LUMBARD, Circuit Judge:
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
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).
I. Glass-Steagall Act
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. Ins., 450 U.S. 46, 56 n. 21, 101 S.Ct. 973, 981 n. 21, 67 L.Ed.2d 36 (1981), quoting Board of Governors v. Agnew, 329 U.S. 441, 450, 67 S.Ct. 411, 415, 91 L.Ed. 408 (1947) (Rutledge, J., concurring); Investment Co. Inst. v. Camp, 401 U.S. 617, 626-27, 91 S.Ct. 1091, 1097, 28 L.Ed.2d 367 (1971); A.G. Becker Inc. v. Board of Governors, 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:
(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, 97 S.Ct. 2307, 2313, 53 L.Ed.2d 368 (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,
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, 67 S.Ct. 411, 91 L.Ed. 408 (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
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, 984, 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, 1099, 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, 91 S.Ct. at 1099. Thus in strictly limiting the right of commercial banks to trade
Schwab's brokerage services do not present any of the dangers which the Glass-Steagall Act was designed to forestall. Because Schwab trades only as an agent, and never as a principal, its assets are not subject to the risks of the securities markets. Equally important, Schwab's lack of a "salesman's interest" in the securities it trades eliminates the incentive for the Bank to engage in promotional activities. Schwab's revenue depends solely on the volume of shares traded, and is not dependent upon the sale or purchase of specific securities. Thus the Bank cannot increase Schwab's profits by extending credit to securities issuers to bolster their stock or to purchasers for the purchase of specific shares, or by improperly favoring particular securities in its management of customers' assets. Although Schwab and the Bank will be associated with one another in the public eye, the losses that some customers will sustain on trades executed through Schwab will be unlikely to impair public confidence in the Bank. Given Schwab's strict policy not to offer investment advice, customers who trade unsuccessfully will have only themselves, and not Schwab or the Bank, to blame for their mistakes.
The Act's legislative history and Supreme Court precedent support our interpretation of the Act's focus. First, the legislative history, though it discusses at length the dangers posed by commercial bank involvement in underwriting and securities speculation, see e.g., S.Rep. No. 77, 73d Cong., 1st Sess. 8-10 (1933), makes but passing reference to bank brokerage activity. The Senate report states only that the Act allows banks to "purchase and sell investment securities for their customers to the same extent as heretofore." Id. at 16. This statement hardly suggests that brokerage was one of Congress' principal concerns. Second, in Investment Co. Inst. v. Camp, supra, the Supreme Court drew a clear distinction between brokerage and activities in which a bank trades as a principal. In Camp, the Court held that a bank's plan to distribute shares in a bank-managed open-end investment fund would constitute an impermissible underwriting of securities in violation of § 16 of the Act. The Court emphasized that the bank would have a salesman's stake in the fund's shares, and thus would have an incentive to engage in promotional activities contrary to the Act's policy. The Court contrasted the bank's plan with brokerage services, and stated that the hazards associated with promotional activities "are not present when a bank undertakes to purchase stock for the account of its individual customers." 401 U.S. at 638, 91 S.Ct. at 1102. The Court stated that purchases on account "do not give rise to a promotional or salesman's stake in a particular investment; ... do not entail a threat to public confidence in the bank itself; ... and do not impair the bank's ability to give disinterested service as a fiduciary or managing agency." Id. The Court's comments, though dicta, strongly suggest that Congress did not intend § 20 to prohibit bank affiliates from engaging in retail brokerage. See also New York Stock Exchange, Inc. v. Smith, 404 F.Supp. 1091, 1099-1100 (D.D.C.1975) (bank's plan to purchase securities on account for customers, and automatically to deduct designated purchase amount from customers' bank accounts, held to be consistent with the Act), vacated on other grounds, 562 F.2d 736 (D.C.Cir.1977), cert.
We thus find the Board's ruling to be supported by both the language of § 20 and the Act's policy. SIA argues, however, that § 20's true meaning cannot be found without reference to § 16 of the Act, 12 U.S.C. § 24(7) (1976), which defines the extent to which commercial banks may trade in securities. Section 16 states, in pertinent part, that:
Although SIA concedes, as indeed it must, that § 16 is directly applicable only to banks, and not to bank holding companies, see Board of Governors v. Investment Co. Inst., 450 U.S. 46, 58 n. 24, 101 S.Ct. 973, 982 n. 24, 67 L.Ed.2d 36 (1981), it argues that §§ 16 and 20 must be interpreted "consistently," and cannot be read to permit bank holding companies a broader degree of brokerage activity than is allowed to banks. SIA contends that § 16 does not authorize banks to conduct retail brokerage businesses such as Schwab's. SIA's position is supported by certain early rulings by the Comptroller of the Currency which held that § 16 authorizes a bank to engage in brokerage only if (1) the customer has a customer relationship with the bank independent of the brokerage transaction, (2) the bank offers its brokerage services at cost, and (3) the customer makes prior payment or has assets at the bank sufficient to cover his transaction. See, e.g., 1 Bulletin of the Comptroller of the Currency, No. 2 at 2-3 (1936). Relying principally upon the Comptroller's rulings, SIA argues that banks may engage in brokerage only to accommodate existing customers, and that the principal brokerage activities of bank holding companies must, under a consistent interpretation of the Act, be similarly limited.
The proper interpretation of § 16 is before us only incidentally, and we do not think it necessary to explore the question in detail. Instead, three considerations convince us that SIA's attempt to transfer the focus of this case from § 20 to § 16 is unavailing. First, the Comptroller of the Currency recently reversed the rulings upon which SIA relies. In Security Pacific Natl. Bank, [Current] Fed.Bank.L.Rep. ¶ 99,284 (CCH) (1982), the Comptroller held that § 16 authorized a national bank to establish a subsidiary that would offer discount brokerage services to the public but would not offer investment advice. The Comptroller stated that his earlier restrictive rulings reflected "the great caution of banking regulations in the years immediately following the 1931-32 debacle," and were not supported by either the purposes or the express language of the Glass-Steagall Act. Because we agree with the Comptroller that the Act's policies are not contravened by bank participation in retail brokerage, we are inclined to give significant weight to the Comptroller's repudiation of his earlier rulings.
Second, SIA has not convincingly explained why §§ 16 and 20, notwithstanding Congress' use of very different language in the two provisions, must be interpreted alike. If, as SIA contends, Congress intended in §§ 16 and 20 significantly and equivalently to restrict the brokerage activities of banks and bank holding companies, it presumably would have used the same, or at least similar, language in both statutes. Finally, the structure of the Act "reveals a congressional intent to treat banks separately from their affiliates," Investment Co. Inst., supra, 450 U.S. at 59 n. 24, 101 S.Ct. at 983 n. 24, and clearly indicates that the same prohibitions do not apply to both. Banks, for example, under § 16 can never underwrite or deal in the securities of private
II. Bank Holding Company Act
The Bank Holding Company Act, 12 U.S.C. §§ 1841 et seq. (1976), generally prohibits bank holding companies from engaging in nonbank activities. However, section 4(c)(8) of the Act, 12 U.S.C. § 1843(c)(8), provides that a bank holding company may acquire:
Section 4(c)(8) further provides that:
Section 4(c)(8) authorizes the Board to approve a bank holding company's acquisition of a nonbank subsidiary only if it determines that (1) the subsidiary's activities are "closely related" to banking, and (2) the public benefits reasonably to be expected from the acquisition will outweigh possible adverse effects. See H.R.Conf.Rep. No. 1747, 91st Cong., 2d Sess. (1970) reprinted in 1970 U.S.Code Cong. & Ad.News 5561, 5572-73. See, e.g., Independent Ins. Agents of America, Inc. v. Board of Governors, 658 F.2d 571, 573 (8th Cir.1981); Citicorp v. Board of Governors, 589 F.2d 1182, 1190 (2d Cir.), cert. denied, 442 U.S. 929, 99 S.Ct. 2860, 61 L.Ed.2d 297 (1979); National Courier Assn. v. Board of Governors, 516 F.2d 1229, 1232-33 & n. 2 (D.C.Cir.1975). SIA challenges the Board's ruling that BAC's acquisition of Schwab satisfies both of these requirements.
Section 4(c)(8) and its legislative history do not identify the factors the Board is to consider in determining which activities are closely related to banking. However, in National Courier Assn., supra, 516 F.2d at 1237, the District of Columbia Court of Appeals held that the Board may treat an activity as one closely related to banking if there is present one or more of the following connections between the activity and the business of banking:
Although the factors listed in National Courier Assn. do not exhaust the possible connections which could establish a close relationship between a proposed activity and banking, see id., they do usefully elucidate the closely related standard and have been employed by several of the courts of appeals, see NCNB Corp. v. Board of Governors, 599 F.2d 609, 613 (4th Cir.1979); Association of Bank Travel Bureaus, Inc. v. Board of Governors, 568 F.2d 549 (7th Cir.1978); Alabama Assn. of Ins. Agents v. Board of Governors, 533 F.2d 224, 241 (5th Cir.1976), and by the Board. See, e.g., Citicorp, 68 Fed.Res.Bull. 505 (1982).
In this case the Board, relying upon the second of the National Courier Assn. factors, held that the present securities activities of banks are operationally or functionally so similar to brokerage that banks are particularly well equipped to act as retail brokers. The Board found that many banks, as an accommodation to their customers, transmit to brokers customer orders to buy or sell securities, and that the trading desks of bank trust departments routinely buy and sell securities as agents for trusts and other accounts. The Board noted one principal difference between the securities activities of brokerage houses and of banks: brokerage houses trade listed securities directly on the exchanges, while banks historically have employed intervening brokers to execute such trades, but it concluded that banks nonetheless have expertise in the methods of securities trading. The Board found that banks, when trading unlisted securities, often deal directly with dealers or other third parties, and that such trades require banks to "exercise the same type of discretion and judgment with respect to the best method of execution that brokers do with respect to similar types of orders." The Board further found that when banks employ intervening brokers, they often direct the broker on the best method of execution, and leave to the broker only the technical execution of the transaction. Finding that banks widely buy and sell securities for the accounts of their customers, and have become skilled in securities trading, the Board held that retail brokerage is an activity closely related to banking.
SIA's challenge to the Board's legal conclusion must be evaluated in light of the deference ordinarily due to Board determinations under § 4(c)(8). Congress has committed to the Board primary responsibility for the administration of the Act. The Board, moreover, has expertise in commercial bank regulation that the courts do not have, and it must be allowed reasonable latitude in its application of the Act to the changing activities of banks. For these reasons the Board's determination that brokerage is closely related to banking "is entitled to the greatest deference," Investment Co. Inst., supra, 450 U.S. at 56, 101 S.Ct. at 981 (footnote omitted), and may be overturned only if unreasonable or inconsistent with Congressional intent. See National Courier Assn. v. Board of Governors, 516 F.2d 1229, 1237 (D.C.Cir.1975). We see nothing in SIA's arguments that would justify reversal of the Board's order under this standard of review.
SIA's claim that an activity must facilitate actual banking practices to be closely related to banking is, we think, refuted by the Supreme Court's decision in Investment Co. Inst., supra. In Investment Co. Inst., the Supreme Court upheld a Board regulation issued under § 4(c)(8) that authorized bank holding company subsidiaries to serve as investment advisers to closed-end investment companies. An investment company offers small investors portfolio diversification and expert management by pooling their resources under the guidance of one manager. Investment advisers are independent of the investment companies they advise. In return for a management fee, an investment adviser selects the investment company's portfolio and supervises most aspects of its business. In affirming the Board's determination that investment advisory services are closely related to banking, the Court emphasized that such services "are not significantly different from the traditional fiduciary functions of banks." 450 U.S. at 55, 101 S.Ct. at 981. The Court stated that the principal duty of an investment adviser is to manage the investment portfolio of its client, and noted that banks, in their roles as executors, trustees, and managing agents, have for decades provided equivalent management services to bank customers. Id. The Court's analysis thus focused upon the relationship of investment advisory services to services traditionally performed by banks. The Court upheld the Board's regulation because the proposed activity constituted, in effect, the provision in a nonbanking context of services that banks have traditionally offered their customers. The Court never considered whether investment advisory
SIA also contends that an activity, to be closely related to banking, must be open to most banks. SIA argues that only the largest banks have the skills and resources needed to engage in retail brokerage; that banks generally will not be able to enter the brokerage business; and that brokerage is therefore not closely related to banking. SIA's argument ignores the Board's express finding "that the use of sophisticated techniques, resources and personnel to execute orders for the purchase or sale of securities for the account of customers is sufficiently widespread in the banking industry to justify a finding that banks generally provide securities execution services that equip them to offer the type of retail brokerage services provided by Schwab." In any event, even if the Board had found to the contrary, we could not accept SIA's conclusion. The closely related standard does not require proof that banks generally will be able to perform the proposed service, but instead principally concerns whether the proposed service is functionally related to the traditional services banks generally have performed. The interpretation SIA gives the Act would effectively preclude the nonbank affiliates of bank holding companies from providing financial services not open to the smallest banks. We see nothing in the legislative history to suggest that Congress intended the closely related standard so greatly to restrict innovation in the financial industry. Cf. H.R.Conf.Rep. No. 1747, supra, 1970 U.S.Code Cong. & Ad.News at 5568 ("One of the asserted justifications for permitting bank holding companies to engage in activities that the Board has determined independently to be closely related to banking, is to permit the introduction of new innovative and competitive vigor into those markets which could benefit therefrom."). An inability of banks generally to engage in a proposed activity may, of course, raise questions of competitive effect or undue concentration of resources, but such questions are appropriately resolved under § 4(c)(8)'s public benefits test and not under the closely related standard.
Finally, SIA challenges the Board's determination that the public benefits reasonably to be expected from BAC's acquisition of Schwab will outweigh the possible adverse effects. We see no basis for disturbing the Board's conclusion. As the Fifth Circuit has recognized, see Alabama Assn. of Ins. Agents, supra, 533 F.2d at 246, Board determinations under the public benefits test necessarily involve some speculation, and should be upheld if reasonable. The Board's ruling here is plainly reasonable.
The petition for review is denied; the order of the Board is affirmed.