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S-258
Reg. 0)42
INTERPRETATION OF LAW OR.REGVLATION
(Copies to be sent to all Federal Reserve Banks)
April 2, 1941
Mr.
, Vice President,
Federal Reserve Bank of ___ ,
--------------' ----------Dear Mr.
This refers to your letter of March 19, 1941, enclosing a
cop,y of a letter dated March 15, 1941, from Mr.
(A) , Chairman
of the board of directors of the
National Bank,
,
~ to Mr.
, Chief National Bank Examiner, inquiring
-wh_e_t_h_e_r section 22(g) of the Federal Reserve Act would prohibit the
_ _ _ National Bank from making a. loan to {A)
as trustee of
his father's estate.
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It appears that Mr.
(A)
is chairman of the ooard of
directors of the national bank. It also appears that he is trustee
of his father's estate, in which he has a life interest, and that
the property of the estate will upon his death vest in his two sons,
one of whom is vice president of the national bank. The trust estate consists of property with a value in excess of $100,000 with no
indebtedness, the principal item being a business block yielding approximately $7,500 per annum, and the estate may wish to borrow about
$15,000, which Mr.
(A)
describes as a "gilt-edged" loan and one
"that any bank would obviously welcome".
It will be assumed that under the laws of the State of ____
a trustee in borrowing on behalf of the trust may sign the instrument
in such a way as to avoid any personal liability on the obligation
and that the proposed loan would be handled in this way. While the
trustee would thus have no personal liability, he would benefit directly from the making of the·loan in his capacity as life tenant of
the trust estate, which would be obligated on the note. He is interested in the loan both in a representative capacity and in his own
right. In this connection, it is notewortqy that the law forbids a
member bank to make any loan or "extend credit in any other manner"
to an executive officer.
It appears that the principal purpose underlying the enactment of section 22(g) of the Federal Reserve !.ct was to prevent the
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S-258
Reg. 0-42
-2-
exercise of undue influence by executive officers of member banks in
obtaining credit from the banks they serve; and, while there is nothing to suggest that any such influence would be 11sed in this particular instance, it is apparent that the case is one of a type in which
undue influence ~ readi~ be exercised.
In all the circumstances, and particularly in view of the
fact that ivir.
(A) _ is not only trustee but also a beneficiary of
the trust estate which would receive the loan, it is the view of the
Board that the making of the loan proposed would contravene the intention of Congress and would be inconsistent with the provisions of
the statute.
Ver,y truly yours,
(Signed)
Chester Morrill
Chester Morrill,
Secretary,
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@FedFRASER