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X-889 \. Narch 21., 1918. S i r You haYe requested mf opinion as to wh~ther the limitations contained in Section 13 of the Federal Reserve Act relating to charges for the collection and paymant of checks can be held to apply to State banks which are neither members of the Federal reserve system .., nor depositors in Federal reserve banks. As originally tio~ i-~ enacted.~ the first paragraph of Sec- reads as follows: "Any Federal rase~ bank may receive from any of its member banks 1 and from the United States~ deposits of current funds in lawful money 1 national-bank notes, Federal reserve notes., or checks and drafts upon solvent nerr~er banks., payable upon presentation.~ or 1 sol~ly for exchanga purposes., may rJceive from other Federal reserve banks deposits of current funds in lawful money., national-bank notes., or checks and drafts upon solvent m;,mber or other Federatl reserve ·oanks., payable upon presentation". In Section 16, apparently as the basis of a. system ·. check clearing or collectj.on., it is provided that Federal ~f X-889. -2reserve banks i>A~l _r:t::.<?_eA!_e__ o_n_~_e.P.'?...S.!i2-~.J~ar__ E,!_lec_k_s_~~- ~~~s on mt:mber and other Federal rt;ser.ve banks; and tht:: Federal Reserve Board is authorized to fix by rule the ghargt:!J...:tP_P.t:l••col}.ect~~- P.i.. El~.~t~r ban~_s_!£..2!!Lp~trona whose checks ~!ear~throu~h ~h~ Federal rt:aerve hank~ charge-for the service of clearing ~r collection rencter~d by the Federal reserve bank. It will be noted that under the first paragraph of Section 13 in its original form the only classes of banks which might be de• positors in and thus clear through a Federal reserve bank were its member. banks and other Federal reserve banks, and the only checks and drafts specified as receivable on deposit Wt:Jre checks and drafts drawn upon member banks or upon other Federal reserve banks. The Ac~s of Septt:mber 7, 1916, and June 21, 1917, so amended the first paragraph of Section 13 as to t.lXtend the clearing and collection facilities of the Federal r(:~St;~rve system to· include checks and drafts generally, to make th(:lae facilities directly available to nonmember banks and to establish the limitations as ~o charges rt~ferred to in the question submitted. The paragraph as so amended reads as follows: Any Federal reserve oank nay rt:ceive from any of its member banks, and from the United States, dt:posits of current funds in lawful money, national bank notes, Federal rt:serve notes, or checks and drafts, payable upon prt:sentation, .:a.nd cilso, for collection, maturing notes and bills; or, solely ~or purposes of exchange ~r of coll~ction, may rtoCt;:iVe from othbr Federal I'tlStlrVe banks deposits of current funds in lawful mon~y, n~tional bank not~s, or c.h~cks upon other Ft:deral r~ servtJ banks, and checks and drafts, payable upon presentation within its district, and maturing notes and bills payaole withi!>. its district; or, solely for the purpus8S ·1f exchange or ot coJ.ltlction, may rbc~ive from any nonmember bank o:: trust company dep6si ts of current f"unds in lawful money, n;:l.tional bank notes, Feder-al reserve nott:s, cht>cks and drafts payable upon presentation~ or maturing nottls and hills; Provided, Such menmt:m'ber bank or trust company maintains with the Fedtlral rt:serve banlr of its district a balance suff.'ici<mt to offset the i t\;;;ms in transit held for its account by the Federal rt:serve bank; Provided further, That nothing iE. this or any other section of this L\.£1..§~h9-).J. b_tl con~ strued as prohibi t.ing a msmb'3r. or nnnmt::rrbe!..J?ank from making rt:Jasoncible charges, to be__:Lt;~tt:l"'!lint:d an~ r~~,?t_~t?.Y the FedP-ral R~se~ E! Boaro, bE-.! 1!! .!l2. ~ ~ ~cet:d .!Q _£,ent.s ,l2!it. ,llQQ. or fr-action therf.lof 1 based on the total of checks and drafts prestlnted at any one time, [£r~ lection ~ payment ~ checks ~ d~afts ~ rtlmission thi:;;refor by exchange X-860 ""( 3 - • or otherwise; reserve banks. The l~itations st the Federal as to charges referred to in the question submitted are contained in the second proviso quoted above. This proviso, apparently recognizing an existing right of Immber and nonmember banks to nake reasonable charges for the collection or pay~nt of checks and drafts and remission therefor by exchange or otherwise, provides (l) that these charges are "to be determined and regulated by the Federal Reserve Board 1 but in no case to exceed 10 cents per $100 11 1 but (2) that "no such charges shall be .trade against the Federal reserve banks". Clearly these limitations apply to national banks, which are compelled to be n:ember banks, to such State banks as becOILe member banks by voluntarily • Act 1 and to such accepting the terms and provisions of the Federal Rese.rve other State banks as do not becone ttember banks but by becoming depositors in Federal reserve banks upon the conditions specified avail themselves directly of the facilities of the Federal reserve clearing system. The specific question to be deterrr.dned is whether these limitations apply to nonmember State banks which do not becorra depositors but checks \ j.. upon whieh may pass through Federal reserve banks in process of clearing or collection. The theory and schene of the Federal reserve legislation seems incon- ,, sistent with the purpose on the part of Congress to subject State banks j against their will tQ Federal control or regulation. State banks are not compelled to became members of the Federal ·reserve system or depositors therein. Those possessing the necessary qualifications are, however, invited to becorr..e members. They are not only free to accept o.r decline 1 but if they accept remain at liberty to withdraw from the system. (Sec.9} By Section 13 as amended 1 State banks not desiring to become members or too small to be X-860 - 4 - eligible for membership afe likewise invited to share in the clearing and collection facilities of the system by becoming depositors in Federal reserve banks. But they may accept or reject the invitation, and if they be- come depositors rray close their accounts at their pleasure. It would accordingly seem that the limitations referred to ought not to be regarded as intended to be imposed upon State banks not connected with the Federal reserve system as members or depositors~ against the will of such banks, unless that intention clearly appears. The term "nonmember bank" as used in the proviso may reasonably be construed as referring to a nom:r..ember bank that has become a depositor as, authorized in the preceding provisions of the paragraph. If this term is so construed, obviously the provision requiring charges "to be determined and regulated by the Federal Reserve Board) but in no case to exceed 10 cents per $100 11 1 will have no application to nonmember depositors in a Federal reserve bank. State banks which are not The broad language of the concluding clause 1 nno such charges shall be xr.a.de against the Federal reserve banksn, may be construed not as directed against State banks which are not depositors but merely as specifying a condition upon which checks may clear through the Federal reserve banks -- in effect a prohibition against the payment of such charmes by the Federal reserve banks. Under this construction 1 ~mber banks and nonwember banks which are depositors in the Federal reserve ban:·J will be subject to the limitations in the proviso but nonxr~mber ject to the limitations. banks which are not depositors will not be sub- All 1 hoHever 1 will have to adjust their charges among themselves and with their own depositors~ being prohibited from paying such charges. the Federal reserve banks . \ X-860 - 5 - This construction seems to be in hanmony with the intention of the framers of the arr£ndment to Section 13 embodying the above nentioned proviso. The Act of June Federal Reserve contained Act~ 21~ 1917 1 amending Section 13 and other sections of the as originally introduced in both the House and Senate no part of the (second) proviso 1 the section in the proposed amended form ending with the preceding proviso. The Senate 1 adopting an au:..e.odment offered by Senator Hardwick 1 added the second proviso in the f ollowing form: Provided further 1 That nothing in this or any other section of this Act shall be construed as prohibiting a member or nonmember bank from n:aking reasonable charges, but in no case to exceed 10 cents per $100 or fraction thereof 1 based on the total of checks and drafts presented at any one time 1 for collection or payment of checks and drafts and rerr~ssion therefor by exchange or otherwise. (55 Cong. Rec. 2065.) It was thought the effect of the Hardwick anendment would be to recognize the right of any bank upon which checks are drawn to make charges against the Federal reserve bank through which such checks might be cleared or collected. The Hardwick amendment was opposed by the Federal Reserve Board 1 as appears from letters from its Governor to Senator Owen and Congressman Glass~ Chairnen of the respective Corrndttees on Banking and Currency of the Senate and House. (Pages 207l 1 3795.) The President also called attention to the seeming effect of the arr£ndnent in a letter to Senator Owen 1 reading as follows! I have been a good deal disturbed to learn of the proposed arr£ndrrent to the Federal Reserve Act which seems to conterr~late chargipg the Federal r§serJe banks for pay~nt of chegk§ cleared by them1 or charging the payee of such checks passing through the reserve banks with a corrmission. I should regard such a provision as most unfortunate and as almost destructive of the function of the Federal reserve banks as a clearing house for member banks 1 a function which they have ;erforued with so rr.uch benefit to the business of the country. I hope most sincerely that this rratter tray be adjusted without interfering with this indispensable clearing function of the banks. (P. 4083.) X-860 - 6 - In conference~ appar~ntly as the result of the letters of the Governor of the Federal Reserve Board and t·he President~ form1 two changes being rrade by the conferees: the proviso took its present First 1 the charges which u.ember or nonmember banks rray nake were nade subject :, "to be determined and regulated by the Federal Reserve Board 11 ; and second, the final clause was added 1 "but no such charges shall be n:ade against the Federal reserve banks!' In presenting the conference report to the Senate . . Senator Owen emphasized the importance of not interfe~ing with the clearing functions of the Fedsral reserve banks 1 explained that under the proviso as amended the banks can charge each other for uaking these accorr~odations if they like 1 ·and they can adjust that to their own satisfaction with one another, without troubling the reserve banks, and apparently conceded that State banks not connected as u.embers or depositors with the Federal reserve system could not be subjected to Federal legislation. (P. 4083.) Mr. Glass in presenting the report to the House _ said: The Congress has no control whatsoever over nonu.ember banks. It can not regulate their charges and will not regulate them if this Eardwick anendment should prevail. * * * This Houoe has no control over the nonuember bank in this matter. Even the Federal Reserve Board has no control over their operations unless they voluntarily join the voluntary collection system established by the Federal Reserve Board. (P. 3794.) and further No noniDember bank thatdoes not voluntarily join the collection system established by the Federal Reserve Board will be specifically affected. No law that we pass here can directly affect the~ The only way they can be affected is incidental. (P. 3795.) It thus seems clear that the proviso was understood by Congress as designed to protect the clearing functions of the Federal reserve banks and not directed at State banks which have no connection a.s members or depositors with the Federal ~eserve system and upon which it was considered the effect of the proviso could be only incidental. X-889 • It may be argued and is probably true that the proviso will necessarily affect the practice of State banks, though not menters or depositors, as to making charges for the payment of checks drawn upon them. WHh the concentration of reserve balances in Federal reserve banks as required by the Federal Reserve Act, the Federal reserve clearing syotem may offer the only adequate a..nd convenient facilities for clearing ,or collecting,checks,drawn upon balks at a distance~:; and depositors; may find . . it inadvisable to maintain accounts with banks, upon 'Altl.ich checks; cannot bt> cl~:>ared. or collected. by the use of these facilities. The Ft:lderal Reserve Act, however, does:> not command or; compel these State,banks.to forego any right they may have under the State, laws ,to maktk charges, in c-onnection with the payment of checks,drawn upon them. The Act merely offers the clearing_,and collection facilit:i.es of the Federal reserve banks upon specified conditions. If the State banks refuse, to comply. with the conditions by insisting upon making_; charges-, a.gainst:. the Federal reserve banks, the result will simply b~, so far as,the Federal Reserve Act is concerned, that .::>ince the lt~ederal r~::serve banks cannot pay these charges they cannot clear or c oJ.lect checks on banks demandingo such payment from them. From what.hasobee.n said it follows that in my opinion the limitations;containect. in Section 13 relating to charges for the c0llection and payment of checks?dj not appiy to State banks QOt connected with the Federal reserve system as members,or depositors. Checks,on banks.making such charges cannot, however, b~;:; clea:o:ed or c ollectt:d through Federal l'eserve banks. Respectfully, (Signed) T. W. Gregory, Attorney The President, The Whit~:: Hous~::. G~neral
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