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No. 24-2355
IN THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
PAYSERVICES BANK,
Plaintiff-Appellant,
v.
FEDERAL RESERVE BANK OF SAN FRANCISCO,
Defendant-Appellee.
On Appeal from the United States District Court
for the District of Idaho
No. 1:23-cv-305
BRIEF FOR AMICUS CURIAE BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
Mark Van Der Weide, General Counsel
Richard M. Ashton, Deputy General Counsel
Joshua P. Chadwick, Senior Special Counsel
Katherine Pomeroy, Senior Counsel
Board of Governors of the Federal Reserve System
20th Street & Constitution Avenue, N.W.
Washington, D.C. 20551
(202) 912-4329
Attorneys for Amicus Curiae Board of Governors of
the Federal Reserve System
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TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES ..................................................................... iii
INTEREST OF AMICUS CURIAE ............................................................l
ARGUMENT ...............................................................................................l
I. THE BOARD DID NOT DELEGATE MASTER ACCOUNT
AUTHORITY TO RESERVE BANKS .............................................. 4
A. Congress granted the authority to open and manage
accounts held by depository institutions directly to
Reserve Banks .......................................................................... 4
B. The Board's master account Guidelines do not reflect a
delegation of Board authority .................................................. 7
11. RESERVE BANKS HAVE ALWAYS ASSESSED RISKS
WHEN PROVIDING ACCOUNTS AND SERVICES TO
DEPOSITORY INSTITUTIONS....................................................... 9
A. Reserve Banks consistently exercised discretion over
access to accounts and services between 1913 and
1980......................................................................................... 1 0
B. Reserve Banks have continued to exercise discretion
over accounts and services for all institutions
between the enactment of the Monetary Control Act
in 1980 and the present ......................................................... 1 5
111. ELIMINATING RESERVE BANK DISCRETION RISKS
SUBSTANTIAL NEGATIVE IMPACT TO THE FINANCIAL
SYSTEM .......................................................................................... 22
CONCLUSION ......................................................................................... 26
i
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CERTIFICATE OF COMPLIANCE
CERTIFICATE OF SERVICE
ii
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TABLE OF AUTHORITIES
Page
Cases
Bar co San Juan Internacional, Inc. U. Federal Reserve Bank of New
York, No. 23-cv-6414, 2023 WL 7111182
(S.D.N.Y. Oct. 27, 2023) ........................................ 2,5,21,24,25,26
Bank Stationers Association, Inc. U. Board of Governors of the Federal
Reserve System, 704 F.2d 1233 (llth Cir. 1983) ........................... 17
Custodia Bank, Inc. U. Federal Reserve Board of Governors,
No. l:22-cv-125, 2024 WL 1788900
(D. Wyo. Mar. 29, 2024) .......................................................... 2, 5, 22
Farmers & Merchants Bank U. Federal Reserve Bank of Richmond,
262 U.S. 649 (1923) ................................................................... II, 12
Federal Reserve Bank of St. Louis U. Metroeentre Improvement District,
492 F. Supp. 353 (ED. Ark. 1980) .................................................... 4
In re HSBC BANK USA, N.A., Debit Card Overdraft Fee Litigation,
l F. Supp. 3d 34 (E.D.N.Y. 2014)...................................................... 7
In re TD Bank, N.A.,
150 F. Supp. 3d 593 (D.S.C. 2015) .................................................... 6
Jet Courier Services, Inc. U. Federal Reserve Bank of Atlanta,
713 F.2d 1221 (6th Cir. 1983> .........................................................16
Statutes
12 U.S.C. § 24(first)-(seventh cl. l) ........................................................... 6
12 U.S.C. § 241-253 .................................................................................... 5
iii
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12 U.S.C. § 2486) ........................................................................................ 7
12 U.S.C. § 248(k) ....................................................................................... 7
12 U.S.C. § 248a........................................................................................ 22
12 U.S.C. § 248a(a) ..................................................................................... 5
12 U.S.C. § 2480 ........................................................................................ 22
12 U.S.C. § 248c(b)(1) ............................................................................... 21
12 U.S.C. § 248c(b)(1)(B)(ii)...................................................................... 22
12 U.S.C. § 248c(3)...................................................................................... 5
12 U.S.C. § 301............................................................................................ 6
12 U.S.C. § 321.......................................................................................... I I
12 U.S.C. § 341(first)-(seventh) ................................................................. 6
12 U.S.C. § 341(sixth) ................................................................................. 6
12 U.S.C. § 341(seventh) ............................................................................ 6
12 U.S.C. §§ 341-361................................................................................... 5
12 U.S.C. § 342........................................................................ 2, 4, 5, 10, 20
12 U.S.C. § 343............................................................................................ 4
12 U.S.C. § 347............................................................................................ 4
12 U.S.C. § 3470 .......................................................................................... 4
12 U.S.C. § 347d ......................................................................................... 4
iv
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12 U.S.C. § 3554> ....................................................................................... 4
Idaho Stat. § 28-3-102(3> .......................................................................... 1 9
Idaho Stat. § 28-4-103(3) .......................................................................... 1 9
Idaho Stat. § 28-4-607 .............................................................................. 1 9
U.C.C. § 3-l02(c) ....................................................................................... 1 9
U.C.C. § 4-l03(c) .................................................................................19, 20
U.C.C. § 4A-107 ........................................................................................ 1 9
Federal Reserve Act of 1913, 12 U.S.C. § 221 et seq,
Pub. L. No. 63-43, 38 Stat. 251 ..................................................... 2, 9
Pub. L. No. 63-43, 38 Stat. 251, 263 ............................................... 10
Pub. L. No. 63-43, § 9, 38 Stat. 251, 259 ........................................ I I
Pub. L. No. 65-25, § 4, 40 Stat. 232, 234-35 ................................... I I
International Banking Center Regulatory Act,
Puerto Rico Act No. 52-1989 (Aug. II, 1989) https://bvirtualogp.
pr. gov/0gp/Bvirtual/leyesreferencia/PDF/Y%20- %20Ing1% (13%
A9s/52-l989.pdf ............................................................................... 25
Monetary Control Act of 1980, Pub. L. No. 96-221,
94 Stat. 132 ...................................................... 2, 9, II, 15, 16, 17, 24
Riegle-Neal Interstate Banking and Branch Efficiency Act of 1994,
Pub. L. No. 103-328, 108 Stat. 2338 ............................................... 2 4
Rules
Fed. R. App. P. 29(a)(2) .............................................................................. l
V
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Regulatory Materials
Guidelines for Evaluating Account and Services Requests,
86 Fed. Reg. 25,865 (May II, 2021) (Proposal) ............................ 7, 8
87 Fed. Reg. 12,957 (Mar. 8, 2022) (Supplemental Notice).. .7
87 Fed. Reg. 51,099 (Aug. 19, 2022) (Guidelines) .. .7, 8, 9, 20, 21
Policy Statement Regarding Risks on Large-Dollar Wire
Transfer Systems, 50 Fed. Reg. 21,120 (May 22, 1985) . .17, 18
Other Authorities
Board of Governors of the Federal Reserve System, Minutes of Board
Meeting (July 26, 1945), https://fraser.stlouisfed.org/files/docs/
historica1/nara/bog_minutes/l9450726_Minutes.pdf ..................... 14
Board of Governors of the Federal Reserve System, Federal Reserve
Bulletin (February 1964), https://fraser.stlouisfed.org/title/federal-
reserve-bulletin-62/february-l964-21350................................. 14, 15
Chester Morrill, Secretary, Board of Governors of the Federal Reserve
System, Nonmember Bank Clearing Accounts, Letter X-9187
(April 26, 1935), https://fraser.stlouisfed.org/archival-collection/
mimeograplrletters-statements-board-4957/letter-secretary
morrill-re-nonmember-bank-clearing accounts-505912 12, 13, 14
Department of the Treasury, National Money Laundering Risk
Assessment (Feb. 2022), https://home.treasury.gov/system/files/
l36/2022-National-MoneyLaundering-Risk-Assessment.pdf ......25
Federal Deposit Insurance Corporation, The Banking Crises of the
1980s and Early 1 .9.90s.° Summary and Implications,
https://www.fdic.gov/bank/historical/history/3_85.pdf .. .24
Federal Reserve Bank Operating Circular l, Account Relationships
(Jan. 2, 1998) web.archive.org/web/20000116011948/http://
www.frbservices.org/Industry/pdf/Ocl.pdf ............................... 18, 19
vi
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Federal Reserve Bank Operating Circular l, Account Relationships
(Sept. l, 2023) https://www.frbservices.org/binaries/content/assets/
crsocms/resources/rules-regulations/090l23-operating-circular-
l.pdf ..................................................................................................19
H.R. Report No. 69, 63d Cong., 1st Sess. 16 (1913) .................................. 4
Julie Andersen Hill, Bank Access to Federal Reserve Accounts and
Payment Systems, 2022 draft
No. 1:22-cv-125 (D. Wyo.), ECF No. 160-1 .....................................16
Julie Andersen Hill, Opening a Federal Reserve Account,
40 Yale J. on Reg. 453 (2023) .......................................................... 1 6
Morgan Ricks, Professor, Expert Report
No. 1:22-cv-l25 (D. Wyo.), ECF No. 240-91 . .23, 24
Office of the Comptroller of the Currency, Interpretive Letter No. 1082,
2007 WL 5393636 (May 17, 2007) .................................................... 7
The Federal Reserve Board, Interstate Branching: New Account
Structure, https://www.federalreserve.gov/generalinfo/isb/
qandahtm ........................................................................................I I
The Federal Reserve System, The Fed Explained (l lth ed. Aug. 2021)
https://www.fede1ra11rese1rve.gov/aboutthefed/files/the-fed-
exp1ained.pdf#page=8 ....................................................................... 4
vii
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INTEREST OF AMICUS CURIAE
The Federal Reserve System is the nation's central bank and
consists of Amicus Curiae Board of Governors of the Federal Reserve
System ("Boalrd"), the Federal Open Market Committee, and twelve
regional Federal Reserve Banks that serve financial institutions in
their respective districts. The Board is responsible, inter alia, for
exercising general supervisory authority over Reserve Banks and for
promoting the health of the U.S. economy and the stability of the U.S.
financial system. As such, the Board has an interest in the proper
interpretation of the Federal Reserve Act and in ensuring that Reserve
Banks retain discretion over access to Reserve Bank accounts and
services given the substantial risks that such access may present to an
individual Reserve Bank, to the U.S. payment system, and to the
overall economy. The Board is authorized to file this Amicus Curiae
brief pursuant to Federal Rule of Appellate Procedure 29(a)(2) .
ARGUMENT
PayServices' extraordinary position in this case is that Federal
Reserve Banks are statutorily prohibited from conducting any risk
assessment of institutions seeking Reserve Bank accounts and services.
l
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This is entirely untenable and there is no evidence that Congress
intended such an anomalous result through the Monetary Control Act
("MCA") or otherwise. Three district courts have correctly held as such
in recent, well-reasoned decisions. First, a judge of the U.S. District
Court for the Southern District of New York carefully considered these
issues and held that, pursuant to the Federal Reserve Act ("FRA"),
"Federal reserve banks are authorized to maintain Master Accounts,
but are not required to do so." Bar co San Juan Internacional, Inc. U.
Fed. Reserve Bank ofN.Y No. 23-cv-6414, 2023 WL 7111182, at *l
(S.D.N.Y. Oct. 27, 2023) (citing 12 U.S.C. § 342). Second, a District of
Wyoming judge determined-after an extensive statutory analysis-
that "[t]he plain language of the relevant statutes can only reasonably
be read to give the Federal Reserve Banks discretion in granting or
denying requests for master accounts." Custodian Bank, Inc. U. Fed.
Reserve Bd. of Governors, No. 1:22-cv-125, 2024 WL 1788900, at *12 (D.
Wyo. Mar. 29, 2024). Finally, the district court in this case explained in
its careful and persuasive decision why Reserve Banks are authorized
(but not required) to open master accounts. ER 21-81.
2
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As these decisions make clear, neither the plain text of the MCA
nor its purpose-to improve the Federal Reserve's control of the money
supply-requires Reserve Banks to ignore risks to themselves, the
public, the financial system, or the economy in deference to any
individual institution. Rather, Reserve Banks must assess risk in their
provision of accounts and services to all institutions and PayServices'
contrary contention defies law, reason, and longstanding historical
precedent.
* * *
Because the brief of Appellee Federal Reserve Bank of San
Francisco ("FRBSF") correctly addresses the legal and statutory
interpretation questions relevant to this case, the Board limits its
participation to underscoring three points for the Court: (l) that
PayServices' repeated assertions that the Board "delegated" master
account decisions to Reserve Banks is erroneous; (2) that Reserve Banks
have, throughout their history, assessed risk in providing accounts and
services to depository institutions, and (3) that eliminating Reserve
Bank discretion would present substantial risk to the financial system.
3
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1. THE BOARD DID NOT DELEGATE MASTER ACCOUNT
AUTHORITY TO RESERVE BANKS
A. Congress granted the authority to open and manage
accounts held by depository institutions directly to
Reserve Banks
By Congressional design, Reserve Banks carry out a variety of
functions subject to the general supervisory authority of the Board. See
The Federal Reserve System, The Fed Explained 8, 10-11 (l lth ed. Aug.
2021) (the "Fed Explained").1 Most notably for present purposes,
Reserve Banks are expressly authorized by statute, not by Board
delegation, to perform various functions in their capacity as "bankers'
banks." Fed. Reserve Bank of St. Louis U. Metroeentre Improvement
Dist., 492 F. Supp. 353, 355 (ED. Ark. 1980) (quoting H.R. Report No.
69, 63d Cong., 1st Sess. 16 (l9l3)). These activities include check
clearing, wire transfers, automated clearing house ("ACH") services,
currency and coin services, and other services appurtenant to the
business of banking that Congress vested directly in the Reserve Banks.
See, et., 12 U.S.C. §§ 342, 343, 347, 3470, 347d, 355(1). As a federal
1 https://www.fedelra11reselrve.gov/aboutthefed/files/the-fed-explained.
pdf-#page=8.
4
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agency and not a bank, the Board lacks the ability to carry out such
functions .
Reserve Banks-not the Board as PayServices erroneously
contends, see Appellant Br. at 20, 28-are thus responsible for opening,
maintaining, and, when appropriate, terminating accounts (and
corresponding services) held by depository institutions. See 12 U.S.C.
§ 342 ("Any Federal reserve bank may receive from any of its member
banks, or other depository institutions, and from the United States,
deposits ...."); 12 U.S.C. § 248a(a) ("Federal Reserve bank selrvices"),
id. § 248c(3) ("reserue bank master account and services"); see also
Bar co San Juan, 2023 WL 7111182, at *l ("Congress authorized
Federal reserve banks to carry out certain banking functions ...
including the authority to accept or reject deposits from depository
institutions"); Custodia Bank, 2024 WL 1788900, at *6.2
2 Although the Board does not revisit FRBSF's careful and correct
statutory analysis here, it bears reiterating that the authority to accept
deposits (and therefore to open deposit accounts) is found in the section
of the FRA governing "Powers and Duties of Federal Reserve Banks"
rather than the section dedicated to the "Board of Governors of the
Federal Reserve System." Compare FRA Subchapter IX (12 U.S.C.
§§ 341-361), with Subchapter II (id. §§ 241-253).
5
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Consistent with the relevant statutory authorities, Reserve Banks
necessarily exercise their banking functions with due consideration of
attendant risks. See, et., 12 U.S.C. § 341 (sixth) (Reserve Banks "shall"
have the power to prescribe bylaws "regulating the manner in which its
general business may be conducted"); § 341 (seventh) (granting Reserve
Banks "such incidental powers as shall be necessary to carry on the
business of banking within the limitations prescribed by this chapter");
§ 301 (Reserve Banks "may, subject to the provisions of law and the
orders of the Board of Governors of the Federal Reserve System, extend
to each member bank such discounts, advancements, and
accommodations as may be safely and reasonably made" (emphases
added)).
Notably, the powers of Federal Reserve Banks under the FRA
were closely modeled on the powers granted to national banks (which
previously served some of the functions of Reserve Banks) under the
National Bank Act, compare, et., 12 U.S.C. § 24(first)-(seventh cl. 1)
with id. § 34l(first)-(seventh), and the power granted under the latter
act "to receive deposits" has likewise been construed as "discretionary."
In re TD Bank, N.A., 150 F. Supp. 3d 593, 611 (D.S.C. 2015) (quoting
6
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OCC Interp. Ltd. No. 1082, 2007 WL 5393636, at *2 (May 17, 2007)); In
re HSBC BANK USA, N.A., Debit Card Overdraft Fee Litig., l F. Supp.
3d 34, 45 (E.D.N.Y. 2014) (same). Risk assessment and mitigation is a
necessary feature of operations at both types of banks.
B. The Board's master account Guidelines do not reflect
a delegation of Board authority
Although the FRA does authorize the Board to delegate certain of
its functions to Reserve Banks, see 12 U.S.C. § 248(k), when Reserve
Banks exercise powers granted directly to them by Congress the Board
exercises only supervisory authority. It cannot make decisions
statutorily vested in Reserve Banks, though it may exercise its
oversight authority. See 12 U.S.C. § 2486). The Board routinely issues
guidance as part of this general supervision of Reserve Banks, and did
so with respect to Reserve Bank master accounts and services in August
2022 following two public notice and comment periods spanning fifteen
months. See 87 Fed. Reg. 51,099, Guidelines for Evaluating Account
and Services Requests ("Guidelines") (Aug. 19, 2022); 87 Fed. Reg.
12,957 (Mar. 8, 2022) (Supplemental Notice); 86 Fed. Reg. 25,865 (May
7
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II, 202 l) (Proposal). The Guidelines set forth six plrinciples3 for use in
access decisions and create a three-tiered review framework that "is
meant to serve as a guide to the level of due diligence and scrutiny to be
applied by Reserve Banks to different types of institutions." 87 Fed.
Reg. at 51,109.
The policy goals for issuing the Guidelines included "ensuring the
safety and soundness of the banking system" and "ensulr[ing] that
Reserve Banks evaluate a transparent and consistent set of factors
when reviewing requests for accounts and services." 86 Fed. Reg.
at 25,866. When proposing the Guidelines, the Board emphasized that
it would not disturb the Reserve Banks' "discretionary authority to
grant or deny [account] requests." Id. The final Guidelines state that
"[d]ecisions on individual requests for access to accounts and services
are made by the Reserve Bank in whose District the requestor is
3 The principles articulated in the Guidelines include legal eligibility
considerations; whether the provision of an account or services presents
or creates undue liquidity, credit, operational, settlement, Cyber or other
risks to the Reserve Bank, overall payment system, or the stability of
the U.S. financial system; whether such provision creates undue risk to
the overall economy by facilitating illicit activity such as money
laundering or terrorism financing; and that such provision should not
adversely affect the Federal Reserve's ability to implement monetary
policy. 87 Fed. Reg. at 51,107-09.
8
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located," and, consistent with the FRA, that Reserve Banks "retain the
discretion to deny a request for access to accounts and services where,
in the Reserve Bank's assessment, granting access to the institution
would pose risks that cannot be sufficiently mitigated." 87 Fed. Reg.
at 51,102, 51,106.
Thus, contrary to PayServices' entirely unsupported suggestion
that the "Guidelines indicate that the [Board] provided Reserve Banks
with the authority to deny master accounts on its behalf," Appellant Br.
at 28 (emphasis added), the Board did not-and could not-delegate
master account decision-making to the Reserve Banks.
11. RESERVE BANKS HAVE ALWAYS ASSESSED RISKS
WHEN PROVIDING ACCOUNTS AND SERVICES TO
DEPOSITORY INSTITUTIONS
Since the passage of the FRA in 1913, and continuing after the
enactment of the MCA in 1980, the Federal Reserve Banks have
considered risk in providing their banking services. While PayServices
discusses the concept of access to or availability of banking services,
(Appellant Br. at 32-37), such access to or availability of banking
services has never equated to an absolute, non-discretionary
requirement that Reserve Banks provide accounts and services to all
9
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requesting institutions, regardless of risk. This extraordinary position
defies common sense, the historical record, the text of the statute, and
the expectations of Congress.
A. Reserve Banks consistently exercised discretion over
access to accounts and services between 1913 and
1980
Since the enactment of the FRA, the Federal Reserve Banks have
exercised discretion in granting access to Reserve Bank accounts and
services. This longstanding exercise of discretion is rooted in Congress's
general grant of banking authority to Reserve Banks, see supra at 4-7,
as well as Section 13 of the FRA, which stated from its enactment in
1913 that Federal Reserve Banks "may receive" deposits from "member
banks." Pub. L. No. 63-43, 38 Stat. 251, 263 (currently codified at
12 U.S.C. § 342) (emphasis added). State-chartered banks became
"members" of the Federal Reserve System by "make[ing] application to
the reserve bank organization committee, and thereafter to the Federal
Reserve Board for the right to subscribe to the stock of the Federal
reserve bank organized or to be organized within the Federal reserve
district where the applicant is located," and the Federal Reserve could
decide membership based upon "such rules and regulations as it may
10
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prescribe." Pub. L. No. 63-43, § 9, 38 Stat. at 259 (currently codified at
12 U.S.C. § 321). In 1917, Congress amended Section 13 to allow limited
deposit-taking accounts "solely for the purposes of exchange or
collection" from "any nonmember bank or trust company." Pub. L.
No. 65-25, § 4, 40 Stat. 232, 234-35.4
In 1923, the Supreme Court had occasion to opine on the language
in Section 13 regarding check collection, and held that the language
granted Reserve Banks discretion. Specifically, in interpreting Section
l3's language that a Reserve Bank "may receive from any nonmember
bank ... deposits of checks ... payable upon presentation," the Court
rejected an argument that "the Federal Reserve Bank of Richmond is
obliged to receive for collection any check upon any North Carolina
state bank." Farmers & Merehs. Bank U. Fed. Reserve Bank of
4 These limited "exchange or collection" accounts established at Reserve
Banks pursuant to Section 13 were referred to as "clearing accounts."
Beginning in 1998, the Federal Reserve no longer used the term
"clearing account" and incorporated these accounts into its revised
"master account" structure. See Federal Reserve Board, Interstate
Branching: New Account Structure, available at https://www.federal
reserve.gov/generalinfo/isb/qanda.htm ("All credits and debits resulting
from the use of Federal Reserve services will be booked to this one
account."). This unified account structure was made possible by the
MCA's revision of FRA Section 13 to permit general deposit accounts for
non-member depository institutions.
II
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Richmond, 262 U.S. 649, 662 (1923). The Court noted that Congress
had from time to time enlarged "[t]he class of cases" to which the
Reserve Banks' authority to receive checks applied, "[b]ut in each
amendment, as in section 13, the words used were 'may receive'-words
of authorization merely." Id. The Court further observed that the FRA
"appears to have been drawn with great care. Throughout the act the
distinction is clearly made between what the [B]oa1rd and the Reserve
Banks 'shall' do and what they 'may' do." Id. at 663. The Court listed
twenty-one provisions of the original FRA where both "may" and "shall"
were used, and another seven where only "shall" was used, to illustrate
the precision Congress took in distinguishing actions the Board or
Reserve Banks were allowed to take from those they were required to
take. Id. at 663 n.6.
In 1935, a Reserve Bank raised with the Board "a question of
policy with respect to the circumstances and conditions under which
clearing accounts of nonmember banks should be accepted under the
authority of Section 13 of the Federal Reserve Act." Chester Morrill,
Secretary, Bd. of Governors of the Fed. Reserve Sys., Letter X-9187
12
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(Apr. 26, 1935), at 365.5 The Board surveyed Reserve Banks, and many
reported that they declined to open such accounts in various
circumstances. For example, the Federal Reserve Bank of Dallas
reported that "in considering an application from a nonmember bank to
become a clearing member we simply weigh all the facts." Id. at 371.
The Federal Reserve Bank of Minneapolis similarly indicated that it did
not automatically open clearing accounts for all nonmember banks: "We
have received a number of requests recently to open accounts for non-
member banks for the purpose of depositing idle funds with us.... We
have not accepted these accounts and have endeavored to restrict the
accounts to active non-member clearing accounts." Id. at 369. And the
Federal Reserve Bank of Philadelphia stated that, while it had opened
accounts for nonmembers in the past, it had stopped doing SO. The
Board in no way required that Reserve Banks open these accounts and
acknowledged that such decisions were left to the discretion of the
Reserve Banks, stating "it is the Board's view that requests for the
establishment of clearing accounts by non-member banks should be
5 Available at https://fraser.stlouisfed.org/archiva1-co11ection/
mimeograpbletters-statements-board4957/1etter-secretary-morrill-r@
nonmember-bank-clearing accounts-505912.
13
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passed upon by your directors in the light of all the circumstances
surrounding each application." Id. at 366 (emphasis added).
In 1945, the Board was asked by The Peoples Savings Bank in
Iowa for a definition of a "nonmember clearing account." Minutes of
Board Meeting of July 26, 1945, at 2.6 The Board unanimously approved
a response stating that Section 13 of the FRA "reasonably define[s]" the
term, and "the Board has never found it necessary to further define it."
Id. The Board further indicated that it "has not prescribed specific
conditions or requirements which should or should not be made by a
Federal Reserve Bank in connection with the opening and maintenance
of nonmember clearing accounts," but that a Federal Reserve Bank can
"in its discretion accept[] such an account." Id. at 3 (emphasis added). In
a similar vein, in 1964 the Federal Reserve Board received an inquiry
about whether branches of foreign banks and private banks were
"nonmember banks" eligible to open clearing accounts at Reserve Banks
pursuant to Section 13. Federal Reserve Bulletin (Feb. 1964), at 168-
6 Available at https://fraser.stlouisfed.org/files/docs/historical/nara/bog_
minutes/l9450726_Minutes.pdf.
14
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69.7 In response, the Board noted that these entities engaged in
banking activities like those typically performed by commercial banks
and were subject to supervision of state banking regulators. Id.
Accordingly, the Board concluded that a foreign bank branch or a
private bank was a "nonmember bank" eligible for a clearing account,
but cautioned that the opening of such accounts was subject to the
"discretion" of the Federal Reserve Bank whose district encompassed the
institution. Id.
Thus, from the earliest days of the Federal Reserve, the provision
of accounts and services was discretionary. And the Supreme Court
validated early on that, in the various places where Congress used
permissive language in the FRA, including in Section 13, this language
merely provided an authorization rather than a requirement.
B. Reserve Banks have continued to exercise discretion
over accounts and services for all institutions
between the enactment of the Monetary Control Act
in 1980 and the present
The Federal Reserve's exercise of discretion to protect the
financial system did not change following the enactment of the MCA in
7 Available at https://fraser.stlouisfed.org/title/federal-reserve-bulletin-
62/february-l964-21350.
15
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1980.8 To facilitate its goal of restoring Federal Reserve control over the
money supply, the MCA amended Section 13 to authorize Reserve
Banks to open deposit accounts for nonmember depository institutions
and provided for a pricing schedule in Section llA under which
corresponding Reserve Bank services would "be made available to non-
member depository institutions at the same fees charged member
banks." Jet Courier Servs., Inc. U. Fed. Reserve Bank of Atlanta,
713 F.2d 1221, 1227 (6th Cir. 1983) (emphasis added). The MCA in no
way altered the discretion granted Reserve Banks in Section 13, and in
the wake of its passage Reserve Banks continued to consider risk in
8 PayServices relies on a paper from law professor Julie Hill for the
premise that, "[f]ollowing the [MCA], .. Federal Reserve Banks opened
accounts with little independent investigation as to the riskiness of the
applicant." Appellant Br. at 6 (citing Julie Anderson Hill, Opening a
Federal Reserve Account, 40 Yale J. on Reg. 453 (2023)). But an earlier
version of the article posted by Professor Hill in 2022 stated otherwise,
observing that "since the passage of the [MCA], the Federal Reserve
Board and Reserve Banks have evaluated risks associated with
providing account and payment services to individual banks." See Julie
Andersen Hill, Bank Access to Federal Reserve Accounts and Payment
Systems (2022 draft), available at Custodia Bank, No. l:22-cv-125, ECF
No. 160-1 (emphasis added). Moreover, as discussed below, master
account requests from novel, uninsured institutions presenting unique
risks have proliferated in recent years.
16
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making decisions about access to accounts and selrvices.9
For example, in 1985, the Federal Reserve adopted policies on
overdrafts that limited some depository institutions' ability to send
payments via Fedwire. See Policy Statement Regarding Risks on Large-
Dollar Wire Transfer Systems, 50 Fed. Reg. 21,120 (1985). In the
ordinary course of their businesses, banks may incur negative balances
in their master accounts when processing funds transfers on behalf of
their customers. There was concern "that a participant could be
unwilling or unable to settle a large net debit position," and that "[a]
9 PayServices' recitation of Bank Stationers Ass'n, Inc. U. Bd. of
Governors of the Fed. Reserve Sys., 704 F.2d 1233 (llth Cir. 1983),
Appellant Br. at 12, does not demonstrate any historical inconsistency
with the Board's position. There, the Board explained that "the
language and legislative history of [the MCA] evince an intent to
provide nonmember financial institutions access to Federal Reserve
services ..." 704 F.2d at 1236 (holding that the producers of a
component used in providing a payments mechanism did not fall within
the MCA's zone of interests). This is a true statement that does nothing
to support PayServices' assertion that all financial institutions may
have automatic, unfettered access to Federal Reserve accounts and
services regardless of the risks presented. Reliance on similarly worded
statements from Board websites that payment services "are available to
all depository institutions" and that the MCA "gave all depository
institutions access to the Federal Reserve's payment services,"
Appellant Br. at 12 (emphases added), in no way speaks to whether the
possibility of such availability and access amount to a discretionless
mandate.
17
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failure of one participant to settle could seriously jeopardize the
financial positions of its net creditors on that network, with serious
repercussions spreading from those participants to their creditors." Id.
at 21,121. To limit the risk of overdrafts, the policy validated that each
Reserve Bank had the power "to reject funds transferred" when those
transfers "expose[d] the Reserve Bank to excessive risk." Id. at 21,124.
And in certain cases, a Reserve Bank could "prohibit [an institution]
from using Fedwire." Id. Thus, an institution's "access" to this Federal
Reserve service was explicitly conditioned on risk in accordance with
the authority provided by Congress in the FRA.
In 1998, the Federal Reserve Banks began issuing circulars
governing the relationship between a Reserve Bank and a master
account holder. These circulars make clear that a master account
involves a contract between a depository institution and the Reserve
Bank and that the Reserve Bank can terminate the relationship at any
time. For example, the 1998 Operating Circular l "establish[es] the
terms for opening, maintaining, and terminating master accounts with
the Federal Reserve Bank." Operating Circular l, Account
18
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Relationships (Jan. 2, 1998) ii 1.1.10 In addition, the Circular states that
"[a]ll master accounts are subject to Reserve Bank approval," without
distinguishing between member or nonmember banks, and notes that
the Reserve Bank "may close your master account ... at any time but
will endeavor to give at least five business days' prior notice." Id. W 2.3,
2.8. Both of these provisions are substantively similar to the
comparable provisions in the most recent operating circular, reflecting
the longstanding practice in which decisions about all master accounts
are made by Reserve Banks based on their exercise of discretion. See
Operating Circular l, Account Relationships (Sept. l, 2023) W 1.0, 2.6,
2.10.11
10Available at web.archive.org/web/20000116011948/http://www.
frbservices.org/Industry/pdf/Ocl.pdf.
11 Available at https://www.frbservices.org/binaries/content/assets/
crsocms/resources/rules-regulations/090 l23-operating-circular- l .pdf.
Notably, Federal Reserve Operating Circulars have been expressly
incorporated into the Uniform Commercial Code and Idaho law. See,
et., U.C.C. § 3-l02(c) & Idaho Stat. § 28-3-102(3) (noting, with respect
to negotiable instruments, that "[r]egulations of the board of governors
of the federal reserve system and operating circulars of the federal
reserve banks supersede any inconsistent provision of this chapter to
the extent of the inconsistency"); U.C.C. § 4A-107 & Idaho Stat. § 28-4-
607 (same with respect to funds transfers); U.C.C. § 4-l03(c) & Idaho
Stat. § 28-4-103(3) (noting, with respect to bank deposits and
19
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More recently, the growth of novel charters and rise of uninsured
depository institutions led the Federal Reserve Board to establish more
formalized processes to manage risk through its Guidelines. See supra
at 3. Consistent with 12 U.S.C. § 342, the Board's Guidelines continued
to "make clear that legal eligibility does not bestow a right to obtain an
account and services." 87 Fed. Reg. at 51,106. Rather, the Board
emphasized that "Reserve Banks ... retain the discretion to deny a
request for access to accounts and services where, in the Reserve Bank's
assessment, granting access to the institution would pose risks that
cannot be sufficiently mitigated." Id. at 51,102. The Board emphasized
that, even when access is granted, the Reserve Bank "may impose (at
the time of account opening, granting access to service, or any time
thereafter) obligations relating to, or conditions or limitations on, use of
the account or services as necessary to limit operational, credit, legal, or
other risks posed to the Reserve Banks, the payment system, financial
stability or the implementation of monetary policy or to address other
considerations." 87 Fed. Reg. at 51,106-07. However, "[i]f the
collections, that "[a]ction or non-action approved by this Article or
pursuant to federal reserve regulations or operating circulars"
constitutes "the exercise of ordinary care") .
20
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obligations, limitations, or controls are ineffective in mitigating the
risks identified or if the obligations, limitations, or controls are
breached, the account-holding Reserve Bank may further restrict the
institution's use of accounts and services or may close the account." Id.
at 51,107.
As this historical record makes clear, Reserve Banks have always
exercised discretion to make risk-based account and services decisions
in furtherance of the stability of the U.S. financial and payment
systems. There is no evidence that Congress intended otherwise.12
12 Not surprisingly given this historical backdrop, Congress recently
recognized, in a law enacted in 2022, that requests for master accounts
and services from "a depository institution that is not an insured
depository institution"-a category that includes PayServices-may be
"rejected." 12 U.S.C. § 248c(b)(l); of. Appellant Br. at 14-15 (describing
the law's disclosure requirements, though inaccurately expressing it as
an obligation to report "decisions the board has reached on such
applications" (emphasis added)). If it were the case that the granting of
a master account to depository institutions is purely ministerial under
the FRA, then Congress could have readily clarified that expectation
during its recent legislation on the issue of master accounts given its
clear awareness of the Board's Guidelines. See Bar co San Juan, 2023
WL 7111182, at *7 (holding that the recent FRA amendment "confirms
that Federal reserve banks may 'reject' [master account] applications"
by requiring the Board to create a searchable database that includes,
inter alia, "rejected" applications (quoting statute)). Regardless of the
purpose of the provision, it would be odd for Congress to contemplate
that master account requests by depository institutions may be
21
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111. ELIMINATING RESERVE BANK DISCRETION RISKS
SUBSTANTIAL NEGATIVE IMPACT TO THE FINANCIAL
SYSTEM
Considering risks in providing access to Reserve Bank accounts
and services is not merely an academic exelrcise; the failure to do so
could lead to significant negative consequences to the financial system.
As detailed by Judge Skavdahl in the Custodia Bank decision, a
determination that Reserve Banks lack discretion over the opening of
master accounts would result in individual state and territorial
chartering provisions serving as "the only layer of insulation for the
U.S. financial system," in which "one can readily foresee a 'race to the
bottom' among states and politicians to attract business by reducing
state chartering burdens through lax legislation, allowing minimally
regulated institutions to gain ready access to the central bank's balance
sheet and Federal Reserve services." Custodia Bank, 2024 WL 1788900,
at *12.
"rejected" in the newly enacted section 248c, while ignoring just two
sections away (in section 248a) a purported Congressional mandate that
they be granted in every instance. Custodian Bank, 2024 WL 1788900,
at *II ("To avoid immediately rendering the 'rejected' option of
§ 248c(b)(l)(B)(ii) meaningless, the Court must conclude the Federal
Reserve Banks were not stripped of their discretion to deny master
account applications.").
22
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Indeed, as further explained in an expelrt report submitted by
Professor Morgan Ricks in that case, see Custodian Bank, No. l:22-cv-
125, ECF No. 240-91, if a judicial ruling required a Federal Reserve
Bank to grant access to each and every chartered entity, regardless of
risk, the adverse consequences could be dramatic:
A state or territory might seek to win market share in digital
asset or other financial businesses by enacting a "free banking"
statute with no regulatory apparatus or supervision whatsoever.
In such a situation, totally unregulated institutions would gain
access to Federal Reserve accounts and services, with potentially
devastating consequences to financial stability, monetary policy
implementation, money laundering, and terrorism financing. Id.
at 18.
A state or territory might enact a "self-depository" statute that
allowed any individual or entity, from the United States or from
abroad, to establish, for a small fee, an unregulated and
unsupervised "bank" subsidiary to hold its own cash. In such a
situation, the Federal Reserve would be bombarded with master
account requests from individuals or entities, both domestic and
foreign, including anyone who wanted to use the account for illicit
purposes. Id.
. Credit risks would be significantly heightened if the Federal
Reserve was put in the position of extending credit to unsound
institutions. Id. at 12-14. For example, risky institutions might
incur negative balances in their master accounts when processing
funds transfers on behalf of their customers, and there also may
be mismatches in check clearing operations. Such conduct could
lead to large losses borne by the Federal Reserve, ultimately
resulting in lower earnings being remitted to the Treasury. Id.
at 13.
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Professor Ricks also addressed the important adverse monetary policy
implications presented by potential new business models. Id. at 15. And
he correctly concluded that, "if the Fed lacked any discretionary
authority over access to master accounts and related services, federal
law enforcement and counterterrorism efforts could be hindered," and
there would likely be substantial "negative consequences for the Fed,
the financial system, and the American public." Id. at 12-13, 17. Such
consequences would go far beyond any conceivable intention of the
Congress that passed the MCA.13
A compelling example of the need to allow Reserve Banks to make
risk-based determinations was recently considered in the Bar co San
Juan case described above. After the Federal Reserve Bank of New
York ("FRBNY") made the decision to terminate the master account of
Bar co San Juan Internacional, Inc. ("BSJI"), a Puerto Rican bank, the
13 It bears noting that the MCA was passed during a time of traditional,
insured depository institutions operating within the bounds of a single
state. Interstate banking was not enabled until the enactment in 1994
of the Riegle-Neal Interstate Banking and Branch Efficiency Act. See
FDIC, The Banking Crises of the 1980s and Early 1990s: Summary and
Implications, at It, available at https://www.fdic.gov/bank/historical/
history/3_85.pdf.
24
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institution sued.14 The court refused to halt the master account closure,
noting that "BSJI's specific and numerous risk factors justif[ied] the
FRANNY's decision to close BSJI's Master Account." Bar co San Juan,
2023 WL 7111182, at *II (citations omitted). In particular, the court
observed that "FRANNY's Compliance Office found a significant number
of red flags identified in BSJI's transaction activity." Id. (citations
omitted). The court determined that the FRBNY was justified in
seeking to close a risky master account:
Accepting deposits from and providing financial services to a
financial institution with BSJI's record of noncompliance
exposes the FRBNY and the financial system to risk. This
harm is not just to the FRBNY, but to the fiscal system,
because "federal reserve banks are not operated for the profit
of shareholders; rather, they were created and are operated
in furtherance of the national fiscal policy." Moreover,
14 BSJI is an international banking entity ("IBE"), a type of banking
entity chartered by Puerto Rico that first became allowed in 1989. See
International Banking Center Regulatory Act, Puerto Rico Act No. 52-
1989 (Aug, II, 1989), available at https://bvirtualogp.pr.gov/ogp/
Bvirtual/leyesreferencia/PDF/Y%20-%20Ingl%C3%A9s/52-l989.pdf. By
law, IBEs generally cannot provide services to Puerto Rican residents;
they may take deposits and offer loans only to nonresident customers
and foreign business entities. The Treasury Department has warned that
IBEs operating under this charter are "attractive money laundering
vehicles, potentially allowing nefarious actors to misuse them to
facilitate illicit financial activity." National Money Laundering Risk
Assessment (Feb. 2022), at 69, available at https://home.treasury.gov/
system/files/l36/2022-National-Money-Laundering-Risk-Assessment.
pdf.
25
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maintaining a Master Account with an entity that the
FRBNY concluded posed an undue risk of "activities such as
money laundering, economic or trade sanctions violations, or
other illicit activity," implicates the Federal Reserve in
BSJI's questionable transactions.
Id. at *12 (citations omitted). Thus, as the court concluded, "granting
BSJI's motion for emergency relief [to stop the account closure] would
place the public in harm's way." Id.
PayServices' attempt to disrupt longstanding practice and
introduce unprecedented risk into the financial system should likewise
be rejected.
CONCLUSION
Reserve Banks do not have a ministerial mandate to open a
master account for each and every depository institution that desires
one. Allowing any institution to receive and maintain a master account,
regardless of the risks its presents, is a truly extraordinary proposition.
Because this position is unsupported by the text or history of the FRA,
the Board respectfully urges the Court to affirm the judgment of the
district court.
26
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DATED: August 5, 2024
Respectfully submitted,
/s/ Katherine Pomeroy
Mark Van Der Weide, General Counsel
Richard M. Ashton, Deputy General Counsel
Joshua P. Chadwick, Senior Special Counsel
Katherine Pomeroy, Senior Counsel
Board of Governors of the Federal Reserve System
20th Street & Constitution Avenue, N.W.
Washington, D.C. 20551
Tel. No. (202) 912-4329
FaX No. (202) 736-5615
katherine.pomeroy@frb.gov
Attorneys for Amicus Curiae Board of Governors of
the Federal Reserve System
27
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CERTIFICATE OF COMPLIANCE
9th Cir. Case Number: 24-2355
I am the attorney or self-represented party.
This brief contains 5,403 words, excluding the items exempted
by Fed. R. App. P. 32(f). The briefs type size and typeface comply with
Fed. R. App. P. 32(3)(5) and (6).
I certify that this brief (select only one):
[ ] complies with the word limit of Cir. R. 32-1.
[ ] is a cross-appeal brief and complies with the word limit of Cir. R.
28.1-1.
[X] is an amicus brief and complies with the word limit of Fed. R. App.
P. 29(a)(5), Cir. R. 29-2(c)(2), or Cir. R. 29-2(c)(3).
[ ] is for a death penalty case and complies with the word limit of Cir.
R. 32-4.
[ ] complies with the longer length limit permitted by Cir. R. 32-2(b)
because (select only one):
[ ] it is a joint brief submitted by separately represented parties;
[ ] a party or parties are filing a single brief in response to
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[ ] complies with the length limit designated by court order dated
[ ] is accompanied by a motion to file a longer brief pursuant to Cir. R.
32-2(a).
Signature /s/ Katherine Pomeroy Date August 5, 2024
Case: 24-2355, 08/06/2024, DktEntry: 24.1, Page 37 of 37
CERTIFICATE OF SERVICE
I hereby certify that on August 5, 2024, I electronically filed the
foregoing using the Court's electronic filing system, which will send
notification of such filing to all parties of record.
/s/ Katherine Pomeroy
Katherine Pomeroy
Attorney for Amicus Curiae Board of
Governors of the Federal Reserve System