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Minutes for
To:
Members of the Board
From:
Office of the Secretary
July ap, 1964
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, 19 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.
Chm. Martin
Gov. Mills
Gov. Robertson
Gov. Balderston
Gov. Shepardson
Gov. Mitchell
Gov. Daane
26GG
Minutes of the Board of Governors of the Federal Reserve
System on Thursday, July 30, 1964.
The Board met in the Board Room
at 10:00 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Balderston Vice Chairman
Mills
Robertson
Shepardson
Daane
Mr. Sherman, Secretary
Mr. Kenyon, Assistant Secretary
Mr. Young, Adviser to the Board and Director,
Division of International Finance
Mr. Noyes, Adviser to the Board
Mr. Molony, Assistant to the Board
Mr. Fauver, Assistant to the Board
Mr. Hackley, General Counsel
Mr. Farrell, Director, Division of Bank
Operations
Mr. Solomon, Director, Division of
Examinations
Mr. Hexter, Assistant General Counsel
Mr. Shay, Assistant General Counsel
Mr. Kiley, Assistant Director, Division
of Bank Operations
Miss Hart, Senior Attorney, Legal Division
Mr. Young, Senior Attorney, Legal Division
Mr. Sanders, Attorney, Legal Division
Certificate of deposit transactions.
In a memorandum of July 28,
1964, which had been distributed, the Division of Examinations recalled
that by letter of March 27, 1964, Chairman McMurray of the Federal Home
Loan Bank Board had expressed concern about reports indicating that
savings and loan associations were becoming holders of bank certificates
c't deposit as a part of somewhat dubious financial transactions.
He had
illquired whether the Board of Governors shared this concern and asked
-2-
7/30/64
for suggestions as to any corrective measures that might be taken.
discussion at the meeting on May
6,
After
the Board of Governors replied to
the effect that it also was concerned about some certificate of deposit
transactions; it suggested that the Home Loan Bank Board might want to
consider limiting or excluding the use of certificates of deposit as
assets that a savings and loan association could use to meet its liquidity requirements.
In addition, the Federal Reserve Banks were asked
by the Board of Governors to forward information about the prevalence
Of practices such as discussed in the correspondence with Chairman
McMurray, and their suggestions for dealing with such practices were
invited.
The replies from the Reserve Banks indicated that practices such
as described by Chairman McMurray were being engaged in by banks only to
a minor degree.
In almost all instances where savings and loan associa-
tions were holding certificates of deposit, the certificates had been
issued directly to the associations, with no broker involved.
The Reserve
Bank letters suggested that one of the most effective ways of curbing any
abuses would be for the Home Loan Bank Board to take action such as had
been recommended by the Board of Governors to Chairman McMurray. (The
JUly 28 memorandum noted that the Home Loan Bank Board had recently
Changed its ruling regarding the treatment of certificates of deposit
as cash for reserve purposes somewhat along these lines.)
4
7/3064
-3The Board's earlier letter to Chairman McMurray had stated that
he would be kept advised of any further developments.
Inasmuch as es-
sentially nothing new had been reported by the Reserve Banks, the Division
Of Examinations recommended that no action be taken by the Board at this
time.
Following comments by Mr. Solomon in supplementation of the
memorandum, Governor Robertson said he understood that the problem was
fairly significant in California.
It appeared that some smaller banks
would be unable to renew outstanding certificates of deposit held by
savings and loan associations and would have to make adjustments in
their loan portfolios.
Such a situation conceivably could lead to merger
applications.
Governor Daane commented that despite the tenor of the Reserve
Bank replies a potential problem of some consequence was involved.
He
Wondered if the Board of Governors should urge the Home Loan Bank Board
to do a little more tightening.
It was noted, however, that any such
move on the part of the Home Loan Bank Board would make the situation
all the more difficult for the banks such as those in California that
had certificates outstanding in the hands of savings and loan associations.
Inquiry was made whether the investigation by the Reserve Banks
Went beyond State member banks, and Mr. Solomon said that the Board's
l'equest was not specific.
Some of the Reserve Bank replies, however,
Went beyond State member banks.
Mr. Noyes commented that it would be
40i26(i
..1
7/3064
Unfortunate to dismiss the problem out of hand simply because the practice
Was not prevalent among State member banks, and Mr. Solomon noted that
there were reports that some new national banks might be selling certificates freely in order to build up their deposits quickly.
Question was raised about the recommendation of the Division of
Examinations that no further action be taken at this time, and Mr. Solomon
commented that obviously the subject would continue to receive attention
as a supervisory problem.
Governor Robertson raised the question whether it would not be
desirable to advise the Hone Loan Bank Board as to the results of the
investigation by the Federal Reserve Banks, and Mr. Solomon replied that
he would be glad, if the Board so desired, to communicate the substance
Of the Reserve Bank replies by telephone.
Governor Daane commented that the fact that the Reserve Banks
had uncovered little new information should not diminish the concern of
the Board of Governors about the potential problem.
Mr. Noyes inquired whether it would be desirable to ask the
Rome Loan Bark Board to report bank certificates of deposit held by
Savings and loan associations on the basis of examination of those associations, and Mr. Solomon observed that such information was obtained
through bank examinations, which revealed the ownership of certificates
clf deposit outstanding.
Mr. Noyes then suggested that one possibility
I/ould be to ask Chairman McMurray if, when savings and loan examiners
2670
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7/3064
ran into an association that held a lot of certificates of deposit, the
Board could be advised as to what banks had issued them.
Mr. Solomon
commented that although this could be done, he did not think there was
any substantial informational gap.
Mr. Noyes noted that the Federal
Reserve Banks did not examine national or insured nonmember banks, and
that there could be some problems building up at those classes of institutions.
Mr. Solomon replied that there was the question of what could
be done about the situation by the Board even if problems were found to
exist among such institutions.
At the conclusion of the discussion, it was understood that
Mr. Solomon would advise the Home Loan Bank Board informally of the
general nature of the information that had been furnished by the Federal
Reserve Banks.
Question under Regulation U (Item No. 1).
There had been dis-
tributed a memorandum from the Legal Division dated July 24, 1964,
relating to a request by Counsel for The First National Bank of Boston,
Boston, Massachusetts, for an interpretation as to whether loans made
bY the bank against collateral consisting of shares of First Participating
Pund, Inc., a mutual fund in process of organization, would be subject
to Regulation U, Loans by Banks for the Purpose of Purchasing or Carrying
Ilegistered Stocks.
The Fund would be an open-end investment company
aPecializing in insurance stocks, but it would customarily include some
l'egistered stocks in its portfolio.
It would not issue share certificates;
-6-
7/3064
instead, records of share ownership would be kept on First National
Bank's computer.
However, a customer could obtain a share certificate,
if he wanted one, by applying to the bank and paying a small fee.
The
Fund argued that customers would be worried about whether they could
borrow against their shares if they had no certificates, and it had made
an arrangement with the bank under which a customer could borrow up to
a fixed amount, at fixed terms, on any Fund shares he owned simply by
filling out a loan application that would be attached to the prospectus
for the Fund and mailing the application to the bank.
The customer's
Signature would be witnessed by an authorized dealer in Fund shares.
The Board's staff did not feel that the requirements of section 221.3(a) of Regulation U could be observed effectively in connection
with nonpurpose statements obtained under the proposed plan.
The staff
believed that Board approval of this proposal would relax the requirements
in a way that would seriously increase the probability that purpose loans
would be made in violation of Regulation U.
This concern was increased
by the likelihood that any favorable ruling given to the Fund would
become known to the mutual fund industry and that for competitive reasons
Other funds would establish similar loan programs.
Nor did the staff
believe that an adverse ruling would result in any serious hardship for
First National Bank, the Fund, or individual borrowers, since a would-
be borrower would retain the option of writing in and having certificates
issued to him on which he could borrow anywhere.
It was recommended that
if
-7-
7/3o/64
the Board send a letter to the Federal Reserve Bank of Boston indicating
that the proposed plan would not meet the requirements of section 221.3(a)
Of Regulation U.
A draft of letter was submitted with the memorandum.
Following comments by Miss Hart based on the memorandum, the
letter to the Federal Reserve Bank of Boston was approved unanimously.
A copy is attached to these minutes as Item No. 1.
Miss Hart then withdrew from the meeting.
Stone Mountain Memorial Association bonds (Item No. 2).
There
had been distributed a memorandum from the Legal Division dated July 29,
1964, regarding an inquiry from the Georgia State Auditor as to whether
Stone Mountain Memorial Association bonds were "general obligations"
vithin the meaning of paragraph seventh, section 5136 of the Revised
Statutes. According to the Legal Division, the bonds seemed clearly
to qualify as "general obligations" in accordance with the interpretation
stated in a letter dated May 1, 1964, from the Board to Governor Sanders
Of the State of Georgia, and published thereafter in the Federal Register,
relating to the underwriting of public authority bonds payable from rents
under leases with governmental entities having general taxing powers.
The Legal Division recommended that the Board decline to rule
On the status of this particular issue of bonds and adopt a general
Policy of ruling only on those issues where the resolution of problems
could add materially to the development of clearer guidelines reflecting
the Board's understanding of statutory requirements.
While such a policy
-8-
7/3o/64
might result in a State member bank occasionally participating in the
underwriting of an obligation that was not eligible under section 5136,
a practice of responding to requests for opinions on issues of bonds
that did not present any significant problem insofar as eligibility
for underwriting was concerned could result in an undue burden, involving a task that should be performed by counsel for commercial banks.
A draft of reply to the Georgia State Auditor reflecting this
recommendation was submitted with the memorandum.
Following comments by Mr. Sanders, agreement was expressed with
the general policy recommended by the Legal Division.
The letter to the
Georgia State Auditor, a copy of which is attached as Item No. 2, was
then approved unanimously.
Messrs. Hexter and Sanders then withdrew from the meeting.
Comment on proposed merger (Item No. 3).
In a letter dated
July 17, 1964, which had been distributed, the Secretary of Banking of
the State of Pennsylvania, Mr. G. Allen Patterson, referred to the Board's
denial in 1962 of the proposed merger of Dauphin Deposit Trust Company,
Rarrisburg, Pennsylvania, and The First National Bank of Mount Holly
SPrings, Mount Holly Springs, Pennsylvania.
Against this background,
he commented on a currently proposed merger of the Mount Holly Springs
hank with Cumberland County National Bank and Trust Company, New Cumberland, Pennsylvania.
For reasons stated, he expressed the view that
approval of such merger would be prejudicial to State banks and the
7/30/64
-9-
dual banking system as well as to membership in the Federal Reserve
System, constituting a demonstration of inconsistency in the application of the bank merger standards established by Congress to insure
uniform consideration and action on all mergers, whether the resulting
institution would be a State or a national bank.
He urged that the
Board recommend disapproval of the proposed merger.
Mr. Patterson's letter had been distributed with a draft of
reply that would acknowledge his comments and transmit a copy of the
report on competitive factors made by the Board to the Comptroller of
the Currency with regard to the currently pending merger.
After certain editorial changes in the proposed reply had been
agreed upon, unanimous approval was given to a letter to Mr. Patterson
in the form attached as Item No.
3.
Mr. Shay then withdrew from the meeting.
Distribution of new Federal Reserve notes from Washington to
Pederal Reserve Banks and branches (Item No.
4). In a memorandum from
the Division of Bank Operations dated July 24, 1964, which had been distributed, it was noted that the Conference of Presidents of the Federal
Reserve Banks at its meeting on June 15, 1964, had approved, subject to
Board approval, the recommendation of the Subcommittee on Cash, Leased
Wire, and Sundry Operations that the Federal Reserve System negotiate a
three-year contract with Brink's, Inc., for the distribution of new
Pederal Reserve notes from Washington, D. C., to all Federal Reserve
2675
7/3064
-10-
offices.
Conference approval was with the understanding that the Sub-
committee would consult with the Federal Reserve Agents on the basic
Proposal and that at an appropriate time an ad hoc committee of Counsel
would be appointed to assist the Subcommittee in its negotiations and
in the drafting of a contract covering the agreement.
In presenting the Subcommittee's report to the Conference,
President Swan, Chairman of the Committee on Miscellaneous Operations,
had pointed out that the Brink's proposal would result in a 20 per cent
saving for the System as a whole based on cost and volume for 1962.
He
also commented on the advantages of the proposal, as compared with current
arrangements, from the standpoint of security, insurance, and door-todoor delivery.
Based on 1962 volume, the Brink's proposal was $289,000
lower than the next lowest proposal, and $214,000 less than 1962 Post
Office charges for shipments of Federal Reserve notes and one dollar
Silver certificates.
If adjustments were made in the four proposals
that had been submitted to match the Brink's proposal for a greater
number of shipments at the load levels preferred by the Reserve Banks,
the difference between the Brink's price and the lowest of the other
Proposers expanded to $469,000.
The Subcommittee also had noted that
Brink's was the only company with experience and facilities in all the
Pederal Reserve Districts, and its superior credit standing and financial
capability would enable it to handle best any sharp expansion in new
business.
Physical facilities and security controls appeared adequate,
7/30/64
-11-
and plans called for the construction of a new building in the Washington
area to accommodate the expansion in local activity.
The Division of Bank Operations recommended that the Board
approve the action of the Conference in directing the Subcommittee to
Proceed with negotiations with Brink's, Inc., with the understanding
that the Federal Reserve Agents would be consulted and that an ad hoc
committee of Counsel would be appointed to assist the Subcommittee.
Submitted with the memorandum from the Division was a draft of letter
to the Chairman of the Presidents' Conference reflecting the recommendation.
The Division memorandum reviewed the history of consideration of
the possibility of transporting new Federal Reserve notes from Washington
by means other than registered mail.
It also listed a number of arguments,
both favorable and unfavorable, on the use of private carriers for this
Purpose and on the use of a combination of air-truck transportation.
The
Subcommittee did not feel that any of the unfavorable factors were comPelling enough to warrant an adverse recommendation.
The menorandum also noted that the question whether the Board,
the Reserve Banks, or both, should be the signatory party or parties
when a contract with Brink's was finally executed had been discussed
Igith the Board's Legal Division.
It was the opinion of that Division
that the Board of Governors alone should execute the contract.
The
Principal basis for this view was that under the fourth paragraph of
4;k1,.
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7/30/64
section 16 of the Federal Reserve Act it is the responsibility of the
Board, through its local Federal Reserve Agents, to supply Federal
Reserve notes upon application by Federal Reserve Banks.
The transpor-
tation of these notes from the Bureau of Engraving and Printing to the
Federal Reserve Agents was a necessary incident to carrying out this
responsibility.
It was also suggested that execution of the contract
by the Board would appear to be the simplest procedure.
In the course of comments on the matter, Mr. Kiley said that
the question of making the work schedules of the Bureau of Engraving and
Printing coincide with the proposed transportation arrangements had been
discussed with the Bureau and that there appeared to be no significant
Problems.
Some attention also had been given to the distribution of
cost among the Federal Reserve Banks.
While this question bad not been
finally resolved, the Presidents seemed to feel that the matter could
be worked out satisfactorily.
In further discussion, Governor Shepardson suggested that the
letter to the Chairman of the Presidents' Conference state specifically
that any contract with Brink's, Inc., would be executed by the Board of
Governors, and there was general agreement with this suggestion.
Governor Robertson said that he felt somewhat uncomfortable
about the proposal, even though he would not vote against it.
Once a
Witch was made to use of private carrier, it would be almost impossible
to go back and utilize Government services for this purpose.
And in
4
•
Orirk)
7/3o/64
-13-
event of a strike against a private carrier, it appeared that the System
could run into some trouble.
Mr. Farrell agreed that a significant decision was involved.
Re added that the question had had full discussion by the Reserve Bank
Presidents.
In his opinion, however, the question of a strike affecting
Shipments of new notes from Washington was not the foremost consideration,
because the problem here was not concerned with day-to-day supplies of
currency.
A strike affecting transportation of currency between Federal
Reserve Banks and member banks would be more harmful.
Governor Robertson then commented that even so, there was still
a problem involved.
He went on to recall that the current proposal
developed out of conferences with a former Postmaster General, which
led him to inquire whether the matter had been taken up with the present
Postmaster General.
Mr. Kiley replied that the matter had been taken up only informally and at a relatively low level.
The Post Office representatives
involved had inquired whether it would still be possible for the Post
Office to "get back in the picture."
They were informed that it was
the Department's prerogative to make a counterproposal, but nothing
further had been heard from them.
There followed comments regarding difficulties of the Post Office
in maintaining adequate registered mail service due to train schedule
cutbacks, after which Chairman Martin suggested that the System had gone
7/30/64
So far along the proposed course as to make further delay of doubtful
advisability.
If the matter were referred back to the Post Office, some
further period of delay would be involved.
Governor Balderston inquired whether an "escape" clause from the
three-year contract was envisaged, and Mr. Kiley said it was hoped some
such clause could be included, and possibly provision for renegotiation
in event of substantial change in the volume or flow of work.
Governor Daane agreed that undue delay would be inadvisable but
asked whether top-level personnel of the Post Office should be informed
Of the proposal as a matter of courtesy, and Mr. Kiley said that the
career people in the Post Office, who would be the ones principally
concerned with a matter of this kind, were aware of the situation.
He
could not say whether the Postmaster General had been informed.
Mr. Farrell referred to one aspect of the proposal that was of
some concern to him.
The worst possibility, he thought, was that an
airplane carrying currency might fly into a mountain, for example, with
the result that burned or partially-burned currency would be scattered
over the terrain.
Full reimbursement would be obtained through insurance,
but there might he no idea as to how many unauthorized notes were floating
around.
However, the Post Office itself was gradually being forced into
the use of air transportation.
Governor Shepardson commented that the current proposal involved
4 subject that had been under consideration over a long period of time.
-15-
7/30/64
As he understood it, the Post Office had been made fully aware in the
past of the possibility that the Federal Reserve might move in such a
In fact, following the holdup of a U. S. Mail truck carrying
direction.
currency in Massachusetts, the then Postmaster General had indicated
that the Federal Reserve should not look to registered mail facilities
to transport large mounts of currency.
Mr. Farrell said that he would be glad, if the Board so desired,
to call Assistant Postmaster General Ralph W. Nicholson, with whom he
had had previous contacts, and inform him of the decision to utilize
Brink's, Inc., and it was agreed that this should be done.
Secretary's Note: In a memorandum dated
July 30, 1964, which has been placed in
the Board's files, Mr. Farrell reported
conversations with Mr. Nicholson and with
William T. Howell, Deputy Treasurer of the
United States. The memorandum indicated
that Mr. Nicholson did not seem unduly
disturbed by the receipt of the information supplied to him.
Thereupon, Governor Robertson's reservations being noted, the
Board concurred in the action taken by the Conference of Presidents
approving the recommendation of the Subcommittee on Cash, Leased Wire,
and sundry Operations that the Federal Reserve System negotiate a threeYear contract with Brink's, Inc., for the transportation of new Federal
Reserve notes from Washington, D. C., to the Federal Reserve Banks and
branches.
Reflecting this concurrence, approval was given to a letter
to the Chairman of the Conference of Presidents in the form attached as
Item No. 4.
-16-
7/30/64
The meeting then adjourned.
Secretary's Notes: A letter was sent today
to First National City Bank, New York, New
York, acknowledging receipt of notice of its
intent to establish a branch in Cartagena,
Colombia.
Governor Shepardson today approved on behalf
of the Board the following items:
Memorandum from the Divisions of Research and Statistics and
Administrative Services dated July 28, 1964 (attached Item No. 5) regarding proposed printing and distribution of a research monograph on
bank mergers and the regulatory agencies. This action included authorization of the resulting budget overexpenditure.
Memoranda from appropriate individuals concerned recommending the
following actions relating to the Board's staff:
Salary increases, effective August 2, 1964
'Warne and title
Division
Basic annual salary
To
From
Office of the Secretary
John B. P. Baird, General Assistant
$ 7,490
$ 7,720
3,880
12,495
4,215
4,850
14,065
7,355
8,970
12,880
9,530
9,810
Research and Statistics
Julia Back, Library Assistant
Loree D. Bernard, Statistical Assistant
George R. Hall, Economist
Monica F. Jones, Statistical Assistant
Paul W. Kuznets, Economist
Elizabeth B. Sette, Chief, Economic Editing
4,690
13,615
7,160
8,690
International Finance
Margaret R. Garber, Economist
2682
7/30/64
-17-
Salary increases, effective August 2, 1964 (continued)
Name and title
—
Division
Basic annual salary
From
To
_....
Personnel Administration
Jeanette E. Devlin, Personnel Records Technician
Robert Sampson, Personnel Assistant
Margaret H. Wolverton, Personnel Assistant
$6,110
7,030
8,970
$6,285
7,260
9,250
3,830
3,410
3,935
3,620
3,880
3,985
Administrative Services
Vincent R. Creamer, Laborer
Bert Harvey, Messenger-Driver
(change in title from Messenger)
Thomas A. Whitty, Guard
P.trmission to engage in outside activity
John H. Wood, Economist, Division of Research and Statistics, to
teach a graduate course in econometrics at the University of Maryland.
oc-t
j;
Aw(:iflik)
BOARD OF GOVERNORS
Item No. 1
7/30/64
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
July 30, 1964.
Mr. Laurence Stone,
Secretary and Assistant Counsel,
Federal Reserve Bank of Boston,
02106
Boston, Massachusetts.
Dear Mr. Stone:
This refers to a letter of June 26, 1964, from The First
National Bank of Boston ("Bank") which replaced, pursuant to your
discussion with Miss Hart of the Board's Legal Division, a letter of
May 7, 1964, transmitted by you to the Board. Bank asks whether
certain loans to be made against collateral consisting of shares of
First Participating Fund, Inc. ("Fund"), a mutual fund in process of
organization, would be subject to Regulation U.
Fund will be an open-end, diversified management company,
investing mainly in insurance company stocks, but the request for an
interpretation states that from time to time it may also invest in
stocks registered on a national securities exchange. Insurance stocks
are not customarily so registered.
Fund plans to issue no share certificates, except on request
and at a small charge. Instead, share records will be kept by Bank.
While operating economies are expected to result from eliminating
share certificates, Bank points out that, lacking such certificates,
?hareholders may find it difficult to borrow against their interests
ln Fund. The result might be to encourage redemptions; and it is
feared that the possibility of such difficulties might also discourage
Prospective purchasers from investing in Fund shares.
To meet these problems, Fund proposes to offer, by pre4rrangement with Bank, a plan under which shareholders would have the
Privilege of borrowing up to sixty per cent of the current value of
shares they have owned for at least sixty days, with a minimum loan
Of $1,000 and a maximum of $10,000. A shareholder would not be
Permitted to reborrow against the same collateral until thirty days
after his earlier loan had been paid. Loans would be repayable within
81-x months, but could be extended for a maximum of three months, at
the borrower's request.
Mr. Laurence Stone
-2-
Fund's prospectus would have attached to it a form of loan
application and agreement. A prospective borrower would fill out
the application, including (1) a statement that he understands that,
under Regulation U, the proceeds of a sixty per cent loan may not
be used to purchase or carry registered stocks and (2) a statement
describing the purpose of the loan. The statement as to the purpose
of the loan would be witnessed by the dealer, who would also guarantee
the borrower's signature.
A bank loan is subject to Regulation U if two conditions
exist: (1) if the loan is secured, directly or indirectly, by any
stock, and (2) if it is for the purpose of purchasing or carrying any
stock registered on a national securities exchange. It seems clear
that mutual fund shares are "stock" within the definition of
section 221.3(1), which includes "any security commonly known as a
stock".
The second condition, that the loan be for the purpose of
purchasing or carrying registered stocks, could obtain in either of
two situations: (1) if the loan was for the purpose of purchasing
or carrying shares in Fund and those shares were "redeemable securities"
Within the meaning of section 221.3(b)(2), or (2)if the loan was for
the purpose of purchasing or carrying registered stocks (or other
redeemable securities). Although Bank's letter did not so state,
representatives of Fund have informed the Board's staff that the
portfolio of Fund will customarily include registered stocks; accordingly, Fund's shares will be such "redeemable securities" for the
Purposes of Regulation U.
The Board has held that "the 'purpose' of a loan means just
that. It cannot be altered by some temporary application of the proceeds", (1947 Federal Reserve Bulletin 27.) If a purchaser ordered
Fund shares, then borrowed from Bank on the security of Fund shares,
then paid for the shares, the fact that proceeds of the bank loan were
not used directly to pay for the shares would not prevent the loan
from being a "purpose loan". Similarly, where a stock-secured bank
loan was outstanding while a periodic plan for purchasing Fund shares
continued in force, it seems probable that the loan would be subject
to the regulation.
In this connection, an interpretation of the Board at 1962
Federal Reserve Bulletin 690 is relevant. The 3oard was considering
Proposed "living expense" loans to be made to certain employees of
American Telephone and Telegraph Company in connection with an
employee stock option plan. The employees had purchased stock under
Previous plans, and that stock was to be held as collateral for monthly
bank loans in the amount of the monthly deduction from the employees'
Pay checks made pursuant to the current stock option plan. The amount
Mr. Laurence Stone
-3-
to be loaned exceeded the amount permissible for a loan subject to
Regulation U. At the end of the period, the borrower would have
acquired a certain number of shares of stock, and would have been
indebted to the lending bank in an amount approximately equal to the
amount paid for the shares. The Board held that "in these circumstances, the loan by the bank must be regarded as a loan 'for the
purpose of purchasing' stock" and therefore subject to the regulation.
The second condition would also obtain if the loans were
for the purpose of purchasing or carrying other redeemable securities,
or registered stocks. In this connection, as well as in the case of
g
loans which could be for the purpose of purchasing or carryin Fund
seek
tly
would
Fund
and
diligen
shares, it is assumed that both Bank
were
ions
Board's
the
regulat
of
ments
to make certain that the require
loans
the
that
for
concern
matter
enforced. Nevertheless, it is a
would be arranged through dealers, in an atmosphere inescapably
connected with the securities business.
Section 221.3(a) of Regulation U permits a bank to rely
nt
Upon a statement as to the purpose of a loan only if the stateme
and
d
faith
in
is
good
(2)
accepte
and
r,
borrowe
(1) is signed by the
The
d.
so
been
having
accepte
as
bank
the
signed by an officer of
regulation provides that "to accept the statement in good faith, the
and
officer must be alert to the circumstances surrounding the loan
a
prudent
put
tion
would
which
informa
no
have
the borrower and must
man upon inquiry and if investigated with reasonable diligence would
lead to the discovery of the falsity of the statement". The regte
ulation does not authorize the lending officer of a bank to substitu
the discretion or diligence of another person for his own in
a loan.
obtaining and scrutinizing a statement as to the purpose of
for the
Bank,
It would not seem feasible, under the plan proposed by
be
to
r,
circumstances surrounding each loan, and each borrowe
adequately known to the loan officer, so that the officer could
become aware of indications that might require further investigation.
While the careful efforts on the part of both Bank and Fund
Reguto work out a loan plan that would meet the requirements of
cases,
most
in
that,
es
the
conclud
Board
lation U are appreciated,
purpose
of
nt
stateme
a
for
accept
Bank to
it would not be possible
meaning of
made under the proposed plan, in "good faith" within the
proposed
the
that
ble
inevita
seems
it
the regulation. Consequently,
ion.
the
of
on
regulat
violati
in
loans
being made
plan would result in
to Bank.
A copy of this letter is enclosed, to be forwarded
Very truly yours,
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.
Attachment
BOARD OF GOVERNORS
.....
.'• OE GOv • •
OF THE
FEDERAL RESERVE SYSTEM
1:
Item No. 2
7/30/64
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
July 30, 1964.
Mr. E. B. Davis,
State Auditor,
Department of Audits,
Atlanta, Georgia.
Dear Mr. Davis:
This is in reply to your letter of July 21, 1964, requesting
a ruling that the proposed issue of Stone Mountain Memorial Association Bonds will be eligible for underwriting by member State banks.
As you may know, the substance of Chairman Martin's letter of
May 1, 1964, to Governor Sanders was published as an interpretation of
the Board of Governors in the May 8, 1964, issue of the Federal Register
(Vol. 29, p. 6061) and the May 1964 issue of the Federal Reserve Bulletin
(p. 564). Although the interpretation did not refer specifically to the
bonds of Georgia State Authorities, it set forth factors that must be
considered by member State banks in determining whether they may participate in the underwriting of obligations such as the proposed issue of
bonds of the Stone Mountain Memorial Association.
Upon brief examination, the documents relating to the proposed
issue appear largely similar, in their terms, to those previously considered by the Board in connection with the correspondence with
Governor Sanders and the interpretation referred to above. In the circumstances the Board does not consider that a ruling could add materially
to the development of clear guidelines as to the Board's understanding
of the statutory requirements.
It might appear that ideally, from the standpoints of public
issuers of obligations and member State banks, a specific supervisory
ruling should be available with respect to each offering of securities
of a public body. Such specific rulings might be particularly desirable
with respect to those obligations falling into categories other than
direct general obligations of a State. However, the Board considers
that the only practical approach to the question of eligibility of obligations for bank underwriting is for it to make clear, by general
interpretations, its understanding of the statutory requirements and
HOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. E. B. Davis
‘,ZiSS e
-2-
to rely upon member banks and their counsel to determine, at least
initially, whether a particular issue qualifies. Accordingly, the Board
deems it preferable not to rule specifically with respect to issues
such as the Stone Mountain Memorial Association Bonds.
If, in the future, particular issues of bonds by a Georgia
State Authority present problems not adequately covered by existing
interpretations, the Board would welcome the opportunity to assist by
clarifying its views.
Very truly yours,
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.
26'88
ovotir:o00
v\t"),x,,
-
;4
(
kz•
BOARD OF GOVERNORS
Item No.
OF THE
C7511.
*
„
FEDERAL RESERVE SYSTEM
•
7/30/64
WASHINGTON
."•!*
OFFICE OF THE CHAIRMAN
t1
July 30, 1964.
The Honorable G. Allen Patterson,
Secretary of Banking,
Department of Banking,
Harrisburg, Pennsylvania.
Dear Mr. Patterson:
1964, you commented on the
In your letter of July 17,
sed merger of Dauphin
propo
then
Board's denial in 1962 of the
nal Bank of Mount Holly
Natio
First
Deposit Trust Company and The
a recently proposed
about
n
matio
infor
Springs. You also provided
Company and
Trust
and
Bank
nal
Natio
merger of Cumberland County
gs.
Holly
Sprin
The First National Bank of Mount
ve comments from State
We are always glad to recei
was brought to the attention
r
lette
banking authorities, and your
end of June, the Board subthe
At
of the members of the Board.
ncy an advisory report on
Curre
the
of
mitted to the Comptroller
proposed merger of The
the
in
ved
invol
the competitive factors
gs and Cumberland County
Sprin
Holly
Mount
First National Bank of
of this report is encopy
A
ny.
Compa
National Bank and Trust
n.
matio
closed for your infor
Sincerely yours,
Wm. McC. Martin, Jr.
Enclosure.
3
42689
BOARD OF GOVERNORS
Item No.
OF THE
I.
7/30/64
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
July 30, 1964.
Hr. Alfred Hayes, Chairman,
Conference of Presidents,
c/o Federal Reserve Bank of New York,
New York, New York
10045.
Dear Mr. Hayes:
The Board concurs in the action taken by the Conference
of Presidents at its meeting on June 15, 1964, approving the
recommendation of the Subcommittee on Cash, Leased Wire and Sundry
Operations that the Federal Reserve System negotiate a three-year
contract with Brink's Inc., for the transportation of new Federal
Reserve notes from Washington, D. C., to the Federal Reserve Banks
and branches. The Board understands that the Subcommittee will
Proceed with negotiations on the proposal with Brink's Inc., that
the Federal Reserve Agents will be consulted on the basic proposal,
and that at the appropriate time an ad hoc committee of counsel
Will be appointed to assist the Subcommittee in its negotiations
and in the drafting of a contract covering the agreement, such
contract to be executed by the Board.
Very truly yours,
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.
cc:
Mr. Timlen, Secretary,
Conference of Presidents.
26.90
Item No. 5
BOARD OF GOVERNORS
OF TM(
7/30/64
FEDERAL RESERVE SYSTEM
°Rice
Correspondence
4
----19-qArd of Governors (via Controller)
P 0 bivisions of Research & Statistics
nd dministrative Services
Datet
July 28, 1964.
Subject: Price and Distribution for
Research Monograph "Bank Mergers and the
Regulatory Agencies: A Comparative
Analysis of Administrative Policy under
the Bank Merger Act of 1960."
On April 1, 1964 the Board approved publication of a research
monograph "Bank Mergers and the Regulatory Agencies: A Comparative Analysis
Of Administrative Policy under the Bank Merger Act of 1960" and authorized
it3he resulting overexpenditure in the 1964 Budget, in which no provision had
een made for the cost involved. It is planned to send the manuscript for
the monograph to the printer on July 29th.
The Divisions of Research and Statistics and Administrative
Services recommend that:
(1) 2,000 copies be printed at an estimated cost of $2,307.
(2) copies be initially distributed to Federal Reserve Banks,
and to selected groups specified by the Division of
Research and Statistics.
copy be distributed to Board Members and Senior Staff.
Each Division be asked to supply names of others having
need for copies.
(3) one
(4) upon request, copies be furnished without charge to
Government departments (domestic and foreign), including
State and City; public libraries and libraries of educational institutions; and the press.
(5) to others, including member banks, copies be distributed
at a charge of $1.00 each.
@FedFRASER