The Supreme Court, settling a major jurisdictional struggle between the nation's banking and securities industries, yesterday ruled that bank holding companies may organize and manage investment companies.
The decision carries banking as close as it has ever come to a legislative line carefully drawn after the bank collapses of The Depression: the line separating investment banking, which necessitates risks, from commercial banking, which trives on confidence.
The 6-0 decision upheld the authority of the Federal Reserve Board to decide, as it did in 1973, that investment company advising by banking subsidiaries was on the safe side of that line. The ruling allows the firms to organize, manage and advise closed-end investment companies, which pool the resources of thousands of small investors to buy and sell securities. The bank holding companies are still prohibited from advising open-end firms, such as mutual funds, which sell shares in themselves.
Banking officials estimated that several hundred bank holding corporations might now expand into investment advising.
Bank holding companies, such as Citibank and Maryland Bankcorp, have already dramatically expanded the conventional mission of banks into such fields as automobile leasing and credit cards. They argued that investment advising is a logical extension of the trust management role routinely assumed by banks. The securities industry fought hard to prevent these giants from also expanding into investment advising, starting frankly that it would upset "the existing delicate competitive balance" between the two.
The investment firms also argued that the "financial risks inherent" in that business could threaten public confidence in banks.
The legal issues revolved primarily around the authority of the Federal Reseve to permit the new activity and, secondarily, around an argument about whether investment advising is sufficiently related to banking to justify the Fed's action. Justice John Paul Stevens, joined by five of his colleagues, ruled favorably for the bankers on both questions yesterday.
A third of the justices -- an unusually high proportion -- did not participate in the decision. Though Justices Potter Stewart, William Rehnquist and Lewis Powell did not explain their withdrawal from the case, it is likely that they considered themselves in potential conflict of interest because of personal financial investments.
Two acts of Congress were central to the controversy. The Bank Holding Company Act of 1956 was designed to control the expansion of bank holding companies by forcing them out of non-banking activities. But it authorized the Federal Reserve System to make exceptions if an activity were "closely related" to banking. The Glass-Steagall Act was enacted in 1933 to protect bank depositors from Depression-style bank closings blamed on the investment activities of commercial banks.