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Minutes for April 7, 1964.
To:
Members of the Board
From:
Office of the Secretary
Attached is a copy of the minutes of the
Board of Governors of the Federal Reserve System on
the above date.
It is not proposed to include a statement
with respect to any of the entries in this set of
minutes in the record of policy actions required to
be maintained pursuant to section 10 of the Federal
Reserve Act.
Should you have any question with regard to
the minutes, it will be appreciated if you will advise
the Secretary's Office. Otherwise, please initial
below. If you were present at the meeting, your
initials will indicate approval of the minutes. If
you were not present, your initials will indicate
only that you have seen the minutes.
Chm. Martin
Gov. Mills
Gov. Robertson
Gov. Balderston
Gov. Shepardson
Gov. Mitchell
Gov. Daane
Minutes of the Board of Governors of the Federal Reserve System
on Tuesday, April 7, 1964.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
The Board met in the Board Room at 11:00 a.m.
Martin, Chairman 1/
Balderston, Vice Chairman
Mills
Robertson
Shepardson
Mitchell 2/
Daane
Sherman, Secretary
Kenyon, Assistant Secretary
Hackley, General Counsel
Johnson, Director, Division of Personnel
Administration
Assistant Director, Division of
Sprecher,
Mr.
Personnel Administration
Mrs. Semia, Technical Assistant, Office of the
Secretary
Mr. Hart, Personnel Assistant, Division of
Personnel Administration
Mr.
Mr.
Mr.
Mr.
Retirement System proposals (Item No. 1).
There had been dis-
tributed a memorandum dated March 20, 1964, from the Division of Personnel
Administration regarding recommendations relating to the Retirement
System of the Federal Reserve Banks and related fringe benefits made
by the Subcommittee on Personnel of the Conference of Presidents of
the Federal Reserve Banks and approved by the Conference on January 28,
1964. The recommendations were as follows:
(1) to establish a $1,000 post-retirement death
benefit for all present and future service retirees
who, at the time of retirement, have completed five
years or more of creditable service; for all present
and future special service retirees who qualify under
the "rule of 80" (i.e., when a combination of age at
retirement plus years of creditable service equals 80);
and for all disability retirees, with the provision
that since the group insurance is continued with waiver
of premium to age 65, the $1,000 death benefit does
not become applicable until the group insurance ceases;
Dr Participated in
morning session; joined afternoon session
at point indicated in minutes.
V Withdrew from afternoon session at point indicated in minutes.
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(2) to increase the normal pension formula, including special service retirement on an acturial equivalent
basis, to 1 per cent of the first $4,800 of final average
salary plus 1-3/4 per cent of the excess of such final
average salary for each year of creditable service, and
to increase the disability pension formula to 1-1/2 per
cent of final average salary for each year of creditable
service with a minimum of 30 per cent of final average
salary;
(3) to provide for the use by the Retirement System
of an interest rate of 3-1/2 per cent per annum for valuation purposes and for crediting interest on employee
contributions (in this connection, the Subcommittee endorsed the decision of the Retirement Committee to adopt
the 1951 Group Annuity Tables using a two-year set-back
for women); 1/
(4) to raise the salary break-point used in the
normal pension formula from $4,200 to $4,800 in order
to integrate it with Social Security;
(5) to establish a spouse's benefit in the case of
death in active service, permitting the surviving widow
or dependent widower to have the option of selecting the
normal benefits provided for death in active service by
the Retirement System or, in lieu thereof, a life pension equal to that which would be received by such survivor had the employee retired on the date of death and
selected the 50 per cent joint and survivorship option;
(6) to remove the $25,000 maximum now applicable
to the death benefit provided by the Retirement System
upon death in active service;
(7) to provide an optional benefit on deferred
retirement by permitting an employee who retires after
attaining age 50 with at least 10 years of service and
elects to defer payment of his allowance to elect either
a 100 per cent or a 50 per cent joint and survivorship
option under which the beneficiary would receive the
same benefit payable on the pensioner's death as would
have been payable had he elected such option on an
immediate retirement allowance at the time of his retirement;
.717-This recommendation was approved by the Board on February 17, 1964.
41 r'T
A ,,,
I 43
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require five years of creditable service
to make employees hired after the adoption of this
change and retiring at age 65 eligible for payment by
the employing Banks of two-thirds of the share of
premiums for hospitalization, surgical, and major
medical coverage, and apply the "rule of 80" to determine the eligibility of special service retirees, including those already retired, for such payments; and
(8) to
(9) to provide for the equitable distribution of
excess earnings of the Retirement System to active
members, pensioners and their beneficiaries, and the
employing Banks, by the allocation of such earnings on
a pro-rata basis, after the interest rate is increased
to 3-1/2 per cent and the reserve for income equalization and the reserve against investments have reached
prescribed maximums, to the retirement reserve account,
annuity accumulation account, and pension accumulation
account.
In addition the Conference of Presidents approved
the discharge of accrued liability arising from the proposals through a lump sum payment (approximately $4.1
million for the post-retirement death benefit, and $2.4
million for other benefits).
The memorandum presented evaluations of these proposals, and
background information was contained in various attached papers.
On
the basis of its analyses, the Division recommended that the Board
indicate to the Conference of Presidents the following informal views
regarding the proposals:
(1) disapproval on grounds of cost (implementation
of this recommendation contemplated a cash payment of
approximately $4.1 million to fund accrued liability,
and an addition to the Reserve Banks' contributory rate
equal to .12 per cent of pay roll);
(2) no objection in principle (some upward revision
of the pension formula being considered desirable in
order to provide benefits more nearly comparable to
those arising from thrift or profit-sharing plans commonly offered in private industry), but some concern
about the relatively large retirement benefit in the
normal pension formula for higher-salaried employees;
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(3) (Board action already taken);
no objection;
(5) no objection;
(6) no objection to raising maximum death benefit
from $25,000 to $40,000;
(7) no objection;
(8) agreement with objectives (no revision of Rules
and Regulations of Retirement System involved);
(9) no objection.
(4)
At the beginning of today's discussion the Division of Personnel
Administration distributed a supplemental memorandum stating that the
Principal reason for recommending disapproval of proposal (1), for a
$1,000 post-retirement death benefit, was the cash payment of approximately
$4.1 million required to fund accrued liability; except for the negative
weight of that payment, there were deemed to be adequate reasons for
favorable consideration of the proposal.
Statistics were cited to
indicate the extent to which private organizations offered such benefits:
Of 53 firms surveyed, all but
6
provided such a benefit, and the great
maJority provided an amount greater than $1,000.
It was suggested in
the memorandum that, as an alternative to the cash payment, the benefit
might be made available by financing it on a group life insurance basis.
This possibility had been discussed with Mr. Buck, the Retirement System's
Consulting Actuary, who was of the opinion that the .12 per cent addition
to the Reserve Banks' contributory rate that had been contemplated in the
°riginal terms of the proposal would pay for the necessary addition to
Present group insurance contracts, except for certain administrative
expenses.
However, Mr. Buck's recommendation was that the benefit be
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provided on a life insurance basis through the Retirement System.
doing so, the administrative expenses (estimated at about
of premium) might be avoided.
By
4 or 5 per cent
The Division recommended that the Board
consider indicating that, while it did not approve the post-retirement
death benefit on the terms contemplated in proposal (1), it would consider
a recommendation for such a benefit to be financed on a group life
insurance basis either through the Retirement System or with an insurance
COMpany.
At today's meeting the Division also distributed a table relating
to recommendation (2).
The present pension formula provided by the Reserve
Banks' contributions, based on the average salary of the "high five" years,
that is, the 5 consecutive years of service during which an employee
received his highest pay, was 3/4 of 1 per cent of the first $4,200 plus
1-1/2 per cent of salary in excess of $4,200.
Recommendation (2) would
Provide a formula of 1 per cent of the first $4,800 of final average
salary (final average being defined as the "high five" under the Rules
end. Regulations of the Retirement System; and the increase from $4,200 to
$4,800 being contemplated by recommendation
the amount of salary in excess of $4,800.
(4)), and 1-3/4 per cent of
The Division regarded the
1'3/4 per cent formula as unduly favorable to employees with higher
s alaries and therefore, in the table distributed at this meeting, suggested an alternative computation based on a formula of 1 per cent of the
first $4,800 and 1-5/8 per cent of salary above $4,800, which it was believed
4e
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would result in more nearly equal improvement of benefits for all salary
levels.
Governor Balderston distributed a table that brought out that
increases in the Reserve Banks' contribution rate of .12 per cent of pay
roll for the post-retirement death benefit on a group insurance basis,
.14 per cent for the spouse's option called for by recommendation (5)
and an estimated 1.60 per cent for calculating the normal pension formula
at a rate of 1-5/8 per cent for the amount of salary in excess of $4,800,
would involve a total increase in contribution rate of 1.86 per cent of
Pay roll, which was very little more than the decrease of 1.83 per cent
that would result from the adoption of a regular rate of interest of
3-1/2 per cent (embodied in recommendation (3) and approved by the Board
on February 17, 1964).
Governor Balderston's table also noted that he
Would not approve a cash payment of $4.1 million to fund accrued liability
for the recommended $1,000 post-retirement death benefit, and that he
Proposed a limitation upon the total benefit package of 80 per cent of
"high-five" average salary.
Mr. Sprecher referred to the request made by the Board on Feb17, 1964, that the Division of Personnel and the Legal Division
explore the question whether it might be advisable for Governors Mitchell
and Daane to abstain from voting on the Retirement System proposals since
they either were or might be beneficiaries of any improvement of benefits
that might be adopted.
Studies of the circumstances had disclosed no
11;4
compelling reason for abstention. From a practical standpoint, the
probabilities of resumption by Governors Mitchell and Daane of their
Reserve Bank service and participation in any improvement in Retirement
System benefits that might now be adopted seemed somewhat remote.
Hypo-
thetically, at some future time there might be four or more members of
the Board having Federal Reserve Bank service, and if they should disqualify
themselves from voting on a Retirement System matter, there would not be
a quorum of the Board remaining.
Mr. Hackley commented that an objective study of possibilities
embraced not only recognition that Governors Mitchell and Daane might
resume Federal Reserve Bank service at some future time, but that other
present (or future) members of the Board who had not previously served
With the Banks might conceivably enter that service.
As a practical
matter, this and the considerations mentioned by Mr. Sprecher would
Weigh against disqualification, but that would not prevent a member from
abstaining if he thought it proper to do so.
Secretary's Note: Governors Mitchell and Daane
subsequently abstained from participating in
the action taken on the Retirement System proposals.
At the Board's request, Mr. Johnson reviewed the evolution of
the Retirement System proposals, following which there was a general
exchange of views regarding the proposed $1,000 post-retirement death
benefit.
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-8Governor Robertson commented that he found more merit in this
proposal than in some of the others in that it provided a benefit to
individuals in the lower ranks.
It seemed to him that the Retirement
System should provide this benefit, but he would suggest doing so on
the group insurance basis suggested in the Division of Personnel Administration's supplemental memorandum rather than through a method that
involved a cash payment of over
$4 million.
Governor Daane expressed agreement with Governor Robertson's
view, remarking that this was a benefit the lower-income people should
have if it could be provided without the
$4 million outlay.
Governor Mills commented that it seemed merely subterfuge to
use an increase in the Reserve Banks' rate of contribution to finance
the proposed death benefit on an insurance basis through the Retirement
SYstem.
If financing was to be accomplished through the Retirement
System, it would seem better to fund the accrued liability, but the
Proper function of the Retirement System was not to provide life insurance.
He would not object, however, if the Board should suggest the acceptability
c)f a proposal to provide the death benefit on a group insurance basis
under contract with an insurance company.
Governor Robertson also expressed the view that the proposed
benefit was an insurance matter rather than a retirement matter, and
that financing through the Retirement System seemed inappropriate.
Mr. Johnson responded that the possibility of financing through
the Retirement System had been suggested because of the administrative
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expenses, estimated at
4 to 5 per cent of the premium, that would be
incurred in providing the benefit through a rider to the present group
Insurance contract.
The Retirement System in a sense was already geared
for handling insurance matters, in that for death in active service it
provided a payment equal to a year's salary - an insurance-type benefit,
though financed from the Retirement System's own funds rather than through
contract with an insurance company.
He then drew comparisons between the
Proposed post-retirement death benefit and the extent to which the Civil
Service Retirement System provided somewhat similar benefits.
Governor Mitchell observed that financing the proposed postretirement death benefit either through funding or through group insurance
with a commercial carrier would involve defrayal of the expense by the
Pederal Reserve Banks, and that to the extent that Retirement System funds
Igere used, there would be that much less to finance other benefits.
Chairman Martin questioned whether the alternative possibilities
would really effect any saving over the longer run as compared with
PaYing the $4.1 million to fund accrued liability.
Governor Balderston then outlined his philosophical approach to
the combination of benefits suggested in the table he had distributed. He
Ilae in favor of bringing Federal Reserve Bank benefits up to the community
level and what was considered good current practice, as nearly as possible,
but with a minimum of increase in the present Bank contribution rate.
He
4180 felt that the proposed 1 and 1-3/4 per cent formula for normal pensions
I
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4/7/64
was too heavily favorable to high-salaried, long-service personnel.
This difficulty had been solved, in his mind, by the Personnel Division's
suggestion of a 1 and 1-5/8 per cent formula, which would reduce the
addition to the Banks' contribution rate from 1.75 per cent (which would
be called for by the 1 and 1-3/4 per cent formula) to 1.60 per cent,
thus leaving some leeway for spouse's option and the post-retirement
death benefit.
He was not in favor of the cash payment of over $4
million to fund the latter benefit; he considered that such a payment
for the purpose of the post-retirement death benefit alone would be
hard to justify, even though the last time there had been an adjustment
in retirement benefits about $8.3 million had been paid.
He had a great
deal of sympathy with the exception taken by Governor Mills to providing
the death benefit on an insurance basis through the Retirement System.
It was a straight insurance matter that was incompatible with the basic
function of the Retirement System and ought to be handled by an insurance
company.
The tenor of further discussion was generally favorable to the
Prqosed $1,000 post-retirement death benefit, if financed through group
insurance under contract with an insurance company.
Mr. Johnson then commented on the proposed revision of the normal
Pension formula, which had been framed with a view to providing for
Pederal Reserve Bank retirees benefits at a level comparable to community
Pl'actice, including the thrift or profit-sharing plans typically included
iX1
the latter but not considered appropriate for adoption by the Federal
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4/7/64
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Reserve Banks.
He also commented on the alternative proposal of the
Division of Personnel Administration, which had in mind not only reasonable comparability with community practice, but also about the same degree
of improvement of benefits for all salary levels, it having been felt that
the 1 and 1-3/4 per cent formula would be unduly favorable to higher-salaried
employees.
There ensued a discussion of the structure, level, and sources
Of the proposed pension benefits as compared to those provided by Civil
Service and by current community practice.
During this discussion Governor Mitchell expressed the view that
comparison with community practice rather than with Civil Service benefits
Should be the primary guide.
Governor Daane observed that in the employment market the Reserve
Banks competed with organizations such as large banks and insurance
companies.
He asked whether the 1 and 1-3/4 per cent formula would be
On the rich side, from that standpoint, or would leave the Reserve Banks
Still somewhat on the short side.
Response was made that the formula
aPPeared to be possibly somewhat on the rich side.
Governor Mills suggested that the fundamental question had to do
with the appropriate pension for Federal Reserve Bank retirees and whether
it could be afforded.
At issue also was the question whether employees
of
°r long service and high salary should retire at a higher percentage
their "high-five" years of employment than did individuals with lower
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l'",04.1
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salaries.
A consideration bearing upon the latter question was that
Presumably those who received higher salaries contributed to the System
more in the way of capacity and energy than did their lower-paid associates.
Governor Balderston responded that the higher contribution of
personal capabilities was presumably recognized in the higher salaries
Paid such individuals year by year.
Governor Mills remarked that as a practical matter there would
be extremely few retirees at the highest salary levels who would have
forty years' service.
Governor Mitchell remarked that it would not bother him if the
Federal Reserve retirement plan was richer than average.
In his view,
the Federal Reserve should offer better retirement terms in order to
attract and keep people with high capabilities rather than to head for
mediocrity.
He wished the Reserve Banks were more competitive for
highly-qualified employees, and he did not see why the System's retirement
b
enefits should be less favorable than those offered by competing private
industries.
He regarded the present benefits as definitely unfavorable
in comparison with retirement plans of the larger commercial banks.
Governor Daane indicated that he had had several occasions to
°I3serva at first hand that Federal Reserve Bank retirement benefits were
ncst competitive with those offered by larger banks.
If the intent was
to attract capable people, or at least not to lose them, the 1 and 1-3/4
Per cent formula would not be out of line in terms of the current market.
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Governor Balderston commented that his recommendation that the
total benefit package be limited to 80 per cent of "high-five" average
salary was based partially on the thought that if criticism should be
leveled at Federal Reserve retirement benefits, he would want to feel
that his position was fortified by the stipulation of a ceiling in the
benefits formula.
Mr. Johnson then made explanatory comments on each of the remaining
Proposals.
Queries by members of the
Board, to which the staff responded,
indicated no particular disagreement as to the merits of proposals
(4),
(5), (7), and (8).
The ninth recommendation, which Mr. Johnson next discussed,
future
contemplated that after crediting income from investments at the
rate of 3-1/2 per cent and bringing reserve accounts to their prescribed
maximum, any accumulation of earnings be distributed under a dividend
plan to active members, pensioners and their beneficiaries, and the
employing Reserve Banks.
On a pro rata basis, the bulk of such a distri-
be added
bution would go to the contributing Banks, a small annuity would
actuarial
to the benefit of pensioners and beneficiaries on the basis of the
purchased
table, and active members would benefit by having a larger annuity
at retirement.
Mr. Buck favored this plan, believing that it might relieve
for increasing
some of the pressure that had been brought to bear in the rast
the benefits of those already retired because of rises in the cost of
living subsequent to retirement.
11
4/7/64
Mr. Johnson responded to several questions by members of the
Board relating to the proposed distribution of excess earnings, following
Which he commented on the recommendation of the Conference of Presidents
that a lump sum of approximately
$6
million be paid to the Retirement
System to fund accrued liabilities arising from the proposals.
Of this
sum, he noted, $4.1 ndllion was for the post-retirement death benefit,
for which the Division of Personnel Administration had suggested alternative
financing.
The meeting then recessed and reconvened at 2:30 p.m., with the
same attendance as at the morning session except that Chairman Martin
14as not initially present.
Governor Balderston, reverting to the discussion at the morning
session of the proposal to distribute excess Retirement System earnings,
noted that it had been suggested that instead of such distribution, any
excess earnings be allowed to continue to accumulate.
Governor Robertson asked why excess earnings should not be used
t° reduce the Reserve Banks' contributions.
Governor Mills commented that, once reserves had reached their
sPeoiried maximums (which he was inclined to consider over-sized), there
1418 a question as to where any further accumulation of earnings should
'
be aPPlied.
In his view, Governor Robertson had raised a real point.
48 Governor Mills understood it, adoption of the new mortality tables in
ffect gave credit to increased longevity without calling on members for
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increased contributions.
The heart of the present proposals was the
one to increase the normal pension formula from 3/4 and 1 per cent to
1 and 1-5/8 or to 1 and 1-3/4 per cent without at the same reducing the
rate of contributions by the Reserve Banks.
It seemed to him an important
consideration that the package of proposals, with the adjustments made
back and forth, including the spouse's benefit, and assuming that the
Post-retirement death benefit, if adopted, would be financed through
group life insurance, resulted in only a small increase in the Reserve
Banks' rate of contributions.
This was reassuring, but it was nonetheless
noteworthy that the Reserve Banks would not receive any benefit through a
reduction in
their contribution.
In his view, special care should be taken
to be sure that the benefits in the form adopted were merited in order to
bring the Federal Reserve Retirement System into reasonable conformance
with private pension and benefit plans and that they were also in reasonable
balance with Civil Service benefits.
Governor Shepardson raised the question why the cash payment that
would be necessary to fund accrued liability for the total benefit package
Should not be paid out of any accumulation of excess earnings, to which
Governor Mills responded that as a practical matter the excess of earnings
Over amounts needed for maintaining reserves would apparently be narrow.
lie continued with comments on the level of Retirement System reserves,
the extent to which they needed to be built to specified maximums, and
their past administration.
1183
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There followed a general discussion of such reserves and the
extent to which it was probable that excess reserves would be available
for distribution in the form of dividends, if such a course Should be
decided upon.
As to the first recommendation in the package of proposals, for
a post-retirement death benefit of $1,000, it was the unanimous view
that the proposal as submitted should be rejected, but with an indication
that the Board would consider a proposal to provide a similar benefit through
group insurance with a private carrier.
The second recommendation was then presented, proposing a normal
Pension formula of 1 per cent of salary up to $4,800 and 1-3/4 per cent
of salary above $4,800, for each year of creditable service; the alternative
Pr0Posed by the Division of Personnel Administration called for a formula
°f 1 and 1-5/8 per cent.
There ensued renewed discussion of comparisons
between the pensions that would be provided to Federal Reserve employees
under the two formulas and those provided under Civil Service retirement.
It was observed that there were relatively few retirees of long service
'
et
the lowest salary levels, due to normal age and advancement patterns.
It was
suggested also that employees in higher-salaried positions were
111°re unfavorably situated vis-a-vis opportunities in private industry,
even with the distribution of benefits under the 1 and 1-3/4 per cent
formula.
After further remarks, it was agreed to reserve proposal (2) for
cieelsion after Chairman Martin had joined the meeting.
1184
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Recommendations
(4), (5), and (7) were then presented, and
Board.
Unanimous approval of each was indicated by the members of the
No objection was expressed to recommendation
(8), which involved no
change in the Rules and Regulations of the Retirement System.
When proposal (6)
was presented, calling for removal of the
d
$25,000 limit on the active service death benefit, it was suggeste
that a vote be taken instead on the recommendation of the Division of
, but
Personnel Administration that the limit not be removed entirely
instead be increased to $40,000.
by the
Governor Mills indicated that he was somewhat bothered
relationship between this proposal and that in (5), spouse's benefit.
Under present benefits, the $25,000 maximum active service death benefit
an estate
131us group life insurance were in a sense intended to provide
that would care to a certain extent for an employee's family. Under the
new proposals, the spouse's benefit was directed toward the same purpose,
'which raised in his mind a question whether the maximum active service
death benefit should be increased to $40,000.
However, he considered
such a benefit more consistent with private pension plans; while Civil
Service retirement did not have it, it did have a
spouse's benefit. On
reservations.
balance, Governor Mills would approve, though with slight
the proposal.
Governor Robertson stated that he would vote against
Re would not remove the $25,000 limit, nor would he increase it to
$40,000.
a favorable
Governors Shepardson and Balderston having expressed
service death
P°sition, the proposal to increase the limitation on the active
118 -1
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4/7/64
benefit from $25,000 to $40,000 was approved, Governor Robertson dissenting.
Proposal (9), calling for a distribution of excess earnings of
the Retirement System, was unanimously rejected, although there was a
suggestion that the Board might be willing to have the question raised
again for consideration if and when there was a clear need for action.
At Governor Balderston's request, Mr. Sherman then commented on
procedures.
On a Retirement System matter of this kind, the positions
taken today normally would not constitute formal approval or disapproval;
the proposals considered favorably would be placed before the Trustees of
the Retirement System at their June meeting and would then be returned to
the Board for final action.
Certain action by the boards of directors of
the Reserve Banks also would be required.
There might also be a question,
he suggested, whether the Board would want to ask the Conference of
Presidents to study further the matter of the normal pension formula.
Chairman Martin joined the meeting at this point, and for his
information Governor Balderston reviewed the status of consideration of
the proposals.
Discussion then reverted to proposal (2), and Governor Mills
stated that he had no objection to the 1 and 1-3/4 per cent pension
r°r4141a.
However, if the Board majority was disposed to prefer the 1
4nd 1-5/8 per cent formula, that would also be acceptable to him.
Governor Robertson said that he would disapprove benefits that
'were
more generous than those provided by Civil Service.
He would approve
13r°Posals that would bring Federal Reserve Bank benefits up to Civil
36
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4/7/64
Service, but he considered the latter an adequate criterion.
He had
sympathy for the 1 and 1-5/8 per cent formula, because it would eliminate
one of the bases on which he otherwise disapproved, namely, that the
1 and 1-3/4 per cent formula would give relatively more favorable treatment to higher-salaried employees than to lower-salaried employees.
At
the conclusion of the discussion, if it took such a turn, he might want
to cast an affirmative vote for the 1 and 1-5/8 per cent formula, but
as of the moment he would simply disapprove the 1 and 1-3/4 per cent
fOrMula.
Governor
Shepardson expressed himself in favor of the 1 and 1-3/4
Per cent formula, modified to specify the 80 per cent ceiling on total
benefits as suggested by Governor Balderston.
Governors Mitchell and
Deane also indicated that, if voting, they would favor the 1 and 1-3/4
Per cent formula.
Governor Balderston stated that he would favor the 1 and 1-5/8
Per cent formula on the basis that it would tend to equalize the improvement of benefits for high- and lower-salaried employees.
Governor Mitchell then withdrew from the meeting.
Chairman Martin stated that he would vote for the 1 and 1-3/4 per
cent formula.
As to other proposals that had been voted on in his absence,
he joined in the majority position.
After further discussion, Governor Balderston's suggestion for
a limitation on total retirement allowance to 80 per cent of final average
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4/7/64
salary was accepted, with the understanding that the calculation would
exclude any supplemental benefits the employee might purchase for himself.
The positions taken by the Board on the proposals submitted for
its consideration by the Presidents' Conference therefore were as stated
in the letter written to the Chairman of the Conference on April 10, 1964,
4
copy of which is attached to these minutes as Item No. 1.
were taken with Governors Mitchell and Daane abstaining.
These positions
As to the other
members of the Board, the position stated in the letter on each proposal
reflected unanimous agreement, except that (1) Governors Balderston and
Robertson dissented from indicating that the Board would approve an
increase in the normal pension formula to 1 per cent of the first $4,800
°f final average salary plus 1-3/4 per cent of the excess of such final
average salary for each year of creditable service, and (2) Governor
Robertson dissented from indicating that the Board would approve an
increase from $25,000 to $40,000 in the maximum benefit provided in
case of death in active service.
It was understood that the Board therefore would not interpose
Objection to the cash payment necessary to fund the accrued liability
resulting from amendments to the Rules and Regulations of the Retirement
System to effectuate the proposals that it had been indicated the Board
'
4°11-14 approve.
fell"
It was further understood that the Board's Annual Report
1964 would reflect the fact that such a payment had been made.
It was noted that the Conference of Presidents had also considered
and
rejected several other retirement benefit proposals, and the suggestion
V7/64
-21-
was made that the Conference might like to have an expression as to
whether the Board concurred in those rejections.
It was agreed that it
would be indicated that the Board had noted the rejected proposals and
had no comment.
Governor Robertson, however, stated that he would have
been in favor of one of the rejected proposals, providing for early
retirement at less than full actuarial discount.
In his view such a
provision, similar to one included in Civil Service benefits, was of
interest to many Federal Reserve employees.
Messrs. Johnson, Sprecher, and Hart then withdraw.
Question under section 32 (Items 2 and 3).
On March 27, 1964,
the Board deferred for further consideration when more members of the
Board would be available a distributed memorandum dated March 24, 1964,
from the Legal Division, regarding the application of section 32 of the
Banking Act of 1933 to service by Robert W. Winthrop as a director of
Pirst National City Bank of New York and as a partner in the firm of
Wood Struthers & Winthrop, New York, New York.
A detailed analysis of
the underlying circumstances was contained in the memorandum, on the
basis of which the Division recommended a finding that Mr. Winthrop's
service as a director of a member bank was prohibited by law.
A draft
Of letter to the Federal Reserve Bank of New York was attached to the
memorandum.
The Division also suggested that, if the Board adopted the
rec°11mendation, the substance of the letter be published in the Federal
Register and the Federal Reserve Bulletin.
1189
4/7/64
-22After discussion, the letter was approved unanimously, with the
understanding that its substance would be published as suggested.
A
copy of the letter is attached as Item No. 2, and a copy of the ruling
as published in the Federal Register is attached as Item No.
3.
The meeting then adjourned.
Secretary's Note: Pursuant to recommendations contained in memoranda from appropriate
individuals concerned, Governor Shepardson
today approved on behalf of the Board the
following actions relating to the Board's
staff:
Atp_21aLlillaL
Helen O. Cooke as Statistical Clerk, Division of Research and
S
tatistics, with basic annual salary at the rate of $4,495, effective
the date of entrance upon duty.
Mack Richardson Rowe as Chief, Economic Graphics Section, Division
of Data Processing, with basic annual salary at the rate of $9,980,
effective the date of entrance upon duty.
Salar
increases
effective A ril 12
Name and title
1964
Division
Basic annual salary
To
From
Office of the Secretary
Zoe Gratsias, Secretary
$ 6,285
$
6,46o
Legal
Cora
Lee
Hatch, Legal File Clerk
6,110
6,285
4,355
4,690
4,495
4,85o
7,260
7,490
Research and Statistics
rzSuzanne31k Bosworth, Statistical Clerk
D. Courtright, Statistical Assistant
ear, C. King, Technical Editor
4/7/64
-23-
§2.1aryLInamp.ses, effective April 12, 1964, (continued)
Name and title
Division
Basic annual salary
To
From
International Finance
Thomas M. Klein, Economist
$12,495
$12,880
12,110
12,110
12,110
12,495
12,495
12,495
3,305
3,515
8,180
3,410
3,620
8,410
Examinations
Robert F. Achor, Review Examiner
John N. Lyon, Review Examiner
John M. Poundstone, Review Examiner
Administrative Services
John C. Chisolm, Cafeteria Laborer
Virginia F. Gums, Charwoman
Mary E. Sanders, General Assistant
Secretary
1191
BOARD OF GOVERNORS
Item No. 1
4/7/64
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
April 10, 1964.
cONFIDENTIAL (FR)
Mr. Alfred Hayes, Chairman,
Conference of Presidents of the
Federal Reserve Banks,
Federal Reserve Bank of New York,
New York, New York. 10045
Dear Mr. Hayes:
The Board of Governors has given consideration to the action
of the Conference of Presidents, as reported in your letter of
January 31, 1964, in approving recommendations of its Subcommittee on
Personnel contained in the Subcommittee's November 25, 1963, report
e ntitled "Study of the Retirement System
of the Federal Reserve Banks
and Related Fringe Benefits." The action of the Conference of Presidents was reported in greater detail in the minutes of a special
meeting held on January 28, 1964, which minutes were also before the
Board.
The Board is prepared to approve amendments to the Rules
and Regulati
ons of the Retirement System of the Federal Reserve Banks
at would carry out certain
of the proposals of the Conference of
'
residents as set forth hereafter, provided they are
modified as indiate-u, in
this letter and are approved in such modified form by the
oard of Trustees. These would include
actions to:
(1) Increase the normal pension formula, including
Special Service retirement on an actuarial equivalent basis,
to 1 per cent
of the first $4,800 of final average salary plus
1-3/4 per cent of the excess of such final average salary for
each year of creditable service,provided
that a maximum limitation of 80 per cent of final average salary is placed on the
total allowance of any retiree at time of retirement, including
Pension (before optional modification, conversion, or actuarial
reduction
), normal annuity, and total Social Security benefit
but excluding additional annuities provided by the member's
v°1nntary contributions. Approval would also include an increase in the disability pension formula to 1-1/2 per cent of
final average salary for each year of creditab
le service with
a minimum of 30 per cent of final average salary.
1192
Mr. Alfred Hayes
- 2
(2) Integrate the salary break point used in the
normal pension formula with Social Security by raising such
break point from $4,200 to $4,800.
(3) Establish a spouse's benefit in the case of
death in active service, permitting the surviving widow or
dependent widower to have the option of selecting the normal
benefits provided for death in active service by the Retirement System or, in lieu thereof, a life pension equal to that
Which would be received by such survivor had the employee retired on the date of death and selected the 50 per cent joint
and survivorship option.
(4) Remove the $25,000 maximum now applicable to
the death benefit provided by the Retirement System in the
case of death in active service, provided that a new maximum
of $40,000 is established.
(5) Provide an optional benefit on deferred retirement by permitting an employee who retires after attaining
age 50 with at least 10 years of service and elects to defer
Payment of his allowance to elect either a 100 per cent or a
50 per cent joint and survivorship option under which the
beneficiary would receive the same benefit payable on the
pensioner's death as would have been payable had he elected
such option on an immediate retirement allowance at the time
of his retirement.
In acting on the foregoing proposals, the Board did so with
the understanding that the accrued liability resulting from the
ad°Ption of
any such amendments would be discharged by a lump sum
1
.'aYment
by the Federal Reserve Banks to the Retirement System. The
rard noted without objection the plan to make such amendments effecive July 1, 1964, when new rates of contribution by the employing
tanks would be established.
Two of the proposals of the Conference of Presidents relating to
the Retirement System were not considered favorably:
(1) The Board is not prepared to approve a proposal
for the establishment within the Retirement System of a $1,000
Post -retirement death benefit. However, the Board would consider a proposal to make available such a death benefit (with
the qualifying requirements as stipulated in the recommendation .
of the Presidents' Subcommittee on Personnel), provided at a
reasonable rate on a group life insurance basis through an insurance company.
Mr. Alfred Hayes
- 3 -
(2) The Board is not prepared, at this time, to
approve a proposal for distribution of excess earnings of the
Retirement System.
Since the Board of Governors previously advised the Conference of Presidents, by letter dated February 17, 1964, that it (1)
interposed no objection to the adoption by the Retirement System of
the mortality tables identified as the 1951 group annuity tables
using a two-year setback for women; (2) concurred in the principle
that annuities of present members of the Bank plan should not be
reduced as a result of the adoption of these tables; and (3) approved increasing the regular rate of interest from 3 to 3-1/2 per
cent, no further Board action is necessary on these matters.
One of the proposals of the Conference of Presidents does
not concern benefits provided by the Retirement System; namely, to
require five years of creditable service in the case of employees
hired after the adoption of this change and retiring at age 65 in
order for them to be eligible for payment by the employing Banks of
two-thirds of the share of premiums for hospitalization, surgical,
and major medical coverage, and apply the "rule of 80" to determine
the eligibility of Special Service retirees, including those already
retired, for such payments. The Board approves this proposal, and a
revision of the Board's outstanding letters to the Reserve Banks, as
contained in the loose-leaf service, is being prepared for early
di
stribution.
In its consideration of the foregoing matters, the Board
noted that the Conference of Presidents at its special meeting on
January 28 had reviewed a number of suggested changes in the Retirement System that had been considered but not recommended by its
Subcammittee on Personnel. The Board has no comment to make with
respect to these changes.
Very truly yours,
(
Merritt yfrmai),
Secretary.
c.c.:
Mr. Frederick L. Deming
Mr. Marcus A. Harris
Mrs. Valerie R. Frank
Mr. Thomas A. Timien, Jr.
Item No. 2
BOARD OF GOVERNORS
4/7/64
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
April 8, 1964.
Mr. Howard D. Crosse, Vice President,
Federal Reserve Bank of New York,
New York, New York. 10045
Dear Mr. Crosse:
This refers to your letter of October 3, 1963, in which
You called the Board's attention to the possibility that section 32
°I the Banking Act of 1933 ("section 32") might prohibit the interlocking service of Mr. Robert W. Winthrop as a director of First
National City Bank of New York and as a partner in the firm of Wood
S truthers
& Winthrop ("Partnership"), successor to two partnerships,
bert Winthrop & Co. ("Winthrop"), and Wood, Struthers & Co.
( S truthers"), all located in New York City.
%
As described below, a corporate affiliate ("Corporation")
°f Partnership has been formed, the stock in which is owned by the
Partners other than Mr. Winthrop in proportion, allowing for
• Winthrop's absence, to their respective partnership interests.
u also point out that the practice of forming corporate affiliates
uf brokerage firms, in order that the affiliates may carry on an
hnderwriting business with limited liability and other advantages,
aa become rather widespread in recent years, and that other cases
ilslaY arise where a partner in such a firm may desire to serve at the
ame time as director of a member bank.
r
The Winthrop partnership had been the subject of periodic
by your Bank for several years, and had been found not to be
reviews4
13;;"`marily engaged in business of the kinds described in section 32
(
tion 32 business"). The Struthers partnership was determined
cls"c
be so engaged in 1948, and the indication was that the firm had
co
ntinuedn
to be so engaged since that time.
On October 30, 1962, Mr. Winthrop's attorney submitted to
Board's staff a draft memorandum on a proposal by the Winthrop
Partnership
to acquire the stock of a securities corporation with a
eli,ew to obtaining staff views on whether the partnership, in such
v
'
neent, should be regarded as "primarily engaged" in section 32 busiee!a, with the result that Mr. Winthrop would be forbidden by that
ction and by the Board's Regulation R to continue to serve as
the
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Hr. Howard D. Crosse
-2-
director of a member bank. The memorandum stated that to the extent
Possible, separate quarters would be provided for the proposed corporation, separate personnel employed, and only certain members of
the partnership, not including Mr. Winthrop, would serve as officers
and directors of the corporation. Despite these measures, the
Board's staff felt that the partnership probably should be regarded
as so engaged if the proposal were carried out, and advised
Mr. Winthrop's attorney informally of this conclusion.
Subsequently, a somewhat altered proposal was put into effect.
BY arrangement with the Struthers partnership, a corporate affiliate of
that partnership, Corporation, with the legal title of Woad, Struthers &
Co., Inc., was formed, and the underwriting business formerly carried on,
by Struthers was transferred to Corporation. The two partnerships then
merged to form Partnership, and stock in Corporation was acquired by
the partners other than Mr. Winthrop. Two of the three directors and
some" of the principal officers of Corporation are partners in Partnership (although Mr. Winthrop is neither a director nor an officer
Of Corporation). Mr. Winthrop's attorney gave him a written opinion
(a copy of which was enclosed with your letter) to the effect that,
under this arrangement, Mr. Winthrop would not himself be engaged in
section 32 business, a conclusion with which the Board agrees. The
letter continued, however, by stating that:
"There remains, then, only the question whether
the Partnership can be said to be engaged in the
securities business to such an extent that it would
be improper for you to act as a member thereof [while
remaining a director of a member bank]. While it is
impossible to predict precisely how the Board of Governors of the Federal Reserve System would interpret
Section 32, particularly with reference to the relationship between the Partnership and the Corporation,
it is my view that the facts described above do not
warrant the conclusion that the Partnership is engaged
in activities prohibited to a bank director by Section 32."
The Board agrees that the material question is whether the
relationship
between Partnership and Corporation is such that the two
onld be regarded as a single entity for purposes of section 32. You
'
11,1 recall that under the language of the section, ". . . no partner
• • of any partnership
primarily engaged in the issue, flotation,
.
Ltiritiderwr
iting, public sale, or distribution, at wholesale or retail, or
_ r°11811 syndicate participation, of stocks, bonds, or other similar
:
0 c urities,
shall serve at the same time as . . . [a] director . . . of
vri.lY member bank . .", with certain exceptions not applicable here. In
4 eW of the fact that Corporation is admitted to be "primarily engaged"
a.11 section 32 business, a finding that the two are one entity for the
!
urPoses of the statute would mean that Mr. Winthrop would be forbidden
Lo serve as director of a member bank, if the one entity is so engaged.
n
1196
BOARD
OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Howard D. Crosse
-3-
Rule 321 of the New York Stock Exchange ("the Exchange")
governing the formation and conduct of affiliated companies of member
°rganizations is material to the decision of this question. Under
Paragraph .15 of that
rule:
"Since Rule 314 provides that each member and
allied member in a member organization must have a
fixed interest in its entire business, it follows that
the fixed interest of each member and allied member
must extend to the member organization's corporate
affiliate. When any of the corporate affiliate's participating stock is owned by the members and allied '
members in the member organization, such holdings must
at all times be distributed among such members and
allied members in approximately the same proportions
as their respective interests in the profits of the
member organization. When a member or allied member's
interest in the member organization is changed, a
corresponding change must be made in his participating
interest in the affiliate."
Although you have been informed that Mr. Winthrop received
Pecial permission from the Exchange not to own any of the stock of Cor:
ration, it appears that the rule would apply to the remaining partners.
:reover, other paragraphs of the rule forbid transfers of the stock,
:
cePt under certain circumstances to limited classes of persons, such
employees of the organization or estates of decedent partners, without
v'rmissio n of the Exchange.
e
the history of the transaction described in your letter
n„ , From
of -LLoner
3, 1963, and in the opinion letter enclosed therewith, it is
clear
that Corporation was formed in order to provide Partnership with
"underwriting arm". Rule 321 of the Exchange makes it clear that the
b:tners (other than Mr. Winthrop) are required to own stock in Corporation
leause of
their partnership interest, would be required to surrender
b,at stock on leaving the partnership, and that incoming partners would
erequired to acquire such stock. It is significant that Rule
321.15
ile_aks of a corporate affiliate such as Corporation as a part of the
utire business" of
a member organization.
j
4
On the basis of the foregoing, the Board concludes that
artner
l'
ente
-siap and Corporation must be regarded as a single entity or
rPrise for purposes of section 32.
The remaining question is whether the enterprise, as a whole,
should be
lett
regarded as "primarily engaged" in section 32 business. A
you er of March 17, 1964, from Mr. Winthrop, enclosed with a letter from
Bank of March 18, states that the total dollar volume of section 32
:
bu
-ness of Corporation during the first eleven months of its operation
BOARD
OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Howard D. Crosse
-4-
was $88.96 million. The gross income from section 32 business was
$0.37 million, and represented about 7.9 per cent of the income of
Partnership. Staff of your Bank has advised the Board's staff informally that the size of the section 32 income of Corporation is .
due to special costs, and to the condition of the market for municipal
and State bonds during the past year, a field in which Corporation
specializes. Corporation is listed in the directory of North American
Securities Dealers, and holds itself out as having separate departments
to deal with the principal underwriting areas in which it functions.
In view of the above information, the Board concludes that
the enterprise consisting of Partnership and Corporation is "primarily
engaged" in section 32 business. Accordingly, the partners in Partnership, including Mr. Winthrop, are forbidden by that section and by
the Board's Regulation R to serve as officers, directors, or employees
Of any member banks.
It will be appreciated if your Bank will advise Mr. Winthrop
and his counsel of the views of the Board, and supply them with copies
of this letter. Two copies are enclosed for your convenience. You may
also wish to advise Mr. Winthrop and his counsel that the substance
°f this letter will be published as an interpretation of the Board in
the Federal Reserve Bulletin and the Federal Register.
Very truly yours,
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.
Enclosures
TITLE 12 - BANKS AND BANKING
Item No.
3
4/7/64
CHAPTER II - FEDERAL RESERVE SYSTEM
SUBCHAPTER A - BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[Reg. R]
PART 218 - RELATIONS WITH DEALERS IN SECURITIES
UNDER SECTION 32, BANKING ACT OF 1933
Securities Affiliate of Brokerage Firm
i 218.108
Interlocking relationship involving securities affiliate
of brokerage firm.
(a) The Board of Governors was asked recently whether section 32
of the Banking Act of 1933 ("section 32"), 12 U.S.C. § 78,prohibits
the interlocking service of X as a director of a member bank of the
Federal Reserve System and as a partner in a New York City brokerage
firm ("Partnership") having a corporate affiliate ("Corporation")
engaged in business of the kinds described in section 32 ("section 32
business”).
(b) Section 32, subject to an exception not applicable here,
Provides that "No officer, director, or employee of any corporation
or unincorporated association, no partner or employee of any partnerShip, and no individual, primarily engaged in the issue, flotation,
underwriting, public sale, or distribution, at wholesale or retail,
°I. through syndicate participation, of stocks, bonds, or other
similar securities, shall serve the same time as an officer, director,
or employee of any member bank .
•
•
•
(c) From the information submitted it appears that Partnership,
4
member firm of the New York Stock Exchange, is the successor of two
prior partnerships, in one of which X had been a partner.
This prior
1199
-2-
Partnership had been found not to be "primarily engaged" in section 32
business.
The other prior partnership, however, had been so engaged.
BY arrangement between the
two
prior firms, Corporation was formed
chiefly for the purpose of carrying on the section 32 business of the
prior firm that had been "primarily engaged" in that business, which
business was transferred to Corporation.
The two prior firms were
then merged, and the stock of Corporation was acquired by all the
partners of Partnership, other than X, in proportion to the respective
Partnership interests of the stockholding partners.
The information
submitted indicated also that two of the three directors and "some"
of the principal officers of Corporation are partners in Partnership,
although X is not a director or officer of Corporation.
(d) It is understood that the practice of forming corporate
affiliates of brokerage firms, in order that the affiliate may carry
on the securities business (such as section 32 business) with limited
liability and other advantages, has become rather widespread in
recent years.
Accordingly, other cases may arise where a partner in
such a firm may desire to serve at the same time as director of a
member bank.
(e) On the basis of the information presented, the Board concluded
that x,
in his capacity as an "individual", was not engaged in
section 32 business.
However, as that information showed Corporation
to be "primarily engaged" in section 32 business, the Board stated
that a finding that Partnership and Corporation were one entity for
the purposes of the statute would mean that X would be forbidden to
-3-
serve both the member bank and Partnership, if the one entity were
so engaged.
(f) Paragraph .15 of Rule 321 of the New York Stock Exchange
governing the formation and conduct of affiliated companies of
member organizations states that:
"Since Rule 314 provides that each member and
allied member in a member organization must have a
fixed interest in its entire business, it follows that
the fixed interest of each member and allied member
must extend to the member organization's corporate
affiliate. When any of the corporate affiliate's participating stock is owned by the members and allied
members in the member organization, such holdings must
at all times be distributed among such members and
allied members in approximately the same proportions
as their respective interests in the profits of the
member organization. When a member or allied member's
interest in the member organization is changed, a
corresponding change must be made in his participating
interest in the affiliate."
(g) Although it was understood that X had received special
Permission from the Exchange not to own any of the stock of Corporation,
Lt appeared to the Board that Rule 321.15 would apply to the remaining
Partners.
Moreover, other paragraphs of the Rule forbid transfers of
the stock, except under certain circumstances to limited classes of
persons, such as employees of the organization or estates of decedent
Partners, Without permission of the Exchange.
(h) The information supplied to the Board clearly indicated that
Corporation was formed in order to provide Partnership with an
underwriting
arm".
Under Rule 321 of the Exchange, the partners
(other than X) are required to own stock in Corporation because of
their partnership interest, would be required to surrender that stock
-4on leaving the partnership, and incoming partners would be required to
acquire such stock.
Furthermore, Rule 321 speaks of a corporate
affiliate, such as Corporation, as a part of the "entire business" of
a member organization.
(i) On the basis of the foregoing, the Board concluded that
Partnership and Corporation must be regarded as a single entity or
enterprise for purposes of section 32.
(j) The remaining question was whether the enterprise, as a
Whole, should be regarded as "primarily engaged" in section 32 business.
The information presented stated that the total dollar volume of
section 32 business of Corporation during the first eleven months of
its operation was $89 million.
The gross income from section 32
business was less than half a million, and represented about 7.9 per
cent of the income of Partnership.
The Board was advised that the
relatively low amount of income from section 32 business of Corporation was due to special costs, and to the condition of the market for
municipal and State bonds during the past year, a field in which
Corporation specializes.
Corporation is listed in a standard
d irectory of securities dealers, and holds itself out as having
separate departments to deal with the principal underwriting areas
in which it functions.
(k) In view of the above information, the Board concluded that
the
enterprise consisting of Partnership and Corporation was
"Primarily engaged" in section 32 business.
Accordingly, the Board
stated that the partners in Partnership, including X, were forbidden
I202
by that section and by this Part 218 (Reg.
the statute, to serve as officers
issued pursuant to
directors, or employees of any
member banks.
(12 U.S.0
78)
Dated at Washington, D. C., this 9th day of April, 1964.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
(SEAL)
ed.) Merritt Sherman
ritt Sherman,
Secretary.
@FedFRASER