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F ed er a l Reser ve Ba n k o f D allas DALLAS, TEXAS 75222 Circular No. 77-1^7 December 30, 1977 PROPOSED INTERPRETATION OF REGULATION A TO THE CHIEF EXECUTIVE OFFICER OF THE MEMBER BANK ADDRESSED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: The Board of Governors of the Federal Reserve System has proposed for comment an interpretation of its Regulation A that would extend the kinds of bankers' acceptances available for discount by Federal Reserve Banks. Printed on the following pages is the text of the proposal as published in the Federal Register, December 21, 1977Comments on the proposed interpretation should be submitted in writing to the Secretary, Board of Governors of the Federal Reserve Syste: Washington, D. C. 20551> to be received no later than February 1, 1978. All materials should include the Docket No. R-0135Sincerely yours, Robert H. Boykin First Vice President This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) Extract From FEDERAL REGISTER, VOL. b 2 , NO. 2^5, Wednesday, December 21, 1977 pp. 63897 - 63898 FEDERAL RESERVE SYSTEM [Reg. A—Docket No. R-0136] [ 12 CFR Part 201 ] PROPOSED INTERPRETATION OF REGULATION A Eligible Bankers' Acceptances AGENCY: B oard of Governors of th e F ederal Reserve System. A CTION: Proposed In terp reta tio n . SUMMARY: This proposed in te rp re ta tion concerning extensions of cre d it by F ederal Reserve Banks provides th a t a b an k e rs’ acceptance secured by a field w arehouse receipt covering readily m a r ketable staples is eligible for discount by a Federal Reserve B ank despite th e fa c t t h a t th e w arehousem an is a n employee of th e owner of th e goods. T his proposed interpretatio n, if adopted, would reverse a c u rre n t in terp re tatio n adopted by th e B oard in 1933. T he Board h as concluded th a t a r e view of th e in terp re tatio n is desirable in ligh t of th e changes in com mercial practice an d com m ercial law in th e 44 years since th e publication of th e c u r re n t interp retation . D A TE: Com m ents m u st be received be fore February 1,1978. ADDRESS: Secretary, B oard of G over nors of th e F ederal Reserve System, W ashington, D.C. 20551. All m aterial subm itted should include th e Docket Number R-0135. FOR FU R TH ER INFORMATION CON TACT: Don C. H am m er, Attorney, Legal D i vision, B oard of G overnors of th e F ed eral Reserve System, W ashington. D.C. 20551,202-452-3611. SUPPLEMENTARY INFORMATION: (1) T he Board h as been asked to review its 1933 in terp re tatio n concerning the eligibility for discount of bankers' a c ceptances secured by field warehouse receipts. U nder th a t in terp retation , such acceptances were determ ined to be n o t eligible for discount because th e actual custodian of th e goods was so closely identified w ith the owner of th e goods th a t, in th e B oard’s view, the lending ban k ’s security, m ight be im paired. T he Board has concluded th a t a review of the In terp reta tio n is desirable in light of th e changes in com mercial practice and com m ercial law in the 44 years since the publication of th e cu rren t in te rp re tation. F urtherm ore, this m a tte r is of significance to m em ber banks because, under th e B oard’s Regulation D, th e sale of such acceptances by m em ber banks could resu lt in additional reserve liabil ity for th e m em ber bank if th e accep t ance sold were ineligible for discount. (2) To aid in th e consideration of this m a tte r by th e Board, interested p er sons are invited to subm it relev an t d ata, views, or comments. Any such m aterial should be subm itted in w riting to th e S ecretary, Board of Governors of th e F ederal Reserve System, W ashington, D.C. 20551, to be received n o t la te r th a n F ebru ary 1, 1978. All m aterial subm itted should include th e docket num ber R 0135. Such m aterial will be m ade avail able for inspection an d copying upon request except as provided in section 261.6(a) of th e B oard’s Rules Regarding A vailability of In fo rm atio n (12 CFR § 261.6(a)). (3) T his action is proposed p u rsu an t to the B oard’s au th o rity un der section 13 of th e F ederal Reserve Act. P ro p o sed I n t e r p r e ta t io n o f R e g u la tio n A T h e Board has been asked to review a n in terp re tatio n it issued in 1933 con cerning th e eligibility for rediscount by a F ederal Reserve B ank of bank ers’ a c ceptances issued ag a in st filed warehouse receipts w here th e custodian of th e goods is a form er employee of th e borrower. (‘11445 Published In terp retatio n s, 1933 Bulletin 188) T he B oard determ ined a t t h a t tim e th a t th e acceptances were n o t eligible because: su c h receipts do n o t com ply w ith th e re q u ire m e n t of section 13 of th e Federal Reserve Act t h a t a b a n k er's acceptance be "secured a t th e tim e of acceptance by a w arehouse receipt or o th e r su c h docum ent conveying or secur ing title covering readily m ark etab le staples,” nor w ith th e re q u ire m e n t of section X I of th e B oard’s R egulation A t h a t it be “secured a t th e tim e of acceptance by a warehouse, term inal, or o th e r sim ilar receipt, conveying se c u rity title to su c h staples, issued by a party independent of the customer." T he requirem ent th a t th e receipt be “is sued by a p arty independent of the cus to m er” was deleted from R egulation A in 1973, an d th u s th e prim ary issue for the B o ard’s consideration is w hether a field warehouse receipt Is a docum ent “secur ing title ” to readily m arketable staples. While b an k ers’ acceptances secured by field warehouse receipts are rarely offered for rediscount or as collateral for an advance, th e issue of “eligibility” is still significant. If a n ineligible acceptance is sold by a mem ber bank, th e proceeds are deemed to be “deposits” u nder section 204.1(f) of Regulation D a n d are subject to reserve requirem ents. I n reviewing this m atter, the B oard has tak en into consideration th e changes th a t have occurred in com m ercial law and p ractice sine 1933. M odern com m ercial law, embodied in th e U niform Com m ercial Code, refers to perfecting “security in terests” ra th e r th a n “securing title ” to goods. The B oard believes th a t if, un der S ta te law, th e field w arehousing arran g e m en t provides th e lender w ith a perfected security in terest in th e goods, th e “securing title ” requirem ent of th e F ederal Reserve Act is satisfied. U nder the U.C.C. evidence of an agree m e n t between the secured p a rty an d th e debtor m ust exist before a security in terest can a ttac h . T his agreem ent may be evidenced by: (1) a w ritte n security agreem en t signed by th e debtor, or (2) th e co llateral being placed in th e posses sion of th e secured p arty or his agent (U.C.C. £ 9-203). If th e security in terest is based on a w ritte n security agreem ent, it ca n only be perfected by th e filing of a financing statem en t. (U.C.C. § 9—302) If th e security in terest is based on posses sion of th e collateral by th e secured party, th e n perfection ca n be achieved by: (1) having w arehouse receipts issued in th e nam e of th e secured p a rty ; (2) notifying the bailee of the secured p a rty ’s in terest; or (3) having a financing s ta te m e n t filed. (U.C.C. S 9-304(3)) If th e field w arehousing operation is properly conducted, a security interest is created by th e secured p a rty ’s agent taking possession of th e collateral an d is perfected eith er by issuance of w are house receipts in th e nam e of th e secured p a rty (the lending bank) or by notifica tion to th e bailee (the field w arehouse m an) of th e secured p a rty ’s interest. Therefore, w arehouse receipts issued p u rsu a n t to a bona fide field warehousing operation satisfy th e legal requirem ents of section 13 of th e Federal Reserve Act. Moreover, in a properly conducted field w arehousing operation, th e w arehouse m anager will be train ed , bonded, su p e r vised and au d ited by th e field w are housing com pany. T his procedure insures t h a t he will n o t be Impermissibly con trolled by his form er (or sometimes p res ent) employer, th e borrower, even though he m ay look to th e borrow er for reem ploym ent a t some fu tu re tim e. I f th e warehousing operation is n o t conducted properly, however, an d the m an ag er rem ains under th e control of th e borrower, th e security in terest m ay be lost. In such instances, th e security In terest should be based upon a w ritten security agreem en t between th e borrow er an d th e secured party, an d perfection should be accom plished by th e filing of a financing sta te m en t. I t h a s been rep re sented to th e B oard th a t a w ritten secu rity agreem ent is alm ost always entered into as an a d ju n c t to establishm ent of a field w arehousing operation and th a t a financing s ta te m e n t is, in fact, often filed. Therefore, if a b an k e rs’ acceptance secured by a field w arehouse receipt is actually offered for rediscount or as col la te ra l for a n advance, th e Reserve B ank m ay in its discretion require proof of th e existence of a w ritten security agree m e n t and it m ay require th a t a financing s ta te m e n t be filed. I t has also been represented to th e B oard th a t m ost established field w are housing com panies m a in ta in large fidel ity bonds a n d legal liability insurance. If th e Reserve B ank desires ad ditio nal pro tection, it m ay require proof of th e ex ist ence of insurance coverage in a n am o un t adequate to cover any loss. T his in te rp re ta tio n is based on facts th a t have been presented in regard to field w arehousing operations conducted by established, professional field w are house com panies, a n d It does n o t neces sarily apply to a d hoc w arehousing op era tions. T hus T 1430 an d I 1440 of th e P u b lished In te rp re ta tio n (1918 B ulletin 31 an d 1918 B ulletin 862) m a in ta in th e ir validity w ith reg a rd to corporations form ed for th e purpose of conducting lim ited field warehousing operations. F urtherm ore, th e prohibition contained in H 1435 Published In terp reta tio n s (1918 B ulletin 634) th a t "the borrow er shall n o t have access to th e prem ises an d shall exercise no control over th e goods sto red ” retains its validity, except th a t access for inspection purposes is still p er m itted u nder H 1450 (1926 B ulletin 666). T he reason for th e acceptance tra n sa c tion m ust be proper and ca n n o t be for speculation 1400, 1919 B ulletin 858) or for th e purpose of furnishing working cap ital (II 1405, 1922 Bulletin 52). T his in te rp re ta tio n represents a re versal only of th e previous fl 1445 of the Published In terp reta tio n s (1933 Bul letin 188), an d is n o t intended to affect any oth er Board in terp re tatio n reg ard ing field warehousing. By order of th e Board of Governors, December 12, 1977. T h e o d o r e E. A l l i s o n , Secretary of the Board |F R Doc.77-36324 Filed 12-20-77;8:45 am ]
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