Independent Community Bankers of America v. Board of Governors of Federal Reserve System
Docket: No. 98-1482
Court: Court of Appeals for the D.C. Circuit; November 1, 1999; Federal Appellate Court
Travelers Group, Inc. sought approval from the Federal Reserve Board to become a bank holding company to acquire Citicorp, Inc., intending to rebrand as Citigroup, Inc. The Board conditionally approved the application, requiring Travelers to divest its insurance business within two years to comply with the Bank Holding Company (BHC) Act, specifically 12 U.S.C. 1843(a)(2). The Board also determined that the acquisition complied with the Glass-Steagall Act, as Citigroup's affiliates would not exceed the 25% revenue threshold from bank-ineligible securities.
The Independent Community Bankers of America (ICBA) challenged the Board’s approval, arguing that the two-year divestiture requirement was inadequate and that the Board’s interpretation of the Glass-Steagall revenue limit was too lenient. ICBA contended that a stricter volumetric limit or a case-specific risk analysis should be applied to prevent the emergence of a large diversified financial institution. The court confirmed its jurisdiction under 12 U.S.C. 1848 and upheld the Board's interpretation and application of the statutes as reasonable. The BHC Act prohibits bank holding companies from retaining ownership in non-banking activities beyond a two-year period post-acquisition, necessitating Travelers’ compliance with the divestiture condition imposed by the Board.
ICBA argues that Citigroup's compliance with 4(a)(2) of the BHC Act is insufficient. It contends that under 5(b) of the Act, the Board must reject applications that undermine the Act's objectives, asserting that Citigroup lacks genuine intent to divest its insurance activities. ICBA claims that Citigroup is leveraging its temporary combined banking and insurance status to pressure Congress for amendments to the BHC Act and gain a competitive edge over other financial institutions. Citigroup and the Board support amending the Act, with Citigroup's leaders expressing hopes that their structure will prompt legislative change. However, 4(a)(2) does not address the applicants' legislative ambitions, and the Board's order requires Citigroup to divest within a specified timeframe, irrespective of its policy preferences. ICBA suggests that Citigroup’s conditional intent to comply—dependent on potential legislative changes—should diminish its commitment's validity, but the statute does not consider this reluctance. Moreover, the Board possesses enforcement mechanisms to ensure compliance. ICBA's claim that Citigroup seeks an unfair competitive advantage is also weakened by the Board’s conditions designed to prevent such an outcome during the grace period. Ultimately, ICBA fails to substantiate its claims regarding the thwarting of the BHC Act's purposes or to justify overriding the specific statutory language with the general provisions of 5(b).
ICBA cites previous cases, such as Citicorp and Wilshire Oil, where the Board found that proposed transactions aimed solely to avoid compliance with the Bank Holding Company (BHC) Act. In Citicorp, the Board prohibited Citicorp from acquiring a South Dakota bank to exploit state law for insurance activities without competing with local interests. Similarly, in Wilshire Oil, the Board upheld that a minor policy change could not exempt a bank holding company from the BHC Act. However, in the current case, the Board determined that the merger was not intended to circumvent BHC Act restrictions.
The Supreme Court has ruled that the Board cannot extend its statutory authority, as established in Board of Governors of the Fed. Reserve Sys. v. Dimension Fin. Corp. The Eleventh Circuit applied this ruling to invalidate a Board decision similar to Wilshire. The Board cannot assert authority not granted by statute. ICBA's claim that the Board is obligated by its previous decisions under 4(c)(9) of the BHC Act is incorrect. The Board had previously granted exemptions to foreign bank holding companies with strict conditions, which were justified by their unique circumstances and the Board's broad discretion.
ICBA argues that Citigroup must comply with specific regulations requiring a prompt divestiture plan following the merger approval. However, these regulations are categorized as 'statements of policy' and do not impose binding obligations. The Board noted that a detailed divestiture plan was unnecessary given the existing comprehensive documentation regarding Travelers’s compliance capabilities.
ICBA's second claim is based on Section 20 of the Glass-Steagall Act, which restricts the securities activities of commercial banks and their affiliates. While Section 16 prohibits banks from underwriting or dealing in most securities, it allows underwriting of government and municipal obligations, termed 'bank-eligible securities.' In contrast, Section 20 permits bank-affiliated companies to engage in securities activities as long as they are not 'engaged principally' in those activities, defined as not deriving more than 25% of revenues from bank-ineligible securities. The Board interprets this limit to apply only to bank-ineligible securities. ICBA contends that, considering the size of Citigroup's securities activities, it is 'engaged principally' in bank-ineligible activities and argues that the Board should assess the risks related to these activities specifically for large mergers.
The jurisdictional aspect of the case is addressed, noting that the rule applied to the Travelers-Citicorp merger is based on the Board's 1996 Order, which could be reviewed within thirty days. ICBA did not seek such review but claims it is only contesting the application of the 25% rule, not the rule itself. However, without challenging the rule's validity, ICBA's appeal is limited if the 25% standard is assumed lawful. The court indicates that a party can still raise substantive objections to a rule at the time it is applied, including claims regarding the agency's authority to adopt the rule, even if they did not previously challenge it within the statutory time limits.
Functional Music, Inc. v. FCC establishes that administrative rules and regulations differ from ordinary adjudicatory orders as they have ongoing applicability. Limiting the right to review such rules could prevent affected parties from questioning their validity. While some cases discussing the application exception may have been dicta, the case of Graceba applied the exception by excusing a failure to challenge a 1994 rulemaking. Procedural challenges to a regulation's adoption, however, are generally barred outside a 60-day statutory review period, as seen in JEM Broadcasting Co. v. FCC and NRDC v. NRC, which dismissed late petitions alleging procedural defects. Review outside this period is typically permissible only for significant violations of statutory or constitutional mandates or if a party lacked an adequate opportunity to contest the regulation. Furthermore, earlier circuit precedents take precedence over subsequent deviations in the event of conflicting panel opinions, as shown in cases like Texaco Inc. v. Louisiana Land & Exploration Co. Eagle-Picher v. EPA reinforced that even parties subjected to a rule cannot challenge it substantively after the review period unless specific exceptions apply. The statute authorizing judicial review in Eagle-Picher explicitly prohibited review post-prescribed period. The Administrative Conference of the United States has advised against prohibiting challenges to a rule's statutory authority without compelling reasons, indicating that Congress generally supports allowing reviews even after the statutory period, which is reflected in the statute at issue, 12 U.S.C. 1848, that contains no explicit review bar.
ICBA challenges the Board's exclusive 25% revenue limit under Section 20 of the Glass-Steagall Act, which prohibits member banks from being affiliated with corporations primarily engaged in bank-ineligible securities transactions. The term "engaged principally" is deemed ambiguous, prompting deference to the Board's reasonable interpretation. ICBA contends that the Board should assess risk factors beyond revenue share, including the nature of bank-ineligible assets and the size of merger participants. Historically, before 1987, the Board had not defined "engaged principally." In 1987, it established criteria indicating that an affiliate is engaged principally in bank-ineligible activities if gross revenue from such activities exceeds 5-10% of total revenue and accounts for more than 5-10% of the domestic market for that activity. The Second Circuit invalidated the market share criterion, affirming a pure revenue share test. Subsequently, the Board increased the revenue ceiling for affiliates' ineligible activities to 10% in 1989 and then to 25% in 1996. Critics expressed concern that this might allow affiliations with large investment banks, contrary to the intent of the Glass-Steagall Act. However, the Board justified the increase by referencing historical contexts and demonstrating that such a change would not heighten risks to bank safety or the federal safety net, citing the capability of bank holding companies to manage investment banking risks effectively. The court generally does not reject an agency's chosen percentage when a statute allows for such discretion, and there is no basis to contest the Board's selection in this case.
ICBA's challenge centers on the Board's authority to implement a purely quantitative proportional line while neglecting other risk indicators and overall sales volume. The Board's 1996 Order clarified that it does not permit independent risk evaluations for specific securities activities, limiting its assessment to whether an affiliate is “engaged principally” in bank-ineligible activities, as determined by Congress. The Board concluded that individualized risk analyses would lead to uncertainty and opted for a consistent approach since risk assessments are already part of evaluating a company’s application to become a bank holding company under the BHC Act. The Board retains the authority to monitor affiliate investments that may jeopardize the subsidiary bank.
The Second Circuit in SIA I ruled that the Board could not utilize a market share test but allowed for a volumetric sales limit, which the Board rejected due to concerns over manipulation. While the lawfulness of such a limit remains unchallenged, the emphasis on risks from excessive securities activity remains significant. ICBA's assertion that the Board's actions breach the separation of powers is unfounded, given that the Board operates solely under powers granted by Congress, unlike the President, thus evading the Youngstown tripartite analysis.
The Board's order is affirmed. ICBA’s argument regarding the Board's practice of granting grace periods for existing bank holding companies violating section 4(a)(1) of the BHC Act is not addressed in this case. Additionally, ICBA's contention that Citigroup should be analyzed as a whole, rather than subsidiary by subsidiary, is left unexamined due to the case's resolution.
