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U.S. Supreme Court

Board of Governors, FRS v. Investment Co. Inst., 450 U.S. 46 (1981)

Board of Governors of the Federal Reserve System v.

Investment Company Institute

No. 79-927

Argued October 15, 1980

Decided February 24, 1981

450 U.S. 46


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.

Held: The amendment to Regulation Y does not exceed the Board's statutory authority. Pp. 450 U. S. 55-78.

(a) The Board's determination that services performed by an investment adviser for a closed-end investment company are "so closely related to banking . . . as to be a proper incident thereto" is supported not only by the normal practice of banks in performing fiduciary functions in various capacities but also by a normal reading of the language of § 4(c)(8). And the Board's determination of what activities are

Page 450 U. S. 47

"closely related" to banking is entitled to the greatest deference. Pp. 450 U. S. 55-58.

(b) Investment adviser services by a bank do not necessarily violate either § 16 or § 21 of the Glass-Steagall Act. The Board interpretive ruling here prohibits a bank holding company or its subsidiaries from participating in the "sale or distribution" of, or from purchasing, securities of any investment company for which it acts as an investment adviser. Thus, if such restrictions are followed, investment advisory services -- even if performed b a bank -- would not violate § 16's requirements. And the management of a customer's investment portfolio is not the kind of selling activity contemplated in the prohibition in § 21, which was intended to require securities firms, such as underwriters or brokerage houses, to sever their banking connections. In any event, 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). Pp. 450 U. S. 58-64.

(c) Since the interpretive ruling issued with the amendment to Regulation Y prohibits a bank holding company acting as an investment adviser from issuing, underwriting, selling, or redeeming securities, Regulation Y, as amended, avoids the potential hazards involved in any association between a bank affiliate and a closed-end investment company. Cf. Investment Company Institute v. Camp, 401 U. S. 617. Pp. 450 U. S. 64-68.

(d) Regulation Y, as amended, is consistent with the legislative history of both the Bank Holding Company Act and the Glass-Steagall Act. More specifically, such legislative history indicates that 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. Pp. 450 U. S. 68-78.

196 U.S.App.D.C. 97, 606 F.2d 1004, reversed.

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.

Page 450 U. S. 48

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