Source: https://supreme.justia.com/cases/federal/us/468/207/
Timestamp: 2019-04-26 06:20:42+00:00

Document:
BankAmerica Corp. (BAC), a bank holding company, applied to the Federal Reserve Board (Board) for approval under § 4(c)(8) of the Bank Holding Company Act of 1956 (BHC Act) to acquire a nonbanking affiliate corporation (Schwab) engaged in retail securities brokerage. Section 4(c)(8) authorizes bank holding companies, with prior Board approval, to acquire stock in other companies that are engaged in nonbanking activities that the Board determines are "so closely related to banking . . . as to be a proper incident thereto." Petitioner, a national trade association of securities brokers, opposed BAC's application and participated in the administrative hearings. The Board authorized BAC to acquire Schwab, holding that a securities business, such as Schwab, that is essentially confined to the purchase and sale of securities for the account of third parties, without providing investment advice to the purchaser or seller, is "closely related" to banking within the meaning of § 4(c)(8). The Board also concluded that the acquisition would not violate § 20 of the Glass-Steagall Act, which prohibits a bank (BAC's banking subsidiary here) from being affiliated with companies "engaged principally in the issue, flotation, underwriting, public sale, or distribution" of securities. On petitioner's application for judicial review, the Court of Appeals affirmed the Board's order.
Held: The Board has authority under § 4(c)(8) of the BHC Act to authorize a bank holding company to acquire a nonbanking affiliate engaged principally in retail securities brokerage. Pp. 468 U. S. 214-221.
generally provided by banks, and that banks are particularly well equipped to provide such services. Pp. 468 U. S. 214-216.
(b) The Board's determination that a bank holding company's acquisition of such a brokerage business as Schwab's is not prohibited by § 20 of the Glass-Steagall Act is reasonable, and supported by the statute's plain language and legislative history, and deserves the deference normally accorded the Board's construction of the banking laws. The term "public sale" in § 20 should be read to refer to the underwriting activity described by the terms that surround it, and to exclude the type of retail brokerage business in which Schwab principally was engaged. This reading of the statute is further supported by the Board's similar longstanding interpretation of identical language found in another provision of the Glass-Steagall Act. Moreover, the legislative history demonstrates that Congress enacted § 20 to prohibit the affiliation of commercial banks with entities that are engaged principally in activities such as underwriting. None of the hazards of underwriting is implicated by Schwab's brokerage activities. Pp. 468 U. S. 216-221.
This case presents the question whether the Federal Reserve Board has statutory authority under § 4(c)(8) of the Bank Holding Company Act of 1956, 12 U.S.C. § 1843(c)(8), to authorize a bank holding company to acquire a nonbanking affiliate engaged principally in retail securities brokerage.
BankAmerica Corp. (BAC) is a bank holding company within the meaning of the Bank Holding Company Act. [Footnote 1] In March, 1982, BAC applied to the Federal Reserve Board (Board) for approval under § 4(c)(8) of the Act to acquire 100 percent of the voting shares of The Charles Schwab Corp., a company that engages through its wholly owned subsidiary, Charles Schwab & Co. (Schwab), in retail discount brokerage. [Footnote 2] The Board ordered that formal public hearings be held before an Administrative Law Judge (ALJ) to consider the application. The Securities Industry Association (SIA), a national trade association of securities brokers, and petitioner here, opposed BAC's application and participated in those hearings. [Footnote 3] After six days of hearings, the ALJ recommended that BAC's application be approved. After reviewing the evidentiary record, the Board adopted, with modifications, the findings and conclusions of the ALJ and authorized BAC to acquire Schwab. 69 Fed.Res.Bull. 105 (1983). SIA petitioned the Court of Appeals for the Second Circuit for judicial review under 12 U.S.C. § 1848.
The Court of Appeals held that the Board had acted within its statutory authority in authorizing BAC's acquisition of Schwab under § 4(c)(8) of the BHC Act. The court accordingly affirmed the Board's order. 716 F.2d 92 (1983). We granted SIA's petition for certiorari, 465 U.S. 1004 (1984), and now affirm.
"bank trust department trading desks, at least at the largest banks, perform the same functions, utilize the same execution techniques, employ personnel with the same general training and expertise, and use the same facilities . . . that brokers do."
"essentially confined to the purchase and sale of securities for the account of third parties, and without the provision of investment advice to the purchaser or seller"
The Board next determined that the public benefits likely to result from BAC's acquisition of Schwab outweighed the possible adverse effects. Specifically, the Board identified as public benefits the increased competition and the increased convenience and efficiencies that the acquisition would bring to the retail brokerage business. Id. at 109-110. As to possible adverse effects, the Board determined that the proposed acquisition would not result in the undue concentration of resources, decreased competition, or unfair competitive prices. Id. at 110-114.
Finally, the Board concluded that BAC's acquisition of Schwab was not prohibited by the Glass-Steagall Act. [Footnote 10] Id. at 114-116. The Board observed that the proposed acquisition would make Schwab an affiliate of BAC's banking subsidiary, and thus subject to the provisions of the Glass-Steagall Act. It held, however, that Schwab was "not engaged principally in any of the activities prohibited to member bank affiliates by the Glass-Steagall Act," and thus concluded that the acquisition was "consistent with the letter and spirit of that act." Id. at 114.
"operationally and functionally very similar to the types of brokerage services that are generally provided by banks, and that banking organizations are particularly well equipped to provide such services."
such factors. Moreover, the Board's factual findings are substantially supported by the record.
"purchasing and selling . . . securities and stock without recourse, solely upon the order, and for the account of, customers, and in no case for [their] own account[s]."
greatest deference." Board of Governors of Federal Reserve System v. Investment Company Institute, 450 U. S. 46, 450 U. S. 56 (1981) (ICI). In this case, the Board has articulated with commendable thoroughness the ways in which banking activities are similar to the brokerage activities at issue here. The standard the Board used to determine that Schwab's brokerage business is "closely related" to banking is reasonable and supported by a normal reading of the statutory language of § 4(c)(8). The factual findings to which this standard was applied are substantially supported by the record. The Court of Appeals, therefore, properly deferred to the Board's determination in this case.
"[N]o member bank shall be affiliated in any manner described in subsection (b) of section 221a of this title with any corporation, association, business trust, or other similar organization engaged principally in the issue, flotation, underwriting, public sale, or distribution at wholesale or retail or through syndicate participation of stocks, bonds, debentures, notes, or other securities . . ."
(Emphasis added.) A bank holding company's subsidiaries are bank affiliates within the meaning of § 20. 12 U.S.C. § 221a(b). Section 20, therefore, prohibits BAC's proposed acquisition if Schwab is "engaged principally" in any of the activities listed therein.
"primarily engaged in the issue, flotation, underwriting, public sale, or distribution, at wholesale or retail, or through syndicate participation"
"[a] broker who is engaged solely in executing orders for the purchase and sale of securities on behalf of others in the open market is not engaged in the business referred to in section 32."
22 Fed.Res.Bull. 51, n. 1 (1936). Because §§ 32 and 20 contain identical language, were enacted for similar purposes, and are part of the same statute, the long-accepted interpretation of the term "public sale" to exclude brokerage services such as those offered by Schwab should apply as well to § 20. [Footnote 20] The Board's interpretation of the disputed term is supported by the plain language of the statute. It is also entirely consistent with legislative intent.
"devote themselves in many cases to perilous underwriting operations, stock speculation, and maintaining a market for the banks' own stock, often largely with the resources of the parent bank."
Schwab's profitability by having its bank affiliate extend credit to issuers of particular securities, nor by encouraging the bank affiliate improperly to favor particular securities in the management of depositors' assets. Finally, the fact that § 16 of the Glass-Steagall Act allows banks to engage directly in the kind of brokerage services at issue here, to accommodate its customers, suggests that the activity was not the sort that concerned Congress in its effort to secure the Nation's banks from the risks of the securities market.
"the business of purchasing or selling securities upon the unsolicited order of, and as agent for, a particular customer does not constitute the 'public sale' of securities for purposes of section 20."
69 Fed.Res.Bull. at 114. This interpretation of the Glass-Steagall Act is reasonable, consistent with the plain language of the statute and its legislative history, and deserves the deference normally accorded the Board's construction of the banking laws.
The Board determined in this case that a securities brokerage business that is essentially limited to the purchase and sale of securities for the account of customers, and without provision of investment advice to purchaser or seller, is "closely related" to banking. We hold that the Board's determination is consistent with the language and policies of the BHC Act. We also hold that the Board's determination that the Glass-Steagall Act permits bank holding companies to acquire firms engaged in such a brokerage business is reasonable, and supported by the plain language and legislative history of the Act. We therefore affirm the judgment of the Court of Appeals.
Schwab is known as a "discount" broker because of the low commissions it charges. Schwab can afford to charge lower commissions than full-service brokerage firms because it does not provide investment advice or analysis, but merely executes the purchase and sell orders placed by its customers .
"(8) shares of any company the activities of which the Board after due notice and opportunity for hearing has determined (by order or regulation) to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. . . . In determining whether a particular activity is a proper incident to banking or managing or controlling banks the Board shall consider whether its performance by an affiliate of a holding company can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices."
"1. Banks generally have in fact provided the proposed services."
"2. Banks generally provide services that are operationally or functionally so similar to the proposed services as to equip them particularly well to provide the proposed service."
"3. Banks generally provide services that are so integrally related to the proposed services as to require their provision in a specialized form."
"any . . . factor that an applicant may advance to demonstrate a reasonable or close connection or relationship of the activity to banking."
The Board conceded that banks, unlike retail brokers, use an intervening broker to execute orders for the purchase and sale of securities traded on an exchange. The Board found, however, that banks often execute purchase and sell orders for securities that are not traded on an exchange without an intervening broker. To this extent, they perform the same services as a retail broker. 69 Fed. Res. Bull., at 107.
"(15) providing securities brokerage services, related securities credit activities pursuant to the Board's Regulation T (12 CFR Part 220), and incidental activities such as offering custodial services, individual retirement accounts, and cash management services, provided that the securities brokerage services are restricted to buying and selling securities solely as agent for the account of customers and do not include securities underwriting or dealing or investment advice or research services."
48 Fed.Reg. 37006 (1983) (emphasis in original).
SIA argues that the legislative history of the 1970 amendment to § 4(c)(8) establishes that Congress expressly rejected a "functionally related" standard, and that the Board exceeded its statutory authority by relying on that standard here. This argument is without merit. In 1970, the initial versions of both the House and Senate bills changed the "closely related" test of § 4(c)(8) to a "functionally related" test. S.Rep. No. 91-1084, p. 25 (1970); H.R.Rep. No. 91-387, p. 1 (1969). The Conference Committee, however, retained the "closely related" language of the prior Act in the final version of the bill. H.R.Conf.Rep. No. 91-1747, p. 5 (1970). As we observed in Board of Governors of Federal Reserve System v. Investment Company Institute, 450 U. S. 46, 450 U. S. 73 (1981), the significance of this legislative history is unclear. It is, however, clear that the 1970 amendment broadened, rather than restricted, the Board's discretion to determine whether nonbanking activities are significantly related to banking. See id. at 450 U. S. 72-76. Thus, there is no indication that Congress intended to preclude consideration by the Board of the functional relationship of nonbanking activities to banking in determining whether those activities may qualify for the § 4(c)(8) exemption.
Moreover, it is not clear that the Board in this case applied the "functionally related" test arguably rejected by Congress in 1970. The Board found that Schwab's brokerage business was both "operationally and functionally very similar to" traditional banking services and that banks were well equipped to provide those services. 69 Fed.Res.Bull. at 107.
See n 9, supra. Schwab also provides some incidental services to its customers such as margin lending, custodial accounts, and appropriate account maintenance. The Board also approved these as "closely related" to banking when offered incident to the approved brokerage services. See 69 Fed.Res.Bull. at 108-109. SIA has not challenged the Board's conclusions with respect to these incidental services.
Those four sections are §§ 16, 20, 21, and 32, codified respectively at 12 U.S.C. §§ 2, 377, 378, and 78.
Such deference is appropriate where, as here, the Board expressly addressed the application of the Glass-Steagall Act to the proposed regulatory action and determined that the proposed action implicated none of the concerns that led to the enactment of that Act. See ICI, 450 U.S. at 450 U. S. 68. In Camp, on the other hand, we gave less deference to regulatory action that was taken without any "expressly articulated position at the administrative level as to the meaning and impact of the provisions of [the Glass-Steagall Act]." 401 U.S. at 401 U. S. 627. We held in Camp that agency action taken "without opinion or accompanying statement" was "hardly tantamount to an administrative interpretation" of the Glass-Steagall Act, and was not due the deference normally accorded such regulatory action. Id. at 401 U. S. 627-628.
In the typical distribution of securities, an underwriter purchases securities from an issuer, frequently in association with other underwriters. The distribution of these securities to the public may be effected by the underwriters alone, or in conjunction with a group of dealers who also purchase and sell the particular issue of securities as principals. Underwriters also may distribute securities under a "best efforts" agreement pursuant to which large blocks of specific issues of securities are offered to the public by the investment banker as agent for the issuer. A "best efforts" distribution is not technically an underwriting. 1 L. Loss, Securities Regulations 172 (2d ed.1961). Because Schwab's brokerage business involves none of these distribution plans, we need not consider whether a "best efforts" distribution is prohibited under § 20.
Most securities firms engage in all aspects of the securities business, acting at various times as underwriters, dealers, or brokers. As underwriter and dealer, the firm buys and sells securities on its own account, thereby assuming all risk of loss. As broker, the firm buys and sells securities as an agent for the account of customers. In these transactions, it is the customer, rather than the securities firm, who bears the risk of loss. Schwab is different from most securities firms in that it engages solely in the brokerage business, and does not participate in underwriting or dealing in securities.
"No officer, director, or employee of any corporation or unincorporated association, no partner or employee of any partnership, and no individual, primarily engaged in the issue, flotation, underwriting, public sale, or distribution, at wholesale or retail, or through syndicated participation, of stocks, bonds, or other similar securities, shall serve the same time as an officer, director, or employee of any member bank. . . ."
SIA argues that the phrase in § 16 that allows banks to engage in "purchasing and selling . . . securities and stock, without recourse, solely upon the order, and for the account of, customers" is essentially equivalent to the term in § 20 that prohibits the "public sale" of securities. This argument is unpersuasive. There is no basis for assuming that the dissimilar phrases found in §§ 16 and 20 are coterminous. The permissive phrase found in § 16 accurately describes securities brokerage, and clearly distinguishes that activity from the activities of "dealing in, underwriting and purchasing for its own account investment securities" that are prohibited elsewhere in that section. Section 20 also prohibits bank affiliates from engaging in these latter activities. The description of securities brokerage found in § 16, however, appears nowhere in § 20.
See Hearings pursuant to S. 71 before a Subcommittee of the Senate Committee on Banking and Currency, 71st Cong., 3d Sess., 1052-1068 (1931).
"The legislative history of the Glass-Steagall Act shows that Congress also had in mind and repeatedly focused on the more subtle hazards that arise when a commercial bank goes beyond the business of acting as fiduciary or managing agent and enters the investment banking business either directly or by establishing an affiliate to hold and sell particular investments."
401 U.S. at 401 U. S. 630.
See Camp, 401 U.S. at 401 U. S. 631-634 (identifying the "subtle hazards" of affiliation with underwriting firms). All these "subtle hazards" are attributable to the promotional pressures that arise from affiliation with entities that purchase and sell particular investments on their own account.

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