Source: http://www.law.cornell.edu/supremecourt/text/401/617
Timestamp: 2014-08-28 04:05:12
Document Index: 668482365

Matched Legal Cases: ['§ 16', '§ 21', '§ 11', '§ 16', '§ 16', '§ 16', '§ 4', '§ 4', '§ 4', '§ 6', '§ 32', '§ 584', '§ 584', '§ 80']

INVESTMENT COMPANY INSTITUTE et al., Petitioners, v. William B. CAMP, Comptroller of the Currency, et al. NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., Petitioner, v. SECURITIES AND EXCHANGE COMMISSION et al. | LII / Legal Information Institute
Supreme Court aboutsearch liibulletin subscribe previews INVESTMENT COMPANY INSTITUTE et al., Petitioners, v. William B. CAMP, Comptroller of the Currency, et al. NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., Petitioner, v. SECURITIES AND EXCHANGE COMMISSION et al.
401 U.S. 617 (91 S.Ct. 1091, 28 L.Ed.2d 367)
INVESTMENT COMPANY INSTITUTE et al., Petitioners, v. William B. CAMP, Comptroller of the Currency, et al. NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., Petitioner, v. SECURITIES AND EXCHANGE COMMISSION et al.
Argued: Dec. 14 and 15, 1970.
1. Petitioners in No. 61 do not lack standing to challenge whether national banks may legally enter a field in competition with them. Association of Data Processing Service v. Camp, 397 U.S. 150, 90 S.Ct. 827, 25 L.Ed.2d 184. Pp. 620621.
2. The operation of a collective investment fund of the kind approved by the Comptroller, that is in direct competition with the mutual fund industry, involves a bank in the underwriting, issuing, selling, and distributing of securities in violation of §§ 16 and 21 of the Glass-Steagall Act. Pp. 621639.
These companion cases involve a double-barreled assault upon the efforts of a national bank to go into the business of operating a mutual investment fund. The petitioners in No. 61 are an association of open-end investment companies and several individual such companies. They brought an action in the United States District Court for the District of Columbia, attacking portions of Regulation 9 issued by the Comptroller of the Currency,
We granted certiorari to consider important questions presented under federal regulatory statutes.
In 1962 Congress transferred jurisdiction over most of the trust activities of national banks from the Board of Governors of the Federal Reserve System to the Comptroller of the Currency, without modifying any provision of substantive law. Pub.L. 87722, 76 Stat. 668, 12 U.S.C. 92a. The Comptroller thereupon solicited suggestions for improving the regulations applicable to trust activities. Subsequently, new regulations were proposed which expressly authorized the collective investment of monies delivered to the bank for investment management, so-called managing agency accounts. These proposed regulations were officially promulgated in 1963 with changes not material here.
Under the plan the bank customer tenders between $10,000 and $50,000 to the bank, together with an authorization making the bank the customer's managing agent. The customer's investment is added to the fund, and a written evidence of participation is issued which expresses in 'units of participation' the customer's proportionate interest in fund assets. Units of participation are freely redeemable, and transferable to anyone who has executed a managing agency agreement with the bank. The fund is registered as an investment company under the Investment Company Act of 1940. The bank is the underwriter of the fund's units of participation within the meaning of that Act. The fund has filed a registration statement pursuant to the Securities Act of 1933. The fund is supervised by a five-member committee elected annually by the participants pursuant to the Investment Company Act of 1940. The Securities and Exchange Commission has exempted the fund from the Investment Company Act to the extent that a majority of this committee may be affiliated with the bank, and it is expected that a majority always will be officers in the bank's trust and investment division.
Section 16 of the Glass-Steagall Act as amended, 12 U.S.C. 24, Seventh, provides that the 'business of dealing in securities and stock (by a national bank) shall be limited to purchasing and selling such securities and stock without recorse, solely upon the order, and for the account of, customers, and in no case for its own account * * *. Except as hereinafter provided or otherwise permitted by law, nothing herein contained shall authorize the purchase by (a national bank) for its own account of any shares of stock of any corporation.'
The petitioners contend that a purchase of stock by a bank's investment fund is a purchase of stock by a bank for its own account in violation of this section.
Section 16 also provides that a national bank 'shall not underwrite any issue of securities or stock.' And § 21 of the same Act, 12 U.S.C. 378(a), provides that 'it shall be unlawful(1) For any person, firm, corporation, association, business trust, or other similar organization, engaged in the business of issuing, underwriting, selling, or distributing, at wholesale or retail, or through syndicate participation, stocks, bonds, debentures, notes, or other securities, to engage at the same time to any extent whatever in the business of (deposit banking).' The petitioners contend that the creation and operation of an investment fund by a bank which offers to its customers the opportunity to purchase an interest in the fund's assets constitutes the issuing, underwriting, selling or distributing of securities or stocks in violation of these sections.
The questions raised by the petitioners are novel and substantial. National banks were granted trust powers in 1913. Federal Reserve Act § 11, 38 Stat. 261. The first common trust fund was organized in 1927, and such funds were expressly authorized by the Federal Reserve Board by Regulation F promulgated in 1937. Report on Commingled or Common Trust Funds Administered by Banks and Trust Companies, H.R.Doc.No.476, 76th Cong., 2d Sess., 45 (1939). For at least a generation, therefore, there has been no reason to doubt that a national bank can, consistently with the banking laws, commingle trust funds on the one hand, and act as a managing agent on the other. No provision of the banking law suggests that it is improper for a national bank to pool trust assets, or to act as a managing agent for individual customers, or to purchase stock for the account of its customers. But the union of these powers gives birth to an investment fund whose activities are of a different character. The differences between the investment fund that the Comptroller has authorized and a conventional open-end mutual fund are subtle at best, and it is undisputed that this bank investment fund finds itself in direct competition with the mutual fund industry. One would suppose that the business of a mutual fund consists of buying stock 'for its own account' and of 'issuing' and 'selling' 'stock' or 'other securities' evidencing an undivided and redeemable interest in the assets of the fund.
On their face, §§ 16 and 21 of the Glass-Steagall Act appear clearly to prohibit this activity by national banks.
The difficulty here is that the Comptroller adopted no expressly articulated position at the administrative level as to the meaning and impact of the provisions of §§ 16 and 21 as they affect bank investment funds. The Comptroller promulgated Regulation 9 without opinion or accompanying statement. His subsequent report to Congress did not advert to the prohibitions of the Glass-Steagall Act. Comptroller of the Currency, 101st Annual Report 1415 (1963).
To be sure, counsel for the Comptroller in the course of this litigation and specifically in his briefs and oral argument in this Court, has rationalized the basis of Regulation 9 with great professional competence. But this is hardly tantamount to an administrative interpretation of §§ 16 and 21. In Burlington Truck Lines v. United States, 371 U.S. 156, 83 S.Ct. 239, 9 L.Ed.2d 207, we said, 'The courts may not accept appellate counsel's post hoc rationalizations for agency action * * *. For the courts to substitute their or counsel's discretion for that of the (agency) is incompatible with the orderly functioning of the process of judicial review.' Id., at 168169, 83 S.Ct. at 246. Congress has delegated to the administrative official and not to appellate counsel the responsibility for elaborating and enforcing statutory commands. It is the administrative official and not appellate counsel who possesses the expertise that can enlighten and rationalize the search for the meaning and intent of Congress. Quite obviously the Comptroller should not grant new authority to national banks until he is satisfied that the exercise of this authority will not violate the intent of the banking laws. If he faces such questions only after he has acted, there is substantial danger that the momentum generated by initial approval may seriously impair the enforcement of the banking laws that Congress enacted.
But in 1908 banks began the practice of establishing security affiliates that engaged in, inter alia, and business of floating bond issues and, less frequently, underwriting stock issues.
Moreover, Congress was concerned that commercial banks in general and member banks of the Federal Reserve System in particular had both aggravated and been damaged by stock market decline partly because of their direct and indirect involvement in the trading and ownership of speculative securities.
The Glass-Steagall Act reflected a determination that policies of competition, convenience, or expertise which might otherwise support the entry of commercial banks into the investment banking business were outweighed by the 'hazards' and 'financial dangers' that arise when commercial banks engage in the activities proscribed by the Act.
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. This course places new promotional and other pressures on the bank which in turn create new temptations. For example, pressures are created because the bank and the affiliate are closely associated in the public mind, and should the affiliate fare badly, public confidence in the bank might be impaired. And since public confidence is essential to the solvency of a bank, there might exist a natural temptation to shore up the affiliate through unsound loans or other aid.
This loss of customer good will might 'become an important handicap to a bank during a major period of security market deflation.'
More broadly, Congress feared that the promotional needs of investment banking might lead commercial banks to lend their reputation for prudence and restraint to the enterprise of selling particular stocks and securities, and that this could not be done without that reputation being undercut by the risks necessarily incident to the investment banking business.
Senator Glass made it plain that it was 'the fixed purpose of Congress' not to see the facilities of commercial banking diverted into speculative operations by the aggressive and promotional character of the investment banking business.
'Obviously, the banker who has nothing to sell to his depositors is much better qualified to advice disinterestedly and to regard diligently the safety of depositors than the banker who uses the list of depositors in his savings department to distribute circulars 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 distribution profit or a trading profit or any combination of such profits.'
'If we want banking service to be strictly banking service, without the expectation of additional profits in selling something to customers, we must keep the banks out of the investment security business.'
Indeed, there is direct evidence that Congress specifically contemplated that the word 'security' includes an interest in an investment fund. The Glass-Steagall Act was the product of hearings conducted pursuant to Senate Resolution 71 which included among the topics to be investigated the impact on the banking system of the formation of investment and security trusts.
The subcommittee found that one of the activities in which bank security affiliates engaged was that of an investment trust: 'buying and selling securities acquired purely for investment or speculative purposes.'
And there are other potential hazards of the kind Congress sought to eliminate with the passage of the Glass-Steagall Act. The bank's stake in the investment fund might distort its credit decisions or lead to unsound loans to the companies in which the fund had invested. The bank might exploit its confidential relationship with its commercial and industrial creditors for the benefit of the fund. The bank might undertake, directly or indirectly, to make its credit facilities available to the fund or to render other aid to the fund inconsistent with the best interests of the bank's depositors. The bank might make loans to facilitate the purchase of interests in the fund. The bank might divert talent and resources from its commercial banking operation to the promotion of the fund. Moreover, because the bank would have a stake in a customer's making a particular investment decisionthe decision to invest in the bank's investment fundthe customer might doubt the motivation behind the bank's recommendation that he make such an investment. If the fund investment should turn out badly there would be a danger that the bank would lose the good will of those customers who had invested in the fund. It might be unlikely that disenchantment would go so far as to threaten the solvency of the bank. But because banks are dependent on the confidence of their customers, the risk would not be unreal.
The Court holds that the Investment Company Institute has standing as a competitor to challenge the action of the Comptroller of the Currency because Congress 'arguably legislated against the competition that the petitioners sought to challenge, and from which flowed their injury.' The ICI, says the Court, is entitled to prevail because 'Congress did legislate against the competition that the petitioners challenge.' Ante, at 620, 621 (emphasis added). I understand the Court to mean by 'legislated against the competition' not only that Congress prohibited banks from entering this field of endeavor, but that it did so in part for reasons stemming from the fact of the resulting competition. See ante, at 631, 634, 636638. However, the Court cannot mean by this phrase that it was Congress' purpose to protect petitioners' class against competitive injury for, as all three judges on the court below agreed, neither the language of the pertinent provisions of the Glass-Steagall Act nor the legislative history evidences any congressional concern for the interests of petitioners and others like them in freedom from competition.
This being the case, the discussion of standing in Hardin v. Kentucky Utilities Co., 390 U.S. 1, 56, 88 S.Ct. 651, 654, 19 L.Ed.2d 787, 792793 (1968), is directly in point:
I do not believe that Association of Data Processing Service Organizations v. Camp, 397 U.S. 150, 90 S.Ct. 827, 25 L.Ed.2d 184 (1970), and Arnold Tours v. Camp, 400 U.S. 45, 91 S.Ct. 158, 27 L.Ed.2d 179 (1970), require the opposite result from the one suggested by this passage from Hardin. Data Processing held that, aside from 'case-or-controversy' problems not present here, the crucial question in ruling on a challenge to standing is 'whether the interest sought to be protected by the complainant is arguable within the zone of interests to be protected or regulated by the statute or constitutional guarantee in question.' 397 U.S., at 153, 90 S.Ct. at 830. That question was resolved in favor of the data processors because '§ 4 (of the Bank Service Corporation Act) arguably brings a competitor within the zone of interests protected by it.' Id., at 156, 90 S.Ct., at 831.
In Arnold Tours the Court observed that it was again dealing with § 4 of the Bank Service Corporation Act, and that '(n)otheing in the (Data Processing) opinion limited § 4 to protecting only competitors in the data-processing field.' 400 U.S., at 46, 91 S.Ct., at 159. Plainly these cases provide little support for the Court's conclusion here that competitors, as such, have standing under the Glass-Steagall Act as well.
The Court's holdingthat if Congress prohibited entry into a field of business for prasons relating to competition, then a competitor has standing to seek observance of the prohibitionhas a surface appeal, but, so far as I can see, no sound analytical basis. Certainly none is offered. In any event, it appears to me that our prior decisions, particularly Hardin, require the conclusion that the petitioners in No. 61 lack standing to challenge the Comptroller's action. While I would not foreclose the possibility that those cases should be further modified in some respect,
the Court has not undertaken to reexamine them, and I deem it inappropriate for me to do so as a single Justice.
The view that I take with regard to petitioners' standing in No. 61 makes it unnecessary for me to reach the merits in that case, but it does require me to rule on the contentions made in No. 59. Like Mr. Justice BLACKMUN, post, at 645, I find lengthy discussion of this topic superfluous. At issue is the propriety of the action of the Securities and Exchange Commission in increasing from two to three the number of seats open to bank officers on the five-man committee which serves as a board of directors of the account.
Substantially for the reasons given by the judges of the court below, 136 U.S.App.D.C. 241, 249253, 266, 420 F.2d 83, 91 95, 108, I am of the opinion that the Commission did not abuse its discretion in determining that the facts of this case made appropriate an exercise of the dispensing power explicitly vested in the Commission by 15 U.S.C. 80a6(c).
With my position as to the Act only a minority one, detailed discussion of the additional issue, raised in No. 59, as to the propriety of the exemption granted by the Securities and Exchange Commission, would be superfluous. Suffice it to say that I am in accord with the views expressed in the respective opinions on this issue in the Court of Appeals, 136 U.S.App.D.C. 241, 249253, 266, 420 F.2d 83, 9195, and 108, and, in particular, by Chief Judge Bazelon when he carefully examined the four 'danger zones' considered by the SEC and the protections erected against them, and then concurred in the Commission's exercise of judgment. I, too, feel that the Commission did not act arbitrarily or exceed its statutory authority and that its determination deserves support here.
The exemption was granted in response to an application filed pursuant to § 6(c) of the Act, 54 Stat. 802, 15 U.S.C. 80a 6(c).
The opinion of the Commission and the dissent of Commissioner Budge are unofficially reported at CCH Fed.Sec.L.Rep., 19641966 Decisions, 77,332.
A mutual fund is an open-end investment company. The Investment Company Act of 1940 defines an investment company as an 'issuer' of 'any security' which 'is or holds itself out as being engaged primarily * * * in the business of investing * * * in securities * * *.' 15 U.S.C. 80a2(a)(21), 80a3(a) (1). An open-end company is one 'which is offering for sale or has outstanding any redeemable security of which it is the issuer.' 15 U.S.C. 80a5(a)(1). An investment company also includes a 'unit investment trust': an investment company which, among other things, 'is organized under a * * * contract of * * * agency * * * and * * * issues only redeemable securities, each of which represents an undivided interest in a unit of specified securities * * *.' 15 U.S.C. 80a4(2).
Section 20 of the Act, 12 U.S.C. 377, prohibits affiliations between banks that are members of the Federal Reserve System and organizations '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 * * *.' And § 32, 12 U.S.C. 78, provides that no officer, director, or employee of a bank in the Federal Reserve System may serve at the same time as officer, director, or employee of an association primarily engaged in the activity de-
A law review article written by Comptroller Saxon and Deputy Comptroller Miller in 1965 did take the position that the Glass-Steagall Act is inapplicable to bank common trust funds. Saxon & Miller, Common Trust Funds, 53 Geo.L.J. 994 (1965). But this view was predicated on the argument that when Congress in 1936 provided a tax exemption for common trust funds maintained by a bank, now 26 U.S.C. 584, it contemplated the exemption of common trust funds created for strictly investment purposes, and that consequently Congress must have assumed that the banking laws, which otherwise appear to proscribe such funds, were not applicable. Id., at 10081010. Whatever the merits of this argument, it has no bearing on the instant litigation. It is clear that the collective investment funds authorized by Regulation 9 need not qualify for tax exemption under § 584; the First National City Bank Fund does not so qualify. Moreover, the position advanced in the brief filed on behalf of the Comptroller in this litigation is not that the banking laws are inapplicable to bank investment funds, but rather that the creation and operation of such funds are consistent with the banking laws.
It is noteworthy that the § 584 exemption is available to common trust funds 'maintained by a bank * * * exclusively for the collective investment and reinvestment of moneys contributed thereto by the bank is its capacity as a trustee, executor, administrator, or guardian * * *.' (Emphasis added.) This language, which makes no reference to contributions by the bank in its capacity as managing agent, is identical to that exempting such common trust funds from the Investment Company Act of 1940, 15 U.S.C. 80a3(c)(3). The Securities and Exchange Commission has taken the position that commingled managing agency accounts do not come within § 80a3(c)(3). See Statement of Commissioner Cary, Hearings on Common Trust FundsOverlapping Responsibility and Conflict in Regulation, before a Subcommittee of the House Committee on Government Operations, 88th Cong., 1st Sess., 3 (1963).
1931 Hearings 116117, 1017, 1068.
S.Rep.No.77, 73d Cong., 1st Sess., 910.
1931 Hearings 10061029; S.Rep.No.77, 73d Cong., 1st Sess., 89.
'It is equally clear that giving even the broadest reading of the legislative history embellishing the Act will not support the conclusion that Congress meant to bestow upon Appellees any protection from competitive injury.' 136 U.S.App.D.C. 241, 263, 420 F.2d 83, 105 (Burger, J., joined by Miller, J.) (footnote omitted); see also Id., at 254, 256258, 420 F.2d, at 96, 98100 (Bazelon, C.J.).
By virtue of the 'person or party aggrieved' provision of the Investment Company Act, 15 U.S.C. 80a42(a), there is no difficulty supporting petitioner's standing in No. 59.