through its offices and mailings,

has broadly solicited potential customers to invest in

the Account by means of a ‘‘tear-out authorization

form.’’ Units of participation are forwarded by Bank

officers in exchange for investors’ money. These ac-

tivities constitute ‘‘selling”’ and ‘‘distributing”’ the par-

ticipations issued by the Account under any definition

of those terms.

Likewise, there can be no doubt that the Bank is

engaged in ‘‘underwriting”’ the units of participation

even though it receives no direct compensation for its

services. In taking the securities issued by the Account

and selling them through Bank personnel, the Bank

fulfills the traditional underwriter’s role.

Without the citation of any persuasive authorities,

the minority concurring opinion concluded that the

Bank was not engaged in ‘‘underwriting”’ (and pre-

sumably also not engaged in ‘“‘selling’’, ‘‘distributing”’,

and ‘‘dealing in’’ securities) because the Bank did

not obtain any direct distribution profit or sales com-

missions from its underwriting activities, even though

—

the Bank admittedly will receive a substantial manage-

ment fee which will increase as more participations

- jnthe Account are sold. However, it is clear that earn-

ing a distribution profit is not a necessary indicia of

underwriting or distribution under the Act. In a

definitive interpretation, the Federal Reserve Board

has held that a mutual fund continuously issuing its

shares—as the Bank’s Account will—is engaged in

the ‘public sale’’ and ‘‘distribution”’ of its securities

within the meaning of Glass-Steagall, irrespective of

the fact that ‘‘the investment company does not derive

any direct profit from the sales’’ of these shares.*

To read into the definition of ‘‘underwriting’’ and

related terms in the Glass-Steagall Act the require-

ment that the underwriting function must produce a

distribution profit would lead to the astonishing result

that banks would be free to sponsor, promote, and sell

the shares of traditional mutual funds of the no-load

variety."

Given this understanding of the role of banks in

promoting collective investment funds as generally-

available investment devices in clear violation of the

prohibitions of Glass-Steagall, it is clear that such

unlawful sales and promotional efforts cannot be justi-

fied as the exercise of traditional fiduciary activity

#12 C.F.R? § 218.101 (1951).

“The establishment of the Account also conflicts with Section

16 which restricts national banks to the purchase and sale of securi-

ties ‘‘for the account of customers.’’ That provision insured that

nothing in the Act was construed as denying banks the right to

order the purchase or sale of securities on specific instructions from,

and for the account of, their customers.

—_——— ENE Regen petites as pate

under the banking laws.* Established fiduciary rela-

tionships have always arisen ‘‘from individually nego-

tiated trust agreements, individually negotiated man-

aging agency accounts, or similar arrangements... .’’™

However, the operation of the Account, an investment

device open to the public at large, represents a sharp

departure from such regular and accepted banking

practices. The Bank’s Account is a ‘‘package deal

offered to all comers’’ (infra, p. 10a); there is no at-

tention to the financial and personal needs of the indi-

vidual investor, a fact which characterizes the proffer

of true fiduciary services. The only standard to de-

termine whether the Bank’s Account is suitable in a

given case is a showing that the potential investor

has the required $10,000 to invest.*’ This is a rela-

35 Section 92a of the National Banking Act authorizes the

Comptroller to grant a national bank power to act as a trustee

and in other conventional fiduciary roles:

‘*When not in contravention of State or local law, the right to

act as trustee, executor, administrator, registrar of stocks

and bonds, guardian of estates, assignee, receiver Commit-

tee of estates of lunatics, or in any other fiduciary capacity

in which State banks, trust companies, or other corporations

which come into competition with national banks are permitted

to act under the laws of the State in which the national bank

is located.”’

36 Statement of Chairman Manuel F. Cohen of the Securities and

Exchange Commission, 1966 Hearings, p. 136.

37 In the words of Chief Judge Bazelon:

‘*The bank’s affidavit states that it will accept the customer's

money if it is satisfied that the Account’s investment policy

is suited to his needs. It appears from the mailing to ‘valued

customers,’ however, that they will be acceptable if they read

the invitation, with its caveats, and the prospectus and send

in the tear-out authorization with $10,000... .’’ (Infra, p.

13a n.9.)

RES pengeonaees ti Rann

PERLE ERED LILI LI IE TS aie

SOP SE LOLIMOT et PREGA EOS

—

tionship of the commercial market piace, not that of

the fiduciary and his cestui que trust.

Respondents contend that the establishment of a

bank-sponsored mutual fund is merely an impercepti-

ble extension of true fiduciary services previously

offered by national banks in the form of common trust

funds where a bank holds money in the capacity of

strict trustee. However, the Federal Reserve Board

has been careful to limit the use of common trust

funds to bona fide fiduciary purposes* and repeatedly

warned banks against aggressive use of advertising

which might turn a common trust fund into a mutual

fund device.”

C. A strict interpretation of the prohibitions of Glass-Steagall

is consistent with Congress’ intent in separating commercial

banking from the securities business.

The legislative record lends support to a stringent

reading of the relevant prohibitions of Glass-Steagall

to bar banks from promoting and operating bank-

sponsored mutual funds.

38 In this connection, the Board stated:

“‘{In permitting] the operation of Common Trust Funds, the

Board intended that a Common Trust Fund should be used

merely to aid in the administration of trusts by a trust insti-

tution through the commingled investment of funds of various

trusts .. . it was contemplated that [the] trust guise or form

should not be used to enable a trust institution to operate a

Common Trust Fund as an investment trust attracting money

seeking investment alone and to embark upon what would

be in effect the sale of participations in a Common Trust Fund

to the public as investments.’’ 26 Fed. Reserve Bull. 393

(1940).

39 42 Fed. Reserve Bull. 228 (1956).

EEE TER RSTO te eee eC ae eceneS

A major concern of Congress in passing Glass-Stea-

gall was to deal with the inherent conflicts of interest

faced by a bank advising a customer to invest in seeu-

rities in which the bank has a financial interest. In its

investigations prior to the passage of Glass-Steagall,

Congress focused upon the need for banks to give

**disinterested investment counsel’? and the inexorable

conflict of interest which arose where bankers, con-

sulted in their role of financial adviser, actually had

**something to sell’? to their customers which would

result in a profit to the bank.”

The prospect of ** profit’’ for a bank operating a col-

lective investment fund and the risk of undue influence

upon the investment advice a bank gives its customers

is clear." The bank’s management fee is directly re-

lated to the size of the fund—the more participations

sold, the greater the bank's fee. There is also a eon-

tinuing pressure on the Bank and its officers to market

participations because of the redemption feature of the

commingled fund. This situation, where the bank

clearly stands to gain if it steers potetial investors to

its own mutual fund, illustrates one of the most wide-

*° In this regard, the Report of the Senate Committee on Bank-

ing and Curreney stated:

**Commercial banks found a fertile field among its [sic] de-

positors for purchasers of security issues which their invest-

ment affiliates were sponsoring. These banks, violating their

fiduciary duty to depositors seeking disinterested investment

counsel from their bankers, referred their depositors to the

affiliates for advice.’’ S. Rep. No. 1455, 73rd Cong., 2nd Sess.

(1934) p. 163. Cf. 75 Cong. Ree. 9912 (1932).

*' The minority concurring opinion below conceded that because

**the Bank’s compensation is tied to the size of the fund, there will

be pressure to market the participations to maintain and increase

its assets."" Infra, p. 13a.

spread abuses which Congress identified and intended

to reach in the Glass-Steagall Act.”

There were a number of other potential conflicts

which Congress found to exist when commercial banks

engaged in the securities business, each of which is

present in the Comptroller’s proposal that banks oper-

ate mutual funds.** Then, banks had become identified

with their securities affiliates and had a substantial

interest in assuring their suecess, an interest which

might well have affected the independence of the bank’s

judgment. Today, a bank would have a similar interest

in the performance of its collective investment fund

“The Congressional purpose of assuring disinterested invest-

ment advice, expressed in the applicable sections of Glass-Steagall,

is reflected in the exemptive provision which was added to Section

32 by the Banking Act of 1935, 49 Stat. 709 (1935), 12 U.S.C. § 78.

That provision permits the Federal Reserve Board to make ex-

ceptions to the prohibitions on interlocking relationships in See-

tion 32 by general regulation, but only on a showing that such

exceptions will ‘‘not unduly influence . . . the advice [the bank]

gives its customers regarding investments.’’ (Emphasis added.)

The Federal Reserve Board has also commented upon this problem

of impartial investment advice as a principal danger that Con-

gress ‘‘regarded as justifying the separation of commercial banks

from the underwriting field’’:

“*. . . that the quasi-fiduciary responsibilities of banks in giv-

ing investment advice to customers (including ‘correspondent’

banks) would not be discharged with optimum effectiveness

if the advisor bank was subject to a conflict between its own

interests (or those of its personnel) as investment banker

and the interests of its customers as investors.’’ Memorandum

of the Board of Governors of the Federal Reserve System

as Amicus Curiae, pp. 5-6, Baker, Watts & Co. v. Saron,

supra, Civ. Act. No. 97-66 (D.D.C.).

*3See Relation of Banks with the Securities Market, Hearings

Pursuant to S. Res. 71, before a Subcommittee of the Senate Com-

mittee on Banking and Currency, 71st Cong., 3rd Sess. (Appendix)

(1931), pp. 1063-64.

ESAS TNT IA ee

Sy ary

and its portfolio of securities, thus possibly influencing

the bank, in its creditor role, to support a lagging

portfolio company.“

Finally, it should be noted that Congress’ concern

was not directed exclusively, as the minority concurring

opinion below asserted, to investment practices which

risked a bank’s own assets." <A principal focus of

the Senate investigation of the banking and securi-

ties industries was the practice of establishing invest-

ment ‘‘affiliates’’ of national banks—ineluding invest-

ment trusts like those involved here—which bought and

sold securities purely for investment or speculative

** Furthermore, Congress was aware that a bank’s goodwill and

reputation might suffer, with damaging consequences to the econ-

omy at large, if the securities owned by the bank’s affiliate lost their

value. Jd. at 1064. The Federal Reserve Board has recently

echoed this Congressional concern. 12 C.F.R. § 218.104(c¢) (1961).

A related risk with which Congress was concerned arises from |

the fact that large city banks, which will presumably be operating

collective investment funds, act as correspondents to large num-

bers of banks in smaller communities throughout the country.

There is a clear risk that large banks operating collective invest-

ment funds would use these correspondent relationships to in-

fluence smaller banks to steer their customers to the bank mutual

fund. Protection of the integrity of such correspondent relation-

ships and avoiding the risk of their contamination were of prime

concern to Congress in adopting the Glass-Steagall Act. 75 Cong.

Ree. 9910 (May 10, 1932).

* Significantly, the activities of many of the most prominent

and notorious of investment affiliates, including those of Respond-

ent Bank, in no way risked the assets or capital of the affiliated

bank. S. Rep. No. 1455, 73rd Cong., 2nd Sess. (1934) pp. 156-

159; 75 Cong. Ree. 9909-9910 (May 10, 1932). Indeed, Congress

was fully aware that a major reason why banks organized affiliated

investment companies was to protect the assets of the affiliated

bank and the monies of its depositors. Obviously, Congress did

not restrict its concern only to investment activities of affiliates

that risked the assets of the parent bank. Jd. at 9911.

arrears tercccrcmcmmmrrmmmcmcll

purposes and whose activities did not affect the assets

of the bank.“

CONCLUSION

For the foregoing reasons, Petitioners pray that the

petition for a writ of certiorari be granted.

Respectfully submitted,

G. DUANE VIETH

JAMES F, Fitzpatrick

1229 - 19th Street, N.W.

Washington, D. C. 20036

Of Counsel: Attorneys for Petitioners

Rosert L. AUGENBLICK

Investment Company Institute

61 Broadway

New York, New York 10006

Rosert H. WINTER

Davip J. NEWBURGER

Arnold & Porter

1229 - 19th Street, N.W.

Washington, D. C. 20036

November 12, 1969

“The prohibitions of Glass-Steagall were understood at the

time of the passage of the Act to bar relationships between a

bank and a collective investment fund of the type authorized by

the Comptroller's regulations. The record herein describes one

such situation where a commercial bank was actively engaged prior

to the passage of the Glass-Steagall Act in selling and offering

shares in a collective fund whose operations were virtually iden-

tical to those of a present day mutual fund. The fund and its

investment adviser were terminated in 1934 ‘‘[i]n consequence of

certain provisions of the Banking Act of 1933 [the Glass-Steagal!

Act] and recent rulings of the Federal Reserve Board made pvr.

suant thereto ....’’ (J.A. 51)

See ‘‘Relations of Banks with the Securities Market,’’ Hear-

ings Pursuant to S. Res. 71 Before a Subcommittee of the Senate

Committee on Banking and Currency, 71st Cong., 3rd Sess., (Ap-

pendix) (1931) p. 1057.

APPENDIX

APPENDIX A

Opinion of the Court of Appeals

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 20,164

Natrona, Association oF Securities Deauers, INc.,

Petitioner

SEcuRITIES AND ExcHANGE CoMMISSION,

Respondent

First Nationau City Bank,

Intervenor

Petition to Review Orders of the

Securities and Exchange Commission

No. 21,661

First Nationau City Bang,

Appellant

InvEsTMENT Company Institut, et al.,

Appellees

No. 21,662

CoMPTROLLER OF THE CuRRENCY, WILLIAM B. Camp,

Appellant

INVESTMENT Company InstitTvuTE, et al.,

Appellees

Appeals from the United States District Court

for the District of Columbia

Decided July 1, 1969

ee ee

amine a

Before: Bazeton, Chief Judge, Wirzur K. MILLER, Senior

Circuit Judge, and Burcer, Circuit Judge.

Per Curtam ;* In these appeals the mutual fund industry

levels a two-pronged attack on a national bank’s authority

to operate a collective investment fund as a service of its

trust department. The fund is a commingled managing

agency account, similar in most respects to an open-end

mutual fund. First National City Bank’s Commingled In.

vestment Account (the Account) and other bank-sponsored

funds likely to follow will compete with mutual funds and

with those who market their shares. Competitors claiming

that the Account is unlawful are the Investment Company

Institute (ICI), an association of mutual funds and their

investment advisers and underwriters; and the National |

Association of Securities Dealers (NASD), whose members

sell shares in open and closed-end mutual funds.

The Account was registered with the Securities and Ex.

change Commission as an investment company under the

Investment Company Act of 1940, 15 U.S.C, § 80a-1, and

approved by the Comptroller of the Currency as a bona fide |

fiduciary activity authorized for national banks by § 92a of

the Federal Reserve Act of 1913, 12 U.S.C. § 92a. The

NASD intervened before the Securities and Exchange Com-

mission to oppose the grant to the Account of exemptions |

from certain provisions of the Investment Company Act,

and now seeks to set aside the Commission’s orders grant-

ing them.’ The ICI sued the Comptroller of the Currency

* These opinions were prepared prior to June 21, 1969 and are

issued pursuant to the J udgment of this court entered on that date.

[Footnote by the Court. }

‘The petition for review of the Commission’s order was previ-

ously dismissed by this court on the ground that the NASD lacked

Standing as a party aggrieved under § 80a-42(a) of the Investment

Company Act. National Association of Securities Dealers v. Securi-

ties & Exchange Comm'n, No. 20164 (decided Nov. 21, 1967). A

petition for rehearing en bane was granted, and the division opinion

and First National City Bank (the Bank) in the United

States District Court for the District of Columbia for a

declaratory judgment invalidating so much of the Comp-

troller’s Regulation 9, 12 C.F.R. § 9.18, as permits national

- banks to operate this type of account. Upon cross-motions

for summary judgment, the District Court invalidated por-

tions of the regulation and required the Comptroller to

rescind approval of the Account. Investment Company

Institute v. Camp, 274 F. Supp. 624 (1967). From that

judgment, the Comptroller and the Bank appeal.

Each appeal raises difficult questions of competitors’

standing. While a majority of the court has reservations

about standing, these doubts have been resolved in favor of

reaching the merits in cases of this consequence. On the

merits, we are agreed that the actions taken by the Securi-

ties and Exchange Commission and the Comptroller are

fully consonant with the statutes committed to their regu-

latory jurisdictions. Accordingly, we affirm the orders of

the Securities and Exchange Commission and reverse on

the merits the judgment of the District Court in favor of

the Investment Company Institute. It is so ordered.

The opinion of Judge Burger, in which Judge Miller con-

curs, and the opinion of Chief Judge Bazelon, which follow,

set forth the reasons for our action:

Bazeton, Chief Judge, concurring: First National City

Bank’s plan to operate a collective investment fund has

generated complex and controversial issues for resolution

by the Comptroller of the Currency and the Securities and

Exchange Commission. Because this innovation in bank-

ing will create massive competition for the mutual fund

industry, its members have brought the dispute to court.

For the reasons stated at the conclusion of this opinion, I

vacated on January 1, 1968. The en bane order was subsequently

vacated on April 12, 1968, to permit the assigned division to recon-

sider the matter. The case was consolidated for decision with

Nos. 21661-62, and considered without reargument.

——e {RUPE RESP egy SRE IIL ART RET 7 Pao SE Se ARES SN aE AEN

believe that representatives of the mutual fund industry

have standing to adjudicate the important legal questions

aired at length before the administrative agencies.

On the merits, the cases together present an interplay of

administrative decisions designed to serve different but

complementary regulatory aims. The Bank’s plan strad-

dles two sets of statutes. The result of a complicated, if

sometimes awkard, accommodation of the requirements of

each. Petitioners below claim that this accommodation

compromises the vital protection to investors and bank

customers afforded by the securities and banking laws, and

creates a dangerous blend of securities dealing and com.

mercial banking. From an analysis of the relevant statutes

-_—

and their legislative history, I conclude that the Account, —

subject to the mutually reinforcing regulations imposed |

by the Comptroller and the Commission, was established in

accordance with law.

INTRODUCTION

Since 1962, the Comptroller has exercised authority

under § 92a of the Federal Reserve Act to grant national

banks, by special permit, the authority to exercise trust

and other fiduciary powers,' namely:

. . . to act as trustee, executor, administrator, regis-

trar of stocks and bonds, guardian of estates, as —

signee, receiver, committee of estates of lunatics, or in

any other fiduciary capacity in which State banks, trust

companies, or other corporations which come into com-

petition with national banks are permitted to act under

the laws of the State in which the national bank is

located.

? Regulatory responsibility for the fiduciary activities of national

banks was transferred from the Federal Reserve Board to the

Comptroller pursuant to Public Law No. 87-722, 76 Stat. 668

(1962), codified at 12 U.S.C. § 92a (1964).

Section 92a(j) authorizes the Comptroller to issue such

rules as he deems necessary to enforce the proper exercise

of those powers. In April 1963 the Comptroller issued re-

vised Regulation 9, 12 C.F.R. § 9.18, which authorized for

the first time the commingling of managing agency accounts

under national banks’ fiduciary powers.

The background of Regulation 9 needs brief mention.

Since the thirties, banks have been authorized to act as

managing agents to purchase and sell stock for a single

principal, 1934 Fed. Reserve Bull. 609, but the cost of bank

management made it prohibitive to offer this service to in-

vestors without very substantial assets. For example, the

Bank’s minimum for an individual managing agency ac-

count is $200,000. Prior to 1963, national banks were au-

thorized by the Federal Reserve Board to commingle and

invest customers’ funds only if held in its capacities as

trustee, executor, administrator, or guardian, and funds

held as part of a tax-exempt pension and profit sharing or

stock bonus plan of employers for the benefit of employees.

Regulation F, 12 C.F.R. § 206 (1959 Rev.). The Federal

Reserve Board, moreover, had consistently taken the view

that common trust funds should not be used as a medium

to attract customers primarily seeking investment manage-

ment of their funds.? After the responsibility for regu-

lating bank trust powers was transferred to the Comp-

troller, that office concluded, after study, that existing

regulations should be broadened to extend the advantages

of collective investment to managing agency accounts.

The Bank proposed the establishment of a commingled

managing agency account pursuant to the revised regula-

726 Fed. Reserve Bull. 393 (1940), 12 C.F.R. § 206.102 (1947) ;

42 Fed. Reserve Bull. 228 (1956): and see 25 Fed. Reg. 12479

(1960), announcing the Board’s intention to investigate whether

the common trust fund regulations should be amended to exclude

inter vivos trusts, because the device of the revocable trust could

and had been used to obtain investment management through a

common trust fund.

SSRIS a Ree a eterna rTM pa Rea

- Pe ee

tion.* Under the Bank’s plan, a customer deposits a mini.

mum of $10,000 under a broad authorization permitting

the Bank to invest the funds with those of other partic.

pants in the plan. The customer is a principal, and the

Bank, his managing agent. The customer receives an undi.

vided interest in the fund, expressed as a ‘‘unit of partici.

pation.’’ These units are redeemable at net asset value,

and are not transferable except to other participants in the

plan. No sales load or redemption charge can be imposed.

The Account is registered as an investment company

under the Investment Company Act, and the units of par.

ticipation are registered as securities under the Securities

Act of 1933, 15 U.S.C. §77a (1964). The Bank is both

investment adviser to the Account and statutory under.

writer for the units of participation issued. The Account

is subject to a Committee with the powers of a board of

directors, whose members are elected annually by the par-

ticipants. The Bank sought and received exemptions from

provisions in the Investment Company Act which would

have required that a majority of the Committee be unaffili-

ated with the Bank. The Securities and Exchange Commis.

sion required that at least two of the five Committee men-

bers must be persons unaffiliated with the Bank, but the

other three will normally be officers of its Trust and Invest-

ment Division.

The Account is managed by the Bank pursuant to a man- —

agement agreement which must be approved by the partici-

pants at their first annual meeting. Thereafter, the con-

tract must be approved annually by the participants or by

* The Bank’s plan does not conform in all respects to Regulation

9 as originally issued due to the adjustments required to satisfy

the requirements of the Investment Company Act. The plan, as

amended, received the Comptroller’s written approval under 12

C.F.R. § 9.18(c) (5), and it is expected to set the pattern for other

bank-sponsored investment funds. There is accordingly no need

to review the provisions of Regulation 9 as it was originally pro-

mulgated.

— ——

the Committee, including both Committee members un-

affiliated with the Bank.

The Account is the functional equivalent of an open-end

mutual fund, but there are several differences. The Comp-

troller’s regulations provide that the units of participation

or shares may not be marketed through regular channels

of public distribution; participation is offered and pub-

licized only through the Trust Department. 12 C.I.R.

§9.18(b)(5) (iii) and (iv) (1968). The Bank’s compensa-

tion is limited by regulation to the sum of the fees nor-

mally charged for separate management of such accounts,

namely, 14 of 1 percent per annum of the average net asset

value of the fund. 12 C.F.R. §9.18(b)(12). Finally, and

most important, the Account is under the supervision of

the Comptroller like other banking functions. This in-

cludes review of the fund’s investments to see that they

are in accordance with sound fiduciary principles. 12

U.S.C. § 481 (1964), 12 C.F.R. §9.11(d) (1968).

VALIDITY OF THE ACCOUNT

Unper THE BankinG Laws

The District Court held that the Account is unlawful on

two grounds: (1) the commingled managing agency ac-

count is not a fiduciary activity within the purview of § 92a

of the Federal Reserve Act and is not open to State banks

under the law of New York, and (2) the maintenance of

the fund violates §§ 16, 20, 21, and 32 of the Glass-Steagall

Act, 12 U.S.C. §§ 24 (seventh), 377, 378, 78 (1964).

A. The Federal Reserve Act

The District Court relied on the differences between the

trustee and agency relationships, noting especially the

higher standard of care of a trustee, to conclude that a

collective managing agency account was not a true fiduciary

activity within the purview of § 92a of the Federal Reserve

—_——— aKING any ete 3

aS Ne Ne ale Ne a Tit Caael on tie eae

—

Act. The differences between the traditional trust relation.

ships of trustee, executor, or administrator and the cop.

tractual principal-agent relationship do not, in my View,

make the agent any less a fiduciary, nor does commingling

of funds, subject to the principal’s authorization, change the

fiduciary character of the duty owed to each. Brown y.

Christman, 75 U.S. App. D.C. 203, 126 F.2d 625 (1942),

The District Court apparently recognized that the Account

might pass muster under the phrase authorizing banks to

act ‘‘in any other fiduciary capacity,’’ but held that it did

not qualify as an activity open to competing State banks

under the New York law.

Section 100-c of the New York Banking Law specifically

authorizes trust companies to commingle funds held in the

strict trust capacities, but New York law contains no spe-

cific grant of authority to commingle funds held as manag-

ing agent. The District Court concluded that the absence

of such authority was an implied prohibition. Section

100-c, however, simply permits commingling in cases where

the governing trust instrument does not authorize it. The

conditions on commingling imposed by § 100-c have not

been imposed upon collective accounts authorized by a trust

instrument. The real question, therefore, was whether

commingling was permissible under the general authority

of § 100, which empowers a State bank to act as agent for

any lawful purpose and to manage a principal’s funds ae-

cording to the terms of the power conferred upon the bank.

N.Y. Bank. Law § 100(1) and (5) (McKinney 1950).

Since the decision of the District Court, the New York

State Banking Department has given formal approval of

commingled managing agency accounts to two New York

banks, stating that the operation of the accounts is author-

ized by § 100 of the Banking Law. Appellee ICI describes

this approval as a defensive response to enable State banks

to meet the national banks’ competition. This is surely

true. Prior to the Comptroller’s issuance of revised Regu-

yet ane —

pate Ly ee Soe ail oe

_—

lation 9, no State banks operated commingled managing

agency accounts. Still, the Banking Department’s action

cannot fairly be dismissed as merely following the Comp-

troller’s lead. The question of whether collective accounts

are a proper fiduciary activity for banks appears to have

been open under both Federal and New York law, and

both banking agencies could reasonably have resolved it

the same way.

The Bank concedes, of course, that the commingling of

managing agency accounts represents a departure from

past banking practice of limiting commingling to funds

held by the Bank in the traditional trust capacities and as

trustee of a pension or profit-sharing trust. Regulation

9.18 permits banks to serve multiple principals under a

standard agreement vesting the bank with broad discretion

to invest their money, subject to the duties and liabilities

of a managing agent, and not a trustee. This is a new and

free-wheeling form of fiduciary activity.

I am persuaded, however, that the Compiroller’s regula-

tions, together with the protection of the customer qua

investor afforded by the securities acts, will reasonably as-

sure the proper exercise of this broad fiduciary power. The

restrictions imposed by Regulation 9, 12 C.F.R. § 9, secure

the Comptroller’s powers of examination and supervision

of the Account. (§§ 9.8, 9.9.) The rules safeguard the

fiduciary relationship by requiring the separation of the

Aceount’s funds from other assets (§§ 9.13, 9.18(b)(2)), by

enforcing the obligations to refrain from self-dealing and

conflicts of interest (§§ 229.10, 9.12, 9.18(b)(8)), and by

limiting the Bank’s charge to its normal fiduciary compen-

sation (§$§ 9.15, 9.18(b) (12)).

The major difference between the Bank’s relationship to

the customers of the Account and its relationship to the

beneficiaries of other management and trust services is the

absence of an individually negotiated agreement. The

character of the Banrk’s initial advice and ultimate account-

—_— eee

RSLS LOE EE SOE LER ITED EE RII OL STE INI SIE PONT TA

10a

ability to the customer is necessarily altered by a package

deal offered to all comers. This was one reason why the

Securities and Exchange Commission required registration

of the Account. The provisions for disclosure and partici-

pant control contained in the securities laws substantially

compensate for the drawbacks of a standardized fiduciary

service. The Securities Act of 1933 requires that potential

customer-investors receive a prospectus describing the man-

agement of the Account, its investment objectives and poli-

cies, and the rights of participants. 15 U.S.C. § 77j (1964).

Periodic reports and proxy statements must be issued for

inspection by both the participants and the Commission.

§§ 80a-20(a) and 80a-29(d). Pursuant to the provisions of

the Investment Company Act, participants in the Account

will elect their directors (§ 80a-16(a)), retain the power to

terminate the contract (§ 80a-15(a)(3)), and ratify the se-

lection of auditors (§ 80a-31(a)(2)). The interests of the

principals participating in the Account, though not identi-

cal, are bound to be similar; and as a group, they possess

a measure of control over the management of their money.

Dual regulation by the Comptroller and the Commission

should assure the proper operation of the Account.

B. The Glass-Steagall Act

The District Court held that the Comptroller’s authoriza-

tion of the Account violated four provisions of the Glass-

Steagall Act. It held that in the issuance of units of par-

ticipation, the Bank was engaged in the business of dealing

in securities for its own account in violation of $§ 16 and 21,

and that the relation between the Bank and the Account

was an affiliation or interlocking directorate between a

bank and an organization principally engaged in the securi-

ties business in violation of $§ 20 and 32 of the Act.

*See Statement of then Chairman Manuel F. Cohen, Hearings

on S. 2704 Before a Subcommittee of the House Committee on

Banking and Currency, 89th Cong., 2d Sess, 132-38 (1966).

-€

eee nin ae

(1) Sections 16 and 21

lla

Section 16 of the Glass-Steagall Act imposes the follow-

ing limitation upon bank dealing in securities:

... The business of dealing in securities and stock by

the [national banking} association shall be limited to

purchasing and selling such securities and stock with-

out recourse, solely upon the order, and for the account

of, customers, and in no case for its own account, and

the association shall not underwrite any issue of securi-

ties or stock... . [12 U.S.C. $24 (seventh).]

Section 21 of the Act prohibits commercial banks from en-

gaging in the business of ‘‘issuing, underwriting, selling or

| distributing’’ most types of securities.” Because the units

of participation in the Account are securities, and the Bank

is the statutory underwriter under the Securities Act of

1933, the District Court held that the Bank is engaged in

the selling and underwriting of securities prohibited by

$$ 16 and 21 in operating the Account.

The words security and underwriter in the Securities

Act of 1933 are terms of art with a high gloss. Their ex-

pansive definitions under the Securities Act cannot be im-

ported wholesale into the Glass-Steagall Act when the two

statutes serve different purposes, in different contexts of

risk to the public. The securities laws are intended to pro-

tect investors, primarily through disclosure requirements.

| Their terms have been interpreted broadly to afford their

| protection to purchasers of all manner of investment inter-

| * The Glass-Steagall Act permits banks to market government

revenue bonds backed by the taxing power of the public authority

issuing the bonds. 12 U.S.C. § 24 (seventh). The Comptroller's

regulation broadening bank underwriting authority to include

revenue bonds was invalidated in Baker, Watts & Co. v. Saron,

261 F.Supp. 247 (D.D.C. 1966), affirmed sub nom. Port of New

| York Authority v. Baker, Watts & Co., 129 U.S.App.D.C. 173, 392

F.2d 497 (1968).

l2a

ests, wherever it is needed. The Glass-Steagall Act, by con-

trast, was enacted to protect bank depositors and the bank-

ing system from the risk of insolvency incident to wide-

spread investment of banks’ assets in speculative securities

during the twenties. Banks frequently not only invested

in speculative securities, but entered the business of invest-

ment banking by underwriting original issues. Some of

these activities were undertaken directly; others were car-

ried on by securities affiliates formed and controlled by

the banks to evade completely the weak restrictions upon

direct bank dealings in speculative securities. Section 16

of the Act was addressed to three problems:

(1) Banks commonly invested their own assets in

securities, risking commercial and savings d: posits if

the securities declined in value.*

(2) Direct bank investment in securities created

pressure for banks to make unsound loans to main-

tain the price of securities or the financial position of

companies in which the bank had holdings.’

(3) Large city banks frequently acted as issuers, or

underwriters of blocks of securities, distributing them

at a profit through correspondent country banks. The

banks’ pecuniary interest in the ownership, price, or

distribution of securities created incentive to steer cus-

tomers into investing in what the banks had to sell."

The problem of risk to deposits does not arise here, be-

cause the securities in the fund are purchased for the ac-

count of the customer, not the Bank. The ICI does claim,

however, that the Bank’s indirect holdings in the Account

* Hearings Pursuant to S.Res. 71 Before a Subcommittee of the

Senate Committee on Banking and Currency, 71st Cong., 3d Sess.

1055-66 (1931).

TJ d. at 1063-64.

*See Address of Senator Bulkley, 75 Cong.Ree. 9912 (1932).

—

13a

may amount to an interest in individual companies sufficient

to influence its credit decisions. The short answer is that,

since this indirect risk is present in all bank investments in

securities for the account of customers, that problem was

not within the contemplation of the Glass-Steagall Act.

With regard to the third abuse treated by § 16, the ICI

points out that because the Bank’s compensation is tied to

the size of the fund, there will be pressure to market the

participations to maintain and increase its assets. I agree.*

But the Bank is under similar pressure to sell all the serv-

ices of its trust department. The Bank’s interest in earning

a regulated fiduciary charge bears little resemblance to its

interest in earning an indeterminate distributing profit

from securities which it owns or underwrites, and the

interest forbidden by § 16 is the latter.

Section 21 of the Act prohibits banks from engaging

‘*... in the business of issuing, underwriting, selling or

distributing, at wholesale or retail, or through syndicate

participation, stocks, bonds, debentures, notes, or other

securities ....’’ It was enacted to extend the prohibi-

tions of §16 to members of the Federal Reserve System

who were not national banks. Congress did not intend

*The Bank would have us stress the restrictions upon merchan-

dising the Account. The Bank is authorized to offer participa-

tions in response to unsolicited requests, to persons on Bank prem-

ises, and to existing customers. The Bank’s affidavit states that it

will accept the customer's money if it is satisfied that the Account’s

investment policy is suited to his needs. It appears from the

mailing to ‘‘ valued customers,’’ however, that they will be accept-

able if they read the invitation, with its caveats, and the prospectus

and send in the tear-out authorization with $10,000. The $10,000

minimum should accomplish a measure of natural selection, but the

Bank's decision on the customer's suitability is unlikely to be so

discriminating that the decision itself is a check on the issuance

of participations. At any rate, the merchandising problem is more

relevant to the question of the proper exercise of fiduciary powers

than to entry into the securities business within the meaning of

the Glass-Steagall Act.

be) SP SSL | EY Se OR Wet ate eee ue an

l4a

to bar those banks from buying and selling securities ‘‘for

the account of customers,’’ so § 21 appears to add nothing

to the argument under $16. If anything, the language

of § 21 confirms the view that Congress was concerned

in both provisions with prohibiting bank dealing in specu-

lative securities for the traditional and direct form of

distribution profit."®

(2) Sections 20 and 32

Sections 20 and 32 of the Act were enacted to maintain

the separation between commercial banking and securities

dealing by prohibiting interlocks and affiliations of per-

sonnel. Section 20 forbids certain types of bank affilia-

tion with any organization ‘‘engaged principally’’ in the

same brand of securities dealing forbidden as a direct

bank activity by §21. One type of prohibited affiliation,

defined in § 22la(b)(3), ordinarily exists when a majority

of the directors of a securities organization are also di-

rectors of any one member bank.

Section 32 generally prohibits directors, officers, or em-

ployees of organizations ‘‘primarily engaged”’ in securities

dealing from serving in those capacities for a member

bank. The Federal Reserve Board has consistently held

that § 32 prohibits bank officials from serving as officials of

open-end investment companies because such companies

(mutual funds) are primarily engaged in issuing their

own shares. 12 C.F.R. § 218.101 (1951). The Board ruled,

however, that the Account and the Bank were a single

Section 21 provides criminal penalties for willful violations.

The Attorney General is charged with prosecutions under § 21,

and has indicated that, while it is not clear whether the operation

of the Account would involve criminal liability, the approval of the

banking agencies precludes a prosecution against the Bank. See let-

ter of January 24, 1966, to the Securities and Exchange Commission

from Assistant Attorney General Fred M. Vinson, in Hearings on

S. 2704 Before a Subcommittee of the House Committee on Banking

and Currency, supra, n. 4 at 588.

: SPRL EPO SATS EE Le Oe

entity for purposes of § 32, since the Account would be

a department of the Bank except for purposes of the In-

vestment Company Act. So long as the Account remained

under the ‘‘effective control’’ of the Bank, the Board stated

that there was no prohibited interlock under §32. 30

Fed.Reg. 12836 (1965), adding 12 C.F.R. § 218.111())

(1965)."*

lida

The participants’ reserve power to sever the connection

with the Bank would be worth something in the event of

extraordinary mismanagement, but barring this contin-

gency, the Account will remain part of the Bank’s or-

ganization. Under the single entity theory, the Bank

cannot interlock with itself, but that is not really the point.

The clear purpose of §$20 and 32 is to prevent banks

from entering into prohibited forms of securities dealing

by the back door. We have held that the Bank may

enter the business of operating the Account by the front

door. The organizational pattern imposed to satisfy the

requirements of the Investment Company Act does not in

i this context create a prohibited interlock or affiliation any

more than the Account itself constitutes a forbidden ex-

cursion into the securities business.

The establishment of a bank-sponsored collective invest-

ment fund is not barred by the banking laws. A commin-

' gled managing agency account is a descendant of the indi-

vidual managing agency account and the common trust

fund, fitting within the traditional authority of banks to

manage other people’s money in a fiduciary capacity sanc-

tioned by the Federal Reserve Act. Where the fiduciary

tie between the bank and multiple principals is looser,

the Comptroller’s regulations and the securities laws will

™ See also the Board’s letter of March 31, 1966, to the Bank stat-

ing that its ruling would stand even though the Securities and

Exchange Commission required that there be two independent

directors, or 40 percent of the Committee, instead of the single

unaffiliated director proposed by the Bank.

PEELS REAR SES ENE TG EEE RATS NSIC POI

l6a

take up the slack. The essential element in this judgment

on the applicability of the Glass-Steagall Act is the fact

that the securities in the Account are bought and sold

for the account of customers. The sale of an investment

service to a potentially large number of customers gives

rise to obligations under the securities laws, but these

do not convert otherwise lawful transactions for the ae.

count of customers into prohibited securities dealings

within the meaning of the Glass-Steagall Act.

The major consequence of expanded investment service

by banks will be a quantitative change in the volume of

securities bought, sold, and held by banks. While sub-

stantial transactions in securities by banks may be es-

sential for the modern management of their customers’

money, an increase in their already massive securities

holdings for the account of customers has some disquieting

consequences for the underpinnings of corporate accounta-

bility and competition in the economy at large.’? The

dimensions of the problem are broader, however, than the

banking laws on the books. The Glass-Steagall Act en-

forces the separation of commercial banking and a par-

ticular kind of securities dealing. Its legislative history

affords little support and even less guidance for a ju

dicial decision to limit bank transactions in securities for

customers because today they differ in degree.

12 For recent comment on the power of banks as institutional in-

vestors to control so-called publicly held corporations, see Studies

by the Staff of the Cabinet Committee on Price Stability 52-54

(Jan. 1969). See also a warning that the trend toward conglom-

erate banking makes it possible for banks to condition access to

credit upon the borrower’s use of the bank’s other services and

dealings with its subsidiaries in ‘‘The Growth of Unregistered

Bank Holding Companies—Problems and Prospects,’’ Staff Re-

port for the House Committee on Banking and Currency, 91st

Cong., Ist Sess. 2 (1969).

17a

Ill

Vauipity oF Exemptions From § 10 or

THE INVESTMENT Company AcT

The NASD, for its part, claims that the Bank’s control

of the Account is all too effective. It contests the orders

by the Securities and Exchange Commission granting cer-

tain of the exemptions from § 10 of the Investment Com-

pany Act requested by the Bank prior to registration of

the Account as a diversified, open-end management invest-

ment company under the Act. The exemptions together

permit 3 or 60 percent of the Account’s five-member

Committee to be persons affiliated with the Bank.

Section 10 of the Act was enacted to protect sharehold-

ers of investment companies from exploitation by insiders

with conflicting interests in other companies or lines of

business by requiring that a certain percentage of directors

be free of affiliations which may involve divided loyalties.

Without the exemptions, §10 of the Act would preclude

the Account from having a majority of directors who are

officers, directors, or employees of (1) a principal under-

writer, 15 U.S.C. § 80a-10(b)(2), (2) investment bankers,

§80a-10(b)(3), and (3) a single bank, § 80a-10(c). While

the Bank fits each of these statutory categories, the over-

riding issue is the propriety of the exemption granted

from §10(c) to permit a maximum of three instead of two

Bank officers to serve on the five-member Committee. A

working majority of Bank directors was essential to allow

the Account to function in conformity with the banking

laws.

Before considering the exemption from § 10(c), it bears

emphasis that there is nothing unusual in the fact that

the Bank as investment adviser has majority control of

the Committee of the Account. Open-end investment com-

panies have traditionally been controlled and managed

by their investment advisers; investors are buying their

advice. Section 10(a) of the Act provides that 60 per-

SEE ER SE: SE eS DEAS SENS OE erety

18a

cent of the directors of an investment company may

affiliated with the investment adviser. Section 10(d),

moreover, permits certain types of ‘‘no-load’’ funds y

have only one unaffiliated director if they meet specific

conditions. The Bank sought but was denied an exemptio:

which, if granted, would have enabled it to have only oy

unaffiliated Committee member.”

Given these facts, the NASD’s assertion that the Con.

mittee will abdicate its supervisory responsibilities be.

cause the Bank has ‘‘effective control’’ of the Account i:

the eyes of the banking authorities requires a showing

of something more than the normal pattern of majority

control by an investment adviser. Nothing in the Comp

troller’s regulations still applicable precludes the Com.

mittee from exercising its responsibilities. Although Regu

lation 9, as originally promulgated, did not take accom

of the requirements of the Investment Company Act, al

provisions of Regulation 9 inconsistent with that Ae

were superseded by the Comptroller’s written approval

of the Account in the form necessary to satisfy the Se

curities and Exchange Commission. The Bank’s majority

control for purposes of day-to-day management of the

fund is a false problem. The real issue is whether ex.

emptions allowing an extra director on the Bank sid

will undereut the Committee’s watchdog role in area:

of potential conflict of interest.

Section 6(c) of the Investment Company Act empowers

the Commission to grant exemptions from the Act, or any

rule or regulation adopted under it, ‘‘. . . if and to the

extent that such exemption is necessary or appropriate in

18 Notwithstanding the provisions of §$10(a) and 10(b) (2).

§10(d) permits all but one of the directors of certain types of |

‘*no-load’’ funds to be affiliated with the investment adviser if |

certain conditions are met. 15 U.S.C. § 80a-10(d). To qualify for |

the exception under § 10(d), the Bank would have had to register |

as an investment adviser, principally involved in that business. An '

exemption from this condition was denied.

investors and the purposes fairly intended by the policy

and provisions’’ of the Act. 15 U.S.C. § 80a-6(c). The

Commission has exercised this authority to exempt per-

sons not within the intent of the Act and generally to

adjust its provisions to take account of special situations

not foreseen when the Act was drafted. Transit Invest-

ment Corporation, 28 S.E.C. 10, 16 (1948); The Atlantic

Coast Line Company, 11 S.E.C. 661, 666-67 (1942).

In granting the exemptions at issue, the Commission

first observed that the Account differs on the one hand

from the bank-dominated securities affiliates of the twenties

whose abuses inspired § 10* and, on the other, from open-

end investment companies (mutual funds) not subject to

the supervision of the Comptroller. For these reasons,

it was appropriate to consider whether a bank-sponsored

fund was a type of investment company requiring the stand-

ard measure of unaffiliated directors or whether exemptions

were justified by its novel characteristics. The Commis-

sion concluded that the risks of conflict of interest would

be adequately controlled by the provisions of the Invest-

ment Company Act still applicable, supplemented by the

Comptroller’s regulations, and that the exemptions would

permit the establishment of a desired new investment

19a

14 Securities affiliates were organized by banks to evade the pro-

hibition against investment of bank funds in common stocks. The

affiliates, usually closed-end investment companies, often took loans

from the sponsor banks, secured by the stock held by the affiliate,

and then used the borrowed funds to trade or invest in the bank’s

stock or in other securities in which the bank had an interest. The

affiliates also made loans of investment company funds to the bank.

Shareholders of the affiliate and depositors of the bank were both

on the losing end of these arrangements. The abuses were detailed

in a comprehensive study submitted to Congress by the Commission

prior to the adoption of the Glass-Steagall Act. Investment Trusts

and Investment Companies, Report of the Securities and Exchange

Commission, Pt. 1, H.R. Doe. No. 707, 75th Cong., 3d Sess. 94

(1938).

ee ™

20a

medium, still subject to all the safeguards necessary for

the protection of its investors.

The conflict of interest problems created by bank affili-

ation with investment companies are of a different order

when the fund is sponsored by the bank. In the proceed.

ings below, the Commission considered four danger zones,

previously cited by former Chairman William L. Cary in

testimony before Congress recommending regulation of

collective investment funds," and urged by the NASD

as reasons for denying the exemptions.

A. Retention of substantial cash deposits for

the Account in the Bank

The Commission discounted the danger that the Bank

might retain an unwarranted portion of the Account’s

assets in cash in order to earn money for the Bank, stating

that the temptation to leave funds uninvested would be

contrary to the Account’s stated policy of investment for

long-term growth of capital and income, and to the Bank's

interest in having the fund’s assets increase. The in-

terest in increasing the assets in the fund dictates not

only that funds already held be invested in growth se- —

curities, but also, as we have seen, creates pressure to

increase the number of participants. The undisputed fact

that the Account will compete with the mutual fund in-

dustry can be expected to inhibit retention of its income-

producing assets in the form of lopsided cash deposits.

There is an important point of convergence between the

interests of the Bank directors qua commercial bankers

and their interest in the success of an investment medium

offered as part of the Bank’s services, a convergence not

present when Bank personnel serve as directors of in-

dependent investment companies.

1% Hearing on Common Trust Funds—Overlapping Responsi-

bility and Conflict in Regulation, Before a Subcommittee of the

House Committee on Government Operations | Hereinafter Hearing

on Common Trust Funds], 89th Cong., Ist Sess. 11-12 (1963).

aeae LACE ILE IOP RII IEE SWS <i

2la

The Comptroller’s regulations, moreover, state that funds

held in a fiduciary capacity by banks shall not be held

uninvested or undistributed for a period longer than is

reasonable for the proper management of the particular

account. 12 C.F.R. §9.10(a). Observance of this regu-

lation is policed through examinations of bank trust de-

partments which occur at least three times in every two

years. 12 U.S.C. §481. The Commission reasonably con-

cluded that the Bank’s interest in holding the Account’s

assets in cash was offset by this combination of the carrot

and the stick.

B. Use of Account investments to shore up

Bank loans

Considered under § 16 of the Glass-Steagall Act was

the danger that the Jank might make unsound loans to

shore up companies in which it had made investments

for the Account. From the standpoint of the Investment

Company Act, the risk is that the Bank will make bad

investments for the Account to shore up unsound loans. In

a letter to the Senate Committee on Banking and Currency,

Chairman William McChesney Martin of the Federal Re-

serve Board explained why this area of risk was not re-

garded as significant.

For many years banks have participated in the man-

agement of employee-benefit funds and other fiduciary

accounts that hold stocks and other securities in an

aggregate amount far exceeding those held by the

entire mutual fund industry. The examinations con-

ducted by bank supervisory agencies have disclosed

practically no such misuse by banks of their invest-

ment advisory and management functions. In the case

of managing agency funds, an additional safeguard

is the prophylactic restrictions and requirements of

the Investment Company Act of 1940, particularly

publicity of the financial transactions of registered

investment companies, which almost inevitably would

Sn aa eee ere

“IND AT A CRORE TP DRI ah

22a

expose such malfeasance. A further deterrent would

be the adverse impact on a collective fund’s per-

formance—its comparative financial record—if any of

its resources were used to make unprofitable invest.

ments; the detrimental effect on sales of participations

might outweigh any benefits the bank could reasonably

expect from its breach of fiduciary duty."®

In addition to taking note of the Comptroller’s supervision

of investments, the Commission cited its own supervision

of transactions involving a joint arrangement between

the Bank acting as a principal and the Account under the

insider provision of §17(d) of the Act, 15 U.S.C. § 80a.

17(d),’* and concluded that the margin for misconduct

of this sort was narrow.

C. Purchase by the Account of securities

underwritten by the Bank

The danger that the Account’s funds might be used to

promote the Bank’s investment banking business is rele-

vant generally to the exemption from §10(¢) and specifi-

cally to the exemption from § 10(b)(3). Section 10(b) (3)

would have required that a majority of the directors

of the Account be unaffiliated with an investment banker.

The Bank is in the investment banking business to

the extent that it participates in syndicates which under-

write debt securities of governmental authorities.

*° Letter dated December 14, 1967, from William McC. Martin,

Jr., Chairman, Federal Reserve Board, to Senate Committee on

Banking and Currency, in Hearings Before the Senate Banking

and Currency Committee on Amendment No. 438 to 8. 1659, 90th

Cong., Ist Sess. 1223-26 (1968).

17 Shoring up loans or acquiring banking business in connection

with the purchase of stock for the fund may be such a joint trans-

action. Note, Commingled Trust Funds and Variable Annuities:

Uniform Federal Regulation of Investment Funds Operated by

Banks and Insurance Companies, 82 Harv. L.REv. 435, 451 (1968).

Se to nas A ne a th te Ei ie fy ie

23a

I concur in the Commission’s judgment that there is

no basis for concern that the Bank can or will use the

Account to further its limited investment banking busi-

ness. The Account is primarily a stock fund. It is not

ermitted to purchase any securities from the Bank, 15

U.S.C. §80a-17(a), and cannot purchase government se-

curities from another member of a syndicate where the

Bank participates as principal underwriter. 15 U.S.C.

§ 80a-10(f). The Commission conditioned the exemption

by prohibiting purehases from syndicate members even

after the syndicate has terminated but the members hold

unsold allotments.

D. Allocation of brokerage to existing or

potential Bank customers

Former Chairman Cary observed that banks often dis-

tribute brokerage to those brokers with whom the Bank

has or seeks reciprocal dealings, and that this may be

contrary to the best interests of the Account’s investors.

This is one breed of the ‘‘hird-dog’’? problem presented

when bankers direct investment business toward companies

whose banking business they desire in return, Such a

practice would, of course, depart from the brokerage policy

set forth in the prospectus. The Bank’s stated objective

in placing orders is to obtain the most favorable prices

and execution of orders and, secondarily, to deal with

brokers and dealers who provide the Bank as investment

adviser with supplementary research and statistical in-

formation or market quotations.

Reliance on the Bank’s representations is not wholly

satisfying. Allocation of brokerage for the Bank’s benefit

is a subtler form of self-dealing than questionable pur-

chases of securities or maintenance of an undue eash bal-

ance, and one less amenable to control through disclosure

and supervision by the agencies. Nonetheless, brokerage

may be improperly distributed in the course of banks’ al-

ready extensive securities purchases for the account of

Nets) REM SOEES Grapes ¢ i cushie .

- Te, DW ANS REPEC RT RT

24a

customers, and it is appropriate to point out that Congress

apparently did not consider this threat to be of critical

significance when it exempted common trust funds from the

Act entirely. See 15 U.S.C. § 80a-3(c) (3).

The Commission’s orders do not rest upon a sanguine

assumption that there are no conflicts of interest incident

to bank-sponsored investment funds, but rather proceed

from a showing that the dangers are significantly different

from those involved in other types of bank-investment

company affiliations. Because the Bank earns only a regu-

lated fiduciary sharge tied to the amount of the Account’s

assets, the Bank-affiliated directors’ interest in attracting

more customers coincides with the interests of investors

and to some degree counteracts the incentive to hold the

fund’s assets in the form of commercial deposits. The

restrictions upon Bank underwriting and Bank transae-

tions with the Account make it anlikely that the Bank can

profit by using the fund to unload or backstop its bad or

indifferent investments, a major function of the bank-

dominated securities affiliates of the twenties. To the

extent that such hazards as improper brokerage allocation

remain, the Commission could reasonably have concluded

that two independent directors would perform adequately

as watchdogs, with the enforcement powers of the Comp-

troller adding extra teeth.

Finally, the NASD claims that the Commission made an

expedient bargain in granting the exemptions in order to

head off legislation to exempt bank-sponsored funds from

the securities laws. It is true that the Commission’s as-

sertion of jurisdiction over such funds generated legisla-

tive proposals, along with some friction between agencies

of the Executive;'* but I view the decision differently.

Taking due account of the reduced potential for conflicts

of interest in bank-sponsored funds and the near-complete

18 Hearing on Common Trust Funds, supra, n. 15 at 2-3 and

161-64.

—

coverage of the securities laws, the Commission determined

that the supervision of the Comptroller would compensate

for the absence of an independent tie-breaker on the Com-

mittee of the Account. This was a fair trade.

25a

STANDING

A. Standing of the Investment Company Institute

The ICI claims standing to challenge competition from

banks on the ground that the Comptroller has authorized

a competitive activity specifically prohibited by Congress

in the Glass-Steagall Act. Cf. Baker, Watts & Co. v.

Saxon, 261 F.Supp. 247 (D.D.C. 1966), affirmed sub nom.

Port of New York Authority v. Baker, Watts & Co., 129

U.S.App.D.C. 178, 392 F.2d 497 (1968); Saxon v. Georgia

Assn. of Ins. Agents, 399 F.2d 1010 (5th Cir. 1968).

As a general rule, competitors lack standing to challenge

competition created or enhanced by governmental action,

even if it is illegal, unless they can claim the benefit of

an implied or express statutory aid to standing. Penn-

sylvania Railroad Co. v. Dillon, 118 U.S.App.D.C. 257,

335 F.2d 292, cert. denied sub nom. American S.S. Co. v.

United States, 379 U.S. 945 (1964). The Glass-Steagall

Act was not intended by Congress to protect mutual funds

from competition from banks, so they do not have stand-

ing as intended beneficiaries; and the Act contains no

aggrieved party provision. Contrast Hardin v. Kentucky

Utilities, 390 U.S. 1 (1968) ; F.C.C. v. Sanders Bros. Radio

Station, 309 U.S. 470 (1940). The District Court held,

however, that the ICI was an implied, though not an in-

tended beneficiary of the Glass-Steagall Act, and granted it

standing to sue as a private attorney general to enforce

the separation between commercial banking and securities

dealing, despite the absence of an aggrieved party pro-

vision to support that role.

26a

We are all agreed that this holding is exceptional, but

so is this case. While the majority concludes from the

cases that there is no satisfactory authority for standing,

I find in those cases no reason to deny standing, and good

reason to grant it. First, the authorities for the rule

denying competitors standing to challenge unlawful com-

petition are inapposite. Second, the basic justification for

entertaining competitors’ suits to challenge administrative

action as statutory aggrieved parties, intended benefiei-

aries, or licensees is to vindicate a public interest, and

not a private right. The absence of a statutory aid to

standing in this case is adventitious, and I would grant ap-

pellants standing to assert the public interest without it.

1. Competitors’ standing to challenge un-

lawful competition without a statutory

aid to standing

Analysis of suits by competitors confirms the Supreme

Court’s observation that ‘‘the various rules of standing ap-

plied by federal courts have not been developed in the

abstract. Rather, they have been fashioned with specific

reference to the status asserted by the party whose stand-

ing is challenged and to the type of question he wishes to

have adjudicated.’’ Flast v. Cohen, 392 U.S. 83, 101 (1968).

The general rule denying standing to competitors who can

claim no statutory aid to standing is derived from two types

of cases in which their interest in attacking allegedly unlaw-

ful competition has not been found reasonably proportion-

ate to the burden on governmental agencies of defending

against such suits. In one class of cases, privately owned

utilities have been denied standing to challenge legislative

public power programs. See e.g., Alabama Power Co. v.

Ickes, 302 U.S. 464 (1938); Tennessee Electric Power Co.

v. T.V.A., 306 U.S. 118 (1933) ; Kansas City Power & Light

v. McKay, 98 U.S.App.D.C,. 273, 225 F.2d 925, cert. denied,

350 U.S. 884 (1955). These cases draw much of their vital-

ity from considerations of separation of powers and the

27a

doctrine ‘‘that a person may not maintain a suit to en-

join the use of Government funds, even if such use is

claimed to be in violation of law.’’ In suits of this nature,

“ft}he fact that the plaintiff is suffering an economic

detriment from competition assisted by a loan or grant

of Government funds, does not give him standing to sue.’’

Baker, Watts & Co. v. Saxon, 261 F.Supp. at 249. Cf. Saxon

¢. Georgia Assn. of Ins. Agents, 399 F.2d at 1020-21 (con-

curring opinion).

There are similarly sound policy reasons why competi-

tive injury does not confer standing to challenge adminis-

trative decisions affording some incidental aid to another

competitor or group of competitors in an industry. Minor

or speculative economic injury is not worth burdening the

agencies and the courts with skirmishes among businesses

over comparative advantages resulting from allegedly il-

legal agency action. See Pennsylvania Railroad Co. v.

Dillon, 118 U.S.App.D.C. at 262, 335 F.2d at 297.

These, then, are the considerations underlying the many

opinions which deny standing with the homily that compe-

tition is our economic norm. To acknowledge that cases

denying standing to competitors are governed by (1) con-

siderations of separation of powers, and (2) a desire to

limit actions against the government, rather than by rigid

abstract rules, seems to me only to do justice to the

subtleties of standing as an element of justiciability. In

suits by competitors, the nature of the claim is plainly

relevant to the status of the economic interest asserted as

a basis for standing. Here the ICT does not challenge the

constitutional propriety of legislation or government

spending. It does not ask this court to invoke due proc-

ess or substantial evidence standards to afford it a remedy

for marginal injury from an illegal administrative action.

It points out, instead, that national banks operated under

a regime of enumerated powers and prohibitions carefully

laid down by Congress, and asks us to decide whether the

competition authorized by the Comptroller violates specific

28a

provisions of the banking laws, one of which carries crim.

inal penalties for bank entry into the securities business,

12 U.S.C. § 378.

In these cricumstances, to put the ICT out of court with

the incantation that competition is our economic norm is

insupportable in law and fact. No case stands for the rule

that authorization of novel and prohibited—even criminal—

business activity by administrative agencies is part of the

rough-and-tumble of a competitive market. And in point

of fact, toe-to-toe competition between mutual funds and

commercial banks has never been the norm. The Comp-

troller’s action introduces a powerful new element into a

market previously closed to commercial banks by the rul-

ings of the Federal Reserve Board, enforcing the same pro-

hibitions now largely committed to the supervision of the

Comptroller. This case falls outside the authorities for the

general rule that competitors lack standing to challenge

illegal competition.

We are not locked into conventional concepts of unfair

competition in assessing a competitor’s interest for pur-

poses of standing. Cf. Jaffe, Standing To Secure Judicial

Review: Private Actions, 75 Harv.L.Rev. 255, 265-66 (1961).

It would not be far-fetched to conclude that competition

illegally authorized by an agency which has allegedly ig-

nored statutory prohibitions is unfair. But while there

is arguably a private interest meriting protection here, it

is plain that the overriding interest in enforcement of the

Glass-Steagall Act is a public one. The question is whether

the ICI may assert the public interest without a statutory

aid to standing.

29a

2. Competitors’ standing to challenge unlawful

competition with a statutory aid

to standing

(a) Aggrieved party statutes

Since the decision in F.C.C. v. Sanders Bros. Radio Sta-

tion, 309 U.S. 470 (1940), competitors have been granted

standing to challenge administrative action under statu-

tory aggrieved party provisions despite the fact that the

statute does not require that their competitive interests

be given weight by the agency. Competitors need not even

be members of the industry subject to a specific regulatory

statute to sue under it, so long as they can show aggrieve-

ment by administrative action pursuant to the statute.

See Clarksburg Publishing Co. v. F.C.C., 96 U.S.App.

D.C. 211, 225 F.2d 511 (1955); Philco Corp. v. F.C.C., 103

U.S.App.D.C. 278, 257 F.2d 656 (1958), cert. denied, 358

U.S. 946 (1959). Competitors whose interests and in-

juries are not legally protected or even immediately rele-

vant to a regulatory jurisdiction are given standing as

private attorneys general to represent the public interest

in the proper administration of a regulatory scheme.

Scripps-Howard Radio, Inc. v. F.C.C., 316 U.S. 4, 14 (1942) ;

Associated Industries v. Ickes, 134 F.2d 694 (2d Cir.),

vacated as moot, 320 U.S. 707 (1943).

(b) Intended beneficiaries

Long before Sanders, the Supreme Court had held that

competitors have standing to challenge unlawful competi-

tion when they can show that a statute was intended to

afford some protection to their economic interests. The

Chicago Junction Case, 264 U.S. 258 (1924). The Chicago

Junction theory is the only logical support for cases holding

that a license, grant, or other property interest makes some

competitors more worthy plaintiffs than others. The sig-

nificance of a license for standing is not its conventional

status as a property right but the fact that licensing may

30a

indicate a legislative intent to limit competition in a mar.

ket by regulating entry. Licensees may be intended bene.

ficiaries entitled to rely on a regulatory scheme, with stand-

ing to enforce it. See Frost v. Corporation Comm’n, 278

U.S. 515 (1929) (Dissenting opinions of Justices Brandeis

and Stone).

In Chicago v. Atchison, Topeka & Santa Fe Ry., 357 US.

77 (1958), the Supreme Court granted standing to a motor

carrier to challenge the operation of a new carrier which

had not obtained a permit required by statute on the ground

that the first carrier was adversely affected and contended

that the competition was prohibited by a valid city ordi-

nance. 357 U.S. at 83. The holding on standing does not

even refer to the fact that the plaintiff carrier had a license;

the point was that one party was lawfully in business and

one allegedly was not. In such eases, the limitation on the

number of entrants in a market is not really intended to

benefit a licensee, but to assure to the public an adequate

level of services from economically viable enterprises. The

licensee-plaintiff is vindicating a public interest. His priv-

ate interest is his reliance on the rules protecting the

public.

Since the enactment of aggrieved party provisions giving

competitors standing in most regulated industries, the in-

tended beneficiary theory has conferred standing in ex-

ceptional cases where there is no express statutory aid

to standing, notably in an action against the TVA and in

the spate of suits against the Comptroller. In Hardin v.

Kentucky Utilities, 390 U.S. 1 (1968), the Supreme Court

granted standing to a private utility to adjudicate a dispute

over statutory area limitations on the expansion of TVA,

a comparatively clear case of market allocation by the legis-

lature.

Competitors in regulated industries have been granted

standing as intended beneficiaries of a regulatory scheme

where the statute (1) requires equal treatment of competi-

tors (Chicago Junction), (2) regulates the number of en-

trauts into a market (Chicago v. Atchison, Topeka & Santa

Fe), and (3) allocates markets among competitors (Har-

din). In each case the legislature has concluded that the

public interest in an adequate level of efficient services is

furthered by some restriction on competition. When pri-

vate parties sue to enforce those restrictions, they are

necessarily asserting a distinct public interest more im-

portant than their own.

3la

3. Competitors’ standing to sue the Comptroller

The banking laws affect competition by keeping banks

out of specified business activities, but the limitation of

competition in certain markets is a by-product of prehibi-

tions whose overriding purpose is to protect the banks and

their depositors’ fortunes. Two courts have nonetheless

granted standing to a group of insurance agents and a data

processing firm to challenge rulings of the Comptroller

authorizing banks to enter their bailiwicks on the ground

that certain provisions of the banking laws indicate an in-

tent to protect their interests. In Saxon v. Georgia Assn.

of Ins. Agents, 399 F.2d 1010 (5th Cir. 1968), the major-

ity held that §92 of the National Bank Act, 12 U.S.C.

§92, permitting banks to act as insurance agents in cities

of 5,000 inhabitants or less was intended to protect insur-

ance agents in larger towns from bank competition. But

it seems more likely that the sale of insurance was never

an activity within the intent of the statutory provision

granting banks ‘‘all such incidental powers as shall be

necessary to carry on the business of banking,’’ 12 U.S.C.

§ 24(7), and that the general ban on bank entry into the

insurance business was qualified solely for the purpose

of strengthening weak banks in small towns. The interest

of insurance agents in retaining the implied prohibition

in larger communities is unrelated to the intent of Congress

in enacting it in the first place. 399 F.2d at 1019 (con-

curring opinion).

32a

Similarly, in The Wingate Corp. v. Industrial National

Bank, 408 F.2d 1147 (1st Cir. 1969), the plaintiff data

processors argued that solicitation by banks of data proe-

essing business from the business community at large was

not a power incidental to banking, and that recently enacted

limitations on the data processing activities of bank serv-

ice corporations, jointly formed by small banks to enable

them to purchase computer equipment, were intended to

protect independent data processing companies.’® The

First Circuit accepted this argument, relying heavily upon

the fact that the National Society of Public Accountants

had proposed the limiting amendment. But the fact that

the organized accountants pressed for an explicit limita-

tion does not mean it was designed to protect them. Enter-

prises that lobby for legislation are not necessarily trans-

formed into intended beneficiaries if it passes.

I agree that the insurance agents and the data processors

in these two cases did have standing, bui T am not per-

suaded that the specific provisions relied upon by the courts

were intended to create protected classes of competitors

any more than the Glass-Steagall Act was intended to

benefit mutual funds or investment bankers. Cf. Baker,

Watts € Co. v. Saxon, 261 F.Supp. 247 (D.D.C. 1966), aff’d

sub nom. Port of New York Authority v. Baker, Watts &

Co., 119 U.S.App.D.C. 173, 392 F.2d 497 (1968). It is fruit-

less to look for an intent to protect these businesses from

competition from banks in legislation designed to restrict or

prohibit bank activities for reasons having nothing to do

with competition. The critical question of congressional

intent is this: Did Congress intend to immunize rulings of

the Comptroller from judicial review? This is the critical

question because substantial immunity is the consequence

of denying standing to competitors. They are the only

parties likely to challenge the authorization of prohibited

bank activity. Cf. Office of Communication of the United

1° Contra, Assoc. of Data Processing Serv. Organ., Inc. v. Camp,

406 F.2d 837, cert. granted, 37 U.S.L.W. 3489 (June 23, 1969).

—

Church of Christ v. F.C.C., 123 US.App.D.C. 328, 335, 359

F.2d 994, 1001 (1966). The intended beneficiaries of the

banking laws, if the class is narrower than the public, are

bank customers who have no immediate and compelling

interest in litigation to further long-term sound banking.

33a

It is fortuitous that there is no aid to standing for these

plaintiffs. If underwriters, insurance agents, data proc-

essors, and securities dealers are right that banks are pro-

hibited by law from entering their businesses, Congress

would never have foreseen that administrative rulings

under the banking laws would substantially affect their

economic interests. Judging from the purpose and pattern

of the banking laws, the question of aggrieved non-bank

competitors never came up.

This conclusion finds support in the fact that when Con-

gress anticipated competition problems, it dealt with them

in specific terms, notably in provisions of the banking laws

equalizing the legal conditions of competition between state

and national banks. In dozens of cases, state banks, and

recently a state banking agency have had standing to chal-

lenge the authorization of new branches of national banks

in violation of the statutory limitation of national bank

branching to areas where state branches are permitted. 12

US.C. § 36(c). See e.g., Whitney Nat. Bank v. Bank of

New Orleans & Trust Co., 116 U.S.App.D.C. 285, 323 F.2d

290 (1963), rev’d on other grounds, 379 U.S. 411 (1965) ;

Nuesse v. Camp, 128 U.S.App.D.C. 172, 385 F.2d 694

(1967).2° Thus, under the usual rules of standing, a state

bank can enjoin illegal branching by national banks, but

there is no party who can sue to enforce the separation

between commercial banking and the securities business.

Given the relative triviality of the threat to the banking

Section 92a of the Federal Reserve Act, 12 U.S.C. § 92a,

authorizing national banks to act in any other fiduciary capacity

open to state banks in the locality, discussed, supra, pp. 8-9, indi-

eates a similar concern for equalizing the ground rules of competi-

tion between state and national banks.

- os ee a as ; = =

a A i Th Saas PRs SA ag ed ae

Ie ea oe,

34a

system posed by outlaw branch banks as compared to the

menace of illegal securities dealing, this result is too

bizarre to have been intended by Congress.

Disappointed license applicants can call the Federal Con.

munications Commission to account for its decisions in the

name of the public. Regulated carriers and state banks may

challenge unlawful competition because courts have inferred

some protection to their interest from a regulatory scheme.

In both cases, competitors’ suits are furthering the public

interest at stake in the rules. All that is missing in this case

is a ‘logical nexus’’ between the competitive interest of the

mutual fund industry and the aims of the banking laws,

Flast v. Cohen, 392 U.S. 83, 102 (1968). It is missing be.

cause Congress had more important interests in mind.

Principles of standing in competitors’ suits have operated

as rules of thumb to sort out proper plaintiffs and legal

issues of competition deemed appropriate for judicial reso-

lution. Both are present here. It is not disputed that the

members of the ICI are aggrieved by the Comptroller’s rul-

ing. Bank-sponsored diversified investment funds open to

$10,000 customers will compete for the cream of the mar.

ket now cornered by the mutual funds. The ICT presents

a question of statutory construction to define the bound.

aries of official authority, a type of question well within

the traditional competence of courts of law. It is the only

party likely to assert the public interest in observance of

the banking laws by the agency responsible for enforcing

them. In the exceptional circumstances of this case, I

would grant the ICI standing to vindicate the publie inter-

est despite the absence of a statutory aid to standing.”

*! The commentators agree that a conventional “legally protected

interest’’ or statutory aid to standing should not be required in all

eases. Professor Davis has long maintained that § 10 of the Ad-

ministrative Procedure Act, 5 U.S.C. §701 (Supp. IT 1965-66),

accords a right of review to any person aggrieved in fact by admin-

istrative action. 3 K. C. Davis, ADMINISTRATIVE LAW TREATISE

§ 22.02 (1958); Standing: Tarpayers and Others, 35 Cut.L.Rrv.

35a

B. Standing of the National Association

of Securities Dealers

The NASD claims standing to seek judicial review under

§80a-42(a) of the Investment Company Act, which accords

aright of review to ‘‘[a]ny person or party aggrieved by

an order issued by the Commission....’’ 15 U.S.C. § 80a-

42(a). It relies principally on the case of F.C.C. v. Sanders

Bros Radio Station, 309 U.S. 470 (1940), to support its

standing to sue as a private attorney general to vindicate

the public interest in the proper enforcement of the Invest-

ment Company Act. This standing issue is settled by

Sanders. There is no requirement that a plaintiff establish

a legally protected private interest to sue under ‘‘party

aggrieved’’ statutes. Office of Communication of United

Church of Christ v. F.C.C., 123 U.S.App.D.C. at 335, 359

F.2d at 1001. The only question is whether the NASD is

601, 619 (1968). Aggrievement in fact is all that is needed to

create a case or controversy in the constitutional sense. There

issome support for Professor Davis’ interpretation in the legisla-

tive history of § 10, but most courts, including this circuit, have

rejected it. Kansas City Power & Light v. McKay, 96 U.S.App.

D.C. 273, 225 F.2d 924, cert. denied, 350 U.S. 884 (1955).

Professor Jaffe views the private attorney general theory grafted

on to aggrieved party provisions as a variant of the common law

publie action, rooted in English and American state law. If a

party is suing as a private prosecutor, Professor Jaffe regards his

individual interest as irrelevant, but in such cases, ‘‘judicial dis-

cretion in terms of the size, urgency, and clarity of the issue at

stake’’ should be exercised in the decision to take jurisdiction.

Jaffe, Standing to Secure Judicial Review: Private Actions, 75

Harv.L.Rev. at 286-87.

The theory that standing may be accorded as a matter of dis-

cretion when the plaintiff is aggrieved in fact combines the two

commentators’ approaches. Curran v. Clifford, No. 21040 (D.C.

Cir., decided Dec. 27, 1968), opinion vacated, petition for rehearing

en bane granted April 3, 1969. These approaches would support

a finding of standing to challenge administrative action where

(1) the plaintiff is aggrieved, or (2) the question presented is

important, urgent and susceptible of judicial resolution, or (3) both

conditions are present.

36a

aggrieved by the Commission’s orders granting the exemp.

tions from the Act to the Bank.

The NASD represents about 3,700 registered brokers ¢

securi®ies dealers. Most of its members sell shares »

mutual funds to investors and are compensated by sal

commissions from the ‘‘load’’ charged by the funds. Th

Bank’s commingled investment Account and similar bak

sponsored funds sure to follow” are an addition to th

group of ‘‘no-load’’ funds whose shares are not sold at;

commission by NASD members. No one denies that bank.

sponsored collective investment funds will provide substa.

tial competition to both ‘‘load’’ and ‘‘no-load’’ mutu!

funds. Limitation of sale of participations to customer

with a minimum of $10,000 to invest does not narrow th

area of competitive overlap enough to make probable injur

insubstantial. Surveys indicate that individual sales o

$10,000 or more have accounted for about half the mutual

fund industry’s total dollar sales.** NASD members stanj

to lose commissions earned from the cream of the busines:

This is enough to show that they are aggrieved partie

under § 80a-42(a).

It is clear, moreover, that the NASD is aggrieved as a re.

sult of the Commissioner’s orders. Analysis of the legal

problems in establishing the Account in conformity with

the banking laws confirms the Bank’s concession that with-

out the exemptions, it would be ‘‘effectively precluded”

22 Speaking of its exemption decision, the Commission has stated:

“*A pattern has thus been set which other banks may follow if ther

see fit.’’ Hearings on S. 2704 Before a Subcommittee of the Senat

Committee on Banking and Currency, 89th Cong., 2d Sess. 138. At

the hearings, the American Bankers Association and _ individual

banks demonstrated great interest in commingled accounts. [did

at 31-61.

23 See testimony of an industry representative in Hearings 0

S. 2704 Before a Subcommittee of the House Committee on Banking

and Currency, supra, n. 22 at 96. i

——

from operating the Account. Both conditions of standing

to sue under the aggrieved party provision are met.

37a

For these reasons, I join in the decision of the court.

Burcer, Circuit Judge, concurring:* Although I am un-

able to join in the rationale underlying Judge Bazelon’s

basis for standing of Appellees, nonetheless I am prepared

to agree with the result in order to make a majority hold-

ing for review of the merits of a subject of such importance.

| do so in order to reach consideration of the merits for

such aid as some examination at our level may be useful to

further judicial review.

(1)

As I see it, there are three generally accepted theories of

sanding which guide the courts in ascertaining whether a

plaintiff is the appropriate ‘‘party seeking to get his com-

plaint before a federal court.’’ Flast v. Cohen, 392 U.S. 83,

9 (1968). The first emerges from those cases involving a

statutorily defined basis for standing. See, e.g., Scripps-

Howard Radio, Inc. v. F.C.C., 316 U.S. 4 (1942); F.C.C. v.

Sanders Bres. Radio Station, 309 U.S. 470 (1940). The

second evolves from those cases where the plaintiff holds

a public license, grant, or recognized property interest

which supports his assertion of litigable rights. See, e.g.,

Frost v. Corporation Com’n, 278 U.S. 515 (1929); Whit-

wey National Bank v. Bank of New Orleans & Trust Co.,

16 U.S. App. D.C. 285, 323 F.2d 290 (1963), rev’d on

ither grounds, 379 U.S. 411 (1965). A third theory of

tanding centers around a finding of intended ‘‘statutory

protection’? which has been bestowed upon the plaintiff

thereby entitling him to sue in order to preserve the inter-

ests which the statutory scheme has found to be worthy of

*Consistent with the views herein expressed which are directed

0 Pirst Nat'l City Bank vy. I.C1., No. 21,661, I coneur in Judge

Bazelon’s finding of standing as respects NASD vy. SEC, No. 20,164

and join in the disposition on the merits in that case.

38a

protection. This third concept of standing supported th

development of a less easily identifiable strain of Cecisions

focusing on a theory of ‘unlawful competition. ”’

The ‘‘unlawful competition” theory as a basis for stand

ing would seem to have two distinct definitional interpreta.

tions: (1) ‘*to compete in any manner, whether legal o

illegal techniques are utilized, is ‘unlawful competition’:

(2) ‘‘to engage in non-prohibited competition by utilizing

techniques or engaging in activities which are in themself

illegal is ‘unlawful competition’.’’ Under the former inter.

pretation, either no one may enter the competition in a

given kind or area of endeavor or the particular party

seeking to enter the competition has been prohibited from

doing so in order to protect those parties already pursuing

the activity under some grant, franchise or license. Under

the latter interpretation, competition per se is not pro.

scribed but the very conduct which constitutes the competi-

tion is in itself illegal. In my view, the first interpretation

is a valid one which necessarily emerges from the recognized

desire to ‘‘protect’’ extant interests and can properly form

the basis for a claim of standing. The second finds no Sup

port in a clove analysis of the myriad cases reviewing the

prerequisites to standing, is a misinterpretation of the con.

ceptual genesis of the theory of unlawful competition, and

cannot support a claim of standing.

An illustration of this can be seen in the distinction drawn

in the recent Hardin v. Kentucky Utilities Co., 390 U.S. 1,

5-6 (1968) case. There, the Supreme Court explained that:

[T]he economie injury which results from lawful com-

petition cannot, in and of itself, confer standing on

the injured business to question the legality of any

aspect of its competitor’s ope: ations (emphasis

added).

The reasonable corollary of this proposition would be that

a party could question the legality of its competitor’s oper-

39a

ations if, independently, it could demonstrate that the com-

petition per se was ‘unlawful.’ In its subsequent analysis,'

the Court made clear that by utilizing the term ‘‘unlawful

competition’? it meant to preserve the operative distinction

between an evaluation of the lawfulness of the competition

itself and an evaluation of the legality of the particular

conduct which produces the competition.*

1In the language following the above-quoted statement, the Court

continued :

But competitive injury provided no basis for standing in the

above cases simply because the statutory and constitutional

requirements that the plaintiff sought to enforce were in no

way concerned with protecting against competitive injury.

In contrast, it has been the rule at least since the Chicago June-

tion Case, 264 U.S. 258 (1924), that when the particular stat-

utory provision invoked does reflect a legislative purpose to

protect a competitive inerest, the injured competitor has stand-

ing to require compliance with that provision.

390 U.S, at 6.

*This court recently recognized this distinction in Pennsylvania

RR. Co. v. Dillon, 118 U.S. App. D.C. 257, 259-60, 335 F.2d 292,

204.95, cert. denicd sub nom. American Hawaiian S.S. Co. v. Dillon,

379 U.S. 945 (1964) ;

**Legal wrong,’’ as we have only recently noted, is the in-

vasion of a legally protected right. See Gonzalez v. Freeman,

supra, 117 U.S. App. D.C. at 186 n. 6, 334 F.2d at 576 n. 6.

Thus, in order to make out a claim of ‘‘legal wrong’’ under

Administrative Procedure Act § 10(a), appellants must assert

some legally protected right to be free of the competition .. ..

This court has very recently spoken on this aspect of standing.

When ‘‘Congress has not given them any such standing by

express or implied provision of statute * * *, mere economic

competition made possible by governmental action (even if

allegedly illegal) does not give standing to sue in the courts

to restrain such action. [citations omitted] For purposes of

standing in this case, the sufficiency of appellants’ allegation

of “‘legal wrong’’ thus depend upon congressional intent to

bestow upon them a legal right to protection from such com-

petition.

40a

To resolve the standing question the Court did not fing

it necessary to inquire into the legality or illegality of the

implementing operations which the Tennessee Valley Av

thority was to utilize to enter the market for selling ele.

tricity in the areas in question.* All that was necessary

was a finding that ‘‘one of the primary purposes of the

area i.‘aitations in § 15d of the [Tennessee Valley Authority

Act of 1933 as amended] was to protect private utilities

from TVA competition.’’ Jd. at 6. An area limitation, of

course, lends itself to ready interpretation, hence competi-

tion per se by TVA would be ‘‘unlawful’’ if TVA had in

fact encroached upon the market area which had been

reserved for the local utility companies and from which

TVA’s entry had been prohibited. Because Kentucky

Utilities Co. was a member of the class so meant to be pro-

tected, it had standing to litigate to obtain an adjudication

of its substantive rights under the protective statutory

scheme, and ‘‘no explicit statutory provision [was] neces-

sary to confer standing.’’ Jd. at 7 (footnote omitted).

The rationale underlying this finding of standing is that

Congress affirmatively intended Kentucky Utilities to be

protected from TVA competition. In essence, it was a

clearly identifiable beneficiary of a statutory grant of pro-

tection, and as such, it was entitled to sue to protect the

rights conferred. Whether TVA’s operations which led to

the competition were in themselves legal or illegal was

irrelevant to the determination of Kentucky Utilities’

standing.

In addition to these three categories of standing cases,

some hybrid variations—some of which are valid, others

not—have emerged. They include: (1) the Flast v. Cohen,

3 Significantly, the Court finally concluded that TVA ‘‘could...

properly make its low-cost power available to consumers in this...

area....’’ 390 U.S. at 5. Therefore, the Court’s resolution of the

standing issue cannot be evaluated as a rationalization prompted

by its determination that Kentucky Utilities Co.’s substantive rights

had been violated.

supra, provision for taxpayer challenges of federal expendi-

tures allegedly in violation of specific constitutional limita-

tion; (2) the unique application of the ‘‘consumer aggrieve-

ment’? concept articulated in Office of Communication of

United Church of Christ v. F.C.C., 123 U.S. App. D.C. 328,

959 F.2d 994 (1966), pursuant to the ‘‘person aggrieved”’

provision of the Federal Communications Act, 47 U.S.C.

309(d) (1964); (3) the discretionary standing theory

broached in Curran v. Clifford, No. 21,040 (D.C. Cir., Dee.

97, 1968), opinion vacated, petition for rehearing en banc

granted, No. 21,040 (D.C. Cir., April 3, 1969) ; (4) the con-

cept that ‘‘aggrievement in fact’? is sufficient to give a party

standing to challenge agency action under § 10 of the Ad-

ministrative Procedure Act; (5) the improper utilization of

the ‘unlawful competition’’ theory discussed supra and em-

ployed by some courts which have granted standing in cases

involving recent promulgations by the Comptroller of the

Currency.*

4la

(2)

Against this background we should examine Appellees’

claim of standing in the present litigation. As set forth in

the preceding opinion, Appellee-Institute is a national asso-

ciation representing 177 open-end management investment

companies commonly designated as ‘‘mutual funds’’ and

the 88 investment advisers and 78 principal underwriters of

these funds. The mutual fund members of the Institute

represent 94 percent of all such companies in the United

States. The Institute membership also includes several

investment advisers and principal underwriters of individ-

ual mutual funds which are individual Appellees in this suit.

The major basis for Appellees’ claim of standing to chal-

lenge the Comptroller’s regulations is that the entry of the

*For an extensive collection of the recent cases involving ‘‘un-

lawful competition’’ as a theory for challenging activity authorized

by the Comptroller see Sa.ron v. Georgia Assoc. of Independent Ins.

Agents, Inc., 399 F.2d 1010, 1017 n. 6 (5th Cir. 1968). See also

Judge Bazelon’s opinion at pp. 30-34.

national banks into the so-called ‘*mutual fund industry”

would constitute ‘‘unlawful competition’? which Appellees

as representatives of the industry may challenge.’ How-

ever, an analysis of the facts of this controversy illustrates

Appellees’ reliance on an incorrect interpretation of the

concept of ‘unlawful competition.’’ ‘To perceive the faulty

basis of the claims of Appellees, their precise contentions

must be studied,

Appellees are complaining of unauthorized adminis-

trative action creating a form of competition specifi-

cally prohibited by Congress in the Glass-Steagall Act,

The challenged regulations authorize banks to engage

in unlawful competition, permitting them to enter the

mutual fund business and engage in issuing, selling,

distributing and underwriting securities in violation of

Section 16, 20, 21 and 82 of the Glass-Steagall Act.

Appellees are not merely challenging a program of

governmental assistance, financial or otherwise, to law-

ful competitors whose competitive activities have been

specifically authorized by Congress.

Brief for Appellees 66 (emphasis added).

5 Appellees also assert that §702(a) (Supp. IT, 1967), embodies

an independent and self-sufficient statutory basis for standing. I

do not feel that the APA was meant to arrest the development

of the law of standing as of the date of its passage :

[W]e would certainly be prepared to hold in an appropriate

ease that one who complains of administrative action may find

a remedy under the Act beyond the strict scope of judicial

review recognized prior to its adoption .

Kansas City Power & Light Co. v. McKay, 96 U.S. App. D.C. 273,

282, 225 F.2d 924, 933, cert. denied, 350 U.S. 884 (1955). Never-

theless, although the review provisions of the APA were not meant

to retard the judicial development and adaptation of the law of

standing, it does not establish an independent right to review

absent judicially articulated notions of ‘‘legal wrong’’ of ‘‘ad-

versely affected or aggrieved . . . within the meaning of any rele-

vant statute.’ See Pennsylvania R.R. Co. v. Dillon, supra, n. 2.

| —

43a

Appellees then go on with sweeping contentions ‘*that com-

petitors have the right to challenge new competition, au-

thorized by administrative action, which has been prohibited

by statute.”’

Furthermore, there is no justification for the gloss

which Appellants attempt to put on Mardin requiring

a specific and express Congressional intent to protect

particular plaintiff's in order to confer standing on them

to challenge regulations which create unlawful competi-

tion. The well-established rule, in this Court, the

Supreme Court, and other courts, is directly t. th

contrary. Where the effect of the statutory prob-&

is to bar competition, those subject to such illegal «

petition created by administrative regulation have the

standing to challenge the regulation.

Brief for Appellees 66, 67, 73 (emphasis added).

Appellees have thus sought to shift the focus to the

activity of the Bank and its alleged violation of the stric-

tures of the Glass-Steagall Act; their burden is to establish

their own status as intended statutory beneficiaries of a

freedom from competition by national banks.

In a recent decision denying standing in a suit brought

by the Association of Data Processing Service Organiza-

tions and Data Systems, Ine.* challenging allegedly im-

proper national bank entrance into the data processing

business, the Eighth Circuit made some cogent observa-

tions :

Much of the confusion on standing seems to arise

from the emphasis upon the issues to be adjudicated or

*Data Systems Inc. is a Minnesota corporation engaged in the

data processing business. Association of Data Processing Organi-

zations is an incorporated association domiciled in Pennsylvania

whose members perform data processing services throughout the

United States.

tta

upon the possible merits of the substantive claim

rather than upon an examination of the status of the

complaining plaintiff. Whether or not a defendant is

alleged to be engaged in illegal competition cannot by

itself determine a plaintiff’s standing to complain. ...

The fundamental aspect of standing is that it focuses

on the party seeking to get his complaint before a fed-

eral court and not on the issues he wishes to have ad-

judicated.

* s e

[I]t seems clear that an allegation of ‘‘illegal competi-

tion’’ is not the balancing determinant of a plaintiff's

standing. The primary search must rest on whether

the plaintiff’s status is one which enjoys a private

interest entitled to protection or one which the law

recognizes to be of such legal significance to allow a

party to act as a public representative for a public

interest.

Association of Data Processing Service Organizations, Inc.

v. Camp, No. 19,218 (8th Cir., Feb. 6, 1969) (citations

omitted) (emphasis added).

That Court found that the plaintiffs were ‘‘competing in

a non-regulatory field of free competition,’’ they were not

members of any class ‘‘designedly protected by statute,”’

and they possessed no legal interest ‘‘recognized at law.”

Id. at 10. Accordingly, they had no standing to challenge

the new rulings by the Comptroller which allowed the bank

to offer these new services.

As previously indicated, the Glass-Steagall Act does not

contain the familiar provisions which constitute an aid to

standing in terms of allowing a ‘‘person aggrieved”’ to chal-

lenge administrative decisions or promulgations made pur-

suant to the Act. Nor can Appellees validly assert any

‘license, grant, or recognized property interest’’ entitling

them to standing. It is equally clear that giving even the

broadest reading of the legislative history embellishing the

45a

Act will not support the conclusion that Congress meant to

bestow upon Appellees any protection from competitive

injury.’ With these bases of standing foreclosed, Appellees

necessarily turn to the inaccurate definition of ‘‘unlawful

competition’? which I find to be without support in an

analysis of the ‘‘competition’’ cases.

For the most part the cases relied on by Appellees are

readily distinguishable. In American Trucking Assn, 364

U.S. 1 (1960), the Court found a statutory purpose to pro-

tect ‘‘all modes of transportation’’ and the complaining

party had the benefit of a specific ‘‘party in interest’’ aid

to standing. Interstate Commerce Act, 49 U.S.C. § 305 (g).

Chicago v. Atchison, T. & S.F. Ry., 357 U.S. 77 (1958),

involved a plaintiff which held a license, thereby entitling

it to oppose another carrier’s operation without obtaining

a license. In Frost, supra, the Court found that a cotton

gin licensee had a ‘‘property right’? and could challenge

the invasion of this right by another without a valid license.

In Whitney Nat’l. Bank, supra, the Court allowed a state

7 See Judge Bazelon’s opinion at p. 25. The thrust of the legis-

lation, and the concern of the drafters, was to protect the banking

public through the maintenance of a sound national banking sys-

tem. Senator Bulkley, one of the managers of the bill, made it

explicit in his remarks that the bill was not focused on protecting

the investing public, much less the securities industry :

[T]he purpose of this bill does not extend to safeguarding

purchasers of securities as such. The purpose of this bill is

to improve the operation of the Federal Reserve System and

the banks which are members of it. The object of the inhibitions

which I am discussing here is not primarily to protect the

investing public, although that is a worthy purpose, but our

field is to protect the operations of the banking system itself,

and to protect the depositors and customers of the banks so

that they shall have the service from national and State mem-

ber banks which they are entitled to expect.

75 Cone. Rec. 9913-14 (1932). See also Jaffe, Standing to Secure

Judicial Review: Private Actions, 75 Harv. L. Rev. 255, 266

(1961).

46a

bank to challenge the Comptroller’s authorization of new

branch banks from national bank competition. The Georgia

Insurance Ass’y case, supra, involved a provision of the

Glass-Steagall Act which evidenced an affirmative legisla.

tive intent to protect local insurance agents from the com.

petition of national banks.

Some of the language in Port of New York Authority,

supra, is more troublesome. There, a group of investment

bankers challenged the Comptroller’s authority under

Glass-Steagall to permit national banks to distribute reve-

nue bonds not backed by the taxing power of the public

body issuing the bonds. In acknowledging standing for the

investment bankers to pursue their challenge, the District

Court explained:

While no one may maintain a suit to restrain lawful

competition merely beeause he is suffering an eco-

nomic detriment, nevertheless, a person has a standing

to complain against illegal competition, or specifically,

against competition on the part of a person who lacks

the legal right or power to pursue the competitive

activities. In this respect this action is precisely paral-

lel to eases in which a state bank has been permitted

to maintain suit to restrain the Comptroller of the Cur-

reney from granting permission to a national bank to

establish a branch that would compete with the plain-

tiff.

Id. at 248 (emphasis added).

It seems to me that the District Court gave undue weight

to the claim of unlawful competition and in effect equated

it with competition created by illegal activities. This made

it possible to rely on the ‘‘branch banking eases’? which are

not really applicable, since those cases turn on the provi-

sions of Glass-Steagall which limit branch banking of na-

tional banks specifically in order to protect state banks

from the unrestricted competition of national banks. See,

47a

Pennsylvania R.R. Co. v. Dillon, 118 U.S. App. D.C. 257,

335 F.2d 292, cert. denied sub nom. American Hawaiian

§.8. Co. v. Dillon, 879 U.S. 945 (1964); Whitney National

Bank v. Bank of New Orleans & Trust Co., 116 U.S. App.

D.C. 285, 328 F.2d 290 (1968), rev’d on other grounds, 379

U.S. 411 (1965).*

Appellees here pursue their associational livelihood in a

securities marketing industry which thrives on competition

in the quest for the investment dollar. The entry of the

national bank commingled investment accounts into this

competition admittedly adds a whole new category of com-

petitors but it is fundamentally not different from the situ-

ation which arises, for example, when ‘‘gas stations’’ sell

candy bars, soft drinks and other staples for which travel-

lers have need. Nevertheless, before Appellees may sue to

prevent bank competition which affects their private finan-

cial interests, they must establish that the Glass-Steagall

Act contemplated that they were to be protected from this

competition in their pursuits. Hven assuming that the com-

peting activity of the Appellant Bank may be otherwise

violative of a provision of the Act, I ean find no indication

that the Act intended to afford protection to securities

dealers generally. My position therefore is one of reserva-

tion amounting to virtual disbelief in any standing in

Appellees.

SIn Pennsylvania R.R. Co. v. Dillon, we specifically noted this

critical distinction :

Appellants’ reliance on Whitney [citation omitted] is also

misplaced. There, this court held that certain state banks had

standing to attempt to enjoin the Comptroller of the Currency

from issuing to a national bank a Certificate of Authority

allegedly in violation of federal banking statutes. The court

found that federal statutes had guaranteed that state banks

would be free of certain competition from national banks.

118 U.S. App. D.C. at 262 n. 6, 335 F.2d at 297 n. 6.

MTEC AEE NRE SS 2° SPINE NI RNR PAT OR ARO RS

48a

(3)

Persuasive arguments can be advanced that the pressure

for someone with standing to challenge conduct in matters

of large public interest is so great that irreconcilable ab.

stractions and distortions have emerged to satisfy what are

thought to be the needs. Quite often courts pursued a

‘*bootstrap’’ or cireular logic by initially analyzing the

merits, in order that a finding of standing to challenge

actions seems more palatable because the course has already

found a possible encroac

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