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8 4 th C ongress ) HOUSE OF REPRESENTATIVES j

1st Session

}

|

R eboot

No. 609

BANK HOLDING COMPANY ACT OF 1955

M at 20, 1955.—Committed to the Committee of the Whole House oo; tbe State

of the Union and ordered to be printed

Mr. S p e n c e , from the Committee on Banking and Ciurency,
submitted the following

REPORT
{To accompany H. R. 6227]

The Committee on Banking and Currency* to whom was referred
the bill (H. R. 6227) to provide for the control and regulation of bank
holding companies, and for other purposes, having considered the
same, report favorably thereon without amendment and recommend
that the bill do pass.
T h e N ee d fo r B a n k H o ld in g C o m p a n y L e g is l a t io n
INTRODUCTION

The need for immediate legislation which would at the same time
control the future expansion of bank holding companies and force
them to divest themselves of nonbanking business has been established
to the complete satisfaction of your committee. It held exhaustive
public hearings on H. R. 2674 (since superseded by H. R. 6227) from
February 28 through March 9, 1955. Executive sessions extended
from April 2(Ho May 13. The views of the Federal Reserve System
were presented by the Honorable William McChesney Martin,
Chairman of its Board of Governors, while those of the Office of the
Comptroller of the Currency were presented by the Honorable Ray
M. Gidnev. Other witnesses representing all shades of opinion in
regard to Dank holding companies appeared and were afforded every
opportunity to set forth their views. All witnesses were subjected to
unusually lengthy and searching interrogation by the membership
of your committee. The printed hearings, including appropriate
exhibits, cover 645 pages.
Evidence developed during the hearings has convinced your com­
mittee that bank holding companies are not in accord with the very




2

BANK HOLDING COMPANY ACT OF 1955

precepts upon which our banking system rests. The United States
early in its history, it should be recalled, adopted a democratic ideal
of banking. Other countries, for the most part, have preferred to
rely on a few large banks controlled by a banking elite. There has
developed in this country, on the other hand, a conception of the
independent unit bank as an institution having its ownership and
origin in the local community and deriving its business chiefly from
the community’s industrial and commercial activities and from the
farming population within its vicinity or trade area. Its activities
are usually fully integrated with the local economic and social organi­
zation. The bank holding company device threatens to destroy this
democratic grassroots institution.
Your committee believes that the destruction of the American unit
banking system, resulting in the further concentration of credit facil­
ities, would have revolutionary effects upon our free-enterprise sys­
tem. Ultimately, monopolistic control of credit could entirely remold
our fundamental political and social institutions.
The time for action is now. We dare wait no longer, for already
we are. rapidly following the example of England whose many banks
became the Big Five, She finally passed a law against further con­
centration. The Bank of. England has been nationalized. France
has nationalized its few banks. The same will inevitably come to
pass here unless we forestall it by legislation.
There is no question about what the reaction of the American people
would be to such a condition. A nation that would not allow a mo­
nopoly over tobacco certainly will not condone one over the lifeblood
of its economy, money, and credit. Through their Representatives in
Congress and the State legislatures they have at various periods erected
legal barriers against centralization of credit. Some of these have
fallen, some have corroded. It is urgently necessary that we stop the
remaining laws from being evaded. H. R. 6227 would do this. Its
adoption by the Congress is necessary if we are to preserve our freeenterprise banking system, the economic counterpart of our political
system. Each is essential to the other.
The four fundamental reasons for enacting this legislation are set
forth below.
BANK HOLDING COMPANIES THWART NATIONAL BANKING POLICY

While our banking structure has evolved down through the years to
meet changing economic requirements, this country has held stead­
fast to the doctrine that competition should prevail in the banking
industry. Our national banking policy has aimed at protecting and
fostering the growth of independent unit banks.
Repeatedly Congress has been urged to break down the restrictions
in the national banking law regarding branches of national banks.
Congress has been urged to permit branches, regardless of State bank
laws, on a trade area basis, on an interstate or Federal Reserve district
basis, and in fact on a nationwide basis. Each time, however, Con­
gress has declared its approval of the American system of local
independent and competitive banks, and has left the matter of
branches to the States to determine, each State for itself. In spite of
these rebuffs, those who have sought to concentrate banking control
into fewer and fewer hands have been able, in certain areas of the




BANK HOLDING COMPANY ACT OF 1955

3

country, to accomplish their purpose to a substantial extent through
the holding company device, acquiring control of a group of banks
which, can thereafter be operated, in effect, as branches.
The opponents of H. R. 6227, it is true, have contended that to
base holding company legislation on branch banking law is wrong,,
because there is a difference between branches and affiliated, or
subsidiary, banks. Great stress has been placed on their difference*
in form, which everyone of course recognizes. Your committee feels,
however, in a large measure they are differences without a distinction.
Other than in form, what is the practical difference between a branch
and a bank the stock of which is owned by a holding company that
can select the bank's directors and change them at its pleasure, even
holding repurchase rights to the directors' qualifying shar&s; that can
hire and fire the bank's personnel and otherwise supervise its opera­
tions; that can make its investments, handle its insurance, buy its
supplies, originate and place its advertising; can pass on its loans to
local firms and individuals, usually receiving a fee for services per­
formed?
Bankers certainly should know whether bank holding company
subsidiaries can in effect be operated as branches. A bankers' associ­
ation asked the bankers of the country this question: “ Do you consider
holding company banking, in effect, branch banking"? More than
97 percent of the replies were “ Yes."
Your committee believes it is obvious that the declared will of
Congress in favor of independent competitive banking is being
thwarted by indirect branch banking, through the mechanism of the
holding company.
BANK HOLDING COMPANIES CIRCUMVENT STATE BANKING LAWS

In the past, Congress has repeatedly been urged both to permit
national banks to carry on branch banking across State lines and to
allow them to operate interstate branches without regard to State
branch banking laws. The Congress however has steadfastly re­
spected the rights of the States to specify the extent to which branch
banking shall be practiced within their respective borders. In fact,
the Federal law authorizes National banks to have branches only to
the extent that State banks are so permitted under the law of the
State in which the national bank is located. This establishes parallel
treatment of branches as regards banks whether State or federally
chartered. Although this equality exists with respect to branches,
States have no way to protect themselves against an outside bank
holding company coming in and buying stock in banks, especially
national banks, located within their borders.
Just recently, for example, the General Contract Corp. of St. Louis
(a holding company) purchased two banks in the southern part of
Illinois; namely the Bank of Benton and the Bank of Ziegler. A
commercial bank, under both existing Federal and State laws, is not
only prohibited from buying stock in banks located in another State,
but is also prohibited from purchasing stock in banks located in tho
same State.
This bank holding company would not have been permitted to
buy these banks which are now subsidiaries of this corporation if
H. R. 6227 was then on the statute books. This corporation already
owned the Illinois State Bank of Quincy which now gives it control




4

BANK HOLDING COMPANY ACT OF 1955

of 3 banks in Illinois; 4 banks in St. Louis, M o.; 1 in Memphis, Tenn.;
besides 3 insurance companies operating in 42 States; a dealer finance
and personal loan company, blanketing 7 States; and approximately
30 finance and personal loan offices extending from St. Louis, Mo., to
New Orleans, La.
The General Contract Corp. is by no means unique. Bank holding
companies of the type which would be controlled under the bill now
reach into 31 States, and no State is immune from invasion. The
operations of the principal interstate bank holding companies are
very extensive. As of December 31, 1954, 1 company, the North­
west Bancorporation, operated 72 banks with 22 branches located in
7 States; the Equity and Morris Plan Corps, operated 10 banks with
19 branches located in 4 States and the District of Columbia; the
Transamerica Corp. operated 6 banks, with 167 branches, located in
5 States; the First Bank Stock Corp. operated 75 banks with 6
branches located in 4 States; the First Security Corp. operated 3
banks with 45 branches located in 3 States.
The bank holding company moreover circumvents our State bank­
ing laws on an additional major count, engaging in nonbanking
businesses.
Most States restrict banks to the banking business and forbid banks
to engage in or control nonbanking businesses. Through the device of
the bank holding company, however, one organization can bring under
centralized control an unlimited number and variety of businesses.
A wholly owned subsidiary of Morris Plan Corporation of America,
the National Industrial Credit Corp., has direct or indirect interests
in six companies engaged in the fire, casualty, reinsurance, and lifeinsurance business. Transamerica in addition to its banking interests
in five States, controls corporations engaged in such widely diversified
businesses as life, fire, automobile, and marine insurance, oil and gas,
fish canning and processing, frozen foods, castings, forge equipment,
kitchen tools, and agricultural equipment.
BANK HOLDING COMPANIES ARE SUSCEPTIBLE TO ABUSE

Your committee, of course, does not contend that all, or even most,
holding companies were organized by promoters for unethical pur­
poses, but the mechanism of the holding company in the field of bank­
ing, just as in other fields, is particularly susceptible to abuse by such
individuals.
It is known, however, that there have been cases such as occurred
not too long ago where a finance company from Texas acquired control
of two banks in Chicago and was in the process of acquiring a third
bank in Indiana, for the evident purpose of loading these institutions
with questionable paper belonging to the holding company. This
action resulted in the temporary closing of these Chicago banks.
Their reopening was only made possible by a change in control and a
very substantial advance by the Federal Deposit Insurance Corpora­
tion.
There have been other cases in which bank holding companies have
been mismanaged and exploited for the benefit of those who controlled
them. This fact was lucidly demonstrated during the banking crisis
of the early 1930’s. The Bank of the United States, a New York
State-chartered institution that was placed in the hands of receivers
late in 1930, for example, was found to have no less than 55 affiliates,




BANK HOLDING COMPANY ACT OF 1955

5

many of them mere dummy enterprises that had been created to
serve as holding companies in which poor or doubtful paper could be
hidden, without having to show it on the books of the parent bank.
In 1930 the head of the Guardian National Bank of Commerce of
Detroit appeared before your committee and boastfully told of the
new era that had been brought to the Detroit area through acquisi­
tions by holding companies of carefully selected, well-managed and
strong banks; how, through the supermanagerial ability of the men
who dominated the holding company stronger institutions, bettermanaged institutions, more profitable institutions, rendering greater
service to every corner of the city and its environs, had come to bless
the Detroit area. Within a matter of only a few months both the
Guardian and the Detroit Bankers—two gigantic Detroit holding
company groups of banks—began to totter. In 1932 the vast finan­
cial empire lay in ruins, 297 controlled banks and branch offices, $785
millions in deposits— the scars of which disaster still mar the lives of
millions of people. Your committee at that time developed that 12
men, each of whom invested $100 apiece, had gained control of a
Detroit chain of more than 250 banks. In other cases banks had lent
heavily to their officers to finance speculation in the stock of their
holding companies. Subsidiary banks had been compelled to pay
unwarranted dividends in the face of operating losses to enable hold­
ing companies to maintain their dividend policies. Holding com­
panies borrowed from the banks which they owned to finance specu­
lative dealings. The Banking Act of 1933, it is true, aimed at pre­
venting a repetition of such abuses. Your committee wishes to point
out, however, that under the terms of that act, a bank holding com­
pany can be regulated only if it happens to own a bank which is a
member of the Federal Reserve System and only if it desires to vote
the stock of that bank.
BANK HOLDING COMPANIES NOT AS CONDUCIVE TO ECONOMIC DEVELOP­
MENT AS INDEPENDENT UNIT BANKS

Independent unit banks, by their willingness to bear substantial
local risks, have accelerated the economic development of the United
States. Most of our leading companies, it should be recalled, were
once small, and got started because local banks had confidence n
the ability of the founders. Ideas and ability are to be found every­
where. And who is so likely to recognize these as the local banker
who has the power to act on his intimate knowledge, and who will
benefit his bank and his community by developing a substantial
customer and employer. As the Commercial and Financial Chronicle
has so well stated:
Unit banking is peculiarly suited to the genius of the American people, to the
democratic republican form of government which we have developed, to the nature
of our business and industrial organization, to our social institutions, and to the
individualism which is the foundation of our national progress * * *. Let us
never despise the day of small beginnings nor the virtue inherent in small things.

The local independent bank is itself, of course, an ideal smallbusiness enterprise. Local people get together, they invest their own
capital, they select their own management and solicit the deposits of
the community in which they are located. They then take those
deposits and put them out to work for the benefit of the people
living in that community. Moreover, because of the FDIU, the




6

BANK HOLDING COMPANY ACT OF 1955

Federal Reserve System, and its corresponding banks, the local bank
is in an advantageous position to meet the changing needs of its
community.
Your committee should like to reemphasize the fact that this is the
only country left where most communities are served by homeowned and home-managed banks which are aware of and responsive
to the needs of the people of their areas. Our independent banking
system has been a vital factor in the development of the United
States. Like yeast cells in a loaf of bread, each working in its imme­
diate area, our banks scattered throughout the country have co­
operated to produce the greatest and most general economic develop­
ment the world has known.
Other countries must depend on 3, 4, or 5 banks having up to
thousands of branches. Policies and important credit decisions are
made hundreds or thousands of miles from many of the branches.
The interest of an enterprising local customer may run counter to
that of a large main office account, in which event the former might
suffer. This inevitably tends toward concentration in all lines, car­
tels, the stifling of new enterprises, and stagnation—what has been
termed the “ matureN
economy.”
T h e O r ig in of G r o u p B a n k in g

During the history of banking in the United States there have been
in operation three distinct types of banking. They are commonly
referred to as (1) independent unit banking, representing a bank with
1 office or with 1 office and branches and having only 1 board of direc­
tors and 1 capital structure; (2) chain banking, in which 1 individual
owns or controls a number of independent unit banks; and (3) group
banking, which is the ownership and control of a group of individual
banks by a corporate holding company or control of bank shares by a
trustee or a group of trustees or control through a majority ownership
of bank shares for investment purposes. This bill, H. R. 6227, is
concerned only with group banking through what is commonly re­
ferred to as ownership or control of banks by a bank holding company.
The most rapid as well as the greatest expansion in group banking
came during the years 1927-29. This was a period of substantial
corporate promotional activity which in many cases was activated by
a desire for promotional and speculative profit. It was during this
era that most of the bank holding companies were formed including the
major bank holding companies that are operating at the present time.
One of the main reasons for the formation of bank holding companies
was the limitation on branch banking which existed during that time.
Through the bank holding company device the ownership of banks
could be acquired in different locations within the same State and also
in different States. Until 1927 national banks were not permitted
to open branches and most States did not authorize branch banking
or if they did so it was limited to areas adjacent to the bank’s home
office. Thus through the bank holding company device ownership
and control of banks could be achieved whereas bank growth could not
hr expanded through the medium of branches.
Bank holding companies are engaged basically in one or two types
ol businesses or both. Some bank holding companies own only the
stocks of banks and are primarily engaged in managing or controlling
such banks through such stock ownership. Other bank holding com*




BANK HOLDING COMPANY ACT OF 1955

7

panies not only own and control banks but also own or control several
nonbanking businesses. Historically, National banks and State banks
(excluding mutual savings banks) have been prohibited from investing
in the stock of any corporation and their investments are limited to
investment securities of a debt character, that is notes, bonds, or
debentures which do not represent an equity ownership. The funda­
mental reason for this limitation on bank investment in common stocks
is for the protection of the depositors in our banks. If banks were per­
mitted to own nonbanking businesses they would be compelled in
many instances to extend credit to such businesses to the detriment of
other competitive businesses in the community and possibly also to
a degree which would be unsound from a banking viewpoint. A bank
should always be at arms’ length with its borrowers and such a position
could not be maintained were banks permitted to own nonbanking
businesses and make credit available to them. - Through the bank
holding company device these restraints which are placed upon banks
generally are absent.
Since the bank holding company device can be used to acquire
control of banks and nonbanking businesses the question might be
asked as to why such operations have not been controlled previously.
There is no constitutional basis by which a State could prohibit a
corporation chartered in another State from owning or controlling a
national bank located within its borders. The only effective means
by which bank holding companies can be regulated and controlled is
through Federal legislation.
T h e P r e s e n t S it u a t io n

As previously mentioned there are now on the statute books certain
provisions enacted in 1933 and 1935 regulating affiliates and holding
company affiliates of banks which are members of the Federal Reserve
System. Any holding company affiliate which desires to vote the
stock owned by it in any member bank must first obtain from the
Board of Governors of the Federal Reserve System a voting permit
and, as a condition to the permit, the company must agree to submit
itself and its controlled banks to examination, to establish certain
reserve funds, to dispose of any interest in securities companies, and
to declare dividends only out of actual net earnings.
The term “ holding company affiliate” as defined in the Banking Act
of 1933, as amended, essentially includes any corporation, business
trust, association, or other similar organization (1) which owns or
controls, directly or indirectly, either a majority of the shares of capital
stock of a member bank or more than 50 percent of the number of
shares voted for the election of directors of any one bank at the preceeding election, or controls in any manner the election of a majority
of the directors of any one bank, or (2) for the benefit of whose share­
holders or members all or substantially all the capital stock of a mem­
ber bank is held by trustees. Any corporation all of the stock of which
is owned by the United States is excluded and the Board of Governors
of the Federal Reserve System is also given authority to exclude any
organization which the Board determines not to be engaged, directly
or indirectly, as a business in holding the stock of, or managing or con­
trolling, banks, banking associations, savings banks, or trust com­
panies.




8

BANK HOLDING COMPANY ACT OF 1 9 5 5

Information with respect to the number of bank holding company
groups operating in the country is not complete. Control of non­
member banks by corporations, business trusts, associations, and other
similar organizations is not generally required to be reported pursuant
to existing Federal law. Undoubtedly, examination of sources of
information other than required reports would disclose bank holding
companies other than the presently known cases for which informa­
tion is readily available. The Federal Reserve has compiled a list of
114 known cases in which corporations, business trusts, associations,
and other similar organizations own or control 50 percent or more of
the capital stocks of one or more banks including both member and
nonmember banks. Such groups as of December 31, 1954, had 1,313
banking offices (including branches) with total deposits of $23.2
billion. The following table sets forth a breakdown of these groups.
T a b le

I.— Characteristics and size of 114 bank holding company groups (as of
Dec. 81, 1954)
Typo of group

Groups ^presently regulated by Federal Reserve
BftartL.-.-._____ _____ _____ ______ ________
1 bank group where the controlled bank is a member
bank..... ....................................... .................... .
1 bank group where the controlled bank is a non­
member bank______________________________
More than 1 bank group where the controlled banks
are nonmember banks________________ ______
Other groups with 2 or more banks of which at least
1 controlled bank is a member bank____________
Total___________________________ ______

Cases

Total
Banks Branches offices

Deposits

18

254

578

832 $10,781,929,000

163

78

197

275

15

21

41

62

682,820,000

8

59

35

94

1.117.417.000

9.622.904.000

*10

40

10

50

1.043.691.000

114

452

861

1,313

23,248,761,000

1Of which 61 have been exempted by the Federal Reserve Board.
* Of which 6 have been exempted by the Federal Reserve Board.

As of December 31, 1954, there were 18 holding company affiliate
bank groups operatii\g in the country which had obtained voting
permits from the Board of Governors of the Federal Reserve System
and thus were subject to the regulation provided for in existing law.
These 18 holding company groups operated in 22 States, had 832
banking offices (including branches) with total deposits of $10.8
billion. As of the same date all commercial banks in the United
States had 19,948 banking offices (including branches) with total
deposits of $183.6 billion.
While the holding company affiliate bank group totals related to
national totals appear relatively modest (4.17 percent for number of
banking offices and 5.87 percent for deposits) a quite different picture
is presented by examination of the data on a State basis. In 11 States
more than 20 percent of deposits in all commercial banks in those
States is controlled by one or more of these 18 holding company
affiliate bank groups. Detail by States is set forth in the following
table.




9

BANK HOLDING COMPANY ACT OF 19 5 5
T a b le

II .—Control of bank deposits in certain States

State

N ev a d a ...____________________________________ _________________________________
Minnesota_____________ -_______________________________________________________
O regon________________________________________________________________________
M o n ta n a ______________________________________________________________________
Washington_________________________________________________________ - _________
Idaho
. ___________________ _____________________ ____________ ____________
South Dakota______________ i - _________________________________ - ______________
North Dakota_________________________________________________________________
Utah.........................................................................................................................................
W isconsin______________________ ____________ _____ - ......... - ......................................
A rizo n a______________ ______________________________________ _________________

Percent of
deposits of
18 holding
company
groups to
deposits of
all commer­
cial banks
in State
78.29
57.04
44.88
44.19
32. 76
32.26
32.19
29.13
24. 14
22.09
21.13

Number of
regulated
holding com­
pany groups
operating
in the
State

1
3
1
2

4
1
2
2
1
2
1

In the case of Nevada, Oregon, and Arizona, just one holding com­
pany through its controlled banking offices had 74.29, 44.88, and 21.13
percent of all deposits of all commercial banks in those States respec­
tively. Of the 18 holding company affiliate bank groups under the
supervision of the Federal Reserve Board, 4 of these groups operate
across State lines. One of these groups has banking offices in 7
States which are located in 3 Federal Reserve districts.
The provisions of existing law providing for the regulation of the
activities of a bank holding company apply only if the bank holding
company controls at least one member bank of the Federal Reserve
System and only if the holding company desires to vote the stock of
that member bank. A bank holding company may avoid regulation
by the Federal Reserve Board through electing not to vote the stock
of any member bank. For instance there is one bank holding com­
pany which owns more than 50 percent of the stock of 5 national
banks, 2 State nonmember banks, and in addition has substantial
minority interests in 3 other national banks. Although approximately
36 percent of the par value of all the bank stocks owned by the holding
company is represented by its stock investment in the five national
banks, the holding company has not elected to obtain a voting permit
enabling it to vote the shares of these banks in which in each case it
owns more than 50 percent of their outstanding capital stocks.
There are a number of bank holding companies which are not sub­
ject to regulation by the Federal Reserve Board due to the fact that
they own controlling interests in only nonmember banks. One such
holding company owns the con-trolling stock interest in 8 State banks
located in 3 States.
One holding company which has extensive nonbanking investments
also owns through a subsidiary the controlling interest in 10 banks
located in 4 States and the District of Columbia. All of these banks
are State banks and hence the bank holding company is not subject
to Federal Reserve Board regulation. However, the activities of this
holding company are such as to make it subject to regulation by the
Securities and Exchange Commission under the Investment Company
Act of 1940. While such regulation is extensive in scope it is designed
principally to protect the interests of share owners as contrasted with
2036 6 O— 58-------40




10

BANK HOLDING COMPANY ACT OF 1955

holding company regulation by the Federal Reserve Board which is
concerned principally with protecting the soundness of the banks in
the group.
There is nothing in existing law which prevents the combination
under the same control, through the holding company device, of both
banking and nonbanking enterprises. Of the 18 holding company
affiliate groups now under regulation by the Federal Reserve Board
13 of the groups had stock investments in one or more nonbanking
organizations. In all, 90 nonbanking organizations were included in
the holdings of these groups as of December 31, 1953 (latest date for
which complete year end figures are available). The following table
sets forth pertinent information as to these holdings.
T able

III .—Nonbanking organizations in 18 holding company affiliate groups
as of Dec. 81, 1958 1

Type of business

Number of
groups

Number of Total assets of
nonbanking nonbanking
organizations organizations

Safe deposit.................................................................................................
Bank bu ildin gs.......................................................................................
Liquidation of assets...............................................................................
Liquidation of assets and insurance agency............. ......................
In liquidation...........................................................................................
Inactive____________ ______________ _____________________________
Service organizations of groups.......................................................... .
Trustees under deeds of trust.................. ............................................
Insurance agencies..................................................................................
Owning and operating real estate.......................................................
Real estate activities and oil development......................................
Real estate sales and insurance............................................................
Real estate sales, rentals, and property management................ .
Real estate sales and liquidations...................................................
Real estate insurance a g e n c y ............... ...... .............................. .
Financing and servicing real estate.......................................... .........
Home construction and improvement..............................................
Building and loan association..............................................................
Automobile financing.............................................................................
Installment financing........ .....................................................................
Installment service agency.................................................... ..............
Abstract and title insurance.................................................................
Investment of own funds........................ ........................... ................
Insurance underwriting (life, fire, casualty, or automobile)___
Catching, processing, and selling fish and fish products. ..........
Metals manufacturing (and subsidiary sales and service com­
pany)......................................................................................................

1
6
3
1
3
4
2
1
7
5
1
1
1
1
1
3
1
1
1
1
2
1
3
2
1
1

2

25,697,000

Total................................................................................................

*13

00

647,493,000

2
8
4
1
4
6
2
2
13
8
1
1
1
1
1
3
0
1
1
1
2
2
5
8
1

$625.000
10,109,000
1,749,000
208,000
852,000
97,000
1,307,000
763,000
1,997,000
1,039,000
19,453,000
329,000
27,000
58,000
334,000
58,646,000
324,000
1,331,000
2,899,000
1,595.000
125,000
1,657,000
5,552,000
498,899,000
11,761,000

1 The “ holding company affiliates*' in these groups are those which are now subject to the limited regula­
tion provided by existing law.
1 Omitting duplications.

One of the regulated bank holding companies which owns more than
50 percent of the capital stocks of banks with total deposits of slightly
over $2 billion, in its annual report for the year ending December 31,
1954, sets forth considerable information as to its holdings and opera­
tions of nonbanking subsidiaries. This holding company owns all of
the capital stock of a life insurance company with total assets of $447
million. This insurance company with over $5 billion of life insurance
in force operates in 47 States, 7 Canadian Provinces, Hawaii, Alaska,
and the District of Columbia. In addition the holding company
owned from 92.5 to 100 percent of the capital stock of 4 fire and cas­
ualty insurance companies which write practically all forms of insur­
ance other than life. The combined assets of these companies were
over $98 million and their premium income in 1954 was over $46
million. The holding company owned a 94.4 percent stock interest




BANK HOLDING COMPANY ACT OF 1955

11

in a company which manufactures hydraulic pumps, diesel engines,
and precision metal products. This manufacturing company with
assets of $23.7 million had net sales in 1954 of over $35 million. The
holding company owned a 75.6 percent stock interest in a seafood
packing company which cans salmon and tuna and also sells frozen
seafoods as well as precooked fish sticks. Assets of this packing
company exceeded $11.3 million and 1954 sales volume was almost
$15 million. The holding company owned all the capital stock of a
finance company dealing in mortgages and home-improvement loans.
The finance company had assets of over $36.6 million and at the end
of 1954 was servicing notes and mortgages totaling slightly over $171
million. The holding company owned all of the capital stock of a
real-estate investment company with assets of $19.3 million. This
investment company develops on its own account or participates with
others in the development of home and shopping-center projects. It
realizes income from the sale of oil from 118 producing wells which it
owns or in which it has an interest together with royalties and rentals
from 130 properties leased to major oil companies. The company
owns subsurface rights to approximately 400,000 acres of lands.
M a j o r P r o v is i o n s o f H. R. 6227

Your committee is convinced from the evidence presented during
its recent hearings that this bill represents the minimum legislation
necessary to deal with the bank holding company problem. The
committee wishes to make clear that the legislation which it proposes
is not designed to abolish bank holding companies or to prohibit the
expansion, within certain limits, of existing bank holding companies.
The bill would impose controls which the committee deems desirable
over the creation and expansion of bank holding companies and would
require them to separate their business of managing and controlling
banks from unrelated businesses. The bill contains five major pro­
visions.
First, the bill would set forth a declaration that it is the policy of
the Congress (a) to control the creation and expansion of bank
holding companies, (6) to separate their business of managing and
controlling banks from unrelated business, (c) generally to maintain
competition among banks and to minimize the danger inherent in
concentration of economic power through centralized control of
banks, and (d) to subject bank holding companies to examination and
regulation. It is the opinion of your committee that bank holding
companies should be subject, insofar as practicable, to the same type
of examination as the banks which they control.
Second, the bill would define a bank holding company as any
company which either (a) controls 25 percent or more of the voting
shares of 2 or more banks or of a bank holding company, or (6) is
found by the Board of Governors of the Federal Reserve System,
after notice and opportunity for hearing, to exercise a controlling
influence over 2 or more banks. Certain exemptions from the defini­
tion of “ bank holding company” are, however, provided. These are
as follows: (a) Any corporation a majority of the shares of which are
owned by the United States or any State, (b) banks which own or
control shares solely in a fiduciary capacity (except where such shares
are held for the benefit of all or a majority of the persons beneficially




12

BANK HOLDING COMPANY ACT OF 19 55

interested in such bank), and (c) any mutual savings bank, and any
nonprofit organization operating exclusively for charitable, religious,
and similar purposes which would otherwise be a bank holding com­
pany by reason of its ownership of bank stock on the effective date
of the act.
Third, the bill would require bank holding companies to obtain the
prior approval of the Board of the Federal Reserve System before
acquiring additional bank stocks or assets. The Board, before grant­
ing approval of any application, would be reauired to ask for the
recommendation of the agency that chartered the bank or banks
involved, the Comptroller of the Currency in the case of a National
bank and the State supervisor in the case of a State bank. If such
an agency denied approval within 30 days that action would be final,
but if approval was granted then the Board, of course, in the light of
the overall situation still could make its own determination.
Fourth, the bill would require bank holding companies within a
maximum of 5 years to divest themselves of interests in nonbanking
enterprises. Suitable tax relief on the distribution of such interests
made at the order of the Board, or where because of such an order a
company chooses to distribute its holdings of bank shares so as to
cease to be a bank holding company, is provided.
Fifth, the bill would prohibit a bank subsidiary of a bank holding
company from investing any of its funds in, or lending any of its fundi
on the security of the stock or Other securities of the nolding company
of which it is a subsidiary, and other subsidiaries thereof, and would
prohibit the bank from making loans to its bank holding company and
other subsidiaries.
D e f in it io n o f a B a n k H o ld in g C o m p a n y

The bill defines a bank holding company as any company which
either (a) controls 25 percent or more of the voting shares of 2 or more
banks or of a bank holding company, or (b) is found by the Board of
Governors of the Federal Reserve System, after notice and opportunity
for hearing, to exercise a controlling influence over 2 or more banks.
Certain exemptions from the definition of “ bank holding company”
are, however, provided. These are as follows: (a) Any corporation a ma­
jority of the shares of which are owned by the United States or any
State, (b) banks which own or control shares solely in a fiduciary ca­
pacity (except where such shares are held for the benefit of all or a
majority of the persons beneficially interested in such bank), and (c)
any mutual savings bank, or any organization operating exclusively
for charitable, religious, and similar purposes which would otherwise
be a bank holding company by reason of its ownership of bank stock
on the effective date of the act.
Your committee is unable to endorse the definition of “ bank holding
company” proposed by the Federal Reserve Board. It recommended
that a “ bank holding company” be defined as any company which
owns or controls, directly or indirectly, a majority of the shares of one
or more banks. Such a definition would perpetuate the long-recog­
nized deficiencies of the definition of the term “ holding company
affiliate” contained in present law. This definition is based primarily
on ownership or control of a majority of the shares of a bank or of the
shares voted in the last election of directors of a bank. Congress and




BANK HOLDING COMPANY ACT OF 1955

13

the courts have recognized the fact that control is often exercised
through ownership of much less than a majority of the shares of a
corporation. In the Public Utilities Holding Company Act of 1930,
for example, the Congress defines a holding company as follows:
* * * any company which directly or indirectly owns, controls, or holds with
power to vote, 10 per centum or more of the outstanding voting securities of a
public-utility company or of a company which is a holding company by virtue of
this clause or clause (B), unless the Commission, as hereinafter provided, by
order declares such company not to be a holding company.

In the Investment Companies and Advisers Act, “ control” is de­
fined in this manner:
Control means the power to exercise a controlling influence over the manage­
ment or policies of a company, unless such power is solely the result of an official
position with such company.
Any person who owns beneficially, either directly or through one or more
controlled companies, more than 25 per centum of the voting securities of a com­
pany shall be presumed to control such company.

Ownership of a majority of the shares voted in the preceeding
election of directors is equally unrealistic. In marked contrast to
its present position the Board in its 1943 annual report acknowledged
it when it stated:
In the Board’s experience, the case in which regulation is most necessary is
likely also to be the case in which advantage has been taken of the gaps in the
statutory definition with respect to the number of shares owned or controlled.
The Board believes that these gaps should be filled in by incorporating in the
statute a more realistic definition envisaging the manner and means by which
effective control actually is exercised.

The type of definition now proposed by the Federal Reserve Board
would not cover some existing groups which are in effect bank holding
companies. More important, it is quite possible it would not cover
arrangements for control of a number of banking units which could
easily be devised in the future to escape coverage of the definition
proposed by the Board. In contrast, your committee believes the
definition of “ bank holding company” contained in H. R. 6227 is a
realistic definition fully adequate to meet these possibilities of evasion.
As pointed out previously this bill does not deal with banks owned
by an individual. The definition of “ company” contained in the bill
does not include an individual, and it also specifically excludes the
administrator of a person’s estate, the executor of a person’s will, and
the trustees of a testamentary trust. Also excluded would be an
irrevocable trust the corpus of which is donated by one person and
consists only of such person’s property. In connection with the latter
exclusion, however, your committee desires to point out that the
exclusion is only intended to cover bona fide trusts created for specif­
ically named beneficiaries. The exclusion is not to be used to evade
the purposes of the act. For instance, if a number of individuals
owning stock in the same banks create such trusts for the purpose of
controlling the banks through the voting of the trustees in concert,
such trusts would not be bona fide trusts entitled to exclusion from the
provisions of this bill. Your committee desires to alert the Federal
Reserve Board in this respect, and requests the Board to inform your
committee and the Congress in its annual reports of attempts to use
this particular exclusion for the purpose of evading the purposes of
the bill.




14

BANK HOLDING COMPANY ACT OF 19 55

C o n tr o l of B a n k H o ld in g C o m p a n y E x p a n s io n

The bill would control the future expansion of bank holding com­
panies. The problem of how far bank holding company systems
should be permitted to expand has long been of serious concern. It
is in this area that one of the greatest potential evils of bank holding
company operations exists.
A chartered bank may be prevented by Federal or State law or
by the appropriate regulatory agency to which it is subject from
expanding its banking offices either by the establishment of new
branches or by taking over and operating the offices of other banks
as branches.
In order to establish branches, national banks must first obtain
permission from the Comptroller of the Currency, State member
banks from the Federal Reserve Board, and nonmember insured
banks from the Federal Deposit Insurance Corporation. But a bank
holding company is not limited by any such requirements.
Through the acquisition by the holding company of the stock of
an existing bank which thereafter may be operated essentially as a
branch of the holding company system, the denial of a branch appli­
cation of a controlled bank may become almost meaningless.
The holding company device lends itself readily to the amassing of
vast resources obtained largely from the public, which can be con­
trolled by the relatively few who comprise the management of the
holding company, giving them a decided advantage in acquiring
additional properties and in carrying out a program of expansion.
Such power can be used to acquire independent banks by measures
which leave local management and minority stockholders little with
which to defend themselves except their own protests.
The enactment into law of H. R. 6227, your committee feels, is
necessary to correct this situation. Section 5 of the bill provides
that no action could be taken which would make a company a bank
holding company without obtaining the approval of the Federal
Reserve Board, nor could any voting stock in any bank or the assets
of a bank be acquired by a bank holding company without obtaining
approval of the Board. The only exception to these provisions is
the acquisition by a bank holding company of voting stock acquired
as a stock dividend.
Before granting approval to any application, the Board would be
required to ask for the recommendations of the agency that chartered
the bank or banks involved, the Comptroller of the Currency in the
case of a national bank and the State supervisor in the case of a
State bank. If such agency denied approval within 30 days, that
action would be final, but if approval was granted then the Board,
of course, in the light of the overall situation still could make its own
determination.
The argument made by the Federal Reserve Board for centering
all decisions on expansion in its hands is not convincing. It is ap­
parently the position of the Federal Reserve Board that to give the
Comptroller in the case of a National bank and the State supervisor
in the case of a State bank, the right to deny approval of acquisition
of the stock or assets of a bank would bring about diffusion of author­
ity, involve dual application of effort and give rise to administrative
difficulties.




BANK HOLDING COMPANY ACT OF 1955

15

Your committee regards this position as fallacious and untenable.
The Federal Reserve Board agrees that the respective Federal and
State supervisory authority should be consulted, and their views
should be considered by the Board. We are unable to see how making
a recommendation by the State supervisors would entail any less
investigative work upon their part, create less diffusion of responsi­
bility, or give rise to less administrative difficulties than the making
of a definite decision that would be final on the Board.
As a matter of fact, if the Federal Reserve’s recommendation were
adopted both the Comptroller and the State supervisor and the Federal
Reserve would have to make an investigation, but under the terms of
the bill reported by your committee, if the State supervisor said
“ No,” that would mean no investigation would be necessary by the
Federal Reserve. The decision would be final and no administrative
work would follow.
Section 5 further provides that in no case could further expansion
outside of the home State of a bank holding company or a subsidiary
thereof be approved and applications within the home State could be
approved only within the area within which branches of banks are
permitted or where by State statute such expansion is specifically
exempted from branch banking restrictions.
The essence of section 5, your committee believes, is the placing of
bank holding company expansion on the same basis as expansion in
offices of banks. It establishes equity between holding companies
and banks as to the area in which they can expand. The statutes of
the States contain provisions clearly calculated to control the extent
of banking operations by geographic limitations. It has been a
generally recognized principle that such control could best be exer­
cised by the individual State, depending on the banking needs of such
State. This principle was given recognition by the Congress in the
Banking Acts of 1927 and 1933, which authorized the Comptroller
of the Currency to approve branches for a National bank only within
State boundaries, and subject to the restrictions as to location imposed
by the laws of the State on State banks.
Nearly all of the States already have legislated on the subject of
branch banking. There is no reason to force a State again to legislate
on branch banking. Your committee concurs with R. M. Evans, a
former member of the Board of Governors of the Federal Reserve
System, who said:
*
* * Once we acknowledge what has been officially ruled in at least two
States— that is, that holding company banking is a type of branch banking— then
holding company legislation should do what our present National banking legis­
lation does; namely, permit branches when State law permits them and deny
branches when State law does not permit them.

Finally, section 5 enumerates the standards which would guide the
Federal Reserve Board in deciding whether to approve any such
expansion. First, it would have to consider the financial history and
conditions of the applicant and the banks concerned; their prospects;
character of their management; and the needs of the communities
involved.
These are in general the considerations now specified in the law as
the t ^ is for administrative action in connection with the admission
of State banks to membership in the Federal Reserve System and the
granting of deposit-insurance coverage.




16

BANK HOLDING COMPANY ACT OF 19 55

However, under H. R. 6227, the Federal Reserve Board would also
have to consider whether the proposed expansion of a bank holding
company or of any banking subsidiary in a bank holding company
group would extend the operation of tne holding company group be­
yond limits consistent with adequate and sound banking and the
public interest.
D iv e s t m e n t o f N o n b a n k in g B u s in e ss e s

The bill provides for the divestment by bank holding companies of
investments in businesses extraneous to banking within a period of
2 years which period can be extended to a maximum of 5 years by the
Federal Reserve Board. Suitable tax relief on such distributions made
at the order of the Board, or where because of such an order a company
chooses to distribute its holdings of bank shares so as to cease to be a
bank holding company, is provided.
The reasons underlying the divestment requirement are simple.
As a general rule, banks are prohibited from engaging in any other
type of enterprise than banking itself. This is because of the danger
to the depositors which might result where the bank finds itself in
effect both the borrower and the lender. It is for this reason, among
others, that statutes limiting the investments of banks have been
passed by both the Congress and State legislatures.
The bank holding company is under no such restriction. It may
acquire and operate as many nonbanking businesses as it has funds and
the disposition to acquire. There are in the country today, as has
been pointed out previously, bank holding companies which, in addi­
tion to their investments in the stocks of banks, also control the opera­
tions of such nonbanking businesses as insurance, manufacture, real
estate, mining, and a number of others.
Whenever a holding company thus controls both banks and non­
banking businesses, it is apparent that the holding company's non­
banking businesses may thereby occupy a preferred position over that
of their competitors in obtaining bank credit. It is also apparent
that in critical times the holding company which operates nonbanking
businesses may be subjected to strong temptation to cause the banks
which it controls to make loans to its nonbanking affiliates even though
such loans may not at that time be entirely justified in the light of
current banking standards. In either situation the public interest
becomes directly involved.
Your committee finds itself unable to accede to the desire of the
Federal Reserve Board for discretionary authority to exempt business
determined by it “ to be so closely related to the business of banking
* * * as to make it unnecessary for the prohibitions of this section to
apply * *
Your committee finds itself in full accord with the views expressed
by former Comptroller of the Currency Preston Delano, when he
testified before the Senate Banking and Currency Committee in 1950
on the Board's proposal. He stated:
Under this provision, a holding company could engage through its subsidiaries
in any other business which the Board, in its discretion, determines to.be a “ proper
incident” to the business of managing, operating, or controlling banks.
By way of illustrating the possible effect of this sweeping discretionary power,
it might be pointed out that if the Board of Governors considered the business of
acquiring consumer paper by purchase or otherwise and the servicing and sale of




BANK HOLDING COMPANY ACT OF 1955

17

that paper to be a “proper incident” to the business of managing, operating, or
controlling banks, a large bank holding company would be in a position to organize
and control subsidiary companies in every city in the Nation to engage in this
business in competition with independent banks operating in their respective
business areas, and such subsidiary companies could funnel this business into the
banks of the holding company system.
Freedom to engage in such activities would give to the bank holding company
systems a tremendous competitive advantage over independent banks, which
cannot engage in similar activities away from their home offices except through
duly authorized branches, which in no case can be established beyond State lines.

Your committee has, however, exempted certain specific businesses
which it believes to be obviously incidental to the business of banking.
A bank holding company would not be required to divest itself of any
company engaged solely in holding or operating properties used wholly
or in part by any subsidiary that is a bank in its operations or acquired
for such future use, or engaged solely in conducting a safe deposit
business, or solely in the business of serving such holding company
and its subsidiaries in auditing, appraising, investment counsel, or in
liquidating assets acquired from such bank holding company and its
subsidiaries. Neither would a bank holding company be required to
divest itself of securities which are eligible for investment by national
banks or general investments of limited amounts.
Your committee has examined the various proposals to “ freeze”
bank holding companies’ nonbanking investments. All of these, it
was found, have a common defect. They would leave any company,
controlled by a bank holding company, free to expand its capital
structure by issuing preferred stock or bonds, by merger, or the
organization of subsidiaries of its own.
The fallacy of any attempt to “ freeze” nonbanking investments will
best be understood by a concrete illustration. Transamerica owns
75 percent of the outstanding voting stock, carried at $2,665,000, in
Columbia River Packers. Now let us assume that Transamerica's
investment in this company was completely frozen; that is, the amount
of money it had invested, the number of shares it held, and the per­
centage of voting shares it held could not be changed. The Columbia
River Packers, nevertheless, could expand its operations by issuing
additional securities to others than the holding company. This com­
pany could also absorb other companies and could expand into other
fields—in fact into any line of business which its charter permitted.
It could organize subsidiaries, raising capital funds from outsiders,
thereby enlarging its financial structure and its operations without
dissipating the control of the holding company. Last year it broad­
ened its tuna packing operations and its frozen seafood lines. It
added precooked fish sticks this year. Your committee has no reason
to believe the company might not expand into canned fruits and
vegetables, or other food processing lines, by merger or otherwise.
Similar expansion could be accomplished by subsidiaries of any bank
holding company.
Self-D

e a l in g

L

im it a t io n s

The bill would prohibit a bank subsidiary from investing any
of its funds in, or loaning any funds on the securities of, its parent
bank holding company or subsidiaries thereof. Such a subsidiary
bank would also be prohibited from loaning any of its funds to its
parent bank holding company or subsidiaries thereof. Your com­




18

BANK HOLDING COMPANY ACT OF 1955

mittee believes that such prohibitions are essential to prevent un­
sound banking practices.
While these prohibitions would prevent so-called “ upstream” finan­
cial transactions between a subsidiary bank up to or through its parent
bank holding company, the prohibitions would not prevent reverse
operations. The committee recognizes that a bank holding company
should be able to make loans and investments in its subsidiaries and
in the case of subsidiary banks may perform a very useful function
in this regard in supplying needed capital funds.
The inadequacy of existing law with respect to self-dealing between
bank holding companies and their subsidiary banks was plainly pre­
sented to the banking world in 1953 when the Bankers Discount
Corp. of Dallas, Tex., which operated a chain of small-loan com­
panies in Texas, Tennessee, Arizona, and California, purchased the
controlling interest in three banks in the Chicago area which later
were forced to close temporarily. The almost unbelievable story of
the Bankers Discount Corp. was recounted to the Senate Banking
and Currency Committee on June 12, 1953, by H. Earl Cook, chair­
man of the board of directors of the Federal Deposit Insurance Cor­
poration, during the hearings on S. 76 and S. 1118, bills to provide
for the control and regulation of bank holding companies.
Briefly stated, this is the story as told by Mr. Cook:
On February 6, 1953, Bankers Discount Corp., of Dallas, Tex., which was
incorporated in 1946 and operated a chain of small-loan companies in Texas,
Tennessee, Arizona, and California, purchased the controlling interest in the
First State Bank of Elmwood Park, Elmwood Park, 111. Bankers Discount
acquired 10,800 shares of the outstanding 20,000 shares of stock at $25 per share.
On February 6 and 25 Bankers Discount Corp. purchased 6,800 shares of the out­
standing 10,000 shares of stock of the Devon-North Town State Bank, of Chicago,
111., at $90 a share. In both instances the stock acquired by the Bankers Discount
was purchased from Henry J. Beutel, president of the two banks, who was also
president of West Irving State Bank, Chicago, 111., and his associates.
Concurrently with the acquisition of the stock in the two banks, Bankers
Discount obtained unsecured loans from each bank in the amount of the banks1
legal lending limit. In the case of First State Bank of Elmwood Park a $50,000
unsecured loan was obtained and in the Devon-North Town State Bank an
$85,000 unsecured loan was granted. .In the case of Devon a contract was entered
into on February 16 whereunder the bank agreed to purchase notes from Bankers
Discount Corp. without recourse for the full value of such notes less a 2-percent
discount to be held in a reserve account. Up to April 1 the bank purchased
approximately $925,000 of such notes which subsequent payments reduced to
approximately $837,000. In the case of the Elmwood Park Bank a similar agree­
ment was entered into on or about March 23, and between that date and April 3
the bank acquired approximately $2,180,000 of personal notes previously held by
Bankers Discount Corp.
On March 31, the auditor of public accounts of the State of Illinois advised the
Federal Deposit Insurance Corporation it was his intention to take over the
Elmwood Park and Devon banks for examination and adjustment on April 2
unless the Bankers Discount Corp.’s loans and the notes which had been purchased
by the banks were removed. He made other requirements with regard to the
management. Subsequently an extension of time was granted the banks by the
auditor in order to permit them to endeavor to have the Bankers Discount obliga­
tions removed. This measure failing, the auditor, on the morning of Saturday,
April 11, took over the Devon and Elmwood Park banks for examination and
adjustment and also took over the West Irving State Bank which had just agreed
to purchase approximately $800,000 of Bankers Discount Corp. notes and had
granted the Bankers Discount a $65,000 unsecured loan.
As a result of the action taken by the auditor of public accounts the $800,000
proceeds of the sale of the notes could not be drawn upon by Bankers Discount,
the sale was canceled and the West Irving State Bank was permitted to reopen
without financial assistance from this corporation on April 20 after the $65,000
loan was refinanced by Bankers Discount Corp.




BANK HOLDING COMPANY ACT OF 1955

19

Through the extension of financial aid of approximately $4,820,000 by the
Federal Deposit Insurance Corporation in accordance with the provisions of
section 13 (e) of the Federal Deposit Insurance Act, the deposit liabilities of First
State Bank of Elmwood Park were assumed by the newly organized bank of
Elmwood Park as of the close of business on May 26.
On May 28, the Devon-North Town State Bank reopened for business, after
disposing of the Bankers Discount Corp. notes held by it, without the financial
assistance of this Corporation.

Your committee feels that to fail to prohibit self-dealing between
bank holding companies and their subsidiary banks would be to invite
a repetition of the situation described above.
T a x R e l ie f fo e D is t r ib u t io n s M ad e U n d e r th e A ct

The bill would add a new part VIII to subchapter 0 of the Internal
Revenue Code of 1954. Under this new part, tax relief is accorded
to distributions which are made pursuant to the Bank Holding Com­
pany Act of 1955 within the period prescribed in the act.
In general, a corporation which comes within the terms of the act as
a bank holding company is given its choice of two alternative routes
(that is, to remain a bank holding company, or to dispose of its interests
in banks).
If the corporation decides to remain a bank holding company subject
to the supervision of the Federal Reserve Board, it may distribute any
“ prohibited property,” which the Board certifies is necessary or appro­
priate to comply with the act, to its shareholders without the recog­
nition of gain by the shareholders on the distribution. For this pur­
pose “ prohibited property,” in general, means stock, securities and
other obligations, or other assets of nonbanking businesses to the extent
the bank holding company is required to divest itself of such assets
under section 6 (a) of the bill. The term, however, does not include
cash, Government bonds, or certain short-term obligations. In the
ordinary case cash and cash equivalents, such as Government bonds
and short-term obligations, will not come within section 6 (a) of the
bill as property which must be disposed of by the bank holding com­
pany. It is believed desirable, however, to expressly exclude cash,
etc., from the definition of “ prohibited property,” since a similar ex­
clusion is contained in the corfiparable provisions of part VI of sub­
chapter O, relating to exchanges in obedience to SEC orders.
With respect to the distributing corporation, the usual provisions
of the Internal Revenue Code of 1954 apply. Under these provisions,
gain generally is not recognized to the distributing corporation except
under unusual circumstances such as the distribution of LIFO inven­
tory, the distribution of property subject to a liability in excess of
the adjusted basis, or the distribution of certain installment obligations.
The distribution of “ prohibited property” may be made either
directly to the shareholders of the corporation which is a bank holding
company or may be transferred to a wholly owned subsidiary expressly
created for purposes of receiving the prohibited property. The stock
of the subsidiary must be immediately distributed to the shareholders
of the corporation which is a bank holding company if the distribution
is to be made under this bill without the recognition of gain to the
shareholders.
If a corporation which qualifies as a bank holding company under
the act chooses the second alternative route, it may distribute to its
shareholders any bank stock or other property of a kind which causes




20

BANK HOLDING COMPANY ACT OF 19 55

it to be a bank holding company, without the recognition of gain to
the recipient stockholders. The Board must certify, however, that
distribution of property of that kind is necessary or appropriate to
effectuate the policies of the act. In such a case, the corporation
may, for example, distribute to its shareholders all of its shares of
bank stock without the recognition of gain even though it would be
possible to retain shares of stock in one bank without Being classified
as a bank holding company. Your committee believes that this
treatment is necessary because a corporation which is compelled to
divest itself of part of its bank stock by reason of the act may wish
to distribute all of its shares of bank stock, so that no possibility will
exist that it will be classified as a bank holding company in the future.
Your committee contemplates that the Federal Reserve Board in
the discharge of its functions in making certifications that exchanges
and distributions are necessary or appropriate to effectuate the pur­
poses of the act will carefully scrutinize the facts and circumstances
in each case to prevent abuses and will cooperate fully with the
Treasury Department to this end. Although the time of recognition
of gain may be legitimately shifted under the provisions of this part,
nothing in these provisions is to be construed or applied in such
manner as to permit tax evasion or sham transactions entered into
for avoiding tax.
Your committee has restricted the nonrecognition treatment de­
scribed above to property which was owned on May 15, 1955. This
restriction is deemed necessary to prevent corporations from purchas­
ing interests in banks or other property in order that their shareholders
may get the benefit of the tax treatment provided in the act. The
restriction would not apply, however, if the property was received in
a transaction in which gain was not recognized because of the general
rules described above. For example, if prohibited property was dis­
tributed by a subsidiary to its parent in a corporate chain without
recognition of gain to the parent by reason of these provisions, the
parent, in turn, may distribute the property to its own shareholders
without recognition of gain under a certification by the Board, even
though the property was acquired by the parent after May 15, 1955.
Similarly, the May 15, 1955, cutoff date is not applicable where the
rohibited property or bank stock (or other similar property) certified
y the Board is transferred to a wholly owned subsidiary created for
that purpose and the stock of the subsidiary is immediately distributed
by the qualified bank holding corporation to its shareholders.
As in the case of the first alternative route, nonrecognition treat­
ment is available whether the bank stock or other similar property
certified by the Board is distributed directly to shareholders or whether
it is first transferred to a wholly owned subsidiary expressly created for
that purpose and the stock of the subsidiary is then immediately
distributed to the shareholders of the parent.
To prevent certain tax avoidance possibilities that might otherwise
exist, your committee's bill does not extend nonrecognition treatment,
under the general rules described above, to any portion of a distribu­
tion attributable to a contribution to the capital of anv corporation
where the contribution is made after May 15, 1955. This restriction
applies whether or not the contribution to capital is made by a share­
holder of the corporation receiving such contribution. In the case of a
contribution to the capital of a bank, however, the limitation does not

E




BANK HOLDING COMPANY ACT OF 1955

21

apply if it is determined that avoidance of Federal income tax was not
a principal purpose of the contribution.
Where the nonrecognition treatment has been extended to “ pro­
hibited property" which has been distributed by the corporation
which is a bank holding company, a final certification must be obtained
from the Board that the corporation has divested itself of all property
necessary for compliance with the act within the statutory period per­
mitted for divestment. If this final certification is not obtained, the
transactions previously permitted to be made without recognition of
gain are reopened and tax may be imposed in such cases. For this
purpose the statute of limitations on assessment of a deficiency result­
ing solely from such a transaction does not expire until 1 year after the
date on which the corporation gives notification that a final certifica­
tion by the Board has been made.
A similar final certification is required where nonrecognition treat­
ment has been originally accorded to the distribution of bank stock or
similar property of a kind which the Board has certified as necessary
so that the corporation will cease to be a bank holding company. In
this case the tax provisions of the bill provide that the Board must give
a final certification that the corporation has ceased to be a bank hold­
ing company within 2 years after the date of enactment unless the
time has been extended by the Board for 1-year renewals not to exceed
5 years from date of enactment.
M

is c e l l a n e o u s

P

r o v is io n s

The bill contains a number of miscellaneous provisions, some of
which are of substantive importance, and some of which are technical
in nature.
The basis of stock or other property received by a distributee
without recognition of gain under the provisions of the bill is deter­
mined by allocating the adjusted basis of the stock with respect to
which the distribution was made between such stock and the property
so distributed. This rule is similar to the general rule for allocation
of basis in the case of a stock dividend. The bill provides that the
allocation shall be made under regulations provided by the Secretary
or his delegate.
REGISTRATION, REPORTS, AND EXAMINATION

The bill would require each bank holding company to register
with the Board of Governors of the Federal Reserve System. It
would be required to do this within 6 months after the effective date
of the act or within 6 months after becoming a bank holding company,
whichever was later, and the Board may grant extensions up to an
additional 6 months. When registering, it would be required to give
such information about its finances and operations as the Board
deemed necessary to carry out the purposes of the act. The bill
would also authorize the Board, to enable it to carry out the purposes
of the act, to issue regulations and orders, require reports under oath,
and make examinations of each bank holding company and subsidiary
thereof.
The Board of Governors would be required within 1 year after the
effective date of the act, and each year thereafter in the Board's




22

BANK HOLDING COMPANY ACT OF 1955

annual report to report to Congress the results of the administra­
tion o,f the act, stating what, if any, substantial difficulties had been
encountered in carrying out the purposes of the act and any rec­
ommendation as to changes in the law which the Board believed
desirable.
RESERVATION OF RIGHTS TO STATES

The bill, in a clear-cut statement, would preserve all the rights
which States, now or hereafter, may have to regulate banks or bank
holding companies.
HEARINGS AND REVIEW

The bill would give any person affected by the Federal Reserve
Board’s action or omission to act under the bill a right to judicial
review with a trial of the facts de novo in an appropriate court proceed­
ing. Your committee believes that simple justice requires any action
or inaction of the Federal Reserve Board should be subject to hearings
and the aggrieved party should have the right to court review.
PENALTIES

The bill would provide penalties for willful violation of the act or
any regulations or orders issued by the Board pursuant thereto. Upon
conviction a company may be fined $1,000 for each day the violation
continues and an individual upon conviction may be subjected to a
$10,000 fine or 1 year imprisonment or both. Officers or employees
of a bank holding company are made subject to the same penalties for
making false entries in books, reports, or statements that are applicable
to officers or employees of Federal Reserve member banks ($5,000 fine
or 5 years’ imprisonment or both).
S e c t io n - b y -S e c t io n A

n a l y s is

of

the

B

il l

Section 1. —This section provides that this act may be cited as the
Bank Holding Company Act of 1955.
Section 2.—This section sets forth a declaration of policy by the
Congress that the creation and expansion of bank holding companies
be subjected to control, that bank holding companies be required to
separate their business of managing and controlling banks from
unrelated businesses and that bank holding companies be subjected
to the same type of examination and regulation as the banks which
they control. The section further provides that it is a policy of the
Congress generally to maintain competition among banks and to
minimize the danger inherent in the concentration of economic
power through centralized control of banks.
Section 3.—Subsection (a) defines the teim “ bank holding company”
to mean any company which directly or indirectly owns or controls
25 percent or more of the voting shares of 2 or more banks or of a
company which is or becomes a bank holding company by virtue of
this act; or any company which, after notice and hearing, is deter­
mined by the Board of Governors of the Federal Reserve System to
exercise directly or indirectly a controlling influence over the manage­
ment or policies of 2 or more banks. A successor to any such bank
holding company for purpose of the act is deemed to be a bank holding
company as of the date the predecessor company became a bank




BANK HOLDING COMPANY ACT OF 1955

23

holding company. However, no (1) mutual savings bank, (2) non­
profit religious, charitable, scientific, or educational organization, nor
(3) company owning banks with aggregate deposits of less than
$15 million as of December 31, 1954, shall be classed as or held to be
a bank holding company by reason of the ownership of the stock of
any bank as of the effective date of the act. A provision of the defini­
tion specifically excludes any corporation wholly owned by the United
States, or any bank owning or controlling shares in a fiduciary capacity
except where such shares are beneficially held for all or a majority of
the persons interested in the bank.
Subsection (b) defines a “ subsidiary” of a specified bank holding
company in terms of the ownership and control tests applicable to a
bank holding company.
Subsection (c) defines the term “ company” to include any bank,
corporation, partnership, joint-stock company, business trust, voting
trust, association, or any similar organized group of persons whether
incorporated of not. However, any such company the majority of
the shares of which are owned by the Federal Government or by any
State are excluded.
Subsection (d) defines the term “ bank” to include any national or
State bank, savings bank or trust company, but excludes any organiza­
tion which does not do business within the United States. The sub­
section also defines the terms “ State member bank” and “ district
bank.”
Subsection (e) defines the term “ successor” and gives the Board of
Governors of the Federal Reserve System the right by regulation to
further define the term “ successor” to the extent necessary to prevent
evasion of the purposes of the act.
Subsection (f) makes clear that where the term “ Board” is used in
the act the reference is to the Board of Governors of the Federal
Reserve System.
Section 4•
—This section sets forth powers and duties with respect
to the registration, making of reports and examination of bank
holding companies.
Subsection (a) requires bank holding companies to register and file
requisite information with the Board within a period of 180 days and
grants the Board the right to extend such period for not to exceed an
additional 180 days.
Subsection (b) authorizes the Board to issue regulations and orders
necessary in administration of the act,
Subsection (c) gives the Board authority to require reports from
and make examinations of bank holding companies and their subsid­
iaries. To avoid duplication of effort, use, so far as possible, will be
made of examination reports of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, or appropriate State bank
supervisory authorities.
Subsection (d) requires the Board within a year and annually there­
after to report to the Congress on operations under'the act and to
make any recommendations as to changes in the law which appear
desirable to the Board.
Section 5.—The provisions of this section relate to future acquisi­
tions of bank shares or bank assets by bank holding companies or
by companies which thereby would become bank holding companies.




24

BANK HOLDING COMPANY ACT OF 1955

Subsection (a) makes it unlawful, except with prior approval of the
Board of Governors of the Federal Reserve System (1) for any action
to be taken which results in a company becoming a bank holding
company ; (2) for any bank holding company or subsidiary thereof to
acquire directly or indirectly, any voting shares of a bank (other than
those received as a stock dividend); or (3) for any bank holding com­
pany or subsidiary thereof, other than a bank, to acquire all or sub­
stantially all of the assets of a bank.
Subsection (b) requires the Board before approving an application
for the acquisition of voting shares or assets of a bank to give 30 days
notice to the Comptroller of the Currency if the applicant or the bank
involved is a national or district bank or to the appropriate State
supervisory authority if the applicant or the bank involved is a State
bank. If the supervisory authority so notified files a written disap­
proval of the application within the 30-day period the application
cannot be approved by the Board.
Subsection (c) confines future bank acquisitions by bank holding
companies to the State within which the bank holding company or
subsidiary thereof maintains its principal office or in which it conducts
its principal operations. Within a State, future bank acquisitions by
a bank holding company or subsidiary thereof are required to conform
to the geographic limitations which apply to the establishment of
branch banks unless State law otherwise affirmatively permits other
acquisition.
Subsection (d) sets forth standards to be considered by the Board in
connection with applications for bank acquisitions under section 5.
These relate to financial history and status, prospects, management of
the holding company and banks involved, needs and welfare of the
communities, and the public interest.
Section
1 his section relates to bank holding company interests
T
in nonbanking organizations and provides for separation of banking
and nonbanking interests.
Subsection (a) makes it unlawful (except as otherwise provided)
for a bank holding company to own any shares or other securities or
obligations of any company other than a bank or to engage in any
business other than (1) banking, (2) managing or controlling banks,
or (3) businesses of the kind enumerated in subsection (c) (1) of this
section. Such ownership or activities become unlawful 2 years after
the effective date of the act except that the Board upon application
may extend such period up to a maximum of 5 years after the date of
enactment or after a company becomes a bank holding company,
whichever is later.
Subsection (b) prohibits a bank holding company after 2 years from
date of enactment from (1) making any statement on its shares that
they represent shares of any other company except a bank or a bank
holding company, or (2) conditioning in any manner ownership, sale,
or transfer of its shares upon the ownership, sale or transfer of shares
of any other company except a bank or a bank holding company.
Subsection (c) provides appropriate exemptions to the blanket
prohibitions on bank holding company investments or activities set
forth in subsection (a).
Paragraph (1) exempts investments by a bank holding company in
companies obviously incidental to the ousiness of banking, such as
holding bank premises, conducting a safe deposit business, or providing
services such as auditing, appraisal, and investment counsel, or in




BANK HOLDING COMPANY ACT OF 19 5 5

25

liquidating assets acquired from the bank holding company or its sub­
sidiaries.
Paragraph (2) exempts for a 2-year period investments acquired by a
bank holding company which is a bank, in satisfaction of a debt previ­
ously contracted.
Paragraph (3) exempts for a 2-year period investments acquired by
a bank holding company from any subsidiary which is requested to
dispose of such investment by a Federal or State examining authority.
Paragraph (4) exempts investments held by a bank (which is a
bank holding company) in a fiduciary capacity and those of the kinds
and amounts eligible for national bank investment under section 5136
of the Revised Statutes. The paragraph also exempts shares lawfully
acquired and owned prior to the enactment of this act by such a bank
or any of its wholly owned subsidiaries.
Paragraph (5) exempts investments held by a bank (which is a bank
holding company) if such investments may be owned under the laws
of the State in which such bank is operating.
Paragraph (6) exempts limited general investments of a bank holding
company from the investment prohibitions of the act. A bank holding
company may own investments in any company provided such invest­
ment does not include more than 5 percent of the outstanding voting
securities of such company and provided the value of the investment
does not exceed 5 percent of the total assets of the holding company.
A bank holding company may also indirectly so invest through an
investment company provided the investment company does not own
more than 5 percent of the voting securities of any company and does
not own any single security having a value greater than 5 percent of
the total assets of the holding company.
Section 7.— This section prohibits a bank subsidiary from investing
any of its funds in or lending any of its funds to its parent bank holding
company or subsidiaries thereof and the subsidiary bank may not
accept the securities of its parent bank holding company or subsidiaries
thereof as collateral for any loan except for debts previously con*
tracted. The subsidiary bank may not purchase assets or securities
under a repurchase agreement from its parent holding company or
from any of the subsidiaries of that holding company. Routine
banking transactions between subsidiary banks are not treated as
extensions of credit and do not fall within the prohibitions of this
section. Also exempted from the self-dealing prohibitions of this
section are securities of (1) a company described in section 6 (c) (1)
(activities incidental to bank operations), (2) a company the sub­
sidiary status of which arises out of a previously contracted bona fide
debt or (3) a company the subsidiary status of which arises through
ownership of securities in a fiduciary capacity, except where such
ownership is for the benefit of all or a majority of the stockholders of
the bank.
Section 8.—This section makes clear that there is reservation of the
rights of any State for exercise of such powers as it has or may here­
after have with respect to banks, bank holding companies and the
subsidiaries thereof.
Section 9.—This section provides that any person adversely affected
or aggrieved shall have the right to a judicial review of the action or
nortaction of the Board of Governors of the Federal Reserve System,
and that the action or nonaction which is the subject thereof shall not
be considered to be action committed to agency discretion within
203(50 0 — 58------ 50




26

BANK HOLDING COMPANY ACT OF 19 55

section 10 of the Administrative Procedure Act. The facts shall be
subject to trial de novo in an appropriate court proceeding.
Section 10.—This section provides penalties for willful violation of
the act or any regulations or orders issued by the Board pursuant
thereto. Upon conviction a company may be fined $1,000 for each
day the violation continues and an individual upon conviction may
be subjected to a $10,000 fine or 1 year imprisonment or both. Offi­
cers or employees of a bank holding company are made subject to the
same penalties for making false entries in books, reports, or state­
ments that are applicable to officers or employees of Federal Reserve
member banks ($5,000 fine or 5 years imprisonment or both).
Section 11.—This section contains technical amendments to bank­
ing acts and other acts to reflect the provisions of this act.
Subsection (a) amends the 16th paragraph of section 4 of the
Federal Reserve Act which pertains to the nomination and election
of class A and class B directors of Federal Reserve banks.
Subsection (b) proyides for repeal of the last sentence of paragraph
19 and aJl of paragraph 22 of section 9 of the Federal Reserve Act.
These paragraphs respectively deal with the penalty imposed on a
State member bank for failure to obtain reports of holding company
affiliates and the applicability of voting permit conditions to State
member banks affiliated with a holding company affiliate.
Subsection (c) provides for repeal of subsection (c) of section (2)
of the Banking Act of 1933, as amended. That subsection contains
the definition of a “ holding company affiliate” under that act.
Subsection (d) rewrites section 5144 of the Revised Statutes, aa
amended, so as to delete the provisions of that section relating to
voting permits of holding company affiliates of national banks.
Subsection (e) amends section 5211 of the Revised Statutes so as
to remove a sentence subjecting holding company affiliates to the
reporting provisions of that section.
Subsection (f) amends subchapter O of chapter 1 of the Internal
Revenue Code of 1954 by adding a new part VIII. This part VIII
specifies the extent to which (during a transition period after the
enactment of the bill) gain will not be recognized upon receipt of
property by a shareholder of a bank holding company, if such distri­
bution is made pursuant to a certification by the Board of Governors
of the Federal Reserve System that such distribution is necessary or
appropriate to effectuate the Bank Holding Company Act of 1955.
The provisions of the new part VIII are restricted by their own terms
to the gain directly attributable to the receipt of property in the dis­
tributions specifically described.
The rules contained in part VIII are in addition to the other pro­
visions of subtitle A of the Internal Revenue Code of 1954 (such as
provisions relating to the recognition or nonrecognition of gain to a
corporation making distributions, the provisions under which tax-free
reorganizations may be effectuated, etc.). Many of these other pro­
visions are contained in subchapter C of chapter 1 of such code (re­
lating to corporate distributions and reorganizations). The provisions
of part VIII supersede the other provisions of chapter 1 only in the
crses qualifying under part VIII, and in those cases only to the extent
specific provision is contained in part VIII.
Section 1101 sets forth the conditions for nonrecognition of gain
attributable to distributions of property by a qualified bank holding
corporation when received by the shareholder with respect to his stock




BANK HOLDING COMPANY ACT OF 1955

27

in such corporation. In addition rules are provided as to the date tho
qualified bank holding corporation must have acquired the property
before it can be distributed with no gain recognized to its shareholders
as a result of the distribution. This section also prescribes certain
conditions which must be fulfilled before any such distributions of
property will obtain the nonrecognition of gain benefits of its provi­
sions.
Subsection (a) of section 1101 provides that a distribution of
prohibited property by a qualified bank holding corporation with
respect to its stock and without the surrender by the shareholder of
any stock or securities in such corporation will not result in any gain
being recognized on the receipt of such property by the shareholder if
the Board has, before the distribution, certified that the distribution
of such property is necessary or appropriate to carry out the first
sentence of section 6 (a) of the Bank Holding Company Act of 1955.
On the date of distribution the distributing corporation must have
been a qualified bank holding corporation. The first sentence of
section 6 (a) provides in general that it shall be unlawful for any
bank holding company, after 2 years from the effective date of the
Bank Holding Company Act of 1955, to own any shares or other
securities or obligations of any company other than a bank or to engage
in any business other than that of banking, or of managing or con­
trolling banks, or of the kind of businesses enumerated in section
6 (c) (1) of the act. However, such section 6 (c) sets forth certain
exceptions and permits the holding by a bank holding company of
certain types of property.
Subsection (b) of section 1101 applies to a distribution of property
by a qualified bank holding corporation, with respect to its stock, to a
shareholder without the surrender by the shareholder of stock or se­
curities in such corporation where the Board has before the distribu­
tion certified that (1) such property is of a kind which causes such
corporation to be a bank holding company, (2) the disposition of
property of that kind is necessary to enable such corporation to cease
being a bank holding company, and (3) the distribution is necessary
or appropriate to effectuate the policies of the Bank Holding Company
Act of 1955. In the case of a distribution falling within subsection
(b), no gain to the shareholder upon the receipt of such property is to
be recognized. Property which is intended to be covered by sub­
section (b) of section 1101 is that property or properties which is of a
kind which causes a company to be a bank holding company within
the provisions of section 3 (a) of the Bank Holding Company Act of
1955. Thus, assuming that all the conditions of this part are met, a
qualified bank holding corporation may distribute to its shareholders
without the recognition of gain to them upon such distribution, part
or all of .the voting shares of one or more of the banks the ownership
of which voting shares was the basis upon which such corporation is
a bank holding company, if the Board makes the certification required
by paragraph (2) of subsection (b). Furthermore, if any corporation
was held by the Board to be a bank holding company under clause 2
of section 3 (a) of the Bank Holding Company Act, and if such cor­
poration is a qualified bank holding corporation as required by this
part, such corporation would be permitted to distribute whatever
property it owned upon the basis of which such determination was
made by the Board to its shareholders without recognition of the gain




28

BANK HOLDING COMPANY ACT OF 1955

on the distribution, if the Board certifies in accord with paragraph
(2)A qualified bank holding corporation which distributes prohibited
property with respect to which the Board has certified as required by
paragraph (2) of subsection (a), may not have any distributions
qualify under subsection (b). If the first distribution under this part
falls under subsection (b), no distribution may qualify under sub­
section (a). It is the intent of these subsections that a qualified
bank holding corporation must determine whether it will dispose of
prohibited property and remain a bank holding company or whether
it will dispose of the property upon the basis of which the corporation
is determined to be a bank holding company.
Subsection (c) of section 1101 is a limitation upon the application
of subsections (a) and (b) Subparagraph (A) of paragraph (1) of
subsection (c) specifically excludes from the application of subsections
(a) and (b) of section 1101 any property which a qualified bank holding
corporation acquired after May 15, 1955, except to the extent such
corporation received such property (even though subsequent to May
15, 1955) and gain was not recognized by reason of subsection (a) or
(b), or unless the property was received by the corporation in exchange
for all of its stock in an exchange to which paragraph (2) or (3) of
subsection (c) applies.
Under subparagraph (B) of paragraph (1), neither subsection (a)
nor (b) of section 1101 is applicable to any distribution by a qualified
bank holding corporation with respect to any stock which was ac­
quired by the shareholder of such corporation after May 15, 1955,
unless such shareholder receives such stock in a distribution the gain
with respect to which was not recognized by reason of subsection
(a) or (b).
Paragraph (2) of subsection (c) of section 1101 is an exception to
the general rule of paragraph (1) of subsection (c) that subsections
(a) and (b) do not apply to any property acquired by the distribut­
ing corporation after May 15, 1955. Under paragraph (2) if a quali­
fied bank holding corporation exchanges solely property which, under
subsection (a), such corporation could distribute directly to its share­
holders without the recognition of gain to such shareholders, for all
of the stock of a second corporation created and availed of solely for
the purpose of receiving such property, and immediately after the
exchange, the qualified bank holding corporation distributes all of
such stock to its shareholders with respect to its stock, then all of
the stock of the second corporation may be distributed to the share­
holders of such qualified bank holding corporation without recogni­
tion of gain. However, prior to such exchange the Board must
certify that the exchange and distribution are necessary or appropri­
ate to effectuate the first sentence of section 6 (a) of the Bank Holding
Company Act of 1955.
Paragraph (3) of subsection (c) of section 1101 is another exception
to the general rule of paragraph (1) of subsection (c) that subsections
(a) and (b) do not apply to any property acquired by the distributing
corporation after May 15, 1955. Under paragraph (3) if any quali­
fied bank holding corporation exchanges solely property which, under
subsection (b), such corporation could distribute directly to its share­
holders without the recognition of gain to such shareholders, for all
of the stock of a second corporation created and availed of solely for




BANK HOLDING COMPANY ACT OF 1955

29

the purpose of receiving such property and immediately after the
exchange, the qualified bank holding corporation distributes all of
such stock to its shareholders with respect to its stock, then all of the
stock of the second corporation may be distributed to the shareholders
of such qualified bank holding corporation without the recognition of
gain. However, prior to such exchange the Board must have certified
that such property is of a kind which causes such corporation to be a
bank holding company, that the disposition of property of that kind
is necessary to enable such corporation to cease being a bank holding
company, and that the exchange and distributions are necessary or
appropriate to effectuate the policies of the Bank Holding Company
Act of 1955.
Under subsection (d) of section 1101 the nonrecognition of gain
provided by subsection (a) or (b) shall not apply to that portion of
any distribution which is attributable to any contribution to capital
of any corporation made after May 15, 1955. Thus, assume that
corporation A (a qualified bank holding corporation) owns all of the
stock of corporation X (such stock being property falling within the
provisions of subsection (a) of section 1101). Assume further that
corporation A, after May 15, 1955, makes a contribution to the capital
of corporation X in the amount of $50,000. Thereafter, corporation A
makes a distribution to which subsection (a) of section 1101 applies
of the stock of corporation X to the shareholders of corporation A.
Under subsection (d), the nonrecognition of gain provided by sub­
section (a) does not apply to that portion of the distribution which is
attributable to the contribution of capital, that is, $50,000. The
amount of the distribution to the extent of the contribution to capital,
$50,000, is a distribution subject to the provisions of section 301 of the
Internal Revenue Code of 1954.
Paragraph (2) of subsection (d), however, provides an exception to
the rule established in paragraph (1). Paragraph (2) provides that
paragraph (1) shall not apply with respect to any contribution to
capital of a bank if the Secretary or his delegate determines that the
avoidance of Federal income tax was not one of the principal purposes
for making such contributions.
Subsection (e) of section 1101 provides that neither subsection (a)
nor subsection (b) shall apply with respect to any distribution by a
corporation unless the Board makes the certification required by the
subsection.
Paragraph (1) of subsection (e) relates to certification with respect
to distributions falling within subsection (a). It provides that sub­
section (a) shall not apply to any such distribution unless the Board
certifies that, before the expiration of the period permitted under
section 6 (a) of the Bank Holding Company Act of 1955 (including
any extensions thereof granted to such corporation under such section
6 (a)), the corporation has disposed of all the property, the disposition
of which is necessary or appropriate to effectuate the first sentence
of such section 6 (a) (or would have been so necessary or appropriate
if the corporation had continued to be a bank holding company).
In order that subsection (a) of section 1101 is to apply to distributions
of prohibited property by a qualified bank holding corporation, it is
essential that such corporation dispose of all of the property which
it is required to dispose of by reason of the Bank Holding Company
Act of 1955, within the period (including extensions thereof) specified




30

BANK HOLDING COMPANY ACT OF 1955

in section 6 (a) of such act. During the period during which such
corporation is required to dispose of all such property, distributions
of prohibited property are to be considered as being within subsection
(a) of section 1101, if other requirements of this part are met. Thus,
no gain would be recognized to shareholders on distributions (if such
distributions would otherwise qualify for the benefits of this part)
during such period. If, at the close of such period, the corporation
has disposed of all of the property which it is required to dispose of
by the Board and the Board has made the certification required under
subsection (e) of section 1101, subsection (a) of section 1101 will
apply to distributions of prohibited property. However, if, at the
close of sucH period, the corporation has not disposed of all of the
property the disposition of which is necessary or appropriate to
effectuate the first sentence of section 6 (a) of the Bank Holding Com­
pany Act of 1955, then subsection (a) of section 1101 will not apply
to any distributions of prohibited property by the corporation. Thus,
in a case where the provisions of subsection (e) (1) are not met, the
tax treatment of any distribution of prohibited property by a qualified
bank holding corporation to its shareholders is governed by the pro­
visions of other sections of the Internal Revenue Code of 1954 appli­
cable thereto.
Paragraph (2) of subsection (e) of section 1101 is applicable to dis­
tributions falling within subsection (b) of section 1101. Subparagraph
(A) provides that subsection (b) shall not apply with respect to any
distribution by any corporation unless the Board certifies that, before
the expiration of 2 years after the enactment of this part, the qualified
bank holding corporation has ceased to be a bank holding company.
However, under subparagraph (B) the Board is authorized on the
application of any qualified bank holding corporation to extend such
period from time to time with respect to such corporation for not
more than 1 year at a time if, in its judgment, such an extension would
not be detrimental to the public interest. Such period may not in
any case be extended beyond the date 5 years after the date of enact­
ment of this part. In order that subsection (b) of section 1101 is to
apply to distributions of property of a kind which causes a qualified
bank holding corporation to be a bank holding company and the
disposition of which is necessary to enable such corporation to cease
being a bank holding company, it is essential that such corporation
cease to be a bank holding company within the period (including
extensions thereof) specified in subsection (e) (2) of section 1101.
During the period during which such corporation disposes of property
to enable it to cease being a bank holding company, distributions of
such property are to be considered as being within subsection (b) of
section 1101, if other requirements of this part are met. Thus, no
gain would be recognized to shareholders on such distributions (if
such distributions would otherwise qualify for the benefits of this part)
during such period. If, at the close of such period specified in sub­
section (e) (2), the corporation has ceased to be a bank holding com­
pany, subsection (b) of section 1101 will apply to distributions of such
property. However, if, at the close of such period, the corporation
has not ceased being a bank holding company, then subsection (b) of
section 1101 will not apply to any distributions of such property by
the corporation. Thus, in a case where the provisions of subsection
(e) (2) are not met, the tax treatment of any distributions of property




BANK HOLDING COMPANY ACT OF 1955

31

of a kind which causes a qualified bank holding corporation to be a
bank holding company to its shareholders is governed by the provi­
sions of other sections of the Internal Revenue Code of 1954 applicable
thereto.
Section 1102 provides special rules for the application of this part.
Subsection (a) relates to the basis of property acquired in distribu­
tions under either subsection (a) or subsection (b) of section 1101.
If gain is not recognized by reason of either of such subsections with
respect to the receipt of any property, then the basis of such property
and of the stock with respect to which it was distributed, shall, in the
hands of the distributee, be determined by allocating the adjusted
basis of such stock between such property and such stock. Such
allocation shall be made under regulations prescribed by the Secretary
or his delegate.
Subsection (b) of section 1102 relates to the periods of limitation.
Under this subsection the periods of limitation provided in sections
6501 and 6502 on the making of an assessment or the collection by
levy, or a proceeding in court shall not expire, with respect to any
deficiency (including interest and additions to the tax) resulting solely
from the receipt of property to which subsection (a) or (b) of section
1101 applies, before the date which is 1 year after the date on which the
corporation notifies the Secretary or his delegate, that final certifica­
tion by the Board with respect to the corporation from which such
property was received has been made under section 1101 (e); and such
assessment and collection may be made notwithstanding any provision
of law or rule of law which would otherwise prevent such assessment
and collection. Thus, if the Board does not make the certification
provided in subsection (e) (1) or (2), the periods of limitation provided
in sections 6501 and 6502 will not prohibit the making of an assess­
ment or collection by levy or proceeding in court with respect to any
deficiency for prior taxable years resulting solely from receipt of
property which would otherwise fall within subsections (a) or (b) of
section 1101.
Subsection (c) of section 1102 relates to allocation of earnings and
profits. In case of any exchange described in section 1101 (c) (2)
or (3), the earnings and profits of the corporation transferring the
property shall be properly allocated between such corporation and the
corporation receiving such property under regulations prescribed by
the Secretary or his delegate.
Subsection (d) relates to itemization of property distributed. The
Board is required in any certification under this part to make such
specification and itemization of property as may be necessary to carry
out the provisions of this part.
Section 1103 sets forth the definitions, for purposes of this part,
of “ bank holding company,” “ qualified bank holding corporation,”
“ prohibited property,” “ nonexempt property,” and “ Board.”
Subsection (a) of this section provides that the term “ bank holding
company” means a bank holding company as defined by section 3 of
the Bank Holding Company Act of 1955.
Subsection (b) of this section defines the term “ qualified bank hold­
ing corporation.” In order for a corporation to be a qualified bank
holding corporation, and therefore for its shareholders to receive the
special tax treatment provided by this part, it must not only be a bank
holding company but in addition, it must hold “ prohibited property”




32

BANK HOLDING COMPANY ACT OF 1955

as defined in subsection (c). For example, if the sole assets of cor­
poration X consist of 25 percent of the voting shares of each of 2 banks,
corporation X is not a qualified bank holding corporation.
In addition, to be a qualified bank holding corporation the pro­
hibited property must have been acquired on or before May 15, 1955,
by a corporation which is a bank holding company, or must have been
acquired in a distribution to it by a qualified bank holding corporation
with respect to which gain is not recognized by reason of section 1101
(a). Furthermore, a bank holding company which holds prohibited
property acquired by it in exchange for all of its stock in an exchange
described in section 1101 (c) (2) is a qualified bank holding corporation.
The preceding paragraph may be illustrated by the following exam­
ples. (1) If the sole assets of corporation X on May 15, 1955, consist
of cash and 25 percent of the voting shares of each of 2 banks and on
May 30, 1955, corporation X purchases nonbanking business assets,
corporation X is not a qualified bank holding corporation. (2) The
sole assets of corporation Y, on May 15, 1955, consist of 25 percent of
the voting shares of each of 2 banks and 4 percent of the outstanding
voting securities (the value of which is less than 5 percent of the value
of corporation Y ’s total assets) of corporation Z, a qualified bank
holding corporation. Corporation Z distributes nonbanking business
assets to corporation Y which are prohibited property in the hands of
corporation Y, in a distribution to which section 1101 (a) applies.
Corporation Y becomes a qualified bank holding corporation by reason
of the distribution by Z. (3) On May 15, 1955, corporation B owns
all of the stock of corporation A, a qualified bank holding corporation
on such date. Corporation B, a qualified bank holding corporation
by virtue of its ownership of the stock of corporation A, transfers such
stock to corporation C in an exchange meeting the requirements of
section 1101 (c) (2). Corporation C is a qualified bank holding
corporation.
Notwithstanding that a corporation meets the requirements of
paragraph (1) of subsection (b), such corporation shall not be a
qualified bank holding corporation unless it meets the additional
requirements of subparagraphs (A), (B), and (C) of paragraph (2).
Subparagraph (A) of paragraph (2) provides that a bank holding
company shall not be a qualified bank holding corporation unless
such corporation would have been a bank holding company on May
15, 1955, if the Bank Holding Company Act of 1955 hacl been in
effect on such date, or unless such corporation is a bank holding
company determined solely by reference to the following: (1) Property
acquired by such corporation on or before May 15, 1955; (2) property
acquired by such corporation in a distribution by a qualified bank
holding corporation to such corporation wherein gain was not recog­
nized by reason of subsection (a) or (b) of section 1101; and (3)
property acquired by such corporation in exchange for all of its stock
in an exchange meeting the requirements of section 1101 (c) (2) or (3).
Thus, if on May 15, 1955, the sole assets of corporation X consist
of cash and business assets and on May 30, 1955, corporation X
acquires 25 percent of the voting shares of each of 2 banks for cash,
then, by reason of subparagraph (A) of paragraph (2) , corporation X ,
although a bank holding company, holding prohibited property
acquired by it before May 15, 1955, is not a qualified bank holding*
corporation. An additional example of the application of subpara-




BANK HOLDING COMPANY ACT OF 1955

33

graph (A) of paragraph (2) is where corporation X is determined, by
the Board, after May 15, 1955, to be a bank holding company by
reason of clause (2) of section 3 (a) of the Bank Holding Company
acquired by sue!
Act of 1955, solely by reference
corporation on or before May 15>
,
x , property acquired
by it from a qualified bank holding corporation in a distribution in
which gain to the distributee was not recognized by reason of sub­
section (a) or (b) of section 1101.
Except as explained in the next paragraph, subparagraph (B) of
paragraph (2) provides that a bank holding company shall not be a
qualified bank holding corporation by reason of either (1) the acquisi­
tion by such bank holding company of prohibited property after
May 15, 1955, in a distribution from a qualified bank holding corpora­
tion to which section 1101 (a) is applicable or (2) the acquisition by
such bank holding company (which company would not have been a
bank holding company on May 15, 1955, if the Bank Holding Com­
pany Act of 1955 had been in effect on such date) of property described
in clause (ii) of subparagraph (A) of paragraph (2). An example of
the operation of the foregoing is where, on May 15, 1955, the sole
assets of corporation Y consist of cash and 25 percent of the voting
shares of each of two banks. On May 30, 1955, corporation Y pur­
chases for cash 50 percent of the stock of corporation Z, a qualified
bank holding corporation. Corporation Z distributes business assets
to corporation Y in a distribution in which gain to corporation Y with
respect to the receipt of such property was not recognized by reason
of section 1101 (a). Corporation Y is not a qualified bank holding
corporation since such property was acquired by corportation Y in a
distribution with respect to stock acquired after May 15, 1955.
A bank holding company may be a qualified bank holding corpora­
tion by reason of the property described in the preceding paragraph
if such property was acquired in a distribution with respect to stock
which was acquired by such company (1) on or before May 15, 1955,
(2) in a distribution (with respect to stock held by it on May 15,
1955, or with respect to stock in respect of which all previous applica­
tions of this clause are satisfied) with respect to which gain to it was
not recognized by reason of subsection (a) or (b) of section 1101, or
(3) in exchange for all of the stock of the bank holding company in
an exchange meeting the requirements of section 1101 (c) (2) or (3).
Subparagraph (C) of paragraph (2) states that a corporation
may not be treated as a qualified bank holding corporation unless
the Board certifies that it satisfies the requirements of subsection
(b) of section 1103.
Subsection (c) of section 1103 defines the term “ prohibited prop­
erty.” Such property is defined as property, other than nonexempt
property, the disposition of which, in the case of any bank holding
company, would be necessary or appropriate to effectuate the first
sentence of section 6 (a) of the Bank Holding Company Act of 1955,
if such company continued to be a bank holding company beyond the
period (including any extensions thereof) specified in section 6 (a),
m the case of distributions under section 1101 (a), or specified in sec­
tion 1101 (e) (2) (B), in the case of distributions under section 1101
(b). The term “ prohibited property” does not include shares, securi­
ties, or obligations of any company which are held by a bank holding
company to the extent that the ownership by such bank holding




34

BANK HOLDING COMPANY ACT OF 1955

company of such property is not prohibited by section 6 of such act
by reason of subsection (c) (6) of such section.
Subsection (d) defines the term “ nonexempt property,” the dis^
tribution of which may not be accorded the tax treatment provided
by this part.
Subsection (e) of this section states that the term “ Board” means
the Board of Governors of the Federal Reserve System.
Subsection (g) amends the Investment Company Act of 1940, as
amended, and the Investment Advisers Act of 1940, as amended, so as
to exclude from those acts, bank holding companies as defined in thq
Bank Holding Company Act of 1955 rather than as defined in the
Banking Act of 1933. The subsection also excludes from the Invest­
ment Company Act of 1940 and the Investment Advisers Act of 1940
any banking subsidiary or other subsidiary of a bank holding company
if such subsidiary is exempt from the provisions of section 6 of the
Bank Holding Company Act of 1955 by reason of the provisions of
section 6 (c) (1) of that act.
Section 12. This section contains a savings clause to make clear that
nothing in this act shall be construed as approving any act, action, or
conduct in violation of existing law or constituting a defense in
antitrust or monopolistic proceedings.
Section IS. This section contains the usual separability clause for
provisions of the act.
C h a n g e s in E x is t in g L a w

In compliance with clause 3 of rule X III of the Rules of the House of
Representatives, changes in existing law made by the bill, as intro­
duced, are shown as follows (existing law proposed to be omitted ia
enclosed in black brackets, new matter is printed in italics, existing
law in which no change is proposed is shown in roman):
F E D E R A L R E S E R V E A C T , AS A M E N D E D

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S e c . 4. * * *

Paragraph 16. N om ination and election o f class A and B directors
D irectors o f class A and class B shall be chosen in the follow ing m anner:
T h e B oard o f G overnors o f the Federal R eserve System shall classify th e
m em ber banks o f the district in to three general groups or divisions, designating
each group b y num ber. E ach group shall consist as nearly as m ay be o f banks o f
similar capitalization. E ach m em ber bank shall be perm itted to n om inate to
the chairm an o f the b oard of directors of the Federal R eserve bank o f the district
one candidate for- director o f class A and one candidate for director o f class B.
T h e candidates so nom inated shall be listed b y the chairm an, indicating b y w h om
nom inated, and a cop y o f said list shall, within fifteen days after its com pletion ,
be furnished b y the chairm an to each m em ber bank. E ach m em ber bank b y a
resolution o f the board or b y an am endm ent to its by-law s shall authorize its
president, cashier, or som e other officer to cast the v ote o f the m em ber bank in th e
elections o f class A and class B directors: [P ro v id e d , T h a t w henever any tw o o r
m ore m em ber banks within the same Federal Reserve district are affiliated w ith
the same holding com pany affiliate, participation b y such m em ber banks in a n y
such nom ination or election shall be confined to one o f such banks, w hich m ay b e
designated for the purpose by such holding com pany affiliate J Provided, That
whenever any member banks within the same Federal Reserve district are subsidiaries
o f the same bank holding com pany within the meaning of the Bank Holding Com pany
A ct o f 1955, participation in any such nomination or election by such member banks,
including such bank holding com pany i f it is also a member bank shall be confined
to one o f such banks, which may be designated fo r the purpose by such holding
com pany.

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35

BANK HOLDING COMPANY ACT OF 1955
S e c . 9. * * *

Paragraph 19. Failure to obtain reports of affiliates
Any such affiliated member bank which fails to obtain from any of its affiliates
and furnish any report provided for by the two preceding paragraphs of this
section shall be subject to a penalty of $100 for each day during which such failure
continues, which, by direction of the Board of Governors of the Federal Reserve
System, may be collected, by suit or otherwise, by the Federal reserve bank of
the district in which such member bank is located. [F or the purposes of this
paragraph and the two preceding paragraphs of this section, the term “ affiliate”
shall include holding company affiliates as well as other affiliates.]!
H
e

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Paragraph 22. Holding company affiliates
[Each State member bank affiliated with a holding company affiliate shall
obtain from such holding company affiliate, within such time as the Board of
Governors of the Federal Reserve System shall prescribe, an agreement that
such holding company affiliate shall be subject to the same conditions and limita­
tions as are applicable under section 5144 of the Revised Statutes, as amended, in
the case of holding company affiliates of national banks. A copy of each such
agreement shall be filed with the Board of Governors of the Federal Reserve
System. Upon the failure of a State member bank affiliated with a holding comany affiliate to obtain such an agreement within the time so prescribed, the
loard of Governors of the Federal Reserve System shall require such bank to
surrender its stock in the Federal reserve bank and to forfeit all rights and
privileges of membership in the Federal Reserve System as provided in this section.
Whenever the Board of Governors of the Federal Reserve System shall have
revoked the voting permit of any such holding company affiliate, the Board of
Governors of the Federal Reserve System may, in its discretion, require any or
all State member banks affiliated with such holding company affiliate to surrender
their stock in the Federal reserve bank and to forfeit all rights and privileges of
membership in the Federal Reserve System as provided in this section. J

S

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BANKING ACT OF 1933, AS AMENDED
Sec. 2.
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As used in this Act and any provision of law amended by this Act—
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[(c) The term “ holding company affiliate” shall include any corporation,
business trust, association, or other similar organization—
t d ) Which owns or controls, directly or indirectly, either a majority of the
shares of capital stock of a member bank or more than 50 per centum of the
number of shares voted for the election of directors of any one bank at the pre­
ceding election, or controls in any manner the election or a majority of the directors
of any one bank; or
[(2) For the benefit of whose shareholders or members all or substantially all
the capital stock of a member bank is held by trustees.
[Notwithstanding the foregoing, the term “ holding company affiliate” shall
not include (except for the purposes of section 23A of the Federal Reserve Act,
as amended) any corporation all of the stock of which is owned by the United
States, or any organization which is determined by the Board of Governors of
the Federal Reserve System not to be engaged, directly or indirectly, as a business
in holding the stock of, or managing or controlling, banks, banking associations,
savings banks, or trust companies. 1

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SECTION 5144, REVISED STATUTES, AS AMENDED
S e c . 5144. In all elections of directors, each shareholder shall have the right
to vote the number of shares owned by him for as many persons as there are
directors to be elected, or to cumulate such shares and give one candidate as many
votes as the number of directors multiplied by the number of his shares shall
equal, or to distribute them on the same principle among as many candidates as
he shall think fit; and in deciding all other questions at meetings of shareholders,
each shareholder shall be entitled to one vote on each share of stock held by him;
except that (1) this shall not be construed as limiting the voting rights of holders




36

BANK HOLDING COMPANY ACT OF 19 55

of preferred stock under the terms and provisions of articles o f association, or
amendments thereto, adopted pursuant to the provisions of section 302 (a) of the
Emergency Banking and Bank Conservation Act, approved March 9, 1933, as
[am ended,! amended; (2) in the election of directors, shares of its own stock held
by a national bank as sole trustee, whether registered in its own name as such
trustee or in the name of its nominee, shall not be voted by the registered owner
unless under the terms of the trust the manner in which such shares shall be voted
may be determined by a donor or beneficiary of the trust and unless such donor or
beneficiary actually directs how such shares shall be voted [ , ! ; and (3) shares of
its own stock held by a national bank and one or more persons as trustees may be
voted by such other person or persons, as trustees, in the same manner as if he or
they were the sole trustee [, and (4) shares controlled by any holding company
affiliate of a national bank shall not be voted unless such holding company affiliate
shall have first obtained a voting permit as hereinafter provided, which permit
is in force at the time such shares are voted, but such holding company affiliate
may, without obtaining such permit, vote in favor of placing the association in
voluntary liquidation or taking any other action pertaining to the voluntary
liquidation of such association!. Shareholders may vote by proxies duly au­
thorized in writing; but no officer, clerk, teller, or bookkeeper of such bank shall
act as proxy ; and no shareholder whose liability is past due and unpaid shall be
allowed to vote. Whenever shares of stock cannot be voted*by reason of being
held by the bank as sole trustee, such shares shall be excluded in determining
whether matters voted upon by the shareholders were adopted by the requisite
percentage of shares.
[F or the purposes of this section shares shall be deemed to be controlled by a
holding company affiliate if they are owned or controlled directly or indirectly
by such holding company affiliate, or held by any trustee for the benefit of the
shareholders or members thereof.
[Any such holding company affiliate may make application to the Board of
Governors of the Federal Reserve System for a voting permit entitling it to
vote the stock controlled by it at any or all meetings of shareholders of such
bank or authorizing the trustee or trustees holding the stock for its benefit or
for the benefit of its shareholders so to vote the same. The Board of Governors
of the Federal Reserve System may, in its discretion, grant or withhold such
permit as the public interest may require. In acting upon such application, the
Board shall consider the financial condition of the applicant, the general char­
acter of its management, and the probable effect of the granting of such permit
upon the affairs of such bank, but no such permit shall be granted except upon
the following conditions:
[(a) Every such holding company affiliate shall, in making the application
for such permit, agree (1) to receive, on dates identical with those fixed for the
examination of banks with which it is affiliated, examiners duly authorized to
examine such banks, who shall make such examinations of such holding company
affiliate as shall be necessary to disclose fully the relations between such banks
and such holding company affiliate and the effect of such relations upon the
affairs of such banks, such examinations to be at the expense of the holding com­
pany affiliate so examined; (2) that the reports of such examiners shall contain
such information as shall be necessary to disclose fully the relations between
such affiliate and such banks and the effect of such relations upon the affairs of
such banks; (3) that such examiners may examine each bank owned or controlled
by the holding company affiliate, both individually and in conjunction with other
banks owned or controlled by such holding company affiliate; and (4) that
publication of individual or consolidated statements of condition of such banks
may be required;
t(b) After five years after the enactment of the Banking Act of 1933, every
such holding company affiliate (1) shall possess, and shall continue to possess
during the life of such permit, free and clear of any lien, pledge, or hypothecation
o f any nature, readily marketable assets other than bank stock in an amount
not less than 12 per centum of the aggregate par value of all bank stocks con­
trolled by such holding company affiliate, which amount shall be increased by
not less than 2 per centum per annum of such aggregate par value until such
assets shall amount to 25 per centum of the aggregate par value of such bank
stocks; and (2) shall reinvest in readily marketable assets other than bank stock
all net earnings over and above 6 per centum per annum on the book value of its
own shares outstanding until such assets shall amount to such 25 per centum of
the aggregate par value of all bank stocks controlled by it;




37

BANK HOLDING COMPANY ACT OF 19 5 5

[(c) Notwithstanding the foregoing provisions of this section, after five years
after the enactment of the Banking Act of 1933, (1) any such holding company
affiliate the shareholders or members of which shall be individually and severally
liable in proportion to the number of shares of such holding company affiliate
held by them respectively, in addition to amounts invested therein, for all statu­
tory liability imposed on such holding company affiliate by reason of its control
of shares of stock of banks, shall be required only to establish and maintain out
of net earnings over and above 6 per centum per annum on the book value of its
own shares outstanding a reserve of readily marketable assets in an amount of
not less than 12 per centum of the aggregate par value of bank stocks controlled
by it, and (2) the assets required by this section to be possessed by such holding
company affiliate may be used by it for replacement of capital in banks affilated
with it and for losses incurred in such banks, but any deficiency in such assets
resulting from such use shall be made up within such period as the Board of
Governors of the Federal Reserve System may by regulation prescribe and the
provisions of this subsection, instead of subsection (b), shall apply to all holding
company affilates with respect to any shares of bank stock owned or controlled
by them as to which there is no statutory liability imposed upon the holders of
such bank stock;
[(d ) Every officer, director, agent, and employee of every such holding company
affiliate shall be subject to the same penalties for false entries in any book, report,
or statement of such holding company affiliate as are applicable to officers,
directors, agents, and employees of member banks under section 5209 of the
Revised Statutes, as amended (U. S. C., title 12, sec. 592); and
[(e) Every such holding company affiliate shall, in its application for such
voting permit, (1) show that it does not own, control, or have any interest in,
and is not participating in the management or direction of, any corporation,
business trust, association, or other similar organization formed for the purpose of,
or engaged principally in, the issue, flotation, underwriting, public sale, or dis­
tribution, at wholesale or retail or through syndicate participation, of stocks,
bonds, debentures, notes, or other securities of any sort (hereinafter referred to
as “ securities company” ); (2) agree that during the period that the permit
remains in force it will not acquire any ownership, control or interest in any such
securities company or participate in the management or direction thereof; (3)
agree that if, at the time of filing the application for such permit, it owns, controls,
or has an interest in, or is participating in the management or direction of, any
such securities company, it will, within five years after the filing of such applica­
tion, divest itself of its ownership, control, and interest in such securities company
and will cease participating in the management or direction thereof, and will not
thereafter, during the period that the permit remains in force, acquire any further
ownership, control, or interest in any such securities company or participate in
the management or direction thereof; and (4) agree that thenceforth it will
declare dividends only out of actual net earnings.
~ EIf at any time it shall appear to the Board of Governors of the Federal Reserve
System that any holding company affiliate has violated any of the provisions of
the Banking Act of 1933 or of any agreement made pursuant to this section, the
Board of Governors of the Federal Reserve System may, in its discretion, revoke
any such voting permit after giving sixty days7 notice by registered mail of its
intention to the holding company affiliate and affording it an opportunity to be
heard. Whenever the Board of Governors of the Federal Reserve System shall
have revoked any such voting permit, no national bank whose stock is controlled
by the holding company affiliate whose permit is so revoked shall receive deposits
of public moneys of the United States, nor shall any such national bank pay any
further dividend to such holding company affiliate upon any shares of such bank
controlled by such holding company affiliate.
[Whenever the Board of Governors of the Federal Reserve System shall have
revoked any voting permit as hereinbefore provided, the rights, privileges, and
franchises of any or all national banks the stock of which is controlled by such
holding company affiliate shall, in the discretion of the Board of Governors of
the Federal Reserve System, be subject to forfeiture in accordance with section
2 of the Federal Reserve Act, as amended.]
0

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38

BANK HOLDING COMPANY ACT OF 1955

SECTION 5211, REVISED STATUTES, AS AM ENDED
Every association shall make to the Comptroller of the Currency
not less than three reports during each year, according to the form which may be
prescribed by him, verified by the oath or affirmation of the president, or of the
cashier, or of a vice president, or of an assistant cashier of the association desig­
nated by its board of directors to verify such reports in the absence of the presi­
dent and cashier, taken before a notary public properly authorized and commis­
sioned by the State in which such notary resides and the association is located, or
any other officer having an official seal, authorized in such State to administer
oaths, and attested by the signature of at least three of the directors. Each
such report shall exhibit, in detail and under appropriate heads, the resources
and liabilities of the association at the close of business on any past day by him
specified, and shall be transmitted to the comptroller within five days after the
receipt of a request or requisition therefor from him; and the statement of resources
and liabilities, together with acknowledgment and attestation in the same form
in which it is made to the comptroller, shall be published in a newspaper published
in the place where such association is established, or if there is no newspaper in
the place, then in the one published nearest thereto in the same county, at the
expense of the association; and such proof of publication shall be furnished as
may be required by the comptroller. The comptroller shall also have power to
call for special reports from any particular association whenever in his judgment
the same are necessary in order to obtain a full and complete knowledge of its
condition.
Each national banking association shall obtain from each of its affiliates other
than member banks and furnish to the Comptroller of the Currency not less than
three reports during each year, in such form as the Comptroller may prescribe,
verified by the oath or affirmation of the president or such other officer as may be
designated by the board of directors of such affiliate to verify such reports, dis­
closing the information hereinafter provided for as of dates identical with those
for which the Comptroller shall during such year require the reports of the condi­
tion of the association. [For the purpose of this section the term “ affiliate”
shall include holding company affiliates as well as other affiliates.] Each such
report of an affiliate shall be transmitted to the Comptroller at the same time as
the corresponding report of the association, except that the Comptroller may, in
his discretion, extend such time for good cause shown. Each such report shall
contain such information as in the judgment of the Comptroller of the Currency
shall be necessary to disclose fully the relations between such affiliate and such
bank and to enable the Comptroller to inform himself as to the effect of such
relations upon the affairs of such bank. The reports of such affiliates shall be
published by the association under the same conditions as govern its own condi­
tion reports. The Comptroller shall also have power to call for additional reports
with respect to any such affiliate whenever in his judgment the same are necessary
in order to obtain a full and complete knowledge of the conditions of the associa­
tion with which it is affiliated. Such additional reports shall be transmitted to
the Comptroller of the Currency in such form as he may prescribe. Any such
affiliated bank which fails to obtain and furnish any report required under this
section shall be subject to a penalty of $100 for each day during which such failure
continues.
S ec. 5211.

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39

BANK HOLDING COMPANY ACT OF 1955

INTERNAL REVENUE CODE OF 1954
C h a p te r

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I— N o rm a l T a x e s

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and

S u rta x e s

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SUBCHAPTER O— GAIN OR LOSS ON DISPOSITION

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OF PROPERTY

Part

I. Determination of amount and recognition of gain or ioss.
Part
II. Basis rales of general application.
Part III. Common nontaxable exchanges.
Part
IV. Special rules.
Part
V. Changes to effectuate F. C. C. policy.
Part
VI. Exchanges in obedience to S. E. C. orders.
Part VII. Wash sales of stock or securities.
Part V III. Distributions pursuant to Bank Holding Company A c ’ of 1955.

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PART VIII.— DISTRIBUTIONS PURSUANT TO BANK
HOLDING COMPANY ACT OF 1955
Sec. 1101. Distributions pursuan t to Bank Holding Company Act of 1955.
Sec. 1102. Special rules.
Sec. 1103. Definitions.

SEC. 1101. DISTRIBUTIONS PURSUANT TO BANK HOLDING COM­
PAN Y ACT OF 1955.
(a )

D

is t r ib u t io n s

of

P

r o h ib it e d

P

roperty

.— I f —

(1) a qualified bank holding corporation distributes (with respect to its stock)
prohibited property to a shareholder, without the surrender by such shareholder
o f stock or securities in such corporation; and
(2) the Board has, before the distribution, certified that the distribution of such
property is necessary or appropriate to effectuate the first sentence of section
6 (a) of the Bank Holding Company A ct of 1955,
then no gain to the shareholder from the receipt o f such property shall be recognized.
This subsection shall not apply to any distribution by a corporation which has made
an y distribution pursuant to subsection (b).
(b) C o r p o r a t i o n C e a s i n g To B e a B a n k H o l d i n g C o m p a n y . — I f —
(1) a qualified bank holding corporation distributes (with respect to its stock)
property to a shareholder, without the surrender by such shareholder of stock or
securities in such corporation; and
(2) the Board has, before the distribution, certified that (A ) such property is
e f a kind which causes such corporation to be a bank holding company. {B ) the
disposition o f property of that kind is necessary to enable such corporation to
cease being a bank holding company, and (C) the distribution is necessary or
appropriate to effectuate the policies of the Bank Holding Company Act of 1955,
then no gain to the shareholder from the receipt o f such property shall be recognized.
This subsection shall not apply to any distribution by a corporation which has made
any distribution pursuant to subsection (a).
(c) P r o p e r t y A c q u i r e d A f t e r M a y 15, 1955.—
( 1) I n g e n e r a l . — Except as provided in paragraphs (2) and (8), subsection
(a) or (b) shall not apply to—
(A ) any property acquired by the distributing corporation after M a y 15,
1955, unless (i) gain to such corporation with respect to the receipt o f such
property was not recognized by reason o f subsection (a) or (b), or (ii) such
property was received by it in exchange for all of its stock in an exchange to
which paragraph {2) or (8) applies, or
(B ) any distribution with respect to any stock which was acquired by the
distributee after M a y 15, 1955, unless gain to such distributee with respect
to the receipt o f such stock was not recognized by reason of subsection (a)
or (b).
(2) E x c h a n g e s i n v o l v i n g p r o h i b i t e d p r o p e r t y . — I f —
(^4) any qualified bank holding corporation exchanges (i) solely property
which, under subsection (a), such corporation could distribute directly to its
shareholders without the recognition o f gain to such shareholders, for (ii) all
o f the stock of a second corporation created and availed o f solely for the pur­
pose o f receiving such property;
(B)
immediately after the exchange, the qualified bank holding corpora­
tion distributes all o f such stock to its shareholders with respect to its stock;
and




40

BANK HOLDING COMPANY ACT OF 1955

(C)
before such exchange, the Board has certified that the exchange and
distribution are necessary or appropriate to effectuate the first sentence
of section 6 (a) of the Bank Holding Company Act of 1955.
then paragraph ( 1) shall not apply with respect to such distribution.
(3)

E

xc h an g es

in v o l v in g

in t e r e s t s

in

b a n k s

.— I f —

(^4) any qualified bank holding corporation exchanges (i) solely property
which, under subsection (b), such corporation could distribute directly to

its shareholders without the recognition of gain to such shareholders, for
(ii) all of the stock of a second corporation created and availed of solely
for the purpose of receiving such property;
(B) immediately after the exchange, the qualified bank holding cor­
poration distributes ail of such stock to its shareholders with respect to its
stock; and
( C) before such exchange, the Board has certified—
(i)
that such property is of a kind which causes such corporation to
be a bank holding company;
(it) that the disposition of property of that kind is necessary to
enable such corporation to cease being a bank holding company; and
{Hi) that the exchange and distribution are necessary or appropriate
to effectuate the policies of the Bank Holding Company Act of 1955,
then paragraph (1) shall not apply with respect to such distribution.
(d) C e r t a i n C o n s t r u c t i o n t o C a p i t a l A f t e r M a y 15, 1955.—
(1) I n g e n e r a l . — The nonrecognition of gain provided by subsection (a) or
(b) shall not apply to that portion of any distribution which is attributable to
any contribution to the capital of any corporation made after May 15, 1955.
( 2 ) S p e c i a l r u l e f o r c o n t r i b u t i o n t o c a p i t a l o f b a n k s . — Paragraph
( 1) shall not apply with respect to any contribution to the capital of a bank, if
the Secretary or his delegate determines that the avoidance of Federal income tax
was not one of the principal purposes for the making of such contribution.
( e)

F

in a l

C

e r t if ic a t io n

.—

(a).— Subsection (a) shall not apply with respect to any
distribution by a corporation unless the Board certifies that, before the expiration
of the period permitted under section 6 (a) of such Act (including any extensions
thereof granted to such corporation under such section 6 (a)), the corporation has
disposed of all the property the disposition of which is necessary or appropriate
to effectuate the first sentence of such section 6 (a) (or would have been so necessary
or appropriate if the corporation had continued to be a bank holding company) .
(1 )

F o r su b se c tio n

(2 )

F or s u b s e c t i o n

( b) . —

(A) Subsection (b) shall not apply with respect to any distribution by any
corporation unless the Board certifies that, before the expiration of the period
specified in subparagraph (B), the corporation has ceased to be a bank holding
company.
(B) The veriod referred to in subparagraph (^4) is the period which expires
two years after the date of the enactment of this pq,rt. The Board is ,authorized,
on application by any corporation, to extend such period from time to time with
respect to such corporation for not more than one year at a time if, in its judgment,
such an extension would not be detrimental to the public interest; except that such
period may not in any case be extended beyond the date five years after the date
of the enactment of this part.
SEC. 1102. SPECIAL RULES.
(a) B a s i s o f P r o p e r t y A c q u i r e d

i n D i s t r i b u t i o n s . — If, by reason of section
1101, gain is not recognized with respect to the reeeipt of any property, then the
basis of such property and of the stock jwith respect to which it is distributed shall,
in the distributee’s hands, be determined by allocating between such property and
such stock the adjusted basis of such stock. Such allocation shall be made under
regulations prescribed by the Secretary or his delegate.
(b) P e r i o d s o f L i m i t a t i o n . — The periods of limitation provided in sections 6501
and 6502 on the making of an assessment or the collection by levy or a proceeding
in court shall not expire, with respect to any deficiency (including interest and addi­
tions to the tax) resulting solely from the receipt of property to which subsection (a)
or (b) of section 1101 applies, before the date which is one year after the date on which
the corporation notifies the Secretary or his delegate that final certification by the
Board with respect to the corporation from which such property was received has
been made under section 1101 (e); and such assessment and collection may be made
notwithstanding any provision of law or rule of law which would otherwise prevent
such assessment and collection.




BANK HOLDING COMPANY ACT OF 19 55

41

(c) A l l o c a t i o n o f E a r n i n g s a n d P r o f i t s . — In the case of any exchange
described in section 1101 (c) (2) or (3), the earnings and profits of the corporation
transferring the prohibited property shall be properly allocated between such corpo­
ration and the corporation receiving such property under regulations prescribed by
the Secretary or his delegate.
(d) I t e m i z a t i o n o f P r o p e r t y . — In any certification under this part, the Board
shall make such specification and itemization of property as may be necessary to
carry out the provisions of this part.

.

SEC 1103. DEFINITIONS.
(a) B a n k H o l d i n g C o m p a n y . —For purposes of this part, the term “ bank holding

company” has the meaning assigned to such term by section 8 of the Bank Holding
Company Act of 1955.
(b) Q u a l i f i e d B a n k H o l d i n g C o r p o r a t i o n . —
( 1) I n g e n e r a l . —Except as provided in paragraph (2), for purposes of this
part the term “ qualified bank holding corporation” means any corporation
which is a bank holding company and which holds prohibited property acquired
by it—
(A) on or before May 15, 1955,
(B) in a distribution in which gain to such corporation with respect to the
receipt of such property was not recognized by reason of subsection (a) of
section 1101, or
(C) in exchange for all of its stock in an exchange described in section
1101 (c) {2).

(2)

L i m i t a t i o n s .—

(A) A bank holding company shall not be a qualified bank holding
corporation, unless it would have been a bank holding company on May 15,
1955, if the Bank Holding Company Act of 1955 had been in effect on such
date, or unless it is a bank holding company determined solely by reference
to—
(t) property acquired by it on or before May 15, 1955,
(it) property acquired by it in a distribution in which gain to such
corporation with respect to the receipt of such property was not recog­
nized by reason of subsection (a) or (6) of section 1101, and
(m*) property acquired by it in exchange for all of its stock in an
exchange described in section 1101 (c) (2) or (3).
(B) A bank holding company shall not be a qualified bank holding cor­
poration by reason of property described in subparagraph (B) of paragraph
(1) or clause (ii) of subparagraph {A) of this paragraph, unless such prop­
erty was acquired in a distribution with respect to stock, which stock was
acquired by such bank holding company-—
(i) on or before May 15, 1955,
(ii) in a distribution {with respect to stock held by it on May 15,
1955, or with respect to stock in respect of which all previous applications
of this clause are satisfied) with respect to which gain to it was not
recognized by reason of subsection (a) or (b) of section 1101, or
(Hi) in exchange for all of its stock in an exchange described in
section 1101 (c) (2) or (3).
(C) A corporation shall be treated as a qualified bank holding corporation
only if the Board certifies that it satisfies the foregoing requirements of this
subsection.
(c) P r o h i b i t e d P r o p e r t y . —For purposes of this part, the term “ prohibited
property” means, in the case of any bank holding company, property (other than
nonexempt property) the disposition of Mich would be necessary or appropriate to
effectuate the first sentence of section 6 (a) of the Bank Holding Company Act of 1955
if such company continued to be a bank holding company beyond the period ( includ­
ing any extensions thereof) specified in such section 6 (a) or in section 1101 (e) (2) (B)
of this part, as the case may be. The term “ prohibited property” does not include
shares, securities, or obligations of any company held by a bank holding company to
the extent that the prohibitions of section 6 of the Bank Holding Company Act of 1955
do not apply to the ownership by such bank holding company of such property by
reason of subsection (c) (6) of such section.
( d ) 1 o n e x e m p t P r o p e r t y .— F or purp oses o f this part , the term “ nonexem pt
'N
p roperty” means —
(1)
obligations (including notes, drafts, bills of exchanges, and bankers' ac­
ceptances) having a maturity at the time of issuance of not exceeding 2 months,
4
exclusive of days of grade;
20;}6<) 0 — 58-------51




42

BANK HOLDING COMPANY ACT OF 1955

(2) securities issued by or guaranteed as to principal or interest by a govern­
ment or subdivision thereof or by any instrumentality of a government or sub­
division; or
(3) money, and the right to receive money not evidenced by a security or obliges
tion (other than a security or obligation described in paragraph ( 1) or (2)).
(e) B o a r d . — For purposes of this part, the term “ Board” means the Board of
Governors of the Federal Reserve System.

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INVESTM ENT COMPANY ACT OF 1940, AS AM ENDED

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S e c . 3. * * *

(e)
Notwithstanding subsections (a) and (b), none of the following persons is
an investment company within the meaning of this title:

*

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*

[(4) Any holding company affiliate, as defined in the Banking Act of 1933,
which is under the supervision of the Board of Governors of the Federal Reserve
System by reason of the fact that such holding company affiliate holds a general
voting permit issued to it by such Board prior to January 1, 1940; and any
holding company affiliate which is under such supervision by reason of the fact
that it holds a general voting permit thereafter issued to it by the Board of
Governors and which is determined by such Board to be primarily engaged,
directly or indirectly, in the business of holding the stock of, and managing or
controlling, banks, banking associations, savings banks, or trust companies.
The Commission shall be given appropriate notice prior to any such determination
and shall be entitled to be heard. The definition of the term “ control” in section
2 (a) shall not apply to this paragraph.]

(4) Any bank holding company which is registered with the Board of Governors
of the Federal Reserve System pursuant to the Bank Holding Company Act. of 1955f
or any banking subsidiary or any other subsidiary thereof which is exempt from,
section 6 by reason of the provisions of subsection (c) (1) thereof as defined in said Act.

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INVESTM ENT ADVISERS ACT OF 1940, AS A M END ED

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S e c . 202 (a) * * *

(11)
“ Investment adviser” means any person who, for compensation, engages
in the business of advising others, either directly or through publications or
writings, as to the value of securities or as to the advisability of investing in,
purchasing, or selling securities, or who, for compensation and as part of a regular
business, issues or promulgates analyses or reports concerning securities; but does
not include (A) a bank, [or any holding company affiliate, as defined in the Bank­
ing Act of 1933] or any bank holding company, as defined in the Bank Holding

Company Act of 1955, or any banking subsidiary or any other subsidiary thereof
which is exempt from section 6 by reason of the provisions of subsection (c) (1) thereof
as defined in said Act, which is not an investment company; * * *.

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Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102