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COPY X-6428 November 11, 1929. Mr. S. E. Black, Governor, Federal Reserve™ Bank of Atlanta, Atlanta, Georgia. Dear Mr. Black; Mr. Wyatt has sent me a copy of the l e t t e r of October 19, 1929, written to Governor Young by Governor Harding, with reference to the propriety of the taking by a Federal Reserve Bank of deposits of collateral for the protection of i t s e l f against any l i a b i l i t y , as agent, arising from the handling for collection of checks drawn on the bank depositing such c o l l a t e r a l . Mr. Wyatt, in transmitting the copy of the aforesaid l e t t e r , suggests that I write you with reference to the questions raised thereby. Inasmuch as you also have a copy of Governor Harding's l e t t e r , I shall not summarize the same here. I am, however, sending you a copy of Mr. Wyatt 1 s l e t t e r , thinking i t possible that no other copy of the same has been furnished you. I am of the opinion that the taking of collateral i n isolated cases, for the purposes and under the conditions stated in Governor Harding' s l e t t e r , would be consistent with the uniform policy heretofore adopted by the Conference of Governors and now approved by the Federal Reserve Board. There i s nothing stated in the Board's l e t t e r of October 16, 1929 (X-6389) which would prohibit a Federal Reserve Bank, which i s unwilling to handle checks drawn upon a bank of doubtful solvency unless i t be indemnified against any loss in the premises, from asking and taking such c o l l a t e r a l . I t seems to me, furthermore, that unless the practice of asking c o l l a t e r a l for such purpose i s made general (as distinguished from the asking of security in particular cases), the question of policy is one for determination by the d i f f e r e n t Federal Reserve Banks. I know that Governor Harding has in mind only the asking of c o l l a t e r a l in cases where i t appears that the i n t e r e s t s of the Federal Reserve Bank of Boston require the taking of such security. As I recollect the statement made by Mr. Weed, counsel to the Boston Bank, before the Conference of Counsel, but one instance had arisen in the past where collateral had been asked by that bank. I see no reason, therefore, why Governor Harding's interpretation of the Board's statement of the uniform policy on check collections should not be accepted as correct. Undoubtedly a question of system wide importance would be raised were any Federal Reserve Bank to either (a) adopt a general policy of requiring c o l l a t e r a l from banks for the indemnification of the Federal Reserve Bank against l i a b i l i t y as a collection agent, or (b) provide by contract that c o l l a t e r a l in i t s hands should stand as security for any indebtedness due to the Federal Reserve Bank by the pledgor, including amounts due to the Reserve Bank as a collection agent. As stated above, however, no such question i s raised in Governor Harding's l e t t e r as I read i t . /VLH) Mr. E. H. Black, -2- 11/11/29. X-6428 Personally, I am inclined to the opinion that the i n t e r e s t s of the Federal Reserve Bank of Atlanta would "be best served by a policy under which collateral would not be asked, even in cases where items are to be sent to banks known to be in a doubtful condition. The taking of c o l l a t eral in one case, without requiring i t in another, would furnish the basis for at l e a s t an inference of negligence in the l a t t e r case. In this Reserve D i s t r i c t , furthermore, the number of non-member par remitting banks i s r e l a t i v e l y small. Demands for collateral to protect items sent forward for payment and remittance would tend to c u r t a i l the number of par remitting banks. Member banks in a f a i l i n g condition are usually largely indebted to the Federal Reserve Bank and they could rarely furnish acceptable c o l l a t e r a l for the purpose of protecting remittances for cash l e t t e r s without u t i l i z i n g security which the Reserve, Bank would wish to obtain for i t s own b e n e f i t . The experience of the Atlanta bank in i t s collection functions has been fortunate. I r e c a l l no claim for negligence in the handling of items which has been successfully asserted. The public generally is beginning to recognize the fact that Federal Reserve Banks, as collection agents, have stipulated for their own protection within proper l i m i t s . I believe i t to be the b e t t e r policy to continue in the future as in the past, and to regard the duties of a mere collection agent as not including any obligation, either legal or moral, to obtain security for the protection of i t s princip a l s . I understand, of course, that the taking of such collateral would be for the protection of the Reserve Bank, as agent, but inevitably the owners of the items would f e e l that i t was in r e a l i t y taken f o r their benefit and the tendency of the practice would doubtless be to foster the conception of a duty on the p a r t of the agent to secure collateral protection for i t s principal. Very t r u l y yours, (S) RSP/w. Copy to: Mr. Walter Wyatt, General Counsel, Federal Reserve Board, Washington, D. C. Robt. S. Parker. COPY X-6438-a EEDmi BBS3RVE BAI1K OF RICHMOND Mr. George J . Seay, Governor. M. G. Wallace, Counsel. November 15, 1929. I n t e r p r e t a t i o n of Uniform Policy re Check Collections. Dpar Mr. Seay: I have read the attached l e t t e r dated November 7th from Mr. E. M. McClelland, Assistant Secretary of the Federal Reserve Board, to yourself and also the l e t t e r s which are r e f e r r e d to by Mr. McClelland. I t i s not quite clear to me whether or not the Federal Reserve Bank of Boston des i r e s to take c o l l a t e r a l merely to protect i t s e l f from l i a b i l i t y in case i t should be held that the Federal Reserve Bank was responsible to the depositors of checks because such checks had been sent to the drawee bank when the l a t t e r was known to be i n a weakened condition, or whether the Federal Reserve Bank of Boston desires to take c o l l a t e r a l to protect the depositors of checks from losses which might otherwise f a l l upon i t s depositors. If the object of the arrangement be ad f i r s t stated, I am of the opinion that the arrangement would be in no way inconsistent with the recent amendments ' to Regulation J, because the c o l l a t e r a l taken would in no way b e n e f i t the banks which deposited the checks or the holders of the checks but would be held merely for the protection of the Federal Reserve Bank i n the event that i t should appear that the Federal Reserve Bank had been g u i l t y of negligence. , There would be c e r t a i n p r a c t i c a l objections,, I believe, to such a p r a c t i c e . In the f i r s t place the very f a c t that the Federal Reserve B$rik had taken c o l l a t e r a l to protect i t against a possible claim f o r negligence would be tantamount to a confession that the Federal Reserve Bank r e a l i z e d that i t s actions were l i k e l y to be considered negligent; also, i t would be impossible to determine when the l i e n of the Federal Reserve Bank upon such c o l l a t e r a l terminated because the Federal Reserve Bank would have no right to resort to the c o l l a t e r a l u n t i l i t had been adjudged negligent, and t h i s could not be determined u n t i l a s u i t had been brought and decided or u n t i l a l l possible claims were barred by s t a t ute of l i m i t a t i o n . If the Federal Reserve Bank contemplates taking t h i s c o l l a t e r a l to be held as a t r u s t f o r the b e n e f i t of member banks which deposit checks or for the b e n e f i t of the holders of such checks, i t appears to me that the arrangement would be inconsistent with the l i m i t a t i o n s prescribed i n the amendments to Regulation J . Regulation J as amended reads i n part as follows: "Neither the owner or holder of any such check, nor the bank which sent such checlfc to the Federal Reserve Bank for c o l l e c t i o n shall have any r i g h t of recourse upon, i n t e r e s t in, or right of payment from, any fund, reserve, c o l l a t e r a l , or other property of the drawee bank i n the -possession of the Federal Reserve Bank." X-6488-a FBH3RAL RESERVE BAH OF RICHMOND 288 November 15, 1929 Mr. George J . Seay, Governor Interpretation of Uniform Policy re Check Collections M. Gr. Wallace, Counsel - 2 - This language i s very broad and appears to prohibit any or a l l agreements •under which a forwarding bank or holder of a check can have any interest in or claim upon any collateral or property of the drawee bank in the possession of the Federal Reserve Bank. If we should attempt to construe the positive provisions of the Regulation as meaning only that the forwarding bank or holder of a check should not have any claim upon any collateral unless such collateral were pledged under an agreement expressly providing for such claim, the provision of the Regulation would become ineffective f o r a l l purposes. In the so-called Lake City case i t was assumed without discussion that the f o r warding banks could have an interest in the reserve balance only in so far as such i n t e r e s t was created by the express terms of the c i r c u l a r . The Circuit Court of Appeals adopted this view and emphasized i t by holding th#.t the forwarding banks could have no i n t e r e s t in the surrender value of stpck held by the drawee bank in the Federal Reserve Bank because the application of t h i s surrender value was prescribed by law and could not be regulated by the provisions of a contract. I do not see that there can be any distinction between the reservation of a l i e n upon certain designated collateral which i s pledged to secure payment for checks and for no other purpose and the reservation of a l i e n upon c o l l a t e r a l which is pledged to secure the payment of checks and likewise for other purposes, for i t seems impossible to distinguish between the right to reserve two d i s t i n c t liens upon two distinct funds and the right to reserve two liens, both of which shall attach to a single fund. I t therefore seems to me to be clear that if a Federal Reserve Bank may take c o l l a t e r a l to secure the payment of cash l e t t e r s in any case, the Federal Reserve Bank may take such c o l l a t e r a l in every case, and if they may take c o l l a t e r a l to secure the payment of cash l e t t e r s and for no other purpose, they may take collateral which may be held for the payment of cash l e t t e r s as well as for other purposes; and consequently i t seems to me that the Regulation must be construed as prohibiting the taking of c o l l a t e r a l to secure forwarding banks or the holders of checks in any case, or else i t must be construed as having no substantial e f f e c t at a l l . I r e c a l l , of course, that at the joint conference Governor Harding asked whether or not the action of h i s bank in taking c o l l a t e r a l in a few special cases would be regarded as a violation of the general understanding that the p o l i c i e s of a l l Federal Reserve Baraks should be uniform. I believe that I , as well as counsel for other banks present, stated that we certainly would not consider the action of the Federal Reserve Bank of Boston as being any violation of our private understanding, but for the reasons stated above I am forced to the conclusion that the proposal involves a technical violation of the Regulations. Very t r u l y yours 1£. G. Wallace, Counsel.
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