Full text of Minutes of the Board of Governors of the Federal Reserve System : Meeting Minutes, December 4, 1956, Volume 43, Part 7

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

The attached set of minutes of the
Board of Governors of the Federal Reserve System
on December 4, 1956, has been amended at the
request of Governors Mills and Robertson to revise the reasons set forth for their opposition
to the adoption of the revised Regulation K. The
changes appear on page 15 and on pages 35 through
14.3.
The minutes also have been amended at
the request of Governor Szymczak to incorporate
in full, rather than by reference, his memorandum
of November 19, 1956, commenting on proposed amendments to the draft revision of Regulation K. The
memorandum appears in the minutes beginning on
page 2.
If you approve these minutes as amended,
please initial below.




Governor Szymczak
Governor Mills
Governor Robertson

Minutes for December 4, 1956

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 proposed to place in the record of policy
actions required to be kept under the provisions of Section
10 of the Federal Reserve Act an entry covering the item in
this set of minutes commencing on the page and dealing with
the subject referred to below.
Page 2 Revision of Regulation K, Corporations Doing Foreign Banking
or Other Foreign Financing Under
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, if you were present at the meeting,
please initial in column A below to indicate that you approve
the minutes. If you were not present, please initial in column B below to indicate that you have seen the minutes.
A
Chin. Martin
Gov. Szymczak
lAov. Vardaman
Gov. Mills
Gov. Robertson

x

Gov. Balderston
Gov. Shepardson
1/ The attached set of minutes was sent to Governor Vardaman's office in
accordance with the procedure approved at the meeting of the Board on
November 29, 1955. The set was returned by Governor Vardaman's office
with the statement (see Mr. Kenyon's memorandum of February 12, 1957)
that hereafter Governor Vardaman would not initial any minutes of meetings of the Board at which he was not present. Therefore, with Governor
Shepardsonis approval, these minutes are being filed without Governor
Vardaman's initial.



2511
Minutes of actions taken by the Board of Governors of the Federal Reserve System on Tuesday, December

4, 1956. The Board met in the

Board Room at 10:00 a.m.
PRESENT: Mr.
Mr.
Mr.
Mr.
Mr.
Mr.

Martin, Chairman
Balderston, Vice Chairman
Szymczak
Mills
Robertson
Shepardson
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.

Mr.

Carpenter, Secretary
Sherman, Assistant Secretary
Fauver, Assistant Secretary
Vest, General Counsel
Young, Director, Division of
Research and Statistics
Marget, Director, Division of
International Finance
Sloan, Director, Division of
Examinations
Solomon, Assistant General Counsel
Goodman, Assistant Director, Division of Examinations
Tamagna, Consultant on Savings
Statistics in the Division of Research and Statistics
Furth, Chief, Financial Operations
and Policy Section, Division of International Finance.

There had been circulated to the members of the Board a letter
to the Presidents of all Federal Reserve Banks reading as follows:
Since the enactment of the Bank Holding Company
Act of 1956, which provides criminal penalties for violation of its provisions or any regulation or order of
the Board, questions have been informally raised as to
the proper procedure to follow with respect to reports
of violations to the Department of Justice, including
local United States Attorneys and the Federal Bureau of
Investigation.
Since violations of the Bank Holding Company Act
would be misdemeanors under the United States Criminal
Code, the procedure for reporting such violations would
be the same as that set forth in the Board's letter of




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-2-

August 19, 1948 (F.R.L.S. #6503). As you know, that
letter states that the Federal Reserve Banks in the
exercise of sound discretion should report or not
report misdemeanors after giving consideration to the
question whether the making of such report would be
desirable or undesirable in the public interest or
would serve any useful purpose in view of the importance of the case and all its facts and circumstances.
Although the Board has no reason to believe that
any of the Federal Reserve Banks have considered existing reporting procedures as not applicable with respect
to violations of the Bank Holding Company Act, it is
believed that this statement of the Boardts position
is desirable in the interest of uniform treatment of
such cases throughout the System.
Approved unanimously.
In accordance with the understanding reached at the meeting on
October 15, 1956, the Board resumed its consideration of the proposed
revision of Regulation K, "Corporations Doing Foreign Banking or Other
Foreign Financing Under the Federal Reserve Act."

As a basis for this

discussion, there had been sent to the members of the Board copies of
a memorandum dated November 19, 1956, from Governor Szymczak reading
as follows:
This memorandum comments upon the proposed amendments to the draft revision of Regulation K that were
distributed by Governor Robertson on October 15 in accordance with his statement of September 13 and his
presentations to the Board on those dates.
1.

Paying Agent

Governor Robertson's proposal would eliminate in
Section 6(a) the authority for an Edge Banking Corporation to act as paying agent in the United States with
respect to foreign securities.
It may be noted that the Special Committee had recommended against the exercise of paying agent functions
by an Edge Banking Corporation in the United States
(p. 158 of Report). This power was included in the



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-3-

draft revision on the basis of a submission by Bank of
America, concurred in by our Division of Examinations,
and following discussion by the Board in March 1956.
The bankers who met with the Special Committee in
June 1954 indicated in general that this operation was
desirable but not essential. In my opinion it is not
vital one way or another, but my inclination would be
to retain the provision of the draft revision permitting
Edge Banking Corporations to exercise this function.
That would be consistent with the general philosophy
of the draft revision.
2.

Receipt of Deposits in the United States
for Foreign Accounts.

Governor Robertson would amend Section 6(c)(2) of
the draft revision by substituting the words:
"and (ii) is not to be held in the United States
by the depositor principally for safekeeping or
income, inactivity being one indication that funds
are so held."
for the phrase
"or (ii) is to be held for reserve or working
balance purposes."
Governor Robertson's proposal follows the minority
dissent registered by Mr. Solomon to the Special Committee
report; the wording is taken from Alternative D (in draft
of December 2, 1955), with a change in the word "primarily"
to "principally." His approach as is evident is a negative approach.
The Special Committee definition of "permitted deposits"
approaclq, on which the provision of the draft revision is based, is intended to convey specifically the nature and purposes of deposits that
these banking corporations could receive and hold in the
United States. I feel that, in deciding whether a deposit
Is of the type eligible for an Edge Banking Corporation to
hold, principal consideration should be given to the overall purpose, nature and use of the account. The fact that
a deposit is held as reserve should not be a cause for disqualifying it; such deposit is potentially active and must
remain available at all times to meet certain contingencies -- even though it may be inactive over any given period
of time.

.5. 157 of Report, a positive




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-4-

I would agree that an Edge Banking Corporatio
n in
the United States should not seek to attra
ct foreign
funds to be held as time deposits solel
y for purposes
of safekeeping or investment and unrelated to
any other
foreign or international business of the
depositor. On
the other hand, it seems clear that the size
and stability of a customer's deposit balances are
very important
considerations in the Banking Corporation's
readiness to
extend credit or provide services to the custo
mer. One
could envisage other situations in which
the holding of
inactive balances would seem appropriat
e, such as:
(a) An Edge Banking Corporation may have
on its books various separate accou
nts for a
particular foreign customer (or for closely
interlocked foreign customers), some of these
being completely inactive and others havin
g
considerable movements related to foreign or
international transactions; or
(b) An Edge Banking Corporation may hold
an inactive account for the centr
al bank or
other official body of a foreign count
ry, with
which the Banking Corporation maint
ains business . relationa through official, banki
ng and
other private customers, or is in the proce
ss
of actively developing such relat
ions.
I feel that the provisions of the Regul
ation should
be clearly formulated to reflect the Board
's intent, without restraining Edge Banking Corporatio
ns from holding
accounts and developing relations which
are found to be
clearly and essentially parts of their
foreign or international activities. I believe that
the positive provisions of the draft revision on this poin
t would accomplish this purpose.
J.

Extension of Credit in the United
States by Edge Banking Corporations.

Governor Robertson's proposals on this
subject would
significantly limit the purposes for which
an Edge Banking
Corporation could issue, confirm, or advise
letters of
credit, or accept drafts or bills of exchange, or
otherwise engage in financing in the United States.




12/4/56

-5-

No question exists as to the legality of the proposals
in this regard that are now contained in Section 6(c)
of the draft revision, nor as to the legality of Governor Robertson's proposals. However, the two sets
of proposals do place in sharp relief the question as
to the kind of provision that will effectively discharge the Board's responsibilities under the Statute,
and at the same time help provide an environment that
will permit such Banking Corporations to make the maximum contributions to economic stability and growth
at home and abroad.
The approach of the draft revision, which I favor,
is expressed in Section 6(c)(1) and (2), and Section
6(c)(6).
(a) Section 6(c)(1) and (2); Qunlifying Drafts.
Section 6(c)(1) and (2) of the draft revision, by the
use of the defined term "qualifying drafts," would
specify the purposes for which the Banking Corporation
could issue, confirm, or advise letters of credit, or
could accept, negotiate, present, discount, purchase or
pay drafts or bills of exchange. The cited provisions
were designed to make the permissibility of the transaction depend on its nature rather than its form and,
by the same token, to align the provisions of the Regulation with recognized patterns of banking services.
Behind this approach lay the controlling thought that,
through the adoption of these provisions, the Board
would be discharging its statutory mandate to judge
which transactions of a Banking Corporation would be
incidental to the Corporation's international or foreign business, and also that such mandate could best
be discharged by the adoption of rules of general
application, rather than ad hoc determinations, in
order to place the Edge Banking Corporation in a position of equality, so far as practicable, with other
banking organizations in the international field.
This is a point of view with which I associate myself
fully.
Governor Robertson would take a more restrictive
position; he would narrow the definition of "qualifying
drafts" (and thus compress the range of permissible
action under Section 6(c)(1) and (2)), first, by requiring that such drafts be drawn only in favor of a
shipper abroad or pursuant to credit opened at the
request of a correspondent abroad, and second, by
limiting the use of such drafts to transactions related to the import or export of goods, through the



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-6-

deletion of provisions in the draft revision contemplating their use in respect of certain foreign and
international transactions concerned principally with
services rather than goods.
The first of Governor Robertson's proposals in
this regard that a shipper abroad or a correspondent
abroad participate in the transaction) would seem to
me to emphasize unnecessarily the form, rather than
the substance, of the transaction; to discourage the
direct relations between an Edge Banking Corporation
and its customers that are usual in commercial banking
transactions of this sort; and thus to place the Banking Corporation in a position somewhat short of equality
with competitor banks in the international field.
It is to be noted that, under the present provisions
of Section XIII of the present Regulation K, an Edge
Corporation may accept "drafts and bills of exchange drawn
upon it which grow out of transactions involving the importation or exportation of goods." This quoted provision is
limited to some extent by provisions of Section VIII of
the present Regulation, which restates the statutory prescription that the business of the Corporation carried on
in the United States shall be incidental to its international or foreign business. But these general expressions
could only create an atmosphere that gives rise to doubt,
debate, and ad hoc decisions.
The draft revision, on the other hand, delineates
as exactly as possible the boundaries between what would,
and what would not, be permissible, and it would in fact
require at least one existing Corporation to discontinue
some of the business it is now conducting.
Governor Robertson's proposal, however, would introduce additional limiting factors based upon the source,
the form, or the beneficiary of a transaction. If adopted,
it would prevent a Banking Corporation from opening credits
(and accepting drafts): (a) at the request of an agent in
the United States of a foreign importer in favor of a United
States manufacturer to the debit of the foreign importer,
to cover the shipment of goods to a foreign country; or
(b) at the direct request of a foreign customer (other than
a bank) to cover payments for goods imported from, or other




12/4/56

-7-

business transactions with, the United States, or in
settlement of transactions outside the United States.
These examples would seem clearly to be foreign or
international transactions that represent customary
banking and trade practices, and accordingly transactions that a Banking Corporation should be permitted
to finance by these methods.
The provisions of the draft revision appear to be
in accordance with the general attitude of the leading
bankers with whom the Special Committee met in June
1954.
The second of Governor Robertson's proposals in
this regard (to limit financing to movements of goods)
has the effect of continuing the limitation on the
acceptance power that requires that it be related to
the physical movement of goods in international commerce, and of denying its extension to international
or foreign transactions concerned principally with
services rather than goods. The cited provisions of
the draft revision which would permit such extension
were not originally suggested by the Special Committee,
but were included therein on the basis of submissions
made by the Bank of America, and following discussions
by the Board during March 1956. In those discussions,
the Board took cognizance of the fact that such operations have become part of the international business
of commercial banks and that any limitation on Banking
Corporations in this regard would hamper their competitive position as respects other banking organizations. The area and scope of such operations by Banking
Coroprations are defined precisely in the draft revision
to provide adequate safeguards in their use.
Specifically, this proposal by Governor Robertson
would prevent a Banking Corporation from issuing letters
of credit or accepting drafts, for instance (1) as a
means of guaranteeing to a foreign government an
American contractor's performance in building port
facilities in that foreign country; (2) for financing
activities of a shipping line in, say, Latin America;
(3) for covering payments by a foreign manufacturer to
a United States firm with respect to royalties or services received; and (4) for financing expenditures
abroad related to a foreign investment of a United States




2.
ril

12/4/56
company (such as those for construction or for
services).
(b) Section 6(c)(6); Financing by Loan Acceptance
Otherwise.
or
The objective of Section 6(c)(6Y of the
draft revision was to clarify the authority of a Banking Corporation to finance movements of goods in international or foreign commerce from shipper to consignee,
in accordance with established trade and banking usages,
within the framework of a single financing agreement,
and at the same time to establish restrictions designed
to prevent financing of an objectionable nature.
Section 6(c)(6) would set the limits of permitted
financing of shipments of goods from or to the United
States, and within or between places abroad; it would
also set the limits of permitted financing of operations
closely related to such shipments (accumulation of
specific goods as part of an existing export financing
program; storage of specific goods in foreign places;
and, in the case of specific goods whose importation
was financed by the Banking Corporation, the delivery
of the goods to the purchaser through domestic transport facilities, or the assembly or packaging of goods
for resale without essential change in the nature of the
product). Some of the transactions that could be financed
under this Section are exclusively foreign or international
in character, while others are, as indicated, incidental
to, but integral parts of, a principal operation initiated
or completed outside the United States.
Governor Robertson proposes to omit this Section and
thereby, in effect, to deny to a Banking Corporation the
authority to finance any such transactions, except to
the extent that they might be financed by letters of
credit, acceptances, or both under the provisions of
Section 6(c)(1) and (2). Although the forms of financing permissible under Section 6(c)(1) and (2) might be
used for some of these transactions, they probably would
not be practicable for others, because of the duration
of a given underlying transaction or its nature. In
these circumstances the Banking Corporation might be
required to split what would otherwise be a single financing arrangement into two separate arrangements and
to refer its customer to another bank for certain of
the required facilities. This would be contrary to
established trade and banking practices. Moreover,




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-9-

it should also be noted that, if the Board were to adopt Governor Robertson's proposals under Section 6(c)(1) and (2) as well
as under Section 6(c)(6), the Banking Corporation could participate in the financing only if a shipper or correspondent abroad
participated in the credit transaction.
Finally, I should point out that, inasmuch as there is a
certain degree of overlapping between transactions that would be
permissible under Section 6(c)(1) and (2) and under Section
6(c)(6),
a denial to a Banking Corporation of the right to finance, by loans,
transactions which it could finance by issuing letters of credit
or accepting drafts or bills of exchange would appear to involve a
choice by the Board of one form of financing in preference to another. It is my view that the Board should properly concern itself with the substance of the transaction rather than with its
form, and that consequently the form of the financing is one that
ordinarily should be left to negotiations between the Banking Corporation and its customer. The form which financing is to take may
well be decided on the basis of such market elements as availability
of credit, relative cost of financing, and trade and banking practices here and abroad.
It is the opinion of the Division of Examinations that Governor Robertson's proposal in this regard would affect a very considerable portion, perhaps more than one-third, of the lending business of the largest Edge Act Corporation now engaged in banking.
It is, of course, impossible to estimate how much business this
Corporation could retain by shifting to alternative ways of
financing, but at the very best it would have to make basic readjustment in its practices and in its relations with its customers.
In the light of the considerations discussed above, I would
urge the Board to adopt the provisions of Section 6(c)(1) and (2)
and Section 6(c)(6) of the draft revision.

(4) Investment by Edge Financing Corporations
in Stock of Other Corporations.
The draft revision, in Section 9(a) and (c), would grant the
Board's advance consent for the purchase by Edge Financing Corporations of stock in certain other corporations. Governor Robertson's
proposal is summed up in this language taken from his memorandum
of September 13, 1956:
. . .It would be much better and safer to have each
nonbanking corporation indicate to the Board at least
the general types of situations in which the corporation
wishes to buy stock, and for the Board's permission then
to be tailored to reasonably specific types of situations
as a class or group . . . ."




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-10-

While I would prefer to retain the present provisions of
the draft revision, I would not object to Governor Robertson's
proposal if it means, as I take it to mean, that the draft revision be amended so as to provide clearly a procedure under
which a Financing Corporation could apply for a prior and general approval with respect to amounts or types of investment
it intends to make and the Board could, as a matter of general
policy, grant such prior general approval. This would envisage
a procedure under which the Board might grant approval by letter to the applicant corporation authorizing it, for example,
to purchase stock in other corporations, provided that such
purchase be made as an integral but subordinate part of a financing arrangement between the Financing Corporation and the particular corporation concerned. (E.g., such a purchase of stock
might be made as part of a proposed financing of the particular
corporation by the Financing Corporation, rather than for the
primary purpose of making a direct long-term investment in, or
obtaining operating control of, the particular corporation.)
The Board could also require that such investment be terminated
within a reasonable time after termination of the financing relationship with the company in which the investment is made.
In cases in which a proposed purchase by a Financing Corporation, which had received such prior and general approval, dia not
meet the tests set forth in the approval, that Corporation would,
of course, be required to make specific application to the Board
for authority to acquire the stock involved.
At this meeting, Governor Szymczak also restated the recommendation
referred to in his memorandum of November 19, 1956, that as soon as feasible
or possible the Board consider a proposal to Congress for legislation
which
would either clarify Sections 25 and 25(a) of the Federal Reserve
Act or
substitute a different approach for the present law, and that such proPosal be not delayed more than two years.
Messrs. Riefler, Assistant to the Chairman, and Thomas, Economic
Adviser to the Board, joined the meeting at this point.
In opening the discussion, Governor Szymczak traced the historical development of Edge Act corporation activity and pointed out
that
most of the questions began to arise after Bank of America,
New York,
vaS organized and sought actively to foster its growth and
development.
He reviewed the long, more than two-year, process
through which the present



2521
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12/4/56

revision had passed and expressed the hope that the Board was now ready
to act decisively.

He said the question was largely one of whether the

authority of these corporations was to be interpreted liberally so they
could operate broadly in the international field or whether it would be
interpreted restrictively so that they would not be permitted to operate
freely.

He then reiterated his views, as outlined in his memorandum, on

the four amendments proposed by Governor Robertson.
Governor Robertson commented that Governor Szymczak's summary of
the two views had been a fair and objective presentation and that he
could add little to what had already been said in previous meetings and
covered in his own memorandum of September 13, 1956.

He agreed that it

was largely a question of what the Board wanted to do.
Governor Szymczak and Governor Robertson agreed that it was important that a revised regulation be issued promptly.

Governor Robert-

son added that the issuance of the regulation was important not only for
the people operating in this field but also for the Board's awn staff
and for the Reserve Banks that have to handle these matters on a day-today basis.

He felt, however, that there was merit in approaching liber-

alizing changes slowly for the reason that, if the Board later found it
had gone too far, it would be difficult to tighten the regulation after
the corporations had been operating under liberalized rules.
Governor Szymczak indicated that this problem already confronted
the Board to some extent since even the proposed revision would restrain
some of the present operations of Bank of America, in that it would have
to "undo" some things that it was now doing.




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-12
The Chairman expressed the view that the present law was in-

adequate and difficult to apply to present day international transactions.
Governor Mills said that if the Board was going to do anything
other than wait for corrective legislation, he would agree with Governor Robertson's suggestions for the reasons that Edge Act banking corporations were auxiliaries of domestic banks and were not intended to
be banks in their own right.

When domestic banks operated in the for-

eign field, they could fill the gaps in the domestic field and there
was no reason to expand Edge Act corporation operations in that field.
He said that the more he reflected on the matter, the more doubt and
misgiving he had with respect to the permission recently granted by the
Board to the American Overseas Finance Corporation to own stock in a
Proposed Canadian corporation.

This was the path to destruction that

some banks took in the 1920's.

To say that the situation had been safe-

guarded by limiting the time that the stock could be held raised in his
mind the doubts expressed by Governor Robertson that if the regulation
was

ued on a relaxed basis, it would be difficult to retract later

on.

He added that there might be a conflict between the action in the

American Overseas case and the Position the Board was taking in the proposed amendment to Section 25 of the Federal Reserve Act to enlarge the
Powers of foreign branches of national banks in which the Board followed
the recommendation of the Federal Advisory Council that foreign branches
Of national banks should not engage in manufacturing or in the issuance
lind distribution of securities.




.43...

12/4/56

The Chairman then said it appeared there was a consensus favoring Governor Robertson's proposal with regard to the fourth point
in Governor Szymczak's memorandum, subject to possible drafting changes
in the language, and this was agreed.
In reply to a question from Governor Balderston as to the reason for Governor Robertson's proposed amendments relating to authority
to hold deposits in the United States, Governor Robertson referred to
his memorandum of September 13, 1956, in which he said that the draft
revision would permit Edge corporations to receive in this country deposits from loosely defined "foreign depositors" when the deposits are
to be held for what the regulation calls "reserve or working balance
Purposes."

The report of the Special Committee on Foreign Operations

Of American Banks, the memorandum continued, referred to these deposits
more candidly as "idle balances." Recent discussion of rates of interest that member banks would be allowed to pay on time deposits under
Regulation Q, he said, demonstrated the essentially investment character of such deposits and brought out the fact that when they are owned
by foreign banks or others abroad, they usually served much the same
Purpose as ownership of bankers' acceptances or Treasury bills and had
no particular relationship to any transactions abroad.
Governor Szymczak stated his belief that the proposed revision

in Regulation K would accomplish that objective and added that his memorandum had pointed out that there were many reasons for inactive deposits
and that an Edge bank might have to hold such deposits to serve a particular area.




It was the function of the examiners, he said, to prevent

2524
12/4/56
abuse of these provisions and they should be able to distinguish between inactive deposits and time deposits.
Governor Robertson commented that he thought it would be extremely difficult for examiners to deal with this matter and he felt
it provided a broad loophole.
Governor Szymczak then asked Mr. Goodman to comment on whether
it would be difficult for examiners to distinguish between deposits
Which would be consistent and those which would be inconsistent with
the provisions of the regulation.

Mr. Goodman indicated that the ques-

tion was a difficult one to answer since in every instance it would be
a matter of the facts and circumstances surrounding the individual deposit.

As an example, he said that a .$12 million deposit of a central

bank which was left untouched for two years, if it were part of the
central bank's reserves, would be a permitted deposit under the draft
regulation, but under Governor Robertson's proposal it probably would
not be.
Governor Robertson referred to the statement at the bottom of
Page 2 of Governor Szymczak's memorandum that an Edge Banking Corporation in the United States should not seek foreign funds to be held as
time deposits solely for purposes of safekeeping or investment and unrelated to any other foreign or international business of the depositor.
He said he could accept that statement, that the question was whether
the deposit was for the purpose of financing foreign trade, and that
he had a fundamental difference as to the desirability of Edge Banking




2525

15.

12/4/56

Corporations holding time deposits of foreign central banks as that
was not their function.

He said he would be willing to accept in

the regulation the substance of the language to which he had referred
in page 2 of Governor Szymczak's memorandum.

Other members of the

Board concurred in this suggestion.
At the conclusion of the discussion,
the revised Regulation K, Corporations
doing Foreign Banking or other Foreign
Financing under the Federal Reserve Act,
was approved in the following form, effective January 15,1957. In taking this
action it was understood that the regulation would be printed by the Board and
appropriate distribution made through the
Federal Reserve Banks; also that it would
be published in the Federal Register. It
was further understood that no press release would be issued regarding the revised regulation.
On these actions Governors Mills and
Robertson voted "no" for the reasons set
forth in these minutes immediately following the text of the regulation:

REGULATION K
CORPORATIONS DOING FOREIGN BANKING OR OTHER
FOREIGN FINANCING UNDER THE FzDERAL RESERVE ACT
SECTION 1.

SCOPE AND APPLICATION OF REGULATION

This regulation is issued by the Board of Governors of
the Federal Reserve System (hereinafter called the "Board
of Governors") under authority of the Federal Reserve Act.
It applies to corporations organized under section 25(a) of
that Act (U.S.C., title 12, secs. 611-631) for the purpose
of engaging in international or foreign banking or other international or foreign financial operations, and to the extent specified in section 11 of this regulation, to corporations




959

It
12/4/56

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having an agreement or undertaking with the Board of Governors under section 25 of the Act (U.S.C., title 12,
secs. 6o1-6o4). Pertinent portions of those sections
are printed in the Appendix to this regulation.
SECTION 2.

DEFINITIONS

For the purpose of this regulation, unless the context otherwise requires (a) "Corporation" when spelled with a capital "C"
means a corporation organized under section 25(a) of
the Federal Reserve Act.
(b) "Banking" means the business of receiving or
paying out deposits, or accepting drafts or bills of
exchange.
(c) "Banking Corporation" means a Corporation
which is engaged in banking.
(d) "Financing Corporation" means a Corporation
which is not engaged in banking except to the extent
that it is required by the Secretary of the Treasury
to act as fiscal agent of the United States. A Corporation in existence on July 1, 1955 is a Banking
Corporation if it was engaged in banking on that date,
or a Financing Corporation if not so engaged on that
date.
(e) "Abroad" means in one or more foreign countries or dependencies or insular possessions of the
United States.
(f) "Goods" includes wares, merchandise, commodities and any other tangible personal property
(other than money).
(g) "Person" includes any individnR1, and
corporation, partnership, association or other
lar organization.

simi-

(h) "Affiliated" when used with respect to two
persons means that, directly or indirectly, either
one controls, is controlled by, or is under common
control with, the other.
(i) "Capital and Surplus" means (1) paid in
and unimpaired capital and (2) surplus.




2527

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SECTION

3.

ORGANIZATION, CORPORATE STRUCTURE AND OWNERSHIP

(a) Articles of Association and Organization Certificate. - Any number of natural persons, not less than five,
desiring to organize a corporation under section 25(a) of
the Federal Reserve Act shall (1) enter into articles of
association (see Form F. R. 151, which is suggested as a
satisfactory form of articles of association); (2) make an
organization certificate on Form F. R. 152, which is made
a part of this regulation; and (3) forward the articles of
association and the organization certificate to the Board
of Governors. The articles of association shall specify
in general terms the objects for which the Corporation is
formed, and may contain any other provisions not inconsistent with law which the Corporation may see fit to adopt for
the regulation of its business and the conduct of its affairs. Each person intending to participate in the organization of the Corporation shall sign the articles of association and the organization certificate and shall acknowledge the execution of the latter before a judge of some
court of record or notary public, who shall certify thereto
under the seal of such court or notary.
(b) Name. - The name of the Corporation is subject
to the approval of the Board of Governors, and a preliminary
application for that approval may be filed with the Board
of Governors on Form F.R. 150, which is made a part of this
regulation. The name shall in no case resemble the name of
any other corporation to the extent that it might result in
misleading or deceiving the public as to its identity, purpose, connections or affiliations, and in the case of an
application with respect to a Financing Corporation the
name shall also comply with section 10(c)(2). The name of
any Corporation hereafter organized sha31 so far as practicable indicate the nature of the business contemplated, and
shall include the word "international", "foreign", "overseas",
or some similar word. No Financing Corporation hereafter
organized will be permitted to have the word "bank" or "banking", or any similar word, as part of its name.
(c) Authority to Commence Business. - After the articles of association and organization certificate have been
filed with and approved by, and a preliminary permit to begin
business has been issued by, the Board of Governors, the association shall become and be a body corporate, but none of its




252S
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-18-

powers, except such as are incidental and preliminary
to its organization, shall be exercised until the Board
of Governors has issued to it a final permit to commence
business. Before the Board of Governors will issue its
final permit to commence business, the president, cashier or secretary, together with at least three of the
directors, must certify (1) that each director is a citizen of the United States; (2) that a majority of the
shares of capital stock is held and owned by citizens of
the United States, by corporations the controlling interest in which is owned by citizens of the United States,
chartered under the laws of the United States or of a
State of the United States, or by firms or companies the
controlling interest in which is owned by citizens of the
United States; and (3) that of the authorized capital stock
specified in the articles of association at least 25 per
cent has been paid in in cash and that each shareholder
has individually paid in in cash at least 25 per cent of
his stock subscription. Thereafter the cashier or secretary shall certify to the payment of the remaining installments as and when each is paid in, in accordance with law.
(d) Amendments to Articles of Association. - The articles of association may contain provisions relative to the
procedure whereby amendments thereof may be effected in
any manner not inconsistent with section 25(a) of the Federal Reserve Act, other applicable law, and this regulation.
No amendment of the articles of association shall become
effective unless and until it shall have been approved by
the Board of Governors.
(e) General Requirements as to Capital Stock. - No Corporation may be organized under section 25(a) with capital
stock of less than *2,000,000. The par value of each share
of stock shall be specified in the articles of association,
and no Corporation will be permitted to issue stock of no
par value. If there is more than one class of stock, the
name and amount of each class and the obligations, rights,
and privileges attaching thereto shall be set forth fully
in the articles of association. Each class of stock shall
be so named, or so described in the stock certificates by
which it is represented, as to indicate as clearly as possible its character and any unusual attributes.
(f) Citizenship of Shareholders. - (1) In order to
insure compliance at all times with the requirements of
section 25(a) of the Federal Reserve Act relating to the
United States citizenship of those who hold, own, or control
a majority of the shares of capital stock of a Corporation,
such stock shall be issuable and transferable only on the



12/4/56

-19-

books of the Corporation, and no issue or transfer of
stock which would cause a violation of such requirements of law or of related provisions of this regulation
shall be made upon the books of the Corporation. The
board of directors of the Corporation, acting directly
or through an agent, may, before making any issue or
transfer of stock, require such evidence as in their
discretion they may think necessary in order to determine whether or not the issue or transfer of the stock
would result in such a violation. The decision of the
board of directors in each such case shall be final and
conclusive as to, and not subject tc question by, any
person.
(2) If at any time a change in the status of the
holder of any shares of a Corporation causes a violation
of the requirements of section 25(a) of the Federal Reserve Act relating to the United States citizenship of
those who hold, own, or control a majority of the shares
of capital stock of a Corporation, the board of directors
shall, when apprised of that fact, forthwith serve on the
holder of the shares in question a notice in writing requiring such holder within two months to transfer such
shares to a person then eligible to acquire such shares.
When such notice has been given by the board of directors,
the shares of stock so held shall cease to confer any
right to vote or to participate in dividends thereafter
declared; and the right to vote and to receive dividends
shall resume only after, and only with respect to votes
cast and dividends declared after, the shares have been
transfered as required above. If on the expiration of
two months after such notice the shares shall not have
been so transferred, the shares shall promptly be sold
at public or private sale by the Corporation, as agent
for and for the account of the ineligible holder, to a
person then eligible to acquire such shares. In the event
such shares cannot be sold for a reasonable price and within a reasonable time at such a public or private sale, the
shares will, with the approval of the Board of Governors,
be forfeited to the Corporation.
(3) The board of directors shall prescribe in the
by-laws of the Corporation appropriate rules for the registration of the shares of stock in accordance with the
terms of the law and these regulations. The certificates
of stock issued by the Corporation shall contain provisions
sufficient to put the holder on notice of the terms of the
law and regulations defining the limitations upon the rights
of ownership and transfer.




2530
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-20SECTION

4. BANKING CORPORATIONS AND
FINANCING CORPORATIONS

A Banking Corporation (a) shall not issue or have
outstanding any debentures, bonds, promissory notes or
similar obligations except promissory notes due within
one year evidencing borrowing from banks or bankers, and
(b) shall not engage in the business of issuing, underwriting, selling or distributing securities, except to
such limited extent as the Board of Governors may, upon
application of the Corporation, exempt activities of the
Corporation's branch or agency in a foreign country with
respect to obligations of, or obligations unconditionally
guaranteed as to principal and interest by, the national
government of such country. A Financing Corporation shall
not engage in banking except to the extent that it is required by the Secretary of the Treasury to act as fiscal
agent of the United States. The Board of Governors may
grant permission, subject to such conditions as it may
prescribe, for a Banking Corporation to change to a Financing Corporation, or for the reverse.
SECTION

5. OPERATIONS ABROAD

(a) General. - Except as otherwise provided by law
or by this regulation, a Corporation may exercise abroad,
through branches or agencies established with the approval
of the Board of Governors or through correspondents or
other agents, not only the powers specifically set forth
in the law or by this regulation and those incidental thereto, but also such powers as may be usual in the determination of the Board of Governors in connection with the transaction of banking in the case of a Banking Corporation, or
other financial operations in the case of a Financing Corporation, in the place in which the Corporation is transacting business. As indicated in section 6(e)(2), the
activities of a Financing Corporation abroad are limited
by the requirement that it shall not, by its activities
abroad, engage or participate, directly or indirectly, in
certain activities in the United States.
(b) Branches. - With the prior approval of the Board
of Governors, a Corporation may establish branches or agencies abroad.
SECTION 6. LIMITED OPERATIONS
IN THE UNITED STATES
(a) General. - A Corporation shall not carry on any
part of its business in the United States except such as



2531

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-21-

shall be incidental to its international or foreign business. It may not engage in the United States in the business of acting as trustee, or in a like fiduciary capacity,
or act in the United States as registrar or in any similar
capacity with respect to the servicing in the United States
of any security issue distributed therein; but it may act
as paying agent in the United States with respect to securities issued by a "foreign state" as defined in section
25(h) of the Federal Reserve Act or by a corporation chartered by such a foreign state and not qualified under the
laws of the United States or any State (or the District of
Columbia) to do business in the United States. A Corporation may not establish any branch in the United States, but
with the prior approval of the Board of Governors may establish agencies in the United States for specific purposes,
but not generally to carry on the business of the Corporation. Funds of a Corporation not currently employed in
the international or foreign business of the Corporation
in accordance with other provisions of this regulation, if
held or invested in the United States, shall be only in
the form of (1) cash, (2) deposits with banks, (3) bankers'
acceptances or prime open market commercial paper, or (4)
direct obligations of the United States or other investment securities of such kinds, and in such amounts, as the
Corporation could purchase within the limitations of section 5136 of the Revised Statutes (U.S.C., title 12, sec.
24) if it were a member bank of the Federal Reserve System.
Subject to the other provisions of this regulation, succeeding paragraphs of this section indicate generally the kinds
of transactions by a Corporation which may be considered
appropriate in the United States.
(b) Receipt of Deposits in United States by Banking
Corporations. - (1) A Banking Corporation may receive only
such deposits within the United States as may be incidental
to or for the purpose of carrying out transactions abroad.
Such deposits may be either time or demand, and shall be
subject to all the requirements of Regulation Q (which relates to the payment of interest on deposits and related
matters) in the same manner as if the Corporation were a
member bank of the Federal Reserve System; but no such
deposit shall be a "savings deposit" as defined in Regulation Q. If a Banking Corporation receives deposits in
the United States, it shall maintain reserves against such
deposits in the same manner and amount (but in no event
less in the aggregate than 10 per cent of such deposits)
as if it were a member bank of the Federal Reserve System,
and shall in like manner submit reports of deposits and be
subject to all the requirements of Regulation D (which relates to reserves of member banks).



232
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-22-

(2) A deposit received in the United States by a
Banking Corporation from a foreign depositor will ordinarily be considered incidental to or for the purpose
of carrying out transactions abroad provided the deposit
is not to be used to make payments for expenses in the
United States of a United States office or representative
and in addition the deposit (i) is to be used to make
payments for transactions abroad, for goods exported or
imported, for other direct costs of export or import, or
for carrying out transactions with the Corporation under
section 6(c) or 6(d); or (ii) is to be held for reserve
or working balance purposes, except that a Banking Corporation shall not receive funds to be held in the United
States as time deposits solely for purposes of safekeeping or investment and unrelated to other international or
foreign business of the depositor with the Corporation.
As used in section 6(b) "foreign depositor" means a foreign government, a person conducting business principally
at the person's offices or establishment abroad, or a
foreign national resident abroad.
(3) A deposit received in the United States by a
Banking Corporation from a depositor who is not a foreign depositor will ordinarily be considered incidental
to or for the purpose of carrying out transactions abroad
provided the deposit is not to be used to make payments
for expenses in the United States of a United States office or representative and in addition the deposit (i)
is for transmission to a place abroad; or (ii) is to provide collateral or payment for extensions of credit by
the Corporation; or (iii) represents proceeds of collections
abroad which are to be used to make payments for goods exported or imported or for other direct costs of export or
import, or periodically transferred to the depositor's account at another bank; or (iv) represents proceeds of extensions of credit by the Corporation which are to be used
for the purposes of the credit extension or to be periodically transferred to the depositor's account at another
bank.
(c) Extensions of Credit in United States by Banking
Corporations. - It will ordinarily be considered incidental
to the international or foreign business of a Banking Corporation for it to engage in any of the following transactions in the United States with respect to extensions of
credit (1) As principal or as agent for another bank, issue,
confirm, or advise letters of credit or other authorizing




4

25:33
12/4/56

-23 -

instrument (or receive and forward to another bank applications therefor) which contemplate the drawing of
"qualifying drafts". As used in section 6(c), "qualifying drafts" means drafts or bills of exchange drawn,
or written receipts given, to cover specific goods in
the process of being (i) exported from or imported into
the United States, (ii) temporarily stored in the United
States as part of such an exportation or importation,
(iii) stored abroad, or (iv) shipped within or between
places abroad, or to cover (v) performance of specific
contracts at places abroad or of specific international
or foreign transactions, (vi) cost of operating ships
in international or foreign transportation, or (vii)
payments in connection with international or foreign
transfers of royalties, copy-rights or patent rights
or with the rendering of services at, or necessary
for carrying out projects at, places abroad.
(2) As principal or as agent for another bank,
accept, negotiate, present, discount, purchase, or pay
qualifying drafts", if the Corporation or a bank at
a place abroad issued, confirmed or advised the authorizing letter of credit or other authorizing instrument
or if the office of the Corporation is named in the
authorizing instrument as the place of payment or an
optional place of payment thereof.
(3) Accept drafts or bills of exchange which are
drawn by a bank or banker located in a place abroad
for the purpose of furnishing dollar exchange as required by the usages of trade in such place.

(4) Purchase, discount, or lend on, documentary
or other drafts which the Corporation is to send to
a place abroad for collection.
(5) Make advances to, or acquire the obligations
of, foreign governments; or, if the advances or acquisitions are for the purpose of financing activities
abroad or payment for goods exported or imported or
other direct costs of export or import (but not expenses
in the United States of a United States office or representative), make advances to, or acquire the obligations of, a person conducting business principally
at the person's offices or establishments abroad or
a foreign national resident abroad.




25:'34
1:
'0
-24-

12/4/56
(6) Finance

by loan, acceptance, or otherwise -

(i) The shipment (but not production) of
specific goods which are being exported, or being
accumulated for export as part of an existing export financing arrangement of the Corporation; or
(ii) The storage of specific goods abroad or
the shipment of specific goods between places abroad;
or
(iii) The importation of specific goods into
the United States, which may include lending against
the shipping documents pending arrival of the goods
from a place abroad; or
(iv) In the case of specific goods whose importation into the United States was financed by the
Corporation, the delivery of the goods to the purchaser through domestic transport facilities or the
assembly or packaging of the goods for resale without essential change in the nature of the product.
(d) Other Activities in United States by Banking Corporations. - It will ordinarily be considered incidental to the
international or foreign business of a Banking Corporation
for it to engage in any of the following other activities in
the United States (1) Buy and sell spot and future foreign exchange.
(2) Receive checks, drafts, bills of exchange, acceptances, notes, bonds, coupons and other securities for
collection abroad, and collect such instruments in the United
States when received from customers abroad.
(3) Hold securities in safekeeping for, or buy and sell
securities upon the order and for the account and risk of,
customers abroad with whom other relationships permitted by
this regulation are maintained.
(e) Activities in United States by Financing Corporations.(1) It will ordinarily be considered incidental to the
international or foreign business of a Financing Corporation
for it to engage in any of the following transactions in the
United States -




(i) Finance its own authorized activities (e.g.,
borrow money or issue its own securities)
or hold or invest, in accordance with section 6(a), funds not currently employed in
the international or foreign business of the
Corporation.

4

12/4/56




(ii) Acquire obligations (by purchasing,
discounting, or lending thereon)
which cover the export of specific
goods (including directly related
services and other direct costs of
the export, but not expenses in the
United States of a United States
office or representative), have as
a primary obligor a foreign government or a person conducting business
principally at the person's offices
or establishments abroad, and are acquired by the Corporation as part of
such export transaction.
(iii) Make advances to, or acquire (by purchasing, discounting, or lending thereon)
the obligations of, foreign governments;
or, if the advances or acquisitions are
for the purpose of financing activities
abroad or payment for goods exported
(including directly related services
and other direct costs of the export,
but not expenses in the United States
of a United States office or representative), make advances to, or acquire
(by purchasing, discounting, or lending
thereon) the obligations of, a person
conducting business principally at the
person's offices or establishments abroad.
iv) Issue sight letters of credit undertaking
to extend credit authorized under other
provisions of this paragraph, but in no
event contemplating the accepting of any
drafts.
(v) Guarantee advances which the Corporation
is authorized to make, or obligations it
is authorized to acquire, under other
provisions of this paragraph.

(vi)

Extend credit, by means of advances, guarantees or otherwise, to a corporation in
which the Financing Corporation own:3 all
the voting stock, or all except directors'
qualifying shares, to enable such subsidiary to extend credit which the Financing
Corporation is itself authorized to extend
under other provisions of this paragraph.

NM,

25143

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12/4/56

(2) A Financing Corporation, in issuing, underwriting,
selling or distributing securities abroad, shall not engage
or participate in the underwriting, sale or distribution of
securities in the United States (except the issuance of its
own securities), and may not so engage or participate directly or indirectly or through an agency or on a commission
or consignment basis or in any other manner. If a security
issue is being sold or distributed partly in and partly outside the United States, a Financing Corporation may not underwrite, even on a standby basis, that portion being sold or
distributed in the United States (no matter by whom it is
being so sold or distributed).
SECTION

7. ACCEPfANCES BY BANKING CORPORATIONS

(a) General. - In accepting drafts or bills of exchange
as permitted in sections 5 and 6, a Banking Corporation shall
comply with the requirements set forth in the succeeding paragraphs of this section.
(b) Maturity. - No Banking Corporation shall accept any
draft or bill of exchange drawn for the purpose of furnishing
dollar exchange having at the date of its acceptance more
than three months to run, or accept any other draft or bill
of exchange having at the date of its acceptance more than
six months to run, exclusive in either case of days of grace.
(c) Limitations. - No acceptances shall be made for the
account of any one person in an amount aggregating at any time
in excess of 10 per cent of the capital and surplus of the Corporation, unless the transaction is fully secured or unless it
represents an exportation or importation of goods and there
is a primary obligation to reimburse the Corporation which
is also guaranteed by a bank or banker. Whenever the aggregate of acceptances outstanding at any time exceeds the amount
of the Corporation's capital and surplus, 50 per cent of all
the acceptances in excess of such amount up to twice the amount of the capital and surplus, and all the acceptances out,
standing in excess of such double amount, (1) shall be fully
secured, or (2) shall represent exportation or importation
of goods and shall have a primary obligation to reimburse
the Corporation which is also guaranteed by a bank or banker.
In accepting drafts drawn for the purpose of furnishing dollar exchange, a Banking Corporation shall be subject to all
the limitations and requirements of Regulation C (which relates to acceptances by member banks of drafts and bills of
exchange) that would apply if it were a member bank of the
Federal Reserve System.




25,3e
12/4/56
SECTION

3.

ISSUE OF OBLIGATIONS BY FINANCING CORPORATIONS

(a) General. - A Financing Corporation is not required to
obtain the approval of the Board of Governors before issuing
any of its debentures, bonds, promissory notes or other such
obligations, but, as specified in section 10(b), it shall in
no event have liabilities outstanding at any time exceeding
ten times its capital and surplus. Every Financing Corporation shall carry on its business in accordance with sound
financial policies, including among other considerations, a
proper regard to the relationship between its assets and the
maturities of its obligations, so as to give reasonable assurance that the Corporation will be in a position to pay its
obligations as they mature. Further requirements are set
forth in paragraphs (b), (c) and (d) of this section with
respect to secured obligations, unsecured obligations, and
information to be made available.
(b) Secured Obligations. - All secured obligations issued by a Financing Corporation (except promissory notes due
within one year evidencing borrowing from banks or bankers)
shall be secured by collateral which, unless placed under
the control of the person or persons owning all the obligations secured thereby, shall be transferred and delivered,
free of any prior lien, charge, or encumbrance thereon, to
a member bank of the Federal Reserve System as the trustee
under a trust indenture executed by the Financing Corporation
as security for the obligations of the Corporation issued or
to be issued thereunder, which trust indenture shall prescribe
the general form of such obligations and shall require that
every such obligation shall be authenticated by the certificate of the trustee noted thereon.
(c) Unsecured Obligations. - In the event a Financing
Corporation issues or has outstanding any unsecured obligations (except promissory notes due within one year evidencing
borrowing from banks or bankers), the Corporation shall comply
with the following requirements (1) While any such unsecured obligations are outstanding, loans or other credits held by the Corporation,
or outstanding with its guarantee, shall not have a maturity or more than ten years.
(2) All unsecured obligations issued by the Corporation (except promissory notes due within one year evidencing
borrowing from banks or bankers) shall contain a provision,
or shall be issued under an agreement, which shall provide
that the Corporation will not, during the time any such
obligations remain outstanding 


2539

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way received the approval of the Board of Governors or
any other agency of the United States or that the collateral securing same has been appraised or approved in
any way by the Board of Governors or any other agency of
the United States. There shall be set forth on the outside front cover page of every prospectus the following
statement in capital letters printed in bold-face roman
type at least as large as ten-point modern type and at
least two points leaded:
These securities have not been approved or
disapproved by the Board of Governors of the
Federal Reserve System or any other agency of
the United States nor has the Board or any
other agency of the United States passed upon
the accuracy or adequacy of this prospectus.
These securities are the obligation solely of
(Name of Financing Corporation), and no other
individual, organization, or group has any
direct or indirect responsibility for their
payment.
Within forty days after issuing any obligations (except
promissory notes due within one year evidencing borrowing from banks or bankers), a Financing Corporation shall
file with the Board of Governors copies of all prospectuses
and other literature describing or affecting such issue
published by the Corporation or its officers or by persons
underwriting, selling or distributing the issue, and shall
also file with the Board of Governors the information described in subparagraphs (1) through (4) of this paragraph
to the extent, if any, that such information is not contained in such prospectuses. The information described in
subparagraphs (1) through (4) of this paragraph is as follows:
(1) The amount of the funded debt outstanding and to
be created by the obligations offered, including the net
price received and to be received by the Corporation for
such obligations, with a brief description of the date,
maturity, and character of such debt, rate of interest,
character of amortization provisions, and the collateral,
if any, provided or to be provided therefor, and a summarized statement of the conditions, if any, under which
substitution of collateral is permitted, and if substitution
is permissible without notice, a specific statement to that
effect.




-30-

12/4/56

(2) A balance sheet showing all assets and liabilities,
including contingent liabilities, of the Corporation with
supporting schedules in the form prescribed by the Board of
Governors for reports of condition (Form F.R. 314) and an
analysis of surplus showing how and from what sources such
surplus was created, all as of the close of business on the
date of issuance of the obligations, and giving effect thereto.
(3) A copy of any underlying agreements or indentures
affecting the obligations.

(4) A copy of the opinion or opinions of counsel as to
the legality of the issue, the validity of any indenture,
and the sufficiency of any transfers of collateral executed
under any indenture.
SECTION

9. INVESTMENTS IN STOCK OF OTHER CORPORATIONS

(a) General. - With the prior consent of the Board of
Governors and subject to the provisions of section 25(a) of
the Federal Reserve Act and this regulation, a Corporation
may purchase and hold stock in other corporations. The succeeding paragraphs of this section indicate the circumstances
in which such consent may be granted upon individual application, those in which such consent is ordinarily not granted,
and those in which general consent may be granted upon application as to types of situations. Any consent granted by the
Board may be conditional, and the conditions prescribed may
apply to activities of the Corporatiou and also to activities
of the corporation in which stock is purchased or held. A
Corporation may purchase and hold stock where such purchase
is necessary to prevent a loss upon a debt previously contracted in good faith; but stock so acquired shall be disposed of within six months from the date of acquisition unless such time is extended by the Board of Governors. If a
Corporation makes a permissible purchase of stock, but a
later change in circumstances or in this regulation causes
the holding of the stock to be no longer permissible, the
Corporation shall dispose of the stock, or the non-conformity
with the regulation shall otherwise be corrected, as promptly
as practicable and in any event within six months unless such
time is extended by the Board of Governors. As used in this
section, the term "stock" includes all certificates of ownership.
(b) By Banking Corporations. - Consent of the Board of
Governors for a Banking Corporation to purchase and hold stock




(1017,- I

12/4/56

-31-

in other corporations will not be granted except upon individual application setting forth the relevant facts and
circumstances. The Board of Governors ordinarily will not
grant consent for a Banking Corporation to purchase and hold
stock in a corporation not engaged in banking or closely related activities.
(c) By Financing Corporations. - Subject to applicable
requirements of law and of this regulation and upon application setting forth the proposed program of the Financing
Corporation, the Board of Governors may grant its general
consent for a Financing Corporation to purchase and hold
stock, up to such amounts and in such circumstances as the
Board may prescribe, in generally designated types of corporations which are not engaged in banking and also are
neither incorporated, nor qualified to do business in the
United States, under the laws of the United States or any
State (or the District of Columbia), provided such stock
is purchased from a foreign seller by negotiations in which
no United States office or establishment of the seller participates, and provided further that such purchase or holding
does not cause the Financing Corporation to be affiliated
with any person engaged in banking or with any person the
stock of which the Corporation would be forbidden to purchase or hold under section 9(d). In any other instance
consent of the Board of Governors for a Financing Corporation to purchase and hold stock will not be granted, except
in special cases upon individual application setting forth
the relevant facts and circumstances. The Board of Governors ordinarily will not grant consent for a Financing Corporation to purchase and hold stock in a corporation engaged
in banking.
(d) Statutory Limitations. - Under section 25(a) of
the Federal Reserve Act, the following limitations apply
to the purchase or holding of stock by a Corporation (1) The corporation whose stock is purchased or held
(i) shall be organized under section 25(a) of the Federal
Reserve Act, the laws of any foreign country or a colony
or dependency thereof, or the laws of any State, dependency,
or insular possession of the United States; and (ii) shall
not be engaged in the general business of buying or selling
goods in the Unites States; and (iii) shall not be transacting any business in the United States except such as in
the judgment of the Board of Governors may be incidental to
its international or foreign business.
(2) Except with the prior approval of the Board of Governors in addition to any consent of the Board of Governors
otherwise required, a Corporation shall not invest an amount
in excess of 15 per cent of its capital and surplus in the
stock of any one corporation engaged in the business of banking, or an amount in excess of 10 per cent of its capital and
surplus in the stock of any other kind of corporation.




2542

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(3) A Corporation shall not purchase, own, or hold any
stock in any other corporation organized under section 25(a)
of the Federal Reserve Act or under the laws of any State,
which is in substantial competition therewith, or which holds
stock in corporations which are in substantial competition
with the purchasing Corporation.
SECTION 10.

GENERAL LIMITATIONS AND RESTRICTIONS

(a) Liabilities of One Borrower. - The total liabilities
to a Corporation of any person or government for money borrowed shall at no time exceed in the case of a Banking Corporation 10 per cent of its capital and surplus, or in the
case of a Financing Corporation 50 per cent thereof. For
the purposes of this paragraph, the cost to a Corporation
of any stock owned by it shall, unless otherwise specified
by the Board of Governors in a particular case, be treated
as if it were a liability of the issuer of the stock for
money borrowed; all bonds, notes or other such obligations,
whether or not purchased in the open market, shall be treated
as such a liability; the liabilities of a partnership or firm
shall include those of the several members thereof; the liabilities of a corporation shall include all liabilities incurred by any subsidiary of the corporation for the benefit
of the corporation; and the liabilities of a foreign government shall include those of all its departments or agencies
which derive their current funds principally from the general
tax revenues of the foreign government. The limitations contained in this paragraph shall not apply (1) to obligations
in the form of drafts or bills of exchange drawn in good faith
against actually existing values; (2) to obligations arising
out of the discount of commercial or business paper actually
owned by the person negotiating the same; (3) to the liability
of a customer on account of an acceptance made by the Corporation for his account unless the Corporation itself holds
the acceptance or the acceptance has matured and the customer
has failed to place the Corporation in funds to cover payment
of the acceptances; (4) to the extent that liabilities are
direct obligations of the United States or are secured or
covered by unconditional guarantees, commitments, or agreements to take over or to purchase, made by the United States
or by any department or establishment of, or corporation
wholly owned by, the United States or by the International
Bank for Reconstruction and Development or the International
Finance Corporation; (5) to a direct obligation of, or obligation unconditionally guaranteed by, a foreign government




2543
12/4/56

-33-

or its appropriate financial or central banking authority,
and with respect to which an institution described in
subdivision (4) has given an unconditional guarantee,
commitment or agreement to take over or to purchase (or
has accepted a participation) which covers only a portion
of the obligation (or a portion of the total credit, in
the case of a participation), but covers it to the extent
of at least 25 per cent and in such manner that any default to the Corporation will necessarily include a default to the governmental agency (any such partial but
concurrent guarantee, commitment, agreement or participation by such an institution being hereinafter called
a "proportionate governmental guarantee"); (6) in the
case of a Financing Corporation, to any obligation which
is subject to a "proportionate governmental guarantee"
and does not exceed 100 per cent of the Corporation's
capital and surplus; (7) to direct obligations of the
national government of a foreign country in which the
Corporation has a branch or agency, or obligations fully
and unconditionally guaranteed as to principal and interest by such government, provided such branch or agency
has outstanding equal or greater liabilities payable in
the same currency; or (8) to such other classes of transactions at a branch or agency of a Corporation in a foreign country as the Board of Governors may, upon application of the Corporation, exclude from the limitations
of this paragraph due to special circumstances surrounding such transactions in such country.
(b) Aggregate Liabilities of Corporation. - Except
with the prior permission of the Board of Governors, the
aggregate outstanding liabilities of (1) a Banking Corporation on account of acceptances, monthly average domestic and foreign deposits, borrowings, guaranties, endorsements and any other such obligations, or (2) a Financing Corporation on account of debentures, bonds,
notes, guaranties, endorsements and any other such obligations, shall not exceed ten times the amount of the
Corporation's capital and surplus. In determining the
amount of the liabilities within the meaning of this
paragraph, endorsements of bills of exchange having not
more than six months to run, drawn and accepted by others,
shall not be included.
(c) Relations of Financing Corporations With Affiliated Banks. - (1) Whenever a Financing Corporation is affiliated with a bank in the United States, such Corporation




2544
12/4/56

-314-

shall not incur any liability to such bank that would
cause the total liabilities of such Corporation to such
bank to exceed 10 per cent of the capital and surplus
of such bank, or cause the total liabilities to such
bank of all Financing Corporations affiliated with such
bank to exceed 20 per cent of such capital and surplus.
For the purposes of this paragraph, a Financing Corporation incurs a liability to a bank whenever such bank
or any organization affiliated with such bank (other
than such Financing Corporation or any organization
controlled by it) makes (i) any investment in, or advance on the collateral security of, capital stock or
obligations of such Corporation or any organization
controlled by it, or (ii) any loan or extension of
credit to, or any purchase under repurchase agreement
from, such Corporation or any organization controlled
by it.
(2) No Financing Corporation hereafter organized
shall have a name which is similar to the name of, or
identifies the Corporation with, any bank in the United
States with which such Financing Corporation is affiliated.
(d) Sale of Securities With Guaranty or Endorsement. - Wbenever a Corporation sells, discounts, or
negotiates with its endorsement or guaranty any securities, notes, drafts, bills of exchange, acceptances,
bankers acceptances, or other evidence of indebtedness, it shall enter on its books a proper record
thereof, describing in detail each such evidence of
indebtedness so sold, discounted, or negotiated, the
amounts thereof, the parties thereto, the maturity
thereof, and the nature of the Corporation's liability
thereon. Every financial statement of the Corporation
submitted to the Board of Governors or made public in
any way shall show the aggregate amount of all such
liabilities outstanding as of the date on which such
statement purports to show the financial condition of
the Corporation.
(e) Reports. - Each Corporation shall make at
least two reports annually to the Board of Governors
at such times and in such form as the Board may require.
The Board may, in its discretion, require that statements of condition or such other reports as it may




2545
12/4/56

35

specify be published or made available for public inspection.
(f) Examinations. - Each Corporation shall be examined at least once a year by examiners appointed by
the Board of Governors. Each Corporation shall obtain
and make available to such examiners, among other things,
such information as to the earnings, finances, management and other aspects of any corporation whose stock
is held by the Corporation as may be appropriate for
appraising such investment and determining its suitability. When required by the Board of Governors, each Corporation shall cause any organization controlled by it
to permit such examiners to examine such organization.
The cost of examinations shall be fixed by the Board of
Governors and paid by the Corporation.
(g) Amendments to Regulation. - This regulation is
subject to amendment by the Board of Governors from time
to time.
SECTION 11. CORPORATIONS WITH AGREEMENTS
UNDER SECTION 25 OF THE FEDERAL RESERVE ACT
In addition to any other requirements to which it
may be subject, no corporation having an agreement or
undertaking with the Board of Governors under section
25 of the Federal Reserve Act shall purchase or hold
any asset, or otherwise exercise any of its powers in
the United States or abroad in any manner, which would
not be permissible under the provisions of this regulation if such corporation were a Banking Corporation.




(The Appendix to the revised
Regulation K consisted entirely
of statutory provisions.)
Governor Mills voted "no" on the
adoption of the regulation in the form
approved by the Board for the reasons
contained in Governor Robertson's statement set forth below, pointing out that
he had been continuously opposed to the
basic reasoning from which the revision
of the regulation was developed into its
final form, which, as he had indicated
by concurrence with the purport of Governor Robertson's statement, contains

2546
12/4/56

-36certain provisions that can encourage unsound banking practices and others that
grant authority to the subject financial
corporations that is inconsistent with
the intent of controlling Federal statutes.
The statement of Governor Robertson's
reasons for voting "no" on the adoption of
the regulation was as follows:

The revision of Regulation K being adopted by the Board
contains features, reflected in several provisions of the
regulation, which seem to me to be a serious mistake. It
permits Edge Corporations to carry on excessive banking activities within the United States, thus failing to give due weight
to the statutory purpose of requiring these corporations to
direct their activities abroad and limit their activities in
this country.
Edge Corporations are unusual institutions, and among
their most unusual and most basic features are the strict
limitations on their activities in the United States. It is
important, therefore, to consider the purpose and significance
of these limitations.
General Purpose of Edge Corporations. - The limitations
are reflected, among other places, in the opening paragraph
of the Edge Act (section 25(a) of the Federal Reserve Act) -the paragraph which states the general purposes of Edge Corporations. That paragraph provides for corporations to be
organized:
"...for the purpose of engaging in international
or foreign banking or other international or foreign
financial operations, or in banking or other financial
operations in a dependency or insular possession of
the United States, either directly or through the
agency, ownership, or control of local institutions
in foreign countries, or in such dependencies or insular possessions..."
Except for two changes which will be discussed later, this
general statement in the Edge Act (adopted in 1919) is identical
with that in the provision written into section 25 of the Federal




2r7V-`

12/4/56

-37-

Reserve Act in 1916 to authorize national banks to invest
in stock of corporations which agree to operate under
limitations prescribed by the Board and which are:
...principally engaged in international or
foreign banking, or banking in a dependency
or insular possession of the United States
either directly or through the agency, ownership, or control of local institutions in
foreign countries, or in such dependencies
or insular possessions."
The background of this general statement of purpose, so
similar in sections 25 and 25(a), throws much light on what
Congress intended it to accomplish.
"In Foreign Countries Exclusively". - In 1916, as a step
in the enactment of the provision quoted above from section
25, the House of Representatives passed the bill in a form
that permitted national banks to invest in corporations:
"which are authorized by their charter to do
a banking business in foreign countries exclusively." (underscoring supplied)
When the Senate Banking and Currency Committee was
considering the bill as passed in that form by the House,
Mr. Paul M. Warburg, a member of the Federal Reserve Board
appeared before the Committee on behalf of the Board and
suggested that the language be changed to the form that
was finally adopted. Mr. Warburg explained that the change
was intended to permit the section 25 corporations to exercise somewhat broader powers, but that their operations
were still to be chiefly in foreign countries. He stated
(Hearing, p.25):
"We feel that we can not say 'exclusively,'
but we say 'principally,' because a bank that
is chartered to do foreign business must of
necessity do some business in the United States.
It must at home purchase bills for collection,
which it will take and transmit into foreign
countries, or it might have to receive money
which it will transfer, and many other similar
functions. So that you can not say in the law
that the business that the bank may do shall
be 'exclusively' done in foreign countries.




2548

12/4/56

_38We provide that it shall do that principally,
and put it up to the Federal Reserve Board to
provide such restrictions as may be necessary
to keep those banks which are to do business
in foreign countries within legitimate limits
for their home transactions. For instance,
they must not take general deposits." (underscoring supplied)

In adopting the language recommended by the Board, the
Senate Committee expressed the view that it was making no
substantial change in the requirement in the House bill that
the business be conducted "in foreign countries exclusively."
The Committee's report (No. 481) stated:
"This is substantially the bill as it passed
the House, except that its form is changed so
as to make section 25 complete in itself, instead of adding an additional section... containing the new matter separately."
In other words, when Congress placed the long phrase
in section 25 at the suggestion of the Board, Congress
considered it to be substantially the same as the authorization in the House bill for a corporation to "do a banking
business in foreign countries exclusively."
Additional Limitations in Edge Act. - When Congress
adopted the Edge Act (section 25(a) of the Federal Reserve
Act) in 1919 it took over exactly the language it had written into section 25 in 1916 for the "agreement corporations"
making only two changes. One was to include a reference to
"international or foreign financial operations" -- a phrase
which had been added to section 25 on a temporary basis in
the meantime. The second was to strike out the word "principally" -- a change made by the sponsors of the bill to
meet criticisms of the bill by tightening the limitations
on the activities of the corporations in the United States.
The Edge Act also contained two new provisions designed
to emphasize further the limitations on activities of Edge
Corporations in the United States. Paragraph 10 provided:




"No corporation organized under this section
shall carry on any part of its business in the
United States except such as, in the judgment of
the Board of Governors of the Federal Reserve
System, shall be incidental to its international
or foreign business-

12/4/56
Paragraph 6 included the following in the list of powers
of the corporations:
.to receive deposits outside of the
United States and to receive only such deposits
within the United States as may be incidental
to or for the purpose of carrying out transactions in foreign countries or dependencies or
insular possessions of the United States;...."
The debates on the Edge Act showed that the deletion of
the word "principally", and the inclusion of the other limitations in the Act, reflected strong opposition to monopoly and
branch banking.
To summarize, when Congress adopted the Edge Act it took
over from section 25 language which was considered substantially
the same as an authorization "to do a banking business in foreign countries exclusively", and it took three steps to emphasize further the limitations on activities to be carried on by
Edge Corporations in the United States. These three steps were:
(1) to strike out the word "principally"; (2) to add a general
prohibition against any Edge Corporation carrying on "any part
of its business in the United States", excepting only that
"incidental to its international or foreign business"; and
(3) to place a special limitation on the receipt of deposits
in the United States by such a corporation.
With this background of strong Congressional intention
to limit the banking activities which these corporations
may carry on in the United States, I submit that the Board
should not permit an Edge Corporation to carry on any banking activities in the United States unless they are clearly
justified under the law and needed in the public interest.
Disregard of Legislative Purpose. - As will be shown below,
the revised regulation being adopted completely fails to take
account of the background and spirit of the legislation as
outlined above. It authorizes Edge Corporations to engage
in extensive banking activities in the United States, stretching and straining even the letter of the law in the process.
Webster's Collegiate Dictionary defines "incidental"
to mean "happening as a chance or undesigned feature of
something; casual; hence, minor; of secondary importance
...." It defines the related word "incident" as meaning
"dependent on, or appertaining to, another thing...; directly
and immediately pertaining to, or involved in, something else,
though not an essential part of it ... a subordinate action
or event ..."




2550
12/4/56
Instead of limiting an Edge Corporation's activities
in this country to those that are truly "incidental" -that is, "subordinate" or "minor", the revised regulation
permits such United States activities in practice to be
the primary and principal activities of the corporation.
In other words, while paying lip service to the
legal limitations on activities in the United States by
Edge Corporations, the revised regulation virtually nullifies the limitations. Whereas the law attempted to
exclude all activities in the United States except those
"incidental" to "its" (i.e., the Edge Corporation's)
international business, the revised regulation will permit an Edge Corporation to engage in almost any activities
in the United States if they have the slightest relationship to any international activity of the Edge Corporation
or anyone else.
Examples of Objectionable Activities Permitted. Some examples will illustrate how sweeping are the activities permitted in the United States.
The revised regulation will permit Edge Corporations
to receive in this country deposits from loosely defined
"foreign depositors" when the deposits are to be held for
what the regulation politely calls "reserve or working
balance purposes". The report of the Special Committee
on Foreign Operations of American Banks refers to these
deposits more candidly as "idle balances".
The regulation will omit the elementary characteristic of true international banking -- that financing
done in this country originate with a correspondent abroad
(branch, subsidiary or ordinary correspondent) or result
in drafts in favor of a person abroad.
It will authorize Edge Corporations to finance transportation, assembly or packaging of goods which occurs
entirely in this country, merely because at some earlier
or later stage the Edge Corporation is financing import
or export of the goods.
The examples just mentioned were recommended by a
majority of the Special Committee on Foreign Operations
of American Banks, although, as shown below, those recommendations conflicted with the Committee's own findings.
However, the revised regulation goes beyond even those
contradictory recommendations.




25M
12/4/56
It will permit Edge Corporations to finance companies
that are located in and do all their financing in the United
States, merely because the financing happens to involve
performance of a contract abroad or of "international or
foreign transactions".
It will even permit an Edge Corporation to act as
paying agent in the United States for securities issued
in this country, merely because the issuer happens to be
a foreign country or foreign corporation.
It would be hard to imagine a more typically domestic
operation than acting as paying agent in this country for
securities issued in this market. To attempt to justify
such an activity by an Edge Corporation on the ground that
it involves the handling of deposits for a foreigner is
to misapply the limitation on receipt of deposits in this
country and treat it as if it were a broadening of authority.
Sweeping Banking Powers in United States Contrary to
Public Interest. - Even if it could be assumed for the sake
of argument that there is sufficient laxness and ambiguity
in the law to make it legally permissible for the Board to
permit Edge Corporations to exercise these extensive banking
powers in the United States, I am convinced that such sweeping action is contrary to the public interest.
A majority of the Special Committee on Foreign Operations
of American Banks recommended some of these powers, but no
evidence whatever has been offered to support those recommendations. In fact, the Committee's own findings directly
contradict such recommendations. The report of that Committee
stated on p. 137:
...American commercial banks are adequately
organized to finance any likely increase in the
needs of American importers and in the needs for
short-term credit of our exporters."
That report also stated on p.139:
"...the facilities of United States banking
institutions are adequate to meet the needs of
foreign nationals for financial services in this
country."
The report of the Special Committee apparently attempts
to justify the recommendations on the ground that there are




12/4/56

42.

deficiencies in the number and growth of foreign offices
of American banks, and the further ground that foreign
financing by United States banks was a smaller ratio to
exports in 1953 than in 1938. Whatever the significance
of those relationships in other connections, it is hard
to see how they can have the slightest bearing on the
question of the banking powers to be exercised in the
United States by Edge Corporations.
The Special Committee offers a more subtle argument to the effect that "predominance of domestic business in the leading foreign trade financing institutions
is likely to result in a less vigorous attitude toward
such business in these institutions than would be the
attitude of institutions deriving most of their income
from foreign business." However, the mere creation of
a separate corporate entity does not produce an
tution deriving most of its income from foreign business."
A wholly owned subsidiary can be, and often is, as much
under the domination of the parent institution as an
ordinary department of the parent.
In actual fact, all existing Edge and "agreement"
banking corporations operating in this country are
completely dominated by their parent banks. For all
practical purposes they are operated as a part of the
parent bank.
The fact that American Overseas Finance Corporation,
a nonbanking corporation, is owned by several different
banks merely illustrates the difference between the two
kinds of activity. Experience has shown that Edge and
"agreement" banking corporations are almost certain to
be subsidiaries of commercial banks -- and the largest
banks at that. In such circumstances, to expect increased
banking powers in the United States for such corporations
by
to result in greater interest in foreign financing
of
es
caliti
practi
their managements is to forget the
corporate management.
The revised regulation may very well result in
g
increased activity by existing or new Edge Bankin
Corporations, which might give a temporary appearance
of increased competition. However, there is no real
reason to believe that it will increase effective
competition or total activity in the field. It is
far more likely that it will merely divert business
from existing commercial banks in New York and other
parts of the country to the Edge Banking Corporations
and the banks that own them.




2553

12/4/56

-I+3-

Since experience shows that only the largest
banks are likely to have Edge Banking Corporation
subsidiaries, the net result promises to be a
shift in the business toward the larger institutions, with foreign financing no less mixed with
domestic than before. The consequent tendency
toward a banking structure that concentrates
business in fewer institutions cannot fail to
lessen competition in the long run. Such banking concentration and lessened competition will
harm not only foreign financing, in whose name
this sweeping action is being taken, but also
all commercial banking and the general economy
which is so heavily dependent on the banking
system.
Cross-Country Banking. - In connection with
all these sweeping authorizations for activities
in the United States, it should be remembered
that a member bank can purchase stock of an
Edge Corporation, within the statutory limits,
without having to obtain permission of the
Board.
That fact emphasizes the dangers inherent in
authorizing Edge Corporations to engage in such
sweeping banking activities in the United States.
Such authorizations can in practice make possible
a special form of cross-country banking that is
not subject to the restraints that ordinarily
apply.
There was agreement with Governor Szymczak's suggestion that
consideration of recommendations for legislation be made to the Congress
as soon as feasible or possible, but in any event not later

than two

Years from the effective date of the amended regulation.
Mr. Goodman raised a question as to whether there was any objection on the part of the Board to the Examination Division's proceeding




2551
12/4/56
at once with an examination of the Bank of America Edge corporation.
The Chairman replied that the adoption of the revised Regulation K
should have no effect on the scheduled examination.
Messrs. Marget, Furth, Tamagna, Solomon, and Goodman withdrew
from the meeting.
Mr. Sherman then distributed and commented on, copies of a
revised agenda for the Chairmen's Conference on December

5

and

6.

Governor Balderston referred to the item in the agenda relating
to the interchange of personnel, pointing out that this was not an easy
matter to resolve.

He said that the compartmentalized structure of the

System was quite watertight and that there was not enough flexibility
between the Banks and between the Banks and the Board.

The objective,

in his opinion, should be that of a wider field of choice in the selection of personnel rather than the more limited approach of rotation
Within a single Bank.

He said he thought perhaps the Conference of

Presidents might be a more appropriate forum for a discussion of this
matter than the Chairmen's Conference, but that it was worth while to
review the problem.
Governor Mills felt this was a matter that had to be handled
most tactfully to avoid an implication of infringement on the authority
of the individual Banks and a step toward further centralization.

The

Banks, he said, had a distaste for uniformity and this was a healthy
thing) even though uniformity might lead to greater efficiency, because
it could also lead to greater centralization.
Governor Robertson agreed with Governor Mills' point and said




2555
12/4/56

-45-

that from his experience, he saw more difficulty in working out personnel interchanges on a Bank-to-Bank basis than he did between the
Board and the Banks.
During the discussion, Messrs. Hackley, Associate General
Counsel, Hostrup, Assistant Director, Division of Examinations,
O'Connell, Assistant General Counsel, and Thompson, Supervisory Review Examiner, Division of Examinations, entered the meeting.
The Board then considered a memorandum from Mr. O'Connell
dated November 27, 1956, which had been distributed prior to the
meeting.

The memorandum discussed the request of Marine Midland Cor-

poration of Buffalo, New York, for the Board's opinion with respect
to certain questions arising under the Bank Holding Company Act of
1956 and included a suggested reply to a letter from Mr. Phelan, Vice
President of the Federal Reserve Bank of New York, dated October 15,
1956.
Governor Shepardson raised a question about the first paragraph of the proposed reply, asking whether it made clear the fact that
the

5 per cent limitation applied to the aggregate holdings of all sub-

sidiaries rather than an individual limit for each subsidiary.

Mr.

O'Connell replied that the prohibition was based on the aggregate holdings, and it was agreed that the draft should be revised to make it clear

on this point.




The Board unanimously approved
the reply to the Federal Reserve
Bank of New York, with the appropriate
revision, and with the understanding
that the other Federal Reserve Banks
would be advised of these rulings.

2556
-46-

12/4/56

Secretary's Note: In accordance with
the above action, the following letter
was sent to the Federal Reserve Bank
of New York on December 51 1956:
This refers to Mr. Phelan's letter of October 15,
1956, enclosing a copy of a letter, with related enclosures, from Marine Midland Corporation, a bank holding company, requesting the opinion of the Board of
Governors on a number of related matters under the
Bank Holding Company Act of 1956.
It is understood that question is raised as to
whether shares in a nonbanking company which were acquired by a banking subsidiary of the bank holding company many years ago when their acquisition was lawful
and are now held as investments/ and which do not include more than 5 per cent of the outstanding voting
securities of such nonbanking company and do not have
a value greater than 5 per cent of the value of the
bank holding company's total assets, are exempted
from the divestment requirements of the Act by the
provisions of section 4(c)(5) of the Act.
In the Board's opinion, this exemption is as applicable to such shares when held by a banking subsidiary of a bank holding company as when held directly
by the bank holding company itself. While the exemption
specifically refers only to shares held or acquired by
the bank holding company, the prohibition of the Act
against retention of nonbanking interests applies to
indirect as well as direct ownership of shares of a
nonbanking company, and, in the absence of a clear mandate to the contrary, any exception to this prohibition
should be given equnl breadth with the prohibition.
Any other interpretation would lead to unwarranted
results.
Although certain of the other exemptions in section
of the Act specifically refer to shares held or
acquired by banking subsidiaries, an analysis of those
exemptions suggests that such specific reference to
banking subsidiaries was for the purpose of excluding
nonbanking subsidiaries from such exemptions, rather
than for the purpose of providing an inclusionary
emphasis on banking subsidiaries.

4(c)




2557
12/4/56
It should be noted that the Board's view as to this
question should not be interpreted as meaning that each
banking subsidiary could own up to 5 per cent of the stock
of the same nonbanking organization. In the Board's opinion the limitations set forth in section 4(c)(5) apply to
the aggregate amount of stock held in a particular organization by the bank holding company itself and '.)y all of
its subsidiaries.
Secondly, question is raised as to whether shares in
a nonbanking company acquired d.p.c. by a banking subsidiary
of the bank holding company may be retained if such shares
meet the conditions contained in section 4(c)(5) as to value
and amount, notwithstanding the requirement of section 4(c)(2)
that shares acquired d.p.c. be disposed of within two years
after the date of their acquisition or the date of the Act,
whichever is later. In the Board's opinion, the 5 per cent
exemption provided by section 4(c)(5) covers any shares,
including shares acquired d.p.c., that meet the conditions
set forth in that exemption, and, consequently, d.p.c. shares
held by a banking subsidiary of a bank holding company which
meet such conditions are not subject to the two-year disposition requirement prescribed by section 4(c)(2), although
any such shares would, of course, continue to be subject to
such requirement for disposition as may be prescribed by
provisions of any applicable banking laws or by the appropriate bank supervisory authorities.
In view of the opinion here expressed on the preceding
question, the inquiry from Marine as to whether the Board
might extend the period for disposition of d.p.c. shares
prescribed by section 4(c)(2) would be academic since Marine
has stated that such shares do not include more than 5 Per
cent of the outstanding voting securities of the companies
in which held and do not have a value greater than 5 per
cent of Marine's total assets.
Finally, question is raised as to whether shares held
by banking subsidiaries of the bank holding company in
companies holding bank premises of such subsidiaries are
exempted from the divestment requirements by section 4(c)(1)
of the Act. It is the Board's view that section 4(c)(l),
exempting shares owned or acquired by a bank holding company in any company engaged solely in holding or operating
properties used wholly or substantially by any subsidiary
bank, is to be read and interpreted, like section 4(c)(5),
as applying to shares owned indirectly by a bank holding
company through a banking subsidiary as well as to shares
held directly by the bank holding company. A contrary




2558
12/4/56
interpretation would impair the right that member banks
controlled by bank holding companies would otherwise
have to invest, subject to the limitations of section 24A
of the Federal Reserve Act, in stock of companies holding
their bank premises; and such a result was not, in the
Board's opinion, intended by the Bank Holding Company
Act.
It is requested that the Board's views as expressed
in this letter be transmitted to Marine Midland Corporation.
Governor Shepardson then caJled attention to a memorandum from
the Division of Personnel Administration dated November 301 1956, recommending that employees of the Board, except those required to be present by the nature of their duties, be excused from duty for the entire
day on Monday, December 241 19561 and that such day be considered a
holiday for purposes of compensation and leave.

This recommendation,

he said, was in line with the directive from the White House to heads
of executive departments and independent establishments.
Approved unanimously.
The meeting then adjourned.