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Minutes for
To:
Members of the Board
From:
Office of the Secretary
February 24, 1959
Attached is a copy of the minutes of the
Board of Governors of the Federal Reserve System on
the above date.
It is not proposed to include a statement
with respect to any of the entries in this set of
minutes in the record of policy actions required to
be maintained pursuant to section 10 of the Federal
Reserve Act.
Should you have any question with regard
to the minutes, it will be appreciated if you will
advise the Secretary's Office. Otherwise, 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
Gov. Mills
Gov. Robertson
Goy. Balderston
Gov. Shepardson
càM
E:10-0
,
r0
,C)4
Minutes of the Board of Governors of the Federal Reserve System
on Tuesday, February 24, 1959.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
The Board met in the Board Room at 10:00 a.m.
Martin, Chairman
Balderston, Vice Chairman
Szymczak
Mills
Robertson
Shepardson
Sherman, Secretary
Kenyon, Assistant Secretary
Thomas, Economic Adviser to the Board
Hackley, General Counsel
Molony, Special Assistant to the Board
Shay, Legislative Counsel
Hexter, Assistant General Counsel
Hostrup, Assistant Director, Division
of Examinations
Mr. Nelson, Assistant Director, Division
of Examinations
Mr. Benner, Assistant Director, Division
of Examinations
Mr. Hill, Assistant to the Secretary
Miss Hart, Assistant Counsel
Mr. Holahan, Supervisory Review Examiner,
Division of Examinations
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Discount rates.
Unanimous approval was given to telegrams to
the following Federal Reserve Banks approving the establishment without
change by those Banks on the dates indicated of the rates on discounts
"cl advances in their existing schedules:
New York
Philadelphia
Chicago
Atlanta
Bank holding company investments
been
February
February
February
February
19
19
19
23
(Items 1 and 2).
There had
circulated to the Board a draft of letter to all Federal Reserve
vith respect to the extent to which a bank holding company and
2/24/59
-2-
its subsidiary banks may acquire stock of small business investment
companies organized pursuant to the Small Business Investment Act of
1958. As indicated in an interpretation published in the October 1958
issue of the Federal Reserve Bulletin, the investment of a bank holding
c°mPany in stock of such a company would be limited to one per cent
Of its capital and surplus, and
question had arisen with regard to the
definition of "capital and surplus."
The proposed letter reflected
the opinion
of the Legal Division that the tam should be interpreted
in
- accordance with generally accepted accounting and reporting procedures
sPPlicable to the investing entity, in the present case the bank holding
conlpanY.
The second question concerned the method of applying the one
Per cent limitation
when all or part of the shares of the small business
investment company were owned by a subsidiary or subsidiaries
of the
bank holding company.
by
On the theory that ownership or control of stock
s subsidiary should be regarded as an indirect ownership or control
°f such stock by the parent, the Legal Division was of the opinion, and
the letter would state, that the amounts invested in a small business
investment company by the holding company and by its subsidiaries must
11°t exceed one per cent of the holding company's capital and surplus
l'hen
added together.
In discussing these questions, Mr. Hackley pointed out, with
respect to
the second, that this appears to be the only interpretation
15°ssib1e under the statutes.
While question had been raised within the
2/24/59
-3-
staff as to whether the interpretation would not be quite restrictive in
its effect, a check indicated that most bank holding companies appeared
to have written up their capital and surplus to the underlying value on
their subsidiary banks' books.
After further discussion, during which Mr. Hostrup observed
that it would be difficult to find any other reasonable basis for
measuring the extent of permissible investments and the comment was made
that the bank holding companies would be likely to suggest a change in
the law if the interpretation proved too restrictive, the proposed letter
was approved unanimously.
A copy is attached hereto as Item No. 1.
In addition, there had been distributed to the Board a draft
°I'
a second letter to all Federal Reserve Banks, likewise with regard
to the applicability of provisions of the Bank Holding Company Act to
the
acquisition by a bank holding company of stock of a small business
investment company.
Question had arisen as to whether a bank holding
Corn
PanY would be regarded as having acquired "direct or indirect ownerShip or
control" of stock of a small business concern in violation of
section 4(0 of the Bank Holding Company Act if, under section 304 of
the Small Business Investment Act, the debentures of such a concern were
converted into stock.
Since section 4(0(4) of the Holding Company Act
aPParently intended to permit a bank holding company to acquire any
to
that would be eligible for purchase by a national bank, it was the
2/24/59
-4-
()Pinion of the Legal Division that section 4(a)(l) of the Act would
not prohibit a bank holding company from acquiring stock of a small
business investment company even though this might result in indirect
ownership or control of stock of a small business concern not eligible
for purchase directly by a national bank or bank holding company.
During discussion of this question, Governor Mills observed
that such an interpretation would permit a bank to use its interest in
a small business investment company as a vehicle for engaging in some
type of business which might be considered inadvisable from the bank
Supervisory standpoint, or in fact prohibited.
Mr. Hackley said that the problem raised by Governor Mills was
recognized by the staff.
However, the provisions of the law were such
as to permit national banks to invest up to a certain amount in stock
a small business investment company and the view had been expressed by
the Office of the Comptroller of the Currecny that the investment would
be a.
Permissible holding even if debentures of a small business concern
hald by
the small business investment company were converted into stock.
) the proposed interpretation would go no further in the case of a
be'nk holding company than a national bank.
When the bank holding company
legislation was being developed, Mr. Hackley said, the point raised by
G°1ternor Mills might not have been thought of; in the event of abuses,
correction could probably be achieved through amendment of the law.
2/24/59
-5While this question had been raised by one particular bank holding
company, Mr. Hackley advised that the Association of Registered Bank
Holding Companies was aware that the question had been submitted and
anY response made by the Board undoubtedly would be made known to all
bank holding companies.
Therefore, it seemed advisable to send the
interpretation to all Federal Reserve Banks and publish it in the
Pederal Register and the Federal Reserve Bulletin.
Thereupon, Governor Millst comment having been noted, the proposed
letter was approved.
A copy is attached as Item No. 2.
Miss Hart then withdrew from the meeting.
Application of Harvard Trust Company (Item No. 3). At the meeting
of the Board on February 9, 1959, it was decided to hold in abeyance
the
application of Harvard Trust Company, Cambridge, Massachusetts, to
establish a branch in Littleton until Governor Robertson had ascertained
frft the Comptroller of the Currency the status of the competing application
of the
First National Bank of Ayer, Massachusetts.
In a memorandum dated
PebrtlarY 18, 1959, which had been distributed to the Board, Governor
Pobertson
reported advice from the Comptroller which indicated that the
itYsr bank was interested primarily in averting the possibility of Harvard
Company establishing a branch in Littleton, and not particularly
irlterested in going into Littleton itself.
He therefore felt the
Rarvard Trust application should be approved.
2/24/59
-6On the basis of Governor Robertson's report, unanimous approval
14as given to a letter to Harvard Trust Company advising of favorable
action on its application.
A copy is attached as Item No. 3.
Mr. Nelson then withdrew and Mr. Young) Director, Division of
Research and Statistics, entered the room.
Hearings on administered prices
(Item No. )).
A draft of reply
t° a letter from Chairman Kefauver of the Senate Subcommittee on Antitrust
84d Monopoly inviting Chairman Martin to testify at further hearings
°11 administered prices to be held March 10 through March 13 had been
distributed to the Board.
After some discussion of the wording of the reply, unanimous
.8.32znEy,B1 was
given to a letter in the form attached hereto as Item No. 4.
Messrs. Thomas, Young, Shay, and Molony then withdrew from
the meeting.
Pan American Bank of Miami (Item No. 5).
In a memorandum
distributed to the Board under date of February 20) 1959, Governor
Robertson
reported a telephone call he had received from Mr. James Sottile,
?resident of the Pan American Bank of Miami, Miami, Florida, with respect
t° the proposed public sale of stock of South Dade Farms, Incorporated,
ilart of the proceeds of which were to be transferred to the Pan American
Bar
Mr. Sottile apparently wanted the Board to agree to withdrawal
the South Dade Farms commitment to remove $2 million of adversely
^it
2/24/59
-7-
classified paper from Pan American Bank so that the commitment would
cease to be a complicating element in the analysis of South Dade Farms'
condition by the auditors and prospective underwriters.
Mr. Sottile
l'as told that it was doubtful whether the Board would agree to withdraw
the commitment until the capital structure of Pan American Bank was
increased by the agreed $3 million but that the Board. might be willing
tO let
the matter remain in status quo while the underlying negotiations,
SEC registration, and actual sale of the stock were in process.
In
effect, this would mean that South Dade Farms would not be required to
Purchase $1 million of Pan American Bank's classified paper by March
31) 1959, the stipulated date for the first step.
On the basis that
it seemed appropriate to cooperate with South Dade Farms to the extent
c°tsistent with the Board's responsibility, there was attached to
Governor Robertsonts memorandum a draft of letter to South Dade Farms
el5ireeeing the Board's intention not to insist upon performance under
the commitment as long as the present financing arrangements progressed
it a s
atisfactory manner.
Governor Mills questioned whether the commitment was enforceable
or Of substantial value and whether South Dade Farms had the ability to
°°14P1Y with it unless additional stock was sold.
He suggested that if
the Board did not remove the commitment and it impeded the sale of stock,
this 'would affect adversely the result the Board wanted.
2/24/59
-8Governor Robertson said he likewise doubted whether the commitment
had much value.
However, he did not feel that the Board should release
South Dade Farms from the commitment until there was more assurance that
the additional stock would be sold.
It might develop, after South Dade
Farms had been released from the commitment, that the additional capital
for Pan American was not going to be produced.
Mr. Sottile, he said,
had expressed agreement with a handling of the matter along the lines
°f the proposed letter.
Following a discussion of the matter in the light of the meetings
between the Board and Mr. Sottile and his associates on January 19 and
20,
1959, the letter, attached to these minutes as Item No. 5, was
2:1
21212yall.
The meeting then adjourned.
Secretary's Note: On February 20, 1959,
Governor Shepardson approved on behalf
of the Board the following item:
iner Memoranda from appropriate individuals concerned recommending
the eases in the basic annual salaries of the following persons on
Board's staff, effective February 22, 1959:
r
Katharyne P. Reil, Economist, Division of Research and Statistics,
P7,335 to $7,510 per annum.
to ,k ,George G. Noory, Analyst, Division of Bank Operations, from $4,790
4;4/980 per annum.
„
1059 Memorandum from the Division of Examinations dated February 19,
Irly requesting approval of a dinner on March 11, 1959, in connection
fuldh the Conference of General Auditors of the Federal Reserve Banks
submitting a list of persons proposed to be invited.
i,"11-10(
f
.
2/24/59
-9Governor Shepardson today approved on
behalf of the Board telegrams to the
Federal Reserve Bank of San Francisco
(attached Items 61 71 and 8) approving
the appointment of Dennis E. Ross, Wayme
Nickolas Condon, and Danila Mitrovich as
assistant examiners.
BOARD OF GOVERNORS
S-1687
OF THE
Item No. 1
2/24/59
FEDERAL RESERVE SYSTEM
WASHINGTON 25, D. C.
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
February 24, 1959.
Dear sir:
An interpretation of the Board published at page 1161 of the
October 1958 issue of the Federal Reserve Bulletin dealt with the
question of whether, and to what extent, the Bank Holding Company Act
Of 1
956 permits a bank holding company or its subsidiary banks to
,oquIre shares in a small business investment company ("SBIC") organ4-zed pursuant to the Small Business Investment Act of 1958 ("SBI Act")
That interpretation pointed out that the general prohibition
in section 4 of the Bank Holding Company Act against a bank holding
ici°111ParlY's acquiring "direct or indirect ownership or control of any
c°'ing shares of any company which is not a bank or a bank holding
ti,
c)
,mParlY" is subject to an exemption in section 4(c)(4) for stocks of
"
'
8 kinds and amounts eligible for investment by a national bank; that
tion 302(b) of the SBI Act permits a national bank to purchase
Shares of
stock in SBIC's "in an amount aggregating Licog more than
Per cent of 5he bankif capital and surplus"; and that, accorda bank holding company may invest in stock of an SBIC up to the
P
h!
o cified one per cent. The interpretation also expressed the view,
a:
e'er) that section 6(a)(1) of the Bank Holding Company Act applies
limitation to banking subsidiaries of a bank holding company;
rid
tilt., that under that section such a subsidiary bank could not invest in
a
stock of an SBIC if the SBIC is, or would become by the investment,
s
ubsidiary" of the bank's parent holding company.
further questions have arisen concerning the amount of
of an SBIC that may be acquired by a bank holding company. The
relates to the definition of "capital and surplus" under the one
Per
of cent limitation
of section 302(b) of the SBI Act. Since the amount
ActS ic stock eligible for investment by a national bank under the SBI
is 4.
18 limited to one per cent of the bank's capital and surplus, it
hold4
!Board's view that the amount eligible for investment by a bank
cora-'"g company is similarly limited to one per cent of the holding
hoe
eanY's capital and surplus. In order to apply this limitation,
:er, it is necessary to define the term "capital and surplus."
Whia,
- the matter is not entirely free from doubt, it is the opinion of
8tockTwo
5-1687
-2-
the Board that, since neither the SBI Act nor its legislative history
suPplies a definition, the term should be interpreted in accordance
With generally accepted accounting and reporting procedures applicable
to the investing entity, in the present case, the bank holding company.
The second question concerns the method of applying the one
Per cent limitation stated in section 302(b) of the SBI Act when all or
Part of the shares of the SBIC are owned by a subsidiary of the bank
holding company. For example, the SBIC shares might be owned by a bank
holding company which is a subsidiary of another bank holding company,
or by a subsidiary bank in a case where the SBIC is not a subsidiary of
the bank's parent holding company. Since ownership or control of stock
by a
subsidiary should be regarded as indirect ownership or control of
tich stock by the parent, the Board is of the opinion that the amount
?-hvested in an SBIC by the holding company and by its subsidiaries must
be added together to determine whether the total amount directly and
indirectly invested by the holding company exceeds the amount
Permissible, that is to say, exceeds one per cent of the holding
c°mPanY's capital and surplus. Assuming that no other exception is
available in the particular case, acquisition or retention by the holdflg Company
of direct or indirect control of any amount in excess of
that one per cent would be prohibited by section 4 of the Bank Holding
°mPallY Act. Thus, a particular subsidiary of a bank holding company
could not invest in the stock of an SBIC if such investment, together
With the investments of the parent bank holding company and of other
Sl1b sidiaries, would exceed one per cent of the capital and surplus of
the parent
bank holding company.
Very truly yours,
/)
Merritt S
an,
Secretary.
To Ta
p
i
'SIDENT3
OF ALL FEDERAL RESERVE BANKS
BOARD OF GOVERNORS
s-1688
OF THE
Item No.
2/24/59
FEDERAL RESERVE SYSTEM
WASHINGTON 25, D. C.
ADDRESS OFFICIAL CORRESPONDENCE
TO THE SOARD
February 24, 1959.
Dear sir:
A question has been raised concerning the applicability of
Provisions of the Bank Holding Company Act of 1956 to the acquisition
V a bank holding company of stock of a small business investment
company ("SBIC") organized pursuant to the Small Business Investment
Act of 1958 ("SBI
Act").
As indicated in the interpretation of the Board published at
Page 1161
of the October 1958 issue of the Federal Reserve Bulletin, it
ls the Board's opinion that, since stock of an SBIC is eligible for
Purchase by national banks and since section 4(c)(4) of the Holding
Company Act exempts stock eligible for investment by national banks from
1"e Prohibitions of section 4 of that Act, a bank holding company may
4-awfully acquire stock in such an SBIC.
However, section 304 of the SBI Act provides that debentures
small business concern purchased by a small business investment
mPanY may be converted at the option of such company into stock of
whe amall business concern. The question therefore arises as to
in the event of such conversion, the parent bank holding corao:"Y would be regarded as having acquired "direct or indirect ownership
control"
of stock of the small business concern in violation of
eticm 4(a) of the Holding Company Act.
Of a
4
The Small Business Investment Act clearly contemplates that
„
needvl the primary purposes of that Act was to enable SBICs to provide
of rled equity capital to small business concerns through the purchase
:
st ebentures convertible into stock. Thus, to the extent that a
sz?kholder in
an SBIC might acquire indirect control of stock of a
t‘l-L
err,1 business concern, such control appears to be a natural and conthjar,-ated incident of ownership of stock of the SBIC. The Office of
with
troller of the Currency has informally indicated concurrence
bank this interpretation insofar as it affects investments by national
s in stock of an SBIC.
-2-
s-1688
Since the exception as to stock eligible for investment by
national banks contained in section 4(6(i4) of the Holding Company
Act was apparently intended to permit a bank holding company to
acquire any stock that would be eligible for purchase by a national
bank, it is the Board's view that section 4(a)(1) of the Act does not
Prohibit a bank holding company from acquiring stock of an SBIC, even
though ownership of such stock may result in the acquisition of
indirect ownership or control of stock of a small business concern
which would not itself be eligible for purchase directly by a national
hank or a bank holding company.
Very truly yours,
Merrit
erman„
Secretary.
raE PRESIDENTS OF ALL FEDERAL RESERVE BANKS
BOARD OF GOVERNORS
OF THE
Item No. 3
FEDERAL RESERVE SYSTEM
2/24/59
WASHINGTON 25. D. C.
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
IIW
440'1**
February 24, 1959.
Board of Directors,
Harvard Trust Company,
CaMbridge, Massachusetts.
Gentlemen:
Pursuant to your request submitted through the
Federal Reserve Bank of Boston, the Board of Governors
Of the Federal Reserve System approves the establishment
Of a branch at Littleton Common in the Town of Littleton,
Massachusetts, by the Harvard Trust Company, provided the
branch is established within one year from the date of
tnis letter and approval of the State authorities is effective as of the date the branch is established.
Very truly yours,
(Signed) Kenneth A. Kenyon
Kenneth A. Kenyon,
Assistant Secretary.
t
BOARD OF GOVERNORS
OF THE
Item No. 4
FEDERAL RESERVE SYSTEM
2/24/59
WASHINGTON
OFFICE OF THE CHAIRMAN
ocirpV)
February 24, 1959
The Honorable Estes Kefauver,
Chairman, Subcommittee on Antitrust
and Monopoly,
Committee on the Judiciary,
United States Senate,
Washington 25, D. C.
MY' dear Mr. Chairman:
Your letter of February 17, 1959, related that your
Subcommittee would resume its hearings on administered prices
for the period March 10 through March 13, and had invited me to
tectify at that time.
I appreciate the invitation; but as I am scheduled to
be in the hospital during the first half of March, I will be
unable to accept. However, there is enclosed a copy of a letter
5 February 5, 1959, to Senator Proxmire from Ralph A. Young,
Director of the Board's Division of Research and Statistics,
which was written in answer to Senator Proxmire's request at an
!conomic review that the Board's staff presented to the Senate
"cramittee on Banking and Currency on January 29, 1959. The statereferred to in the letter is that of Gardiner C. Means before
i(D11/* Subcommittee on January 24, 1959. The letter accompanies
certain remarks of Senator Proxmire in the Congressional Record
February 9 and, therefore, probably has come to your attention
vu'r"dY. The Board felt, however, that it might take this
cIPPortunity to forward a copy of the letter to you.
Sincerely yours,
(Signed) Wm. McC. Martin, Jr.
Wm. McC. Martin, Jr.
li;nclosures 4
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON 25. D. C.
Item No.
2/24/59
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
February 24, 1959
South Dade Farms, Inc.,
Miami, Florida.
Gentlemen:
You have informed the Board of Governors of pending
negotiations looking toward the public sale and distribution of
common stock of South Dade Farms, Inc. that will provide the
corporation with $14 million for general corporate purposes. One
object of this proposed sale and distribution is to facilitate a
million increase in the capital structure of Pan American Bank
of Miami, a member bank of the Federal Reserve System.
In a letter of July 24, 1958 addressed to the Federal
Reserve Bank of Atlanta, Pan American Bank presented a program under
ich, among other things, "the Sottile interests" were committed
tic' remove from Pan American Bank a total of $2 million "of the
esent doubtful loan classifications contained in the March 31,
58 examination" report of Pan American Bank. Of this amount, at
aeast $1 million was to be removed prior to March 31, 1959, an
0 ditional $500,000 prior to March 31, 1960, and an additional
1500,000 prior to March 31, 1961. Enclosed with said letter was
a letter in which South Dade Farms, Inc. pledged that it would
carrY out the above-mentioned commitment.
n
r1
the
In a letter of January 20, 1959 to Pan American Bank,
Board of Governors stated that
"Iiihen the Board has been assured that definite arrangements have been made to provide the :$3 million [to be
added to the capital funds of Pan American Bank], it will
consent to a withdrawal of the commitment heretofore
given, pursuant to which South Dade Farms agreed to take
out of the bank within specified times a specified amount
of the classified assets."
As indicated by the foregoing summary of correspondence,
he capital structure of Pan American Bank is increased, as a
thr t of the pending program, by not less than 3 million in cash
rae ?ugh the sale of additional common stock of the bank, the abovebor ioned commitment may be withdrawn and, in the opinion of this
pa I'd, it will cease to be a commitment or obligation of South Dade
Inc.
if
BOARD
OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
South Dade Farms, Inc.
-2-
You have informed the Board that the proposed public
sale and distribution of stock may be consummated during April 1959,
although an additional two or three months may be required, and
that the $3 million addition to the capital structure of Pan American
Bank will take place promptly after such sale and distribution. On
this basis, you have requested that, during the course of negotiations with underwriters, registration under the Securities Act of
1933, and the other steps involved in the sale and distribution, the
Board of Governors refrain from insisting that South Dade Farms, Inc.
Purchase from Pan American Bank l million of adversely classified
loans prior to March 31, 1959, as required by the July 24, 1958
c
ommitment.
As you are aware, this Board could not with propriety
agree that it will in no event require prompt performance of the
commitment, since a situation could conceivably arise in which the
Board's supervisory responsibilities would require insistence that
conunitment be carried out in strict accordance with its terms,
including the specified dates. However, in the absence of major
adverse developments, which are not anticipated, the Board will not
require South Dade Farms, Inc. to carry out said commitment so long
the program of public sale and distribution of stock of South
?de Farms, Inc. and consequent increase in the capital structure of
l'n American Bank continues to move forward in accordance with a
c.1:me schedule that appears to the Board to be reasonable in a transaction of this nature and magnitude.
Very truly yours,
(Signed) 14erritt Sherman
Merritt Sherman,
Secretary.
TELEGRAM
LEASED WIRE SERVICE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON
February 24, 1959.
SWAN - SAN FRANCISCO
lieurlet February 11, 1959.
Board approves appointment of
Dennis E. Ross as assistant examiner for Federal Reserve
Bank of San Francisco.
Advise effective date of appoint-
ment and when United States citizenship has been granted.
(Signed) Kenneth A. Kenyon
KENYON
Item No. 6
2/24/59
Item No. 7
TELEGRAM
2/24/59
LEASED WIRE SERVICE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON
February 24, 1959.
BIOS - SAN FRA.NCISCO
leurlet February 18, 1959.
Board approves the appointment
Of Wayne Nickolas Condon as assistant examiner for the
Federal Reserve Bank of San Francisco. Advise effective
date of appointment.
(Signed) Kenneth A. Kenyon
KENYON
TELEGRAM
Item No. 8
LEASED WIRE SERVICE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON
2/24/59
February 24, 1959.
SWAN - SAN FRANCISCO
Reurlet February 17, 1959. Board approves appointment of
Danila Mitrovich as an assistant examiner for Federal Reserve
Bank of San Francisco. Please advise date of appointment.
(Signed) Kenneth A. Kenyon
KENYON
@FedFRASER