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X-9674 Reg. F-4 INTERPRETATION OF LAW OR REGULATION (Copies to be sent to all Federal Reserve banks) July 22, 1936. Mr. Z. G. Fenner, Acting Assistant Federal Reserve Agent, Federal Reserve Bank of Philadelphia, Philadelphia, Pennsylvania. Dear Mr. Fenner: This refers to your letter of July 7, 1936, inquiring whether subsection (a) of section 11 of Regulation F prohibits the investment of trust funds by a national bank in obligations executed by an officer of the bank as a receiver appointed by a Federal court. The pertinent provisions of the regulation read as follows: "(a) Obligations of trustee bank or its directors. officers, etc.—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, or in stock or obligations of, or property acquired from, affiliates of the bank." With respect to such provisions, footnote numbered 10 states: "* * * this requirement contemplates that the national bank will not invest trust funds in the obligations of any organization in which officers, directors, or employees of the bank have such an interest as might affect the exercise of the best judgment of the management of the bank in investing trust funds." While, of course, the interest of the officer of the bank when acting as receiver would be an official interest rather than a X-9674 Reg. F—4 -2- personal interest in the obligation, the Board agrees with the suggestion contained in your letter that even an official interest of this kind is such as might influence the action of the bank and affect the exercise of the best judgment of the bank in investing trust funds. Accordingly, the Board feels that the investment in question comes within the intent and purpose of the prohibition contained in the above-quoted provisions of the regulation. Attention is also called to the following provisions of section ll(k) of the Federal Reserve Act, although the Board cannot undertake to interpret or determine the applicability of such statutory provisions since they impose a criminal penalty and their enforcement falls within the jurisdiction of the Department of Justice: "It shall be unlawful for any national banking association to lend any officer, director, or employee any funds held in trust under the powers conferred fcy this section. Any officer, director, or employee making such loan, or to whom such loan is made, may be fined not more than $5,000, or imprisoned not more than five years, or may be both fined and imprisoned, in the discretion of the court." Very truly yours, (Signed) Chester Morrill Chester Morrill, Secretary.