The opinion of the court was delivered by: HOLTZOFF
The subject matter of this action relates to an aspect of the authority of commercial banks to underwrite and deal in securities issued by States and political subdivisions. This litigation presents an unusual situation in that two agencies of the Government, - the Federal Reserve System and the Comptroller of the Currency, - that administer the pertinent statutes adopt and apply divergent interpretations of a crucial provision. Consequently, the outcome of this lawsuit will not only constitute an adjudication of the rights of the parties, but will also effect a resolution of conflicting views of the two Government agencies.
The specific problem consists of an interpretation of the statutory provisions of 12 U.S.C. § 24, paragraph Seventh, which, while prohibiting commercial banks to underwrite securities or stock, or to deal in them for customers, carves out an exception for "obligations of the United States, or general obligations of any State or of any political subdivision thereof". The particular question is whether the phrase " general1 obligations of any State or of any political subdivision thereof" is limited to such obligations as are supported by the taxing power, or includes all obligations issued on the full faith and credit of a State or political subdivision, even if they are not sustained by the taxing power.
The Federal Reserve System, which administers this statute in respect to State banks that are members of the System, has for many years construed and now construes the definition as being restricted to securities that are backed by the taxing power. The Comptroller of the Currency, who administers the statute in respect to national banks and who has for a long time followed the same construction, changed his position in 1963 and issued a ruling to the effect that the statutory definition is broad enough to include all securities based on the full faith and credit of the issuing political subdivision, even if that entity lacks the taxing power. For reasons discussed in this opinion, this Court adopts the more narrow construction that is applied by the Federal Reserve System.
This action is brought against the Comptroller of the Currency by a group of investment bankers. It seeks an injunction to restrain the Comptroller from authorizing national banks to underwrite and deal in obligations of States and political subdivisions that are not secured by the general power of taxation. It also prays for a declaratory judgment adjudicating the pertinent Regulation promulgated by the Comptroller to be invalid.
Two preliminary procedural matters may be noted briefly. The Government interposes the objection that the plaintiffs lack standing to sue. This objection is overruled. The gravamen of the plaintiffs' claim for relief is that they are being subjected to competition by illegal activities of national banks. While no one may maintain a suit to restrain lawful competition merely because he is suffering an economic detriment, nevertheless, a person has a standing to complain against illegal competition, or specifically, against competition on the part of a person who lacks the legal right or power to pursue the competitive activities. In this respect this action is precisely parallel to cases in which a State bank has been permitted to maintain suit to restrain the Comptroller of the Currency from granting permission to a national bank to establish a branch that would compete with the plaintiff. Commercial State Bank of Roseville v. Gidney, D.C., 174 F. Supp. 770, affirmed 108 U.S.App.D.C. 37, 278 F.2d 871; National Bank of Detroit v. Wayne Oakland Bank, 252 F.2d 537 (6th C.). See also City of Chicago v. Atchison, T. & S.F.R. Co., 357 U.S. 77, 83, 78 S. Ct. 1063, 2 L. Ed. 2d 1174.
The line of cases on which the Government relies and that are well represented by Alabama Power Co. v. Ickes, 302 U.S. 464, 58 S. Ct. 300, 82 L. Ed. 374, and other similar decisions, are distinguishable. Their progenitor is a doctrine enunciated in Commonwealth of Massachusetts v. Mellon, 262 U.S. 447, 43 S. Ct. 597, 67 L. Ed. 1078, to the effect that a person may not maintain a suit to enjoin the use of Government funds, even if such use is claimed to be in violation of law. The fact that the plaintiff is suffering an economic detriment from competition assisted by a loan or grant of Government funds, does not give him a standing to sue. This doctrine is entirely different from the principle that permits one to bring an action to enjoin an illegal activity on the part of a competitor, or to restrain the illegal authorization by the Government of an unlawful competitive undertaking.
So, too, a justiciable controversy obviously exists justifying the Court in entertaining an action for a declaratory judgment. The plaintiffs claim that the defendant is authorizing national banks to conduct certain activities in violation of law and that these activities transgress the powers of the banks and that they are injurious to the plaintiffs. In any event the action has a double aspect, since it is a suit both for a declaratory judgment and an injunction.
The Port of New York Authority, a political subdivision created jointly by the States of New York and New Jersey, has been permitted to intervene as a defendant in support of the Comptroller's position. The relation of this intervenor to the controversy is, however, merely that of a potential issuer of bonds, desiring an opportunity to deal through commercial banks, as well as through investment bankers, apparently in order to increase competition among prospective underwriters and thereby possibly secure more desirable terms. Its interest in the present controversy is manifestly indirect and remote.
Having completed the foregoing summary and considered possible procedural objections, we are ready to enter on an intensive discussion of the subject matter involved in this litigation. The tragic debacle that shook the banking community in the late 1920's, led to a thorough, comprehensive and fruitful Congressional investigation. It was found that one of the principal causes of the catastrophe had been the growing practice of commercial banks to enter into the field of investment banking, that is underwriting issues of securities, and buying and selling securities to customers. The result was that undesirable securities were at times foisted upon the public, and that funds of banking institutions that should have been devoted to the customary commercial banking transactions were directed to other enterprises, some of which proved of doubtful desirability. Many other evils and abuses also arose. Congress definitively and unalterably determined to compel commercial banks to return and confine themselves to their classic time-honored functions: acceptance of deposits of money subject to withdrawal by check or other means; discount of commercial paper; and making loans. The function of investment banking was to be divorced from commercial banking. Drastic provisions were enacted to that end. Thus by the Act of June 16, 1933, 12 U.S.C. § 378, often known as the Glass-Steagall Act, concerns engaged in underwriting, selling or distributing securities, were prohibited to receive deposits subject to check or repayment by other means. To prevent evasion by the use of affiliates, the same Act provided that no person engaged in the issue, flotation, underwriting, public sale, or distribution of securities, and no officer, director, or employee of any corporation, or a partner or employee of any partnership, engaged in any of these lines of endeavor, should serve as an officer, director, or employee of any bank that was a member of the Federal Reserve System, 12 U.S.C. § 78. No member bank was permitted to be affiliated in any manner with any concern engaged in the issue, flotation, underwriting, public sale, or distribution of securities, 12 U.S.C. § 377. Some of the violations of these prohibitions were made punishable by criminal penalties, 12 U.S.C. § 378(b).
The specific provision involved in this litigation, which was also a part of the Act of June 16, 1933, 12 U.S.C. § 24, paragraph Seventh, reads in part as follows:
"The business of dealing in securities and stock by the association [i.e. banking institution] shall be limited to purchasing and selling such securities and stock without recourse, solely upon the order, and for the account of, customers, and in no case for its own account, and the association shall not underwrite any issue of securities or stock."
"The limitations and restrictions herein contained as to dealing in, underwriting and purchasing for its own account, investment securities shall not apply to obligations of the United States, or general obligations of ...