Securities Industry Association v. Board of Governors of the Federal Reserve System

Under the Glass-Steagall Act (the act), commercial banks were prohibited from engaging in investment-banking activities. Bankers Trust Company (defendant) was a state-chartered commercial bank. the Board of Governors of the Federal Reserve System (the board) (defendant) was one of the federal agencies administering the act. Bankers Trust applied to the board for permission to place, i.e., sell interests in, commercial paper issued by some of its customers. The board approved Bankers Trust’s request, finding that the private placement of the commercial paper of a third party did not constitute investment banking. Initially, the Securities Industry Association (the association) (plaintiff) successfully challenged the board’s decision approving Bankers Trust’s proposal at the United States Supreme Court, which remanded the matter back to the board. The Supreme Court concluded that the board had not provided sufficient reasoning for its decision, so it was not entitled to great deference. On remand, the board again found that Bankers Trust’s placement of commercial paper was permitted by the act, but this time, it provided thorough reasoning for its decision. The board considered the hazards that Bankers Trust (1) would invest bank funds in speculative securities, (2) would make loans to commercial-paper issuers to ensure the success of the commercial paper, (3) might make self-interested loans to finance the purchase of commercial paper, (4) would give unsound financial advice to its customers, and (5) would give unsound financial advice to its depositors. The board found that the placement of commercial paper as proposed by Bankers Trust did not pose these subtle hazards that Congress intended to eliminate with the act for two main reasons. First, Bankers Trust adopted policies that would prevent loans to issuers of commercial paper, self-dealing, and conflicts of interest. Second, the profit received by Bankers Trust for the placement of commercial paper would be so small that making loans to boost commercial-paper issuances would not be cost-effective. The association again challenged the board’s decision in the district court. The district court invalidated the board’s decision. The board and Bankers Trust appealed.