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121 A. meeting of the Board of Governors of the Federal Reserve SYstea was held in Washington on Monday, January 30, 1939, at 11:30 Et. PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Eccles, Chairman Ransom, Vice Chairman Szymczak McKee Davis Draper Mr. Mr. Mr. Mr. Morrill, Secretary Bethea, Assistant Secretary Carpenter, Assistant Secretary Clayton, Assistant to the Chairman The action stated with respect to each of the matters herein"'ter referred to was taken by the Board: The minutes of the meeting of the Board of Governors of the l'sderal Reserve System held on January 28, 1939, were approved unani111°11sly. Letter to Mr. Young, Vice President of the Federal Reserve Bank Of Chicago, reading as follows: 193. "Reference is made to your letter of September 27, and the previous correspondence, with respect to °ne unauthorized exercise of trust powers by the G. W. i ea Exchange Bank, Mtrcellus, Michigan, and to your ,I_Iformal discussion of this matter with Mr. Cagle of the 11rd'5 staff on November 4, 1938. "As you know, this bank was admitted to Maro, '4 4, 1918, subject to the following condition of memmebrshipu uership: ' 11 , p 'That except with the approval of the Federal Reserve Board there shall be no change in the general character of the assets of or broadenin the functions now exercised by you, such 122 1/30/39 -2- "as will tend to affect materially the standard now maintained and recuired as a condition of membership.' "Tinder date of November 12, 1927, the bank was granted limited trust powers by the State of Michigan, authorizing it to act as executor, administrator and guardian, but, so far as our records show, had not exercised such powers prior to acceptance of the Pmardianship listed in the report of examination made as of May 29, 1937. "The Board's letter of July 28, 1937, to you, called attention to the fact that the acceptance of that trust, Without having first obtained the permission of the Board, was regarded as a violation of the membership condition quoted above. The view was taken, however, that the violation was apparently inadvertent, and the Board raised no objection to the bank's administering the account, but advised that ii it desired to accept any additional trust accounts it should first make application to the Board for permission to exercise the fiduciary powers granted to it by the State authorities. "The report of examination made as of July 11, 1938, indicates that the guardianship in question had been disPosed of and that two email estate accounts had been acquired without having first obtained the permission of the Board. your letter of September 27, 1938, you state that th e bank is not desirous of exercising trust powers after th ese estates are closed, but that it feels that it may be advisable from time to time to act in a fiduciary capacity in connection with snail estates in the community, You recanmend that the bank be permitted to exercise limited trust powers. f. "Iurther consideration has been given to this situai'l°n in the lipht of the information presented by you. 1,11 view of the limited fiduciary authority held by the ;ank under the State law, the limited field for trust busii_ ess, the nominal amount of trust business so far received c7 Is the bank, and the fact that it apparently is not desira1/_2 of exercising trust powers other than occasionally , 6 an accommodation to its customers, the Board feels -01Eit fle matter of accepting tae two small estate accounts is" _not of sufficient importance to warrant any further acun by it at this time. 122, 1/30/39 -3- "however, if the bank desires to extend materially its fiduciary activities, it should make the necessary arrangements, including the maintenance of adequate books and records and competent Personnel, and should also, under the above-quoted condition of membership, obtain the consent of the Board. in this connection the bank would be expected to accept the three standard conditions now being Prescribed in connection with the admission to membership or banks exercising fiduciary powers. Please advise the bank accordingly. "In view of the circumstances recited by you, it is suggested that you may prefer to either discuss this matter personally with the bank's president when a favorable oPportunity arises, or to have your examiners do so at the tiue of the next examination, rather than to take it 111) by correspondence." Approved unanimously. Letter to Mr. Clerk, First Vice President of the Federal Reserve " 11 k of San Francisco, reading as follows: "Reference is made to Mr. Sargent's letter of December 1, 1938, transmitting an application of the 'Carbon illerY Bank', Price, Utah, for permission to act as trustee and guardian of estates. "Phis bank, as you know, was admitted to membership on December 12, 1918, and is subject to the following condition of membership, among others: 'That except with the approval of the Federal Reserve Board, there shall be no change in the general character of your assets or broadening in the functions now exercised by you, such as Will tend to affect materially the standard now maintained and required as a condition of membership.' "It is understood that the bank was granted trust powers bY the State Banking Commission of Utah on March 12, 1923. 'Your examination of this bank as of October 19, 1936, rev e'LJ-ed that the bank had accepted, without prior approval s the Board, one anall guardianship account arising through U. S. Veterans Bureau, which delivers to the bank camvensation to be distributed under court order for the benefit j 124 1/30/39 "Of an incompetent or his dependents, and a few accounts, in connection with which it appears that the bank exercised but limited, if any, fiduciary powers, arising from the designation by the Industrial Commission of the State Of Utah of the bank to hold certain funds and distribute them to the widows and children of deceased coal miners by monthly payments in accordance with instructions of the Commission. After due consideration, the Board advised You on March 12, 1937, that, in the circumstances, no objection would be raised to the bank continuing to handle the guardianship account and accounts of the kind then beinq handled for the Commission but that if the bank should desire to exercise trust powers in other instances it should first obtain the permission of the Board. "It is understood that the bank has made this application since having its attention again called, during the examination as of September 7, 1938, by an examiner for Your bank, to the above-quoted condition of membership in connection with the acceptance of one additional snail guardianship account arising through the U. S. Veterans Bureau. "It is understood that the amount of guardianship business which may be expected by the Carbon Emery Bank will be nominal and that the fiduciary powers and responsibilities involved are narrowly limited and defined; that the management and asset condition of the bank are generally satisfactory, and that although the bank desires to accept occasional accounts of the kinds above described it does not expect to enter the trust business actively and does not desire formally to establish a trust departrrlent under qualified management. In the circumstances, the Board does not feel that the bank's application for unrestricted permission to act as trustee and guardian Of estates should be approved, but the Board interposes no.objection, under the above-quoted condition of membership, to the bank's administerine the State Industrial Commission accounts and the two U. S. Veterans Bureau g4ardian5hip accounts described above or to its acceptance er an occasional account of a similar nature which may be tendered to it. "From the information available here, it appears doUbtful whether the bank has complied with the requirements of Utah State law with respect to the pledge of 125 1/30/3g -5- "collateral to secure trust funds deposited in its banllag department, or can legally grant the preference to flInds of the State Industrial Cobh_iission accounts which it is understood is provided for in the instruments under which they are handled, and it will be appreciated if you will determine the status of these matters and take such steps as may be necessary to correct any criticizable features which may be present and infom the Board of Governors in the premises." Approved unanimously. Letter to Honorable Brien McMahon, Assistant Attorney General ot the United States, reading as follows: "You will recall that in the latter part of November 19:38 there was transmitted to you by the Securities and Exchange Commission certain material crowing out of its investigation of the failure of Richard Whitney and ComPanY, a member firm of the New York Stock Exchange, relating to Possible Federal offenses involved in the failure. "At that time you were advised that the Board of Governors of the Federal Reserve System was conducting a sPecial inquiry at various New York banks, which at one tirae or another had extended credit to Richard Whitney and , e_°111Pany or to Richard Whitney, to ascertain whether there nerd been violation of the Board's Regulation U, relating to loans by banks for the purpose of' purchasing or carrying stocks registered on a national securities exchange. The inquirY, comprising special investigations of six State ember banks of the Federal 'Reserve System by the examin;ing division of the Federal Reserve Banii. of New York, nas now been completed. "Similar investigations of two national banks also were conducted by national bank examiners at the direction °Ifi the Comptroller of' the Currency. It is understood at these investigations have also been completed and t4Il8t the results of the same will be reported to you by ue oCrice of the Comptroller of the Currency. "The investigation of the State member banks covered 8/1 aggregate of some 1015 loans made or outstanding to Richard Whitney and Company or Richard Whitney over the T 126 1/30/39 -6- "period from May 1, 1936, the effective date of the Board's Regulation U, to the company's failure. Investigation of each loan also involved investigation of the collateral accepted, substitutions made therein, and withdrawals made therefram. The examiner's reports, therefore, are quite voluminous and contain a large amount of data not pertinent to the subject matter of this letter. "Summarizing them, it may be said that the possible violations in the aggregate are few and in general are of R technical nature, or are doubtful as to existence, as to proof, or both. Establi shing a violation would in practically every case depend upon establishing with respect to the questioned loan one of the followi ng: "1. The possibility that signed statements that loans were not for the purpose of purchasing or carrying registered stocks may not have been 'accepted by the bank in good faith' as specified in section 3(a) of the regulation, or that loans treated for other reasons as not bainC aabject to the regulation may actually have been sabject. "2. The possibility that the market value assigned to certain unregistered stocks may not have been 'deterrained by any reasonable method' as specified in the supplement to the regulation, or that the loan value assigned to collateral other than stocks may not have been 'deterTined by the bank in good faith' as specified in section 1- of the regulation. , "3. The possibility that signed statements that cer'ain securities were carried for the account of customers Other than partners may not have been 'accepted in good faith' as specified in thu suppleme nt to the regulation, °r that such statements may not have been received as Promptly as required. "4. The possibility that certain withdrawals or allbstitutions of collateral, usually involving rather amounts in relation to the size of the loan, may 'aye conflicted with section 1 of the regulation. "The various reports of the examiners covering the itve • stigations of the State member banks have been anby Mr. Frederic Solomon of the Board's legal staff , copy of his memorandum discussing in some detail fld t1:0asible violations of the Board's Regulation U by the ariouz banks is inclosed herewith, together with copies 127 1/30/39 "of the Regulation as the same was in effect at the time Of the various transactions discussed. Details of all questionable transactions referred to in the memorandum and set out more fully in the reports have, of course, been discussed with officers of the banks and it is understood that they now have a better understanding of the various technical requirements of the regulation and are endeavorirw to comply fully with such requirements. . "Should your department desire any further informa- ion or explanat ions relating to the transactions involved in this matter, the Board, upon request, will be glad to make available all of the pertinent data which it has." Approved unanimously. Letter to Mr. Hamilton, President of the Federal Reserve Bank Or -Kansas City, reading as follows: "Thank you for your letter of January 20, 1939 regarding the inquiry of Mr. Ernest E. Radford, President Of the First Federal Savings and Loan Association of Oklahoma, Oklahoma City, as to the applicability of the Clayton Act to one of the directors of the association. "In view of the fact that the association is a Iedel'el savings and loan association, the Clayton Act would 11°t Prohibit a director of a national bank from being a director of the association, for the reasons stated in etion 2(b) of Regulation .i., and the footnote thereto. e°1-sclingly, Ur. Radford's assumption that such a relationship would be prohibited is not correct, irrespective Or whether the other 'local building and loan association' ich he says the director is serving is a 'bank' within he meaning of the Clayton Act. 'You state that the copies of the correspondence Which you inclosed were obtained from your Oklahoma City cianch, and it is possible that at that time your Oklahoma ij /ranch cave Mr. i-;adford the information which he re1 If such is the case, it would seem that no terther reply to Mr. ladford's letter of January 10 is cessarY. If not, it would seem to be desirable, in view °f Mr. Radford's request that the reply be sent to r? n C„?‘ 1/ 39 "under personal cover', that your Oklahoma City Branch communicate the information to him." Approved unanimously. Thereupon the m ad ed.
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