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333 S-238 Reg. P-16 INTERPRETATION OF LAW OR REGULATION (Copies to be sent to all Federal Reserve Banks) November 15, 1940. Mr. , Vice President, Federal Reserve Bank of Dear Mr. : This refers to your letter of October 15, 1940, raising certain questions regarding the report of examination of __ Bond & Mortgage Company, , , as of June 29, 1940, made by an examiner for your bank. You requested the Board's comments as to whether the assets of Bond & Mortgage Company which are claimed by it to satisfy the requirements of section 5144 of the Revised Statutes, with respect to readily marketable assets, may be so regarded. The assets consist of stock of Theatre Company and _____ Department Store, Inc., small local corporations, the former owning the stock of a corporation which operates the moving picture theatres in and the latter operating a department store in that town. All of the stock of ______ Department Store, Inc. and half of the stock of Theatre Company is owned by Bond & Mortgage Company. The examiner states that it would be extremely difficult to accurately appraise the sales value of the stocks and that it is recognized that they do not have a broad market. It appears that, in support of its position that the assets ore readily marketable, it is claimed by Bond & Mortgage Company that, in view of the good earnings shown and the fact that the company controls the moving picture possibilities in the town, the stock of Theatre Company could be easily sold to persons who would be interested in gaining control of the local situation, and it is stated that the Department Store is the only locally owned store of its type and that it possesses a favorable lease and shows good earnings. In its ruling published in the Federal Reserve Bulletin for March 1938 at page 192 (based upon its letter of February 4, 1938 to your bank concerning an inquiry from Bond & Mortgage Company), the Board stated that, in determining whether assets are readily marketable within the meaning of section 5144, it should be borne in mind that - 8-238 Reg. P- "the law apparently contemplates that the assets shall be of such a nature that their fair market value can be easily ascertained with reasonable accuracy and can be readily realized in the market at any time in order to pay assessments on bank stocks or to assist subsidiary banks through voluntary contributions." Thus, an asset does not satisfy the statutory requirements merely because it is considered sound and desirable and it is believed that a purchaser at some price could be found if an effort were made. Accordingly, upon the basis of the facts presented, the Board does not consider that the stocks of Theatre Company or Department Store, Inc. satisfy such requirements and, unless you have additional pertinent facts which might lead to a contrary view, please advise Bond & Mortgage Company accordingly. According to the information in the report of examination, the holding company affiliate has invested in the stock of the Department Store, Inc., over ten per cent of its total assets (book value). In consideration of the granting of the general voting permit held by Bond & Mortgage Company, the corporation agreed, among other things, "that, except with the permission of the Board of Governors of the Federal Reserve System, it shall not cause or permit any change to be made in the general character of its business or investments". Investment by the corporation of so large a portion of its assets, other than bank stocks, in control of a department store, without first having requested or obtained the permission of the Board, is regarded as a violation of the quoted provision of the agreement, and it is requested that you so inform the holding company affiliate, The report of examination indicates that the stock of the Department Store, Inc., has been shown as "Investment Q," on the books of the holding company affiliate and that it was so designated because it was felt desirable to conceal the ownership of the local store by interests close to the subsidiary bank. The full extent to which the concealment is carried is not definitely disclosed in the report of examination and a question arises as to whether the holding company affiliate is unduly concealing the nature of its activities from its own shareholders. It is noted also that the company's investment of $10,000 in the department store as of December 31» 1939» was concealed by use of 335 -3- S-238 Reg. P-16 the caption "Investment Q," in the corporation's annual report to the Board for 1939* It is requested that you inform the Bond & Mortgage Company that, so long as it is subject to the voting permit law and agreements, for the administration of which the Board is responsible, the Board expects that full and accurate information regarding the corporation's assets and operations will be set forth in its books and records and in its annual reports to the Board, and that fictitious captions will not be substituted for the names of organizations whose securities are held by the corporation. It will be appreciated if you will keep us informed as to any further developments in connection with the foregoing matters. You requested also the Board's views as to the propriety of supplying the holding company affiliate and its directors certain information with respect to the condition and operations of the two banks which are affiliated with the holding company affiliate but which are not subsidiary banks. Data concerning the holding company affiliate and subsidiary and other affiliated banks, and other affiliated organizations, obtained by an examination of the holding company affiliate itself should be contained in the open section of the report of examination of the holding company affiliate. Of course, any information so obtained which is of a confidential nature, including such information as is ordinarily contained in the confidential section of a report of examination of a bank, should be set out only in the confidential section of the report of examination of the holding company affiliate. Data taken from reports of examination of banks or other affiliated organizations, and data derived from the contents of such reports of examinations, to the extent considered necessary in reviewing the financial condition and operations of the holding company affiliate and its relationships with other organizations, should be included in the confidential section only. In no case should the contents of a report of examination of a bank be quoted verbatim or paraphrased in such manner as to result in any embarrassment to the examiner or the supervisory authority responsible for such report. Very truly yours, (Signed) S. R. Carpenter S. R. Carpenter, Assistant Secretaiy.
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