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F E D E R A L R E SE R V E B A N K O F D A LL A S DALLAS, TEXAS F e b ru a ry 18, 1966 A M E N D M E N T T O R E G U L A T IO N R “ R E L A T IO N S H IP S W IT H D E A L E R S IN S E C U R IT IE S U N D E R S E C T IO N 32 O F T H E B A N K IN G A C T O F 1933” T o A ll M em ber B anks and O th ers C oncerned in th e E lev en th F ed era l R eserv e D is tr ic t: E ffe ctiv e N ov em b er 17, 1965, th e B oard o f G ov ern ors o f th e F ed eral R eserv e S ystem am ended R egu la tion R so as to add five n ew ca teg ories o f ob liga tion s to the excep tion s con tained in section 218.2. T h ese ob ligation s are a m on g th ose eligible f o r u n d erw ritin g and d ealin g in b y m em b er banks u n der section 5136 o f th e R ev ised Statutes. A tta ch e d is a co p y o f the R egu la tion as am ended N ov em b er 17, 1965, and as ed itoria lly rev ised Jan u ary 25, 1966. M em b e r banks are req u ested to su bstitu te th e rev ised R e g u la tio n in th e rin g b in d er con ta in in g th e R egu la tion s o f th e B oa rd o f G ov ern ors and th e B ulletins o f th is bank. T h e e x is tin g R eg u la tion as am en ded O ctob er 23, 1959, sh ould be d estroyed . Y ou rs v e r y truly, W a trou s H. Iron s P resid en t This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) BOARD OF GOVERNORS o f the FE D E R A L R E S E R V E SYSTE M RELATIONSHIPS WITH DEALERS IN SECURITIES UNDER SECTION 32 OF THE BANKING ACT OF 1933 R E G U L A T IO N R (1 2 CFR 2 1 8 ) As Am ended N ovem ber 17, 1965 As Editorially Revised January 25, 1966 INQUIRIES REGARDING THIS REGULATION Any inquiry relating to this regulation should be addressed to the Federal Reserve bank of the district in which the inquiry arises. R E G U L A T IO N R (12 C F R 218) As Amended November 17, 1965 As Editorially Revised January 25, 1966 RELATIONSHIPS WITH DEALERS IN SECURITIES UNDER SECTION 32 OF THE BANKING ACT OF 1933 * SE C TIO N 218.1— P R O H IB IT IO N S Under section 32 of the Banking A ct of 1933 (49 Stat. 709; 12 U.S.C. 78), except as stated in §218.2, no officer, director, or em ployee of any corporation or unincorporated association, no partner or employee of any partnership, and no individual primarily en gaged in the issue, flotation, underwriting, public sale, or distribu tion, at wholesale or retail, or through syndicate participation, of stocks, bonds, or other similar securities, can legally be at the same time an officer, director, or employee of any member bank of the Federal Reserve System.1 SE C TIO N 218.2— E X C E P T IO N S Pursuant to the authority vested in it by section 32, the Board of Governors of the Federal Reserve System hereby grants perm ission2 for any officer, director, or employee of any member bank of the * This text corresponds to the Code o f Federal R egulations, T itle 12, Chapter II, Part 218; cited as 12 C FR 218. 1 Therefore, by its term s, section 32 does n ot apply— (a ) T o a person w ho is not an officer, director, or em ployee o f a m em ber bank o f the Federal Reserve System; (b ) T o a person (1 ) who is n ot an officer, director, or employee o f a corporation or unincorporated association prim arily engaged in the issue, flotation, underw riting, public sale, or distribution, at wholesale or retail, or through syndicate p a rticip ation, o f stocks, bonds or other sim ilar securities, (2 ) w ho is n ot a p artner o r em ployee o f a partnership prim arily so engaged, and (3 ) w ho is not, in his individual capacity, prim arily so engaged. A broker w ho is engaged solely in executing orders fo r the purchase and sale o f secur ities on behalf o f others in the open m arket is n ot engaged in the business referred to in section 32. 2 U nder section 32, as amended effective January 1, 1936 (49 Stat. 709; 12 U .S.C. 7 8), the Board is authorized to except lim ited classes o f relationships from the prohibitions o f the statute, under certain conditions; but the Board can m ake such exceptions only by general regulations and is n ot authorized to issue individual perm its. 2 REGULATION R SECS. 218.2-218.3 Federal Reserve System, unless otherwise prohibited,3 to be at the same time an officer, director, or employee of any corporation or unincorporated association, a partner or employee of any partner ship, or an individual, engaged in the issue, flotation, underwriting, public sale, or distribution, at wholesale or retail, or through syndi cate participation, of any stocks, bonds, or other similar securities, if so engaged only as to the following securities: bonds, notes, certifi cates of indebtedness, and Treasury bills of the United States; obli gations fully guaranteed both as to principal and interest b y the United States; obligations of Federal Intermediate Credit banks, Federal Land banks, Central Bank for Cooperatives, Federal Home Loan banks, the Federal National M ortgage Association, and the Tennessee V alley A uthority; subject to specifications contained in paragraph Seventh of Section 5136, Revised Statutes (12 U.S.C. 2 4), obligations of the International Bank for Reconstruction and Development, the Inter-American Developm ent Bank, any local public agency, and obligations insured by the Federal Housing Adm inistrator; and general obligations of Territories, dependencies, and insular possessions of the United States. S E C T IO N 218.3— A M E N D M E N T S The right to alter, amend, or repeal this Part, in whole or in part, is expressly reserved. 8 Section 8 o f the Clayton A ct (38 Stat. 732, 49 Stat. 718; 15 U .S.C. 19) is applicable in certain circum stances to interlocking; relationships between m em ber banks and private bankers, and other banks, banking; associations, savings banks and trust com panies. See P a rt 212 o f this Chapter. Section 17 (c ) o f the Public U tility A ct o f 1935 (49 Stat. 831; 15 U .S.C . 7 9 q ( c ) ) is applicable in certain circum stances to interlocking relationships between banks and p rivate bankers (and corporations owned by banks and p rivate b a n k ers), and public utility com panies and public utility holding com panies. Inquiries regarding this section should be addressed to the Securities and E xchange Comm ission and n ot to the Board o f G overnors o f the Federal R eserve System. Section 1 0 (c ) o f the Investm ent Com pany A ct o f 1940 (54 Stat. 806; 15 U .S.C . 80a1 0 ( c ) ) is applicable in certain circum stances to interlocking relationships between banks and registered investm ent com panies. Inquiries regardin g this section should be addressed to the Securities and E xchange Commission and n ot to the Board o f Governors o f the Federal Reserve System. Section 3 05 (b ) o f the Federal P ow er A ct (49 Stat. 856; 16 U .S.C . 825d(b) ) is ap p li cable in certain circum stances to interlocking relationships between public utility com panies and banks and bankers that are authorized by law to underwrite or p articipate in the m arketing o f securities o f a public utility. Inquiries regardin g this section should be addressed to the Federal P ow er Comm ission and n ot to the Board o f Governors o f the Federal Reserve System. 3 APPEND IX S T A T U T O R Y PR O V ISIO N S Section 32 of the Banking A ct of 1933 (12 U.S.C. 78) reads as follows: Sec. 32. N o officer, director, or employee of any corporation or unincorporated association, no partner or employee of any partnership, and no individual, primarily engaged in the issue, flotation, underwriting, public sale, or distribution, at wholesale or retail, or through syndicate participation, of stocks, bonds, or other similar securities, shall serve the same time as an officer, director, or employee of any member bank except in limited classes of cases in which the Board of Governors of the Federal Reserve System m ay allow such service by general regulations when in the judgment of the said Board it would not unduly influence the investment policies of such member bank or the advice it gives its customers regarding investments. Paragraph “ Seventh” of Section 5136, Revised Statutes (12 U.S.C. 24) reads as follow s: Seventh. T o exercise by its board of directors or duly author ized officers or agents, subject to law, all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of ex change, and other evidences of debt; by receiving deposits; by buying and selling exchange, coin, and bullion; by loaning money on personal security; and by obtaining, issuing, and circulating notes according to the provisions of this chapter. The business of dealing in securities and stock by the association shall be limited to purchasing and selling such securities and stock without re course, solely upon the order, and for the account of, customers, and in no case for its own account, and the association shall not underwrite any issue o f securities or stock: Provided, That the association m ay purchase for its own account investment secu rities under such limitations and restrictions as the Comptroller of the Currency may by regulation prescribe. In no event shall the total amount of the investment securities of any one obligor or maker, held by the association for its own account, exceed at any time 10 per centum of its capital stock actually paid in and unimpaired and 10 per centum of its unimpaired surplus fund, except that this limitation shall not require any association to dis pose of any securities lawfully held by it on August 23, 1935. As used in this section the term “ investment securities” shall mean marketable obligations, evidencing indebtedness of any person, copartnership, association, or corporation in the form of bonds, 4 REGULATION R notes a n d /o r debentures com monly known as investment secur ities under such further definition of the term “ investment secur ities” as may by regulation be prescribed by the Comptroller of the Currency. Except as hereinafter provided or otherwise per mitted by law, nothing herein contained shall authorize the pur chase by the association for its own account of any shares of stock of any corporation. The limitations and restrictions herein contained as to dealing in, underwriting and purchasing for its own account, investment securities shall not apply to obligations of the United States, or general obligations of any State or of any political subdivision thereof, or obligations issued under authority of the Federal Farm Loan Act, as amended, or issued b y the thir teen banks for cooperatives of any of them or the Federal Home Loan Banks, or obligations which are insured by the Federal Housing Administrator pursuant to section 1713 of this title, if the debentures to be issued in payment of such insured obligations are guaranteed as to principal and interest by the United States, or obligations, participations, or other instruments of or issued b y the Federal National M ortgage Association, or such obligations of any local public agency (as defined in section 1460(h) of Title 42) as are secured by an agreement between the local public agency and the Housing and Home Finance Administrator in which the local public agency agrees to borrow from said A dm in istrator, and said Administrator agrees to lend to said local pub lic agency, monies in an aggregate amount which (together with any other monies irrevocably committed to the payment of inter est or such obligations) will suffice to pay, when due, the interest on and all installments (including the final installment) of the principal of such obligations, which monies under the terms of said agreement are required to be used for such payments, or such obligations of a public housing agency (as defined in the United States Housing A ct of 1937, as amended) as are secured either (1) by an agreement between the public housing agency and the Public Housing Administration in which the public housing agency agrees to borrow from the Public Housing Admininstration, and the Public Housing Administration agrees to lend to the REGULATION R 5 public housing agency, prior to the maturity of such obligations (which obligations shall have a maturity of not more than eighteen m onths), monies in an amount which (together with any other monies irrevocably committed to the paym ent of inter est on such obligations) will suffice to pay the principal of such obligations with interest to maturity thereon, which monies under the terms of said agreement are required to be used for the pur pose of paying the principal o f and the interest on such obliga tions at their maturity, or (2) by a pledge of annual contributions under an annual contributions contract between such public hous ing agency and the Public Housing Administration if such contract shall contain the covenant b y the Public Housing A dministration which is authorized b y section 1421a (b) of Title 42, and if the maximum sum and the maximum period specified in such contract pursuant to section 1421a (b) of Title 42 shall not be less than the annual amount and the period for payment which are requisite to provide for the payment when due of all installments of prin cipal and interest on such obligations: Provided, That in carrying on the business com monly known as the safe-deposit business the association shall not invest in the capital stock of a corporation organized under the law of any State to conduct a safe-deposit business in an amount in excess of 15 per centum of the capital stock of the association actually paid in and unimpaired and 15 per centum of its unimpaired surplus. The limitations and restrictions herein contained as to dealing in and underwriting investment securities shall not apply to obligations issued b y the International Bank for Reconstruction and Developm ent or the Inter-American Developm ent Bank which are at the time eligible for purchase b y a national bank for its own account, nor to bonds, notes and other obligations issued by the Tennessee V alley Au thority: Provided, That no association shall hold obligations issued b y any of said organizations as a result of underwriting, dealing, or purchasing for its own account (and for this purpose obligations as to which it is under commitment shall be deemed to be held b y it) in a total amount exceeding at any one time 10 per centum of its capital stock actually paid in and unimpaired and 10 per centum of its unimpaired surplus fund.
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