Opinion ID: 501705
Heading Depth: 2
Heading Rank: 4

Heading: Market Share Limitation

Text: 102 The Board's second limitation on the subsidiaries' bank-ineligible securities activities provides that the subsidiaries' involvement in each activity may not exceed a five percent share of the total market for that activity. It reasoned that it has employed a market share limitation in determining whether a firm is primarily engaged in securities activities within the meaning of Sec. 32. 73 Fed.Reserve Bull. at 484. The Board stated that the fact that an affiliate would be a major force in a particular securities market would be an evidentiary factor suggesting that the affiliate is 'engaged principally' in underwriting securities. Id. It also concluded that a sales volume test--currently employed under its interpretation of Sec. 32--would be subject to manipulation and that a market share test would provide a useful and objective proxy for sales volume. Id. It was concerned that sales volume could be easily inflated by use of repurchase and reverse repurchase agreements for government securities--a common practice among government securities dealers--or by churning. Id. 103 The bank holding companies argue that neither Sec. 20 nor the legislative history of the Glass-Steagall Act provides a basis for the Board's market share test. They assert that Sec. 20 mandates an inquiry only into activities within a subsidiary rather than one into the size of the subsidiary's activity in relation to the market as a whole. A market share test, they claim, is intended sub silentio to promote competition rather than to protect against the hazards of affiliation envisioned by Congress. 104 The Board's justifications for imposing a market share limitation are not persuasive. It cites only two instances in which it has relied on market share data under Sec. 32. One citation is to a 1947 internal letter from the Board to the Federal Reserve Bank of New York. The second citation is to a 1948 letter now included in a compilation of Board interpretations of Regulation R. See Fed.Reserve Reg.Serv. p 3-895 (1948). The 1948 interpretative letter apparently was intended as a guide for future decisions. 105 It is true that Sec. 32 implicitly delegates to the Board the power to determine when a firm is primarily engaged in securities activities, in the same way that Sec. 20 implicitly delegates the power to determine when a firm is engaged principally in securities activities. Yet Congress chose to grant the Board power to exempt individuals from Sec. 32, but did not grant it similar power in Sec. 20. Since Congress expressly granted the Board different regulatory power in Sec. 32 than in Sec. 20, it does not at all follow that the Board's power to define the meaning of Sec. 20 is coextensive with its power under Sec. 32. Thus, the Board's reliance on Sec. 32 is not dispositive. 106 We discern no support in Sec. 20 for the Board's market share limitation. In the legislative history there is evidence that before the enactment of Glass-Steagall, banks and bank affiliates had acquired an increasingly large share of securities activity in relation to investment banks. See W. Peach, The Security Affiliates of National Banks 108-10 (1941). For example, between 1927 and 1930 the percentage share of commercial banks in origination of bond issues more than doubled. Id. at 109. This increasing market share of commercial banks in traditional investment banking activities was not unknown to Congress. See 1931 Hearings, supra, at 299 (testimony of C.E. Mitchell, Chairman, National City Bank of New York) (presenting data). But, the fact that this was brought to Congress's attention and that Congress did not directly address it is, if anything, a strong indication that Congress was not concerned about market share. Rather, by using the term engaged principally, Congress indicated that its principal anxiety was over the perceived risk to bank solvency resulting from their over-involvement in securities activity. A market share limitation simply does not further reduce this congressional worry. 107 In addition, the Board has not proven on the record before us that a market share limitation is an objective proxy for a sales volume test. The Board makes no claim that the Act empowers it to limit the power of bank affiliates to compete in the securities markets open to them. Consequently, the banks' cross-petition to eliminate the market share limitation is granted.