Opinion ID: 501705
Heading Depth: 2
Heading Rank: 2

Heading: Prior Judicial Construction

Text: 67 The compromise aspect of Sec. 20 exposes the difficulties of fitting this case comfortably within the traditional subtle hazards analysis developed in Camp and used by the Supreme Court in subsequent Glass-Steagall Act cases. Under this analysis, the Court noted the hazards that Congress sought to prevent when the Act was passed and then examined whether a particular activity would implicate them. See Schwab, 468 U.S. at 220-21, 104 S.Ct. at 3010-11; Bankers Trust I, 468 U.S. at 154-60, 104 S.Ct. at 2988-2990; ICI, 450 U.S. at 66-68, 101 S.Ct. at 986-88; Camp, 401 U.S. at 630-34, 91 S.Ct. at 1098-1100. By using in Sec. 20 the language engaged principally rather than a more restrictive term, Congress expressed a legislative choice to tolerate at least some of those hazards. This situation is not entirely inconsistent with subtle hazards analysis--which never controlled the result in a Glass-Steagall case but only reinforced a conclusion already reached as a matter of statutory interpretation. See Bankers Trust II, 807 F.2d at 1069. Nor, for that matter, has the existence of one hazard required reversal of the Board: a hazard need not be 'totally obliterated' to permit a banking practice--avoidance of the hazard 'to a large extent' suffices. Id. (quoting ICI, 450 U.S. at 67 n. 39, 101 S.Ct. at 987 n. 39). 68 Accordingly, in reviewing the Board's determination that Sec. 20 does not encompass bank-eligible securities, we give due regard not only to the hazards inherent in affiliation, but also to the manner in which Congress ultimately addressed those hazards through Sec. 20. See Commissioner v. Engle, 464 U.S. 206, 217, 104 S.Ct. 597, 604, 78 L.Ed.2d 420 (1984); Southeastern Community College v. Davis, 442 U.S. 397, 411, 99 S.Ct. 2361, 2369, 60 L.Ed.2d 980 (1979). As the Supreme Court stated in Board of Governors of the Federal Reserve System v. Dimension Financial Corp., 474 U.S. 361, 106 S.Ct. 681, 88 L.Ed.2d 691 (1986): 69 Application of broad purposes of legislation at the expense of specific provisions ignores the complexity of the problems Congress is called upon to address and the dynamics of legislative action. Congress may be unanimous in its intent to stamp out some vague social or economic evil; however, because its Members may differ sharply on the means for effectuating that intent, the final language of the legislation may reflect hard-fought compromises. Invocation of the plain purpose of legislation at the expense of the terms of the statute itself takes no account of the processes of compromise and, in the end, prevents the effectuation of congressional intent. 70 474 U.S. at 373-74, 106 S.Ct. at 688. 71 In light of these principles, the Court's subtle hazards analysis does not preclude the Board's construction of Sec. 20. As noted, Congress was not concerned with affiliation per se, but rather with the dangers attendant upon the entry of commercial banks into the investment banking field either directly or indirectly. Yet even after acknowledging these perils, Congress allowed banks to underwrite and deal in bank-eligible securities under Sec. 16, making it plain therefore that it believed the risks were not so great when banks dealt in these securities. As Senator Bulkley stressed, whether or not a bank chooses to engage in these activities itself or through an affiliate is relatively unimportant compared to the question of whether a bank should engage in them at all. Since banks are allowed under Sec. 16 to underwrite and deal in government obligations without limitation, it would be incongruous for Sec. 20 to prohibit banks from affiliating with entities that are merely engaged principally in those same activities. 72 Further, the Supreme Court observed that [i]n both the Glass-Steagall Act itself and in the Bank Holding Company Act, Congress indicated that a bank affiliate may engage in activities that would be impermissible for the bank itself. ICI, 450 U.S. at 64, 101 S.Ct. at 985. Similarly, in Schwab the Court commented that the fact that Sec. 16 of the Glass-Steagall Act allows banks to engage directly in [a service] 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. 468 U.S. at 221, 104 S.Ct. at 3011. The same principle necessarily applies here. As we recently stated, the latitude the Act grants bank holding companies partially to engage in activities such as underwriting, which implicate the Act's policies whether conducted by banks or by bank holding companies, suggests that bank holding companies can, under the Act, be allowed principally to engage in activities which pose the dangers the Act addressed only when conducted by banks. Securities Indus. Ass'n v. Board of Governors of the Fed. Reserve Sys., 716 F.2d 92, 100 (2d Cir.1983), aff'd, Schwab, 468 U.S. 207, 104 S.Ct. 3003, 82 L.Ed.2d 158 (1984). Because underwriting and dealing in government securities pose no hazards to banks themselves, a fortiori bank affiliates should be able principally to engage in the same activity. 73 In sum, the Board's construction of Glass-Steagall is not only reasonable, but dictated by a thorough examination of the legislative history of Glass-Steagall and of the hazards that Congress sought to prevent when enacting Sec. 20. We hold that it was not Congress' purpose in Sec. 20 to preclude a bank affiliate from engaging in the same activities to the same extent as a member bank and we uphold the Board's determination that the reference in Sec. 20 to securities does not encompass those securities which Sec. 16 allows banks themselves to underwrite. 74 III Engaged Principally 75 We now turn to the Board's determination of when a security affiliate is engaged principally in activities covered by Sec. 20. In their applications the bank holding companies sought to comply with the engaged principally standard of Sec. 20 by proposing limitations on their underwriting and dealing in bank-ineligible securities. J.P. Morgan & Co., for example, proposed that its bank-ineligible securities activities would not exceed during any rolling two-year period 15 percent of its total business. J.P. Morgan & Co. Proposal, 50 Fed.Reg. 41,025 (1985). It proposed a combination of accounting tests to measure its compliance with the 15 percent limitation. 6 The other companies proposed total volume limits of ten to 15 percent of their total business. 76 The Board rejected these proposals. Following the analysis set forth in its Bankers Trust order, 73 Fed.Reserve Bull. 138 (1987), the Board concluded that engaged principally in Sec. 20 denotes any substantial bank-ineligible activity. See 73 Fed.Reserve Bull. at 482. Measured quantitatively, the Board stated that an affiliate would not be principally or substantially engaged in bank-ineligible activities if: (1) the gross revenue from Sec. 20 activities did not exceed five to ten percent of the affiliate's total gross revenues (gross revenue limitation or gross revenue test); and (2) the affiliate's activities in connection with each particular type of ineligible security did not account for more than five to ten percent of the total amount of that type of security underwritten domestically by all firms (or, with commercial paper, the average amount of dealer-placed commercial paper outstanding) during the previous calendar year (market share limitation or market share test). 7 Applying this measure to the applications before it, the Board selected the lower five percent figure for both gross revenue and market share limitations. It recognized that this was a conservative approach, but stated that it would review the limitations within one year of the implementation of its orders. 73 Fed.Reserve Bull. at 485. 77 The bank holding companies petition for review of this interpretation of engaged principally. First, they argue that the Board's view contravenes Supreme Court precedent. Second, they contend that the limitation is inconsistent with the language, structure, and legislative intent of the Glass-Steagall Act. Finally, cross-petitioner Security Pacific Corporation argues that the Board erred in adopting an inflexible percentage test instead of approaching each affiliate's application on a case-by-case basis. 78 The term engaged principally is intrinsically ambiguous. As discussed above, we must uphold the Board's interpretation if it is reasonable. Unlike the facts presented on the issue of the scope of Sec. 20, the Board's position here does not contradict its prior interpretations. Accordingly, we defer to the Board's construction of Sec. 20. A. Agnew 79 The Board found that principally in Sec. 20 means substantially. The banks urge that in Board of Governors of the Fed. Reserve Sys. v. Agnew, 329 U.S. 441, 67 S.Ct. 411, 91 L.Ed. 408 (1947), the Supreme Court decided that principally means something more than substantially, and therefore that the Board's decision conflicts with Agnew. 80 In Agnew the Board issued an order that required the removal of directors of a national bank because of their affiliation with a company which, in the Board's view, was primarily engaged in underwriting securities as prohibited by Sec. 32 of the Act. The United States Court of Appeals for the District of Columbia reversed the Board and held that a company is not primarily engaged in underwriting unless the activity is its chief or principal activity--one exceeding 50 percent of the company's business. See Agnew, 153 F.2d 785, 790-91 (D.C.Cir.1946). The Court of Appeals rejected the Board's argument that primarily in Sec. 32 could mean substantially or importantly. 81 The Supreme Court reversed, holding that primarily in Sec. 32 meant substantially. 329 U.S. at 446, 67 S.Ct. at 414. In support of that conclusion, the Court noted that Congress used three different terms in the Glass-Steagall Act to describe underwriting firms: (1) those merely engaged  in underwriting (Sec. 21); (2) those primarily engaged  in underwriting (Sec. 32); and (3) those engaged principally  in underwriting (Sec. 20). 329 U.S. at 448, 67 S.Ct. at 414. It then concluded that [t]he inference seems reasonable to us that Congress by the words it chose marked a distinction which we should not obliterate by reading 'primarily' to mean 'principally'. Id. Because the Board has found that a gross income level of ten percent of covered activities will trigger Sec. 32, see Staff Opinion 3-939, 1 Fed.Reserve Reg.Serv. 389 (Dec. 14, 1981), the holding companies argue that principally under Sec. 20 mandates approval of a higher level of activity, and that their proposed ten to 15 percent limitations were well within that level. 82 The statements in Agnew regarding the meaning of principally are not dispositive in the instant case. For one thing the meaning of Sec. 20 was not before the Supreme Court in that case. See Cohens v. Virginia, 19 U.S. (6 Wheat.) 264, 398 (1821). Further, the statements concerning Sec. 20 are not essential to its holding that primarily means substantially. See Kastigar v. United States, 406 U.S. 441, 454-55, 92 S.Ct. 1653, 1661-62, 32 L.Ed.2d 212 (1972). The main focus of the Court's analysis is on definitions of primary, see 329 U.S. at 446, 67 S.Ct. at 413, and on the perils Congress sought to check by enacting Sec. 32, id. at 447, 67 S.Ct. at 414. In fact, the brief discussion of Sec. 20 is used to demonstrate that [t]here is other intrinsic evidence in the Banking Act of 1933 to support our conclusion [on the meaning of primary]. Id. Hence, we read Agnew as holding only that primarily engaged in Sec. 32 means any substantial activity. 83 B. Substantially 84 The Board's construction of engaged principally as denoting any substantial activity is reasonable. We do not conclude that because engaged principally in Sec. 20 and primarily engaged in Sec. 32 both denote substantial activity that the two terms are therefore synonymous. Substantiality is an amorphous qualitative concept that has many quantitative definitional manifestations, see The Shorter Oxford English Dictionary 2172 (3d ed. 1973), which vary with the context in which the term is used. Hence, the Agnew dicta that engaged principally and primarily engaged do not necessarily mean the same thing, see 329 U.S. at 448-49, 67 S.Ct. at 415, is not entirely circumscribed by the Board's interpretation. In fact, the same considerations that compelled the Court in Agnew to conclude that primarily in Sec. 32 means substantially apply equally--if not more forcefully--here. 85 The Supreme Court in Agnew rejected a reading that primarily meant chief or leading because the concerns that Congress addressed in enacting Sec. 32 do not vanish if the firm's underwriting activities are 49 percent rather than 51 percent. See 329 U.S. at 447, 67 S.Ct. at 414. In both situations, a bank director interested in the underwriting business may use his influence in the bank to involve it or its customers in securities which his underwriting house has in its portfolio or has committed itself to take. Id. The banks' argument essentially adopts the Court of Appeals holding in Agnew, that is, principally means chief or first. But the same reasoning that guided the Supreme Court guides us. The worries envisioned by bank affiliation with securities firms do not disappear simply because the activity is less than 50 percent of a firm's business. 86 An example illuminates how equating principally in Sec. 20 with chief or first begets the dangers foreseen by Congress. Such an interpretation would allow a member bank to become affiliated with any large integrated securities firm. One commentator has pointed out that reading principally as chief would allow a bank to be affiliated with Merrill Lynch & Co., Inc., one of the nation's largest investment bankers. See Plotkin, What Meaning Does Glass-Steagall Have for Today's Financial World?, 95 Banking L.J. 404, 414-16 (1977). It cannot be supposed that the Congress that enacted Glass-Steagall would have intended that Sec. 20 not prohibit such affiliations. This is not to say that principally cannot in some contexts mean chief or first, but rather that in Sec. 20 the term must be given a definition that is both sensible and in harmony with legislative purpose. 87 Moreover, the logic of the holding companies' position is that principally in Sec. 20 is a directly quantitative, not a qualitative, term. Substantially, on the other hand, reflects the qualitative aspects of principally. When Congress wanted to use a quantitative test in the Banking Act of 1933, it knew how to do it. See Sec. 2(b), (c), 48 Stat. at 162-63 (definition of affiliate); Sec. 13, 48 Stat. at 183 (collateral requirements for loans to affiliates); Sec. 16 (Seventh), 48 Stat. at 185 (limitations on banks' purchase of securities for own account), Sec. 19(b), 48 Stat. at 187 (level of assets for holding company affiliates to be maintained free of any liens); Sec. 19(c), 48 Stat. at 187 (shareholders' liability determination). Because in Sec. 20 Congress departed from a quantitative approach, the argument that a qualitative test should be controlling is all the more compelling. 88 SIA and ICI advance several arguments against the Board's interpretation of principally. They assert that engaged principally in Sec. 20 at least covers any firm formed for the purpose of underwriting securities, relying on the Supreme Court's statement in ICI regarding repealed Sec. 19(e) that [a]ll companies formed for the purpose of issuing or underwriting securities would surely meet the 'engaged principally' test. 450 U.S. at 70 n. 43, 101 S.Ct. at 988-89 n. 43. Concededly, the subsidiaries here were formed for the purpose of engaging in securities activities. 89 Yet, this argument is unpersuasive too. The Court's statement in ICI is dicta and seems to indicate nothing more remarkable than that a company formed for the purpose of underwriting securities most likely would be expected to be engaged principally in that activity. Further, since Sec. 20 does not restrict bank-eligible securities activities, SIA and ICI arguably miss the point. Companies formed for the purpose of dealing in bank-eligible securities would not fall within the prohibitions of Sec. 20. 8 90 To support their argument, SIA and ICI also rely on former Sec. 19(e) of the Glass-Steagall Act. Section 19(e)--repealed in 1966--indirectly limited bank holding companies' acquisition of subsidiaries formed for the purpose of, or engaged principally in prohibited securities activities. 48 Stat. at 188; see also supra note 4. Because Sec. 20 and Sec. 19(e) were intended to accomplish the same result, SIA and ICI argue that we should read the two sections as being coextensive. 91 Even assuming that SIA and ICI are correct, Sec. 19(e) would not have prohibited the activities here approved. It originally was intended to apply to any affiliate formed for the purpose of, or engaged in securities activities. See 1932 Hearings, supra, at 13 (text of proposed Sec. 20(e)) (emphasis added). As originally conceived, any securities activity was prohibited under Sec. 19(e). Thus, there are only two situations when the term formed for the purpose of had any meaning independent from engaged in: when a company had been formed for the purpose of engaging in unpermitted activities, but had (1) not yet commenced activities, or (2) ceased the activities, but might possibly resume them. Plainly, the evil that the formed for the purpose of standard was designed to avoid was the formation of subsidiaries ready to engage--but not yet engaged--in unauthorized securities activities. 92 Congress eventually added the term principally to engaged in Sec. 19(e), presumably to have Sec. 19(e) correspond with the standard laid down in Sec. 20. We think that the original meaning of the formed for the purpose of language in Sec. 19(e) was retained after this amendment to qualify the new and less restrictive standard of engaged principally. Thus, Sec. 19(e) prevented subsidiaries from either engaging principally in banned activities--which we have held above to be only bank-ineligible activities--or being formed for the purpose of engaging principally in such activities. Even if the proscriptions of Sec. 20 are coextensive with those of former Sec. 19(e), none of the subsidiaries here has been formed for the purpose of engaging principally in bank-ineligible activities. Section 19(e) therefore would not apply. 93 Alternatively, SIA claims that Congress intended that Sec. 20 bar underwriting or dealing activities that constitute a regular or integral part of the affiliate's business, as opposed to incidental or occasional activities. The activities that concerned Congress did not necessarily arise only with the frequency of their repetition. In any event, the Board's interpretation of principally as any substantial activity adequately addresses any apprehension arising from the frequency or integral nature of an activity. 94 The final argument raised by SIA is that because the Board's interpretation of engaged principally necessitates regulation, it a fortiori contravenes the Glass-Steagall Act. It is true that Congress rejected a regulatory approach when it drafted the statute. Bankers Trust I, 468 U.S. at 153, 104 S.Ct. at 2988. The Board's interpretation is one that attempts to walk the line that Congress laid down. The mere necessity of regulation in carrying out Glass-Steagall's prohibitions is insufficient to justify rejection of an otherwise reasonable interpretation of the Act. Cf. Bankers Trust II, 807 F.2d at 1067 (The Glass-Steagall Act does impose a system of flat 'prohibitions' and 'prophylactic' measures, but this cannot obviate the need to examine particular factual situations to determine on which side of the prohibitory line they fall.). 95 Consequently, the Board's view of engaged principally as meaning any substantial activity is reasonable and consistent with Congressional purpose.