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Minutes for To: Members of the Board From: Office Of the Secretary July 19, 1963 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, please initial below. If you were present at the meeting, your initials will indicate approval of the minutes. If you were not present, your initials will indicate only that you have seen the minutes. Chin. Martin Gov. Mills Gov. Robertson Gov. Balderston Gov. Shepardson Gov. King Gov. Mitchell Minutes of the Board of Governors of the Federal Reserve System on Friday, July 19, 1963. The Board met in the Board Room at 10:00 a.m. PRESENT: Mr. Mr. Mr. Mr. Martin, Chairman Balderston, Vice Chairman Robertson Shepardson Mr. Sherman, Secretary Mr. Young, Adviser to the Board and Director, Division of International Finance Mr. Cardon, Legislative Counsel Mr. Fauver, Assistant to the Board Mr. Noyes, Director, Division of Research and Statistics Mr. Koch, Associate Director, Division of Research and Statistics Adviser, Division of Research Holland, Mr. and Statistics Mr. Furth, Adviser, Division of International Finance Mr. Katz, Associate Adviser, Division of International Finance Assistant to the Secretary Landry, Mr. Chief, Banking Section, Division of Eckert, Mr. Research and Statistics Mr. Yager, Chief, Government Finance Section, Division of Research and Statistics Mr. Keir, Senior Economist, Division of Research and Statistics Mr. Bernard, Economist, Division of Research and Statistics Mr. Goldstein, Economist, Division of International Finance Money market review. Tables were distributed summarizing monetary developments during the preceding four weeks and member bank reserve positions on statement weeks in May, June, and July of 1963 along with a chart showing comparative yield curves on Government securities for recent dates. Mr. Bernard described developments in the money market, including reference to the Government's cash budget t 7/19/63 -2- position for fiscal 1963. Mr. Koch then commented on the situation With respect to bank reserves, the money supply, and liquidity, following which Mr. Goldstein reported on the foreign exchange market. At the conclusion of these reports all members of the staff except Messrs. Sherman, Fauver, and Landry withdrew and the following entered the roan: Mr. Farrell, Director, Division of Bank Operations Mr. Solomon, Director, Division of Examinations Mr. Conkling, Assistant Director, Division of Bank Operations Mr. Benner, Assistant Director, Division of Examinations Discount rates. The establishment without change by the Federal Reserve Bank of New York on July 18, 1963, of the rates on discounts and advances in its existing schedule was approved unanimously With the understanding that appropriate advice would be sent to that Bank. Currency shipments across district lines (Item No. 1). Reference was made in a distributed memorandum from the Division of Bank Operations dated July 16, 1963, to advice received from Chairman Irons of the Presidents' Conference in a letter dated July 2 that the Conference agreed at its meeting on June 17, 1963, that the present SYstem policy of permitting shipments of currency across district lines 44 at the request of a member bank was too restrictive and should be broadened to permit such shipments on the initiative of the Reserve Banks concerned. -3- 7/19/63 The memorandum noted that the question was discussed by the Presidents' Conference at the suggestion of President Scanlon of the Chicago Reserve Bank, who had ascertained that one of the common carriers (Brink's Inc.) was able to provide service at a more reasonable rate out of Minneapolis than out of Chicago to certain areas of the Chicago District, principally western Iowa. Mr. Scanlon had expressed the view that with the passage of time the most efficient and economical IlaY to deliver currency and coin would be to permit some crossing of district lines in the manner indicated. Attached to the memorandum was a draft of letter to the Presidents of all Reserve Banks advising that the Board would interpose no objection to the shipment of currency across district lines on the initiative of the Reserve Banks concerned and on a mutually agreeable basis, with the understanding that the Board *would be advised of any such arrangements and the names of the cities in other districts to which a Reserve Bank might agree to make such shipments at the request of another Reserve Bank. At the invitation of the Board Mr. Farrell commented on the memorandum. In reply to a question from Governor Robertson, he stated that, although it was not essential that the Board be advised of arrangements worked out by the Reserve Banks for currency and coin sbiPments across district lines, it seemed advisable for the Board to be kept informed of such developments. Following discussion, unanimous approval was given to a letter to all Reserve Bank Presidents interposing no objection to the 4 .4 -4- 7/19/63 initiation by the Reserve Banks of currency shipments to member banks in other districts on such basis as was mutually agreeable to the Reserve Banks concerned. A copy of the letter is attached as Item No. 1. Messrs. Hexter and O'Connell, Assistant General Counsel, and Mr. Stone, Law Clerk, joined the meeting at this point. Proposed Investment Securities Regulation of the Comptroller of the Currency (Item No. 2). On June 21, 1963, the Comptroller of the Currency published in the Federal Register for comment within thirty days a Proposed revision of the Investment Securities Regulation that would purport to govern "purchase, sale, underwriting, and holding Of' investment securities" by national banks and member State banks. In a distributed memorandum dated July 17, 1963, from the Legal Division it was noted that the comments of the Reserve Banks on the proposed revision, which had been grouped by topic in an appendix to the memorandum, had been incorporated to the extent deemed appropriate in an attached draft of letter to the Comptroller of the Currency. The memorandum noted that the proposed revision would introduce 4 number of new features into the Regulation that for the most part "ere discussed in an enclosure that would accompany the draft letter. In one respect, however, the Regulation would purport to deal with a matter that was believed to go beyond the authority of the Comptroller to regulate, and would do so in a manner that apparently would conflict vith applicable Federal statutory provisions. This was the question of memorandum was underwriting and dealing in securities, to which the 241. 'Cs* I1‘ 7/19/63 -5- principally devoted, since it was believed that the other subjects requiring comment were covered sufficiently in the proposed communication to the Comptroller. The statutory provision upon which the Comptroller relied for his authority to adopt the proposed Regulation was paragraph seventh of section 5136 of the Revised Statutes (12 U.S.C. 24), as amended by the Banking Acts of 1933 and 1935, in which was stated a fundamental distinction between investing in securities and underwriting and dealing in securities. With respect to securities invest- ment the statute, which vested regulatory authority in the Comptroller, Provided that a bank may not hold "investment securities of any one Obligor or maker" in an amount exceeding 10 per cent of the bank's capital and surplus. Limitations were prescribed in the statute with respect to bank underwriting and dealing in securities restricting such activity to transactions for the account of customers and prohibiting banks from underwriting any issue of securities or stock. The chief exception to this general prohibition related to obligations of the United States or general obligations of any State or of any political subdivision thereof. As noted in the memorandum, since the 1930's when the provisions relating to underwriting and dealing in securities were added to Revised Statutes 5136, the exception had been construed uniformly as applicable only to °Ipligations of governmental organizations possessing the general power °f property taxation and only where the obligations were supported by this power. Over the past decade a number of bills had been introduced 541 4L -6- 7/19/63 into Congress for the purpose of amending the statute to permit banks to underwrite and deal in government revenue bonds, to a limited extent. under the proposed It was the view of the Legal Division that in a position to make Regulation a State or other public body would be every obligation a "general obligation," eligible for bank underwriting and investment without limitation upon amount, simply by creating an purpose. "authority" or other public organization for a particular In such instances the basic distinction drawn between revenue bonds and be general obligations by Congress in Revised Statutes 5136 could substantive nullified by changes in form having no relationship to the investment characteristics of the securities involved. The memorandum went on to state that even should the proposed would be Regulation be made applicable only to national banks, the Board concerned both indirectly and directly: indirectly, because of the tions and unauthorized administrative relaxation of legislative restric directly, because section 9 of the Federal Reserve Act provides that State member banks are subject to the same limitations and conditions with respect to underwriting, etc., "as are applicable in the case of national banks." In this connection, a letter had been addressed to the Board by Bankers Trust Company, New York City, inquiring proposed "whether the Board concurs in the provision of the applicable are ions such regulat regulations to the effect that in this does concur not Board to state member banks. If the the not or knowing whether provision, we would appreciate we respect In ons. this regulati Board will issue similar rs conside the Board whether would also appreciate knowing -7- 7/19/63 that there is any difference between investment securities which national and state member banks may purchase for their own accounts and securities which national and state member banks may deal in or underwrite." It was the Legal Division's opinion that, should the Board take a position similar to that proposed in the draft letter to the ss Comptroller of the Currency, and should the Comptroller neverthele Promulgate the Regulation substantially in its proposed form, it would seem necessary for the Board to inform all member State banks that the Comptroller lacked authority to enlarge the underwriting powers of member banks and that, despite the language of the new Regulation, member State banks might not underwrite and deal in securities except to the extent permitted by the provisions of Revised Statutes 5136. Following comment by Mr. Hexter on the Legal Division's memorandum, Chairman Martin inquired whether Counsel at the Reserve Banks took the same view of the question as the Legal Division. In reply, Mr. Hexter said that all of the Reserve Banks that analyzed the proposed revision reached the same conclusion as the Board's Legal Division. A lengthy discussion then ensued in the course of which it became apparent that the Board members present favored sending to the Comptroller of the Currency a letter substantially the same as that attached to the Legal Division memorandum. At the conclusion of the attached discussion, the letter was approved unanimously in the form as Item No. 2. 7/19/63 -8With respect to the manner in which member State banks might be informed of the Board's views on the proposed Regulation should it be adopted by the Comptroller of the Currency, it was understood that there would be no such advice until the Board had given consideration to alternative approaches that might be taken. Meeting with proponents of commercial bank revenue bond financing. Chairman Martin said that a group of proponents of public revenue bond financing headed by Mr. Hardin Hawes, Senior Vice President, Rarris Trust and Savings Bank, Chicago, Illinois, would be in Washington next Wednesday to confer with the Treasury Department and had requested an opportunity to meet with the Board to present their views. Noting that copies had been distributed of a pamphlet on the subject by Mr. John K. Langum, the Chairman inquired whether the Board would be agreeable to meeting with Mr. Hawes and his group on Wednesday afternoon, July 24. There being agreement expressed with the proposal, it was understood that appropriate arrangements would be made. The meeting then adjourned. Secretary's Notes: Governor Shepardson today approved on behalf of the Board the following actions relating to the Board's staff: Salary increase James R. Turner, Offset Press Operator (Multilith), Division of AdMinistrative Services, from $4,909 to $4,930 per annum, effective July 21, 1963. .2362 7/19/63 Transfer Concetta M. Ndbilio, from the position of Clerk-Typist in the Division of Personnel Administration to the position of Clerk-Typist in the Division of Bank Operations, with no change in basic annual salary at the rate of $3,8201 effective July 21, 1963. 9utside activity Wilbert J. Hart, Messenger, Division of Administrative Services, to work on a part-time basis for Aldo Cafe. Governor Shepardson also approved today on behalf of the Board a letter to Mr. Fernando Rivera, Assistant Director of the Center for Latin American Monetary Studies, Mexico City, Mexico, regarding arrangements for the annual visit to the Board's offices of the Center's trainees during the week of September 3, 1963. (It was understood that the costs of the program would include a luncheon, translating facilities, a conducted tour of Washington, and certain minor expenditures, provision for all of these items having been made in the budget of the Secretary's Office.) Item No. 1 7/19/63 S-1880 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON 25. D. C. ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD tag. ,* 4*** July 22, 1963. Dear Sir: This letter supersedes the Board's letter of April 7, 1938 (S-84, F.R.L.L.S. #3064) which interposed no objection to a Federal Reserve Bank entering into an arrangement, under certain circumstances, whereby shipment of currency might be made by a Reserve Bank to member banks in adjacent districts. The Board has been informed that, at their June 17, 1963 meeting, the Presidents agreed that the policy set forth in the 1938 letter of permitting shipments of currency across district lines only at the request of a member bank was too restrictive and should be broadened to permit such shipments on the initiative of the Reserve Banks concerned. The Board will interpose no objection to mutually agreeable arrangements between Federal Reserve Banks for the shipment of currency to an adjacent district, without expense to the member banks involved, such arrangements to be entered into either on the initiative of the Reserve Banks concerned or at the request of a member bank to its own Federal Reserve Bank. Please advise the Board whenever your Bank enters into any arrangement for the shipment of currency to a member bank in another district and the names of the cities to which such shipments are made. Very truly yours, TO TEE PRESIDENTS OF ALL imDERAL RESERVE BANKS BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Item No. 2 7/19/63 WASHINGTON OFFICE OF THE CHAIRMAN July 19, 1963. The Honorable James J. Saxon, Comptroller of the Currency, Treasury Department, Washington 25, D. C. Dear Jim: Register contained a notice On June 21, 1963, the Federal considering the adoption that the Comptroller of the Currency was Regulation (12 CFR Part 1). of a revision of the Investment Securities comments submitted It was stated that consideration would be given to Lo the Comptroller within 30 days. of Governors, certain of the In the opinion of the Board would be beneficial. However, Proposed changes in the Regulation ects. the proposed revision appears to be questionable in some resp in upon enumerated and commented 4 number of apparent defects are e antiv subst the enclosure. Some of these are of considerable uities that can be ambig or ncies siste incon importance; others are actual intent of the Regulation. corrected readily to reflect the concern relates to those provisions The Board's most serious purport to govern the authority of the proposed Regulation that would banks to underwrite and deal in of national banks and member State classes of securities without securities, and to invest in certain of 1927 and the Banking limitation on amount. In the McFadden Act Federal banking laws the Acts of 1933 and 1935, Congress amended invest in securities to (1) With respect to the authority of banks With respect to banks' es. riti and (2) to underwrite and deal in secu ncy was empowered to define Investments, the Comptroller of the Curre ribe "limitations and presc to the term "investment securities" and was conferred upon rity autho restrictions". However, no regulatory in securities. ng deali and ng the Comptroller regarding underwriti that 5136 S. R. of sion provi Those subjects are covered by a urse, reco hout "wit only ities secur (1) permits banks to deal in account of, customers, and in solely upon the order, and for the forbids banks to "underwrite no case for its own account", and (2) nce of section 5136, any issue of securities". A subsequent sente however, provides that The Honorable James J. Saxon -2- n contained as "The limitations and restrictions herei for its awn asing to dealing in, underwriting and purch to obliapply not account, investment securities shall s of ation oblig al gations of the United States, or gener or of," there n any State or of any political subdivisio rities (Secu . ities secur certain other enumerated classes of to, red refer are of the kinds described in that sentence generally, as "exempt securities".) nors, the Federal banking In the opinion of the Board of Gover expand or laws do not authorize the Comptroller of the Currency to ting powers inves or ng, deali contract the coverage of the underwriting, consistent posiconferred by this provision; and this has been the and the Federal ncy Curre the of tion of the Office of the Comptroller Reserve System. excluding from the proposed Accordingly, the Board recommends regulate the Regulation any provisions purporting either (1) to ase for their purch or in, deal , extent to which banks may underwrite by OWn accounts, so-called "exempt securities", which are governed the provision of section 5136 that is quoted above, or (2) to confer , Upon banks powers relating to underwriting and dealing in securities aS distinguished from investing in securities. ding "public securities" The objections to the proposals regar being embodied in are not based solely, or even principally, on their If the proviby law. rized autho regulatory provisions that are not ssible sions of the proposed Regulation on this subject constituted permi the inclusion in inter retations of the applicable statutes, their would appear to they that in ading misle Regulation would be merely than constitute regulations with the force and effect of law rather sed propo interpretations of legislative provisions. However, these , stent consi rm, from the unifo provisions involve a serious departure provi tory and clearly correct interpretation of the relevant statu er in the sions. Therefore, their adoption by your Office, wheth unauthorized an to t amoun would f°rm of regulation or interpretation, ssed in expre y nal polic essio attempt to change or to nullify Congr existing law. "general obligations" exempted The distinction between (1) cable to bY section 5136 from the limitations and restrictions appli ally gener s, ation al oblig Other securities, and (2) other government lished estab y firml is t, exemp alled "revenue bonds", which are not so must s issue ity ly secur ional in both law and practice, although occas which category they belong. be analyzed carefully to determine in exempted from the limitations With respect to the group of securities ral obligations of any . "gene of R. S. 5136 by the statutory phrase of", the following excerpt there State or of any political subdivision Office of the Comptroller of the from the Digest of Opinions of the -9..LillEm.sx states the applicable principles: ) °J. g The Honorable James J. Saxon 4)t -3- "The term 'political subdivision,' as used in R.S. 5136, includes only such governmental units as have the power of general property taxation, together With the incidental power to compel payment, as distinguished from governmental units which have lesser taxing powers or which may merely levy charges for Voluntary use of their property or facilities. In order to qualify as 'general obligations' of a political subdivision, securities must be backed by its full faith and credit." (Paragraph 520) As far as the Board of Governors is aware, this interpretation has been accepted by banks and has been enforced by Federal bank supervisors without exception. Since the relevant statutory provisions were adoPted, banks have regularly participated in underwriting general °bligations of political subdivisions of States, as described in the abc've quotation from the Digest of Opinions, and at no time have banks .derwritten securities of governmental units that were not supported, : 12-rectly or indirectly, by the power of general property taxation. distinction has also been maintained scrupulously by banks in Lneir activities as dealers in municipal securities. n As you know, over the past decade a number of bills have Introduced into Congress for the purpose of amending R. S. 5136 t ,n Permit banks to underwrite and deal in governmental revenue bonds ‘t° a limited extent) in addition to general obligations of States and political subdivisions. These efforts by the national banks and ie.mber State banks most active as underwriters and dealers reflect t"eir understanding that a statutory amendment would be necessary empower them to underwrite revenue securities. been T Under the proposed Regulation a bank would be permitted to underwrite and deal in any security of a "public authority" or "any P onliely awned entity which is an instrumentality of the state or ,' a municipal corporation", provided the security was "supported ° t11Y the full faith and credit of the obligor". In effect, this would aean that banks could underwrite and deal in any security as to which e Public authority or publicly owned corporation was generally liable, ven though the obligor did not possess any power of taxation or have access to funds derived from taxation. In other words, securities a turnpike authority or bridge authority, or a public corporation ;Perating parking facilities or public beaches, would be eligible s°r bank underwriting, even though the principal and interest on duch securities were payable solely from the net income, if any, rived by such authority or corporation from voluntary use by the Public of its facilities. • The Honorable James J. Saxon -4- of paragraph Seventh of Under such an interpretation would be in a position, 4- S. 5136, a State or other public body igation", igation a "general obl !?nerally speaking, to make every obl tation limi any t hou wit nt leiligible for bank underwriting and investme niorga ic publ r othe authority or zPon amount, simply by creating an be The consequence would 2tion for a particular limited purpose. be d coul 6 513 that the basic distinction drawn by Congress in R. S. the to ship tion rela u nified at will, by changes in form having no : acteristics of char nt stme inve ive strength or the substant the '-ne securities involved. in ection that when Congress, It is noteworthy in this conn gaobli in l dea and e 1959, s to underwrit specifically authorized bank ically proey Authority, it specif Vall i°ns issued by the Tennessee g obligations din hol m fro te bank 1(1111:bited any national bank or member Sta , dealing, or purchasing ff that Authority "as a result of underwriting at any one time lot its own account...in a total amount exceeding plus. Bonds of sur l stock and 0 Per centum" of the bank's capita ions are subject orat and corp tther Federal governmental authorities by R. S. 5136 ed crib ions pres all the prohibitions and restrict trast, the con In . wlth respect to security investments generally underwrite, to s bank to authorize Ilatoposed Regulation would purport a local of es riti own account, secu beal in, and purchase for their for on, ati por -facilities cor eridge authority or public parking ever upon amount. It would be what on szi ample, without any limitati the extent to which the proposed Itlfficult to bring out more sharply ect Congressional prohibition with resp tegulation would contravene the ng hasi purc to as on tati limi and the f° underwriting and dealing in, tions", es other than "general obliga riti secu ..(3r investment, municipal ted and applied. 'a that term has been consistently interpre to the provisions of section 21 Attention is directed also °f the Banking Act of 1933 (12 U.S.C. 378). Board discussed at length because the This matter has been rt erned over the proposal to depa Governors is seriously conc principles embodied in the provifrom the Congressional policy and 8. ioned herein. The Board rlons of R. S. 5136 that have been ment that the proposed Regulation beiterates its earnest recommendation regarding underwriting and de amended by excluding any provisions egory of purporting to expand the cat l ealing in securities, or ' isions R. S. 5136, since such prov aexempt securities" established by ler trol by Congress upon the Comp re beyond the powers conferred 2368 The Honorable James J. Saxon ••• provisions that the of the Currency and would contravene statutory or modify. The Board's Comptroller is not authorized to disregard along these revising the Regulation .?taff is prepared to assist in that has not been lines and to discuss any aspect of the matter sufficiently clarified. Sincerely yours, (Signed) Wm. MCC. Martin, Jr. Wm. McC. Martin, Jr. Enclosure on of Investment Securities Regulati Comments on proposed revision 1963 of June 21, published in Federal Register er er is discussed in the lett 1. Legal validity. This matt memo this h with whic from the Board of Governors to the Comptroller, by owed foll recommendation is randum will be enclosed. If the Board's be d woul on lati the proposed Regu the Comptroller, several provisions of no d woul comments listed below deleted; in that case, some of the longer be applicable. e". ably should be "the Stat 2. In § 1.3(d), "a state" prob ably 1.4, "In the case of" prob In the second sentence of § should be "Pri 3. or to purchase of". r to specified determination prio 4. Section 1.4 requires a eof". ther ion ivis subd l State or politica d Purchase of "an obligation of a woul s, case such in e ent, if advisabl It is not clear why this requirem es". riti secu lic other "pub not be equally desirable with respect to ified might seem to imply spec ps grou Limiting this requirement to the political subdivisions tend a view that the obligations of States and other public securities and require to be of somewhat lower quality than stronger justification. second "source" should be the same sentence, the In 5. If sources". Sections 1.4, 1.5(a), and 1.5(b) 6. Varying criteria. prerequisites to the purchase of require certain determinations as t from The three criteria are differen certain kinds of securities. . For rent appa not are ces differen each other, and the reasons for the uate adeq is e determination "that ther example, § 1.5(a) requires a b) requires ity to perform, whereas § 1.5( abil evidence" of the obligor's ed upon "bas be to it is required a similar determination, except that read to ged chan a) were se in § 1.5( able estimates". If the clau reli ", ence evid uate adeq It d upon ment, base when in its prudent banking judg rer. clea what be t some migh the intended difference between the two connection, is the fact that an More important, in this prescribed by g 1.4. It appears that entirely different criterion is d be equally applicable to the the criterion specified in 0 1.5(a) woul ling this respect would avoid the puzz 0 1.4 situation, and uniformity in the objective, if any, was intended by question as to what different d ifference in language. includes fined terms. The Regulation 7. Use of new and unde defined, and their meanings a number of novel terms. Those are not aps the most important is are not clear from the terms themselves. Perh -2This provision the term "qualified investment department" in 0 1.5(b). banks and supervisors, since Probably would lead to conflicts between ities are purthe latter will be required to determine, whenever secur asing bank purch r the chased under the provisions of g 1.5(b), whethe tment". Presumably, this term possesses a "qualified investment depar organized departis not intended to include only large and formally officer and assistants ments, since a smaller institution may have an evaluate securiwho are as capable as a larger bank's organization to investment department" standard ties. Consequently, if the "qualified find it necessary is to have any effect whatever, bank examiners will to grade each bank's "investment department" as "qualified" or arrangement seems clear. unqualified". The undesirability of such an term that could give rise to Another example of an undefined in 0 1.5(b). Presumd ifficulties is "based upon reliable estimates", and so on. ably, these will be estimates of firms of traffic engineers, ate evalu to ners exami Is it advisable, or practical, to require bank the reliability of professional estimates? is intended to cover only 8. It is inferred that g 1.5(a) securities of obligors that have a financial history, whereas g 1.5(b) d in a is intended to apply only to the .securities of obligors engage new and unproved enterprise. It might be advisable to indicate this bY a brief sentence in 0 1.5(b), since "estimates" could be made regarding the prospects of established enterprises as well as new ones. g of the Comptroller" 9. In g 1.5(c), "a published rulin the by Comptroller". This hed publis should be changed to "a ruling an individual bank, and to sent g rulin would avoid any inference that a bility under 0 1.5(c), eligi for basis a Published by it, would constitute which presuwably is not intended. d that the 10. (For purposes of this comment, it is assume dual indivi a of gate list promul Comotrol to ler has legal authority as to ruling A l .) list" "lega a of eligible securities in the nature circumstances eligibility for purchase necessarily rests on the relevant from at the time of the ruling. The quality of a security may change 1963 y in time to time; securities that are of bank-investment qualit However, or two year later. a ible inelig r 1aY deteriorate and become ( ; security is "ruled eligible for a 1.5(0 appears to provide that, if a Purchase" by the Comptroller at any time, it will continue to be eligible would be an undesirable at all times thereafter. Obviously, this to purchase weak, speculative, banks t permi arrangement, since it would had ruled those °r defaulted securities simply because the Comptroller securities "eligible" in the past, when their quality was better. ent, unless the The solution to this difficulty is not appar CO zation in his office that will mptroller intends to maintain an organi y of all securities theretofore keel) up-to-date on the investment qualit 2371 -3ities that have deteriorated "ruled eligible", and to "de-list" secur table for bank in quality to such an extent as to make them unsui investment. general prohibition against 11. Section 1.6(a) contains a in a total a bank's holding "investment securities of any one obligor al and surplus". The term amount in excess of 107. of the bank's capit 1.3(b) to include securities that investment security" is defined in 8 Accordingly, are exempted by R. S. 5136 from the 107. limitation. R. S. 5136, a by ded § 1.6(a) should begin "Except as otherwise provi bank may not hold", etc. the statutory 107. limitation, 12. For the purpose of applying tment "is to be 0 1.6(a) provides that the amount of a bank's inves the security". In of value face determined on the basis of the par or on 5136--to Secti by ribed presc view of the purpose of the 107. limit s funds at risk bank' a of t amoun compel diversification and to limit the er the wheth le ionab quest is in the securities of any one obligor--it practically or valid ly r legal eithe is use of "face value" as the measure sell far above face value, this proadvisable. Since bonds frequently with a capital and surplus of 1.6(a) would mean that a bank vision of 000 or $200,000 (i.e., 157. $150, $1,000,000, for example, could invest n. Accordingly, the second ratio corpo or 207.) in the securities of one t paid for the security" amoun "the sentence of 6 1.6(a) should specify ity". the secur rather than "the par or face value of intends to set a maximum limit 13. Section 1.6(b) presumably s purchased pursuant to pararitie "secu on the aggregate amount of all rs of the proposed Regulation, graph (b) of 6 1.5". However, some reade lly have misinterpreted this even though experienced in this field, actua holdings of securities of any one obligor. provision as fixing a limit on "dollar To prevent this misinterpretation, there should be inserted after such securities,". amount" a phrase such as ", for all ) prohibit a bank from holding 14. Sections 1.6(b) and 1.6(c amounts specified or to be specified. certain securities in excess of dation in circumstances where this is This provision might compel liqui assume that a not intended and would not be desirable. For example, a total amount equal to the 57. bank purchases "8 1.5(b) securities" in after the percentage aggregate limit prescribed by g 1.6(b). There sale or redemption increases to more than the permissible 5% (either by securities, or increase of other securities, decrease in value of other language of 6 1.6(b) in the value of the § 1.5(b) securities). The ces, a sale of enough of the would seem to require, in those circumstan ribed 57. maximum. 0 1.5(b) securities to reduce the aggregate to the presc (and a similar interpretation This undesirable interpretation nating the,word "hold" and, in lieu of 0 1.6(c) could be avoided by elimi these lines: thereof, including something along "44 securities pursuant to "...may not purchase investment r such purchase, the paragraph (b) of g 1.5 if, afte holdings of such securiaggregate amount of the bank's 's investment account." ties would exceed 57. of the bank , in this context, would Definition of 'investment account" seem advisable. an aggregate limitation on the 15. Section 1.6(b) prescribes h (b) chased pursuant to paragrap amount of securities that may be "pur hase purc to s bank it perm gned to of g 1.5". However, § 1.5(b) is desi the Over s. orie hist l ncia without fina securities of new enterprises, b), 1.5( 0 to uant purs d hase purc Years, after such securities have been sfactory financial record, the obligor usually will establish a sati quate evidence" that permits and thereafter there would exist the "ade ances, it appears unreasonumst e circ Purchase under § 1.5(a). In thos seasoned issued of able to require banks to continue to take such tation prescribed by limi ying the 57. securities into account in appl to be the effect of 0 1.6(b) in § 1.6(b), Nevertheless, that seems its present form. ns of g 1.6(b) and g 1.6(c), it is (In the parallel provisio not hold at any time" and "may not at noted that the wordings are "may parallel nature of the proany time thereafter hold". Because of the wording, to avoid any lar simi to use visions, it might be advisable intended to have are ons essi expr Possible inference that the two different meanings.) the Comptroller does not contemplate 16. It is assumed that are with respect to any securities that making rulings, under § 1.6(c), uded excl y such securities are expressl exempt" under R. S. 5136, since under that section. ions rict from the limitations and rest that banks may request the Comptroller 17. Section 1.9 provides lation or paragraph Seventh for rulings on the "application of the Regu to include "bank" is defined in g 1.3(a) Of 12 U.S.C. 24". The term member State to g 1.9 is an invitation State member banks. Accordingly, utory stat the Regulation or of the banks to seek interpretations of : made The following comments are provision from the Comptroller. (g 1.9) seems unnecessary, no (a) The entire provision required to enable banks to regulatory authorization is rpret applicable statutes or regu request supervisors to inte on horization" of such requests lations, and specific "aut suggest that interpretations will this subject might seem to well . Accordingly, g 1.9 might not be made on other subjects be deleted. retained, its application (b) If such a provision is banks. As the Board recently should be confined to national -5Board's responsibility informed the Comptroller, it is the as they apply to tions regula to interpret Federal laws and to seek such banks those member State banks, and inviting to unneceslead might oller interpretations from the Comptr does not t commen (This sary conflicts and complications. gated promul list" "legal relate to securities included in a .) 1.5(c) § ed propos by the Comptroller pursuant to the would permit banks 18. Convertible securities. Section 1.10 provided the stock, into to purchase securities that are convertible price that se purcha the bank immediately charged off the portion of independently ered consid ty exceeded the "investment value of the securi of the conversion feature", etc. provision of R. S. 5136 This provision (1) would contravene a erable number of consid A rable. and (2) would be substantively undesi their "investment convertible debentures sell at prices far in excess of purchase of the and e, featur sion value's, solely because of the conver stock into the of se purcha to , effect such securities is equivalent, in -priced higher of sample broad a of vhich they are convertible. A check Stock Exchange (at prices convertible debentures traded on the New York ses that, without disclo ure) debent ranging up to $3,380 for a $1,000 s of the value of dollar few a within exception, the price of the bond is the stock into which it is convertible. banks to invest in The Federal banking statutes forbid corporate stocks. As mentioned, however, the purchase of convertible securities at prices greatly in excess of face value is tantamount to demonstrated by (a) the investment in the stock itself. This is and the convertible bonds stock the of relationship between the prices the prices of both which in manner in such instances and (b) the In these circumstances, y. ntiall substa fluctuate to the same extent, it has been considered that bank purchase of such convertible securities investwould be an attempt to evade the statutory prohibition of stock isory ments, and it has not been permitted by the Federal superv A uthorities. ' the present Investment This position is reflected in g 1.3(f) of Securities Regulation of the Comptroller of the Currency, and paragraph 330 of the Comptroller's Digest of Opinions points out that higher "A convertible bond selling at a price considerably be must y yield and qualit able than other issues of compar value ative specul the matter this recognized as reflecting in stock the of the value is, --that ege" of the conversion privil that the convertible bond actually represents. -6provision such as § 1.10, Inclusion in the RAdulatLon of a y speculative investhighl make therefore, might encourage banks to proposed § 1.3(b) and ments contrary to the principle stated in the addition would appear also contrary to sound banking practices, and in st to approve attempted evasion of the statutory prohibition again of convertible stock investments by indirection, through purchase sively on their exclu t s ecurities whose price clearly is based almos of Governors urges Board value as eauity securities. Accordingly, the 1.10. deletion of the objectionable features of § redemption price of an 19. In view of the fact that the it is issue of securities frequently changes with the passage of time, recommended that the last clause of B 1.11 be amended to read: "at Which the obligor may currently redeem such security". dures prescribed by § 1.10 (The difference between the proce n and § 1.11 for amortization of premiums evidences tacit recognitio convertible securities of the stock-investment character of purchases of "investment value.) at Prices greatly in excess of their expression that is difficult 20. Section 1.13 contains an reflects the to analyze: "a price level representing a yield which t might be better inten the that sted invgstment value", etc. It is sugge yield" were deleted. expressed if the words "representing a securities acquired "d.p.c." 21. Section 1.12 provides that ations of the Regulation. limit and are not subject to the restrictions seem to disregard those Unless this provision is modified, it would inadvisably. For example, and ily essar unnec restrictions and limitations ble investment assume that a bank acquires, through foreclosure, eligi us. securities of one obligor equal to 6% of the bank's capital and surpl , ation Regul the If that holding were excluded from the limitations of the bank would be at liberty, under § 1.6(a), to purchase additional capital securities of that obligor to the extent of 107. of the bank's in the t inves to bank the t permi and surplus. In effect, this would tory 107. statu of the s exces in s ecurities of one obligor, voluntarily, with 1.12, , § under exist would limitation. (A. similar difficulty the by held were that ities secur respect to banks' investments in limitafied speci a to ct subje Comptroller to be "eligible for purchase tion", pursuant to g 1.6(c).)
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