Banks Can Open Brokerage Firms Wherever They Want : Security Pacific Wins Key Ruling

In a case with high financial stakes, the Supreme Court cleared the way today for banks to buy and sell stocks for customers in offices throughout the nation.

Attorneys and banking officials said the ruling moves banks another step toward becoming all-purpose financial centers and further blurs the line drawn after the Depression between banks and the stock industry.

Ruling on an appeal brought by Security Pacific National Bank of Los Angeles, the high court declared unanimously that the discount brokerage offices are not banks and, therefore, should not be restricted by federal banking laws.

These laws limit banks such as Security Pacific from opening branches outside of California, but the justices said this restriction should not extend to other services, such as offering stocks to customers.

Not ‘Core Banking’ Function

“We conclude that Congress did not intend to subject a bank’s conduct of a securities business to the branching restrictions imposed by (the McFadden Act of 1927),” Associate Justice Byron R. White wrote for the court. Regulations that seek to maintain “competitive equality” apply “only in core banking functions,” White said, “and not in all incidental services in which national banks are authorized to engage.”

Stockbrokers, fearing intense competition from the banks, had sought to block this expansion, and the Security Industries Assn. won a federal appeals court ruling in 1985 saying regulations forbid banks from offering such services outside their home states.

Both Security Pacific and the U.S. Comptroller of the Currency, which authorized the banks to move into the stock business, appealed to the Supreme Court.

“The issue here was not whether they could offer the service, but where,” said Michael Crotty, associate general counsel for the American Bankers Assn. in Washington. “If Security Pacific wants to set up a discount brokerage office outside of California, this says they can.”

Decision Praised

William T. Coleman Jr., the Washington attorney for Security Pacific, praised the decision for allowing banks to compete in new areas.

“Banks shouldn’t be restricted by territorial limitations. This says a bank can engage in discount securities business anyplace, with no territorial restrictions, and (the principle set forth) applies to everything but the core bank functions,” said Coleman, former transportation secretary in the Gerald R. Ford Administration.

“It’s a great decision,” he added. “Congress has been slow to amend the (banking) statute, but fortunately the court has stepped in.”

The Securities Industry Assn., which lost the case, managed to win a consolation prize. The Justice Department argued that the brokers association had no right to challenge the comptroller’s actions in a federal court suit, but the justices disagreed.

On a 5-3 vote, the court said the industry has a clear interest in the comptroller’s move and, therefore, “has standing to maintain this lawsuit.” But, after winning that point, they lost on the main question. Associate Justice Antonin Scalia took no part in the two cases, which were decided jointly.

In other action today, the court:

--Ruled that tenants of low-income public housing projects have the right to sue over alleged violations of federal housing law.

By a 5-4 vote in a case from Roanoke, Va., the court said such tenants do not have to rely on the federal Department of Housing and Urban Development to enforce housing laws against local public housing authorities.

--Gave police officers greater leeway to search the vehicles of arrested suspects without first obtaining court warrants.