Opinion ID: 501705
Heading Depth: 3
Heading Rank: 2

Heading: Construing Sec. 20--Congress' Compromise

Text: 50 Section 20 was Congress' solution to the problem of affiliates and establishes the boundary separating banks from their security affiliates. While Sec. 21 prohibits firms engaged in investment banking activities from accepting deposits, Sec. 20 prohibits commercial bank affiliation with firms engaged principally in underwriting and dealing in securities. The inference following from this different terminology is obvious: Sec. 20 applies a less stringent standard than the absolute bar between commercial and investment banking laid down by Secs. 16 and 21. ICI, 450 U.S. at 60 n. 26, 101 S.Ct. at 283-84 n. 26. Nor can the difference in terminology be attributed to oversight. Section 21 originally contained the term engaged principally. In offering the amendment that deleted principally, Senator Bulkley argued that [i]t has become apparent that at least some of the great investment houses are engaged in so many forms of business that there is some doubt as to whether the investment business is the principal one. 77 Cong.Rec. 4180 (1933). Given that one of the leading advocates of Glass-Steagall recognized that engaged connoted a stricter standard than engaged principally, it is inconceivable that the latter term could remain in Sec. 20 by sheer happenstance. Thus, while the original impetus behind the Glass-Steagall bill on the floor of Congress may have been to sever completely the commercial and investment banking industries, it fell short of that goal--a victim of legislative compromise. 51 Legislative history also supports the view that Sec. 20's use of the word securities did not imply a complete separation between commercial and investment banking. A colloquy between Senators Glass and Long is illuminating: 52 MR. LONG. I have been told that the Senator has said that he did not think this bill would prohibit the handling of Government and State bonds by the Federal reserve banks, that the Senator's provision against affiliates handling bonds was not intended to affect the handling of Government and State bonds. 53 MR. GLASS. They are expressly excluded from the terms of the bill. 54 MR. LONG. As to both affiliates and the banks? 55 MR. GLASS. As to affiliates? We are trying to abolish the affiliates in a period of years. 56 MR. LONG. The Senator has no objection, has he, to an affiliate handling them if they handle nothing but the Government and State Bonds under supervision, the same supervision the banks are given? 57 MR. GLASS. I am objecting to affiliates altogether. I am objecting to a national banking institution setting up a back-door arrangement by which it may engage in a business which the national bank act denies it the privilege of doing. If investment banking is a profitable business, who does not know that such business will be set up as a separate institution, not using the money and prestige and facilities of a national bank and its deposits to engage in investment activities? I want to make it impossible hereafter to have the portfolios of commercial banks filled with useless speculative securities, so that when stringency comes upon the country these banks may not respond to the requirements of commerce. That is what is the matter with the country to-day, and it is because this bill would avert a repetition of that disaster that intense and bitter opposition has been organized against it. 58 76 Cong.Rec. 2000 (1933). Senator Glass' aspiration to divorce completely commercial banks from their security affiliates was never attained: Sec. 20 only prohibits affiliation with firms that are engaged principally in forbidden investment activity. SIA urges from the above colloquy that Senator Glass objected to affiliates' handling even securities that banks themselves could underwrite under the proposed legislation and that the Senator's view carried the day in Sec. 20 as enacted. On the contrary, we believe Senator Glass' response to Senator Long indicates that he was primarily concerned with back-door arrangements between banks and their security affiliates that permitted affiliates to engage in the securities business denied by law to the bank itself. Senator Glass' reservation did not encompass affiliate activity in a business that Sec. 16 grants to a bank the privilege of doing. 59 Further, Senator Long's initial query indicates that the issue of whether affiliates ought to be able to engage in bank-eligible activities to the same extent as banks themselves was not dormant during the debates. Thus, Senator Long commented that those who had opposed some provisions in the bill have seen some virtue in it. I particularly refer to the divorcing of the affiliates, except in so far as they handle municipal and Government bonds and securities. 76 Cong.Rec. 2274 (1933). To make certain affiliates had the same right to deal in government obligations, Senator Long had printed and circulated an amendment to the Glass-Steagall bill to that effect. Proposed Amend. to S. 4412, 72d Cong., 2d Sess. (Jan. 10, 1933). Despite Senator Long's repeated insistence that Sec. 20 would not preclude bank-eligible activities by an affiliate, this amendment was never formally raised in debate. The Banking Act of 1933 became law five months later, on June 16, 1933, and it can be plausibly urged that the bill finally agreed upon and enacted into law made his amendment unnecessary. Recognizing the power of Senator Long's position, SIA argues that statements and actions taken during debate are not entitled to much weight. See, e.g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 203 n. 24, 96 S.Ct. 1375, 1386 n. 24, 47 L.Ed.2d 668 (1976). A look at subsequent events in this case illustrates the soundness of that rule. In 1935, just two years after his strong rhetoric in the Banking Act debate, Senator Glass himself supported a proposed amendment to that law granting to commercial banks the right to underwrite securities. 79 Cong.Rec. 11,827 (1935). So much for not having the portfolios of commercial banks filled with useless securities. 60 Thus, it seems eminently reasonable to conclude from Senator Glass' response to Senator Long, as well as other evidence in the legislative history, that Congress' concern was primarily with bank affiliate activities in bank-ineligible securities. Bank affiliates often devote[d] themselves ... to perilous underwriting operations, stock speculation, and maintaining a market for the banks' own stock often largely with the resources of the parent bank. 1933 Senate Report, supra, at 10. According to Senator Glass, [w]hat the committee had foremost in its thought was to exclude from commercial banking all investment securities except those of an undoubted character that would be surely liquidated; and for that reason we made an exception [in Sec. 16] of United States securities and of the general liabilities of States and subdivisions of States. 76 Cong.Rec. 2092 (1933). Given that Glass-Steagall was a means to sever commercial banking only from more speculative, perilous investment activities, in which bank-eligible activities were not included, an interpretation of securities in Sec. 20 that excludes bank-eligible securities from its reach is entirely consistent with Congress' aim. 61 The history of security affiliates in the United States also supports this view. Many banks formed security affiliates in order to handle the sale of government bonds used to finance World War I. B. Klebaner, Commercial Banking in the United States: A History 109-10 (1974); Banking Divorce, supra, at 490-91; see also 1932 Hearings, supra, at 29 (testimony of A.M. Pope, President, Investment Bankers' Ass'n of Am.). Banks were expected to aid the government in distributing war loans and were encouraged to aid potential investors by lending them the purchase price of government bonds. Banking Divorce, supra, at 491. It was not until the 1920's that affiliates began to expand into private debt and equity securities activities in response to the demands of the public and business. See id. at 493-96; see also 77 Cong.Rec. 3835 (1933) (remarks of Rep. Steagall) (Our great banking system was diverted from its original purposes into investment activities, and its service devoted to speculation and international high finance.); 75 Cong.Rec. 9904-05 (1932) (remarks of Sen. Walcott) (businesses began to finance their requirements by sale of securities rather than by borrowing; growth of affiliates was the outgrowth of the willingness of public to buy readily and without very much inquiry). It was not the affiliate system as a concept that worried Congress, but the affiliate system as it had developed. The evil that Congress intended to attack was bank involvement in speculative securities, that is, bank-ineligible securities. We cannot attribute to Congress a purpose to limit all securities activities when it consistently made clear that it was only concerned with one type. 62 An elucidation of SIA's suggested interpretation of Sec. 20 shows the anomalies that an over-literal interpretation of the term securities in that section might bring. If bank-eligible securities are included in the prohibitions of Sec. 20, an affiliate could engage (but not principally) in bank-ineligible securities activities. Alternatively, the same affiliate could engage to the identical extent in bank-eligible securities activities. SIA's construction would permit either, or both, types of activity--up to a certain point. Two banks could each have an affiliate, one engaged in underwriting and dealing in high-risk securities prohibited to banks, and the other engaged in the government obligations that Congress felt to be of such negligible risk that it allowed, and encouraged, banks themselves to deal in them. It is paradoxical to presume that it was Congress' purpose to place both affiliates on the same footing. 63 A subsequent amendment to the Glass-Steagall Act also argues against too strict a construction of Sec. 20. As mentioned earlier, Congress amended Sec. 21 in 1935 to make it clear that [Sec. 21] does not prohibit any financial institution or private banker from engaging in the securities business to the extent permitted in Sec. 16. H.R.Rep. No. 742, 74th Cong., 1st Sess. 16 (1935); see also S.Rep. No. 1007, 74th Cong., 1st Sess. 15 (1935); S.Rep. No. 1260, 73d Cong., 2d Sess. 2 (1934). SIA claims that because Sec. 20 was also amended at the same time, see H.R.Rep. No. 742, 74th Cong., 1st Sess. 16 (1935) (amendment to Sec. 20 regarding formalities of affiliate liquidation), the failure to add to Sec. 20 a similar proviso indicates a deliberate legislative determination that Sec. 16 activities are within the scope of Sec. 20. We cannot agree. 64 First, this argument belies the clarifying nature of the amendment to Sec. 21. See Bankers Trust II, 807 F.2d at 1057-58. Second, we decline to hold that in failing to amend Sec. 20 in the same manner Congress planned to clarify the meaning of the term securities by its silence. There is evidence that the Banking Act of 1933 itself was not the driving force that caused banks to divest themselves of their affiliates. Instead, economic conditions and Congress' investigation into stock market practices were instrumental in bringing banks to divorce themselves voluntarily from their affiliates. See B. Klebaner, supra, at 140; Banking Divorce, supra, at 522-24. Given this voluntary divestiture, Sec. 20 became much less of a controversy in practice than it had been in legislative debate. Viewed in that perspective, it is not so unusual that Congress failed to amend Sec. 20 in order to clarify the intent of that section as it had with Sec. 21. 65 Finally, amicus Investment Company Institute (ICI) argues that repealed Sec. 19(e)'s definition of securities--securities of any sort--confirms that securities in Sec. 20 must mean both bank-eligible and bank-ineligible securities. To the contrary, securities of any sort is just as ambiguous as the word securities standing alone, and the phrase is vulnerable to the same construction as that advanced for Sec. 20. 66 Thus, the legislative history strongly supports the view that securities in Sec. 20 only refers to bank-ineligible securities.