Securities Industry Ass'n v. Board of Governors of the Federal Reserve System , 104 S. Ct. 2979 ( 1984 )

Justice Blackmun

delivered the opinion of the Court.

This case involves a challenge to the efforts of a state commercial bank to enter the business of selling third-party commercial paper. The Board of Governors of the Federal Reserve System (Board) concluded that such activity by state member banks is not prohibited by the Banking Act of 1933, ch. 89, 48 Stat. 162 (commonly known as the Glass-Steagall Act) because commercial paper is neither a “security” nor a “note” within the meaning of that Act and therefore falls outside the Act’s proscriptions. The District Court disagreed with the Board, but the Court of Appeals deferred to the Board’s interpretation and reversed the judgment of the District Court. Because commercial paper falls within the plain language of the Act, and because the inclusion of commercial paper within the terms of the Act is fully consistent with the Act’s purposes, we conclude that commercial paper is a “security” under the Glass-Steagall Act, and we reverse the judgment of the Court of Appeals.

hH

During 1978 Bankers Trust Company (Bankers Trust), a New York-chartered member bank of the Federal Reserve System, began serving as agent for several of its corporate customers in placing their commercial paper¹ in the commercial-paper market. Petitioners, the Securities Industry Association (SIA), a national securities-industry trade association, and A. G. Becker Inc. (Becker), a dealer in commercial paper, informally expressed concern to the Board about Bankers Trust’s commercial-paper activities. SIA and Becker subsequently petitioned the Board for, among other things, a ruling that Bankers Trust’s activities are unlawful under §§16 and 21 of the Act, 12 U. S. C. §§24 Seventh and 378(a)(1). Section 16 prohibits commercial banks from underwriting “securities or stock,” while §21 prohibits them from marketing “stocks, bonds, debentures, notes, or other securities.” Petitioners asserted that Bankers Trust’s activities violated both § 16 and § 21.

On September 26, 1980, the Board responded to petitioners’ request for enforcement of §§ 16 and 21 against Bankers Trust. See Federal Reserve System, Statement Regarding Petitions to Initiate Enforcement Action (1980), App. 122A (Board Statement). The Board acknowledged that Congress enacted the Act to prevent commercial banks from engaging in certain investment-banking activities, but explained that Congress did not intend the Act’s prohibitions to cover every instrument that could be characterized as a “note” or “security.” The Board expressed concern that such a broad interpretation might preclude commercial banks from maintaining many of their traditional activities. Accordingly, the Board took the position that “if a particular kind of financial instrument evidences a transaction that is more functionally similar to a traditional commercial banking operation than to an investment transaction, then fidelity to the purposes of the Act would dictate that the instrument should not be viewed as a security.” Id., at 135A. Applying this “functional analysis” to commercial paper, the Board concluded that such paper more closely resembles a commercial bank loan than an investment transaction and that it is not a “security” for purposes of the Glass-Steagall Act. Because of this determination, the Board did not consider whether Bankers Trust’s involvement with commercial paper constitutes “underwriting,” within the meaning of the Act.

Petitioners challenged the Board’s ruling in the United States District Court for the District of Columbia under, inter alia, the judicial-review provisions of the Administrative Procedure Act, 5 U. S. C. §701 et seq., claiming that the ruling was contrary to law. The District Court reversed the ruling, finding that commercial paper falls within the scope of §21’s reference to “notes ... or other securities.” A. G. Becker Inc. v. Board of Governors of Federal Reserve System, 519 F. Supp. 602, 612 (1981). The court also found error in the Board’s “functional analysis” because it focused exclusively on the role that commercial paper plays in the financial affairs of the issuer. This approach ignored the commercial bank’s role in the transaction, which the District Court concluded is a central concern of the Act. Id., at 615-616.

The United States Court of Appeals for the District of Columbia Circuit, by a divided vote, reversed the judgment of the District Court. A. G. Becker Inc. v. Board of Governors of Federal Reserve System, 224 U. S. App. D. C. 21, 693 F. 2d 136 (1982). The Court of Appeals’ majority acknowledged that § 21’s reference to “notes” was broad enough to include commercial paper, which is a promissory note. The court explained, however, that the term “note” was also susceptible of a narrower reading, limited to long-term debt securities closely resembling a bond or debenture but of shorter maturity. Id., at 28-29, 693 F. 2d, at 143-144. Because the legislative history of the Act indicates that the 1933 Congress sought to encourage commercial banks to invest more heavily in commercial paper than in longer-term, more speculative securities, the court concluded that Congress used the term “notes” in §21 in this narrower sense. Id., at 29-31, 693 F. 2d, at 144-146. Finally, the court endorsed the Board’s functional analysis of commercial paper and concluded that commercial paper more closely resembled a loan than a security because of its low default rate, the large denominations in which it is issued, and the sophistication of its buyers. In the Court of Appeals’ view, these features of commercial paper eliminate the concerns that moved Congress to pass the Glass-Steagall Act. Id., at 32-36, 693 F. 2d, at 147-151.

Because of the importance of the issue for the Nation’s financial markets, we granted certiorari. 464 U. S. 812 (1983).

II

The Board is the agency responsible for federal regulation of the national banking system, and its interpretation of a federal banking statute is entitled to substantial deference. As the Court states elsewhere today, “the Board has primary responsibility for implementing the Glass-Steagall Act, and we accord substantial deference to the Board’s interpretation of that Act whenever its interpretation provides a reasonable construction of the statutory language and is consistent with legislative intent.” No. 83-614, Securities Industry Assn. v. Board of Governors of Federal Reserve System, post, at 217. We also have made clear, however, that deference is not to be a device that emasculates the significance of judicial review. Judicial deference to an agency’s interpretation of a statute “only sets ‘the framework for judicial analysis; it does not displace it.’” United States v. Vogel Fertilizer Co., 455 U. S. 16, 24 (1982), quoting United States v. Cartwright, 411 U. S. 546, 550 (1973). A reviewing court “must reject administrative constructions of [a] statute, whether reached by adjudication or by rulemaking, that are inconsistent with the statutory mandate or that frustrate the policy that Congress sought to implement.” FEC v. Democratic Senatorial Campaign Committee, 454 U. S. 27, 32 (1981).

Although these principles establish in general terms the appropriate standard of review, this case presents an additional consideration that counsels against full deference to the Board. At the administrative level, the Board took the position that commercial paper was not a “security” within the meaning of the Act, and that, therefore, it did “not appear necessary to examine the dangers that the Act was intended to eliminate.” Board Statement, App. 140A.² Before this Court, however, the Board appears to have changed somewhat the nature of its argument. The Board’s counsel now insists that the activities of Bankers Trust “involv[e] none of the ‘hazards’ that this Court identified” as the concerns at which the Act is aimed. Brief for Respondents 40. We previously have stated that post hoc rationalizations by counsel for agency action are entitled to little deference: “It is the administrative official and not appellate counsel who possesses the expertise that can enlighten and rationalize the search for the meaning and intent of Congress.” Investment Company Institute v. Camp, 401 U. S. 617, 628 (1971); see also Burlington Truck Lines, Inc. v. United States, 371 U. S. 156, 168-169 (1962). As a result, the Board’s presentation here of the policies behind the Act as they apply to this case is of less significance than it would be if it had occurred at the administrative level. Because of this apparent shift, moreover, the contours of the Board’s present position are somewhat unclear; much of the Board’s argument now addresses the particular characteristics of the commercial paper in this case, apparently leaving open the possibility that commercial paper with different characteristics would qualify as a “security” and be subject to the Glass-Steagall Act’s proscriptions. See Brief for Respondents 33-44. To the extent that the Board has changed its position from that adopted at the administrative level, its interpretation is entitled to less weight.

Ill

A

In Camp this Court explored at some length the congressional concerns that produced the Glass-Steagall Act. Congress passed the Act in the aftermath of the banking collapse that produced the Great Depression of the 1930’s. The Act responded to the opinion, widely expressed at the time, that much of the financial difficulty experienced by banks could be traced to their involvement in investment-banking activities both directly and through security affiliates. At the very least, Congress held the view that the extensive involvement by commercial banks had been unwise; some in Congress concluded that it had been illegal.³ Senator Glass stated bluntly that commercial-bank involvement in securities had made “one of the greatest contributions to the unprecedented disaster which has caused this almost incurable depression.” 75 Cong. Rec. 9887 (1932).

Congressional worries about commercial-bank involvement in investment-bank activities reflected two general concerns. The first was the inherent risks of the securities business. Speculation in securities by banks and their affiliates during the speculative fever of the 1920’s produced tremendous bank losses when the securities markets went sour.⁴ In addition to the palpable effect that such losses had on the assets of affected banks, they also eroded the confidence of depositors in the safety of banks as depository institutions. This crisis of confidence contributed to the runs on the banks that proved so devastating to the solvency of many commercial banks.

But the dangers that Congress sought to eliminate through the Act were considerably more than the obvious risk that a bank could lose money by imprudent investment of its funds in speculative securities. The legislative history of the Act shows that Congress also focused on “the more subtle hazards that arise when a commercial bank goes beyond the business of acting as fiduciary or managing agent and enters the investment banking business.” Camp, 401 U. S., at 630. The Glass-Steagall Act reflects the 1933 Congress’ conclusion that certain investment-banking activities conflicted in fundamental ways with the institutional role of commercial banks.

The Act’s legislative history is replete with references to the various conflicts of interest that Congress feared to be present when a single institution is involved in both investment and commercial banking. Congress observed that commercial bankers serve as an important source of financial advice for their clients. They routinely advise clients on a variety of financial matters such as whether and how best to issue equity or debt securities. Congress concluded that it was unrealistic to expect a banker to give impartial advice about such matters if he stands to realize a profit from the underwriting or distribution of securities. See, e. g., 75 Cong. Rec. 9912 (1932) (remarks of Sen. Bulkley). Some legislators noted that this conflict is exacerbated by the considerable fixed cost that a securities dealer must incur to build and maintain a securities-distribution system. Explaining this concern, Senator Bulkley, a major sponsor of the Act, described the pressures that commercial banks had experienced through their involvement in the distribution of securities:

“In order to be efficient a securities department had to be developed; it had to have salesmen; and it had to have correspondent connections with smaller banks throughout the territory tributary to the great bank. Organizations were developed with enthusiasm and with efficiency. . . . But the sales departments were subject to fixed expenses which could not be reduced without the danger of so disrupting the organization as to put the institution at a disadvantage in competition with rival institutions. These expenses would turn the operation very quickly from a profit to a loss if there were not sufficient originations and underwritings to keep the sales departments busy.” Id., at 9911.

Congress also expressed concern that the involvement of a commercial bank in particular securities could compromise the objectivity of the bank’s lending operations. Congress feared that the pressure to dispose of an issue of securities successfully might lead a bank to use its credit facilities to shore up a company whose securities the bank sought to distribute. See 1931 Hearings, pt. 7, p. 1064. Some in Congress feared that a bank might even make unsound loans to companies in whose securities the bank has a stake or to a purchaser of securities that the bank seeks to distribute. Ibid. Alternatively, a bank with loans outstanding to a company might encourage the company to issue securities through the bank’s distribution system in order to obtain the funds needed to repay bank loans. 75 Cong. Rec. 9912 (1932) (remarks of Sen. Bulkley). Congress also faced some evidence that banks had misused their trust departments to unload excessive holdings of undesirable securities. Camp, 401 U. S., at 633; 1931 Hearings, pt. 1, p. 237.

The Act’s design reflects the congressional perception that certain investment-banking activities are fundamentally incompatible with commercial banking. After hearing much testimony concerning the appropriate form of a legislative response to the problems,⁵ Congress rejected the view of those who preferred legislation that simply would regulate the underwriting activities of commercial banks. Congress chose instead a broad structural approach that would “surround the banking business with sound rules which recognize the imperfection of human nature that our bankers may not be led into temptation, the evil effect of which is sometimes so subtle as not to be easily recognized by the most honorable man.” 75 Cong. Rec. 9912 (1932) (remarks of Sen. Bulkley). Through flat prohibitions, the Act sought to “separate] as completely as possible commercial from investment banking.” Board of Governors of Federal Reserve System v. Investment Company Institute, 450 U. S. 46, 70 (1981) (ICI).⁶ Such an approach was not without costs in terms of efficiency and competition, but the Act reflects the view that the subtle risks created by mixing the two activities justified a strong prophylaxis. Camp, 401 U. S., at 630.

B

Sections 16 and 21 of the Act are the principal provisions that demarcate the line separating commercial and investment banking. Section 16 limits the involvement of a commercial bank in the “business of dealing in stock and securities” and prohibits a national bank from buying securities, other than “investment securities,” for its own account. 12 U. S. C. §24 Seventh. In addition, the section includes the general provision that a national bank “shall not underwrite any issue of securities or stock.” Section 5(c) of the Act, 12 U. S. C. §335, makes §16’s limitations applicable to state banks that are members of the Federal Reserve System. It is therefore clear that Bankers Trust may not underwrite commercial paper if commercial paper is a “security” within the meaning of the Act.

Section 21 also separates investment and commercial banks, but does so from the perspective of investment banks. Congress designed § 21 to prevent persons engaged in specified investment-banking activities from entering the commercial-banking business. The section prohibits any person “engaged in the business of issuing, underwriting, selling, or distributing . . . stocks, bonds, debentures, notes, or other securities” from receiving deposits. Bankers Trust receives deposits, and it therefore is clear that § 21’s prohibitions apply to it.

Because § 16 and § 21 seek to draw the same line, the parties agree that the underwriting prohibitions described in the two sections are coextensive, and we shall assume that to be the case. In any event, because both § 16 and § 21 apply to Bankers Trust, its activities in this case are unlawful if prohibited by either section. The language of §21 is perhaps the more helpful, however, because that section describes in greater detail the particular activities of investment banking that Congress found inconsistent with the activity of commercial banks.

It is common ground that the terms “stocks,” “bonds,” and “debentures” do not encompass commercial paper. The dispute in this case focuses instead on petitioners’ claims that commercial paper constitutes a “note” within the meaning of § 21, and, if not, that it is nevertheless encompassed within the inclusive term “other securities.” Thus, petitioners claim that the plain language of the Act makes untenable the Board’s conclusion that commercial paper is not a “security” within the meaning of the Act. Petitioners contend further that the role played by Bankers Trust in placing the commercial paper of third parties is precisely what the Glass-Steagall Act sought to prohibit.

C

Neither the term “notes” nor the term “other securities” is defined by the statute. “This silence compels us to 'start with the assumption that the legislative purpose is expressed by the ordinary meaning of the words used.’” Russello v. United States, 464 U. S. 16, 21 (1983), quoting Richards v. United States, 369 U. S. 1, 9 (1962). Respondents do not dispute that commercial paper consists of unsecured promissory notes and falls within the general meaning of the term “notes.” See Board Statement, App. 131A; see also Brief for Respondents 2. Respondents assert, however, that the context in which the term is used suggests that Congress intended a narrower definition. Because the term appears in a phrase that includes “stocks, bonds, [and] debentures,” the Board insists that the Act’s prohibitions apply only to “notes [and] other securities” that resemble the enumerated financial instruments. The Board’s position seems to be that because “stocks, bonds, [and] debentures” normally are considered “investments,” the Act is meant to prohibit the underwriting of only those notes that “shar[e] that characteristic of an investment that is the common feature of each of the other enumerated instruments.” Brief for Respondents 23. Applying that criterion to commercial paper, the Board maintains that commercial paper more closely resembles a commercial loan and that it is therefore not an investment of the kind that qualifies as a “security” under the Act.

For a variety of reasons, we find unpersuasive the notion that Congress used the terms “notes ... or other securities” in the narrow sense that respondents suggest. First, the Court noted in Camp that “there is nothing in the phrasing of either § 16 or § 21 that suggests a narrow reading of the word ‘securities.’ To the contrary, the breadth of the term is implicit in the fact that the antecedent statutory language encompasses not only equity securities but also securities representing debt.” 401 U. S., at 635.

There is, moreover, considerable evidence to indicate that the ordinary meaning of the terms “security” and “note” as used by the 1933 Congress encompasses commercial paper. Congress enacted the Glass-Steagall Act as one of several pieces of legislation collectively designed to restore public confidence in financial markets. See the Banking Act of 1933, ch. 89, 48 Stat. 162 (codified as amended in scattered sections of 12 U. S. C.); the Securities Act of 1933, 48 Stat. 74, 15 U. S. C. §77a et seq.; the Securities Exchange Act of 1934, 48 Stat. 881, 15 U. S. C. §78a et seq.; and the Public Utility Holding Company Act of 1935, 49 Stat. 803, 15 U. S. C. §79a et seq. In each of these other statutes, the definition of the term “security” includes commercial paper, and each statute contains explicit exceptions where Congress meant for the provisions of an Act not to apply to commercial paper.⁷ These explicit exceptions demonstrate congressional cognizance of commercial paper and Congress’ understanding that, unless modified, the use of the term “security” encompasses it.

The Securities Act of 1933, for example, defines the term “security” to include “any note.” 15 U. S. C. §77b(1). During the hearings on that Act, Senator Glass expressed dissatisfaction with that definition because it plainly did encompass commercial paper. With the support of the Board, he sought to amend the definition of the term to exclude commercial paper,⁸ but Congress chose instead to exempt commercial paper from only the registration requirements of the statute, see 15 U. S. C. §77c(a)(3),⁹ while preserving application of the statute’s antifraud provisions to all commercial-paper “securities.” §§77i, 77q(c). Congress passed the Glass-Steagall Act two weeks later, and throughout consideration of that Act by the same Committees of the same Congress, the eponymous Senator Glass displayed no similar concern over the ordinary meaning of the broad phrase “notes ... or other securities” in §21.

The difficulty with the Board’s attempt to narrow the ordinary meaning of the statutory language is evidenced by the Board’s unsuccessful efforts to articulate a meaningful distinction between notes that the Act purportedly covers and those it does not. In other statutes in which commercial paper is exempted from securities regulation, Congress either has identified a particular feature, such as maturity period, that defines the exempted class of “notes,” or it has authorized a federal agency to define it through regulation. See n. 7, supra. The Glass-Steagall Act does neither, and the efforts by the Board and the Court of Appeals to provide a workable definition that excludes commercial paper have been fraught with uncertainty and inconsistency. The Court of Appeals concluded that the Act applies only to notes that are issued “to raise money available for an extended period of time as part of the corporation’s capital structure.” 693 F. 2d, at 143. It is not clear that such a distinction finds support even with reference to the statutory language from which it purportedly derives. There is no requirement, for example, that stocks, bonds, and debentures be used only to meet the capital requirements of a corporation, and, even if there were, the legislative history provides little evidence to suggest that such a distinction was one that Congress found significant.

The Board, in contrast, seems to have concluded that a note is covered by the Act only if the note is properly viewed as an “investment.” The Board contends that this approach requires it to consider a “cluster” of the note’s features, see Brief for Respondents 34, n. 60, such as its maturity period, its risk features, and its prospective purchasers. Stocks, bonds, and debentures display a wide range of each of these characteristics, however, and the Act’s underwriting prohibition does not demonstrate any sensitivity to the characteristics of a particular issue; the Act simply prohibits commercial banks from underwriting them all. Without some clearer directive from Congress that it intended the statutory terms to involve the nebulous inquiry described by the Board, we cannot endorse the Board’s departure from the literal meaning of the Act. The Court, in another context, has said pertinently: “Had Congress intended so fundamental a distinction, it would have expressed that intent clearly in the statutory language or the legislative history. It did not do so, however, and it is not this Court’s function ‘to sit as a super-legislature,’ Griswold v. Connecticut, 381 U. S. 479, 482 (1965), and create statutory distinctions where none were intended.” American Tobacco Co. v. Patterson, 456 U. S. 63, 72, n. 6 (1982).

In this respect, we find ourselves in substantial agreement with petitioners’ suggestion that the Board’s interpretation effectively converts a portion of the Act’s broad prohibition into a system of administrative regulation. By concluding that commercial paper is not covered by the Act, the Board in effect has obtained authority to regulate the marketing of commercial paper under its general supervisory power over member banks. The Board acknowledges that “the sale of third party commercial paper by a commercial bank could involve, at least in some circumstances, practices that are not consistent with principles of safe banking.” Board Statement, App. 141A. In response to these concerns, the Board issued guidelines for state member banks explaining the circumstances in which they properly may place the commercial paper of third parties. See n. 2, supra.

Although the guidelines may be a sufficient regulatory response to the potential problems, Congress rejected a regulatory approach when it drafted the statute, and it has adhered to that rejection ever since. In 1935, for example, Congress refused to amend the Act to permit “national banks under regulations by the Comptroller of the Currency ... to underwrite and sell bonds, debentures, and notes.” H. R. Conf. Rep. No. 1822, 74th Cong., 1st Sess., 53 (1935). As recently as 1980, Congress extended to the Comptroller of the Currency authority to issue such rules as were needed to “carry out the responsibilities of the office,” but expressly continued to withhold from the Comptroller the authority to issue regulations concerning “securities activities of National Banks under the Act commonly known as the ‘Glass-Steagall Act.’ ” Depository Institutions Deregulation and Monetary Control Act of 1980, § 708, 94 Stat. 188, 12 U. S. C. § 93a. When Congress has concluded that a particular form of notes should not be covered by the Act’s prohibitions, it has amended the statute accordingly. See Banking Act of 1935, § 303(a), 49 Stat. 707, 12 U. S. C. § 378(a)(1) (exempting mortgage notes from the coverage of § 21). In the face of Congress’ refusal to give the Board any rulemaking authority over the activities prohibited by the Act, we find it difficult to imagine that Congress intended the Board to engage in the subtle and ad hoc “functional analysis” described by the Board.

D

By focusing entirely on the nature of the financial instrument and ignoring the role of the bank in the transaction, moreover, the Board’s “functional analysis” misapprehends Congress’ concerns with commercial bank involvement in marketing securities. Both the Board and the Court of Appeals emphasized that Congress designed the Act to prevent future bank losses arising out of investments in speculative, long-term investments. This description of the Act’s underlying concerns is perhaps accurate but somewhat incomplete. “[I]n enacting the Glass-Steagall Act, Congress contemplated other hazards in addition to the danger of banks using bank assets in imprudent securities investments.” ICI, 450 U. S., at 66. The concern about commercial-bank underwriting activities derived from the perception that the role of a bank as a promoter of securities was fundamentally incompatible with its role as a disinterested lender and adviser. This Court explained in Camp:

“In sum, Congress acted to keep commercial banks out of the investment banking business largely because it believed that the promotional incentives of investment banking and the investment banker’s pecuniary stake in the success of particular investment opportunities was destructive of prudent and disinterested commercial banking and of public confidence in the commercial banking system.” 401 U. S., at 634.

At the administrative level, the Board expressly chose not to consider whether these concerns are present when a commercial bank has a pecuniary interest in promoting commercial paper. Board Statement, App. 140A. Although the Board indicates before this Court that such activities do not implicate the concerns of the Act, we are unpersuaded by this belated assertion. In adopting the Act, for example, Congress concluded that a bank’s “salesman’s interest” in an offering “might impair its ability to function as an impartial source of credit.” Camp, 401 U. S., at 631. In the commercial-paper market, where the distribution of an issue depends heavily on the creditworthiness of the issuer, a bank presumably can enhance the marketability of an issue by extending backup credit to the issuer. Similarly, as a commercial bank finds itself in direct competition with other commercial-paper dealers, it may feel pressure to purchase unsold notes in order to demonstrate the reliability of its distribution system, even if the paper does not meet the bank’s normal credit standards. Recognizing these pressures, this Court stated in Camp: “When a bank puts itself in competition with [securities dealers], the bank must make an accommodation to the kind of ground rules that Congress firmly concluded could not be prudently mixed with the business of commercial banking.” Id., at 637.

The 1933 Congress also was concerned that banks might use their relationships with depositors to facilitate the distribution of securities in which the bank has an interest, and that the bank’s depositors might lose confidence in the bank if the issuer should default on its obligations. See id., at 631; 1931 Hearings, pt. 7, p. 1064. This concern would appear fully applicable to commercial-paper sales, because banks presumably will use their depositor lists as a prime source of customers for such sales. To the extent that a bank sells commercial paper to large bank depositors, the result of a loss of confidence in the bank would be especially severe.

By giving banks a pecuniary incentive in the marketing of a particular security, commercial-bank dealing in commercial paper also seems to produce precisely the conflict of interest that Congress feared would impair a commercial bank’s ability to act as a source of disinterested financial advice. Senator Bulkley, during the debates on the Act, explained:

“Obviously, the banker who has nothing to sell to his depositors is much better qualified to advise disinterestedly and to regard diligently the safety of depositors than the banker who uses the list of depositors in his savings department to distribute circulars concerning the advantages of this, that, or the other investment on which the bank is to receive an originating profit or an underwriting profit or a distribution profit or a trading profit or any combination of such profits.” 75 Cong. Ree. 9912 (1932).

This conflict of interest becomes especially acute if a bank decides to distribute commercial paper on behalf of an issuer who intends to use the proceeds of the offering to retire a debt that the issuer owes the bank.

In addressing these concerns before this Court, the Board focuses primarily on the extremely low rate of default on prime-quality commercial paper. We do not doubt that the risk of default with commercial paper is relatively low — lower perhaps than with many bank loans. For several reasons, however, we find reliance on this characteristic misplaced. First, it is not clear that the Board’s exemption of commercial paper from the proscriptions of the Act is limited to commercial paper that is “prime.” The statutory language admits of no distinction in this respect, and the logic of the Board’s opinion must exempt all commercial paper from the prohibition on underwriting by commercial banks. Second, as described above, it appears that a bank can make a particular issue “prime” simply by extending backup credit to the issuer. Such a practice would seem to fit squarely within Congress’ concern that banks would use their credit facilities to aid in the distribution of securities.

More importantly, however, there is little evidence to suggest that Congress intended the Act’s prohibitions on underwriting to depend on the safety of particular securities. Stocks, bonds, and debentures exhibit the full range of risk; some are less risky than many of the loans made by a bank. And while the risk features of a security presumably affect whether it qualifies as an “investment security” that a commercial bank may purchase for its own account,¹⁰ the Act’s underwriting prohibition displays no appreciation for the features of a particular issue; the Act just prohibits commercial banks from underwriting any of them, with an exception for certain enumerated governmental obligations that Congress specifically has chosen to favor. See 12 U. S. C. §24 Seventh. The Act’s prophylactic prohibition on underwriting reflects Congress’ conclusion that the mere existence of a securities operation, “ ‘no matter how carefully and conservatively run, is inconsistent with the best interests’” of the bank as a whole. 75 Cong. Rec. 9913 (1932) (remarks of Sen. Bulkley, quoting a statement issued by the Bank of Manhattan Trust Co.).

In this regard, the Board’s focus on the fact that commercial banks traditionally have acquired commercial paper for their own accounts is beside the point. It is clearly true, as the Board asserts before this Court, that Congress designed the Glass-Steagall Act to cause banks to invest more of their funds in short-term obligations like commercial paper instead of in longer term and more speculative securities. By so doing, Congress hoped to enhance the liquidity of funds and protect bank solvency. But the authority to discount commercial paper is very different from the authority to underwrite it. The former places banks in their traditional role as a prudent lender. The latter places a commercial bank in the role of an investment banker, which is precisely what Congress sought to prohibit in the Act.¹¹ See Note, A Conduct-Oriented Approach to the Glass-Steagall Act, 91 Yale L. J. 102 (1981); Comment, 9 J. Corp. L. 321 (1984).

The Board also seeks comfort in the fact that commercial paper is sold largely to “sophisticated” investors. Once again, however, the Act leaves little room for such an ad hoc analysis. In its prohibition on commercial-bank underwriting, the Act admits of no exception according to the particular investment expertise of the customer. The Act’s prohibition on underwriting is a flat prohibition that applies to sales to both the knowledgeable and the naive. Congress expressed concern that commercial-bank involvement in securities operations threatened the ability of commercial banks to act as “financial confidant and mentor” for both “the poor widow” and “the great corporation.” 75 Cong. Rec. 9912 (1932) (remarks of Sen. Bulkley). Even if purchaser-sophistication is relevant under the Act, moreover, it is not clear that commercial paper is sold only in large denominations, see Hicks, Commercial Paper: An Exempted Security Under Section 3(a)(3) of the Securities Act of 1933, 24 UCLA L. Rev. 227, 234, and n. 30 (1976), or only to sophisticated investors. See Sanders v. John Nuveen & Co., 524 F. 2d 1064 (CA7 1975), vacated and remanded, 425 U. S. 929 (1976).

Finally, it is certainly not without some significance that Bankers Trust’s commercial-paper placement activities appear to be the first of that kind since the passage of the Act. The history of commercial-bank involvement in commercial paper prior to the Act is not well documented; evidently, commercial banks occasionally dealt in commercial paper, but their involvement was overwhelmingly in the role of discounter rather than dealer. See R. Foulke, The Commercial Paper Market 108 (1931); A. Greef, The Commercial Paper House in the United States 63, 403-405 (1938). Since enactment of the Act, however, there is no evidence of commercial-bank participation in the commercial-paper market as a dealer. The Board has not offered any explanation as to why commercial banks in the past have not ventured to test the limits of the Act’s prohibitions on underwriting activities. Although such behavior is far from conclusive, it does support the view that when Congress sought to “separate] as completely as possible commercial from investment banking,” ICI, 450 U. S., at 70, the banks regulated by the Act universally recognized that underwriting¹² commercial paper falls on the investment-banking side of the line.

> HH

For the foregoing reasons, the judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion.

It is so ordered.

1 “Commercial paper” refers generally to unsecured, short-term promissory notes issued by commercial entities. Such a note is payable to the bearer on a stated maturity date. Maturities vary considerably, but typically are less than nine months. See generally Hurley, The Commercial Paper Market, 63 Fed. Res. Bull. 525 (1977); Comment, The Commercial Paper Market and the Securities Acts, 39 U. Chi. L. Rev. 362, 363-364 (1972).

2 Despite this conclusion, the Board responded to concerns that activity similar to that of Bankers Trust might give rise to the problems that the Act sought to avoid, and issued a policy statement with “guidelines” imposing conditions as to when state member banks may sell third-party commercial paper. See 46 Fed. Reg. 29333 (1981). The Board issued these guidelines pursuant to its supervisory authority over state member banks under §§ 9 and 11 of the Federal Reserve Act, 38 Stat. 259 and 261, as amended, 12 U. S. C. §§248, 321-338, and §202 of the Financial Institutions Supervisory Act of 1966, 80 Stat. 1046, as amended, 12 U. S. C. § 1818(b).

3 Several Members of Congress expressed the view that the securities activities of bank affiliates were unlawful because they were not authorized by the federal charters under which national banks operated or by the state charters under which state banks operated. See 75 Cong. Rec. 9887-9888 (1932) (remarks of Sen. Glass); id., at 9911 (remarks of Sen. Bulkley).

4 The failure of the Bank of the United States, for example, was attributed largely to that bank’s activities with respect to its numerous securities affiliates. Operation of the National and Federal Reserve Banking Systems: Hearings pursuant to S. Res. 71 before a Subcommittee of the Senate Committee on Banking and Currency, 71st Cong., 3d Sess., pts. 1, 7, pp. 116-117, 1017, 1068 (1931) (1931 Hearings).

5 See 1931 Hearings, pt. 1, pp. 19-22 (testimony of J. Pole, Comptroller of the Currency); id., at 191-192 (testimony of A. Wiggin, chairman, Chase National Bank); id., at 238-241 (testimony of B. Trafford, vice chairman, First National Bank of Boston); id., pt. 2, pp. 301-304, 318 (testimony of C. Mitchell, chairman, National City Bank of New York); id., at 356,364-365 (testimony of 0. Young, chairman, General Electric Co.); id., pt. 3, at 539 (testimony of A. Pope, executive vice president, First National Old Colony COrp.).

6 We recognize, of course, that there are some activities, such as the safekeeping of securities for customers, in which Congress concluded that both commercial and investment banks may safely engage. The Act merely reflects Congress’ view that those investment-banking activities that it determined to be incompatible with prudent commercial banking, such as underwriting securities, created risks that were so subtle as to justify a broad prohibition.

7 See 15 U. S. C. § 77c(a)(3) (exempting certain “note[s]” with maturities of less than nine months from the definition of “security” for certain provisions of the Securities Act of 1933); 15 U. S. C. § 78c(a)(10) (exempting certain “note[s]” with maturities of less than nine months from the definition of “security” under the Securities Exchange Act of 1934); 15 U. S. C. §79i(e)(3) (exempting “commercial paper and other securities” specified by the Securities and Exchange Commission from the Public Utility Holding Company Act’s restriction prohibiting acquisition by a holding company of “securities”).

8 See Securities Act: Hearings on S. 875 before the Senate Committee on Banking and Currency, 73d Cong., 1st Sess., 98, 120 (1933); see also Federal Securities Act: Hearings on H. R. 4314 before the House Committee on Interstate and Foreign Commerce, 73d Cong., 1st Sess., 180-181 (1933).

9 It is significant that the exemption for commercial paper is described using the term “note,” plainly indicating that Congress understood the ordinary meaning of that term to encompass commercial paper.

10 It is clear that Congress’ concern with commercial-bank purchases of securities was different from its concern about commercial-bank involvement in securities underwriting activities. In 1938 Congress refused to report out of committee legislation that would have allowed national banks to “underwrite or participate in the underwriting of new issues of such securities as [they] may otherwise lawfully purchase for its own account.” H. R. 9441, § 1(b), 75th Cong., 3d Sess. (1938).

11 The Board makes an additional argument based on § 16’s restrictions on securities purchases by commercial banks. Section 16 prohibits commercial banks from “dealing in securities” on their own account altogether, and permits them to “purchase for [their] own account” only “investment securities,” The Board argues that commercial paper does not constitute an “investment security” within the meaning of that term in § 16, and hence that § 16 would not permit commercial banks to purchase commercial paper for their own account if commercial paper were classified as a “security.” Because commercial banks traditionally have acquired commercial paper for their own account, and because that practice universally has been assumed not to run afoul of the Glass-Steagall Act, the Board argues that the practice cannot be reconciled with § 16 unless commercial paper is not deemed a “security.” See Brief for Respondents 17-18, 26-30.

Even if the Board is correct that commercial paper is not an “investment security” under § 16, something that we need not decide, we find the Board’s argument unpersuasive because it rests on the faulty premise that the process of acquiring commercial paper necessarily constitutes “the business of dealing” in securities. The underlying source of authority for national banks to conduct business is the first sentence of § 16, which originated as § 8 of the National Bank Act of 1864, ch. 106, 13 Stat. 101. That provision grants national banks the authority to exercise “all such incidental powers as shall be necessary to carry on the business of banking” and enumerates five constituent powers that constitute “the business of banking. ” One of those powers is “discounting and negotiating promissory notes.” 12 U. S. C. §24 Seventh. The Board appears to concede that the authority for national banks to acquire commercial paper is grounded in this authorization to discount promissory notes. See Brief for Respondents 18, n. 25. The subsequent prohibition on engaging in “[t]he business of dealing in securities” does not affect this authority; while the Glass-Steagall Act does not define the term “business of dealing” in securities, the term clearly does not include the activity of “discounting” promissory notes because that activity is defined to be a part of the “business of banking.” In short, the fact that commercial banks properly are free to acquire commercial paper for their own account implies not that commercial paper is not a “security,” but simply that the process of extending credit by “discounting” commercial paper is not part of the “business of dealing” in securities.

12 Because of its conclusion that the commercial paper in this case was not a “security” under the Act, the Court of Appeals did not consider whether the activity of Bankers Trust constitutes “underwriting” within the meaning of § 16, or “the business of issuing, underwriting, selling, or distributing” within the meaning of § 21. We express no opinion on these matters, leaving them to be decided on remand.