Petitioners Brief — Investment Company Institute v. Camp
Supreme Court brief1971
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INDEX
PAGE
Opinions Below ... npiesitiidamaceins a? <a
SEER 1
Statutes Involved ................... allah lisa 2
A. The relevant portions of the Glass-Steagall Act,
RNR aE mn a Oe ONES 2
B. The relevant portions of 12 U.S.C. § 92a .......... 5
I OU nner enneneneenneennnccennnenn 5
le STEEP eee APs ee 6
The Parties and Industries Involved ........................ 11
A. The Mutual Fund Business .........................- 11
B. The Investment Company Institute ............ 13
C. Commercial Banking .............................-........ 14
D. First National City Bank ......00.......-........ 14
The Citibank Investment Fund ...........00.....02...........--- 15
I le 16
asta eicladealcghaanssinitilinaneiiaae 19
ARGUMENT
I. The Bank Investment Fund Authorized by the
Comptroller Violates the Glass-Steagall Act ... 21
A. Citibank Through Its Open-End Investment
Fund Issues, Sells and Underwrites Securi-
ties Within the Meaning of the Glass-Steagall
Act
B. Congress Meant to Separate the Banking and
Securities Industries
1. Failure to Give Disinterested Investment
Advice
2. Securities Affiliates
3. Conflicts Between Interests of the Fund
and Those of the Bank
C. There Are No Relevant Differences Between
Citibank’s Investment Fund and Other
Mutual Funds .......
Il. A Bank Mutual Fund Is Not Immune From the
Glass-Steagall Act Simply Because It Is Oper-
ated by the Bank’s Trust Department
A. No Immunity Arises From the Mere Fact
That the Bank Has a “Fiduciary” Obligation
Towards Investors in Its Fund ......0000...........
B. 12 U.S.C. §92a Neither Authorizes Regula-
tion 9 Nor Confers Immunity From the Glass-
PIII: GI seth anthenisnpitcnntientbnaciitsnhensastonipnninn —
ConcLusION
PAGE
31
49
Towa
TABLE OF AUTHORITIES
iii
PAGE
Cases:
Agnew v. Board of Governors, 153 F.2d 785 (D.C. Cir.
1946), rev’d on other grounds, 329 U.S. 441 (1947) .. 24
Arnold Tours Ine. v. Camp, 408 F.2d 1147 (1st Cir.
1969), judgment vacated, 90 S. Ct. 1109 (Mar. 23,
1970) ; 7
Association of Data Processing Service Organizations,
Inc. v. Camp, 406 F.2d 837 (8th Cir. 1969), rev’d 397
TID 6 sin icibdaniiscnlaciniahdnsesieiainndapindngbaneniininieiiniieiniee 7
Baker, Watts & Co. v. Saxon, 261 F. Supp. 247 (D.D.C.
1966), aff’d sub nom. Port of New York Authority
v. Baker, Watts & Co., 392 F.2d 497 (D.C. Cir.
gk ; 6, 7, 31, 32
Blau v. Lehman, 368 U.S. 403 (1962) ........................-..-- 31
Board of Governors v. Agnew, 329 U.S. 441 (1947) ....22, 40
Camp v. The Wingate Corp., 408 F.2d 1147 (1st Cir.
1969), cert. denied, 90 S. Ct. 1110 (Mar. 23, 1970) ... 7
Elgin, Joliet & Eastern Ry. v. Benj. Harris & Co.,
245 F. Supp. 467 (N.D. Ill. 1965) -......2-2-.. eee eee 48
First National Bank v. Dickinson, 396 U.S. 122 (1969) 48
Georgia Ass’n of Independent Ins. Agents, Inc. v.
Saxon, 268 F. Supp. 236 (N.D. Ga. 1967), aff’d, 399
F.2d 1010 (5th Cir. 1968) ................. = mG
Matson Navigation Co. v. United States, 284 U.S. 352
Se SRR CPE AR Wee 31
National Ass’n of Securities Dealers v. SEC, U.S. Sup.
Ct. No. 835, October Term, 1969 00.2... eects 10
NLRB v. Brown, 380 U.S. 278 (1965) 0.0.0.2... 48
NLRB vy. Insurance Agents’ International Union,
, , M, GEE CRIED sicnshccnnaserenasenserstnnindnnnane 48
iv
PAGE
Osaka Shosen Kaisha Line v. United States, 300 U.S.
Bet Sree RENCE REE Ia ct hoa Sire ae ac OO 31
Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672
(1954) - 48
Silver v. New York Stock Exchange, 373 U.S. 341
RTT nsesiciacaieedtealeabiieaceniabiabceinilaliabieeemrteaiianianiidsineantvesdii 51
Social Security Board v. Nierotko, 327 U.S. 358 (1946) 48
Toolson v. New York Yankees, 346 U.S. 356 (1953) ... 31
United States v. Philadelphia National Bank, 374 U.S.
321 (1963) 14,51
The Wingate Corp. v. Industrial National Bank, 408
F.2d 1147 (1st Cir. 1969), cert. denied, 90 S. Ct. 1110
(Mar. 23, 1970)
~
Statutes:
12 U.S.C. $21 et seg. 14
12 U.S.C. $24 3, 6, 14, 18, 19, 22, 23, 27,
28, 29, 30, 31, 40, 49
12 U.S.C. $78 4, 9, 18, 19, 22, 23, 29,
30, 31, 33, 40, 45, 49
12 U.S.C. §92a 5, 6, 17, 21, 49, 50,
51, 52, 53, 55
12 U.S.C. §215a 51
12 U.S.C. §222 14
12 U.S.C. $335 23, 24
12 U.S.C. $377 4, 18, 19, 22, 23, 25,
29, 30, 31, 40, 49
12 U.S.C. §378 .. o 2, 9, 18, 19, 22, 23, 24,
25, 26, 30, 31, 40, 49
12 U.S.C. §1815 14
15 U.S.C. §77(a) et seq. 9, 13, 22, 25
15 U.S.C. §80a-1 et seq. .......0........-... 8, 9, 13, 18, 20, 22, 42, 44
PAGE
15 U.S.C. §80a-3(c) (3) 52
15 U.S.C. §80a-8(b)(1) - 44
15 U.S.C. §80a-8(b) (2) .... 44
15 U.S.C. §80a-13(a) (3) 44
15 U.S.C. §80a-17 45
15 U.S.C. §80a-21 45
15 U.S.C. §80a-30 45
15 U.S.C. $§80a-31 to -37 45
8 U.S.C. §1254(1) 1
% U.S.C. §1331 1
Federal Reserve Act of 1913
Section 11(k), 38 Stat. 262 (1915), as amended by
40 Stat. 968 (1918) and 48 Stat. 2 (1933),
formerly 12 U.S.C. §248(d) (1958) ~....20..... 6
Internal Revenue Code of 1954
Section 584 7, 8, 52
Section 851 8
Section 852 8
P.L. 87-722, 76 Stat. 668 (1962), 12 U.S.C. §92a .......... 6
Regulations :
12 C.F.R. §9 (1964) W000... 6, 11, 17, 41, 44, 45, 48, 51, 56
12 C.F.R. §9.1(g) 45
12 C.F.R. §9.11(d) 43, 44
12 C.F.R. §$9.12(f) (1963) 37, 45
12 C.F.R. §9.18(a) (3) 45
12 C.F.R. §9.18(b) 44, 45
12 C.F.R. $9.18(ce) (5) a4
12 C.F.R. §218.101 (1951) 26, 27, 30, 32
26, 32
12 C.F.R. §218.102 (1960)
vi
12 C.F.R. §218.104 (1961) a)
12 CAFR. §218.104(b) (1961) ssssssssoosccscccccesssessssessssesene 32
12 C.F.R. §218.104(e) (1961) 1
Be SIE orci, 39
Se ee ee 30, 32
12 C.FLR. §218.107(€) (1963) csssscssssocssscssesessssessseseren 26, 32
CO BEES CII intent 9, 10, 45
17 CARR G27O220-1 (1968) anacseccnnsccccscsccooosevennnecesseserse 12, 15
Other Authorities:
SN UI IID | ssicccesespieeenqersesnsnsacevensannesinns 22, 33, 36
oe | Si 5 eno 34, 37, 40
Fe PT CRIED atesc in tdeckd cn veccavintinecentssnoniaitciniecninn 36
115 Cong. Rec. (Daily ed., Nov. 5, 1969) ............-...-000- 27, 30
28 Fed. Reg. 3309 (1963) 6
29 Fed. Reg. 1719 (1964) ....................-0+- 6,7
33 Fed. Reg. 9649 (1968) ...... i 6
19 Fed. Res. Bull. 188 (1933) .................. 51
24 Fed. Res. Bull. 4 (1938) a a 53
26 Fed. Res. Bull. 393 (1940) 53
27 Fed. Res. Bull. 399 (1941) ; 26, 30
41 Fed. Res. Bull. 142 (1955) . hes 53
eS a mee 6, 53
Fed. Res. Bull., Mar. 1970 ....... sas 14
H. Rep. No. 2639, 76th Cong., 3d Sess. (1940) ................ 52
H. Rep. No. 91-387, 91st Cong., Ist Sess. (1969) ............ 27
H.R. 6 78 ist eS | een 30
H.R. > Slet Cong., 2d Sess. (1970) ............cccccecscsese 30
S. Rep. No. 77, 73d Cong., Ist Sess. (1933) .................... 36
S. Rep. No. 1455, 73d Cong., 2d Sess. (1934) .......... 33, 36, 50
S. Rep. No. 1775, 76th Cong., 3d Sess. (1940) ................ 52
S. Rep. No. 1351, 90th Cong., 2d Sess. (1968) ................ 48
S. Rep. No. 91-184, 91st Cong., Ist Sess. (1969) ............ 27
vii
PAGE
§, 2224, 91st Cong., 1st Sess. (1969) 30
1933 Comptroller of the Currency Ann. Rep. 1 ............ 21, 28
1967 Comptroller of the Currency Ann. Rep. 16 ....15, 41
Bulletin of the Comptroller of the Currency, Oct. 27,
ES A vee eens Tee 28
Digest of Opinions of Comptroller of Currency, Par.
220 (April 1, 1960), 4 CCH Fep. Banxine Law
SEL Jutcusichapenritinenientonscnletjeninininasisarenentsinapeiatsiiechiviinnenmiens 29
1934 Federal Reserve Aas. Rep. . 33
Fiske, How Banks Pass Out Commissions, Tue InstI-
TUTIONAL Investor, Dec. 1969, at 30 43
Galbraith, 1929 and 1969—Financial Genius Is A Short
Memory and a Rising Market, Harpers, Nov. 1969 .... 36
Hearings on S. Res. 71 Before a Subcomm. of the Sen-
ate Comm. on Banking and Currency, 71st Cong., 3d
Sess. (1931) eS 36
Hearings on S. 3580 Before a Subcomm. of the Senate
Comm. on Banking and Currency, 76th Cong., 3d
Sess. (1940) 52
Hearing or Common Trust Funds Before a Subcomm.
of the House Comm. on Government Operations, 88th
Cong., Ist Sess. 58 (1963) 8, 10, 29, 34, 38,
41, 42, 48, 52, 54
Hearings on H.R. 8499 and H.R. 9410 Before the Sub-
comm. on Commerce and Finance of the House
Comm. on Interstate and Foreign Commerce, 88th
Cong., 2d Sess. (1964) .... - 8, 31, 54
Hearings on S. 2704 Before a Subcomm. of the Sen-
ate Comm. on Banking and Currency, 89th Cong., 2d
ID: this steaiijenntiesiiinintaiiniion 8, 9, 11, 25, 27, 29, 31,
42, 46, 47, 48, 53
Hearings on Amendment No. 438 to S. 1659, Before the
Senate Comm. on Banking and Currency, 90th Cong.,
II MII © ciccsnnbaathinievesihenstibisiieneilcstteibiiplan 31
viii
PAGE
Hearings on Bank and Insurance Company Collective
Investment Funds and Accounts, Investment Com-
pany Act Amendments of 1967, H.R. 14742, Before
the Subcomm. on Commerce and Finance of the
House Comm. on Interstate and Foreign Commerce,
ee ee 31
Hearings on H.R. 14742 Before the Subcomm. on Com-
merce and Finance of the House Comm. on Inter-
state and Foreign Commerce, 90th Cong., 2d Sess.
LG Rie hy Bee EINER A Deed Ot NO A 48
Lovell, Trust New Business, Development by Com-
mercial Officers, 104 Trusts & Estates 1164 (1965) .. 42
Paton’s Bank Dicest (American Bankers Ass’n ed.
eee ERAN CEN CE Oe SET 28, 29
F, Pecora, Watt St. Unver Oatu (1939, reprinted
Ra aha de cttiatiinioncnsennenn 22
Poik’s Wortp Bank Directory (150th ed. 1969) ........ 14
Report of the SEC on the Public Policy Implications
of Investment Company Growth, Hovsz Comm. on
INTERSTATE AND Foreign Commerce, H.R. Rep. No.
2337, 89th Cong., 2d Sess. (1966) ‘. 13
Rev. Rul. 64-59, 1964-1 (Pt. 1) Cum. Buy. 193 WW... 8
Scorr, Law or Trusts (3d ed. 1967) 43
SEC Investment Company Act Release No. 2621 (Oct.
31, 1957) 42
SEC Investment Company Act Release No. 4538
RON Wy OED teins resiaialattsadcdscionat me 9
SEC Investment Company Act, Rule 22¢-1, 17 C.F.R.
§270.22c-1 (1968) 12, 15
StarF or Suscomm. on Domestic Finance, Hovse
Comm. ON BANKING AND CuRRENCY, COMMERCIAL
Banks anD Tuer Trust Activities, 90th Cong., 2d
Sess. (1968) 39
Wall Street Journal, Feb. 26, 1964 000000000000... 8
17 Washington Financial Report (1970) 30
IN THE
Supreme Court of the United States
Octoser TreRM, 1969
No. 843
INVESTMENT Company Institutes, et al.,
Petitioners,
v.
Wiiu1am B. Camp, Comptroller of the Currency;
First Nationau Crtry Banx,
Respondents.
ON WRIT OF CERTIORARI TO THE UNITED STATES COURT
OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT
BRIEF FOR PETITIONERS
OPINIONS BELOW
The opinion of the District Court (A. 206) is reported
at 274 F. Supp. 624. The opinion of the Court of Appeals
(A. 263) is reported at 420 F.2d 83.
JURISDICTION
The judgment of the Court of Appeals was entered on
June 21, 1969 (A. 261). A timely petition for rehearing
was denied on August 15, 1969 (A. 311). This Court
granted a petition for writ of certiorari on March 23, 1970.
Id.; 90 8. Ct. 1114.
The jurisdiction of this Court is conferred by 28 U.S.C.
§1254(1). The jurisdiction of the District Court was
based on 28 U.S.C. § 1331.
STATUTES INVOLVED
A. The relevant portions of the Glass-Steagall Act,
as amended, are as follows:
1. Section 21, 12 U.S.C. § 378
“(a) After the expiration of one year after June
16, 1933, it shall be unlawful—
(1) For any person, firm, corporation, associa.
tion, business trust, or other similar organization,
engaged in the business of issuing, underwriting,
selling, or distributing, at wholesale or retail, or
through syndicate participation, stocks, bonds, de.
bentures, notes, or other securities, to engage at the
same time to any extent whatever in the business
of receiving deposits subject to check or to repay.
ment upon presentation of a passbook, certificate
of deposit, or other evidence of debt, or upon re.
quest of the depositor: Provided, That the provi-
sions of this paragraph shall not prohibit national
banks or State banks or trust companies (whether
or not members of the Federal Reserve System) or
other financial institutions or private bankers from
dealing in, underwriting, purchasing, and selling in-
vestment securities or issuing securities to the ex.
tent permitted to national banking associations by the
provisions of section 24 of this title: Provided fur-
ther, That nothing in this paragraph shall be con-
strued as affecting in any way such right as any
bank, banking association, savings bank, trust com-
pany, or other banking institution, may otherwise
possess to sell, without recourse or agreement to
repurchase, obligations evidencing loans on real
estate ....
“(b) Whoever shall willfully violate any of the pro-
visions 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, employee,
seasenntinnceuasaliasisicsdiaaaae
—
3
or agent of any person, firm, corporation, association,
business trust, or other similar organization who
knowingly participates in any such violation shall be
punished by a like fine or imprisonment or both.”
2. Section 16, 12 U.S.C. § 24
“fA national bank] shall have power—
“Seventh. To exercise by its board of directors or
duly authorized officers or agents, subject to law, all
such incidental powers as shall be necessary to carry
on the business of banking; by discounting and ne-
gotiating 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 obtain-
ing, issuing, and circulating notes according to the pro-
visions 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, customers, and in no case for its own ac-
count, and the association shall not underwrite any
issue of securities or stock: Provided, That the asso-
ciation may purchase for its own account investment
securities under such limitations and restrictions as
the Comptroller of the Currency may by regulation
prescribe. ...
As used in this section the term “investment securi-
ties” shall mean marketable obligations, evidencing
indebtedness of any person, copartnership, association,
or corporation in the form of bonds, notes and/or de-
bentures commonly known as investment securities
under such further definition of the term “investment
securities” as may by regulation be prescribed by the
Comptroller of the Currency. Except as hereinafter
provided or otherwise permitted by law, nothing
herein contained shall authorize the purchase by the
4
association for its own account of any shares of stock
of any corporation. The limitations and restrictions
herein contained as to dealing in, underwriting and
purchasing for its own account, investment securities
shall not apply to obligations of the United States, or
general obligations of any State or of any political
subdivision thereof... .”
3. Section 20, 12 U.S.C. § 377
“After one year from June 16, 1933, no member bank
shall be affiliated in any manner described in subsec-
tion (b) of section 221la of this title with any corpora.
tion, association, business trust, or other similar or.
ganization 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 securities ... .
“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 viola-
tion continues. Such penalty may be assessed by the
Board of Governors of the Federal Reserve System,
in its discretion, and, when so assessed, may be col-
lected by the Federal reserve bank by suit or other-
wise.”
4. Section 32, 12 U.S.C. $78
“No officer, director, or employee of any corporation
or unincorporated association, no partner or employee
of any partnership, and no individual, primarily en-
gaged in the issue, flotation, underwriting, public sale,
or distribution, at wholesale or retail, or through syn-
dicate participation, of stocks, bonds, or other similar
securities, shall serve the same time as an officer, diree-
tor, 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
5
Board it would not wduly influence the investment
policies of such membe: bank or the advice it gives its
customers regarding investments.”
B. The relevant portions of 12 U.S.C. § 92a are as
follows:
“(a) The Comptrolla of the Currency shall be au-
thorized and empowerel to grant by special permit to
national banks applying therefor, when not in contra-
vention of State or loca 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 corpo-
rations which come into competition with national
banks are permitted toact under the laws of the State
in which the national bank is located.
“(j) .. . The Comptrdler of the Currency is author-
ized 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.”
QUESTION PRESENTED
Whether the Comptroller of the Currency may, under
12 US.C. § 92a, authorize national banks to operate open-
end investment funds identical to mutual funds, notwith-
standing those provisions of the Glass-Steagall Act which
prohibit banks from engaging in the securities business?
STATEMENT
In April 1963, the Comptroller of the Currency’ pur-
ported to authorize national banks to operate investment
funds “similar in most respects to an open-end mutual
fund” (A. 265). Banks have not engaged in the securities
business since 1934,? when the prohibitions of the depres-
sion-engendered Glass-Steagall Act went into effect.
The Comptroller’s claim of authority was based on a Sep-
tember 1962 statute which transferred supervision over
national bank trust powers from the Board of Governors
of the Federal Reserve System* (“Federal Reserve”) to
the Comptroller. The Federal Reserve had exercised that
authority since 1913.* It had at no time permitted the use
of common trust funds as a device to attract “individuals
primarily seeking investment management of their funds.”
42 Fep. Res. Buu. 228 (1956). Seven months after the
transfer, the Comptroller promulgated Regulation 9° which
2The Comptroller was then James J. Saxon; his successor is
Respondent William B. Camp.
2The exceptions relate to underwriting certain government
bonds, including obligations of the United States, general obliga-
tions of states and political subdivisions, and certain other public
agency obligations. These exceptions are set forth in 12 U.S.C. § 24
Seventh. The Comptroller’s attempt, in September 1963, to extend
national banks’ authority to deal in revenue bonds not backed by
the taxing power was held to violate the Glass-Steagall Act in
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.,
392 F.2d 497 (D.C. Cir. 1968).
’ PL. 87-722, 76 Stat. 668 (1962), 12 U.S.C. § 92a.
*Section 11(k) of the Federal Reserve Act of 1913, 38 Stat.
262 (1915), as amended by 40 Stat. 968 (1918) and 48 Stat. 2
(1933), formerly 12 U.S.C. § 248(d) (1958).
512 C.F.R. §9, 28 Fed. Reg. 3309 (1963), as amended, 29 Fed.
Reg. 1719 (1964), 33 Fed. Reg. 9649 (1968).
7
set forth conditions under which national banks might
operate open-end investment funds.‘ The original Regu-
lation did not require, however, that the moneys to be de-
posited in these funds were to be received by banks in trust.
The Internal Revenue Service did not respond favorably
to the Comptroller’s request for a ruling that bank open-end
investment funds would be entitled to the income tax exemp-
tion afforded common trust funds by Internal Revenue Code
of 1954 Section 584° until the Comptroller amended his
Regulation® to require that sums placed in such investment
*Comptroller Saxon also encouraged national banks to spread
into other nonbanking activities, a number of which have since
been declared unlawful. See Baker, Watts & Co. v. Saxon, note
2 supra; Georgia Ass’n of Independent Ins. Agents, Inc. Vv.
Sazon, 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 ease nor filed a petition for
certiorari in the latter. Several other cases challenging the Comp-
troller’s regulations are still in litigation. Association of Data
Processing Service Organizations, Inc. v. Camp, 406 F.2d 837
(8th Cir. 1969), rev’d (on the issue of standing), 397 U.S. 150
(1970) ; Arnold Tours Inc. v. Camp, 408 F.2d 1147 (1st Cir. 1969),
judgment vacated and remanded for reconsideration in light of the
Court’s decision in the Association of Data Processing Service
Organizations case, 397 U.S. 150 (1970); petitions for certi-
orari from decisions upholding standing to sue in The Wingate
Corp. v. Industrial National Bank, 408 F.2d 1147 (1st Cir. 1969)
and Camp v. The Wingate Corp., id., were denied, 90 S. Ct. 1110
(Mar. 23, 1970).
"Section 584 exempts those common trust funds maintained by
a bank:
“(1) exclusively for the collective investment and rein-
vestment of moneys contributed thereto by the bank in its
capacity as a trustee, executor, administrator, or guardian;
and
“(2) in conformity with the rules and regulations, pre-
vailing from time to time, of the Board of Governors of the
Federal Reserve System or the Comptroller of the Currency
pertaining to the collective investment of trust funds by
national banks.”
*29 Fed. Reg. 1719 (1964).
8
funds must be received in trust. Rev. Rul. 64-59, 19641
(Pt. 1) Cum. Butt. 193.°
On May 10, 1965, the Comptroller granted respondent
First National City Bank of New York (“Citibank”) the
first administrative approval of such a bank-sponsored in.
vestment fund, although Citibank’s investment fund dif.
fered in many ways from the Comptroller’s Regulation.”
The Comptroller has announced that he will approve all
other national bank funds in the form of Citibank’s fund
(A. 94).
One difference between Citibank’s fund and the Comp.
troller’s Regulation was that Citibank chose not to receive
its customers’ money in trust." Its fund was therefore
ineligible for the tax exemption provided common trust
funds by Internal Revenue Code of 1954 Section 584 under
the aforementioned ruling. Citibank secured a tax-exempt
status for the fund, however, by registering it with the
Securities and Exchange Commission as an open-end
investment company under the Investment Company Act
of 1940, 15 U.S.C. §80a-1 et seq.,’? thereby making the
fund eligible for the special tax treatment accorded to regu-
lated investment companies by Sections 851 and 852 of the
Internal Revenue Code. Citibank effected such registra-
tion on April 20, 1966, designating the bank as principal
® Hearings on H.R. 8499 and H.R. 9410 Before the Subcomm. on
Commerce and Finance of the House Comm. on Interstate and
Foreign Commerce, 88th Cong., 2d Sess. 49 (1964), hereinafter
referred to as “1964 Hearings”; Hearing on Common Trust Funds
Before a Subcomm. of the House Comm. on Government Operations,
88th Cong., lst Sess. 58-59 (1963), hereinafter referred to as “1963
Hearing.”
1 See note 51 infra.
" Hearings on 8. 2704 Before a Subcomm. of the Senate Comm.
on Banking and Currency, 89th Cong., 2d Sess. 582 (1966), herein-
after referred to as “1966 Hearings.” See also Wall St. J., Feb.
26, 1964, at 1, col. 5.
* Hereinafter referred to as the “Investment Company Act.”
9
underwriter and also as investment advisor. Citibank also
filed a registration statement with the Commission, pursu-
ant to the Securities Act of 1933, 15 U.S.C. §§77(a) et
seq.,* registering the fund’s “units of participation” (A.
148) as securities to be issued by the fund (A. 208).
The bank also sought from the Commission certain ex-
emptions from provisions of the Investment Company Act.
The Commission approved these exemptions, expressing
no opinion concerning the effect of the Glass-Steagall Act.”
The Commission’s approval was premised on its view that
the fund was an entity separate and distinct from Citibank
itself.* The Federal Reserve, on the other hand, found
that the fund was not an entity separate and distinct from
the bank, and on that basis held that there was no
violation of Section 32 of the Glass-Steagall Act (see p.
29 infra) because there could be no interlocking relation-
ship between the bank and a separate entity engaged in
the securities business. 12 C.F.R. ¢ 218.111 (1965). In that
same proceeding, the Federal Reserve indicated its view
that the fund’s “units of participation” are securities
within the meaning of the Glass-Steagall Act.’* That find-
ing necessarily raised issues of the fund’s lawfulness under
Section 21 of the Act. As the Federal Reserve pointed
out:
Ss Hereinafter referred to as the “Securities Act.”
“SEC Investment Co. Act Release No. 4538 (Mar. 9, 1966),
reproduced in 1966 Hearings, supra note 11, at 81. The Commis-
sion’s approval was challenged by the National Association of
Securities Dealers. That case was consolidated with this one in
the Court of Appeals and is here on certiorari (No. 835) from
the Court’s affirmance of the Commission’s decision.
* Chairman (then Commissioner) Hamer H. Budge, dissenting,
asserted that “the ‘single entity’ interpretation is a realistic ap-
_ of the true nature of the Bank’s proposed operation.” Id.
at 9.
** Td. at 583.
10
“In conclusion, the Board called attention to section
21 of the Banking Act of 1933 which, briefly, forbids
a securities firm or organization to engage in the busi-
ness of receiving deposits, subject to certain excep.
tions. However, since section 21 is a criminal statute,
the Board has followed the policy of not expressing
views as to its meaning. (1934 Federal Reserve Bul-
letin 41,543) The Board, therefore, expressed no posi-
tion with respect to whether the section might be held
applicable to the establishment and operation of the
proposed ‘Commingled Investment Account’.” 12
C.F.R. § 218.111 (1965).
The Comptroller disputed the Federal Reserve’s view
that the fund’s units of participation are securities under
the Glass-Steagall Act, but sided with the Federal Re-
serve rather than with the Securities and Exchange Com-
mission in viewing the fund and the bank as a single
entity.”
The regulatory agencies involved are thus in disarray
over features of the fund upon which its lawfulness under
the Glass-Steagall Act depends.
Several other major banks planning to sponsor invest-
ment funds have applied to the Securities and Exchange
Commission for similar exemptions from provisions of the
Investment Company Act. See note 53 infra.** As of this
date, however, Citibank has the only such bank investment
fund in operation.
17 See testimony of former Comptroller Saxon. 1963 Hearing,
supra note 9, at 37, 54.
**The Commission has advised this Court that there “is no
assurance that the Commission would reach the same judgment
[as in the Citibank case] if a similar matter is again presented.”
Memorandum for the Securities and Exchange Commission, Na-
tional Ass’n of Securities Dealers v. SEC, U.S. Sup. Ct. No. 835,
October Term, 1969, p. 4.
11
In April 1966, Petitioners (who are described at p. 13
infra) brought this suit against the Comptroller, charging
that Regulation 9, as implemented by approval of Citi-
pank’s fund, permitted bank activity which violates the
Glass-Steagall Act. On cross motions for summary judg-
ment, the District Court (McGarraghy, J.) declared that
Regulation 9, as implemented, was unlawful (A. 256-57).
The Comptroller was enjoined from authorizing additional
national banks to operate such funds (A. 257), but the order
requiring dissolution of Citibank’s fund was stayed pend-
ing appeals filed by the Comptroller and by Citibank (A.
257) which had by then intervened (A. 258). The Court
of Appeals (Bazelon, C.J., Miller and Burger, JJ.) re-
versed. On November 18, 1969, the judgment of the Court
of Appeals was stayed by Mr. Justice Black pending reso-
lution of these issues on certiorari.’®
The Parties and Industries Involved
A. The Mutual Fund Business
Mutual funds came into existence in the 1920’s*° and
have operated completely apart from the banking industry
since passage of the Glass-Steagall Act. See p. 29 infra.
1 Citibank’s November 24, 1969 Prospectus for the Fund (At-
tachment B, p. 12, to Form N-IR filed with SEC December 29,
1969) states:
“A final decision adverse to either agency might require
the termination of the Commingled Account and the dis-
tribution of its net assets to the Participants or the resigna-
tion of the members of the Committee who are affiliated with
the Bank and the termination by the Bank of the management
agreement. The Bank is of the opinion, however, that the
nature of the Commingled Account’s portfolio is such that
the securities could readily be sold to facilitate a cash dis-
tribution without materially affecting the then net asset value
per unit.”
*© 1966 Hearings, supra note 11, at 65. See also id. at 97-98.
12
A mutual fund issues and sells securities which represent
undivided interests in its investment portfolio. The pro.
ceeds are invested in accordance with each fund’s stated
investment policy (A. 209). Each fund is continuously
changing the make-up of its portfolio and is thus continu.
ously buying and selling securities in the market.
Mutual funds take both corporate and non-corporate
forms. Securities of the latter are designated as “bene-
ficial interests,” “participating agreements,” and the like
(A. 209).
There is no significant trading market for mutual fund
shares (A. 209). Rather, an investor desiring to dispose
of his shares may at any time require the fund to re.
deem his proportionate share of the fund’s current net
asset value. This “open-end” feature distinguishes mutual
funds (referred to as open-end investment companies)
from the closed-end investment company, in which no right
of redemption exists. A mutual fund continuously issues
its securities for sale to generate the cash needed to meet
these redemption obligations; otherwise, portions of the
fund’s portfolio might have to be liquidated. See pp. 25-26
infra.
To facilitate this redemption process and to establish
a price at which new sales are offered, the value of a share
in a mutual fund is calculated at least once a day on the
basis of the market value of the securities held by the fund
(A. 209). See also SEC Investment Company Act Rule
22c-1, 17 C.F.R. § 270.22¢c-1 (1968).
The Board of Directors of a mutual fund, elected
annually by the fund’s investors, governs the fund’s
activities. Mutual funds enter into contracts with invest-
ment advisors who furnish supervisory and administrative
13
services as well as advice concerning investment port-
folios. The advisor’s compensation is usually an annual
fee based upon the total value of the assets being managed
(A. 210). The traditional fee has been one-half of 1
percent, or less in the case of many funds.” Mutual funds
also contract with a principal underwriter for the dis-
tribution of the fund’s securities (A. 210). Those mutual
funds which do not charge a sales commission (or sales
“load”) as part of the price for their securities are known
as “no-load” funds (A. 210).
Mutual funds are regulated by the Securities and Ex-
change Commission under the Investment Company Act.”
Under the provisions of that Act, a mutual fund is
registered as open-end investment company (A. 210-11).
In addition, the shares issued by the fund representing the
investors’ units of participation in the fund, are registered
as securities with the Commission pursuant to the Securi-
ties Act. These securities are offered to the investing
public by means of a prospectus, which is also filed with
and subject to regulation by the Commission (A. 211).
B. The Investment Company Institute
Petitioner Investment Company Institute” is an associa-
tion which at the time of the proceedings below repre-
sented 177 mutual funds, their 88 investment advisors and
*1 Report of the SEC on the Public Policy Implications of In-
vestment Company Growth, Hous—E Comm. oN INTERSTATE AND
Foreign Commerce, H.R. Rep. No. 2337, 89th Cong., 2d Sess. 89
(1966).
*2 Td. at 59-71 summarizes the basic regulatory pattern.
*8 Individual Petitioners, also members of the Institute, include
Investors Diversified Services, Inc.; Investors Management Com-
pany, Inc.; Hugh W. Long & Company, Inc.; Wellington Man-
agement Company; and Wellington Company, Inc. (A. 7-9).
14
78 principal underwriters (A. 206). These members, which
included both “load” and “no-load” funds, represent about
94 percent of all such companies in the United States and
had approximately 3.5 million shareholders and assets of
more than $36 billion (A. 206).
C. Commercial Banking
Commercial banks conduct the “business of banking”
described in Section 16 of the Glass-Steagall Act, 12 U.S.C.
§ 24 Seventh—“by discounting and negotiating promissory
notes, drafts, bills of exchange, and other evidences of
debt; by receiving deposits; by buying and selling ex-
change, coin, and bullion; by loaning money on personal
security; and by obtaining, issuing and circulating notes
according to the provisions of this chapter ....” See
United States v. Philadelphia National Bank, 374 U.S. 321,
326-30 (1963).
As of June 30, 1969, there were 13,464 commercial banks,
of which 4,700 were national hanks under the supervision
of the Comptroller (12 U.S.C. §21 et seq.); 1,236 were
state member banks of the Federal Reserve System
(national banks are also required to be members under 12
U.S.C. § 222); and 7,528 were state nonmember banks with
deposits insured by, and therefore subject to supervision
of, the Federal Deposit Insurance Corporation under 12
U.S.C. § 1815. Frep. Res. Buui., Mar. 1970, at A. 21.
D. First National City Bank |
As of June 1969, respondent Citibank was the nation’s
third largest commercial bank (after Bank of America and
Chase-Manhattan). It had as of that date total assets of
$21.2 billion and deposits of $17.4 billion. PoiK’s Wort
Bank Directory vi (150th ed. 1969). In 1967, Citibank had
15
168 branches in metropolitan New York and 241 overseas
offices.**
The Citibank Investment Fund
The purpose and structure of Citibank’s open-end invest-
ment fund are the same as those of mutual funds. Citibank
uses the pooled funds tendered to it by its investors to
invest in securities in accordance with the fund’s stated
investment policy (A. 212). Any individual may become
a participant in Citibank’s fund by tendering $10,000 or
more to the bank under a short form which accompanies
sales literature sent to bank customers (A. 158). The form
designates the bank as managing agent. The promotional
literature is accompanied by a copy of the prospectus for
the fund (A. 170) in which Citibank describes the “oppor-
tunity for long-term growth of principal and of income”
by investing in the bank’s fund.
A “unit of participation” is issued to the investor which
represents his share of the fund’s assets. An investor may
at any time require the bank to redeem his units of
participation for the proportionate share of the fund’s
net asset value which those units represent.”
To facilitate the redemption process, the value of the
fund’s portfolio is determined not less frequently than
once a week and daily valuations are made, if necessary,
to cover redemptions (A. 149, 150). Cf. SEC Investment
Company Act Rule 22c-1, 17 C.F.R. § 270.22e-1 (1968).
* Citibank’s 1967 Annual Report, pp. 16, 19, filed with the
Comptroller ef Currency.
** During the fiscal year ended August 31, 1969, Citibank re-
deemed over 168,000 units for $2.1 million. Annual Report of
Management Investment Company of the Commingled Investment
Account of First National City Bank for fiseal year ended August
31, 1969 (Form N-IR, at 3, filed with the SEC December 29, 1969).
16
Operation of the fund 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” (A,
214). Pursuant to an annual investment advisory contract
with the Committee, the bank provides investment services,
for which it is paid a fee of one-half of 1 percent of the
portfolio’s net asset value. Jd.
The bank acts as underwriter of the units of participa.
tion pursuant to a contract executed between the fund and
the bank. Jd. Sales of the units are handled by employees
and officers of the bank; they are made without commission
on sales, as in the case of a “no load” mutual fund.
The June 1966 prospectus for the bank’s investment fund
stated that the fund’s investment policy “is to invest in
securities which offer the opportunity for long-term growth
of capital and of income . . . principally in common stocks
and in securities convertible into common stocks . . .” (A.
147). The bank’s six-month report to participants in the
fund dated April 1967 stated that “we have invested your
funds in as major industries with emphasis in the office
equipment, electrical and electronics, drug and cosmetic,
and airline groups” (A. 180). The bank compares the
performance of its fund with the Dow-Jones Industrial
Average, a method of dramatizing investment results fre-
quently used by mutual funds (A. 180).
The Decision Below
In reversing the District Court’s holding that the Citi-
bank fund was in all substantial respects a mutual fund
which a bank could not lawfully operate, the Court of
Appeals issued three opinions: a per curiam opinion; an
opinion of Chief Justice (then Judge) Burger, in which
—
Judge Miller concurred; and an opinion by Chief Judge
Bazelon.
The only reference to the merits of this case in the per
curiam opinion was a conclusion that the action taken by
the Comptroller was “fully consonant” with the statute
committed to his regulatory jurisdiction (A. 266). The
court also stated that the “opinion of Judge Burger, in
which Judge Miller concurs, and the opinion of Chief Judge
Bazelon . . . set forth the reasons for our action...” (A.
266).
The opinion of the two-judge majority was devoted
principally to the standing issue. It dealt briefly with
the merits, treating the case as a matter of judicial review
of agency expertise in defining the scope of statutory au-
thority granted the agency and the banks by Congress
(A. 309-10).
The opinion of Chief Judge Bazelon also concluded that
the Comptroller’s approval of Citibank’s fund under Regu-
lation 9 was lawful. Judge Bazelon found that Citibank’s
fund “is the functional equivalent of an open-end mutual
fund” (A. 269), but noted certain differences. See p. 41
infra.
Judge Bazelon dealt first with the issue Wee whether
12 U.S.C. § 92a authorized “the commingling of managing
agency accounts” since that “represents a departure from
past banking practice of limiting commingling to funds
held by the bank in the traditional trust capacities and as
trustee of a pension or profit-sharing trust.” He noted
that the Comptroller’s Regulation “permits banks to serve
multiple principals under a standard agreement vesting
the bank with broad discretion to invest their money, sub-
ject to the duties and liabilities of a managing agent, and
17
18
not a trustee” and that this is “a new and free-wheeling
form of fiduciary activity” (A. 271-72). He nonetheless
found that the Regulation was consistent with Section 92
because “the Comptroller’s Regulations, together with the
protection of the customer qua investor afforded by the
securities acts, will reasonably assure the proper exercise
of this broad fiduciary power” (A. 272).
Turning next to the question of whether the fund av-
thorized by the Comptroller violated the provisions of the
Glass-Steagall Act, Judge Bazelon determined that the
definitions of “security” and “underwriter” in that Act
must be limited to situations in which banks risked their
assets in speculative securities and “entered the business
of investment banking by underwriting original issues”
(A. 274). He therefore found that Sections 16, 20, 21
and 32 of the Act were inapplicable to Citibank’s fund.
In summarizing his conclusions Judge Bazelon stated
that:
“The essential element in this judgment on the ap-
plicability of the Glass-Steagall Act is the fact that
the securities in the Account are bought and sold for
the account of customers” (A. 278).
Accordingly, he found that the Glass-Steagall Act was
powerless to cope with the fact that
“ .. an increase in [the banks’] already massive secur-
ities holdings for the account of customers has some
disquieting consequences for the underpinnings of cor.
porate accountability and competition in the economy
at large...” (A. 278) (footnote omitted).
st
19
SUMMARY OF ARGUMENT
I
A. Citibank’s open-end investment fund, which is regis-
tered as an investment company under the Investment Com-
pany Act, involves the issuance, sale, distribution and un-
derwriting of securities, just as in the case of any other
open-end investment company. Sections 16, 20, 21, and 32
of the Glass-Steagall Ac: prohibit banks from engaging in
such securities activities. Section 21 forbids joint operation
of a securities and bankng business. Section 16 forbids a
bank from dealing in seeurities except upon the order and
for the account of customers. Sections 20 and 32 forbid
affiliations and interlocxing relationships between banks
and firms engaged in securities activities. The undivided
interests in an open-end investment fund regardless of how
denominated are securities within the meaning of the Glass-
Steagall Act. The Federal Reserve has so held in the case
of Citibank’s fund, just as it has held that shares of other
open-end investment companies are securities within the
meaning of the Glass-Steagall Act. The Federal Reserve
has also ruled that, because of the redemption process, the
issuance of securities constitutes a primary activity of
open-end investment fands. On that basis, the "ederal
Reserve has consistently prohibited bank directois from
serving as mutual fund directors under Section 32 of the
Glass-Steagall Act. Whether or not a bank open-end in-
vestment fund is an entity separate and distinct from the
bank, the fund violates one or more of Sections 16, 20, 21,
and 32. The comptroller therefore has no power to au-
thorize bank operation of open-end investment funds.
B. The legislative history of the Glass-Steagall Act
shows that there had been a number of abuses inherent in
20
the joint operation of a banking and securities business,
some of which are directly pertinent to Citibank’s opera.
tion of an investment fund: (1) the bank stands to profit
from the invocation of its ostensibly disinterested invest-
ment advice; (2) the relationship between the fund and the
bank is in significant respects similar to that between se.
curities affiliates and banks in the 1920’s; and (3) there are
potential conflicts of interest between the bank’s securities
and lending functions. There are other potential conflicts
of interest which inhere in Citibank’s operation of the in-
vestment fund—Citibank’s ability to affect the value of
its portfolio by precipitating a change in the prime rate
of interest; Citibank’s use of its portfolio transactions to
seeure deposit accounts of brokers; and, finally, the danger
to the public interest inherent in permitting banks to gain
control over still more quantities of voting securities.
C. The differences noted by the court below between
Citibank’s investment fund and other mutual funds are not
significant. Limitations on publicizing the fund through
Citibank’s trust department are not meaningful in view of
the size of that institution and the scope of its con-
tacts with the public. There is no difference between
the fees charged by Citibank for its investment advisory
service and the traditional level of charges in the mutual
fund industry. Finally, the Comptroller’s regulation sub-
jecting trust department investments to regulation by the
Comptroller under “sound fiduciary principles” is irrele-
vant since Citibank’s fund portfolio must under the Invest-
ment Company Act conform to the investment policy stated
in the fund’s prospectus. Positions taken by leading repre-
sentatives of the banking and securities industries confirm
that the Citibank fund is in all important respects identical
to a mutual fund.
21
II
A. The “fiduciary” label affixed to Citibank’s fund by
Citibank and the Comptroller does not suffice to exempt
it from the Glass-Steagall Act. That Act was designed to
prohibit banks from abusing their fiduciary obligations.
B. 12 U.S.C. § 92a neither authorizes the operation of
an open-end investment fund like the Citibank fund nor
does it immunize such a fund from the Glass-Steagall Act.
The obligations of other mutual funds are no less “fiduci-
ary” than those of bank-operated funds. The Federal Re-
serve had refused to permit banks to operate common trust
funds except as incident to bona fide or strictly fiduciary
relationships and had viewed the use of such funds solely
for investment purposes as not being for a bona fide fiduci-
ary purpose. Citibank’s open-end investment fund provides
for automatic commingling of customers’ investment sums
secured on a package basis, requires no personal relation-
ships and is otherwise devoid of the trust concepts which
inhere in Section 92a.
ARGUMENT
I. THE BANK INVESTMENT FUND AUTHORIZED BY THE
COMPTROLLER VIOLATES THE GLASS-STEAGALL ACT.
The Glass-Steagall Act was enacted in a period of na-
tional financial crisis. Events which had their roots in the
1929 crash caused a wave of bank failures leading up
to the Bank Holiday of 1933.°° The latter occurred in the
midst of a Congressional inquiry into the role of the com-
mercial banking industry in the collapse of the securities
market and the ensuing depression.”
26 See 1933 CoMPTROLLER OF THE CURRENCY ANN. Rep. 1.
_ ™ The present dispute over the first attempted entry of a bank
into the open-end investment fund business is an echo from the
22
Congress in 1933 determined to separate the banking
and securities industries as a “preventive or prophylactic
measure.” Board of Governors v. Agnew, 329 U.S. 441,
449 (1947). Sect.ons 16, 20, 21 and 32 of the Glass.
Steagall Act were fashioned to achieve that result.
It has been understood for over 30 years that the Glass.
Steagall Act forbids joint operation of a securities and
banking business.** No one doubts that an open-end invest-
ment fund is engaged im the securities business; the Glass-
Steagall Act has repeatedly been applied to mutual funds.
See pp. 25-27, 29-30 infra.
Against these facts amd the language of Sections 16, 20,
21, and 32 of the Act, the result reached below is remark-
past. A primary focus of Congress’ hearings in the early 1930's
was on the ventures of respondent (then National City Bank of
New York) into the securities business. See e.g., 75 Cona. RE.
9909 (1932). See also F. Pecora, Wau Street UNpER OartH 76
(1939, reprinted 1968) :
“The National City alone, under Mr. Mitchell’s pioneering
direction, came to sell not less than $1,000,000,000 of securities
per year, and sometimes $2,000,000,000—aggregating the
enormous total of at least $20,000,000,000 in securities which
the National City manufactured, or in the manufacture of
which it participated, for the ten years preceding the Senate
investigation. And the National City not only ‘manufactured’
(the phrase is Mr. Mitchell’s) these huge quantities of securi-
ties, ‘suitable for public distribution’—it likewise sold these
securities like so many pounds of coffee to the public. (This
analogy likewise of Mr. Mitchell’s.)”
8 The prohibitions of the Glass-Steagall Act were understood
at the time of the Act’s passage to bar relationships between a
bank and an investment fund of the type authorized by the Comp-
troller’s Regulation. The corporate predecessor of one of the peti-
tioners, Investors Management Company Inc., was a subsidiary
of the Irving Trust Company of New York and was also an in-
vestment advisor to Irving Investors Fund C, Inc., an open-end
investment fund whose shares were sold to customers of Irving
Trust. The Irving Trust Company in 1934 divested itself of Irving
Investors Management Company because of the passage of the
Glass-Steagall Act (A. 38-40).
|
23
able: A fund which operates just like a mutual fund, which
registers aS an open-end investment company with the
Securities and Exchange Commission under the Investment
Company Act, which thereby secures the special tax bene-
fits provided by that status, and which registers the shares
it issues under the Securities Act—is somehow permitted
to deny that it is engaged in the securities business under
the Glass-Steagall Act. Nothing in that Act or its legisla-
tive history warrants such a strained construction of its
terms.
A. Citibank Through Its Open-End Investment Fund
Issues, Sells and Underwrites Securities Within
the Meaning of the Glass-Steagall Act
Section 16 (together with Section 5(c), 12 U.S.C. § 335—
see note 29 infra), provides that a member bank’s authority
to engage in the “business of dealing in securities and
stock . . . shall be limited to purchasing and selling such
securities and stock without recourse, solely upon the order,
and for the account of, customers, and in no case for its
own account” and that the bank “shall not underwrite any
issue of securities or stock... .”
Sections 20 and 32 apply when the securities activity is
conducted by an entity separate from the bank. Section 20
prohibits affiliations between member banks and entities
“engaged principally in the issue, flotation, underwriting,
public sale, or distribution . . . of stocks, bonds, debentures,
notes, or other securities ....’’ Section 32 prohibits officers,
directors, or employees of member banks from holding like
positions at the same time in enterprises primarily engaged
in the issue, flotation, underwriting, public sale, or distribu-
tion of stock, bonds, or similar securities.
The most sweeping of the four provisions, however, is
Section 21, which prohibits any business organization from
24
engaging simultaneously in commercial banking and “the
business of issuing, underwriting, selling, or distributing,
. .. Stocks, bonds, debentures, notes, or other securities.”*
Citibank’s activities in creating, controlling and pro.
moting its investment fund and in selling and distributing
its “units of participation” to investors in the fund con.
stitute securities activities which are barred by one or more
of the foregoing provisions of the Glass-Steagall Act.
1. The central point with respect to the applicability of
all these sections is that the undivided interests in an open-
end investment fund—whether they are called “shares,” or
“units of participation,” or “beneficial interests”—are se-
curities within the meaning of the Glass-Steagall Act.
While the decision below is based on deference to agency
expertise, the critical holding that the “units of partici-
pation” of Citibank’s investment fund are not securities
within the meaning of the Glass-Steagall Act con-
tradicts the judgment of the Federal Reserve, the agency
2° Judge Bazelon incorrectly thought Section 21 lacked inde-
pendent significance. In his view, its sole purpose was “to extend
the prohibitions of §16 to members of the Federal Reserve
System who were not national banks” [i.e., State member banks).
(A. 276). The extension of the Section 16 prohibitions to State
member banks, however, was explicitly accomplished by Section
5(¢e) of the Act:
“State member banks shall be subject to the same limita-
tions and conditions with respect to the purchasing, selling,
underwriting and holding of investment securities and stock
as are applicable in the case of national banks under [See-
tion 16].”
The same court had previously emphasized the independent
significance of Section 21 in describing its prohibitions:
“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, 153 F.2d 785, 793 (D.C. Cir. 1946), rev’d on other
grounds, 329 U.S. 441 (1947).
| —— oe
charged with administering the Glass-Steagall Act since
1933. It is the Federal Reserve’s view that Citibank’s units
of participation are securities within the meaning of the
Glass-Steagall Act. 1966 Hearings, supra note 11 at 584.
Indeed, the Federal Reserve has “consistently taken the
position that participations or shares in an ordinary open-
end investment company or mutual fund are ‘securities’
for the purposes of Section 32.” Jd. at 583. The Board
said that the Glass-Steagall Act is:
“ .. 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.” Jd. at 584.
| Furthermore, while the term “securities” is not defined
in the Glass-Steagall Act, the sections of the Act which
refer to that term do so in a context which suggests that it
should not be narrowly construed. The language of Sec-
tions 20 and 21—“stocks, bonds, debentures, notes, or other
securities”—does not reflect a restrictive intent. Finally,
Citibank’s units are investment media and represent un-
divided interests in the fund’s assets just as in the case of
shares of garden-variety mutual funds. Citibank’s units
of participation are securities within any reasonable con-
struction of that term in the Glass-Steagall Act. It there-
fore does not matter whether Congress can be thought to
have intended the term security in the Glass-Steagall Act
to have a different meaning than the same term in the
simultaneously-enacted Securities Act of 1933.
2. Like considerations require construing the terms of
the Glass-Steagall Act describing prohibited securities
activities in accordance with their natural meaning. Thus,
the prohibitions of the Act apply to mutual funds because,
as the Federal Reserve has ruled, the business of issuing
securities within the meaning of the Act constitutes a pri-
mary activity of such a fund:
26
“It is customary for [mutual funds] to have but one
class of securities, namely, capital stock, and it js
apparent that the more or less continued process of
redemption of the stock issued by such a company
would restrict and contract its 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 company’s size and to the continuance of opera.
tions without substantial contraction, and therefore
the issue and sale of its stock constitutes one of the
primary activities of such a company.” 12 C.F R.
§ 218.101 (1951).*°
The redemption process likewise requires Citibank con-
tinuously to issue shares in its open-end investment fund.
See note 25 supra and p. 35 infra. Citibank is there-
fore engaged in the issuance of securities within the mean-
ing of Section 21 of the Act. Since that section prohibits
banks from engaging in the business of issuing securities,
the Comptroller has no power to authorize a bank to oper-
ate an open-end investment fund.
Citibank’s investment fund also violates those provisions
of Section 21 which prohibit commercial banks from sell-
ing, distributing, or underwriting securities. The pro-
spectus for the fund (A. 146) and Citibank’s sales circular
(A. 170) show that the bank is selling, distributing, and
underwriting’ shares in its fund within any reasonable
definition of those terms.*
Contrary to the views expressed by Judge Bazelon, the
fact that the bank does not secure a specific distribution
® Accord, 27 Fep. Res. Buty. 399 (1941); 12 C.F.R. § 218.102
(1960) ; 12 C.F.R. § 218.107(e) (1963).
51 Citibank is the fund’s statutory underwriter (A. 142-44).
52 Former SEC Chairman Manuel F. Cohen stated:
“A commingled managing agency fund will operate essen-
tially as follows: The banks will sell to their customers, and
apparently to any other interested person, a participation in
a pool of general securities, usually equity securities, which
=
profit or sales commission from its sales and distribution
activity in behalf of the fund has no bearing upon the ques-
tion whether the bank is engaged in underwriting, selling,
distributing or dealing in securities within the meaning of
the Glass-Steagall Act. The bank profits from promoting
sales of units in the fund because its income is based on
the size of the fund (see p. 16 supra). The Federal Reserve
has held that a mutual fund is engaged in the public sale
and distribution of its securities within the meaning of
the Glass-Steagall Act irrespective of the fact that “the
investment company does not derive any direct profit from
the sales” of these shares. 12 C.F-R. § 218.101 (1951).
Furthermore, as previously noted, the investment advisory
fee is the only fee charged by “no-load” mutual funds,
which no one doubts involve underwriting, selling, dis-
tributing and dealing in securities. The Senate and House
Committees on Banking and Currency are also of the view
that a bank open-end investment fund like that of Citi-
bank’s is engaged in the “underwriting, distribution and
sales of securities” for the purposes of the banking and se-
curities laws. S. Rep. No. 91-184, 91st Cong., Ist Sess. 10,
| 25 (1969); H. Rep. No. 91-387, 91st Cong., Ist Sess. 3, 9,
. 24 (1969); 115 Cong. Ree. H10553, H10554 (Daily ed. Nov.
5, 1969).
3. Comptroller Saxon had no power to promulgate
Regulation 9 or to approve Citibank’s fund because Sec-
27
are selected by the bank, but which do not represent an in-
terest in or an obligation of the bank. Such participations
will be sold simply upon the basis that they represent a de-
sirable investment since the purchaser will obtain the benefits
of the investment management services of the bank, which
will endeavor to procure for the purchaser both capital ap-
preciation and income through the judicious selection of
securities in which funds contributed to the account will be
invested.
“Tt seems perfectly clear that such a participation is essen-
tially a security, a medium of investment, and it will be sold
as such.” 1966 Hearings, supra note 11, at 133.
28
tion 16 precludes member banks from operating open-end
investment funds. That section provides that a bank
“shall not underwrite any issue of securities or stock,”
and that any “dealing in securities and stock [by the bank]
shall be limited to purchasing and selling such securities
and stock, without recourse, solely upon the order, and
for the account of, customers ... .” As shown by the con-
temporaneous construction of this Section, it was designed
to permit national banks to effect securities transactions
as an accommodation to customers located in communities
removed from the money centers. 1933 CoMPTROLLER OF THE
Currency Ann. Rep. 11. The Comptroller ruled in 1936
that a bank’s authority under this section was limited to
executing a customer’s instructions:
“In general [the statutory provision] confines the ac-
tivity of a national bank in purchasing and selling
securities for the accounts of customers to that of an
accommodation agent, the purpose being to prevent
such banks from engaging in the business of dealing
in securities for profit, without limiting the service
which may be rendered to customers in purchasing and
selling securities upon their orders and for their ac-
counts.” Bulletin of Comptroller of the Currency,
Oct. 27, 1936, quoted in 1 Paton’s Bank Dicest 58
(American Bankers Ass’n ed. 1940).
Section 16 does not authorize a bank to create and pro-
mote an investment device and to solicit participants in
the bank’s open-end investment fund. The Comptroller
ruled that the authority to effect a securities transaction
“for the account of” a customer is limited to accommodat-
ing an existing customer and has emphasized that the cus-
tomer relationship must exist independently of the par-
ticular securities transaction:
“The statutory provision] is to be construed as limit-
ing the purchase and sale transactions mentioned to
actual customers of the bank, which customer rela-
eres re Bsr ares
29
tionship exists independently and apart from the par-
ticular transaction in which the bank buys or sells
upon the order and for the account of such ‘customer,’
in distinction to the relationship arising solely by
virtue of the particular transaction.” Jd.
The Comptroller’s office adhered to these interpreta-
tions through at least 1960. See Digest of Opinions of
Comptroller of the Currency, par. 220 (April 1, 1960), 4
CCH Fep. Bankine Law J 59,654.**
4. An affiliation or interlocking relationship between an
open-end investment fund and a member bank might violate
Sections 20 and 32 of the Act. If the fund and the bank are
separate entities, bank officials may not serve on the fund’s
board of directors. The Federal Reserve has said that
“ordinary open-end investment companies or mutual funds
have been regarded by the Board as subject to section 32.
Accordingly, the Board consistently has taken the view that
interlocking relationships described in the statute between
such funds and member banks are prohibited ... .” 1966
Hearings, supra note 11, at 585.**
88 Bank officials have recognized the limited authority of Sec-
tion 16. The executive vice president of the Bank of New York
said in 1962:
“Obviously, there is no problem [under Section 16] when
banks act for a particular customer who owns individual se-
curities. Orders are carried out upon the direction of the
customer, and it makes no difference whether or not the moti-
vation for the change resulted from a recommendation by
the bank as investment adviser. But as soon as there is
commingling, the customer no longer owns individual bonds
or shares of stock but instead units in a commingled fund
which the bank would manage. Any action taken would be
solely by the bank for the account of the bank’s investment
fund and therefore only indirectly for any particular cus-
tomer. Accordingly, the bank would be acting contrary to
section 16 and the other pertinent provisions of the Banking
Act of 1933 in operating a fund made up of participations from
accounts of individuals.” 1963 Hearing, supra note 9, at 123.
Tn 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 redeem-
30
Thus, whatever resolution is made of the dispute between
the regulatory agencies below over whether Citibank’s fund
is an entity separate from the bank (see pp. 9-10 supra),
one or more of Sections 16, 20, 21 and 32 bar bank opera-
tion of open-end investment funds.
5. On the understanding that total severance was re-
quired by the 1933 Act,** the banking and securities indus.
tries have developed separately. Moreover, the application
of the Act over the years has played a significant role in
shaping the structure and competitive standing of mutual
funds in the investment media market. As noted (p. 29
supra), mutual funds have been denied the services of all
executives of commerce and industry who also served on
the boards or as officers of member banks.
Congress has repeatedly had the question of the pro-
priety of bank entry into the mutual fund business under
consideration, but has thus far not seen fit to permit it.”
able stock for sale, it is ‘primarily engaged in the issue . .
public sale, or distribution, . . . of securities’ and that section
32 of the Banking Act of 1933, as amended, prohibits an
officer, director or employee of any such company from serv-
ing at the same time as an officer, director or employee of any
member bank.” 12 C.F.R. § 218.101 (1951). See also 27 Fern.
Res. Bui. 399 (1941); 12 C.F.R. § 218.107 (1963).
%5> See the contemporaneous interpretations of the Act by the
Comptroller (pp. 28-29 supra) and by a member of the mutual fund
industry (note 28 supra), the 1941 ruling of the Federal Reserve
(note 30 supra). See also discussion pp. 31-32, 39-40 infra.
** Currently, Congress is considering two bills affecting bank
entry into the mutual fund business. One bill, expressly authoriz-
ing bank operation of open-end investment funds, passed the Senate
(S. 2224, 9ist Cong.. Ist Sess.; 115 Cone. Rec. 13700 (May 26
1969) ) ; but such authorization has been stricken by the appropri-
ate House Committee (H.R. 17333, 91st Cong., 2d Sess.; see 17
Washington Financial Report A-9 (1970)). A second bill prohibits
bank holding companies and their bank and non-bank subsidiaries
from selling participations in commingled agency accounts (H.R.
6778, 91st Cong., Ist Sess.; 115 Cong. Ree. H10554, H10559 (Daily
ed. Nov. 5, 1969) ). Previous Congressional consideration of
a
Under the circumstances, the long-standing separation of
these two industries based on the interpretations of the
Glass-Steagall Act by the Comptroller and the Federal
Reserve should not now be altered except by legislation.
This Court stated in parallel circumstances that “Congress
is the proper agency to change an interpretation of the
Act unbroken since its passage, if the change is to be
made.” Blau v. Lehman, 368 U.S. 403, 413 (1962). See
also Toolson v. New York Yankees, 346 U.S. 356, 357
(1953); Port of New York Authority v. Baker, Watts &
Co., 392 F.2d 497, 502, 504 (D.C. Cir. 1968).
31
B. Congress Meant to Separate the Banking and
Securities Industries
The Court below refused to give effect to the terms of
Sections 16, 20, 21 and 32. Judge Bazelon found the Act
inapplicable because its purpose, he said, was “to protect
bank depositors and the banking system from the risk of
insolvency incident to widespread investment of banks’
assets in speculative securities during the twenties” (A.
274). Even if it is appropriate at this late date to go behind
the plain words of the Act,*’ the legislative history shows
that the assumptions made over the last 30 years were not
incorrect and that Sections 16, 20, 21, and 32 mean what
they say.
bank entry into the mutual fund business is reflected in Hearings
on Bank and Insurance Company Collective Investment Funds
and Accounts, Investment Company Act Amendment of 1967, H.R.
14742 Before the Subcomm. on Commerce and Finance of the
ouse Comm. on Interstate and Foreign Commerce, 90th Cong..
2d Sess. (1968); Hearings on Amendment No. 438 to 8. 1659
Before the Senate Comm. on Banking and Currency, 90th Cong.,
Ist Sess. (1967) ; 1966 Hearings, supra note 11; and 1964 Hearings,
supra note 9.
* Osaka Shosen Kaisha Line v. United States, 300 U.S. 98, 100-01
(1937); Matson Navigation Co. v. United States, 284 U.S. 352
(1932) ; Georgia Ass’n of Independent Ins. Agents, Inc. v. Saron,
= bey 236, 238 (N.D. Ga. 1967), aff'd, 399 F.2d 1010 (5th
32
While Congress in 1933 was certainly concerned over
links between commercial and investment banking, in which
banks risked their own funds in purchasing securities,
that was by no means its only concern.” As the court in
Baker, Watts € Co. v. Saxon, 261 F. Supp. 247, 249 (D.D.C.
1966), aff’d sub nom. Port of New York Authority v. Baker,
Watts & Co., 392 F.2d 497 (D.C. Cir. 1968), noted of the
congressional investigation leading up to the passage of
the Act:
“Many other evils and abuses also arose. Congress
definitely and unalterably determined to compel com.
mercial banks to return and confine themselves to
their classic time-honored functions: acceptance of de-
posits of money subject to withdrawal by check or
other means; discount of commercial paper; and
making loans.”
Some of these other evils and abuses were: (1) that cus-
tomers seeking disinterested investment advice from their
88 The Federal Reserve has over the years applied the prohibi-
tions of the Glass-Steagall Act to bar interlocking relationships
between commercial banks and a variety of organizations which
were engaged in the issuance, sale, distribution or underwriting
of securities in which the bank’s own funds were not subject to risk:
(i) open-end investment companies, 12 C.F.R. § 218.101
(1951) ;
(ii) companies 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
substantial amount of stock relative 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 CFR.
§ 218.105 (1961) ; and
(vi) closed-end investment companies in process of organiza-
tion when issuance of own stock is primary activity of
company, 12 C.F.R. §§ 218.102 (1960), 218.104 (1961).
_—
33
banks had been encouraged to buy securities from which
the banks stood to gain; (2) that banks operated securities
affiliates; (3) that there were conflicts of interest between
' the bank’s securities and lending functions.
l. Failure to Give Disinterested Investment Advice
Congress was concerned over the fact that some bankers
had breached their fiduciary obligations by suggesting to
depositors who sought disinterested investment advice that
they make purchases from which the banks stood to gain.
See S. Rep. No. 1455, 73d Cong., 2d Sess. 163 (1934)."
Senator Bulkley said in this connection :”
“The banker ought to be regarded as the financial con-
fidant and mentor of his depositors. This underlying
relationship is a natural and desirable one with respect
to all depositors, although the aspects of it and the
® During the year in which the Glass-Steagall Act was passed,
the Federal Reserve stated:
“The Board believes that it was the intent of the Congress
in enacting the provision regarding officers and directors of
member banks to terminate relationships of certain kinds be-
tween member banks and dealers in securities, apparently
because the Congress believed that such relationships might
tend to influence the banks’ credit and investment policies
and their advice to their correspondent banks and other cus-
tomers respecting investments in a manner which the Con-
gress deemed to be incompatible with the public interest.”
1934 FeperaL Reserve ANN. Rep. 57.
The Congressional purpose of assuring disinterested investment
advice is also reflected in the exemption added to Section 32 by
the Banking Act of 1935, 49 Stat. 709 (1935), 12 U.S.C. § 78, as
amended. Under that provision the Federal Reserve may grant
exceptions to the Section 32 prohibitions on interlocking relation-
ships by general regulation but only upon a showing that such
exceptions will “not unduly influence . . . the advice [the bank]
gives its customers regarding investments.”
“ Senator Glass asked Senator Bulkley, a member of the Com-
mittee on Banking and Currency, to explain to the Senate various
portions of the Glass-Steagall Act, including those relevant here.
75 Cone. Rec. 9909 (1932).
34
kind of advice called for will necessarily vary a great
deal from the poor widow whose life savings are eyvi-
denced by a savings passbook to the great corporation
requiring financial aid in the development of intricate
business problems.
“Obviously, the banker who has nothing to sell to
his depositors is much better qualified to advise dis.
interestedly and to regard diligently the safety of
depositors than the banker who uses the list of de.
positors in his savings department to distribute cir-
culars concerning the advantages of this, that, or the
other investment on which the bank is to receive an
originating profit or an underwriting profit or a dis.
tribution profit or a trading profit or any combination
of such profits.” 75 Conc. Rec. 9912 (1932).
The sense of these remarks cannot be limited to the four
types of profit which Senator Bulkley happened to men-
tion. His concern was that a bank should profit at all by
its sale of securities to a customer upon the customer's
invocation of the bank’s ostensibly disinterested invest-
ment advice.
Congress’ aim to prevent banks from being able to sell
securities to their customers from which the banks stood
to profit has relevance here for three reasons: First, Citi-
bank profits from the sale of a unit in the fund because its
management fee is based on the size and value of the fund.
See p. 16 supra. Second, the economics of operating an
open-end fund like Citibank’s are such that the fund must
be aggressively merchandised to be viable. Former SEC
Chairman William L. Cary testified before Congress:
“To make this activity economically practicable many
accounts must be obtained. It is unrealistic to assume
that the requisite number of accounts can be obtained
without engaging in a public offering.” 1963 Hearing,
supra note 9, at 8. See also id. at 19.
35
Third, the redemption process creates a pressure to sell
new shares in the fund. The Affidavit of Citibank’s Execu-
tive Vice President in support of its application to stay the
District Court’s order enjoining operation of the fund
stated :
“Even if the Commingled Account were to continue
intact, without liquidation, the existing participants
would be injured unless additional customers of the
Bank were permitted to come in as participants. If
new participants were not taken in from time to time,
the Commingled Account would inevitably shrink in
size as a result of withdrawals (including automatic
withdrawals upon the death or incompetency of par-
ticipants). As the net assets were reduced, the ratio
of the operating expenses to net assets would in-
crease” (A. 253).
Indeed, the failure to replace withdrawals from the fund
by selling additional shares may have a “snowballing”
effect, in that each such withdrawal results in an increase
of the ratio of expenses to net assets, thus adversely af-
fecting performance, which in turn causes additional par-
ticipants to withdraw. There is no equivalent set of
pressures upon the bank to sell other trust department
services to customers seeking disinterested investment ad-
vice. Thus, Judge Bazelon’s observation that banks have
equal incentive to sell other trust department services (A.
276) is incorrect. Furthermore, the situation which con-
fronts a bank operating an investment fund when a cus-
tomer seeks disinterested investment advice is in no way
analogous to situations in which the family lawyer, the
testator or a court asks the bank to serve as committee for
an incompetent, or as guardian of a minor, or as executor,
administrator, or trustee under a will.
_ “ The Affidavit also stated that the fund cost the bank $300,000
in organizational expenses (A. 251, par. 4).
36
2. Securities Affiliates
Another major area of concern was the operation by
banks of securities affiliates.* Senator Glass stated:
“But these affiliates, I repeat, were the most unscrupv-
lous contributors, next to the debauch of the New York
Stock Exchange, to the financial catastrophe which
visited this country and was mainly responsible for the
depression under which we have been suffering since.
They ought to be separated, and they ought speedily
to be separated, from the parent banks; and in this
bill we have done that.” 77 Conc. Rec. 3726 (1933).
Some of these affiliates were engaged in “the operation of
investment trusts which bought and sold securities purely
for investment or speculative purposes” (A. 243). See
Hearings on S. Res. 71 Before a Subcomm. of the Senate
Comm. on Banking and Currency, 71st Cong., 3d Sess.,
pt. 7, at 1057 (1931). The District Court said, “These
investment trusts were the equivalent of our present day
investment companies” (A. 243).**
One of Congress’ concerns over these affiliates was that
they sometimes operated on funds borrowed from the par-
ent or affiliate bank. S. Rep. No. 77, 73d Cong., 1st Sess. 9
(1933). While Citibank’s Prospectus announced that its
fund will not borrow money (A. 148), the Comptroller’s
Regulation appears to permit banks to make loans to their
“S$. Rep. No. 1455, 73d Cong., 2d Sess. 156-159 (1934); 75
Cona. Rec. 9909-10 (1932). Congress did not restrict its concern to
affiliates in which funds of the parent bank were risked. Jd. at 9911.
*® See also Galbraith, 1929 and 1969—Financial Genius Is A
Short Memory and a Rising Market, Harper’s, Nov. 1969, at 56:
“There was an explosion of these investment trusts in the late
Twenties. If they sound suspiciously like a mutual fund, of
which in these last years there has been an even more
spectacular explosion, that suspicion is well founded.”
37
investment funds, and to take back the fund’s assets as
security. 12 C.F.R. §9.12(f) (1963).
Another of Congress’ fears about securities affiliates was
that, despite the absence of risk to the bank’s funds, the
public might identify the affiliate with the bank, with con-
sequent adverse effects upon the bank in the event of a
failure of the affiliate.“* There is no reason to believe that
Congress in 1933 would have had any less concern over the
consequences of a failure of Citibank’s fund.*
3. Conflicts Between Interests of the Fund and Those
of the Bank
Congress feared that banks might allocate loan funds to
companies whose securities they held (A. 274). The pres-
sures which operate upon all mutual funds to sell new
shares and avoid redemptions of outstanding shares (see
pp. 26, 35 supra) create unique incentives on the part
of banks to make loans needed by companies whose stock
is held in their investment funds, in order to maintain the
fund’s value.
In the view of former SEC Chairman Cary, the possi-
bility that “fund investments could be used to shore up
“Senator Bulkley remarked as follows in connection with the
possible consequences of the bank affiliate sustaining an under-
writing loss :
“And although such a loss would possibly not result in any
substantial impairment of the resources of the banking institu-
tion owning that affiliate, still it might be suspected that large
amounts might have been loaned to the affiliate; and whether
that were true or not, there can be no doubt that the whole
transaction tends to discredit the bank and impair the confi-
dence of its depositors.” 75 Cone. Rec. 9912 (1932).
“The Federal Reserve reflected that concern in 1961 in observ-
ing that bank directors serving as directors of a real estate invest-
ment company “.. . might cause the company to be so identified in
the minds of the public with the bank that any financial reverses
suffered by the company might affect the confidence of the public
in the bank.” 12 C.F.R. § 218.104(c) (1961).
38
bank investments” represents an area “of potential con.
flict” between the fund’s interests and those of the bank.
1963 Hearing, supra note 9, at 11-12. A comparison of the
list of Citibank’s directors as of April 20, 1966 with
the list of the fund’s investments as of August 31,
1966 indicates that almost one-third of the fund’s as.
sets were invested in securities in companies whose off-
cials were also directors of Citibank.**
The simultaneous engagement in the banking and open.
end investment fund businesses creates other potential con-
flicts of interest which confirm the wisdom of a policy re-
quiring their total separation. For example, Citivank is
sufficiently powerful to precipitate (and thus have advance
knowledge of) an increase or decrease in the prime rate of
interest. Such a change in interest levels could have a
dramatic impact upon the stock market generally and upon
the value of securities held by the fund.
Again, banks ean, by allocating brokerage payments,
secure broker deposits, thus creating an incentive for turn-
over of the securities in the fund’s portfolio. As former
SEC Chairman Cary testified before Congress:
“The fund has brokerage business to direct. We have
learned that at present brokerage is often distributed
by banks according to a formula which rewards those
brokers who keep balances in the banks or have other
business relations with the bank. This policy of the
banks could lead to excessive portfolio turnover or
to the fund not receiving the maximum benefit from
its brokerage business.” 1963 Hearing, supra note 9,
at 12.
Furthermore, the mutual fund market represents a poten-
tial for bringing under bank control substantial amounts
*® Compare A. 109-20 with A. 176-77.
39
of voting securities over and above the vast amounts now
held in bank trust departments. Such acquisitions would
increase the potential dangers in a situation which has
already alarmed some thoughtful observers, including
Judge Bazelon in the course of writing the opinion below
(A. 278). See also Starr or Suscomm. on Domestic F'-
yance, House Comm. on BANKING AND CuRRENCY, COMMER-
cat Banks anp TxHemR Trust Activities, 90th Cong., 2d
Sess., vol. I, at 1-5, 18-30 (1968).** According to that report,
Citibank’s trust department, as of April 1, 1968, controlled
approximately $6.4 billion in stocks. Id. at 49.
In any case, Congress was concerned not merely with
the manifestations of the abuses revealed in the course of
its investigations, but also with potential conflicts inherent
in the joint operation of a banking and securities business.
As Senator Bulkley explained prior to enactment of the
Glass-Steagall Act:
“Tt is not, of course, contended that the abuses here
intimated 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 they oecur. Yet the
“In his letter transmitting that report, Congressman Wright
Patman said that:
“(I]t is my view that the data presented here for the first time
show that the American economy of today is in the greatest
danger of being dominated by a handful of corporations in a
single industry as it has been since the great money trusts of
the early 1900s. Through the various devices described in this
study, commercial banks control the investments of billions
of dollars of funds and vote large blocks of stock of major
corporations in practically every important industry in the
economy. These same banking institutions have gained rep-
resentation on boards of directors of and serve as major
sources of credit for many of these same major industrial
corporations. Therefore, a few banking institutions are in a
position to exercise significant influence, and perhaps even
control, over some of the largest business enterprises in the
nation.” Jd. at iii.
40
danger is always there, and must be there as long as
human nature remains human nature. ... [WJe 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
Cone. Rec. 9912 (1932).
This Court characterized the Act as a “preventive or
prophylactic measure. The fact that respondents have been
scrupulous in their relationships to the bank is therefore
immaterial.” Board of Governors v. Agnew, 329 U.S. 441,
449 (1947). And, as the District Court held in this case,
“this is effective legislation against temptation” (A. 245).
It is not of course incumbent on petitioners to show that
the Citibank’s venture into the securities business through
its open-end investment fund recreates each and every
abuse which led to the Glass-Steagall Act. The overall
theme which emerges from the legislative history of that
Act is Congress’ conviction that the marriage of the
banking and securities industries had led to many abuses
and conflicts of interest, some of which had played impor-
tant roles in causing a national disaster. It was not a time
for nice distinctions between the various types of profit
which banks derived from dealing in securities. Congress
wanted the banks to have no profits from dealing in securi-
ties beyond the transactions in government bonds specifi-
cally permitted by Section 16. Congress decreed that the
two industries were to be divorced. Sections 16, 20, 21 and
32 of the Act mean what they say.
C. There Are No Relevant Differences Between Citibank’s
Open-End Investment Fund and Other Mutual Funds
Finally, the differences which Judge Bazelon saw be-
tween Citibank’s fund and any other open-end investment
41
fund furnish no basis for concluding that the Glass-Steagall
Act applies to one but not the other. Judge Bazelon agreed
with the Court’s per curiam finding that the fund is “simi-
lar in most respects to an open-end mutual fund” (A. 265),
but noted differences relating to (1) channels of distribu-
tion; (2) the amount of the bank’s compensation; and (3)
regulatory supervision by the Comptroller (A. 265-70).
These alleged differences lack substance.
1. The fact that under Regulation 9 shares in a bank
fund are offered and publicized only through the bank’s
trust department# might be of some relevance to a fund
sponsored by a small bank in an isolated community. The
issue here, however, concerns the First National City Bank
of New York, one of the world’s largest financial institu-
tions, with 168 branches in metropolitan New York, 241
overseas branches, and a staff of nearly 27,000. Citibank’s
1967 Annual Report, pp. 16, 18, filed with the Comptroller
of the Currency. By its own account, it serves “one out of
every five families” in metropolitan New York. 1963 Hear-
ing, supra note 9, at 89. Its credit card customers alone
number 1.4 million. Citibank’s 1967 Annual Report, supra,
p. 6. Given the size of this institution and the scope of its
contacts with the public, there do not appear to be any
meaningful limitations on its ability to publicize its fund.
Former SEC Chairman Cary pointed out in testimony
before Congress:
“Tt has been suggested that if the banks do not ad-
vertise the availability of participation in these com-
mingled funds, no public offering will exist. However,
advertising is not the only way to solicit participation.
“The Bank of America with 738 branches and 25,700
employees in California, including branches in every
community of modest size, can surely make the avail-
ability of the commingled managing agency account as
42
an investment medium known in a highly effective
fashion.” 1963 Hearing, supra note 9, at 8.
For the same reason, the fact that shares in Citibank’s
investment fund are offered and publicized only through
the bank’s trust departmentf also lacks significance. Spon-
sorship by the bank’s trust department did not preclude
Citibank from sending out a sales flyer announcing its
fund, in which anyone could “become a participant by com-
pleting the tear-out authorization form on page 13 of the
Prospectus and forwarding it with his check to First Na-
tional City Bank” (A. 170). See also Lovell, Trust New
Business, Development by Commercial Officers, 104 Trusts
& Estates 1164 (1965).
The real limitations on the content of the selling message
are those provided under the Investment Company Act
of 1940, which apply as well to Citibank’s fund as they do
to other mutual funds. See SEC Investment Company Act
Release No. 2621 (Oct. 31, 1957). Comparison of Citibank’s
Prospectus for the fund (A. 146) with those of other mutual
funds (A. 43) indicates that there are no relevant differ-
ences in the approach to the prospective investor.
2. Judge Bazelon was also mistaken in relying upon
the amount of the bank’s fee—one-half of 1 percent—as
a basis for distinguishing Citibank’s fund from other
mutual funds. The traditional level of fees for investment
advisory services in the mutual fund industry is also one-
half of 1 percent or less. See p. 13 supra. See also 1966
Hearings, supra note 11, at 61. (As previously noted, the
investment advisory fee is the only fee charged by “no-
load” mutual funds.)
*® See also 1966 Hearings, supra note 11, at 95, 110.
—
Furthermore, management fees do not represent the sole
possible financial benefit to banks operating such funds.
As noted (p. 38 supra), allocation of brokerage fees arising
from execution of transactions for the fund’s portfolio can
produce significant financial benefits, including the acquisi-
tion of broker deposit accounts. See also Fiske, How Banks
Pass Out Commissions, Tue InstirutionaL Investor, Dec.
1969, at 30.
43
3. Finally, Judge Bazelon misplaced reliance upon the
factor he deemed the “most important” (A. 270), namely,
that under Section 9.11(d) of the Regulation, the Comp-
troller has power of review over “the fund’s investments to
see that they are in accordance with sound fiduciary prin-
ciples” (A. 270).*°
The “sound fiduciary principles” standard is meaningful
in reviewing trust department investments where the bank
acts in traditional trust capacities—executor, trustee under
will, guardian, ete. In such cases, it provides a basis for
disapproval of investments which do not meet the needs of
particular trust beneficiaries or which are made in securi-
ties not on lists approved by state officials for investment
by fiduciaries or are otherwise not in accord with the
“prudent man” rule. See 3 Scorr, Law or Trusts § 227.13
(3d ed. 1967).
It may also provide a basis for review of investments
which involve the bank in self-dealing or other breaches of
* The cited Regulation provides:
“(d) As a part of each examination of the trust department of
a national bank and as provided by the Manual of Instructions
for Representatives i in Trusts, the Comptroller of the Currency
will examine the investments held by such bank as fiduciary,
including the investment of funds under the provisions of
§ 9. 18, in order to determine whether such investments are
in accordance with law, this part and sound fiduciary prin-
ciples
44
fiduciary obligations. The “sound fiduciary principles”
standard has no meaningful application, however, in re.
viewing the soundness of the securities purchased for the
Citibank fund portfolio since the bank is obliged under the
Investment Company Act to purchase securities strictly
in accordance with its stated investment policy.*° The
prospectus for Citibank’s fund states that the fund's in.
vestment policy is to invest principally in those common
stocks and securities convertible into common stock “which
offer the opportunity for long-term growth of capital . ..
in a carefully selected portfolio diversified among various
industries” not more than 25 percent of which is to be “in
any one particular industry. Purchases and sales of securi-
ties will be made on the basis of investment consideration
and not for short-term profit” (A. 147). The prospectus
further states that the fund will not invest in investment
company securities, real estate investment trusts, com-
modity contracts, or for the purpose of exercising control
of management (A. 147-48). The “sound fiduciary prin-
ciples” standard of Regulation 9.11(d) has been supplanted,
insofar as funds registered under the Investment Company
Act are concerned, by the obligation to adhere to the terms
of the fund’s prospectus."
* Sections 8(b)(1), 8(b)(2) and 13(a)(3) of the Investment
Company Act, 15 U.S.C. § 80a-8(b) (1), -8(b) (2), -13(a) (3), re
quire that each investment fund have, announce and adhere to an
investment policy.
** Reliance on the Comptroller’s Regulation 9 is in any case open
to question. The Comptroller approved Citibank’s investment fund
under Section 9.18(c)(5), which provides that, in addition to in-
vestments to which the detailed requirements of Section 9.18(b)
apply, banks may also invest collectively funds received as
fiduciary “[i]n such other manner as shall be approved in writing
by the Comptroller of the Currency” (A. 268 n. 3).
The Comptroller announced on August 25, 1965, that Regulation
9 would be amended to “include a general provision authorizing
—
45
Moreover, limitations on self-dealing and protection
against other breaches of fiduciary operations are pro-
vided for under the Investment Company Act and the Com-
mission’s regulations issued thereunder. See, e.g., Sections
17, 21, 32-38, 15 U.S.C. §§ 80a-17, -21, -31 to -37. The
Commission’s inspection power—applicable to Citibank’s
fund as well as to other mutual funds—is provided for
under Section 31 of the Investment Company Act, 15
U.S.C. § 80a-30 and the regulations thereunder.
Thus, the differences which Judge Bazelon noted be-
tween the bank’s fund and mutual funds lack significance.
Furthermore, prominent representatives of both the
banking and securities industries concur in the view that,
notwithstanding minor operational distinctions, the bank’s
such funds” similar to Citibank’s (A. 94). Judge Bazelon recognized
that Citibank’s fund differed from Regulation 9 and said that
“there is accordingly no need to review the provisions of Regu-
lation 9 as it was originally promulgated” (A. 268, n. 3). Thus,
the restrictions of Section 9.18(b) appear to be inapplicable to
funds like those of Citibank.
Citibank’s fund departs from the requirements of Section 9.18(b)
and other portions of Regulation 9 as well. For example, Sec-
tion 9.1(g¢) limits managing agency accounts to those which im-
pose upon the bank “the fiduciary responsibilities imposed upon
trustees under will or deed,” and Section 9.18(a) (3) requires that
the commingling of managing agency accounts be pursuant to an
agreement “expressly providing that such monies are received by
the bank in trust.” As Citibank advised the Federal Reserve, how-
ever (in seeking a favorable ruling on the applicability of Section
82 of the Glass-Steagall Act), such monies are not received in
trust. See 12 C.F.R. § 218.111 (1965).
In some respects, the Comptroller’s Regulation is more permis-
sive than Citibank’s prospectus. For example, Section 9.12(f) of
the Regulation permits the bank to lend money to the fund, but
a Citibank’s prospectus the fund may not borrow money (A.
In short, it is not clear what restrictions, if any, in the Comp-
troller’s regulation limit the operation of Citibank’s fund, nor is
it clear whether other bank investment funds (see note 53 infra)
will be limited by the restrictions in Citibank’s prospectus where
the Comptroller's regulation is more permissive.
46
fund authorized by the Comptroller is in sum and sub.
stance a mutual fund. Thus, in hearings on a bill which
would have permitted bank funds of the general type av.
thorized by the Comptroller’s Regulations (but under
restrictions different from those involved here), the Presi.
dent of the New York Stock Exchange advised Congress
that
“banks operating collective investment funds for man.
aging agency accounts under the bill will be engaging
in the same business conducted today by open end
investment companies, commonly known as mutual
funds.” 1966 Hearings, supra note 11, at 174.
The American Stock Exchange advised Congress that
“the banks now wish to establish collective investment
funds, offering to the public investment facilities and ser-
vices not differing significantly from those of ordinary
open end, ‘mutual’ investment funds.” /d. at 175. The Ex-
change also stated that “passage of this bill would b
a direct repudiation of the policy established by the
Glass-Steagall Act. Banks would again be in the securities
business... .” Jd. at 177."
‘2In these same hearings, the Investment Bankers Association
of America took the position that “a bank collective investment
fund would not differ in any significant respect from an open-end
investment company, popularly called a mutual fund.” /d. at 120.
The Association of Stock Exchange Firms also stated its opposi-
tion to the bill:
“The exchange community, as represented by the Associa-
tion of Stock Exchange Firms, believes that the decision o!
Congress to separate the Nation’s banks from the securities
business still stands—that the Glass-Steagall Act should not
be finessed or diluted by piecemeal legislation. We cannot help
but believe that the banks would be equally vehement—and
equally justified—in their opposition to the other side of this
legislative coin: A bill authorizing the reentry of stock ex
change member firms into major phases of the commercial
banking business.” Jd. at 115.
—
47
A statement submitted by the American Bankers Asso-
ciation to Congress in favor of a bill to authorize com-
mingled managing agency accounts underscores the essen-
tial similarity between Citibank’s fund and other mutual
funds. The Association representative stressed that the
bill would preclude banks from making daily valuations—
a “prohibition [which] places a significant restraint on
admissions and withdrawals, so important to the successful
operation of a mutual fund.” 1966 Hearings, supra note
11, at 389. See also td. at 45-46. The Comptroller, however,
permitted Citibank to make daily valuations. See p. 15
supra,
The American Bankers Association also stressed the
limitation in the proposed legislation which would have
prohibited investors from participating in the fund unless
their initial investment was at least $10,000. 1966 Hearings,
supra note 11, at 39, 46. The Comptroller’s regulation,
however, has no minimum amount prescribed. Further-
more, there are several applications on file with the Seeuri-
ties and Exchange Commission by banks proposing to spon-
sor funds which provide for minimum investments of
$5,000.* One national bank is “actively considering” a fund
providing for a $2,500 minimum investment. Brief for the
Comptroller in Opposition to Certiorari, at 6 n. 6.
Former SEC Chairman Cohen said that bank-sponsored
commingled funds are “essentially the same as mutual
8 See, e.g., First Minneapolis Growth Fund (File No. 2-36569-1) ;
First Minneapolis Income Fund (File No. 2-36570-1) ; Continental
Bank Growth Fund, Chicago (File No. 2-36450-1); Continental
Bank Security Fund, Chicago (File No. 2-36449-1) ; First Chicago
Growth Fund (File No. 2-35935-1); First Chicago Investment
Fund (File No. 2-35934-1) ; Northwestern Investment Fund, Min-
neapolis (File No. 2-35828-1); C & S Investment Fund, Atlanta
(File No. 2-35003-1).
48
funds.” Hearings on H.R. 14742 Before the Subcomm. on
Commerce and Finance of the House Comm. on Interstate
and Foreign Commerce, 90th Cong., 2d Sess., at 122 (1968).
Former SEC Chairman Cary said that the Comptroller's
regulation “permits banks to engage in what is hardly dis.
tinguishable from the mutual fund business.” 1963 Hear.
ing, supra note 9, at 7. The chairman of the Federal Deposit
Insurance Corporation stated that the Comptroller’s regu.
lation authorizes “bank entry in the mutual fund business.”
1966 Hearings, supra note 11, at 276. See also S. Rep. No.
1351, 90th Cong., 2d Sess. 10-12 (1968).**
Therefore, Citibank’s fund is a mutual fund, and the
Comptroller, by implementing his Regulation 9 to authorize
that fund, has in fact authorized the bank to engage in the
issuance, sale, distribution and underwriting of securities,
each of which activities violates the Glass-Steagall Act.®
5¢ The 1969 Annual Report of the First National City Corpora-
tion (a oge-bank holding company formed in 1968), p. 16, filed
with the SEC February 12, 1970, described this suit as one which
seeks to block bank operation of “mutual-type funds.”
55 It follows that the Court of Appeals was in error in holding
that the question presented was one involving the review of an
exercise of agency expertise. Such a standard of review is in-
apposite in cases asserting that administrative action is not av-
thorized by statute. See First National Bank v. Dickinson, 3%
U.S. 122 (1969); NLRB v. Brown, 380 U.S. 278, 292 (1965);
NLRB vy. Insuranse Agents’ International Union, AFL-CIO, 361
U.S. 477, 499-500 (1960); Phillips Petroleum Co. v. Wisconsin,
347 U.S. 672, 677-78 (1954); Elgin, Joliet & Eastern Ry. V.
Benj. Harris & Co., 245 F. Supp. 467, 472 (N.D. Ill. 1965). As
this Court has stated:
“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 4
judicial function.” Social Security Board v. Nierotko, 32i
U.S. 358, 369 (1946) (footnote omitted).
49
pf. A BANK MUTUAL FUND IS NOT IMMUNE FROM THE
GLASS-STEAGALL ACT SIMPLY BECAUSE IT IS OPER-
ATED BY THE BANK’S TRUST DEPARTMENT.
Absent exemption from the Glass-Steagall Act, banks
cannot directly or indirectly engage in the securities busi-
ness without violating one or more of Sections 16, 20, 21
and 32. It is implicit in the decision below, particularly in
the opinion written by Judge Bazelon, that such an exemp-
tion from Glass-Steagall arises in favor of securities deal-
ings by banks when conducted unc.r the aegis of their trust
departments. Such a holding can only be justified if: (1)
the Glass-Steagall Act does not apply to securities deal-
ings by a bank when the bank has a “fiduciary” obliga-
tion to its customer; and (2) 12 U.S.C. § 92a (which pro-
vides for the granting of trust powers by the Comptroller
to national banks) authorizes the Comptroller to grant
exemptions from the Glass-Steagall Act. Neither propo-
sition is valid.
A. No Immunity Arises From the Mere Fact That the
Bank Has a “Fiduciary” Obligation Towards
Investors in Its Fund
Nothing in the Glass-Steagall Act warrants the conclu-
sion that it is inapplicable here simply because a “fiduciary”
label has been affixed to the bank’s fund by the Comptroller
and Citibank. Indeed, it was the breach by banks of their
“fiduciary” obligations which caused Congress to pass the
* The provision in Section 16 which permits banks to buy and
sell securities “for the account of customers” has nothing to do
with a distinction between securities dealings conducted in a fidu-
ciary capacity and those conducted in other banking capacities.
The purpose of that provision was simply to allow banks to ac-
commodate existing customers by executing their stock market
orders. See pp. 27-29 supra.
50
Glass-Steagall Act in the first place. The Report of the
Committee on Currency and Banking stated:
“Commercial banks found a fertile field among [their]
depositors for purchasers of security issues which
their investment affiliates were sponsoring. These
banks, violating their fiduciary duty to depositors seek.
ing disinterested investment counsel from their bank.
ers, referred these depositors to the affiliates for ad-
vice.” S. Rep. No. 1455, 73rd Cong., 2d Sess. 163
(1934).
The Report further found
“A great many of these evils [disclosed in Senate Sub-
committee Hearings] were, however, attributable to
the utter disregard by officers and directors of com-
mercial banks and investment affiliates of the basic
obligations and standards arising out of the fiduciary
relationship extending not only to stockholders and
depositors, but to persons seeking financial accommo.
dation or advice. The hearings disclosed, on the part
of many bankers, a woeful lack of regard for the
public interest and a proper conception of fiduciary
responsibility.” Jd. at 185.
Thus the Glass-Steagall Act was meant to reach bank
activities even if conducted in the exercise of its fiduciary
responsibility.
B. 12 U.S.C. § 92a Neither Authorizes Regulation 9
Nor Confers Immunity From the Glass-Steagall
Act
Section 92a does not authorize the Comptroller to im-
munize conduct which would otherwise violate the Glass-
Steagall Act. The statute simply concerns the granting of
corporate authority to-act in a trust capacity—“as trustee,
executor, administrator, registrar of stocks and _ bonds,
—
guardian of estates, assignee, receiver, committee of
estates, lunatics, or in any other fiduciary capacity in which
State banks . . . are permitted to act under the laws of
the State in which the national bank is located.*’ Like
any other grant of corporate authority conferred by statute
or by charter, it cannot be escalated into a license to vio-
late the provisions of substantive law. For example, it is
clear that the authority granted national banks to merge
under 12 U.S.C. §215a does not immunize bank mergers
from prosecution under the antitrust laws. See United
States v. Philadelphia National Bank, 374 U.S. 321, 350-52
(1963).
Section 92a does not explicitly confer any immunity
from the Glass-Steagall Act. Nor is there a repugnancy
between the two statutes which requires reconciliation here.
Compare Silver v. New York Stock Exchange, 373 U.S. 341
(1963).
The term “fiduciary” covers so many activities (e.g.,
the practice of law) which are far removed from tradi-
tional trustee services that Congress cannot reasonably
be deemed to have given the Comptroller authority to allow
bank trust departments to engage in any activity which
he or a State®® might conclude involves “fiduciary” obli-
gations. A mutual fund’s obligations to its shareholders
are no less “fiduciary” than those of the Citibank fund.
51
* While Section 92a authorizes the Comptroller to grant trust
powers to national banks in states where similar powers are
granted to state banks, the fact that New York would now author-
ie its banks to engage in such activity has no bearing on the
lawfulness of the Comptroller’s action under the Glass-Steagall
Act, since state banks are likewise subject to the prohibitions
of the Glass-Steagall Act.
*Cf. 19 Fed. Res. Bull. 188 (1933) :
“The fact that corporate fiduciaries in at least one State
are permitted by State law to invest trust funds collectively
in real-estate mortgage pools in this manner was brought to
52
Hearings on S. 3580 Before a Subcomm. of the Senate .
Comm. on Banking and Currency, 76th Cong., 3d Sess. 4§
(1940). See also H. Rep. No. 2639, 76th Cong., 3d Sess. 10
(1940); S. Rup. No. 1775, 76th Cong., 3d Sess. 12 (1940).
There is no basis for an inference that Congress meant the
Glass-Steagall prohibitions to give way before whatever
powers labeled “fiduciary” are dispensed by the Comp.
troller under Section 92a.
Indeed, other legislation suggests that Congress would
not have regarded Citibank’s commingling of managing
agency accounts as a “fiduciary” activity under Section
92a. Thus, in Section 584 of the Internal Revenue Code,
Congress exempted from taxation common trust funds
maintained by a bank in its capacity as “trustee, executor,
administrator, or guardian.” This would not include Citi-
bank’s commingled managing agency fund. See pp. 78
supra. Similarly, Section 3(c)(3) of the Investment Com-
pany Act, 15 U.S.C. § 80a-3(¢) (3), exempted “any common
trust fund or similar fund maintained by a bank exclusively
for the collective investment and reinvestment of moneys
contributed thereto by the bank in its capacity as a trus-
tee, executor, administrator or guardian . . .” but again,
this would not include Citibank’s commingled managing
agency fund. Former SEC Chairman Cary testified in
House hearings in 1963 that the basis for this distinction
was “the assumption that the traditional common trust
fund as circumscribed by the Federal Reserve Board could
be used only for bona fide fiduciary purposes and not as a
vehicle for general investment by the public.” 1963 Hear-
ing, supra note 9, at 4.
The promotion and sale by a bank of an investment fund
in form composed of commingled managing agency ac-
the board’s attention when it was considering this question;
but the board held that this did not authorize national banks
to engage in such practices.”
53
counts is far removed from the trust concepts of Section
92a. As Chief Judge Bazelon noted, this is a “new and
free-wheeling activity” (A. 272). The Federal Reserve,
which supervised trust powers of national banks from 1913
until 1962, consistently warned against abuse of the au-
thority to employ common trust funds, strictly limiting
them to trusts created for “bona fide” or “strictly fiduciary
purposes.” 24 rp. Res. Butt. 4-5, 10 (1938). The Board
stated that it was “improper” for a bank to use “the common
trust fund as a medium attracting individuals primarily
seeking investment management of their funds.” 42 Fen.
Res. Buy. 228 (1956). See also 26 Fep. Res. Bui. 393-94
(1940); 41 Fen. Res. Buty. 142 (1955).
The factor which distinguishes accepted trust activity
from a public investment medium such as a mutual fund
is the element of continuing personal attention to the
customer’s individual needs. As former SEC Chairman
Cohen stated :
“The commingling of managing agency accounts rep-
resents a departure from traditional banking practice
.... Previously, the relationships between the bank
and the persons for whom it acted arose from indi-
vidually negotiated trust agreements, individually nego-
tiated managing agency accounts, or similar arrange-
ments, and the commingled fund itself was never
presented as an investment medium to the general
public. The proposal to [authorize banks to operate
mutual funds] removes the element of individualized
relationships and replaces it with a standard invest-
ment package offered on an identical basis to all
comers.” 1966 Hearings, supra note 11, at 136-37.
A similar distinction was drawn by Reese Harris, Vice
President, Trust Division, American Bankers Association,
whose testimony before Congress indicated that a bank
collective fund for managing agency accounts would lack
54
sufficient “fiduciary” characteristics to distinguish it from
a mutual fund unless:
(1) the managing agency accounts come into existence
prior to the time that the bank establishes its collective
fund. “By contrast,” Mr. Harris noted, “a person who
buys shares in a mutual fund does so exactly as he buys
shares in any other corporation”; and
(2) the bank has discretion whether to commingle any
part of the customer’s funds, so that there can be no “pos.
sibility of a managing agency contract providing for the
direct or automatic investment of management agency ae.
count in a collective fund.” 1964 Hearings, supra note 9, at
87, 88.°°
Citibank’s fund fails on both tests set out by Mr. Harris.
The investor creates the managing agency as he tenders
his money, exactly as he buys shares in a mutual fund.
Second, there is no exercise of discretion by a trust officer
and no element of individualized relationship. The only
information required from the participant in the tear-out
5° Former Comptroller Saxon has emphasized that the bank's
retention of discretion in determining whether to commingle funds
is a controlling element of a true fiduciary relationship, even for
managing agency accounts:
“Now, in all of these funds, it is the bank itself which
exercises the discretion as to whether the funds of particular
accounts shall go into a common trust fund.
“In our own regulation, for example, the investment dis-
cretion makes the relationship an agency trust, rather than
simply an agency. It is the discretion exercised by the bank
in putting a trust customer’s funds either into a common
trust fund or elsewhere, which is significant.
“People, too, aware that common trust funds exist, in enter-
ing into a fiduciary relationship may request or otherwise
provide for collective investment as a permissible form of
investment.
“Fundamentally, though, the discretion lies in the bank.”
1963 Hearing, supra note 9, at 50.
55
authorization form is his name, address and social security
number (A. 158). All of the funds so tendered by the in-
yestor are directly and automatically invested in the
collective fund. The fund’s Prospectus so requires (A.
147), and the Affidavit of City Bank’s executive vice presi-
dent shows that the bank at no time weighs the possibility
of not investing the customer’s money in the commingled
account (A. 197). As Judge Bazelon noted of the bank’s
claim that it gave individual attention to each investor’s
particular needs:
“The Bank’s affidavit states that it will accept the cus-
tomer’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” (A. 275, n. 9).
In short, the operation by a bank trust department of
an open-end investment fund like Citibank’s is devoid of
the personai trust concepts of Section 92a and is indis-
tinguishable from a mutual fund. There is accordingly
no basis for inferring that Congress intended either to
authorize bank operation of such funds under 12 U.S.C.
§92a or to grant exemptions in their favor from the Glass-
Steagall Act.
CONCLUSION
The judgment of the Court of Appeals should be wm
versed and the cause should be remanded to that court
to enter judgment affirming the judgment of the Distrig}
Court.
Respectfully submitted,
G. Duane VIETH
JaMEs F. Firzpatrick
Metvin SPAETH
1229—19th Street, N. W.
Washington, D. C.
Counsel for Petitioners
Of Counsel:
Rosert AUGENBLICK
Investment Company Institute
1775 K Street, N. W.
Washington, D. C.
Davip J. NEWBURGER
ArNoLD & PorTER
1229—19th Street, N. W.
Washington, D. C.
May 22, 1970
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.