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F ederal Reserve Bank of Dallas
DALLAS, T E X A S

75222

C i r c u l a r No. 78-67
May 25, 1978

INTERPRETATION OF REGULATION A

TO THE CHIEF EXECUTIVE OFFICER
OF THE MEMBER BANK ADDRESSED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
T h e Board of G o v e rn o rs of the Fed eral R e s e r v e System has is su e d
an in te r p r e ta tio n of R egulation A, "E x te n s io n s of C r e d it by F ed eral R e s e rv e
B a n k s , " w hich e x te n d s the k in d s of b a n k e r s ' a c c e p ta n c e s e lig ib le for d is c o u n t
b y Federal R e s e rv e B a n k s . A p r o p o s e d re v is io n of th e in te r p r e ta tio n was sen t
to you on Decem ber 30, 1977, u n d e r C ir c u la r No. 77-147, a n d w as ado p ted with
some tech n ical c h a n g e s b a s e d on comments r e c e i v e d . T h is in te rp r e ta tio n s u p e r ­
s e d e s P a r a g r a p h 1445 of th e B o a r d 's P u b lis h e d In te rp r e ta tio n s .
P r in te d on th e following p a g e s is a copy of the text of the i n t e r p r e t a ­
tion. T h e in te r p r e ta tio n is being p r i n t e d in th e FEDERAL REGISTER a n d in the
J u n e 1978 i s s u e of th e FEDERAL RESERVE BULLETIN.
S in c e r e ly y o u r s ,
R obert H . Boykin
F irst Vice President

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

EXTRACT
(REGULATION A — DOCKET NO. R-0135)
INTERPRETATION OF REGULATION A

5 1445—Goods held by p e r s o n s em ployed b y o w n e r .

(12 CFR 201.110)

(a) T h e Board h a s b e en a s k e d to re v ie w an In te rp r e ta tio n it is su e d in 1933
c o n c e r n in g th e elig ib ility for r e d is c o u n t b y a F ederal R e s e rv e B ank of b a n k e r s ' a c c e p t­
a n c e s is su e d a g a i n s t field w a r e h o u s e r e c e ip t s w h e r e th e cu sto d ian of the goods is a
p r e s e n t o r fo r m e r employee of the b o r r o w e r [5 1445 P u b lis h e d I n t e r p r e t a t i o n s , 1933
BULLETIN 188] . T h e Board d e te rm in e d a t that time tha t th e a c c e p ta n c e s w e re not
e lig ib le b e c a u s e :
su ch re c e ip t s do not comply with the r e q u ir e m e n t of section 13
of t h e Federal R e s e rv e Act th a t a b a n k e r ' s a c c e p ta n c e be " s e c u r e d
a t th e time of a c c e p ta n c e b y a w a r e h o u s e re c e ip t o r o th e r su ch
d o cu m ent c o n v e y i n g o r s e c u r in g title c o v e r in g re a d ily m a r k e t­
ab le s t a p l e s , " n o r w ith th e r e q u i r e m e n t of section XI of the
B o a r d 's R egulation A th a t it be " s e c u r e d a t th e time of a c c e p ta n c e
b y a w a r e h o u s e , t e rm in a l, o r o th e r s im ila r r e c e ip t , c o n v ey in g
s e c u r i t y title to s u ch s t a p l e s , is su e d by a p a r t y i n d e p e n d e n t of
the c u s t o m e r ."
T h e r e q u i r e m e n t t h a t the re c e ip t be " i s s u e d b y a p a r t y in d e p e n d e n t of the c u sto m er"
was d e le ted from Regulation A in 1973, a n d th u s th e p r i m a r y is s u e fo r the B o a r d 's c o n ­
s id e r a t io n is w h e th e r a field w a r e h o u s e re c e ip t is a d o c u m e n t " s e c u r i n g title" to r e a d ­
ily m a rk e ta b le s t a p l e s .
(b) While b a n k e r s ' a c c e p ta n c e s s e c u r e d b y field w a r e h o u s e re c e ip ts a r e r a r e l y
offered for r e d i s c o u n t o r a s c o llateral fo r an a d v a n c e , th e is s u e of " eligib ility " is still
s ig n ific a n t. If an ineligible a c c e p ta n c e is d is c o u n te d a n d then sold b y a m em ber b a n k ,
th e p r o c e e d s a r e d eem ed to be " d e p o s its " u n d e r section 204.1(f) of Regulation D a n d
a r e s u b j e c t to r e s e r v e r e q u i r e m e n t s .
(c) In re v ie w in g th is m a tte r, th e B oard has ta k e n into c o n s id e ra tio n th e c h a n g e s
th a t h a v e o c c u r r e d in commercial law a n d p r a c t i c e s in c e 1933. Modern com m ercial law,
em bodied in the Uniform Commercial C ode, r e f e r s to " p e r fe c tin g s e c u r it y i n te r e s ts "
r a t h e r th a n " s e c u r i n g title" to g o o d s . T h e Board b e lie v e s t h a t if, u n d e r State law, the
is s u a n c e of a field w a r e h o u s e re c e ip t p r o v id e s the le n d e r with a p e r fe c te d s e c u r it y
i n t e r e s t in th e g o o d s , th e r e c e i p t sh o u ld be r e g a r d e d as a d o c u m e n t " s e c u r i n g title" to
goods for th e p u r p o s e s of § 13 of th e Fed eral R e s e r v e A ct. It sh o u ld b e noted , h o w e v e r ,
th a t th e m ere e x is te n c e of a p e rfe c te d s e c u r i t y i n t e r e s t alone is not sufficient; th e Act
r e q u i r e s th a t th e a c c e p ta n c e be s e c u r e d b y a w a r e h o u s e re c e ip t o r its e q u iv a le n t .

- 2 (d) U n d e r th e U . C . C . , e v id e n c e of a n a g r e e m e n t betw een th e s e c u r e d p a r t y a n d
th e d e b to r m ust e x i s t b e fo re a s e c u r i t y i n t e r e s t c a n atta ch [ U . C . C . § 9 -2 0 2 ], T h is
a g r e e m e n t may b e e v id e n c e d by: (1) a w r itt e n s e c u r it y a g r e e m e n t s i g n e d b y the d e b t o r ,
o r (2) th e c o llateral b e in g p la c e d in the p o s s e s s io n of th e s e c u r e d p a r t y o r h is a g e n t
[ U . C . C . § 9-203] . G e n e r a lly , a s e c u r it y in t e r e s t is p e rfe c te d b y the filing of a fin a n c ­
ing statem e n t [ U . C . C . § 9-302] . H ow ever, if the collateral is in the p o s s e s s io n of a
b a ile e , th e n p e rfe c tio n c a n be a c h i e v e d by: (1) h a v in g w a r e h o u s e re c e ip t s is su e d in
th e name of t h e s e c u r e d p a r t y ; (2) notifying the bailee of the s e c u r e d p a r t y ' s in te re s t;
o r (3) h a v in g a fin a n c in g statem ent filed [ U . C . C . § 9 -3 0 4 ( 3 ) ] .
(e) If t h e field w a r e h o u s in g o p e ra tio n is p r o p e r l y c o n d u c te d , a s e c u r it y in te r e s t
in the go o d s is p e r fe c te d w h en a w a r e h o u s e re c e ip t is is s u e d in th e name of th e s e c u r e d
p a r t y (the lending bank) . T h e r e f o r e , w a r e h o u s e re c e ip ts is su e d p u r s u a n t to a bona
fide field w a r e h o u s in g o p e ra tio n satisfy the legal r e q u ir e m e n t s of section 13 of th e Fed­
e ra l R e s e r v e Act. M o reo v er, in a p r o p e r l y c o n d u c te d field w a r e h o u s in g o p e ra tio n , the
w a r e h o u s e m a n a g e r will be t r a i n e d , b o n d e d , s u p e r v i s e d , a n d a u d ite d b y the field w a r e ­
h o u s in g c o m p a n y . T h is p r o c e d u r e te n d s to i n s u r e that he will not be im p e rm issib ly
c o n tro lle d b y h is fo rm er (or sometimes p r e s e n t ) e m p lo y e r, th e b o r r o w e r , e v e n though
he may look to the b o r r o w e r fo r re e m plo ym e n t a t some f u tu r e tim e. A p r u d e n t le n d e r
w ill, of c o u r s e , c a r e f u lly re v ie w the field w a r e h o u s in g o p e ra tio n to e n s u r e tha t stated
p r o c e d u r e s a r e sa tisfa c to ry a n d th a t they a r e a c tu a lly b e in g followed. T h e le n d e r may
also w ish to re v ie w th e field w a r e h o u s in g c o m p a n y 's fidelity b o n d s a n d legal liability
i n s u r a n c e policies to e n s u r e th a t th e y p r o v id e s atisfa c to ry p rotection to th e le n d e r .
(f) If the w a r e h o u s in g operatio n is not c o n d u c te d p r o p e r l y , h o w e v e r, a n d the
m a n a g e r re m a in s u n d e r th e control of the b o r r o w e r , the s e c u r it y in te r e s t may be lost.
C o n s e q u e n tly , the le n d e r may w ish to r e q u i r e a w r itt e n s e c u r it y a g r e e m e n t and the fil­
ing of a fin a n c in g s tatem ent to in s u r e th a t th e le n d e r will h a v e a p e rfe c te d s e c u r it y in­
t e r e s t e v e n if it is later d e te rm in e d th a t th e field w a r e h o u s in g o p e ra tio n was not p r o p e r l y
c o n d u c t e d . It sh o u ld b e n o te d , h o w e v e r , th a t th e F e d e ra l R e s e rv e Act c le a r l y r e q u i r e s
th a t t h e b a n k e r s ' a c c e p ta n c e b e s e c u r e d b y a w a r e h o u s e r e c e i p t in o r d e r to satisfy the
r e q u i r e m e n t s of e lig ib ili ty , a n d a w r itt e n s e c u r i t y a g r e e m e n t a n d a filed finan cin g
s ta te m e n t, w hile d e s i r a b l e , c a n n o t s e r v e a s a s u b s tit u te fo r a w a r e h o u s e r e c e ip t .
(g) T h is i n te r p r e t a t io n is b a s e d on facts th a t h a v e b e e n p r e s e n t e d in r e g a r d to
field w a r e h o u s in g o p e ra tio n s c o n d u c te d b y e s t a b l i s h e d , p ro fessio n al field w a re h o u s e
c o m p a n ie s , a n d it d o e s not n e c e s s a r i l y a p p ly to all field w a r e h o u s in g o p e r a tio n s . T h u s ,
5 1430 a n d J 1440 of th e P u b li s h e d In te rp r e ta tio n s [1918 BULLETIN 31 a n d 1918 BULLETIN
862] maintain t h e i r v a lid ity with r e g a r d to c o rp o ra tio n s formed fo r the p u r p o s e of c o n ­
d u c tin g limited field w a r e h o u s in g o p e r a tio n s . F u r t h e r m o r e , th e p ro h ib itio n contained
in 5 1435 P u b li s h e d I n te rp r e ta tio n s [1918 BULLETIN 634] th a t " th e b o r r o w e r s h all not
h a v e a c c e s s to th e p r e m is e s a n d shall e x e r c i s e no control o v e r th e goods sto re d " r e ta in s
its v a lid ity , e x c e p t th a t a c c e s s fo r in sp ectio n p u r p o s e s is still p e rm itte d u n d e r 5 1450
[1926 BULLETIN 666] T h e p u r p o s e fo r the a c c e p ta n c e tr a n s a c tio n m ust be p r o p e r a n d
c a n n o t b e for sp ec u la tio n [5 1400, 1919 BULLETIN 858] o r fo r the p u r p o s e of f u r n is h in g
w o rk in g capital [ f 1405, 1922 BULLETIN 52] .

- 3 (h)
T h i s in te r p r e ta tio n s u p e r s e d e s only th e p r e v i o u s 5 1445 of th e P u b lis h e d
I n te rp r e ta tio n s [1933 BULLETIN 188] , a n d is not in ten d ed to affect a ny o th e r Board
in te r p r e ta tio n r e g a r d i n g field w a r e h o u s in g .
By o r d e r of the Board of G o v e r n o r s , May 10, 1978.
(Signed) T h e o d o re E. Allison

T h e o d o re E. Allison
S e c r e t a r y of the Board

(SEAL)

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