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1-7701: 4 5 6 INTERPRETATION OF BANKING ACT OF 1933. (Copies to be sent to a l l Federal reserve "banks.) December 1, 1933. Mr. Dear Sir: Receipt i s acknowledged of your l e t t e r of September 16, 1933, addressed to the Governor of the Federal Reserve Board, i n which you r e quest to be advised of any ruling of the Federal Reserve Board i n respect to the meaning of the words "bona f i d e owner i n h i s own right", as used i n Section 31 of the Banking Act of 1933. The Board has not issued any such ruling, and i t does not f e e l that i t should undertake at t h i s time to def i n e i n d e t a i l the words to which you have reference. It appears from your l e t t e r , however, that one of your subscribers desires to know whether the provisions of Section 31 would render unlawful the pledge by a director of a member b%nk of h i s q u a l i f y i n g shares as c o l l a t e r a l security for a loan, I t i s the opinion of the Board that, a f t e r one year from June 16, 1933, the e f f e c t i v e date of Section 31, a director of a State member bank must own the required qualifying shares i n h i s own r i g h t , and that such shares may not lawfully be hypothecated or pledged as security for a loan or debt a f t e r that date. This conclusion f i n d s support i n the fact that Section 5146 of the Revised Statutes, which has been amended i n part by s e c t i o n 31, provides that every director of a national bank must "own i n h i s own right" qualifying shares i n stated amounts, and that Section X-7701 -2- 5147 of the Revised S t a t u t e s , which i s i n f u l l force and e f f e c t , requires each director of a national bank to take an oath that he i s the "owner i n good f a i t h , and i n h i s own r i g h t , of a number of shares of stock required by t h i s t i t l e , subscribed by him, or standing i n h i s name on the books of the association, and that the same i s not hypothecated, or i n any way pledged, as security for any loan or debt". The underscored portion of Section 5147 indicates that Congress considered the words "own i n h i s own right", as used i n Section 5146, to mean that qualifying shares of a director of a national bank should be unpledged and unhypothecated, and there does not appear to be any reason why the words "owner in h i s own right", as used in Section 31 of the Banking Act of 1933, should be construed d i f f e r e n t l y . Very truly yours, (Signed) ' Chester Morrill Chester Morrill, Secretary.