View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

September f ,

1939

Board o f Governors
of the Federal f e s e r v e Syste©
F e d e r a l Heserve B u i l d i n g
Wathington, D. C.

Pet

Construction o f Subjection ( c )
o f f a c t i o n 5 H 4 o f the Revised
S t a t u t e s i n r e l a t i o n to the
holding by Trf.nsctserica Corporat i o n of shares o f Bank o f
A&erics, 8 . T . & 5 . A . , i n i t s
reserve of r e a d i l y r-arfce t a b l e
assets.

Dear C i r s i

On i.ugu«t 14, 1939, the Federal Feserve Bank of Tan Francisco t r a n s m i t t e d t o Sr« John B* G r e e t , Presicent o f Trans«ij«rica
Corpore.tion, a l e t t e r i n which was incorporated an expression o f
opinion t h a t the proper c o n s t r u c t i o n of Subsection ( e ) of Section
5 L U o f the Revised S t a t u t e s r e q u i r e d t h a t t h e r e be read i n t o i t s
phraseology the fords "other than bank stock,* thereby s&king Subs e c t i o n ( c ) impose the sa»e p r o h i b i t i o n upon bank stock as i s cont a i n e d i n Subsection (b) of Section 5 1 U of the Revised S t a t u t e s ,
3n August 19, 1939, « r . Grant r e p l i e d by l a t t e r to the
Federal Feserve Bank of San Francisco i n which he took issue w i t h
t h i s c o n s t r u c t i o n &ade by the Board of Governors and asked the
Federal Peserve Bank t o t r a n s m i t h i s l e t t e r t o the Board w i t h h i s
request f o r a r e c o n s i d e r a t i o n o f the B a t t e r .
I n connection w i t h the question o f a r e c o n s i d e r a t i o n by
t h e Board o f Governors, S r . Grant has requested ca t o l a y before
the Board asy views o f the s t a t u t e and I herewith r e s p e c t f u l l y subg i t them f o r your c o n s i d e r a t i o n .




Board-of Governors o f the
Federal T*e serve System - 2

epteebar

1939

I.

I n the Banking Act of 1933 (Act o f June 16, 1933,
Stat,
1 6 ^ ) , Congress f o r the f i r s t t i a e undertook to b r i n g bank holding
companiea tinker the j u r i s d i c t i o n sad c o n t r o l o f the F e d e r a l Government. ?his was accomplished through an aaandsant of --ection 5144 o f
the Revised S t a t u t e s which.vas t h a t section of the n a t i o n a l
Act
( l e t of Jvxie 3» 1S£>4, 13
102) which provided t h a t each shareholder of a n e t loo* 1 bank should be e n t i t l e d to on* vote or. eech s h r r e
o f stock held by bin. i n sLL e l e c t i o n s o f d i r e c t o r s *
This e&efcdaent of 1933 p r o h i b i t e d a bank b o l t i n g oompany
f r ^ : voting, the stock of a c o n t r o l l e d n a t i o n a l back unlass the company
Here i n possession o f a v o t i n g paradt issued by the Board of Governors
o f the Federal Heserv© i y s t a e . As a condition precedent to tbo i s suance of tha permit by the Board o f Governors, such c bank holding
company—defined as a "holding company t f f i l i a t e * — w a s required to
ugree t o comply w i t h a number o f conditions s p e c i f i c a l l y set f o r t h by
Congress i n the amendment* A*»ng thg^e i t ^ubsaction (c) which, as
enacted i n the Banking Set of 1^33 f a c t i o n 1 9 ( c j / , reads as f o l l o ^ s i
•(c)
notwithstanding the foregoing provisions of.
t h i s s e c t i o n , e f t e ~ f i v e years s f t e r the enactavnt of the
Banking Act of 1933, ( l ) any such holding company a f f i l i a t e
the shareholders or merbers o f vhich s h a l l be i n d i v i d u a l l y and
s e v e r a l l y l i a b l e i n proportion to the number of shares o f
such holding company a f f i l i a t e held by the* r e s p e c t i v e l y , i n
a d d i t i o n to amounts invested t h e r e i n , f o r a i l s t a t u t o r y l i a b i l i t y imposed on such holding company a f f i l i a t e b> reason o f
i t s c o n t r o l o f shares of stock o f banks, s h a l l | | a g t o l j c^.V
share? o f
of
be
ffl^y
ft

p v t i ^ trer m m w i irfw b o ^
6
t/
» reserve ,?f r f ^^UU a fiarfcgfr^*
reserve y f f T
fiftTfcgfr^s
J^y.g

^

y
V

p?
Pg r

of

t f r fi
c

9:' ^
assgty
•^gfty

a lg g ist ?
e fg a rg ff l & V e

pgr

ci^yes o u t r
outaft amount o *
sMyunt
valua
^

gf

Uftfc

reftfrro^y*
fry
the
required
th s
>U«4 »r
and ( 2 ) tha assets r e q u i r e d by t h i s
be
company
s e c t i o n t o be p o s s e s s e d by s u c h holding coepfuay a f f i l i a t e may
say
used
r e j i l * cement
bei&s
be u teci by i t f o r rejilacement o f c a p i t a l i n banVs a f f i l i a t e d
w i t h i t and f o r losses i n c u r r e d i n such ban a , but any d e f i c i e n c y i n such assets r e s u l t i n g fror- such use s h a l l be &ad#
&ad*
froz.
bf
up w i t h i n such period as the Federal Reserve Board nay by
)
regulation prescribe}"
(Underscoring s u p p l i e d * )
T h i s p a r t i c u l a r p r o v i s i o n was designed t o ambrace a speciea1
speci l
c l a s s o f holding company a f f i l i a t e s , namely, those upon the shareholders




Board o f Governors of the
f e d e r a l Besarve Tystes - 3

September 7 , 1939

of which rested i n d i v i d u a l l y and s e v e r a l l y a l e g a l l i a b i l i t y f o r
th& s t a t u t o r y l i a b i l i t y imposed upon such holding company a f f i l i ates under tha banking la-*a* Cubsection ( c j makes only one condit i o n w i t h respect to such holding company a f f i l i a t e s and t h a t i s
t h n t they s h a l l be required to e s t a b l i s h and maintain oat of net
earnings a reserve o f r e e d i l y merketable assets i n an amount not
less tlian 12 per c#ntu®a of the aggregate par value of the bank
stocks c o n t r o l l e d *
Subsection (b) t o ^hich the Board of Governors has r e f e r r e d f o r i t s construction of Subsection ( c ) was designed to embrace t h a t class o f holding company a f f i l i a t e s the stockholders of
*hich were not l e g a l l y l i a b l e f o r the s t a t u t o r y l i a b i l i t y imposed
upon such h o l d i n g company a f f i l i a t e s by the banking laws. I t reads
as f o l l o w s i
9

[ b ) A f t e r f i v e years a f t e r the enactment of the
Banking Act of 1933, every ?uch holding company a f f i l i a t e
( 1 ) s h a l l possess, and s h a l l continue t o possess during the
l i f e of such p e r m i t , f r e e and c l e a r of any l i e n , pledge, or
hypothecation of any n a t u r e , r e a d i l y ^ a r k a t t b l e assets other
than bank stock i n en a&rOunt not less t i * n 12 per century of
the aggregate per value o f e l l bank stocks c o n t r o l l e d by such
holding company a f f i l i a t e , which amount s h a l l be Increa ed by
not less than 2 per centum per annua* of such aggro-gate par
value u n t i l such assets si a l l amount to 25 per centix- of the
aggregate par v t l u e of such bank stock; and ( 2 ) s h a l l r e i n v e s t
i n r e a d i l y marketable assets other than bank stock a l l n e t
earnings over and above 6 per centum per annum on th« book
value of i t s own shares outstanding u n t i l such assets s h a l l
amount t o such 25 per centum o f the aggregate per value of
a l l bank stocks c o n t r o l l e d by i t | "
I t fcill be r e a d i l y seen t t e t Congress intended Subsection (b)
t o be £uch no re t x i r u e n . ^ e snd s t r i n g e n t i n I t s operation th^n
M
"estion ( c ) . For example, holding company a f f i l i a t e s subject t o (b)
are required t o possess on June I 6 t 1936, unpledged r e a d i l y Marketa b l e assets other than bank stock i n an amount not l e s s then 12 per
centum of the aggregate par value of a l l bank stock c o n t r o l l e d and
wnich amount s h a l l be increased by not 1 ess than 2 per centum per a n nus u n t i l the t o t a l reaches 25 per centueu Ko such condition i s imposed upon t i * holding company a f f i l i a t e s subject to Subsection ( c } * They
enter the f i f t h year a f t e r the let without having t o bear any such
burdens* Also, (b) provides t h a t holding coiqpeny a f f i l i a t e s subject
to t h i s provision s h a l l r e i n v e s t i n r e a d i l y marketable assets other
than bank stocks a l l n e t earnings over and above € -per centuc. per annus
on the book value o f i t s own shares u n t i l such assets s h a l l amount t o
25 p«r centum of the aggregate par value of bank stock c o n t r o l l e d *
£o
such c o n d i t i o n i s imposed by Subsection ( c ) .




Board or Governors o f the
F e d e r a l Reserve y e t e x - 4

."eptarber JT, 1939

fubsection ' ' c ) , on the other hand, a is? ply provides f o r
the r e s e r v e above mentioned and, f u r t h e r , permits the reserve to be
used f o r replacements of c a p i t a l and l o s s e s .
The marked leniency sthown to holding company a f f i l i a t e s
subject t o the conditions of Subjection ( c ) as compared v i t h the
r i g i d t e r s s imposed on those subject t o (b) was no ioubt aua to
the i n t e n t i o n of Congress t o p r o t e c t or conserve, i n
the
s t a t u t o r y l i a b i l i t y «hich the shareholders o f holding company a f f i l i a t e s subject t o (b) Right otherwise e n t i r e l y escape.
I n the B a n k i n l ^ / c t of 1933 O e c t i o n T<) C o n ^ r * ' ' amended
Section 5151 of the Revised Statutes and f a c t i o n 23 of the vedereJL
f ^ s e r v e Act by exem p t i n g from the s t a t u t o r y additiona l l i a b i l i t y ,
ifcpo*md upon shareholders of netior.ai. banks, a i l nor shares it? sued
by any n a t i o n a l batik a f t e r June 16, 1933, the date o f the approval
of the A c t . About two years l a t e r , i n the Banking Act of 1935 (Sect i o n 304} Congress extended t h i s exemption by ascending f a c t i o n 22 of
the Banking J e t o f 19*3 to provide f o r t h * complete irbrogatlon o f the
a t r t u t o r y a d d i t i o n a l l i a b i l i t y on a l l shares of n a t i o n a l banks engaged i n a c t i v e business on J u l y 1 , 1937. These two provisions t h e r e fore provided the £*?ans f o r the f i n a l e l i m i n a t i o n of the s t a t u t o r y
a d d i t i o n a l l i a b i l i t y on the shares of a l l n a t i o n a l ben;rs.
At the sait© t i r e , tha Banking Act of 1935 f u r t h e r amended
a c t i o n 5144 of the Revised S t a t u t e s b. adding a t the end of Subsection ( c ) t h e r e o f the f o l l o w i n g provisiont
•ana th*» provisions o f t h i s subsection, i n s t e a d of
subsection ( b ) , s h a l l apply to a l l holding company a f f i l i a t e s
w i t h raspect to any shares o f bank stock o*ned or c o n t r o l l e d
by tbei& as to r h i c h there i s no s t a t u t o r y l i a b i l i t y imposed
upon the holders o f such ben** s t o c k * *
Congress t h e r e f o r e , through the above s e r i e s o f s t a t u t o r y
enact&enta, provided the means f o r the removal of holding company a f f i l i a t e s which o-ced or c o n t r o l l e d n a t i o n a l banks f r o * the class of
holding company a f f i l i a t e s mibject t o the provisions o f Section 5144(b)
o f the Revised S t a t u t e s and made that; subject to the mich more l e n i e n t
provisions of A c t i o n 5144(c).
Since there a r e now no holding company a f f i l i a t e s subject t o
the s t a t u t o r y a d d i t i o n a l l i a b i l i t y ux&er the n a t i o n a l banking laws
«nd perhaps a l s o no such l i a b i l i t y under the varioup s t a t e lews, the
t h r e e amendments made by Congress above mentioned r e l a t i n g to such
s t a t u t o r y l i a b i l i t y have had the e f f e c t o f rendering Subsection (b)
obsolete.
I t has, i n e f f e c t , been r e p e a l e d by Congrass by i n d i r e c t i o n .




Board o f Governors of the
F e d e r a l Reserve System - 5

eptember

1939

Trense2«rice Corporation q u a l i f i e d under Subsection ( c )
and set aside e reserve o f r e a d i l y marketable assets out o f n e t
earnings over and above 6 per centum of the book value o f i t s own
sharea outstanding* The srerketable assets i n t h i s reserve a t the
present tiste consist of 1 5 0 , 0 0 0 . shares o f stock o f ban. o f
jaerica,
n a t i o n a l T r u s t & Savings I s s o c i a t i o n *
Tha B o t U o f Governors communicated t o the Federal Reserve Sank o f San Francisco I t s v i e * tlx t
t h i s reserve could not hold bank s t o c k *

II.
eofsrrrjcTios OF THE STATUTE

There are three w e l l known r u l e s of i n t e r p r e t a t i o n and cons t r u c t i o n o f s t a t u t e s a p p l i c a b l e t o the present discussion vhich
are of such long standing i n > n,jrlo-i ruericen j u r i c p r u i e n c e t h a t they
nay be s a i d to have themselves the f o r c e o f l a * . They era b r i e f l y
i n d i c a t e d belowi
i*

T'»

rhoui4
nyaseoipgy of v m

Bf, f o ^ f r t
i^ovi^on

fo
xy*^.

The words employed by Conrress should be taken i n t h e i r
ordinary meaning and There the p r o v i s i o n I s f r e e fros ambiguity i n
i t s e l f , t h e r e e x i s t s no room f o r c o n s t r u c t i o n .
here the language
o f the s t a t u t e i s susceptible of a sensible i n t e r p r e t a t i o n , i t
should not be c o n t r o l l e d by any extraneous c o n s i d e r a t i o n s .
I n the
present i n s t a n c e , the p a r t i c u l a r language under c o n s i d e r a t i o n i s the
requirement t h a t holding compeny a f f i l i a t e s subject to ( c ) • . . . s h a l l
be r e q u i r e d to e s t a b l i s h and maintain out of n e t earnings over and
above 6 per centur per annum on the book value o f I t s own shares o u t standing a r e s e r v e of r e r d i l y marketable a s s e t s . T h i s language a p pears to be without any ambiguity and given i t s o r d i n a r y wearing, i t
would impose no r e s t r i c t i o n s upon the assets o f the r e q u i r e d r e s e r v e
except t h a t they be " r e a d i l y a a r k e t a b l e . " T h i s p r o v i s i o n would sees
t o f u r n i s h no occasion to a t t e m p t to give i t a d i f f e r e n t rseaning by
i n s e r t i n g the phraseology used by Congress i n the preceding Subsect i o n ( b ) , namely, "other than bank stock*" These words were omitted
by Congress i n t h e enactment o f ( c ) *
Sound p r i n c i p l e s o f c o n s t r u c t i o n
r e q u i r e t h a t where Congress omits phraseology from a p r o v i s i o n , such
omission r u s t be held to have been made by design end th« s t a t u t e
should be so i n t e r p r e t e d end construed.
The p r e l i m i n a r y clause used ir* Subsection ( c ) , memely, • N o t withstanding the foregoing p r o v i s i o n s o f t h i s s e c t i o n , " ( o e c t i o n 19)
i n d i e e t e s C l e a r l y t h a t Congress had i n mind a l l of the c o n d i t i o n s and
r e s t r i c t i o n s e a t f o r t h i n Subsection ( b ) but n e v e r t h e l e s s intended




9oerd o f Governors o f t h e
f e d e r a 1 f i t s w m fystets - 6

September 7 , 1939

t h a t (c) should stand i n the f c t n o t onxy independently of the p r o v i s i o n s of ( b ; but i n c o n t r a d i c t i o n to i t ,
Although one tmy n o t
i n q u i r e i n t o the question of the ^isdos: of
a c t of Congress, y e t
i t eay be p e r t i n e n t to eay t h a t the s i t u a t i o n c l e a r l y p r * * * n t a d
an occasion t o Congress f o r separate trefttcent o f th« two classes
of bo i c i n g company a f f i l i a t e s then i x i i t l n g *
Technically, there i s
nothing; ;aaw©rk*ble i n the e s t & b l i s h a e c t sad saintenance of a r e serve of r e a d i l y scarketable assets h i c h includes ben* s t o c l fin.; the
words employed, by Congress c l e a r l y do not r e q u i r e the ©zciusion o f
benV. stock. (
,
• (••
2.

• u b * » ? t l o n (c) ^ i r q s , a ' - t r < c t
a m p^gfrruefripfi

Int^-rgtstion

« • Bft^u^e i t i s a pepy^ n u t ^ ,
The r u l e f o r the s t r i c t
c o n s t r u c t i o n o f penal s t a t u t e s i s apparent because i t i s necessary
to avoid any expansion or « a l t r ^ e f . e n t o f the p e n a l t i e s i i posed by
Cmfrees.
The degree of s t r i c t n e s s r e q u i r e ! i s i n proportion to the
g r a v i t y of the conre fences flowing from the i n f r a c t i o n o f the s t a t u t e ,
I n order t o c l a s s i f y a r t c a r t e as "penal,** i t i s n o t
necessary ths-t i t provide f o r the punishment of a c r i u e , I t i s also
a penal st&tute i f t h e v i o l a t i o n o f i t can r e s u l t i n trie imposition
of s p e c i a l burdens or tt*ke away or i u p a i r e x i s t i n g p r i v i l e g e s or
rights.
I n the present case, the provisions o f Subsection ( c )
f o r * s p a r t o f an a c t of Cotu;r«3s which i s mm i&port&nt innovation i n
the f i e l d of banking. I t i n poses ne* c o a d i U M f and r e s t r i c t i o n s upon
c e r t a i n classes of shareholders of n a t i o n a l banks. One of these cond i t i o n s i s embraced i n r u b r e c t i o n (c), namely, the reqoireuent f o r a
reserve o f r e a d i l y marketable a s s e t s . The p e n a l t i e s f o r v i o l a t i o n o f
t h i s c o n d i t i o n a r e extret&ely d r a s t i c . They bear not only upon the
shareholder I the holding company a f f i l i a t e ) but upon the banks cont r o l l e d by i t .
I n tha c«sc o f the shareholder, tho i a j o s i t i o t i of the
penalty would ^ean a loss o f power t o r o t e tb# shares. I n the case
o f the c o n t r o l l e d b a n s * f u r t h e r dividends could be p r o h i b i t e d t o the
shareholder, the benks deprived o f the r i g h t t o r e c e i v e deposits o f
the public i&onies o f the ! i n i t e d S t a t e s , and proceedings could be
I n s t i t u t e d f o r the f o r f e i t u r e o f the c h a r t e r of such banks i n order
t o accoepliah t h e i r complete l i q u i d a t i o n .
I n other words, the p e n a l t i e s would r e s u l t i n no l e s s
than a complete d e s t r u c t i o n o f the investments i n the f i n a n c i a l i n s t i tutions involved.
This e x t r a s * penalty r e q u i r e s e correspondingly extreme
s t r i c t n e s s of i n t e r p r e t a t i o n en>i c o n s t r u c t i o n i n order t h a t the
Board of Governors n i g h t not t a k e a view o f the s t a t u t e which would
ixpose a g r e a t e r burden than Congress i n t e n d e d .



Board o f Governors o f the
Feueru i l » M m rysteei - 7

r « p t « i b w If, 1939

P 9 W V?
ity
taftrectfofi
j r ffrp.nte:: t p
t h e Bo&ru.
her® po*-er i a g r a n t e d o r delegated by Congress t o an
e x e c u t i v e agency o f the Government, t h e r u l e re<iulres t h a t t h e t e r & *
o f t h e g r e a t be s t r i c t l y c o n s t r u e d . Thus i n t h e p r e s e n t case, two
p r i n c i p l e s concur* WL'^ely, t h a t o f s t r i c t c o n s t r u c t i o n o f p e n a l
s t a t u t e s and o f s t r i c t c o n s t r u c t i o n o f the g r & n t o f power t o impose
t h e p e n a l t y . I n t h e p r e s e n t case, t h e c o n d i t i o n t o be met i s s e t
f o r t h i n f u b s e c t i o n ( c ) . t h e g r & n t o f po*er t o puni?h t h e o f f e n d e r
f o r the i n f r a c t i o n o f t h a t c o n d i t i o n i s found a t the end o f Subsect i o n (e) i n t h e seam s e c t i o n ( S e c t i o n 19}• I f the c l a u s e , " r e s e r v e
o f r e a d i l y o a r s e t * h i e a s s e t s , " be construed by the Board o f Govern o r s t o i n c l u d e a p r o h i b i t i o n a g c i n s t the i n c o r p o r a t i o n o f bank
s t o c k i n t h e r e s e r v e , the .Board by t h s t c o n s t r u c t i o n tie? e n l a r g e d
i t s om porer t o p u n i s h . Having sade t h i s c o n s t r u c t i o n , the l o e r d
c o u l d t h e n proceed t o punish the o f f e n d e r because i t h e l d bank s t o c k
i n t h e r e s e r v e , whereas unJer a s t r i c t c o n s t r u c t i o n bank s t o c k * o u l d
be p e r m i t t e d t o be i n c l u d e d and t h e r e f o r e no o f f e n s e w i l l hav« been
c o s ^ i t t e d and consequently no l i a b i l i t y f o r ptanistefcent.

in.
COKC^OS

I n v i e * o f t h e above c o n s i d e r a t i o n s , i t i s r e s p e c t f u l l y
s u b m i t t e d t h a t f u b a e c t i o n ( c ) i s f r e e f r o a any a a b i ^ u i t y as t o the
I n t e n t o f Congress i n so f a r as t h e n a t u r e o f the. r e s e r v e i s concerned. I t i s t o be a r e s e r v e o f " r e a d i l y s*erketshle a s s e t s . * The
p r i n c i p l e s o f sound c o n s t r u c t i o n r e q u i r e t h a t t h e language be t&ken
i n i t s o r d i n a r y t * e n i n g w i t h o u t any expansion o r e n l a r g e m e n t ,
furt h e r m o r e , t h e p r o v i s i o n i t s e l f b e i n g a p e r t o f a penal s t a t u t e and
t h e consequences o f i t s i n f r a c t i o n being r-ost o r a s t i c , i t s h o u l d
be s t r i c t l y c o n s t r u e d a c c o r d i n g l y i n o r a e r t o a v o i d t h e p o s s i b i l i t y
o f an enlargement o f t h * p e n a l t y beyond t h e i n t e n t expressed by
Congress. And, f i n a l l y , t h e s t r i c t c o n s t r u c t i o n i s f u r t h e r r e q u i r e d
becfeuse t h e s t a t u t e c o n t a i n s new g r a n t s o f v a s t po^er t o trie Board
I t i s , -thereo f Governors t o ir.pose pun i s recent f o r i t s i n f r a c t i o n .
f o r e , encumbent upon t h e Board o f Governors i n t h i s c o n n e c t i o n t o be
c a r e f u l n o t t o e n l a r g e i t s powers o f punishment t h r o u g h i t s o*m coobs t r u c t i o n o f the s t a t u t e .
There i s attached hereto a &e&orendua i n «hich are c i t e d
soae l e a d i n g cases decided by the Suprece Court o f the " a i t e d f t a t e s
upon the questions here presented.
Respectfully,

Charles
Collins
Counsel, T r * n s * » o r i c a
Enclosure -




i

Corporetion