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664 A meeting of the Board of Governors of the Federal Reserve Syster Was held in Washington on Friday, May 7, 1937, at 11:30 a. in. PRESENT: Mr. Mr. Mr. Mr. Mr. Ransom, Vice Chairman Broderick Szymczak McKee Davis Mr. Morrill, Secretary Mr. Bethea, Assistant Secretary Mr. Carpenter, Assistant Secretary Consideration was given to each of the matters hereinafter referred to and the action stated with respect thereto was taken by the Board: The minutes of the meeting of the Board of Governors of the Fed- e1 Reser7e System held on May 6, 1937, were approved unanimously. Telegrams to Messrs. Kimball, Clark and Young, Secretaries of the Fed "ral Reserve 11. '4)31(13 of New York, Atlanta and Chicago, respectively stating that the Board approves the establishment without change by the New York bank on May 6, 1937, and by the Atlanta and Chicago 11141143 t day, of the rates of discount and purchase in their existing eettecitaes. Approved unanimously. lieeerve Telegram to Mr. Thomas, Federal Reserve Agent at the Federal Bank of Kansas City, reading as follows: meh# "Referring your April 27 letter, Board approves appointT. Bruce Robb as Alternate Assistant Federal Reserve at your bank at his present salary of $4,500 per aneffective May 1, 1937, with the understanding that Mr. will be placed upon the Agent's payroll and will be duj lY responsible to you for the proper performance of his When not engaged in the performance of his duties 665 5/7/37 -2- "as Alternate Assistant Federal Reserve Agent he may, with the approval of the Federal Reserve Agent and the President, perform such work for the bank as in your opinion not inconsistent with his duties as an Alternate Assistant ederal Reserve Agent. Mr. Robb should execute the usual ?eth of office and surety bond in the amount of 050,000 and he should not enter upon the performance of his duties as Alternate Assistent Federal Reserve Agent until the bond S been examined by your counsel to determine whether its xecution complies fully with the rules printed on the reverse side of form of bond 182, following which the bond should be f orwarded to th. , Board promptly for approval." Approved unanimously. Letter to Mr. Wood, Vice President of the Federal Reserve Bank °11 St. Louis, reading as follows: r "Reference is made to your letter of April 28, 1937, elative to the inquiry of the St. Louis County Bank, Clayton, Missouri, whose application for membership was ap%(21141ed April 23, 1937, as to the applicability to the opi°Tle of the recently organized General Realty Company ! 01" , condition of membership numbered 3, which reeds as fol_Lows: 3. Such bank shall not engage as a business in issuing or selling either directly or indirectly (through affiliated corporations or otherwise) notes, bonds, mortgages, certificates, or other evidences of indebtedness representing real estate loans or participations therein, either with or without a guarantee, indorsement, or Other oblipation of such bank or an affiliated corporation. The bank 44 has asked specifically whether, under the provisions Of condition of membership, the realty company (1) may 13Z-ce the real estate loans which had been sold by the or take such other steps as may seen desirable in the for iltlicing and reselling of such loans, and (2) may engage re,,"8.own account in the sale of the ordinary type of ; 11 01-1 estate note. You also request to be advised whether, comn the admission of the bank to membership, the realty mea9811Y will became an affiliate of the bank within the fling of section 2(b) of the Banking Act of 1933. rel . "The realty company is said to have been organized to 841eve the bank of its other real estate, to take over the IficinE: of the real estate loans which had been sold by 666 5/7/37 "the bank prior to the discontinuance of that practice, and o take over the insurance department of the bank. As shown by its articles of incorporation, the powers of the realty carnPanY are, broadly, to transact a general real estate, real estate loan, and insurance agency business. "According to the report of examination of the bank as Of January 4, 1937, the General Realty Company was organized In November 1936 with a paid-in capital of 442,500, represented by 425 shares of preferred stock, and with 1,000 811ares of non par common stock, for which no cash was reUnder an agreement between the bank and the com. 3anY, the common stock has been or will be issued to trus' ( teee under a voting trust agreement, and the trustees, in Urn, have issued or will issue to the stockholders of the On a pro rata basis voting trust certificates reprebank, -ehtin the beneficial interest in the common stock of the Company, The three trustees under the voting trust agreeant were appointed by the bank and are directors of the ,nk, and vacancies among the trustees are to be filled by the bank. Of the five directors of the realty company, two are directors of the bank and one an officer. ,, "The management of the bank appears to be of the opinion .aet the provisions of condition of membership numbered 3 021d be applicable to the operations of the General Realty TanY only in the event the company is technically an afsi late of the bank. While it appears that, upon the admis,2n of the bank to membership, the realty company may be ' 0 ';, affiliate of the bank within the meaning of section 2(h) ! he Banking Act of 1933, it is not necessary to determine thatqu question in connection with the bank's inquiry. The coestion of whether the operations of the General Realty /PanY would be in violation of the condition of membership does not depend upon the existence of a technical affiliate iportionship, as an 'affiliated corporation', for the purhave of the condition of membership, does not necessarily si e to be a technical affiliate. Conditions of membership lz,!ilar to condition numbered 3 in this case have, as you been uniformly prescribed by the Board for some time. be; scondition was adopted as a standard condition of menfl the interest of sound banking, as it was recogd that, although banks may have been under no legal liacas tY on loans sold without recourse, the public in many theea assumed the existence of a moral responsibility on the Part of the selling bank, and did so even in cases where In sales had been made through associated corporations. whism° ,1fle eases great difficulty was experienced by the banks found it advisable to recognize the responsibility ") repurchase mortgages which had gone into default or I I Z 667 5/7/37 -4- "otherwise proved unsatisfactory, and in other cases embarrassment and loss of confidence resulted if demands for re imbursement by the investors were refused. It is felt, therefore, that, unless the St. Louis County Bank takes all Possible steps to divorce the General Realty Company from tlle bank and to disassociate the company from the bank in minds of the Public, it would be in violation of condit" ion of membership numbered 3 for the company to engage . generally in the business of selling real estate loans to the public. "however, the condition of membership was not intended to restrict the bank in discharging its responsibility for , le Ttinuing to service the loans it had sold or to interfere such steps as may seem necessary or desirable in conLis?ction with the refinancing of any such loans. Therefore, nlrice such activities, even if performed by the bank, would n°t be in violation of the condition of membership, there is (pbjection under the condition of membership to the General 47eltY Company taking them over from the bank, regardless of 'ae relationship of the bank and the company." Approved unanimously. Letter to Mr. Iry, Vice President of the Federal Reserve Bank ()fichmond, reading as follows: "Reference is made to your letter of March 17, 1937, eSard. lco ing the manner in which the V;achovia Bank and Trust thmPenY) Viinston-Salecu, North Carolina, has been reporting ore assets of its bond and insurance departments in reports tt condition. It is understood that it has been the prac, " 11. of the bank to treat its bond department and its inezir dance department as entities separate from each other from the bank and to show in its statements of condition 0,,"-L Y the net control figures of the respective departments. "The Board has no objection to the maintenance of *hat Of .-ver accounts the bank may desire to carry as a matter ernal accounting, orovided the records are such as to 41.--Lect the true condition of the bank, but feels that the reP°rting of net control figures of the two departments in sogilired reports of condition is not proper and that reports Reprendered do not reflect the true condition of the bank. 141dorts of condition submitted to the Board should include or ie .f appropriate captions all actual assets and liabilities /110 ,44e bank, regardless of how carried on the bank's depart'al records. The Board has taken this position in similar 668 5/7/37 -5- "cases in the past and the banks involved have made approPriate changes in the method of preparing reports. "Reference is made also to your comments regarding the Purchase of stocks by the Wachovia Bank and Trust Company from certain trust estates which it is administering. You state that it was necessary to acquire the stocks to prevent threatened litigation against the bank and it is assumed that .0?-e.litigation was threatened because of a Potential lia11tY which the bank has incurred to the trusts in connection with such stocks. You request advice as to whether a State member bank is justified in acquiring stocks under TIch circumstances and in holding them for a reasonable time to Protect itself from loss. "The Board has heretofore taken the position that the Provisions of section 9 of the Federal Reserve Act and section 5136 of the Revised Statutes of the United States do ', c3t.Prohibit a State member bank from acquiring stocks held uY it as collateral to a loan, if such acquisition is neceslrY to reduce loss or to eliminate the possibility of loss 1T the loan, but that a disposition of such stocks should be as soon as is reasonably practicable. The Board feels that ,i1.1e.t these provisions of law likewise do not preclude a State member bank from acquiring stocks in order to effect bona fide adjustment or compromise in the discharge of a potential liability which the bank has incurred to trusts , 111 connection with such stocks, and the Board will not raise tly Westion with regard to such acquisition, provided the acquired are disposed of at the first favorable opInanitY. It is assumed, of course, that in any case the 11-1,!', in view of all the facts existing, will be justified elle', established trust principles in carrying out the transtlon with a trust it is administering." T p "k8 Approved unanimously. Letter to Mr. Rounds, Vice President of the Eederal Reserve Bank or New York, reading as follows: re "Reference is made to your letter of April 28, 1937 y4al ' dille; certain questions which have been presented to New under Regulation U by Chemical Bank & Trust Company, `uw, N. Y. You state these questions as follows: '(1) May a bank, without regard to Regulation U, make a loan to a firm having membership in a nattional securities exchange on securities owned by he firm, if the purpose of the loan is to furnish 669 5/7/37 -6"'cash working capital for the conduct of the brokerage business of the firm; i.e., for purchasing and carrying securities for the account of customers but not for the firm's account? '(2) May a bank, without regard to Regulation U, make a loan to a partner of such a member firm for the purpose of enabling such partner to make a capital contribution to his firm? '(3) May a bank make either of the above loans if the firm maintains for the partner a margin account in which there is a debit balance?' "While, as you indicate, all the facts involved in these are not entirely clear, upon the basis of the given " " 8 lacts and assuming the loans to be secured by stocks, the ard agrees with your view that the loans in each of the ,Ilree instances referred to would ordinarily be subject to ,1-,agulation U. The situation represented by question numbered i) seems to be quite similar to that covered in the Board's etter of April 5, 1937 (X-9862, Reg. U-13) and, on the ! rinciPle stated in that letter, would seem to be a loan ;?1* the purpose of Purchasing or carrying registered stocks. "her loans would seem to be subject to the regulation 1°11 substantially similar reasons. .'ou refer to the question of whether or not it would be w‘,1 .Luvlsable to amend the regulation to exempt certain loans the type here involved. Careful consideration has been !ran to the various aspects of the problem, including those Ises of the matter discussed in your letter; and the probtom,_ will, of course, be Pdven further study. It would seem preferable, however, for the present inquiry to be "8 ered without regard to questions concerning such an aale ndment." l c!! Approved unanimously. Letter to Mr. Sargent, Vice President of the Federal Reserve °t San Francisco, reading as follows: 1,e "Reference is made to your letter of March 27, 1937, i garding Your examination program for the year 1937. It s; noted that it has been difficult to work out satisfactory tl hedules for the examination of the State member banks in e) e':,7arious States in the district, and that the problem cj'era Primarily in the five largest State member banks in ir°rnia. You report that the State Banking Department co : "centrates its entire examining force for such examinations, 670 5/7/37 _7- "and that the State Department, although it cooperates to tfle best of its ability, is not always able to arrange the exanination schedule to suit your convenience, with the result that it is not always possible to call in your examiners from other States and supply an adequate number of examiners to match the State examiners in the important assign11nts necessary in the examination of a large bank. You 0,.gest two solutions, either or both of which could be emPloyed: r 1. To conduct independent examinations of some of the larger banks on dates that will fit into your own schedule, and/or 2. To examine two or three of the larger banks once every other year, accepting State reports for the odd years. "You advise that in 1936 you made very complete examinet. 1,1?ns (including the trust departments) of the Wells Fargo & Union Trust Co., and the American Trust Company, both San Francisco, and that, in your opinion, the managements : lid conditions of these banks are such as to justify the ac07,Ptance of examinations made by the State for 1937, in lieu Y°11r own examinations. You propose, therefore, unless the erd interposes an objection; to omit this year an examina0 011 of the Wells Fargo Bank & Union Trust Co., of San Francisco, and possibly the American Trust Company of San Francisand to conduct an independent examination of the Califor171 , a Bank, Los Angeles, if this should be necessary to permit ''11 to coraplete your schedule of other examinations for 1937. "In view of the reasons stated in your letter and of all j c o the circum stances, the Board will interpose no objection Fa_Y°11r plan for this year so far as it concerns the 'Wells f0J--go Bank& Union Trust Co., San Francisco, and the CaliB annualank, Los Angeles. It is believed, however, that your examination of the American Trust Company, San FranShould not be omitted. This refers only to the exof 11.ation program for the current year, and any modification Res6ne general policy of regular examinations by the Federal unoerve Bank of each State member bank each year will depend n the circumstances as they develop." j Approved unanimously. Letter to Yir. Sinclair, President of the Federal Reserve Bank . or'ld e Phia, reading as follows: "This refers to your letter of Tiarch 25, 1937, with 671 -8regard to the Board's letter of March 17 to Mr. Bill regardthe mortgage indebtedness of Mr. G. W. Shadle, an assistant examiner of your bank, to the Fidelity-Philadelphia Trust ,().11PenY and Margaret J. Freeman, trustees under the will of rank A. Freeman, deceased. In view of all the circumstances 01- this case, the Board has decided that it will not be necessary to make a report thereof to the local United States tt°rneY or to the Department of Justice." Approved unanimously. Thereupon the meeting adjourned.
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