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7/16/47 AMENDMENTS TO H. R. 3351 WHICH ARE RECOMMENDED BY THE BOARD Amend Section 3 as follows: Change the figure ff 10ff appearing on page 2, l i n e 20, to the f i g - ure "15". I n s e r t the following a f t e r the comma on page 2 , l i n e 21: "or any company which i s a bank and which d i r e c t l y or i n d i r e c t l y owns, controls, or holds w i t h power to vote 15 per centum or more of the voting shares of one or more other banks, or any company which d i r e c t l y or i n d i r e c t l y owns, controls, or holds w i t h power to vote 15 per centum or more of the voting shares of one bank provided such bank operates one or more branches," S t r i k e the word "and" appearing on page 2 , l i n e 23. A f t e r the word "banks" on page 3, l i n e 3 , add the following: "or of only one bank i f such bank operates one or more branches" Substitute a semicolon f o r the period on page 3 , l i n e 7 , and add the following: "and (3) any company which i s a bank and which the Board determines, a f t e r notice and opportunity f o r hearing, d i r e c t l y or i n d i r e c t l y exercises ( e i t h e r alone or pursuant to an arrangement or understanding w i t h one or more other persons) such a controll i n g influence over the management or policies of one or more other banks as to make i t necessary or appropriate i n the public i n t e r e s t or f o r the protection of investors or depositors that such company be subject to the obligations, duties and l i a b i l i t i e s imposed i n t h i s Act upon bank holding companies." S t r i k e the words "two or more" appearing on page 3, l i n e 13, and substitute therefor "the stated number o f " . Change the f i g u r e "10" appearing on page l i n e 8, t o the f i g - ure "15". Add new subsection ( f ) as follows: " ( f ) For the purposes of t h i s section there s h a l l be excluded from consideration a l l voting shares of banks or other companies - 2acquired or held by a bank i n a f i d u c i a r y capacity, except where such voting shares are acquired or held f o r the b e n e f i t of a l l or a majority of the persons b e n e f i c i a l l y interested i n such bank or except where the Board, a f t e r notice and opportunity f o r hearing, finds that such acquisition or holding i s being employed as a device f o r avoiding the provisions of t h i s Act." Amend Section 5 as follows: Add the words "banking or" on page 7 , a t the end of l i n e 4Add the following a f t e r the comma on page 7 , l i n e 14: "or engaged i n the business of furnishing managerial, auditing, supervisory, purchasings and other similar services solely to such bank holding company and i t s subsidiaries, or i n the business of procuring and servicing s o l e l y f o r such bank holding company and i t s subsidiaries investments and paper e l i g i b l e f o r bank investment, or i n the business of l i q u i d a t i n g assets acquired from such bank holding company and i t s subsidiaries," S t r i k e the words "at the request of" appearing on page 7, l i n e s 20 and 21, and substitute t h e r e f o r the following: "which have been requested t o dispose of such voting shares, sec u r i t i e s or obligations by" A f t e r the word "subsidiaries" and before the semicolon appearing on page 7, l i n e 22, add the following: "or which have been acquired from such subsidiaries w i t h the p r i o r approval of the Board" Add new subsection (d) as follows: "(d) Nor s h a l l the prohibitions of t h i s section apply to voting shares or other securities or obligations which are held or acquired by a bank, which i s a bank holding company, i n a f i d u c i ary capacity or which are otherwise l a w f u l l y owned by such bank or any of i t s wholly owned subsidiaries on the e f f e c t i v e date of t h i s Act; nor s h a l l the prohibitions i n t h i s section apply t o investment s e c u r i t i e s of the kinds and amounts e l i g i b l e f o r investment by national banks under the provisions of section 5136 of the Revised Statutes, I f , while such bank or bank holding company owns - 3or controls such shares, securities or other obligations, the Board, a f t e r notice and opportunity f o r hearing, determines t h a t the ownership or control of such shares, securities or obligations i s being employed as a device f o r avoiding the provisions of t h i s Act, i t may by order require such bank or bank holding company t o dispose of a l l or any part thereof f o r t h w i t h . " Amend Section 6 as follows: S t r i k e the words "owning, e i t h e r d i r e c t l y or i n d i r e c t l y , 10 per centum or more of the voting shares of each of two or more banks," appearing on page 8, l i n e s 10 and 11, and substitute therefor the follow- "becoming a bank holding company, as defined i n Section 3 ( a ) ( 1 ) of this Act," Change the period on page 8 , a t the end of l i n e 15, to a colon, and add the following: "Provided, however, That nothing herein contained s h a l l be construed to apply t o the acquisition by a bank holding company of any a d d i t i o n a l voting shares of a bank i n any case where such bank holding company, p r i o r to such acquisition, owned a majority of the voting shares t h e r e o f , " Change the period on page 9 , a t the end of l i n e 13, to a colon and add the following: "Provided, however, That nothing herein contained s h a l l be construed t o authorize the approval of any acquisition subject to paragraphs ( a ) , ( b ) , or (c) of t h i s section where, regardless of i t s competitive or other aspects, the e f f e c t of such acquisition may be to expand the size and extent of a bank holding company system beyond l i m i t s consistent with adequate and sound banking and the public i n t e r e s t . The factors stated i n t h i s section s h a l l likewise be considered by the Board, the Comptroller of the Currency or the Federal Deposit Insurance Corporation i n determining whether t o approve an application of any bank, which i s a part of a bank holding company system, to establish a branch or branches of such bank." ~4Amend Section 7 as follows: Change the period on page 9, a t the end of l i n e 23, t o a colon and. add the following: "Provided, however, That any bank may, with the p r i o r approval of the Board, accept such c a p i t a l stock as a security f o r debts previously contracted." Change the f i g u r e "10" to the f i g u r e "20" on page 10, l i n e 12. Add the following sentence a f t e r the period on page 10, l i n e 13: "Non-interest-bearing deposits to the c r e d i t of a bank s h a l l not be deemed t o be a loan or advance t o the bank of deposit, nor s h a l l the giving of immediate c r e d i t t o a bank upon uncollected items received i n the ordinary course of business be deemed to be a loan or advance t o the depositing bank." Amend Section 9 as followst Change the word "par" appearing on page 12, l i n e 8 , to the word "book". A f t e r the comma following the word "banks" appearing on page 12, l i n e 18, add the following: "and, w i t h the p r i o r approval of the Board, to increase the capit a l or surplus of i t s subsidiary banks," Amend Section 13 as follows: S t r i k e the f i g u r e " ( 1 ) " appearing on page 19, l i n e 13. S t r i k e everything from l i n e 3 to l i n e 24, inclusive, on page 21, and substitute therefor the following: " ( f ) ( 1 ) Subsection (d) of Section 26 of the I n t e r n a l Revenue Code, as amended, i s amended to read as follows: " ' ( d ) BANK HOLDING COMPANIES.—In the case of a bank holding company (as defined i n the Bank Holding Company Act of 1947), the amount of the earnings or p r o f i t s which the Board of Governors of the Federal Reserve System c e r t i f i e s -5to the Commissioner has been devoted by such company during the taxable year to the acquisition of r e a d i l y marketable assets i n compliance with section 9 of the Bank Holding Company Act of 1947. The aggregate of the c r e d i t s allowable under t h i s subsection f o r al|. taxable years s h a l l not exceed the amount required to be devoted under such section 9 t o such purposes, and the amount of the c r e d i t f o r any taxable year s h a l l not exceed the adjusted net income f o r such y e a r . 1 ff S t r i k e out everything from l i n e 1 to l i n e 7 , inclusive, on page 22, and substitute t h e r e f o r the followingi "(2) Subdivision (3) of subsection (b) of section 27 of the I n t e r n a l Revenue Code, as amended, i s amended to read as follows: ,fl ( 3 ) The bank holding company c r e d i t provided i n section 26(d).1 "(3) Section 112 (b) of the I n t e r n a l Revenue Code i s amended by i n s e r t i n g a t the end thereof the following: 111 (11) Distributions and Exchanges Pursuant t o Bank Holding Company Act of 1947. (A) D i s t r i b u t i o n s . — I n the case of a d i s t r i b u t i o n of property not permitted t o be owned by a bank holding company under the provisions of section 5 of the Bank Holding Company Act of 1947, held by a bank holding company on the date of enactment of such Act or t h e r e a f t e r l e g a l l y acquired pursuant to such Act, made pursuant to an order of the Board of Governors of the Federal Reserve System authorizing, approving or d i r e c t i n g such d i s t r i b u t i o n as e f f e c t u a t i n g the p o l i c y of the Bank Holding Company Act of 1947, to a shareholder i n such bank holding company as defined i n such Act, without the surrender by such shareholder of stock or securit i e s i n such company, no gain to the d i s t r i b u t e e s h a l l be Recognized• (B) Exchanges.—No gain or loss s h a l l be recognized i f a bank holding company, pursuant to an order of the Board of Governors of the Federal Reserve System authorizing, approving or d i r e c t i n g such exchange as e f f e c t u a t i n g the policy of the Bank Holding Company Act of 1947, transfers property not permitted to be owned by a bank holding company under the provisions of section 5 of such Act, to a corporat i o n organized to receive such property solely i n exchange for - 6a l l of the stock of such transferee corporation and such stock i s d i s t r i b u t e d f o r t h w i t h i n a d i s t r i b u t i o n subject to the previsions of subparagraph (A). (C) Application of Subsection.--The provisions of t h i s subsection s h a l l not apply unless the Board of Governors of the Federal Reserve System s h a l l c e r t i f y t h a t such d i s t r i b u t i o n or exchange was of property not permitted to be owned under the provisions of secticn 5 of the Bank Holding Company Act of 1947 and was riecessary or appropriate to effectuate the provisions of such Act, I n such c e r t i f i c a t i o n , the Board of Governors of the Federal Reserve System s h a l l specify and itemize the stock, securities or other property so d i s t r i b u t e d or exchanged. 1 "(4) Section 113 (a) of the I n t e r n a l Revenue Code i s amended by inserting a t the end thereof the following: 111 (23) Property Acquired i n D i s t r i b u t i o n Pursuant to Bank Holding Company Act of 1947. (a) I f property other than stock or securities i s acquired i n a d i s t r i b u t i o n subject to the provisions of section 112 ( b ) ( l l ) , then the basis of such property s h a l l be the same as i t would be i n the hands of the company d i s t r i b u t i n g such property; and an amount equal to the adjusted basis which such property had i n the hands of such d i s t r i b u t i n g company a t the ticae of such d i s t r i bution s h a l l be applied against and reduce the adjusted basis of ttoe stock i n respect of which the d i s t r i b u t i o n was made, and i f i n excess of such basis, such excess s h a l l be taxable i n the same manner as a gain from the sale or exchange of property* (b) I f stock or securities i s acquired i n a d i s t r i bution subject to the provisions of section 112 ( b ) ( l l ) , then the basis i n the case of the stock i n respect of which the d i s t r i b u t i o n was made s h a l l be apportioned, under regulations prescribed by the Commissioner with the approval of the Secretary, between such stock and the stock or securities acquired i n such d i s t r i b u t i o n , (c) Where stock or securities and property other than stock or securities are acquired i n a d i s t r i b u t i o n subject to the provisions of section 112 ( b ) ( l l ) , subparagraph (a) of t h i s subsection s h a l l be applied before subparagraph ( b ) . - 7(d) I f stock i s acquired by a bank holding company i n an exchange subject to the provisions of section 112 ( b ) ( l l ) ( B ) , then the basis of such stock s h a l l be the same as i n the case of the property exchanged; and when, i n a d i s t r i b u t i o n subject to the provisions of section 112 ( b ) ( l l ) ( A ) , such stock i s acquired by a d i s t r i b u t e e of such company, then the basis s h a l l be determined as though the stock were property other than stock or s e c u r i t i e s . (e) I f property i s acquired by a corporation i n a t r a n s f e r from a bank holding company subject to the provisions of section 112 ( b ) ( l l ) ( B ) , then the basis of such property s h a l l be the same as i t would be i n the hands of such bank holding company.tn Before the quotation marks appearing on page 22, l i n e 13, add the following: "or any subsidiary thereof as defined i n said Act" Before the quotation marks appearing on page 22, l i n e 19, add the following: "or any subsidiary thereof as defined i n said Act" Add new paragraph a t the end of l i n e 19 on page 22 as follows: "(h) Subsection (b) of Section 2 of the Banking Act of 1933, as amended, i s amended by adding the following paragraphs: 111 (4-) which owns or controls, d i r e c t l y or i n d i r e c t l y , e i t h e r a majority of the shares of c a p i t a l stock of a member bank or more than 50 per centum of the number of shares voted f o r the e l e c t i o n of directors of any one bank a t the preceding e l e c t i o n , or controls i n any manner the e l e c t i o n of a m a j o r i t y of the directors of any one bankj or " f ( 5 ) f o r the benefit of whose shareholders or members a l l or s u b s t a n t i a l l y a l l of the c a p i t a l stock of a member bank i s held by t r u s t e e s . 1 " 7/16/47 Testimony EXPLANATION OF SUGGESTED AMENDMENTS Section 3 I n Section 3(a) the d e f i n i t i o n of a bank holding company was changed from one whichr owns 10% or more of the voting shares of two or more banks t o one which owns 15%. This was done t o meet the recommendations of the Reserve C i t y Bankers and the Federal Advisory Council (the resolutions of which are both i n the Record), both organizations f e e l i n g t h a t the 10$ t o t a l would reach too many situations of a wholly incident a l and noncontrolling status. The d e f i n i t i o n of a bank holding company was also changed to include those situations where e i t h e r the holding company i s i t s e l f a bank and owns 15$ of the stock Of only one bank or where the holding company (not a bank) owns 15% of the stock of only one bank which operates branches. The theory underlying these changes was t o give f u l l e f f e c t to the purpose of the o r i g i n a l d e f i n i t i o n , namely, to reach a l l s i t u a tions where one company i n e f f e c t controls the operations of two or more banking o f f i c e s . A technical change i n the second paragraph of Sect i o n 3(a) was made to give e f f e c t to these changes. The term "subsidiary" (Section 3(G)) was changed to adjust the f i g u r e 10$ to 15% i n conformity w i t h the change i n the d e f i n i t i o n of a holding c ompany. Section 3 ( f ) i s a new section and was added so t h a t a bank w i l l not be held t o be a bank holding company i n those cases where the bank ! s ownership of the shares of other banks arises as a r e s u l t of l e gitimate business i n i t s t r u s t department. Appropriate exceptions are made when the shares are held f o r the majority of the bank's stockholders or when the f i d u c i a r y arrangement i s merely a device f o r avoiding the Act. Section ft The prohibition contained i n Section 5(a) was changed by adding the words "banking or" on l i n e 21, page 7. This was done t o protect a bank which i s a bank holding company i n the continued operation of i t s own banking business. The itemization of additional companies i n Section 5(b) i s to include by name those which are already included i n those "so closely r e l a t e d tc the business of managing, operating, or c o n t r o l l i n g banks as to be a proper incident t h e r e t o " , but which a number of the holding companies desired t o have s p e c i f i c a l l y included i n the l e g i s l a t i o n . - 2The change i n Section 5(c) was suggested by questions asked of Mr. Eccles a t the time of the Committee hearing i n the Senate. I t was pointed out t h a t the "request" appearing i n the o r i g i n a l version of the b i l l would appear to have to be made by the banking a u t h o r i t i e s of the holding company — an a u t h o r i t y which the banking agencies probably do not have. As changed, the holding company i s permitted to take from i t s banks those securities which the banking a u t h o r i t i e s have requested the bank to get r i d o f , or which the Board approves. Section 5(d) i s a new section and was added i n order t o carry out the previous amendment respecting the ownership of bank shares i n a f i d u c i a r y capacity and t o protect those r e l a t i v e l y few situations where a member bank already l a w f u l l y owns, d i r e c t l y or i n d i r e c t l y , some voting shares of nonbanking companies. For example, the Georgia Trust Company, which i s i t s e l f a bank holding company, owns both d i r e c t l y and i n d i r e c t l y a number of corporate shares. These shares were l a w f u l l y acquired t y the bank p r i o r to i t s admission t o the Federal Reserve System." "While the bank cannot acquire any additional shares, i t nevertheless i s permitted as a member bank t o r e t a i n those which i t had thus previously lawf u l l y acquired. The amendment simply continues the status quo of t h i s and s i m i l a r s i t u a t i o n s . Section 5(d) also allows bank holding companies t o invest t h e i r surplus funds i n such securities as are e l i g i b l e f o r i n vestment by a national bank. I t provides, however, t h a t i f a t any time the Board finds t h a t the ownership of such shares i s being employed as a device f o r avoiding the Act, the holding company can be required t o d i s pose of the shares immediately. Section 6 Section 6(a) has been amended to the d e f i n i t i o n of a bank holding company. bank holding company, which already owns a bank, to purchase minority stock interests proval of the Board. give e f f e c t to the changes i n Another amendment permits a majority of the shares of a i n such bank without p r i o r ap- Section 6 ( d ) , which contains the standards f o r agency action i n deciding whether to approve bank holding company expansion, has been amended t o include a provision which would p r o h i b i t such expansion, even though no monopolistic development be involved, i f the banking operations of the holding company are so geographically extensive as t o be inconsistent with adequate and sound banking i n the public i n t e r e s t . This amendment was suggested by the Reserve City Bankers and the Federal Advisory Council. The amendment also makes i d e n t i c a l standards applicable to agency action i n permitting the establishment of branches of a bank which i s a part of a holding company system. - 3Section 7 By amendment t o Section 7(b) a bank, which i s otherwise proh i b i t e d from accepting the stock of a bank holding company or any of i t s subsidiaries as c o l l a t e r a l f o r c r e d i t extended, i s permitted w i t h the approval of the Board t o accept such c o l l a t e r a l f o r any debts which have previously been contracted. Section 7 ( c ) , which defines the maximum aggregate amount of loans which any bank may make to a bank holding company and i t s subsidia r i e s , i s amended to exclude from the t o t a l of any such loans non-interest-bearing deposits and credit allowed f o r uncollected items received i n the ordinary course of business by such bank. This amendment was recommended t y representatives of the bank holding companies who f e l t t h a t without such a proviso i t might be possible t o construe the remaining language i n the section to include t h i s run-of-the-mine banking business i n calculating the t o t a l amount of c r e d i t permitted by the section. Section 9 Section 9 was designed t o continue i n force the present provisions of the law respecting reserve requirements. The word "par1* appearing on l i n e 25, page 14, was changed to "book" i n order to carry out t h a t i n t e n t i o n . The word "par" was merely a c l e r i c a l mistake i n the o r i g i n a l d r a f t . The section i s also amended t c allow the use of the reserve fund to increase the c a p i t a l or surplus of subsidiary banks w i t h the approval of the Board. This change was made a t the request of the representatives of the bank holding companies who urged t h a t there might be situations where no c a p i t a l impairments of any of their.banks might e x i s t ( i n which event the law permits them to replace c a p i t a l ) , but where, nevertheless, i t might be desirable and appropriate f o r the holding company t o increase the c a p i t a l or surplus of such banks. Section 13 The changes i n Section 1 3 ( f ) ( 1 ) and Section 1 3 ( f ) ( 2 ) are purely technical and were suggested a f t e r discussions w i t h the technical taxing s t a f f of the Treasury Department. Section 1 3 ( f ) ( 3 ) and Section 1 3 ( f ) ( 4 ) were added (also a f t e r discussion with the Treasury o f f i c i a l s ) i n order t o provide appropriate t a x protection i n the case of d i s t r i b u t i o n s i n kind by bank holding companies under the provision of Section 5 of the Act. Similar provisions were enacted i n 1935 to cover comparable situations occurring as a r e s u l t of the death-sentence requirements of the Public U t i l i t y Holding Company Act of 1935. Section 1 3 ( g ) ( 1 ) and Section 1 3 ( g ) ( 2 ) were amended t o include i n the exemption from the Investment Company Act and the Investment Advisers 1 Act "subsidiaries 11 of bank holding companies as w e l l as bank holding companies themselves. This was done t o prevent possible dual regulation of such companies as a r e itemized i n Section 5 ( b ) , which perform services s o l e l y f o r the bank holding company and i t s subsidiaries. I n his l e t t e r t o Chairman Tobey of May 23, 1947, the Chairman of the Securities and Exchange Commission pointed out t h a t "The Commission agrees t h a t there i s no need f o r regulation under the Investment Company Act or the Investment Advisers 1 Act of companies which w i l l be subject to r e g u l a t i o n under the Bank Holding Company Act . . . " Section 13(h) was added t o prevent a technical loophole from developing i n e x i s t i n g law, which might permit those companies which are presently "bank holding company a f f i l i a t e s " but which might not be "bank holding companies" under t h i s Act to engage i n the s e c u r i t i e s business or to borrow from a subsidiary bank i n excess of statutory l i m i t a t i o n s .
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