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CONFIDENTIAL

347

Ir 17

February 9, 1933.

IffiCOlMEHDATIOlTS OF THE FEDERAL DESERVE BOARD

WHICH HAVE HOT BEEN ADOPTED III THE GLASS BILL.

I n i t s l e t t e r of March 29, 1932 addressed t o Senator Horbeck,

Chairman

of th e

Committee

on

Banking

and

Currency

o f t he

United States

Senate, t h e Federal Reserve Board made a number of recommendations with

re fe rence t o t h e provis ions of the Glass Bil l , S . 4115 . Some of these

recommendations have been incorporated

i n t h e

r e v i s e d b i l l ,

S. 4412 , and

others have n o t . There a r e summarized below t h e recommendations c o n -

ta ined i n t h e Board's report of March 29 , 1932 , which have n o t been

adopted subs tant ia l ly i n t h e b i l l , S . 4412 , i n t he form i n which i t

was passed by t he Senate on January 25 , 1933 . No mention i s made of

provis ions of the bi l l which a r e s u b s t a n t i a l l y a s recommended by t he

Board.

(page

and

section numbers refer

t o t h e

b i l l

S. 4412 a s i t

passed

t h e

Senate

on

January

25 , 1933 , unless otherwise indicated, and

t h e b i l l i n this form i s r e f e r r e d t o i n th is

memorandum

as t he

p resen t b i l l " . )

SECTION 2 .

D e f i n i t i o n o f t he te rm "aff i l ia te* , (pages 2 , 3 )

The Board's recommendations on this subject have been incorporat-

ed i n t he p r e s e n t b i l l . I t may be noted, however, that certain addi-

tional changes i n t h e d e f i n i t i o n of the term "affiliate" have been made.

The provi s ion tha t t hi s term sha ll include a n organiza t ion of which a

major i ty

of the

members

o f i t s

executive committee

a r e

d i r e c t o r s

of a

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34.8

L-17

- 3 -

member bank

h a s

"been stricken from

t h e

present

M i l .

Another change

i s

t h e sub-d iv is ion i n t h e presen t b i l l of the severa l c lasses of i n s t i t u -

t ions defined a s a f f i l i a t e s so as to make a d i s t inc t ion be tween "a f f i l i -

a tes" general ly

and

"holding company a f f i l i a t e s " .

SEC$IOiT 3 . ( b )

Voting by groups o r chains i n e l ec t ions o f F e d-

er al res erv e bank di re ct or s. (Pages

4 , 5 ) .

The

Federal Reserve Board recommended

t h e

omission

of a

p rov i -

sion (contained i n sec t ion 4 of S« 4115) which prohibited a bank which

belongs t o a group o r chain o r which i s n o t cont ro l led by local res iden ts

from voting

f o r

Federal reserve bank directors.

The

p resen t b i l l

p r o -

vides that when two or more member banks a r e a f f i l i a t e d w it h t h e same

holding company a f f i l i a t e only one of such banks may p a r t i c i p a t e i n t h e

nomination o r e l e c t i o n of Federal reserve bank directors.

I n

connection with

i t s

recommendation

on

th i s sub jec t ,

t h e

Board

said that this section "prohibits banks that belong

t o a

group

o r a

chain

from voting f o r Federal reserve bank directors. The wording o f t h e s e c -

t i o n i s such a s n o t t o confine t h e p roh ib i t i on t o group and chain banks,

however, b u t t o include a l l banks that a r e n o t con t ro l l ed en t i r e ly by

loc al ly res ide nt s tockholder s. Since

t h e

stock

of

many important banks

i s widely owned throughout t h e country, th is might restr ict t h e voting

p r i v i l e g e t o smaller a n d less important banks that a r e owned by local

stockholders.

I t i s t o b e

feared that this section would

b a r

from

p a r -

t i c i p a t i o n i n t h e s e l e c t i o n of Federal reserve directors many of the

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349

L-17

Ukjju

"better managed banks."

S TION

4.

Dis t r ibu t ion

of

earnings

of

Federal

r ese rve "banks. (Page

5)

The Federal Reserve Board recommended that t h e Secre tary of the

Treasury

be

authorized

i n h i s

d i sc re t ion

t o u s e t h e

f r a n c h i s e

t a x r e -

ceived from Fe de ra l re se rv e "banks

f o r

investment

i n

ob l igat ions

of the

proposed Federal Liquidating Corporation, b u t t h e present bi l l provides

that

a l l n e t

earnings

o f a

Federal reserve bank after payment

of

d i v i d -

ends , claims and expenses shall b e paid into t h e surplus fund o f t h e bank.

I n

d iscuss ing

t h e

corresponding section

of S . 4115 ,

(Sect ion

5 ) , t h e

Board s a id : "This s ec t io n would amend

t h e

f i r s t paragraph

of

Section

7

of the

Federal Reserve

Act so

t h a t , a f t e r

t h e

payment

of

expenses

and

dividends,

a l l o f t h e n e t

earnings

of a

Federal reserve bank over

and

above

any

amounts necessary

t o

r e s t o r e

i t s

surplus

t o t h e

amount

on De-

cember 3 1 , 1 9 3 1 , would b e paid t o t h e Federal Liquidating Corporation. The

amendment

i s

also worded

i n

such

a way as to

prevent

t h e

payment

of any

dividends

out of

surplus

and to

prevent

t h e

payment

of

dividends whenever

t h e

surplus

of a

Federal reserve bank

i s

less than

i t was on

December

31 ,

1931.

A

different method

of

f inancing

th e

l iqu idat ing corporat ion

i s

proposed

an d

wi l l

b e

discussed under

t h e

appropr ia te sect ion .

F o r

th is

reason a modif ica t ion of Section 5 i s suggested which would n o t change

t h e

provisions

o f t h e

present

law in

regard

t o t h e

surplus

o f t h e

Federal

reserve banks, b u t would authorize t h e Secretary of the Treasury to u s e

t h e

f r anch i se

t a x

received from

t h e

Federal reserve banks

f o r t h e p u r p o s e

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Ir 17

350

4r

of supplementing t h e funds of the corpora t ion."

SECTI01T 5 ( h ) .

Reports of a f f i l i a t e s of State member hanks. (Page 6)

The Board stated i n i t s l e t t e r tha t "With resp ect t o a f f i l i a t e s ,

t h e Board be li ev es t ha t important reforms to be accomplished a t t h e p r e s -

e n t times a r e t h e g ran t ing of power t o t h e supe rv i so ry au thor i t i e s t o o b -

t a in repor t s and to make examinations o f a l l a f f i l i a t e s of member banks

and t he p resc r ib ing of l imi ta t ions on t he loans that a member bank may

make t o i t s a f f i l i a t e s . The Board realizes that many evils have developed

through t h e opera t ion of affiliates connected with member banks, p a r -

t i c u l a r l y a f f i l i a t e s d e a l i n g i n s e c u r i t i e s . "

The

Board also recommended that,

i n

d e a l i n g w i t h a f f i l i a t e s ,

t h e

fo l lowing pr inc iples

b e

observed:

( l ) To

require them

t o

make reports

and to submit t d examination a t t h e d i s c r e t i o n of the Board o r t he Comp-

t r o l l e r ;

(2 ) t o

l i m i t

t h e

loans that

can be

extended

t o an

a f f i l i a t e

by

a

member bank;

and (3) to

p roh ib i t

t h e

ty ing

up of

capi ta l s tock

of an

a f f i l i a t e w i t h

t h e

capi ta l s tock

of a

member bank.

I n

favoring these

l i m i t a t i o n s ,

t h e

Board

h a s i n

mind that

i t may no t be

des i rab le

t o

abo l i sh

a l l t h e

existing relationships between member banks

and

their

a f f i l i a t e s , b u t tha t i t i s des i rab le t o p ro tec t t h e opera t ions of the

member banks from be in g unduly inf lu en ce d by the i r a f f i l i a t e s . Recent

experience

h a s

demonstrated that operations

of the

a f f i l i a t e s

a t

times

have unfavorable effects

on t he

condi t ion

of

member banks.

The

Federal Reserve Board accordingly recommended that reports

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351

1 - 1 7

of a f f i l i a t e s of State member "banks be required only when deemed neces-

sary by t h e Federal Reserve Board." The present "bill provides that a

State member bank shall obtain from each o f i t s a f f i l i a t e s , o th e r t h an

member "banks, and f u r n i s h t o t h e Federal reserve "bank a n d t h e Federal R e-

serve Board, n o t less than three reports of condition each year on dates

iden t ica l wi th t h e r ep o r t s o f t he affiliated member "bank and such addi-

t ional repor ts a s t h e reserve bank o r t he Board may deem necessary. The

provision requir ing such reports

t o be

made

i s

mandatory;

b u t

they

a r e

required

t o

contain only such information

a s , i n t h e

judgment

of the

Federal Reserve Board, shall b e necessary t o d i sc lose fu l ly t h e r e la t ions

between such af f i l ia te and such bank and t o enable t h e Board t o inform

i t s e l f a s t o t h e e f f e c t of such relations upon t h e a f f a i r s of such bank.

The r epor t s of a f f i l i a t e s a r e t o b e published b y t h e bank under t h e same

conditions a s govern i t s own condition reports .

(Subs tan t ia l ly t h e same provisions a r e contained i n Section 24

of the present b i l l wi th reference t o r epor t s of a f f i l i a t e s of national

banks, except that t h e repor ts a r e made t o t h e Comptroller o f t he Cur -

rency instead

o f t he

Federal Reserve Board.)

SECTION

5 ( b ) .

i n

stocks

and

investment securi-

t i e s by St a te member bank s. (Page 8 )

The present b i l l contains a provis ion t o t h e ef fect that Sta te

member banks shall b e subject t o t h e same limitations and conditions

a s a r e national banks with respect t o t h e purchase, sale, underwriting

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ii— 7

and holding of investment securi t ies and st oc k. There was no such

provis ion in S . 4115; bu t the Board recommended that t h e provis ion in .

Section 15 of S . 4115 , which restric ted dealings i n investment securi-

t i e s by nat ion al hanks, he omitted entirely.

(The.

provis ions

on

this subject regarding national banks

a r e i n

Section 15 of th e p r e s e n t b i l l . )

SECTION 5 ( b ) .

Divorce of s tock of State member bank from

stock of other corporations. (Page 8)

The

present b i l l conta ins

a

provis ion

to the

e f f e c t t h a t , a f t e r

five years from t h e passage of th e A ct , no c e r t i f i c a t e of s tock of a

St at e member bank sh a ll re pr es en t

th e

s tock

of any

other corporation

except a member bank, n o r s h a l l t h e ownership o r t r a n s f e r of the stock

c e r t i f i c a t e of such a bank be conditioned upon t h e ownership o r t rans fe r

of a c e r t i f i c a t e of stock of another corporation, except a member bank.

S. 4115

contained

no

such provision regarding

th e

stock

of

State member

banks. There was a s imilar provis ion regarding th e stock o f national

banks (Section

17 of S.

4115), which would have become effective immedi-

a t e l y , and the Board recommended that i t be re ta ined but tha t i t be made

e f fec t ive a f t e r th ree yea rs . The Board also recommended i n connection

with i t s d iscuss ion of a f f i l i a t e s t h a t th e b i l l "p rohib i t t h e ty ing u p

of

capi ta l s tock

of an

a f f i l i a t e w i t h

t h e

capi ta l s tock

of a

member bank

(The provis ion on this subject applicable to the s tock of na t ion-

a l

banks

i s

found

i n

Section

17 of the

p resen t b i l l . )

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3 5 3

L- 17

SUCTION

5 ( b ) .

Right

of an

a f f i l i a t e

of a

State member "bank

to

vote stock held

by i t in

such "bank. (Page

8).

Under

th e

pre sen t b i l l , each State member bank a f f i l i a t e d with

a

holding company affiliate i s required to obta in from such a f f i l i a t e ,

within

a

period prescribed

by the

Board,

an

agreement that

t h e

a f f i l i a t e

w i l l

be

subjec t

to the

same conditions

and

l imitat ions with respect

t o v o t -

i n g stock i n t h e bank a s a r e appl icable in the case o f holding company a f -

f i l i a t e s

of

national banks (under Section

18 of t he

b i l l ) ;

a n d f o r

f a i l u r e

so to do the membership of the State bank i n t h e Federal Reserve System may

b e

f o r f e i t e d .

I f t he

Board revokes

th e

voting permit (required

by

Section

18) of any

holding company affi l ia te ,

t h e

membership

of any

State member

bank a f f i l i a t ed wi th

i t may be

f o r f e i t e d .

Section

20 of S. 4115

contained provisions with reference

to the

conditions under which holding company affiliates

of

national, banks

may

obtain permits t o vote stock owned b y them i n such banks, b u t these p r o -

visions were

n o t

made applicable

to

State member banks.

The

Board recom-

mended a number o f changes i n these provis ions, and tha t subs tan t i a l ly the

same pr ov is io ns , with

t h e

changes recommended,

be

made applicable also

to

a f f i l i a t e s

o f

State member banks.

The

provis ions appl icable

to

a f f i l i -

a te s of national banks, however, ( t o w h i c h a f f i l i a t e s of State member

banks

a r e

also subject) have

n o t ,

except

in a few

respects, been made

to

conform

t o t h e

recommendations

of the

Board

on the

subjec t .

(The

p rov i s ions re fe r red

t o a r e

described below more

i n

d e t a i l

i n

Section

18

h e r e a f t e r . )

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3 5 4

-8 - I r -17

SECTION 5 ( b ) .

Examination of the a f f i l i a t e s of State

member ba nk s. (Page 9)

The Federal Reserve Board recommended i n order that sui t-

able provision-

may b e

made

f o r t h e

examination

of

a f f i l i a t e s

of

St at e member banks when deemed ne ce ssar y" tha t such examina tions

be

authorized to be made when deemed necessary i n order t o inform the

Board o r t he Federal reserve bank of the relations between t h e a f f i l i -

a t e and t he member bank and the e f f e c t of such re la t io ns ; tha t t h e e x -

aminer be author ized to examine officers a n d employees of the a f f i l i a t e

under oath; that

t h e

expenses

of the

examination

be

assessed,

in the

d i s c r e t i o n

of the

Board, against

th e

a f f i l i a t e ;

and i f no t

pa id

by

th e a f f i l i a t e , ag ai ns t t h e member bank; and t h a t a r e f u s a l by the a f f i l -

i a t e to permit a n examination or to give necessary information be

penalized by a f ine aga ins t t h e member bank of $100 p e r da y .

The pre sen t b i l l re qui re s such examinations of a f f i l i a t e s of

State member banks

to be

made

i n

connection with

t h e

examinations

of

such

banks

a s

s h a l l

be

necessary

t o

d i sc lose fu l ly

t h e

relations between

such banks

and

t h e i r a f f i l i a t e s

and the

e f f e c t

of

such re la t ions ;

the

expenses of such examination may, i n th e d i s c r e t i o n of the Board,

be assessed against th e bank examined; and , i n t he event of the r e f u s -

a l o f t he a f f i l i a t e t o give information or to permit an examination,

or in the

event

of the

f a i l u r e

of the

bank

to pay the

cost thereof,

t h e

membership

of t he

bank

may be

f o r f e i t e d .

The

p rov i s ions

re com-

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1 17

mended

by th e

Board

a s t o

examinations under oath, payment

of

expenses

of examination by t he a f f i l i a t e , and p e n a l t i e s of $100 a day, are

omitted.

(provisions with reference to examinations of a f f i l i a t e s o f

nat ional tanks a r e contained i n Section 25 of the p r e s e n t b i l l . )

SECTION 6 ,

O ff i c e s

of the

Federal Reserve Board. (Pages 10-13).

The

Federal Reserve Board recommended that

i f t h e

au thor i ty

of the Secretary of the Treasury, contained i n e x i s t i n g law, to assign

quar te rs t o t he Federal Reserve Board i s repea led , i t would seem that

t h e Board should be authorized to purchase o r cons t ruc t a bu i ld ing f o r

i t s own us e and t h a t , i n t he i n t e r e s t of convenience an d e f f i c i e n c y ,

space should

be

provided

i n

such building

f o r t h e

Comptroller

of the

Currency a n d h i s s t a f f a n d f o r t h e proposed Federal Liquidating Corpor-

a t i o n .

0

The Board, however, i s n o t given authori ty to purchase o r

e rec t a bu i ld ing i n t he p r e s e n t b i l l , and t he provis ion e f ex i s t ing

la w

au thor iz ing

th e

Secretary

of the

Treasury

to

a s s ign o f f i ces

to the

Board

h a s

been omitted.

SECTI01T 7 .

Open Market Committee. (Page 13)

The p rov i s ions of Section 10 of S. 4115 c rea t ing th e Federal

Open Market Committee hav e, wi th some changes, been re ta i ned in the

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356

L*-l?

p r es en t t i l l .

The

Board said

i n i t s

l e t t e r "With respect

t o t he

sect ion

of the

"bill dealing with open market operations,

th e

Board calls

a t t e n t i o n t o t he fact that there i s already i n exis tence an open

market committee on which each of the Federal reserve "banks h a s r e p -

resenta t ion. This h a s come about as t he r e s u l t of natural develop-

ment. The Board believes that i t would be inadvisable t o d is turb

this development

by

c rys ta l z ing in to

law any

par t icular procedure .

The Board be li ev es that nothing fu rt he r i s necessary o r advisable a t

this time than an amendment clarifying i t s power of supervision over

open market operations of the Federal reserve banks and t h e i r r e l a -

tionships with foreign banks, as se t ou t in the memorandum attached."

The Board suggested a s a s u b s t i t u t e f o r t h e provis ions

on

this subject certain amendments

t o

Section

14 of the

Federal

Heserve

A c t : ( l )

c l a r i f y i n g

t h e

Board's power over open market

opera t ions ,

and (3)

improving

and

c l a r i fy i n g

one of the

provis ions

of the b i l l wi th respec t to the considerations which should govern

purchases and s a le s on the open market, so a s to apply n o t only t o

purchases and s a l e s of paper" but to any open market transactions.

The f i r s t of these suggested amendments i s n o t incorporated in the

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L 17

present "bill and while th e phraseology of the provision with respect

to the co ns id er at io ns governing open market opera tio ns h a s "been

changed, i t h a s n o t "been altered in the manner suggested by th e

Board.

The

Federal Reserve Board pointed

o u t

tha t

th e

statement

i n Section 10 of S. 4115 tha t Ho Federal reserve "bank shall engage

i n

open market ope ra ti on s

* * *

except after approval

and

a u t h o r i z a -

t ion hy the Committee", appears to be too r i g i d . The Board said that

th is pro visi on "deprives

a n

individual reserve hank

of a l l

author i ty

t o make purchases i n t he open market except a f t e r obtai nin g t he con -

sent

of

both

t h e

Board

and the

committee.

The

open market committee

would have no a u t h o r i t y t o a c t without approval of the Board and the

Board would have

no

a u t h o r i t y

t o a c t

without approval

of the

commit-

t e e , This would r e s u l t i n t h e p o s s i b i l i t y of obs t ruc t ion of any

system program

and

would tend

t o

make

t h e

operat ion

of the

Federal

reserve system less timely a n d l e s s e f f i c i e n t . " In t he present

b i l l

th e

p rov i s ions re fe r red

to

have been changed slightly

i n

form,

b u t l i t t l e i n e f f e c t .

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5 5 8

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—11—

S3CTI0H 7 .

Fede ral Liq uid ati ng Corpora tion. (Pages 14-28 ).

The

Board said

i n i t s

l e t t e r t h a t

i t i s i n

favor

of

es tab -

l i s h in g

a

l iqu idat ing corporat ion ,

b u t

proposes

t o

l i m i t

t h e

scope

of

i t s operations t o meriter banks and suggests a different method of

f inancing i t , together with certain changes i n t h e provis ions f o r

i t s adminis ta t ion ."

Accordingly, t h e Board suggested i n l i e u of the provisions

of sect ion 10 of S. 4115 on th i s sub je c t , a proposed substitute which

provided a number of material changes. I n submitt ing this substi tute

t h e Board said: The substitute would confine t h e b e n e f i t s of the

l iqu idat ing corporat ion t o member banks. Pr ov isi on i s made f o r a s s i s t -

ance t o nonmember banks i n t h e Reconstruction Finance Corporation A c t ,

a n d i t

would render membership

i n t h e

System more attractive

i f t h e

b en e f i t s

of the

Corporation were confined

t o

member banks.

I n t h e

s u b s t i t u t e

i t i s

proposed that $100,000,000

o f t he

c a p i t a l

o f t h e l i -

quidating corporation

b e

subscribed

b y t h e

Treasury. This sub scr ip-

t ion t o cap i t a l may be considered a s being derived from t h e f r anch ise

t a x previously paid t o t h e Treasury b y t h e reserve banks. I n add i -

t i o n , i t i s proposed that t h e corporation be authorized t o issue

debentures up to twice t h e amount of i t s subscribed ca pi ta l and that

t h e Federal reserve banks b e given authority t o purchase those d e -

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3 5 9

L 17

- 1 3 -

bentures up to one—fourth of th ei r surp lus. This i s no t a propi t ious

time

t o a s k t h e

member "banks

t o

contr ibute

t o t h e

l iqu idat ing corpora-

t i o n .

The

banks

a r e

going through

a

very d i f f icu l t pe r iod

and to

t a x

them

f o r

this purpose would

b e a

considerable hardship

on

them.

I n order t o make t h e operations of the corporation more

easily manageable, i t i s proposed that t h e d i r ec to r a t e b e comprised of

five members instead o f four teen a s proposed i n t h e b i l l . "

Some of t he suggestions of the Board mentioned i n t h e above

quotation have been adopted i n t h e p r e s en t b i l l . The provis ions of

t h e present b i l l conf ine t h e b en e f i t s o f t he l iqu idat ing corporat ion

t o member banks (paragraph ( a ) ) a n d debentures may be issued by t he

corporation up t o twice t h e amount o f i t s cap i t a l (and this would seem t o

mean "subscribed capital", though

i t i s n o t

clear) (paragraph

(m )) . The

d i r ec to r a t e

of the

corporation

i s t o

consis t

of

five members (paragraph

( b ) ) .

The

other recommendations

o f t he

Board, mentioned

i n t h e

above quotation,

namely, as t o capi ta l s tock and the purchase of debentures o f t he corporation

by Federal reserve banks, have n o t been adopted.

The present b i l l provides f o r three c lasses of capital s tock;

Class A s tock , to be subscribed by member banks i n a n amount equal t o

one-fourth of one p e r cent of their deposits; Class B s tock , t o b e s u b -

scribed b y t h e Federal reserve banks i n a n amount equal t o one-four th of

their surplus (paragraphs (d ) and ( e ) ) ; and stock i n t h e amount of $125,000,-

000 , t o be subscribed b y t h e United States (paragraph ( c ) ) . One-half of the

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3 8 0

- 13* L- 17

Class A stoc k (paragraph (e ) ) and of the Class B stock (paragraph ( d ) )

i s

apparently required

to be

paid

in on the

organization

of the

corpor-

a t ion

a nd the

remainder

i s

subjec t

t o

call (paragraphs

( d ) a n d ( e ) ) .

Bone

of the

stock subscribed

by th e

United States

i s t o be

pa id

in on

organization,

b u t i s

subject

t o

c a l l

by the

board

of

d i r e c t o r s

of the

corporat ion;

a nd

$125,000,000

i s

authorized

to be

appropr ia ted

f o r

payment

f o r t h e

stock (paragraph

( c ) ) .

I n

add i t ion

to the

points mentioned above, there

a r e a

number

of

othe r dif fe re nc es between

th e

provis ions

o f the

present b i l l

a nd the

Boa rd' s suggested su b s t i t u t e . Many

of

these

a r e

d i f fe rences

of

relat ively s l ight importance

or of

language on ly . Other s, however,

a r e

more substantial

and

those which appear

to be

ma te r i a l wi l l

be

noted here:

The

Board's suggested substitute provided that debentures issued

by the

corporation should

be

guaranteed

by the

United States

an d

paid

by the

United States

i f t he

corporation should

b e

unable

to pa y

them,

b u t

this amendment

h a s n o t

been adopted.

The

prese nt b i l l (paragraph

( b ) )

contains

a

provis ion

( n o t

found

i n the

Board's proposed substitute) that

no

member

of the

board

o f

d i r e c t o r s of the corporat ion (consis t ing of the Comptroller of the

Currency, a member of the Federal Reserve Board an d three members appointed

by the governors of the Federal reserve banks) shall receive any addi t iona l

compensation

f o r h i s

services

a s

such member.

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4 ^ I r 1 7

Both under th e present bi l l (paragraph (h ) ) and t he Board's

proposed substi tute, an o f f i c e r o r employee of the United States may

be an o f f i c e r o r employee o f t he corporation; b u t t h e present bil l does

n o t spec i f ica l ly au thor ize an o f f i c e r o r employee of the United States

to be a

d i r e c t o r

of the

corporation

a s

does

t h e

Board 's subst i tu te .

The

pres ent b i l l (paragraph

( i ) )

requires

th e

board

of

d i r ec to r s

to

administer

t h e

a f f a i r s

of the

corporat ion fa i r ly

and

imp a r t i a l l y

and

without discrimination among member banks

and to

extend

t o

member banks

such accommodations as may be sa fe ly and reasonably made with due regard

f o r t h e claims a n d demands of oth er member ban ks. This pr ov isi on was

n o t contained i n t he Board 's substi tute.

The p r e sen t b i l l , i n providing f o r Class A stock to be subscribed

by the member banks and Class B stock (paragraphs (d ) and ( e ) ) t o be s ub -

scribed by Federal reserve banks, contains a number of provisions with

reference

to the

a t t r i b u t e s

of

this s tock

and the

manner

i n

which Class

A

stock shall

be

increased

o r

decreased according

to

increases

o r

decreases

in the

amount

o f

deposi ts

o f

member banks

o r . in the

number

of

member

banks (paragraph ( f ) ) .

The Board's proposed substitute authorized t h e deal ing i n real

o r personal property t o t he extent necessary o r convenient f o r t h e

t r ansac t ion of the corporat ion 's bus iness , b u t th is provis ion i s no t

included i n t he p resen t b i l l .

The present b i l l does n o t contain t h e provision suggested by the

Board that t h e corporation be authorized t o appoint

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362

15 Ir 17

i t s employees without regard to the provisions of other laws appli-

cable to the employment and compensation of o f f i c e r s a nd employees

of the United States.

The present b i l l contains a provis ion ( n o t found i n t he

Board's proposed substitute) f o r a valuation committee (which i n -

cludes

t h e

r ece iv e r ,

a

r ep resen ta t ive

o f t he

insolvent bank

and a

third member, selected

by

these

t wo , bu t

does

n o t

include

a

r ep re -

sen ta t ive

o f t he

cor por at ion ). Loans

on and

purchases

o f t he

assets

of the closed member banks b y t h e corporation a re t o be made on the

b as i s of valuations made by this committee (paragraph ( j ) ) .

The present b i l l does n o t contain a provision (suggested

by the Board) that in no case shall th e corporation make any loan

o r purchase any a s s e t s i n an amount which shall n o t fu l l y p ro tec t

t h e corporation.

The present b i l l requires the corporation to pay to the

receiver

any

excess realized upon

t h e

assets purchased (paragraph

( j ) ) ,

b u t

does

n o t

contain such

a

requirement

as to an

excess realized upon

as s e t s

on

which

a

loan

h a s

been made

( a s

provided

i n t he

Board 's subst i -

tu te . )

The present b i l l p rovides f o r t h e deduction of a l iqu idat ion

fe e o f 8$ of th e amount realized upon t h e assets purchased (paragraph

( j ) ) ; whereas t h e Board suggested t h e deduction of the expenses o f

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L 1 7

l i q u i d a t i n g t h e a s s e t s and an amount equal t o i n t e r e s t a t t h e rate

of f> p e r annum, and required that a l l loans made by th e corpora-

t ion to receivers "bear interest a t 6 $ p e r annum.

The

present "bill contains

a

provis ion author iz ing

the

corporat ion

to

purchase

t h e

a s s e t s

of

"banks

i n t he

hands

of

rece ive rs on the date of the organization o f t he corporat ion on

th e same general terms and condit ions a s a r e appl icable i n t h e case

of banks closed after that date (paragraph ( k ) ) . This pro vis ion

appears

to be

unnecessary;

and the

same effect

i s

accomplished

b y

t h e provis ions of the Board's proposed substi tute , a l though an

express provis ion of this kind i s n o t found i n t he s u b s t i t u t e .

The pre sent b i l l a lso recognizes th e r i g h t of the

corporat ion to enter in to negot ia t ions t o secure t h e reopening o f

closed member banks (paragraph ( k ) ) . Express aut hor i ty f o r th i s

purpose i s n o t given i n t he Board's proposed substi tute .

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- 1 7 -

lr-17

3 6 4

SECTION 8 .

Loans on member "banks

1

col la te ra l notes . (Page 28)

The

present b i l l providesthat ,

i f a

member "bank, while

i n -

debted t o a Federal reserve "bank on a f i f t e e n day co l l a t e ra l no te and

desp i t e a warning o f t he Federal reserve bank or o f the Federal Reserve

Board, increases i t s outsta nding loans f o r t h e purpose of purchasing

or carrying s tocks or investment securi t ies (except obligations of

t h e Uni ted Sta tes ) , i t s note shall b e immediately due and payable and

t h e

member bank shall

b e

i n e l i g i b l e

t o

borrow

on

s u c h f i f t e e n

day

notes

f o r such period a s t h e Federal Reserve Board shall determine.

The Federal Reserve Board recommended that t h e provis ions

of Section 11 of S. 4115 on th is subjec t b e omitted and tha t a n amend-

ment b e adopted increasing t h e maximum maturity of advances t o member

banks on their promissory notes secured by el igible paper from 15 to

90 days; b u t , except f o r t h e amission of two provis ions of S.4115 t o

which t h e Board objected, t h e Board's recommendations on th is s ubject

have n o t been adopted.

I n

this connection

t h e

Board said:

The

Board

i s no t in

sympathy with

t h e

provis ions

of the

bill discriminating against member

bank c o l l a t e r a l no te s. Experience shows th at t h e p a r t i c u l a r i n s t r u -

ment on which Federal reserve credit i s obtained i s no t an adequate test

of th e us e to be made by t he member bank of the proceeds of the c redi t

and

tha t

a n

attempt

t o

control specula t ion through re s t r i c t io ns

on

member

bank collateral notes would

no t be

e f f e c t i v e

i n

accomplishing

t h e

purpose of th is sec t ion of the b i l l . Indeed, i t probably would

in te r fe re s e r ious ly wi th t h e convenient and economical operation of the

system. I n this connection, t h e Federal Reserve Board desires t o

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365

L-17

1 8

renew

t h e

recommendation made

i n i t s

annual reports

f o r

several years,

tha t t h e matur i ty f o r which advances may be made t o member banks on

their promissory notes secured by paper which i s e l i g i b l e f o r discount

b e increased f rom f i f t e e n t o ni ne ty days . Such a n amendment would b e

espec ia l ly he lp fu l t o country banks."

The Board also said that t h e theory underl ying t hi s se ct io n

(Section 11 of S.4115) namely, "that there i s a more direct connection

between member bank collateral notes and t h e u s e o f reserve credi t f o r

speculative activity than between other borrowings and t h i s a c t iv i t y

i s unfounded. Member banks borrow on 15-day notes, because of the greater

convenience both t o them and t o t he Federal reserve bank; a n d , i f th i s

form

of

borrowing were prohibited

o r

made more expensive, they would

merely subst i tu te

t h e

procedure

of

rediscounting eligible paper without

any

change

i n t h e u s e o f t h e

proceeds.

F o r

these reasons,

i t i s

believed

that this section would make t h e operation of the Federal reserve banks

l e s s e f f i c i en t and more expensive."

( i t may be noted that t h e present bill amends t h e seventh

paragraph of Section 13 of the Federal Reserve A c t ; b u t , d u e t o

t h e i n s e r t i o n of another paragraph i n sect ion 13 by t h e Act o f

Ju ly 21 , 1932 , t he paragraph intended t o be amended i s n ot now

t h e seventh paragraph, b u t t h e ei ght h parag raph. Further more,

t h e enactment of the present bill would repeal t h e amendment

t o t h e paragraph i n question which was contained i n t he Ac t

of May 19 , 19 32 , an d which authorized t he u s e o f obl igat ions

of Federal intermediate credit banks a s secu r i ty f o r member

bank

15 day

notes . )

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L i?

M S

SECTION 9 .

Foreign Transactions

of

Federal reserve "banks (Pages 29,30)

The

principal recommendations which

t h e

Board made with

r e -

spect

t o

Section

12 of S. 4115

dealing with

t h e

superv is ion

of the

Federal Reserve Board over foreign transactions

and

r e l a t i o n s h ip s

of

Federal reserve banks have been adopted i n t h e p r e s en t b i l l . One point

of difference, however, may be noted. S. 4115 provided that a report

o f a l l conferences o r negot ia t ions and mater ia l facts apper ta in ing

there to b e f i l ed wi th t h e Federal Reserve Board i n wr i t ing and signed

b y a l l r ep resen ta t ives of the Federal reserve bank attending such c o n -

ferences o r n eg o t i a t i o n s . The Board recommended t h e omission o f t he clause

requ i r ing t h e r ep resen ta t ives o f t he Federal reserve bank t o sign t h e

r ep o r t . The present b i l l requires that a report of such conferences

or negot ia t ions b e f i l ed wi th t h e Board i n wr i t ing b y a duly authorized

o f f i c e r of each Federal reserve bank which shall have participated there-

i n .

SECTION

10 .

Reserves

of

member banks(page

30)

Section 13 of S. 4115 contained a r ev is ion o f t he provisions

with reference t o t h e reserve requirements of member banks; and t he

Board recommended that these provisions b e s t r i ck en out and that there

b e s u b s t i t u t ed a r ev i s io n of Section 19 of the Federal Reserve Act i n

accordance with t h e recommendations o f t he System's Committee on Reserves,

with some modifications. The provis ions of S. 4115 have been omitted

from t h e p r e s en t b i l l ; b u t t h e Board's recommended substitute (with t h e

exception of a provision forbidding a member bank t o a c t a s t h e medium

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~ 2 0 ~

o r agent of a non-banking instittlt iOti i n making collateral loans t o

"brokers o r dea le rs i n investment securi t ies) h a s n o t been incorporated

t h e re i n . The present b i l l does no t conta in any provis ion with reference

t o

reserve requirements

of

member banks.

On

th is subjec t

t h e

Board stated that

i t was of th e

opinion

tha t t h e adoption of a system of reserves based on v e l o c i t y of accounts

a s well as on their volume a s recommended b y t h e System's Committee

on Reserves, would be an important step i n s t rengthening t h e inf luence

tha t t h e Federal Reserve System could exert i n t h e d i r e c t i o n of sound

credi t condi t ions ."

The Board also said i n this connection, Any thorough-going

rev i s ion of Section 19 of the Federal Reserve A ct should base

required reserves , i n s o f a r a s prac t icable , upon t h e a c t i v i t y

of the

business handled through each bank, rather than

on an

a r b i t r a r y c l a s s i f i c a t i o n of banks according t o l o c a t i o n . A proposal

submitted i n t h e 'Report of the Committee on Bank Reserves of the

Federal Reserve System' embodies a method of ca lcula t ing required

reserves which i s be l ieved to be sound i n p r i n c i p l e and which would

make fluctuations i n t h e volume of required reserves exert a n inf luence

i n t h e

d i r e c t i o n

of

sound credit conditions

and

would also eliminate

many inequitable

and

u n fa i r f e a t u r e s

of the

present

l a w .

SECTION

11

loans by Member Banks t o Executive Officers o r

Re la ti ve s. (Pages 30-33)

There i s a p rov i s ion i n t h e p r e s e n t b i l l , n o t contained i n

S.4115 and no t recommended by t he Federal Reserve Board, which f o r -

bids a member bank t o loan t o i t s execut ive off icers and forbids them

t o borrow from t h e bank. I t a lso requires an execut ive off icer of a

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L~l?

si 368

bank vrho "borrows from any other "bank t o make a report thereof t o t he

chairman

of the

board

of

d i r e c t o r s

o f h i s

"bank;

and

fu r t h e r , th a t

i f

a spouse, "brother, s is ter , l ineal ancestor o r direct descendant of an

execut ive off icer

of any

member "bank "borrow fr o n such "bank,

t h e

o f f i c e r

sh al l make re po rt the reo f t o t h e chairman of the board of d i r e c t o r s .

Viola t ion

of

th i s s ec t ion

i s

made

a

crime, subject

t o

f i n e

o r

imprisonm-

nent.

SECTION

12 .

Loans t o o r investments i n stock of a f f i l i a t e s .

(pages 33-34)

The

provisions recommended

by t h e

Federal Reserve Board with

respect t o t h e l imitat ions upon loans o r extensions of c r e d i t t o a f -

f i l i a t e s

by

me:.:ber banks

and

upon investments

i n t h e

s tock

o r

obl iga-

t ions of such a f f i l i a t e s by member banks have been adopted substantially

i : i t h e p r e s e n t b i l l . One exception t o this statement, however, nay be

noted.

Among

t h e

l imi ta t ions provided

by

th i s s ec t ion

i s a

r e q u i r e -

ment that a loan o r extension of c red i t to an a f f i l i a t e of a member

bank b e secured by col la te ra l having a market value o f a t l e a s t 20$

more than t h e amount of the loan o r extension, except loans or exten-

sions secured by ob l iga t ions of the United States, Federal intermediate

credit banks, Federal land banks o r paper e l i g ib le f o r rediscount

by Federal reserve banks. The Board recommended that a n exception

t o t h i s l i m i t a t i o n b e made also i n favor . o f loans secured by ob l iga -

t ions of the Reconstruction Finance Corporation, b u t such a n exception

i s n o t contained i n t h e p resen t b i l l .

SECTION

13 .

Limita t ion on Investments i n Bank Pr emis es . (Page 34)

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- 2 3 -

The Federal Reserve Board reConnended a provis ion that no

national banl:, x?ithov.t t h e permission o f t he Comptroller of the

Currency, and no State member bank, without t h e permission of t h e

Board, shall invest i n bank premises, o r i n stock o r ob l iga t ions o f ,

o r in

loans

t o , a n y

corporation orming

o r

holding

i t s

banlc premis es ,

a sum

exceeding

t h e

amount

o f t he

bank's cap it al s tock .

The

presen t b i l l adopts

i n

substance this provision recom-

mended

by t h e

Board,

b u t t h e

language

of the

provis ion

i s

somewhat

changed and loans upon t h e secu r i ty o f t he stock of any such corpora-

tion holding bank premises a r e included within t h e investments t o which

t h e l imi ta t ion app l ies .

SECTION 14 .

J u r i s d i c t i o n of Federal Courts over cases involving

for ei gn banking tr an sa ct ion s. (Page

35)

The present b i l l contains a provis ion , n o t found i n

S.4115 and no t recommended b y t h e Federal Reserve Board, which c o n -

fe rs upon Di s t ri c t Courts of the United States jur isdiction over

an y case t o which a corporation organized under t h e laws of the

United States i s a p a r ty and which arises out of t r ansac t ions i n -

volv ing in ternat ional o r forei gn banking, eit her di re ct ly o r through

t h e agency, ownership o r control of branches or of l o ca l i n s t i t u t i o n s

i n foreign countr ies .

SECTION 15 .

National Banks granted a l l powers of S t a t e Banks. (Page 3 6 . )

The Federal Reserve Board recommended t h e omission of a

provis ion of Section 15 of S.4115 authorizing a national banlc t o engage

i n a l l

forms

of

banking business permitted

by t he

laws

o f t he

S ta te

i n

which

i t i s

located

t o

"banks

of

deposit

an d

discount" organized under

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L-17

370

such State laws, except t o t h e extSilt that t h e exercise of sudh powers i s

forbidden by t he laws of the United States. The Board said i n t h i s con~

nection that this provision "apparently i s intended t o enable national

"banks t o compete more effectively with State "banks. I t s tendency would

be to lower t h e standards of banking i n t h e national banking system

t o t h e

standard

o f t he

State banks, where more liberal powers

a r e

granted

t o

State banks

by

S ta te

l a w .

The

provis ion

i n

question, however,

h a s

been retained

i n t h e

p r e s -

e n t

b i l l , w it h

t h e

qua l i f i cat ion that th i s sect ion sha l l take ef fe ct f i ve

years af ter t h e date of the approval o f t he Ac t .

SECTION 15 .

Dealings i n investment s e c ur i t i es , (pages 36-38)

The Board recommended that a number of provisions, contained i n

Section 15 of S.4115, which referred t o dealings i n investment securit ies

by national banks and prescr ibed cer ta in l imita t ions thereon, b e omitted

from t h e b i l l . I n this connection t h e Board s a i d: "This se ct io n would

make i t necessary f o r member banks t o dispose of a large amount of s ecu r i -

t i e s

a t

t h i s t ime which would

b e

very unfo rtu nat e. Since

i t i s

aimed

g e n -

e r a l ly

a t

investments

i n

s e c u r i t i e s ,

i t i s

believed that

i t s

purpose

i s

covered suf f ic ien t ly by t h e proposed substi tute f o r Section 3 of the B i l l .

The

d e f i n i t i o n

of

investment securities which

i s

contained

i n t he

l a w , a s

amended

by th e Act o f

February

25 , 1927 ,

would

b e

s t r i ck en

out

and apparent ly t h e Comptroller would b e given unlimited power t o prescr ibe

his own de fi ni ti on except that stocks could not be inc lud ed. This modi fi-

ca t ion i s undesirab le .

For t he reasons stated, i t i s recommended that this section b e

omit ted en t i re ly ."

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t«24~

Ir-17

1

The d e f i n i t i o n o f investment securities contained i n e x i s t i n g law

h a s been restored i n e f f e c t in the p r e s e n t b i l l . The other provis ions on

this subject, however, which

t h e

Board recommended

be

o mi tt ed , have been

re ta ined

i n t h e

present bill with certain changes

and

with

t h e

q u a l i f i c a -

t ion that t h e sec t ion sha l l n o t ta lce effect unti l f ive years after the

approval o f t he Ac t . Under Secti on 5 of th e present b i l l , fur thermore,

these provis ions a r e applicable also t o State member banks.

Dealings i n inves tment secur i t ies a r e l imi ted t o t he purchase and sale of

such se cu ri ti es , without reco urse, sol ely upon

t h e

order

and fo r t he

account

of

customers, except that

a

member bank

may

purchase

and

hold

f o r i t s own

account investment securi t ies under l imitat ions

a nd

re s t r i c t ions p resc r ibed

by regula t ion of the Comptroller of the Currency.

No member bank shall underwrite any issue o f s e c u r i t i e s .

The total amount of any one issue of investment securi t ies of any one

obligor purchased after this sect ion takes effect and held by a member bank

f o r i t s o w n

account sh al l

n o t

exceed

10 pe r

cent

of the

total amount

of

such issue outstanding, b u t this l imitat ion does n o t apply to any issue no t

i n excess of $100,000 and no t in excess of 50 p er cent of the c a p i t a l of the

bank; and the total amount of investment securi t ies of any one obligor

purchased after this sect ion takes effect and held by a member bank f o r i t s

own account s ha ll n o t exceed 1 5 p e r cent of the paid-up unimpaired capital

of the bank and 25 pe r cent o f i t s unimpaired surplus.

Ho

member bank

may

purchase

th e

stock

of any

corporat ion, except

a s

o t h e r -

wise permitted

by l aw, and

except that

a

bank

may

inves t

n o t

more than

-The present b i l l provides i n e f fec t tha t :

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3 7 *

- 2 5 - L - 1 7

1 5 p e r

cent

o f i t s

unimpaired, capital

and

surplus

i n t h e

s tock

of

safe

d e -

p os it companies. These li mi t at io ns do no t apply t o ob l iga t ions of the

United States ,

t o

obligations (whether general

o r

spec ia l )

of any

Sta te

o r

an y

subdivis ion thereof,

or to

obligations issued under

t h e

author i ty

of

th e Federal Farm Loan A c t .

SECTION

16( b )

Capital Requirements

of

State Member Banks. (Page

3 9 ) .

The present b i l l conta ins a provis ion, n o t found in S. 4115 and

n o t

recommended

b y t h e

Federal Reserve Board, which amends Section

9 of

th e

Federal Reserve

Act so as to

el iminate

th e

provis ion

o f

e x i s t i n g

lav/

under which a State bank i s permitted to become a member o f the Federal

Reserve System with

a

capital equal

to

only

6 0 p e r

cent

of the

amount

required

f o r t h e

organiza t ion

of a

national bank

in the

place

i n

which

i t

i s s i t u a t e d . The c a p i t a l o f Sta te member banks he r ea f t er admit ted to the

System, therefore, would

b e

required

i n a l l

cases

to be

equal

to

that

required

of

national banks located

i n

p laces

o f

l ike s ize.

SECTION 17.

Divorce

of

Stock

of

National Banks from stock

of

other corporations. (Page

3 9 ) .

The

pres ent b i l l provides tha t , a f t e r f i ve years from

t h e

passage

of the Act , no

c e r t i f i c a t e

of

stock

of a

national bank shall represent

t h e s tock of any other corporation "except a member bank"; n o r shall owner-

ship

o r

t r a n s f e r

o f a

s t o c k c e r t i f i c a t e

of a

national bank

b e

conditioned

upon

th e

ownership

o r

t r a n s f e r

of a

c e r t i f i c a t e

of

stock

o f

another corpor-

ation "except a member bank".

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Ir-17

This provision

i s a s

recommended

by th e

Federal Reserve Board

except that

( l ) t h e

Board suggested that

i t

become effective three years

a f t e r th e passage of the Act ins tead of f ive yea rs the rea f te r ; and (2) the

qua li fyi ng phrase "except

a

member bank"

was not

contained

i n t h e

Board's

recommendation.

(Similar provis ions regarding cer t i f ica tes

of

s tock

of

State

member banks

a r e

included

i n

Section

5(b) of the

p r e s e n t b i l l ) .

SECTION 18.

Right

of an

a f f i l i a t e

of a

national bank

to

vote stock held

b y i t i n

such bank. (Pages 39 -4 5) .

The


a

number

of

changes

in the

provisions which appeared

i n

sect ions

19 and 20 of S. 411 5

with reference

t o the

conditions under which

an

a f f i l i a t e

of a

national bank might vote

stock held by i t i n such bank, and also recommended that a new sec t ion be

added imposing similar requirements upon affiliates

o f

State member banks.

The present bi l l does n o t contain th e provisions recommended b y t h e Board

on

this subject , a l though,

a s

explained heretofore under Section

5 ( b ) , a

State member bank i s required t o obtain from i t s holding company a f f i l i a t e s

an

agreement

to

comply with

t h e

same requirements which

a r e

appl icable

t o

nat ional bank a f f i l i a t e s under th is sec t ion . In this connection th e Board

said:

"Under t h e d e f i n i t i o n o f ' a f f i l i a t e ' c o n t a i n e d i n Section 2 and

under

t h e

provis ions

of

Sections

6, 27, and 28 of t he

B i l l

( S .

4115),

i f

amended i n accordance with th e recommendations contained i n this report ,

a l l

holding companies which control member banks

a n d a l l

banks owned

o r

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374

*27- I r -17

cont ro l led by such holding companies will be a f f i l i a t e s of such member

banks an d w i l l b e requi red to make reports and submit to examinations

whenever deemed necessary o r advisable by the Comptroller of the

Currency, t h e Federal Reserve Board o r examiners appointed b y them; and ,

t he r e fo re , i t i s suggested that th e provisions regarding examinations and

condi t ion reports of holding companies be omitted from th is sec tio n and

from

th e

co rres pond ing se ct io ns reg ard ing hol din g companies which

own or

control State member banks.

I t i s

also suggested that there

b e

i n se r t ed

i n

Section

19 and

in t h e

proposed

new

Section

SO

cer ta i n add i t i ona l provis ions providing

f o r t h e

r egu l a t i on

an d

supervis ion

of

holding companies

a n d

requi r ing

a l l

el igible State banks control led

by

them

to be

members

o f t h e

Federal

Reserve System,"

The

s a l i en t f ea tu r e s

o f t h e


by the

Board

on

this subject were

a s

fo l lo ws : Shares owned

o r

cont ro l l ed

by an

a f f i l i -

a te o f a nat ional bank or any representa t ive o r agent o f such a f f i l i a t e

s h a l l n o t b e voted "unless such affi l iate h a s f i l e d a n agreement with the

Comptroller of the Currency to comply wi th t h e provis ions of th i s sec t ion .

Within one year from th e da te of any such agreement each nonmember State

bank owned o r cont ro l l ed by s u c h a f f i l i a t e , i f e l i g i b l e , s ha l l apply f o r

membership

i n t h e

Federal Reserve System

an d i f n o t

admitted

o r , i f

a f t e r

admission,

i t

ceases

to be a

member, such a f f i l i a t e sh al l div est i t s e l f

o f a l l

i n t e r e s t

i n

such bank. Each such a f f i l i a t e sh al l ,

on and

a f t e r

January 1 , 1934 , hold unpledged re ad il y marketable as s et s, oth er than

bank stock, equal t o 1 5 p e r cent of bank stocks held b y i t an d shal l

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Ir 17

•****

o

/ o

2 8

r e inves t i t s n e t earnings aboVe 6 pel

4

i n such as se ts u n t i l they

amount t o 2 5 p e r cent of "bank shares held by i t ; with a proviso that , i n

computing t h e amount of such as se ts , cred it sha ll h e given f o r contr ibu-

tions made during t h e preceding three years t o banks owned o r contro l led

by t he a f f i l i a t e . F a il ur e on the p a r t of any such a f f i l i a t e t o comply with

t h e

provis ions

o f t he

sect ion

or o f the

agreement

i s

ground

f o r t h e

termina-

t i o n

o f t he

agreement

by t he

Comptroller

of the

Currency.

Uo

national bank

shall make

ny

loan

on t he

secu r i ty

of the

stock

o f , o r b e t h e

purchaser

or

holder

o f t he

stock

o f , a n y

such affiliate which owns

or

controls

such bank,

o r

make

an y

loan

t o any

s u c h a f f i l i a t e

on t he

secu r i ty

of the

stock of a corporation owned or contro l led by such a f f i l i a t e , u n l es s

necessary t o prevent loss upon a debt previously contracted i n good

f a i t h ; and stock so acquired shall b e disposed of with in two years .

The vot ing of stock held by a f f i l i a t e s w h en a n agreement o f t he kind

mentioned i s n o t i n e f f e c t i s made a crime punishable by f i n e ; and

o f f i c e r s and employees o f a f f i l i a t e s which have entered into such a n

agreement with t h e Comptroller o f t he Currency a r e made subject t o c e r -

tain cr iminal provisions with reference t o f a l s e en t r i e s .

The


b y t h e

Board with reference

t o

a f f i l i a t e s of State member banks were i n large measure similar t o those

with reference

t o

na ti on al banks except th at

t h e


i s

subs t i tu ted

f o r t h e

Comptroller

o f t he

Currency. Under

t h e

Board's

recommendations,

no

State member bank might remain

a

member after

one

y ea r u n l e s s a f f i l i a t e s

of

such bank f i l e

t h e

required agreements with

t h e Board.

The provis ions o f t he present b i l l wi th reference t o t he

vot ing r ights of a f f i l i a t e s of national banks, which do no t contain

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20u

1 1 7

t h e

provis ions

a s

recommended

by the

Board,

a r e i n

"brief form

s e t

f o r t h in t he follow ing paragraphs;

Shares of a national hank controlled by a holding company

af f i l i a te , inc lud ing those he ld by a t r u s t ee f o r t h e "benefit of the

shareholders

o f

such a f f i l i a t e , sha l l

no t he

voted unless such a f f i l -

iate shall have obtained a voting permit from th e Federal Reserve

Board; and in acting upon a n appl ica t ion f o r such permit, t h e Board

shall consider th e f inanc ia l condi t ion of t he app l i can t , t h e general

character o f i t s management and the probable effect of the grant ing

of t he permit upon th e a f f a i r s of such bank. Ho permit sh al l b e

granted except upon th e following conditions:

( a ) Each such holding company a f f i l i a t e s ha ll agree : t o

submit

to

examinations,

a t i t s own

expense, disc losi ng fu l l y

th6

re la t ionsh ip be tween such a f f i l i a te and such bank; that such examin-

a t i ons

may be

made

of

each bank owned

o r

cont ro l led

by the

a f f i l i a t e ;

and

tha t publ ica t ion

of

s ta tements

of

condition

of

such banks

may

be required.

( b ) Af te r f ive years a f te r t h e passage of t he Ac t , every

such holding company a f f i l i a t e sh al l posse ss unpledged re ad il y m a r -

ketable assets other than bank stock in an amount n o t less than 12$

of t he pa r

value

o f a l l

bank stocks controlled

b y

s u c h a f f i l i a t e ,

which amount shall be increased by no t less than 2$ annually up to

25$ thereof and by r e - i nves t i ng i n such re ad il y marks tab le as se ts

n e t

earnings

i n

excess

of 6$

annually un t i l such

25$

requirement

i s

reached.

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Ir-17

( c )

Howevei

1

, where

t h e

shareholders

of the

a f f i l i a t e

a r e

them-

selves liable urider th e double l iab i l i ty p rov is ions cn the bank stock

held by th e a f f i l i a t e , th e l a t t e r s h a l l be required only t o es t ab l i sh ,

o u t o f i t s n e t

earnings

i n

excess

of 6$, a

reserve

of

readi ly market-

able assets equal t o 12$ of th e p ar value of bank stocks controlled b y

i t , a n d readi ly marketable assets required of such a f f i l i a t e may be

used

f o r

replacement

o f

c a p i t a l

i n , o r

losses incurred

b y ,

banks

a f f i l i a t e d w i t h i t ; b u t a n y def ic iency so incurred shal l be made u p

within such period a s t h e Federal Reserve Board may p resc r ibe .

(d )

That o f f icers , d i rec tors , agen ts

a n d

employees

of

such

a

holding company affil iate shall b e sub ject to the same pe na lt ie s f o r

f a l se en t r i e s a s o f f i c e r s and employees of member banks a r e subject

to

under Section 5209

o f th e

Revised Statutes.

( e ) That eve ry such hol din g company a f f i l i a t e s ha l l show th at i t

does n o t have any i n t e r e s t in a nd i s no t p a r t i c i p a t i n g in the manage-

ment

of any

securities company

and

that

i t

w i l l

n o t

acquire such

a n

i n t e r e s t o r p a r t i c i p a t i o n ; t h a t , i f i t h a s such an i n t e r e s t o r p a r t i -

c ipat ion

i t

wi l l , wi th in f iv e years , d ives t i t s e l f thereof ;

a n d

that

i t will declare dividends only out of ac tua l n e t earnings.

I f any holding company a f f i l i a t e viol at es any of the p rov i -

sions

of

t h i s

a c t , t h e


may

revoke

i t s

vo t ing

p e r -

m i t a f t e r n o t i c e , an d t h e r e a f t e r no national bank whose stock i s c o n -

t r o l l e d b y such affil iate shall receive Government deposits or pay any

dividend to such a f f i l i a t e .

Where such a voting permit of an a f f i l i a t e h a s been revoked,

t h e f r anch i se of any national bank controlled b y such an a f f i l i a t e sh a ll

b e sub ject t o f o r f e i t u r e .

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3 7 8

-31- I r -17

SECTION

19 .

Relationships between member banks and s ecu r i t i e s

dea le r s o r corporations making collateral loans.

(Pages 45 . 46)

Section 18 of S . 4115 contained provisions prohibit ing

d i r e c t o r s , o f f i c e r s o r employees of member banks to be d i r e c t o r s , o f -

f i c e r s o r employees of cer ta in o ther specif ied c lasses of business

en te r p r i s e s and p roh ib i t ing a member bank from clearing checks o r doing

t h e ordinary banking business of a correspondent f o r a n y business en ter -

p r i s e s of the classes mentioned. The Board recommended t h e omission of

these provisions and they a r e n o t found i n t he p r e s en t b i l l .

The

Board suggested, however,

a

subst i tu te paragraph

on

th is

subject

a n d

sa id

i n

this connection:

I t h a s been clearly demonstrated that aff i l iat ions between

member banks

and

security companies have contributed

to

undesirable

banking deve lopments . There a r e , however , d i f f icu l t ies in the way of

accomplishing a complete divorce of member banks from th ei r a f f i l i -

ates ar ising from t h e f ac t tha t a law intended f o r that purpose i s

l i k e ly to be suscept ib le of evasion o r e l s e t o apply to many cases

to which i t i s n o t intended t o appl y. Therefore, th e Board i s no t

prepared a t this time t o make a definite recommendation, b u t s u b -

mits ,

f o r t h e

considerat ion

of the

Committee

on

Banking

and

Currency,

a

s u b s t i t u t e

f o r

Section

18

which

i s

designed

to

provide

f o r t h e

divorce

of

sec uri ty a f f i l i a t e s from member banks a f t e r three ye ar s. "

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—32—

Ir 17

The

present "bill provides,

i n

substantial accordance with

t h e provision recommended b y t h e Board, that no member bank shall

be

a f f i l i a t e d w i t h

a

secur i t ies corpora t ion

i n t h e

manner described

i n

Section

2 ( b ) o f t he

present bill (where

th e

w o rd "a f f i l i a t e "

i s d e -

f ined so a s no t t o include holding company a f f i l i a t e s ) . A v io l a t ion

of

th is provis ion subjec ts

t h e

member bank

to a

penal ty

o f

$1,000

a

da y , i n the

d i s c r e t i o n

o f the

Federal Reserve Board,

a n d i f t h e

v i o l a t i o n

i s

continued

f o r s i x

months after warning from

t h e

Board,

t h e

bank*

s

f ranch i se

may be

f o r f e i t e d ,

i f a

national bank,

o r i t s

membership

i n t h e

Federal Reserve System

may be

f o r f e i t e d ,

i f a

State bank. The Board recommended that this provision b e e f f e c t i v e

three years a f te r

t h e

passage

o f the Ac t , bu t t he

p r e s e n t b i l l

p r o -

vides a pe r iod o f f ive years before the provis ion becomes effect ive.

Under

th e

Board's recommendation

th e

f ranch i se

of a

national bank

might

b e

f o r f e i t e d

f o r

v i o l a t i o n

of

th is provis ion

i n

accordance

with Section 5239 o f t he Revised Statutes, b u t under t h e present

b i l l

th e

forfe i ture would

b e

under Section

2 of the

Federal Reserve

A c t ,

(under which s u i t

f o r

f o r f e i t u r e

may be

brought

b y

d i r e c t i o n

of

t h e

Federal Reserve Board.)

SECTION

20.

Branches

of

na ti on al Banks. (Pages

46. 47)

The recommendations made by the Federal Reserve Board

with respect t o t h e provis ions o f Section 21 of S. 4115 regarding

branches

of

national banks have been incorporated

i n t h e

present

b i l l . Cer tain provis ions

o f the

present bill , however, regarding

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380

L 17

- 3 3 -

matters concerning which t h e Board recommended no changes, may

b e

noted:

1. The

p resen t h i l l r equ i re s

t h e

approval

of the

Comptroller o f the Currency instead o f tha t of the Federa l R e -

serve Board

f o r t h e

establishment

of a new

branch

by a

national

bank.

2 . Out of town branches may be established only i n those

States where

the law

expressly authorizes State banks

t o

e s tab l i sh

than

a n d i n

accordance with

t h e

r e s t r i c t i o n s

of

S ta te

l a w a s t o l o -

ca t ion, and in no case outside o f the S ta te i n which t h e bank i s l o -

cated.

3. An

exception

i s

made

t o t h e

requirement that

a

n a t i o n -

a l bank have $500,000 capital stock i n order t o e s t a b l i s h an out of

town branch,

so a s to

provide that where

t h e

bank

i s

loca ted

in a

State having

a

popu la t ion

of

less than 1,000,000.

and i n

which there

i s n o

ci ty with

a

population exceeding 100,000,

t h e

required capi ta l

f o r t h e

establishment

of an out of

town branch shall

b e

$250,000.

(The provis ions a s t o t h e establishment of branches of

State member banks,

i n t h e

form recommended

b y t h e

Board,

a r e

contained

i n

Section

5 ( b ) o f t h e

p resen t b i l l . )

SECTION 24

Reports

of

a f f i l i a t e s

of

national banks, (pages 49,50).

The


a

change

i n

Section

27

of S . 411 5 on th i s sub jec t , i n order that reports o f a f f i l i a t e s of

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381

urf

3 4

national "barJ.cs may be required only when deemed necessary and to

c l a r i f y t h e provis ions o f t he bil l with respect t o such reports" .

The present b i l l p rovides that a na ti on al "bank s ha l l o bt ai n from

each of i t s a f f i l i a t e s , other than member banks, and f u r n i s h t o t he

Comptroller of the Currency no t le ss than thr ee repo rt s each year on

t h e saae dates on which condition reports a r e required o f t he bank

and

such additional reports

a s t h e

Comptroller

may

deem necessary.

The

term "af f i l ia te" includes hold ing company af f i l ia te .

T he p r o -

vision requir ing such reports

i s

st i l l mandatory;

b u t

they

a r e r e -

quired

t o

contain only such information

a s i n t h e

judgment

of the

Comptroller shall

b e

necessary

t o

d i sc lose fu l ly

t h e

r e l a t i o n s

b e -

tween such af f i l ia te a nd such bank and as to t he e f f e c t of such re l a-

tions upon t h e a f f a i r s of such bank. Such rep or t s of a f f i l i a t e s

s h a l l b e published by t he bank o n t h e same conditions a s govern i t s

own condi t ion repor ts . The bank i s subject t o a penal ty f o r f a i l u r e

t o render such re po rt s.

(Subs tan t ia l ly t h e same provisions a r e contained i n S e c -

t i o n

5 (b ) o f t he

present b i l l wi th reference

t o

r ep o r t s

o f

a f f i l i -

a t e s

of

State member banks, except that

t h e

r epor t s

a r e t o b e

made

t o t h e

Federal Reserve Board instead

o f t o t he

Comptroller

of the

Currency.)

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- 3 5 -

SECTION

25 .

Examinations

of

a f f i l i a t e s

of

national

ba nks. (Pages 50-53)

The Federal Reserve Board recommended a s u b s t i t u t e f o r t h e

provis ions of Section 28 of S. 4115 with respect t o examinations of

a f f i l i a t e s of na t iona l "banks. Some o f t h e provis ions of the Board's

substitute have "beat adopted i n t h e p r e s en t b i l l and others have

n o t .

The

Federal Reserve Board's su bs ti tu te author ize d

t h e

exam-

in a t io n

of

a f f i l i a t e s

of

national banks

t o b e

made when deemed neces-

sary

t o

obtain adequate information regarding

t h e

relations between

t h e

bank

and t he

a f f i l i a t e

and t he

e f f e c t

of

such relations upon

t h e

bank.

The

pre sen t b i l l req ui res that examiners

i n

making

t h e

examin-

a t i o n of any national bank shall include such an examination of the

a f f a i r s o f a l l o f i t s a f f i l i a t e s , other than member banks, a s shall

b e necessary t o d i sc lose fu l ly t h e relations between t h e bank a n d i t s

a f f i l i a t e s a n d t h e e f fec t the reo f ; and au thor izes t h e f o r f e i t u r e of

t h e f r an ch i s e o f t he bank i n t h e event of the r e f u s a l o f t he a f f i l i -

a t e t o give information o r t o permit such an examination.

The present b i l l au thor izes t h e pub l ica t ion of an examilig-

at ion repor t of a national bank or a f f i l i a t e a f t e r 90 days ' notice

i f t h e bank o r a f f i l i a t e f a i l s t o comply within 133 days with t h e

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- 3 6 -

recommendations

o f the

Comptroller

o f the

Currency "based

on

such

examination. This pro vis ion , r h i l e contained

in S . 4115, was

omitted

i n t h e

suggestion

of the

Board

on

th is su b jec t .

The Fede ral Reserve Board suggested ce r ta in oth er de ta il ed

provis ions , au thor iz ing t h e examiner t o examine officers and employees

of

a f f i l i a t e s under oath; p rovid ing that

t h e

expenses

o f the

examin-

a t ion

be

assessed

by th e

Comptroller against

t h e

a f f i l i a t e

a nd , i f no t

paid

by the

a f f i l i a t e , a g a i n s t

t h e

nat ional tank ;

and

providing that

a

r e f u s a l by th e a f f i l i a t e t o permit a n examination or to give informa-

t ion be penal ized by a f ine agains t t h e national baric of $100 p er d ay .

These suggestions of the Board have been substantially adopted i n

t h e pr e se n t b i l l , b u t t h e bi l l provides that the $100 pena l ty may

b e assessed and co l l ec t ed b y t h e Comptroller of the Currency rrhereas

the;

Board suggested th at

i t b e

assessed

by the

Board

a nd

co l l ec t ed

by

t h e

Federal reserve bank.

(Somewhat similar provisions with reference

t o

examinations

of

a f f i l i a t e s of State member banks a r e contained i n Sect ion 5(b) of the

presen t b i l l . )

SECTION

26.

Resumption of business by closed

na ti on al banks. (Pages 52, 53)

The presen t b i l l con ta ins a prov is ion , n o t found in S . 4115

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L- 17

a nd no t

recommended

by t h e

Board, under which,

i n a n y

case where,

i n t h e

opinion

o f the

Comptroller

o f the

Currency,

i t

would

be t o

t h e advantage of depos i tors and unsecured creditors of a closed

national bank

f o r i t t o

resume business upon

t h e

r e t e n t i o n

f o r a

reason-

able period,

o f a l l o r a

pa r t

o f i t s

depos i t s ,

t h e

Comptroller

may

permit such resumption of business i f 8 5 $ i n amount of depositors

and

unsecured cr ed it or s consent

i n

wr i t ing

t o

such re tent ion

o f d e -

p o s i t s .

I t i s

provided that this sect ion shall

n o t

a f f e c t

a n y

powers

which t h e Comptroller now ha s with respect t o t h e reorgan iza t ion of

national banks.

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