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t L X-5098 rviarch 14, 1928 To Federal Reserve Board. SUBJECT: Revision of the Regulation. Cla~rton Act Fror;1 kr. Wyatt, General Counsel. Due to the enactment of the amend.':lent to the Clayton Act, whicr. was signed by the President on iV.arch 9th, it is necessary to revise the Board's Regulation, pertaining to interlocking directorates under the Clayton Act; and I respectfull~r submit herewith for the Board's consideration a proposed draft of a revised. rec;ulation in such fonn as to show the e::act textual cha~1ges proposed to be made in the Regulation. lEost of these chanr;es are technical and are designed to make the Regulations confo~~ to the provisions of the law as amended. There is one q_uestion, however, v:rhich is of considerable importance and to which, I believe, the Board should give especial attention, viz: ~nat facts should the Board take into consideration in determining whether it will be 11 compatible '.7i th the public interest 11 to permit interlocking directorates "between particular banks? Heretofore, the Board has had only one q_uestion to consider in granting interlocking directorates, i~e., whether the banks were 11 in suostantial competition11 • If the banks were in substantial cor:J.petition the Board had no authority to permit interlocking directorates and could do nothing but refuse its :permission. If the banks were not in substantial competition, the Board had discretionary authori t~r to grant the application, and usually granted it without considering any other q_uestion. As amended, however, the statute provides that the Federal Reserve Board may issue a permit "if in its judgment it is not incompatible with the public interest". This clearly gives the Board much "broader authority than it previously had, and it would seem that such increased authority carries with it an increased responsibility. Moreover, the q_uestion whether it is compatible with the public interest for a person to serve as director of two or more banks coming within the prohibitions of the Clayton Act would seem to be a broader q_uestion than the mere q_uestion whether such banks are in substantial competition. Every time the Board grants permission for interlocking directorates under the law as amended the issuance of such a permit will be eq_uivalent to an expression of the Board's opinion thc;t it is compatible with the public interest for the applicant to serve as director of all the banks involved and for such banks to have interlocking directorates. In passing upon each application, therefore, it is the :Ccard 1 s duty to take into consideration every fact which ·would have a bearinc u:Jon the q_uestion whether it is compatible with the public interest to grant a perni t, and it ·.'.'ould seem that the applicants should be advised in advance as to the facts which the Board will consider in formulating its judgment on this question. -2In revising the reGulation, therefore, I have stricken out all to substantial competition; and, in lieu of the old definition of that term, have inserted, as Section IV( d), a proposed statement of what the ]oard will take into consideration in determining whether the issuance of such a permit would be compatible with the public interest. This is a difficult question and I am not prepared definitely to recommend the adoption of the statement which I have drafted. I submit it, however, for the Board's consideration and shall discuss below my reasons for sugt;;esting these various points. In deciding whether it would be compatible with the public interest for a 1Jerson to be permitted to serve as director of two or nore banks corning within the prohibitions of the Clayton Act, it is obvious that the Board should consider ( 1) whether the banks are natural co~~etitors, and (2) whether the existence of such an interlocking directorate would tend to lessen competition between such banks; since the main pur-_pose of the original Clayton Act was to prevent a lessening of competition and a restriction of credit. ~eference It seems to me tnat it would also be proper for the Board to consider whether the banks involved have conflicting interests and whether the applicant will be able faithfully to serve both of them. In other words, it would seem to be incompatible with the public interest for the Boar~ to sanction a person serving as director of a bank when he has interests adverse to that bank. Thus, it might be considered incompatible with the public interest for a director of a large bank with branches to serve also as director of a sraall independent bank which is resisting absorption into the branch system of the larger bank. It may also be appropriate for the Board to consider whether the service by the applicant as officer, director or employee of more than one of the banks involved would prevent him from giving :1roper attention to the affairs of all of the banks involved or from properly discharcing his duties to all of them. It seems obvious that the public is vi tally concerned with the proper management of banks, since bank failures always affect the public adversely, and one of the most frequent causes of bank failures is poor management, which usually is due to the lack of proper attention to the bank's affairs by the directors thereof. Conceivably, a person might make an excellent director for one bank, but would be unable to give proper attention to the affairs of three ba11ks, especially if such banks are located in widely different parts of the country. The Supreme Court has said that a person should not accept the position of director of a baru~. unless he is able to attend the directors' meetings regularly and faithfully to discharge his duties by acquainting himself with the bankt s affairs and intelligently participating in the supervision of its management by the Board of directors, It would also seem that the Board should t~e into consideration any other facts having a bearing upon the interest of the public in the banks involved, in so far as such interest is affected by their having the same directors, officers or employees. -3- vVhile I am not prepared to recommend unqualifiedly the statement on this subject uhich I Lave drafted, therefore, I submit it for the Board's consideration and believe tLat it is worthy of careful attention. Respectfully, Walter Wyatt, General Counsel. Draft attached • .•
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