Section 4(c)(8) of the Bank Holding Company Act authorizes the
Federal Reserve Board (Board) to allow bank holding companies to
acquire or retain ownership in companies whose activities are "so
closely related to banking or managing or controlling banks as to
be a proper incident thereto." In 1972, the Board amended its
Regulation Y, and issued an interpretive ruling in connection
therewith, enlarging the category of activities that it would
regard as "closely related to banking" under § 4(c)(8) by
permitting bank holding companies and their nonbanking subsidiaries
to act as an investment adviser to a closed-end investment company.
Section 16 of the Banking Act of 1933 (Glass-Steagall Act)
prohibits a bank from "underwriting" any issue of a security or
purchasing any security for its own account, and § 21 of that Act
prohibits any organization "engaged in the business of issuing,
underwriting, selling, or distributing" securities from engaging in
banking. Respondent trade association of open-end investment
companies, in proceedings before the Board and on direct review in
the Court of Appeals, challenged, on the basis of the
Glass-Steagall Act, the Board's authority to determine that
investment adviser services are "closely related" to banking. While
rejecting respondent's argument that Regulation Y, as amended,
violated the Glass-Steagall Act, the Court of Appeals nevertheless
held that § 4(c)(8) of the Bank Holding Company Act did not
authorize the regulation, because the activities that it permitted
were not consistent with the congressional intent in both of these
Acts to effect as complete a separation as possible between the
securities and commercial banking businesses.
Held: The amendment to Regulation Y does not exceed the
Board's statutory authority. Pp.
450 U. S.
55-78.
(a) The Board's determination that services performed by an
investment adviser for a closed-end investment company are "so
closely related to banking . . . as to be a proper incident
thereto" is supported not only by the normal practice of banks in
performing fiduciary functions in various capacities but also by a
normal reading of the language of § 4(c)(8). And the Board's
determination of what activities are
Page 450 U. S. 47
"closely related" to banking is entitled to the greatest
deference. Pp.
450 U. S.
55-58.
(b) Investment adviser services by a bank do not necessarily
violate either § 16 or § 21 of the Glass-Steagall Act. The Board
interpretive ruling here prohibits a bank holding company or its
subsidiaries from participating in the "sale or distribution" of,
or from purchasing, securities of any investment company for which
it acts as an investment adviser. Thus, if such restrictions are
followed, investment advisory services -- even if performed b a
bank -- would not violate § 16's requirements. And the management
of a customer's investment portfolio is not the kind of selling
activity contemplated in the prohibition in § 21, which was
intended to require securities firms, such as underwriters or
brokerage houses, to sever their banking connections. In any event,
even if the Glass-Steagall Act did prohibit banks from acting as
investment advisers, that prohibition would not necessarily
preclude the Board from determining that such adviser services
would be permissible under § 4(c)(8). Pp.
450 U. S.
58-64.
(c) Since the interpretive ruling issued with the amendment to
Regulation Y prohibits a bank holding company acting as an
investment adviser from issuing, underwriting, selling, or
redeeming securities, Regulation Y, as amended, avoids the
potential hazards involved in any association between a bank
affiliate and a closed-end investment company.
Cf. Investment
Company Institute v. Camp, 401 U. S. 617. Pp.
450 U. S.
64-68.
(d) Regulation Y, as amended, is consistent with the legislative
history of both the Bank Holding Company Act and the Glass-Steagall
Act. More specifically, such legislative history indicates that
Congress did not intend the Bank Holding Company Act to limit the
Board's discretion to approve securities-related activity as
closely related to banking beyond the prohibitions already
contained in the Glass-Steagall Act. Pp.
450 U. S.
68-78.
196 U.S.App.D.C. 97, 606 F.2d 1004, reversed.
STEVENS, J., delivered the opinion of the Court, in which all
other Members joined, except STEWART and REHNQUIST, JJ., who took
no part in the consideration or decision of the case, and POWELL,
J., who took no part in the decision of the case.
Page 450 U. S. 48
JUSTICE STEVENS delivered the opinion of the Court.
In 1956, Congress enacted the Bank Holding Company Act to
control the future expansion of bank holding companies and to
require divestment of their nonbanking interests. [
Footnote 1] The Act, however, authorizes the
Federal Reserve Board (Board) to allow holding companies to acquire
or retain ownership in companies whose activities are "so closely
related to banking or managing or controlling banks as to be a
proper incident thereto." [
Footnote
2] In 1972, the Board amended its
Page 450 U. S. 49
regulations to enlarge the category of activities that it would
regard as "closely related to banking," and therefore permissible
for bank holding companies and their nonbanking subsidiaries.
Specifically, the Board determined that the services of an
investment adviser to a closed-end investment company may be such a
permissible activity. The question presented by this case is
whether the Board had the statutory authority to make that
determination.
The Board's determination, which was implemented by an amendment
to its "Regulation Y," permits bank holding companies and their
nonbanking subsidiaries to act as an investment adviser as that
term is defined by the Investment Company Act of 1940. [
Footnote 3] Although the statutory
definition
Page 450 U. S. 50
is a detailed one, [
Footnote
4] the typical relationship between an investment adviser and
an investment company can be briefly described. Investment
companies, by pooling the resources of small investors under the
guidance of one manager, provide those investors with
diversification and expert management. [
Footnote 5] Investment advisers generally organize and
manage investment companies pursuant to a contractual arrangement
with the company. [
Footnote 6]
In return for a management fee, the adviser
Page 450 U. S. 51
selects the company's investment portfolio and supervises most
aspects of its business. [
Footnote
7]
The Board issued an interpretive ruling in connection with its
amendment to Regulation Y. That ruling distinguished "open-end"
investment companies (commonly referred to as "mutual funds") from
"closed-end" investment companies. The ruling explained that
"a mutual fund is an investment company, which, typically, is
continuously engaged in the issuance of its shares and stands ready
at any time to redeem the securities as to which it is the issuer;
a closed-end investment company typically does not issue shares
after its initial organization except at infrequent intervals and
does not stand ready to redeem its shares. [
Footnote 8]"
Because open-end investment companies will redeem their shares,
they must constantly issue securities to prevent shrinkage of
assets. [
Footnote 9] In
contrast, the capital structure of a closed-end company is similar
to that of other corporations; if its shareholders wish to sell,
they must do so in the marketplace. Without any obligation to
redeem, closed-end companies need not continuously seek new
capital. [
Footnote 10]
Page 450 U. S. 52
The Board' interpretive ruling expressed the opinion that a bank
holding company may not lawfully sponsor, organize, or control an
open-end investment company, [
Footnote 11] but the Board perceived no objection to
sponsorship of a closed-end investment company provided that
certain restrictions are observed. [
Footnote 12] Among those restrictions is a requirement
that the investment company may not primarily or frequently engage
in the issuance, sale, and distribution of securities; a
requirement that the investment adviser may not have any ownership
interest in the investment company, or extend credit to it; and a
requirement that the adviser may not underwrite or otherwise
participate in the sale or distribution of the investment company's
securities. [
Footnote
13]
Page 450 U. S. 53
Respondent Investment Company Institute, a trade association of
open-end investment companies, commenced this litigation
challenging as in excess of the Board's statutory authority the
determination that investment adviser services are "closely
related" to banking. Both in proceedings before the Board and in a
direct review proceeding in the United States Court of Appeals for
the District of Columbia Circuit, respondent based this challenge
on the Banking Act of 1933, commonly known as the Glass-Steagall
Act, in which Congress placed restrictions on the
securities-related business of banks in order to protect their
depositors. [
Footnote
14]
The Court of Appeals rejected respondent's argument that
Regulation Y, as amended, violated the Glass-Steagall Act, relying
on the fact that the prohibitions of §§ 16 and 21 of
Page 450 U. S. 54
that Act [
Footnote 15]
apply only to banks, rather than to bank holding companies or their
nonbanking subsidiaries. 196 U.S.App.D.C. 97, 606 F.2d 1004. The
court nevertheless concluded that § 4(c)(8) of the Bank Holding
Company Act did not authorize the regulation. The court reasoned
that the legislative history of the Act demonstrates that Congress
did not intend the Bank Holding Company Act to restrict the scope
of the Glass-Steagall Act. Because the court read the legislative
history to indicate that Congress perceived the Glass-Steagall Act
as an effort to effect as complete a separation as possible between
the securities business and the commercial banking business, the
court read a similar intent into the Bank Holding Company Act. The
Court of Appeals believed that activities permitted by the
challenged regulation were not consistent with the congressional
intent to effect this separation.
We granted certiorari because of the importance of the Court of
Appeals holding. 444 U.S. 1070. We are persuaded
Page 450 U. S. 55
that the language of both the Bank Holding Company Act and the
Glass-Steagall Act, as well as our interpretation of the
Glass-Steagall Act in
Investment Company Institute v.
Camp, 401 U. S. 617
(1971), supports the Board. Moreover, contrary to the view of the
Court of Appeals, we are persuaded that the regulation is
consistent with the legislative history of both statutes.
I
The services of an investment adviser are not significantly
different from the traditional fiduciary functions of banks. The
principal activity of an investment adviser is to manage the
investment portfolio of its advisee -- to invest and reinvest the
funds of the client. Banks have engaged in that sort of activity
for decades. [
Footnote 16]
As executor, trustee, or managing agent of funds committed to its
custody, a bank regularly buys and sells securities for its
customers. Bank trust departments manage employee benefits trusts,
institutional and corporate agency accounts, and personal trust and
agency accounts. [
Footnote
17] Moreover, for over 50 years, banks have performed these
tasks for trust funds consisting of commingled funds of customers.
[
Footnote 18] These common
trust funds administered
Page 450 U. S. 56
by banks would be regulated as investment companies by the
Investment Company Act of 1940 were they not exempted from the
Act's coverage. [
Footnote
19] The Board's conclusion that the services performed by an
investment adviser are "so closely related to banking . . . as to
be a proper incident thereto" is therefore supported by banking
practice and by a normal reading of the language of § 4(c)(8).
[
Footnote 20]
The Board's determination of what activities are "closely
related" to banking is entitled to the greatest deference.
[
Footnote 21]
Page 450 U. S. 57
Such deference' is particularly appropriate in this case because
the regulation under attack is merely a general determination that
investment advisory services which otherwise satisfy the
restrictions imposed by the Board's interpretive ruling constitute
an activity that is so closely related to banking as to be a proper
incident thereto. [
Footnote
22] Because the authority for any specific investment advisory
relationship must be preceded by a further determination by the
Board that the relationship can be expected to provide benefits for
the public, the Board will have the opportunity to ensure that no
bank holding company exceeds the bounds of a bank's traditional
fiduciary function of managing customers' accounts. [
Footnote 23] Thus,
Page 450 U. S. 58
unless the Glass-Stegall Act requires a contrary conclusion, the
Board's interpretation of the plain language of the Bank Company
Holding Act must be upheld.
II
Respondent's principal attack on the Board's general
determination that investment adviser services are so closely
related as to be a proper incident to banking proceeds from the
premise that, if such services were performed by a bank, the bank
would violate §§ 16 and 21 of the Glass-Steagall Act. [
Footnote 24] Respondent therefore
argues that such services may
Page 450 U. S. 59
never be regarded as a "proper incident" that could be performed
by a bank affiliate. [
Footnote
25] We reject both the premise and the conclusion of this
argument. The performance of
Page 450 U. S. 60
investment advisory services by a bank would not necessarily
violate § 16 or § 21 of the Glass-Steagall Act. Moreover, bank
affiliates may be authorized to engage in certain activities that
are prohibited to banks themselves. [
Footnote 26]
Page 450 U. S. 61
It is familiar history that the Glass-Steagall Act was enacted
in 1933 to protect bank depositors from any repetition of the
widespread bank closings that occurred during the Great Depression.
[
Footnote 27] Congress was
persuaded that speculative activities, partially attributable to
the connection between commercial banking and investment banking,
had contributed to the rash of bank failures. [
Footnote 28] The legislative history reveals
that securities firms affiliated with banks had
Page 450 U. S. 62
engaged in perilous underwriting operations, stock speculation,
and maintaining a market for the bank's own stock, often with the
bank's resources. [
Footnote
29] Congress sought to separate national banks, as completely
as possible, from affiliates engaged in such activities. [
Footnote 30]
Sections 16 and 21 of the Glass-Steagall Act approach the
legislative goal of separating the securities business from the
banking business from different directions. The former places a
limit on the power of a bank to engage in securities transactions;
the latter prohibits a securities firm from engaging in the banking
business. Section 16 expressly prohibits a bank from "underwriting"
any issue of a security or purchasing any security for its own
account. The Board's interpretive ruling here expressly prohibits a
bank holding company or its subsidiaries from participating in the
"sale or distribution" of securities of any investment company for
which it acts as investment adviser. 12 CFR § 225.125(h) (1980).
The ruling also prohibits bank holding companies and their
subsidiaries from purchasing securities of the investment company
for which it acts as investment adviser. § 225.125(g). [
Footnote 31] Therefore, if the
restrictions imposed by the Board's interpretive ruling are
followed, investment advisory services -- even if performed by a
bank -- would not violate the requirements of § 16.
We are also satisfied that a bank's performance of such services
would not necessarily violate § 21. In contrast to § 16, § 21
prohibits certain kinds of securities firms from engaging in
banking. The § 21 prohibition applies to any organization "engaged
in the business of issuing, underwriting, selling, or distributing"
securities. Such a securities firm may not engage at the same time
"to any extent whatever in
Page 450 U. S. 63
the business of. receiving deposits." The management of a
customer's investment portfolio -- even when the manager has the
power to sell securities owned by the customer -- is not the kind
of selling activity that Congress contemplated when it enacted §
21. If it were, the statute would prohibit banks from continuing to
manage investment accounts in a fiduciary capacity or as an agent
for an individual. We do not believe Congress intended that such a
reading be given § 21. [
Footnote
32] Rather, § 21 presented the converse situation of § 16, and
was intended to require securities firms such as underwriters or
brokerage houses to sever their banking connections. It surely was
not intended to require banks to abandon an accepted banking
practice that was subjected to regulation under § 16. [
Footnote 33]
Even if we were to assume that a bank would violate the
Glass-Steagall Act by engaging in certain investment advisory
Page 450 U. S. 64
services, it would. not follow that a bank holding company could
never perform such services. In 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. Thus, § 21 of Glass-Steagall entirely prohibits
the same firm from engaging in banking and in the underwriting
business, whereas § 20 does not prohibit bank affiliation with a
securities firm unless that firm is "engaged principally" in
activities such as underwriting. [
Footnote 34] Further, § 4(c)(7) of the Bank Holding
Company Act, which authorizes holding companies to purchase and own
shares of investment companies, permits investment activity by a
holding company that is impermissible for a bank itself. [
Footnote 35] Finally, inasmuch as
the Bank Holding Company Act requires divestment only of nonbanking
interests, the § 4(c)(8) exception would be unnecessary if it
applied only to services that a bank could legally perform. Thus
even if the Glass-Steagall Act did prohibit banks from acting as
investment advisers, that prohibition would not necessarily
preclude the Board from determining that such adviser services
would be permissible under § 4(c)(8).
In all events, because all that is presently at issue is the
Board's preliminary authorization of such services, rather than
approval of any specific advisory relationship, speculation about
possible conflicts with the Glass-Steagall Act is plainly not a
sufficient basis for totally rejecting the Board's carefully
considered determination.
III
Our conclusions with respect to the Glass-Steagall Act are in no
way altered by consideration of our decision in
Investment
Page 450 U. S. 65
Company Institute v. Camp, 401 U.
S. 617 (1971). The Court there held that a regulation
issued by the Comptroller of the Currency purporting to authorize
banks to operate mutual funds violated §§ 16 and 21 of the
Glass-Steagall Act. The mutual fund under review in that case was
the functional equivalent of an open-end investment company.
[
Footnote 36] Because the
authorization at issue in this case is expressly limited to
closed-end investment companies, the holding in
Camp is
clearly not dispositive. Respondent argues, however, that both the
Court's reasoning in
Camp and its description of the "more
subtle hazards" created by the performance of investment advisory
services by a bank are inconsistent with the Board's action. We
disagree.
In
Camp, the Court relied squarely on the literal
language of §§ 16 and 21 of the Glass-Steagall Act. After noting
that § 16 prohibited the underwriting by a national bank of any
issue of securities and the purchase for its own account of shares
of stock of any corporation, and that § 21 prohibited corporations
from both receiving deposits and engaging in issuing, underwriting,
selling, or distributing securities, the Court recognized that the
statutory language plainly applied to a bank's sale of redeemable
and transferable "units of participation" in a common investment
fund operated by the bank. 401 U.S. at
401 U. S. 634.
Because the Court held that the bank was the underwriter of the
fund's units of participation within the meaning of the Investment
Company Act of 1940,
Page 450 U. S. 66
id. at
401 U. S.
622-623, the Comptroller attempted to avoid the reach of
§ 16 by arguing that the units of participation were not
"securities" within the meaning of the Glass-Steagall Act. The
Court's contrary determination led inexorably to the conclusion
that § 16 had been violated.
This case presents an entirely different issue. No one could
dispute the fact that the shares in a closed-end investment company
are securities. But as we have indicated, such securities are not
issued, sold, or underwritten by the investment adviser. In
contrast to the bank's activities in issuing, underwriting,
selling, and redeeming the units of participation in the
Camp case, in this case, the Board's interpretive ruling
expressly prohibits such activity. [
Footnote 37]
The Court in
Camp recognized that, in enacting the
Glass-Steagall Act, Congress contemplated other hazards in addition
to the danger of banks using bank assets in imprudent securities
investments. [
Footnote 38]
But none of these "more subtle hazards"
Page 450 U. S. 67
would be present were a bank to act as an investment adviser to
a closed-end investment company subject to the restrictions imposed
by the Board. Those restrictions would prevent the bank from
extending credit to the investment company, and would also preclude
the promotional pressures that are inherent in the investment
banking business. [
Footnote
39] In addition to the fact that the bank could not underwrite
or sell the stock of the closed-end investment company, that
company, unlike a mutual fund, would not be constantly involved in
the search for new capital to cover the redemption of other stock.
The advisory fee earned by the bank would provide little incentive
to the bank or its holding company to engage in promotional
activities. [
Footnote
40]
Page 450 U. S. 68
Our obligation to accord deference to the Board's interpretive
ruling provides added support to our conclusion that the Board's
regulation avoids the potential hazards involved in any association
between a bank affiliate and a closed-end investment company. In
Camp, the Court emphasized that the Comptroller of the
Currency had provided no guidance as to the effect of the
Glass-Steagall Act on the proposed activity. [
Footnote 41] Whereas, in
Camp, the
Court was deprived of administrative "expertise that can enlighten
and rationalize the search for the meaning and intent of Congress,"
401 U.S. at
401 U. S. 628,
in this case, the regulatory action by the Board recognized and
addressed the concerns that led to the enactment of the
Glass-Steagall Act. Contrary to respondent's argument, the
Camp decision therefore affirmatively supports the Board's
action in this case.
IV
The Court of Appeals rested its conclusion that the Board had
exceeded its statutory authority on a review of the legislative
history of § 4(c)(8). As originally enacted in 1956, the section
referred to activities "closely related to the business of
banking." In 1970, when the Act was amended to
Page 450 U. S. 69
extend its coverage to holding companies controlling just one
bank, the words "business of" were deleted from § 4(c)(8), thereby
making the section refer merely to activities "closely related to
banking." The conclusion of the Court of Appeals did not, however,
place special reliance on this modest change. Rather, the Court of
Appeals was persuaded that, in 1956, Congress believed that the
Glass-Steagall Act had been enacted in 1933 to "divorc[e]
investment from commercial banking," and that the 1970 amendment to
§ 4(c)(8) did not alter the intent expressed by the 1956 Congress.
196 U.S.App.D.C. at 110, 606 F.2d at 1017.
Congress did intend the Bank Holding Company Act to maintain and
even to strengthen Glass-Steagall's restrictions on the
relationship between commercial and investment banking. Part of the
motivation underlying the requirement that bank holding companies
divest themselves of nonbanking interests was the desire to provide
a measure of regulation missing from the Glass-Steagall Act.
[
Footnote 42] In 1956, the
only provision of the Glass-Steagall Act which regulated bank
holding companies was § 19(e) of the Act, which provided that a
bank holding company could not obtain a permit from the Federal
Reserve Board entitling it to vote the shares of a bank subsidiary
unless it agreed to divest itself within five years of any interest
in a company formed for the purpose of, or "engaged principally"
in, the issuance or underwriting of securities. [
Footnote 43] This provision was largely
ineffectual, because
Page 450 U. S. 70
bank holding companies were not subject to the divestiture
requirement as long as they did not vote their bank subsidiary
shares. [
Footnote 44] Thus,
bank holding companies were able to avoid Glass-Steagall's general
purpose of separating as completely as possible commercial from
investment banking in a way not available to other bank affiliates
or banks themselves. The inadequacy of § 19(e) therefore lay not in
the type of affiliation with securities-related firms permitted to
bank holding companies but in the ability of holding companies to
avoid any restrictions on affiliation by simply not voting their
shares. To the extent that Congress strengthened the Glass-Steagall
Act, it did so by closing this loophole, rather than by imposing
further restrictions on the permissible securities-related business
of bank affiliates. [
Footnote
45] The clear evidence of a
Page 450 U. S. 71
congressional purpose in 1956 to remedy the inadequacy of §
19(e) of the 1933 Act does not support the conclusion that Congress
also intended § 4(c)(8) to be read as totally prohibiting bank
holding companies from being "engaged" in any securities-related
activities; on the contrary, it is more accurately read as merely
completing the job of severing the connection between bank holding
companies and affiliates "principally engaged" in the securities
business. [
Footnote 46]
To invalidate the Board's regulation, the Court of Appeals had
to assume that the activity of managing investments for a customer
had been regarded by Congress as an aspect of investment banking,
rather than an aspect of commercial banking. But the Congress that
enacted the Glass-Steagall Act did not take such an expansive view
of investment banking. [
Footnote
47] Investment advisers and closed-end investment companies are
not "principally engaged" in the issuance or the underwriting of
securities within the meaning of the Glass-Steagall Act, even if
they are so engaged within the meaning of §§ 16 and 21. [
Footnote 48] Nothing in the
legislative history of the Bank Holding Company Act persuades us
that Congress, in 1956, intended to effect a more complete
separation between commercial and investment banking than the
separation that the Glass-Steagall Act had achieved with respect to
banks in §§ 16 and 21 and had sought unsuccessfully to achieve with
respect to bank holding companies in § 19(e). [
Footnote 49]
Page 450 U. S. 72
A review of the 1970 Amendments to the Bank Holding Company Act
only strengthens this conclusion. [
Footnote 50] On its face, the 1970 amendment to § 4(c)(8)
would appear to have
Page 450 U. S. 73
broadened the Board's authority to determine when an activity is
sufficiently related to banking to be permissible for a nonbanking
subsidiary of a bank holding company. [
Footnote 51] The initial versions of both the House
and the Senate bills changed the "closely related" test of §
4(c)(8) to a "functionally related" test. [
Footnote 52] The Conference Committee's final
version of the bill, however, retained the "closely related"
language of the 1956 Act. [
Footnote 53] Whether this indicated that § 4(c)(8) was to
have the same scope as it did under the 1956 Act is difficult to
discern. [
Footnote 54] For
purposes of this case, however, we need
Page 450 U. S. 74
not reconcile the conflicting views as to whether the 1970
amendment expanded the scope of § 4(c)(8), because no one disputes
that the Board's discretion is at least as broad under the 1970
Amendments as it was under the 1956 Act. Therefore, our conclusion
that nothing in the 1956 Act or its legislative history indicates
that Congress intended to prohibit bank holding companies from
acting as investment advisers to closed-end investment companies
should also apply to the 1970 Amendments unless Congress
specifically indicated that such services should not be authorized
by the Board. Not only is there no such specific evidence, there is
affirmative evidence to the contrary.
The legislative history of the 1970 Amendments indicates that
Congress did not intend the 1970 Amendments to have any effect on
the prohibitions of the Glass-Steagall Act. The Senate chairman of
the Conference Committee assured his fellow Senators that the
conference bill was intended neither to enlarge nor to restrict the
prohibitions contained
Page 450 U. S. 75
in the Glass-Steagall Act. [
Footnote 55] Moreover, the Senate Report refers to
investment services, but declines to state that the Board could not
approve under § 4(c)(8) "bank sponsored mutual funds." [
Footnote 56] The House's version of
the bill rigidly
Page 450 U. S. 76
confined the Board's discretion in certain areas by including a
"laundry list" of activities which the Board could not approve.
Included in this list was a prohibition of bank holding company
acquisition of shares of any company engaged in "the issue,
flotation, underwriting, public sale, or distribution," of
securities, "whether or not any such interests ar redeemable."
[
Footnote 57] The Conference
Committee deleted this list. This deletion indicates a rejection of
the House's restrictive approach in favor of the Senate's more
flexible attitude toward the Board's exercise of its discretion.
[
Footnote 58] Thus,
Page 450 U. S. 77
as we read the legislative history of the 1970 Amendments,
Congress did not intend the Bank Holding Company Act to limit the
Board's discretion to approve securities-related activity as
closely related to banking beyond the prohibitions already
contained in the Glass-Steagall Act. [
Footnote 59] This case is
Page 450 U. S. 78
therefore one that is best resolved by deferring to the Board's
expertise in determining what activities are encompassed within the
plain language of the statute.
Because we have concluded that the Board's decision to permit
bank holding companies to act as investment advisers for closed-end
investment companies is consistent with the language of the Bank
Holding Company Act, and because such services are not prohibited
by the Glass-Steagall Act, we hold that the amendment to Regulation
Y does not exceed the Board's statutory authority. The judgment of
the Court of Appeals is
Reversed.
JUSTICE STEWART and JUSTICE REHNQUIST took no part in the
consideration or decision of this case. JUSTICE POWELL took no part
in the decision of this case.
[
Footnote 1]
The stated purpose of the Bank Holding Company Act of 1956 was
"[t]o define bank holding companies, control their future
expansion, and require divestment of their nonbanking interests."
70 Stat. 133.
[
Footnote 2]
Section 4 of the statute, as originally enacted, provided in
pertinent part:
"(a) Except as otherwise provided in this Act, no bank holding
company shall -- "
"(1) after the date of enactment of this Act acquire direct or
indirect ownership or control of any voting shares of any company
which is not a bank. . . ."
"
* * * *"
"(c) The prohibitions in this section shall not apply --"
"
* * * *"
"(6) to shares of any company all the activities of which are of
a financial, fiduciary, or insurance nature and which the Board
after due notice and hearing, and on the basis of the record made
at such hearing, by order has determined to be so closely related
to the business of banking or of managing or controlling bank as to
be a proper incident thereto and as to make it unnecessary for the
prohibitions of this section to apply in order to carry out the
purposes of this Act. . . ."
70 Stat. 135-137. The relevant exemption is now found in §
4(c)(8), which allows holding company ownership of:
"(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. In orders and regulations
under this subsection, the Board may differentiate between
activities commenced
de novo and activities commenced by
the acquisition, in whole or in part, of a going concern."
12 U.S.C. § 1843(c)(8).
[
Footnote 3]
See 36 Fed.Reg. 16695, 17514 (1971); 37 Fed.Reg. 1463
(1972); 12 CFR § 225.4(a)(5)(ii) (1980). The 1972 amendment to
Regulation Y made the following addition to the list of permissible
activities:
"(ii) serving as investment adviser, as defined in section
2(a)(20) of the Investment Company Act of 1940, to an investment
company registered under that Act."
[
Footnote 4]
The definition of an investment adviser in § (2)(a)(20) of the
Investment Company Act of 1940 reads as follows:
"(20) 'Investment adviser' of an investment company means (A)
any person (other than a bona fide officer, director, trustee,
member of an advisory board, or employee of such company, as such)
who pursuant to contract with such company regularly furnishes
advice to such company with respect to the desirability of
investing in, purchasing or selling securities or other property,
or is empowered to determine what securities or other property
shall be purchased or sold by such company, and (B) any other
person who pursuant to contract with a person described in clause
(A) of this paragraph regularly performs substantially all of the
duties undertaken by such person described in said clause (A); but
does not include (i) a person whose advice is furnished solely
through uniform publications distributed to subscribers thereto,
(ii) a person who furnishes only statistical and other factual
information, advice regarding economic factors and trends, or
advice as to occasional transactions in specific securities, but
without generally furnishing advice or making recommendations
regarding the purchase or sale of securities, (iii) a company
furnishing such services at cost to one or more investment
companies, insurance companies, or other financial institutions,
(iv) any person the character and amount of whose compensation for
such services must be approved by a court, or (v) such other
persons as the Commission may by rules and regulations or order
determine not to be within the intent of this definition."
15 U.S.C. § 80a-2(20).
[
Footnote 5]
1 T. Frankel, The Regulation of Money Managers, I-A, § 2, p. 6
(1978) .
[
Footnote 6]
Id. at I-B, § 4, pp. 9-10;
see Wharton School
Study of Mutual Funds, H.R.Rep. No. 2274, 87th Cong., 2d Sess.,
467-477 (1962) (hereinafter Wharton School Study);
Burks v.
Lasker, 441 U. S. 471,
441 U. S.
480-481 (1979).
[
Footnote 7]
Securities and Exchange Commission Report on the Public Policy
Implications of Investment Company Growth, H.R.Rep. No. 2337, 89th
Cong., 2d Sess., 8 (1966).
[
Footnote 8]
12 CFR § 225.125(c) (1980).
[
Footnote 9]
Hearings on S. 3580 before a Senate Subcommittee on Banking and
Currency, 76th Cong., 3d Sess., 43 (1940) (hereinafter 1940 Senate
Hearings) (statement of Robert E. Healy). As the SEC Report on the
Public Policy Implications of Investment Company Growth recognized
with respect to open-end funds:
"Since there will always be some shareholders who want to sell,
an open-end company must comply with continuous demands for cash
from selling stockholders. To offset the resulting cash outflow and
because of the strong incentives for growth created by the
structure of the industry, the managers of virtually all open-end
companies vigorously promote sales of new shares at all times."
H.R.Rep. No. 2337,
supra, at 42-43.
[
Footnote 10]
Id. at 42.
[
Footnote 11]
The ruling would apparently permit a bank holding company to
provide investment advice to an open-end investment company if the
holding company does not have the authority to make investment
decisions or otherwise to control investments of such an advisee.
Respondent has not specifically challenged the legality of a
relationship that is purely advisory in character.
[
Footnote 12]
"(f) In the Board's opinion, the Glass-Steagall Act provisions,
as interpreted by the U.S. Supreme Court, forbid a bank holding
company to sponsor, organize or control a mutual fund. However, the
Board does not believe that such restrictions apply to closed-end
investment companies as long as such companies are not primarily or
frequently engaged in the issuance, sale and distribution of
securities. CFR § 225.125(f) (1980)."
[
Footnote 13]
Pertinent parts of the interpretive ruling read as follows:
"In no case, however, should a bank holding company act as
investment adviser to an investment company which has a name that
is similar to, or a variation of, the name of the holding company
or any of its subsidiary banks."
"(g) In view of the potential conflicts of interests that may
exist, a bank holding company and its bank and nonbank subsidiaries
should not (1) purchase for their own account securities of any
investment company for which the bank holding company acts as
investment adviser; (2) purchase in their sole discretion, any such
securities in a fiduciary capacity (including as managing agent);
(3) extend credit to any such investment company; or (4) accept the
securities of any such investment company as collateral for a loan
which is for the purpose of purchasing securities of the investment
company."
"(h) A bank holding company should not engage, directly or
indirectly, in the sale or distribution of securities of any
investment company for which it acts as investment adviser.
Prospectuses or sales literature should not be distributed by the
holding company, nor should any literature be made available to the
public at any offices of the holding company. In addition, officers
and employees of bank subsidiaries should be instructed not to
express any opinion with respect to advisability of purchase of
securities of any investment company for which the bank holding
company acts as investment adviser. Customers of banks in a bank
holding company system who request information on an unsolicited
basis regarding any investment company for which the bank holding
company acts as investment adviser may be furnished the name and
address of the fund and its underwriter or distributing company,
but the names of bank customers should not be furnished by the bank
holding company to the fund or its distributor. Further, a bank
holding company should not act as investment adviser to a mutual
fund which has offices in any building which is likely to be
identified in the public's mind with the bank holding company."
12 CFR §§ 225.125(f), (g), (h) (1980).
[
Footnote 14]
The stated purpose of the 1933 Act was
"[t]o provide for the safer and more effective use of the assets
of banks, to regulate interbank control, to prevent the undue
diversion of funds into speculative operations, and for other
purposes."
48 Stat. 162.
[
Footnote 15]
Section 16, as originally enacted, provided in pertinent
part:
"The business of dealing in investment securities by [a national
bank] shall be limited to purchasing and selling such securities
without recourse, solely upon the order, and for the account of,
customers, and in no case for its own account, and [a national
bank] shall not underwrite any issue of securities:
Provided, That [a national bank] may purchase for its own
account investment securities under such limitations and
restrictions as the Comptroller of the Currency may by regulation
prescribe. . . ."
48 Stat. 184. Section 16, as amended, is now codified at 12
U.S.C. § 24 (Seventh).
Section 21, provides, in pertinent part, that it is unlawful
"[f]or 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 receiving deposits
subject to check or to repayment upon presentation of a passbook,
certificate of deposit, or other evidence of debt, or upon request
of the depositor. . . ."
48 Stat. 18, 12 U.S.C. § 378.
[
Footnote 16]
A memorandum submitted to the Board on behalf of the American
Bankers Association states, in part:
"For well over a century, banks and trust companies in every
state have managed and administered customers' investment funds in
the form of trusts, estates and agency accounts."
App. 20. The accuracy of that statement is not challenged.
[
Footnote 17]
See Securities Exchange Commission Institutional
Investor Study Report Summary, H.R. Doc. No. 92-64, pt. 8, pp.
34-35 (1971).
[
Footnote 18]
As we recognized in
Investment Company Institute v.
Camp, 401 U. S. 617
(1971):
"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."
Id. at
401 U. S.
624-625.
See also Mullane v. Central Hanover Bank
& Trust Co., 339 U. S. 306,
339 U. S.
307-308 (1950).
[
Footnote 19]
See 15 U.S.C. § 80a-3(c)(3). As David Schenker, an
attorney for the SEC, explained at the 1940 Senate Hearings:
"We have exempted any common trust fund. . . . Those common
trust funds are a sort of investment trust in which trustees can
participate, and they are managed by banks and trust
companies."
1940 Senate Hearings at 181.
[
Footnote 20]
The normal reading of the language of § 4(c)(8) takes on
additional significance in light of the fact, recognized by the
Court of Appeals, that the legislative history of the section
provides no real guidance as to the scope of the exception
contained therein. 106 U.S.App.D.C. 97, 110, 606 F.2d 1004,
1017.
[
Footnote 21]
Commenting on an interpretation of the Glass-Steagall Act by the
Board in
Board of Governors v. Agnew, 329 U.
S. 441 (1947), Justice Rutledge observed:
"Not only because Congress has committed the system's operation
to their hands, but also because the system itself is a highly
specialized and technical one, requiring expert and coordinated
management in all its phases, I think their judgment should be
conclusive upon any matter which, like this one, is open to
reasonable difference of opinion. Their specialized experience
gives them an advantage judges cannot possibly have, not only in
dealing with the problems raised for their discretion by the
system's working, but also in ascertaining the meaning Congress had
in mind in prescribing the standards by which they should
administer it. Accordingly, their judgment in such matters should
be overturned only where there is no reasonable basis to sustain it
or where they exercise it in a manner which clearly exceeds their
statutory authority."
Id. at
329 U. S. 450.
See also Board of Governors v. First Lincolnwood Corp.,
439 U. S. 234,
439 U. S. 248
(1978).
[
Footnote 22]
A determination by the Board that a particular service is
closely related to banking does not end the Board's role. A bank
holding company must submit a specific application with respect to
each service it wishes to perform. The Board then determines on the
basis of the circumstances of each applicant whether the proposed
activity would serve the public interest.
See 12 CFR §
225.4(a) (1980); H.R.Conf.Rep. No. 91-1747, p. 22 (1970);
NCNB
Corp. v. Board of Governors, 599 F.2d 609, 610-611 (CA4 1979).
If a bank holding company wishes to acquire or retain shares of a
company engaged in an activity already approved as "closely
related," the Board publishes notice of the application in the
Federal Register for public comment on the "public benefits" issue.
12 CFR § 225.4(b)(2) (1980).
[
Footnote 23]
The Senate Report on the Bank Holding Company Act indicated the
importance of the role of the Board in determining what activities
would be permitted under § 4(c)(8):
"[T]here are many other activities of a financial, fiduciary, or
insurance nature which cannot be determined to be closely related
to banking without a careful examination of the particular type of
business carried on under such activity. For this reason, your
committee deems it advisable to provide a forum before an
appropriate Federal authority in which decisions concerning the
relationship of such activities to banking can be determined in
each case on its merits."
S.Rep. No. 1095, 84th Cong., 1st Sess., pt. 1, p. 13 (1955)
(hereinafter 1955 Senate Report). The legislative history of the
Bank Holding Company Act Amendments of 1970 indicated that the
Amendments were not intended to cut back on the discretion afforded
the Board. As Senator Bennett, a member of the Conference
Committee, indicated, the 1970 Amendments maintained
"maximum flexibility for the Federal Reserve Board to determine
the activities in which a bank holding company and its subsidiaries
may engage. . . ."
116 Cong.Rec. 42432 (1970).
See n 58,
infra.
[
Footnote 24]
See n 15,
supra. We agree with the Court of Appeals that §§ 16 and
21 apply only to banks, and not to bank holding companies. Section
21 prohibits firms engaged in the securities business from also
receiving deposits. Bank holding companies do not receive deposits,
and the language of § 21 cannot be read to include within its
prohibition separate organizations related by ownership with a
bank, which does receive deposits. As the following colloquy, cited
by the Court of Appeals, between Senator Glass, cosponsor of the
bill, and Senator Robinson, indicates, the drafters of the bill
agreed with this construction:
"Mr. GLASS. . . . Here [§ 21], we prohibit the large private
banks, whose chief business is investment business, from receiving
deposits. We separate them from the deposit banking business."
"
* * * *"
"Mr. ROBINSON of Arkansas. That means, if they wish to receive
deposits, they must have separate institutions for that
purpose?"
"Mr. GLASS. Yes."
77 Cong.Rec. 3730 (1933). Section 16, which prohibits a national
bank from "underwriting" any issue of a security, by its terms,
applies only to banks. Although respondent contended here and in
the Court of Appeals that the bank and its holding company should
be treated as a single entity for purposes of applying §§ 16 and
21, the structure of the Glass-Steagall Act indicates to the
contrary. Sections 16 and 21 flatly prohibit banks from engaging in
the underwriting business. Organizations affiliated with banks,
however, are dealt with by other sections of the Act. Section
19(e), 48 Stat. 188, repealed in pertinent part, 80 Stat. 242,
prohibited bank holding companies from voting the shares of a bank
subsidiary unless the holding company divested itself of any
interest in a subsidiary formed for the purpose of or "engaged
principally" in the issuance or underwriting of securities. More
importantly, § 20 of the Act, 48 Stat. 188, prohibits national
banks or state bank members of the Federal Reserve System from
owning securities affiliates, defined in § 2(b), 48 Stat. 162, that
are "engaged principally" in the issuance or underwriting of
securities. Thus, the structure of the Act reveals a congressional
intent to treat banks separately from their affiliates. The reading
of the Act urged by respondent would render § 20 meaningless.
[
Footnote 25]
Respondent also argues that the regulation authorizes banks, as
well as bank holding companies and nonbank subsidiaries, to act as
investment advisers. The operative definition of "bank holding
company" in the Board's interpretive ruling includes "their bank
and nonbank subsidiaries." 12 CFR § 225.125(c) (1980). Respondent
contends that banks have relied on the interpretive ruling as
authorization for them to sponsor investment companies. Brief for
Respondent 13-18. The simple answer to this argument is that not
only does the interpretive ruling confer no authorization to
undertake any activities, but also the Board does not have the
power to confer such authorization on banks. As the Board's opinion
in this case stated:
"[T]he Board's regulation was adopted pursuant to section
4(c)(8) of the Bank Holding Company Act, and authorizes investment
advisory activity to be conducted by a nonbanking subsidiary of the
holding company. The authority of national banks or state member
banks to furnish investment advisory services does not derive from
the Board's regulation; such authority would exist independently of
the Board's regulation, and its scope is to be determined by a
particular bank's primary supervisory agency."
App. to Pet. for Cert 61a. Thus, the regulation applies only to
bank holding companies. Although the interpretive ruling applies to
banks, that ruling contains only restrictions on the activity
permitted by the regulation. The Board's opinion explained that the
restrictions contained in the interpretive ruling were intended to
apply to banks when the investment advisory function was performed
by a holding company or its nonbanking subsidiaries.
Ibid.
This imposition of restrictions on banks prevented bank holding
companies and their nonbanking subsidiaries from evading the
restrictions by allowing subsidiary banks to perform the restricted
activities. Whether banks are mistakenly relying on the Board's
interpretive ruling to derive permission to act as investment
advisers is not relevant to the determination of the Board's power
to enact the challenged regulation. We do note that, at the time of
the Court of Appeals decision, the Board represented that no bank
had sought the Board's approval for an investment adviser service
that is a prerequisite to acting pursuant to Board authority.
See 196 U.S.App.D.C. at 107, n. 26, 606 F.2d at 1014, n.
26. Thus, although in the discussion to follow, we refer to bank
affiliation with investment companies, this reference is only for
purposes of addressing respondent's argument that banks would
violate the Glass-Steagall Act by serving as investment advisers to
closed-end investment companies.
[
Footnote 26]
Respondent also contends that the Board's regulation violates §
20 of the Glass-Steagall Act. The Court of Appeals did not consider
the § 20 argument, but the respondent has submitted this contention
to answer the Board's argument that § 20 is the only relevant
section of the Glass-Steagall Act for purposes of determining what
services bank holding companies may provide. Section 20 provides in
pertinent part:
"[N]o [national bank] shall be affiliated . . . 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."
48 Stat. 188, 12 U.S.C. § 377. Although "affiliate," as
originally defined in § 2(b) of the Glass-Steagall Act, did not
include holding companies,
see 48 Stat. 162, Congress, in
1966, amended the statute to bring holding companies within the
definition of "affiliate," and thereby within the reach of § 20. 80
Stat. 242, 12 U.S.C. § 221a(b)(4). In
Board of Governors v.
Agnew, 329 U. S. 441
(1947), the Court recognized the difference in the extent of
prohibition of securities-related activities reflected in the use
of the word "engaged" in § 21, as opposed to the use of the words
"engaged principally" in § 20. Thus, a less stringent standard
should apply to determine whether a holding company has violated §
20 than is applied to a determination of whether a bank has
violated §§ 16 and 21. Nevertheless, the Board's regulation goes
beyond the less stringent standard by prohibiting any involvement
by the bank holding company or its subsidiaries in the underwriting
or selling of the securities of the investment company. Moreover,
the distinction here between closed-end and open-end investment
companies is crucial. If, as respondent contends, the closed-end
company's initial issuance of stock were sufficient to render the
company "principally engaged" in the issuance of securities, then
all corporations, including banks, would at some point be engaged
principally in the issuance of securities. We cannot accept this
premise. Moreover, given our rejection of this premise, it follows
that the investment adviser to such a company is clearly not
engaged principally in the issuance of securities. To a certain
extent, our conclusions
infra with respect to §§ 16 and 21
subsume the argument that the regulation is inconsistent with §
20.
[
Footnote 27]
Representative Steagall, cosponsor of the bill, stated in
debate:
"[T]he purpose of this legislation is to protect the people of
the United States in the right to have banks in which their
deposits will be safe. They have a right to expect of Congress the
establishment and maintenance of a system of banks in the United
States where citizens may place their hard earnings with reasonable
expectation of being able to get them out again upon demand."
77 Cong.Rec. 3837 (1933). This purpose is also reflected by the
fact that a major portion of the Act, around which most of the
debate by both Houses centered, was the creation of the Federal
Deposit Insurance Corporation.
See 48 Stat. 16180.
[
Footnote 28]
S.Rep. No. 77, 73d Cong., 1st Sess., 6, 10 (1933) (hereinafter
1933 Senate Report). Representative Koppleman stated in debate:
"One of the chief causes of this depression has been the diversion
of depositors' moneys into the speculative markets of Wall Street."
77 Cong.Rec. 3907 (1933).
See also id. at 3835 (remarks of
Rep. Steagall).
[
Footnote 29]
1933 Senate Report at 10.
See also 77 Cong.Rec. 3835
(1933) (remarks of Rep. Steagall);
id. at 4179, 4180
(remarks of Sen. Bulkley).
[
Footnote 30]
1933 Senate Report at 10.
See also 77 Cong.Rec. 3835
(1933) (remarks of Rep. Steagall);
id. at 4179, 4180
(remarks of Sen. Bulkley).
[
Footnote 31]
See n 13,
supra.
[
Footnote 32]
The statutory prohibition in § 21 applies to firms
"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. . . . ; that is hardly the sort of language that would
be used to describe an investment adviser.
Compare the
statutory definition of an investment adviser quoted in
n 4,
supra."
[
Footnote 33]
Section 21 originally prohibited firms "engaged principally" in
the business of issuing securities from receiving deposits. Senator
Bulkley introduced an amendment striking the word "principally"
because
"[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). This amendment indicates the type of
institution which Congress focused upon in § 21. Senator Glass, in
discussing the effect that § 21 would have upon the credit supply,
indicated that,
"[i]f we confine to their proper business activities these large
private concerns whose principal business is that of dealing in
investment securities, . . . and many of which unloaded millions of
dollars of worthless investment securities upon the banks of this
country, and deny them the right to conduct the deposit bank
business at the same time, there will be no difficulty on the face
of the globe in financing any business enterprise that needs to be
financed at a profit in this country."
77 Cong.Rec. 4179 (1933)
[
Footnote 34]
See nn.
15
26 supra.
[
Footnote 35]
See 12 U.S.C. § 1843(c)(7). Section 4(c)(7) even
permits a bank holding company to own a controlling interest in an
investment company, and § 4(a)(2) permits a holding company to
provide management services to companies in which it has a
controlling interest.
See 12 U.S.C. § 1843(a)(2).
[
Footnote 36]
It was described as follows:
"Under the plan, the bank customer tenders between $10,000 and
$500,000 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."
401 U.S. at
401 U. S.
622-623.
[
Footnote 37]
Moreover, the decision by an investment adviser to purchase or
sell securities on behalf of a closed-end investment company is
critically different from the comparable decision by the operator
of the mutual fund reviewed in
Camp. When an adviser makes
a change in the securities portfolio of a closed-end company, the
adviser is acting for the account of its customer -- not for its
own account. In
Camp, however, the securities in the
portfolio of the mutual fund were at least arguably the property of
the bank itself, and therefore the bank was arguably acting for its
own account within the meaning of § 16.
[
Footnote 38]
The Court recognized that, because the bank and its affiliate
would be closely associated in the public mind, public confidence
in the bank might be impaired if the affiliate performed poorly.
Further, depositors of the bank might lose money on investments
purchased in reliance on the relationship between the bank and its
affiliate. The pressure on banks to prevent this loss of public
confidence could induce the bank to make unsound loans to the
affiliate or to companies in whose stock the affiliate has
invested. Moreover, the association between the commercial and
investment bank could result in the commercial bank's reputation
for prudence and restraint being attributed, without justification,
to an enterprise selling stocks and securities. Furthermore,
promotional considerations might induce banks to make loans to
customers to be used for the purchase of stocks, and might impair
the ability of the commercial banker to render disinterested
advice. 401 U.S. at
401 U. S.
630-634.
[
Footnote 39]
The bank could not stray from its obligation to render impartial
advice to its customers by promoting the fund, because the
interpretive ruling prohibits a bank from giving the names of its
depositors to the investment company. 12 CFR § 225.125(h) (1980);
see n 13,
supra. Further, the bank could not act as investment
adviser to any investment company having a similar name;
prospectuses and sales literature of the investment company could
not be distributed by the bank; officers and employees of the bank
could not express an opinion with respect to the advisability of
the purchase of securities of the investment company, and the
investment company could not locate its offices in the same
building as the bank.
Ibid. These restrictions would
prevent to a large extent the association in the public mind
between the bank and the investment company, as well as the
resulting connection between public confidence in the bank and the
fortunes of the investment company. Although this association
cannot be completely obliterated, we do note that the performance
of the large trust funds operated by banks is routinely published.
See American Banker, Sept. 2, 1980, pp. 1, 10, 16. The
Securities Exchange Act of 1934 requires disclosure of information
about the securities portfolios of common trust funds that have a
portfolio with an aggregate value of at least $100 million. 15
U.S.C. § 78m(f); 17 CFR § 240.13f-1 (1980).
[
Footnote 40]
The advisory fee is the adviser's consideration for managing the
investment company. In 1962, the Wharton School Study of Mutual
Funds indicated that the advisory fee charged by advisers to
open-end funds was typically one-half of one percent of the value
of the fund's assets. Wharton School Study at 484. The amount of
the advisory fee earned by the adviser to a closed-end company
increases only if the value of the investment portfolio increases.
In contrast, the fee of the adviser to a mutual fund increases both
with the increase in value of the investment portfolio and through
the sale of the company's shares. SEC Report of Special Study of
Securities Markets, H.R. Doc. No. 95, 88th Cong., 1st Sess., pt. 4,
pp. 204-205, 96-99 (1963). The fee paid by the closed-end company
would provide scant incentive to a bank to risk its assets by
making unwise loans to companies whose stock is held by the
investment company.
[
Footnote 41]
The Court stated:
"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."
401 U.S. at
401 U. S.
627.
[
Footnote 42]
1955 Senate Report at 2.
See also H.R.Rep. No. 609,
84th Cong., 1st Sess., 16 (1955) (hereinafter 1955 House
Report).
[
Footnote 43]
Section 19(e) provided in pertinent part:
"Every such holding company affiliate shall, in its application
for such voting permit, (1) show that it does not own, control, or
have any interest in, and is not participating in the management or
direction of, any corporation, business trust, association, or
other similar organization formed for the purpose of, or 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 of any sort (hereinafter referred to as 'securities
company'); (2) agree that during the period that the permit remains
in force it will not acquire any ownership, control, or interest in
any such securities company or participation in the management or
direction thereof; (3) agree that, if, at the time of filing the
application for such permit, it owns, controls, or has an interest,
in, or is participating in the management or direction of, any such
securities company, it will, within five years after the filing of
such application, divest itself of its ownership, control, and
interest in such securities company and will cease participating in
the management or direction thereof, and will not thereafter,
during the period that the permit remains in force, acquire any
further ownership, control, or interest in any such securities
company or participate in the management or direction thereof. . .
."
48 Stat. 188 The "engaged principally" standard is the same
standard as is contained in § 20 of the Glass-Steagall Act. Section
19(e) also required bank holding companies to divest themselves of
shares of companies "formed for the purpose of" the issuance or
underwriting of securities. We do not view this language as
prohibiting securities-related activities that would not also be
prohibited by the "engaged principally" standard. All companies
formed for the purpose of issuing or underwriting securities would
surely meet the "engaged principally" test.
[
Footnote 44]
955 Senate Report at 2;
see S.Rep. No. 1179, 89th
Cong., 2d Sess., 12 (1966) (hereinafter 1966 Senate Report).
[
Footnote 45]
The Senate Report to the Bank Holding Company Act indicated
that, as of December 31, 1954, only 18 holding companies had
obtained voting permits for bank shares from the Board. The Board
estimated that 46 bank holding companies would be subjected to
regulation by the Bank Holding Company Act.1955 Senate Report at
2.
[
Footnote 46]
As we have indicated previously,
see n 26,
supra, the words
"principally engaged," contained in both §§ 19(e) and 20 of the
Glass-Steagall Act, the sections applicable to bank affiliates,
indicate a significantly less stringent test for determining the
permissibility of securities-related activity than does the word
"engaged," contained in §§ 16 and 21, the sections applicable to
banks.
[
Footnote 47]
See nn.
32
33 supra, and
accompanying text.
[
Footnote 48]
See n 26,
supra.
[
Footnote 49]
The 1966 Senate Report on the 1966 Amendments to the Bank
Holding Company Act states that the purpose of the 1956 Act was in
part to serve the "general purposes of the Glass-Steagall Act of
1933 -- to prevent unduly extensive connections between banking and
other businesses." 1966 Senate Report at 2. The legislative history
identified by the Court of Appeals merely indicates that Congress
recognized the deficiency of § 19(e), 1955 Senate Report at 2, or
that Congress intended the Bank Holding Company Act to serve some
of the same policies that we have identified as motivating the
Glass-Steagall Congress:
"Whenever a holding company thus controls both banks and
nonbanking businesses, it is apparent that the holding company's
nonbanking businesses may thereby occupy a preferred position over
that of their competitors in obtaining bank credit. It is also
apparent that, in critical times, the holding company which
operates nonbanking businesses may be subjected to strong
temptation to cause the banks which it controls to make loans to
its nonbanking affiliates even though such loans may not at that
time be entirely justified in the light of current banking
standards. In either situation, the public interest becomes
directly involved."
1955 House Report at 16. The Court of Appeals also cited
legislative history indicating that the Board was to have a
"limited" authority to administer the § 4(c)(8) exception.
See Control and Regulation of Bank Holding Companies:
Hearings on H.R. 2674 before the House Committee on Banking and
Currency, 84th Cong., 1st Sess., 14 (1955); Control of Bank Holding
Companies: Hearings on S. 880, S. 2350, and H.R. 6277 before a
Subcommittee of the Senate Committee on Banking and Currency, 84th
Cong., 1st Sess., 76 (1955). The fact that the scope of the Board's
discretion was to be limited sheds no light on the question of
Congress' view of the Glass-Steagall Act. Moreover, although the
Court of Appeals relied, as indicative of congressional intent
regarding the scope of § 4(c)(8), on the Senate Report's omission
of any securities-related activities from the listing of activities
clearly falling within the § 4(c)(8) exception, 196 U.S.App.D.C. at
110, 606 F.2d at 1017, the Senate Report, after listing those
obviously related activities, goes on to indicate the importance of
the Board's role in approving other such activities.
See
1955 Senate Report at 13;
n
23,
supra. Finally, the Court of Appeals found
significance in the repeal of § 19(e) of Glass-Steagall in 1966 and
the Senate Report's indication that § 19(e) "serve[d] no
substantial purpose" after passage of the 1956 Act. 1966 Senate
Report at 12. At the same time as Congress repealed § 19(e),
however, it amended the definition of "affiliate" in § 2(b) of the
Glass-Steagall Act to include bank holding companies, so that the
restrictions applying to affiliates contained in § 20 of the Act
then applied to bank holding companies as well. 80 Stat. 242.
Furthermore, the fact that § 19(e) served no purpose after the
passage of the 1956 Act merely indicates that Congress was
successful in its attempt to close the loophole left by Congress in
the Glass-Steagall Act. It does not indicate that the 1956 Congress
sought to impose more substantial restrictions than those contained
in § 19(e), or that the 1956 Congress misperceived the scope of
those restrictions.
[
Footnote 50]
See S.Rep. No. 91-1084, p. 4 (1970) (hereinafter 1970
Senate Report):
"[T]he primary purpose of the pending legislation is to modify
the Bank Holding Company Act of 1956 to bring under its provisions
those companies controlling one bank. . . ."
See also H.R.Rep. No. 91-387, p. 2 (1969) (hereinafter
1969 House Report).
[
Footnote 51]
The 1956 version had required a close connection to the
"business of banking." The 1970 Amendments required only a close
connection to "banking." This change eliminated the requirement
that bank holding companies show a close connection between a
proposed activity and an activity in which the holding company or
its subsidiary already actually engaged. Thus, the 1970 amendment
to § 4(c)(8) permitted bank holding companies to engage in any
activities closely related to activities generally engaged in by
banks. H.R.Conf.Rep. No. 91-1747, p. 16 (1970) (hereinafter 1970
Conference Report); 116 Cong.Rec. 42436 (1970) (remarks of Sen.
Bennett).
[
Footnote 52]
1969 House Report at 1; 1970 Senate Report at 25.
[
Footnote 53]
1970 Conference Report at 5.
[
Footnote 54]
The Conference Committee Report, signed by only four of the
seven House conference managers, indicated that the "functionally
related" test represented a "more liberal and expansive approach by
the Federal Reserve Board in authorizing nonbank activities for
bank holding companies," and that the retention of the "closely
related" language indicated that "Congress was not convinced that
such expansion and liberalization was justified."
Id. at
21. This view was not shared by all of the Senate Members of the
Conference Committee, however. Senator Bennett criticized the
Conference Report as an inaccurate indication of the conference's
intent, and expressed his belief that the conference intended to
broaden the power of the Board to determine what activities are
closely related to banking. 116 Cong.Rec. 42432-42437 (1970).
Senator Bennett indicated that the proposed term "functionally
related" was no broader than the retained term "closely related,"
and that the removal of the phrase "of a financial, fiduciary, or
insurance nature" was intended to reflect an expansion of the
Board's discretion.
Id. at 42432-42433.
See also
id. at 42422 (remarks of Sen. Sparkman).
See n 2,
supra. 11 of the Senators
on the Conference Committee, however, did not so perceive the final
version of § 4(c)(8). Senator Proxmire indicated that "the
conference committee agreed essentially to retain the standards of
the existing 1956 Bank Holding Company Act." 11 Cong.Rec. 42427
(1970).
[
Footnote 55]
During debate on the conference bill, Senator Williams expressed
concern about the effect of the 1970 Amendments on the prohibitions
of the Glass-Steagall Act:
"Mr. WILLIAMS of New Jersey. I have one question I should like
to ask the chairman of the committee."
"Both the Senate and House bills contained, in section 4(c)(8),
substantially similar language reiterating the existing law
embodied in the Glass-Steagall Act which provides, essentially, for
separation of commercial banking and the securities business. This
language does not appear in the bill agreed to by the conferees. I
wonder whether there was any intention to imply that the very
securities-related activities forbidden to banks directly may
nevertheless be engaged in by bank holding companies or their
nonbanking affiliates."
"Mr. SPARKMAN. The answer to the Senator's question is that
there clearly was not. As it now stands, the Glass-Steagall Act
broadly prohibits both banks and their affiliates from engaging in
what we commonly understand to be the securities business. There
are some specific exceptions, of course, but I can assure you that
we did not mean to enlarge or contract them here. We regarded that
general prohibition as being so clearly applicable to the subjects
of this bill as to make a restatement of it unnecessary. The
provision to which you referred is already complicated enough. In
short, we did not intend to amend or modify, directly or
indirectly, any limitations on the activities of banks, bank
holding companies or any of their affiliates, now contained in the
Glass-Steagall Act. If Congress is to change that longstanding,
fundamental statement of public policy, we will have to do so in
other legislation. I hope there is no longer any misconception on
that point."
"Mr. WILLIAMS of New Jersey. It is reassuring, indeed, to know
that the Glass-Steagall Act has not been disturbed in any way, and
that there is no intention at all here to do so."
Id. at 42430.
See also 1970 Senate Report at
15. By the time Congress was considering the 1970 Amendments, the
definition of "affiliate" contained in § 2(b) of the Glass-Steagall
Act had been amended to include bank holding companies, so that the
prohibitions contained in § 20 of Glass-Steagall had become
applicable to bank holding companies.
[
Footnote 56]
1970 Senate Report at 15. The Report notes that the Senate
version of the bill prohibited bank holding companies from holding
shares in companies "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 securities." The Report recognized that this provision was
a restatement of the prohibition already contained in the
Glass-Steagall Act. The Report goes on to state:
"The inclusion of this provision is not intended to prejudice
the rights of banks or bank holding companies or their affiliates
to engage in such of these activities as may be permitted under
existing law or which may become permissible under this legislation
or under any future legislation. In particular, the language is not
intended to inhibit the underwriting of revenue bonds nor operating
commingled or managing agency accounts (bank sponsored mutual
funds) which activities have already been specifically approved in
legislation previously reported by this committee and passed by the
Senate, if such legislation is finally enacted, if these activities
are allowed under the amendments being made by this legislation, or
if the activities are permitted by the courts."
Ibid. When the 1970 Amendments were passed, the status
of bank-sponsored mutual funds under the Glass-Steagall Act was
unsettled. The District of Columbia Circuit's decision in
National Association of Securities Dealers v. SEC, 136
U.S.App.D.C. 241, 420 F.2d 83 (1969), approving bank operation of
mutual funds, had not yet been reversed by our decision in
Investment Company Institute v. Camp, 401 U.
S. 617 (1971).
[
Footnote 57]
115 Cong.Rec. 33133 (1969).
[
Footnote 58]
Senator Goodell stated that "[t]he Senate-passed bill . . .
provided the banking industry with a great deal of flexibility
regarding expansion into bank-related activities." 116 Cong.Rec.
42429 (1970).
See n
23,
supra. As Senator Sparkman stated of the
conference:
"We reached a decision that the whole thing ought to be
flexible, that it ought to be lodged in the hands of the Federal
Reserve Board to carry out the guidelines we set."
116 Cong.Rec. 42429 (1970).
[
Footnote 59]
The Court of Appeals read the colloquy between Senators Williams
and Sparkman,
see n
55,
supra, as an indication that Congress was under the
impression -- admittedly incorrect -- that the Glass-Steagall Act
prohibited the services authorized by the Board here. 196
U.S.App.D.C. at 114, 606 F.2d at 1022. In light of the indications
in the Senate Report that the Senate did not intend §4(c)(8) to
foreclose the Board from approving bank-sponsored mutual funds,
see n.
56
supra, and accompanying text, the Senate colloquy cited by
the Court of Appeals lends scant support to the theory that
Congress misunderstood the scope of the Glass-Steagall Act.
Moreover, the language deleted from the Senate bill's version of
§4(c)(8) to which Senators Sparkman and Williams were referring
contained the "principally engaged" standard contained in § 20 of
the Glass-Steagall Act, and not the more complete prohibition
contained in §§ 16 and 21.
See nn.
54 55,
supra. Furthermore, if Congress
was confused about the scope of the Glass-Steagall Act, it may have
believed that the statute permitted more than is actually the case.
See n 55,
supra. Finally, given the flexible approach to § 4(c)(8)
which prevailed in the 1970 amendments, we must presume that
Congress did not intend to adopt a rigid and fixed construction of
the Glass-Steagall Act, but rather intended that the prevailing
view of Glass-Steagall should guide the Board's discretion.
We also disagree with the Court of Appeals' conclusion that the
policies underlying the 1970 Amendments would be frustrated by
permitting bank holding companies to act as investment advisers to
closed-end investment companies.
See 196 U.S.App.D.C. at
116, 606 F.2d at 1023. The first policy, the fear that bank holding
companies would improperly further the interests of the nonbanking
subsidiary, is adequately protected by the Board's interpretive
ruling.
See nn.
38-44 supra, and accompanying text. Furthermore,
given our conclusion that the 1970 Amendments, at the very least,
did not cut back on the discretion granted the Board under the 1956
Act, we believe that, to the extent that Congress addressed in the
1970 Amendments the second policy, the prevention of centralization
of economic power, it did so by eliminating the one bank holding
company loophole, and not by limiting Board discretion to determine
what activities are closely related to banking. 1970 Senate Report
at 2-4; 1969 House Report at 2.