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9
Minutes for
To:
Members of the Board
From:
Office of the Secretary
June 23, 1966
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. Robertson
Gov. Shepardson
Gov. Mitchell
Gov. Daane
Gov. Maisel
Gov. Brimmer
t3t,'
,4
r
Minutes of the Board of Governors of the Federal Reserve
System on Thursday, June 23, 1966.
The Board met in the Board
Room at 10:00 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Robertson, Vice Chairman
Maisel
Brimmer
Sherman, Secretary
Bakke, Assistant Secretary
Hackley, General Counsel
Solomon, Director, Division of Examinations
Hexter, Associate General Counsel
Hooff, Assistant General Counsel
Daniels, Assistant Director, Division of
Bank Operations
Mr. Leavitt, Assistant Director, Division of
Examinations
Miss Wolcott, Technical Assistant, Office of the
Secretary
Miss Hart and Mr. Shuter of the Legal Division
Mr. Poundstone, Review Examiner, Division of
Examinations
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Approved items.
The following items were approved unanimously
alter consideration of background information that had been made
available to the Board.
Copies are attached under the respective item
nu4thers indicated.
Item No.
'
,letter to Puritan Bank and Trust Company,
lni
,den, Connecticut, approving the estab-8"ment of an in-town branch.
li:etter to Hempstead Bank, Hempstead, New York,
:
8 t
cerPosing no objection to the continuation of
:
131 e deposit facilities at the bank's Levittown
ii-Ianch while conducting other branch operations
nearby temporary quarters.
1
2222
6/23/66
-2Item No.
Letter to Bankers International Corporation,
New York, New York, granting permission to
acquire shares of Petroquimica del Atlantico,
S.A., Barranquilla, Colombia.
3
Letter to the Bureau of the Budget regarding
enrolled bill H.R. 7371, to amend the Bank
Holding Company Act of 1956.
4
Currency of $2 denomination (Item No. 5).
In a letter dated
February
28, 1966, the Secretary of the Treasury had sought the views
of the Board on alternative proposals of abandoning the $2 denomination
of United States notes or the issuance of $2 Federal Reserve notes.
The question was raised because of the elimination from the 1967 Federal
budget of funds for the printing of United States notes, and the possibilitY that existing stocks would not be sufficient to meet demand during
that fiscal year.
On April 21, 1966,the Board replied to the effect
th't, with few exceptions, the public would not be significantly inconvenienced by the elimination of $2 bills, and neither the Board nor the
ieserve Banks favored the printing of $2 Federal Reserve notes at this
time.
Also, it was suggested that if the $2 bill was discontinued, the
keserve Banks and the Treasury should stop paying out notes at the same
ttme
and the existing stocks should be destroyed.
It now appeared that in the near future it would be impracticable
for „
the
Federal Reserve Banks to continue to meet requests for $2 notes
1/ith
°nt new supplies.
The stock of new $2 bills in Washington had been
6/23/66
-3-
exhausted, and the total supply at Reserve Banks would soon become so
small as to make continuation of the current procedure of shipments
between Federal Reserve offices to meet regional demands unfeasible.
Accordingly, the Division of Bank Operations, in a draft letter to the
Secretary of the Treasury that had been circulated to the Board, proPosed that the Federal Reserve Banks discontinue paying out $2 bills
and that outstanding notes be returned to custody of the Treasurer of
the United States until such time as the Treasury could supply additional quantities of $2 United States notes.
In this connection, it
was understood that funds for printing $2 United States notes were included in the Treasury's proposed budget for the fiscal year 1968,
although the Department would not be averse to having the proposal
deleted by the Bureau of the Budget.
During remarks supplementing the circulated material, Mr. Daniels
noted that the stock of $2 bills had become depleted faster than antici-
Pated
He observed that no reply to the Board's letter of April 21 had
been received from the Treasury, and, from informal talks with members
f the Treasury staff, it was his belief that no reply would be forthbefore September, at which time the budget proposal for printing
$2
United States notes during fiscal 1968 would have been acted upon
by the Budget Bureau.
Following consideration of questions raised by members of the
13°4rd that pointed up the limited use of the $2 denomination as a
6/23/66
-4-
circulating medium, the letter to the Secretary of the Treasury was
-9-2PL2y2s1 unanimously.
A copy is attached as Item No. 5.
Interpretation of Regulation T (Item No. 6).
In a letter dated
APril 22, 1966, the National Association of Securities Dealers requested
the opinion
of the Board as to whether a violation of section 220.4(f)(6)
of Regulation T (Credit by Brokers, Dealers, and Members of National
Securities Exchanges) had occurred in a transaction involving the transfer of credit by a broker from a customer's margin account into a special
miscellaneous account.
An appeal by the customer, from a decision ad-
verse to him rendered by the Philadelphia branch of the National Association of Securities Dealers, was pending before the Association.
In summary, it appeared that on November 1, 1963, the customer
Ordered the closing of several margin accounts in which were held positio
.
ns in certain securities, all registered on a national securities
exchange.
The customer paid the broker the total amount of the debit
balances in cash, and the broker initiated steps to have the securities
transferred
to the customer's name.
On November 6, margin requirements
'were raised from 50 per cent to 70 per cent.
On November 8, before
transfer of shares to the customer's name had been completed, the customer decided to buy over-the-counter securities.
The broker informed
the customer
that the shares would have to be purchased for cash, but
that a loan, in the amount of 50 per cent of the current market value
Of the
registered securities still held by the broker, could be made
e'/ailable for this purpose.
2`)"15
6/23/66
-5Thereafter, a dispute arose over management of the account, and
the customer charged the broker with a violation of Regulation T in
having extended credit on the basis of 50 per cent, rather than 30 per
cent, of the value of his securities, since on the date the credit was
extended the margin requirement was 70 per cent.
The broker countered
that on November 4, incident to closing out the margin accounts, a
routine bookkeeping transfer of 50 per cent of the current market value
of the registered shares in the customer's margin accounts had been
made to his special miscellaneous account.
He argued that it was
customary trade practice for a broker to withdraw excess funds from
customers' margin accounts into their special miscellaneous accounts,
thereby making these funds available for unrestricted use, and that
"-nee this particular transfer had taken place before margin requirements were raised, the full 50 per cent was therefore available for
e tension of credit to the customer.
The question before the Board was whether the broker had the
authority to make the transfer into the special miscellaneous account
after the customer had indicated he wanted to close his margin accounts.
There had been distributed a memorandum from the Legal Division dated
jutie 21, 1966, in which it was concluded that, on the basis of the
l'ecord submitted to the Board, the transfer was in violation of Regulation ,
This conclusion was based on the premise that a broker's
4uth°rity to effect withdrawals from overmargined accounts for deposit
(
30
(
3r4
tts,"Kr
6/23/66
-6-
in special miscellaneous accounts arises from his contract with the
customer, subject to applicable regulations and laws.
Since, in this
Particular case, the customer had ordered his accounts closed, had paid
in full the debit balance, and directed that the securities be delivered
to him, the contractual authorization for transactions with respect to
the customer's accounts, other than to have the securities issued out
in the customer's name, had terminated, and could not be revived absent
a specific request from the customer that his accounts be reopened.
Various aspects of the matter were discussed, in the light of
the distributed material and supplementary remarks by Miss Hart, directed
toward clarifying the issue before the Board.
Certain suggestions for
modifications in the draft reply were made by Governor Brimmer, after
which unanimous approval was given to a letter to the National Associati°n of Securities Dealers in the form attached as Item No. 6.
The meeting then adjourned.
Secretary's Note: Acting in the absence of
Governor Shepardson, Governor Robertson today
approved on behalf of the Board memoranda
recommending the following actions relating
to the Board's staff:
increases, effective July 3, 1966
Name and
title
Division
Basic annual salary
To
From
Research and Statistics
Iar
wilY.Jane Harrington, Economist
jilam Paul Smith, Economist
"uith A. Ziobro, Research Assistant
$10,491
11,355
7,097
$10,797
11,723
7,304
222'7
6/23/66
-7-
increases, effective July 3, 1966 (continued)
Name and title
Division
Basic annual salary
From
To
International Finance
Gordon B. Grimwood, Assistant to the Director
$19,415
$20,005
5,181
5,352
3,983
5,733
4,429
4,459
4,569
4,102
5,889
4,569
4,578
4,709
Personnel Administration
Patricia E. Gardosik, Secretary
Administrative Services
Viola E. Hamilton, Charwoman
Esmond C. Langley, Head Messenger
oh H. McDonald, Guard
'31.anche E. Peacock, Charwoman
Rubert G. Weems, Guard
Ptance of
Edward J. Finck, Purchasing Assistant, Division of Administrative
Services, effective the close of business August 31, 1966.
SSion to_tag2ge in outside activity
to
Donna A. Jameson, Clerk-Typist, Division of Personnel Administration,
work for a local department store on a part-time basis.
222S
BOARD OF GOVERNORS
Item No. 1
6/23/66
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS
orriciAL
CORRESPONDENCE
TO THE BOARD
June 23, 1966
Board of Directors,
Puritan Bank and Trust Company,
Meriden, Connecticut.
Gentlemen:
The Board of Governors of the Federal Reserve
and
System approves the establishment by Puritan Bank
on
branch
a
of
Connecticut,
Trust Company, Meriden,
Property adjacent to 27 East Main Street, Meriden,
within
Connecticut, provided the branch is established
one year from the date of this letter.
Very truly yours,
(Signed) Karl E. Bakke
Karl E. Bakke,
Assistant Secretary.
(The letter to the Reserve Bank stated that the
Board also had approved a six-month extension
of the period allowed to establish the branch;
and that if an extension should be requested,
the procedure prescribed in the Board's letter
of November 9, 1962 (S-1846), should be followed.)
olitt)
*v.
BOARD OF GOVERNORS
Item No. 2
6/23/66
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20531
ADDRESS
orrictm. CORRESPONDENCE
TO THE BOARD
June 23, 1966
Board of Directors,
Hempstead Bank,
Hempstead, New York.
Gentlemen:
The Board of Governors of the Federal Reserve
System offers no objection to Hempstead Bank, Hempstead,
New York, continuing to provide access to its safe
deposit boxes at 3240-42 Hempstead Turnpike, Levittown,
New York, while conducting branch operations from new
temporary quarters at 3278 Hempstead Turnpike, Levittown,
until such time as renovation of the permanent quarters
are completed and all operations are resumed at that site.
Very truly yours,
(Signed) Karl E. Bakke
Karl E. Bakke,
Assistant Secretary.
(
710-10 Y4-4
,t 7
Item No. 3
6/23/66
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
June 23, 1966.
Bankers International Corporation,
16 Wall Street,
New York, New York. 10015
Gentlemen:
As requested in your letter of May 17, 1966, the Board
Governors grants consent for your Corporation to acquire 2,631,900
8:ljares of Petroquimica del Atlantico, S.A., Barranquilla, Colombia
(
Pstroquimica"), at a cost of approximately US$1,462,170, provided
sueh shares are acquired within one year from the date of this letter.
f
It is understood that the acquisition of approximately
471 onr.
„
11 1,7vu of the above-mentioned shares will be concurrent with the
07:e by your Corporation to Petroquimica of 30,035 shares of Antex
1-i- and Gas Co., Inc., in the approximate amount of US$262,170.
The Board also approves the purchase of shares of Petroquimica
the terms of the above consent in excess of 10 per cent of
Y°11r Corporation's capital and surplus.
with
The foregoing consent is given with the understanding that
the
444 'Ilvestment now being approved, combined with other foreign loans
not investments of your Corporation and Bankers Trust Company, will
glii,icanae the total of such loans and investments to exceed the
etf'elines established under the voluntary foreign credit restraint
theettt now in effect and that due consideration is being given to
Priorities contained therein.
Very truly yours,
(Signed) Karl E. Bakke
Karl E. Bakke,
Assistant Secretary.
,0171
0
1 0‘
Ogi*e#.
BOARD OF GOVERNORS
Item No. 4
6/23/66
or THE
FEDERAL RESERVE SYSTEM
WASHINGTON, O. C. 20551
OFFICE OF THE CHAIRMAN
June 23, 1966
Mr. Wilfred H. Rommel,
Assistant Director for Legislative
Reference,
Bureau of the Budget,
20503
Washington, D. C.
Dear Mr. Rommel:
This is in response to your communication of
June 22, 1966, requesting the views of the Board on the
enrolled bill H. R. 7371, "To amend the Bank Holding
Company Act of 1956."
The Board recommends that the enrolled bill
be approved by the President.
Sincerely yours,
(Signed) Wm. McC. Martin, Jr.
Wm. McC. Martin, Jr.
,
BOARD OF GOVERNORS
Item No. 5
6/23/66
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON
4,1
OFFICE OF THE CHAIRMAN
•
•• ••
June 23, 1966
The Honorable Henry H. Fowler,
Secretary of the Treasury,
Washington, D. C. 20220
Dear Joe:
On April 21, 1966, we responded to your letter of
February 28, 1966, requesting our views on the alternative
Proposals of abandoning the $2 denomination note or the
xasuance of a $2 Federal Reserve note. The letter stated
that the Reserve Banks and the Board would not favor the
Printing of a $2 Federal Reserve note at this time and that
if the $2 bill is discontinued, the Reserve Banks and the
Treasury should stop paying out the notes at the same time and
the existing stocks should be destroyed.
Your letter of February 28 said that the Bureau of
the Budget had eliminated from the 1967 budget the Treasury's
normal request for funds for printing United States notes and
that you could, with our help and some lowering of the
standard
of fitness, meet the demand for $2 currency in
fiscal year 1967 without buying any $2 United States notes.
le understand that funds for printing $2 United States notes
nave been included in the Treasury's proposed budget for fiscal
Year 1968.
I
It appears now that it will be impracticable to
continue to supply the demand for $2 bills much longer without
*1,e'w supplies. For several weeks, the stock of new $2 bills in
7,nshington has been exhausted, and so far we have requested the
vffice of the Treasurer of the United States to authorize 24
shiPments between one Federal Reserve office and another in
17
. cler to meet the demand. Our estimates indicate that it will
ecame impracticable to continue to meet the growing demand by
such interoffice shipments much beyond June.
Accordingly, we propose to instruct the Federal Reserve
to discontinue paying out $2 notes when the total supply
the Reserve Banks becomes so small that it is impracticable to
Beni,
at
BOARD
Cr
DOVER
or THE FEDERAL RESERVE SYSTEM
The Honorable Henry H. Fowler
2233
-2-
continue the current procedure of interoffice shipments. The
Ranks could place the notes in custody for the Treasurer of the
United States and hold them until such time as the Treasury can
suPply additional quantities of $2 United States notes.
I trust you will have no objection to the program
outlined in this letter.
Sincerely yours,
(Signed) Bill
McC. Martin, Jr.
223,4
BOARD OF GOVERNORS
Item No. 6
6/23/66
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
June 23, 1966
Mr. Lloyd J. Derrickson,
Associate
General Counsel,
National Association of Securities Dealers,
888 17th Street, N. W.,
4ashington, D. C.
Dear Mr.
Derrickson:
This refers to your letter of April 21, 1966, enclosing a
°PY of the record in a matter pending before the Board of Governors
?f the National Association of Securities Dealers, Inc. The matter
a
ltivolves a
question whether Regulation T, "Credit by Brokers, Dealers,
ed Members of National Securities Exchanges", promulgated by the
ts3ard of Governors of the Federal Reserve System ("the Board") pursuant
be°
section 7 of the Securities Exchange Act of 1934 ("the Act") has
en violated. You have asked for the Board's opinion.
The matter is on appeal from a decision of the District
Bus
No Less Conduct Committee of District No. 11 in regard to Complaint
an' F-282, of Dr. Manassi Antonis, against Fahnestock & Co. ("Fahnestock")
f d Prank Bahr (a registered representative employed by Fahnestock). So
!
ti l. as material to the question before the Board, the facts found by
"a District Committee are as follows.
Dr. Antonis and his mother had several joint margin accounts
ttlh Fahnestock, in which were held positions in certain securities,
:
b,. registered on a national securities exchange. In October, 1963,
wit Antonis decided to close the accounts. Since he wished to do this
Of h°ut liquidating any collateral, he paid Fahnestock the total amount
04 the debit balances in cash. This cash was credited to the accounts
begN°vember 1. The debit balances were then cleared, and Fahnestock
0f ,r to effect the transfer of the securities to the joint names
sp ur. Antonis and his mother. The total market value of the securities
Pears to have been approximately $12,500.
Mr. Derrickson
-2-
On November 6, 1963, the Supplement to Regulation T was
amended, decreasing the maximum loan value of securities registered on a
national securities exchange from 50 to 30 per cent, with the effect of
raising the margin requirement from 50 to 70 per cent. The retention
requirement imposed by section 220.8(c) of the Supplement was increased
at the same time to 70 per cent.
On November 8, Dr. Antonis asked Mr. Bahr about the possibility
of purchasing shares of Magnafax Co., a stock which is not registered on
a national securities exchange. Mr. Bahr explained that these shares
would have to be purchased for cash, and told Dr. Antonis that sufficient
credit could be made available against the registered securities he owned
(which Fahnestock still had in its possession) to finance the purchase of
the desired number of shares of Magnafax, with a market value of about
$6,200. Dr. Antonis instructed Mr. Bahr to make the purchase.
In a rising market, however, the shares cost some $300 more
than the credit Mr. Bahr had indicated was available. Dr. Antonis was
then told that section 220.3(c)(1) of Regulation T required that he make
additional deposit of $300 in his margin account. The deposit could
made in cash or he could liquidate some of the registered securities
eld in the account. He chose liquidation. Under the increased retention
!
e quirement, over $1,100 worth of registered securities had to be liquidated
ln order to release the amount needed for deposit into the margin account.
Subsequent to the liquidation just described, Dr. Antonis
a protest to Fahnestock based on the fact that after November 6, 1963,
current Supplement to the regulation forbade a creditor to lend more
an 30 per cent of the current market value of registered securities
he
b ld as collateral in a margin account. Dr. Antonis contended that
Rs
hties
tock had violated the regulation in lending more than approximately
'750, the maximum permitted under the amended Supplement against the
,
l*!gistered securities which Fahnestock had held for him, thereby inducing
„lm to buy more securities than he would have had the proper margin
'
-equirement been applied.
in
i
It seems clear that a creditor would violate the regulation
if in ,
30
tact he extended credit after November 6, 1963, in excess of
a,Per cent of the market value of registered securities held in a margin
'count, where the purpose of the loan was to purchase securities. As
%d
efense to the charge, however, Fahnestock asserted, and the District
e21mittee apparently assumed, that the credit in question had been
tisl'tended before November 6. To explain this assertion, Fahnestock stated
maat on or immediately after clearing the debit balance in the prior
ain accounts, a bookkeeping entry was made "withdrawing" 50 per cent
the current market value of the registered shares held in those
W
Mr. Derrickson
-3-
223G
accounts, the shares still being, as stated above, in the firm's possession
for the purpose of transferring them into the names of Dr. Antonis and his
mother. An exhibit in the record indicates that such a withdrawal may have
been made on November 4. The amount withdrawn was credited, Fahnestock
states, to a memorandum "special miscellaneous account" ("s.m.a.") in
Dr. Antonis' name. This credit, according to Fahnestock, was in the amount
of $6,200, and was available to Antonis in his "new" margin account.
Section 220.4(0(6) permits a creditor to " . . . receive from
Or for any customer, and pay out or deliver to or for any customer, any
money . . ." in a special miscellaneous account. Among its other functions,
this section affords a benefit to customers who would otherwise have
overmargined accounts, protecting a customer's excess purchasing power
gainst changes in margin requirements by permitting the broker to withtaw excess funds out of a general account and hold them as a credit
b alance in a s.m.a.
An increase in margin requirements reflects the Board's
;ludgment that excessive credit is flowing into the securities markets.
t.he increase is designed not only to reduce the inflow of additional credit
:
1 11to old and new accounts, but through the restrictions on withdrawals to
rove the margin status of undermargined accounts. While the use of
s e s.m.a. to effect withdrawals from overmargined accounts tend to preserve
flexibility for investors, it must be recognized that such procedures
ut!tract from the effectiveness of margin requirements, and consequently
eY should be used only in strict conformity with the contractual arrange'
ent between the creditor and the customer.
r
2
The creditor's authority to effect withdrawals from overmargined
for deposit in the s.m.a. arises from his contract with the
austomer, subject to applicable regulations of the Board, the Securities
ind Exchange Commission, the NASD, and the stock exchanges, as well as
ieal law. Applying the principle that the permission granted by secen 220.4(f)(6) is to be strictly construed, it follows that such
with- ,
drawals
e
should not be effected unless clearly authorized by the creditor s
ti°1?tract with the customer. In many cases involving a continuing account,
wal
ss Practice may be authorized by the agreement under which the account
kno ?Pened. In such cases, it can be assumed
that the customer has
undwlnglY given his consent to the making of withdrawals where permitted
The
"aPplicable regulations, without being consulted
on each occasion.
wi„burden of proof would be upon the creditor to
show that a particular
'"drawal was so authorized.
accounts
j
On the other hand, facts such as those found in the
eas..
present
pa
Where
there was an instruction to close an account coupled with
_73
serent in
full of the debit balance and directions to transfer the
inturities which had been held in the account out of street
name and
arly° the individual names of the customers do not
seem compatible with
itia.such continuing authorization. If anything, the
facts tend to
'leate that
no authorization to make withdrawals into an s.m.a. existed.
Mr. Derrickson
-4-
41-11$70:"!--1
/
In such a case, the Board considers that the principle that
the regulation should be strictly construed requires, in order to overcome the inference that the
credit to the s.m.a. was not made in compliance
with section 220.4(0(6), that the creditor establish
that the customer
Specifically authorized the withdrawal. On the basis
of the record submitted to the Board, it does not appear that such an authorization was
given, and that as a result, the withdrawal was apparently effected in
violation of Regulation T. The Board's conclusion,
of course, is limited
to the facts before it.
Very truly yours,
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.
@FedFRASER