Securities Industry Association v. Robert L. Clarke and Office of the Comptroller of the Currency v. Security Pacific National Bank, Intervenor-Defendant-Appellant

Plaintiff-appellee Securities Industry Association (SIA) brought the instant action in the United States District Court for the Southern District of New York, Duffy, J. SIA's suit challenged a decision of Robert L. Clarke, the Comptroller of the Currency (the Comptroller). The Comptroller determined that the sale of mortgage pass-through certificates by intervenor-defendant-appellant Security Pacific National Bank (SPN Bank) was not in violation of those sections of the Banking Act of 1933, ch. 89, Pub.L. No. 73-66, 48 Stat. 162 (1933) (codified as amended in scattered sections of 12 U.S.C.), commonly referred to as the Glass-Steagall Act. See Securities Industry Ass'n v. Board of Governors, 839 F.2d 47, 54-56 (2d Cir.), cert. denied, --- U.S. ----, 108 S.Ct. 2830, 100 L.Ed.2d 931 (1988) (Citicorp ). The district court granted SIA's Fed.R.Civ.P. 56 motion for summary judgment, rejecting the statutory analysis of the Comptroller's decision. Securities Industry Ass'n v. Clarke, 703 F.Supp. 256 (S.D.N.Y.1988).

We vacate the judgment of the district court and remand with instructions to dismiss the complaint.

Mortgage pass-through certificates are used by banks as a mechanism for selling mortgage loans. A number of mortgage loans previously originated by a bank are placed in a pool. The bank then transfers the pool to a trust. In exchange for the pool, the trustee transfers to the bank pass-through certificates. These certificates represent fractional undivided interests in the pool of mortgage loans. The certificates may then be sold publicly or privately.

After sale of the certificates, the mortgage loans are often serviced by the originator-bank. In such a case, the bank collects the loan payments and "passes through" the principal and interest on a pro rata basis to the certificate holders. In doing so, the bank may deduct service or other fees.

Use of this mechanism has important benefits for banks, benefits that have resulted in its increasing popularity and use. Because residential mortgage loans typically are of long duration, banks traditionally have bought and sold the loans to facilitate management of their assets and liabilities. Use of the pass-through certificate mechanism makes the sale of these loans easier. Individual loans do not have to be sold separately, and buyers may find it more efficient and less risky to purchase interests in a pool of mortgages instead of single mortgages.

B. The January 23, 1987 Offering of SPN Bank

A Prospectus and Prospectus Supplement dated January 23, 1987 described the offering of approximately $194 million of Security Pacific Mortgage Pass-Through Certificates, Series 1987-B.

The Prospectus provided for the creation of a pool consisting of conventional, fixed-rate residential mortgage loans. "Each Mortgage Loan [would] be selected by [SPN Bank] for inclusion in the Mortgage Pool from among those originated by [SPN Bank] in the ordinary course of [SPN Bank's] lending activities as carried on in its offices in California." Certain characteristics of the mortgages to be selected were specified.

The Prospectus provided that, at the time of issuance of the series, "[SPN Bank] will assign the Mortgage Loans in the Mortgage Pool evidenced by that series to the Trustee.... The Trustee will, concurrently with such assignment, authenticate and deliver Certificates evidencing such series to [SPN Bank] in exchange for the Mortgage Loans." The freely transferable certificates would represent fractional undivided interests in the Trust Fund.

Limited credit support for the issue was to be provided either by (1) an irrevocable letter of credit issued by SPN Bank, (2) a limited guaranty issued by an entity other than SPN Bank, or (3) third-party mortgage insurance purchased by SPN Bank in its role as servicer of the mortgage loans. If SPN Bank provided its own letter of credit, the coverage was to be no more than ten percent of the initial aggregate principal balance of the mortgage pool. Any risk of delinquency or default not covered by these mechanisms of credit support would be borne by the certificate holders.

The Prospectus provided for distribution of the certificates by any of three methods: "1. By negotiated firm commitment underwriting and public reoffering by underwriters; 2. By placements by [SPN Bank] with institutional investors through agents; and 3. By direct placements by [SPN Bank] with institutional investors."

After the sale of the certificates, SPN Bank was to continue to service the mortgage loans on behalf of the certificate holders for a contractually specified fee. As part of its ongoing responsibilities, SPN Bank would "monthly distribute[ ] to certificate holders the payments received from the mortgagors (net of its servicing fee) based on their pro rata interest in the mortgage loans."

The Prospectus Supplement for Series 1987-B described various characteristics of the mortgages selected for inclusion in the pool for that particular issue. The Supplement also specified that the trustee was to be Union Bank, a California bank. Credit support was to be provided by SPN Bank's parent, Security Pacific Corporation, in the form of a limited guaranty of no more than ten percent of the aggregate principal balance of the mortgage loans. With respect to distribution of this issue, the Supplement provided, in pertinent part:

Subject to the terms and conditions of [an] Underwriting Agreement ... among [SPN Bank, its parent Security Pacific Corporation and Kidder, Peabody & Co., Inc.], under which [SPN Bank] and Kidder Peabody ... will act as [the U]nderwriters ..., the Certificates are being purchased from [SPN Bank] by the Underwriters upon issuance. Distribution of the Certificates is being made by the Underwriters from time to time in negotiated transactions or otherwise at varying prices to be determined at the time of sale.

On February 23, 1987, the sale of certificates for Series 1987-B closed and the certificates were delivered to their purchasers.

SIA is a national trade association. According to its complaint, its members include "over 500 organizations responsible for more than 90 percent of the securities brokerage and investment banking business of the nation." Its members are in the businesses of "retail and institutional securities brokerage, investment advisory services, securities trading and market making, underwriting and other investment banking functions and related activities." In an April 2, 1987 letter, SIA wrote to the Comptroller, expressing its "concern" about SPN Bank's Prospectus and Prospectus Supplement for the Series 1987-B issue of mortgage pass-through certificates.1 SIA stated its belief that SPN Bank's participation in the transaction constituted a violation of the Glass-Steagall Act. The letter asked the Comptroller to review the transaction and "declare the bank's involvement in it to be contrary to the Glass-Steagall Act."

The Comptroller responded to SIA's request by issuing a twenty page letter dated June 16, 1987. Letter from Robert L. Clarke to Russell A. Freeman, O.C.C. Interpretive Letter No. 388, Fed.Banking L.Rep. (CCH) p 85,612, 6 O.C.C. Qtrly.J. No. 4, at 41. The letter was addressed directly to SPN Bank because, as the Comptroller explained, the Office of the Comptroller of the Currency (OCC) "is the primary regulator of [SPN] Bank's activities." A copy of the letter was sent to SIA. The Comptroller found that SPN Bank's offering did not violate the Glass-Steagall Act. The Comptroller concluded that

the Bank's program, as described in the Prospectus and Prospectus Supplement dated January 23, 1987, is squarely based on long-standing precedent that is fully supported by applicable law and subsequent court decisions interpreting these laws. In pooling its mortgage loans and selling interests therein, the Bank is merely engaging in a permitted sale of its mortgage assets. We cannot conclude that the Glass-Steagall Act is intended to preclude banks from conducting this activity.

Unsatisfied with this result, SIA filed a complaint against the Comptroller and the OCC in the United States District Court for the Southern District of New York. SIA sought declaratory and injunctive relief. The complaint claimed that the Comptroller's ruling was "arbitrary, capricious, an abuse of discretion, in excess of his statutory authority and otherwise not in accordance with the law, and that it is, therefore, null and void." SIA asked that the Comptroller be ordered to withdraw his ruling and refrain from approving the requests of banks to engage in similar activity. SIA also asked the court to enjoin the Comptroller "from continuing in effect any other such approvals that may have been granted by the Comptroller."

Pursuant to a stipulation between the parties, the district court ordered the intervention of SPN Bank under Fed.R.Civ.P. 24. The Comptroller and the OCC moved for dismissal of the complaint under Fed.R.Civ.P. 8(c) and 12(b)(1), or, in the alternative, for summary judgment under Fed.R.Civ.P. 56. SPN Bank moved for dismissal under Fed.R.Civ.P. 12(b)(1) or, in the alternative, for summary judgment. SIA cross-moved for summary judgment.

The district court, in a December 19, 1988 Memorandum and Order, granted the summary judgment motion of SIA, rejecting the statutory analysis of the Comptroller's decision. Securities Industry Ass'n v. Clarke, 703 F.Supp. 256 (S.D.N.Y.1988). In a final judgment filed January 4, 1989, the court "ORDERED, ADJUDGED AND DECREED that the bank activities described in the Court's December 19, 1988 Memorandum and Order violate[d] federal law, and the June 16, 1987 ruling of the Comptroller of the Currency approving of such activities is contrary to law, null, void and of no legal force or effect."

The Comptroller, the OCC and SPN Bank appeal from the final judgment of the district court. We vacate the judgment of the district court and remand with instructions to dismiss the complaint.

The Comptroller and SPN Bank both argue that SIA lacks standing to bring this action. The Comptroller also argues that SIA's action should be barred by the equitable doctrine of laches. These arguments were raised below, but the district court did not address them. We reject both arguments and hold that SIA has standing and that the action was timely brought.

SIA asserts that both it "and its members are directly interested and aggrieved parties entitled to review and challenge this action of the Comptroller." In Clarke v. Securities Industry Ass'n, 479 U.S. 388, 107 S.Ct. 750, 93 L.Ed.2d 757 (1987) (Clarke ), the Supreme Court upheld SIA's standing to challenge decisions of the Comptroller to approve "the applications of two national banks for the establishment or purchase of discount brokerage subsidiaries." Id. at 390, 107 S.Ct. at 752-53.2 After an analysis of standing requirements and the governing banking laws, the Court concluded that

competitors who allege an injury that implicates the policies of the National Bank Act are very reasonable candidates to seek review of the Comptroller's rulings. There is sound reason to infer that Congress "intended [SIA's] class [of plaintiffs] to be relied upon to challenge agency disregard of the law." [Block v.] Community Nutrition Institute, 467 U.S. [340, 347, 104 S.Ct. 2450, 2454, 81 L.Ed.2d 270 (1984) ]. And we see no indications of the kind presented in Community Nutrition Institute that make "fairly discernible" a congressional intent to preclude review at [SIA's] behest. We conclude, therefore, that [SIA] was a proper party to bring this lawsuit.

Id. 479 U.S. at 403, 107 S.Ct. at 759. We find the same to be the case here.

The statutory basis for SIA's standing is section 10 of the Administrative Procedure Act, 5 U.S.C. Sec. 702 (1982). That section "grants standing to a person 'aggrieved by agency action within the meaning of a relevant statute.' " Association of Data Processing Serv. Orgs., Inc. v. Camp, 397 U.S. 150, 153, 90 S.Ct. 827, 830, 25 L.Ed.2d 184 (1970) (Data Processing ) (quoting 5 U.S.C. Sec. 702); see also Clarke, 479 U.S. at 394, 107 S.Ct. at 754. The Supreme Court has indicated that section 702 requires not only "that the complainant be 'adversely affected or aggrieved,' i.e., injured in fact," Clarke, 479 U.S. at 395, 107 S.Ct. at 755 (quoting 5 U.S.C. Sec. 702), but also that " 'the interest sought to be protected by the complainant [be] arguably within the zone of interests to be protected or regulated by the statute or constitutional guarantee in question.' " Id. at 396, 107 S.Ct. at 755 (quoting Data Processing, 397 U.S. at 153, 90 S.Ct. at 830). The "zone of interests" test "is most usefully understood as a gloss on the meaning of Sec. 702." Id. at 400 n. 16, 107 S.Ct. at 758 n. 16. The crux of SIA's complaint in this case is that the Comptroller's ruling permits national banks such as SPN Bank to sell mortgage pass-through certificates, an activity SIA alleges is illegal under the Glass-Steagall Act. SIA claims that the Comptroller's ruling will "subject SIA's members to unlawful competition, will deprive them of legitimate business, and will dilute, divert and withdraw a portion of the market pertaining to the underwriting of various securities."

As discussed infra, a major purpose of the Glass-Steagall Act was to draw a line between commercial and investment banking, with national banks prohibited from participating in investment banking. See Securities Industry Ass'n v. Board of Governors, 468 U.S. 137, 144-48, 104 S.Ct. 2979, 2983-85, 82 L.Ed.2d 107 (1984) (Bankers Trust I ); Investment Co. Inst. v. Camp, 401 U.S. 617, 629, 91 S.Ct. 1091, 1098, 28 L.Ed.2d 367 (1971) (Camp ); Citicorp, 839 F.2d at 54-56. The Comptroller's decision has the effects of permitting and encouraging national banks to issue mortgage pass-through certificates. See infra. SIA's complaint is that such activity constitutes investment banking. SIA, representing participants in the field of investment banking, seeks by this action to prevent competition with its members in that field. Cf. Investment Co. Inst. v. Conover, 790 F.2d 925, 926 (D.C.Cir.), cert. denied, 479 U.S. 939, 107 S.Ct. 421, 93 L.Ed.2d 372 (1986) (Conover ). We find it at least "arguable" that the competition SIA seeks to prevent by this action is that legislated against by Congress, and we therefore conclude that SIA's interests are within the zone of interests protected by the Glass-Steagall Act. See Clarke, 479 U.S. at 394-403, 107 S.Ct. at 754-59; Camp, 401 U.S. at 620-21, 91 S.Ct. at 1093-94; Arnold Tours, Inc. v. Camp, 400 U.S. 45, 46, 91 S.Ct. 158, 159, 27 L.Ed.2d 179 (1970) (per curiam); Data Processing, 397 U.S. at 156, 90 S.Ct. at 831.3 We thus hold that the zone of interests standing requirement is satisfied here.

Appellants raise lack of standing as a constitutional objection to SIA's right to bring this action.

Although standing in its outer dimensions is a prudential concept to be shaped by the decisions of the courts as a matter of sound judicial policy and subject to the control of Congress, at its core it becomes a constitutional question; for standing in its most basic aspect can be one of the controlling elements in the definition of a case or controversy under Article III.

ASARCO Inc. v. Kadish, --- U.S. ----, ----, 109 S.Ct. 2037, 2043, 104 L.Ed.2d 696 (1989). As a constitutional matter, appellants argue that the requirements of causation and redressability are not satisfied here. See generally L. Tribe, American Constitutional Law Sec. 3-18 (2d ed.1988). That is, they maintain that SIA's alleged injury "can[not] be traced to the challenged action of the [Comptroller]," Simon v. Eastern Kentucky Welfare Rights Org., 426 U.S. 26, 41, 96 S.Ct. 1917, 1926, 48 L.Ed.2d 450 (1976), and that SIA "has [not] shown an injury to [it]self that is likely to be redressed by a favorable decision," id. at 38, 96 S.Ct. at 1924.

In focusing on these constitutional concerns, appellants seek to distinguish Data Processing, 397 U.S. 150, 90 S.Ct. 827, Camp, 401 U.S. 617, 91 S.Ct. 1091, and Clarke, 479 U.S. 388, 107 S.Ct. 750. The Comptroller argues that in those cases it was significant that the challenged decision of the Comptroller occurred before the banks' activities and that the banks' activities could not have occurred prior to the Comptroller's approval. He maintains that in this case, on the other hand, various banks have issued mortgage pass-through certificates in the past, and that, indeed the particular issue underlying the Comptroller's June 16, 1987 decision, SPN Bank's Series 1987-B, occurred before the Comptroller made his decision. The Comptroller concludes that any injury to SIA or its members is therefore not causally linked to that decision. We reject this argument and conclude that SIA's alleged competitive injury is sufficiently linked to the Comptroller's decision to satisfy constitutional standing requirements.

In arguing that any competitive injury suffered by SIA could not have resulted from a ruling of the Comptroller subsequent to those transactions, appellants portray SIA's suit as if it is an attack merely on past marketing of mortgage pass-through certificates by banks. But SIA's primary concern here is not with past lost competition.4 Rather, SIA's purpose is manifest: it fears future competition that will be permitted and encouraged by the Comptroller's interpretation of the applicable law, as reflected in the June 16 decision at issue here. Cf. Conover, 790 F.2d at 926 (recognizing implications for banking and securities industries in considering action for declaratory and injunctive relief challenging Comptroller's decision that Citibank's marketing of individual retirement accounts did not violate Glass-Steagall Act).

Appellants' argument ignores the future effects of the Comptroller's ruling approving SPN Bank's use of mortgage pass-through certificates. Cf. id. "The Comptroller ... is charged by the national banking laws with the execution of all laws of the United States relating to the organization, operation, regulation and supervision of national banks and in particular with the execution of 12 U.S.C. [Sec.] 24 which sets forth the corporate powers of national banks." 12 C.F.R. Sec. 1.1 (1989); see also 12 U.S.C. Sec. 1 (1982). Decisions issued by the Comptroller pursuant to his regulatory authority have consequences beyond the particular facts at hand. The Supreme Court implicitly recognized this in Camp, 401 U.S. at 624, 91 S.Ct. at 1095. There, the Court found that an association of investment companies had standing to bring a suit based on future competitive injury where the association challenged not only regulations issued by the Comptroller but also a decision by the Comptroller to approve the plan of First National Bank of New York to offer collective investment services. In so doing, the Court noted that the plan approved by the Comptroller was "expected, the briefs tell us, to be a model for other banks which decide to offer their customers a collective investment service." Id. at 622, 91 S.Ct. at 1094. The same would seem to be the case here. The decision by the Comptroller, issued under his statutory authority, is, in effect, a "green light" for other national banks to enter the mortgage pass-through certificate market with programs similar to that used by SPN Bank and specifically approved by the Comptroller. That analogous programs have been approved in the past does not diminish the significance of this particular decision. SIA has provided indications that the Comptroller's ruling, until it was reversed by the district court, did in fact have the effect of encouraging this type of activity. In light of the important role the Comptroller plays in regulating the behavior of national banks, this response is not surprising. In sum, we find that this is not a case where "[t]he links in the chain of causation between the challenged Government conduct and the asserted injury are far too weak for the chain as a whole to sustain [SIA's] standing." Allen v. Wright, 468 U.S. 737, 759, 104 S.Ct. 3315, 3328, 82 L.Ed.2d 556 (1984); see also Simon, 426 U.S. at 40-46, 96 S.Ct. at 1925-28.

Indeed, we think it is somewhat curious that the Comptroller bases his standing argument in part on the position that his own decision will have no causal connection to national banks' increased use of mortgage pass-through certificates in the future and therefore to the competitive injury SIA alleges it will suffer thereby. Such minimizing of the importance and impact of his own decisions is particularly anomalous in light of his arguments on the issue of laches (many banks have relied on his earlier rulings approving similar programs) and on the merits (his earlier rulings have precedential force).

We thus reject the argument that the Comptroller's decision is not sufficiently causally linked to SIA's alleged injury to support SIA's standing. We also reject appellants' related argument that SIA's injury "is [not] likely to be redressed by a favorable decision." Simon, 426 U.S. at 38, 96 S.Ct. at 1924; see also ASARCO, --- U.S. at ----, 109 S.Ct. at 2042. The Comptroller's decision will have the effect of permitting and encouraging national banks to market mortgage pass-through certificates. By its action for declaratory and injunctive relief, SIA seeks a judicial determination that the Comptroller was wrong, i.e., that national banks violate federal law when they market mortgage pass-through certificates as SPN Bank has done. The "likely effect," see Von Aulock v. Smith, 720 F.2d 176, 181 (D.C.Cir.1983), of such a determination would be to prevent the competitive injury that SIA alleges it will suffer in the future as a result of the Comptroller's decision.

The Comptroller seeks to invoke the doctrine of laches, suggesting that "equitable considerations dictate denial of injunctive relief in this action." New Era Publications Int'l v. Henry Holt & Co., 873 F.2d 576, 584 (2d Cir.1989). We reject the contention that prejudice resulted from "unreasonable and inexcusable delay" by SIA in bringing this action. See id.

The Comptroller points to his approval of "programs closely resembling the mortgage-backed pass-through certificate programs of Security Pacific" over the course of the past ten years. SIA has been aware of these transactions, and its members have even participated in them, but SIA has not previously challenged their legality. Apparently unpersuaded by his own argument concerning traceability for purposes of standing, see supra, the Comptroller seeks to demonstrate prejudice by contending that national banks have relied on these earlier, unchallenged approvals of the programs and have thereby "expend[ed] financial and human resources to establish such programs."

As we have already noted, however, SIA's main concern is to prevent future competition that will be encouraged by the Comptroller's decision permitting the SPN Bank program. Its aim is not to disrupt expectations formed by analogous pass-through certificate transactions that have occurred in the past. As SIA concedes in its brief, "[t]he [Comptroller] refers to billions of dollars of mortgage-backed securities sold by banks in the past ..., but SIA's contentions neither concern those transactions nor seek to undo them." On that basis, we find the doctrine of laches to be inapplicable.

The issue in this case is the validity of a decision by the Comptroller that SPN Bank's sale of mortgage pass-through certificates was not violative of the Glass-Steagall Act. In assessing the Comptroller's performance of his duties, we must keep in mind the rather explicit guidance from the Supreme Court.

[W]e cannot come lightly to the conclusion that the Comptroller has authorized activity that violates the banking laws. It is settled that courts should give great weight to any reasonable construction of a regulatory statute adopted by the agency charged with the enforcement of that statute. The Comptroller of the Currency is charged with the enforcement of the banking laws to an extent that warrants the invocation of this principle with respect to his deliberative conclusions as to the meaning of these laws.

Camp, 401 U.S. at 626-27, 91 S.Ct. at 1097; see Clarke, 479 U.S. at 403-04, 107 S.Ct. at 759-60; Conover, 790 F.2d at 932 (noting that the Supreme Court's "declination to defer to the Comptroller" in Camp was "occasioned ... by the Comptroller's complete silence as to the meaning of the governing statute"); cf. Securities Industry Ass'n v. Board of Governors, 468 U.S. 207, 217 & n. 16, 104 S.Ct. 3003, 3009 & n. 16, 82 L.Ed.2d 158 (1984) (Schwab ); Board of Governors v. Investment Co. Inst., 450 U.S. 46, 68, 101 S.Ct. 973, 988, 67 L.Ed.2d 36 (1981) (ICI ). On the other hand, this "deference is not to be a device that emasculates the significance of judicial review. Judicia