Securities Indus. Assn. v. Frs, 468 U.S. 137 (1984)

Securities Industry Association v. Board of Governors

of the Federal Reserve System
No. 82-1766

Argued March 21, 1984
Decided June 28, 1984
468 U.S. 137

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE DISTRICT OF COLUMBIA CIRCUIT

Syllabus

Section 16 of the Banking Act of 1933 (Act), commonly known as the Glass-Steagall Act, prohibits commercial banks from underwriting "securities or stock," and § 21 prohibits them from marketing "stocks, bonds, debentures, notes, or other securities." When Bankers Trust Co., a state commercial bank that is a member of the Federal Reserve System, began serving as agent for several of its corporate customers and marketing their commercial paper, petitioners (a national securities industry trade association and a dealer in commercial paper) petitioned the Federal Reserve Board for a ruling that such activities were unlawful under §§ 16 and 21. Taking the position that, if a particular kind of financial instrument evidences a transaction that is more functionally similar to a traditional commercial banking operation than to an investment transaction, then the instrument should not be viewed as a "security" for purposes of the Act, the Board concluded that commercial paper more closely resembles a commercial hank loan than an investment transaction, and that it is not a "security" or "note" within the meaning of the Act, and hence falls outside its proscriptions. The District Court disagreed, but the Court of Appeals deferred to the Board’s interpretation and reversed the District Court’s judgment.

Held: Because commercial paper falls within the plain language of the Act, and because the inclusion of commercial paper within the terms of the Act is fully consistent with its purposes, commercial paper is a "security" under the Act, and therefore is subject to its proscriptions. Pp. 142-160.

(a) Although the Board’s interpretation of the Act is entitled to substantial deference, this case presents considerations that counsel against giving full deference to that interpretation. The Board at the administrative level took the position that commercial paper was not a "security" within the meaning of the Act, and that therefore it was unnecessary to examine the dangers that the Act was intended to eliminate, but before this Court, the Board insisted that Bankers Trust’s activities involved none of such dangers. Post hoc rationalizations by counsel for agency action are entitled to little deference. Pp. 142-144.

(b) In enacting the Act, Congress’ worries about commercial-bank involvement in investment bank activities reflected two general concerns. The first of these concerns was that a commercial bank might experience large losses from investing its funds in speculative securities. In addition to this concern, however, Congress focused on the conflicts of interest that arise when a commercial bank goes beyond the business of acting as a fiduciary or managing agent and develops a pecuniary interest in marketing securities. The Act’s design reflects the congressional perception that some commercial and investment banking activities are fundamentally incompatible, and justify a strong prophylaxis. Pp. 144-148.

(c) There is nothing in the language of either § 16 or § 21 to suggest a narrow reading of the word "securities," i.e., that, because the word appears in a phrase that includes "stocks, bonds, [and] debentures," the Act’s prohibitions apply only to "notes [and] other securities" that resemble the enumerated instruments. To the contrary, the breadth of the term "securities" is implicit in the fact that the antecedent language encompasses not only equity securities, but also securities representing debt. While the Act does not define the terms "notes" or "other securities," there is considerable evidence, particularly with respect to other Acts enacted at the same time that do define "security" to include commercial paper, to indicate that the ordinary meaning of the terms "securities" and "notes" as used in the Act encompasses commercial paper. The Board’s interpretation effectively converts a portion of the Act’s broad prohibitions into a system of administrative regulation, since, by concluding that commercial paper is not covered by the Act, the Board in effect has obtained authority to regulate the marketing of commercial paper under its general supervisory power over member banks. Pp. 148-154.

(d) By focusing entirely on the nature of the financial instrument and ignoring the bank’s role in the transaction, the Board’s "functional analysis" misapprehends Congress’ concerns with commercial bank involvement in marketing securities. The facts that commercial paper is relatively low risk, that commercial banks traditionally have acquired commercial paper for their own accounts, or that commercial paper is sold largely to "sophisticated" investors, do not justify the Board’s interpretation of the Act. There is little evidence to suggest that Congress intended the Act’s prohibitions on underwriting to depend on the safety of particular securities. The authority to discount commercial paper is very different from the authority to underwrite it, and the Act admits of no exception to the prohibition on commercial bank underwriting according to the particular investment expertise of the customer. Pp. 154-160.

224 U.S.App.D.C. 21, 693 F.2d 136, reversed and remanded.

BLACKMUN, J., delivered the opinion of the Court, in which BURGER, C.J., and WHITE, MARSHALL, POWELL, and REHNQUIST, JJ., joined. O’CONNOR, J., filed a dissenting opinion, in which BRENNAN and STEVENS, JJ., joined, post, p. 160.