Alabama Association of Insurance Agents v. Board of Governors of the Federal Reserve System, Georgia Association of Independent Insurance Agents v. Board of Governors of the Federal Reserve System, National Association of Insurance Agents, Inc. v. Board of Governors of the Federal Reserve SystemAlabama Association of Insurance Agents v. Board of Governors of the Federal Reserve System, Georgia Association of Independent Insurance Agents v. Board of Governors of the Federal Reserve System, National Association of Insurance Agents, Inc. v. Board of Governors of the Federal Reserve System
Wm. B. Scher, Jr., Washington, D. C., for Nat. Ass‘n of Life Underwriters and Alabama State Ass‘n of Life Underwriters, Inc., amici curiae.
Macbeth Wagnon, Jr., Birmingham, Ala., for intervenor Southern Bancorporation.
William B. Saxbe, Atty. Gen., Edward H. Levi, Atty. Gen., U. S. Dept. of Justice, Theodore E. Allison, Secretary, Board of Governors of the Federal Reserve System, Leonard Schaitman, Ronald R. Glancz, Dept. of Justice, Washington, D. C., for respondent Bd. of Governors.
John V. Austin, Eugene J. Metzger, Lawrence F. Noble, Washington, D. C., for intervenor Committee to Preserve Consumer Options.
Herbert E. Marks, Thomas J. Bacas, Thomas E. Wilson, Washington, D. C., Robert R. Richardson, Atlanta, Ga., John F. Neville, Gen. Counsel, National Ass‘n of Ins. Agents, Inc., New York City, for petitioners Ga. Ass‘n of Independent Ins. Agents et al.
John V. Austin, Washington D. C., McChesney H. Jeffries, Howard O. Hunter, Atlanta, Ga., for intervenors.
Herbert E. Marks, Washington, D. C., Robert R. Richardson, Atlanta, Ga., for petitioner Nat. Ass‘n of Ins. Agents, Inc.
Petitions for Review of Orders of the Board of Governors of the Federal Reserve System (Alabama, Georgia and Georgia Cases respectively).
Before TUTTLE, THORNBERRY and CLARK, Circuit Judges.
THORNBERRY, Circuit Judge:
These consolidated petitions for review of orders by the Board of Governors of the Federal Reserve System represent the culmination of a four year campaign by Southern Bancorporation (Southern) of Birmingham, Alabama, and First National Holding Corporation (First National) of Atlanta, Georgia, to gain entry into certain aspects of the insurance agency business. From a broader perspective, they represent only one of many episodes in a huge commercial tug-of-war between the bank holding company industry on one hand and independent insurance agents and other insurance industry groups on the other. This struggle has taken place not only in the courts, but in the Congress and before the Federal Reserve System Board of Governors as well. After carefully considering the efforts and accomplishments of the contending parties before those bodies and the arguments advanced by the able counsel in this case, we find that substantial ground has been gained by the bank holding companies. We uphold for the most part the Board of Governors’ action in granting Southern and First National permission to act as agent with respect to specified types of insurance and leave further struggle between insurance agents and these holding companies in the specified areas to the marketplace.1
While recognizing that the protection of savings and the extension of credit are useful and even essential to our economic wellbeing, we as a nation have often been distrustful of the concentrated economic power that may accrue to the organizations that provide those services. This feeling has not been left at large in the streets, the factories, and the small businesses of the land, but has been written into the law by Congress; the Bank Holding Company Act,
Pursuant to this provision, the Federal Reserve System Board of Governors (hereinafter the Board) in the late 1950‘s and 1960‘s granted many individual applications by holding companies to engage in nonbanking activities, including the sale of insurance. And when amendments to the Act were discussed in the late 1960‘s, there was significant sentiment for broadening the Board‘s discretion in the area. Whether the proponents of liberalization succeeded will be dealt with hereinafter; but it is clear that the Holding Company Act Amendments passed in 1970 contained several changes of significance in this case. First, Congress permitted the Board to make the determination whether particular lines of business were closely related to banking and thus within the
(I)n determining whether a particular activity is a proper incident to banking or managing or controlling banks the Board shall consider whether its performance by an affiliate of a holding company can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices.
The Federal Reserve Board was not slow to use its new power to issue
(a) . . . The following activities have been determined by the Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto: . . .
(9) acting as insurance agent or broker in offices at which the holding company or its subsidiaries are otherwise engaged in business (or in an office adjacent thereto) with respect to the following types of insurance:
(i) Any insurance for the holding company and its subsidiaries;
(ii) Any insurance that (a) is directly related to an extension of credit by a bank or a bank-related firm of the kind described in this regulation, or (b) is directly related to the provision of other financial services by a bank or such a bank-related firm, or (c) is otherwise sold as a matter of convenience to the purchaser, so long as the premium income from sales within this subdivision (ii)(c) does not constitute a significant portion of the aggregate insurance premium income of the holding company from insurance sold pursuant to this subdivision (ii);
(iii) Any insurance sold in a community that (a) has a population not exceeding 5,000, or (b) the holding company demonstrates has inadequate insurance agency facilities.
No judicial review of this regulation was immediately sought. On September 6, 1972, the Board issued a regulation indicating its views as to the operative meaning of § 225.4(a)(9) in several particulars.
Among the flurry of applications for permission to engage in nonbanking activities which followed the adoption of § 225.4(a) of Regulation Y were those of Southern Bancorporation and First National Holding Corporation. They were submitted separately in February of 1972, but sought authority to sell, through subsidiaries, many of the same types of insurance. Some of the lines, such as credit life, credit health and accident insurance, and mortgage redemption insurance are not in issue here. The applications to sell other types of insurance were and are hotly contested. In this category are property damage insurance on assets being financed by banks owned by the holding company, liability insurance for borrowers from such banks, and “convenience” insurance as defined in Regulation Y.
The insurance industry parties in this case immediately expressed their opposition to the Southern and First National applications. After more than a year of preparation and preliminary skirmishing, the applications were considered consecutively at hearings before Administrative Law Judge Paul N. Pfeiffer in June, 1973. In early 1974, Judge Pfeiffer announced his findings and recommended decision: although the insurance activities proposed by Southern and First National were within the “closely related” standard of
The holding companies were down, but by no means out. They pressed their claims vigorously before the Federal Reserve Board and, in July and September of 1974, the Board responded favorably. In its orders, the Board noted its previous determination in § 225.4(a)(9) that certain insurance activities were permissible within the meaning of
II. Parties
The petition for review in No. 74-2981 was brought by the National Association of Insurance Agents, the Alabama Association of Insurance Agents, the Birmingham Association of Insurance Agents, and several individual insurance agencies. NAIA also is a petitioner in No. 74-3544, along with the Georgia Association of Independent Insurance Agents and several individual agencies. Together the 74-2981 and 74-3544 petitioners shall be referred to hereinafter as “the NAIA parties“. All petitioners are or represent individual insurance agencies which are primarily small businesses selling insurance policies issued by more than one underwriter.
Southern Bancorporation (formerly known as The Alabama Financial Group, Inc.) is a bank holding company headquartered in Birmingham, Alabama. Its primary business is banking and it has subsidiaries in that business operating in twelve Alabama cities. Several of these subsidiaries have more than one banking office; the Birmingham Trust National Bank has over twenty. Southern also has three nonbanking subsidiaries: AFG Data Services, Inc., Alabama Financial Leasing, Inc., and Southern State Life Insurance Co.
Southern is the third largest bank holding company in Alabama, controlling approximately ten per cent of all commercial bank deposits in the state. It controls about twenty-two per cent of bank deposits in the Birmingham metropolitan area and nearly half of deposits in the Dothan metropolitan area and in Marion County. With the other four largest bank holding companies in Alabama, Southern controls approximately seventy-five per cent of commercial bank deposits in the state.
First National Holding Corporation, unlike Southern, is a one-bank holding company.5 Its banking subsidiary, First National Bank of Atlanta, has over forty offices in two counties of the Atlanta metropolitan area. It is the second largest bank in the area, with about twenty-five per cent of all bank deposits. The holding company also has 162 subsidiaries engaged in various business and financial endeavors in Georgia and neighboring states. The most important of these for our purposes is Tharpe & Brooks, Inc., a wholly owned subsidiary which is in the mortgage banking business. Unlike Southern, which proposes to establish a new insurance agency to carry on the activities, First National plans to conduct its insurance activities through First South Insurance Agency, a Tharpe & Brooks subsidiary.
A. Jurisdiction to Review
The jurisdiction of this court derives from
We disagree with the Board and find that it is our duty to review not only these orders, but the regulations upon which they are partially based. For one thing, the courts have held that a statutory provision for review of orders permits review of regulations, even standing alone, where the issues are primarily legal rather than factual, and there is an adequate record for review. See Deutsche Lufthansa Aktiengesellschaft v. CAB, 156 U.S.App.D.C. 191, 479 F.2d 912 (1973); City of Chicago v. FPC, 147 U.S.App.D.C. 312, 458 F.2d 731 (1971), cert. denied, 405 U.S. 1074, 92 S.Ct. 1495, 31 L.Ed.2d 808 (1972). See also Pacific Gas & Elec. Co. v. FPC, 164 U.S.App.D.C. 371, 506 F.2d 33, 47-48 (1974). This principle was illustrated in the recent decision in National Courier Ass‘n v. Board of Governors of the Federal Reserve System, 170 U.S.App.D.C. 301, 516 F.2d 1229 (1975) (Couriers ), in which the court reviewed amendments to § 225.4(a) of Regulation Y under the jurisdictional provision for review of “orders” invoked here. The case before us arguably fulfills the applicable criteria, since the issues are primarily legal—whether the activities listed in the regulation meet the statutory “closely related” test—and there is factual material concerning the relationship of these activities to banking in the voluminous record compiled in these proceedings.
More importantly, we believe that even belated review of these regulations should not be foreclosed in the circumstances of this case. We deal here with orders that involve two basic issues concerning the holding company applications: whether they meet the “closely related” test and whether they meet the “public benefits” test. The latter, by its nature, may be conclusively resolved only in the context of specific applications,6 Independent Bankers Ass‘n of Georgia v. Board of Governors of Federal Reserve System, 170 U.S.App.D.C. 278, 516 F.2d 1206, 1215-16 (1975); American Bancorp., Inc. v. Board of Governors of Federal Reserve System, 509 F.2d 29, 38-39 (8 Cir. 1974), while the former can be resolved either on an individual basis or by regulation. See
In light of the determinative effect of the regulation on some issues involved in the promulgation of these orders, it would be an “empty and useless thing” to review them without scrutiny of the regulation as well. Doe v. CAB, 356 F.2d 699, 701 (10 Cir. 1966), quoted in International Harvester Co. v. Ruckelshaus, 155 U.S.App.D.C. 411, 478 F.2d 615 (1973). We would partially abdicate our judicial duty if we were to allow the time limit for direct review to insulate forever this regulation, which has never been judicially tested, from scrutiny as to its consistency with Congressional mandate, all the while “reviewing” orders based, in significant part, wholly and directly upon it. Perhaps more importantly, that course would be unjust to many of the petitioning parties. It may be fair to say that NAIA, which participated in the rulemaking proceedings in 1971, had a chance to challenge this regulation within thirty days of its promulgation.8 But is it fair to say the same thing of petitioner R. A. Brown Insurance Agency, Inc., in Alabama, or Morris-Fallaize Insurance, Inc., in Georgia, which may bear the economic detriments potentially arising from these applications? We believe not and find that, considerations of finality notwithstanding, our duty to see that the Congressional mandate in
B. Procedural Validity
We pass then to the question of whether the regulation complied with the requirement of the Administrative Procedure Act that
the agency shall incorporate in the rules adopted a concise general statement of their basis and purpose.
(t)he following activities have been determined by the Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
This statement does no more than conclusorily announce the import of the regulation. It does nothing to illuminate the process by which the Board arrived at the regulation and accordingly is of little use in fulfilling the purposes of the statute, the facilitation of judicial review. See Amoco Oil Co. v. EPA, 163 U.S.App.D.C. 162, 501 F.2d 722 (1974); Automotive Parts & Accessories Ass‘n v. Boyd, 132 U.S.App.D.C. 200, 407 F.2d 330 (1968); Natural Resources Defense Council, Inc. v. SEC, 389 F.Supp. 689 (D.D.C.1974). The APA provision “does not require the agency to supply specific and detailed findings and conclusions of the kind customarily associated with formal proceedings“, but this limitation “does not lessen or excuse the agency‘s obligation to publish a statement of reasons that will be sufficiently detailed to permit judicial review.” National Nutritional Foods Ass‘n v. Weinberger, 512 F.2d 688, 701 (2 Cir. 1975).
This statutory requirement, however, has not been enforced with the vigor that would, at first blush, seem indicated. Statements with no more informative content than the one before us have been held to pass muster. Automotive Parts & Accessories Ass‘n v. Boyd, supra; New York Freight Forw‘rs & Brokers Ass‘n v. Federal Maritime Comm‘n, 337 F.2d 289 (2 Cir. 1964), cert. denied, 380 U.S. 910, 85 S.Ct. 893, 13 L.Ed.2d 797 (1965). And regulations with no statement of basis and purpose at all have been upheld where the court deemed the basis and purpose obvious. Hoving Corp. v. FTC, 290 F.2d 803 (2 Cir. 1961).
The rationale of these decisions is not difficult to ascertain. Courts must have an adequate basis to engage in judicial review, but, as partners with the agencies in the effectuation of Congressional will through the administrative process, they do not function to strike down agency action because of merely formal or technical flaws. Greater Boston Tel. Corp. v. FCC, 143 U.S.App.D.C. 383, 444 F.2d 841, 851 (1970), cert. denied, 403 U.S. 923, 91 S.Ct. 2229, 29 L.Ed.2d 701 (1971); Braniff Airways v. CAB, 126 U.S.App.D.C. 399, 379 F.2d 453, 465-68 (1967). For this reason, a court must not only examine whether an agency‘s promulgation of a challenged regulation complies with the procedural requirement; it must also determine whether, in light of the nature and content of the regulation and of the underlying legislation, the extraneous material which may be available to explain the basis and purpose of the agency action, and the quantum of action taken in reliance on the regulation, any procedural flaw so subverts the process of judicial review that invalidation of the regulation is warranted.
We find that this case is one in which we can “discern the path” of the Board with sufficient confidence. See Environmental Defense Fund, Inc. v. EPA, 167 U.S.App.D.C. 71, 510 F.2d 1292, 1304 (1975), quoting Greater Boston Television Corp. v. FCC, supra. The regulation at issue is not one which purports to carry out a vague statutory command through prescription of detailed standards of conduct, or sets out a complex method of proceeding in order to receive some type of agency approval. Cf. National Ornament & Elec. Light Christmas Ass‘n, Inc. v. Consumer Product Safety Comm., 526 F.2d 1368, 1371-72 (2 Cir. 1975). To the contrary, the regulation makes a single and limited factual and legal determination: that certain insurance activities are so “closely related” to banking as to be proper incidents thereto. For this reason, it is not necessary for the agency to explain what the purpose of the regulation is; it obviously is intended to facilitate the process of applying for holding company authority to engage in nonbanking activities while authorizing only such activities as are permissible under the “closely related” standard.
The basis for the agency‘s designation of these particular activities as permissible is less clear. But to aid us in divining it we have not only the detailed briefs of the several parties and amici, the pre-1970 decisions of the Board on applications to engage in insurance activities,9 and the legislative history of the 1956 Act and the 1970 Amendments, but also the extensive record in the hearings before the Administrative Law Judge in these cases. Cf. Automobile Parts & Accessories Ass‘n v. Boyd, supra at 338 (court may consider statement of agency in denying rehearing); Environmental Defense Fund v. EPA, supra at 1304 & n. 40 (resort to detailed factual record is permissible in lieu of complete findings in hearing contest). Admittedly, much of the record is not relevant to the Board‘s reasoning on the “closely related” issue and that portion which is relevant is “after the fact” explication of which we have every right to be suspicious. See Rodway v. Department of Agriculture, 168 U.S.App.D.C. 387, 514 F.2d 809, 816-17 (1975). But we find that there is enough here, in light of the limited nature of the regulation and the impact of its wholesale invalidation for non-substantive flaws, that we can “see whether the agency, given an essentially legislative task to perform, has carried it out in a manner calculated to negate the dangers of arbitrariness and irrationality.” Automotive Parts & Accessories Ass‘n v. Boyd, supra at 338.
C. Substantive Challenges
The NAIA parties generally argue that the activities listed in § 225.4(a)(9) of Regulation Y violate
As the Board recognizes, the “closely related” standard imposes definite limits upon its discretion to permit nonbanking activities by bank holding companies. Accordingly, the Board rejected applications to engage in some insurance activities, even before the 1970 Amendments.10 However, the great majority of pre-1970 insurance applications were accepted by the Board, and these constituted most of the nonbanking activities authorized under
It was against this backdrop that Congress acted in 1970. Both the Senate and House of Representatives passed legislation which was intended in part to give the Board greater discretion in administering the Act.11 In particular, both houses approved a change of the “closely related” language of the 1956 Act to a requirement that nonbanking activities need be only “functionally related” to banking.12 The two bills did not completely agree, however; the House of Representatives included a provision specifically prohibiting holding companies from engaging in six nonbanking activities, including insurance agency activities other than those relating to credit life, and credit health and accident insurance.
The conflict between the “functionally related” language, which clearly was intended to broaden to some degree the Board‘s discretion in approving nonbanking activities, and the specific prohibitions in the House bill made for a difficult Conference Committee session. Ultimately, the list of prohibited activities was deleted from the Act, apparently in return for a retention of the pre-1970 “closely related” language. Four of the seven House conferees13 emerged to argue that the resulting legislation should “be construed to mean that the Congress was not convinced that such expansion and liberalization was justified.” Conference Report, 1970 U.S.Code Cong. & Adm.News at p. 5572. See also 116 Cong.Rec. 41952, 41961 (1970) (remarks of Rep. Patman). The Senate conferees and the minority House conferees, however, argued that even the compromise bill which survived the Conference represented a liberalization of the law.14
Certainly some other changes in the Act represent a modest broadening of the Board‘s discretion. The deletion of the requirement that the nonbanking activity be of a “financial, fiduciary, or insurance nature” and that it relate to the “business of banking” are examples.15 And it can be argued that the belief of the majority of the entire Conference Committee should be given precedence over that of the slim majority of the House conferees. Nevertheless, on balance we cannot concur in the District of Columbia Court of Appeal‘s conclusion that “it is plain that Congress intended to expand (the Board‘s) latitude in substantial degree“. 516 F.2d at 1236. Any liberalization of the standards effected by these minor wording changes was largely if not wholly offset by the Conference Committee‘s rejection of the “functionally related standard” and the addition of the public benefits test. The purpose and effect of the 1970 Amendments in this particular was quite ambiguous, and we find that no significant change in the general range of the Board‘s discretion was effected by them.
Despite petitioners’ earnest efforts to persuade us to this conclusion, however, we find that it avails them little. One reason for this is that the pre-1970 law simply was not very restrictive in the insurance area. Petitioners correctly note that approval of many pre-1970 insurance applications was grounded in part on long established bank practices in the local area involved and the existence of bank competitors already carrying on insurance activities.16 But, even so, the fact remains that the Board between 1956 and 1970 rejected the first two applications to engage in insurance activities and thereafter granted all twenty-five applications which came before it, many without reference to local practices; this hardly bespeaks a highly restrictive policy.
Petitioners have been able to cite nothing in the legislative history to indicate disapproval of the Board‘s pre-1970 decisions. To the contrary, the Senate Report stated that
the deletion of (the restriction to “financial, fiduciary, or insurance” activities) shall not be construed as indicating the committee‘s intent that these activities be no longer permitted. To the contrary, these activities are “functionally related to banking” and are included under the new provision adopted by the committee to the full extent they were permitted under the existing act, and to such additional extent as the Board may find it desirable under the new criteria established.
Senate Report, 1970 U.S.Code Cong. & Adm.News at p. 5533 (emphasis supplied). Of course, the “functionally related” language disappeared in conference, but even the House members who held the more restrictive view of the resulting legislation quoted the Senate Report‘s language, emphasizing that “these . . . are included . . . to the full extent they were permitted under the existing act.” Conference Report, 1970 U.S.Code Cong. & Adm.News at p. 5565. See also 116 Cong.Rec. 41963 (remarks of Rep. Reuss).
We have, then a series of interpretations of the “closely related” standard with respect to insurance activities, over a period of fourteen years, by the agency charged with setting the machinery of the Bank Holding Company Act in motion. See Chemehuevi Tribe of Indians v. FPC, 420 U.S. 395, 409-10, 95 S.Ct. 1066, 1075, 43 L.Ed.2d 279, 290 (1975); Trafficante v. Metropolitan Life Ins. Co., 409 U.S. 205, 210, 93 S.Ct. 364, 367, 34 L.Ed.2d 415, 420 (1972); FDIC v. Sumner Fin. Corp., 451 F.2d 898 (5 Cir. 1971). The “great respect” that is due such interpretations “is enhanced by the fact that Congress gave no indication of its dissatisfaction of the agency‘s interpretation of the scope of its . . . jurisdiction when it amended the Act.” Chemehuevi Tribe of Indians, supra. See Saxbe v. Bustos, 419 U.S. 65, 95 S.Ct. 272, 42 L.Ed.2d 231 (1974); Reeb v. Economic Opp‘y Atlanta, Inc., 516 F.2d 924 (5 Cir. 1975). We must be most reluctant then, to reach results which would repudiate pre-1970 Board decisions, particularly in view of the fact that the Board‘s expertise in this area must be presumed to exceed ours. See Brennan v. General Tel. Co., 488 F.2d 157, 160 (5 Cir. 1973).
A second reason why petitioners have a difficult burden derives from our limited role in reviewing these regulations. Because this regulation does not involve findings “required by statute to be made on the record after opportunity for an agency hearing,” see
With these observations we turn to the portion of § 225.4(a)(9) under primary attack. It provides that a holding company subsidiary may act as an insurance agent or broker with respect to:
(ii) Any insurance that (a) is directly related to an extension of credit by a bank or a bank-related firm of the kind described in this regulation, or (b) is directly related to the provision of other financial services by a bank or such a bank-related firm. . . .
The immediately apparent fact is that these sections represent only slightly more narrow definitions than the “closely related” language itself. They state in essence that one type of “close” relation to banking exists when there is a “direct” relationship of the activity to an extension of credit or other financial service. Since the essential function of banking is the provision of credit or other financial services, the primary result of the regulation itself is merely to shift the inquiry from the word “close” to “direct“. Such a minute change cannot be deemed outside the Board‘s discretion; if there is invalidity in the Board‘s action pursuant to this regulation, it must be in the application of the regulation to the particular activities authorized under it.
Other parts of § 225.4(a)(9) represent more substantial departures from the wording of the Act. The first example is subsection (i), which permits the sale of “any insurance for the holding company or its subsidiaries“.17 Acting pursuant to this authorization, the Board approved applications by both Southern and First National and authorized the sale of any insurance within the terms of subsection (i).
It is apparent that at least some of the insurance sales thereby permitted will relate only tangentially to the basic functions of banks: the protection of savings and the provision of financial services. For example, the regulation would authorize the sale of group health insurance for janitorial and maintenance employees, and property insurance on the physical assets of banking subsidiaries, such as bank fixtures or real property owned by the bank. Moreover, sales of insurance to the holding company or to nonbanking subsidiaries would be permitted. In the case of First National, for instance, the insurance subsidiary could sell insurance to Gulf Finance Corporation of Mississippi or Woods-Tucker Leasing Company, which has offices in Mississippi and Louisiana. However, convenient to the holding company it is to eliminate the need to pay the commissions of an unrelated insurance broker for such insurance, the relationship of the brokering of such insurance to banking is difficult to discern.
We do not seek to be restrictive in determining what types of relationships to banking are cognizable under the Act. As the Couriers court stated, activities meeting the following criteria seem permissible:
- Banks generally have in fact provided the proposed services.
- Banks generally provide services that are operationally or functionally so similar to the proposed services as to equip them particularly well to provide the proposed service.
- Banks generally provide services that are so integrally related to the proposed services as to require their provision in a specialized form.
516 F.2d at 1237. Clearly, however, brokering insurance for even those subsidiaries of a holding company which are banks does not come within these strictures. We have been apprised of no general practice on the part of banks (and certainly the Board has not articulated one) to broker the types of insurance that they need for their own account and we know of no evidence that they have provided “functionally” or “integrally” related insurance services. Certainly any past practice in which banks have engaged in this area does not cover “any” type of insurance which the banks or their subsidiaries might require.
We are willing, however, to consider broader types of relationships. For example, it cannot be doubted that many types of insurance for banking subsidiaries are helpful, and perhaps essential, to the success of the enterprise, and thus to the provision of financial services. Such insurance may protect the physical facilities which are necessary to banking, insure the fidelity of the employees who are intimately involved in banking operations, or insure the availability of necessary health care for the employees who directly or indirectly provide financial services. The relationship of such insurance to “banking” is in some cases quite indirect; in many cases the bank‘s need for it is no different than the need of any business enterprise. But in view of the limited role of this court in reviewing these regulations, we are unwilling to say that the Board was wrong in finding it sufficient.
As noted above, however, even this rationale cannot justify the Board‘s authorization of the holding companies to broker insurance for themselves or their nonbanking subsidiaries. Such insurance simply does not contribute to the operations of those subsidiaries actually engaged in the banking business. Perhaps it could be argued that uninsured losses of those businesses or of the holding company may affect the availability of resources to the banking subsidiary or other policies of the directors or shareholders of the holding company, who directly or indirectly control the banking subsidiaries. But the Board has not, to our knowledge, articulated this rationale and, in any event, it seems to us so attenuated as to stray even from the broad area of discretion to which the Board is entitled. We therefore find that the portion of § 225.4(a)(9)(i) which authorizes the sale of insurance for bank holding companies and nonbank subsidiaries of holding companies must be invalidated, and the portions of the orders under review which authorize the sale of such insurance must also fall.
A second specific provision in the regulation is (ii)(c), which authorizes holding company subsidiaries to act as agents with respect to insurance that
is otherwise sold as a matter of convenience to the purchaser, so long as the premium income from sales within this subdivision (ii)(c) does not constitute a significant portion of the aggregate insurance premium income of the holding company from insurance sold pursuant to this subdivision (ii). . . .
The Board argues that this provision “permits the holding company agency to round-out its insurance offerings” by, for example, permitting renewal of policies covering an automobile after a loan from a holding company bank on the automobile has been repaid. The Board stresses also that, in its interpretive regulation,
The Board may well be correct in its forecasts. And it may be correct in assuming that such renewal insurance would be “closely related” to banking within the meaning of the Act. But the fact is that the regulation is not so restricted. It permits holding company affiliates to sell any type of insurance under any conditions as a “matter of convenience“, imposing no condition that the insurance relate in any way to banking.
The court in the Couriers case was faced with a similar provision, which authorized holding company affiliates to furnish “courier services for non-financially-related material upon the specific, unsolicited request of a third party when courier services are not otherwise reasonably available.”
The justification for the “incidental” courier services at issue here is, however, quite different. It is not, as far as we can tell, that the carriage of non-financially related material is in any way necessary to the successful operation of the courier service affiliates. Rather, it is that the provision of such service would “serve the convenience of the public“.
The court then noted that the provision of such services might indeed be beneficial to the public, in view of the fact that bank affiliates would not likely become deeply involved in providing such unsolicited services, and that no bank competitor would be injured since the services were required to be “otherwise unavailable“. The court then made a statement with which we fully agree:
But Congress did not instruct the Board to allow or disallow bank involvement in non-financial activities as may be required by the policies which counsel a separation of commerce and banking. Having heeded that counsel itself, it decreed the separation, and instructed the Board to enforce it.
Here, too, we believe the Board has misconstrued its role. The Board‘s function is not to promote generally the public interest consistent with the policies of the Bank Holding Company Act, but to determine what activities are “closely related” to banking. While we might agree that the sale of certain types of convenience insurance would help a holding company agency “round out” its offerings to the benefit of its clients, the agency, and the general public, the fact remains that the handling of convenience insurance simply is not, as broadly defined in the regulation, closely related or necessarily related at all to banking.
The Board, however, argues that the brokering of convenience insurance is “a necessary activity to the operation of an affiliated insurance agency“. To the extent that this is an assertion that it is an incidental activity reasonably necessary to the carrying on of clearly permissible ones, we find that it is one that, if supported, would be legally sufficient. See
A final provision which must be examined is § 225.4(a)(9)(iii) of Regulation Y, which permits a holding company agency to sell:
Any insurance sold in a community that (a) has a population not exceeding 5,000, or (b) the holding company demonstrates has inadequate insurance agency facilities.
This provision, too, seems to authorize the handling of insurance for the benefit of the public, despite the absence of any discernible connection to “banking“. It is interesting to note, however, that Congress has since 1916 permitted national banks to engage in just such activity.
The answer to this question can be found in the legislative history of
This additional income will strengthen them and increase their ability to make a fair return to their shareholders, while the new business is not likely to assume such proportions as to distract the officers of the bank from the principal business of banking.
399 F.2d at 1015. It clearly appears, then, that
No one doubts that subsidiaries of holding companies which are national banks located in small towns have the authority to broker insurance. But to hold that other holding company subsidiaries which are not banks have such authority as a result of
This is made even more apparent by the fact that the Board regulation is not even restricted to holding company subsidiaries which are located in small communities. Unlike the national banks which were the object of the 1916 provision, the holding company affiliates which would sell this insurance would be located in downtown Birmingham or Atlanta and have full access to the commercial opportunities of major metropolitan areas and beyond. For all of these reasons, we must hold that § 225.4(a)(9)(iii) of Regulation Y is invalid and that the portions of the orders before us which are based upon it must also fall.
III. Application of the Regulation
We turn now to one of the most hotly contested aspects of this case: the Board‘s authorization of holding company sales of property damage and liability insurance. The “property damage” insurance referred to would protect collateral for loans by holding company banks from damage caused by fires, storms, accidents, and other hazards. The liability insurance at issue would protect borrowers from liability resulting from injury or damage to the person or property of others in connection with property financed by holding company banks. Thus, for example, a bank financing and taking a security interest in an automobile might also sell the owner-borrower collision insurance and insurance against any liability arising from an accident in the automobile. The Board found that both property damage and liability insurance were “directly related to an extension of credit” and therefore within § 225.4(a)(9)(ii)(a) of Regulation Y.
Petitioners argue primarily that the sale of physical damage insurance is unauthorized because it is neither “functionally equivalent to an extension of credit” nor “operationally integrated into the lending transaction“. As noted earlier, we are not convinced that Congress intended to so limit the universe of relevant connections between banking and proposed nonbanking activities. To the contrary, we believe that the Board should be upheld when it articulates any type connection between banking and the nonbanking activity in question which makes it rational to consider the proposed activity an “incident” to banking.
In approving the sale of property damage insurance, the Board stressed the fact that such insurance is “essential from the lender‘s standpoint to assure that the value of the collateral will not be impaired by physical damage.” II App. 187; IV App. 732. The Board also noted that such insurance performs “an integral function for the borrower as well, since the presence or lack of insurance protecting loan collateral is an essential element of the credit evaluation.” II App. 187. Its decision, then, was based neither on any historical practice by banks, nor upon any process characteristic of lending transactions which would necessitate specialized forms of the activity at issue. The Board seems to have relied simply on the fact that, in lending transactions, banks have a legitimate need for physical damage insurance to protect the value of the collateral and that borrowers have need for the insurance to obtain credit. We hold that this is enough, particularly in view of the pre-1970 authorization of similar insurance sales. See Citizens and Southern Holding Co., 1969 Fed.Res.Bull. 673; Otto Bremer Co., 1969 Fed.Res.Bull. 388; Otto Bremer Co., 1967 Fed.Res.Bull. 1555. Where a product or service is regularly desired by both parties and supports the transaction in some significant way, we cannot say that the Board acts irrationally or arbitrarily in deeming the furnishing of the product or service “closely related to banking” or “directly related to an extension of credit“.
The case for liability insurance proceeds upon the same general lines but is significantly weaker. Liability insurance protects the borrower‘s ability to repay a loan, which could otherwise be destroyed by an accident or other catastrophe. It therefore fulfills a need of both the borrower and lender, particularly where the borrower is an individual or a small business with limited assets. Petitioners note, however, that liability insurance, unlike physical damage insurance, is not required of borrowers as a general banking practice. And the authorization at issue is in no way limited to cases where the borrower‘s ability to repay could be significantly affected by an uninsured liability.
This is not surprising in view of the fact that the Board‘s orders in these cases relied on an entirely different rationale. The Board stressed the insurance industry practice of selling liability insurance in conjunction with property damage insurance protecting an automobile or other property. It concluded that a “packaged” insurance policy, combining liability insurance with insurance relating to physical damage on property purchased from loan proceeds, fulfills a legitimate need of the lender and borrower alike at the time a loan is made. Moreover, in the case of homeowner‘s insurance, it appears that it would not be economical for a borrower to procure separately the various coverages customarily packaged in such a policy.
II App. 188; see IV App. 733. The Board‘s rationale therefore comes down to this: (1) borrowers, for convenience and, in some cases, cost reasons, want liability insurance packaged with property damage insurance, which itself is incident to banking; (2) the need for liability insurance arises out of the lending transaction; (3) liability insurance to some extent protects the borrower‘s ability to repay the loan.
We find that these form a sufficient basis for the brokering of liability insurance by bank holding companies. The evidence amply supports the conclusion that, from the consumer‘s point of view, packaged property damage and liability policies are more desirable than the same policies separately sold. See II App. 273, 278, 309-10, 411-12; V App. 1228. To permit banks to sell only property damage insurance, then, could have the effect of substantially limiting the gains in convenience and in increased competition which Congress sought to promote. The sale of packaged liability insurance therefore may be seen as an activity “incidental” to the sale of property damage insurance and necessary for the effectuation of the Congressional purpose with respect to the latter activity. See
It cannot be said, moreover, that the relationship of banking to liability insurance itself is chimerical. Although banks do not customarily require it, liability insurance does in a significant way “support the lending transaction“. Indeed, assurance of the borrower‘s ability to repay the loan may be more important than protection of the collateral; repayment rather than repossession is the bank‘s primary objective. And, too, the need for the insurance does arise directly from the purchase of property, which is the very purpose of the loan. In attempting to answer the question whether these relationships are sufficient to establish the connection that Congress required, we have been impressed by the pre-Amendment decisions of the Board. In two cases decided in the year prior to the passage in 1970 of the provision we are construing, the Board granted applications authorizing the sale of liability insurance by a bank holding company agency, without any requirement that it be packaged with other insurance. United Virginia Bankshares, Inc., 1970 Fed.Res.Bull. 599, 600; First Security Corp., 1969 Fed.Res.Bull. 667, 668. Yet Congress made no substantial change in the language of the relevant provision and the legislative history is void of any suggestion that the pre-Amendment decisions were disapproved. In view of the familiar presumption that the legislature is aware of existing constructions of statutes which it reenacts,18 this court has every reason to believe that the more limited authorization of liability insurance in these cases was within the intent of Congress.
IV. The Calculus of Public Benefits
The 1970 Holding Company Act Amendments transformed the general question of whether the proposed activity would be a “proper incident” to banking, in part at least,19 into the more particularized inquiry of whether the activity “can reasonably be expected to produce benefits to the public . . . that outweigh possible adverse effects“.
Congress in the 1956 Act clearly circumscribed our role in reviewing the Board‘s findings: “(t)he findings of the Board as to the facts, if supported by substantial evidence, shall be conclusive“.
The reasons for deference to the Board‘s reasoned judgment in the general run of cases are magnified in the context of the “public benefits” determination of § 4(c)(8). Congress required only that public benefits “reasonably” be expected to outweigh adverse effects. In so doing, it indicated recognition of the fact that the judgments required of the Board are necessarily imprecise and to some degree speculative. Not only do they relate to complex future events often unprecedented ones but they concern aggregate rather than discrete effects. Thus, the Board must determine not whether there will be one or more aspects of insurance agency activity by holding company affiliates that will tend to produce efficiency gains, but whether, overall, such aspects will outweigh possible sources of efficiency loss sufficiently to produce net gains. The latter determination is much more difficult than the former, and is one which is much less susceptible to detailed evidentiary support. Unless we are to impose insurmountable barriers upon those who seek to take advantage of the § 4(c)(8) authorization, which was reaffirmed by Congress in 1970, our review must be sensitive to these circumstances. See, e. g., Bowman Transp., Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 292-94, 95 S.Ct. 438, 446, 42 L.Ed.2d 447, 460 (1974).
We note, however, that the Board‘s rejection of the Administrative Law Judge‘s conclusions cuts the other way. While the Board is in no way bound by those conclusions, e. g., Bowman Transp., Inc. v. Arkansas-Best Freight System, Inc., supra, 419 U.S. at 297-98, 95 S.Ct. at 447-48, 42 L.Ed.2d at 462-63, “evidence supporting a conclusion may be less substantial when an impartial, experienced examiner who has observed the witnesses and lived with the case has drawn conclusions different from the Board‘s than when he has reached the same conclusion“. Universal Camera v. NLRB, 340 U.S. 474, 496, 71 S.Ct. 456, 469, 95 L.Ed. 456, 472 (1947). Although we are inclined to uphold the Board where it clearly explains its reasons for differing with the Administrative Law Judge (particularly on issues upon which it may be presumed to have particular expertise), its findings will be vulnerable where it merely announces an opposite conclusion from the Administrative Law Judge without explanation. See Greater Boston Television Corp. v. FCC, 143 U.S.App.D.C. 383, 444 F.2d 841, 853 (1970), cert. denied, 403 U.S. 923, 91 S.Ct. 2229, 29 L.Ed.2d 701 (1971).
A. Greater Convenience
The Administrative Law Judge found no likelihood of increased convenience in the Southern case and a likelihood of only “minimum” increased convenience in First National‘s. The Board disagreed in both instances, relying primarily on its belief that the “one-stop shopping” that would be made possible would save consumers an extra trip to an insurance agent and would avoid the necessity of obtaining the same information from the consumer twice once for the loan and once for insurance. It noted that “borrowers have often requested insurance from Applicant‘s banks in the past” in support of its contention that there is a demand for the postulated added convenience. The Board now argues also that the consumer would thereby be assured that he has insurance coverage satisfactory to the lender and that insurance and loan payments could be combined in a single bill, resulting in further consumer convenience.
As the NAIA parties argue, the Board‘s conclusions on this issue are cast in doubt by the fact that the licensed insurance agents in both cases will be located at central offices in Birmingham or Atlanta. The result is that, although loan officers around the area or state can telephone such agents to make insurance arrangements at the time loans are made, any dealings by borrower-insureds living outside those metropolitan areas with the agents thereafter will be on an impersonal and long-distance basis. Relationships with local independent agents, on the other hand, can be conducted on a more personal basis and face-to-face discussion of insurance matters will be much easier to arrange. The Board showed no recognition whatever of the resulting decrease in convenience.
Moreover, the Board made no attempt to explain why non-affiliated insurance agents could not effect the same conveniences through a one-stop shopping system. Loan officers could (and if there is a genuine bank need to insure that acceptable coverage be secured, they will) suggest to the prospective loan customer a reputable local agent; if the customer is willing, that agent could be telephoned and could perform the same functions as the proposed holding company affiliate agent.
In its brief, First National suggests that a practice of recommending independent insurance agents to borrowers would not be “good business policy or good ethics“.20 This may or may not be true, but what is clear is that the Board made no such argument and that we have been directed to no evidentiary support in the record for that conclusion. The same situation exists with respect to the claim of added billing convenience; it is one advanced post hoc by the Board with no evidentiary support which has been pointed out to us. See Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168-69, 83 S.Ct. 239, 246, 9 L.Ed.2d 207, 216 (1962); City of Lafayette v. SEC, 147 U.S.App.D.C. 98, 454 F.2d 941 (1971), aff‘d sub nom. Gulf States Utilities Co. v. FPC, 411 U.S. 747, 93 S.Ct. 1870, 36 L.Ed.2d 635 (1973). Because of these deficiencies, and particularly because of the Board‘s failure to delineate clearly the sources of its disagreement with the conclusions of the Administrative Law Judge, we must find that its conclusion on this point is not supported by substantial evidence.
B. Greater Efficiency
The dispute on this point centers around the insurance industry practice of “direct billing“, by which insurance underwriters, rather than agents, issue the policy to the customer and bill and collect the premiums. There was evidence that this practice results in lower commissions to the agent and lower premiums for the consumer. Because both First National and Southern indicated that they probably would not use “direct billing“, the Administrative Law Judge concluded that any possible gains in efficiency from elimination of advertising and soliciting expense and from combination of billing would be negated, and that therefore there was no reasonable likelihood of efficiency gains.
The Board, however, concluded that reduction of advertising and solicitation expenses, the elimination of present bank difficulties in obtaining verification of automobile insurance renewals, the possibility of establishment of a “common pattern of operations” between loan officers and the single insurance agency, and certain “technical efficiencies in the data processing area” would constitute efficiency gains resulting in a public benefit.21 Significantly, in neither the First National nor the Southern order did the Board even mention the direct billing concept or the Administrative Law Judge‘s reliance thereon.
After examination of the record, we find substantial evidence to support the Board‘s conclusions that some of the types of efficiency gains it relied upon in the orders were reasonably likely to result. Although the briefs of the NAIA parties make abundantly clear that the evidentiary showings in favor of these conclusions were much weaker than they could have been, it is not our function, nor the Board‘s, to require the strongest showing possible. Even without the professional studies, the detailed projections, and the unequivocal expert testimony that the NAIA parties deem essential, there is significant evidentiary support for the conclusions that there will be an avoidance of advertising and solicitation expenses, some elimination of duplicated information gathering and information sharing, and some efficiencies in data processing.
But the Board again has failed utterly in its responsibility to consider possible sources of efficiency loss and to arrive at a reasoned evaluation of net efficiency gains. It may well be that the Board could properly have concluded that a net gain would result or that, as First National suggests in its brief, the holding company affiliates would in the future adopt direct billing. But the fact remains that, despite the Administrative Law Judge‘s explicit reliance upon the negative efficiency effects of non-use of direct billing, the Board failed to so much as mention the issue. Because of this failure, we cannot uphold the Board‘s finding on this issue.
C. Increased Competition
Because insurance premium rates are set by insurance underwriters and subject to state regulation, competition on the basis of price among insurance agents is limited. Because of this, the Administrative Law Judge found that there was no “hard evidence” that there would be increased competition in the Georgia case. The Board, however, agreed with the Law Judge‘s conclusion in the Alabama case that, although price competition would be limited, the applications would result in increased competition on the basis of service. In particular, the Board concluded that the greater convenience to consumers of “one-stop shopping” and the availability of bank financial expertise to insurance customers would force independent agents to increase their service efforts to compete with the holding company affiliates.
Here we find sufficient evidence to support the Board‘s conclusions and no unexplained conflict with the Law Judge‘s findings. To the evidence that there would be some pressure for lower prices, we must add the customer-attracting advantages of one-stop shopping and the financial expertise of loan officers, for which there is support in the record.22 While the evidence on this issue certainly can be described as vague, we find that in light of the realities of such applications, it is enough.
We find that this conclusion is bolstered by two factors not specifically relied upon by the Board. The first is that the entry by both Southern and First National into most of these lines of business will be de novo, rather than by purchase or merger with an existing competitor. See III App. 716; V App. 1230. It is quite clear that Congress “believe(d) that an activity commenced de novo will tend to have procompetitive effects, and consequently should be viewed more favorably than the commencement of an activity through the acquisition of an existing concern“. Senate Report, 1970 U.S.Code Cong. & Adm.News at p. 5534. See Conference Report, 1970 U.S.Code Cong. & Adm.News at p. 5568;
D. Decreased or Unfair Competition
The primary claim of the NAIA parties with respect to this issue relates to the possibility that insurance sales will be “tied” to bank loans, thus reducing competition for reasons unrelated to efficiency. The claim is that loan officers may require prospective borrowers to insure through holding company affiliates as a condition for obtaining a loan (coercive tying) or that prospective borrowers may act on a belief that insuring through the holding company will be helpful or necessary in obtaining a loan, without being required to do so (voluntary tying).23 The Administrative Law Judge noted that coercive tying was prohibited by the Holding Company Act Amendments of 1970,
The debate over voluntary tying25 well illustrates the difficulty of the judgments entrusted to the Board under the Amendments. The Board was required to surmise the reasonable likelihood, in the future, of occurrences which are incapable of direct measurement even in the past. In its attempt to do so, the Board relied on two indirect indicia: past “penetration rates” and market structure. A penetration rate, which in this case is the percentage of borrowers from a particular lender who purchase insurance from the lender‘s affiliate, is an indication of the upper limit of possible voluntary tying. Since borrowers may purchase the insurance from lenders for other reasons, such as greater convenience, a strong personal relationship with the lender, or better price or service, the actual rate of voluntary tying may be much lower than the penetration rate.
A First National officer testified that its subsidiary, Tharpe & Brooks, had experienced a penetration rate of 13.5 per cent with respect to mortgage lending. IV App. 830-31. And a North Carolina bank holding company also reported a low penetration rate by its insurance subsidiary operating a general insurance business. I App. 120. We agree with the NAIA parties that it would have been helpful to have further evidence on penetration rates, with information on rates with respect to particular types of loans, and with detailed consideration of the relevance of the North Carolina and Tharpe & Brooks rates to the applications at hand. But we find that this evidence is credible, significant support for the Board‘s conclusion, particularly in view of the fact that the NAIA parties failed to present evidence or penetration rates contradicting the conclusions it suggested.
Second, the Board considered the structure of the respective lending markets, recognizing that the possibility of voluntary tying is inversely related to the availability of other sources of credit. In so doing, the Board responded to the Congressional belief that “the dangers of ‘voluntary’ tie-ins and reciprocity are basically structural“. Conference Report, 1970 U.S.Code Cong. & Adm.News at p. 5569. In the Alabama case, the evidence showed that there are six to twenty banking alternatives in each of the markets in which Southern subsidiaries operate, and that borrowers also have access to nonbank lenders such as finance companies, savings and loan associations, mortgage bankers, and credit unions. III App. 663-70. The Board in the Georgia case also relied upon the existence of other lenders as well as competition from over thirty banks in the Atlanta area. V App. 1233-34, 1327, 1330. We find these structural characteristics persuasive in support of the Board‘s conclusions as to voluntary tying. Despite the fact that there are bank subsidiaries in the Alabama case which have leading shares in individual market areas, and that there may be particular types of commercial loans for which there are few alternative lenders, there was a reasonable basis for the conclusion that the total amount of possible voluntary tying was not of the magnitude Congress was concerned about. This, we believe, is the relevant inquiry, for the size of bank holding companies in 1970, as today, is such that any will have individual markets in which, for certain types of loans, they will be the only practical source of credit. To conclude that the existence of any individual instances of market hegemony necessarily requires a conclusion that voluntary tying is likely would require a finding of this adverse effect in a great number of applications. We find no evidence that Congress intended so particularized and stringent an inquiry, and hold that an overall estimation of the magnitude of likely tying is proper. The Board‘s conclusion on this issue is supported by substantial evidence.26
Notes
language of the statute should make clear that there are two tests to be satisfied in deciding whether nonbank subsidiaries of bank holding companies should be allowed to engage in a particular activity: (1) whether the activity is closely related to banking, and (2) whether it is a proper incident to banking, and that in applying the second test, the Board is to weigh the possible benefits to the public against the risks of adverse consequences. We believe that the language proposed by the House conferees might be misconstrued to apply three tests: (1) whether the activity is closely related, (2) whether it is a proper incident to banking, and (3) whether the benefits outweigh the risks.
116 Cong.Rec. 42434 (1970). The Chairman, whose suggestions on this matter were heeded by the Committee, thus seems to have regarded the “closely related” and “proper incident” determinations as wholly separateTo be sure, improved service or lower prices to the consumer are one type of public benefit, but it is also true that a public benefit in a broad sense is conferred whenever a service is performed in a new way which requires less of society‘s limited human and economic resources. The result may be lower prices to the consumer of the service, or it may be greater dividends to the body of stockholders of the service provider, better salaries or benefits to the provider‘s employees, or the availability of greater capital for expansion of the business. In the latter instances as well as the former we believe that efficiencies reasonably can be said to result in a public benefit: the freeing of scarce resources for beneficial economic use.