Further blurring the line between the banking and securities industries, the Supreme Court on Monday upheld a Federal Reserve Board order allowing a bank to open a brokerage service that gives investment advice.
The high court action was the latest in a series of victories by the banking industry and comes at a time when Congress will consider bills that would dilute the Depression-era Glass-Steagall Act, the law that bars banks from engaging in the "underwriting (or) public sale of stocks."
Banking industry spokesmen said the action is a further indication that the securities trading prohibition is outdated.
"We think it shows that the financial services industry as it once was no longer exists now and that it is time to modernize the laws regulating financial services," said Kirk Willison, manager of public relations for the American Bankers Assn. in Washington. "We think customers should be given the full benefit of vibrant competition" between banks and stock brokerages.
No Underwriting by Bank
Officials of the securities industry, which has been trying to counter banks' expansion into the business, reacted mildly to the setback. In light of the legislation in Congress, the case's importance "has diminished since its inception," said Securities Industry Assn. President Edward O'Brien. "SIA has always thought that Congress is the forum which should address these matters."
The court upheld the Federal Reserve Board action allowing the National Westminster Bank, a British holding company with U.S. operations based in New York, to operate a brokerage business that takes stock orders and gives investment advice.
Last year, the U.S. Court of Appeals for the District of Columbia, in an opinion written by Judge Robert H. Bork, concluded that the NatWest subsidiary did not plan to actually underwrite stocks--that is, provide the financing for the stock issue--so its expanded activity should be permissible.
The securities association appealed the ruling, saying that the case was the first time in 50 years that a bank had applied to "engage in full-service brokerage" and urged the courts to halt the encroachment. But the high court let it stand, refusing to hear the case (SIA vs. Board of Governors of the Federal Reserve, 87-562.)
In 1984, in a ruling that also chipped away at the Glass-Steagall barrier, the high court allowed BankAmerica to operate the Charles Schwab discount stock brokerage, concluding that this service only took orders to buy and sell stocks and did not underwrite them.
At least four different bills have been introduced in Congress to revise the banking laws involving securities trading, including ones that would permit banks to become full participants in the securities business.
Foreign Competition Cited
Securities industry officials have contended that, just as the stock market crash of 1929 convinced Congress that banks needed protection from the risks of securities trading, last October's market collapse shows that a separation between the two industries is still wise.
"After Oct. 19th (when the Dow Jones stock average plunged more than 500 points), I don't know why banks would want to get into this business," said William J. Fitzpatrick, an SIA lawyer in New York.
However, banking officials contended that U.S. banks must be able to engage in securities activities to compete with foreign banks that have this latitude. They also maintained that they would keep their banking and securities operations separate to insulate their depositors from any risks.
Lobbyists for the banking and securities industries said they expect Congress to give serious consideration to new banking legislation this year, but neither side was confident that a bill would emerge from both houses.