INVESTMENT COMPANY INSTITUTE, ET AL., PETITIONERS V. FEDERAL
DEPOSIT INSURANCE CORP., ET AL.

   No. 87-36

   In the Supreme Court of the United States

   October Term, 1987

   On Petition for a Writ of Certiorari to the United States Court of
Appeals for the District of Columbia Circuit

   Brief for the Respondents in Opposition

            TABLE OF CONTENTS
   Question Presented
   Opinions below
   Jurisdiction
   Statement
   Argument
   Conclusion

                            OPINIONS BELOW

   The opinion of the court of appeals (Pet. App. 1a-18a) is reported
at 815 F.2d 1540.  The opinion of the district court (Pet. App.
39a-44a) is reported at 606 F. Supp. 683.

                             JURISDICTION

   The judgment of the court of appeals was entered on April 7, 1987.
The petition for a writ of certiorari was filed on July 6, 1987.  The
jurisdiction of this Court is invoked under 28 U.S.C. 1254(1).

                          QUESTION PRESENTED

   Whether federal law prohibits state-chartered banks that are not
members of the Federal System from becoming affiliated with firms that
engage in the securities business.

                               STATEMENT

   1. The Banking Act of 1933, ch. 89, 48 Stat. 162, contains four
provisions, usually referred to together as the Glass-Steagall Act,
that restrict the participation of banks and certain bank affiliates
in specified securities activities.  See Securities Industry Ass'n v.
Board of Governors, 468 U.S. 207, 216 (1984).  Section 16 of the Act,
12 U.S.C. (Supp. III) 24 Seventh, limits the authority of national
banks to deal in securities.  Sections 20 and 32 of the Act, 12 U.S.C.
377 and 78, restrict the affiliate activities of banks, both
federally- and state-chartered, that are members of the Federal
Reserve System.  Section 20 provides that "no member bank shall be
affiliated in any manner" with firms "engaged principally" in the
underwriting or distribution of securities;  Section 32 provides that
no director, officer or employee of a firm "primarily engaged" in the
underwriting or distribution of securities "shall serve (at) the same
time as an officer, director, or employee of any member bank."

   Section 21 of the Act, 12 U.S.C. 378, is the only provision that
applies to state-chartered banks that are not members of the Federal
Reserve System, as well as to national and state member banks.  Like
the other provisions of the Act, Section 21 "separates investment and
commercial banks, but does so from the perspective of investment
banks." Securities Industry Ass'n, 468 U.S. at 148.  It prohibits any
person "engaged in the business of issuing, underwriting, selling, or
distributing * * * stocks, bonds, debentures, notes, or other
securities" from "engag(ing) at the same time to any extent whatever
in the business of receiving deposits" (12 U.S.C. 378(a)(1)).  Willful
violations of Section 21 are punishable by fine or imprisonment (12
U.S.C. 378(b)).

   2. In 1984, after two years of consideration and two rounds of
rulemaking proceedings, the Federal Deposit Insurance Corporation
(FDIC), which regulates federally-insured state banks that are not
members of the Federal Reserve System (insured non-member banks),
issued regulations permitting such banks to become affiliated with
firms engaged in the securities business.  In a 1982 statement of
policy (Pet. App. 189a-193a), the FDIC explained that the
Glass-Steagall Act does not prohibit insured nonmember banks from
establishing affiliates or organizing subsidiaries that engage in the
securities business.  The FDIC noted that Section 21, the only
provision of the Act that applies to nonmember banks, "does not
address the actions of subsidiaries or affiliates" (Pet. App. 191a).
In contrast, Sections 20 and 32 of the Act, which regulate
affiliations between banks and securities firms, apply only to member
banks (id. at 191a-192a).  The FDIC accordingly concluded that it
should not "extend() the reach of the prohibitions of section 21 of
the Glass-Steagall Act to bona fide subsidiaries of insured nonmember
banks" (Pet. App. 193a) -- a conclusion that the agency believed was
supported both by the Glass-Steagall Act's legislative history and by
this Court's decision in Board of Governors v. Investment Co.
Institute, 450 U.S. 46 (1981).

   The FDIC, however, also recognized its responsibility for
maintaining the safe and sound operation of insured nonmember banks
(see Pet. App. 190a).  It therefore promulgated a regulation
providing, among other things, that the securities affiliates and
subsidiaries of such banks must be physically separated from the bank,
must conduct their business according to wholly independent policies,
and must observe separate corporate formalities;  affiliates and
subsidiaries also must make it clear to customers that recommended
investments are not bank deposits, are not guaranteed by the bank, and
are not insured by the FDIC.  At the same time, potentially risky bank
activities, including purchases of securities from and extensions of
credit to affiliated or subsidiary securities firms, are severely
restricted.  12 C.F.R. 337.4(e).  And a bank's creation of a
subsidiary relationship with a securities firm must be promptly
disclosed to the FDIC.  12 C.F.R. 337.4(d).  /1/

   3. Petitioners, trade associations that represent investment
companies and securities dealers, then filed this action challenging
the regulation under both Section 21 of the Glass-Steagall Act and the
Federal Deposit Insurance Act (12 U.S.C. 1181 et seq.).  The United
States District Court for the District of Columbia rejected this
challenge, upholding the regulation (Pet. App. 39a-44a).  The court
noted that petitioners' argument reduced to the assertion that Section
21 bars insured nonmember banks from entering into a parent-subsidiary
or affiliate relationship with a securities firm.  But such a reading
of Section 21, the court continued, would render nugatory Section 20,
which specifically regulates the affiliate relationship of member
banks.  Because petitioners' approach would lead to this
"contradictory" result -- and because Section 21, as a criminal
provision, should be narrowly construed -- the court found the
regulation consistent with the Glass-Steagall Act.

   The court of appeals affirmed (Pet. App. 1a-18a), finding that
"Congress clearly intended Section 21 to allow insured nonmember banks
to maintain subsidiary or affiliate relationships with securities
firms" (id. at 11a).  /2/ The court noted that Section 21, the only
provision of the Glass-Steagall Act that regulates nonmember banks,
"says nothing explicitly" about the propriety of such banks
"establishing subsidiaries or affiliates that engage in the securities
business" (Pet. App. 12a).  And if the provision is read to regulate
such relationships, the court continued, "then Section 20's somewhat
permissive language, which allows member banks to establish affiliate
relationships with firms doing some limited amount of securities work
(that is, firms not "principally engaged" in the securities business),
becomes meaningless" (id. at 13a).

   Petitioners attempted to avoid this conclusion by arguing to the
court of appeals that Section 20 is a permissive provision that
creates a limited exemption for member banks from the general
prohibition on affiliation with securities firms supposedly imposed on
all banks by Section 21.  The court explained, however, that Section
20 "speaks in the language of prohibition, not authorization" (Pet.
App. 13a).  The court also found it "utterly improbable" (id. at 15a)
that Congress intended to impose greater restrictions on nonmember
than on member banks, noting that many members of Congress had
considerable doubt at the time of the enactment of the Glass-Steagall
Act about Congress's authority to regulate nonmember banks at all (see
id. at 12a, 14a-15a).  And the court of appeals found compelling
support for its holding in this Court's decision in Board of Governors
v. Investment Co. Institute, supra, which held under Section 21 that
"'bank affiliates may be authorized to engage in certain activities
that are prohibited to banks themselves'" (Pet. App. 15a-16a (quoting
450 U.S. at 60)).

   The court of appeals also rejected petitioners' contention that the
FDIC regulation is inconsistent with provisions of the Federal Deposit
Insurance Act prohibiting "unsafe and unsound banking practices" (see
12 U.S.C. 1818, 1816).  /3/ The court explained that this contention
rested on the incorrect assumption that the challenged regulation is
invalid under Section 21 of the Glass-Steagall Act (Pet. App. 17a).
And the court added that, in any event, "(a)uthority to determine what
constitutes an 'unsafe' or 'unsound' banking practice is firmly
committed to the (FDIC)" (id. at 18a).  Here, the court concluded,
petitioners have provided "no rationale that demonstrates the
'unreasonableness' of FDIC's decision to impose stringent regulations
on insured nonmember banks' affiliate and subsidiary relationships
with securities firms, in lieu of pursuing an outright ban on such
relationships" (ibid.).

                               ARGUMENT

   The decision below is correct:  it is unambiguously supported by
the language and legislative history of the Glass-Steagall Act, as
well as by this Court's decision in Board of Governors v. Investment
Co. Institute, 450 U.S. 46 (1981).  In the absence of a conflict in
the circuits, review of the holding below plainly is not warranted.

   1. a. Petitioners' principal legal contention (Pet. 12-13) is their
assertion that Section 21's plain terms bar the subsidiaries and
affiliates of insured nonmember banks from dealing in securities.
This assertion, however, is an insupportable ipse dixit.  In fact,
Section 21 prohibits "any person, firm, corporation, association,
business trust, or other similar organization, engaged in the
(securities business)" from "engag(ing) at the same time to any extent
whatever in the business of receiving deposits." The "to any extent
whatever" phrase, upon which petitioners rely, simply provides that
securities firms may not accept any deposits in any form.  See 77
Cong. Rec. 4179 (remarks of Sen. Bukley).  Nothing in Section 21 has
any bearing on the authority of insured nonmember banks to establish
bona fide affiliate or subsidiary relationships with securities firms,
so long as those firms do not engage in the business of receiving
deposits.

   As both courts below recognized, Congress's decision to exclude
affiliate and subsidiary relationships from the reach of Section 21 is
confirmed by the fact that other provisions of the Glass-Steagall Act
expressly address the affiliations of member banks.  Section 20
provides that "no member bank shall be affiliated in any manner" with
a firm engaged principally in issuing, underwriting or distributing
securities, while Section 32 prohibits interlocking managements
between such banks and securities firms.  When Congress wanted to
address bank affiliations, it thus did so in express terms.  Indeed,
petitioners' reading of Section 21 would render Section 20
meaningless, a result that could not have been intended by the
Congress that simultaneously enacted both provisions.  /4/ And the
legislative history makes clear, as the language of these provisions
suggests, that Congress acted deliberately in declining to regulate
affiliate relationships in Section 21:  in the only direct
congressional commentary on the provision, Senator Glass responded
"(y)es" when asked whether, "if (investment banks) wish to receive
deposits they must have separate institutions for that purpose." 77
Cong. Rec. 3730 (1933) (colloquy between Senators Glass and Robinson).

   b. The holding below also follows directly from this Court's
decision in Board of Governors v. Investment Co. Institute, supra, an
earlier challenge to bank activities brought by one of the petitioners
in this case.  Noting that "a bank affiliate may engage in activities
that would be impermissible for the bank itself" (450 U.S. at 64), the
Court there held that bank holding companies -- which are defined as
bank affiliates for purposes of the Glass-Steagall Act (see 12 U.S.C.
221a(b)(4)) -- may offer certain securities-related services even if
Section 21 would bar banks from performing those services (450 U.S. at
63-64).  /5/ In reaching this conclusion, the Court flatly rejected
the assertion that "the bank and its holding company should be treated
as a single entity for purposes of applying sections 16 and 21,"
finding that "the structure of the Glass-Steagall Act indicates to the
contrary." The Court explained:  "Sections 16 and 21 flatly prohibit
banks from engaging in the underwriting business.  Organizations
affiliated with banks, however, are dealt with by other sections of
the Act (among them, Section 20).  * * * Thus the structure of the Act
reveals a congressional intent to treat banks separately from their
affiliates.  The reading of the Act urged by respondent would render
Section 20 meaningless." 450 U.S. at 58-59 n.24.  This holding is
dispositive here.  /6/

   In contrast, the two decisions of this Court relied upon by
petitioners (Pet. 14-16), Investment Co. Institute v. Camp, 401 U.S.
617 (1971), and Securities Industry Ass'n v. Board of Governors, 468
U.S. 137 (1984), are wholly inapposite.  Camp involved a national
bank's operation of a mutual fund, an activity that is unlawful for
banks under Sections 16 and 21;  deferring to a conclusion of the
Federal Reserve Board, the Court concluded that the bank and its fund
were not separate entities (401 U.S. at 626 n.12).  See 12 C.F.R.
218.111(j).  Securities Industry Ass'n held only that commercial paper
is a "security" within the meaning of the Glass-Steagall Act, a
conclusion that has no relevance in this case.  /7/

   2. Petitioners' lengthy assertion that the FDIC's action here is
part of a concerted administrative attempt to thwart the will of
Congress (Pet. 6-12) is plainly without merit.  This argument simply
fails to take into account either the language and history of the
Glass-Steagall Act or this Court's decisions under the Act, all of
which make it clear that the FDIC's interpretation is the only one
that is consistent with the statute.  Indeed, Congress expressly
recognized the FDIC's approach in recent comprehensive banking
legislation, which was signed into law on August 10, 1987.
Competitive Equality Banking Act of 1987, Pub. L. No. 100-86.  Section
103 of that law subjects the securities affiliations of insured
nonmember banks to Sections 20 and 32 of the Glass-Steagall Act until
March 1, 1988;  affiliations established prior to March 5, 11987, are
not affected.  See H.R. Conf. Rep. 100-261, 100th Cong., 1st Sess. 17
(1987).  The Conference Report notes that the affiliate restrictions
of Sections 20 and 32 currently "do not apply to nonmember banks," and
explains that the moratorium legislation is intended to maintain the
status quo as to the activities of the affiliates of such banks (H.R.
Conf. Rep. 100-261, supra, at 134).

   In Section 203 of the recent legislation, moreover, Congress
expressed its intent "to conduct a comprehensive review of our banking
and financial laws and to make decisions on the need for financial
restructuring legislation in the light of today's changing financial
environment * * * before the expiration of (the March 1988)
moratorium." H.R. Conf. Rep. 100-261, supra, at 35.  In these
circumstances, it is petitioners, not the FDIC, who are attempting to
disrupt the legislative scheme, and who are attempting to use
litigation to thwart or influence the ongoing legislative process.
/8/

   3. Petitioners' final contention -- that the FDIC regulation
sanctions "unsafe and unsound" banking practices in violation of the
Federal Deposit Insurance Act (Pet. 17-19) -- also lacks merit.  As
the court below recognized, this assertion is based on the assumption
that Congress, in enacting Section 21 of the Glass-Steagall Act, meant
to indicate that it was per se an unsafe practice for nonmember banks
to affiliate with securities firms (see Pet. 18).  As we explain
above, however, Section 21 does not bar such affiliations, and
therefore can hardly be read to exprss a congressional view that such
affiliations invariably raise safety concerns.  And petitioners have
not even attempted to demonstrate that the FDIC's stringent regulation
fails to obviate whatever risks are associated with securities-dealing
by affiliates or subsidiaries of nonmember banks.

                              CONCLUSION

   The petition for a writ of certiorari should be denied.

   Respectfully submitted.

   CHARLES FRIED

      Solicitor General

   RICHARD K. WILLARD

      Assistant Attorney General

   ANTHONY J. STEINMEYER

   THEODORE C. HIRT

      Attorneys

   SEPTEMBER 1987

   /1/ The FDIC recently issued proposed amendments to portions of the
regulations dealing with common names of affiliated banks and
securities firms, and common entrances to bank and affiliated
securities firm facilities.  52 Fed. Reg. 11492 (1987).

   /2/ Petitioners simultaneously filed both their district court
action challenging the regulation and a petition for review of the
regulation in the court of appeals (Pet. App. 5a).  The court of
appeals stayed proceedings on the petition for review pending the
district court's decision (ibid.), and ultimately affirmed the
district court's decision while dismissing the petition for review
(id. at 18a).

   /3/ The court of appeals originally held that petitioners lacked
standing to assert claims under the Federal Deposit Insurance Act (see
Pet. App. 27a-30a).  The court of appeals vacated this portion of its
holding after this Court's decision in Clarke v. Securities Industry
Ass'n, No. 85-971 (Jan. 14, 1987) (see Pet. App. 9a-10a), and
proceeded to reject petitioners' claim on the merits.

   /4/ Petitioners' only answer to this proposition is the assertion
that Section 20 -- which permits member banks to affiliate with firms
that do some securities business, so long as those firms are not
"principally engaged" in the securities business -- was intended to
create a special exception for the benefit of member banks to the
otherwise general prohibition created by Section 21 (Pet. 15-16).  As
the court below noted, however, this "utterly improbable" assertion
turns the Glass-Steagall Act on its head.  Absolutely nothing in the
language of Section 20 suggests that it was written as a permissive
exemption rather than as an independent prohibition (see Pet. App.
13a-14a).  Such a reading, moreover, would mean that member banks are
subjected to less stringent regulation than nonmember banks.  That
would fly in the face of Congress' express intent not to
"discriminate, in any manner, against State nonmember, and in favor
of, national or member banks" (Section 8, 48 Stat. 180).  And it is
hardly a likely reading, given the doubts expressed by some sponsors
of the Glass-Steagall Act that Congress had the power to regulate
nonmember banks at all.  See 75 Cong. Rec. 9905 (1932) (remarks of
Sen. Fess);  ibid. (remarks of Sen. Walcott);  Pet. App. 12a.

   /5/ The Court noted that "Section 21 prohibits firms engaged in the
securities business from also receiving deposits.  Bank holding
companies do not receive deposits, and the language of Section 21
cannot be read to include within its prohibition separate
organizations related by ownership with a bank, which does receive
deposits" (450 U.S. at 58 n.24).  The Court added that the legislative
history of Section 21 supports this conclusion (ibid.) (citing 77
Cong. Rec. 3730 (1933) (colloquy between Senators Glass and
Robinson)).

   /6/ Petitioners' suggestion (Pet. 13) that the legislative
background demonstrates a congressional intent in Section 21 to treat
banks and their affiliates as single entities is thus flatly
inconsistent with the statutory language and legislative history, and
with this Court's holding in Board of Governors v. Investment Co.
Institute, supra.

   /7/ On remand from this Court's decision in Securities Industry
Ass'n, the court of appeals held that a bank's distribution of
commercial paper does not constitute an unlawful underwriting under
the Glass-Steagall Act.  807 F.2d 1052 (D.C. Cir. 1986).  This Court
declined to review that decision.  No. 86-1429 (June 22, 1987).

   /8/ Petitioners are simply incorrect in asserting (Pet. 7) that the
FDIC's regulation involved a change in administrative position.  The
FDIC has not expressed the view that the affiliation of insured
nonmember banks with securities firms violates the Glass-Steagall Act;
 to the contrary, as the FDIC informed the court of appeals, between
1969 and 1986 there were 28 instances in which securities firms
affiliated themselves with insured nonmember banks without objection
from the FDIC.  Petitioners also are incorrect in suggesting that the
Securities and Exchange Commission (SEC) has challenged the validity
of the FDIC's regulation (Pet. 7 n.8).  In fact, the SEC, which has
recognized that the issue here is within the FDIC's area of expertise
(see Pet. App 194a), has expressed no formal view on the FDIC
regulation.  See generally FDIC Securities Proposal and Related
Issues:  Hearings Before the Subcomm. on Telecommunications, Consumer
Protection, and Finance of the House Comm. on Energy and Commerce,
98th Cong., 1st Sess. 44 (1983) (testimony of Chairman John Shad).