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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for a Writ of Certiorari
- **Published:** January 1, 1971
- **Citation:** 401 U.S. 617

## Text

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

19

’

12
18

5
18
18
18

4
6

Section 16, 12 U.S.C. § 24 ........... 2, 6, 7, 19, 20
Section 20, 12 U.S.C. 8377 ............. 2, 6, 7, 20

_

fi
.

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

2

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

—

3

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

4

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.

6

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

8

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).

|
|
|
|

—_—

9

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.

10

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

11

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

_

12

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."

18

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

14

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.

15

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.

16

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

17

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).

18

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.

19

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).

= ——

20

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.)

21

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

22

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

25

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

24

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.*

20

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

i

26

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

—

27

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

28

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.

29
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

30

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." ... CP Ra Eee ype firs sp et crest acron es

ST ES ee ES EMME Se

62a

in Article III, § 2 of the United States Constitution, that is,
a ‘‘constitutional’’ federal court cannot be given power
to sit in judgment and revise administrative action, since
there is no justiciable controversy and the opinion thus
issued would merely be advisory. See concurring opinion
of Mr. Justice Frankfurter in Joint Anti-Fascist Refugee
Committee v. MeGrath, 841 U.S. 128, 149, 150, 71 S.Ct,
624, 95 L.Ed. 817 (1951), Muskrat v. United States, 219
U.S. 346, 354, 31 S.Ct. 250, 55 L.Ed. 246 (1911), Chicago &
Southern Airlines, Inc. v. Waterman Corp., 333 U.S. 109,
118, 68 S.Ct. 4381, 92 L.Ed. 568 (1948), United Public
Workers of America v. Mitchell, 330 U.S. 75, 89, 67 S.Ct,
556, 91 L.Ed. 754 (1947), Associated Ind. of New York
v. Ickes, supra.

Standing to challenge an administrative action can be
premised on a statutory provision specifically appended to
the statute under which the administrative action was
promulgated or where the provision for review has been
made generally applicable by the Administrative Pro-
cedure Act, 5 U.S.C. $$ 701-704 (recodified by Pub. Law 89-
554, 80 Stat. 378). Since there is no specific provision for
review of the Comptroller’s regulation within the terms
of the enabling statute, Title 12, Section 1 et seq., the terms
of the Administrative Procedure Act will apply. Citizens
Nat. Bank of Maplewood v. Saxon, 249 F.Supp. 557 (D.C,
Mo. 1965), affirmed Webster Groves Trust Co. v. Saxon, 370
F.2d 381 (8th Cir. 1966). See also United Gas Pipe Line
Co. v. F. P. C., 86 U.S. App. 314, 181 F.2d 796 (1950), cert.
denied 340 U.S. 827, 71 S.Ct. 63, 95 L.Ed. 609 (1950).

The pertinent section of the Administrative Procedure
Act specifically provides that:

‘*A person suffering legal wrong because of agency
action, or adversely affected or aggrieved by agency
action within the meaning of a relevant statute, is
entitled to judicial review thereof.’’ 5 U.S.C. § 702.

|

Under this statutory provision a plaintiff must allege
that he has suffered a legal wrong or that a legally pro-
tected right will be adversely affected or aggrieved by the
agency’s action in order to obtain standing before this
court. The plaintiffs here are alleging that they are suffer-
ing a legal wrong by the allegedly illegal competition made
possible by the Comptroller’s regulation, thereby being ad-
versely affected or aggrieved. The exact amount of dam
ages which will be incurred by the plaintiffs is rather
difficult to assess in precise figures, but the Comptroller
has predicted that over the next five to ten years, com-
mercial banks might capture as much as two billion dollars
of mutual fund business.* The defendant interposes that
the competition, even if illegally promulgated, does not
create any legal wrong for which the plaintiffs may
complain.

63a

In support of its contention that the plaintiffs are not
suffering any legal wrong and thereby lack standing to
challenge the Comptroller’s regulation, the defendant relies
on a series of cases which contain the general principle
that mere competitive injury made possible by govern-
mental action does not confer standing on the injured party
to restrain governmental action. Tennessee Electric
Power Co. v. TVA, 306 U.S. 118, 137, 59 S.Ct. 366, 83 L.Ed.
543 (1938); Alabama Power Co. v. Ickes, 302 U.S. 464,
479, 58 S.Ct. 300, 82 L.Ed. 374 (1937); Perkins v. Lukens
Steel Co., 310 U.S. 113, 60 S.Ct. 869, 84 L.Ed. 1108 (1940) ;
Texas State AFL-CIO v. Kennedy, 117 U.S. App. D.C, 343,
330 F.2d 217, 218 (1964); Benson v. Schofield, 98 U.S.
App. D.C. 424, 236 F.2d 719 (1956), cert. denied 352 U.S.
976, 77 S.Ct. 363, 1 L.Ed. 2d 324 (year); Kansas City
Power & Light Co. v. McKay, 96 U.S. App. D.C. 273, 225

’ Hearings on H.R. 8499, 9410 before the Commerce and Finance
Subcommittee of the House Committee on Interstate and Foreign
Commerce, 88 Cong.2d Sess. p. 26 (1964). See also Comment, Of
Banks and Mutual Funds: The Collective Investment Trust, 20
Sw.L.J. 334 (1966).

64a

F.2d 924 (1955), cert. denied 350 U.S. 884, 76 S.Ct. 137,
100 L.Ed. 780 (1955). In these cases, the plaintiffs alleged
that they were suffering economic loss from the government
created competition, but it is significant to note that the
competition created by government action in these cases
was specifically authorized and sanctioned by Congress and
was based upon specific statutory grounds.

Moreover, most of the cases cited by the defendant in
support of his allegation that the plaintiffs lack standing
have been assiduously distinguished by subsequent de-
cisions of the Supreme Court, even though they have not
been expressly overruled. In City of Chicago v. Atchison,
Topeka & Santa Fe Railway, 357 U.S. 77, 78 S.Ct. 1063,
2 L.Ed. 2d 1174 (1958), the Supreme Court gave explicit
recognition to a competitor’s standing to challenge illegal
competition. That case involved two competitors, one of
whom (Parmelee) had alleged that the other (Transfer)
was operating illegally because it had not complied with
certain licensing requirements imposed by the City of Chi-
cago. Transfer argued that Parmelee had no standing to
object to Transfer’s allegedly illegal competition, but this
argument was flatly rejected by the Court:

‘It is enough, for purposes of standing, that we
have an actual controversy before us in which Par-
melee has a direct and substantial personal interest
in the outeome. Undoubtedly it is affected adversely
by Transfer’s operation, Parmelee contends that this
operation is prohibited by a valid city ordinance and
asserts the right to be free from unlawful competition,

‘‘'Transfer] argues that a party has no right to
complain about lawful competition, citing Alabama
Power Co. v. Ickes, 302 U.S. 464, 58 S.Ct. 300, 82 L.Ed.
374, and Tennessee Electric Power Co. v. Tennessee
Valley Authority, 306 U.S. 118, 59 S.Ct. 366, 83 L.Ed.
543. We do not regard either of these cases as con-
trolling here. It seems to us that Transfer’s argument

wits
ee eee wer —————

65a

confuses the merits of the controversy with the stand-
ing of Parmelee to litigate them. * * * Parmelee’s
standing could hardly depend on whether or not it is
eventually held that Transfer can lawfully operate
without a certificate of convenience and necessity.’’
357 U.S. 77, at 83-84, 78 S.Ct. 1063, at 1067.

With regard to some later cases holding that competitors
had standing, see American Trucking Ass’ns, Ine. v. United
States, 364 U.S. 1, 80 S.Ct. 1570, 4 L.Ed. 2d 1527 (1960),
National Motor Freight Traffic Ass’n v. United States, 371
US. 223, 83 S.Ct. 311, 9 L.Ed. 2d 273, rehearing denied 372
US. 246, 83 S.Ct. 688, 9 L.Ed. 2d 709 (1963), affirming 205
F.Supp. 592 (D.C. D.C. 1962) only on the merits but not
as to the standing issue; Phileo Corp. v. FCC, 103 (U.S.
App. D.C. 278, 257 F.2d 656 (1958), cert. denied 358 U.S.
946, 79 S.Ct. 350, 3 L.Ed. 2d 352 (1959) ; Whitney National
Bank in Jefferson Parish v. Bank of New Orleans & Trust
(Co, 116 U.S. App. D.C. 285, 328 F.2d 290 (1963), rev’d
on other grounds, 379 U.S. 411, 85 S.Ct. 551, 13 L.Ed. 2d
386 (1965).

In two recent cases challenging the authority of the
Comptroller to promulgate regulations under other sections
of the banking statutes, the plaintiffs have been granted
standing to challenge the regulations over the objections
of the Comptroller. Since these cases are directly in point
they will be discussed at length. In Baker, Watts & Co.
vy. Saxon, 261 F.Supp. 247 (D.C. D.C. 1966), a number of
plaintiffs, engaged in underwriting and distributing reve-
nue bonds, sought a declaratory judgment that the Comp.
troller’s regulations authorizing commercial banks, for the
first time, to enter the revenue bond business violated the
Glass-Steagall Act. The Comptroller raised the standing
defense, citing the identical cases as brought forth in his
present argument. Judge Holtzoff summarily disposed of
that contention by stating:

‘“‘The gravamen of the plaintiffs’ claim for relief is
that they are being subjected to competition by illegal

ee SNRs, cr tea ee:

Oba

activities of national banks. While no one WAY maiy
tain a suit to restrain lawful competition merely he
cause he is suffering an economic detriment, neverth
less, a person has a standing to COMPLAIN ARNINSE Hogs
competition, or specifically, against competition on th
part of a person who lacks the lowal right or Powe
to pursue the competitive activities’ 261 I Supp,
at 248,

Judge Holtzoff’s opinion focuses not On the impairmey
of the plaintiffs’ competitive position by the untawtal)
created competition, but rather on the premise that but fo
the illegal competition condoned by the Comptroller's reg
lation, the plaintiffs would not have Any economic dety
ment to base their complaint,

Likewise, in Georgia Associntion of Independent Tnasur
ance Agents, Ine. vo Saxon, 260 Supp. 802 (NLD, Gy.
1966), the district court denied a motion to dismiss for lack
of standing. In that case the Comptroller had authorized,
for the first time, national banks to sell IMSuraAnee in towns
With more than 5000 people, even though Section 9 of
Title 12 of the United States Code permitted banks to aet
as insurance agents only in places with a population of
5000 or less, Plaintiff's were insurance agents and trade
organizations representing insurance agents, — Plaintitls
there alleged that the Comptroller was acting beyond his
authority to issue the ruling whieh was in direet violation
of 12 U.S.C. $92 and that, as a result, national banks were
able to illegally compete with the plaintiffs, The distrie
court, in reaching its conclusion, observed that:

“In Tennessee Electric Power Co., supra, and ip
Alabama Power Co. v. Iekes, 302 U.S. 464, 58 SCL
800, 82 L.Ed. 374 (1937), the plaintiffs alleged that
they were suffering economie loss from the govern.
ment-created competition. In both eases the Supreme

Court held that such eeonomie loss alone did not confer

standing on the aspiring plaintiffs. It is important

. somaanny th GE
REPLI N TENN BNO IT NP LTE VER NE TE RTO ESTING TER ONO WY TEES

a

to note that such competition was authorized by Con-
gress and was based upon statutory grounds,

O7a

“Tn the instant case, the competition complained of
is not explicitly authorized by statute, but rather is
impliedly prohibited by the congressional grant of the
power * * %.") 260 B.Supp. at 803.

The district judge, in denying the Comptroller’s motion
to dismiss, further stated:

“The Court is of the opinion that the defendant’s
attack on the plaintiffs’ standing is without merit.
Tithe 12 U.S.CLA, $92 has the effect of protecting in-
surance agents age certain competition. Surely, the
plaintiffs have the right to their day in court to show
that the protection afforded them by 12 ULS.CLA. § 92
has been violated’? 260 F.Supp. at 804,

Subsequent to its finding of standing, the Distriet Court
ruled on the merits of the issues and granted the declara-
tory judgment and injunction which was sought by the
plaintiffs, 268 F.Supp. 286 (N.D. Ga. 1967).

Defendant places great reliance in his brief on the recent
case of Pennsylvania Railroad Co, v. Dillon, 118 U.S. App.
D.C. 257, 885 F.2d 292 (1964), cert. denied sub nom. Ameri-
can Hawaiian Steamship Co. v. Dillon, 379 U.S. 945, 85
S.Ct. 487, 18 Ld. 2d 548 (1964),

In that case plaintiffs alleged not only that defendant
Dillon had exeeeded his statutory authority but also that
the cempetitive activity which had been allowed was in and
of itself illegal. The competing carriers challenged the
authority of the Secretary of the Treasury to enroll certain
vessels in the coastwise trade, allegedly in viclation of the
Merchant Marine Act of 1920, as amended, 45 U.S.C. § 883.
That section prohibited the enrollment and documentation
of vessels ‘‘jumboized’’ by installation of foreign-made
mid-bodies. The Court of Appeals for the District of

68a

Columbia Circuit found that the carriers lacked Standix
even though they alleged the competition was illegal a:
in violation of the specifie provision of the statute. Th
Court pointed out the dichotomy of Section 10(a) of &
A.P.A., namely the ‘legal wrong’? aspect and the “g
versely affected or aggrieved’’ aspect, as it related to th
issue of standing and it concluded that:

‘*Under either leg of Section 10(a), therefore, sin.
appellants only complain of government enhanceme
of economic competition, they must demonstrate ‘sty.
utory aid to standing’.’’ 335 F.2d at 295.

After analyzing the enabling statute the Court conclude
that ‘‘Congress did not intend to insulate coastwise carriex
from other domestic competition or to give them any legal}
protected right to be free of such competition.”’ 335 Fj
at 295.

A close analysis of the holding in the Pennsylvania Rai.
road, supra, case does not require a determination of the
standing issue adverse to the plaintiffs. In that case the
Court of Appeals found that the underlying purpose o
the statute under which the regulation was promulgate
was to stimulate and encourage resort to domestic ship-
yards and thus to ensure them sufficient business so tha
their facilities would be adequate at times of national
emergencies. 335 F.2d 292, at 295. The statutes, under
which the regulation in issue was promulgated, were er-
acted to establish a clear Congressional policy which sought
to separate national commercial banking from the secv-
rities business.* The primary intent of Congress was to

* Hearings Pursuant to S.Res. 71 Before a Subcommittee of the
Senate Committee on Banking and Currency, 71st Cong. 3rd Ses
(1931).

S.Rep. No. 77, 73d Cong. 1st Sess. (1933). H.R.Rep. No. 742
74th Cong. Ist Sess. (1935).

See also 75 Cong.Ree. 9909 (1932) (remarks of Senator Bulkley). —

} 69a
i
segregate these functions and to allow separate entities to
engage in these business areas. This clarity of purpose
js garnered not only from the Congressional hearings re-
‘ports of the Glass-Steagall Act, but also from the exacti-
‘tude with which Congress has delineated the areas of com-
‘mon interest in this financial structure.’ This strong gen-
eral policy against the invasion of either field of endeavor
by either entity is sufficient to postulate an interest upon

which standing to challenge the regulation may be pre-

mised, ef. American Trucking Ass’ns, Ine. v. United States,

364 U.S. 1, 80 S.Ct. 1570, 4 L.Ed.2d 1527 (1960).

Therefore, by implication, the plaintiffs here have a
right to complain of the competition which is being con-
doned under the Regulation. This competition is illegal in
the sense that Congress has indicated its policy of separat-
ing the two financial institutions and this Regulation allows
in an indirect manner a joinder of these interests. The
plaintiffs were the recipients by implication of Congres-

sional protection.

Even if this invasion would not in fact cause a palpable
injury® to be inflicted upon the plaintiffs which could be
termed to be a legal wrong under the first leg of Section
10(a) of the A.P.A., now 5 U.S.C. § 702, the plaintiffs could
have standing to represent the public interest as held in

Sanders Bros. Radio Station v. F.C.C., 309 U.S. 470, 60

S.Ct. 698, 84 L.Ed. 869 (1940). Scripps-Howard Radio, Ine.

v. FP.C., 316 U.S. 4, 62 S.Ct. 875, 86 L.Ed. 1229 (1942),

and F.C.C. v. N.B.C. (IK.0.A.), 319 U.S. 239, 63 S.Ct. 1035,
87 L.Ed. 13874 (1948). See the application of this doctrine
by Judge Frank in Associated Industries of New York v.

*Note specifically amendments made to Section 24, par. Seventh
of Title 12.

* Bantam Book v. Sullivan, 372 U.S. 58, 83 S.Ct. 631, 9 L.Ed.2d
584 (1963)—see also the discussion of the ‘‘ Adversely Affected in
Fact” doctrine promulgated by Prof. Davis, 3 Davis, Administra-
tive Law Treatise § 22.02 (1965 Supp.).

a Sees ate

70a

Ickes, 134 F.2d 694 (2nd Cir. 1943), vacated as moot 39
U.S. 707, 64 S.Ct. 74 (1943).

The practical effect of the doctrine advanced by those
series of cases grants standing to challenge the legality of
administrative action to one who is in fact adversely af.
fected by administrative action. Standing in those jp.
stances is predicated upon the theory that the plaintiff
do not represent their own private property interests but
rather the interests of the public. In the instant situa.
tion the plaintiffs could be classified as private “Attorneys
General’’ based on the premise that the public policy die.
tated by Congress in the Glass-Steagall Act is not being
adhered to by the agency charged with its enforcement.
See Phileo Corp. v. F.C.C., 103 U.S.App.D.C. 278, 257 F.%4
656 (1958), cert. denied 358 U.S. 946, 79 S.Ct. 350, 3 L.Bd.2d
352 (1959), where the competitive interest of a manufac.
turer and not a broadcaster was held sufficient to satisfy
the ‘‘person aggrieved” provision of the Federal Com.
munications Act. See also Jaffe, Standing to Secure Judi-
cial Review: Public Actions and Private Actions, 74 Hary.
L.Rev. 1265 (1961), 75 Harv.L.Rev. 255 ( 1961), and Davis,
3 Administrative Law Treatise §§ 22.04, 22.05, 22.11 (1958),
(Supp.1965).

Finally, a denial of standing, as urged by the defendant,
would leave the plaintiffs and all others similarly situated
without a right to seek redress against capricious, arbi-
trary and unwarranted Regulations issued by the Comp-
troller, however flagrant and contrary to the intent of
Congress. This court, therefore, holds that the plaintiffs
have standing to challenge the Comptroller’s Regulation 9.

The Comptroller also asserts that there is no justiciable
issue or controversy present in this case. This assertion is
bifurcated on two grounds. The first is apparently premised
upon the theory that the Comptroller’s regulation permit-
ting national commercial banks to establish the commingled
Account does not regulate nor does it impose any obliga-

Tla

tion or duty upon the plaintiffs. The standards of justici-
ability are not limited to those situations in which the plain-
tiffs are directly regulated by the defendant government
oficial. Indeed, in none of the branch bank cases in which
the plaintiff was a state bank did the challenged regulations
impose a duty upon or regulate the plaintiffs in any man-
ner. E.g. First Hardin National Bank v. Fort Knox Na-
tional Bank, 361 F.2d 276 (6th Cir. 1966); First National
Bank of Smithfield, N. C. v. Saxon, 352 F.2d 267 (4th
Cir. 1965); Union Savings Bank of Patchogue v. Saxon,
118 U.S.App.D.C. 296, 335 F.2d 718 (1964); Whitney Na-
tional Bank in Jefferson Parish 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, 85 S.Ct. 551, 13 L.Ed.
2d 386 (1965), Commercial Security Bank v. Saxon, 236 F.
Supp. 457 (D.C.D.C. 1964), affirmed First National Bank
of Logan, Utah v. Walker Bank and Trust Co., 385 U.S.
252, 87 S.Ct. 492, 17 L.Kd.2d 348, (1966) rehearing denied
385 U.S. 1032, 87 S.Ct. 738, 17 L.Ed.2d 680 (1967). How-
ever, the justiciability assertion made by the Comptroller
ineach of these cases was decided adversely to the Comp-
troller.

The district court in Baker, Watts & Co. v. Saxon, supra,
summarily rejected the Comptroller’s contention, stating
that:

“* * * a justiciable controversy obviously exists justi-

fying the Court in entertaining an action for a declara-
tory judgment. The plaintiffs claim that the defend-
ant is authorizing national banks to conduct certain

activities in violation of the law and that these activities
transgress the powers of the banks and that they are
injurious to the plaintiffs.’’ 261 F.Supp. at 249.

The second ground for the lack of justiciability is pre-
mised on the theory that only the Comptroller can chal-
lenge the acts of a national commercial bank when it acts
in excess of its powers. However, the primary thrust of

ESR NS er ages Srey stom ota: SPS Ne

Se ta od oat

REPRE APES PRETTIEST ES GEO IE DOLE ELON | LEE LOS DOE PR eS

72a

the plaintiffs’ allegation is directed not at the national bank
which is acting under authority granted by the Comptroller,
but rather at the scope of the authority under which the
Comptroller promulgated the regulation in issue. The dis
triet court in Georgia Association of Independent Insyr.
ance Agents, Ine. v. Saxon, supra, simultaneous with its
denial of the motion to dismiss for lack of standing, re.
jected the Comptroller’s assertions on the issue of justi
ciability. It unequivocally stated that:

om

he defendant further contends that * * * the
Comptroller is sole enforcer of the National Banking
Act. This contention is impliedly repudiated by
the repeated decisions that banks have standing
to challenge an allegedly illegal order * * * and was
explicitly repudiated in an opinion by the Fifth Cir-
cuit Court of Appeals which stated. “The fact that
the Comptroller is charged under 12 U.S.C. § 93 with
the duty of enforeing the National Banking Act certain.
ly does not have the effect of prohibiting actions to en-
force that law by any other party who might have a
legitimate interest. Jackson v. First National Bank
of Valdosta, 349 F.2d 71, at p. 75 (1965).’’’ 260 F.
Supp. at 804.

A recent Supreme Court decision inferentially rejects
the Comptroller’s arguments on the lack of justiciability,
Abbott Laboratories v. Gardner, 387 U.S. 136, 87 S.Ct.
1507, 18 L.Md.2d 681 (1967). The Supreme Court reversed
and remanded to the Court of Appeals for the Third Cir-
cuit so that the Court of Appeals could consider the issues
on the merits. The Court of Appeals had reversed the
district court’s decision without reaching the merits of
the case, Abbott Laboratories v. Celebrezze, 352 F.2d 286
(3rd Cir. 1965). The district court had found that ‘‘a jus-
ticiable controversy arises where plaintiff is confronted
with substantial present or imminent harm. * * * the very
presence of a threat of harm makes the regulations ready

an

for review.”’ 228 F.Supp. 855, 861 (D.C.Del. 1968). The
Court of Appeals reversed on the basis that no ‘‘actual
case or controversy’’ existed as required for justiciability
under the Declaratory Judgments Act. However, the Su-
preme Court deerced that “the impact of the regulations
upon the plaintiffs is sufficiently direct and immediate so
as to render the issue appropriate for judicial review at
this stage.’’ 387 U.S. at 152, 87 S.Ct. at 1517.

Having found that the plaintiffs have standing to seek
redress and that they have presented a justiciable issue, we
are now ready to seck a resolution of the subject matter
involved in this litigation.

73a

The principal issue involved in this controversy is
whether or not the Comptroller has the statutory author-
ity to empower national commercial banks to create, organ-
ize and manage the commingled Account. The gist of the
activity of managing the Account consists of the purchase
and sale of equity securities, nominally for long-term
growth of capital and income, for the participating mem-
bers. National banks have only such powers as are ex-
pressly given by federal statute or by necessary implica-
tion therefrom, 12 U.S.C. § 24. Houston v. Drake, 97 F.2d
863 (9th Cir. 1938), Baltimore & O. R. Co., et al. v. Smith,
56 F.2d 799 (8rd Cir. 1932), and in some trust activities
they may be authorized to act by the Comptroller in any
capacity in which competing state banks are permitted to
act. 12 U.S.C. §92a(a). See First National Bank in St.
Louis v. State of Missouri, 263 U.S. 640, 44 S.Ct. 213, 68
L.Ed. 486 (1923), and Mercantile National Bank at Dallas
v. Langdeau, 371 U.S. 55, 83 S.Ct. 520, 9 L.Ed2d 523 (1962),
City of Yonkers v. Downey, 309 U.S. 590, 60 S.Ct. 796, 84
L.Ed. 964 (1940), rehearing denied 310 U.S. 656, 60 S.Ct.
1071, 84 L.d. 1420, and Condon v. Downey, 310 U.S. 656,
60 S.Ct. 1071, 84 L.Ed. 1420, United States v. Palmer, 28
F.Supp. 936 (D.C.N.Y. 1939).

Authority to oversee trust activities of national banks
which was vested in the Federal Reserve Board of Gov-

T4a

ernors, 12 U.S.C. § 248(k) was repealed in 1962 when an-
thority to regulate the fiduciary activities of national banks
was transferred to the Comptroller. 12 U.S.C. § 92a, 76
Stat. 668, Pub.L. 87-722. Upon transfer of this authority
the Comptroller issued Regulation 9 pursuant to which the
Mirst National City Bank established the commingled Ae.
count. In order to determine the validity of Regulation 9,
it will be necessary to investigate each section of the rele-
vant statutes and also to determine the intent of Congress
when it enacted the relevant statutes. In order to com-
plete the determination of the issues involved, it will also be
necessary to determine whether or not the relevant state
statute, here the N.Y. Banking Law, MeKinney’s Consol.
Laws, ¢. 2, Seetion 100, allows local state banks to act ina
similar fashion as is presently being allowed by Regula-
tion 9.

This Regulation authorizes national banks to commingle
managing agent accounts, allowing, therefore, the bank to
purchase equity securities for the Account in general and
not for any specific participating member. The essence of
this activity is the purchase and sale of securities deriving
thereby a benefit for the participating members, and ful-
filling the stated purpose of the Account.

The first statutory provision which is encountered along
the logical progression to our conclusion is 12 U.S.C. § 92:
which delineates the trust powers which the Comptroller
is authorized to grant to the national banks. Section 92:
(a) provides:

‘*The Comptroller of the Currency shall be author-
ized and empowered to grant by special permit to na-
tional banks applying therefor, when not in contraven-
tion of State or local law, the right to act as trustee,
executor, administrator, registrar of stocks and bonds,
guardian of estates, assignee, receiver, committee of
estates of lunatics, or in any other fiduciary capacity
in which State banks, trust companies, or other cor-

75a

porations which come into competition with national
banks are permitted to act under the laws of the State
in which the national bank is located.’’

and under 12 U.S.C. § 92a(j) the Comptroller: 7

oe * * is authorized and empowered to promulgate
such regulations as he may deem necessary to enforce
compliance with the provisions of this section and the
proper exercise of the powers granted therein.’ 76
Stat. 668, Pub.L. 87-722 § 1.

Pursuant to this statutory anthority the Comptroller can
empower national banks the right to act in a fiduciary
capacity and to issue regulations controlling this aetivity.
From the statutory language it can be concluded that the
Comptroller can grant trust powers to the national banks;
but the real crux of this issue is whether or not the com-
mingled Account can be considered a fiduciary activity as
provided by the statute.

The Comptroller cotends that there can be no doubt
that the Bank's relationship to the participants in the
commingled Account is a fiduciary relationship; however,
this general statement, upon close analysis, is untenable.
The principal-agent relationship arises from a contractual
agreement between the parties. The nature of this relation-
ship gives rise to certain duties which are implied by the
law, namely, a fiduciary duty and a duty of loyalty. The
trustee and the agent have an equivalent duty of loyalty.
The fiduciary duty of the agent is similar to but not the
equivalent of the fiduciary duty of a trustee.

The many differences as to the characteristics of a
principal-agent relationship and a trustee relationship are
notable especially as they relate to the issue in this case.

Section 11(k) of the Federal Reserve Act, as amended, 12
US.C, § 248(k) (repealed), empowered, in identical terms the
Federal Reserve Board to issue regulations.

POF OP Ld a PEN Tr eden OO ea > ow Sten tar

76a

Consent of both principal and agent is a necessary require.
ment for the creation of the relation whereas the bene.
ficiary of a trust need not consent. An agent is subject
to the control of his principal, but a trustee is not subject
to the contro! of the beneficiary. An agent ean bind
his principal by contract or otherwise, but a trustee has
no such power with regard to his beneficiary. The ageney
relationship is terminable by the direetion of the principal
or by his death without any express provision to that
efYeet, but this is untrue with respect to a trust unless
the instrument so provides, See Restatement (Second) of
Ageney, Section 13, comment a, Section 14B, comments
© to hy, and Section 425, comment a. Note also Bogert,
Trusts and Trustees, $15 (2d. ed. 1965) p. 70 and Re-
statement of Trusts, 2d § 8, comment i.

The Bank and the individual participant of the Account
enter into an ageney relationship prior to or simultaneous
with the participant's engagement with the Account. The
Bank's role in this relationship is one of managing agent,
not as trustee for the participant. A leading authority
on the law of trusts has stated:

“The duties and powers of the institution [e.g a
bank] as agent are determined by the terms of the eon-
tract made with the customer; the duties and powers
of the institution as trustee depend not only upon
the terms of the trust but also upon the principles and
rules of the common law and of statutes which are
applicable to the trust relation. The liabilities of the
institution as agent depend upon whether it has failed
to use due care in the performance of the duties which
it undertakes; its liabilities as a trustee depend upon
whether it has committed a breach of trust. Ordi-
narily the responsibilities of the institution are more
extensive where it acts as trustee than where it acts
as agent, and it may ineur no liabilities as agent for
conduct which would render it liable if it were trustee.”’
1 Seott on Trusts, Section 8.1 Bank as Trustee or
Agent (2d. ed. 1956).

77a

The courts, as well as the recognized authorities in trust
law, have distinguished sharply between the responsibilities
of a true trustee and those of a managing agent, even
where the latter is granted complete diseretion in acting for
his principal. It is, of course, established that the managing
agent occupies a position of confidence, in which he must
act with reasonable care and is held to a standard of con
duct higher than that which prevails in the ordinary course
of business in the marketplace. But the courts have stated
plainly that this is not the high standard of care and strict
accounting imposed upon a trustee, Stephens v. Detroit
Trust Co., 284 Mich. 149, 278 N.W. 799 (1933): Anderson
y. Abbott, 61 F. Supp. 888 (W.D.Ky. 1945); O'Connor
v. Burns, Potter & Co., 151 Neb. 9, 36 NW. 2d 507 (1949).
In both the Stephens and O’Connor cases the principal
brought suit for accounting against the defendant managing
agent on the basis that they had breached the high duty
of care imposed upon a trustee. The decisive factor in
both eases was that the relationship which existed between
the parties had been freely chosen and established and,
having entered into an agency contract, the investor could
not assert that the relationship was in fact a trust.*

Contrary to the contentions made by the Comptroller,
the managing agent relationship is not a true fiduciary
relationship as it has been defined by the courts and by the
recognized authorities in this field. Therefore, it is con-
eluded that the managing agency relationship does not
fall within the traditional fiduciary powers as delineated
in 12 U.S.C. § 92a(a).

Section 12 U.S.C. 92a(a), however, permits a national
bank to act ‘‘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

5 But see, Saxon and Miller, Common Trust Funds. 53 Geo.Q.J.
994, 1015, and Main, Common Trust Funds, 83 Banking L.J. 565.

78a

bank is located.’’? This saving provision allows national
banks to offer the equivalent fiduciary services to their
customers that a local state bank might offer.

The Comptroller has authorized the First National
City Bank, located in New York state, to establish
a commingled Account pursuant to Regulation 9,
and under the competitive provision of 12 U.S.C. § 92a(a)
the authorization granted to First National City Bank
may be legally valid, if the banking laws of New York
state allow competing institutions to establish a commingled
Account.

The general powers of state banks in New York state
are contained in MeKinney’s Consol.Laws, ¢. 2, N.Y. Bank-
ing Law $96 as amended, L.1966, ¢. 324. These general
powers have been supplemented by specific statutory pro-
visions which grant state banks the power to act in a
fiduciary capacity, N.Y. Banking Law, $$ 100, 100-a, 100-b,
100-c, as amended. Each of these statutory provisions de-
lineate the authorization of state banks with a definite
degree of specificity, and none of the sections noted above
allow a commingling of managing agency accounts. The
only section which could even be deemed to inferentially
grant this authority is Section 100-c, which relates to the
power of banks to commingle funds held in a fiduciary
capacity, specifically requiring that common trust funds
be limited to moneys received and held ‘‘as executor, ad-
ministrator, guardian, personal or testamentary trustee,
donee of a power during minority to manage property
vested in an infant or committee * * *,’’

A search of the New York state case law has failed
to reveal any relevant judicial interpretation of this
statutory section. However, it has been held that state
banks are prohibited to exercise any power which was
not expressly granted, O’Connor v. Bankers Trust Co.
159 Mise. 920, 289 N.Y.S. 252 (Sup.Ct. 1936) affirmed
278 N.Y. 649. 16 N.E. 2d 302; see also Nassau Bank

79a

y. Jones, 95 N.Y. 115, 47 Am.Rep. 14, (Ct. of App. 1884).
These decisions indicate that New York state courts follow
the federal rule, applicable to national banks, as expressed
in Calif. Bank v. Kennedy, 167 U.S. 362, 17 S.Ct. 831, 42
L.Ed. 198 (1897), that the exercise of power not expressly
granted to a national bank is prohibited. This restrictive
interpretation of the powers granted under Section 100-c
is further substantiated by noting that when the New York
legislature has wanted to broaden the categories of accounts
held and administered by banks which could be invested
in a common trust fund, it has amended Section 100-¢ to
do so."

[t is the conclusion of this court that the commingling
of managing agency accounts is not authorized cither under
the federal statutes or the New York banking laws.

Even if the managing agency accounts could be considered
bona fide fiduciary activities, and, therefore, authorized
by the present statutes, the commingling of these accounts
would still be illegal under the provisions of the Glass-
Steagall Act. In order to arrive at this determination it
is necessary to make an exact characterization of the Ac-
count which was established.

As noted in the early section of this decision, a mutual
fund continuously issues its own securities as does the com-
mingled Account. A mutual fund invests the proceeds
from the sale of its securities in a diversified investment
portfolio, in the same manner as the commingled Account.

* For example, that section was amended to permit a state bank
acting as the ‘‘donee of a power during minority to manage prop-
erty vested in an infant’’ to place the property so managed in a
common trust fund, L.1958, e. 496 §1; L.1965, ¢. 824 §5. Note
also the specific accounting and notice provisions which are con-
tained in Section 100-c as strictly construed by the courts in In
re Lincoln Rochester Trust Co., 201 Mise. 1008, 111 N.Y.S.2d 45
(1952). See also New York Banking Board Regulation, 3 N.Y.
C.R.R. 11.91 which states that a common trust fund ‘‘may be
operated only for true fiduciary purposes.’’

80a

The mutual fund shares obtains for the investor an und.
vided interest in the fund’s portfolio, as does a unit of
participation in the commingled Account. Within certain
limitations, a participating member of the Account cay
redeem his units of participation in a similar manner as the
holder of mutual fund shares. A majority of the partici.
pating members elect the members of the Committee, who
oversee the affairs of the Account in much the same manner
as mutual fund stockholders elect their board of directors
or trustees. The SEC has required the Account to regis.
ter as an investment company under the Investment Com.
pany Act of 1940, 15 U.S.C. §80a-1 et seq. The SEC
pursuant to its authority under 15 U.S.C. § 80-3(¢e), has
granted certain exemptions to the requirements of the
Investment Company Act as it relates to board member.
ship ;’* nevertheless it has recognized the similarity between
the Account and an investment company."' The Bank and
the Committee have entered into a contractual agreement
under which the Bank performs managing and advising
functions for the Account. This contract is the equivalent
of the contracts which are entered into by the mutual funds
and their investment advisers. These contracts are sub-
ject to and must be submitted for review by the SEC
under the provisions of the Investment Company Act.

The exemptions which were granted are being challenged in
the Court of Appeals for the District of Columbia Circuit, Na-
tional Association of Securities Dealers, Inc. v. Security Exchange
Commission, Appeal No. 20,164, decided Novy. 21, 1967.

"The similarity between mutual funds and the Account have
been noted by many authorities in the financial community, see
Hearings on S. 2704 on Collective Investment Funds Before the
Subcommittee on Financial Institutions of the Senate Committee
on Banking and Currency, 89th Cong., 2d Sess. (1966) ; University
of Pennsylvania Law School Conference on Mutual Funds, 115
U.Pa.L.Rev. 669; and Comment, Of Banks and Mutual Funds, 20
Sw.L.J.

8la

There are some differences between a mutual fund and
a commingled Account,’* but these are not substantially
sufficient to create a legal differentiation between the two
investment vehicles. The similarities between these related
activities are a sufficient basis to draw an analogy from
which an equivalency can be premised.

The Comptroller attempts to differentiate between the
mutual fund investment vehicle and the commingled Ac-
count by attempting to establish a major difference between
a mutual fund share and a unit of participation. This
differentiation is premised on the basis that the unit of
participation is not a security as such. This is mere tau-
tology and a matter of semantics.

The United States Supreme Court has noted that for the
purposes of the Securities Act of 1933 the test for a secu-
rity is whether the scheme involves an investment of money
‘na common enterprise with profits to come solely from the
efforts of others. SEC v. W. J. Howey, Co., 328 U.S. 293,
301, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). See also S8.E.C.
y. Variable Annuity Life Ins. Co., 359 U.S. 65, 79 S.Ct.
618, 3 L.Ed.2d 640 (1959) and Prudential Insurance Co. of
America v. S.E.C., 326 F.2d 383 (8rd Cir. 1964), cert.
denied 377 U.S. 953, 84 S.Ct. 1629, 12 L.Ed.2d 497 (1964).
Under this all encompassing definition, in its most compre-
hensive sense, whenever an investor relinquishes control
over his funds and submits their control to another for the
purpose and hopeful expectation of deriving profits there-
from he is in fact investing his funds in a security. The
unit of participation in the commingled Account is in fact
a security and has been so recognized by the SEC by its
requirement that the Bank register the units of par cipa-
tion under the Securities Act of 1983.

12 See Hearings on S. 2704 (1966) supra, at pp. 55 and 56.

82a

The Comptroller argues, however, that the definition o
‘securities’? for the purpose of the Securities Act of 1933
is not applicable to define ‘‘securities’’ as the term is used
in the Glass-Steagall Act. He asserts that this definitioy
as judicially and administratively derived has no relevance
to the meaning of the various provisions of the national
banking laws. He bases this assertion on the allegedly
different purposes which the laws have, namely that the
securities laws were enacted to protect the interests of
investors while the banking laws were enacted to protect
the country’s credit and currency and the solvency of the
national banks. This differentiation fails to focus upon
the primary essence of the complete regulatory scheme
which the Congress enacted to mitigate the problems that
the country faced in the 1930s. Congress, after extensive
investigation, realized that the financial community needed
stabilization in order to overcome the debacle which arose
in 1929 and to prevent any further recurrences. It would
be inconsistent to conclude that Congress did not intend
to obtain the equivalent meaning for the term ‘‘securities”
as used in the Securities Act of 1933 when it used the
term in the Glass-Steagall Act which was enacted by the
same Congress."*

By finding that the Account is an equivalent investment
vehicle to a mutual fund and that the units of participation
are in fact securities, it is, therefore, necessary to de-
termine whether or not the Bank is barred from these ae-
tivities by the provisions of the Glass-Steagall Act, Sections

18 The Federal Reserve Board has repeatedly ruled that par-
ticipations or shares in mutual funds are securities for purposes
of the Glass-Steagall Act, and it has similarly characterized the
units of participation in the bank sponsored commingled man-
aging agency account, Federal Reserve Board Legal Memorandum,
**Legal Considerations Under Section 32 of the Banking Act of
1933 in Connection With the Proposed Commingled Investment
Account of First National City Bank of New York’’ (Dee. 15,
1965) reprinted in Hearings on S. 2704 (1966) at 581-588.

_

16, 20, 21 and 32, codified in 12 U.S.C. §§ 24, 377, 378 and
78 respectively.

83a

The first relevant section is 12 U.S.C. § 24 dealing with
the explicit powers granted to the national banks by the
Congress. For our analysis only paragraph Seventh is
pertinent. It states:

‘To exercise by its board of directors or duly au-
thorized officers or agents, subject to law, all such
incidental powers as shall be necessary to carry on the
business of banking; by discounting and negotiating
promissory notes, drafts, bills of exchange, and other
evidences of debt; by receiving deposits; by buying
and selling exchange, coin, and bullion; by loaning
money on personal security; and by obtaining, issuing,
and circulating notes according to the provisions of
this chapter. The business of dealing in securities and
stock by the association shall be limited to purchasing
and selling such securities and stock without recourse,
solely upon the order, and for the account of, cus-
tomers, and in no case for its own account, and the
association shall not underwrite any issue of securities
or stock: Provided, That the association may purchase
for its own account investment securities under such
limitations and restrictions as the Comptroller of the
Currency may by regulation prescribe. * * *”’

The power of national banks to deal in securities has
had a motley history, both legislatively and judicially. In
1823 the Supreme Court held that a prohibition against
a national bank’s trading and dealing in stocks was nothing
more than a prohibition against engaging in the ordinary
business of buying and selling stocks for a profit and it
did not include purchases resulting from ordinary banking
transactions. Fleckner v. Bank of the United States, 8
Wheat, 338, 351, 21 U.S. 338, 351, 5 L.Ed. 631 (1823).
In First National Bank of Charlotte v. Nat. Exchange Bank,

84a

92 U.S, 122, 28 L.Ed. 679 (1875), the Supreme Court state)
that ‘*Dealing in stocks is not expressly prohibited; by
such a prohibition is implied from the failure to. gray
the power.’? 92 U.S. at 128. The Court in the First Xs.
tional Bank case was interpreting, Rev.Stat. $5136, par,
7, 15; 15 Stat. 101 $8, the forerunner of 12 U.S.C, ¢4
par. 7 which delineated the powers of the national banks,

The limitation on the national bank’s power in security
dealings was reiterated in subsequent decisions of the Sy.
preme Court. Concord First National Bank v. Hawkins
174 U.S. 364, 371, 19 S.Ct. 739, 48 L.Kd. 1007 (1898).
California Nat. Bank v. Kennedy, 167 U.S. 362, 17 Sy
831, 42 L.Md. 198 (1897); MeCormick v. Market National
Bank, 165 U.S. 588, 17 S.Ct. 423, 41 L.Ed. 817 (1896); se
also Birdsell Mfg. Co. v. Anderson, 20 F.Supp. 571 (WD).
Ky. 1937) affirmed 104 F.2d 840 (6th Cir. 1939), and
Michelsen v. Penney, 135 F.2d 409, 424 (2nd Cir. 1948),

This implied limitation caused the national banks to
establish security affiliates, organized under state law, to
profit from underwriting and dealing in stocks and other
securities. In 1927 Congress passed the McFadden Ac
which added to the list of banking powers in paragrap)
Seventh of Section 5136 of the Revised Statutes the fol:
lowing proviso:

‘*Provided, that the business of buying and selling
investment securities shall hereafter be limited to
buying and selling without recourse marketable obli-
gations evidencing indebtedness of any person, ¢o-
partnership, association, or corporation, in the form
of bonds, notes and/or debentures, commonly know
as investment securities, under such further definition
of the term ‘investment securities’ as may by regula.
tion be prescribed by the Comptroller of the Currency
** *, [Act of February 25, 1927 (McFadden Act),
Section 2(b), 44 Stat. 1226]”’

85a

This proviso was intended to be a confirmation and a
regulation of the investment security business which was
being conducted by the banks through their security affili-
ates. H.R.Rep.No. 83, 69th Cong. Ist Sess. (1926). By
the provisions of this Act, the national banks were au
thorized by statute to engage in the business of underwrit-
ing and dealing in investment securities,

The storms looming on the horizon were not within
the contemplation of very many people in 1927. It was
not until 1931 when the Congress, graced with hindsight,
sought the primary causes of the debacle which enveloped
the country and had its repercussions throughout the world.
The Congressional inquiry generated various statutes in an
attempt to avoid a repetition of the debacle which had
transpired. Among these statutes were the Glass-Steagall
Act and the Securities Act of 19233.

The Glass-Steagall Act in particular redefined the
powers of the national banks and imposed severe limita-
tions on their activity in the investment security business
by amending 12 U.S.C. § 24, par. 7, and adding 12 U.S.C.
§§78, 377 and 378. Section 24, paragraph Seventh, has
been noted above. The other relevant sections are noted
below. Section 32 of the Glass-Steagall Act, now 12 U.S.C.
$78, provides:

“No officer, director, or employee of any corpora-
tion or unincorporated association, no partner or em-
ployee of any partnership, and no individual, primarily
engaged in the issue, flotation, underwriting public
sale, or distribution, at wholesale or retail, or through
syndicate participation, of stocks, bonds, or other
similar securities shall serve the same time as an
officer, director, or employee of any member bank
except in limited classes of cases in which the Board
of Governors of the Federal Reserve System may
allow such service by general regulations when in
the judgment of the said Board it would not unduly

ae —

Ee

86a

influence the investment policies of such member bank
or the advice it gives its customers regarding inves.
ments.’’

Section 20 of the Glass-Steagall Act, now 12 U.S.C. § 377,
provides:

‘After one year from June 16, 1933, no member
bank shall be affiliated in any manner described jy
subsection (b) of section 221a of this title with any
corporation, association, business trust, or other sim-
ilar organization engaged principally in the issue,
flotation, underwriting, public sale, or distribution at
wholesale or retail or through syndicate participation
of stocks, bonds, debentures, notes, or other securi-
ties: Provided, That nothing in this paragraph shall
apply to any such organization which shall have been
placed in formal liquidation and which shall transact
no business except such as may be incidental to the
liquidation of its affairs.

‘For every violation of this section the member bank
involved shall be subject to a penalty not exceeding
$1,000 per day for each day during which such vio-
lation continues. Such penalty may be assessed by
the Board of Governors of the Federal Reserve Sys-
tem, in its discretion, and, when so assessed, may be
collected by the Federal reserve bank by suit or
otherwise.

‘*If any such violation shall continue for six calen-
dar months after the member bank shall have been
warned by the Board of Governors of the Federal
Reserve System to discontinue the same, (a) in the
case of a national bank, all the rights, privileges, and
franchises granted to it under chapter 2 of this title
may be forfeited in the manner prescribed in sections
141, 222-225, 281-286 and 502 of this title, or, (b)
in the case of a State member bank, all of its rights

_—

and privileges of membership in the Federal Reserve
System may be forfeited in the manner prescribed in
sections 321-332 of this title.’’

87a

Section 21 of the Glass-Steagall Act, now 12 U.S.C. § 378,
provides :

‘‘(a) After the expiration of one year after June
16, 1933, it shall be unlawful—

‘(1) For any person, firm, corporation, association,
business trust, or other similar organization, engaged
in the business of issuing, underwriting, selling, or
distributing, at wholesale or retail, or through syndi-
cate participation, stocks, bonds, debentures, notes,
or other securities, to engage at the same time to
any extent whatever in the business of receiving de-
posits subject to check or to repayment upon presenta-
tion of a passbook, certificate of deposit, or other evi-
dence of debt, or upon request of the depositor: Pro-
vided, That the provisions of this paragraph shall
not prohibit national banks or State banks or trust com-
panies (whether or not members of the Federal Re-
serve System) or other financial institutions or private
bankers from dealing in, underwriting, purchasing,
and selling investment securities to the extent per-
mitted to national banking associations by the provi-
sions of section 24 of this title: Provided further, That
nothing in this paragraph shall be construed as affect-
ing in any way such right as any bank, banking as-
sociation, savings bank, trust company, or other bank-
ing institution, may otherwise possess to sell, without
recourse or agreement to repurchase, obligations evi-
dencing loans on real estate;

* * * * fol * * * *

‘*(b) Whoever shall willfully violate any of the
provisions of this section shall upon conviction be
fined not more than $5,000 or imprisoned not more
than five years, or both, and any officer, director,

Re . SESE HERS EE RE eNO,

88a

employee, or agent of any person, firm, corporation,
association, business trust, or other similar organiza.
tion who knowingly participates in any such violatioy
shall be punished by a lke fine or imprisonment o
both.’’

The obvious purpose of these legislative enactments was
to divorce the banking business from the security investing
business, Congress was so emphatic in promulgating this
divoree, that it included a criminal provision to assure
the efficacy and continuity of the separation; see 12 US.
§ 878(b), supra, and in some instances it imposed money
penalties and forfeitures; see 12 U.S.C. § 377, supra. The
many pages of legislative hearings reports which preceded
the final enactment of the Glass-Steagall Act contain and
outline the potential dangers which the involvement of
commercial banking in the investment security busines
created.

These potential dangers were noted by the Comptroller
of the Currency in his report of 1920, excerpts of which
were cited by the Subcommittee of the Senate conducting
the investigation:

‘*Some ‘securities companies’ operating in close con-
nection with, and often officered by, the same men
who manage the national banks with which they are
allied, have become instruments of speculation and
headquarters for promotions of all kinds of financial
schemes. Many of the flotations promoted by the
‘securities corporations’ which are operated as ad-
juncts to national banks have proven disastrous to
their subscribers, and have in some instances reflected
seriously not only upon the credit and the standing of
the ‘securities companies’ by which they are sponsored,
but also in some cases have damaged the credit and
reputation of national banks with which the ‘securities
companies’ are allied.

re

89a

“Tt has been established clearly by decisions of the
United States Supreme Court that a national bank
can not, except as authorized by the Federal reserve
act, hold the stock of other national banks or the stock
of other corporations; but these adjunct or auxiliary
companies whose stockholders are identical with the
stockholders of the national banks with which they
are connected by various ties and devices frequently
deal actively in stocks, and they also sometimes ac-
quire the ownership or control of other banks, National
and State, through their stock purchases.

“In times of rising prices and active speculation
some of these auxiliary corporations have made large
profits through their ventures and syndicate opera-
tions, but their losses in other periods have been heavy,
and they have become an element of increasing peril
to the banks with which they are associated. The busi-
ness of legitimate banking is entirely separate and
distinct from the kind of business conducted by many
of the ‘securities corporations’, and it would be diffi-
cult, if not impossible, for the same set of officers
to conduct safely, soundly, and successfully the con-
servative business of the national bank and at the
same time direct and manage the speculative ventures
and promotions of the ancillary institutions. These
varying institutions demand a different kind of ability
and experience on the part of those who manage them,
and the two types of business when combined with
one management are likely to be operated to the ad-
vantage of neither.

* * * * * * * * *

‘“‘These ancillary companies are being used with
increasing frequency for promotion of speculation and
for dealing in bonds and stocks, often those of new
and unseasoned issues, and which are attended with
improper hazard risk, and as a means of enabling

Denn. SUSE

34S ecaEess . :
RR ER EN Cy

90a

banks to do, indirectly through thetr instrumentality,
things which they can neither safely nor lawfully do
direetly.’’ [See Hearings Pursuant to S. Res. 71
Before a Subcommittee of the Senate Committee on
Banking and Currency, 71st Cong. 3d Sess. pp. 1067.
1068 (1931) |

The Senate Subcommittee Report also outlined the or-
ganization and functions of the security affiliates. Among
one of these functions was the operation of investment
trusts which bought and sold securities purely for invest-
ment or speculative purposes, Hearings, S.Res. 71, p. 1057.
These investment trusts were the equivalent of our present
day investment companies."*

Another drawback which the Subcommittee Report ree-
ognized was that ‘‘in the case of a trust company or a
bank with a trust department, the possession of a security
affiliate may adversely affect the independence with which
fiduciary activities are exercised.’’ Hearings, S.Res. 71,
p. 1064.

There can be little doubt as to what Congress intended
to do by the enactment of the Glass-Steagall provisions
outlined above. Section 16, 12 U.S.C. § 24, par. 7 pro-
hibits national banks from not only underwriting securi-
ties directly but also limits the capacity of the national
banks in the purchase and sale of securities. Awotin
v. Atlas Exchange Bank, 295 U.S. 209, 55 S.Ct. 674, 79
L.Ed. 1398 (1935); ef. United States v. Philadelphia Na-
tional Bank, 374 U.S. $21, 329, 83 S.Ct. 1715, 10 L.Ea.2d
915 (1968), First Natl Bank in St. Louis v. State of
Missouri, 263 U.S. 640, 44 S.Ct. 218, 68 L.Ed. 486 (1923),
Genessee Trustee Corp. v. Smith, 102 F.2d 125, 127 (6th
Cir. 1939), Guaranty Trust Co. v. United States, 44 F.

144 S.E.C. Report on the Public Policy Implications of Investment
Company Growth, H.R.Rep.No, 2337, 89th Cong. 2nd Sess. p. 33,
Fn. 3 (1966).

9la

Supp. 417, (H.D.Wash. 1942), affirmed 139 F.2d 69 (9th
Cir. 1943), United States v. Palmer, 28 F.Supp. 936
(S.D.N.Y. 1989). Section 20, 12 U.S.C. § 377 effectively
provides that national banks may not be affiliated with an
entity which is engaged principally in the business of pur-
chasing, selling, or underwriting securities. Section 21,
12 U.S.C. $3878 specifically provides that it is unlawful
for any entity which is engaged in the business of pur-
chasing, selling, or underwriting to also be engaged in
the banking business. Section $2, 12 U.S.C. § 78 prohibits
banks and investment organizations from having inter-
locking directorates, and common officials and employees.
Through this legislative scheme Congress intended to sep-
arate these previously integrated activities, and it made
its intent explicitly clear. Merchants National Bank of
Mobile v. Commissioner of Internal Revenue, 199 F.2d 657
(5th Cir. 1952); Commissioner of Internal Revenue v. Mer-
chants Nat. Bldg. Co., 131 F.2d 740, 741 (Sth Cir. 1942) ;
ef. Paramount Pictures v. Langer, 23 F.Supp. 890, 902
(D.N.D. 1938), reversed as moot 306 U.S. 619, 59 S.Ct.
641, 83 L.Ed. 1025 (1938), Morgan Stanley & Co. v. S.E.C.,
126 F.2d 325, 329 (2nd Cir. 1942).

The Supreme Court has stated with specifie relation to
Section 32, 12 U.S.C. §78, that “‘It [Section 32] is a
preventive or prophylactic measure. The fact that re-
spondents have been scrupulous in their relationship to
the bank is therefore immaterial,’’ Board of Governors of
Federal Reserve System v. Agnew, 329 U.S. 441, 449, 67
S.Ct. 311, 415, 91 L.Ed. 408 (1946), see also United States
v. Brown, 381 U.S. 437, 454, 85 S.Ct. 1707, 14 L.Ed.2d
484 (1965). This ‘‘prophylactic’’ aspect of Section 32 is
also inherent in Sections 20 and 21. This is effective legis-
lation against temptation, National Maritime Union of
America v. Herzog, 78 F.Supp. 146, 171 (D.C.D.C. 1948)
affirmed 334 U.S. 354 (1948), and it should not be derogated
except by the Congress.

92a

The Comptroller contends that the Account has been
passed upon and approved by the Federal Reserve Board
of Governors as far as its establishment would be contrary
to the provisions of Section 32, 12 U.S.C. § 78." In order
to support its conclusion the Board promulgated a ‘‘single
entity’’ theory, that is, that the Bank and the Account
would constitute a single entity for the purposes of See-
tion 32, since the Account would be regarded as nothing
more than an arm or department of the Bank. This
proposition seems to be based more on nuances of lan-
guage than on the factual ascertainment of the relation-
ship of the Account with the Bank. The Account is to
be governed by an independent board of directors, the
Committee, with full policy making authority. The Com-
mittee is elected by a majority of the units of participa-
tion in the Account and is responsible only to the in-
vestor-participants in the Account and not to the Bank.
The Bank serves as investment adviser to the Account
and also provides administrative services. It performs
these services pursuant to a contract which conforms to
the

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386413_0258%3A03. Public record. Not legal advice.