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Mi tes of actions taken by the Board of Governors of the , al Reserve System on Monday, August 1), 1949. PRESENT: Mr. Eccles Chairman pro tem. Mr. Draper Mr. Clayton Mr. Mr. Mr. Mr. Carpenter, Secretary Hammond, Assistant Secretary Morrill, Special Adviser Thurston, Assistant to the Board Memorandum dated August 1' 1949, from Mr. Leonard, Director Of ulle Division of Bank Operations, recommending the appointment of 4'8 it. IJnderwood, Jr., as an analyst in that Division, with basic q.rY at the rate of $3,351 per annum, effective as of the date upon he enters upon the performance of his duties after having passed the 81L41 Physical examination. Approved unanimously. or Memorandum dated August 12, 1949, from Mr. Bethea, Director 'She D ivision of Administrative Services, recommending the appointAlThreY Lake Simmons as a laborer in that Division on a tempobasis for a period of two months, with basic salary at the rate or$2 ' °20 per annum, effective as of the date upon which he enters 111)4 the Performance of his duties after having passed the usual physicAl inati0n. Approved unanimously. Letter to Mr. Hill, Vice President of the Fede al Reserve Bank 4delPhia, reading as follows: M5/49 -2- "Reference is made to your letter of August 8, 1949, submitting the request of Wilmington Trust Company, Wilmington, Delaware, for permission to establish a branch in Greenville, Delaware. "It is understood that approval of the appropriate State authorities has been obtained, and in view of your recommendation, the Board of Governors approves the estabil:ishment and operation of a branch in Greenville, Delaware, u37. Wilmington Trust Company, Wilmington, Delaware, prosuch branch is established within twelve months of the date of this letter and with the understanding that CoUnsel for the Reserve Bank will review and satisfy him• as to the legality of the steps taken to establish the branch." Approved unanimously. Letter to Mr. Williams, President of the Federal Reserve Bank or ?hiladelphia, reading as follows: i • "This is in reply to your letter of August 1 regardthe Proposed air conditioning of the Bank building. noted that a preliminary study made in mid-1948 :,Iclicated that the cost of completing air conditioning for 'ne entire building would be approximately $700,000. , "As requested in your letter, the Board authorizes , '1°11r Bank to proceed with the preparation of more deled plans and specifications for the air conditioning ir the building. It is understood that before entering • anY commitment to proceed with the installation you submit the matter to the Board on the basis of the t'roPosed plans and specifications and more definite in“pr mation as to costs.” Approved inlnimously. Letter to Mr. Wayne, Vice President of the Federal Reserve r Richmond, reading as follows: tial, This refers to the purchase in May 1948 of substan-LY all the stock of Eastern Insurance Company by Dean4(3',, 1 Company, a wholly owned subsidiary of The City Bank "eshington, Washington, D. C., reported in the reports Li, 8/15/49 Of examination of the bank as of June 17, 1948, and JanIlarY 17, 1949, and discussed in Mr. Wallace's letter of March 22, 1949, to Mr. Baumann, of the Board's staff. "All of the stock of Deanwood Company was owned by The CitY Bank of Washington when the bank was admitted to mem12ersh1p in 1940. Deanwood Company was organized in 1934 co hold the assets of one of the bank's borrowers who was engaged in real estate ventures and, following the borrower's death, the bank acquired the stock of the company as the result of debts previously contracted. When the bank was admitted to membership, the assets of Deanwood Company consisted of real estate, real estate loans, Government securities, and cash. In addition to managing its real ?state and real estate loans, the company was acting as an -insurance agent engaged principally in placing insurance on alltcmobiles securing loans made by the bank; and the coinhas continued to engage in that business since the 4k I S admission to membership. The management and operaof Deanwood Company have been closely integrated with hose of the bank, with the company being operated in effect s a part of the bank. The bank was not required by law ° dispose of the stock of the company before its admis2-Lon to membership, and this was not required by the Board ac.8 a condition of membership since it appeared that the b°111Pany was not performing any functions which might not le Properly performed by a member bank and, as set out beany changes in the corporate powers exercised by the e 2,111PanY were restricted by one of the standard conditions " Membership. "The Purchase of the stock of Eastern Insurance Cornby Deanwood Company in May 1948 was, in substance, ti;e Purchase by the bank of corporate stock which, under 5e law, a State member bank is not permitted to purchase. ion 9 of the Federal Reserve Act and section')136 of t Revised Statutes prohibit the purchase by a State mem'be r bank of corporate stocks other than those which may be 1)1eIrchased by national banks. The Board so construed the tinent statutory provisions in a ruling published in the p; seu-eral Reserve Bulletin for July 1933 at page 449 (F.R.L. si #7080) and it has consistently adhered to this position. 0 , 11ce a national bank could not legally purchase the stock Eastern Insurance Company, The City Bank of Washington, a State member bank, was prohibited from doing so. The '._'rchase of the stock by a wholly owned subsidiary was con' j e.rY to the spirit and purposes of the law, and the facts j Z "and circumstances Circumstances of this case appear to afford ample Justification for disregarding the corporate fiction and holding that the stock was purchased by the bank in violation of the law. "Apart from the limitations prescribed by law, the PUrchase of the stock without the Board's permission was Prohibited because it violated a condition of membership accepted by the bank when it was admitted to membership. The bank was admitted subject to standard condition of memoership numbered 1 which reads as follows: '1. Such bank at all times shall conduct its business and exercise its powers with due regard to the safety of its depositors, and, except with the Permission of the Board of Governors of the Federal Reserve System, such bank shall not cause or permit any change to be made in the general character of its business or in the scope of the corporate powers exercised by it at the time of admission to membership.' "In its letter of June 29, 1940, to The City Bank of 1.43.81,• 4,-angton, approving the bank's application for membership, :le u Board stated that if the bank, directly or through Deanrod Company, should desire to exercise any corporate powers :hich were not being exercised when the bank was admitted membership, it would be necessary under this condition Membership for the bank to obtain the Board's permission. ;he pertinent paragraph of the Board's letter read as fol.Lovs: 'It appears that the bank possesses certain Powers which are not being exercised and which are not necessarily required in the conduct of a banking business, such as the power to "guarantee, or become surety in respect of the stock, bonds, or other securities and obligations of other comPanies." Also in this connection it is understood that the bank's wholly owned subsidiary, the Deanwood company, exercises no powers which the bank itself is not empowered to exercise. Attention is invited to the fact that if the bank, directly or through the subsidiary, should desire to exercise exY powers not actually exercised by the bank at the time of its admission to membership, it will be necessary under condition of membership numbered 1 to obtain the permission of the Board of Governors before exercising them. It is assumed, of course, t 1379 -5"'that there has been no change in the scope of the corporate powers exercised by the bank or the comPany since the date of the bank's application for membership.' "Eastern Insurance Company is an insurance underwriting company with broad powers to write fire, marine, and casualty insurance. This is, of course, an entirely different type of business from that of an insurance agent or broker such as was being conducted by Deanwood Company when The City Bank of Washington was admitted to membership; and, the Board's opinion, it is not a business in which a °Wak should be engaged. Under the above-quoted condition °f membership, as construed in the Board's letter approving the bank's application for membership, The City Bank of nshington was required to obtain the Board's permission cefore it organized Eastern Insurance Company and purchased Ubstantially all of its stock through Deanwood Company and, hus, undertook to operate an insurance underwriting busi.!". The Board's permission was not obtained; and, had ; 141Ile matter been submitted to the Board, such permission °uld not have been granted. "It is understood that, prior to the purchase of the sto 1, of Eastern Insurance Company, the president of the ;1111ber bank took the matter up with your Bank and was adthsed, as he had been in connection with earlier inquiries, t Itt Your Bank knew of no law or regulation which restricT,ed the investments which might be made by Deanwood CornHowever, the matter was not submitted to the Board ;7 its permission was not obtained as required by the conti°n of membership. While it is unfortunAte that no (.0_Vection was expressed when the matter was brought to your a Ilk's attention, the Board does not feel that it can con8°ne the continued ownership of the stock of Eastern Inblulrance Company and the operation of an insurance underwriting thsiness by the bank. Accordingly, it is the Board's view ariat the bank should dispose of the stock of Eastern Insur, ce Company as promptly as practicable; and it will be 4 4reciated if you will so advise the bank. Th It also appears from the report of examination of be :City Bank of Washington as of January 17, 1949, that the.400d Company had purchased and then held 600 shares of st common stock of Potomac Electric Power Company. If this ! ek is still held by Deanwood Company, the Board believes th -'t Prompt disposition should also be made of it." Z Aprroved unanimously.
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