Petition for review of an order of the Federal Reserve Board authorizing the BankAmerica Corporation, a bank holding company, to acquire the Charles Schwab Corporation, the sole owner of the nation's largest discount brokerage firm. Petitioner Securities Industry Association raises issues under the Glass-Steagall Act and the Bank Holding Company Act. Petition for review denied; order of the Board affirmed.
Feinberg, Chief Judge, Lumbard and Winter, Circuit Judges.
On January 7, 1983 the Federal Reserve Board authorized the BankAmerica Corporation, a bank holding company, to acquire the Charles Schwab Corporation, the sole owner of Charles Schwab & Co., the nation's largest "discount" brokerage firm. The Securities Industry Association (SIA), a national trade association representing over 540 securities brokers, dealers, and investment banking companies, petitions for judicial review of the Board's order. SIA contends that the acquisition approved by the Board violates both the Glass-Steagall Act and the Bank Holding Company Act. We find, however, that neither of those Acts prohibits a bank holding company from engaging in retail brokerage, and that the Board acted well within its discretion in approving BankAmerica's application. We therefore deny SIA's petition for review and affirm the order of the Board.
The BankAmerica Corporation (BAC), with total assets of $120.5 billion, is the second largest bank holding company in the United States. BAC's most important subsidiary is the Bank of America (Bank) which, with domestic deposits of $52 billion, is the nation's largest commercial bank. Charles Schwab & Co. (Schwab) is principally engaged in retail securities brokerage. Schwab buys and sells securities solely as agent, on the order and for the account of its customers. Schwab offers its brokerage customers incidental services including margin loans, securities custodial services, and "sweep" accounts in which net balances awaiting investment are deposited in a money market fund not affiliated with Schwab. Schwab does not, however, offer its customers investment advice and, with minor exceptions not here relevant, does not underwrite or deal in securities. Schwab and similar firms are called "discount brokers" because the commissions they charge typically are significantly lower than those charged by full-service brokerage firms which offer investment advice. Schwab, headquartered in San Francisco, operates nationwide with offices in 26 states and the District of Columbia. Although, by revenue, Schwab currently holds 9% of the discount brokerage market, it holds less than 1% of the total retail brokerage market.
On March 8, 1982 BAC applied to the Federal Reserve Board for permission to acquire 100% of the stock of Schwab's parent corporation. BAC filed its application under § 4(c)(8) of the Bank Holding Company Act, 12 U.S.C. § 1843(c)(8) (1976), which authorizes the Board to approve a bank holding company's acquisition of a subsidiary if the subsidiary's activities are "closely related" to banking and if the public benefits reasonably to be expected from the acquisition outweigh possible adverse effects. The Board published notice of BAC's application in the Federal Register, 47 Fed. Reg. 16,104 (1982), and requested comments from interested parties. The Antitrust Division of the Department of Justice, the Comptroller of the Currency, and the Securities and Exchange Commission all filed comments in support of the application. SIA opposed the application and requested the Board to conduct a formal hearing. An administrative law judge held an evidentiary hearing in September, 1982, and on November 12, 1982, issued his decision recommending that the acquisition be approved. The judge found the proposed acquisition to be consistent with both the Glass-Steagall Act and the Bank Holding Company Act. On January 7, 1983 the Board adopted the judge's findings and conclusions, with modifications, and authorized BAC to acquire Schwab. 69 Fed. Res. Bull. 105 (1983). SIA petitions for review under 12 U.S.C. § 1848 (1976).
Those provisions of the Banking Act of 1933 that mandated a separation of the commercial and investment banking industries are known as the Glass-Steagall Act. See Pub. L. No. 73-66, §§ 16, 20, 21, & 32, 48 Stat. 162 (1933). SIA claims that the Glass-Steagall Act prohibits bank holding company subsidiaries from conducting a retail brokerage business. Although SIA's claim raises an issue of law which we have the ultimate responsibility to decide, see 5 U.S.C. § 706 (1976), the Board's thorough opinion rejecting the claim is entitled to substantial deference. Because the Board has both primary responsibility for implementing the Glass-Steagall Act and expert knowledge of commercial banking, we must uphold its interpretation of the Act if it is reasonable. See Board of Governors v. Investment Co. Institute., 450 U.S. 46, 56 n.21, 67 L. Ed. 2d 36, 101 S. Ct. 973 (1981), quoting Board of Governors v. Agnew, 329 U.S. 441, 450, 91 L. Ed. 408, 67 S. Ct. 411 (1974) (Rutledge, J., concurring); Investment Co. Inst. v. Camp, 401 U.S. 617, 626-27, 91 S. Ct. 1091, 28 L. Ed. 2d 367 (1971); A.G. Becker Inc. v. Board of Governors, 224 U.S. App. D.C. 21, 693 F.2d 136, 140-41 (D.C. Cir. 1982). We conclude that the Board's interpretation was reasonable and entirely consistent with the Act's language and policy.
Only one of the Glass-Steagall Act's four provisions is directly applicable to bank holding companies. That provision, § 20, 12 U.S.C. § 377 (1976) states:
(N)o member bank shall be affiliated in any manner . . . . 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 . . . .
(emphasis supplied). As a bank holding company's various subsidiaries are bank affiliates for purposes of § 20, see 12 U.S.C. § 221a(b) (1976), BAC's acquisition of Schwab will make Schwab an affiliate of Bank. Section 20 therefore prohibits the acquisition if Schwab is "engaged principally" in any of the activities listed in the statute. Although SIA concedes that Schwab is not engaged in the issue, flotation, underwriting, or distribution of securities, it argues that Schwab's retail brokerage business does constitute the "public sale" of securities.
SIA's interpretation of "public sale" to include brokerage is rebutted by the "familiar principle of statutory construction that words grouped in a list should be given related meaning." Third Natl. Bank in Nashville v. Impac, Ltd., 432 U.S. 312, 322, 53 L. Ed. 2d 368, 97 S. Ct. 2307 (1977) (footnote omitted). See also General Elec. Co. v. OSHRC, 583 F.2d 61, 65 (2d Cir. 1978). The terms "issue," "flotation," "underwriting," and "distribution" all refer to the widespread marketing of specific issues of new securities in which the dealer trades as principal for his own profit. See generally 1 L. Loss, Securities Regulation 159-72 & 547-53 (2d ed. 1961). Such activities greatly differ from retail brokerage, in which the broker trades as an agent for commission, not as a principal for profit, and does not transfer title. Thus if "public sale" is to be given a meaning similar to that of the terms that surround it, it cannot be read to encompass retail brokerage. Moreover, if Congress had intended § 20 to cover brokerage, it presumably would have used words more precise than "public sale." Section 16 of the Act, 12 U.S.C. § 24(7) (1976), authorizes banks to engage in "purchasing and selling . . . . securities and stocks without recourse, solely upon the order, and for the account of, customers." Congress' use in § 16 of language that specifically refers to brokerage,*fn1 and its omission of similar terms from § 20, suggests that Congress did not intend § 20 to cover brokerage. See FTC v. Sun Oil Co., 371 U.S. 505, 514-15, 9 L. Ed. 2d 466, 83 S. Ct. 358 (1963) (terms carefully employed by Congress in one place, and excluded in another, should not be implied where excluded).
The Board's ruling that § 20 does not encompass brokerage is supported by its long-standing interpretation of a different provision of the Glass-Steagall Act, § 32, 12 U.S.C. § 78 (1976). Section 32 prohibits managerial or other interlocks between member banks and any entity primarily engaged in "the issue, flotation, underwriting, public sale, or distribution" of securities. Section 32's list of prohibited activities is precisely that found in § 20. In January, 1936, shortly after the Banking Act of 1935 revised § 32 into its present form, the Board ruled that "(a) broker who is engaged solely in executing orders for the purchase and sale of securities on behalf of others in the open market is not engaged in the business referred to in section 32." 22 Fed. Res. Bull. 51 (1936). The Board's interpretation of § 32, to which it still adheres, see 12 C.F.R. § 218.1 n.1, has been confirmed by the Supreme Court. In Board of Governors v. Agnew, 329 U.S. 441, 91 L. Ed. 408, 67 S. Ct. 411 (1947), two directors of a national bank also worked for a securities firm which derived approximately 32% of its gross income from underwriting, and 42% from brokerage. The Board ruled that the directors' outside firm was "primarily engaged" in activities covered by § 32, and it ordered the directors to resign from the bank. The directors challenged the Board's order in court. The District of Columbia Court of Appeals, by a divided vote, held that enforcement of the Board's order should be enjoined. 153 F.2d 785 (1946). The majority and dissenting opinions in the Court of Appeals agreed that § 32 does not cover brokerage. 153 F.2d at 790, 795. They disagreed only on the degree of involvement necessary for a firm to be "primarily" engaged in the activity prohibited by § 32. The Supreme Court granted certiorari and reversed. The Court concluded, as had the dissenting judge in the Court of Appeals, that a firm is "primarily" engaged in a prohibited activity if it is "substantially" so engaged, and that the Board's order was therefore lawful notwithstanding the fact that the directors' outside firm earned less than half of its revenue from underwriting. Although the Court did not explicitly rule brokerage to be excluded from § 32, it did distinguish the firm's brokerage income from its underwriting income, and used the language of § 32 to define "underwriting" as the "issue, flotation, underwriting, public sale or distribution" of securities. 329 U.S. at 445 n.3. It thus seems clear that the Court read § 32 to exclude brokerage. Indeed, if the Court had not so read the statute, it would not have had to explore the meaning of "primarily engaged," since the directors' outside employer was, under any interpretation of the term, "primarily engaged" in underwriting and brokerage taken together. Use of the same language in different statutory provisions, where the various provisions were enacted together and concern the same general goals, is a strong indication that Congress intended the language to have the same meaning wherever it appears. See Northcross v. Board of Educ. of the Memphis City Schools, 412 U.S. 427, 428, 93 S. Ct. 2201, 37 L. Ed. 2d 48 (1973); Hargrave v. Oki Nursery, Inc., 646 F.2d 716, 720 (2d Cir. 1981). The Board's consistent interpretation excluding brokerage from § 32 is thus, especially in view of Agnew, strong evidence that brokerage is excluded from § 20.*fn2
The policies behind the Glass-Steagall Act shed further light on the proper interpretation of § 20. Congress intended the Act to address two principal concerns. First and foremost, Congress believed that commercial bank involvement in underwriting and securities speculation had unduly placed bank assets at risk and had contributed to "the widespread bank closings that occurred during the Great Depression." Board of Governors v. Investment Co. Inst., 450 U.S. 46, 61, 101 S. Ct. 973, 67 L. Ed. 2d 36 (1981) (footnote omitted). Securities trading had impaired bank solvency not only directly through bad investments by banks, but also indirectly through the unsound banking practices that securities trading promoted. In particular, Congress recognized that a bank trading for its own account has a "salesman's interest" that is inconsistent with the traditional role of banks as impartial extenders of credit. A bank seeking to sell the stock of a particular company might, for example, extend customers credit to be used for purchase of the stock or might grant the company an unsound loan simply to improve the stock's marketability. See Investment Co. Inst. v. Camp, 401 U.S. 617, 631, 91 S. Ct. 1091, 28 L. Ed. 2d 367 (1971). Similarly, a bank that engages in trading through a securities affiliate might improperly extend credit to the affiliate, or to companies in which the affiliate invested, in order to avoid the loss in public confidence it would experience if the affiliate failed. Securities trading further shakes public confidence in banks because it associates banks with speculative ventures, and because some customers purchasing securities on bank representations will inevitably suffer losses. This loss of public confidence poses an additional threat to bank solvency. See id., 401 U.S. at 631-32. Thus in strictly limiting the right of commercial banks to trade in securities, Congress sought to ensure bank solvency, to protect bank depositors, and to maintain public confidence in the nation's banks. Second, Congress recognized the inherent conflict between the promotional role of an investment banker and the commercial ...