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07/07/87 Securities Industry v. Board of Governors of the

July 7, 1987

SECURITIES INDUSTRY ASSOCIATION, PETITIONER

v.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, ET AL., RESPONDENTS, NATIONAL WESTMINSTER BANK PLC AND NATWEST HOLDINGS INC., INTERVENOR 1987.CDC.291



Before: BORK and SILBERMAN, Circuit Judges, and MARKEY,* Chief Judge.

UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

Petition for Review of an Order of the Board of Governors of the Federal Reserve System.

APPELLATE PANEL:

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE BORK

Section 20 of the Glass-Steagall Act *fn1 prohibits the affiliation of member banks of the Federal Reserve System with corporations "engaged principally in the issue, flotation, underwriting, public sale, or distribution" of securities. 12 U.S.C. § 377 (1982). The issue here is whether the Board of Governors of the Federal Reserve System reasonably concluded that the combined provision of securities brokerage services and investment advice by a member bank's affiliate does not implicate section 20's prohibition of the "public sale" of securities. We find that the Board's decision is a reasonable interpretation of the language and legislative history of the Act and is consistent with prior precedent. We therefore deny the petition for review. I.

In August 1985, National Westminster Bank PLC and its subsidiary NatWest Holdings, Inc. (collectively "NatWest") submitted an application to the Board pursuant to section 4(c)(8) of the Bank Holding Company Act of 1956, as amended, 12 U.S.C. § 1843(c)(8) (1982),2 for permission to provide investment advice and securities brokerage services to institutional customers through a newly formed subsidiary, County Services Corporation .3

(1) provide "portfolio investment advice to Institutional Customers," a term defined to include a bank, insurance company or corporation "with assets exceeding $5,000,000 that regularly invests in the types of securities as to which investment advice is given, or that regularly engages in transactions in securities; . . . an employee benefit plan with assets exceeding $5,000,000 . . .; and a natural person whose individual net worth . . . at the time of receipt of the investment advice or brokerage services exceeds $5,000,000." [Joint Appendix at 10-11];

(2) provide "securities brokerage services, related securities credit activities pursuant to the Board's Regulation T, and incidental activities such as offering custodial services and cash management services, in each case for Institutional Customers, and in each case under circumstances where the securities brokerage services are restricted to buying and selling securities solely as agent for the account of such Customers;"

(3) furnish "general economic information and advice, general economic statistical forecasting services and industry studies to Institutional Customers; and"

(4) serve "as investment advisor (as defined in Section 2(a)(20) of the Investment Company (Company Act of 1940) to investment companies registered under that Act."

J.A. at 63.

As proposed by NatWest, CSC's brokerage services would be restricted to buying and selling securities solely as agent for the account of customers. CSC would execute transactions only at the request of its customers and would not exercise any discretion with respect to a customer's account. Joint Appendix at 63. CSC would not act as principal or as underwriter and would not bear any financial risk with respect to any security it brokers or recommends. Id. at 102. Generally, CSC would receive all of its compensation, including that for investment advice, in the fees for securities transactions it executes for customers. Id. at 10-11. CSC would charge separate fees for investment advice and brokerage services upon request of a customer. Id. at 11.

NatWest's application also provided that CSC would hold itself out as a corporate entity separate and distinct from NatWest and would have its own assets, liabilities, books and records. J.A. at 12. NatWest and CSC would not share customer or depositor lists or confidential information. Id.4

"1. The Subsidiary will not transmit its investment advisory research or recommendations to the commercial lending department of any member of the NatWest group. (This is not intended, of course, to preclude the publication or dissemination of the Subsidiary's research or recommendations to potential Institutional Customers (as defined in the Application) generally.)" J.A. at 173.

" *fn2. In any brokerage transaction performed by the Subsidiary where the counterparty (as principal) is a member of the NatWest group, NatWest will disclose this fact to the brokerage customer and obtain specific consent from the customer for such transaction." Id.

*fn3. "No director of the Subsidiary will also be a director of either NatWest PLC, National Westminster Bank USA, N.A. ("NatWest USA") or any subsidiary of NatWest USA. It is anticipated, however, that certain directors of the Subsidiary may also be directors of other subsidiaries of NatWest PLC." J.A. at 175.

*fn4. "No officer of the Subsidiary will also serve as an officer of either NatWest PLC, NatWest USA or any subsidiary of NatWest USA. In addition, no officer of the Subsidiary engaged in providing investment advisory or securities brokerage services will also provide such services for, on behalf of or with respect to any other member of the NatWest group. As noted in the Application (at 9), the Subsidiary will be maintained, and will hold itself out to the public, as a separate and distinct corporate entity, and will conduct its business separate from the other members of the NatWest group." Id.

*fn5. "The Subsidiary will not refer its customers who desire to purchase securities on credit to any Affiliate." J.A. at 177.

*fn6. "There will be no established program by which an Affiliate will extend credit for securities purchases to the Subsidiary's customers." Id.

*fn7. "As set forth in the Application (at 60), the Subsidiary is seeking approval to engage in securities credit activities pursuant to the Board's Regulation T and, accordingly, is expected to have its own margin ...


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