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TREASURY DEPARTMENT Comptroller of the Currency WASHINGTON INVESTMENT SECURITIES REGULATION Issued by the Comptroller of the Currency By virtue of the authority vested in the Comptroller of the Currency by paragraph Seventh of Section 5156 of the Revised Statutes, the following regulation is promulgated: SECTION I ' (1) An obligation of indebtedness which may be purchased for its own account by a national bank or State member bank of the Federal Reserve System, in order to come within the classification of "investment securities" within the meaning of paragraph Seventh of said Section 5136, must be a marketable obligation, i.e. it must be salable under ordinary circumstances with reasonable promDtness at a fair value; and with respect to the particular security, there must be present one or more of the following characteristics: (a) A public distribution of the securities must have been provided for or made in a manner to protect or insure the marketability of the issue; or, (b) Other existing securities of the obligor must have such a public distribution as to protect or insure the marketability of the issue under consideration; or, (c) In the case of investment securities for which a public - 2 distribution as set forth in (a) or (b) above can not be so provided, or so made, and which are issued by established commercial or industrial businesses or enterprises,that can demonstrate the ability to service such securitiest the debt evidenced thereby must mature not later than ten years nfter the data of issuance of the security and must be of such sound value or so secured as reasonably to assure its payment; and such securities must, by their terms, provide for the amortization of the debt evidenced thereby so that at lenst 75$ of the principal will be extinguished by the maturity date by substantial periodic payments: Provided, That no amortization need be required for the period of the first year after the date of issuance of such securities. (2} Where the security is issued under a trust agreement, the agreement must provide for a trustee independent of the obligor, and such trustee must be c bank or trust company. (3) All purchases of investment securities by national and State member banks for their own account must be of securities "in the form of bonds, notes, and/or debentures, commonly known as investment securities"; and every transaction which is in fact such a purchase must, regardless of its form, comply with this regulation. SECTION II (1) Although the bank is permitted to purchase "investment securities" for its own account for purposes of investment under - 5 the provisions of R. S. 5136 and this regulation, the bank is not permitted otherwise to participate as a principal in tha marketing of securities* (2) The statutory limitation on the amount of the "investment securities" of any one obligor or maker which may be held by the bank, is to be determined on the basis of the par cr face value of the securities, and net on their market value. (3) The purchase of "investment securities" in which the invest- ment characteristics are distinctly or predominantly speculative, or the purchase of securities which are in default, either as to principal or interest, is prohibited. (4) Purchase of an investment security at a price exceeding par is prohibited, unless the bank shall: (a) Provide for the regular amortization of the premium paid so that the premium shall be entirely extinguished at or before the maturity of the security and the security (including premium) shall at no intervening date be carried at an amount in excess of that at which the obligor may legally redeem such security; or (b) Set up a reserve account to amortize the premium, said account to be credited periodically with an amount not less than the amount required for amortization under (a) above. (5) Purchase of securities convertible into stock at the option of the issuer is prohibited. (6) Purchase of securities convertible into stock at the option of the holder or with stock purchase warrants attached is prohibited - 4 if the price paid for such security is in excess of the investment value of the security itself, considered independently of the stock purchase warrants or conversion feature. If it is apparent that the price paid for an otherwise eligible security fairly reflects the investment value of the security itself and does not include any speculative value based upon the presence of a stock purchase warrant or conversion option the purchase of such a security is not prohibited, (7) As to purchase of securities under repurchase agreement, subject to the limitations and restrictions set forth in the law and this regulation: (a)- It is permissible for the bank to purchase "investment securities" from another under an agreement whereby the bank has an option or a right to require the seller of the securities to repurchase them from the bank at a price stated or at a price subject to determination under the terms of the agreemsnt, but in no case less than the valua at the time of repurchase* (b) It is permissible for tha broik to purchase "investment securities" from another under an agreement whereby the seller or a third party guarantees the bank against loss on resale of the securities. (c) It is not permissible for tine bank to purchase "invest- ment securities" from another under an agreement whereby the seller reserves the right or the option to repurchase said se- - 5 curities itself or through its nominee at a price stated or at a price subject to determination under thy terms of the agreement, notwithstanding the fact that the bank may else, under such agreement, have the right or option to compel the seller to repurchase the securities at a price stated or at o. price subject to determination under the terms of the agreement, (8) As to repurchase agreements accompanying soles of securities, (a) It is parmissible for the bank selling securities to another to agree that the bank shall have an option or right to repurchase the securities from the buyer at a price stated or at a price subject to determination under the terms of the agreement, but in no case in excess of the market value at the time of repurchase. (b) It is not permissible for the bank selling securities to another to agree that the purchr ser shall have the right or the option to require the bank to repurchase said securities at a price stated or at a price subject to determination under the terns of the agreement, notwithstanding the fact that the bank may also, under such agreement, have the right or option to repurchase the securities from the buyer at a price stated or at a price subject to determination under the terms of the agreement. In view of the fact that some banks may have bought or sold securities under a form of agreement which is prohibited by this regulation, the bank should either terminate or modify same so as to conform to this regulation, where such action may lawfully be taken. Existing agreements of the pro - 6 h i b i t a d type must not be renewed. .EXCEPTION The restrictions and limitations of this regulation do not apply to securities acquired through foreclosure on collateral, or acquired in good faith by way Df compromise of a doubtful claim or to avert an apprehended loss in connection with a debt previously contracted, or to real estate securities acquired pursuant to Section 24 of the Federal Reserve Act, as amended. This regulation supersedes prior regulations governing the purchase of "investment securities" and is effective from and after July 1, 1938. Signed and promulgated this 27th day of June, 1938. MARSHALL R. DIGGS Acting Comptroller of the Currency