Full text of Minutes of the Board of Governors of the Federal Reserve System : Meeting Minutes, July 15, 1938, Volume 25, Part 3

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756
A meeting of the Board of Governors of the Federal Reserve
System was held in Washington on Friday, July 15, 1938, at 12:00 noon.
PRESENT: , Mr. Eccles, Chairman
Mr. Ransom, Vice Chairman
Mr. Szymczak
Mr.
Mr.
Mr.
Mr.

Morrill, Secretary
Bethea, Assistant Secretary
Carpenter, Assistant Secretary
Clayton, Assistant to the Chainnan

Consideration was given to each of the matters hereinafter
referred to and the action stated with respect thereto was taken by
the Board:
Telegrams to Messrs. Kimball and Post, Secretaries of the Federal Reserve BRT1k8 of New York and Philadelphia, respectively, Mr.
Walden, First Vice President of the Federal Reserve Bank of Richmond,
Mr. McLarin, Vice President of the Federal Reserve Bank of Atlanta,
Messrs. Young and Stewart, Secretaries of the Federal Reserve Banks
of Chicago and St. Louis

respectively, Mr. Ziemer, Vice President of

the Federal
Reserve Bank of Minneapolis, Mr. McKinney, President of
the Federal Reserve Bank of Dallas, and Mr. Sargent, Secretary of the
Federal Reserve Bnnk of San Francisco, stating that the Board approves
the establishment without change by the Federal Reserve Bank of San
l'rencisco on July 12, by the Federal Reserve Banks of New York, Richmond,
Chicago, St. Louis, Minneapolis and Dallas on Tuly 14, 1938, and by
the Federal Reserve Banks of Philadelphia and Atlanta today, of the
rates of discount and purchase in their existing schedules.




Approved unanimously.

757

7/15/38
Letter to the "First National Bank in Boulder", Boulder,
Colorado, reading as follows:
"The Board of Governors of the Federal Reserye System has given consideration to your application for fiduciary powers, and grants you authority to act, when not
in contravention of State or local law, as trustee, executor, administrator, registrar of stocks and bonds,
guardian of estates, assignee, receiver, committee of
estates of lunatics, or in any other fiduciary capacity
in which State banks, trust companies or other corporations which came into competition with national banks
are permitted to act under the laws of the State of
Colorado, the exercise of all such rights to be subject
to the provisions of the Federal Reserve Act and the
regulations of the Board of Governors of the Federal
Reserve System.
.
"This letter will be your authority to exercise the
fiduciary powers granted by the Board pending the preparation of a formal certificate covering such authorization,
Which will be forwarded to you in due course."
Approved unanimously.
Letter to Mr. Sargent, Vice President of the Federal Reserve
Bank of San Francisco, reading as follows:
.
"Reference is made to your letter of June 16, 1938
With respect to four cases submitted by the San Francisco
Stock Exchange involving questions under the Board's Regulation T.
"Case 1. It is understood that a member of a national
securities exchange sells short on the exchange for his
own account certain securities at a price of $1,000. The
buying member later agrees to accept a due bill for the
securities and a check for $1,000. Pursuant to the rules
of the clearing house, the selling member delivers the
due bill and the check to the clearing house, and the transaction is settled. As a part of the settlement, the selling member receives payment for the sale in the usual
manner.
"The first question is whether the selling member is




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"required by Regulation T to deposit 0500 with the buying
member as margin on the short sale. The second question
is whether such a deposit of margin would be required if
the short sale had been for the account of a customer.
"It seams that the transaction in question may properly
be considered to consist of two parts, first, a sale of
securities and its completion by delivery of the securities,
and second, a borrowing of securities for the purpose of
effecting the delivery. It appears that the method of
settlement is such that the acceptance by the buying member of the due bill is in effect a loan of the securities
for the purpose of completing delivery. It is understood
that, as a practical matter, the buying member's books
Often would not differentiate between such a receipt of
the due bill and the making of an ordinary loan of securities.
"Section 6(h) of Regulation T provides that creditors
may borrow and lend securities for the purpose of making
delivery in the case of short sales without regard to the
Other provisions of the regulation. The Board is of the
opinion, therefore, that, in the case cited, the selling
member need not deposit margin with the buying member
and that it is immaterial whether the sale is for the
member's own account or for the account of a customer.
"Case 2. It is understood that A and B are partners
of a firm which is a member firm of a national securities
exchange. Transactions in the account of C, a customer
of the firm, on a given day create an excess of the adjusted debit balance of the account over the loan value
Of the securities in the account. The question is whether
Regulation T permits A, in his individual capacity, to
make an advance of cash to C in the amount of the excess.
If the advance were made by A, neither his nor B's capital or drawing account would be reduced.
"The Board is of the opinion that partner A, who is
e 'creditor' within the meaning of that term as used in
Regulation T, may not make the advance to the customer
Without obtaining the deposit of margin prescribed by the
regulation.
"Case 3. This relates to a broker who conducts a
regular security brokerage business in Canada, acquires
membership in a national securities exchange in the United
unregisStates, and buys and sells both registered and
customers.
American
tered securities for Canadian and
It involves interpretations of the Act and questions of




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"the extraterritorial effect of statutes, and would depend in each instance upon the particular facts of the
ease. In the circumstances, the Board feels that it should
not attempt to generalize upon the subject.
"Case 4. It is understood that customer A and her
SOBS B and C each has an account with a member of a national securities exchange. Each account is operated
separately although the mother furnishes all capital.
Profits on the sons' transactions are taken by them, but
if there is any loss, the mother absorbs it. A guarantees
the accounts of B and C. On May 27, 1938, B and C made
Purchases requiring under Regulation T the deposit of
4a,400 and 431,200, respectively, as margin. On May 31,
1938, A made a purchase requiring a margin deposit of
§1,700,
"On June 1, 1938, A deposited in her account registered securities having a current market value of 0,250,
and B liquidated securities in his account having a current market value of .2,700. The broker, acting in good
faith, considered that the deposit and liquidation satisfied the requirements of Regulation T for the deposit of
margin in all three accounts, with the exception of $70.
On Tune 2, 1938, A purchased registered securities having
a current market value of 1,400. At this time, the maximum loan value of the securities in all three accounts
combined exceeded the combined adjusted debit balance by
2,500, after deducting the 470 not yet deposited in connection with the previous transactions. The 00 was deposited in cash on June 3, 1938. The question presented
is whether any deposit of margin must be obtained in connection with the 1,400 purchase on June 2, 1938.
"From the facts as stated, it would appear that in
this case there were three separate accounts, the accounts
of B and C, and the account of A which guaranteed the first
two. If this is the case, a deposit of margin in the
guarantor's account could not serve the same purpose as
a deposit of margin in the guaranteed account or a liquidation in such account.
"In order for a guarantee to be effective under section
6(c) the guarantor's account must contain the necessary
excess margin for the transactions in the guaranteed account at the time such transactions are effected, and the
necessary adjustments must be made pursuant to section 6(c)
at that time, because when the need for a deposit of margin




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"has arisen in an account sections 3(h) and 3(e) of the
regulation require that there be either a deposit of margin
in the account where the transaction was effected or a
liquidation therein. The obtaining of a guarantee, or a
deposit of margin or liquidation in a guarantor's account,
is of no avail in such circumstances.
"It is understood that at the time of the transactions
in the guaranteed accounts of B and C the maximum loan
value of the securities in the account of guarantor A did
not exceed the adjusted debit balance of the account.
Therefore, the margin required by the regulation should
have been deposited in the guaranteed accounts, or the
appropriate liquidation effected therein.
"Actually, however, securities having a loan value
of only 42700 were liquidated in the account of B. This
transaction released margin of 41,080 leaving 0320 still
to be deposited. In the account of C, no deposit or liquidation was effected.
"The deposit in the account of A on June 1, 1938 of
registered securities having a current market value of
0,250 more than satisfied the requirements of the regulation in connection with the purchase in her account on
May 31, 1938.
"The facts stated do not clearly indicate whether the
maximum loan value of the securities in A's account exceeded the adjusted debit balance of the account by 4560
or more on June 2, 1938 when the 41,400 purchase was made.
Such, however, is to be assumed from the fact that when
the 0,250 market value of registered securities was deposited in the account on June 1, 1938 only .2,834 was
required in connection with the previous transaction. If
this assumption is correct, no deposit of margin was required in connection with the purchase on June 2, 1938;
but, as indicated above, this would depend upon the status
Of A's account (including adjustments for the guarantees)
rather than upon the combined loan value of the securities
in all three accounts.
"While the foregoing opinions regarding the accounts
Of A, B and C appear to be correct, given the facts as
stated, it may be that other circumstances not revealed
would lead to different results. In the first place, the
actual arrangements between the broker and A, B, and C
divided
may have constituted one single account with A,
the
case,
into three parts for convenience. In that




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"requirements of the regulation would seen to have been
satisfied. Secondly, any failure by the broker to comply
With the regulation may have resulted from such a mistake
made in good faith as is referred to in section 6(k) of
the regulation. In that case, the broker should take
Whatever action may be practicable in the circumstances
to remedy the mistake."
Approved unanimously.
Letter to Mr. Parker, First Vice President and General Counsel
Of the Federal
Reserve Bank of Atlanta, reading as follows:
"It is noted from your letter of July 9, 1938, that
the bankers of Jackson, Mississippi, have invited your
directors to meet in Jackson and that while the directors feel that generally speaking their meetings should
be held in Atlanta and from time to time in a branch city,
they feel that to accept the invitation would make for
a closer relationship between the bank and its Mississippi
members. The Board of Governors will interpose no objection to the holding of a regular monthly meeting of your
Board of Directors in Jackson, Mississippi."
Approved unanimously.
Letter to honorable Wayne C. Taylor, Assistant Secretary of
the

Treasury, reading as follows:
"This refers to your reply of March 23 to our letter of March 4, 1938, and to our letter of March 29,
With respect to reimbursing the Federal Reserve banks
for expenses incurred in redeeming adjusted service
bonds.
"Mr'. M. T. Fleming, President of the Federal Reserve
Bank of Cleveland, who is Chairman of the Presidents'
Conference Committee on Reimbursable Expenses, communicated with the other Federal Reserve banks recently with
respect to the above matter and they have decided not to
submit, at this time, monthly claims for reimbursement
of their expenses incurred after June 30 in redeeming
adjusted service bonds. They will, however, keep detailed




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"records of their expenses in redeeming adjusted service
bonds, and should such expenses amount to a substantial
sum the question of reimbursement will again be taken up
With you some time before the end of this year."
Approved unanimously.
Letter to Mr. B. L. Read, Fitch Investors Service, New York,
New York, reading as follows:
"This refers to your letter of J'uly 1 in connection
With the manner in which a member bank of the Federal
Reserve System, which has preferred capital stock outstanding with a retirable value of 050 and a par value
of p20, reflects its capital account in published statements.
"Condition reports rendered by State bank members
of the Federal Reserve System pursuant to the provisions
of the Federal Reserve Act are submitted on Form F.R.
105, a copy of which is inclosed. You will note that
State bank members are required to show on Form F.R. 105
under item 31, Capital account, not only the par value
per share of preferred and common stock but also the
retirable value per share of preferred stock.
"The Board's general instructions require that, in
the case of State bank members with preferred stock outstanding, the single amount extended against sub-items
(a), (b), (c) and (d) of item 31 be the sum of (1) the
aggregate retirable value of the preferred stock, (2) the
aggregate par value of the common stock, and (3) the
amount of any capital notes and debentures outstanding,
unless that sum is greater than the excess of the book
value of the bank's assets over all of its liabilities
(including reserves but excluding capital, surplus, and
undivided profits). In the latter event, the excess of
the book value of the bank's assets over all of its liabilities (including reserves but excluding capital, surplus, and undivided profits) must be shown in a single
amount against sub-items (a), (b), (c) and (d) of item 31.
The Board has authorized a modification of the above-described formula because in some States the capital account
figures reported on Form F.R. 105 would differ from those
reported to the State banking departments. Under the
modified formula State bank members may, if they wish,




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"use the par value of both common and preferred stock,
rather than the par value of common stock and retirable
value of preferred stock, in determining the amount to be
shown against sub-items (a), (b), (c) and (d), provided
that in such cases the caption 'Surplus' is amended to
read 'Surplus over par value of capital stock'. Under
either the general or the modified formula the equity of
each class of stockholders on the basis of reported book
values can be determined from condition reports rendered
and published by State bank members pursuant to the provisions of the Federal Reserve Act.
"In this connection you may be interested to know
that Section 345 of the Banking Act of 1935 contains the
following provision:
'If any part of the capital of a national
bank, State member bank, or bank applying for
membership in the Federal Reserve System consists of preferred stock, the determination of
Whether or not the capital of such bank is impaired and the amount of such impairment shall
be based upon the par value of its stock even
though the amount which the holders of such
preferred stock shall be entitled to receive
in the event of retirement or liquidation shall
be in excess of the par value of such preferred
stock.'"




Approved unanimously.

Thereupon the meeting adjourned.

1-1010,141 kiLt7

rSecretary.