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347 Ir-17 CONFIDENTIAL February 9, 1933. IffiCOlMEHDATIOlTS OF THE FEDERAL DESERVE BOARD WHICH HAVE HOT BEEN ADOPTED III THE GLASS BILL. In i t s l e t t e r of March 29, 1932 addressed to Senator Horbeck, Chairman of the Committee on Banking and Currency of t h e United S t a t e s Senate, the Federal Reserve Board made a number of recommendations with r e f e r e n c e to the p r o v i s i o n s of the Glass B i l l , S. 4115. Some of t h e s e recommendations have been incorporated i n the r e v i s e d b i l l , S. 4412, and others have n o t . There a r e summarized below t h e recommendations con- t a i n e d i n t h e Board's r e p o r t of March 29, 1932, which have not been adopted s u b s t a n t i a l l y i n the b i l l , S. 4412, i n the form i n which i t was passed by the Senate on January 25, 1933. No mention i s made of p r o v i s i o n s of the b i l l which a r e s u b s t a n t i a l l y as recommended by t h e Board. (page and s e c t i o n numbers r e f e r to t h e b i l l S. 4412 a s i t passed t h e Senate on January 25, 1933, u n l e s s otherwise i n d i c a t e d , and t h e b i l l i n t h i s form i s r e f e r r e d t o i n t h i s memorandum as "the p r e s e n t b i l l " . ) SECTION 2. D e f i n i t i o n of t h e term " a f f i l i a t e * , (pages 2,3) The Board's recommendations on t h i s s u b j e c t have been i n c o r p o r a t ed i n the p r e s e n t b i l l . I t may be noted, however, t h a t c e r t a i n a d d i - t i o n a l changes i n t h e d e f i n i t i o n of t h e term " a f f i l i a t e " have been made. The p r o v i s i o n t h a t t h i s term s h a l l i n c l u d e an o r g a n i z a t i o n of which a m a j o r i t y of the members of i t s executive committee a r e d i r e c t o r s of a 34.8 L-17 -3member bank has "been s t r i c k e n from t h e p r e s e n t M i l . Another change i s t h e s u b - d i v i s i o n i n t h e present b i l l of the s e v e r a l c l a s s e s of i n s t i t u t i o n s d e f i n e d as a f f i l i a t e s so as t o make a d i s t i n c t i o n between " a f f i l i a t e s " g e n e r a l l y and "holding company a f f i l i a t e s " . SEC$IOiT 3 . ( b ) Voting by groups or chains i n e l e c t i o n s of Fede r a l r e s e r v e bank d i r e c t o r s . (Pages 4 , 5 ) . The Federal Reserve Board recommended t h e omission of a p r o v i sion (contained i n s e c t i o n 4 of S« 4115) which p r o h i b i t e d a bank which belongs to a group or chain or which i s not c o n t r o l l e d by l o c a l r e s i d e n t s from v o t i n g f o r Federal r e s e r v e bank d i r e c t o r s . The p r e s e n t b i l l p r o - vides t h a t when two or more member banks a r e a f f i l i a t e d with the same holding company a f f i l i a t e only one of such banks may p a r t i c i p a t e i n the nomination or e l e c t i o n of Federal r e s e r v e bank d i r e c t o r s . In connection with i t s recommendation on t h i s s u b j e c t , t h e Board s a i d t h a t t h i s s e c t i o n " p r o h i b i t s banks t h a t belong to a group or a chain from v o t i n g f o r Federal r e s e r v e bank d i r e c t o r s . The wording of the s e c - t i o n i s such a s not t o confine the p r o h i b i t i o n to group and chain banks, however, but t o i n c l u d e a l l banks t h a t a r e not c o n t r o l l e d e n t i r e l y by locally resident stockholders. Since the stock of many important banks i s widely owned throughout the country, t h i s might r e s t r i c t t h e v o t i n g p r i v i l e g e t o smaller and l e s s important banks t h a t a r e owned by l o c a l stockholders. I t i s t o be f e a r e d t h a t t h i s s e c t i o n would bar from p a r - t i c i p a t i o n i n the s e l e c t i o n of Federal r e s e r v e d i r e c t o r s many of the 349 L-17 Ukjju "better managed b a n k s . " SECTION 4. D i s t r i b u t i o n of earnings of Federal r e s e r v e "banks. (Page 5) The Federal Reserve Board recommended t h a t the S e c r e t a r y of the Treasury "be a u t h o r i z e d i n h i s d i s c r e t i o n to use the f r a n c h i s e t a x r e ceived from F e d e r a l r e s e r v e "banks f o r investment i n o b l i g a t i o n s of the proposed Federal Liquidating Corporation, but the p r e s e n t b i l l provides t h a t a l l net earnings of a Federal r e s e r v e bank a f t e r payment of d i v i d - ends , claims and expenses s h a l l be paid i n t o the s u r p l u s fund of t h e bank. In d i s c u s s i n g the corresponding s e c t i o n of S. 4115, (Section 5 ) , the Board s a i d : "This s e c t i o n would amend the f i r s t paragraph of Section 7 of the Federal Reserve Act so t h a t , a f t e r the payment of expenses and dividends, a l l of the net earnings of a Federal r e s e r v e bank over and above any amounts necessary to r e s t o r e i t s surplus to the amount on December 31, 1931, would be paid to the Federal Liquidating Corporation. The amendment i s a l s o worded i n such a way a s to prevent the payment of any dividends out of s u r p l u s and to prevent the payment of dividends whenever the surplus of a Federal r e s e r v e bank i s l e s s than i t was on December 31, 1931. "A d i f f e r e n t method of f i n a n c i n g the l i q u i d a t i n g c o r p o r a t i o n i s proposed and w i l l be discussed under t h e a p p r o p r i a t e s e c t i o n . For t h i s reason a m o d i f i c a t i o n of Section 5 i s suggested which would not change the p r o v i s i o n s of t h e p r e s e n t law i n regard t o the s u r p l u s of t h e Federal r e s e r v e banks, but would a u t h o r i z e the Secretary of the Treasury to use the f r a n c h i s e t a x r e c e i v e d from the Federal r e s e r v e banks f o r the purpose Ir-17 350 -4rof supplementing t h e funds of the c o r p o r a t i o n . " SECTI01T 5 ( h ) . Reports of a f f i l i a t e s of S t a t e member hanks. (Page 6) The Board s t a t e d i n i t s l e t t e r t h a t "With r e s p e c t to a f f i l i a t e s , the Board b e l i e v e s t h a t important reforms to be accomplished a t t h e p r e s ent times a r e t h e g r a n t i n g of power to the supervisory a u t h o r i t i e s t o obt a i n r e p o r t s and t o make examinations of a l l a f f i l i a t e s of member banks and t h e p r e s c r i b i n g of l i m i t a t i o n s on t h e loans t h a t a member bank may make t o i t s a f f i l i a t e s . The Board r e a l i z e s t h a t many e v i l s have developed through the o p e r a t i o n of a f f i l i a t e s connected with member banks, p a r t i c u l a r l y a f f i l i a t e s dealing in s e c u r i t i e s . " The Board a l s o recommended t h a t , i n d e a l i n g with a f f i l i a t e s , t h e following p r i n c i p l e s be observed: "(l) To r e q u i r e them to make r e p o r t s and to submit td examination a t t h e d i s c r e t i o n of the Board or t h e Compt r o l l e r ; (2) to l i m i t the loans t h a t can be extended t o an a f f i l i a t e by a member bank; and (3) to p r o h i b i t t h e t y i n g up of c a p i t a l stock of an a f f i l i a t e with the c a p i t a l stock of a member bank. In f a v o r i n g t h e s e l i m i t a t i o n s , the Board has i n mind t h a t i t may not be d e s i r a b l e t o a b o l i s h a l l the e x i s t i n g r e l a t i o n s h i p s between member banks and t h e i r a f f i l i a t e s , but t h a t i t i s d e s i r a b l e to p r o t e c t the o p e r a t i o n s of t h e member banks from being unduly i n f l u e n c e d by t h e i r a f f i l i a t e s . Recent experience has demonstrated t h a t operations of the a f f i l i a t e s a t times have u n f a v o r a b l e e f f e c t s on the c o n d i t i o n of member banks. The Federal Reserve Board accordingly recommended t h a t r e p o r t s 351 1-17 of a f f i l i a t e s of S t a t e member "banks ""be r e q u i r e d only when deemed n e c e s sary "by t h e Federal Reserve Board." The p r e s e n t "bill provides t h a t a S t a t e member bank s h a l l obtain from each of i t s a f f i l i a t e s , other than member "banks, and f u r n i s h t o the Federal r e s e r v e "bank and t h e Federal Reserve Board, not l e s s than t h r e e r e p o r t s of c o n d i t i o n each year on d a t e s i d e n t i c a l with t h e r e p o r t s of the a f f i l i a t e d member "bank and such a d d i t i o n a l r e p o r t s as the r e s e r v e bank or the Board may deem n e c e s s a r y . The p r o v i s i o n r e q u i r i n g such r e p o r t s to be made i s mandatory; but they a r e r e q u i r e d to contain only such information a s , i n the judgment of t h e Federal Reserve Board, s h a l l be necessary to d i s c l o s e f u l l y the r e l a t i o n s between such a f f i l i a t e and such bank and t o enable t h e Board t o inform i t s e l f as to t h e e f f e c t of such r e l a t i o n s upon the a f f a i r s of such bank. The r e p o r t s of a f f i l i a t e s a r e t o be published by t h e bank under the same conditions as govern i t s own condition r e p o r t s . ( S u b s t a n t i a l l y the same p r o v i s i o n s a r e contained i n Section 24 of the p r e s e n t b i l l w i t h r e f e r e n c e to r e p o r t s of a f f i l i a t e s of n a t i o n a l banks, except t h a t t h e r e p o r t s a r e made to the Comptroller of the Currency i n s t e a d of the Federal Reserve Board.) SECTION 5 ( b ) . 4 Dealings i n stocks and investment s e c u r i t i e s by S t a t e member banks. (Page 8) The p r e s e n t b i l l contains a p r o v i s i o n t o the e f f e c t t h a t S t a t e member banks s h a l l be s u b j e c t to t h e same l i m i t a t i o n s and c o n d i t i o n s as a r e n a t i o n a l banks with r e s p e c t to the purchase, s a l e , u n d e r w r i t i n g ii—17 and holding of investment s e c u r i t i e s and s t o c k . There was no such p r o v i s i o n in S. 4115; but the Board recommended t h a t the p r o v i s i o n in. Section 15 of S. 4115, which r e s t r i c t e d d e a l i n g s in investment s e c u r i t i e s "by n a t i o n a l hanks, he omitted e n t i r e l y . (The. p r o v i s i o n s on t h i s s u b j e c t regarding n a t i o n a l banks a r e i n Section 15 of the p r e s e n t b i l l . ) SECTION 5 ( b ) . Divorce of stock of State member bank from stock of other c o r p o r a t i o n s . (Page 8) The p r e s e n t b i l l contains a p r o v i s i o n to the e f f e c t t h a t , a f t e r f i v e y e a r s from the passage of the Act, no c e r t i f i c a t e of s t o c k of a State member bank s h a l l r e p r e s e n t the stock of any other c o r p o r a t i o n except a member bank, nor s h a l l the ownership or t r a n s f e r of the stock c e r t i f i c a t e of such a bank be conditioned upon the ownership or t r a n s f e r of a c e r t i f i c a t e of stock of another c o r p o r a t i o n , except a member bank. S. 4115 contained no such p r o v i s i o n regarding the stock of S t a t e member banks. There was a s i m i l a r p r o v i s i o n regarding the stock of n a t i o n a l banks (Section 17 of S. 4115), which would have become e f f e c t i v e immedia t e l y , and the Board recommended t h a t i t be r e t a i n e d but t h a t i t be made effective a f t e r three years. The Board a l s o recommended i n connection with i t s d i s c u s s i o n of a f f i l i a t e s t h a t the b i l l " p r o h i b i t the t y i n g up of c a p i t a l s t o c k of an a f f i l i a t e with the c a p i t a l stock of a member bank (The p r o v i s i o n on t h i s s u b j e c t a p p l i c a b l e to the stock of n a t i o n a l banks i s found i n Section 17 of the p r e s e n t b i l l . ) 353 L-17 SUCTION 5 ( b ) . Right of an a f f i l i a t e of a State member "bank to vote stock held "by i t in such "bank. (Page 8). Under the p r e s e n t b i l l , each State member bank a f f i l i a t e d with a holding company a f f i l i a t e i s r e q u i r e d to o b t a i n from such a f f i l i a t e , w i t h i n a p e r i o d p r e s c r i b e d by the Board, an agreement t h a t the a f f i l i a t e w i l l be s u b j e c t to the same conditions and l i m i t a t i o n s with r e s p e c t to v o t ing stock i n the bank as a r e a p p l i c a b l e in the case of holding company a f f i l i a t e s of n a t i o n a l banks (under Section 18 of the b i l l ) ; and f o r f a i l u r e so to do the membership of the State bank i n the Federal Reserve System may be f o r f e i t e d . I f the Board revokes the v o t i n g permit ( r e q u i r e d by Section 18) of any holding company a f f i l i a t e , the membership of any State member bank a f f i l i a t e d with i t may be f o r f e i t e d . Section 20 of S. 4115 contained p r o v i s i o n s with r e f e r e n c e to the conditions under which holding company a f f i l i a t e s of national, banks may obtain permits to vote stock owned by them in such banks, but these p r o v i s i o n s were not made a p p l i c a b l e to State member banks. The Board recom- mended a number of changes i n these p r o v i s i o n s , and t h a t s u b s t a n t i a l l y the same p r o v i s i o n s , with the changes recommended, be made a p p l i c a b l e a l s o to a f f i l i a t e s of S t a t e member banks. The p r o v i s i o n s a p p l i c a b l e to a f f i l i - a t e s of n a t i o n a l banks, however, ( t o which a f f i l i a t e s of S t a t e member banks are a l s o s u b j e c t ) have n o t , except i n a few r e s p e c t s , been made to conform to the recommendations of the Board on the s u b j e c t . (The p r o v i s i o n s r e f e r r e d to are described below more i n d e t a i l in Section 18 h e r e a f t e r . ) 354 -8- Ir-17 SECTION 5 ( b ) . Examination of the a f f i l i a t e s of S t a t e member banks. (Page 9) The Federal Reserve Board recommended "in order t h a t s u i t able provision- may be made f o r the examination of a f f i l i a t e s of State member banks when deemed necessary" t h a t such examinations be authorized to be made when deemed necessary in order to inform the Board or the Federal reserve bank of the r e l a t i o n s between the a f f i l i a t e and the member bank and the e f f e c t of such r e l a t i o n s ; t h a t the e x aminer be a u t h o r i z e d to examine o f f i c e r s and employees of the a f f i l i a t e under oath; t h a t the expenses of the examination be a s s e s s e d , i n the d i s c r e t i o n of the Board, a g a i n s t the a f f i l i a t e ; and i f not p a i d by the a f f i l i a t e , a g a i n s t the member bank; and t h a t a r e f u s a l by the a f f i l i a t e to permit an examination or to give necessary information be p e n a l i z e d by a f i n e a g a i n s t the member bank of $100 p e r day. The p r e s e n t b i l l r e q u i r e s such examinations of a f f i l i a t e s of State member banks to be made in connection w i t h the examinations of such banks as s h a l l be necessary to d i s c l o s e f u l l y the r e l a t i o n s between such banks and t h e i r a f f i l i a t e s and the e f f e c t of such r e l a t i o n s ; the expenses of such examination may, in the d i s c r e t i o n of the Board, be a s s e s s e d a g a i n s t the bank examined; and, in the event of the r e f u s a l of the a f f i l i a t e to give information or to permit an examination, or in the event of the f a i l u r e of the bank to pay the cost t h e r e o f , the membership of the bank may be f o r f e i t e d . The p r o v i s i o n s re com- 1-17 mended "by the Board a s to examinations under oath, payment of expenses of examination by the a f f i l i a t e , and p e n a l t i e s of $100 a day, a r e omitted. ( p r o v i s i o n s with r e f e r e n c e to examinations of a f f i l i a t e s of n a t i o n a l t a n k s a r e contained i n Section 25 of the p r e s e n t b i l l . ) SECTION 6, O f f i c e s of the Federal Reserve Board. (Pages 10-13). The Federal Reserve Board recommended t h a t i f the a u t h o r i t y of the Secretary of the Treasury, contained in e x i s t i n g law, to a s s i g n q u a r t e r s to the Federal Reserve Board i s r e p e a l e d , " i t would seem t h a t the Board should be authorized to purchase or c o n s t r u c t a b u i l d i n g f o r i t s own use and t h a t , in the i n t e r e s t of convenience and e f f i c i e n c y , space should be provided in such b u i l d i n g f o r the Comptroller of the Currency and h i s s t a f f and f o r the proposed Federal L i q u i d a t i n g Corporation. 0 The Board, however, i s not given a u t h o r i t y to purchase or e r e c t a b u i l d i n g i n the p r e s e n t b i l l , and the p r o v i s i o n ef e x i s t i n g law a u t h o r i z i n g the Secretary of the Treasury to a s s i g n o f f i c e s to the Board has been omitted. SECTI01T 7. Open Market Committee. (Page 13) The p r o v i s i o n s of Section 10 of S. 4115 c r e a t i n g the Federal Open Market Committee have, with some changes, been r e t a i n e d in the 356 L*-l? present t i l l . The Board s a i d i n i t s l e t t e r "With r e s p e c t to the s e c t i o n of the "bill d e a l i n g with open market o p e r a t i o n s , the Board c a l l s a t t e n t i o n to the f a c t t h a t t h e r e i s already i n e x i s t e n c e an open market committee on which each of the Federal reserve "banks has r e p resentation. ment. This has come about as the r e s u l t of n a t u r a l develop- The Board b e l i e v e s t h a t i t would "be inadvisable to d i s t u r b t h i s development by c r y s t a l ! z i n g i n t o law any p a r t i c u l a r procedure. The Board b e l i e v e s t h a t nothing f u r t h e r i s necessary or a d v i s a b l e a t t h i s time than an amendment c l a r i f y i n g i t s power of supervision over open market o p e r a t i o n s of the Federal reserve banks and t h e i r r e l a t i o n s h i p s with f o r e i g n banks, a s s e t out in the memorandum a t t a c h e d . " The Board suggested as a s u b s t i t u t e f o r the p r o v i s i o n s on t h i s s u b j e c t c e r t a i n amendments to Section 14 of the Federal Heserve Act: ( l ) c l a r i f y i n g the Board's power over open market o p e r a t i o n s , and (3) improving and c l a r i f y i n g one of the p r o v i s i o n s of the b i l l with r e s p e c t to the c o n s i d e r a t i o n s which should govern purchases and s a l e s on the open market, so a s to apply not only to purchases and s a l e s "of paper" but to any open market t r a n s a c t i o n s . The f i r s t of these suggested amendments i s not incorporated in the L-17 p r e s e n t "bill and while the phraseology of the p r o v i s i o n with r e s p e c t to the c o n s i d e r a t i o n s governing open market o p e r a t i o n s has "been changed, i t has not "been a l t e r e d i n the manner suggested "by the Board. The Federal Reserve Board pointed out t h a t the statement in Section 10 of S. 4115 t h a t "Ho Federal reserve "bank s h a l l engage i n open market o p e r a t i o n s * * * except a f t e r approval and a u t h o r i z a t i o n hy the Committee", appears to be too r i g i d . this provision The Board s a i d t h a t "deprives an i n d i v i d u a l reserve hank of a l l a u t h o r i t y to make purchases in the open market except a f t e r obtaining the consent of both the Board and the committee. The open market committee would have no a u t h o r i t y to a c t without approval of the Board and the Board would have no a u t h o r i t y to a c t without approval of the committee, This would r e s u l t i n the p o s s i b i l i t y of o b s t r u c t i o n of any system program and would tend to make the o p e r a t i o n of the Federal reserve system l e s s timely and l e s s e f f i c i e n t . " In the p r e s e n t b i l l the p r o v i s i o n s r e f e r r e d to have been changed s l i g h t l y i n form, but l i t t l e i n e f f e c t . 558 L-17 —11— S3CTI0H 7. Federal Liquidating Corporation. (Pages 14-28). The Board s a i d i n i t s l e t t e r t h a t i t " i s i n f a v o r of e s t a b l i s h i n g a l i q u i d a t i n g c o r p o r a t i o n , but proposes t o l i m i t the scope of i t s o p e r a t i o n s t o meriter banks and suggests a d i f f e r e n t method of f i n a n c i n g i t , t o g e t h e r w i t h c e r t a i n changes i n the p r o v i s i o n s f o r i t s administation." Accordingly, the Board suggested i n l i e u of the p r o v i s i o n s of s e c t i o n 10 of S. 4115 on t h i s s u b j e c t , a proposed s u b s t i t u t e which provided a number of m a t e r i a l changes. t h e Board s a i d : In submitting t h i s s u b s t i t u t e "The s u b s t i t u t e would confine the b e n e f i t s of t h e l i q u i d a t i n g c o r p o r a t i o n to member banks. Provision i s made f o r a s s i s t - ance to nonmember banks i n t h e Reconstruction Finance Corporation Act, and i t would render membership i n the System more a t t r a c t i v e i f the b e n e f i t s of the Corporation were confined to member banks. In t h e s u b s t i t u t e i t i s proposed t h a t $100,000,000 of t h e c a p i t a l of the l i quidating corporation be subscribed by t h e Treasury. This s u b s c r i p - t i o n t o c a p i t a l may be considered as being derived from t h e f r a n c h i s e t a x p r e v i o u s l y p a i d to the Treasury by t h e r e s e r v e banks. In a d d i - t i o n , i t i s proposed t h a t t h e c o r p o r a t i o n be a u t h o r i z e d to i s s u e debentures up to twice t h e amount of i t s subscribed c a p i t a l and t h a t the Federal r e s e r v e banks be given a u t h o r i t y to purchase those d e - 359 L-17 -13bentu r e s up to one—fourth of t h e i r s u r p l u s . This i s not a p r o p i t i o u s time to ask the member "banks to c o n t r i b u t e to the l i q u i d a t i n g corporation. The banks a r e going through a very d i f f i c u l t p e r i o d and t o t a x them f o r t h i s purpose would be a considerable h a r d s h i p on them. "In order to make t h e operations of the c o r p o r a t i o n more e a s i l y manageable, i t i s proposed t h a t t h e d i r e c t o r a t e be comprised of f i v e members i n s t e a d of f o u r t e e n as proposed i n t h e b i l l . " Some of the suggestions of the Board mentioned i n t h e above quotation have been adopted i n the p r e s e n t b i l l . The p r o v i s i o n s of the p r e s e n t b i l l c o n f i n e the b e n e f i t s of t h e l i q u i d a t i n g c o r p o r a t i o n t o member banks (paragraph ( a ) ) and debentures may be i s s u e d by t h e c o r p o r a t i o n up t o twice the amount of i t s c a p i t a l (and t h i s would seem to mean "subscribed c a p i t a l " , though i t i s not c l e a r ) (paragraph (m)). The d i r e c t o r a t e of t h e c o r p o r a t i o n i s to c o n s i s t of f i v e members (paragraph ( b ) ) . The other recommendations of t h e Board, mentioned i n t h e above q u o t a t i o n , namely, a s to c a p i t a l stock and the purchase of debentures of t h e c o r p o r a t i o n by Federal r e s e r v e banks, have not been adopted. The p r e s e n t b i l l provides f o r t h r e e c l a s s e s of c a p i t a l s t o c k ; Class A s t o c k , to be subscribed by member banks i n an amount equal t o o n e - f o u r t h of one p e r cent of t h e i r d e p o s i t s ; Class B s t o c k , to be subs c r i b e d by t h e Federal r e s e r v e banks i n an amount equal to o n e - f o u r t h of t h e i r s u r p l u s (paragraphs (d) and ( e ) ) ; and stock i n t h e amount of $125,000,000, to be subscribed by the United S t a t e s (paragraph ( c ) ) . One-half of t h e 380 -13* L-17 Class A stock (paragraph ( e ) ) and of the Class B stock (paragraph (d)) i s a p p a r e n t l y r e q u i r e d to be paid in on the o r g a n i z a t i o n of the corpora t i o n and the remainder i s s u b j e c t to c a l l (paragraphs (d) and ( e ) ) . Bone of the s t o c k subscribed "by the United S t a t e s i s t o be p a i d i n on o r g a n i z a t i o n , but i s subject to c a l l by the board of d i r e c t o r s of the c o r p o r a t i o n ; and $125,000,000 i s authorized to be a p p r o p r i a t e d f o r payment f o r the stock (paragraph ( c ) ) . In a d d i t i o n to the p o i n t s mentioned above, there a r e a number of o t h e r d i f f e r e n c e s between the p r o v i s i o n s of the p r e s e n t b i l l and the Board's suggested s u b s t i t u t e . Many of these a r e d i f f e r e n c e s of r e l a t i v e l y s l i g h t importance or of language only. Others, however, are more s u b s t a n t i a l and those which appear to be m a t e r i a l w i l l be noted h e r e : The Board's suggested s u b s t i t u t e provided t h a t debentures issued by the c o r p o r a t i o n should be guaranteed by the United S t a t e s and p a i d by the United S t a t e s i f the corporation should be unable to pay them, but t h i s amendment has not been adopted. The p r e s e n t b i l l (paragraph (b)) contains a p r o v i s i o n (not found in the Board's proposed s u b s t i t u t e ) t h a t no member of the board of d i r e c t o r s of the corporation ( c o n s i s t i n g of the Comptroller of the Currency, a member of the Federal Reserve Board and three members appointed by the governors of the Federal reserve banks) s h a l l receive any a d d i t i o n a l compensation f o r h i s s e r v i c e s a s such member. 4^- Ir-17 Both under the p r e s e n t b i l l (paragraph (h)) and the Board's proposed s u b s t i t u t e , an o f f i c e r or employee of the United S t a t e s may be an o f f i c e r or employee of the corporation; but the p r e s e n t b i l l does not s p e c i f i c a l l y a u t h o r i z e an o f f i c e r or employee of the United S t a t e s to be a d i r e c t o r of the corporation a s does the Board's s u b s t i t u t e . The p r e s e n t b i l l (paragraph ( i ) ) r e q u i r e s the board of d i r e c t o r s to administer the a f f a i r s of the corporation f a i r l y and i m p a r t i a l l y and without d i s c r i m i n a t i o n among member banks and to extend to member banks such accommodations as may be s a f e l y and reasonably made with due regard f o r the claims and demands of other member banks. This p r o v i s i o n was not contained in the Board's s u b s t i t u t e . The p r e s e n t b i l l , i n providing f o r Class A stock to be subscribed by the member banks and Class B stock (paragraphs (d) and ( e ) ) to be subs c r i b e d by Federal reserve banks, contains a number of p r o v i s i o n s with r e f e r e n c e to the a t t r i b u t e s of t h i s stock and the manner in which Class A stock s h a l l be i n c r e a s e d or decreased according to i n c r e a s e s or decreases in the amount of d e p o s i t s of member banks or. in the number of member banks (paragraph ( f ) ) . The Board's proposed s u b s t i t u t e a u t h o r i z e d the d e a l i n g i n r e a l or personal p r o p e r t y to the extent necessary or convenient f o r the t r a n s a c t i o n of the c o r p o r a t i o n ' s b u s i n e s s , but t h i s p r o v i s i o n i s not included i n the p r e s e n t b i l l . The p r e s e n t b i l l does not contain the p r o v i s i o n suggested by the Board t h a t the corporation be authorized to appoint 362 -15- Ir-17 i t s employees without regard to the p r o v i s i o n s of other laws a p p l i cable to the employment and compensation of o f f i c e r s and employees of the United S t a t e s . The p r e s e n t b i l l c o n t a i n s a p r o v i s i o n (not found i n the Board's proposed s u b s t i t u t e ) f o r a v a l u a t i o n committee (which i n cludes the r e c e i v e r , a r e p r e s e n t a t i v e of the i n s o l v e n t bank and a t h i r d member, s e l e c t e d by these two, but does not include a r e p r e s e n t a t i v e of the c o r p o r a t i o n ) . Loans on and purchases of the a s s e t s of the closed member banks by the corporation a r e to be made on the b a s i s of v a l u a t i o n s made by t h i s committee (paragraph ( j ) ) . The p r e s e n t b i l l does not contain a p r o v i s i o n (suggested by the Board) t h a t in no case s h a l l the corporation make any loan or purchase any a s s e t s i n an amount which s h a l l not f u l l y p r o t e c t the c o r p o r a t i o n . The p r e s e n t b i l l r e q u i r e s the c o r p o r a t i o n to pay to the r e c e i v e r any excess r e a l i z e d upon the a s s e t s purchased (paragraph ( j ) ) , but does not c o n t a i n such a requirement as to an excess r e a l i z e d upon a s s e t s on which a loan has been made (as provided in the Board's s u b s t i tute .) The p r e s e n t b i l l provides f o r the deduction of a l i q u i d a t i o n f e e of 8$ of the amount r e a l i z e d upon the a s s e t s purchased (paragraph ( j ) ) ; whereas the Board suggested the deduction of the expenses of L-17 l i q u i d a t i n g the a s s e t s and an amount equal to i n t e r e s t a t the r a t e of &f> p e r annum, and required t h a t a l l loans made "by the c o r p o r a t i o n to r e c e i v e r s "bear i n t e r e s t a t 6$ p e r annum. The p r e s e n t "bill contains a p r o v i s i o n a u t h o r i z i n g the corporation to purchase the a s s e t s of "banks in the hands of r e c e i v e r s on the date of the o r g a n i z a t i o n of the corporation on the same general terms and conditions a s a r e a p p l i c a b l e i n the case of banks closed a f t e r t h a t date (paragraph ( k ) ) . This p r o v i s i o n appears to be unnecessary; and the same e f f e c t i s accomplished by the p r o v i s i o n s of the Board's proposed s u b s t i t u t e , although an express p r o v i s i o n of t h i s kind i s not found in the s u b s t i t u t e . The p r e s e n t b i l l a l s o recognizes the r i g h t of the corporation to e n t e r into n e g o t i a t i o n s to secure the reopening of closed member banks (paragraph ( k ) ) . Express a u t h o r i t y f o r t h i s purpose i s not given in the Board's proposed s u b s t i t u t e . lr-17 364 -17SECTION 8 . Loans on member "banks1 c o l l a t e r a l n o t e s . (Page 28) The p r e s e n t b i l l providesthat, i f a member "bank, while i n debted to a Federal r e s e r v e "bank on a f i f t e e n day c o l l a t e r a l note and d e s p i t e a warning of t h e Federal r e s e r v e bank or of t h e Federal Reserve Board, i n c r e a s e s i t s outstanding loans f o r the purpose of purchasing or c a r r y i n g stocks or investment s e c u r i t i e s (except o b l i g a t i o n s of the United S t a t e s ) , i t s note s h a l l be immediately due and payable and the member bank s h a l l be i n e l i g i b l e t o borrow on such f i f t e e n day notes f o r such p e r i o d as t h e Federal Reserve Board s h a l l determine. The F e d e r a l Reserve Board recommended t h a t t h e p r o v i s i o n s of Section 11 of S. 4115 on t h i s s u b j e c t be omitted and t h a t an amendment be adopted i n c r e a s i n g t h e maximum m a t u r i t y of advances to member banks on t h e i r promissory notes secured by e l i g i b l e paper from 15 to 90 days; b u t , except f o r the amission of two p r o v i s i o n s of S.4115 to which the Board o b j e c t e d , the Board's recommendations on t h i s s u b j e c t have not been adopted. In t h i s connection t h e Board s a i d : "The Board i s not i n sympathy w i t h the p r o v i s i o n s of the b i l l d i s c r i m i n a t i n g a g a i n s t member bank c o l l a t e r a l n o t e s . Experience shows t h a t the p a r t i c u l a r i n s t r u - ment on which Federal r e s e r v e c r e d i t i s obtained i s not an adequate t e s t of the use to be made by the member bank of the proceeds of t h e c r e d i t and t h a t an attempt to c o n t r o l s p e c u l a t i o n through r e s t r i c t i o n s on member bank c o l l a t e r a l notes would not be e f f e c t i v e i n accomplishing t h e purpose of t h i s s e c t i o n of the b i l l . Indeed, i t probably would i n t e r f e r e s e r i o u s l y w i t h the convenient and economical o p e r a t i o n of the http://fraser.stlouisfed.org/ system. In Federal Reserve Bank of St. Louis t h i s connection, the Federal Reserve Board d e s i r e s t o 365 L-17 -18- renew t h e recommendation made i n i t s annual r e p o r t s f o r s e v e r a l y e a r s , t h a t t h e m a t u r i t y f o r which advances may be made t o member banks on t h e i r promissory notes secured by paper which i s e l i g i b l e f o r discount be i n c r e a s e d from f i f t e e n to n i n e t y days. Such an amendment would be e s p e c i a l l y h e l p f u l to country banks." The Board a l s o said t h a t the theory u n d e r l y i n g t h i s s e c t i o n (Section 11 of S.4115) namely, " t h a t t h e r e i s a more d i r e c t connection between member bank c o l l a t e r a l notes and t h e use of r e s e r v e c r e d i t f o r s p e c u l a t i v e a c t i v i t y than between other borrowings and t h i s a c t i v i t y i s unfounded. Member banks borrow on 15-day n o t e s , because of the g r e a t e r convenience b o t h t o them and to the Federal r e s e r v e bank; and, i f t h i s form of borrowing were p r o h i b i t e d or made more expensive, they would merely s u b s t i t u t e t h e procedure of r e d i s c o u n t i n g e l i g i b l e paper without any change i n t h e use of the proceeds. For the se r e a s o n s , i t i s b e l i e v e d t h a t t h i s s e c t i o n would make the o p e r a t i o n of t h e Federal r e s e r v e banks l e s s e f f i c i e n t and more expensive." ( i t may be noted t h a t the p r e s e n t b i l l amends t h e seventh paragraph of Section 13 of the Federal Reserve Act; b u t , due to t h e i n s e r t i o n of another paragraph i n s e c t i o n 13 by t h e Act of J u l y 21, 1932, t h e paragraph intended to be amended i s not now t h e seventh p a r a g r a p h , but t h e e i g h t h paragraph. Furthermore, the enactment of the p r e s e n t b i l l would r e p e a l t h e amendment to the paragraph i n question which was contained i n t h e Act of May 19, 1932, and which authorized t h e use of o b l i g a t i o n s of Federal i n t e r m e d i a t e c r e d i t banks as s e c u r i t y f o r member bank 15 day notes.) L-i? MS- SECTION 9. Foreign Transactions of Federal r e s e r v e "banks (Pages 29,30) The p r i n c i p a l recommendations which the Board made with r e spect t o Section 12 of S. 4115 dealing with the s u p e r v i s i o n of t h e Federal Reserve Board over f o r e i g n t r a n s a c t i o n s and r e l a t i o n s h i p s of Federal r e s e r v e banks have been adopted i n the p r e s e n t b i l l . of d i f f e r e n c e , however, may be noted. One p o i n t S. 4115 provided t h a t a r e p o r t of a l l conferences or n e g o t i a t i o n s and m a t e r i a l f a c t s a p p e r t a i n i n g t h e r e t o be f i l e d with the Federal Reserve Board i n w r i t i n g and signed by a l l r e p r e s e n t a t i v e s of the Federal r e s e r v e bank a t t e n d i n g such conf e r e n c e s or n e g o t i a t i o n s . The Board recommended t h e omission of t h e clause r e q u i r i n g the r e p r e s e n t a t i v e s of the Federal r e s e r v e bank t o sign t h e report. The p r e s e n t b i l l r e q u i r e s t h a t a r e p o r t of such conferences or n e g o t i a t i o n s be f i l e d with the Board i n w r i t i n g by a duly a u t h o r i z e d o f f i c e r of each Federal r e s e r v e bank which s h a l l have p a r t i c i p a t e d t h e r e in. SECTION 10. Reserves of member banks(page 30) Section 13 of S. 4115 contained a r e v i s i o n of the p r o v i s i o n s with r e f e r e n c e t o t h e r e s e r v e requirements of member banks; and t h e Board recommended t h a t these p r o v i s i o n s be s t r i c k e n out and t h a t t h e r e be s u b s t i t u t e d a r e v i s i o n of Section 19 of the Federal Reserve Act i n accordance with t h e recommendations of the System's Committee on Reserves, with some m o d i f i c a t i o n s . The p r o v i s i o n s of S. 4115 have been omitted from t h e p r e s e n t b i l l ; but the Board's recommended s u b s t i t u t e (with the exception of a p r o v i s i o n f o r b i d d i n g a member bank to a c t as t h e medium ~20~ or agent of a non-banking i n s t i t t l t i O t i i n making c o l l a t e r a l loans t o "brokers or d e a l e r s i n investment s e c u r i t i e s ) has not been i n c o r p o r a t e d therein. The p r e s e n t b i l l does not c o n t a i n any p r o v i s i o n w i t h r e f e r e n c e to r e s e r v e requirements of member banks. On t h i s s u b j e c t the Board s t a t e d that i t was "of t h e opinion t h a t the adoption of a system of r e s e r v e s based on v e l o c i t y of accounts as well as on t h e i r volume as recommended by the System's Committee on Reserves, would be an important s t e p i n s t r e n g t h e n i n g t h e i n f l u e n c e t h a t the Federal Reserve System could exert i n t h e d i r e c t i o n of sound credit conditions." The Board a l s o s a i d i n t h i s connection, "Any thorough-going r e v i s i o n of Section 19 of the Federal Reserve Act should b a s e r e q u i r e d r e s e r v e s , i n so f a r as p r a c t i c a b l e , upon t h e a c t i v i t y of the b u s i n e s s handled through each bank, r a t h e r than on an a r b i t r a r y c l a s s i f i c a t i o n of banks according t o l o c a t i o n . A proposal submitted i n the 'Report of the Committee on Bank Reserves of the Federal Reserve System' embodies a method of c a l c u l a t i n g r e q u i r e d r e s e r v e s which i s b e l i e v e d to be sound i n p r i n c i p l e and which would make f l u c t u a t i o n s i n t h e volume of r e q u i r e d r e s e r v e s exert an i n f l u e n c e i n the d i r e c t i o n of sound c r e d i t conditions and would a l s o e l i m i n a t e many i n e q u i t a b l e and u n f a i r f e a t u r e s of the p r e s e n t law." SECTION 11 loans by Member Banks to Executive O f f i c e r s or R e l a t i v e s . (Pages 30-33) There i s a p r o v i s i o n i n the p r e s e n t b i l l , not contained i n S.4115 and not recommended by the F e d e r a l Reserve Board, which f o r b i d s a member bank to loan to i t s executive o f f i c e r s and f o r b i d s them to borrow from t h e bank. I t a l s o r e q u i r e s an executive o f f i c e r of a -si- L~l? bank vrho "borrows from any other "bank t o make a r e p o r t thereof t o the chairman of the board of d i r e c t o r s of h i s "bank; and f u r t h e r , t h a t i f a spouse, "brother, s i s t e r , l i n e a l a n c e s t o r or d i r e c t descendant of an executive o f f i c e r of any member "bank "borrow f r o n such "bank, t h e o f f i c e r s h a l l make r e p o r t thereof to t h e chairman of the board of d i r e c t o r s . V i o l a t i o n of t h i s s e c t i o n i s made a crime, s u b j e c t t o f i n e or imprisonmnent. SECTION 12. Loans t o or investments i n stock of a f f i l i a t e s . (pages 33-34) The p r o v i s i o n s recommended by t h e Federal Reserve Board with r e s p e c t to the l i m i t a t i o n s upon loans or extensions of c r e d i t to a f f i l i a t e s by me:.:ber banks and upon investments i n t h e s t o c k or o b l i g a t i o n s of such a f f i l i a t e s by member banks have been adopted s u b s t a n t i a l l y i:i t h e p r e s e n t b i l l . One exception t o t h i s s t a t e m e n t , however, nay be noted. Among the l i m i t a t i o n s provided by t h i s s e c t i o n i s a r e q u i r e ment t h a t a loan or extension of c r e d i t t o an a f f i l i a t e of a member bank be secured by c o l l a t e r a l having a market v a l u e of a t l e a s t 20$ more than the amount of the loan or extension, except loans or extensions secured by o b l i g a t i o n s of the United S t a t e s , Federal i n t e r m e d i a t e c r e d i t banks, Federal land banks or paper e l i g i b l e f o r r e d i s c o u n t by Federal r e s e r v e banks. The Board recommended t h a t an exception to t h i s l i m i t a t i o n be made a l s o i n f a v o r . of loans secured by o b l i g a t i o n s of the Reconstruction Finance Corporation, but such an exception i s not contained i n t h e present b i l l . SECTION 13. L i m i t a t i o n on Investments i n Bank Premises. (Page 34) 368 -23The Federal Reserve Board reConnended a p r o v i s i o n t h a t no n a t i o n a l banl:, x?ithov.t t h e permission of the Comptroller of the Currency, and no S t a t e member bank, without the p e r m i s s i o n of t h e Board, s h a l l i n v e s t i n bank premises, or i n stock or o b l i g a t i o n s o f , or i n loans t o , any c o r p o r a t i o n orming or holding i t s banlc premises, a sum exceeding t h e amount of t h e b a n k ' s c a p i t a l s t o c k . The p r e s e n t b i l l adopts i n substance t h i s p r o v i s i o n recommended by the Board, but the language of the p r o v i s i o n i s somewhat changed and loans upon the s e c u r i t y of the stock of any such corporat i o n h o l d i n g bank premises a r e included w i t h i n t h e investments to which the l i m i t a t i o n a p p l i e s . SECTION 14. J u r i s d i c t i o n of Federal Courts over cases involving f o r e i g n banking t r a n s a c t i o n s . (Page 35) The p r e s e n t b i l l contains a p r o v i s i o n , not found i n S.4115 and not recommended by the Federal Reserve Board, which conf e r s upon D i s t r i c t Courts of the United S t a t e s j u r i s d i c t i o n over any case to which a c o r p o r a t i o n organized under the laws of t h e United S t a t e s i s a p a r t y and which a r i s e s out of t r a n s a c t i o n s i n volving i n t e r n a t i o n a l or f o r e i g n banking, e i t h e r d i r e c t l y or through the agency, ownership or control of branches or of l o c a l i n s t i t u t i o n s in foreign countries. SECTION 15. National Banks granted a l l powers of S t a t e Banks. (Page 36.) The Federal Reserve Board recommended t h e omission of a p r o v i s i o n of Section 15 of S.4115 a u t h o r i z i n g a n a t i o n a l banlc to engage i n a l l forms of banking business p e r m i t t e d by the laws of t h e S t a t e i n which i t i s l o c a t e d t o "banks of deposit and d i s c o u n t " organized under L-17 370 such S t a t e laws, except to the extSilt t h a t the e x e r c i s e of sudh powers i s forbidden by the laws of the United S t a t e s . The Board s a i d i n t h i s con~ n e c t i o n t h a t t h i s p r o v i s i o n "apparently i s intended to enable n a t i o n a l "banks to compete more e f f e c t i v e l y with S t a t e "banks. I t s tendency would "be to lower t h e standards of banking i n the n a t i o n a l banking system to the standard of t h e S t a t e banks, where more l i b e r a l powers a r e granted t o S t a t e banks by S t a t e l a w . " The p r o v i s i o n i n question, however, has been r e t a i n e d i n t h e p r e s ent b i l l , w i t h t h e q u a l i f i c a t i o n t h a t t h i s s e c t i o n s h a l l take e f f e c t f i v e years a f t e r t h e d a t e of the approval of t h e Act. SECTION 15. Dealings i n investment s e c u r i t i e s , (pages 36-38) The Board recommended t h a t a number of p r o v i s i o n s , contained i n Section 15 of S.4115, which r e f e r r e d to dealings i n investment s e c u r i t i e s by n a t i o n a l banks and p r e s c r i b e d c e r t a i n l i m i t a t i o n s t h e r e o n , be omitted from t h e b i l l . In t h i s connection the Board s a i d : "This s e c t i o n would make i t necessary f o r member banks to dispose of a l a r g e amount of s e c u r i t i e s a t t h i s time which would be very u n f o r t u n a t e . Since i t i s aimed gen- e r a l l y a t investments i n s e c u r i t i e s , i t i s b e l i e v e d t h a t i t s purpose i s covered s u f f i c i e n t l y by the proposed s u b s t i t u t e f o r Section 3 of t h e B i l l . "The d e f i n i t i o n of investment s e c u r i t i e s which i s contained i n the law, as amended by the Act of February 25, 1927, would be s t r i c k e n out and a p p a r e n t l y t h e Comptroller would be given u n l i m i t e d power to p r e s c r i b e h i s own d e f i n i t i o n except t h a t stocks could not be i n c l u d e d . This m o d i f i - cation i s undesirable. "For the reasons s t a t e d , i t i s recommended t h a t t h i s s e c t i o n be omitted e n t i r e l y . " t«24~ Ir-17 1 The d e f i n i t i o n of investment s e c u r i t i e s contained i n e x i s t i n g law has been r e s t o r e d i n e f f e c t in the p r e s e n t b i l l . The o t h e r p r o v i s i o n s on t h i s s u b j e c t , however, which the Board recommended be omitted, have been r e t a i n e d i n the p r e s e n t b i l l with c e r t a i n changes and with the q u a l i f i c a t i o n t h a t the s e c t i o n s h a l l not talce e f f e c t u n t i l f i v e y e a r s a f t e r the approval of the Act. Under Section 5 of the p r e s e n t b i l l , furthermore, these p r o v i s i o n s a r e a p p l i c a b l e a l s o to S t a t e member banks. -The p r e s e n t b i l l provides i n e f f e c t t h a t : Dealings in investment s e c u r i t i e s a r e l i m i t e d to the purchase and s a l e of such s e c u r i t i e s , without r e c o u r s e , s o l e l y upon the order and f o r the account of customers, except t h a t a member bank may purchase and hold f o r i t s own account investment s e c u r i t i e s under l i m i t a t i o n s and r e s t r i c t i o n s p r e s c r i b e d by r e g u l a t i o n of the Comptroller of the Currency. No member bank s h a l l underwrite any issue of s e c u r i t i e s . The t o t a l amount of any one issue of investment s e c u r i t i e s of any one obligor purchased a f t e r t h i s s e c t i o n takes e f f e c t and held by a member bank f o r i t s own account s h a l l not exceed 10 per cent of the t o t a l amount of such i s s u e o u t s t a n d i n g , b u t t h i s l i m i t a t i o n does not apply to any issue not i n excess of $100,000 and not in excess of 50 per cent of the c a p i t a l of the bank; and the t o t a l amount of investment s e c u r i t i e s of any one o b l i g o r purchased a f t e r t h i s s e c t i o n takes e f f e c t and held by a member bank f o r i t s own account s h a l l not exceed 15 per cent of the paid-up unimpaired c a p i t a l of the bank and 25 p e r cent of i t s unimpaired s u r p l u s . Ho member bank may purchase the stock of any c o r p o r a t i o n , except as o t h e r wise p e r m i t t e d by law, and except t h a t a bank may i n v e s t n o t more than 3 7 * -25- L-17 15 p e r cent of i t s unimpaired, c a p i t a l and s u r p l u s i n the s t o c k of s a f e dep o s i t companies. These l i m i t a t i o n s do not apply to o b l i g a t i o n s of the United S t a t e s , to o b l i g a t i o n s (whether general or s p e c i a l ) of any S t a t e or any subdivision t h e r e o f , or to o b l i g a t i o n s issued under the a u t h o r i t y of the Federal Farm Loan Act. SECTION 16(b) Capital Requirements of State Member Banks. (Page 3 9 ) . The p r e s e n t b i l l contains a p r o v i s i o n , not found i n S. 4115 and not recommended by the Federal Reserve Board, which amends Section 9 of the Federal Reserve Act so as to eliminate the p r o v i s i o n of e x i s t i n g lav/ under which a S t a t e bank i s p e r m i t t e d to become a member of the Federal Reserve System with a c a p i t a l equal to only 60 p e r cent of the amount r e q u i r e d f o r the o r g a n i z a t i o n of a n a t i o n a l bank in the p l a c e i n which i t is situated. The c a p i t a l of S t a t e member banks h e r e a f t e r admitted to the System, t h e r e f o r e , would be r e q u i r e d in a l l cases to be equal to t h a t required of n a t i o n a l banks l o c a t e d i n p l a c e s of l i k e s i z e . SECTION 17. Divorce of Stock of National Banks from stock of o t h e r c o r p o r a t i o n s . (Page 39). The p r e s e n t b i l l provides t h a t , a f t e r f i v e y e a r s from the passage of the Act, no c e r t i f i c a t e of stock of a n a t i o n a l bank s h a l l r e p r e s e n t the stock of any other c o r p o r a t i o n "except a member bank"; nor s h a l l ownership or t r a n s f e r of a stock c e r t i f i c a t e of a n a t i o n a l bank be conditioned upon the ownership or t r a n s f e r of a c e r t i f i c a t e of stock of another corpora t i o n "except a member bank". Ir-17 This p r o v i s i o n i s as recommended "by the Federal Reserve Board except t h a t ( l ) the Board suggested t h a t i t become e f f e c t i v e t h r e e y e a r s a f t e r the passage of the Act i n s t e a d of f i v e y e a r s t h e r e a f t e r ; and (2) the q u a l i f y i n g phrase "except a member bank" was not contained i n the Board's recommendation. ( S i m i l a r p r o v i s i o n s regarding c e r t i f i c a t e s of s t o c k of S t a t e member banks a r e included i n Section 5(b) of the p r e s e n t b i l l ) . SECTION 18. Right of an a f f i l i a t e of a n a t i o n a l bank to vote stock held by i t in such bank. (Pages 39-45). The Federal Reserve Board recommended a number of changes in the p r o v i s i o n s which appeared i n s e c t i o n s 19 and 20 of S. 4115 with r e f e r e n c e to the c o n d i t i o n s under which an a f f i l i a t e of a n a t i o n a l bank might vote stock held by i t in such bank, and a l s o recommended t h a t a new s e c t i o n be added imposing s i m i l a r requirements upon a f f i l i a t e s of S t a t e member banks. The p r e s e n t b i l l does not contain the p r o v i s i o n s recommended by the Board on t h i s s u b j e c t , although, a s explained h e r e t o f o r e under Section 5 ( b ) , a State member bank i s r e q u i r e d to obtain from i t s holding company a f f i l i a t e s an agreement to comply with the same requirements which a r e a p p l i c a b l e to n a t i o n a l bank a f f i l i a t e s under t h i s s e c t i o n . In t h i s connection the Board said: "Under the d e f i n i t i o n of ' a f f i l i a t e ' contained i n Section 2 and under the p r o v i s i o n s of Sections 6, 27, and 28 of the B i l l (S. 4115), i f amended i n accordance with the recommendations contained in t h i s r e p o r t , a l l holding companies which c o n t r o l member banks and a l l banks owned or 374 *27- Ir-17 c o n t r o l l e d by such holding companies w i l l be a f f i l i a t e s of such member banks and w i l l be r e q u i r e d to make r e p o r t s and submit to examinations whenever deemed necessary or a d v i s a b l e by the Comptroller of the Currency, the Federal Reserve Board or examiners appointed by them; and, t h e r e f o r e , i t i s suggested t h a t the p r o v i s i o n s regarding examinations and condition r e p o r t s of holding companies be omitted from t h i s s e c t i o n and from the corresponding s e c t i o n s regarding holding companies which own or c o n t r o l S t a t e member banks. " I t i s a l s o suggested t h a t there be i n s e r t e d i n Section 19 and i n the proposed new Section SO c e r t a i n a d d i t i o n a l p r o v i s i o n s providing f o r the r e g u l a t i o n and s u p e r v i s i o n of holding companies and r e q u i r i n g a l l e l i g i b l e S t a t e banks c o n t r o l l e d by them to be members of t h e Federal Reserve System," The s a l i e n t f e a t u r e s of the p r o v i s i o n s recommended by the Board on t h i s s u b j e c t were a s f o l l o w s : Shares owned or c o n t r o l l e d by an a f f i l i - a t e of a n a t i o n a l bank or any r e p r e s e n t a t i v e or agent of such a f f i l i a t e s h a l l not be voted "unless such a f f i l i a t e has f i l e d an agreement with the Comptroller of the Currency to comply with the p r o v i s i o n s of t h i s s e c t i o n . Within one y e a r from the d a t e of any such agreement each nonmember S t a t e bank owned or c o n t r o l l e d by such a f f i l i a t e , i f e l i g i b l e , s h a l l apply f o r membership i n the Federal Reserve System and i f not admitted o r , i f a f t e r admission, i t c e a s e s to be a member, such a f f i l i a t e s h a l l d i v e s t i t s e l f of a l l i n t e r e s t i n such bank. Each such a f f i l i a t e s h a l l , on and a f t e r January 1, 1934, hold unpledged r e a d i l y marketable a s s e t s , o t h e r than bank stock, equal to 15 p e r cent of bank stocks held by i t and s h a l l Ir-17 •****! o / o -28- r e i n v e s t i t s net earnings aboVe 6 pel4 i n such a s s e t s u n t i l they amount to 25 p e r cent of "bank shares h e l d "by i t ; with a p r o v i s o t h a t , i n computing t h e amount of such a s s e t s , c r e d i t s h a l l he given f o r c o n t r i b u t i o n s made during t h e preceding t h r e e y e a r s to banks owned or c o n t r o l l e d by the a f f i l i a t e . F a i l u r e on the p a r t of any such a f f i l i a t e to comply w i t h the p r o v i s i o n s of t h e s e c t i o n or of t h e agreement i s ground f o r t h e terminat i o n of the agreement by the Comptroller of the Currency. Uo n a t i o n a l bank s h a l l make any loan on the s e c u r i t y of the stock o f , or be t h e purchaser or holder of t h e stock o f , any such a f f i l i a t e which owns or c o n t r o l s such bank, or make any loan t o any such a f f i l i a t e on the s e c u r i t y of the stock of a c o r p o r a t i o n owned or c o n t r o l l e d by such a f f i l i a t e , u n l e s s necessary t o prevent l o s s upon a debt p r e v i o u s l y c o n t r a c t e d i n good f a i t h ; and stock so acquired s h a l l be disposed of w i t h i n two y e a r s . The v o t i n g of s t o c k h e l d by a f f i l i a t e s when an agreement of the kind mentioned i s not i n e f f e c t i s made a crime punishable by f i n e ; and o f f i c e r s and employees of a f f i l i a t e s which have entered i n t o such an agreement with the Comptroller of t h e Currency a r e made s u b j e c t t o c e r t a i n criminal p r o v i s i o n s with r e f e r e n c e t o f a l s e e n t r i e s . The p r o v i s i o n s recommended by t h e Board with r e f e r e n c e t o a f f i l i a t e s of S t a t e member banks were i n l a r g e measure s i m i l a r t o those with r e f e r e n c e to n a t i o n a l banks except t h a t t h e F e d e r a l Reserve Board i s s u b s t i t u t e d f o r t h e Comptroller of the Currency. Under t h e Board's recommendations, no S t a t e member bank might remain a member a f t e r one year u n l e s s a f f i l i a t e s of such bank f i l e the r e q u i r e d agreements w i t h the Board. The p r o v i s i o n s of t h e p r e s e n t b i l l with r e f e r e n c e to t h e voting r i g h t s of a f f i l i a t e s of n a t i o n a l banks, which do not c o n t a i n "20u 1-17 the p r o v i s i o n s a s recommended "by the Board, are in "brief form s e t f o r t h in the f o l l o w i n g paragraphs; Shares of a n a t i o n a l hank c o n t r o l l e d "by a holding company a f f i l i a t e , i n c l u d i n g those held by a t r u s t e e f o r the "benefit of the shareholders of such a f f i l i a t e , s h a l l not he voted u n l e s s such a f f i l i a t e s h a l l have obtained a voting permit from the Federal Reserve Board; and i n a c t i n g upon an a p p l i c a t i o n f o r such p e r m i t , the Board s h a l l consider the f i n a n c i a l condition of the a p p l i c a n t , the general c h a r a c t e r of i t s management and the probable e f f e c t of the g r a n t i n g of the permit upon the a f f a i r s of such bank. Ho permit s h a l l be granted except upon the f o l l o w i n g c o n d i t i o n s : (a) Each such holding company a f f i l i a t e s h a l l a g r e e : to submit to examinations, a t i t s own expense, d i s c l o s i n g f u l l y th6 r e l a t i o n s h i p between such a f f i l i a t e and such bank; t h a t such examina t i o n s may be made of each bank owned or c o n t r o l l e d by the a f f i l i a t e ; and t h a t p u b l i c a t i o n of s t a t e m e n t s of condition of such banks may be r e q u i r e d . (b) A f t e r f i v e y e a r s a f t e r the passage of the Act, every such holding company a f f i l i a t e s h a l l possess unpledged r e a d i l y mark e t a b l e a s s e t s o t h e r than bank stock in an amount not l e s s than 12$ of the p a r value of a l l bank stocks c o n t r o l l e d by such a f f i l i a t e , which amount s h a l l be increased by not l e s s than 2$ annually up to 25$ thereof and by r e - i n v e s t i n g in such r e a d i l y marks t a b l e a s s e t s net earnings i n excess of 6$ annually u n t i l such 25$ requirement i s reached. Ir-17 (c) Howevei1, where the shareholders of the a f f i l i a t e a r e themselves l i a b l e urider the double l i a b i l i t y p r o v i s i o n s cn the bank stock held "by the a f f i l i a t e , the l a t t e r s h a l l be r e q u i r e d only to e s t a b l i s h , out of i t s n e t earnings i n excess of 6$, a reserve of r e a d i l y marketable a s s e t s equal to 12$ of the par value of bank stocks c o n t r o l l e d by i t , and r e a d i l y marketable a s s e t s required of such a f f i l i a t e may be used f o r replacement of c a p i t a l i n , or l o s s e s inc urred by, banks a f f i l i a t e d with i t ; but any d e f i c i e n c y so i n c u r r e d s h a l l be made up w i t h i n such p e r i o d as the Federal Reserve Board may p r e s c r i b e . (d) That o f f i c e r s , d i r e c t o r s , agents and employees of such a holding company a f f i l i a t e s h a l l be s u b j e c t to the same p e n a l t i e s f o r f a l s e e n t r i e s a s o f f i c e r s and employees of member banks a r e s u b j e c t to under Section 5209 of the Revised S t a t u t e s . (e) That every such holding company a f f i l i a t e s h a l l show t h a t i t does not have any i n t e r e s t i n and i s not p a r t i c i p a t i n g in the management of any s e c u r i t i e s company and t h a t i t w i l l not acquire such an i n t e r e s t or p a r t i c i p a t i o n ; t h a t , i f i t has such an i n t e r e s t or p a r t i c i p a t i o n i t w i l l , within f i v e y e a r s , d i v e s t i t s e l f t h e r e o f ; and t h a t i t w i l l d e c l a r e dividends only out of a c t u a l n e t e a r n i n g s . If any holding company a f f i l i a t e v i o l a t e s any of the p r o v i sions of t h i s a c t , the Federal Reserve Board may revoke i t s v o t i n g p e r mit a f t e r n o t i c e , and t h e r e a f t e r no n a t i o n a l bank whose stock i s cont r o l l e d by such a f f i l i a t e s h a l l receive Government d e p o s i t s or pay any dividend to such a f f i l i a t e . Where such a v o t i n g permit of an a f f i l i a t e has been revoked, the f r a n c h i s e of any n a t i o n a l bank c o n t r o l l e d by such an a f f i l i a t e s h a l l be s u b j e c t to f o r f e i t u r e . 3 7 8 -31- Ir-17 SECTION 19. R e l a t i o n s h i p s between member banks and s e c u r i t i e s d e a l e r s or corporations making c o l l a t e r a l l o a n s . (Pages 45. 46) Section 18 of S. 4115 contained p r o v i s i o n s p r o h i b i t i n g d i r e c t o r s , o f f i c e r s or employees of member banks to be d i r e c t o r s , o f f i c e r s or employees of c e r t a i n o t h e r s p e c i f i e d c l a s s e s of b u s i n e s s e n t e r p r i s e s and p r o h i b i t i n g a member bank from c l e a r i n g checks or doing the ordinary banking business of a correspondent f o r any b u s i n e s s e n t e r p r i s e s of the c l a s s e s mentioned. The Board recommended the omission of these p r o v i s i o n s and they are not found in the p r e s e n t b i l l . The Board suggested, however, a s u b s t i t u t e paragraph on t h i s s u b j e c t and s a i d i n t h i s connection: " I t has been c l e a r l y demonstrated t h a t a f f i l i a t i o n s between member banks and s e c u r i t y companies have c o n t r i b u t e d to u n d e s i r a b l e banking developments. There a r e , however, d i f f i c u l t i e s i n the way of accomplishing a complete divorce of member banks from t h e i r a f f i l i a t e s a r i s i n g from the f a c t t h a t a law intended f o r t h a t purpose i s l i k e l y to be s u s c e p t i b l e of evasion or e l s e to apply to many cases to which i t i s not intended to a p p l y . Therefore, the Board i s not prepared a t t h i s time to make a d e f i n i t e recommendation, b u t subm i t s , f o r the c o n s i d e r a t i o n of the Committee on Banking and Currency, a s u b s t i t u t e f o r Section 18 which i s designed to provide f o r the divorce of s e c u r i t y a f f i l i a t e s from member banks a f t e r t h r e e y e a r s . " —32— Ir-17 The p r e s e n t "bill p r o v i d e s , in s u b s t a n t i a l accordance w i t h the p r o v i s i o n recommended by the Board, t h a t no member bank s h a l l be a f f i l i a t e d with a s e c u r i t i e s corporation in the manner d e s c r i b e d in Section 2(b) of the p r e s e n t b i l l (where the word " a f f i l i a t e " i s d e f i n e d so a s not to include holding company a f f i l i a t e s ) . A violation of t h i s p r o v i s i o n s u b j e c t s the member bank to a p e n a l t y of $1,000 a day, i n the d i s c r e t i o n of the Federal Reserve Board, and i f the v i o l a t i o n i s continued f o r s i x months a f t e r warning from the Board, the bank* s f r a n c h i s e may be f o r f e i t e d , i f a n a t i o n a l bank, or i t s membership i n the Federal Reserve System may be f o r f e i t e d , i f a State bank. The Board recommended t h a t t h i s p r o v i s i o n be e f f e c t i v e three years a f t e r the passage of the Act, but the p r e s e n t b i l l p r o vides a p e r i o d of f i v e y e a r s b e f o r e the p r o v i s i o n becomes e f f e c t i v e . Under the Board's recommendation the f r a n c h i s e of a n a t i o n a l bank might be f o r f e i t e d f o r v i o l a t i o n of t h i s p r o v i s i o n i n accordance with Section 5239 of the Revised S t a t u t e s , but under the p r e s e n t b i l l the f o r f e i t u r e would be under Section 2 of the Federal Reserve Act, (under which s u i t f o r f o r f e i t u r e may be brought by d i r e c t i o n of the Federal Reserve Board.) SECTION 20. Branches of n a t i o n a l Banks. (Pages 46. 47) The recommendations made by the Federal Reserve Board with r e s p e c t to the p r o v i s i o n s of Section 21 of S. 4115 r e g a r d i n g branches of n a t i o n a l banks have been incorporated i n the p r e s e n t bill. Certain p r o v i s i o n s of the p r e s e n t b i l l , however, regarding 380 L-17 -33m a t t e r s concerning which the Board recommended no changes, may be noted: 1. The p r e s e n t h i l l r e q u i r e s the approval of t h e Comptroller of t h e Currency i n s t e a d of t h a t of the F e d e r a l Reserve Board f o r t h e establishment of a new branch by a n a t i o n a l bank. 2. Out of town branches may be e s t a b l i s h e d only i n t h o s e S t a t e s where the law expressly a u t h o r i z e s S t a t e banks to e s t a b l i s h than and i n accordance with the r e s t r i c t i o n s of S t a t e law as to l o c a t i o n , and i n no case o u t s i d e of the S t a t e i n which t h e bank i s l o cated. 3. An exception i s made to the requirement t h a t a n a t i o n - a l bank have $500,000 c a p i t a l stock i n order to e s t a b l i s h an out of town branch, so as t o provide t h a t where the bank i s l o c a t e d i n a S t a t e having a p o p u l a t i o n of l e s s than 1,000,000. and i n which t h e r e i s no c i t y with a p o p u l a t i o n exceeding 100,000, the r e q u i r e d c a p i t a l f o r the establishment of an out of town branch s h a l l be $250,000. (The p r o v i s i o n s as to the establishment of branches of S t a t e member banks, i n the form recommended by the Board, a r e contained i n Section 5(b) of t h e p r e s e n t b i l l . ) SECTION 24 Reports of a f f i l i a t e s of n a t i o n a l banks, (pages 4 9 , 5 0 ) . The Federal Reserve Board recommended a change i n Section 27 of S. 4115 on t h i s s u b j e c t , "in order t h a t r e p o r t s of a f f i l i a t e s of 381 urf -34- n a t i o n a l "barJ.cs may "be r e q u i r e d only when deemed necessary and t o c l a r i f y t h e p r o v i s i o n s of t h e b i l l with r e s p e c t t o such r e p o r t s " . The p r e s e n t b i l l provides t h a t a n a t i o n a l "bank s h a l l o b t a i n from each of i t s a f f i l i a t e s , other than member banks, and f u r n i s h to t h e Comptroller of the Currency not l e s s than t h r e e r e p o r t s each year on the saae d a t e s on which condition r e p o r t s a r e r e q u i r e d of t h e bank and such a d d i t i o n a l r e p o r t s as the Comptroller may deem n e c e s s a r y . The term " a f f i l i a t e " includes holding company a f f i l i a t e . The p r o - v i s i o n r e q u i r i n g such r e p o r t s i s s t i l l mandatory; but they a r e r e quired to contain only such i n f o r m a t i o n as i n the judgment of t h e Comptroller s h a l l be necessary to d i s c l o s e f u l l y t h e r e l a t i o n s b e tween such a f f i l i a t e and such bank and as to the e f f e c t of such r e l a t i o n s upon the a f f a i r s of such bank. Such r e p o r t s of a f f i l i a t e s s h a l l be published by the bank on t h e same conditions as govern i t s own c o n d i t i o n r e p o r t s . The bank i s s u b j e c t to a p e n a l t y f o r f a i l u r e to render such r e p o r t s . ( S u b s t a n t i a l l y t h e same p r o v i s i o n s a r e contained i n Sect i o n 5(b) of the p r e s e n t b i l l with r e f e r e n c e t o r e p o r t s of a f f i l i a t e s of S t a t e member banks, except t h a t the r e p o r t s a r e to be made to t h e Federal Reserve Board i n s t e a d of t o the Comptroller of t h e Currency.) -35SECTION 25. Examinations of a f f i l i a t e s of n a t i o n a l banks. (Pages 50-53) The Federal Reserve Board recommended a s u b s t i t u t e f o r t h e p r o v i s i o n s of Section 28 of S. 4115 w i t h r e s p e c t t o examinations of a f f i l i a t e s of n a t i o n a l "banks. Some of t h e p r o v i s i o n s of the Board's s u b s t i t u t e have "beat adopted i n the p r e s e n t b i l l and others have not. The Federal Reserve Board's s u b s t i t u t e a u t h o r i z e d t h e exami n a t i o n of a f f i l i a t e s of n a t i o n a l banks t o be made when deemed n e c e s sary to o b t a i n adequate information r e g a r d i n g the r e l a t i o n s between the bank and the a f f i l i a t e and the e f f e c t of such r e l a t i o n s upon the bank. The p r e s e n t b i l l r e q u i r e s t h a t examiners i n making the examin- a t i o n of any n a t i o n a l bank s h a l l include such an examination of the a f f a i r s of a l l of i t s a f f i l i a t e s , other than member banks, as s h a l l be necessary t o d i s c l o s e f u l l y the r e l a t i o n s between the bank and i t s a f f i l i a t e s and t h e e f f e c t t h e r e o f ; and a u t h o r i z e s the f o r f e i t u r e of the f r a n c h i s e of t h e bank i n the event of the r e f u s a l of t h e a f f i l i a t e t o give i n f o r m a t i o n or t o permit such an examination. The p r e s e n t b i l l a u t h o r i z e s t h e p u b l i c a t i o n of an examiliga t i o n r e p o r t of a n a t i o n a l bank or a f f i l i a t e a f t e r 90 d a y s ' n o t i c e i f the bank or a f f i l i a t e f a i l s to comply w i t h i n 133 days with t h e -36recommendations of the Comptroller of the Currency "based on such examination. This p r o v i s i o n , r h i l e contained i n S. 4115, was omitted i n the suggestion of the Board on t h i s s u b j e c t . The Federal Reserve Board suggested c e r t a i n other d e t a i l e d p r o v i s i o n s , a u t h o r i z i n g t h e examiner to examine o f f i c e r s and employees of a f f i l i a t e s under o a t h ; providing t h a t the expenses of t h e examina t i o n "be a s s e s s e d "by t h e Comptroller a g a i n s t the a f f i l i a t e and, i f not p a i d by the a f f i l i a t e , a g a i n s t the n a t i o n a l t a n k ; and providing t h a t a r e f u s a l "by the a f f i l i a t e to permit a n examination or to give informat i o n "be p e n a l i z e d "by a f i n e a g a i n s t t h e n a t i o n a l baric of $100 per day. These suggestions of the Board have been s u b s t a n t i a l l y adopted i n the p r e s e n t b i l l , but the b i l l provides t h a t the $100 p e n a l t y may be a s s e s s e d and c o l l e c t e d by the Comptroller of the Currency rrhereas the; Board suggested t h a t i t be assessed by the Board and c o l l e c t e d by the Federal r e s e r v e bank. (Somewhat s i m i l a r p r o v i s i o n s with r e f e r e n c e t o examinations of a f f i l i a t e s of S t a t e member banks a r e contained i n Section 5(b) of the present b i l l . ) SECTION 26. Resumption of b u s i n e s s by closed n a t i o n a l banks. (Pages 52, 53) The p r e s e n t b i l l contains a p r o v i s i o n , not found i n S. 4115 L-17 and not recommended by the Board, under which, i n any case where, i n t h e opinion of t h e Comptroller of the Currency, i t would "be t o the advantage of d e p o s i t o r s and unsecured c r e d i t o r s of a closed n a t i o n a l bank f o r i t t o resume business upon t h e r e t e n t i o n for a reason- a b l e p e r i o d , of a l l or a p a r t of i t s d e p o s i t s , t h e Comptroller may permit such resumption of business i f 85$ i n amount of d e p o s i t o r s and unsecured c r e d i t o r s consent i n w r i t i n g t o such r e t e n t i o n of deposits. I t i s provided t h a t t h i s s e c t i o n s h a l l not a f f e c t any powers which t h e Comptroller now has with r e s p e c t to the r e o r g a n i z a t i o n of n a t i o n a l banks.