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513 A meeting of the Board of Governors of the Federal Reserve System was held in Washington on Thursday, April 18, 1940, at 11:30 a.m. PRESENT: Mr. Mr. Mr. Mr. Eccles, Chairman Ransom, Vice Chairman Szymczak Davis Mr. Mr. Mr. Mr. Morrill, Secretary Bethea, Assistant Secretary Carpenter, Assistant Secretary Clayton, Assistant to the Chairman The action stated with respect to each of the matters hereinafter referred to was taken by the Board: The minutes of the meeting of the Board of Governors of the Federal Reserve System held on April 15, 1940, were approvmi unanimously. Letter to the board of directors of the "Ludington State Bank", bldington, Michigan, stating that, subject to conditions of membership numbered 1 to 6 contained in the Board's Regulation H and the following sPecial condition, the Board approves the bank's application for memter'shiP in the Federal Reserve System and for the appropriate amount °f stock in the Federal Reserve Bank of Chicago: "7. Such bank shall make adequate provision for depreciation in its banking house and furniture and fixtures." The letter also contained the following special comments: "The report of examination for membership contains numerous criticisms of the operations and supervision of the trust department, which the examiner reports were fully discussed during the examination. Also it has been noted that the institution was acting in one capacity, that of trustee, for which it had no authority, and that the examiner Questions whether permission to act as trustee of 514 "testamentary trusts, for which application is to be made to the State authorities immediately, will cover one trust now being administered. Acceptance of trust business entails serious responsibilities and, as a member bank, the Ludington State Bank will be expected to take the necessary steps to give the trust department proper attention and bring its trust activities into conformity with approved practices and applicable State laws." Approved unanimously, together with a letter to Mr. Schaller, President of the Federal Reserve Bank of Chicago, reading as follows: "The Board of Governors of the Federal Reserve System approves the application of the 'Ludington State Bank', Ludington, Michigan, for membership in the Federal Reserve System, subject to the conditions prescribed in the enclosed letter which you are requested to forward to the Ronrd of Directors of the institution. Two copies of such letter are also enclosed, one of which is for your files, and the other of which you are requested to forward to the Commissioner of Banking for the State of Michigan for his information. "It is assumed of course that your office will follow to a conclusion the matter of the bank's making the needed improvements in its trust department operations and bringing its fiduciary activities into conformity with applicable State laws." Letter to Mr. Young, Vice President of the Federal Reserve of Chicago, reading as follows: "In accordance with the recommendation contained in Your letter of April 13, 1940, the Board approves the establishment and operation of a seasonal agency at Ephraim, Wisconsin, by the 'Bank of Sturgeon Bay', Sturgeon Bay, Wisconsin, provided the establishment of such agency is aPproved by the appropriate State authorities. It is understood that the proposed agency will be operated only during the summer months of each year for the purpose of receiving and paying out deposits, issuing and cashing checks and drafts, and doing business incident thereto in accordance with the applicable provisions of Section 5155 United States Revised Statutes." Approved unanimously. 515 4/18/40 Letter to Mr. Clerk, First Vice President of the Federal Reserve Bank of San Francisco, reading as follows: "This refers to your letter of April 11, 1940, relating to the contemplated removal by American Trust Company, San Francisco, California, of the branch naNbEing Operated by it at 2265 Telegraph Avenue, Berkeley, California. On the basis of the information which you have submitted, the Board is of the opinion that the removal of the branch will not result in the establishment of a new branch within the meaning of section 9 of the Federal Reserve Act, and that the Board's approval is not required." Approved unanimously. Letter to "The City National Bank of Kankakee", Kankakee, Illinois, reading as follows: "The Board of Governors of the Federal Reserve System has given consideration to your supplemental application for fiduciary powers, and, in addition to the authority heretofore granted to act as trustee, executor, administrator, and registrar of stocks and bonds, grants you authority, effective if and when the proposed consolidation of the City Trust and Savings Bank, Kankakee, Illinois, with your bank, under the title City National Bank of Kankakee, is consumated, to act when not in contravention of State or local law, as guardian of estates, assignee, receiver, committee of estates of lunatics, or in any other fiduciary capacity in Which State banks, trust companies or other corporations Which come into competition with national banks are permitted to act under the laws of the State of Illinois, the exercise of all such rights to be subject to the provisions of the Federal Reserve Act and the regulations of the Board °f Governors of the Federal Reserve System. "Upon receipt of advice from the Comptroller of the Currency that the proposed consolidation has been effected, a formal certificate evidencing your right to exercise fiduciary powers will be forwarded to you." Approved unanimously. Letter, dated April 171 1940, to Mr. Hamilton, President of the Pod. ' 1*al Reserve Bank of Kansas City, reading as follows: 516 4/18/40 -4- "Enclosed are copies of a letter of March 28, 1940, from Mr. E. E. Placek, President, The First National Bank of Wahoo, Wahoo, Nebraska, and a letter of April 4, 1940, from Mr. Robert H. Downing, General Counsel, Nebraska State Department of Banking, relating to the efforts of The First National Bank of Wahoo to obtain the release of securities deposited by it with the State authorities in connection with its exercise of fiduciary powers. There is also enclosed a copy of National Bank Examiner Henninger's letter of March 6, 1940, relating to the same matter, which was referred to us by the office of the Comptroller of the Currency. "Pursuant to subsection (k) of section 11 of the Federal Reserve Act, the Board, on May 11, 1939, issued a certificate, in the usual form, certifying that The First National Bank of Wahoo was no longer authorized to exercise any of the powers conferred by such subsection, and, on March 23, 1940, in response to Mr. Henninger's letter, the bank was furnished a certified copy of the certificate. However, you will note that, while the Federal Reserve Act provides that, upon the issuance of such a certificate, the bank shall be entitled to have returned to it any securities which it may have dePosited with the State authorities for the protection of Private or court trusts, the State authorities have declined to release the securities deposited by The First National Bank of Wahoo because the State law provides that they shall do so when furnished a certificate by the Board certifying not only that the bank is no longer authorized to exercise fiduciary powers but also that the bank 'has been relieved, in accordance with the laws of this State, of all duties and o bligations as assignee, receiver, or trustee, either by appointment of court or under will, and for depository of money in court.' "As you know, subsection (k) of section 11 of the Federal Reserve Act provides that the Board shall issue a cerificate certifying that a national bank is no longer author'zed to exercise the powers conferred by such subsection only lafter satisfying itself that such bank has been relieved in accordance with State law of all duties as trustee, executor, administrator, registrar of stocks and bonds, Fuardian of estates, assignee, receiver, committee of estates of lunatics or other fiduciary, under court, private, °r other appointments previously accepted under authority °f this subsection'. The fact that the Board issued such a certificate in the case of The First National Bank of Wahoo necessarily implies that it had so satisfied itself and 517 "nothing could be added to the certificate which would do more than expressly state that the Board had complied with the law and, perhaps, describe the action taken in order to do so. Regardless of the precautions taken by the Board to properly discharge its responsibilities, it is obviously impossible to certify categorically that the bank has been relieved, in accordance with the laws of the State of Nebraska, of all of its duties and obligations as assignee, receiver, or trustee; and no certificate can be issued by the Board with respect to the discharge of the bank's duties and obligations as depository of money in court, which apparently are not of a fiduciary nature. "In the circumstances, it will be appreciated if you will take this matter up with the State authorities, bringing to their attention the pertinent provisions of the Federal Reserve Act and ascertaining whether they still consider a further certificate necessary and, if so, whether any which the Board could properly issue would be deemed sufficient. The Board, of course, desires to cooperate with the State authorities in so far as possible and it is hoped that you will be able to work out some satisfactory disposition of this matter. Mr. Placek and Mr. Downing are being advised of this reference and copies of our letters to them are enclosed." Approved unanimously. Letter to Mr. C. B. Upham, Deputy Comptroller of the Currency, ' l eacling as follows: "This refers to your letter of March 13, 1940, submitting additional information in connection with the question whether a loan made by a national bank to the wife of an executive officer of the bank on the security of a first mortgage on a newly constructed residence property is in violation of section 22(g) of the Federal Reserve Act. "Even with the additional facts submitted, the information at hand does not appear to admit of a definite conclui°n on the question presented. It is the desire of the Board to cooperate with your office as fully as possible in ll matters of this kind, but in this case a ruling that 21e transaction is a permissible one would open the door to _fle evasions of the law in other similar cases, while, on the Other hand, it does not clearly appear that the transaction should he considered an actual violation of the law. Z 518 4/18/40 -6- "The executive officer states that he conveyed the property to his wife 'principally for tax purposes', but the result intended to be accomplished in this respect is not entirely clear. Presumably the laws of the State in which the bank is located do not provide for community property between husband and wife, but ae do not know whether this is the case. It appears that the wife has no separate income and that the payment of the debt depends upon the earning ability of the executive officer. The facts of the case suggest that the transaction was an evasion of the provisions of section 22(g) of the Federal Reserve Act, and, as You know, this section authorizes the Board to prescribe such rules and regulations as it may deem necessary 'to Prevent evasions' of the provisions of the section. "In the circumstances, you may wish to consider the advisability of having your examiner, on the occasion of the next examination of the bank, discuss this matter with the directors, calling attention to the authority of the Board of Governors to prescribe rules to prevent evasions, and, unless convinced that the transaction was not intended as an evasion, suggesting to the bank that in order to comply with the spirit of the law it would seem desirable for it to take appropriate steps to eliminate the loan from its assets as soon as it finds it practicable to do so." Approved unanimously. Letter to the Comptroller of the Currency, reading as follows: "It is respectfully requested that you place a special °rder with the Bureau of Engraving and Printing, supplement,tng the order requested June 14, 1939, for the printing of r sderal reserve notes of the 1934 Series in the amount and , uenomination stated for the Federal Reserve Bank of New York: DenomiNumber of nation Amount sheets $10,000 150 $18,000,000." Approved unanimously. Letter to Mr. Day, President of the Federal Reserve Bank of pr ancisco, reading as follows: 519 4/18/40 -7- "Reference is made to your letters of March 15 and April 1, 1940, transmitting a copy of a letter from Mr. Thomson, President of The Anglo California National Bank of San Francisco, and a petition by Mr. Maddux, President of The San Francisco Bank, relating to the applicability of the Clayton Act to Mr. Walter E. Buck and Mr. Walter A. Haas who are directors of both banks. "Both Mr. Thomson and Mr. Maddux contend that the two banks are not engaged in the same class or classes of business within the meaning of paragraph (6) of section 8 of the statute, and Mr. Maddux also petitions the Board to amend its Regulation L so as to except these relationships. "Virtually all of the deposits of The San Francisco Bank are classified as 'savings deposits, including time accounts,' although a portion of such deposits are subject to withdrawal by check. The time deposits of the national bank are about equal to its individual demand deposits. Both banks maintain trust departments, although Mr. Maddux states that the trust department of The San Francisco Bank as well as the checking Privileges accorded to its customers are merely incidental to the savings business which it conducts as its principal function. "In view of the fact that both banks receive savings and Other time deposits, hold accounts which are subject to withdrawal by check, maintain trust departments, and make real estate loans, the Board is of the opinion that the exceptions contained in paragraph (6) of the statute, relating to banks not engaged in the 'same class or classes of business' is not applicable since they are both engaged in several of the classes of business enumerated in footnote 9 in Regulation L. "However, Mr. Maddux's petition requests an amendment to Regulation L which would make an additional exception similar to that now contained in paragraph (7) of the statute relating to mutual savings banks, and similar to the exception in secti°n 3(a) of Regulation L, relating to Morris Plan banks. Mr. !addux's arguments are based on the points of similarity which !l_e finds between his bank and these two types of institutions. Me relies principally on its similarity to mutual savings uks; and the similarity to Morris Plan banks need not be .liscussed further in view of the fact that the Board has eliminated, effective June 1, 1940, the exception which it had eviously made in its regulation with respect to such banks the reason for this action being, as you know, the fact that TauY of such banks are now conducting a business similar to Qlat conducted by commercial banks). r 520 4/18/4o -3- "Mr. Maddux suggests that mutual savings banks and savings banks having capital stock should not be treated differently under the Clayton Act, because both conduct substantially the same kinds of business, and the details of their internal organization do not affect the matters contemplated by the Clayton Act. Mr. Maddux discusses this Point in detail and makes an argument which deserves very careful consideration. However, the Board has consiotently taken the position that its authority to make additional exceptions by regulation should be used only to fill out the pattern established by Congress in the statute, and not to alter it. In the statute Congress, specifically excepted mutual savings banks, and made the prohibition of the statute specifically applicable to other savings banks. Therefore, an exception applicable to other savings banks would be clearly inconsistent with the pattern laid down by Congress, and the Board for this reason believes that it should not amend its regulation as suggested. "Furthermore, in the present case where the savings bank also conducts a trust business and permits withdrawals by Check, even though these two functions are merely adjuncts to its principal business, an exception which would permit directors of this bank to serve a national bank with a trust department would be an even greater departure from the patestablished by Congress than an exception of the kind discussed in the preceding paragraph. The Board has on numerous occasions considered cases where the principal business conducted by two institutions was different, but w_ here both, as incidents to their principal businesses, conducted other types of business which were the same. Under the statute as it existed prior to the Banking Act of 1935 the Board in many cases had great difficulty in determining . 7tether the degree in which two institutions were engaged in he same classes of business was sufficiently small as to . 11stify a finding that they were not in substantial competi' lon. However, the Clayton Act was amended in 1935 so as to Prohibit interlocking directorships if a member bank was engaged 'in a class or classes of business' in which the ?ther bank was engaged, thus eliminating the question of c.Llegree. If the Board should make an exception, by regulawhich would again make the applicability of the stat' 1. 'te depend upon this question, its action would be a direct eversal of the change made by the Banking Act of 1935. 4, "The Board appreciates Mr. Thomson's desire to retain ese two directors whose services he regards as being of great value and as necessary to his bank under the existing 1 521 4/18/40 ft circumstances. However, if the Board should make an exception which would permit these directors to serve both banks, the exception, being of general applicability, would permit a large number of other relationships which are now Prohibited and would thus materially alter the effect of the statute, which, as stated above, the Board believes would not be a proper exercise of its authority." Approved unanimously. Thereupon the meeting adjourned. Secx:eth:
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