Securities Industry Association v. Board of Governors of the Federal Reserve System

PETITIONER: Securities Industry Association
RESPONDENT: Board of Governors of the Federal Reserve System
LOCATION: The D&B Corporation

DOCKET NO.: 83-614
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 468 US 207 (1984)
ARGUED: Apr 24, 1984
DECIDED: Jun 28, 1984

ADVOCATES:
Carter G. Phillips - on behalf of Respondent
James B. Weidner - on behalf of the petitioners

Facts of the case

Question

Media for Securities Industry Association v. Board of Governors of the Federal Reserve System

Audio Transcription for Oral Argument - April 24, 1984 in Securities Industry Association v. Board of Governors of the Federal Reserve System

Warren E. Burger:

We will hear arguments next in Securities Industry Association against the Board of Governors of the Federal Reserve.

Mr. Weidner, you may proceed whenever you are ready.

James B. Weidner:

Mr. Chief Justice, may it please the Court.

This case involves an admittedly unprecedented order of the Federal Reserve Board, reversing 50 years of administrative understanding, and industry understanding permitting bank affiliates, for the first time in half a century--

How can it be unprecedented if you reverse something?

James B. Weidner:

--Unprecedented in terms of reversing the understanding, but not unprecedented in terms of reversing a prior administrative ruling.

Involved are two statutes fundamental to the governing of the banking industry, and financial services industry in this country, the Bank Holding Company Act and the Glass-Steagall Act.

In this case, directly contrary to congressional intent, in our view, the Board of Governors, affirmed by the Second Circuit, turned two narrow exceptions in the statutes into broad authorizations instead.

We believe that the decision below should be reversed for two reasons.

First, the Bank Holding Company Act requires that any bank affiliate, which is not a bank, be involved in a business that is so closely related to banking as to be a proper incident thereto.

That has been interpreted and requires that that business be closely related in the sense of being... of having a direct and significant connection to banking, and not similar... not simply being related to it in the sense of being functionally similar, which is what the Board found.

Secondly, we believe that the Glass-Steagall Act prevents any affiliation of a bank with an entity that is principally engaged in the public securities business, and that is the business in which the affiliate here involved is here involved.

Briefly, the facts are these: In early 1982, the BankAmerica Corporation, owner of BankAmerica, one of the largest banks in the world, applied to the Federal Reserve Board for permission to acquire the Charles Schwab Corporation.

Schwab is the owner of one of the largest, if not the largest discount brokers in the United States.

The SIA, our client, opposed the application and requested a hearing.

The Federal Reserve Board ordered a hearing before an Administrative Law Judge.

The Law Judge ruled in favor of the proposed acquisition.

The Second Circuit affirmed.

If I may, let me first address the Bank Holding Company Act.

That Act was passed in 1956 to further the basic congressional purpose of separating banking from commerce in general.

By that Act, Congress said that banks will not evade that separation through the structure of a bank holding company, and said that a bank holding company could not acquire a non-banking subsidiary unless... a very narrow exception... that subsidiary's business was so closely related to the business of banking to be a proper incident thereto.

The Board of Governors interpreted that statute for the next decade as requiring a direct and significant connection between the proposed activity of the subsidiary and the activity of the bank holding company itself.

In 1969, the Board asked Congress to amend the statute to loosen up the standard.

They found it to be too restrictive.

What they proposed was that the closely related standard be changed to read "functionally related", and that the phase "the business of" be deleted from the phrase

"closely related to the business of banking. "

The House and the Senate both passed bills, which in fact did substitute "functionally related" for "closely related", but there were significant differences between those bills.

One of the most significant differences was that the House said: We will put functionally related in, but we are also going to have what became known as a laundry list of prohibited activities that in no case will be deemed closely related to banking.

The result was a conference committee, of course, and what can only be described as a legislative Donnybrook.

Clearly there was a battle in the Conference Committee as to which view would prevail.