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! 510 X-7734 INTEKPRETATION OF BANKING ACT OF 1933 (Copies to be sent to a l l Federal Reserve Banks) December 22, 1933 Mr. , President, ยป Dear Sir: Your l e t t e r of December 6, 1933, addressed to Governor Black s t a t e s that three directors of your bank are partners i n a firm engaged in dealing in s e c u r i t i e s , and r a i s e s several questions regarding the a p p l i c a b i l i t y of Section 32 of the Banking Act of 1933 and Section 8A of the Clayton Act (Section 33 of the Banking Act of 1933) to the serv i c e of such d i r e c t o r s . You ask f i r s t whether any d i s t i n c t i o n i s made between national banks and State member banks i n connection with an application by a director for permission to be at the same time a partner of a firm dealing i n s e c u r i t i e s . This question r e l a t e s to the provisions of Section 32 of the Banking Act of 1933 which contains c e r t a i n prohibitions which are applicable to an o f f i c e r or director of " any member bank". The s e c t i o n therefore makes no d i s t i n c t i o n between national banks and State member banks. Your second question i s whether a director of a member bank who i s a partner i n a firm which carries margin accounts for i t s customers may obtain a permit pursuant to the provisions of Section 32. That s e c t i o n authorizes the Board to issue permits, and provides that X-7734 ~ 2 - the prohibitions contained, in that section shall not be applicable to any case i n which such a permit has been issued. However, as you indicate by your third question, the provisions of Section 8A of the Clayton Act must also be taken into consideration. Your l e t t e r does not describe the exact manner i n which the margin account to which you refer are carried, but i f they involve the making of "loans secured by stock or bond c o l l a t e r a l " , the service of these directors would come within the prohibitions of Section 8A a l s o . Accordingly, a permit issued under Section 32 of the Banking Act of 1933, although i t would take the service of these directors out of the prohibitions of Section 32, would serve no useful purpose i n such a case unless Section 8A of the Clayton Act were likewise not applicable to them. Section 8A of the Clayton Act i s not applicable in any case i n which a permit has been issued by the Federal Reserve Board. However, the Board's authority to issue permits covering r e l a t i o n s within the proh i b i t i o n s of the Clayton Act i s limited, by Section 8 of that Act, to the issuance of permits covering relationships between banking organizations of certain types, with the result that, unless the partnership to which you refer i s an organization of that kind, the Board i s without authority to issue a permit exempting the service i n question from the provisions of the Clayton Act. The principal question i n your l e t t e r therefore i s whether a permit issued pursuant to the authority granted i n Section 32 w i l l also exempt the r e l a t i o n s h i p which i t covers from the provisions of the Clayton Act. r 512 X-7734 - 3 In considering t h i s question, i t should he noted that permits i s su ed "by the Board under the provisions of the Clayton Act c l e a r l y apply only to the p r o h i b i t i o n s of that Act, since the p r o v i s i o n i n Section 8 authorizing the issuance of permits provides that "nothing i n t h i s Act s h a l l prohibit" r e l a t i o n s h i p s of c e r t a i n types "if i n any case there i s i n force a permit therefor issued by the Federal Reserve Board; and the Federal Reserve Board i s authorized to i s s u e such permits" under c e r t a i n circumstances. Section 32 applies to c e r t a i n s p e c i f i e d r e l a t i o n s h i p s , which are not the same as those covered by Section 814 of the Clayton Act, and renders unlawful the r e l a t i o n s h i p s to which i t a p p l i e s "unless i n any case there i s a permit therefor issued by the Federal Reserve Board; and the Board i s authorized to i s s u e such permit i f i n i t s judgment i t i s not incompatible with the public i n t e r e s t " . There i s no reason to assume that the Board i s authorized by t h i s p r o v i s i o n i n S e c t i o n 32 to i s s u e permits which w i l l make the s e r v i c e i n question lawful regardless of any other p r o v i s i o n of law which might be applicable i n a p a r t i c u l a r case. I t i s f e l t that an i n t e r p r e t a t i o n which would reach such a r e s u l t would be an unwarranted extension of the authority contained i n Section 32. Accordingly, a permit issued under S e c t i o n 32 would serve no u s e f u l purpose i n a case where the r e l a t i o n s h i p was prohibited by the Clayton Act and no permit had been issued pursuant to the p r o v i s i o n s of that Act. 513 X-7734 As you know, the phrase "organized or operating under the laws of the United States" i n Section 8 and Section 8A of the Clayton Act i s not applicable to State member banks of the Federal Reserve System. Very t r u l y yours, (Signed) Chester Morrill, Chester Morrill, Secretary.
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