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FEDERAL RESERVE BANK OF N EW YORK r Circular No. 6 2 7 1 ~l u January 8, 1969 J INTERPRETATION BY BOARD OF GOVERNORS Regulation R — Relationships With Dealers in Securities Under Section 32 of the Banking Act of 1933 To All Member Banks in the Second Federal Reserve D istrict: Printed below is an excerpt from the Federal R egister of January 3, containing an interpreta tion by the Board of Governors of the Federal Reserve System of its Regulation R, entitled “ Rela tionships With Dealers in Securities Under Section 32 of the Banking Act of 1933.” Additional copies of this circular will be furnished upon request. A H lfred ayes, President. Title 12— BANKS AND BANKING Chapter II— Federal Reserve System SUBCHAPTER A— BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM PART 218— RELATIONS WITH DEAL ERS IN SECURITIES UNDER SECTION 32, B A N K IN G ACT OF 1933 Applicability to Bank Holding Companies § 218.114 Interlocking service between securities com panies and bank hold ing companies. (a) The Board has recently con sidered whether section 32 of the Bank ing Act of 1933 (12 U.S.C. 78) and this part (Regulation R) prohibit a person primarily engaged in securities activi ties described in section 32, or associated with an organization so engaged, from serving as an officer, director, or em ployee of a holding company proposed to be organizd by a member bank to own all the stock of such bank. (b) Section 32 provides in relevant part that: “No officer, director, or em ployee of any corporation or unincor porated association, no partner or em ployee of any partnership, and no in dividual, 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 [at] the same time as an of ficer, director, or employee of any mem ber bank * * (c) As the U.S. Supreme Court ob served in Board of Governors v. Agnew, 329 U.S. 441 (1946), “Section 32 is di rected to the probability or likelihood, based on the experience of the 1920’s, that a bank director interested in the underwriting business may use his in fluence in the bank to involve it or its customers in securities which his under writing house has in its portfolio or has committed itself to take. * * * It [sec tion 32] is a preventive or prophylactic measure.” (d) In an earlier interpretation, the Board had concluded that section 32 did not prohibit a partner of a securities firm from serving as a director of a longestablished holding company, with seven nonbank subsidiaries, that recently had acquired the controlling stock of a mem ber bank. In distinguishing that situation from the present matter, the Board ob served that the predominant— in fact, almost the sole— function of the proposed bank holding company would be to hold the stock of the bank. It therefore ap peared to the Board that the affairs of the member bank and the holding com pany would be so closely identified and functionally related that the same possi bilities of abuse which section 32 was designed to guard against would be pres ent in the case of a director of the hold ing company as In the case of a director of the member bank. To give cognizance to the separate corporate entities in such a situation, would, in the Board’s opinion, partially frustrate Congressional purpose In enacting the statute. (e) The Board concluded that where the principal activity of a holding com pany is the ownership and control of banks, including one or more member banks, the holding company and each member bank subsidiary should be con sidered as constituting together a single entity for section 32 purposes, so that a person who is primarily engaged in sec tion 32 business or associated with an organization so engaged is prohibited by that law from serving as an officer, di rector, or employee of such a holding company. (12 U.8.C. 248(i). Interprets or appUes 12 UJ3.C. 78) Dated at Washington, D.C., the 20th day of December 1968. By order of the Board of Governors. [seal] R obert P. F orrestal, Assistant Secretary. [F .R . Doc. 69-29; F ile d , Jan. 8:46 a.m.] 2, 1969;
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