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Supplementary memorandum to be attached
to Mr. Vest's memorandum of April 3rd
regarding Bank Holding Company Bill.




< .
,
AMENDMENTS TO S. 2318 PROPOSED BY
MOFKIS PLAN REPRESENTATIVES

Representatives of the Morris Plan group have submitted
to the Senate Banking and Currency Subcommittee a lengthy memorandum
which sets forth their proposals for changes in the bank holding
company legislation, 3. 2318. In brief, these proposals are of two
alternative categories: (1) A number of amendments to existing law,
end (2) a complete revision of S. 2318. These are taken up in order
below. However, only the more important suggestions are mentioned
and no attempt is made to describe in detail all of the provisions
which are proposed, since many of them are of a very technical
character and others are in substance the same as suggestions made
by other interested groups.

AMENDMENTS TO EXISTING LAW
Definition of Bank Holding Company. - A bank holding company
would be defined as any company which controls two or more banks. A
company would be deemed to control a bank if it had the power to elect
one-half of the bank's directors or owned more than 50 per cent of the
number of shares voted at the last election of directors of the bank,
or if the FDIC determined that the company exercised such power over
the management or policies of the bank as to be the substantial equivalent of power to elect one-half cf the directors of the bank.
Expansion of Bank Holding Companies. - There apparently would
be an outright prohibition against any company acquiring shares of a
bank which would result in the company becoming a bank holding company,
and against a bank holding company acquiring any additional bank shares,
except in limited circumstances. Every insured bank would be required
to prevent any transfer of its voting shares to a bank holding company
or to a company which would thereby become a bank holding company, without the consent of the FDIC regardless of the nature of the bank, and
also the consent of the Board, the Comptroller and the State supervisory
authority according to the nature of the bank in question. In addition,
an insured bank would be prohibited from conveying substantially all of
its assets to another insured bank except with the consent of the FDIC
in any case and also the consent of the other appropriate supervisory
authorities, depending on the nature of the banks.
Application of Investment Company Act. - A bank holding company which owns any securities or businesses except banks and companies
which are broadly related to banking would be classified as investment
companies under the Investment Company Act of 194-0.




-2PROPOSED REVISION OF S. 2318
Definition of Bank Holding Company. - A banK holding company would be defined as any company which controls tvo or more banks.
A company would be deemed to control a bank if it had the power to
elect one-half of the bank's directors or o\med more than 50 per cent
of the number of shares voted at the lest election of directors of the
bank, or if the Board determined that the company exercised such power
over the management or policies of the bank as to be the substantial
equivalent of power to elect one-half of the directors of the bank.
A State bank would not be a holdinB company by reason of owning stock
in other banks if this was permitted by State law. Moreover, unless
e company owns some stock of a member bank, the company would not be
a bank holding company except with the consent of the banKing authorities of a majority of the States in which the company was operating.
And, unless a company owns some bank stock directly, it would not be
a bank holding company merely because it controlled a bank holding
company; but such related company would be subject to certain restrictions on intercompany dealings, and these are described later. Likewise, a company which indirectly owned or controlled bank stock but
did not directly own any banK stock would not be a bank holding company
if it was registered under the Investment Company Act of 1940.
Interests in Nonbanking Organizations. - The requirement for
the divorcement of nonbanking assets would not apply to the ownership
of any business which was not prohibited to banks or rele.ted persons
by the applicable State law. Also, the requirement for the divorcement of nonbanking assets would not apply to the ownership by a bank
holding company which w?s registered under the Investment Company Act
of securities of a company which was engaged in certain businesses
broadly related to the banking business.
Expansion of Bank Holding Companies. - The provisions relating to the expansion of bank holding companies differ in a number
of respects from those of S. 2318. Ln addition, they provide for the
diffusion of the authority to regulate and permit such expansion among
the Federal and State bank supervisory agencies and also permit the
State supervisory agency to veto any such proposed expansion regardless
of the viewpoint of the Federal agency. A banK holding company or a
company controlling a bank holding company could not acquire more than
5 per cent of the outstanding securities of any other bank holding company without the consent of the Board, unless the acquiring company already owns 25 per cent of the other company or unless the security is
received as a dividend.




-3Transactions of Bank Holding Companies and Related Persons. There are complicated and detailed provisions based upon the Investment
Company Act which would regulate and control intercompany transactions
involving bank holding companies and affiliated institutions• The
latter are broadly classified as related persons. These provisions
involve some seven pages of statutory language and are difficult to
understand or interpret. Among other things, an affiliated institution would be prohibited from borrowing money from or selling securities
to a bank holding company except with the permission of the Board and
except transactions in the ordinary course of business. The Board
would be given a brosd regulatory authority with respect to transactions
in which a bank holding company and a related person participate in
order to insure that the bank holding company participates on the same
basis as any other person might do. There would be regulatory provisions on compensation in connection with an affiliated institution
8cting as agent or broker in relation to a bank holding company.
Tax Provisions. - The tax provisions of S. 2318 would be
completely rewritten.




COMMENTS ON MORRIS PLAN PROPOSALS
Amendments to Existing Law

The proposed definition of "bank holding company" would be
unsatisfactory for reasons which have been stated in connection with
somewhat similar proposals made by other groups. In addition, the
authority to make discretionary individual determinations, which
would be vested in the FDIC rather than the Board, appears to be too
limited to accomplish the purpose desired.
The outright prohibition against any company hereafter becoming a bank holding company goes much further than S. 2318, which
is a bill to regulate rather than to "freeze" the existing situation.
For this reason, no doubt strong objection would be voiced by those
who may now be favorable to the bill.
The provisions for diffusion of authority among the supervisory agencies has been previously commented upon in connection with
other similar suggestions. In addition, the Morris Plan proposal
would require the consent of two agencies, instead of one.
The proposed requirement that a bank holding company which
has nonbanking assets register under the Investment Company Act is
no sufficient reason for eliminating the provisions of the bill regarding divorcement of nonbank assets. The objectives of the Investment Company Act and of the Holding Company Bill are very different.
Generally speaking, the proposed amendments to the existing
law are inadequate and unsatisfactory to accomplish the purposes of
the bank holding company legislation.

Proposed Revision of S. 2318
The definition of "bank holding company" is inadequate for
reasons previously stated above. Moreover, the various exceptions
proposed would provide large loopholes which would make the law
ineffective.
The exceptions from the requirements concerning the divorcement of nonbank assets are so broad as to make the requirement almost
meaningless in most cases.




The diffusion of authority among the supervisory agencies
which would be provided in connection with the expansion of bank
holding companies is believed impracticable and objectionable for the
reasons discussed in other connections * Moreover, the power of the
State supervisory agency to veto any such expansion, and thus impose
its will on the Federal agency, would seem to be most undesirable.
The provisions to regulate intercompany transactions, while
possibly justifiable from a theoretical standpoint, would involve a
completely new approach to the legislation, would be most difficult
to work out in an equitable manner, would be hard to understand, would
undoubtedly raise many objections on the part of those who are now
generally agreeable to the legislation, and would in effect make it
necessary to delay the consideration of the legislation until the
results of the proposals could be fully explored and considered by
all interested parties.
Briefly stated, the provisions of the revision suggested
by Morris Plan are so sweeping and involve so many new ideas that
it would bring down objection from numerous quarters and would delay
the legislation indefinitely. This is in addition to the fact that
many of the provisions proposed seem definitely undesirable.

April U, 1950