Supreme Court Clears Way for Banks to Deal in Securities Nationwide

WASHINGTON —  In a case with high financial stakes, the Supreme Court cleared the way Wednesday for banks to buy and sell stocks, bonds and mutual funds for customers in offices throughout the nation.

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

And by allowing banks to open brokerage offices outside their home states, the decision contributes to the rapid erosion of state and federal laws barring interstate banking.

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

These laws limit banks such as Security Pacific from opening branches outside of California, but the justices said this restriction should not extend to other services, such as offering stocks to customers. Bankers hope that the decision will be a wedge behind which they can drive additional powers, such as the right to sell insurance and real estate.

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

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

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

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

Wednesday’s decision gives legal status to a service that has been offered by several large banks since 1982 over the opposition of established brokerage firms. The case was brought by Security Pacific and Union Planters National Bank of Memphis, but 60 other national banks have applied for permission to provide discount brokerage services in their local branches and in free-standing offices outside their home states.

Several other big banking companies, such as Citicorp, BankAmerica and Chase Manhattan, own nationwide discount brokerages as independent subsidiaries of their bank holding companies. That arrangement was ratified by the Supreme Court in 1984.

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

“Banks shouldn’t be restricted by territorial limitations. This says a bank can engage in discount securities business any place, with no territorial restrictions, and it applies to everything but the core bank functions,” said Coleman, former transportation secretary in the Administration of President Gerald R. Ford.

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

Security Pacific said it spent more than $1 million to win the right to expand its brokerage services.

The Securities Industry Assn., which lost the case, sought to minimize the significance of the decision. “It was not favorable to us, but it was not a monumental loss,” said Evan Cooper, senior vice president of the association.

“The breakdown of barriers between investment banking and commercial banking remains of concern to us,” Cooper added. “We’ve been calling on Congress for 10 years to take a thorough look at this.”

But the securities group managed to win a consolation prize. The Justice Department argued that the brokers association had no right to challenge the comptroller’s actions in a federal court suit, but the justices disagreed.

On a 5-3 vote, the court said the industry has a clear interest in the comptroller’s move and, therefore, “has standing to maintain this lawsuit.” But, after winning that point, they lost on the main question.

Associate Justice Antonin Scalia took no part in the two cases (Clarke, Comptroller vs. Securities Industry Assn., 85-971, and Security Pacific National Bank vs. SIA, 85-972.).

Times Staff Writer John M. Broder in Los Angeles contributed to this story.