High Court Lets Bank Units Deal in Securities

The Supreme Court let stand a ruling on Monday that allows banks to use subsidiaries to engage in underwriting and dealing in some securities.

Over two dissenting votes, the court let stand a ruling that such activity does not violate a 1933 law aimed primarily at protecting the financial stability of banks by restricting them from speculating in stocks and bonds.

Justices Harry A. Blackmun and Sandra Day O’Connor voted to hear arguments in the case, but four votes are needed to grant such review.

The 1933 federal law, the Glass-Steagall Act, was passed by Congress in the wake of the stock market crash of 1929.

The law placed various restrictions on banks, in large measure to protect deposits from being squandered on Wall Street.

In recent years, the wall of separation between commercial and investment bank activities has been lowered.

At issue in the case acted on Monday were rulings by the Federal Reserve Board allowing some of the nation’s leading banks to use subsidiaries to underwrite and deal in municipal revenue bonds, mortgage-related securities and commercial paper. The latter is a form of IOU used by corporations to finance short-term debt.

Ruling Challenged

The Fed last year said bank subsidiaries may underwrite and deal in such securities as long as they do not exceed 5% to 10% of the subsidiary’s gross revenue.

The board said that is in line with the Glass-Steagall Act’s requirement that banks may not affiliate with an organization “engaged principally” in underwriting or dealing in securities.

The board’s rulings were challenged by the Securities Industry Assn., a trade group of underwriters, brokers and securities dealers.

The 2nd U.S. Circuit Court of Appeals in February upheld the Fed decisions, and the Reagan Administration urged the justices to leave intact the appeals court ruling.

Justice Department lawyers said the Fed acted properly and that any change in banking regulations should be left to Congress.

The government noted that a moratorium Congress imposed on the type of banking activities involved in the dispute expired in March, and Congress has not renewed it. Moreover, legislation is pending to repeal parts of the Glass-Steagall Act.

“Victory for Consumers”

Reacting to today’s decision, Edward I. O’Brien, president of the Securities Industry Assn., said: “We are disappointed the Supreme Court decided not to hear our appeal to prevent banks, through affiliates, from engaging in a wide range of securities.”

“But we are pleased the Federal Reserve itself has erected a series of fire walls . . . to prevent banks from taking excessive risks within the securities arena which would further weaken banks and thus endanger the nation’s economy.”