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FEDERAL RESERVE BOARD 296 WASHINGTON ADDRESS OFFICIAL CORRESPONDENCE TO THE FEDERAL RESERVE BOARD .. X-4484 December 30, 1925. SL~JECT: Eligibility for RediscolL~t of Notes of Corporation Representing Borrowings of Funds to be Advanced to Subsidiaries. Dear Sir: .. The Federal Reserve Board has recently had occasion to rule upon the eligibility for rediscount at a Federal reserve bank of notes of a parent corporation representing borrowings by the parent corporation of funds to be advanced to its own subsidiaries. In the narticular case ~resented to the Board for a ruling it appeared t:::w.t formerly mo:nber banks took the notes of the subsidiaries with the endorsement of the parent corporation and that such notes were considered eligible for rediscou.~t at Federal reserve banks; but that recently the :Parent corporation had decided tba.t it would be better and simpler financing for it to borrow all funds to be used by it or its subsidiaries on its own notes and to make advances from such borrowings to its subsidiaries. Two of the Federal reserve banks, however, took tho :?osition that, i.L."l.dor tho regulatio:i.s of tho Federal Reserve Board, notes of the parent corporation given for funds borrowed for the purpose of IT..akiag advances to its o><n subsidiaries must be classed as 11 finance paper 11 which is ineligible for rediscount at Federal reserve ba'i.ks; a."'ld a member bank requested the Board to reco~sider the question with a view of ascertaining ;:hether a more liberal interpretation could be placed upon tl~t provision of its regulations which pertains to fina"'l.cc paper. The -position taken by the Federal reserve bar.Jcs in this matter is in accordance ~ith a strict technical interpretation of that provision of the Board's reGulations which ~rovides trat in order for paper to be eligible for rediscount the proceeds of such paper must have been used 11 in the first instance" for an eligible purpose and that paper 11 the proceeds of whicn have been or are to be advanced or loaned to some other borrowerM is not eligible for rediscount. Upon further consideration of this question, however, the Board reached the conclusion that this is an unnecessarily strict interpretation of its regulations in cases of thi.s kind, and the :Soard Tilled that where a parent corporation owns a.t least 75 per cent of tho stock·of each of a number of subsidiary corporations the nO'"til:>S of ouch parent corporation the proceeds of which 297 X-4484 -2- have been adv~~ced or loaned to its subsidiary corporations will not be considered finan·co paper vvithin the moa.~irlg of tho Board 1 s regulations; provided that (1) tho parent corporation makes no adva~ces except to its own subsidiaries, (2) the subsidiaries borrow no money except from the parent corporation, and (3) the yrocceds of such advances have boon or are to be used by the subsidiary corporation for ru1 industrial, commercial, or agricultural purpose, within the meaning of the Federal Reserve Act and the Bo[~d 1 s regulations. It is understood, of course, that in order to be eligible for rediscount such paper must also comply in all other respects with the requirements of the law and the Board's regulations. The Board has heretofore published several rulings to the effect that paper representing borrowings by one person, firm, or corporation of funds to be advanced to an independent person, firm, or corporation, is 11 finance paper 11 a~J.d is therefore ineligible for rediscount; and this ruling is not intended as a reversal or qualification of those rulings. There is a clear distinction, however, between cases such as those covered in tho rulings above mentioned and the case here urcsontod; because, whore tho borrower is a parent corporation ond makes~ advances only to subsidiary corporations owned by it, the parent corporation a~d tho subsidiaries arc in practical effect one single organization a~d may with propriety be viewed as a single borrower. Very truly yours, D. R. CRISSINGER, Governor. TO GOVERJ:.TORS AND FEDERAL RESERVE AGENTS OF ALL F. R. BANKS '
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