The banking industry scored a major victory over the securities industry yesterday when a federal appeals court ruled that a commercial bank affiliate may sell investment advice and securities brokerage services to any company or individual with at least $5 million in assets.
Judge Robert H. Bork, writing for a unanimous three-judge panel of the U.S. Court of Appeals for the District of Columbia, said that such activity does not violate a 50-year-old law separating commercial banking from investment banking.
Specifically, the court upheld the Federal Reserve Board, which decided in June 1986 to allow National Westminster Bank PLC, a British bank holding company, to provide investment advice and securities brokerage services through a subsidiary in the United States.
The securities industry challenged the ruling, arguing that investment advice is traditionally the domain of investment bankers, who underwrite securities. The Supreme Court in recent years has affirmed the right of bank holding companies to own discount brokerage houses and to open brokerage offices across the country. Yesterday's ruling goes a step further by saying that a bank affiliate can offer investment advice along with a securities transaction.
Brokers of securities act as agents, collecting a fee for matching buyers and sellers of stocks and other financial instruments. Underwriters, by contrast, risk their own money in transactions by buying securities and reselling them.
Bork said that although securities underwriters usually provide investment advice when they buy and sell securities for clients, providing such advice "does not necessarily" turn a broker into an underwriter.
The decision is the latest in a series in favor of the banking industry and against the securities industry. Bankers, in seeking to broaden the kinds of financial services they are allowed to sell, especially in securities and insurance markets, increasingly have relied on court rulings.
Investment bankers, having lost many court battles, have turned to Congress in their quest to halt commercial banks from treading into the securities market.
Congress is now considering a comprehensive banking bill that would temporarily bar banks from selling any securities products they began offering after March 5. Some lawmakers hope the legislation, if passed, will give Congress time to decide just how far the financial services industries should be deregulated. The securities industry pushed hard for the legislations. Yesterday's court ruling would still stand if Congress approves the legislation.
"It's a step closer to allowing banks to offer a broader range of securities services to consumers," said a spokesman for the American Bankers Association, the largest trade group for the banking industry. "We hope Congress will allow banks to offer same service to all consumers. If it's good for people with over $5 million assets it should be good for everybody.