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561 A meeting of the Board of Governors of the Federal Reserve System was held in Washincston on Wednesday, April 24, 1940, at 11:30 a.m. PRESENT: Mr. Mr. Mr. Mr. Ransom, Vice Chairman Szymczak Davis Draper 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 ederai Reserve System held on April 23, 1940, were approved unani- Letter to Mr. Parker, President of the Federal Reserve Bank Atl -anta, reading as follows: Boara"Referring to your letter of April 19, 1940, the 4, - of Governors approves the payment of salary at ra+",_ of 0,300 per annum to Mr. Leo W. Starr, 4:tssistant Cashier, Birmingham Branch, for the period April 12 to May 31, 1940." Approved unanimously. Letter to Mr. Peyton, President of the Federal Reserve Bank reading as follows: to "The Board of Governors has given consideration bankh salaries fixed by the board of directors of your for the officers of the Federal Reserve Bank of 562 4/24/40 -2- "Minneapolis for the year beginning June 1, 1940, as set forth in your letter of April 10, 1940, and Mr. Szymczak has discussed over the telephone with Mr. Coffey the salary of Mr. Oliver S. Powell, First Vice President of the bank. In the light of that discusslon the Board approves for Mr. Powell a salary at the rate of $14,000 per annum, effective June 1, 1940, lf fixed by your directors at that rate. "The other salaries fixed by your directors for the officers of the bank, effective June 1, 1940, are approved by the Board as follows: J. N. Peyton H. I. Ziemer E. W. Swanson F. C. Dunlop H. C. Core A. R. Larson 0. R. Preston W. E. Peterson T. H. Hodgson A- W. Mills Helena Branch: $25,000.00 President 9,000.00 Vice President and Cashier Vice President and Secretary 10,000.00 6,000.00 Auditor 6,000.00 Assistant Cashier 5,500.00 Assistant Cashier 6,000.00 Assistant Cashier 5,500.00 Assistant Cashier 5,000.00 Assistant. Counsel 5,000.00 Assistant Auditor n- E. Towle A. A. Hoerr C. J. Larson Managing Director Cashier Assistant Cashier 7,500.00 4,500.00 4,000.00" Approved unanimously. Letter to Mr. Frederic P. Benedict, Burroughs & Brown, New .131%k) New York, reading as follows: wh. "This is in reply to your letter of April 6, in leh You present some further inquiries with respect the questions discussed in the Board's letter of aPril 3) 1940, regarding the effect of Regulation T on sto cklending transaction. "Assuming that a broker has received registered none.Aempted stocks from a customer and has loaned these ;s in the 'loan crowd' on a national securities tlehange, you inquire as to the application of Regulaco°4 T to payments by the broker to the customer in stnneetion with premiums received on the lending of °elt, in connection with the payment of a cash dividend r 563 4/24/40 -3- ft on the stock, in connection with the stock being 'marked to the market' in case it increases in value, or in connection with the payment of a stock dividend on the stock. 'With respect to the broker's payment to the customer ?.! a sum equal to a premium which the broker received on Idle lending of the stock, it is assumed that the customer is not to return such amount when he receives his stock back from the broker. If this is the case, it may be stated as a general proposition that such a payment by the ib.1;oker would not be limited by any provision of the regulation. So far as concerns the procedur or mechanic e s of the matter, it may be noted that if the premium is credited to a general account and is not withdrawn on the same day it maY, as a part of the account, become subject to withdrawal restrictions at a later date; but any difficulty on this Point could be avoided by transferring the sum on the same da s y_ from the general account to a special miscellaneous 'ecount pursuant to section 4(f)(6) of the regulation. is assumed that any amounts paid by the broker to the '"e customer Customer in connection with a cash dividend on the isot°ck also would not be repaid by the customer to the sr°ker- If such is the case, their status would be the as that of payments connected with a premium on the lending of the stock, with the minor exception that in case; the dividends had been credited to a general account arti°n 6(g) would permit the withdrawal of such dividends time within 35 days thereafter if the crediting had not co served in the meantime to permit any transaction which uld not otherwise have been effected in the account. 'A different situation would, however, be presented ban y as a Y Paywents which the broker might make to the customer sin result of the stock being 'marked to the market', fun ! ,e it is assumed that the customer would repay such tl_ cls to the broker when his stock was returned to him by Accordingly, such payhients to the customer Would be cat,!! 1?e subject to the same requirements as those indiconIT4 In the Board's letter of April 3 for payments in e ion with an original deposit of the stock. cle,e With respect to stock dividends, the result would ' the nd on whether the broker delivers to the customer stock dividend, or cash based on the stock divided woul , n . If stock is delivered, presumably the customer it ' Iv not return it to the broker. If this is the case, connQuld have the same status as that discussed above in sin,?etion with a premium on the lending of the shares, cash ?ection 6(g) allowing 35 days for the payment of dlvidends does not apply to stock dividends. However, 564 4/24/40 —4— "if the broker advances cash to the customer on the basis of the stock which was received as a dividend and the customer is later to repay such amount and receive the stock, the requirements stated in the Board's letter of April 3 with respect to the original deposit of stock would apply. "As the basis for a further question, you state that the customer here involved has not purchased or carried or traded in securities through the lending broker or to his knowledge within several months. You ask whether this would justify the broker in con— cluding that the customer is able to qualify under sections 4(f)(8) and 7(c) of Regulation T, and whether, if this is the case, the customer could deposit the proceeds in his general account. The answer to this must be in the negative. The mere fact that the cus— tomer has not purchased or carried or traded in secur— ities through the lending broker or to his knowledge Nrithin several months in the past would clearly not sufficient to justify a conclusion that a future ntension of credit would not be for such purpose. As 'udicated in the Board's letter of April 3, this is a estion of fact which must turn upon all the relevant .acts of the case, of which that stated in your inquiry but one. In addition, the fact that the customer au, lePosited the proceeds in his general account would be 4.,strong indication that the funds were obtained for '"e Purpose of purchasing or carrying or trading in securities." r Approved unanimously. Letter to 1,:r. Evans, Vice President of the Federal Reserve atik of Dallas, reading as follows: "Reference is made to your letter of April 8, 1940, regarding Regulation U. "You describe a case in which a borrower who has a loan has sold part of the stock subject to Regulation U the proceeds left securing the loan and IIN:lth the the securing bank as a cashier's check tIrn- Nevertheless the amount of the loan exceeded illaXiMUM loan value of the collateral even after the t , - sale. Several weeks later, Ivilen the amount of the, " loan still exceeded the maximum loan value of the 565 4/24/40 -5- collateral, the borrower wished to repurchase the stock, using the cashier's check to make payment. The question is whether such purchase could be made Without the borrower depositing additional cash or collateral. "As you indicate in your letter, the purchase would, in effect, be a substitution of the stock for the cashier's check, the replacement of collateral having 100 per cent loan value by collateral having ' o Per cent lo;.,n - value. This would cause a reduction in the maximum loan value of the collateral, would therefore increase the deficiency in such maximum loan value, and hence would seem to be forbidden by section 1 of the regulation. "You point out that although the ilarchase would increase the deficiency, the entire series of transacticms would in this particular case produce a slight reduction in the deficiency. You then raise the question whether this fact would not, in such a case, disPense with the need for obtaining additional cash or collateral for the purchase. "However, the regulation does not seem to offer anY practical basis for giving the purchase such a Privileged status because of its relation to the sale that occurred at a considerably earlier time, and it ls the view of the Board, as indicated in its letter (fi September 3, 1937, (S-32; Loose-Leaf Service #8163), „ t),I..t the Purchase would not comply with the regulation ;"-Less the borroer tv deposited sufficient additional ,ash or collateral. This conclusion not only appears ; 11! be the correct interprytaticri of the regulation but c'i-s°3 upon further consideration and in view of all the Vumstances, is believed to represent the most workvx te general rule for various siturtions. Therefore, Lille the Board agrees with your view that the problem Should be considered by the Board in the light of the Which you describe, it feels after such considre , tion that it would not be desirable to alter the 'Illirements of the regulation on the point. "It. may be noted with respect to the general Problem, however, that when stocks are sold the bank d4fPermit the borrower to Nithdraw a sum equal to the an,erence between the maxi_mul lecloanvalue of the stocks thLtheir ma rket value. Under present requirements such would permit a withdrawal equal to 40 per cent of market value. Such a withdrawal in connection with _ 566 4/24/40 -6- a sale would, of course, make it possible for the borroer to have the margin required for a subsequent pur54a3e of securities at the same or any lower price. It ?s recognized that this procedure might be impractical In certain circumstances, but it seems that it might present a means of facilitating the transactions in some situations of the type to which you refer." Approved unanimously. Thereupon the meeting adjourned.
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