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Fe d e r a l Reserve ban k of Dallas DALLAS. TEXAS August 12, 1957 To All State Member Banks: There is enclosed a copy o f regulations recently issued by the Comptroller o f the Currency pertaining to Investment Securities and to National Bank Loans Secured by Direct Obligations o f the United States. A copy o f the Comptroller’s letter o f July 23, 1957, which accompanied these regulations when they were sent to all national banks, is also enclosed. This information is being forwarded to you since sections 9 and l l ( m ) o f the Federal Reserve A ct make these regulations applicable to State banks which are members o f the Federal Reserve System. Yours very truly, Watrous H. Irons President This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) T R E A S U R Y DEPARTMENT COMPTROLLER OF THE CURRENCY W A S H IN G T O N 25 AD D RESS REPLY TO “ CO M PTRO LLE R OF TH E CU R REN CY’ * July TO A L L NATIONAL 23, 1957 BANKS: W e a r e e n c l o s i n g f o r y o u r i n f o r m a t i o n c o p i e s of (1) t h e I n v e s t m e n t S e c u r i t i e s R e g u l a t i o n , a s a m e n d e d , a n d (2) a n e w r e g u l a t i o n c o v e r i n g L o a n s M a d e b y N a t i o n a l B a n k s S e c u r e d b y D i r e c t O b l i g a t i o n s of t h e U n i t e d S t a t e s . The two r e g u l a t i o n s were p u b l i s h e d in t h e F e d e r a l R e g i s t e r o n J u l y 17, 1 9 5 7 , a n d w i l l b e c o m e e f f e c t i v e A u g u s t 16, 1 9 5 7 . T h e I n v e s t m e n t S e c u r i t i e s R e g u l a t i o n is i s s u e d b y t h e C o m p t r o l l e r of t h e C u r r e n c y u n d e r t h e a u t h o r i t y c o n t a i n e d i n p a r a g r a p h S e v e n t h of s e c t i o n 5 1 3 6 of t h e R e v i s e d S t a t u t e s ( 12 U . S . C . 24) a n d t h e p u r p o s e of t h i s r e g u l a t i o n is t o p r e s c r i b e the l i m i t a t i o n s a n d r e s t r i c t i o n s u n d e r w h i c h n a t i o n a l b a n k s , a s w e l l a s S t a t e m e m b e r b a n k s of t h e F e d e r a l R e s e r v e S y s t e m , m a y p u r c h a s e i n v e s t m e n t s e c u r i t i e s f o r t h e i r o w n a c c o u n t a n d to d e f i n e t h e t e r m " i n v e s t m e n t s e c u r i t i e s . " U n d e r t h e e x i s t i n g r e g u l a t i o n t h e r e h a s b e e n d o u b t a s to t h e e l i g i b i l i t y of c e r t a i n s m a l l i s s u e s of s p e c i a l r e v e n u e o b l i g a t i o n s b e c a u s e of t h e p r e s e n t d i s t r i b u t i o n r e q u i r e m e n t s s e t f o r t h i n p a r a g r a p h s (a) a n d (b) of s e c t i o n 1. The n e w r e g u l a t i o n c l a r i f i e s t h e p o s i t i o n t h a t h a s b e e n t a k e n b y th e C o m p t r o l l e r w i t h r e s p e c t to the e l i g i b i l i t y of s m a l l i s s u e s of s p e c i a l r e v e n u e o b l i g a t i o n s . While the d i s t r i b u t i o n s t a n d a r d s a s s t a t e d i n p a r a g r a p h s (a) a n d (b) of s e c t i o n 1 of t h e p r e s e n t r e g u l a t i o n a n d p a r a g r a p h s (1) a n d (2) of s e c t i o n 2 of t h e n e w r e g u l a t i o n m a y n o t b e m e t by s o m e s m a l l s p e c i a l r e v e n u e i s s u e s , it is r e c o g n i z e d t h a t m a n y of s u c h i s s u e s p o s s e s s a h i g h d e g r e e of c r e d i t s o u n d n e s s w h i c h a s s u r e s m a r k e t a b i l i t y t o t h e p o i n t c o n t e m p l a t e d b y s e c t i o n 5 1 3 6 of t h e R e v i s e d S t a t u t e s . T h e r e s t r i c t i o n s i n t h e p r e s e n t r e g u l a t i o n g o v e r n i n g t h e p u r c h a s e o r s a l e of s e c u r i t i e s b y b a n k s u n d e r r e p u r c h a s e or r e s a l e a g r e e m e n t s a r e no l o n g e r c o n s i d e r e d d e s i r a b l e b e c a u s e of t h e b a s i c n a t u r e of s u c h t r a n s a c t i o n s a n d a r e d e l e t e d f r o m t h e new regulation. E x p e r i e n c e h a s s h o w n th a t r e p u r c h a s e or r e s a l e t r a n s a c t i o n s in s e c u r i t i e s a r e u s e d f o r t h e l e n d i n g a n d b o r r o w i n g of m o n e y . T h e y w i l l h e n c e f o r t h be t r e a t e d a s l o a n o r b o r r o w i n g t r a n s a c t i o n s g o v e r n e d b y s e c t i o n s 5 2 0 0 a n d 5 2 0 2 of t h e R e v i s e d S t a t u t e s (12 U . S . C . 84, 82) a n d n o t b y s e c t i o n 5 1 3 6 of t h e R e v i s e d S t a t u t e s (12 U . S . C . 24) . T h i s m e a n s t h a t a b a n k s e l l i n g s e c u r i t i e s u n d e r a n a g r e e m e n t to r e p u r c h a s e t h e m at a f u t u r e d a t e w i l l b e b o r r o w i n g f u n d s f r o m t h e p u r c h a s i n g b a n k a n d s e c t i o n 5 2 0 2 p r o v i d e s t h a t n a t i o n a l b a n k s m a y n o t b o r r o w a n a m o u n t i n e x c e s s of t h e i r c a p i t a l s t o c k e x c e p t f r o m a F e d e r a l R e s e r v e B a n k or as p e r m i t t e d u n d e r o t h e r e x c e p t i o n s to s e c t i o n 5202. T h e p u r c h a s i n g b a n k w i l l b e l e n d i n g f u n d s to t h e s e l l ing b a n k a n d , if d i r e c t o b l i g a t i o n s of t h e U n i t e d S t a t e s a r e i n v o l v e d , n a t i o n a l b a n k s , u n d e r th e p r o v i s i o n s of a n e w r e g u l a t i o n d i s c u s s e d b e l o w , m a y l e n d u p to 1 0 0 % of t h e i r c a p i t a l a n d s u r p l u s a c c o u n t s o n t h e b a s i s of s u c h s e c u r i t y p r o v i d e d t h e a m o u n t of t h e l o a n i n e x c e s s of 2 5 % of c a p i t a l a n d s u r p l u s is s e c u r e d b y d i r e c t o b l i g a t i o n s of t h e U n i t e d S t a t e s h a v i n g m a t u r i t i e s n o t e x c e e d i n g 1 8 m o n t h s . T h e r e s t r i c t i o n s i n t h e p r e s e n t r e g u l a t i o n g o v e r n i n g t h e a m o r t i z a t i o n of p r e m i u m s p a i d o n i n v e s t m e n t s e c u r i t i e s a r e b e i n g a m e n d e d i n t h e n e w r e g u l a t i o n to p e r m i t a m o r t i z a t i o n t o t h e m a t u r i t y d a t e r a t h e r t h a n t h e c a l l d a t e of t h e i s s u e , if Federal Internal Revenue Laws and regulations issued thereunder disallow amortiza tion d e d u c t i o n s f r o m g r o s s i n c o m e w h e n c o m p u t e d to the n e a r e s t ca l l date. Also a m e n d m e n t s a r e b e i n g p r o v i d e d i n t h e n e w r e g u l a t i o n to c l a r i f y t h e s e c t i o n p e r t a i n i n g to s e c u r i t i e s c o n v e r t i b l e i n t o s t o c k . It h a s a l s o b e e n d e e m e d a d v i s a b l e to i n c o r p o r a t e i n t o t h e n e w r e g u l a t i o n a p r o v i s i o n c a r r y i n g ou t t h e p r e s e n t a d m i n i s t r a t i v e p r a c t i c e w h i c h r e q u i r e s th a t i n v e s t m e n t s e c u r i t i e s o w n e d b y a b a n k be s u p p o r t e d b y a d e q u a t e i n f o r m a t i o n i n t h e f i l e s of t h e b a n k a s to t h e i r i n v e s t m e n t q u a l i t y . The new re g u l a t i o n , "Loans Made by N a t i o n a l Ba n k s S e c u r e d by D i r e c t O b l i g a t i o n s of t h e U n i t e d S t a t e s " , i s s u e d b y t h e C o m p t r o l l e r , w i t h t h e a p p r o v a l of t h e S e c r e t a r y of t h e T r e a s u r y , u n d e r t h e a u t h o r i t y c o n t a i n e d i n p a r a g r a p h (8) of s e c t i o n 5 2 0 0 of t h e R e v i s e d S t a t u t e s , a s a m e n d e d , p r e s c r i b e s c o n d i t i o n s u n d e r w h i c h n a t i o n a l b a n k s m a y m a k e l o a n s t o o n e b o r r o w e r i n e x c e s s of 2 5 % of c a p i t a l a n d s u r p l u s , a n d u p to 1 0 0 % of c a p i t a l a n d s u r p l u s w h e n s u c h l o a n s m a d e i n e x c e s s of 2 5 % of c a p i t a l a n d s u r p l u s a r e s e c u r e d b y d i r e c t o b l i g a t i o n s of t h e U n i t e d S t a t e s w h i c h w i l l m a t u r e in n ot e x c e e d i n g 18 m o n t h s . U n d e r t h e t e r m s of p a r a g r a p h (8) of s e c t i o n 5 2 0 0 of t h e R e v i s e d S t a t u t e s , n a t i o n a l b a n k s m a y l e n d t o a s i n g l e b o r r o w e r a n a d d i t i o n a l 1 5 % of c a p i t a l a n d s u r p l u s (in a d d i t i o n to t h e c u s t o m a r y 1 0 % l i m i t a t i o n ) o n o b l i g a t i o n s s e c u r e d b y n o t l e s s t h a n a l i k e a m o u n t of b o n d s o r n o t e s of t h e U n i t e d S t a t e s , c e r t i f i c a t e s of i n d e b t e d n e s s of t h e U n i t e d S t a t e s , T r e a s u r y B i l l s of th e U n i t e d S t a t e s , o r o b l i g a t i o n s f u l l y g u a r a n t e e d b o t h a s to p r i n c i p a l a n d i n t e r e s t b y t h e U n i t e d S t a t e s . B e c a u s e of t h e a m e n d m e n t s b e i n g m a d e in the Inv e s t m e n t S e c u r i t i e s R e g u l a t i o n w h i c h will p l a c e r e s a l e a n d r e p u r c h a s e t r a n s a c t i o n s in b o n d s u n d e r s e c t i o n s 5 2 0 0 a n d 5 2 0 2 of t h e R e v i s e d S t a t u t e s (12 U . S . C . 84, 82) r a t h e r t h a n s e c t i o n 5 1 3 6 of t h e R e v i s e d S t a t u t e s (12 U . S . C . 2 4), t h e p r e s e n t 2 5 % l i m i t a t i o n e m b o d i e d i n s e c t i o n 5 2 0 0 is b e l i e v e d t o be t o o r e s t r i c t i v e w i t h r e s p e c t to l o a n s to one b o r r o w e r w h i c h a r e s e c u r e d b y n o t l e s s t h a n a l i k e a m o u n t of d i r e c t o b l i g a t i o n s of t h e U n i t e d S t a t e s . U n d e r the p r o v i s i o n s of s e c t i o n 5 1 3 6 , r e p u r c h a s e a n d r e s a l e t r a n s a c t i o n s i n v o l v i n g U n i t e d S t a t e s B onds have not b e e n s ubject to a n y l i m i t a t i o n m e a s u r e d by cap i t a l a n d surplus. The i s s u a n c e of t h i s r e g u l a t i o n is n e c e s s a r y t o i m p l e m e n t t h e m a k i n g of s u c h l o a n s a b o v e 2 5 % a n d u p t o 1 0 0 % of t h e b a n k ' s c a p i t a l a n d s u r p l u s , p r o v i d e d t h e y a r e s e c u r e d b y d i r e c t o b l i g a t i o n s of t h e U n i t e d S t a t e s w h i c h w i l l m a t u r e w i t h i n 1 8 m o n t h s . A s s t a t e d a b o v e , t h e t w o r e g u l a t i o n s b e c o m e e f f e c t i v e A u g u s t 16, 1 9 5 7 . It w a s n o t p o s s i b l e t o i n c l u d e t h e r e g u l a t i o n s in t h e 1 9 5 7 S u p p l e m e n t t o t h e D i g e s t of O p i n i o n s w h i c h h a s n o w b e e n d i s t r i b u t e d to n a t i o n a l b a n k s . We will issue an i n v e s t m e n t s e c u r i t i e s S u p p l e m e n t to the D i g e s t in a p p r o x i m a t e l y 30 days, w h i c h w i l l inc l u d e the new r e g u l a t i o n s and a p p r o p r i a t e comments r e l a t i n g ther e t o in the p a r a g r a p h s of t h e D i g e s t d e a l i n g ' w i t h t h e s u b j e c t m a t t e r of t h e r e g u l a t i o n s . Very truly yours, Comptroller Enclosures of the Currency. TREASURY DEPARTMENT COMPTROLLER OF THE CURRENCY WASHINGTON INVESTMENT SECURITIES REGULATION SECTION 1 — SCOPE AND APPLICATION. (a) This regulation is issued by the Comptroller of the Currency under authority of paragraph Seventh of Section 5136 of the Revised Statutes, as amended (12 U.S.C. 2 4 ); (b) This regulation applies to the purchase for its own account of investment securities b y a national bank or a State member bank of the Federal Reserve System. SECTION 2 — DEFINITION OF THE TERM “ INVESTMENT SECURITIES” . (a) An obligation of indebtedness which m ay be purchased for its own account by a national bank or State member bank of the Federal Reserve System in order to constitute an “ investment security” within the meaning of paragraph Seventh of Section 5136 of the Revised Statutes, must be a marketable obligation, i.e., it must be salable under ordinary circumstances with reasonable promptness at a fair value; and except as provided in (b) and (c) below, there must be present one or both of the following characteristics: (1) A public distribution of the securities must have been provided for or made in a manner to protect or insure the m arketability of the issue; or, (2) Other existing securities of the obligor must have such a public distribution as to protect or insure the marketability of the issue under consideration. (b) In the case of investment securities for which a public distribution as set forth in (1) or (2) above cannot be so provided, or so made, and which are issued b y established commercial or industrial businesses or enterprises, that can demonstrate the ability to service such securities, the debt evidenced thereby must mature not later than ten years after the date of issuance of the security and must be of such sound value or so secured as reasonably to assure its paym ent; and such securities must, b y their terms, provide for the amortization of the debt evidenced thereby so that at least 7 5 % of the principal will be extinguished by the maturity date by substantial periodic paym ents: Provided, that no amortization need be required for the period of the first year after the date of issuance of such securities. (c) Special revenue obligations of States or local governments or of duly constituted public Authorities thereof which possess a high degree of credit soundness, so as to assure sale under ordinary circumstances with reasonable promptness at a fair value, but which do not meet the distribution standards of (a) (1) or (a) (2) above, m ay be considered to constitute “ investment securities.” (d) Where the security is issued under a trust agreement, the agreement must provide for a trustee independent of the obligor, and such trustee must be a bank or trust company. (e) A ll purchases of investment securities b y national and State member banks for their own account must be securities “ in the form of bonds, notes, a n d /o r debentures, com m only known as investment securities” ; and every transaction wdiich is in fact such a purchase must, regardless of its form, com ply with this regulation. SECTION 3 — LIMITATIONS AND RESTRICTIONS ON PURCHASE OF INVESTMENT SECURITIES FOR BANK’S OWN ACCOUNT. (a) Although the bank is permitted to purchase “ investment securities” for its own account for purposes of investment under the provisions of R . S. 5136 and this regulation, the bank is not permitted otherwise to participate as a principal in the marketing of securities. (b) The statutory limitation on the amount of the “ investment securities” of any one obligor or maker which m ay be held b y the bank is to be determined on the basis of the par or face value of the securities, and not on their market value. (c) The purchase of “ investment securities” in which the investment characteristics are distinctly or predominantly speculative, or the purchase of securities which are in default, whether as to principal or interest, is prohibited. (d) Purchase of an investment security at a price exceeding par or face value is prohibited, unless the bank shall: (1) Provide for the regular amortization of the premium paid so that the premium shall be entirely extinguished at or before the maturity of the security, and the security (including premium) shall a t no intervening date be carried at an amount in excess of that at which the obligor m ay legally redeem such security, unless the amortization which would be necessary to meet the latter requirement w ould not be allowable as a deduction from gross income under applicable Federal Internal Revenue laws and regulations issued thereunder, in which case the rate of amortization shall be sufficient to extinguish the premium by m aturity; or (2) Set up a reserve account to amortize the premium, said account to be credited periodically with an amount not less than the amount required for amortization under (1) above. (e) Purchase of securities convertible into stock at the option of the issuer is prohibited. (f) Purchase of securities convertible into stock at the option of the holder or with stock purchase warrants attached is prohibited if the price paid for such security is in excess of the investment value o f the security itself, considered independently of the stock purchase warrants or conversion feature. I f it is apparent that the price paid for an otherwise eligible security reflects the investment value of the security and does not include any speculative value based upon the presence of a stock purchase warrant o r conversion option, the purchase of such security is not prohibited. I f the price paid for a convertible security provides a yield reasonably similar to that of non-convertible securities of similar quality and m aturity, a speculative value will not be deemed to exist. (g) A ll investment securities shall be supported by adequate information in the files of the bank as to their investment quality. S E C T IO N 4 — -E X C E P T I O N T O L I M IT A T IO N S A N D R E S T R IC T IO N S . The restrictions and limitations of this regulation do not apply to securities acquired through fo re closure on collateral, or acquired in good faith b y w ay of compromise of a doubtful claim or to avert an apprehended loss in connection with a debt previously contracted, or to real estate securities acquired pursuant to Section 24 of the Federal Reserve A ct, as amended. S E C T IO N 5 — E F F E C T IV E D A T E . This regulation is effective August 16, 1957. R A Y M . G ID N E Y C o m p tr o lle r o f th e C u r r e n c y TREASURY DEPARTMENT COMPTROLLER OF THE CURRENCY WASHINGTON REGULATION REGARDING NATIONAL BANK LOANS SECURED BY DIRECT OBLIGATIONS OF THE UNITED STATES Section 5200 U.S.R.S. (12 U.S.C. 84) provides as follows: “ See. 5200. The total obligations to any national banking association of any person, copartnership, association, or corporation shall at no time exceed 10 per centum of the amount of the capital stock of such association actually paid in and unimpaired and 10 per centum of its unimpaired surplus fund. The term ‘obligations’ shall mean the direct liability of the maker or acceptor of paper discounted with or sold to such association and the liability of the indorser, drawer, or guarantor who obtains a loan from or discounts paper with or sells paper under his guaranty to such association and shall include in the case of obligations of a copartnership or association the obligations of the several members thereof and shall include in the case of obligations of a corporation all obligations of all subsidiaries thereof in which such corporation owns or controls a m ajority interest. Such limitation of 10 per centum shall be subject to the following exceptions: “ (8) Obligations of any person, copartnership, association, or corporation in the form of notes secured by not less than a like amount of bonds or notes of the United States issued since April 24, 1917, or certificates of indebtedness of the United States, Treasury bills of the United States, or obligations fully guaranteed both as to principal and interest by the United States, shall (except to the extent permitted by rules and regulations prescribed by the Comptroller o f the Currency, with the approval of the Secretary of the Treasury) be subject under this section to a limitation of 15 per centum of such capital and surplus in addition to such 10 per centum of such capital and surplus.” SECTION I — SCOPE AND APPLICATION. (a) This regulation is issued by the Comptroller of the Currency with the approval of the Sec retary of the Treasury under authority of paragraph (8) of section 5200 of the Revised Statutes, as amended (12 U.S.C. 84), and section 321 (b) of the Act of August 23, 1935 (49 Stat. 713); (b) This regulation applies to loans made by national banks secured by direct obligations o f the United States which will mature in not exceeding 18 months. SECTION 2 — GENERAL AUTHORIZATION. The obligations to any national banking association in the form of notes of any person, copartnership, association, or corporation, secured by not less than a like amount 'of direct obligations of the United States which will mature in not exceeding eighteen months from the date such obligations to such national banking association are entered into shall be limited to 75 per centum of the capital and surplus of such association in addition to the 10 per centum of such capital and surplus prescribed in the opening paragraph of said section 5200 and the 15 per centum limitation referred to in paragraph (8) of section 5200. SECTION 3 — EFFECTIVE DATE. This regulation is effective August 16, 1957. R A Y M . G ID N E Y C om p troller o f the C u rren cy Approved: GEORGE M. HUMPHREY S ecreta ry o f the T rea su ry
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