The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Calendar No. 1107
84th C ongress
1st Session
)
j
SENATE
j
R eport
1
No. 1095
BANK HOLDING COMPANY ACT OF 1955
J uly
25, 1955.— Ordered to be printed
Mr. R o b e r t s o n , from the Committee on Banking and Currency,
submitted the following
REPORT
[To accompany S. 2577]
The Committee on Banking and Currency, 16 whom was referred
the bill (S. 2577) to define bank holding companies, control their future
expansion, and require divestment of their nonbanking interests, hav
ing considered the same, report favorably thereon with an amendment
and recommend that the bill, as amended, do pass.
G en er al Sta tem en t
In the opinion of your committee, public welfare requires the en
actment of legislation providing Federal regulation of the growth of
bank holding companies and the type of assets it is appropriate for
such companies to control. In general, the philosophy of this bill is
that bank holding companies ought to confine their activities to the
management and control of banks and that such activities should be
conducted in a manner consistent with the public interest. Your
committee believes that bank holding companies ought not to manage
or control nonbanking assets having no close relationship to banking.
It is not the committee’s contention that bank holding companies
are evil of themselves. However, because of the importance of the
banking system to the national economy, adequate safeguards should
be provided against undue concentration of control of banking
activities. The dangers accompanying monopoly in this field are
particularly undesirable in view of the significant part played by
banking in our present national economy. The extensive use of
bank checking accounts in modern commerce exerts an influence on
the value of money, which the Constitution empowers the Congress
to regulate. Moreover, banking activities are carried on to a large
extent by the use of depositors’ funds rather than by the use of equity
capital subscribed by bank shareholders.
2
CONTROL OF BANK HOLDING COMPANIES
Considerable care has been taken to provide regulatory control over
individual banks by Federal and State authorities. Yet there is at
present only a very limited control over the activities of bank holding
companies that manage or control banks. The Banking Act of 1933
(commonly referred to as the Glass-Steagall Act) provides a measure
of control through the Board of Governors of the Federal Reserve
System, but only (1) if one bank in the holding-company group con
cerned is a member of the Federal Reserve System, and (2) if the hold
ing company wishes to vote the stock it owns in such a bank. Under
those limited conditions, such a bank holding company must apply
to the Federal Reserve Board for a voting permit and submit itself
and its subsidiaries to examination. It should be noted that under
the present law, the bank holding company can remove itself from
Federal Reserve Board control by abstaining from voting the shares
of the member banks it owns.
As of December 31, 1954, only 18 holding company affiliate bank
groups in the United States had obtained voting permits from the
Federal Reserve Board. Based on information readily available to it,
the Board estimates there are 46 bank holding companies in the United
States that would be subjected to regulation by the Board under the
terms of this bill, based upon the ownership by the company of 25
percent or more of the shares of each of two or more banks.
Testifying before your committee for the Board of Governors of the
Federal Reserve System, Chairman William McChesney Martin, Jr.,
stated :
Existing provisions of law, originally enacted in the Banking Act of 1933, have
proved entirely inadequate to deal with the special problems presented by bank
holding companies. It has been, and still is, the Board’s view that additional
legislation is essential to deal effectively with these problems.
Chairman Martin noted that the principal problems in the bank
holding company field arise from two circumstances:
(1) The unrestricted ability of a bank holding company group to
add to the number of its banking units, making possible the concen
tration of commercial bank facilities in a particular area under a
single control and management; and
(2) The combination under single control of both banking and
nonbanking enterprises, permitting departure from the principle that
banking institutions should not engage in business wholly unrelated
to banking. Such a combination involves the lending of depositors7
money, whereas other types of business enterprise, not connected
with banking, do not involve this element of trusteeship.
Your committee is of the opinion that this bill will enable the
Federal Government to cope more adequately with both of these
problems. Like H. R. 6227, the bank holding bill passed by the House
of Representatives, this bill empowers a regulatory agency to pass
upon the application of a bank holding company for the acquisition
of a substantial number of voting shares in one or more additional
banks. The bill also follows the principle laid down in H. R. 6227
that bank holding companies must divest themselves, within a speci
fied period, of nonbanking assets not closely related to banking
activities. Thus, under the bill, the growth of bank holding companies
in the banking field would be regulated but not prohibited. However,
bank holding companies would no longer be authorized to manage or
control nonbanking assets unrelated to the banking business.
CONTROL OF BANK HOLDING COMPANIES
3
H is t o r y
The inadequacy of current Federal legislation in the bank holding
company field has led to repeated attempts to pass adequate legisla
tion. In 1938, in a special message to Congress (S. Doc. 173, 75th
Cong., 3d sess.), the President urged that the Congress enact legisla
tion that would effectively control the operation of bank holding
companies; prevent holding companies from acquiring control of
any more banks, directly or indirectly; prevent banks controlled by
holding companies from establishing any more branches; and make
it illegal for a holding company or any corporation or enterprise in
which it is financially interested to borrow from or sell securities to a
bank in which it holds stock.
On January 5, 1938, Senator Glass and Senator McAdoo introduced
S. 3573, a bill to provide for the regulation of bank holding companies
and affiliates, and for other purposes. This bill was referred to this
committee; in turn it was referred to the committee’s Subcommittee
on Monetary Policy, Banking, and Deposit Insurance. If enacted
into law, this bill would have carried out the recommendations made
by the President in his special message. However, the bill progressed
no further after it was referred to the subcommittee. *
On January 14, 1941, Senator Glass introduced, by request, S. 310,
during the 1st session of the 77th Congress. This bill was likewise
referred to the committee’s Subcommittee on Monetary Policy,
Banking, and Deposit Insurance, but no further action appears to
have been taken on it.
During the 1st session of the 79th Congress, Senator Wagner
introduced S. 792 on March 26, 1945. A companion bill (H. R. 2776)
was also introduced in the House of Representatives. No further
action was taken by the committee on either of these measures.
However, during the 1st session of the 80th Congress, Senator
Tobey, on March 10, 1947, introduced S. 829. Hearings were held
on this measure on May 26, June 2, and June 11, 1947. Following
the hearings a committee print designated “ 2” was prepared at the
direction of Senator Tobey on June 13, 1947. This committee on
June 19 reported favorably to the Senate a bill to regulate bank
holding companies. Senate Report 300 accompanied this bill. The
companion bill in the House of Representatives bore bill number
H. R. 3351. Amendments to the Senate bill were offered by Senator
Buck of this committee on February 3 and March 9, 1948. The
proposed legislation progressed no further during the 80th Congress.
During the 1st session of the 81st Congress, on July 22, 1949,
Senator Robertson introduced, for himself and Senator Maybank,
S. 2318. This bill was the same as S. 829, introduced in the 80th
Congress. Hearings were held on S. 2318 on March 1, 2, 3, 15, 16,
17, and 21 in 1950, before the committee’s Subcommittee on Federal
Reserve Matters. Following these hearings, Senator Robertson intro
duced S. 3547 on March 5, 1950. Five days later five amendments
were offered to S. 3547 by Senator Douglas, for himself and Senator
Tobey. No further action was taken on the proposed legislation by
the committee during the 81st Congress.
Proposed legislation in this field was next referred to the committee
during the first session of the 83d Congress. On January 7, 1953,
Senator Robertson introduced S. 76. On February 27 of that year,
4
CONTROL OF BANK HOLDING COMPANIES
Senator Capehart introduced, by request, S. 1118. Hearings on both
bills were held by the committee on June 10, 11, and 12 and July 21
and 22 in 1953. Further hearings on both bills were held by the
committee on June 21, 22, and 23 in 1954. During the hearings a
third proposed piece of legislation was prepared as a committee print.
This was also considered by the committee during the hearings held
on the two bills previously mentioned. No further action was taken
on the proposed legislation during the 83d Congress.
During the present Congress, Senator Capehart, for himself and
Senators Beall, Douglas, Fulbright, Payne, Sparkman, and Frear, on
February 1, 1955, introduced S. 880. A similar bill, H. R. 2674, was
introduced in the House of Representatives. Hearings on H. R . 2674
were held by the House Committee on Banking and Currency on
February 28 and March 1, 2, 3, 4, 7, 8, and 9 in 1955. Following
these hearings, H. R. 6227 was introduced in the House, superseding
H. R. 2674. On May 20, 1955, the House Committee on Banking
and Currency favorably reported H. R. 6227, without amendment.
House Report 609 accompanied the bill. After debate, H. R. 6227
was amended and passed by the House on June 14, 1955.
On June 28, 1955, Senator Robertson introduced S. 2350. On July
5, 6, 7, 11, 13, and 14, 1955, the committee’s Subcommittee on
Banking held hearings on S. 880, S. 2350, and H. R. 6227, as passed
by the House of Representatives. Following the hearings, the sub
committee met in executive session and after thorough discussion
agreed upon a compromise bill (S. 2577), which Senator Robertson,
for himself and Senators Bricker and Bennett, introduced on July 19,
1955. In executive session on July 21, 1955, the committee ordered
this bill reported favorably to the Senate, after adopting a compara
tively minor amendment.
As is evident from the foregoing, this committee has had proposed
legislation on this subject matter before it during most of the past 17
years. Ample opportunity has been afforded for interested persons
to express views on legislation. Over the years it has been possible
to narrow the area of difference in the views of proponents of legislation
of this nature. The committee is of the opinion that the bill now
favorably reported to the Senate represents adequate and fair legisla
tion to regulate the future expansion of bank holding companies and
requires divestment of their nonbanking interests.
It also contains adequate safeguards against “ upstream lending”
and “ horizontal lending” in the bank holding company structure.
While it is true that banks within a bank holding company system
are subject to Federal or State supervisory authority (and sometimes
both), fear has been expressed that, improperly but within the present
law, a bank holding company may take undue advantage of one or
more banks in its system. This it might do by discounting commercial
paper at the bank with a resulting profit to the bank holding company
itself but at an unwarranted risk to the bank and its shareholders.
No widespread abuse of this nature has been brought to the attention
of your committee, but the provision in the bill prohibiting upstream
lending should adequately prevent the possibility of any such abuse.
This provision, in part at least, is in accordance with the recommenda
tions of Mr. H. Earl Cook, Chairman of the Federal Deposit Insurance
Corporation who testified against permitting either upstream or
downstream dealing.
CONTROL OF BANK HOLDING COMPANIES
5
The bill's requirement for divestment of nonbanking assets will
help to keep bank ventures in a field of their own. The committee
was informed of the danger to a bank within a bank holding company
controlling nonbanking assets, should the company unduly favor its
nonbanking operations by requiring the bank's customers to make
use of such nonbanking enterprises as a condition to doing business
with the bank. The bilPs divestment provisions should prevent this
fear from becoming a reality.
D e f in it io n of B a n k H o ld in g C o m p a n y
The committee is satisfied that legislation in the bank holding
field will be adequate if it applies to any company controlling two or
more banks. In order to accomplish this result, the bill defines a
bank holding company as one meeting any of the three following tests:
(1) A company which directly or indirectly owns, controls, or holds
with power to vote 25 percent or more of the voting shares of each of
two or more banks or of a bank holding company;
(2) A company which controls the election of the majority of the
directors of each of two or more banks; or
(3) A company for the benefit of whose shareholders or members
25 percent or more of the voting shares of each of two or more banks
or a bank holding company is held by trustees.
The bill also includes in its scope any successor to a bank holding
company where the relationship between the successor and the bank
holding company is such that the successor's acquisition of bank
shares from the company causes no substantial change in control of
the bank or beneficial ownership of shares.
Section 3 (a) of the bill expressly excludes from the definition of bank
holding company the following:
(1) A bank controlling shares in a fiduciary capacity, unless the
shares are held for the profit of the bank's shareholders;
(2) A company registered under the Investment Company Act of
1940 prior to May 15, 1955, and its affiliates, unless the company or
any affiliate, as the case may be, directly owns 25 percent or more of
the voting shares of each of two or more banks;
(3) A company engaged in bona fide underwriting of securities held
only for a period of time permitting their sale on a reasonable basis;
and
(4) A company formed for the sole purpose for participating in a
proxy solicitation which acquired control of voting rights during the
course of such solicitation.
The exemption for shares held in a fiduciary capacity is necessary
to enable banks to carry on a normal trust business. The exemption
for companies registered under the Investment Company Act of
1940 is included in the bill on the theory that any such company is
adequately supervised by the Securities and Exchange Commission,
which administers that act. Among the purposes listed in that act
are the mitigation of undue concentration of the control of investment
companies through pyramiding or inequitable methods of control,
the mitigation of inequitable distribution of such companies, and the
mitigation of irresponsible management of such companies. Your
committee believes that SEC regulation in such cases is closely
akin to the purposes of this bill and that it is therefore unnecessary
6
CONTROL OF BANK HOLDING COMPANIES
to require a registrant under the Investment Company Act of 1940
to be subjected to the additional regulatory authority granted to
the Board of Governors of the Federal Reserve System by this bill.
It will not be possible however, for a bank holding company to evade
regulations under the proposed legislation by registering as an in
vestment company since this exception applies only to a bank holding
company registered under the Investment Company Act of 1940
prior to May 15, 1955, which does not directly own 25 percent or
more of the voting shares of each of two or more banks. An affiliated
company of such a company, within the meaning of the Investment
Company Act of 1940, is also exempted from the definition of a bank
holding company under this bill unless the affiliate directly owns 25
percent or more of the voting shares of two or more banks.
The exemption of a company engaged in the underwriting of secur
ities is included in the bill because of the possibility that such a
company might happen to acquire title, in the course of its normal
underwriting business, to 25 percent or more of the voting shares of
each of two or more banks. Should this transpire, it should be noted
that the company must dispose of such shares within a period of time
adequate to permit their sale upon a reasonable basis, in order to
continue to receive the benefits of exemption from the definition of
a bank holding company.
The remaining exemption from the definition of bank holding com
pany is included to allow formation of a bona fide stockholders'
committee or a similar organization for the sole purpose of soliciting
proxies in order to gain control of voting rights of shares. Your
committee is of the opinion that such an exemption is justified in
order to prevent undue interference with proxy contests. It was
pointed out that if in the course of such a contest, a company so
formed acquires control of the voting rights of 25 percent or more of
the voting shares of each of two or more banks, it might well find
itself included within the definition of a bank holding company in
this bill in the absence of a specific exemption. The provision is
intended to provide an exemption only for qualified companies during
the course of the proxy contest. The exemption is not intended to
carry over for the benefit of any such company following the termina
tion of the proxy contest.
DEFINITION OF COMPANY
Under the bill, only a “ company” as defined in the bill can become a
bank holding company. Company is expressly defined to mean any
corporation, business trust, association, or similar organization. It
will be noted that an individual, as such, is not included in this defini
tion. Moreover, the definition expressly excludes: (1) any corpora
tion the majority of whose shares are owned by the United States or
any State; (2) any corporation or community chest, fund, or founda
tion, organized or operated exclusively as a religious, charitable, or
educational organization, no part of the net earnings of which inures
to the benefit of any private shareholder or individual, and no sub
stantial part of the activities of which is carrying on propaganda or
otherwise attempting to influence legislation; and (3) any partnership.
The first exclusion is provided on the theory that any corporation
the majority of whose shares are owned by the United States or any
CONTROL OF BANK HOLDING COMPANIES
7
State is subject to the control of either the United States or of the
State owning such shares. The exclusion of religious and other char
itable organizations is similar to that granted to such organizations
under the Internal Revenue Code. The committee’s attention was
invited to at least one case where a bona fide religious organization
controls two or more banks as well as nonbanking interests as an inci
dent to its main purpose. In the opinion of the committee, even
though these incidental business activities are organized for the pri
mary purpose of profit, the very nature of the religious organization
itself precludes the possibility of violating the spirit of this bill.
The third exemption from the definition of “ company” is granted
to any partnership because the attributes of a partnership are similar
to those presented by an individual in the sense that neither has
perpetual duration. As the individual’s personal control of business
activities ceases with his death, any business control exercised by a
partnership will likewise terminate upon the death of either partner.
Usualy, the death of an individual who controls banks is accompanied
by a diffusion of ownership of such banks.
By way of contrast, corporations and similar organizations may
have perpetual existence. The death of any individual member of a
corporation has no effect upon continued control of banks by the
corporation. This bill is designed to bring under control those types
of entities that may be used as media for acquiring and maintaining
in perpetuity management and control of bank shares or assets.
The exemptions previously mentioned in this report are the only
ones given by this bill from the definitions of company and bank
holding company. All other such organizations are required by the
bill to subject themselves to such regulation as the bill prescribes as
a condition to growth by means of bank share or asset acquisition.
Your committee did not deem it necessary to include within the
scope of this bill any company which manages or controls no more than
a single bank. It is possible to conjure up visions of monopolistic
control of banking in a given area through ownership of a single bank
with many and widespread branches. However, in the opinion of
your committee, no present danger of such control through the bank
holding company device threatens to a degree sufficient to warrant
inclusion of such a company within the scope of this bill. Should
legislation of that nature prove desirable in the future, the Congress
is free to act upon a showing of need for such a law.
O t h e r D e f in it io n s
This bill defines banks to include both National banks and State
banks, savings banks, and trust companies. It excludes, however,
organizations that do no business in the United States and those
organized for foreign or international banking under section 25 (a)
of the Federal Reserve Act. A District bank is defined as a State
bank organized or operating under the laws of the District of Co
lumbia. A State member bank is defined to mean a State bank which
is a member of the Federal Reserve System.
The bill defines a subsidiary of a bank holding company in terms
of a company owned or controlled by a bank holding company under
the same general tests as laid down for ownership or control exercised
by a bank holding company.
8
CONTROL OF BANK HOLDING COMPANIES
A successor is defined as a company acquiring bank shares from a
bank holding company with no resulting substantial change m bank
beneficial ownership or control. The Federal Reserve Board is em
powered to define successor in more detail by regulation in order to
prevent evasion of the purposes of this bill.
The committee is of the opinion that the definitions in this bill will
adequately cover the organizations which should be included in the
scope of this bill without unnecessarily encompassing organizations
that need not be included in order to accomplish the purposes of the
bill.
A c q u ir in g B a n k S h a r e s or A ssets
The bill makes it unlawful for a company to become a bank holding
company without prior approval by the Federal Reserve Board.
It also makes it unlawful, without like approval, for a bank holding
company to acquire bank stocks or assets as noted in the bill or to
merge or consolidate with another bank holding company. Federal
Reserve Board approval is required if after the proposed acquisition
of voting shares of a bank, the bank holding company will own or
control, directly or indirectly, more than 5 percent of the bank's
voting shares. Like approval is required if a bank holding company
(or one of its nonbank subsidiaries) wishes to acquire substantially
all of a bank's assets. Acquisition of assets, as well as acquisition of
stock, may be used to gain practical control of a bank's operations,
especially at its existing site of operations. In order to encourage
competitive banking and discourage monopoly of banking, this, bill
provides regulatory control over both types of acquisition.
For the same reasons, the committee deems it advisable to provide
for regulatory control over the merger or consolidation of bank
holding companies.
In three types of transactions the committee considered it unneces
sary to require Federal Reserve Board approval of the acquisition of
bank shares or assets by a bank holding company. It therefore
granted exemptions from this requirement—
(1) if a bank which is a bank holding company acquires bank
shares in a fiduciary capacity (unless such shares are held for the
benefit of the bank's shareholders) ;
(2) if a bank which is a bank holding company acquires bank
shares in the regular course of securing or collecting a debt earlier
contracted in good faith (but such shares must be disposed of
within 2 years after acquisition); and
(3) if any bank holding company acquires additional shares of
a bank as to which it already owns or controls a majority of the
voting shares.
The first exemption listed is required to permit the conduct of
trust business. The second is required to allow the conduct of normal
bank-lending operations. The third exemption is granted because
little if any benefit to the public could be achieved by denying a bank
holding company the privilege of entrenching more strongly its exist
ing majority control of a given bank.
D e c is io n on A p p l ic a t io n
The bill contemplates that any Federal Reserve Board approval
required under its provisions will be sought by application to the
CONTROL OF BANK HOLDING COMPANIES
9
Board. Some advocates of bank holding company control legislation
thought that the bank supervisory authorities (State or Federal Comp
troller of the Currency, as the case might be) ought to be given the
right to decline such an application, regardless of the opinion of the
Federal Reserve Board. Other advocates of such legislation urged
that the power of decision be placed in the Federal Reserve Boardr
with the bank supervisory authorities playing only an informal con
sulting role. This bill represents a compromise between those two
positions. It affords the bank supervisory authorities an opportunity
to file with the Federal Reserve Board a formal recommendation that
the application be denied. But it also provides that if such a recom
mendation is made, the Federal Reserve Board must provide a hearing
of record after due notice at which the testimony of all interested
parties may be received, including, of course, the applicant and the
disapproving bank supervisory authority. After this hearing on the
merits of the application has been held, the Federal Reserve Board is
required to grant or deny the application by formal order. The bill
then affords any party aggrieved by the order the right to a judicial
review of the order by an appropriate Federal court of appeals. In
such a review, the Federal Reserve Board's findings of facts are con
clusive, if supported by substantial evidence.
This procedure, it appeal's to your committee, should afford oppor
tunity for developing the true merits of an application upon due con
sideration of the facts, in instances where the bank supervisory author
ity involved expresses written disapproval of the application. It also
assures adequate recourse to court proceedings for an aggrieved party.
At the same time, it leaves the Federal Reserve Board free to pro
ceed in a more informal manner in handling an application as to which
the appropriate bank supervisory authority expresses no written
disapproval.
A pp l ic a t io n P r o c e d u r e
In particular, the bill requires that upon receipt of an application for
acquisition of bank shares or assets or for merger or consolidation of
bank holding companies, the Federal Reserve Board shall give notice
to the appropriate bank supervisory authority. If the applicant or
the bank whose shares or assets are sought to be acquired is a national
bank or a district bank, notice must be given to the Comptroller of the
Currency. If the applicant or the bank whose shares or assets are
sought to be acquired is a State bank, notice must be given to the
appropriate State supervisory authority in the interested State or
States. Thirty days are allowed for any notified authority to submit
recommendations to the Federal Reserve Board. If within that
period, any such notified authority disapproves in writing the applica
tion, the Federal Reserve Board must so notify the applicant in writ
ing. Within 3 days after giving such notice, the Federal Reserve
Board must give written notification to the applicant and each
disapproving authority of the date fixed for commencement of a hear
ing on the application. The hearing must begin from 10 to 30 days
after the Board has given the applicant written notice of the disapprov
ing action by the appropriate supervisory authority. While the dura
tion of the hearing is within the discretion of the Federal Reserve
Board, it must last long enough to give all interested parties a reason
able opportunity to testify. Only after the conclusion of the hearing
10
CONTROL OF BANK HOLDING COMPANIES
may the Federal Reserve Board grant or deny the application. This
action is to be taken on the basis of the record made at the hearing.
In acting upon any application for acquisition, merger, or consolida
tion, the Federal Reserve Board is required by the bill to consider
these factors:
(1) the financial history and condition of each company or
bank concerned in the application;
(2) the prospects of each;
(3) the character of the management of each;
(4) the convenience, needs and welfare of both the communities
and the area concerned ; and
(5) whether the effect of the acquisition, merger, or consolida
tion would be to expand the size or extent of the bank holding
company system involved beyond limits consistent with adequate
and sound banking, the public interest, and the preservation of
competition in the banking field.
It is upon the basis of these factors that the Federal Reserve Board
is to measure whether each application should be granted or denied
in the public interest. It will be noted that these factors extend
beyond the nature of those primary in importance to bank super
visory authorities in the exercise of their supervisory powers. In
most instances, safety of the depositor’s funds and adequate banking
service to the public in the area where the bank operates are upper
most in the consideration of such hank supervisory authorities. The
factors required to be taken into consideration by the Federal Reserve
Board under this bill also require contemplation of the prevention of
undue concentration of control in the banking field to the detriment
of public interest and the encouragement of competition in banking.
It is the lack of any effective requirement of this nature in present
Federal laws which has led your committee to the conviction that
legislation such as that contained in this bill is needed. Under its
provisions, the expansion of bank holding companies in the banking
field would not be prohibited, but would be regulated in the public
interest.
In view of the adequate opportunity for expression of opinion on
an application accorded to the Comptroller of the Currency and the
State bank supervisory authorities in appropriate cases by the bill,
the committee deems it unnecessary and inadvisable to insert in the
bill any arbitrary prohibition against the expansion of bank holding
companies across State lines. Let any application for such expansion
be decided on its merits in accordance with the procedure outlined in
this bill. The committee received testimony indicating the public
benefits which have flowed from the interstate structure of some bank
holding companies. Like bank holding companies in general, inter
state bank holding companies are not evil of themselves. The pro
visions of this bill, in the opinion of your committee, provide adequate
safeguards so that the maintenance or expansion of such bank holding
companies can be regulated in the public interest.
The same reasoning led the committee to believe that the bill
should contain no provision leaving solely to State control determina
tion of the question as to whether a bank holding company can acquire
an interest in a national bank. If our dual banking system is to
operate as a truly dual system, the Federal authorities ought not to
surrender their supervisory authority over national banks to State
CONTROL OF BANK HOLDING COMPANIES
11
decision. This is not to say the Federal authorities ought not to
consider carefully the views of State authorities regarding the manage
ment and control of national banks, but the ultimate determination
of public interest in the national bank system should rest with the
appropriate Federal authorities. Within broad areas, banks them
selves retain the choice of whether they shall operate as State or
National institutions.
In any event, another provision of this bill expressly preserves to
the States a right to be more restrictive regarding the formation or
operation of bank holding companies within their respective borders
than the Federal authorities can be or are under this bill. Under such
a grant of authority, each State may, within the limits of its proper
jurisdictional authority, be more severe on bank holding companies
as a class than (1) this bill empowers the Federal authorities to be or
(2) such Federal authorities actually are in their administration of
the provisions of this bill. In the opinion of the committee, this
provision adequately safeguards States' rights as to bank holding
companies.
The committee decided against inclusion of a provision in the bill
that would automatically apply State laws concerning branch bank
ing to bank holding company operations. The purposes of branch
banking laws are not identical with the purpose of this bill to control
bank holding companies. Moreover, branch banking is mostly
conducted by the use of depositors’ funds, thus making the protection
of these funds of prime importance. Bank holding companies,
however, as such have no depositors. For operating funds they have
recourse to equity capital supplied by their shareholders. It is be
lieved the bill contains adequate provisions to regulate bank holding
company operations without an arbitrary tiein with branch banking
laws.
No pretense is made that this bill will regulate all forms of central
ized control of financial institutions. As previously noted, it does not
include chain banking, where several banks are controlled by a single
individual. Nor a >s it attempt to regulate centralized control of
such financial inslitut ons as savings and loan associations or insur
ance companies. It lias been designed to provide appropriate regu
lation of centralized control of banking institutions by bank holding
companies as defined in the bill.
D
iv e s t m e n t
of
N
o n b a n k in g
A
ssets
The bill prohibits a bank holding company from acquiring, after
the passage of this bill, ownership or control of any voting shares of
any company which is not a bank. It also provides that existing
bank holding companies cannot retain ownership or control, for more
than 2 years after the date of passage of this bill, of any voting shares
of a company which is not related to banking. Nor can any such
company engage in a business other than banking or managing or
controlling banks or furnishing or performing services for any bank
of which it owns or controls 25 percent or more of the voting shares.
Upon application by a bank holding company, the Federal"Reserve
Board is authorized to extend the 2-year deadline for periods of not
more than 1 year at a time, provided that in no event can the exten
sions extend the total divestment period to longer than 5 years after
12
CONTROL OF BANK HOLDING COMPANIES
the date of enactment of the bill, or 5 years after the date upon which
a company becomes a bank holding company, whichever is later.
Appropriate exceptions are made in the bill in order to enable bank
holding companies to retain ownership and control of nonbanking
assets in cases where such retention will not violate the purposes of
the bill. Seven classes of such exemptions are provided as follows:
(1) Shares owned or acquired by a bank holding company in a com
pany engaged solely in holding or operating properties used primarily
by a bank in the bank holding company system or acquired for future
use of such bank in its operations; and shares owned or acquired by
a bank holding company in any company engaged solely in conducting
a safe deposit business or serving the holding company and banks in
the holding company system with respect to such functions as audits,
appraisals, investment counsel, or the liquidation of assets acquired
from the bank holding company and the banks within the bank hold
ing company system;
(2) Shares acquired by a bank holding company that is a bank or
any of its banking subsidiaries in satisfaction of a debt previously
contracted in good faith (in which event such shares must be disposed
of within 2 years after their acquisition or 2 years after the passage
of this bill, whichever is later);
(3) Shares acquired by a bank holding company from any of its
subsidiaries by virtue of action initiated by any examining Federal
or State authority (but such shares must be disposed of within 2 years
after their acquisition or 2 years after the passage of this bill, which
ever is later);
(4) Shares held or acquired in a fiduciary capacity by a bank
holding company that is a bank or shares eligible for investment by
national banks ;
(5) Shares of any company that do not represent more than 5
percent of the company’s outstanding voting securities and that do
not have a value greater than 5 percent of the total asset value of the
bank holding company;
(6) Shares of any company whose activities of a financial, fiduciary,
or insurance nature are determined by the Federal Reserve Board to
be so closely related to the banking business as to constitute a proper
incident to that business, and to make unnecessary the divestment of
such shares in order to carry out the purposes of the bill; or
(7) Any bank holding company which is a labor, agricultural, or
horticultural organization.
It seems obvious that the foregoing exemptions with reference to
bank premises, safe-deposit businesses, bank-servicing organizations,
collection of debts, involuntary acquisition of shares, and acquisition
of shares in a fiduciary capacity, or permissible investments for
national banks, are all appropriate in order to enable a bank holding
company to carry on operations closely related to banking. The
same reasoning dictates the inclusion of exemption (5). Moreover,
control of no more than 5 percent of the voting securities of a company
is not deemed adequate for effective control of that company. It
should be further noted that no bank holding company can enjoy the
benefits of this exemption if its investment in the shares of the com
pany exceed 5 percent of the total asset value of the bank holding
company.
CONTROL OF BANK HOLDING COMPANIES
13
Exemption (6) has been included by the committee as a necessary
provision to enable the administering authority under this bill to
permit the retention by a bank holding company of activities found
to be closely related to banking. It should be noted that the Board
is required to make its determination after due notice and hearing
and on the basis of the record made at the hearing. The Federal
Reserve Board’s action is required to be taken in the form of an
order, as to which any aggrieved party can obtain a review in the
appropriate court of appeals. In the opinion of your committee,,
certain activities of a financial, fiduciary, or insurance nature are
obviously so closely related to banking as to require no divestment
by a bank holding company. For example, the operation of a credit
life-insurance program in cosmection with bank loans is clearly within
the scope of banking operations as presently conducted. So is the
operation of an insurance program under which the insurance pro
ceeds retire the outstanding balance of the mortgage upon the death
of the mortgagor in cases where the bank holds the mortgage. How
ever, there are many other activities of a- financial, fiduciary, or
insurance nature which cannot be determined to be closely related
to bunking without a careful examination of the particular type of
business carried on under such activity. For this reason your com
mittee deems it advisable to provide a forum before an appropriate
Federal authority in which decisions concerning the relationship of
suck activities to banking can be determined in each case on its
merits.
Exemption (7) concerning labor, agricultural and horticultural
organizations is closely akin to the similar exemption from Federal
income taxes granted to such organizations. In order to be entitled
to the exemption under this bill, no net income derived by any such
organization can inure to the benefit of any individual. Such organ
izations must be formed primarily for the betterment of the working
conditions of their members, in the case of labor organizations, and
for the improvement in grade of agricultural or horticultural products
in the case of agricultural or horticultural organizations. As in the
case of the Federal income tax exemption, such agricultural and horti
cultural organizations as county fairs, quasi-public in nature, that
are designed to encourage better products through a s}7stem of awards,
would qualify for exemption under this bill. However, the growing
of agricultural or horticultural products for profit by an agricultural
or horticultural organization would not entitle such organization to
the benefits of exemption from the divestment features of this bill.
The seven specific classes of exemption from the divestment require
ments of the bill do not excuse those exempted from compliance with
the remaining provisions of the bill. Such exempted organizations
or companies will be required to register under the bill with the Federal
Reserve Board and to obtain the approval of that Board in the event
the organization or company wishes to acquire additional voting shares
or assets of any bank, if such approval is otherwise required under
the bill for bank holding companies.
Your committee holds the opinion that bank holding companies
should confine their activities to the control and management of
banks and activities closely related to banking. They should not
combine management and control of banking activities with manage
14
CONTROL OF BANK HOLDING COMPANIES
ment and control of nonbanking activities. The divestment require
ments in this bill are designed to remove the danger that a bank
holding company might misuse or abuse the resources of a bank it
controls in order to gain an advantage in the operation of the non
banking activities it controls.
The committee gave consideration to a suggestion that present bank
holding companies be allowed to retain their existing nonbanking
assets and that the bill merely prohibit such companies from acquiring
additional nonbanking assets. However, the committee believes that
to adopt this course of action would give an unfair competitive ad
vantage to existing bank holding companies over bank holding com
panies which might be formed in the future consistent with the pro
visions of this bill. Your committee believes that in general all bank
holding companies should be required to observe the same ground
rules concerning formation and operation, insofar*as Federal legislation
is concerned.
A d m in is t r a t io n
This bill centralizes Federal administrative control under the bill in
the Board of Governors of the Federal Reserve System. It requires
that each bank holding company, as defined in the bill, register with
the Board within 180 days after the passage of the bill, or within 180
days after becoming a "bank holding company, whichever is later.
Registration forms prescribed by the Federal Reserve Board are to
require information deemed appropriate by the Board with respect to
the financial history and condition of the registering bank holding
company and the banks it controls, information concerning the opera
tion and management of such company and banks, the relationships of
such company with banks and other organizations, and similar matters
appropriate to carry out the purposes of the bill. Discretion is given
to the Board to extend the time within which a bank holding company
must register and file the required information.
The Federal Reserve Board is granted authority to issue appropriate
regulations and orders in order to carry out the purposes of the bill
and to prevent evasion of its provisions. The Federal Reserve Board
is also empowered to require reports under oath so that it may be
informed as to compliance with the provisions of the bill and regula
tions and orders issued in accordance with its provisions. The Board
is expressly authorized to make examinations of each bank holding
company and each of its subsidiaries at the expense of the holding
company. In order to prevent unnecessary duplication, the bill
requires the Board, in administering the provisions of. the bill, as far
as possible, to make use of examination reports made by the Comp
troller of the Currency, the Federal Deposit Insurance Corporation,
or the appropriate State bank supervisory authority.
The bill further requires the Board to submit to the Congress,
within 2 years after the passage of the bill, a report of the results of
the administration of the provisions of the bill, stating any substantial
difficulties encountered and any recommendations for changes in the
law which the Board deems advisable. Following the date of submis
sion of the original report, the Federal Reserve Board is required
thereafter to submit an annual report of the same nature. In view
of the complexities which may be encountered in untangling the
operations of bank holding companies in order to comply with the
CONTROL OF BANK HOLDING COMPANIES
15
provisions of the bill, your committee is of the opinion that the Board
should be allowed a 2-year period within which to prepare and submit
its report to the Congress.
P r o h ib it io n
of
U
pstream
or
H
o r iz o n t a l
B
o r r o w in g
Your committee received testimony to the effect that one of the
dangers inherent in the bank holding company system is that the
parent company may take undue advantage of the resources of its
subsidiary banks. To prevent that situation from arising, the bill
prohibits in general the borrowing of subsidary bank funds by a
bank holding company or by another subsidiary in the bank holding
company system. The bill does not prohibit the borrowing of funds
by any subsidiary in the system from the parent bank holding com
pany. Such downstream financing is one of the beneficial advantages
cited to your committee in the use of the bank holding system tech
nique. Downstream financing enables the bank holding company
to draw on the equity capital of its shareholders and its own operating
funds in order to strengthen the financial condition of any one or
more of its subsidiaries. In the past, this has operated not only to
the advantage of the bank holding company system itself, but also
to the advantage of shareholders and depositors of the subsidiary
bank so assisted and the public served by the subsidiary bank.
In particular, the bill makes it unlawful for a bank after the passage
of the bill:
(1) To invest its funds in the capital stock, bonds, debentures or
other obligations of its parent bank holding company or of any other
subsidiary within the bank holding company system;
(2) To accept the capital stock, bonds, debentures or other obliga
tions of its parent bank holding company or of any other subsidiary
within the bank holding company system, as collateral security for
advances made to any person or any company (except that this does
not prohibit the acceptance of such securities as security for pre
viously contracted debts, as long as the collateral is not held by the
bank for more than 2 years);
(3) To purchase securities, other assets or obligations, under a
repurchase agreement either from its parent bank holding company
or from any other subsidiary within the bank holding company
system; and
(4) To make any loan, discount or extension of credit to its parent
bank holding company or to another subsidiary within the bank
holding company system.
The bill makes it clear that its provisions do not prohibit noninterest
bearing deposits to be made to the credit of a bank, nor do they
prohibit giving immediate credit to a bank on uncollected items
received in the ordinary course of business.
The bill provides three classes of exemptions from the provisions
concerning borrowing from a subsidiary bank. These provide that
the upstream and horizontal borrowing restrictions do not apply:
(1)
To the capital stock, bonds, debentures, or other obligations
of a company engaged in holding bank properties, a safe deposit
business, or a bank servicing business of the nature described in section
4 (c) (1) of the bill;
2 0 3 6 tl O— 5 8 -------- 5 2
16
CONTROL OF BANK HOLDING COMPANIES
(2) T o any company which became a subsidiary due to a bona fide
debt to the bank contracted before it became a subsidiary; or
(3) T o any company that became a subsidiary due to the ownership
or control of its voting shares by the bank in a fiduciary capacity
(unless the shares are held for the benefit of a majority of the bank's
stockholders).
T
ax
R
e l ie f fo r
D
is t r ib u t io n s
M
ade
H. R. 6227, as passed by the House of Representatives, would add
a new part V III to subchapter 0 of the Internal Revenue Code of
1954. Under this new part, tax relief is accorded to distributions made*
pursuant to the provisions of this bill within the period prescribed
therein. Your committee has adopted the tax provisions contained in
the House bill with certain technical changes.
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 4 (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 4 (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 comparable provisions of part V I of sub
chapter O, relating to exchanges in obedience to SEC orders.
With respect to the distributing corporation, the usual provisions
of the Ii\ternal 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 mav distribute to its
shareholders any bank stock or other property of a kind which causes
it to be a bank holding company, without the recognition of gain to
CONTROL OF BANK HOLDING COMPANIES
17
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 bill. 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 bill 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 bill 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 the property which was owned on M ay 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 bill. The
restriction would not apply, however, if the property was received in
a transaction in which gain was not recognized because o I 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 M ay 15, 1955.
Similarly, the M ay 15, 1955, cutoff date is not applicable where the
prohibited property or bank stock (or other similar property) certified
by 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 any corporation
where the contribution is made after M ay 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
18
CONTROL OF BANK HOLDING COMPANIES
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 bill within the statutory period
permitted 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
resulting solely from the distribution of prohibited property which
has been certified by the Board under section 1101 (a) does not
expire until 5 years after the corporation gives notification that the
period prescribed in section 4 (a) of the bill has expired.
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
holding company within 2 years after the date of enactment of the bill
or 2 years after the date on which the corporation becomes a bank
holding company, whichever is later, unless the time has been extended
by the Board for 1-year renewals not to exceed 5 years from the date of
enactment of the bill or the date on which the corporation becomes a
bank holding company, whichever is later. The statutory period for
the assessment of a deficiency resulting solely from such distribution
is extended in the same manner as in the case of the distribution of
prohibited property.
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.
P e n a l t ie s
The bill provides adequate penalties for violation of its provisions,
after conviction. In particular, any company convicted of willful
violation of any provision of the bill or any regulation or order issued
by the Federal Reserve Board pursuant to its provisions is subject to
a fine of not more than $1,000 a day for each day during which the
violation continues. Any individual convicted of willful participation
in a violation of any provision of the bill is subject to a fine of not
more than $10,000 or imprisonment for not more than 1 year,* or both.
Every officer, director, agent and employee of a bank holding company
is made subject to the same penalties for false entries in any book,
report, or statement of the bank holding company as apply to corre
sponding officials and employees of member banks of the Federal
Reserve System for false entries in any books, reports, or statements
of such member banks under section 1005 of title 18 of the United
CONTROL OF BANK HOLDING COMPANIES
19
States Code. This section of the code provides for a maximum fine
of $5,000 or a maximum term of imprisonment for not more than 5
years, or both.
S a v i n g P r o v is i o n
The bill provides that none of its provisions are to be construed as
approving any act, action or conduct in violation of existing law. It
also provides that nothing in the bill shall constitute a defense to any
action, suit, or proceeding pending or later instituted on account of
any prohibited antitrust or monopolistic act, action or conduct. In
the opinion of your committee, approvals granted and action permitted
under the provisions of this bill are,not to supersede the provisions of
other Federal laws, particularly those designed to control monopoly
or break up trusts. For example, the Clayton Act has been judicially
determined to apply to banks. Under the provisions of that act, the
Federal Reserve Board has an administrative role to play in deter
mining whether banks comply with the requirements of the Clayton
Act. Under the provisions of this bill, any action taken by the Federal
Reserve Board in accordance with its terms is not to interfere in any
manner with the performance by the Board of such functions as may
be assigned to it under the Clayton Act.
C
o n c l u s io n
As previously outlined in this report, your committee has been
giving consideration to this matter for several years. In its opinion
the present bill, properly administered, will safeguard the interests
of the public in the formation and operation of bank holding com
panies. It represents a compromise designed to meet acceptance of
proponents of this type of legislation, while at the same time being
fully fair to the companies to which the provisions of the bill will
apply. Exemptions from its provisions have been kept to a minimum.
Under its terms, the operations of bank holding companies will not
be prohibited, but they will be confined to banking activities and
regulated in the public interest. In view of the lack of adequate
legislation concerning the formation and operation of bank holding
companies, your committee strongly urges the passage of this bill.
Perfecting amendments may then be considered upon their merits
by any subsequent Congress. Proper observance of the Congress7
duty to the citizens of this Nation demands the enactment of appro
priate legislation in this field.
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 defines the terms used in the bill.
Subsection (a) defines the term “ bank holding company” to mean
(1) 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
(2) any company controlling the election of a majority of the directors
or 2 or more banks; or (3) any company for whose shareholders
trustees hold 25 percent or more of stock of 2 or more banks or of
20
CONTROL OF BANK HOLDING COMPANIES
bank holding company. A successor to any such bank holding
company is deemed to be a bank holding company as of the date the
predecessor company became a bank holding company. Excluded
from the definition are (a) any bank controlling shares in a fiduciary
capacity (unless controlled for benefit of the bank’s shareholders);
(b) any company or affiliate registered under Investment Company
Act of 1940, prior to M ay 15, 1955, unless it owns 25 percent of shares
of 2 or more banks; (c) any company engaged in underwriting securi
ties; and (d) any company formed for the purpose of soliciting proxies.
Subsection (b) defines the term “ company” to include any corpora
tion, business trust, association, or similar organization. However, (1)
any company the majority of the shares of which are owned by the
Federal Government or by any State, (2) any nonprofit religious,
charitable, or educational organization, and (3) any partnership— are
excluded from the definition.
Subsection (c) defines the term “ bank” to include any national or
State bank, savings bank or trust company, but excludes any organi
zation which does not do business within the United States. The
subsection also defines the terms “ State member bank” and “ district
bank.”
Subsection (d) defines a “ subsidiary” of a specified bank holding
company in terms of the tests applicable to a bank holding company.
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 8 .— 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 and
to the merger or consolidation of bank holding companies.
Subsection (a) makes it unlawful except with prior Board approval
(1) for a company to become a bank holding company; (2) for a bank
holding company or subsidiary to acquire more than 5 percent of the
voting shares of any bank; (3) for a bank holding company or sub
sidiary, other than a bank, to acquire substantially all the assets of a
bank; or (4) for a bank holding company to merge or consolidate with
any other bank holding company. This prohibition does not apply
to (a) any bank holding company, which is a bank acquiring shares in
a fiduciary capacity (unless for benefit of its own shareholders) or in
collecting debt (but must divest in 2 years), and (b) any bank holding
company, which is a bank acquiring additional shares in a bank of
which it owns a majority of the voting shares.
Subsection (b) provides that 30 days before approving any acquisi
tion, merger or consolidation, the Board shall notify: (i) Comptroller
of the Currency if bank to be acquired is a national or District bank;
(ii) State supervisory authority if bank being acquired is a State
bank. If such notified authority disapproves it in writing within 30
days, the Board will hold a hearing to grant or deny the application.
Subsection (c) sets forth the standards to be followed by the Board
in granting or denying approval including (1) bank holding company’s
and bank’s financial history and conditions; (2) prospects; (3) man
CONTROL OF BANK HOLDING COMPANIES
21
agement; (4) convenience, needs, and welfare of area concerned; and
(5) sound banking, public interest, and bank competition.
Section 4 •— This section relates to bank holding company interests
in nonbanking organizations and provides for separation of banking
and nonbanking interests.
Subsection (a) prohibits a bank holding company from acquiring or
retaining voting shares of any nonbank company or engaging in a
business other than (1) banking, (2) managing or controlling banks,
or (3) furnishing services to or providing services for a subsidiary
bank. Divestment of nonbank business is required within 2 years
after the date of this act or from date of becoming a bank holding
company, whichever is later. The Board may extend this time up
to not more than 5 years.
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 ofther 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 business of banking, such as
holding bank premises, conducting a safe deposit business, or providing
services such as auditing, appraisal, and investment counsel, or in
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
previously 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 investments
eligible for national bank investment under section 5136 of the Re
vised Statutes.
Paragraph (5) 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.
Paragraph (6) authorizes the Board to exempt shares of any com
pany all the activities of which are of a financial, fiduciary, or insur°
ance nature and are determined to be so closely related to the busi
ness of banking as to be a proper incident thereto.
Paragraph (7) exempts any bank holding company which is a labor,
agricultural or horticultural organization.
Section 5 .— This section sets forth powers and duties with respect
to the registration, making of reports and examination of bank holding
companies.
22
CONTROL 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.
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. T o 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 2 years 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 6 .— 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 7.— 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 in a manner more restrictive than the provisions
of this bill.
Section 8 .— 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 of 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 9.— This section provides that any person aggrieved by an
order of the Board may obtain a judicial review of such order in the
United States Circuit Court of Appeals. The findings of the Board
as to the facts shall be conclusive, if supported by substantial evidence.
Section 10.— This section amends subchapter O of chapter 1 of the
Internal Revenue Code of 1954 by adding a new part V III. This
part V III specifies the extent to which (during a transition period
CONTROL OF BANK HOLDING COMPANIES
23
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 distribution 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 V III are restricted by
their own terms to the gain directly attributable to the receipt of
property in the distributions specifically described.
The rules contained in part V III 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 V III supersede the other provisions of chapter 1 only in the
cases qualifying under part VIII, and in those cases only to the extent
specific provision is contained in part V III.
Your committee has adopted the tax provisions contained in the
House bill with certain technical changes.
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
in such corporation. In addition rules are provided as to the date the
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 pro
visions.
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
24
CONTROL OF BANK HOLDING COMPANIES
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 ban’c 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 corpo
ration 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 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) o f 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 M ay 15, 1955, except to the extent such
corporation received such property (even though subsequent to M ay
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 the distribution by a qualified
bank holding corporation of property which was acquired by such
corporation in a distribution with respect to stock acquired by it
after M ay 15, 1955, unless such stock was acquired by it (1) in a dis
tribution (with respect to stock held by it on M ay 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 (2) in exchange
CONTROL OF BANK HOLDING COMPANIES
25
for all of its stock in an exchange meeting the requirements of section
1101 (c) (2) or (3).
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 M ay 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 M ay 15, 1955. Under paragraph (3) if any quali
fied bank holding corporation exchanges solely property which, under
subsection (b), sucli corporation could distribute directly to its share
holders without the recognition of gain to such shareholders, for all
o i 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 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 distribution 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 M ay 15, 1955. The portion of any
distribution which is attributable to a contribution to capital depends
upon the particular facts and circumstances of each case.
The preceding paragraph may be illustrated by the following ex
amples. (1) 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 subsec. (a) of sec. 1101).
Assume further that corporation A, after M ay 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 subjection
(a) of section 1101 applies of the stock of corporation X to the share
26
CONTROL OF BANK HOLDING COMPANIES
holders of corporation A. Under subsection (d) the nonrecognition
of gain provided by subsection (a) does not apply to that portion o f
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 pro
visions of section 301 of the Internal Revenue Code of 1954. (2) The
facts are the same as in example (1) above, except that the value o f
the portion of the distribution which is attributable to the contribu
tion to capital, at the time of the distribution, is less than $50,000.
The value of that portion of the distribution which is attributable to
the contribution to capital of $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 isessential 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
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 o f
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
CONTROL OF BANK HOLDING COMPANIES
27
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 unless the Board
certifies that the corporation has ceased to be a bank holding company
before the expiration of the period specified in subparagraph (B).
Under the House bill the period specified in paragraph (B) was 2
years after the date of enactment. Your committee has modified
subparagraph (B) to provide that the specified period expires 2 years
after the enactment of this part or 2 years after the corporation
becomes a bank holding company, whichever is later. Under subparagraph (B) of the House bill the Board is authorized on the appli
cation 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, but such period might not be
extended beyond the date 5 years after the date of enactment of this
part. Your committee has modified this provision to provide that
such period may not in any case be extended beyond the date 5 years
after the date of enactment of this part or 5 years after the date on
which the corporation becomes a bank holding company, whichever is
later. The purpose of your committee’s changes is to extend the speci
fied periods in the case of corporations which become bank holding
companies after the date of enactment of this part by reason of a
distribution under section 1101. This treatment makes the specified
periods uniform whether such a corporation chooses to distribute
prohibited property or bank stock. 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 com
pany and the disposition of which is necessary to enable such corpora
tion 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, distribu
tions 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
of a kind which causes a qualified bank holding corporation to be a
){>ank holding company to its shareholders is governed by the provisions
of other sections of the Internal Revenue Code of 1954 applicable
thereto.
28
CONTROL OF BANK HOLDING COMPANIES
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 of the House bill provided for the
extension of the periods of limitation on the assessment and collection
of deficiencies in tax arising from distributions to which subsection
(a) or (b) of section 1101 apply. Your committee has revised this
provision of the House bill in several respects: (1) it has eliminated
the extension of the period under section 6502 relating to collection
as unnecessary; (2) it has provided that the extension applies to dis
tributions certified by the Board under subsection (a) or (b) of
section 1101 in order to correct a technical defect; (3) it has provided
that the notification by the corporation be in such manner and with
such accompanying information as prescribed in regulations by the
Secretary or his delegate; (4) it has provided for a 5-year period after
the notification instead of a 1-year period; and (5) it has provided that
the notification can only be made after the expiration of the period
prescribed in section 6 (a) of the Bank Holding Company A ct or
section 1101 (e), whichever is applicable, instead of after a final
certification by the Board. Accordingly, under subsection (b) of
section 1102 of your committee’s bill, the periods of limitation pro
vided in section 6501 (relating to limitations on assessment) shall not
expire, with respect to any deficiency (including interest and additions
to the tax), resulting solely from the receipt of property by share
holders in a distribution by a qualified bank holding corporation which
is certified by the Board under subsection (a) or (b) of section 1101,
until 5 years after such corporation notifies the Secretary or his
delegate (in such manner and with such accompanying information
as the Secretary or his delegate may by regulations prescribe) that
the period (including extensions thereof) prescribed in section 6 (a)
of the Bank Holding Company Act, or section 1101 (e), whichever
is applicable, has expired. Such assessment may be made notwith
standing any provisions of law or rule of law which would otherwise
prevent such assessment.
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,
o f “ bank holding company,” “ qualified bank holding corporation,”
“ prohibited property,” “ nonexempt property,” and “ Board.”
CONTROL OF BANK HOLDING COMPANIES
29
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.” Your committee has made a technical amendment
to subsection (b) in order to make it clear that the tax provisions of
this part apply to any corporation as defined in section 7701 (a) (3)
of the Internal Revenue Code of 1954 if such corporation is a qualified
bank holding 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” as defined in subsection (c). For example, if the sole
assets of corporation X consist of 25 percent of the voting shares of
each of 2 banks, corporation X is not a qualified bank holding cor
poration.
In addition, to be a qualified bank holding corporation the pro
hibited property must have been acquired on or before M ay 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 M ay 15, 1955, consist
of cash and 25 percent of the voting shares of each of 2 banks and on
M ay 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 M ay 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 M ay 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 M ay
15, 1955, if the Bank Holding Company Act of 1955 had been in
effect on such date, or unless such corporation is a bank holding
company determined solely by reference to the following: (1) Property
30
CONTROL OF BANK HOLDING COMPANIES
acquired by such corporation on or before M ay 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 M ay 15, 1955, the sole assets of corporation X consist
of cash and business assets and on M ay 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 M ay 15, 1955, is not a qualified bank holding
corporation. An additional example of the application of subpara
graph (A) of paragraph (2) is where corporation X is determined, by
the Board, after M ay 15, 1955, to be a bank holding company by
reason of clause (2) of section 3 (a) of the Bank Holding Company
Act of 1955, solely by reference to (1) property acquired by such
corporation on or before M ay 15, 1955, and (2) 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
M ay 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 M ay 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 M ay 15, 1955, the sole
assets of corporation Y consist of cash and 25 percent of the voting
shares of each of two banks. On M ay 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 corporation Y in a
distribution with respect to stock acquired after M ay 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 M ay 15, 1955,
(2) in a distribution (with respect to stock held by it on M ay 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
31
CONTROL OF BANK HOLDING COMPANIES
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),
in 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
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.
Section 10 (b) amends table of parts of chapter 1, subchapter O of
Internal Revenue Code of 1954 by adding “ Part V III. Distributions
pursuant to Bank Holding Company Act of 1955.”
Section 10 (c) makes these tax provisions in section 10 (a) apply
to taxable years ending after the enactment of the act.
Section 11 .— This section contains a savings clause to mr.ke 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 12 .— This section contains the usual separability clause for
provisions of the act.
C hanges
in
In compliance with subsection
Rules of the Senate, changes in
reported, are shown as follows
existing law in which no change
E x is t in g
L aw
(4) of rule X X I X of the Standing
existing law made by the bill, as
(new matter is printed in italics,
is proposed is shown in roman):
IN T E R N A L R E V E N U E CO DE OF 1954
C h a p te r I— N o r m a l T a x e s and S u r t a x e s
*
*
*
*
*
*
*
SUBCHAPTER O— GAIN OR LOSS ON DISPOSITION OF PROPERTY
Part
I.
Part
II.
Part III.
Part IV.
Part
V.
Part VI.
Part VII.
Determination of amount and recognition of gain or loss.
Basic rules of general application.
Common nontaxable exchanges.
Special rules.
Changes to effectuate F. C. C. policy.
Exchanges in obedience to S. E. C. orders.
Wash sales of stock or securities.
Part VIII. Distributions pursuant to Bank Holding Company Act of 1955.
*
*
2 0 8 0 6 0 — 5 8 -------- 53
*
*
*
*
*
32
CONTROL OF BANK HOLDING COMPANIES
PART VUL— DISTRIBUTIONS PURSUANT TO BANK
HOLDING COMPANY ACT OF 1955
Sec. 1101. Distributions pursuant to Bank Holding Company Act oj 1955.
Sec. 1103. Special rules.
Sec. UOS. Definitions.
SEC. 1101. DISTRIBUTIONS PURSUANT TO BANK HOLDING COM PANY ACT OF 1955.
(a)
D istr ib u tio n s
of
P r o h ib ited
P r o p e r t y .— 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
of 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
4 (a) of the Bank Holding Company Act of 1955 ,
then no gain to the shareholder from the receipt of such property shall be recognized.
This subsection shall not apply to any distribution by a corporation which has made
any 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 Be 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 stogk or
securities in such corporation; and
(2) the Board has, before the distribution, certified that (A ) such property is
of a kind which causes such corporation to be a bank holding company, (B) the
disposition of 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 of 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 (3), subsection
(a) or (b) shall not apply to—
(A) any property acquired by the distributing corporation after M ay 15,
1955, unless (i ) gain to such corporation with respect to the receipt of such
property was not recognized by reason of 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 (3) applies, or
(B) any property which was acquired by the distributing corporation in
a distribution with respect to stock acquired by such corporation after M ay
15, 1955, unless such stock was acquired by such corporation (i) in a
distribution (with respect to stock held by it on M ay 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 su jsection (a) or (b)f or (ii) in exchange for all of its stock in an exchange
to which paragraph (2) or (3) applies.
(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 —
(A) any qualified bank holding corporation exchanges (i) solely property
which, under subsection (a), 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 pur
pose of receiving such property;
(B) immediately after the exchange, the qualified bank holding corpora
tion distributes all of such stock to its shareholders with respect to its stock;
and
(C) before such exchange, the Board has certified that the exchange and
distribution are necessary or appropriate to effectutate the first sentence
of section 4 (a) of the Bank Holding Company Act of 1955,
then paragraph (1) shall not apply with respect to such distribution.
(8)
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 —
(A) 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 all of such stock to its shareholders with respeci to its:
stock; and
CONTROL OF BANK HOLDING COMPANIES
33
(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;
(ii) that the disposition of property of that kind i s necessary to
enable such corporation to cease being a bank holding company; and
(in) 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 t r i b u t i o n s 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 M ay 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 i n a l C e r t i f i c a t i o n . —
(1) F o r s u b s e c t i o 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 4 (a) of the Bank Holding Company Act of 1955
(including any extensions thereof granted to such corporation under such section
4 (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 4 (a) (or
would have been so necessary or appropriate if the corporation had continued to be
a bank holding company).
(2)
F or
s u b s e c t io 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 period referred to in subparagraph (A) is the period which expires
2 years after the date of the enactment of this part or 2 years after the date
on which the corporation becomes a bank holding company, whichever date
is later. 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 1 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 5 years after the date of the enactment
of this part or 5 years after the date on which the corporation becomes a
bank holding company, whichever date is later.
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 receipt of any property, then the
basis of such property and of the stock with respect to which it is distributed shall
in the distributee’s hands, be determined by allocating between such property ana
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 section 6501
(relating to limitations on assessment and collections) shall not expire, with respect
to any deficiency (including interest and additions to the tax) resulting solely from the
receipt of property by shareholders in a distribution by a qualified bank holding cor
poration which is certified by the Board under subsection (a) or (b) of section 1101,
until 5 years after such corporation notifies the Secretary or his delegate (in such
manner and with such accompanying information as the Secretary or his delegate may
by regulations prescribe) that the period (including extensions thereof) prescribed in
section 4 (a) of the Bank Holding Company Act of 1955, or section 1101 (e), which
ever is applicable, has expired; and such assessment may be made notwithstanding
any provision of law or rule of law which would otherwise prevent such assessment.
(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 property shall be properly allocated between such corporation 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.
34
CONTROL OF BANK HOLDING COMPANIES
SEC. 1103. DEFINITIONS.
(a) B ank H olding Company.— For purposes of this party the term “ bank holding
company” has the meaning assigned to such term by section 2 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) In 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 {as
defined in section 7701 (a) (8)) which is a bank holding company and which
holds prohibited property acquired by it—
(A) on or before M ay 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
(O 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 M a y 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 referenc
to—
(i) property acouired by it on or before M ay 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 (b) of section 1101, and
(Hi) property acquired by it in exchange for all of its slock in an
exchange described in section 1101 (c) (2) or (8).
(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 M ay 15, 1955,
(ii) in a distribution (with respect to stock held by it on M ay 15,
1955, or with respect to stock in respect of which all previous applications
of this clause are satisfied) with rcspect 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 (8).
(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 which would be necessary or appropriate to
effectuate the first sentence of section 4 (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 4 (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 4 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) (5) of such section.
(d) N o n e x e m p t P r o p e r t y . — For purposes of this part, the term “ nonexempt
property” means—
(1) obligations (including notes, drafts, bills of exchange, and bankers’ ac
ceptances) having a maturity at the time of issuance of not exceeding 24 months,
exclusive of days of grace;
(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 obliga
tion (other than a security of 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.
*
*
*
*
o
*
*
*
@FedFRASER