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268 BOARD OF GOVERNORS OF" THE FEDERAL RESERVE SYSTEM WASHINGTON S-254 Sec. 5136 R.S.-17 ADDRESS DF'F'ICIAL CDRREBJODNDENCE TD THE BOARD March l2, 1941 Dear Sir: For your information the~e are &ncloaed herewith copies of certain correspondence between tn• Pr~ident of the Federal Reserve Bank of Cleveland, the Board of GoYernors, and the Comptroller of the C~rency with reference to certa~ questions regarding the applicabilit,y of section 5136 and section 5200, United States Revised Statutes, to the acquisition br member banks of assignments of claims arising under Emergency Plant lt'a¢1lities Contracts. The following are the letters copies of which are enclosed: Letter tram the President of the Federal Reserve Bank of Cleveland dated Nove•ber 29, 1940, with a cop,y of its enclosure; Letter from the Board to the President of the Federal Reserve Bank of Cleveland dated December 9, 1940; • Letter !rom ti1e Comptroller of the dated February 24., 1941; and Curren~3 to the Board Letter from the Board to the President of the Federal Reserve Bank of Clevel&ld dated February 26, 1941. There were certain other letters of intermediate dates which were e~hanged with regard to this matter, but they do not affect the conclusions expressed in the letters enclose(;\, and you will note that the enclosed letter from the Comptroller of the Currency expressly states that it supersedes certain earlier letters from his office on this subject. s, • Enclosures TO THE PRESIDENTS OF ALL FEDERAL RESERVE BANKS • S-254-a . Sec. 5136 R.S.-17 FEDERAL RESE.RVJi: BANK OF' CLEVELAND Novem.ber 29, 1940 Board of Governors of the Federal Reserve System Washington, D. C. Gentlemen: Enclosed you will find copy of a letter addressed to me National Bank and Trust Company, - -......' ___ , on november 27, 1940. by _ _ _ , Vice President of The In reading Mr. ' s let·t.er, I am impressed vd th the fact that if it is possible to accomplish ti1e result desired ~J him, it cannot be achieved through any construction of R. S. Section 5200, for the reason that the provisions of this section, paragraph 8, clearly specifY that the securit,y of the notos mentioned therein must be bonds, notes, certificates of indebtedness or treasur,r · bills of the United States, or obli ations f'ul ~r aranteed both as to principal and interest qy the United States. CLear , the contract which Mr. montions is a direct obligation of the ! U~ited States and not an obligation fully guaranteed by it both as to principal .and interest. In this connection, I invito your attention to the portion of the 7th paragraph of R. S. Section 5136, reading as follows: .... "The limitations and restrictions heroin contained as to dealing in, u.nderwriting and purchasing for its own account, investment securities· shall not ~·pply to obligations of the United States or general obligations of any state or of any political subdivision thereof ... II As the a~endments to this portion of this paragraph of Section 5136 were all made prior to the passage of the Assignment of Claims Act of 1940, it is arguable that tho reference to obligations of the United States was intended to cover only obligations of the United States having the characteristics of investment securities. However, the literal ,terms of this portion of the section seem to me to include direct obligations of the United States of the type to which Mr. refers. Therefore, I wish in considering Mr. --=--'s letter thc..t you would advise mewhether the proceeds of contracts of the type mentioned b;)r him may be assigned to member • 270 S-254-a Sec. 5136 R.S.-17 -2- banks b,y the contractor and considered as investments b,r the member banks on a parity with obligations of the United States having the quality of investment securities as mentioned in the 7th paragraph of said section 5136 and in the Regulations of the Comptroller of the Currenc,y of JUne 28, 1938. It is mf opinion with respect to Defense Plant Contracts, after completion of the plant and acceptance thereof b,y the Government, that member banks mey be willing to acquire the assignment of the right to receive p8311lents from the United Sta.tes under SllCh contracts and hold such rights as investments in amounts far in excess of the limitations imposed b,y Section 5200 if obligations of the United States of this type can be given the swne status as ci·ther obligations of the United States having the characteristics of investment sec~itics. In discussing this matter verbally, Mr. has contended that obligations of the United States to pay stated installments under a contract should have the same status for investment by member banks as other obligations of the United States having the quality of investment securities, and that to make this distinction between the two types of obl,igations constitutes a discrimination against member banks in their efforts to aid in the Defense Program and to empla,y their excess reserves at a profit. His argument has impressed me as having merit. Very truly yours, (Signed) ~. J. Fleming j) President • .. • , S-254-b Sec. 5136 R.S.-17 THE NATIONAL BANK AND TRUST COMPANY November 27, 1940 Mr. M. J. Fleming, President Federal Reserve Bank Cleveland, Ohio Dear Mr. Flemi.'lg: For the past six weeks we have been working with one of our clients - namely, the Corporation - to negotiate a contract with the United States Government for new plant facilities tmder the defense program, the estimated cost of which is $910,000.00. · ~ing the closing days of negotiations between the company, the banks anci the Government, it was stated by the Government representatives that the contract in its final form was a direct obligation of the Government for not less than 80% of tho total cost of the new facilities. Therefore, tho interest rate to be charged on this obligation qy the banks would have to be closely in line with that of Government obligations, and they set a c&iling of 2% for this parM.Jular contract, and apparently the only reason for not making the rate lower than 2% was due to the fact that 20% of the obligation is to be repaid by t.he contractor - namely, the Corporation. • •' • ___ Corporation is a small but excellently operated corporation whose total resources will not exceed $250,000.00; therefore, it would be rather foolharqy for us to consider a loan of $910,000.00 to a company of this size unless the Goverrunent 1 s,obligation for 80% of the a'Ilount would be definitely irrevocable. It is our opinion that tho present contract is an irrevocable obligation of the Government up to at least SO% of the total amount involved, and therefore we have not considered that the Corporation will at any time be called upon to pey- more than 20% of the totnl contract, plus the interest on the obligation dur~ng its existence • If our assumption is c9rrect in this matter, we feel that definite action should be taken qy the Federal Reserve Board and the Comptr·oller of the Currency, to classify the contract up to 80% of the total figures involved, as a direct Government obligation, the same as a Government bond, thereqy releasing the banks from the legal limitations as provided in Section 5200, and also providing them with an "A" classification from the Federal Reserve Bank on the oontrnct • S-254-b Sec. 5136 R.S.-17 -2- in case of emergency, for that portion which is the Government's obligation. I believe that A , from the Cit,y Bank at , furnished your attorneys with his copy of this contract, and that f4r. B is thoroughly conversant with its contents. I might state, for your information, that irrespective of the ruling which m8f be handed down in this case, we are proceeding with a loan to the company under the contract, in order that the National Defense Program will not be further held up, but would like to be .in a position in the near future of releasing at least a portion of our legal credit limit to the Corporation for working capital requirements which will be necessar,y after completion of the new facilities. If there are aqy questions which you have in regard to the contract or aqy other phase of this situation, I will be more than glad to give you the desired information. Thanking you for your consideration, ond with kindest personal regards, I am Sincere~ 1 yours, (Signed) Vice President • .. • • J S-254-c Sec. 5136 R.S.-17 December 9, 1940 Mr. M. J. Fleming, President, Federal Reserve Bank of Cleveland, Cleveland, Ohio. Dear Mr. Fleming: .. This refers to your letter of November 29, 1940, enclosing a letter from .Jr. _____ , Vice President of The ---~ National Bank and Trust Company, __.~--' ------' raising certain questions with respect to the proper construction of section 5136 and section 5200 of the Revised Statutes in relation to obligations of the United States arising out of Emergency Plant Facilities Contracts. The questions you raised will be taken up with the office of the Comptroller of the Currency, since they involve limitations applicable to national banks as well as to State member banks, and you will be advised as soon as possible of the conclusions reached. Very truly yours, • (Signed) Chester Mort-ill Chester Morrill Secretary • • • S-254-d Sec. 5136 R.S.-17 TREASURY DEPARTMENT ' Comptroller of the Currency Washington February 24, 1941 Board of Governors of the Federal Reserve System Washington, D. C. Gentlemen: This is with further reference to your letters of Decem...: ber 10, 1940 and January 14, 1941, relating to the acquisition by national banks of cla~ns against the Federal Government arising out of Emergency Plant Facilities Contracts assigned under the provisions of the Assignment of Claims Act of 1940. It is believed that this letter clarifies the opinions expressed in our letters of January 6th and February 8th, which are hereby superseded. By virtue of the Assignment of Clnims Act, claims arising under such contracts may be assigned.to banks as security for loans. In such cases the loan is made to the contractor, and the claim against the Government is assigned to the bank as collateral security. Such loans are subject to the ordinary 10% lL~tation prescribed by section 5200 of Rev. Stat. of 1873, as amended (u.s.c. title 12, sec. 84), since none of the exceptions to that limitation specified in section 5200 is applicable to this situation. • • The question has been raised whether assignrrLents of such claims may be purchased by national banks outright, rather than being taken as security for loan,s to the contractor. Section '5136 of Rev. Stat. of 1873, as ar.1ended (U.S.C. title 12, sec. 24) authorizes national banks to acquire "promis-sory notes, drafts, bills of exchange, and other evidences of debt". In order to constitute an "evidence of debt" within this statutory provision, an obligs.tion must involve an admission of liability or a promise to pay a specified or determinable amount. Until the completion of the plant facilities called for by these contracts, the Government does not appear to undertake any such absolute obligation, although it does bind itself to assume an obligation not to exceed a specified MlO\mt upon the completion of the facilities and the filing of a Final Cost Certificate. Accordingly, until the facilities ha.ve been completed and the Final Cost Certificate filed, the contractor's potential claim against the Government does not constitute an evidence of debt which may be purchased by a national bank • S-254-d Sec. 5136 R.S.-17 -2- After the facilities have been completed and the Final Cost Certificate filed, the contractor's claim against the United States becomes an evidence of debt within the meaning of section 5136 and may be acquired as such by a national bank. The question then arises whether the acquisition of such claims is subject to any of the limits as to amount which are prescribed in the National Bank Act. Inasmuch as these assigned claims do not constitute "investment securities 11 as defined in section 5136, the applicable limitations and exceptions are those of section 5200, relating to loans and sindlar extensions of credit, rather than those o£ section 5136, relating to investment securities. However, it is the position of this office that the lindtations of section 5200 do not apply to obligations of the United States, since the Federal Government is not deemed to be a "person, copartnership, or corporation" within the purview of that section. It is therefore concluded that after the plant facilities have been completed in accordance with the contract and the Final Cost Certificate filed, the claim of the contractor against the Government may be acquired by a national bank W'i.thout any limitation other than those imposed by the applicable principles of safe and sound banking practice. In purchasing such cla~ns, the bank should take into consideration whatever possibility exists of the assigned claim thereafter becoming subject to valid defenses, set-offs, or counterclairiLS. If you deem it advisable, it is agreeable that this letter be published in the Federal Regeqe BulJ.et~n. Yours ver,y truly, (Signed) Preston Delano Comptroller of the Currency • • • ........ S-254-e Sec. 5136 R.S.-17 February 26, 1941 Mr. M. J. Fleming, President, Federal Reserve Bank of Cleveland, Cleveland, Ohio. Dear Mr. Fleming: This is in further reference to your letter of February 10, 1941, and previous .correspondence regarding certain questions arising under section 5136 and section 5200, United States ltevised Statutes, which were submitted by you and were by us referred to the Comptroller of the Currency. We enclose herewith a cop,y of a letter from the Comptroller of the Currency dated February :24, 1941, with reference to this matter. • You will note that the Comptroller's letter concludes that, after the plant faciliti.es have been completed in accordance with the contract and the Final Cost Certificate filed, the claim of the contractor against the Government may be acquired by a national bank without any limitation other than those imposed b.Y the applicable principles of safe and sound banking practice. In view of this ruling of the Comptroller of the Currency and the fact that State member banks under the law are subject to the same conditions vd.th respect to the purchasing and holding of invE!stment securities as are national banks, the Board will consider that State member banks, in acquiring clain1s against the Government of the kind described after the plant facilities have been completed in accordance with the contract and tne Final Cost Certificate filed, are likewise not subject to the limitations imposed by section 5136, United States Revised Statutes • Very truly yours, (Signed) L. P. Bethea L. P. Bethea, Assistant Secretary • • •
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