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389
A meeting of the Board of Governors of the Federal Reserve
SP.tem was held in Washington on Thursday, March 14, 1946, at 10:30

PRESENT:

Mr.
Mr.
Mr.
Mr.
Mr.
Mr.

Eccles, Chairman
Ransom, Vice Chairman
Szymczak
McKee
Draper
Evans

Mr. Carpenter, Secretary
Mr. Morrill, Special Adviser
Mr. Thurston, Assistant to the Chairman
The action stated with respect to each of the matters hereiner referred
to was taken by the Board:
The minutes of the meeting of the Board of Governors of the
Nera1 Reserve System held on March
13, 1946, were approved unani-

Letter to the Presidents of all the Federal Reserve Banks
rea,44_
'
4-L1g as follows:
"Some questions have been raised as to the proper interpretation of, and the procedure necessary under the provisions of the Board's letter of February 11, 1936 (X-9488):
regarding approval of leaves of absence with pay in excess
of 30 days granted officers and employees on account of illness.
"The Board has taken the occasion to review the present
arrangenents and, as a step towards simplification, cancels
the following letters regarding extended leave of absence on
account of sickness and annual leave in excess of regular
vacation periods, which are included as items 9120 - 9124,
inclusive, in the Federal Reserve Loose-Leaf Service and
which are superseded by this letter: June 14, 1928
cX-6069); December 5, 1932 (X-7303); February 11, 1936
X-9488); April 16, 1936 (X-9550); and June 15, 1937 (S-3).




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3/14/46

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"Inasmuch as the granting of extended leaves of absence
With pay is controlled by the boards of directors or executive committees of the Banks, either through establishment
of general policies or action in specific cases, the Board
ls cancelling its previous requirements with respect to reports or approvals of extended leaves of absence with pay.
It is expected that the directors will continue to maintain
appropriate control over the granting of extended leaves of
absence. The cancellation of the previous requirements is
not intended to affect in any way such procedures as the
directors may consider desirable with respect to reports or
approvals of leaves of absence.
"It is requested that the records of extended leaves
of absence with pay reflect the authorization upon which the
leave has been granted. The Board's examiners will continue,
as in the past, to review cases of extended leave granted on
account of sickness or for other reasons and to take up with
the proper officers at the Reserve Banks any particular case
about which there may be a question.
"One of the letters cancelled (X-9550) stated that the
Board offered no objection to employees of a Reserve Bank
Who have been accepted for the courses offered by the Graduate School of Banking at Rutgers University being granted
sufficient leave in addition to their regular annual leave
to enable them to attend the School, or to employees who
have been elected as delegates being granted such additional
leave as may be necessary to enable them to attend the annual
conference of the American Institute of Banking. The cancellation of the letter does not reflect any change of position
and the Board continues in the belief that leave in addition
to regular leave may be properly granted for such purposes."
Approved unanimously.
Letter to the Presidents of all Federal Reserve Banks, reading
44 tO1
—4-0Ws

"Consideration has recently been given to a question re4..?rding the purchase of certain notes by a bank under Regulau,lon U.
"In the case presented, a manufacturing corporation had
Made loans to certain of its officers in 1944. The loans were
secured by the corporation's stock and were for the purpose of
PtIrchasing such stock from the corporation. The stock was
'
l egistered on a national securities exchange, and if the loans




Z-11-

3/4/46

-3-

"had been made by a bank in 1944 they would have been
exempt from Regulation U under section 2(e) as then effective. Subsequent to January 21, 1946, a bank was requested
by the corporation to purchase the notes representing the
loan so that the corporation could obtain funds for ordinary corporate operations, and it asked whether this is
permitted under the regulation. The facts showed that there
was no connection between the original loan and the later
proposal that the bank purchase the notes.
"It was obvious that the notes in question represented
loans of the type described in section 1 of Regulation U i.e., loans which a bank is at present not permitted to
I maket. It was also obvious that the regulation would be
Practically meaningless if a bank could avoid it merely by
going through the form of purchasing notes instead of the
usual procedure of 'making' a loan.
"On the other hand, it was evident that here the bank
would not be creating a loan described in section 1. It
would be purchasing one that had been made independently at
a. considerable time in the past, and the facts made it clear
that the purchase was in no sense a disguise for the making
Of a prohibited loan. In other words, the bank would not be
making a loan for the specified purpose, and this was true not
Only in a literal and technical sense but also according to
much more general meaning. In the circumstances, the Board
18 of the opinion that the purchase is permitted under the
regulation.
"The facts leading to this conclusion were (1) that
there was no agreement or understanding on the part of the
lamk, at the time the loans were originally made, that the
Dank would at some future time take them over; (2) that the
t°
r11Ze
gd transaction was an actual purchase and not a mere
operation set up for purposes of subterfuge as the
Purchase of a loan; (3) that the corporation offering the
notes was a manufacturing concern and not a corporation engaged in the business of making loans of the specified type
or engaged, like an investment company, in the business of
Purchasing or carrying registered securities; and (4) that
,.?he corporation would use the funds obtained by the transac140n for manufacturing purposes and not for purchasing or
Carrying securities.
"Notwithstanding the opinion that the bank would not be
Prohibited by Regulation U from purchasing notes, it is
pointed out that, because they in fact represent loans of the
'',Y10e referred to in section 1, they would become subject to
the regulation, after they come into possession of the bank.

I




3/14/46

-4-

"For example, they must be included in determining the entire indebtedness of the borrower subject to the regulation,
for the purposes of the second and third paragraphs of section 1. In addition, the provisions of section 3(d) regarding the renewal or extension of maturity of a loan apply.
"Even though this interpretation relates to a special
set of facts that limits its application, the Board recognizes that it may nevertheless be subject to abuse. The
Board and the Federal Reserve Banks will accordingly be on
the alert to observe any substantial development of such
abuse in order that appropriate amendments to prevent it may
be adopted if the need should become evident."
Approved unanimously.
Letter to Mr. Fletcher, First Vice President of the Federal
iteserve Bank of Cleveland, reading as follows:
"This refers to your letter of March 6, 1946, regarding
Regulation U.
"You present a case in which a bank has outstanding a
loan that was made under Regulation U before the adoption
?f 100 per cent margin requirements. The bank recognizes that
cannot permit withdrawals of the collateral, which is conelderably more than it would ordinarily require for its own
Protection.
"The bank wishes to make a loan to the same borrower
for a purpose other than purchasing or carrying registered
stocks--for example, to build a house. It asks whether it
IllaY make this nonpurpose loan on the security of the extra
collateral impounded behind the regulated loan. Since the
is:cts indicate that the borrower is not a broker or dealer,
'ne provisions of section 3(n) of the Regulation do not
apply.
"At present the Regulation permits the bank to make the
n°nPurpose loan on the security of the collateral behind the
regulated loan. It is recognized that this is, to a degree,
weakness in the Regulation, and the Board would naturally
.2e concerned at any substantial development of such loans.
tt will be appreciated, therefore, if you will keep the
:'1,
4ard advised as to any untoward developments in this direc'
10n that may indicate the need for amending the Regulation."

f




Approved unanimously.

3/4/46

_5Letter to Mr. Willett, First Vice President of the Federal

Re8erve Bank of Boston, reading as follows:
"Reference is made to your letter of March 8, 1946,
submitting the request of the Hadley Falls Trust Company,
Holyoke, Massachusetts, for approval of an additional investment not to exceed $75,000 in bank premises for the
Purpose of providing quarters for the proposed branch in
Chicopee Falls, Massachusetts, establishment of which
was approved by the Board of Governors January 5, 1946.
"In view of your recommendation and the information
?ubmitted, the Board of Governors approves the additional
investment of not to exceed $75,000 in banking premises
by the Hadley Falls Trust Company, Holyoke, Massachusetts,
substantially in accordance with the plan as submitted."
Approved unanimously.
Letter to Mr. L. W. Knoke, Vice President of the Federal Reof New York, reading as follows:
"This refers to your letter of February 16, 1946,
and enclosures, with respect to the Central Corporation
of Banking Companies, Budapest, Hungary, opening an account in its name on your books.
"The Board is agreeable to your proceeding in the
manner indicated in your letter and enclosures."




Approved unanimously.

Thereupon the meeting adjourned

Secretary.

i 27
e/i/
Chairman.