Securities Industry Ass'n v. Board of Governors of the Federal Reserve System
Headline: Banking limits tightened as Court rules commercial paper is a "security" under Glass-Steagall, reversing appeals court and making it harder for commercial banks to place third-party commercial paper.
Holding:
- Allows Glass-Steagall limits to apply to commercial banks selling third-party commercial paper.
- May stop state member banks from underwriting or marketing third-party commercial paper.
- Leaves whether a bank’s conduct is underwriting for lower courts to decide.
Summary
Background
A state member bank (Bankers Trust) began placing other companies’ short-term commercial paper for customers. A national securities trade association and a dealer complained to the Federal Reserve Board and asked the Board to say the bank’s sales broke the Glass-Steagall Act. The Board concluded commercial paper was more like a bank loan and not a “security.” Lower courts split: the District Court disagreed, the Court of Appeals deferred to the Board, and the Supreme Court agreed to decide the issue.
Reasoning
The Court examined the Act’s words and history and concluded that the phrases “notes” and “other securities” in the statute naturally include commercial paper. The majority found that Congress meant to draw a broad line between investment banking and commercial banking and that the Board’s narrower “functional” test was inconsistent with the Act’s plain language and purposes. The Court therefore held commercial paper falls within the Act’s prohibition on certain securities activities by banks. The Court did not resolve whether Bankers Trust’s specific placement activities counted as “underwriting” and sent the case back to resolve those factual questions.
Real world impact
The ruling makes it possible for Glass-Steagall’s limits to be applied to banks that sell or underwrite third‑party commercial paper. The Board had already issued supervisory guidelines under its separate authority, but the Supreme Court’s decision means banks and dealers must now treat sales of commercial paper as potentially subject to the Act. The practical effect will be decided in follow-up proceedings.
Dissents or concurrances
A three‑Justice dissent argued the Court should have deferred to the Board’s technical expertise and left commercial paper outside the Act, because the statutory language can reasonably be read either way.
Opinions in this case:
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