CBC, INC., PETITIONER V. BOARD OF GOVERNORS OF THE FEDERAL RESERVE
SYSTEM

   No. 88-1109

   In The Supreme Court Of The United States

   October Term, 1988

   On Petition For A Writ Of Certiorari To The United States Court Of
Appeals For The Tenth Circuit

   Memorandum For The Respondent In Opposition

   Petitioner challenges a determination by respondent Board of
Governors of the Federal Reserve System that the Board has authority
under the Bank Holding Company Act (BHCA or Act), 12 U.S.C. 1841-1848,
to require bank holding companies having more than $150 million in
consolidated assets to submit financial statements that are certified
by an independent public accountant as a part of the companies' annual
report to the Board.

   1. The BHCA comprehensively regulates bank holding companies.
Section 5(c) of the Act, 12 U.S.C. 1844(c), provides that the Board
"may require reports under oath to keep it informed as to whether the
provisions of (the Act) and such regulations and orders issued
thereunder have been complied with." Pursuant to that provision, the
Board has long required bank holding companies to submit annual
reports of operations in a prescribed form (Form FR Y-6).  12 C.F.R.
225.5(b).

   On July 9, 1985, the Board issued a proposed regulation revising
the reporting requirements for Form FR Y-6 and other forms.  50 Fed.
Reg. 28,026.  The Board proposed to modify the existing requirement
that bank holding companies having at least $100 million in
consolidated banking assets must submit financial statements certified
by an independent public accountant.  Under the proposed revision,
bank holding companies with total consolidated assets (nonbanking as
well as banking) exceeding $150 million were to be required to submit
certified financial statements.  Id. at 28,030.  The Board stated that
the proposed change would reduce the reporting burden for some bank
holding companies.  Ibid.

   2. Petitioner, a bank holding company with total consolidated
assets in excess of $150 million, submitted a comment on the proposal
objecting to the certified financial statement requirement.  R.
29-245.  Petitioner argued that the Board lacks statutory authority to
require certified financial statements.  Petitioner suggested that the
Board is required instead to rely on reports of examinations of
subsidiary banks made by other federal and state bank regulators.  R.
30-48.

   On December 13, 1985, the Board adopted the proposed revision to
Form FR Y-6 requiring bank holding companies with total consolidated
assets in excess of $150 million to submit auditor-certified financial
statements.  50 Fed. Reg. 50,950, 50,951.  As statutory authority, the
Board relied on Section 5(c) of the BHCA.  Id. at 50,956.  The Board
explained that the certification requirement promotes safe and sound
operations.  Ibid.

   3. On a petition for review filed by petitioner under 12 U.S.C.
1848, the court of appeals upheld the Board's modified regulation.
Pet. App. A1-A19.  The court concluded that the Board's requirement of
certification by an independent accountant is based on a reasonable
construction of BHCA Section 5(c), which authorizes the Board to
require reports from bank holding companies.  Pet. App. A6-A17.  The
court found that financial statements certified by an independent
accountant fall within the ordinary meaning of the statutory term
"reports" (id. at A6-A9) and that the auditor-certification
requirement is consistent with the purposes of the Act because it
enables the Board to meet its statutory responsibility to obtain
reliable evidence of the commercial credit practices and financial
positions of bank holding companies and their subsidiaries (id. at
A9-A12).

   The court of appeals also concluded that the Board must be
permitted to require reports of a bank holding company's subsidiary
banks, as well as of the holding company itself, in order to give
effect to the purposes of the Act.  Pet. App. A12-A13.  Further, the
court found that the Board was not required to use examination reports
prepared by other bank supervisory authorities in lieu of certified
financial statements, explaining that the Board is required to use
such examination reports only "as far as possible" (12 U.S.C. 1844(c))
and that petitioner had failed to show that such reports produce the
same reliable, complete, timely information as the more frequent
reports required by the Board.  Pet. App. A13-A17.  Finally, the court
concluded that the Board's selection of $150 million in consolidated
assets as the minimum threshold for the certified financial statement
requirement is within the Board's discretion under the statute and is
arbitrary and capricious.  Id. at A17-A19.

   4. The Board's determination that BHCA Section 5(c) authorizes it
to require financial statements in annual reports certified by
independent public accountants was correctly upheld as a permissible
construction of the statute by the agency charged with administering
it.  See Chevron U.S.A. Inc. v. Natural Resources Defense Council,
Inc., 467 U.S. 837, 843 (1984);  see also Northeast Bancorp, Inc. v.
Board of Governors, 472 U.S. 159, 168 (1985) (Board is "an
authoritative voice on the meaning of a federal banking statute");
Board of Governors v. First Lincolnwood Corp., 439 U.S. 234, 251
(1978).  /1/ Section 5(c), 12 U.S.C. 1844(c), provides that "(t)he
Board from time to time may require reports under oath to keep it
informed as to whether the provisions of (the Act) and such
regulations and orders issued thereunder have been complied with." The
provision gives the Board substantial discretion to determine the form
and content of required reports, and the language is plainly broad
enough to encompass a requirement of certified financial statements --
like those in an "auditor's report" -- as long as the requirement
reasonably advances the Board's ability to carry out its
responsibilities under the BHCA.

   The requirement of auditor-certified financial statements at issue
in this case advances the Board's ability to carry out its statutory
duties to monitor the financial condition of bank holding companies to
ensure their safe and sound operation.  For example, the Board must
consider the financial condition of a bank holding company when the
company acquires a bank or nonbank company.  12 U.S.C. 1842(c),
1843(c)(8);  Board of Governors v. First Lincolnwood Corp., 439 U.S.
at 243, 249-251;  12 C.F.R. 225.24.  In addition, the Board may
terminate any direct or indirect nonbanking activity of a holding
company if, among other things, the activity poses "a serious risk to
the financial safety, soundness, or stability of a bank holding
company subsidiary bank." 12 U.S.C. 1844(e).  Also, Section 5(c)
specifically authorizes the Board to "make examinations of each bank
holding company and each subsidiary thereof." 12 U.S.C. 1844(c)
(emphasis added).  See also S. Rep. No. 1084, 91st Cong., 2d Sess. 24
(1970) (BHCA purpose "to prevent possible abuses related to the
control of commercial credit");  Pet. App. A10-A11.  In short, the
particular reporting requirement at issue here is reasonably related
to the Act's purposes and the Board's functions under the Act.  /2/

   The requirement of financial statements certified by independent
accountants is entirely consistent with Section 5(c)'s direction that
the Board "shall, as far as possible, use the reports of examinations
made by the Comptroller of the Currency (the primary supervisor of
national banks), the Federal Deposit Insurance Corporation, and the
appropriate State bank supervisory authority." 12 U.S.C. 1844(c).
That direction by its terms provides only that examination reports of
bank supervisors shall be used "as far as possible." Moreover, Section
5(c) expressly contemplates that the Board itself "may make
examinations of each bank holding company and each subsidiary
thereof." Here, as the court of appeals concluded (Pet. App. A14-A17),
there is a reasonable basis for the Board to conclude that the
supervisory agencies' examination reports relating to subsidiary banks
of holding companies do not fully substitute for a certification by an
outside auditor of financial statements contained in the holding
companies' annual reports.  Even aside from the fact that that bank
examinations may not as heavily focus on the propriety of the
company's accounting methods and the adequacy of the company's
mechanisms to detect and deter fraud, complete bank examinations in
many cases are performed only at irregular intervals of up to three
years.  Id. at A15.  And updates of such examinations may provide less
complete information than can the annual audits required by the Board.
 Id. at A15-A16.

   Finally, the Board acted reasonably in applying the requirement of
a certified financial statement to all bank holding companies with
more than $150 million in consolidated assets.  Selection of such a
threshold involves weighing the costs of compliance for smaller
institutions against the supervisory benefits to be achieved by the
certification requirement;  and any particular threshold dollar figure
is necessarily arbitrary in the sense that a slightly higher or lower
figure is not materially distinguishable.  An agency must have wide
discretion in selecting such a threshold.  Here, the Board's selection
of $150 million in total assets as a threshold was reasonable, as the
same threshold has been used to identify smaller bank holding
companies for various other regulatory purposes.  /3/

   It is therefore respectfully submitted that the petition for a writ
of certiorari should be denied.

   WILLIAM C. BRYSON

      Acting Solicitor General

   MARCH 1989

   /1/ In 1957, the year after enactment of the BHCA, the Board began
requiring relatively large bank holding companies to submit annual
reports with financial statements certified by independent
accountants.  22 Fed. Reg. 2341 (1957).  Since then, although specific
reporting requirements for the annual report have been modified from
time to time, the direction that financial statements submitted with
annual reports be certified by independent accountants has, with one
brief exception, been continuously retained for covered bank holding
companies.  E.g., 31 Fed. Reg. 14,800 (1966);  32 Fed. Reg. 3813
(1967).  In 1975, the Board allowed all bank holding companies to
submit annual reports with unaudited financial statements, but the
following year the Board reinstated the requirement of certified
statements for bank holding companies with consolidated banking assets
of more than $100 million.  R. 89-90.

   /2/ Contrary to petitioner's assertion (Pet. 12-20), the decision
of the court of appeals upholding the Board's regulation does not
conflict with this Court's holding or reasoning in Board of Governors
v. Dimension Financial Corp., 474 U.S. 361 (1986).  Dimension involved
administrative interpretations of the terms "demand deposit" and
"commercial loans" in the BHCA's definition of "bank." 474 U.S. at
364-365.  In contrast to the Board's construction of the authority to
require "reports" in Section 5(c) of the Act, this Court found in
Dimension that the Board's interpretation of the "bank" definition was
inconsistent with the unambiguous meaning of the statutory language.
474 U.S. at 373-374.  Here, the construction adopted by the Board is
fully consistent with the common understanding of the "plain language"
of Section 5(c) of the BHCA.

   /3/ For example, under the Board's guidelines for determining the
capital adequacy of banking institutions, bank holding companies with
less than $150 million in consolidated assets are generally allowed to
determine compliance based on the capital of the subsidiary bank
alone.  E.g., 71 Fed. Res. Bull. 445, 446 n.1 (1985);  54 Fed. Reg.
4186, 4209 (Jan. 27, 1989).  The Board has also used a benchmark of
$150 million in consolidated assets to identify certain types of shell
bank holding companies that are small enough that supervisory
examinations may be performed less frequently than for larger
companies.  Fed. Res. Regulatory Serv. para. 3-1531 (1985).