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BOARD OF GOVERNORS OF' THE FEDERAL RESERVE SYSTEM S-556 WASHINGTON ADDRESS OF"F"ICIAL CORRESPONDENCE TO THE BOARD Dear Sir: • In its letter of March 6, 1942, the Board advised you that it had decided n0t to amend Regulation R so as to permit interlocking relationships between member banks and open-end investment companies. Accordingly, in administering tho Hegulat:Lon, it will be necessar.f to determine from tir~-.e to time whether particular open-end investment companies are "primarily engaged" in the issue or distribution of their own stock (see 1941 Federal Reserve Bulletin, page .399; letter of May 26, 1941, S-269, F.R.:L.S. #7610; and letter of October 26, 1934, X-8097) • • An open-end investment company is defined in section 5(a)(l) of the Investment Company Act of 1940 as a company "which is offering for sale or has outstanding any redeemable security of which it is the issuer." Section 2( a)( 31) of said Act provides that a "redeemable security" means "any security, other than short-term paper, under the terms of which the holder, upon its presentation to the issuer or to a person de;.:ignated by the is suer, is entitlod (whether absolutely or only out of surplus) to receive approxi.rnately his proportionate sharE: of the isst:er' s current net asset::;, or the cash equivalent thereof." It is customary for such companies to have but one class of securities, namely, capital stock, and it is apparent that the more or less continued process of redemption of the stock issued by such a. company would restrict a..11d contract its activities if it did not continue to issue its stock. Thus, the issuance and sale of its stock is essential to the maintenance of the company's size and to the continuance of operations without substantial contraction, and therefore the issue and sale of its stock constitutes one of the primary activities of such a compa~y . • • • Accordingly, it is the opinion of the Board that if such a company is issuing or offering its redeemabl~;; stock for sale, it is "primarily engaged in the issue -~-:H~o public sale, or distribution, IC10RY • -2- S-556 of securities 11 and that section 32 of the Banking Act of 1933, as amended, prohibits an officer, director or employee of any such company from serving at the same time as an officer, director or employee of any member bank. It is the Board's view that this is true even though the shares are sold to the public through- independent organizations with the result that the investment company does not derive any direct profit from the sales. ~t-:HH~ If, however, the company has ceased to issue or offer any of its stock for sale, the company would not be engaged in the issue or di::rtribution of its stcick and, therefore, the prohibition contained in ::~ection 32 would be inapplicable unless the company 1vere primarily engaged in the underwriting, public sale or distribution of securities other than its o·wn stock . . TO THE PRESIDE.~TS • . • • • • OF ALL FEDERAL RESERVE BANKS 85
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