BOARD OF GOVERNORS OF FEDERAL RESERVE SYSTEM v. INVESTMENT COMPANY
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT.
Argued October 15, 1980.
Decided February 24, 1981.
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.
The amendment to Regulation Y does not exceed the Board's statutory authority. Pp. 55-78.
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.
Stephen M. Shapiro argued the cause for petitioner. With him on the briefs were Solicitor General McCree, Assistant Attorney General Daniel, Anthony J. Steinmeyer, and Neal L. Petersen. [450 U.S. 46, 48]
G. Duane Vieth argued the cause for respondent. With him on the briefs was Leonard H. Becker. *
[ Footnote * ] William H. Smith, Keith A. Jones, Alan B. Levenson, Daniel F. Kolb, Geoffrey S. Stewart, Arnold M. Lerman, Michael L. Burack, and Edward T. Hand filed a brief for the American Bankers Association et al. as amici curiae urging reversal.
Briefs of amici curiae urging affirmance were filed by Roger A. Clark, John M. Liftin, and Donald J. Crawford for the Securities Industry Association; and by Harvey L. Pitt, James H. Schropp, and Randy A. Harris for A. G. Becker Inc.
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. 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." 2 In 1972 the Board amended its [450 U.S. 46, 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. 3 Although the statutory definition [450 U.S. 46, 50] is a detailed one, 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. 5 Investment advisers generally organize and manage investment companies pursuant to a contractual arrangement with the company. 6 In return for a management fee, the adviser [450 U.S. 46, 51] selects the company's investment portfolio and supervises most aspects of its business. 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." 8 Because open-end investment companies will redeem their shares, they must constantly issue securities to prevent shrinkage of assets. 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. 10 [450 U.S. 46, 52]
The Board's interpretive ruling expressed the opinion that a bank holding company may not lawfully sponsor, organize, or control an open-end investment company. 11 but the Board perceived no objection to sponsorship of a closed-end investment company provided that certain restrictions are observed. 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. 13 [450 U.S. 46, 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. 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 [450 U.S. 46, 54] that Act 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 [450 U.S. 46, 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.
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 advise - to invest and reinvest the funds of the client. Banks have engaged in that sort of activity for decades. 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. 17 Moreover, for over 50 years banks have performed these tasks for trust funds consisting of commingled funds of customers. 18 These common trust funds administered [450 U.S. 46, 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. 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). 20
The Board's determination of what activities are "closely related" to banking is entitled to the greatest deference. 21 [450 U.S. 46, 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. 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. 23 Thus [450 U.S. 46, 58] unless the Glass-Steagall Act requires a contrary conclusion, the Board's interpretation of the plain language of the Bank Company Holding Act must be upheld.
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. 24 Respondent therefore argues that such services may [450 U.S. 46, 59] never be regarded as a "proper incident" that could be performed by a bank affiliate. 25 We reject both the premise and the conclusion of this argument. The performance of [450 U.S. 46, 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. 26 [450 U.S. 46, 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. 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. 28 The legislative history reveals that securities firms affiliated with banks had [450 U.S. 46, 62] engaged in perilous underwriting operations, stock speculation, and maintaining a market for the bank's own stock, often with the bank's resources. 29 Congress sought to separate national banks, as completely as possible, from affiliates engaged in such activities. 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). 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 [450 U.S. 46, 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. 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. 33
Even if we were to assume that a bank would violate the Glass-Steagall Act by engaging in certain investment advisory [450 U.S. 46, 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 impressible 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. 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. 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.
Our conclusions with respect to the Glass-Steagall Act are in no way altered by consideration of our decision in Investment [450 U.S. 46, 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. 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 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, [450 U.S. 46, 66] id., at 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. 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. 38 But none of these "more subtle hazards" [450 U.S. 46, 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. 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. 40 [450 U.S. 46, 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. 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 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.
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 [450 U.S. 46, 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. 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. 43 This provision was largely ineffectual, because [450 U.S. 46, 70] bank holding companies were not subject to the divestiture requirement as long as they did not vote their bank subsidiary shares. 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. 45 The clear evidence of a [450 U.S. 46, 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. 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. 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. 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). 49 [450 U.S. 46, 72]
A review of the 1970 Amendments to the Bank Holding Company Act only strengthens this conclusion. 50 On its face the 1970 amendment to 4 (c) (8) would appear to have [450 U.S. 46, 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. 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. 52 The Conference Committee's final version of the bill, however, retained the "closely related" language of the 1956 Act. 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. 54 For purposes of this case, however, we need [450 U.S. 46, 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 [450 U.S. 46, 75] in the Glass-Steagall Act. 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." 56 The House's version of the bill rigidly [450 U.S. 46, 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 are redeemable." 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. 58 Thus [450 U.S. 46, 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. 59 This case is [450 U.S. 46, 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
[ Footnote 2 ] Section 4 of the statute, as originally enacted, provided in pertinent part:
[ 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:
[ Footnote 4 ] The definition of an investment adviser in (2) (a) (20) of the Investment Company Act of 1940 reads as follows:
[ 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, 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:
[ 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." 12 CFR 225.125 (f) (1980).
[ Footnote 13 ] Pertinent parts of the interpretive ruling read as follows:
[ 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:
Section 21, provides, in pertinent part, that it is unlawful
[ 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 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. 196 U.S. App. D.C. 97, 110, 606 F.2d 1004, 1017.
[ 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):
[ 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:
[ 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:
[ 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:
[ Footnote 27 ] Representative Steagall, cosponsor of the bill, stated in debate:
[ 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:
[ 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 [450 U.S. 46, 67] for the purchase of stocks and might impair the ability of the commercial banker to render disinterested advice. 401 U.S., at 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 [450 U.S. 46, 68] 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:
[ 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:
[ Footnote 44 ] 1955 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 [450 U.S. 46, 71] 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 [450 U.S. 46, 72] 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:
[ 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 [450 U.S. 46, 74] represented a "more liberal and expensive 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. All 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." 116 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:
[ 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 [450 U.S. 46, 76] "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:
[ 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 115, 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 loop-hole 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. [450 U.S. 46, 79]