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National Advisory Council
Staff Draft 112
April 9, 3 S ! ?
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To:

National Advisory Council

From:

National Advisory Council Staff Committee

Subject: Federal Legislative Problems Involved in Marketing International
Bank Securities,
Problem, The United States Executive Director of the International Bank lias
strongly recommended that existing banking legislation be amended in order
that member banks might be authorized to deal in International Bank securities. He further recommends that the Securities Act be amended to relieve
banks and other dealers of the civil liabilities as under.vriters and distributors under this Act, A prompt decision is desirable on this problem so that
the Bank can plan its program for marketing securities.
The U,5, Executive Director considers it desirable that legislation be
passed which would authorize member banks to deal in securities of the International Bank and to distribute them on a commission basis; In addition he
considers it desirable that the Securities Act of 1933 be amended* he v;ould
consider cither of the t.,ro following types of amendment to be satisfactory
for this purpose, although he has expressed a preference for the first form:
(1) An amendment tc add International Bank securities to the
list of securities under Section 3 (a) (2) of the Securities Act of 1933, thereby exempting them from all provisions of the Securities Act, including the registration
provisions; or
(2) An amendment to exempt all dealers, in dealing in International Bank securities or in distributing them on a
commission basis, from liability under Sections 11 and 12
of the Securities Act (but not exempting International Bank
securities fror.: the registration provisions of that Act),
Present Laus and Regulations* Transactions of member banks of the Federal
Reserve System in non-exempt securities are limited to (1) buying and selling vdthout recourse solely upon the order and for the account of a customer
and (2) buying and selling for a bank!s ov/n account for investment purposes
only. At present national banks may invest an amount not in excess of 10
percent of their capital and surplus in non-exempt "investment securities'1 of
a single obligor. The lav; expressly prohibits the bank from underv/riting
non-exempt securities, and, rulings by the Comptroller restrict the resale to
customers of securities which a bank has purchased for investment.
The lav; exempts certain securities, however, from both the statutory ,
restrictions and the'Comptrollerls regulations. With respect to exempt securities, a bank may buy, in unlimited amounts and for the bank's own account, may
underwrite the issuance, and may sell such securities to customers after having
purchased then for its own account. Exempt securities include obligations of
the United States, the States and their subdivisions, obligations issued under
the Federal Farm Loan Act and by the HCLC or FIIL Banks, Obligations of
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National Advisory Council
Staff Draft 112

national mortgage associations and certain obligations issued by FHA are also
exempt. Securities of the International Bank could be made eligible for
dealing by member banks only by legislation.
The Executive Director states that even if permitted to deal by amendment of the Banking Act, member banks would not be willing to do sc in view
of the fact that they would be subject to liabilities as unden/riters and
distributors under the Securities Act of 1933. These liabilities under
Sections 11 and 12 of that Act flow from the sale of securities by an underwriter or distributor based upon a false or misleading prospectus. Amendment
of the Securities Act would be necessary to remove these liabilities.
Discussion, It is anticipated that the Bank will float a sizable issue of
securities before the September meeting of the Board of Governors, The basic
problems are (1) whether there will be a sufficient market for these securities at a satisfactory price without a large degree of participation by
member banks, and (2) whether such member bank participation will be forthcoming in the absence cf legislation permitting them to deal in the Bank's
securities and exempting them from civil liability.
One viewpoint on these problems may be summarized as follows:


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(a) The participation of member banks would contribute
to a better market for the Bank's securities. The
U.S, Executive Director points out in this regard
that issues of the size and kind of security contemplated by the Bank have never been undertaken
before. He states categorically, based on his
experience in the marketing of securities, that
he believes commercial bank dealing is essential
in order that a sufficient market at a satisfactory
price nay be obtained. He adds that he will of
course do the best he can with the existing situation if the NAC does not concur in his opinion but
wishes to advise the NAC he feels strongly that
failure to obtain the suggested amendments may
jeopardize the entire program for marketing the
securities,
(b) Member bank?, if permitted to act as dealers, are
in a position to establish a broad secondary
market for the Bank's securities, whereas investment bankers do not have sufficient funds available
for this purpose relative to the scale of Bank
securities issues contemplated. Furthermore, the
use of names of leading member banks, as sponsors of
the issue, would stimulate sales. The prospects of
a good secondary market should assist the initial
sales,
(c) Member bank participation will not be forthcoming
to the maximum extent in the absence of legislation

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National /advisory Council
Staff Draft 112

permitting them to deal and exempting them from
civil liability. If limited to investment buying, member banks vail not want to tie up a large
part of their available funds in the Bank's securities for an extended period; whereas, if permitted
to deal, they vd.ll purchase a much larger amount of
the Bank's securities - possibly up to their 10 percent limit,
A viewpoint on the other side is:
(a) Investment bankers, insurance companies, savings
institutions, and member banks to the extent that
they invest under present law, can be expected to
provide adequate financing for the Bank's initial
operations«,
(b) It v/ouLd be bettor to determine the adequacy of
the market unde.-1 present legislation before risking the reopening of the entire subject of the
Brotton Woods Agreements Act by requesting an
amendment of the Banking Act of 1933• The prospects of a possible debate in Congress at this
tine on"the Bretton Joods institutions and, particularly, on the question of Tdiy the Bank's securities may not bo marketable might unfavorably- affect
the future salability of the Bank's securities.
On the other hand, resort to Congress at a later •
date, after the market may been found insufficient,
w o l d be very difficult,
(c) Since the Banking Act of 1933 was passed expressly
to curb the securities dealing practices of banks,
any revision of the Act to extend the exemptions
might be regarded as a weakening of the Act,

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(d) In any event, it will probably be desirable for the
International Bank to bo prepared to operate in its
ov/n securities in such a manner as to assure a continuous and reasonably liquid market—in somewhat
the same way as the Federal Reserve Bank of Mew York
has operated in U.S. Government securities. Commercial banks or other dealers, necessarily operating
rath their own profit in view, could hardly be relied
on to stabilize the market for the Bank's securities
when most needed. Article IV, Section 8, of the Bank!s
Articles of Agreement authorizes the Bank to conduct
such operations in its ov/n securities.
Civil Liability undor Sections 11 and 12 of the Securities Act of 1933
Representatives of member banks have indicated that even if the banking

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Federal Reserve Bank of St. Louis

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National Advisory Council
Staff Draft 112

laws were amended to permit then to act as dealers and distributors in
International Bank securities, they would be unwilling to do so unless
they wore also in some way exempted from civil liability under the Securities Act of 1933• At present, the only securities in which member banks
may act as dealers or distributors are securities which are completely
oxomptod from the Securities Act of 1933, and it appears that banks are
unwilling to undertake an active role in'marketing securities which would
involve civil liabilities under that Act.
The U.S. Executive Director has therefore indicated that if the banking laws are amended in accordance with his recommendation, some amendr/jnt
of the Securities Act should also be made. It appears clear that as a
matter of fairness any exemption given to bunks should also extend to all
other persons acting as dealers or distributors in International Bank
securities. Against this view, it is contended that the actual risk and
liabilities of banks in connection with the distribution of the securities
of the International Bank would be insubstantial, in view of the special
nature of the Bank and of its close relation to the U«S«, Government0 Therefore, if the banking laws were amended to permit banks to deal in these
securities, it seems unlikely that they would in fact be seriously deterred
by the liabilities under the Securities Act,,
Registration Statement,
If any amendment to the Securities Act is to be made, the question remains whether the amendment should simply exempt banks and other dealers
in these securities from civil liabilities, leaving the securities subject
to the registration requirements.
One viewpoint on this question is as follows:
No particular purpose would be served by having the Bank's
securities subject to the registration provisions of the
Securities Act of 1933• This is true since the National advisory Council consults rath the U.S. Executive Director
on tho loan operations and security flotations of the International Bank, Dealers might regard the Bank's securities even r.ore favorably if they were not registered, since
their status might then be associated more closely with the
status of "exempt" securities.
The arguments against the proposal to exempt from registration:
(a) Even though the Council consults with the U.S, •
Executive Director on the operations of the Bank,
it docs not consider what disclosures should be
made to the public with respect to the Bank's
securities. It is the statutory responsibility
of the Securities and Exchange Commission and
not of the National Advisory Council to assure

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National Advisory Council
Staff Draft 112

full disclosure in connection with the public
issue of securities in the United States.
(b) The legislative history of the Bretton Woods
Agreements Act would appear to Indicate that
the filing of a registration statement by the
Bank Traa contemplated,
(c) It is understood leading members of the investment community have expressed the view
that registration would assist'in the sale of
the Bank's securities and have, therefore,
indicated their belief that a registration
statement should be filed by the Bank,
(d) Public support of the Bank or reliance upon
its securities would not be enhancedfcjyattempts to obtain special exemptions for securities of the Bank, Moreover, registration under
the Securities Act will furnish a convenient
way to give full publicity and information
about such securities to the public4

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