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7 X-7951 FEDERAL P. E S E R VT.3 B O A R D STATEMENT FOR THE PRESS For r e l e a s e i n morning papers of July 7, 1934. SECURITIES COMPANY WITHIN PROVISIONS OF SECTIONS 20 and 32 of BANKING- ACT OF 1933. The Banking Act of 1933 was enacted on June 16, 1933, and Section 20 of that Act became e f f e c t i v e June 16, 1934, and reads i n part as f o l l o w s ; "Sec. 20. After one year from the date of the enactment of t h i s Act, no member bank s h a l l be a f f i l i a t e d i n any manner described i n s e c t i o n 2(b) hereof with any corporation, a s s o c i a t i o n , business t r u s t , or other similar organization engaged p r i n c i p a l l y i n the i s s u e , f l o t a t i o n , underwriting, public s a l e , or d i s t r i b u t i o n at wholesale or r e t a i l or through syndicate p a r t i c i p a t i o n of s t o c k s , bonds, debentures, notes, or other s e c u r i t i e s . * * * * . The Federal Reserve Board recently considered the question whether a t r u s t company which was a f f i l i a t e d with a member bank withi n the meaning of the provisions of section 2 (b) of the Banking Act of 1933 and which was engaged i n the business of i s s u i n g and s e l l i n g ^ mortgage bonds was a corporation carrying on the kind of business described i n s e c t i o n 20 of the Banking Act of 1933. The business of the company involved was as f o l l o w s : The t r u s t company made loans secured by f i r s t mortgages on improved real e s t a t e and the obligations secured by such mortgages were & assigned to one of t wo corporate t r u s t e e s , i n accordance with the terns of a t r u s t agreement, to secure the payment of bonds of the trust coopany which were issued and sold to the public by the t r u s t company. It X-7951 — 2 — appeared that these bonds were issued s e r i a l l y i n denominations of $100, $500, or $1000 each; that the bonds "bore i n t e r e s t payable semiannually; that at the time of the Board's consideration of the matter the r a t e of i n t e r e s t on such bonds then being issued was 4§$; that the bonds were negotiable i n form; that the bonds were the direct obligations of the trust company; that i n addition to obligations secured by mortgages certain s e c u r i t i e s of s p e c i f i e d c l a s s e s might be deposited with the trustees to secure the payment of such bonds; that i t was the p r a c t i c e of the trust company to authorize the i s s u e of such bonds i n s e r i e s of $1,000,000 or l e s s , although the whole amount of each s e r i e s might not i n every case be sold; and that i t was the practice of the trust company to i s s u e the s e r i e s of bonds with maturities of either f i v e or ten years. It a l s o appeared that the trust company received deposits to some extent and did a considerable amount of trust business. However, i t appeared that the principal business of the trust company was the malring of mortgage loans and the issuance and s a l e of i t s mortgage bonds. After careful consideration of t h i s matter the Board ruled, i n view of a l l the f a c t s involved, that the trust company was engaged p r i n c i p a l l y i n the i s s u e and s a l e of s e c u r i t i e s within the meaning of Section 20 of the Banking Act of 1933, and that, i n view of the a f f i l i a t i o n of the t r u s t company with a member bank, appropriate a c t i o n should be taken t o comply with the requirements of Section 20 of the Banking Act of 1933. X-7951 *" 3 ** Section 32 of the Banking Act of 1933 reads i n part as f o l l o w s : "Sec. 32. From and a f t e r January 1, 1934, no o f f i c e r or director of any member tank s h a l l be an o f f i c e r , d i r e c t o r , or manager of any corporation, partnership, or unincorporated a s s o c i a t i o n engaged primarily i n the business of purchasing, s e l l i n g , or negotiating s e c u r i t i e s * * * unless i n any such case there i s a permit therefor issued by the Federal Reserve Board; and the Board i s authorized to i s s u e such permit i f i n i t s judgment i t i s not incompatible with the public i n t e r e s t , and to revoke any such permit whenever i t finds a f t e r reasonable notice and opportunity to be heard, that the public i n t e r e s t requires such revocation." In the case discussed above i t a l s o appeared that directors of the trust company were also directors of a member bank. In view of the f a c t s described above, the Board also ruled that the trust company was engaged primarily i n the business of s e l l i n g or negotiating s e c u r i t i e s within the meaning of Section 32 of the Banking Act of 1933.
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