The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
S-24 438 Reg. F-15 IH'l'ERPRETATION OF LAW OR REGULATION (Copies to be sent to all Federal reserve banks) August 4, 1937. Mr. , First Vice President, Federal Reserve Bank of , ---------------' Dear Mr. - - - - This refers to your letter of June 9, 1937, and its inclosures, relating to an inquiry from The National Bank, , -=------' concerning the application of section ll(a) of the Board's Regulation F, the pertinent provisions of which read as follows: "Funds received or held by a national bank as fiduciary shall not be invested in stock or obligations of, or property acquired from, the bank or its directors, officers, or employees, or their interests, ~*' * ~~ . 11 It appears that in the latest report of examination of the bank the examiner listed certain trust investm~1ts as investments in concerns in which directors are interested and criticized those purchased since June 1, 1936, as having been purchased in violation of the abovequoted provisions of Regulation F which became effective on that date. The investments listed are stocks or obligc.. tions of Creamery Company, Power Company, Railroad Company, Railway Company, and Railroad and Navigation Camp~. The bank inquires whether the investment of trust funds by it in such securities is prohibited by Regulation F. It appears that one.direct6r of the bank is a director and executive vice president of Creamery Company; that one director is a director of Power Company and, until recently, another was a director of that company; that one director is a director and president of each of the railroad companies; that the securities of the railroad companies are listed on the New York Stock Exchange and possess a gene'ral market; and that the securities of the other companies are not listed on any securities exchange but it is stated that they are not closely held and possess a fair~ active local market. It is understood from a letter received from the president of the bank that none of the securities is ever purchased from the issuing corporation or through any of the directors of the bank and that such securities are purchased entire~ through brokers or bond houses of independent and national standing. The purpose of the above-quoted prov~s~ons of Regulation F is explained in a footnoto which reads, in part, us follows: S-24 -2-- 439 Reg. F-13 11-l*- * ~~ this requirement contemplat')S that the national bank will not invest tr·ust funds in the obligations of any organization in which offict-7rs, directors or employ~es of the bank havr~ such rm interost as might affect the r;;xercise of the best judgment of the management of th~ bank in investing trust funds." ~Vhil'J thD footnote ref9rs only to oblig&tions of organizations in which officers, dirr;ctors, or omployoes ar0 int<Jrested, the same principle is appl:Lcnblo in the case of' inv'3stments in stocks of, or property acquired from, such orgonizations. In determinlng wheth'Jr particular investments are prohibi tf.:Jd, it is necessary to consider all of the facts and circumstances of ~ach case. For 'JXamplrJ, the mero fact t.~nt a d:i.r'3ctor of a national bank is director of a corporation does not nec0ssarily rnak·~ it a violation of tho r<:lgulation for the bank to invest trust funds in stocks or obligations of the corporation. On thrJ other hand, such un investment mey not b'a properly made unless it :is cler.J.X that, in view of all of the facts end circumstances of th<J case, the int!Jrest of the dirCJctor in the corporation is not such as mlght. affect the excrciso of the best judgment of the management of th9 bank in inv<Jstj_ng tho trust funds. An investment which may otherwise b~~ entir::lly ::n:opf;;r, or oven highly dr:3sirable, may be in violation of tho abovB-quot'i3d provisions of the Board's regulation, and the wcll-establi.shed principl·.:Js of sound trust administration upon which they c.r'9 bas:;d, b(~cause conflicts of int'Jr:;st are involved; transactions in which trus!tecs have conflicting int':lrGsts arr~ cond'.::mned as o. class because there is grave dangr::Jr of ubus'JS. Th'.:J Board f0els that, as a g<Jneral proposition, it is undesirabl.;~ for it to att-;mpt to rule upon :JpDcific casBs of the kind pres·~nted by this inquiry, both br~caus<:J of the difficulty of ascertaining and accurately stating c.ll of thrJ f:~cts tmd circumstances involved and b0cause such rulings t<;;nd to destroy the int~:mdod floxibili ty of the p~:;rtinr..mt language of the regulation. It is felt that this is a matter which Should be left primurily to tho good faith and sound judgment of the bunks and that ordino.rily they must d•::Jtermin·::J for themselves whether particular transactions m·e in violation of th; spirit nnd purposo:J of this requirement of th<.: r·-,;gulation. •. It is sugg·:;stad the.t th•J inclosr;d copy of this lott8r bo furnished to Th9 National Bank, togoth".)r v:ith any additional cornm•mts which you r.:o.y wish to make. V·-~ry truly yours, (Signr:ld) Ch<:Jstc;r Morrill Chest';lr Morrill, Secretary. +
@FedFRASER