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FEDERAL RESERVE BANK OF NEW YORK Circular No. 2 4 4 1 1 May 27, 1942 J REVISION OF REGULATION S To all Banking Institutions, in the Second Federal Reserve District: Enclosed is a copy of Regulation S, relating to industrial loans by Federal Reserve Banks under section 13b of the Federal Reserve Act, as revised by the Board of Governors of the Federal Reserve System effective April 30, 1942. The changes which have been made in the regulation are merely of a clarifying or technical character and are intended to facilitate the participation of the Federal Reserve Banks in the program of war financing contemplated by the President's Executive Order No. 9112 of March 26, 1942. As stated in the foreword, the regulation leaves the powers granted by Congress to the Federal Reserve Banks unimpaired and prescribes no restrictions beyond those required by the law itself. Any attempt to prescribe technical definitions of such terms as "working capital", "established industrial or commercial business" and "financing institutions" has been avoided, lest it have the effect of restricting or hampering the operations of the Federal Reserve Banks under the statute. The regulation, therefore, contains little except an analysis of the law and an outline of the necessary procedure. Additional copies of the regulation will be supplied upon request. ALLAN SPROTJL, President. BOARD OF GOVERNORS of the FEDERAL RESERVE SYSTEM INDUSTRIAL LOANS BY FEDERAL RESERVE BANKS REGULATION S This regulation as printed herewith is in the form as revised effective April 30, 1942 FOREWORD (Not a part of the regulation) In order to facilitate the participation of Federal Reserve Banks in the program of war financing contemplated by the President's Executive Order No. 9112 of March 26, 1942, the Board of Governors has revised its Regulation S relating to loans by Federal Reserve Banks to industry and business under the provisions of section 13b of the Federal Reserve Act. The changes which have been made in the regulation are merely of a clarifying or technical character. As heretofore, the regulation leaves the powers granted by Congress to the Federal Reserve Banks unimpaired and prescribes no restrictions beyond those required by the law itself. Any attempt to prescribe technical definitions of such terms as "working capital," "established industrial or commercial business" and "financing institutions" has been avoided, lest it have the effect of restricting or hampering the operations of the Federal Reserve Banks under the statute. The regulation, therefore, contains little except an analysis of the law and an outline of the necessary procedure. The law permits Federal Reserve Banks to make direct loans to established industrial and commercial businesses only when authorized by the Board of Governors of the Federal Reserve System; but, in order to avoid the necessity of having applications for such accommodations passed on in Washington, the* Board has continued in the revised regulation the blanket authority to all Federal Reserve Banks to grant such accommodations directly on their own responsibility without reference to Washington. INQUIRIES REGARDING THIS REGULATION Any inquiry relating to this regulation should be addressed to the Federal Reserve Bank or Federal Reserve branch bank of the district in which the inquiry arises. REGULATION S Revised effective April 30, 1942 INDUSTRIAL LOANS BY FEDERAL RESERVE BANKS INTRODUCTION This regulation is based upon and issued pursuant to section 13b of the Federal Reserve Act, as amended, and other provisions of law. The provisions of section 13b and certain other related statutory provisions are set forth in the Appendix to the regulation. SECTION 1. TRANSACTIONS BY FEDERAL RESERVE BANKS WITH FINANCING INSTITUTIONS (a) Legal Requirements.—Under the provisions of subsection (b) of section 13b of the Federal Reserve Act, a Federal Reserve Bank is authorized to discount obligations for, purchase obligations from, and make loans or advances on the security of such obligations direct to, any bank, trust company, mortgage company, credit corporation for industry or other financing institution (hereinafter referred to as "financing institution") operating in its district and to make commitments with regard to such discounts, purchases, loans or advances, subject to the following requirements: (1) Obligations which are the subject of such discounts, purchases, loans, advances, or commitments must have been or must be entered into for the purpose of obtaining working capital for an established industrial or commercial business; (2) Such obligations must have a maturity of not exceeding five years; (3) Each such financing institution shall— (A) Obligate itself to the satisfaction of the Federal Reserve Bank for at least 20 per centum of any loss which may be sustained by the Reserve Bank upon any such obligation acquired from such financing institution, the existence and amount of any such loss to be determined in accordance with subsection (c) of this section; or (B) In lieu thereof, advance at least 20 per centum of such working capital and in such event the advances by both such financing institution and the Federal Reserve Bank shall be considered as one advance and repayment shall be made on a pro rata basis. 4 REGULATION S (b) Applications by financing institutions.—An application1 by a financing institution for the discount or purchase of an obligation entered into for the purpose of obtaining working capital for an established industrial or commercial business located in any Federal Reserve district or for a loan or advance on the security of such an obligation or for a commitment with regard to such discount, purchase, loan, or advance, may be transmitted to the Federal Reserve Bank of any district in which the applicant financing institution is operating and shall be submitted by such Federal Reserve Bank to the Industrial Advisory Committee of such district. Such application may be made on a form furnished for that purpose by the Federal Reserve Bank and must contain or be accompanied by such information, agreements, and documents as the Federal Reserve Bank may require. (c) Existence and amount of losses.—The Federal Reserve Bank shall be deemed to have sustained a loss upon any obligation acquired from a financing institution in accordance with the provisions of this section of this regulation whenever the board of directors of the Reserve Bank, after investigation, shall have determined that such obligation or any part thereof is a loss and the Reserve Bank shall have charged off of its books the amount so determined to be a loss, subject to review by the Board of Governors of the Federal Reserve System. The amount of loss in any such case shall be deemed to be the amount so charged off, together with unpaid interest thereon. Such financing institution shall reimburse the Federal Reserve Bank for the portion of such loss for which such financing institution shall have obligated itself, with interest on such portion of such loss until the date of such reimbursement. If any recovery be realized on the amount of the loss ascertained in accordance with this subsection, such financing institution and the Federal Reserve Bank shall be entitled to share pro rata in the amount so recovered. SECTION 2. DIRECT TRANSACTIONS BY FEDERAL RESERVE BANKS WITH ESTABLISHED INDUSTRIAL OR COMMERCIAL BUSINESSES (a) Legal Requirements.—A Federal Reserve Bank may exercise its authority to make loans to or purchase obligations of an established industrial or commercial business having an office or place of business in its district or to make commitments with respect thereto under subsection (a) of section 13b of the Federal Reserve Act: (1) in 1 Attention is invited to the requirements of subsections (h) and (k) of section 22 of the Federal Reserve Act quoted in the Appendix to this regulation, with regard to material statements or overvaluation «f security in connection with applications of this kind and with regard to the giving or receiving of fees, commissions, bonuses, or things of value for procuring or endeavoring to procure from a Federal Reserve Honk any credit accommodation, either directly from sucli Federal Reserve Bank or indirectly through any financing institution. REGULATION S 0 exceptional circumstances pursuant to the authority hereinafter granted by the Board of Governors of the Federal Reserve System; (2) when it appears to the satisfaction of the Federal Reserve Bank that such established industrial or commercial business is unable to obtain requisite financial assistance on a reasonable basis from the usual sources; (3) for the purpose of providing such established industrial or commercial business with working capital; (4) on a reasonable and sound basis; and (5) with respect to obligations which have maturities not exceeding five years. (b) Authorization by Board of Governors of the Federal Reserve System.—The Board of Governors of the Federal Reserve System, pursuant to the provisions of subsection (a) of section 13b of the Federal Reserve Act, hereby authorizes every Federal Reserve Bank, until such time as the Board of Governors may revoke or modify such authority, to make loans to and purchase obligations of established industrial or commercial businesses, and to make commitments with respect thereto, subject to the provisions of the law and this regulation. (c) Applications by established industrial or commercial businesses.—An application 1 by an established industrial or commercial business for a loan to, or the purchase of the obligations of, such business, or a commitment with respect to such a loan or purchase, may be transmitted to the Federal Reserve Bank of any district in which an office or place of business of the applicant is located and shall be submitted by such Federal Reserve Bank to the Industrial Advisory Committee of such district. Such application may be made on a form furnished for that purpose by the Federal Reserve Bank and must contain or be accompanied by such information, agreements, and documents as the Federal Reserve Bank may require. SECTION 3 . INDUSTRIAL ADVISORY COMMITTEES (a) Membership of committees.—The Industrial Advisory Committee established in each Federal Reserve district under the provisions of subsection (d) of section 13b of the Federal Reserve Act shall consist of five members actively engaged in some industrial pursuit within the Federal Reserve district in which the committee is established. The membership of such committee shall consist of persons who are familiar with the problems and needs of industry and commerce in such district. On or before the 15th day of February of each year, the board of ^Attention is invited to tile requirements of suhsections (h) and (k) of section 22 of the Federal Reserve Act quoted in the Appendix to this regulation, with regard to material statements or overvaluation of security in connection with applications of this kind and with regard to the (riving or receivine of fees, commissions, bonuses, or things of value for procuring or endeavorine to procure from a Federal Reserve Bank any credit accommodation, either directly from such Federal Reserve Bank or indirectly through any financing institution. 6 REGULATION S directors of each Federal Reserve Bank shall submit to the Board of Governors of the Federal Reserve System the names of the persons selected to serve for the ensuing year as members of the Industrial Advisory Committee of the district of such Federal Reserve Bank, and, if approved by the Board of Governors, such persons shall serve for terms of one year commencing on the 1st day of March of such year. Vacancies that may occur in the membership of such committees shall be filled in like manner, and persons appointed to fill such vacancies shall hold office for the unexpired terms of their predecessors. (5) Recommendations of committees.—The Industrial Advisory Committee, to which an application for any such discount, purchase, loan, advance, or commitment by the Federal Reserve Bank of the district shall have been submitted, after an examination by it of the business with respect to which the application is made and a consideration of the necessity and advisability of granting the application and of such other factors as it may deem appropriate, shall transmit the application to the Federal Reserve Bank together with the recommendation of the committee. SECTION 4. AGGREGATE AMOUNT OF ACCOMMODATIONS WHICH MAY BE EXTENDED BY A FEDERAL RESERVE BANK Except with the permission of the Board of Governors of the Federal Reserve System, the aggregate amount of loans, advances, and commitments of each Federal Reserve Bank made pursuant to the provisions of section 13b of the Federal Reserve Act and outstanding, plus the amount of purchases and discounts acquired under that section and held at the same time, shall not exceed the surplus of such Federal Reserve Bank as of July 1, 1934, plus all amounts paid to such Federal Reserve Bank by the Secretary of the Treasury under subsection (e) of section 13b of the Federal Reserve Act. SECTION 5. RATES All rates of interest and of discount established by any Federal Reserve Bank with respect to loans, advances, discounts and purchases made under authority of the provisions of section 13b of the Federal Reserve Act, and all charges established by any Reserve Bank with respect to commitments made under such authority, shall be subject to review and determination of the Board of Governors of the Federal Reserve System. SECTION 6. REPORTS BY FEDERAL RESERVE BANKS Each Federal Reserve Bank shall make a daily report to the Board of Governors of the Federal Reserve System of all transactions entered REGULATION S 7 into pursuant to the authority conferred by section 13b of the Federal Reserve Act on the Board's form B D 4, prescribed for the reporting of discount transactions. SECTION 7. CHANGES IN REGULATIONS The Board of Governors of the Federal Reserve System, pursuant to the authority conferred u]>on it by section 13b of the Federal Reserve Act, may alter, modify, or amend the provisions of this regulation from time to time in its discretion. S REGULATION S APPENDIX STATUTORY PROVISIONS Section 13b of the Federal Reserve Act, as added by Act of June 19, 1934, and amended by Act of August 23, 1935, provides as follows: Sec. 13b. (a) In exceptional circumstances, when it appears to the satisfaction of a Federal Reserve bank that an established industrial or commercial business located in its district is unable to obtain requisite financial assistance on a reasonable basis from the usual sources, the Federal Reserve bank, pursuant to authority granted by the Board of Governors of the Federal Reserve System, may make loans to, or purchase obligations of, such business, or may make commitments with respect thereto, on a reasonable and sound basis, for the purpose of providing it with working capital, but no obligation shall be acquired or commitment made hereunder with a maturity exceeding five years. (b) Each Federal Reserve bank shall also have power to discount for, or purchase from, any bank, trust company, mortgage company, credit corporation for industry, or other financing institution operating in its district, obligations having maturities not exceeding five years, entered into for the purpose of obtaining working capital for any such established industrial or commercial business; to make loans or advances direct to any such financing institution on the security of such obligations; and to make commitments with regard to such discount or purchase of obligations or with respect to such loans or advances on the security thereof, including commitments made in advance of the actual undertaking of such obligations. Each such financing institution shall obligate itself to the satisfaction of the Federal Reserve bank for at least 20 per centum of any loss which may be sustained by such bank upon any of the obligations acquired from such financing institution, the existence and amount of any such loss to be determined in accordance with regulations of the Board of Governors of the Federal Reserve System: Provided, That in lieu of such obligation against loss any such financing institution may advance at least 20 per centum of such working capital for any established industrial or commercial business without obligating itself to the Federal Reserve bank against loss on the amount advanced by the Federal Reserve bank: Provided, however, That such advances by the financing institution and the Federal Reserve bank shall be considered as one advance, and repayment shall be made pro rata under such regulations as the Board of Governors of the Federal Reserve System may prescribe. (c) The aggregate amount of loans, advances, and commitments of the Federal Reserve banks outstanding under this section at any one time, plus the amount of purchases and discounts under this section held at the same time, shall not exceed the REGULATION S 9 combined surplus of the Federal Reserve banks as of July 1, 1934, plus all amounts paid to the Federal Reserve banks by the Secretary of the Treasury under subsection (e) of this section, and all operations of the Federal Reserve banks under this section shall be subject to such regulations as the Board of Governors of the Federal Reserve System may prescribe. (d) For the purpose of aiding the Federal Reserve banks in carrying out the provisions of this section, there is hereby established in each Federal Reserve district an industrial advisory committee, to be appointed by the Federal Reserve bank subject to the approval and regulations of the Board of Governors of the Federal Reserve System, and to be composed of not less than three nor more than five members as determined by the Board of Governors of the Federal Reserve System. Each member of such committee shall be actively engaged in some industrial pursuit within the Federal Reserve district in which the committee is established, and each such member shall serve without compensation but shall be entitled to receive from the Federal Reserve bank of such district his necessary expenses while engaged in the business of the committee, or a per diem allowance in lieu thereof to be fixed by the Board of Governors of the Federal Reserve System. Each application for any such loan, advance, purchase, discount, or commitment shall be submitted to the appropriate committee and, after an examination by it of the business with respect to which the application is made, the application shall be transmitted to the Federal Reserve bank, together with the recommendation of the committee. (e) In order to enable the Federal Reserve banks to make the loans, discounts, advances, purchases, and commitments provided for in this section, the Secretary of the Treasury, on and after June 19, 1934, is authorized, under such rules and regulations as he shall prescribe, to pay to each Federal Reserve bank not to exceed such portion of the sum of $139,299,557 as may be represented by the amount paid by each Federal Reserve bank for stock of the Federal Deposit Insurance Corporation, upon the execution by each Federal Reserve bank of its agreement (to be endorsed on the certificate of such stock) to hold such stock unencumbered and to pay to the United States all dividends, all payments on liquidation, and all other proceeds of such stock, for which dividends, payments, and proceeds the United States shall be secured by such stock itself up to the total amount paid to each Federal Reserve bank by the Secretary of the Treasury under this section. Each Federal Reserve bank, in addition, shall agree that, in the event such dividends, payments, and other proceeds in any calendar year do not aggregate 2 pe;r centum of the total payment made by the Secretary of the Treasury, under this section, it will pay to the United States in such year such further amount, if any, up to 2 per centum of the said total payment, as shall be covered by the net earnings of the bank for that year derived from the use of the sum so paid by the Secretary of the Treasury, and that for said amount so due the United States shall have a first claim against such earn 10 REGULATION S ings and stock, and further that it will continue such payments until the final liquidation of said stock by the Federal Deposit Insurance Corporation. The sum so paid to each Federal Reserve bank by the Secretary of the Treasury shall become a part of the surplus fund of such Federal Reserve bank within the meaning of this section. All amounts required to be expended by the Secretary of the Treasury in order to carry out the provisions of this-section shall be paid out of the miscellaneous receipts of the Treasury created by the increment resulting from the reduction of the weight of the gold dollar under the President's proclamation of January 31, 1934; and there is hereby appropriated, out of such receipts, such sum as shall be required for such purpose. Subsections (h), (i), (j) and (k) of section 22 of the Federal Reserve Act, as amended by the Act of June 19, 1934, provide as follows: (h) Whoever makes any material statement, knowing it to be false, or whoever willfully overvalues any security, for the purpose of influencing in any way the action of a Federal Reserve bank upon any application, commitment, advance, discount, purchase, or loan, or any extension thereof by renewal, deferment of action, or otherwise, or the acceptance, release, or substitution of security therefor, shall be punished by a fine of not more than $5,000 or by imprisonment for not more than two years, or both. (i) Whoever, being connected in any capacity with a Federal Reserve bank (1) embezzles, abstracts, purloins, or willfully misapplies any moneys, funds, securities, or other things of value, whether belonging to it or pledged or otherwise entrusted to it, or (2) with intent to defraud any Federal Reserve bank, or any other body politic or corporate, or any individual, or to deceive any officer, auditor, or examiner, makes any false entry in any book, report, or statement of or to a Federal Reserve bank, or, without being duly authorized, draws any order or issues, puts forth, or assigns any note, debenture, bond, or other obligation, or draft, mortgage, judgment, or decree shall be punished by a fine of not more than $10,000 or by imprisonment for not more than five years, or both. (j) The provisions of sections 112, 113, 114, 115, 116, and 117 of the Criminal Code of the United States, insofar as applicable, are extended to apply to contracts or agreements of any Federal Reserve bank under this Act, which, for the purposes hereof, shall be held to include advances, loans, discounts, purchase, and repurchase agreements; extensions and renewals thereof; and acceptances, releases, and substitutions of security therefor. (k) It shall be unlawful for any person to stipulate for or give or receive, or consent or agree to give or receive, any fee, commission, bonus, or thing of value for procuring or endeavoring to procure from any Federal Reserve bank any advance, loan, or extension of credit or discount or purchase of any obligation or commitment with respect thereto, either directly from such Fed REGULATION S 11 eral Reserve bank or indirectly through any financing institution unless such fee, commission, bonus, or thing of value and all material facts with respect to the arrangement or understanding therefor shall be disclosed in writing in the application or request for such advance, loan, extension of credit, discount, purchase, or commitment. Any violation of the provisions of this paragraph shall be punishable by imprisonment for not more than one year or by a fine of not exceeding $5,000, or both. If a director, officer, employee, or agent of any Federal Reserve bank shall knowingly violate this paragraph, he shall be held liable in his personal and individual capacity for any loss or damage sustained by such Federal Reserve bank in consequence of such violation. The third paragraph of section 24 of the Federal Reserve Act, as added by Act of August 23, 1935, provides as follows: Loans made to established industrial or commercial businesses (a) which are in whole or in part discounted or purchased or loaned against as security by a Federal Reserve bank under the provisions of section 13b of this Act, (b) for any part of which a commitment shall have been made by a Federal Reserve bank under the provisions of said section, (c) in the making of which a Federal Reserve bank participates under the provisions of said section, or (d) in which the Reconstruction Finance Corporation cooperates or purchases a participation under the provisions of section 5d of the Reconstruction Finance Corporation Act, shall not be subject to the restrictions or limitations of this section upon loans secured by real estate.
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