On July 28, a class action was filed in federal court in Philadelphia against Mellon Bank and its directors. The suit, Simpson v. Mellon Bank (or "Mellon III"), claims that the sweep fees" charged by the bank for investment of cash balances of trust accounts were so excessive as to violate the National Bank Act, the trust regulations of the Office of the Comptroller of the Currency, and the antifraud provision of thefederal securities laws.
By filing Mellon III, plaintiffs are trying to do indirectly what the federal courts have said they can't do directly -- federalize a state law claim for fiduciary mismanagement of a trust.
|Mellon I' and |Mellon II'
In August of 1992, the U.S. District Court for the Eastern District of Pennsylvania awarded class plaintiffs $55 million for allegedly excessive sweep fees charged by Mellon to trust accounts. The suit, Upp v. Mellon Bank ("Mellon II"), had been brought under state law.
The district court's decision was reversed in May by the U.S. Court of Appeals for the Third Circuit, because the federal courts have no jurisdiction to decide class claims arising solely under state law where the amount claimed by each purported class member does not exceed $50,000.
The plaintiffs in both these lawsuits, represented by some of the same law firms, want their claims decided in federal court to utilize the class-action device -- and because they'd almost certainly lose in state court.
Pennsylvania law expressly authorizes trustee banks to charge a 'reasonable' sweep fee for investing cash balances of trust accounts. The Orphans Court -- which has jurisdiction over trust accounts -- reviewed the bank's fees last year in its "Mellon I" decisions and determined that the fees are "reasonable."
The Federal Route
To avoid a similar fate for his claim, Mr. Simpson and the class of beneficiaries he purports to represent in Mellon III sought to bring their case under federal law.
The complaint asserts that the bank's sweep fees violated Comptroller's regulations governing trust accounts and that the bank committed securities fraud by charging and making misrepresentations as to allegedly excessive sweep fees.
If successful, the case could "federalize" trust law by applying federal law standards to the conduct and fee schedules of trustee banks, and subject bank trustees' actions to review in federal court.
But the Mellon III claims ultimately will fail for the same reason the claims in Mellon I and Mellon II failed: No matter how a lawyer may choose to style a particular cause, of action, fees charged to trust accounts are governed by state law, not federal law, and Pennsylvania law expressly allows trustee banks to charge sweep fees.
State Law Incorporated
The main claim in Mellon III is that Mellon violated the Comptroller's trust regulations and 12 U.S.C. 92A (which authorizes national banks to obtain trust powers) by charging allegedly excessive sweep fees.
Section 92a and the Comptroller's regulations, however, expressly adopt and incorporate state law to govern a national bank's conduct as trustee. Specifically, national banks are authorized to charge the fees to trust accounts that are authorized by state laws.
Pennsylvania law permits Mellon to charge "reasonable" sweep fees, and it was decided in Mellon I the bank's sweep fees were reasonable. As a result, the Comptroller's regulations were not violated.
Even if Mellon had violated regulations of the Comptroller's office, however, that would be a matter for that agency alone to raise. There is no "private rig of action" under the Comptroller's trust regulations or section 92a. Private persons cannot sue a bank under federal law for a violation of those provision.
The Mellon III complaint states that section 93(a) of the National Bank Act creates a private right of action against a national bank for Violation of any part. of the National Bank Act or the Comproller's regulations.
Plaintiffs apparently base this view on a 1917 decision of the U.S. Supreme Court -- Chesbrough v. Woodworth -- which references a predecessor statute to section 93 (a) in allowing a federal common law claim to proceed against a national bank for violation of the National Bank Act in publishing false statements of condition.
To the extent that section 93 creates a private right of action at all, it is for violations of the National Bank Act of 1864, as amended. Section 92a, upon which plaintiffs rely for the substantive basis for this suit, is not a part of the National Bank Act, and never has been.
Originally enacted as section 11(k) of the Federal Reserve Act of 1913, the power to license national banks to engage in trust activities was transferred by Congress to the Comptroller's office in 1962.
Congress did so by separate act, not by amendment of the National Bank Act. Although the 1962 statute was codified in Title of the U.S. Code by the Office of Law Revision Counsel, Title 12 has never been enacted as one piece of legislation.
Instead, it is a collection of various acts of Congress relevant to banking, including the National Bank Act and the 1962 trust powers statute.
No Right of Private Action
The Comptroller's power to bring an action suit against a national bank for violations of section 92a is established by section 92a(k), not section 93a.
Although section 93 (b) has recently been amended to allow the Comptroller to impose civil money penalties for violations of section 92a, it also specifies that those penalties must be paid to the Department of Treasury. Even under the Chesbrough line of decisions, section 93 does not create a private right of action for violations of section 92a.
Notably, under Chesbrough and its progeny, if section 93 creates a private right of action for conduct by a national bank, that is the exclusive remedy, and no state law claim can be brought for the same conduct.
It is self-evident that Congress never intended to preempt private rights of action under state trust law by enactment of sections 92a and 93. The Chesbrough decision, moreover, is based upon legal principle that have long since been repudiated, and it is questionable under current law whether section 93 creates a private right of action even for violations of the National Bank Act.
The Mellon III plaintiffs also claim that Mellon Bank committed securities fraud in violation of SEC Rule 10b-5 by charging "unreasonable" sweep fees and by failing to accurately disclose the amount of these fees.
Most of the sweeps were into deposit accounts, which are not securities, and for that reason alone the fees charged do not implicate the securities laws and cannot form the basis for a securities fraud claim.
In addition, Mellon disclosed to its trust customers that it was charging a sweep fee and the size of that sweep fee. There was thus no "fraud" or failure to disclose.
Likewise, any fee related statements made to the plaintiff in trust related statements made to the plaintiff in trust documents or other public mailings were not made |in connection with' the purchase or sale of a security, a prerequisite to a Rule 10b-5 claim.
In short, Rule 10b-5 operates with respect to disclosure and prohibits manipulation of the securities markets. It does not regulate the size of fees, nor does it provide a right to sue for breach of fiduciary duties or breach of contract.
To the contrary, the only "antifraud" provision of the securities laws that limits the size of advisory type fees is section 206 of the Investment Advisers Act.
The Advisers Act regulates nonbank investment managers and expressly exempts banks from coverage.
Morevover, the Supreme Court had held that there are no private rights of action for damages under the Advisers Act.
The Mellon III lawsuit is at preliminary stage. Until plaintiffs' claims are resolved, bank trust departments will have a new burden with which to contend -- the threat of class-action lawsuits challenging under federal banking and securities laws the trust fees and practices that are authorized by state law.