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X-6636 June 27, 1930. Federal Reserve Board ? 634 Amendments to Regulation J Recommended by the Conference of Counsel# Mr. Wyatt - General Counsel, On June 17th I submitted to the Board for its information a copy of the Minutes of the Conference of Counsel of all Federal reserve hanks held in Washington on June 9th and 10th, which recommended that the Board adopt certain amendments to Regulation J for the purpose of clarify* lng the rights, duties and responsibilities of all parties to the collection of checks through Federal reserve banks and for the purpose of protect* ing Federal reserve banks against unwarranted liabilities which might otherwise result from the recent decision of the Supreme Court of the United States in the case of Thomas A. Early, Receiver, v. Federal Reserve Bank of Richmond. I now respectfully submit herewith a letter addressed to the Board by Honorable Hew ton D. Baker recommending that the Board adopt these proposed amendments to Regulation J, with certain slight changes in punctuation and phraseology, at the earliest possible date. RECOMMENDATIONS I respectfully recommend: 1. That the attached amendments to Regulation J, as recommended by the Conference of Counsel, with certain changes in phraseology and punctuation suggested by Honorable Newton D. Baker and myself, be adopted 1)y the Board at the earliest possible date and be made effective thirty days after their adoption; 2. That, if the Board is unwilling to adopt these amendments without further consultation with the Federal reserve banks, the attached draft of the amendments with the changes in phraseology recommended by Mr. Baker and myself, be transmitted to all Federal reserve banks immediately with a request that they advise the Board of their views thereon at the earliest possible moment; 3. That, if the replies received from the Federal reserve banks disclose no important differences of opinion, the Board immediately adopt the proposed amendments without awaiting the action of a Conference of Governors on this subject; and 4. That the Board immediately request Governor Calkins to request the Standing Committee on Collections, with the assistance of the undersigned and a committee of Counsel of the Federal reserve banks, to proceed immediately to prepare a revision of the uniform provisions of the check collection circulars of the Federal reserve banks, in order that the new check collection circulars may be adopted, printed and distributed within thirty days after the Board adopts the proposed amendments to Regulation J* •• 2 •* X-6636 , 635 With all of the Federal reserve "banks represented "by one or more Counsel and. with four, members of the Standing Committee on Collections present and participating in the discussion, the Conference recommended these amendments to Regulation J with only one dissenting vote* that of Mr. M. G. Wallace, Counsel to tho Federal Reserve Bank of Richmond, who explained that ho was acting in accordance witia definite instructions from the officers of his bank* However, several of the counsel requested that they be placed on record as opposing in principle certain of the amendments, although they voted for the recommendation as a whole for the sake of uniformity# These statements, which were dictated to a stenographer during the meeting and carefully chocked by the persons making them, were incorporated in the Minuses of the Conference, a copy of which is attached hereto for the Board's information* The Conference voted to recommend the proposed amendnonts to Regulation J in the form set forth in the attached copy of the Minutes of the Conference, with the understanding that Honorable Newton D. Baker and the undersigned should be at liberty to make such changes in the punctuation and phraseology of the amendments as might bo deemed advisable but without making any changes in the substance of the amendments. It will also be necessary for the check collection circulars of the Federal reserve banks to be revised so as to conform to the amended regulation; and the Conference adopted a resolution requesting the Chair* man of the Governors' Conference to instruct the Standing Committee oh Collections to prepare a revised draft of the uniform provisions of the check collection circulars with the assistance of a committee consisting of the undersigned and Counsel for several of the Federal reserve banks as soon as possible. Honorable Newton D. Baker, who had been retained by the Board for the purpose of giving the Boardtitobenefit of his views as to any amendments to Regulation J which might be recommended by the Conference of Counsel, was Unable to reach Washington until after the Conference was over; but, prior to the Conference, ho studied all letters and memoranda which had beon written on this subject was fully acquainted with the problems before tho Conference and with the views with respect to these problems which had been expressed by this office and by Counsel to the various Federal reserve banks. On Wednesday, Jtiae ll, Mr. Baker and I, together with Counsel for a number of the Federal reserve banks, carefully examined the proposed amendments to Regulation J recommended by the Conference and agreed upon certain changes intiiephraseology of the amendments which would clarify and improve the form of the amendments, but would make no changes in the substance thereof* VIBES OF MR. BAKZR M P MR. WYATft. After consultation and after very careful consideration of the proposed amendments to Regulation J recommended by the Conference of Counsel, Mfr. Baker and I are of the opinion that these proposed amendments (with our — 3 — X-6W6 636 suggested changes in phraseology) aro entirely cdfiBistent with the method of collecting checks heretofore authorized by tho Board in its Regulation J; that they more clearly define the rights, duties and responsibilities of all parties to the collection of checks through the Federal reserve banks then the existing regulations; thay they aro a distinct improvement over the existing regulations; that the regulation as so amended would afford to the Federal reserve banks much greater protection against unwarranted liabilities resulting from the recent decision of tho Supreme Court in the Early Case; and that they would greatly reduce the chances of litigation which otherwise might result from the decision of the Supreme Court in the Early Case* Mr. Baker and I, therefore, are of the opinion that it is very important to the Federal Reserve System that Regulation J and the check collection circulars of the Federal reserve banks be amended at the earliest possible date in accordance with the recommendations made by the Conference of Counsel but with the changes in phraseology which we have agreed upon. TEXT mr vRAensim The proposed amendments to Regulation J in the form recommended by the Conference of Counsel are set forth in the Minutes of the Conference of Counsel, a cot>y of which is attached hereto. With the slight changes in phraseology suggested by Mr. Baker and myself, which did not change the substance of the proposed amendments and are in no way inconsistent with the amendments recommended by the Conference of Counsel, these proposed amendingnts are as follows: "SECfrlOKIII "That paragraph 1 of Section III be amended by changing the words "acceptable to the Federal Reserve Bank of the District in which such nonmember banks aro located* to read 'acceptable to the collecting Federal reserve bank.' "That paragraph 3 of Section III be amended by changing the words 'acceptable to tho Federal Reserve Bank of the District in which such nonmember bank is located' to read 'acceptable to the collecting Federal reserve bank'* I'SECKOH IV. "That paragraph 2 of Section IV bo amended by changing the period at the end thereof to a comma and by adding the following words:. " 'provided, however, that the Federal reserve bank may in its discretion refuse at any time to permit the withdrawal or other use of credit given for any item for which the Federal reserve bank has not yet received payment in - 4 "actually said Hnally collected- fBB&s.1 "That paragraph 3 of Section IV be amended "by changing the period at the end thereof to a comma endtoyadding the following words: " 'provided, however, that the Federal reserve tank may in its discretion refuse at any time to permit the withdrawal or other use of credit given for any item for which the Federal reserve "bank has not yet received jpayment in actually and finally collected funds. "SECTION1 V. • "That Section V be amended to read as follows: ' "'SECTION Vw TEBMS OF COLLECTION. "'The Federal Reserve Board hereby authorizes the Federal reserve banks to handle such checks subject to the following terms aqd conditions; and each member and nonmember clearing bank which sends checks to any Federal reserve bank for deposit or collection shall by such action bo deemed (a) to authorize the Federal reserve banks to handle such chocks subject to the following terms and conditions, (b) to warrant its own authority to give the Federal reserve banks such authority, and (c) to agree to indemnify any Federal reserve bank for any loss resulting from the failure of such sending bank to have such authority. "1 (l) A Federal reserve bank will act only as agent of the bank from which it receives such chocks and will assume no liability except for its own negligence and its guaranty of prior indorsements.' " 1 (2) A Federal reserve bank may present such checks for payment or send such checks for collection direct to the bank on which they are drawn or at which they are payable, or in its discretion may forward them to another agent with author!ty to present thfm for payment or send them for collection direct to the bank on which they are drawn or at which they are $a yable., (3) A Federal reserve bank may, in its discretion and at its option, either directly or through or from an agent, accept in payment of or in remittance for such chocks, cash, bank drafts, transfers of funds or bank credits, or other forme of payment or rend, ttanco, acceptable to the collecting Federal - 5 X-6636 reserve bank* The Federal reserv# W n k shall not he liable for the failure of the drawee bank or any agent to pay or remit for such checks, nor for any loss resulting from the acceptance from the drawee bank or any collecting agent, in lieu of cash, of any other form of payment or remittance authorized herein, nor for the nonpayment of, or failure to realize upon, any bank draft or other medium of payment or remittance which may be accepted from the drawee bank or any collecting agent. "1(4) Checks received by a Federal reserve bank which are payable in its own district will ordinarily be forwarded or presented direct to the banks on which they are drawn, arid such banks will be required to remit or pay. therefor at par in such one or more of the forms of payment or remittance authorized under paragraph (3) hereof as may bo acceptable to the Federal reserve bank. 111 (5) Checks received by a Federal reserve bank payable in other districts will ordinarily be forwarded for collection to the Federal reserve batik of the district in which such checks are payable; provided, however, that, where arrangements c6n be made satisfactory to tho collecting bank or agent and to the Federal reserve batik of the district in which such checks are payable, any such checks may be forwarded for collection direct to tho bank on which they are drawn or at which they are payable, or may bo forwarded for collection to another agent with authority to present them for payment direct to the bank on which they are drawn or at which they are payable. 43.1 such checks shall be handled subject to all the terms and conditions of this Regulation. "'(6) Bank drafts received by a Federal reserve bank in payment of or iri remittance for checks handled under the terms of this regulation shall likewise be handled for collection subject to all the terms and conditions of this regulation. 111 (?) The amount of any check for which payment in actually and finally collected funds is not received shall be charged back to the forwarding bank, regardless of whether or not the check itself can be returned. In such event, neither the owner or holder of any such check, nor the bank which sent such check to the Federal reserve bank for collection shall have any right of recourse upon, interest in, or right of payment from, any reserve balance* clearing account, 638 X-6636 6 3 deposit account, or other such fund of the drawee hank or of any hank to which such checks have been sent for collection, in the possession of the.Federal reserve hank. Ho draft, authorization to charge, or other order, upon any reserve balance, clearing account, deposit account, or other such funds of a paying, remitting, or collecting hank in the possession of a Federal reserve bank, issued for the purpose of settling items handled under the terms of this Regulation will be paid, acted upon, or honored after receipt by such Federal reserve bank of notice of suspension or closing*of such paying, remitting, or collecting bank./" There is also submitted as a separate document a print showing the exact textual changes which would be made in the regulation by the proposed amendments and also the changes in phraseology made by Mr. Baker and the undersigned. EXPLANATION OF PROPOSE Sec. III. The proposed amendments to paragraphs 1 and 3 of Section III make no important changes in the regulation, but merely change the phraseology thereof so as to conform to another proposed amendment designed to permit Federal reserve banks to send checks for collection direct to banks in another district, in accordance with recommendations of the Governors' Conference and the Standing Committee on Collections which will t&reafter be explained. Sec. IT. The proposed amendments to paragraphs 2 and 3 of Section IV were suggested by Mr. Walter S." Logan, Counsel to the Federal Reserve Bank of Hew York, and are designed to make clear the right of a Federal reserve bank to refuse to permit the withdrawal or ether use of credit given for any item for which a Federal reserve bank has not received payment in actually and finally collected funds. Under the terms of Section IV of Regulation J, immediate credit is given for certain checks and credit is given for all other checks at the expiration of the time stated in the time schedule, regardless of whether or not the checks have actually been collected. Under the terms of the regulation the credit thus given is subject to final payment, and the Federal reserve bank clearly has the right to charge the checks back to the member bank if final payment is not received. If tho member batik draws out its reserve balance and fails before final payment is received on such checks, however, tho Fodoral reserve bank probably would be uarable to collect the checks and there would be no reserve balance to which they could be charged. In the case of banks in an extended condition,. therefore, it is important that the Federal reserve bank have the right to refuse to permit the withdrawal of credit given for checks which have not finally been collected; and, in order to prevent "kiting", it may be important for the Federal reserve banks to have this right as to perfectly solvent member banks. g • 64:0 - 7- 1-6636 I understand that the Federal reserve banks have assumed that they have this right and have exercised it whenever the occasion seemed to warrant it; "but the view was expressed that their right to refuse to permit member tanks to draw against uncollected funds might sometimes be challenged, in view of the present language of the regulations to the effect that credit.given in the reserve account, subject to final payment, will be "counted as reserve and become available for withdrawal or other use by the sending bank." I understand that, if this amendment is adopted, the Federal reserve banks do not intend to make any change in their present practice; buttiieydesire this amendment in order that there may be no doubt of their right to continue their present practice. The practice of reserving the right to refuse to honor checks drawn against uncollected funds is in accordance with commercial banking practice, and I know of no reason why the Federal reserve banks should not reserve such right. Section V of Regulation J, which deals with "Terms of Collection", consists of an introductory paragraph which is not numbered and six paragraphs numbered from 1 to 6 inclusive. The Conference recommended no changes whatever in the introductory paragraph and in paragraphs numbered 1 and 2. These paragraphs, as set forth in the attached resolution, therefore, are exactly the same as the corresponding paragraphs of the existing regulation. Paragraph 3 - The Conference recommended that paragraph 3 of Section V of Regulation J be amended as follows, the letters in ordinary type indicating the present language of the regulation, the canceled words being stricken from the present regulation, and the words in capital letters being inserted: "(3) A Federal reserve bank may, in its discretion and at its option, either directly or through OR FROM an agent, accept either sash ear bank drafts in payment of or in remittance for such checks, CASH, B A H DRAFTS, TRANSFERS OF FOOTS OR BANK CREDITS, QR OTHER FORMS OF PAYMENT OR REMITTANCE, ACCEPTABLE TO THE COLLECTm FEDERAL RESERVE BAM. THE FEDERAL RESERVE BAKE shall not be held liable FOR THE FAILURE OF THE DRAWEE BASK OR ANY AGENT TO PAY OR REMIT FOR SUCH CHECKS,- NOB for any loss resulting from the acceptance e# bank drafts FROM THE DRAWEE BANK OB ANY COLLECTING AGENT, in lieu of cash, OF ANY OTHER FORM OF PAYMENT QR REMITTANCE AUTHORIZED HEREIN, aear fee -the failuee ef the daraweevbaak eg any agent te remit fer sueh eheeks, nor for the nonpayment of, QR FAILURE TO REALIZE UPON any bank, draft aeeepted is payment &£ as a OR OTHER MEDIUM OF PAYMENT OR remittance WHICH MAY BE ACCEPTED IROM the drawee bank or any COLLE CTIlto agent." i 641 X-6636 The principal changes proposed to be made in the substance of this paragraph are as follows; Whereas paragraph 3 of the present regulation in term# authorizes the Federal reserve bank to accept Only cash or bank drafts in remittance for checks forwarded for collection, it is proposed to have the new regulation authorize the acceptance of such other forme of payment or remittance as are customarily accepted by Federal reserve banks, and very broad language is used for this purpose. It is not contemplated that this amendment will result in any change in the present practices of the Federal reserve banks, but it is intended clearly to authorize the continuation of the present practices. In addition to cash and bank drafts, the Federal reserve banks accept informal authorizations to charge the amount of such checks to the reserve account of the drawee bank, telegraphic transfers of bank funds and in some instances an authorisation to charge the amount of such checks to the reserve account of a bank other than the drawee bank. The purpose of the amendment, therefore, Is singly to broaden the language so as to cover all forms of remittance customarily accepted by the Federal reserve banks. While the language might seem quite broad, I see no objection to it, because the Federal reserve banks, for their own protection, would insist upon the best form of remittance that thoy can possibly get. Par. 4. j The proposed changes in paragraph 4 are as follows: "(5) Checks received by a Federal reserve , bank en its member er aeaaeaber clearing banks WHICH ABE PAYABlJS III ITS O W DISTRICT will ordinarily be forwarded or presented direct to eueh THE banks, - OH WHICH THE! ABE DRAWN, and such banks will be required to remit or pay therefor at par in eaeh er tank draft SUCH OHB OR MOBEOF THE FORMS OF PAYMBTT COS EEMITTANCE AUTHORIZED ORDER PARAGBAPH(3.) HEREOF AS MAY BE acceptable to the eelleetiag Federal reserve bank? er a* the eptien e# suck Federal reserve beak te authorise saeh federal reserve baak te eharge their reserve aeeeasts er eleartag aeeeunta. The principal change in paragraph 4 is the elimination therefrom of the specific mention of the form of payment of remittance which will be expected from the drawee bank and the substitution therefor of a general statement to the effect that the drawee banks will be required to pay for such chocks at par "in such one or more of the forms of paymont or remittance authorized under paragraph 3 hereof as may be acceptable to the Federal reserve bank." Having specified in paragraph 3 all of the forms of romi ttance customarily received by Federal reserve banks, it was deemed unnecessary to repeat the specific mention of these various forms of remittance in paragraph 4, and it was thought better merely to refer to paragraph 3. ! 642 X-6636 Theire is one other change proposed to be made in paragraph 4 which I think I should call specially to the Board's attention. . In the existing regulation, this paragraph is limited to checks received , "by the Federal reserve tank on its member or nnnmamhAr clearing banks, and the paragraph contains a requirement that such banks rami*, at par for the checks sent to them.- Because this paragraph also states the forms of remittance which id 11 be expected by the Federal reserve banks from all banks to which such checks arc sent for collection, including par remitting nonmember banks which maintain no clearing account, .the Conference ftilt that it should not be limitod to member tanks and nonmember clearing banks* Heretofore it has been limited to member banks and nonmember clearing banks; because it contains a requirement that such banks remit at par, and the Federal Reserve Board has no right to require nonmember banks to remit at par* In practice, however, the only checks which are forwarded direct to nonmember banks are ' checks on those which voluntarily agree to remit at par; and there- . fore, it would seem appropriate for this paragraph to apply to nonmember banks as well as to member banks and nonmember clearing banks* By making the paragraph containing a requirement that they remit at par apply to nonmember banks, it might be contended that the Federal Reserve Board is again attempting to enforce par clearance on nonmember banks which are unwilling to remit at par; but this contention would be absurd in view of tho provisions of Section III of Regulation J, which clearly forbid the Federal reserve banks to receive on deposit or for collection any check on any nonmember bank which cannot be collected at par. The classes of checks which can be received for collection are specified by Section III of the Regulation; and Section V deals only with the tenns governing the collection of such checks. I therefore, fool that there is no objection to the proposed amendment to paragraph 4. Paragraph 5. as follows: •' Tho proposed change in paragraph 5 recommended is "(5) Chocks received by a Federal reserve bonk payable in other districts will ORDINARILY be forwarded for collection upQa-%ke-*ea?ma-aa&~eeHdi%ieaB-ke?eira-jp3?evided-to the Federal reserve bank of the district in which such checks are payable* PROVIDED, HOWEVER, THM&WHERE ARRANGEMENTS CAN BE MA Tim SATISFACTORY TO THE COLLECTING BANK OR AGENT AND TO THE FEDERAL RESERVE BANK OF: THE DISTRICT IN WHICH SUCH CHECKS ARE PAYABLE, ANY SUCH CHECKS MAY BE FORWARDED FOR COLLECTION DIRECT TO THE ON WHICH THEY ARE DRAWN OR AT WHICH THEY ARE PAYABLE, OR MAY BE FORWARDED FOR COLLECTION TO AN01HEZR AGENT WITH AUTHORITY TO PR3SENT THEM FOR PAYMENT DIRECT TO THE BANK ON WHICH THEY ARE DRAWN AT WHICH THBY ARE PAYABLE. ALL SUCH CHECKS SHALL BE • HANBIiTO SUBJECT TO ALL THE TERMS AND CONDITIONS OF THIS REGULATION." "10 - X~6§36 0 ^ 3 The .only purpose of the proposed changes in this, paragraph is to enable the Federal reserve banks to forward chocks for collection direct to drawee banks in other districts, in order to expedite the collection of such checks when satisfactory arrangements calx be made with the Federal Reserve bank of the district in which such checks are payable and with • the drawee banks or with the banks to which such checks are forwarded for collection. It will be remembered that the Standing Comnittee on Collections had recommended to the Governors' Conference that Federal reserve banks be authorized at their discretion to conduct an experiment along this line, by sending checks for collection direct to drawee badks located in the principal cities in States adjoining their districts, when appropriate arrangements could be made with the drawee banks and Federal reserve banks of the other district, provided that I was of the opinion that such practice would be legal. I advised the Board that such practice would not violate the law, provided that no checks received from other Federal reserve banks were handled in this way, but that Regulation J prohibits such practice, because it requires all Federal reserve banks receiving checks payable in other districts to forward them to the Federal reserve banks of the district in which they are payable. The Board advised the Federal reserve banks of my opinion in a letter addressed to them under date of October 31, 1929 (X-6405); and the Governors1 Conference requested the Standing Committee on Collections to prepare a proposed amendment to Regulation J for this purpose. Dae above quoted amendment is substantially the same as the one drafted by the Standing Committee on Collections, pursuant to this request of the Governors' Conference; and I know of no reason why it should not be adopted.' Paragraph 6. The proposed paragraph 6 is entirely new and is intended to enable the Federal reserve banks to handle the bank drafts which they receive in remittance for checks handled under the terms of Regulation J without having to present such bank drafts over the counter and insist upon payment in cash in Accordance with the old common law rules. In nqr opinion, this is entirely consistent with the other provisions of Regulation J and is justified by the fact that it is practically impossible for Federal reserve banks always to obtain remittances in the form of cash or drafts on the reserve account and, therefore, they must frequently accept bank drafts drawn on other banks. Wherever possible, they insist upon drafts drawn upon other banks located in the city of the collecting Federal reserve bank, so that they can be collected on the day on which they are received; but, even in such cases, such drafts usually are not presented across the countor and collected in cash, but are collocted through the local clearing houses or through some clearing house arrangement entered into by the Fedr* era! reserve bank with the banks located in the Federal reserve city. It is not always possible to obtain drafts drown on banks located in the city of the collecting Federal reserve banks; and, when drafts are received on banks outside of such cities, it is necessary for the Federal Reserve bank to forward them through the mails for colloction. In all such instances it is vitally important that the Federal reserve banks have the right to - 11 - X-66?6 0 4 4 handle such bank drafts ex&qtly in the same way that they handle other checks for collection. I, therefore, proposed this amendment myself and have no doubt that its adaption is thoroughly justified. follows: Paragraph 7. The urdposed amendment to paragraph 7 is as "(7) The amount of any check for which payment in actually and finally collected funds is not received shall "be charged t?aak to the forwarding "bank, regardless of whether or not the check itself can be returned. IN SUCH EVENT, NEITHER raE OWUM OE HOLDER OF M Y SUCH CHECK^ NOH THE BANK WHICH SENT SUCH CHECK TO THE FEDERAL RESERVE B A H 70S COLLECTION SHALL HAVE ANY RIGHT OF RECOURSE UPON, INTEREST IN, OR RIGHT OF PAYMENT JBOM, ANT RESERVE BALANCE, CLEARING ACCOUNT, Qg DEPOSIT ACCOUNT* Oft OTHER SUCH POND OP THE DRAWEE B A H OR OP ANT BANK TOtiHICH SUCH CHECKS HAVE BEEN SENT FOR COLLECTION, II THE POSSESSION OP THE F2&ERAL RESERVE. BANK. NO DRAFT, AUTHORIZATION TO CHARGE., OR OTHER ORDER UPON ANY RESERVE BALANCE. ACCOUNT. DEPOSIT ACCOUNT. OS OTH&R SUCH JUNDS OF A PAYING, REMII* TINGj. OR COLLECTING BANK IN THE POSSESSION OF A FEDERAL RESERVE BANK,. ISSUED FOR TfiE PURPOSE 07 SETTLING ITEMS HANDLED UNDER THE TERMS OF THIS . REGULATION WILL BE PAID, ACTED UPON,. OR HONORED AFTER SUCH FEDERAL RESERVE BANK OF NOTICE OF SUSPENSION OR CLOSING OP SUCH PAYING, REMITTING* OR COLLECTING BANK." This is the most important amendment recommended by the Conferehce. of Counsel, and is intended to clarify the rights, duties and responr sibilities of all parties to the collection of the checks through Federal reserve banks and to protect the Federal reserve banks against the assumption of unwarranted liabilities as a result of the decision of the Supreme Court of the United States in the Early Case. The first sentence of this paragraph is the same as paragraph 6 of the present regulation. It has been in the regulation ever since 1924, and no change is proposed to be made in it. The second sentence of this paragraph is similar to the proposed amendment recommended by the Conference of Counsel in April, 1929, but omits the reference to collateral and other property of the drawee bank in the possession of the Federal reserve bank which gave rise to •the difference of opinion amongst tho eight counsel voting for that recommendation last year and gave rise to tho question raised by Governor Harding in his letter of October 19, 1929, In other words, it is now proposed that this sentence refer only to any reserve balance, clearing account, deposit account or other such fund of the drawee bank, or of any bank to which such checks have been sent for collection, and that it makes no reference to collateral or other property of such other banks in the possession of the Federal reserve bank. Whereas, last year the corresponding amendment to Regulation J was voted for by only 8 of the 12 counsel and they were divided on its interpretation by a vote of 5 to 3j this year the representatives for all of the Federal reserve banks * ., , . - 12 - • except Richmond voted for it in this modified form. X-6636 i 645 3his sentence is also modified so as to conform to the suggestion made "by Deputy Governor Blair of the Federal Reserve Bank of Chicago in his letter of October 22, 1925, - i.e., so as to apply to drafts or other orders upon the reserve accounts of tanks to which chocks are sent for collection as well %s to drafts or orders upon the reserve account of the drawee hank. I originally opposed this suggestion; but, upon further reflection, I believe it is wise to adopt it. fho last sentence of this paragraph, which is entirely new, was proposed originally by Mr. Agnew, Counsel to the Federal Reserve Bank of San BVancisco, and is intended definitely to prohibittiippractice engaged in by the Federal Reserve Bank of Richmond, which gave rise to the Early Case and resulted in a decision extremely dangerous to all of the Federal reserve banks. The proposed amendment is in accordance with the generally accepted view that, upon the appointment of a receiver for a bank, the rights of a H parties become fixed and no action can be taken thereafter changing or affecting the rights of any parties having dealings with the insolvent bank* This view is very strongly maintained by the Office of the Comptroller of the Currency, and a failure to accept it must necessarily result in further litigation. Regardless of whether wish drafts or orders may lawfully be charged to the reserve account of a member bank after the appointment of a receiver for such bank, it is my opinion, and obviously was the opinion of the majority of the counsel, that the Federal reserve banks have a right by contract to stipulate that no such driaft, authorization to charge, or other order will be executed or charged to the reserve ao* count after receipt of notice of suspension or closing of the bank issuing such order and that, where this is clearly understood in advance, no injustice results. Section V of Regulation J defines the terms upon which Federal reserve banks will collect checks, and all banks which send checks to Federal reserve banks for collection agree to those terms* In my opinion, it is perfectly competent and entirely proper for them to agree that no draft, authorization to charge or other order upon funds of a paying, remitting or collecting bank in the possession of a Federal reserve bank, issued for |he purpose of settling items handled under the terms of this regulation, will be paid, acted upon or honored after receipt by such Federal reserve bank of notice of suspension or doming of such paying, remitting or collecting bank; and I believe that it is important to include this provision in the regulation, so that there will be a clear understands ing on this point and litigation which otherwise would arise will be avoided. I T O P R m T I O K OF UNIFORM POLICY. The Conference discussed the advisability of adopting some further resolution regarding the interpretation of the uniform policy recommended by the Conference of Counsel and adopted by tho Conference of Vfc'>f.; - 13 - X-6636 646 Governors in April, 1929, but took no formal action thoroon, "because it "believed that the uniform policy previously adopted, together with the vote taken "by the Governors' Conference at its meeting in December, 1929, completely covered the subject, especially since it is now proposed to eliminate from tho amended regulations all reference to collateral. It will be remembered that the uniform policy contained the following paragraph pertaining to collateral t "4. When a Federal reserve bank takes from one of its members collateral for the payment of indebtedness due to it bv such member. • such collateral Should be applicable only to the satisfaction and discharge of the obligations due to the reserve bank in its own right. It would be an unwise policy, in our opinion, to permit such collateral to be utilized in the liquidation or satisfaction of debts payable to the Federal reserve bank as a collection agent." The amendment then proposed to paragraph 6 of the Regulation provided, in part, that: "In such event, neither the owner or holder of any such check, nor the bank which sent such check to the Federal reserve bank for collection, shall have any : right of recourse upon, interest in, or right of pay-» ment from, any fund, reserve, collateral, or other property of the drawee bank in the possession of the Federal reserve bank#" In a letter addressed to Governor Young under date of October 19, 1929, Governor Harding raised the question whether the uniform policy and the amendment to the regulation were intended to carry with them any implication that a Federal reserve bank may not make special arrangements with reference to collateral to insure the payment of checks in special cases. Opinions on this question were divided, and the subject was placed on the program for the next Governors* Conference. Op on consideration of this question, the Conference of Governors of all Federal reserve batiks, at its meeting in December, 1929, voted as follows: , "VOTED That the conference is in agreement with the uniform policy* approved by the Federal Reserve Board in its letter of October 16, 1929 (X-6389): that they are in favor of the amendment to Regulation J recommended by the majority of the Conference of Counsel; that they believe, however, it should be madef clear in the regulation that any Federal reserve bank desiring to do so, may take collateral in order to -protect itself only from liability as collecting agent." - 14 - X-663 ^ g4^ The amendments now proposed to the regulation omit any reference to collateral and, therefore, clearly conform to the views of the Conference of Governors on this subject. I concur in the view of the Conference of Counsel, therefore, that the uniform pqlicy, When read in con^ nection with the vote taken "by the Governors' Conference at its meeting in December, 1929, completely covers this subject and that no further interpretation of the uniform policy is necessary in view of the amendments now proposed to tho regulation. In other words, the Governors' Conference in December, 1929, clearly concurred in Governor Harding's views on this subject; and, by adopting an amended regulation which makes no reference to collateral, the Board will also concur in his view; so that no further clarification of this point is necessary. IMPORTANCE OF PROMPT ACTION. I respectfully invite tho Board's attention to the fact that these proposed amendments to Regulation J are designed to protect the Federal reserve banks against the possible dangers growing out of the decision of the Supreme Court in the case of Thomas A. Early, Receive** v. Federal Reserve Bank of Richmond, and that every day's delay in the final promulgation of those regulations may result in substantial financial loss to the Federal reserve banks. It is, therefore, very important that these amendments to Regulation J be made effective as soon as possible and that every effort be made to expedite their final promulgation. I, therefore, respectfully recommend that, unless the Board is willing to adopt these regulations without further consultation with the Federal reserve banks* the text of these proposed amendments be transmitted immediately to all Federal reserve banks with the request that each of them submit to the Board at the earliest possible date all criticisms and comments with reference thereto. If the replies received indicate no important differences of opinion, it would seem safe for the Board to promulgate the amended regulation and make it effective without awaiting formal consideration of a Conference of the Governors of the Federal re serve banks. On the other hand, if the replies received to this inquiry disclose in*portant differences of opinion, then the Board can consider the advisability of delaying the final promulgation of the regulations until they have been considered formally by the Conference of Governors. I believe that this procedure would be most likely to result in the promulgation of the regulation at the earliest possible date and at the same time afford sufficient safeguards against the adoption of a regulation which is not satisfactory to the great majority of the Federal reserve banks. Respectfully, Walter Wyatt, General Counsel. Papers attached WW SAD- C X-6636-a i I Textual changes which would be made in Regulation J of : Board's Regulations, Series of 1928, by amendments recommended by Conference ofi federal Reserve Bank Counsel held in June, 1930, and by additional changes recommended by Messrs. Baker and ffyatt. Present regulation is indicated by ordinary type. Matter proposed to be stricken out is indicated by canceled wording. Conference of Counsel recommendations are indicated by CAPITAL LETTERS. Additional changes recommended by Messrs. Baker and Wyatt are indicated by CAPITAL LETTERS and are UNDERLINED. SECTION III Paragraph 1 of Section III would be changed as follows: "(1) Each Federal reserve bank will receive at par from its member banks and from nonmember clearing banks in its district* checks drawn on all member and nonmember clearing banks, and checks drawn on all other nonmember banks which are collectible at par in funds acceptable to the COLLECTING Federal reserve bank* 0f-*he-dla*pie*-iB-w3aieh-B»eh-aeiMaeaT9er-%aake-a3Pe-leea%e4T" Paragraph 3 of Section III would be changed as follows: "(3) No Federal reserve bank shall receive on deposit or for collection any check drawn on any nonmember bank which can not be collected at par in funds acceptable to the COLLECTING Federal reserve bank ei-the-die-^riet-ta-whieh-Biaeh-RenmeafeeF-feaBk is-leeateA*" SECTION IV. Paragraph 2 of Section IV would be changed as follows: "(2.) For all such checks as are received for immediate crefit in accordance with such titte schedule, immediate credit, subject to final payment, will be given upon the books of the Federal reserve bank at full face value in the reserve account or clearing account upon day of receipt, and the proceeds will at once be counted as reserve and become available for withdrawal or other use by the sending heritor, PROVIDED, HOffSVBB, THAT THE FEW ERAL RESERVE BANK MAY IN ITS DISCRETION REFUSE AT ANY TIME TO mm % mm X"*6636>w& V 649 PERMIT THE WITHDRAWAL OR OTHER USE OF CREDIT GIVEN PC® ANY ITEM FOR WHICH THE FEDERAL RESERVE B A M HAS HOT YET RECEIVED PAYMENT IN ACTUALLY AND FINALLY COLLECTED StJNDS." Paragraph 3 of Section IV would "be changed, as follows: "(3) For all such checks as are received for deferred credit in accordance with such time schedule, deferred credit, subject to final payment, will be entered upon the books of the Federal reserve bank at full face value, but the proceeds will not be counted as reserve nor become available for withdrawal or other use by the sending bank until such time as may be specified in such time schedule, at which tirite credit will be transferred from the deferred account to the reserve account or clearing account subject to final payment and will then be counted as reserve and become available for withdrawal or other use by the sending bank,, PROVIDED, HOWEVER, THAT THE FEDERAL RESERVE B A H MAY IF ITS DISGBETiaer RETOSE AT ANY TIME TO PERMIT THE -WITHDRAWAL OR OTHER USE OF CREDIT GIVEN FOR ANY ITEM FOR WHICH THE FEDERAL RESERVE BANK HAS NOT YET RECEIVED PAYMENT IN ACTUALLY AND FINALLY COLLECTED FUNDS." SECTION V. This section would be amended to read as follows: "SECTION V. TERMS OF COLLECTION "The Federal Reserve Board hereby authorizes the Federal reserve banks to handle such checks subject to the following terms and conditions; and each member and nonmember clearing bank which sends Checks to any Federal reserve bank for deposit or collection shall by such action be deemed (a) to authorize the Federal reserve banks to handle such checks subject to the following terms and conditions, (b.) to warrant its own authority to give the Federal reserve banks such authority, and (c) to agree to indemnify any Federal reserve bank for any loss resulting from the failure of such sending bank to have such authority. "(1) A Federal reserve bank will act only as agent of the bank from which it receives such Chocks and will assume no liability except for its own negligence and its guaranty of prior indorsements. " (2) A Federal reserve bank may present such checks for payment or send such checks for collection direct to the bank on which they are drawn or at which they aye payable, or in its discretion may forward them to another agent with authority to present them for payment or send them for Collection direct to the bank on which they are drawn or at which they are payable." 3 - x-eese^a q q q "(3) A Federal reserve bank may, in its discretion and at its option, either directly or througjh OE IBOM an agent, accept e&thef-eaeh-ep-teak-'&paftB in payment of or in remittance for such checks. CASH, BASK DRAFTS, TRANSFERS 07 SUNDS OB B A H CREDITS, OB OTHER FOBMS OF PAYMESTOB RBMITTASCB,. ACCEPTABLE TO THE COLLECTING. FEEDEAL RESERVEBANK. and THE FEDERAL RESERVE BASK shall not ' "*. "be held liable FOB THE lAILtJRB OF THE IBAES BiUSlK Cft ANY AGENT TO PAY OR REMIT FOB SUCH CHECKS, SOB for any loss resulting from the acceptance e€'feaak-d?a#*fi FROM THE DRAWEE BASE OR AHY COLLECTING AGENT, in lieu of cash, OF ASY OTHER FORM OF PAYMENT OR REMITTANCE AUTHORIZED HEREIS, ner-fea?-fctie-fai£ti?e-e#-%he-4$,awee-baak-ea?-aay agea*-ie-peair*-#ey-eetdi-<teed$s, nor for the non-payment of , OB FAILURE T0 REALI2E UPOSx any bank draft aeeep fced-ia-paymeat-ear ae-a OR 6 # m MEDIUM OF PAYMENT OB remi ttance WHICH MAY BE ACCEPTED from the drawee bank or any COLLECTING agent." "(4) Checks received by a Federal reserve bank aa-ite-meatee* es-neiaTOaibeir-eleaaptng-baiaka WHICH ABE PAYABLE IS ITS OWN DISTRICT will ordinarily be forwarded or presented direct to and* THE banks? Oil WHICH THEY ARE DRAWS, and such banks will be required to remit or pay therefor at par in eaBh-er-feaak-eLra#* SUCH ONE OR MORE OF THE FORMS OF PAYMENT OB REMITTANCE AUTHORIZED mitER PARAGRAPH (3) HEREOF AS MAY BE acceptable to the eel lee ting Federal reserve bank? e*-at-tM-@p*ien-ef-8ueb-Fede%'al-*eee*ve-beak-*e-@a*&erlse-mieh-#e&" eral-seaesve-baak %e-aka»ge-%het»-peaeyve-aeeeua%8-ap-eleapiag-ae- ; eennt'B« "(5) Chocks rocoivdd by a Federal rosorve bank payable in other districts will CRDISABILY bo forwarded for collection upea ^he-teyBas-aad-eeadi%ieas-hereia-p?evided to the Federal reserve bank of the district in which such checks are payable*; PROVIDED, HOWEVER, .CHAT*. WHERE ARRANGEMENTS CAS BE MADE SATISFACTORY TO THE COLLECTISG BASK OB AGENT AND TO THE FEDERAL RESERVE BASK OF THE DISTRICT IN WHICH SUCH CHECKS ARE PAYABLE, ANY SUCH CHECKS MAY BE : FORWARDED FOB COLLECTION piBSCT TO THE BANK ON WHICH THEY ARE DRAWS OB AT WHICH THEY ARE PAYABLE, OB MAY BE FORWARDED FOR COZ^ LECTION TO ANOTHER AGENT WITH AUTHORITY TO PRESENT THEM FOR PAYMENT DIBECT TO THE BANK ON WHICH THEY.ARE DRAWS OE AT WHICH THEY ARE PAYABLE. ALL SUCH CHECKS SHALL BE HANDLED SUBJECT TO £ & THE TERMS AND CONDITIONS OF THIS REGULATION. . "(6) PAYMENT OF THIS JECT TO BANK DRAFTS RECEIVED BY A FEDERAL RESERVE BASK IN OF OR IN REMITTANCE FOB CHECKS HANDLED UNDER THE TERMS REGULATION SHALL LIKEWISE BE HANDLED FOB COLLECTION SOBALL THE TERMS AND CONDITIONS OF THIS REGULATION. - 4 - x-6636-ai 651. '%€) (7) The amount of any check for which payment in actrually and finally collected funds is not received shall "be charged back to the f orwarding 'bank, regardless, ofwhether or not the check itself can "be returned. IS StJCH EVEST, NEITHER THE OUSER OR hot,tubft OF ANY StJCH CHECK. NQR THE BASK whiCH SfflT SUCH CHECK TO TIC FIDSilAL EES2EVE B ^ T O a COLLECTION SHALL HAVE ANY EIGHT OF KECOUHSE UPON, IITT33GEST IS, OR SIGHT OF PAYliBNTIBOM.ANY EZSmVE BALANCE, clsarisgi ACOOOST,figDEPOSIT ACCOUNT, SS OTHER SUCHIUNDOF the d r a w bask or of any bask to which such CHUCKS HATE BEES SENT FOR COLLECTIOS, IS THE POSSESSION OF THE FEDERAL RESIlRVB 5BASK. SO DRAFT, AUTHORIZATION TO CHASG4, OR OTHER ORDER tiros ' AOOCOBg. DEPOSIT ACOODST: OR OTHgt SUCH iUSDS OF A PAYING. REMITTING, OR COLLECTING BAM IN THE P0SSESSI02T OF A FEDERAL RESERVE BASK, ISSUEDFOR THE PURPOSE OF SETTLING ITEMS HANDLED UNDERTHE TERMS OF THIS PECULATION WILL BB PAID, ACTED U P O % OR BQSORBD AFTER RECEIPT BY SUCH FEDERAL. RESERVE BASK OFNOTICE OF SUSPMSIOS OR CLOSI2TG OF SUCH PAYING, REMITTISGX OR COLLECTING BASK.W
@FedFRASER