The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
154 BOARD OF G O V E R N O R S OF.THE FEDERAL RESERVE SYSTEM X-3709 Sec• 15 FRA—£ WASHINGTON A D D R E S S OFFICIAL C O R R E S P O N D E N C E TO T H E B O A R D ******* September SO, 1956. subject: Deposits of uninvested trust funds in Federal Reserve banks. Dear Sir: As will be recalled, the conference of Governors of Federal Reserve banks on October 23, 1935, discussed the matter of the acceptance of deposits of uninvested trust funds from member banks by Federal Reserve banks, and the conference expressed itself as favoring such a practice, with four of the Governors voting in the negative. Replies which have been received to the Board's letter of April 15, 1936, on this subject, however, show that the large majority of the Federal Reserve banks are unfavorably disposed toward the acceptance of uninvested trust funds on deposit from member banks. While some member banks would derive benefit from the privilege of depositing uninvested trust funds with Federal Reserve banks in that they would have a safe depositary and would not be required to pledge securities for funds so deposited, it does not appear that any large number of member banks have expressed a desire for this service. It is doubtful whether the receipt of such deposits can be said to fall within the scope of the purposes for which the Federal Reserve banks were established and it is believed that the acceptance X-9709 Sec. 15 FEA-2 -2- of such deposits would, in addition to the extra work which would be entailed, subject the Federal Reserve banks to annoying complications and possible legal liabilities, against some of which, at least, adequate precautions could not be taken. The Board of Governors has given consideration to the matter in the light of the views expressed by the Federal Reserve banks and feels that it is not desirable that Federal Reserve banks engage as a general practice in receiving uninvested trust funds on deposit from member banks. However, in view of the fact that in the Board's judgment it cannot be said that Federal Reserve banks are without the legal authority to accept such deposits, ana since two or three of the Federal Reserve banks are desirous of performing the service in some circumstances, the Board for the present will offer no objection to the receipt of deposits of uninvested trust funds in a special account when in the judgment of the Federal Reserve bank special circumstances render such service to a particular member bank desirable for a temporary period. Any such account which is established, how- ever, should have constant attention and should be discontinued as soon as the special circumstances justifying the account are eliminated. In opening any such account an agreement between the Federal Reserve bank and the member bank should be carefully prepared with the assistance of counsel for the Federal Reserve bank, and such other precautions as may seem necessary should be taken to minimize the possibility of litigation or loss to the Federal Reserve bank. -5- X-9709 Sec. IS FRA-2 It would seem that the opening of a separate account for each trust estate whose funds are deposited with the Reserve bank, in lieu of one account for the receipt of all uninvested trust funds deposited by a particular member bank, would be so burdensome to a Federal Reserve bank as to be impracticable. While the action of the Governors' conference in October 1935 contemplated that transactions in an account in which trust funds are received would be confined to transfers to and from the reserve account of the member bank, it is believed that this practice would involve a commingling of the funds of the fiduciary with trust funds, which would be objectionable both from the standpoint of the fiduciary and the Federal Reserve bank, with possible ensuing liabilities. For this reason, it is suggested that, in any case in which a Federal Reserve bank feels it necessary to establish an account of this kind, transactions between the trust account and the reserve account be not permitted but that some other method of effecting deposits in and withdrawals from the account be followed. It should be understood, of course, that deposits of funds received by a member bank in a fiduciary capacity and deposited with a Federal Reserve bank in such an account may not be counted as a part of the member bank's reserve balance with the Federal Reserve bank. The action of the Governors' conference in October 1935 appears to contemplate the possibility of a Federal Reserve bank's X-9709 Sec. 15 FRA-2 -4- receiving trust funds awaiting investment or distribution not only from a member bank but also from a trust company engaged exclusively in conducting a trust business and owned by a member bank. It is the view of the Board that the receipt by a Federal Reserve bank of uninvested trust funds from a norimember institution would not be legally authorized. There is inclosed herewith for your information a copy of a memorandum prepared in the office of the Board's counsel regarding this matter, together with a summary of views expressed by the Federal Reserve banks in their letters replying to the Board's letter of April 15, 1956, on this subject. Very truly yours, Chester Morrill, Secretary. Inclosures TO THE PRESIDENTS OF ALL FEDERAL RESERVE BANKS X-9709-a Sec. 13 FRA-2 OFFICE CORRESPONDENCE TO Board of Governors FROM Mr. Vest September 17, 1356 SUBJECT: Deposits in Federal Reserve banks of uninvested trust funds of member banks. The attached file presents the question whether Federal Reserve banks should receive on deposit from member banks deposits of trust funds of such member banks awaiting investment or distribution. This matter was considered by the Governors' Conference in October 1955, and the Governors voted eight to four in favor of receiving such deposits. However, a letter was sent to the Federal Reserve banks in April of this year requesting copies of opinions or memoranda. prepared in the respective banks with regard to this subject and it appears from the replies which have now been received that at least nine of the banks are unfavorable to accepting deposits of uninvested trust funds of member banks on deposit. CONCLUSIONS It appears that there is not any great demand among the member banks for the acceptance of uninvested trust funds on deposit by Federal Reserve banks and that the great majority of Federal Reserve banks are opposed to the practice. It also appears that disadvantages of the practice from the standpoint of the Reserve banks outweigh the possible advantages. Moreover, it is doubtful whether the receipt of trust funds is a function which was contemplated byCongress in establishing the Federal Reserve banks and the acceptance of such deposits might, in certain circumstances at least, involve the Federal Reserve banks in legal responsibilities which might lead to loss. In addition, a considerable burden of work might be entailed. On the other hand, there seems to be technical legal authority for the practice. Some member banks would like to have the service rendered to them and two or three Federal Reserve banks are disposed to perform the service. In all the circumstances, it is recommended that the Board write a letter to the Federal Reserve banks indicating that the practice is not a desirable one, with a statement, however, that the Board will offer no objection to the receipt of deposits of uninvested trust funds subject to proper safeguards when in special circumstances a Federal Reserve bank may feel that it is neccssary or desirable to render the service for a temporary period to particular member banks, A draft of such a letter is attached. FACTS AND HISTORY Under the provisions of section 11(k) of the Federal Reserve Act, a national bank exercising trust powers may not, use trust funds in the conduct of its business unless it sets aside in the trust department United States bonds or other securities approved by the Board of Governors. A similar requirement, in the form of a condition of membership, is now imposed upon State banks exercising trust powers which become members of the Federal Reserve System (this requirement being subject to exception where trust funds are fully protected by a statutory preference). However, a member bank may deposit such trust funds awaiting investment or distribution in another institution without depositing securities in its trust department. There have been several suggestions from member banks in the last year or two that Federal Reserve banks receive such deposits of uninvested trust funds from member banks. In a letter to the Federal Reserve Bank of San Francisco in June, 1955, Mr. C. K. Mcintosh, President of the Bank of California National Association, points out that present conditions make it profitable for concerns having outstanding bond issues for which banks or trust companies act as trustee to call these issues for payment and to refinance them at the lower rates now prevailing. As a result, largo amounts of funds are temporarily in the hands of such trustees and these fundi": must either be retained in cash, deposited in another institution or secured by the deposit of securities. Mr. Mcintosh contends that the demand for large sums in cash would be a burden upon the Federal Reserve bank and that it would be impracticable for banks in many instances to have free securities in large amounts sufficient to cover the amount of uninvested trust funds. Of course, the banks are unwilling to deoosit the funds in large amounts in another institution unless they are entirely satisfied as to its financial condition because such funds so deposited are unsecured. Therefore, as a solution of the matter, the Federal Reserve banks are asked to accept such deposits. This matter was presented to the Board by the Federal Reserve Bank of Richmond in 1954. Counsel for the bank had indicated doubt as to whether the bank was authorized under the law to receive such deposits and the bank advised the Board that it felt, in view of the legal and practical questions involved, that it would, be undesirable to accept such deposits. In these circumstances, the Board expressed the opinion that since it was doubtful whether the receipt of uninvested trust funds from member banks by Federal Reserve banks falls within the purposes of the Federal Reserve Act and since such a deposit in a Federal Reserve bank could not be counted as a part of the depositing member bank's reserve balance, and in view of the legal responsibilities which might be assumed by a Federal Reserve 160 r' -5- X-9709-a Sec. 15 FRA-2 bank in accepting such deposits, it would not be advisable for Federal Reserve banks to receive uninvested trust funds from member banks. The same question, however, was subsequently raised by the Federal Reserve Bank of Minneapolis and the Federal Reserve Bank of Dallas, and as a result the matter was considered by the Governors' Conference in October 1955. As indicated above, the Governors voted eight to four in favor of the acceptance by Federal Reserve banks of deposits of uninvested trust funds from member banks. Mr. Robert Neill, Chief National Bank Examiner for the 8th district, has addressed a memorandum to the Comptroller of the Currency recommending strongly that national banks deposit uninvested trust funds in Federal Reserve banks. It is understood that many Federal Reserve banks have for a number of years accepted securities for safe-keeping for the account of the trust department of member banks and the Board has recognized that fact without objecting to the practice. In view of the difference of opinion on this subject which was apparent from the action of the Governors' Conference in October 1955 and in view of the many legal and practical considerations involved, a letter was addressed to the Presidents of all Federal Reserve banks on April 15, 1956, requesting copies of any opinions or memoranda prepared by counsel or other officers of the banks with regard to the various aspects of this problem. The replies to this letter are contained in the attached file. There is attached hereto a summary of the replies of the Federal Reserve banks on this question, together with a tabular synopsis indicating very briefly and without appropriate qualifications the position taken by the Federal Reserve banks and their counsel with regard to various points arising in connection with this matter. These replies show that the large majority of Federal Reserve banks (at least nine) are unfavorably disposed toward the acceptance of uninvested trust funds on deposit from member banks. They feel that they would not be justified in assuming the legal and practical responsibilities which would be involved in the receipt of such deposits. Apparently only one Federal Reserve bank, San Francisco, feels that the Federal Reserve banks should perform this function as a general practice. Another bank, Dallas, feels that the practice should be permitted if and when in the judgment of the Federal Reserve banks circumstances warrant, but that the trust account should be discontinued as soon as circumstances indicate that a proper need no longer exists. A third bank, Philadelphia, indicates that it would receive such deposits in particular cases when emergency or temporary conditions make such action desirable as a service to member banks. T -4- X-9709-a Sec. 15 FRA-2 The replies received from the Federal Reserve banks do not indicate that very many member banks desire the proposed service. LEGAL AUTHORITY OF FEDERAL RESERVE BANKS TO RECEIVE SUCH DEPOSITS The first paragraph of section 13 of the Federal Reserve Act provides in part as follows; "Any Federal reserve bank may receive from any of its member banks, and from the United States, deposits of current funds in lawful money, national-bank notes, Federal reserve notes, or checks, and drafts payable upon presentation, and also, for collection, maturing notes and bills; * * * *." Section 4 of the Federal Reserve Act empowers a Federal Reserve bank "To exercise by its board of directors, or duly authorized officers or agents, all powers specifically granted by the provisions of this Act and such incidental powers as shall be necessary to carry on the business of banking within the limitations prescribed by this Act." It will be observed that under the above provisions of the statute a Federal Reserve bank is authorized to receive deposits from any of its member banks and is authorized to exercise such incidental powers as are necessary to carry on its banking business within the limitations of the Federal Reserve Act. No restriction is made by the law as to the number of accounts which a Federal Reserve bank may receive from any one member bank, nor is there any provision requiring such accounts to consist of funds held by the member bank in its own right, rather than as trustee or other fiduciary . It cannot be said that Federal Reserve banks are prohibited by the provisions of the law from receiving deposits of trust funds from member banks, nor is there any implication to be derived from the Act which in my opinion would justify the restrictive interpretation that the authority to receive deposits of member banks does not include authority to receive on deposit funds held by a member bank as trustee as well as funds to which the member bank has both the legal and equitable title. This provision of the law has heretofore been given a rather broad interpretation. For example, with regard to this provision, in the case of Pascagoula National Bank v. Federal Reserve Bank of Atlanta, one of the most important cases in which any Federal Reserve bank has ever been involved, the statement was made in the brief filed on behalf of the Federal Reserve Bank, in the preparation of which this office participated, that "the word 'deposits' is obviously used, as in other sections of the act, in its broad, 161 -5- X-9709-a Sec. 13 FRA-2 non-technical sense, and contemplates the physical receipt of checks". Although this point was not referred to specifically in the opinion of the court, the decision was in favor of the Federal Reserve bank. Moreover, during the banking holiday of 1933 the Board authorized the Federal Reserve banks to open special accounts on their books for receipt from member banks of funds representing new deposits in such banks which were subject to an agreement that they be repaid in full on demand. These so-called new deposits were in effect trust funds, and this action appears to be a precedent for the receipt of uninvested trust funds in a separate account, so far as the legal question is concerned. Counsel for the Federal Reserve banks, it is indicated in the letters received from the banks, divide almost equally in their opinions on the question whether Federal Reserve banks have the legal authority to accept deposits of trust funds from member banks. The Federal Reserve Act constitutes remedial legislation and therefore under established rules of statutory construction the powers conferred try- the law upon Federal Reserve banks should have a liberal interpretation. Accordingly, while it is conceded that in enacting the original Federal Reserve Act Congress did not have in mind the acceptance of trust deposits from member banks by Federal Reserve banks and the conclusion is open to doubt, it is my opinion that the Federal Reserve banks have the requisite legal authority under the provisions of sections 15 and 4 of the Federal Reserve Act to receive deposits of uninvested trust funds from a member bank and to place such deposits in a separate account, segregated on the books of the Federal Reserve bank from the reserve account of the member bank, It may be well in this connection to call attention to two rulings of the Board heretofore made, which at first glance might not seem to be in harmony with the opinion above expressed, but which in reality are believed to be in no wise inconsistent. Prior to the Banking Act of 1935 section 19 of the Federal Reserve Act provided that the net difference of amounts due to and from other banks should be taken as the basis for ascertaining the deposits against which required reserve balances of member banks are determined. In 1922 the Board took the position that trust funds deposited by a member bank as fiduciary in another member bank should be treated by the depositary member bank as an individual deposit rrther than a bank deposit and therefore might not be included by the depositary bank among the amounts due to othor banks within the meaning of the provision of section 19 in question. It is obvious, however, that the purpose of this provision of section 19 is very different from that of the provision of section 13 which is under consideration. The purpose of the provision of section 19 was to permit an off-set -6- X-9709-a Sec. 15 FRA-2 of bank balances in computing reserves on the theory that such balances owing to a member bank would be readily available to it at any time for meeting demands upon it. Obviously, balances owing to a member bank in its capacity as fiduciary could not be utilized for any such purpose. This ruling, therefore, does not seem to me to affect the present question. In a ruling in June 1936 the Board took the position that a deposit of trust funds with a State nonmember bank by a member bank as fiduciary in excess of 10 per cent of the member bank's capital and surplus is not prohibited by the provision of section 19 that no member bank shall keep on deposit with a State nonmember bank a sum in excess of 10 per cent of its own paid-up capital and surolus. Attention was called to the fact, in this connection, that the statutory limitation was based upon a specified percentage of the capital and surplus of the member bank, and thrt it would be possible for all the funds of one trust to be deposited with a nonmember bank and still not to exceed the specified percentage. If Congress had intended the limitation to apply to a deposit of trust funds it would seem that it would have provided a limitation bearing a relation to the funds of each individual trust. In view of these considerations and the purpose for which this provision v-as enacted, it does not seem that this precedent is inconsistent with a broad interpretation of the provisions of the first paragraph of section 13. For the reasons stated, it is ray conclusion, while recognizing the doubt with regard to this matter, that Federal Reserve banks have implied authority to receive the deposits in question. The action of the Governors' Conference in October 1955 appears to contemplate the possibility of a Federal Reserve bank's receiving trust funds awaiting investment or distribution not only from a member bank but also from a trust company engaged exclusively in conducting a trust business and owned by a member bank. Such a trust company it is assumed would not be a member of the Federal Reserve System and there does not appear to be any legel authority for the receipt by a Federal Reserve bank of uninvested trust funds from such an institution. On this point, counsel for the twelve Federal Reserve banks are unanimous in the view that there is no legal authority. USE OF SUCK DEPOSITS AS RliSBRVE OR AS A SET-OFF FOR INDEBTEDNESS OWING TO THE RESERVE BANK Such deposits of trust funds in a Federal Reserve bank would not be placed in a member bank's reserve account but would be placed in a special account in which the funds would be segregated on the books of the Federal Reserve bank from other funds standing 164 —7— X-9709-a S©' to the credit of the member bank and. would be in the name of the member bank as trustee or other fiduciary. Such deposits could not be counted as a part of the lawful reserve of the member bank against its deposits since they are trust funds deposited by the member bank in its capacity as fiduciary and are not funds held by it in its own right. Likewise, it is believed that they would not be subject to any claim by the Federal Reserve bank against the member bank for indebtedness due by the latter to the Reserve bank, because they are not funds belonging to the member bank in its own right, NECESSITY FOR MORE THAN ONE TRUST ACCOUNT In its letter to the Federal Reserve banks of April 15, 1936, the Board requested the views of the Federal Reserve banks, in consultation with their counsel, on the question whether if deposits of uninvested trust funds are received from member banks by Federal Reserve banks, a member bank should be permitted to deposit in one account with a Federal Reserve bank the funds of any number of trust estates held by the member bank without earmarking or segregation, or whether it is necessary or advisable that a separate account be opened for each trust estate whose funds are deposited in the Federal Reserve bank. In this connection, attention was invited to the principle that a fiduciary should keep the properties of various trusts separate and distinct one from another. With regard to this matter, the majority of counsel for the Federal Reserve banks seem to feel that it is not necessary to haveseparate accounts for each trust but that one account is sufficient provided the member bank keeps proper records on its books showing the ownership of the funds in such account, and that the Federal Reserve bank would be taking little risk in accepting only one account representing the funds of several estates. In this connection, the following statement from Bogert on Trusts, Vol. 5, page 1888, is pertinent: "(5) It is also a breach of trust of this type if the trustee commingles two distinct trust funds., If the same person is trustee of two trusts even though there is some identity in the personnel of the two groups of cestuis, he should set up the trusts separately, tag the property of each with the appropriate name, and keep the res of each trust distinct both physically with respect to all records and marks of identification. He should not maintain a single bank account for the two trusts, nor should he use a mixed fund to purchase a mortgage as an investment. There has been some tendency, however, to permit the mingling of two or more trust -8- X-9709-a Sec. 13 FRA-2 funds in an investment, provided the trustee keeps accurate books with regard to the shares of each trust, and each cestui is given notice of his exact interest." On the other hand, however, the following is an excerpt from the Restatement of the Law of Trusts of the American Law Institute, Volume I, page 457: "Where the trustee holds the funds of numerous beneficiaries, and it would be unreasonable and not subserve any purpose in protecting the interests of the beneficiaries of the several trusts to require him to keep separate the funds of the different trusts, it may be proper for the trustee to mingle funds of the different trusts by deposit thereof in a common bank account. Thus, ordinarily a trust company can properly deposit in a single trust account, in another bank the funds of several trusts, provided thet it keeps an accurate record of the contributions of tho separate trusts. * * It is apparent, therefore, that the law on this subject is not entirely settled, but as stated by counsel for the Federal Reserve Bank of Cleveland "It does not seem to us that any protection to the beneficiaries of the various trusts is achieved through complicating the machinery of deposit of the individual trust funds by keeping individual records with respect thereto. The possibility of loss to the beneficiaries is not increased by the common deposit of such funds in one account if proper accounting for the individual trusts is kept upon the books of the trustee. If a shortage arises in the account of any individual beneficiary, it does not seem to us that the proximate cause of such shortage is the method of depositing the trust funds. No liability therefore should accrue to the Federal Reserve banks." •Mr. Hackley, Law Clerk in this office, has prepared a memorandum with regard to the deposit of funds of several trusts by a fiduciary in a single bank account. He reaches the conclusion that a fiduciary bank may properly deposit trust funds of several trust estates in a lump sum in a single account in another institution provided certain requirements are met. The cases which he has found having a bearing on this subject relate generally to the right of a fiduciary to invest in one investment the funds of several trusts and not to the right of the fiduciary to deposit the funds of .several trusts in one account* Regardless of the right to make collective investments of trust funds, and on this point the decisions are not in harmony, it would seem that most of the objections which may be raised against such collective investments would not apply with respect, to a mingling of funds of different estates in one bank account if proper records are kept by the fiduciary showing the interest of each estate in such account. 166 -9- X-9709-a Sec. 15 FRA-2 At any rate, there would appear to be little likelihood of any liability on the part of a Federal Reserve bank arising from the fact that it may have received on deposit the funds of a number of different trust estates in a single account. While a Federal Reserve bank might be held liable for the misappropriation of trust funds deposited with it if it had actual knowledge of such misappropriation by the trustee, it would be a remote possibility that any such liability would be any more likely to occur where one account was received on deposit than where a number of different accounts were received. On this particular point, therefore, it is my conclusion that if Federal Reserve banks are to be permitted to receive such deposits at all they should be permitted to receive deposits of funds of a number of different estates in one account. To require separate accounts would, as many Federal Reserve banks point out, involve great operating difficulties, as well as considerable expense, and would impose an unjustified burden upon the Reserve banks. TRANSACTIONS BETWEEN TRUST ACCOUNT AND RESERVE ACCOUNT The Conference of Governors in October 1955 approved the practice of receiving trust funds, but with the qualification that transactions in an account in which such trust funds are received should be confined to transfers to and from the reserve account of the member bank. This raises a serious question as to whether or not a fiduciary bank might not in such circumstances violate one of the well established rules of the law of trusts that a trustee shall not mingle funds of a trust estate with his own funds. It is obvious that in transferring amounts to the trust account from the reserve account and withdrawing funds from the trust account and placing them in the reserve account, a member bank would be commingling its own funds with trust funds both at the time of the deposit in the trust account and the withdrawal therefrom. While the transaction might be handled on its books in such a way that the commingling would be a matter of . short duration, possibly almost instantaneous, nevertheless, there would be at least a technical commingling in violation of the rule. It is possible that this might, in some cases at least, subject a Federal Reserve bank to embarrassment or to liability if it had knowledge of a wrongful appropriation of trust funds on the part of the fiduciary bank. If a member bank transfers from its reserve account to the trust account a specified amount and later re-transfers the amount to the reserve account and misappropriates such amount, the Federal Reserve bank might be liable to the beneficiaries for the loss which —10— X-9709-a Sec. 13 FRA-2 they suffered. For example, if a member bank were deficient in its reserve account and made a transfer from its trust account to make up the deficiency, it would seem that the Federal Reserve bank would be on notice of a wrongful use of trust funds and therefore, being charged with knowledge of the misappropriation, might be held liable. The majority of counsel for the Federal Reserve banks feel that if the practice of receiving trust funds is to be permitted at all, there should not be transfers from the trust account to the reserve account. They feel that such a practice would be likely to involve the Federal Reserve bank in litigation with possible loss. If trust funds are received on deposit by Federal Reserve banks, therefore, it is believed that it would be advisable not to adopt the practice suggested by the Governors' conference of having transactions between the reserve account and the trust account, but to adopt some other method for deposits in and withdrawals from the trust account. ADVANTAGES AND DISADVANTAGES OF THE PRACTICE There are listed below the chief advantages and disadvantages of the acceptance by Federal Reserve banks of uninvested trust funds on deposit from member banks. Advantages Member banks would be enabled to release from pledge with their trust departments securities now deposited there to secure deposits of trust funds in their commercial or savings departments; and hereafter could deposit uninvested trust funds in Federal Reserve banks without the necessity of putting up securities. It is sometimes inconvenient for banks to cover trust funds with securities, especially where there has been a temporary increase in such funds in connection with corporate bond issues. Member banks would have a safe olace of deposit for their uninvested trust funds. It is true that deposits made in other commercial institutions which are members of the Federal Deoosit Insurance Corporation would be insured up to $5,000 for each account, but unlimited amounts could be placed with Federal Reserve banks with assurance of safety. A State member bank which is subject to the condition of membership that trust funds deposited by the bank in its banking department shall be secured by a pledge of collateral with the trust department finds itself unable to carry uninvested trust funds in its own banking department in those States where the laws 168 I -11- X-9709-a Sec. 13 FRA-2 do not permit the pledging of collateral for this purpose. The Board has been urged to waive this requirement in some of such cases, as the banks are usually unwilling to deposit trust funds in other commercial banks. The acceptance of such deposits by Federal Reserve banks, by providing a safe depositary for such funds, would remove one of the principal obstacles to the enforcement of this condition of membership. Some member banks may be unwilling to deposit funds with their competitors or other commercial banks due to the feeling that such depositary banks may use or disclose confidential information. This would not be the case, of course, with deposits in the Federal Reserve banks. To the extent that member banks desire such facilities this service would be an added attraction to membership in the System. As indicated in a memorandum addressed to Mr. Vfoodlief Thomas by Mr. Longstreet, to the extent that Federal Reserve banks may receive such deposits the Federal Reserve System's power over the money market is likely to be increased The extent to which this would be the case cannot be predicted in the absence of information as to the amount of such deposits which there might be. Pi sadvantages The acceptance of such deposits of trust funds is not believed to be a function which Congress had in mind in establishing the Federal Reserve banks. Federal Reserve banks would necessarily incur additional work and possibly some additional expense. If separate accounts for each trust were maintained the additional work would be tremendous and there would be considerable additional expense. There is some possibility of loss to the Federal Reserve banks in engaging in the proposed practice. It is believed that this would be fairly remote, however, unless transfers between the trust account and the reserve account should be permitted. If uninvested trust funds are deposited in a correspondent insured bank the depositing member bank avoids the deposit insurance assessments on such deposits, but this would not be the case if the funds were deposited in the Federal Reserve bank. Some correspondent banks might view the receipt of deposits of trust funds by Federal Reserve banks as an unreasonable encroachment upon their correspondent relationships. -12- X-9709-a Sec. 13 FRA-2 If Federal Reserve banks perform this service, member bank would be encouraged to request other services from Federal Reserve banks, such as acting as trustee, escrow agent, and so on. This service would further complicate the problem of free services rendered by Federal Reserve banks which has been under consideration for some time. Experience proves that the member banks would, in manycases confuse the charges and credits to be made to the reserve account, on the one hand, and the trust account, on the other. As stated by one Federal Reserve bank, the acceptance of such deposits may subject the Federal Reserve banks to legal liability and annoying complications, some of which cannot be adequately guarded against. Respectfully, (Signed) George B. Vest George 3. Vest, Assistant General Counsel. X-9709~b Sec. 13 FRA-2 Summary of Views of Federal Reserve Banks Regarding the Deposit of Uninvested Trust Funds of Member Banks in Federal Reserve Banks (In the following paragraphs no distinction is made between the views expressed by the President or other officers, on one hand, and Counsel for the Federal Reserve bank, on the other.) BOSTON: The view is expressed that the Federal Reserve bank does not possess authority to accept deposits of uninvested trust funds and that the acceptance of such deposits may subject the Federal Reserve banks to legal liabilities and annoying complications, some of which cannot be adequately guarded against. It is suggested that it would be well, if such deposits are accepted, to permit credits from the reserve account of a member bank to a trust account, but not to permit credits in the reserve account for funds diverted directly from the trust account. Attention is called to the complications which may result with respect to trust funds in which a member bank ana a third party are co-trustees, the point being made that a Federal Reserve bank could not legally accept such deposits. ' If a single account were accepted from each bank in the Boston district now operating a trust department, the volume of additional work would not be very great but if separate accounts were accepted for each trust there would be a considerable amount of additional work and expense. However carefully the arrangement may be set up, some confusion may result between items drawn on the reserve account and items drawn on the trust account, ana it is possible that there might be serious embarrassment in some such cases. Some correspondent member banks might view the receipt of deposits of trust funds by Federal Reserve banks as an unreasonable encroachment upon their correspondent relationships. There does not appear to be any general desire on the part of member banks in the Boston district to have the Federal Reserve bank receive deposits of uninvested trust funds. If uninvested trust funds are deposited in a correspondent bank which is insured under section 12B of the Federal Reserve Act, the X-9709-b Sec. 13 FRA-2 -2- depositing member bank avoids the deposit insurance assessment on such deposits, an advantage which would not accrue to the depositing bank if the funds were deposited with the Federal Reserve bank. The view is indicated that it is usually permissible to mingle in a single deposit funds of various trust estates. The Reserve banks clearly lack the authority to receive deposits of uninvested trust funds from nonmember banks. It is suggested that a member bank may now effect a deposit of trust funds in its Reserve bank by having the latter charge to its reserve account and issue a check payable to a designated trust fund or to the member bank which would endorse it over to a trust fund, the check to be held in the assets of the trust pending investment or distribution. It is pointed out, however, that this would not constitute the acceptance of a deposit of trust funds and that the relationship of the Reserve bank to such a check and the legal and practical responsibility involved are different from the case of the deposit of trust funds. NEW YORK: It is stated that there would be no real occasion for the Federal Reserve Bank of New York to accept separate accounts from member banks for the deposit of uninvested trust funds. Only one or two member banks have suggested that this be done and they have not indicated that the matter was of particular importance to them. The question of the technical legal authority of the eral Reserve banks to accept such deposits is doubtful, but no nite opinion is given. It is said that there are no practical siderations which make it desirable to undertake this function this time. Feddeficonat lii'hile it is not felt that any liability would be incurred by the commingling in one account of the funds of several different trust estates, in view of a statute of the State of New York it is said that it would not be advisable for the Reserve bank to permit such commingling in a single account for banks in that State without proof of the fiduciary's authority to commingle. It has been the experience of the Reserve bank that when a member bank has maintained two accounts on the books of the Reserve bank it has been extremely difficult to segregate the entries, due largely to errors made by the member bank. Checks and advices to X-9709-b Sec. 15 FRA-2 -3- make transfers are often erroneously marked. If separate accounts vere opened by one Lank for numerous trusts the accounting procedure would be very complicated and would take much time of the auditors, as well as considerable legal work. While there may be some risk to the Federal Reserve bank if trust funds of several estates are mingled and deposited with the Reserve bank, it is believed that the risk is fairly remote. In discussin;; the question, the advantages to member banks of depositing uninvested trust funds in Federal Reserve banks are stated briefly as (l) relief from the necessity of depositing securities with its own trust department, (2) s safe depository, ana (3) a reluctance by member banks to deposit funus with another bank other than a Reserve bank due to the feeling that depositing banks may disclose confidential information. There is believed to be no authority to accept deposits of uninvested trust funds from nonmember banks. PHILADELPHIA; The question is not a practical one in the Philadelphia district. As a matter of policy the Philadelphia bank is not inclined to accept such deposits from a member bank unless in a given case emergency or temporary conditions make such action desirable. No Difficulty is found in arranging for a segregated account to be kept entirely apart from the reserve balance. There is believed to be ample legal authority for the receipt of deposits of uninvested trust funds and that no unusual risk would be involved in doing so. It is believed that it would be decidedly inadvisable to permit separate accounts for each trust estate and that there is no absolute rule prohibiting a fiduciary from commingling in one account the cash funds of several estates so long as proper records are maintained. There is a technical question with respect to the right of a Pennsylvania State member bank to deposit uninvested trust funds with a Federal Reserve bank. There would be no saving in the Federal Deposit Insurance Corporation insurance assessment by making these deposits in the Federal Reserve bank. X-9709-b Sec. 15 FRA-2 173 There is no authority to receive such deposits from a nonmember bank. Transfers in the trust account to and from the reserve account would constitute a mingling of trust funds with a fiduciary's own funds and, therefore, be objectionable. CLEVELAND: There is no legal authority for the acceptance of deposits of uninvested trust funds either from member or nonmember banks. It would not be practicable to have separate accounts for each trust estate and there would be no liability on Federal Reserve banks for failure to do so. Reciprocal accounts are carried by member banks and there would apparently not be any great demand for accounts on the books of the Federal Reserve bank. There would be no objection to the mingling of the funds of several estates, if the receipt of such funds is legal at all. The President states that there would not be much risk in carrying one account for each bank, but Counsel indicates that there would be considerable risk if transactions in the account were permitted only by transfers to and from the reserve account. Counsel takes the view that this arrangement would involve a commingling of trust funds with the general funds of the bank with the knowledge of the Federal Reserve bank and in case of a misappropriation by the member bank such as a transfer from the trust account in order to make up a deficiency in the reserve account the Reserve bank might be liable. In response to the suggestion that this may be a proper service to. be rendered by Federal Reserve banks for their members, it is said that if such functions are to be undertaken it should be only pursuant to statutory authority authorizing acceptance of such deposits. No protection to the beneficiaries of various trusts is achieved through complicating the machinery of the deposits of individual trust funds, The possibility of loss to beneficiaries is not increased by the common deposit of such funds in one account if proper accounting for individual trusts is kept by the trustee. X-9709-b Sec. 15 FRA-2 -5RICHMOND: Only one inquiry from a member bank has been received on this subject and that several years ago. There is legal authority (but no requirement) to accept uninvested trust funds from a member bank, but not from a nonmember bank. It is not necessary to have separate accounts for each trust estate but one account will be sufficient if proper records are kept by the trustee. The provision that transactions in the trust account should be confined to transfers to and from the reserve account might be embarrassing to the Federal Reserve bank in many instances and might actually cause losses in some, especially where the Reserve bank might have knowledge or be deemed to have knowledge of an improper use of the trust funds. If the practice is to be engaged in, it is suggested that instead of having transfers to and from the reserve account it would be preferable to have all withdrawals from the trust account made on voucher checks designating the estate for which the funds are withdrawn and possibly also the purpose for which the withdrawal is to be used. Although not expressly so stated, it is understood from the Richmond letter that the Richmond bank is opposed to the practice in question and Governor Seay voted against it at the 1955 Governors' conference. ATLANTA: In view of the practical responsibilities which might be assumed it is believed it would be inadvisable for Federal Reserve banks to accept deposits of trust funds. Federal Reserve banks may be considered to have the incidental power to accept deposits of this character. If proper precautions were taken the possibility of liability on the part of the Federal Reserve bank would be remote. It would be advisable, if not legally necessary, to have separate accounts for separate trust estates. 174 X-9709-b Sec. 15 FRA-2 - 6 - The taking of proper precautions to avoid liability would involve considerable work and might call for continual supervision of some skilled person. There is no authority to receive such deposits from nonmember banks. CHICAGO: In view of the additional responsibility which will be imposed upon Federal Reserve banks, they should not accept such deposits. Counsel apparently takes the position that there is not even implied authority for the receipt of deposits of uninvested trust funds, although this is not entirely clear. Some risk would be involved in accepting in a single account trust deposits of a number of different estates, whereas practical difficulties of a burdensome character would be presented if separate accounts were maintained. If Federal Reserve banks perform this function requests would be encouraged from member banks to serve them in other capacities, such as trustee, escrow agent, etc., clearly not within the corporate powers of the Reserve banks. There is no authority to receive such deposits from nonmember banks. ST. LOUIS: It would be unwise for Federal Reserve banks to receive deposits of uninvested trust funds because (1) it will mean added work, put them in competition with member banks and further complicate the problem of free servicesj (2) if such uninvested funds are accepted it would be difficult to explain why the St. Louis bank declines to accept for safe-keeping securities held in trust estates; and (5) many legal and practical possibilities of trouble would be opened up. These difficulties should be avoided, especially as member banks can adequately care for these needs through other member banks. Apparently it is felt that there is implied legal authority for the receipt of trust funds. It is stated that there would not be undue risk of loss to the Federal Reserve bank so long as transactions in the trust account are confined to transfers to and from the reserve account. X-9709-b Sec. 15 FEA-2 -7It is not necessary to have separate accounts for each trust estate, provided the trustee1s books show the amount of the funds belonging to each estate. There is no authority for the receipt of such funds from a nonmember bank. MINNEAPOLIS: The officers of the bank unanimously recommend against the installation of the proposed service, confident that disadvantages in the 9th district far outweigh any advantages or good will that might accrue to the Federal Reserve bank from the service. The Federal Reserve banks have the requisite legal authority to accept uninvested trust funds from member banks. Separate accounts for each trust should be maintained. If proper safeguards were observed there would be little risk to the Federal Reserve bank but considerable additional expense. Transfers to the Reserve account should not be permitted. banks. There is no authority to receive such funds from nonmember A list of advantages and disadvantages of the proposed service is given, upon the assumption that it would be practical to open only one account for each bank. Advantages (1) In States where deposits of trust funds with self are illegal, State member banks and trust companies would not be required to deposit with competitors or with distant correspondents; but there are very few State member banks in the 9th district having trust departments. (2) Banks would not have to ps.y for insurance on uninvested trust funds so deposited (Note: This appears to be incorrect) — an inducement to join the System — but as there are few nonmember State banks operating trust departments in the 9th district this would be of little use. (3) Securities pledged with trust departments Could be released but it is very seldom that a bank finds itself without eligible securities. 1 7 6 177 X-9709-b Sec. 13 FRA-2 Disadvantages (1) Bookkeeping burden would be great and operating expense would increase even with only one account for each bank. (2) Transactions between the reserve account and the trust account would be objectionable and Reserve bank might be held liable in some cases. (3) Neither Congress nor the Board ever contemplated the reception of such deposits as trust funds by Federal Reserve banks. (4) National banks may deposit trust funds with themselves upon putting up securities ana would therefore have little or no use for the proposed service. (5) two accounts. Member banks would, confuse charges and credits to the KANSAS CITY: Provisions of the Federal Reserve Act confer no legal authority upon Federal Reserve banks to accept such deposits. Moreover, there are a number of practical considerations why the receipt of uninvested trust funds should not be undertaken. It would be necessary to maintain separate accounts in order to comply with the rule forbidding the intermingling of trust estates and this would be burdensome. State banks can make such deposits only if permitted by law and Federal Reserve banks might have to determine at their own risk what the law of a particular State is. Transfers to and from the trust account and the reserve account should not be permitted because of the rule against mingling trust funds with the fiduciary's funds. In some cases the Federal Reserve bank might be liable. There is no real need for the service in the 10th district, especially as trust funds are now insured up to $5000 for each trust estate, even when deposited by the fiduciary bank in another insured "Dank. DALLAS: Federal Reserve banks should be free to accept such deposits X-9709-b Sec. 13 FRA-2 -9- in such cases and under such circumstances as to them at the time may seem warranted. Such an account should have the continued attention of the Federal Reserve bank with a view to discontinuing it whenever the circumstances indicated a proper need for such account no longer exists. Only one account for each bank should be opened. It is common practice among all banks to commingle the cash funds of their several trust estates even when the money is held in the bank's OV.TI vaults earmarking being accomplished entirely by bookkeeping. The Federal Reserve banks have the requisite legal authority to receive such deposits from member banks but not from nonmember banks SAN FRANCISCO; It is the opinion of counsel and officers of the San Francisco bank that a member bank should be permitted to carry in the name of its trust department one separate account on the books of the Federal Reserve bank. This is in harmony with the practice approved by the Board of a departmental bank carrying with its Reserve bank a separate account in the name of its savings department. One account is sufficient, as ownership of the funds appears on the books of the fiduciary. No risk to the Federal Reserve bank would be involved inasmuch as no transactions will be permitted except to and from the reserve account. It is pointed out that the safe-keeping service which some Federal Reserve banks perform at great expense and considerable risk is ultra vires and the question of ultra vires should not be raised in one case and disregarded in another. There is legal authority for receipt of such funds from member banks but not from nonmember banks. In no case should such deposits be received except under special contract with the member bank containing such provisions as reasonably will insure the Federal Reserve bank against the contingency of loss. X-9709-c Sec. 15 FRA-2 SYH0PSI3 Of VIEv.S OF fEDERAi, RESERVE BAi^S REGARDING ACCEPTANCE OF DivliiVESTED TRUST PUuDS FROri MEMBER BANKS Should or should not Federal Reserve banxs accept trust funds on deposit? ' Is there legal authority for the acceptance nf such funds from member banks? BOSTON Unwise to do so. MEV< YORK Not advisable (apparently). PHILADELPHIA Only when emergency Ample legal authority. or temporary conditions No legal authority. make such action desirable. Should not do so chief-rb legal authority. Jo legal authority, ly because of legal considerations. CLEVELAND Is there legal authority for the acceptance of such funds from nonmember banks? Is it desirable that transfers between the reserve account and the trust account be permitted? lio legal authority. No legal authority. One account sufficient. Doubtful but proba- iio legal authority, bly no legal authority. Little risk in taking only one acc't but might be necessary to take separate acc'ts in N. Y. Separate accounts inadvisable. Credits to reserve ac- No general desire. count from trust account inadvisable. Has been suggested by only one or two member banks. Not desirable. Apparently no general desire. One account sufficient. Not desirable. Apparently little desire, Legally authorized. No legal authority. One account sufficient. Not desirable. Only one inquiry severe! years ago. Separate acc'ts for each trust. Some risk in ono acc't but practical burdens if separate acc'ts ree'd. Ono account sufficient. ATLANTA Wot desirable (apparently). Inadvisable. CHICAGO Should not accept. Legal authority tio legal authority, exists. No legal authority. No legal authority. Unwise to do so. Legally authorized. No legal authority. RICHMOND ST. LOUIS \ Is there any desire on the part of member banks for this service? If accepted, is one account from each member banic sufficient or should there be separate accounts for each trust? No undue risk so long as transactions confined to transfers to and from reserve accounts. a -z- SYNOPSIS OF VIEWS OF FEDERAL RESERVE Biu^S REGARDING ACCEPTANCE OF UNINVESTED TRUST FUJDS FROM MEMBER BAi^KS Should or should not Federal Reserve banks accept trust funds on deposit? Is there legal authority for the acceptance of such funds from member banks? MINNEAPOLIS Undesirable. KANSAS CITY Undesirable. Requisite legal No legal authority. authority. No legal authority. DALLAS F.R.banks should be free to accept such deposits as and when warranted. Requisite legal authority. SAN FRANCISCO Should be oermitted. Requisite legal authority. Is there legal authority for the acceptance of such funds from nonmember banks? X-9709-c Sec. 13 FRA-2 If accepted, is cne~ac count from each member bank sufficient or should there be separate accounts for each trust? Is it desirable that transfers between the reserve account and the trust account be oermitted? Is there any desire on the part of member banks for this service? Not desirable. Apparently little desire. Should not be permitted. No need for the service. No legal authority. Separate accounts for each trust. Separate accounts for each trust. One account sufficient. No legal authority. One account sufficient. Desirable. Apparently some desire but extent not indicated. 00
@FedFRASER