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Minutes for
To:
Members of the Board
From:
Office of the Secretary
October 3, 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.
Chm. Martin
Gov. Robertson
Gov. Shepardson
Gov. Mitchell
Gov. Daane
Gov. Maisel
Gov. Brimmer
Minutes of the Board of Governors of the Federal Reserve
System on Monday, October 3, 1966.
The Board met in executive
session in the Special Library at 10:00 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman 1/
Robertson, Vice Chairman
Shepardson
Mitchell
Daane
Maisel
Brimmer
The Secretary was advised later that during the executive
session the Board gave consideration to certain aspects of the salary
structure pertaining to the Board's staff.
The Board also approved travel by Daniel H. Brill, Director of
the Division of Research and Statistics, to Rome, Italy, during the
period October 12-16, 1966, to conduct a seminar at the Bank of Italy,
it being understood that Mr. Brill was attending a meeting of the OECD
Working Group I, Invisibles Committee, in Paris, France, during the
period October 2-11.
The meeting continued in the Board Room beginning at 10:45 a.m.,
at which time the following members of the staff joined the meeting:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
1/
Sherman, Secretary
Kenyon, Assistant Secretary
Broida, Assistant Secretary
Bakke, Assistant Secretary
Young, Senior Adviser to the Board and Director, Division
of International Finance
Holland, Adviser to the Board
Solomon, Adviser to the Board
Cardon, Legislative Counsel
Fauver, Assistant to the Board
Solomon, Director, Division of Examinations
Withdrew from meeting at point indicated in minutes.
t )4
10/3/66
-2Mr. Dahl, Assistant Director, Division of Examinations
Miss Eaton, General Assistant, Office of the Secretary
Mr. Furth, Consultant
Mr. Morgan, Staff Assistant, Board Members' Offices
Messrs. Koch, Partee, Garfield, Williams, Axilrod, Gramley,
Smith, Eckert, Freedman, Gehman, Keir, Rosenblatt,
Thompson, and Trueblood of the Division of Research and
Statistics
Messrs. Irvine, Hersey, Katz, Wood, Bryant, Gemmill, Grimwood,
Hayes, Klein, Kohn, and Maroni, and Mrs. Junz of the
Division of International Finance
Economic review.
The Division of International Finance reviewed
international financial developments, following which the Division of
Research and Statistics presented a summary of domestic economic trends.
The staff reports were based to a certain extent on materials that had
been distributed in preparation for tomorrow's meeting of the Federal
Open Market Committee.
Copies of the relevant documents have been
placed in the files of the Committee.
Chairman Martin then withdrew, as did members of the research
divisions except Messrs. Koch, Katz, Hersey, Axilrod, Gemmill, and
Grimwood, and the following entered the room:
Mr. Johnson, Director, Division of Personnel Administration
Mr. Hexter, Associate General Counsel
Mr. Leavitt, Assistant Director, Division of Examinations
Miss Hart and Mr. Forrestal of the Legal Division
Mr. Egertson of the Division of Examinations
Approved items.
The following letters, copies of which are
attached to these minutes under the respective numbers indicated, were
approved unanimously after consideration of background information
that had been made available to the Board:
-3-
10/3/66
Item No.
Letter to Mexico Savings Bank, Mexico, Missouri,
approving the establishment of a branch at 10111015 East Liberty Street and an investment in
bank premises.
1
Letter to United California Bank, Los Angeles,
California, approving the establishment of a
branch in Riverside.
2
Letter to Wells Fargo Bank, San Francisco,
California, granting an extension of time to
establish a branch in the Del Monte Shopping
Center, Monterey.
3
Letter to Farmers State Bank, Pine Bluffs,
Wyoming, approving its application for admission
to membership in the Federal Reserve System.
4
Letter to the Federal Reserve Bank of Richmond
approving the payment of salary to John C.
Horigan as Assistant General Auditor and to
Lloyd W. Bostian as Examining Officer at the
respective rates approved by the Bank's Board
of Directors.
5
Letter to the Federal Reserve Bank of Boston
expressing the opinion that section 32 of the
Banking Act of 1933 would not forbid certain
directors of Old Colony Trust Company, Boston,
Massachusetts, from serving as directors of a
proposed closed-end investment company.
6
Inflow of funds through foreign branches.
At its meeting on
August 31, 1966, the Board requested that a staff task force obtain
information on the use by U.S. banks of dollar funds obtained through
their foreign branches.
The report of the task force, which consisted
of Messrs. Axilrod, Forrestal, and Katz, had been distributed with a
cover memorandum from Mr. Axilrod dated September 21, 1966.
w
10/3/66
-4There had also been distributed a memorandum from Mr. Solomon
(Adviser) dated September 30, 1966, evaluating the significance of this
short-term capital inflow from the viewpoint of U.S. balance of payments
objectives, both immediate and longer run.
Governor Brimmer commented that in a sense this study had gotten
under way because of his having raised the question in August and having
pressed for investigation into the subject to help the Board make up
its mind whether any action should be taken.
He had been highly con-
scious of the experience during July, but he now felt that the question
was less germane than in early August.
The evidence suggested that the
basis of his earlier concern, which was that the Board ought to do something to moderate the availability of foreign funds to U.S. banks to
expand credit domestically, was less pressing now than earlier.
The
question of the impact of the short-term capital inflow on the balance
of payments appeared to have been resolved in favor of deciding that
the inflow had been helpful and fortuitous.
He agreed with Mr. Solomon
that the inflow had more or less offset a deterioration in other sectors
of the balance of payments, at least on a temporary basis.
there remained the question of the equity of the matter.
However,
A handful of
U.S. banks had benefited from an inflow that enabled them to offset
somewhat the effectiveness of domestic credit restraint as far as they
were concerned.
Governor Brimmer recalled that one reason for the staff inquiry
was to determine a reasonable basis for the application of reserve
'Vr4Lr,'
t
10/3/66
-5-
requirements if the Board decided to take such action.
It did not
appear to him that any additional work had been done on that phase of
the problem.
If the Board decided to move in that direction, some
additional work would be needed.
Governor Brimmer noted that he was giving a speech on Wednesday
on the subject of monetary policy and the balance of payments, and said
that he would like guidance from the Board in connection with the
pertinent portion of his speech.
As he had indicated previously, he
felt that the urgency of the matter had diminished.
Mr. Axilrod said the task force understood its objective was to
seek information from the commercial banks concerned about the sources
and uses of these funds.
The task force did not feel at liberty to
raise certain kinds of questions, for example, what the commercial banks
would do if reserve requirements were placed against the funds.
There
was a discussion of possibilities in the staff paper, but it should not
be understood to reflect views of the banks.
The essential points covered in the paper were rather straightforward, Mr. Axilrod continued.
The banks interviewed said that they
used the funds in effect for domestic purposes, that the market was
available and the banks with foreign branches went abroad and obtained
the funds, and that that improved the over-all lending position of the
banks.
The funds, however, were relatively costly.
For 7-day to 30-day
money the cost was greater than the cost of equivalent money here.
On
10/3/66
-6-
overnight funds, the cost was roughly comparable.
The banks tended to
adjust on a cost basis, but if banks were placed under sufficient pressure they appeared willing to go out and obtain funds at a cost varying
from 6-1/4 to 7-1/4 per cent for longer-term money.
After commenting on the bookkeeping relationships between head
offices and foreign branches, Mr. Axilrod said the comments of the banks
as to the potential further use of such funds varied somewhat.
One
bank did not see much future in the business because it did not want
to pay higher rates; another bank said that if it were hard pressed it
would be willing to pay higher rates.
Some banks seemed rather surprised
at the success that had been achieved in obtaining funds through the
foreign branches.
As to alternative ways of obtaining funds, the banks
were again rather vague.
In any event, there was no need just now to
explore alternative methods.
Most banks felt that it would be possible
to transfer assets abroad--some had done that--although one bank said
it complicated the evaluation of foreign branch operations.
Mr. Axilrod noted that there was some discussion in the staff
paper of the possible domestic credit effects, but that that was more
or less a theoretical discussion.
Mr. Forrestal said that he had concluded that the legal position
outlined in the August 17, 1966, memorandum from the Legal Division was
correct.
He had found nothing that would change the fundamental basis
of that legal position, which was that the Board had authority to impose
10/3/66
-7-
reserve requirements on deposits in foreign branches, using as a vehicle
section 25 of the Federal Reserve Act.
He described certain operating
difficulties that might be involved for the banks, but he believed that
a solution such as outlined in the August 17 memorandum would work as
a practical matter and would meet the Board's objectives if the Board
decided to take action.
As to the question of equity mentioned by Governor Brimmer,
Mr. Forrestal noted that the large banks with foreign branches and subsidiaries had a built-in competitive advantage.
However, that advantage
in ability to obtain dollar deposits for use in the U.S. was offset by
the cost of obtaining such funds.
The banks seemed quite conscious of
the cost factor, although there was no telling how far they might go
under the pressure of extremely tight money conditions.
Mr. Katz commented that the possibility of the use of moral
suasion seemed relevant in a situation where only a few banks were
involved.
He had nothing to add to the material that had been distrib-
uted from the balance of payments point of view.
It should be recog-
nized, however, that this was hot money and that there were dangers in
hot money.
There might be difficulties when the funds obtained through
the foreign branches began to flow out again.
There would be a vulner-
ability which, based on British experience, might require discount rate
action, but for the moment the situation was aiding the U.S. balance of
payments a good deal.
10/3/66
-8Governor Mitchell referred to statistics contained in the staff
paper and raised the question whether it seemed necessary or advisable
to augment the statistical reporting in this area.
On the basis of
staff replies, he indicated that he would not pursue the question further since the staff apparently believed that adequate statistics were
available or could be obtained as necessary.
Governor Mitchell also said it was not entirely clear to him from
the task force paper whether the staff felt there was any disposition on
the part of U.S. firms to make deposits abroad as an avoidance operation.
By this he meant that the banks could avoid maintaining reserve requirements and the depositor could obtain a higher rate of interest.
Mr. Axilrod replied that the banks had said that the only funds
bid for abroad were dollar funds already abroad.
He believed studies
made by the Division of International Finance tended to bear that out.
As to Governor Brimmer's forthcoming speech, Governor Mitchell
expressed the view that care should be exercised in what was said in
advance of a Board decision because of the implications that might be
drawn.
Governor Brimmer replied that that was why he had asked for the
Board's guidance.
He outlined the general theme of his speech and read
portions of the draft that had a bearing on the area under discussion.
Other members of the Board indicated that they saw no particular
difficulty in most of the language read by Governor Brimmer, but they
urged careful editing of certain parts of the speech.
5
10/3/66
-9On the question whether the Board should take action, Governor
Daane said he might have wanted to do something if the situation had
become more fully apparent at some earlier point in time.
At the
present juncture, however, he would not want to do anything.
From a
balance of payments standpoint, the reasons had been brought out in the
staff memoranda.
Also, even though there might be some inequity involved
in the situation, he did not believe that the idea of exerting further
pressure at this time would be wise from the standpoint of financial
markets.
Governor Maisel expressed concern about the longer-run implications.
He noted that the action of a few banks appeared, according to
his calculations, to have about offset all the reserve action that the
System had taken this year.
From the standpoint of the formulation of
monetary policy, he believed that that kind of a situation was quite
intolerable.
The whole question of hot money also was involved.
If,
for example, the Federal Reserve desired a reduction of interest rates
six months from now, it might be told that that was not feasible because
there would be an outflow of hot money.
Therefore, he felt that a
potentially dangerous situation was involved and that the Board probably
ought to move on it, whether immediately or not.
Other members of the Board observed that the inflow of funds
had been netted out, in effect, in arriving at the desired over-all monetary policy position.
Governor Maisel pointed out, on the other hand,
-10-
10/3/66
that the inflow was not taken into account in certain credit series.
Mr. Axilrod commented that one could debate what the banks concerned
would have done if they had not had access to these funds.
Presumably
they would have had to be more aggressive seekers of Federal funds or
would have had to borrow more through the discount window if the funds
had not been available.
Governor Maisel noted that in such circumstances
the Federal Reserve would have been establishing policy on the basis of
a better awareness of the factors making up the total situation.
Governor Robertson expressed agreement with the dangers Governor
Maisel had pointed out, but went on to say that he thought it would be
unwise to do anything at this juncture.
The Board might be faced later
with a situation where it would have to do something, for example, if
the British problem became acute around the end of the year.
He sug-
gested that care be exercised not to make comments that would indicate
that the Board was or was not contemplating any action, although this
was not to say that the Board should not indicate awareness of the
problem.
The Board should keep abreast of developments so that it would
be in a position to move if necessary.
Mr. Fauver said he had recently received several inquiries from
newsmen, which indicated that it must be fairly well known that the
Board was considering the possible application of reserve requirements.
If the Board should decide not to do anything at this time, there might
be some benefit in eliminating the prevailing uncertainty unless the
Board desired to perpetuate the uncertainty.
I Lt_
10/3/66
-11Governor Robertson expressed the view that the Board should make
no decision at this time, particularly in the absence of Chairman Martin.
It should table the matter, but it should keep aware of the facts so as
to be in a position to move as circumstances might require.
Governor Brimmer said that as of last Friday the Chairman's
attitude appeared to be that for the time being it would be unwise to
apply reserve requirements or take any other action.
The Chairman also
appeared to feel that if action became necessary, the situation possibly
could be handled on a moral suasion basis through conversations with
appropriate people.
Governor Brimmer went on to say that he had hoped the Board
would decide that it was not going to do anything, as of now, but that
it would keep alert to the situation.
that rumors had gotten around.
Mr. Fauver was right in saying
Therefore, it might be helpful if word
got around that, for the time being, the Board was not contemplating
any action.
Governor Robertson expressed the view that it was not desirable
for the Board to indicate in conversations what its policy was or was
not.
That simply put the Board in a position where it might be pre-
cluded from taking action or, on the other hand, might be driven into
action.
Governor Brimmer pointed out that rumors were around because
the Board had sent members of its staff into the field, and Governor
10/3/66
-12-
Robertson said he would simply accept the fact and for the moment try
to knock down any inquiries.
Mr. Holland raised the question whether the Board might want
to obtain comments on this issue from the Reserve Bank Presidents
tomorrow, and Governor Robertson said he would prefer to enter into
such a discussion only if the Presidents expressed a desire.
Governor Shepardson said he joined in the comments that had
been made and felt that the less said the better for the moment.
The meeting then adjourned.
Secretary's Note: Governor Shepardson
today approved on behalf of the Board
memoranda recommending the following
actions relating to the Board's staff:
Appointment
James P. Baldwin, Jr., as Messenger, Division of Administrative
Services, with basic annual salary at the rate of $3,609, effective
the date of entrance upon duty.
Acceptance of resignations
Mary M. Menegos, Stenographer, Division of Data Processing, effective the close of business October 7, 1966.
Louis S. Zeller, Programmer, Division of Data Processing, effective
the close of business October 7, 1966.
Joyce J. Wood, Secretary, Division of Research and Statistics,
effective the close of business October 28, 1966.
BOARD OF GOVERNORS
Item No. 1
10/3/66
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
AOORIESS
orriciAt. CORRIMPONOIENCIE
TO THE SOARD
October 3, 1966
Board of Directors,
Mexico Savings Bank,
Mexico, Missouri.
Gentlemen:
Reserve
The Board of Governors of the Federal
Mexico
by
branch
a
System approves the establishment of
Liberty
East
5
1011-101
Savings Bank, Mexico, Missouri, at
hed
establis
is
branch
Street, Mexico, Missouri, provided the
The
letter.
within eighteen months from the date of this
Board's previous
approval of this branch is in lieu of the
your bank in
approval of the establishment of a branch by
and
Avenue
the vicinity of the intersection of Western
Promenade Street, Mexico, Missouri.
The Board also approves, pursuant to the
•
Reserve Act, an
provisions of Section 24A of the Federal
$221,500 by
exceed
investment in bank premises of not to
purchase of
the
for
Mexico Savings Bank, Mexico, Missouri,
for the
quarters
land ($81,500) and the construction of
new branch ($140,000).
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.)
Item No. 2
10/3/66
BOARD OF GOVERNORS
•
••
OF THE
of G01;.!••
•
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS
OFFICIAL
CORRESPONDENCE
TO THE SOAR°
October 3, 1966
Board of Directors,
United California Bank,
Los Angeles, California.
Gentlemen:.
The Board of Governors of the Federal Reserve
ia
System approves the establishment by United Californ
the
in
branch
a
of
ia,
Bank, Los Angeles, Californ
vicinity of the intersection of Magnolia Avenue and
Tyler Street, Riverside, California, provided the
branch is established within 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.)
4114471,
v.) I-.
Item No. 3
10/3/66
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
October 3, 1966
Board of Directors,
Wells Fargo Bank,
San Francisco, California.
Gentlemen:
The Board of Governors of the Federal
Reserve System extends to September 26, 1967, the
time within which Wells Fargo Bank, San Francisco,
California, may establish a branch in the Del Monte
Shopping Center on Old Capitol Site on Carmel Hill,
Monterey, California.
Very truly yours,
(Signed) Karl E. Bakke
Karl E. Bakke,
Assistant Secretary.
Item No. 4
10/3/66
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
October 7, 1966
Board of Directors,
Farmers State Bank,
Pine Bluffs, Wyoming.
Gentlemen:
The Board of Governors of the Federal Reserve System approves the
application of Farmers State Bank, Pine Bluffs, Wyoming, for stock in the
Federal Reserve Bank of Kansas City, subject to the numbered conditions
hereinafter set forth:
1.
Such bank at all times shall conduct its business and
exercise its powers with due regard to the safety of
its depositors, and, except with the permission of the
Board of Governors of the Federal Reserve System, such
bank shall not cause or permit any change to be made in
the general character of its business or in the scope
of the corporate powers exercised by it at the time of
admission to membership.
2.
The net capital and surplus funds of such bank shall
be adequate in relation to the character and condition
of its assets and to its deposit liabilities and other
corporate responsibilities.
In connection with foregoing conditions of membership, particular
attention is called to the provisions of the Board's Regulation H, regarding
with
membership of State banking institutions in the Federal Reserve System,
is
especial reference to Section 208.7 thereof. A copy of the regulation
enclosed.
is
If at any time a change in or amendment to the bank's charter
made, the bank 6hould advise the Federal Reserve Bank, furnishing copies of
change
any documents involved, in order that it may be determined whether such
System.
affects in any way the bank's status as a member of the Federal Reserve
SYSTEM
BOARD OF GOVERNORS OF' THE FEDERAL RESERVE
Farmers State Bank
-2-
Acceptance of the conditions of membership contained in this letter
Should be evidenced by a resolution adopted by the board of directors and
spread upon its minutes, and a certified copy of such resolution should be
filed with the Federal Reserve Bank. Arrangements will thereupon be made
to accept payment for an appropriate amount of Federal Reserve Bank stock,
to accept the deposit of the required reserve balance, and to issue the
appropriate amount of Federal Reserve Bank stock to the bank.
The time within which admission to membership in the' Federal
Reserve System in the manner described may be accomplished is limited to 30
days from the date of this letter, unless the bank applies to the Board and
obtains an extension of time. When the Board is advised that all of the
requirements have been complied with and that the appropriate amount of
Federal Reserve Bank stock has been issued to the bank, the Board will
forward to the bank a formal certificate of membership in the Federal Reserve
System.
The Board of Governors sincerely hopes that you will find membership in the System beneficial and your relations with the Reserve Bank
pleasant. The officers of the Federal Reserve Bank will be glad to assist
You in establishing your relationships with the Federal Reserve System and
at any time to discuss with representatives of your bank means for making
the services of the System most useful to you.
Very truly yours,
(Signed) Karl E. Bakke
Karl E. Bakke,
Assistant Secretary.
Enclosure.
BOARD OF GOVERNORS
Item No. 5
10/3/66
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADORICIIII OFFICIAL CORRCEPONOCNCE
TO THE BOARD
October 3, 1966
CONFIDENTIAL (FR)
Mr. Edwin Hyde,
Chairman of the Board,
Federal Reserve Bank of Richmond,
Richmond, Virginia. 23213
Dear Mr. Hyde:
The Board of Governors has approved the payment of salary
to officers of the Federal Reserve Bank of Richmond listed below,
for the period October 1 through December 31, 1966, at the following
rates fixed by your Board of Directors, as reported in your letter
of September 15:
Name
John C. Horigan
Lloyd W. Bostian
Title
Annual
Salary
Assistant General Auditor
Examining Officer
$17,000
14,000
The Board has noted that Mr. Horigan will be placed in
Group B rather than Group C of the Officers' Salary Administration
Plan because of his increased responsibilities in the Audit function.
Very truly yours,
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.
"Va'"
BOARD OF GOVERNORS
Item No. 6
10/3/66
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
October 3, 1966
Mr. Laurence H. Stone, Secretary and
Associate General Counsel,
Federal Reserve Bank of Boston,
Boston, Massachusetts. 02106
Dear Mr. Stone:
This refers to your letter of September 9, 1966, enclosing
a letter of September 7, 1966, from Mr. John Hand, of the law firm
of Sullivan and Worester, counsel for John P. Chase, Inc., ("Chase")
an investment counseling firm of Boston, Massachusetts. Chase proposes
to organize and to serve as investment adviser to a new closed-end investment company ("the fund"). Two individuals, Mr. John E. Lawrence and
Mr. John N. Worcester, who are now serving as directors of a member bank,
Old Colony Trust Company, Boston, Massachusetts, would also serve at the
same time as directors of the fund. In addition, Mr. Worcester is a
Partner in the firm of Sullivan and Worcester and would be Clerk of the
proposed company. Counsel asks whether these relationships are subject
to the prohibitions of section 32 of the Banking Act of 1933.
Section 32 provides, with an exception not relevant here,
that:
"No officer, director, or employee of any corporation
or unincorporated association, no partner or employee of any
partnership, and no individual, primarily engaged in the issue,
flotation, underwriting, public sale, or distribution, at wholesale or retail, or through syndicate participation, of stocks,
bonds, or other similar securities, shall serve [at] the same
time as an officer, director, or employee of any member bank . . .
For many years, the Board has held that open-end investment companies
are primarily engaged in the activities described in the statute because
the more or less continued process of redemption of the stock issued
Mr. Laurence H. Stone
-2-
by such a company would restrict and contract its activities if it did
not continue to issue its stock." (1951 Bulletin 645; 12 CFR 218.101)
As a result, section 32 prohibits interlocking service between an open-end
investment company and a member bank.
In 1960, the Board expressed the view that the same rule
applies to a closed-end company which is "in process of organization
and . . . actively engaged in issuing and selling its shares". (1960
Bulletin 371; 12 CFR 218.102) The following year, the Board clarified
this position by explaining that the rule applies only:
. . . where the circumstances are such as to indicate that
the issuance of the company's stock is a primary or principal
activity of the company. For example, such circumstances
might exist where the initial stock of a company is actively
issued over a period of time longer than that ordinarily
required for corporate organization, or where, subsequent to
organization, the company issues its own stock frequently
and in substantial amounts relative to the total amount of
shares outstanding." (1961 Bulletin 156; 12 CFR 218.104)
In one of the instances discussed in this interpretation,
Where the company was held not to be engaged in the activities described
in section 32, issuance of the stock was to be completed within 30 to
60 days.
In the present case, it is anticipated that the actual
selling period during which orders for shares will be confirmed to the
Public by the underwriters and the dealer group, extending from the
effective date of the registration statement to the closing when the
Shares are actually issued, will be not more than ten days, and although
the period could be extended by agreement of the parties, it is most
unlikely that it would be extended even by as much as 30 days. Accordingly,
it appears that the fund will not be engaged in the activities described
in section 32 in respect to the issuance of its shares.
You also ask whether Mr. Worcester should be regarded as an
employee of Chase because of his membership in a firm which serves as
counsel to the corporation. You state that it would probably be correct
to assume that Chase is primarily engaged in the activities described
in section 32, so that, if Hr. Worcester were an employee of the corporation, his service as a director of the Old Colony Trust Company would
be prohibited by section 32.
In the administration of section 32, the Board has interpreted
the term 'employee' as not applicable to an attorney except in the unusual
case where the attorney is actually an employee of the bank or company
Mr. Laurence H. Stone
involved. The Board has not regarded the customary relationship of
attorney and client as constituting the attorney an 'employee' of the
client. You have informed the Board's staff that the firm of Sullivan
and Worcester is retained from time to time as attorney for Chase in
connection with various specific matters, and that the relationship is
the customary one between attorney and client, with no unusual features.
Accordingly, it would not appear that Mr. Worcester should be regarded
as an employee of Chase for purposes of section 32. The Board recognizes,
as you point out, that some doubt is thrown on a similar question under
the Investment Company Act of 1940, by an opinion of the General Counsel
of the Securities and Exchange Commission cited in Loss, Securities Regulation,
Vol. II (1961 ed.), page 732, n. 37. However, this opinion was handed
down in a different context, under a different statute, and should not
be regarded as controlling a long-standing administrative position of
the Board.
For the reasons just stated, then, the Board does not believe
that section 32 of the Banking Act of 1933 forbids the interlocking
service of Mr. Worcester and Mr. Lawrence as directors of the Old Colony
Trust Company and the proposed closed-end investment company sponsored
by Chase, or the service of Mr. Worcester as a director of that bank
While he is a member of the law firm of Sullivan and Worcester. This
Opinion is based, of course, on the facts submitted to the Board, and
different or additional facts might well require a different conclusion.
It would be appreciated if you would transmit the substance of these
views to Mr. Hand.
Very truly yours,
(Signed) Merritt Sherman
Merritt Sherman,
Secretary.
@FedFRASER