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S-269
Reg. R-4
INTER.PRETATIQN QF LAW OR REGULATION
(Copies to be sent to all Federal Reserve
~anks)
MS¥ 26, 1941
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Mr.
, Vice President,
Federal Reserve Bank of
,
_______________,
Dear Mr.
.
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:
Reference is made to your letter of May 1, 1941 and the enclosed copies of correspondence and two opinions of your Counsel relating
to the question whether section 32 of the Banking Act of 1933 is applicable to Mr.
"X" who is an ·officer and director of "B" Investment
Company and of "A" Investment.· Corporation and a director of ("M"
National Bank) ,
, and to Mr. _ "Y" • who is a director of "A"
Investment Corporation and a director of J~ti" Nationcl Bank) ,
It appears that "A11
Investmer~ot Corporation and
"B"
Investment Compaqy are organizations of the kind sometimes called "investment trusts".
"C" Securities Compcmy, a wholly-mmed subsidiary of
the former, was'apparently created for the purpose of selling and distributing the shares of the former, and after all of such shares had been
sol,d,
"B" Imrestment Company was organized and the principal activity
of "C" Securities Compllr.IY is now the sale and distribution of the
shares of · "B" Investment Compaey-, for which it receives a premium of
S per cent of the offering price. The portfolio of "B" . Investment
Compaey- is managed tu "A" Investment Corpor(l.tion, for which the latter receives a quarterly fee of 1/S of 1 per cent of tne asset value of
the outstanding shares of the former. A fourth organization in the group,
-~- Fund, was organized to handle installment sales of the shares of
"B" Investment Company, but is no longer active.
For the purpose of his opinion, your Counsel treats
"A"
Investment Corporation and "C" Securities Company as one, and he further states that it appears from the information available that the
"B" Investment Compaw wo.s created at the direction of, and exists
onq as a convenience and s9urce of income for,
"A" Investment Corporation. Therefore, it would appear to be proper to consider all three
organizations o.s one in determining the applicability of section 32.
As stated above,
"A" Investment Corporation is no longer
engaged in issuing or distributing its shares, but "B"
Investment
Company is so engaged 1 through the mediUlll of "C" Securities Company.
During 1939, 47,442 shares were thus sold, and during 1940, 10,088 were
sold. During these two years a total of S7,206 were redeemed, and at the
end of l940 there were 431,233 shares outstanding. The~efore the case
has maDf points of similarit,y with that discussed in the Federal Reserve
3()!
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-2-
S-269
Reg. H-4
Bulletin for 1941 at page 399 (F.R.L.S. #7610), the principal difference
being the volume of sales.
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On this point, however, your Counsel expresses the opinion
that a decision as to whether or not a. corporation of this kind is "primarily engaged" in the issue, flotation, public sale or distribution of
securities should not be predicated upon the volume of sales effected
during a given period, but upon the purpose for which the corporation
is organized and operated, the manner in which it functions, and the
sources from which it deriv~s its operating revenue, because otherwise
it could be said, during a period of depression when sales were at a
low ebb, that it was not "primarily engaged" in the business described
in the st.o.tute. In other words, the purpose o.nd functions of the organization are the important factors, and although the.y m~ be apparent from
a large volume of sales actually effected, they mcy be apparent from a
number of other fo.cts (including, for example, the extent of the sales
organization maintained by the corporation and the extent of its sales
efforts) even in the absence of a large vol~~e of sales.
With respect to
"B"
Investment Company your Counsel concludes: "The structure, hMory and purposes for which this organization was organized, the manner in which its operating capital is acquired,
and the manner in which it functions, in mf opinion, mark it as a corporation 'primarily engaged' in the issue, public sale and distribution of
its stock." He further concludes that section 32 is applicable both to
Mr.
"X"
and Mr.
"Y"
On the basis of the information submitted, the Board sees no
reason to dif'f0r with this opinion. Incidentally, since the amendment
of section 32 by the Banking Act of 1935, the Board has not regarded
"turnover" in the portfolios of such organizations (as distinguished
from underwriting, distributing, etc.) as constituting the kind of business described in the section. Hov1ever, it does not appear that this
affects the opinion above stated •
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Very truly ynurs,
(Signed)
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..
L. P. Bethea
L. P. I3ethe<J.,
Assistant Secretary •
31.(
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