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191 FEDERAL RESERVE BOARD WASHINGTON ADDRESS OFFICIAL CORRESPONDENCE TO THE FEDERAL RESERVE BOARD X-7107 March 4, 1932. SUBJECT: Right of n a t i o n a l Banks to s e l l Municipal Warrants with t h e i r Indorsement. Dear S i r : There a r e inclosed f o r your information copies of l e t t e r s on the above s u b j e c t addressed t o the Board "by Governor Young on February 20, 1932, to the Comptroller of the Currency by the Board on February 29, 1932 and to the Board by the Comptroller of t h e Currency on March 1, 1932. The p o s i t i o n taken i n the l a s t paragraph of the Board's l e t t e r of February 18, 1932, t o Governor Geery (X-7097-a), was based upon informal advice from title o f f i c e of the Comptroller of the Currency and should be considered to be modified by the advice contained i n the Comptroller's l e t t e r of March 1, 1932, i n so f a x as the two a r e i n c o n f l i c t . Very t r u l y yours, Chester M o r r i l l , Secretary. Inclosures. TO GOVERNORS OF ALL F. E. BAMS EXCEPT BOSTON. X-7107-a 198 COPY FEDERAL RESERVE BANK OF BOSTON February 20, 1932. Mr. Chester M o r r i l l Secretary Federal Reserve Board Washington, D. C. Dear Mr. M o r r i l l This w i l l acknowledge r e c e i p t of your l e t t e r s of February 18, 1932, Nos. X-7097 and X-7097-a, i n r e f e r e n c e t o Federal Reserve Banks purchasing municipal w a r r a n t s . The l a s t paragraph of your l e t t e r t o Governor Geery, No. X-7097-a, reads as follows "Your a t t e n t i o n i s i n v i t e d to the f a c t , however, t h a t , under the p r o v i s i o n s of Section 5136 of the Revised S t a t u t e s , a n a t i o n a l bank i s permitted to s e l l i n v e s t ment s e c u r i t i e s only 'without r e c o u r s e ' and, t h e r e f o r e , may not s e l l warrants of m u n i c i p a l i t i e s with i t s i n d o r s e ment ". Are we t o assume from t h i s t h a t the Comptroller of the Currency and the Federal Reserve Board are c l a s s i f y i n g a s i x months note of a m u n i c i p a l i t y i s s u e d i n a n t i c i p a t i o n of the c o l l e c t i o n of taxes and conforming to a l l the r e g u l a t i o n s of t h e Federal Reserve Board i n r e f e r e n c e to such a note to be an investment s e c u r i t y ? I t appears t o us t h a t t h i s i s a s e l f l i q u i d a t i n g loan and should not by any p o s s i b l e l i n e of reasoning be c l a s s i f i e d as an investment s e c u r i t y . In any event, we have always cons i d e r e d such an o b l i g a t i o n a loan and not an investment s e c u r i t y and we a r e prompted to i n q u i r e i f the paragraph quoted i s i n accord with t h e regulations and i n s t r u c t i o n s of t h e Comptroller. Very t r u l y yours, (Signed) R. A. Young R. A. Young Governor X-7107-b i 193 COPY February 29, 1932. Honorable J . W. P o l e , Comptroller of t h e Currency, Washington, D. C. Dear Mr. Pole : The Federal Reserve Board r e c e n t l y addressed a l e t t e r to one of the Federal r e s e r v e banks which contained a statement t h a t a n a t i o n a l bank i s permitted to s e l l investment s e c u r i t i e s only "without r e c o u r s e " and, t h e r e f o r e , may not s e l l warrants of munic i p a l i t i e s with i t s indorsement. A copy of t h i s l e t t e r was sent by the Board to t h e Governors of a l l Federal r e s e r v e banks, and the Board has now received a l e t t e r from Governor Young of the Federal Reserve Bank of Boston i n q u i r i n g whether t h i s statement i s i n accord with the r e g u l a t i o n s and i n s t r u c t i o n s of t h e Comptroller of t h e Currency. I n order t h a t the Board may make a proper r e p l y to Governor Young's i n q u i r y , i t w i l l be a p p r e c i a t e d i f you w i l l advise as t o the p o s i t i o n of your o f f i c e on t h i s p o i n t . Copies of the l e t t e r s r e - f e r r e d to a r e i n c l o s e d herewith f o r your i n f o r m a t i o n . Very t r u l y y o u r s , (Signed) Chester M o r r i l l Chester M o r r i l l , Secretary. Inclosures. X-7107-rf 1.94 OOPY TREASURY DEPARTMENT WASHINGTON March 1, 1932. Federal Reserve Board, Washington, D. C. Gentlemen: I have a l e t t e r from your Secretary under d a t e of February 29, enclosing copies of a l e t t e r addressed t o the Governors of t h e Federal Reserve Banks and a l e t t e r from Governor Young with r e s p e c t t h e r e t o . The i n f o r m a t i o n d e s i r e d i s t h e p o s i t i o n of t h i s o f f i c e with r e s p e c t to whether a n a t i o n a l "bank i s permitted to s e l l warrants of m u n i c i p a l i t i e s w i t h i t s endorsements. This o f f i c e holds t h a t t h e discounting or n e g o t i a t i n g of promissory n o t e s , d r a f t s , "bills of exchange and other evidences of debt by a n a t i o n a l bank must e i t h e r i n volve t h e g r a n t i n g of a loan or t h e purchase of an investment s e c u r i t y . The circumstances surrounding each t r a n s a c t i o n must determine whether i t r e s u l t s i n t h e making of a loan s u b j e c t to a l l the p r o v i s i o n s of t h e law with r e s p e c t to loans or the making of an investment which must conform t o t h e requirements of Section 5136, U . S . R . S . , as amended, and t o the r e g u l a t i o n s of the Comptroller i n connection t h e r e w i t h . I f , t h e r e f o r e , a bank holds an o b l i g a t i o n of a m u n i c i p a l i t y r e p r e s e n t i n g an advance of funds made d i r e c t l y to the m u n i c i p a l i t y , the t r a n s a c t i o n would appear to be a loan and not an investment, and would not be s u b j e c t t o the p r o v i s i o n s of Section 5136., U . S . R . S . , which r e q u i r e s purchase and s a l e "without r e c o u r s e " . I t i s a l s o held t h a t t h e i n t e n t of t h e law p l a c e s municipal loans on t h e same b a s i s as other government l o a n s . Governments a r e not h e l d t o be c o r p o r a t i o n s w i t h i n the meaning of Section 5200, U.S. R . S . , and i n consequence loans t h e r e t o a r e not s u b j e c t t o t h e l i m i t p r e s c r i b e d by t h i s s e c t i o n . Very t r u l y y o u r s , (Signed) J . W. Pole J . W. POLE, Comptroller,
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