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2054 A meeting of the Executive Committee of the Board of Governors Of the Federal Reserve System was held in Washington on Tuesday, October 8 1935, at 11:30 a. m. ' PRESENT: Mr. Mr. Mr. Mr. Thomas, Vice Chairman Hamlin James Szymczak Mr. Bethea, Assistant Secretary Mr. Carpenter, Assistant Secretary The Committee acted upon the following matters: Letter dated October 5, 1935, addressed to Mr. Paulger, Chief of the Division of Examinations, by Miss Elizabeth B. Griffin submitting her Isesignation as a stenographer in the Division, effective as of the close c/f business on October 15, 1935. Mr. Paulger had noted a recommendation °II the letter that the resignation be accepted by the Board. Accepted. Letter to Mr. Case, Federal Reserve Agent at the Federal Reserve Bank Of Net- York, reading as follows: "Reference is made to :Jr. Gidney's letter of September 1935, relative to the voting permit application of Bank of Nutley', Nutley, New Jersey, in which it is set forth that the subsidiary, 'The Franklin National Bank of utleY', Nutley, Nev; Jersey, intends to offer objections to Lhe issuance of a voting permit to the applicant and that action in this matter will be taken by the directors of the subsidiary bank at a meeting to be held the second Monday in October. "It has been noted that a reason for the delay in sub— mitting a detailed statement of these objections, in accord— ance with the Board's letter of August 22, 1935 and previous suggestions made by your office, is that the acts complained °f are scattered over a period of years and considerable search of the bank's records is required to supply supporting data. "In the event the Board feels that the objections offered are such that the hearing requested by this bank should be 2055 1o/8/35 tl granted, it is most probable that a reasonable amount of time must be allowed to the applicant to prepare and present its Side of the case, and, of course, a certain amount of time will be required for the Board's consideration of whatever data is presented. In view of the nature of the controversy, it appears important that the issue be settled, if possible, in ample time before the next annual meetinr of stockholders of The Franklin National Bank of Nutley in January, in order to avoid any Possible unfavorable reaction which might result from any postponement of such meeting. Accordingly, you are requested to advise the subsidiary bank, or it attorney, that the Board has required that the detailed statement of objections be filed in Your office by October 19, 1935, if it is desired that consideration be given to such objections in connection with the voting Permit application of Bank of Nutley, now pending before the Board. "It will be appreciated if, upon the receipt of the above mentioned statement of objections filed by The Franklin National Bank of Nutley, you will review the subject matter contained therein and promptly forward a copy of such statement to the Board, together with :/our recommendations and coments as to the soundness of the objections offered and the correctness of, and extent of any bias in, the information submitted, and also Present any supplemental information which you may have concerning the matter. If, from a review of the statement of objections you deem it necessary that the subsidiary bank offer additional or supplemental information, it is requested that You suggest to the bank, or its attorney, the necessity for furnishing such additional data promptly, and that it be forwarded to the Board immediately upon receipt by you. "In communicating with The Franklin National Bank of Nut1 or its attorney, it is assumed that you v.111 make your request for any additional information in the form of ,liggestions only, in order that there be no question that the 'Dank understands that this information is being voluntarily submitted by it for the consideration of the Board in deter1114ining whether there are any circumstances present which would tustifY the holding of a hearing at which the applicant may be ' epresented and given an opportunity to answer the objections °ffered. The question of whether the Board will decide that !Ich hearing is necessary will depend largely on the nature of '?e objections offered and the connection of such objections :?th the matters which the Board is required by lay to conIder in deciding upon voting permit applications." Approved unanimously. 2056 10/8/35 Telegram to Mr. Clark, Assistant Federal Reserve Agent at the Federal Reserve Bank of Atlanta, reading as follows: "Retel October 3 regarding interest rates in Mississippi. Regardless of technical aspects of question of applicability Of section 24 of Federal Reserve Act to contracts entered into by national banks since July 1, in view of the practical situation and in fairness to national banks which, because of : 1Incertainty or lack of definite information from proper author.ties as to the rate payable, may have entered into contracts in good faith since July 1 providing for payment of interest at a rate greater than the rate fixed by State Comptroller, oard would not be disposed to object to payment of interest in accordance with the terms of contracts entered into before cate on which banks receive notice from you of reduced rates lf such contracts are otherwise in conformity with Regulation Q and are terminated as soon as possible under terms thereof. ccordingly, Board believes that it is not desirable to alter -the provisions of its letter of September 16 regarding this Point.” Approved unanimously, together with a similar telegram to Mr. Stewart, Assistant Federal Reserve Agent at the Federal Reserve Bank of St. Louis. Letter to Mr. Curtiss, Federal Reserve Agent at the Federal Re8.1re Bank of Boston, reading as follows: "This refers to your letter of July 23, 1933,! with regard to the deposit of trust funds in the commercial and avings departments of The Southington Bank and Trust crPany, Southington, Connecticut, in the light of the conltIon of membership which the Board of Governors of the ' :ederal . Reserve System has prescribed for that bank requiring It to deposit with its trust department security in the same anner and to the same extent as is required of national rnks exercising trust powers if trust funds held by such uank are deposited in its banking department or are otherwise used in the conduct of its business. "It is under:tood from the information which you have 1Ditted regarding this matter that the Attorney General for ,11.e State of Connecticut is of the opinion that a State member rnk or trust company does not have the statutory authority to Posit securities in accordance with the requiredlents of the 2ard t s condition referred to above. It is also underatood calat the laws of the State of Connecticut do not provide any T TI- r 2057 10/8/35 -4-. "Safeguards by way of preference or otherwise for the protection of trust funds deposited or used by a State bank or trust company in its commercial or savings department, and that Your counsel has expressed some doubt as to the legality under such laws of a State bank depositing trust funds in its commercial department. In this connection, your counsel has called attention to the decision in the case of Bassett v. aty Bank and Trust Company (Conn., 1932), 160 AU. 60, and it has been noted that you have advised that that case is regarded in the State of Connecticut as authority for the propositlon that all deposits of trust funds in the savings department Of a trust company are investments. You have advised also that Your counsel is not entirely convinced as to the correctness of this conclusion, although it appears that, upon the basis Of the decision in that case, he is of the opinion that a ?onneeticut bank or trust company, if acting in good faith and sZ absence of any restrictions imposed by the terms of the ItTli.t may invest trust funds in its savings department. In the case of such investments, however, he has pointed out that no preference tould be given to such funds over other savings deposits in the event of liquidation or insolvency. It has dlso been observed that your counsel has stated that the case of Bassett v. City Bank and Trust Compau lends little or no authority for the proposition that trust funds may be deposited ln the commercial or savings department awaiting investment or distribution, although he has indicated that, if such deposits are unlawful, the commercial or savings department would prcome a constructive trustee of the trust funds and such funds lould be preferred in liquidation proceedings as against other aepositors and general creditors. "As stated in the Borrd's letter of March 8, 1935 (X-9143), -t is contrary to the general- principles of law with reference _(:) the administration of trusts for a trustee to use trust runds for his or its own purposes and benefit and, if any "ception is made to this rule, it seems clear that the trustee OUld be required to furnish adequate protection for the trust l'Inds so used. Accordingly, the Board's purpose in prescribing condition of membership above referred to is to assure Pr°Per protection for trust funds handled by member State banks trust companies and the condition is designed to cover any of trust funds by such banks and trust companies in the .Lt°Ilduct of their commercial or savings departments. Moreover, ,le.Board, as you know, has consistently held that this conof membership contemplates that any deposit of securities lin the trust department of a State member bank or trust company secure trust funds deposited in its banking department or ° t6herwise used in the conduct of its business shall result in -le creation of a valid pledge for the security of such funds, 1 2 2058 10/8/35 —5-"and, if, under the laws of the State in which a particular State member bank or trust company is located, such a pledge may not be lawfully made, the bank or trust company should not deposit trust funds in its banking department or otherwise use such funds in the conduct of its business. "In the circumstances and after carefully considering the situation existing in the State of Connecticut, the Board feels that State member banks and trust companies in Connecticut Should not deposit trust funds in their orn commercial or Savings departments or otherwise use such funds in the conduct of the business of such departments. Please advise The Southington Bank and Trust Company, Southington, Connecticut, accordingly. "It has been observed that you have not definitely deter— 'mined whether the funds belonging to agency and corporate accounts in the trust department of The Southington Bank and Trust Company should be secured if such funds are deposited in its banking department. In this connection, you have pointed out the difficulties involved in concluding in each case whether ,unds of this character should be considered trust funds and You have stated that, if questions as to matters covered by reports of examination are to be satisfactorily disposed of, s°me authoritative outline of principles is essential so that 71-.1ch funds referred to in the reports can be definitely classi— led. In the circumstances, you have suggested that, as recom— mended in the report of the Conference of Trust Examiners, held Washington, in September, 1954, the Board define the term trust funds'. "While the Board appreciates the difficulties that may be encountered in determining definitely whether particular funds ?°nstitutP trust funds, the Board, for the reasons indicated !,-11 its rulings published in the Federal Reserve Bulletins for uecember, 1921 (p. 1435), and May, 1922 (p.572), has not ,ttempted to promulgate a general definition of the term 'trust run(Ist which would be apPlicable to every case of this kind. "nerally speaking, however, it rould seem that, if transactions °f the kind under discussion are handled through the trust rPartment of tie bank, at least a presumption would arise that funds involved are held by the bank in a fiduciary capacity, though in the final analysis the determination of the question "euether particular funds actually are trust funds depends in ,!ch case upon the express or implied terms of the agreement Cr which the funds are r,:ceived and the other circumstances vcived. Accordingly, a bank might wish to consider the Xisability of handling through its commercial department agency f. corporate accounts in which it is evident that trust or j -uuciary relationships are not involved, since it is recognized 'flat there are certain functions of this nature that may be 1 r 2059 -6"handled by banks lawfully, even though they have no authority to exercise trust powers. In such a type of situation, if the unctLon in question does not involve a fiduciary relationship, ls not handled through the trust department, and is not treated as a trust department transaction by the parties thereto, then lt.rrould seem that the funds involved are not trust funds. Wile, as stated above, the Board has not attempted to define tne term 'trust funds' and it rould be difficult to formulate such a definition which would be workable in every case in determining”hether a fiduciary relationship exists, it is understood that another Conference of the Trust Examiners may be held this fall and, in the circumstances, you may Ash to suggest that that Conference give further consideration to this matter." f Approved unanimously. Letter to Governor McKinney of the Federal Reserve Bank of Dallas, as follows: "Reference is made to your letter of September 30, stating thEt one of the member banks in your district in rendering its r,eport of net deposits shows credit figures in the demand Posit column, and requesting advice as to the method that .11ould be followed in such cases in arriving at the average net aemand deposits subject to reserve. "For any day on which permitted deductions exceed gross demand deposits, net demand deposits subject to reserve should cbie reported as zero and not as a minus amount, and average net bemand deposits subject to reserve should be computed on this : m L°1-s as should also average net demand deposits renorted to the ' 143ard.” Approved unanimously. Letter to Mr. McKay, Deputy Governor of the Federal Reserve Dank ()robot can, readin7 as follows: letter of September 30 in reply to + "Reference is made to your uhe Board's letter of September 28, in which you advise that j .,C_/1 3 now have outstanding J,10.00 participation certificates, in total amount of :!380.00, issued by the Chicago bank in Zlnection with the First Liberty Loan 31% Bonds, and also You-40 representing coupons. It is stated in your letter that have turned in the 374 bonds to the Treasury and received payment "erefor, including the coupons to the call date, and attention 2060 10/8/35 -7- directed to the fact that the participation certificates are obligations of the Federal Reserve Bank of Chicago and not of the Treasury. It is further stated that under the circitmstances you feel that these amounts should be carried on your books as unclaimed balances as they are a liability of the Reserve bank for the participation certificates outstanding, and you request the views of the Board in the "In the Board's letter of September 28, 1935, it was surested that inasmuch as all Liberty Bonds have now been called for payment, the question of the proper disposition of the bonds held for the redemption of participation certificates be taken up with the Treasury Department with the view f eliminating the item from the accounts of the Reserve bank. 'ince it now develops that these bonds have been turned in to -11,10 Treasury Department, it is suggested that the proceeds taereof, referred to in your letter as 'Unclaimed balances', be carried in the item 'Other deposits' on the bank's daily balance sheet, form 34." Approved unanimously. Letter to Mr. Stevens, Federal Reserve Agent at the Federal Resel ' ve Bank of Chicago, reading as follows: "Receipt is ackno7ledged of your letter of September 1935, which is in further reference to the proposed conP -terenee to be held this fall of the heads of the Bank Examination Departments of the Federal reserve banks. As 011hairman of the Conference of Chairmen and Federal Reserve ,5ents, the Board will be glad to have you call such a conIerence and undertake the preparation of the program. It is ,e,uggested that the conference be called to meet at the . 11oreham Building in Washinton at 9:00 a.m., on November 18, !-935, and that in addition to the Assistant Federal Reserve gent in charge of examinations, it include the Chief '4cam1ner and Trust Examiner of each Federal reserve bank. "As you know, each of the Federal Reserve Agents has recently been reQuested to submit suggestions in connection th the proposed revision of the form of report of examina4)/1, the final revision of which was contemplated would be ! lade one of the topics for discussion at the conference. It 18 suggested that the program, in addition to the proposed 1,:evision of the form of report of examination, include a lurther discussion of uniform charges for costs of examinations , (11ade of State member banks by examiners for the Federal re-erve banks. In this connection, reference is made to the (v. n 2061 10/8/35 -8- "Board's letter of November 3, 1934, X-90111 in which it was stpted that the Board believed it advisable to defer action on the question of general uniform charges until after the completion of examinations made in connection with certifications to the Federal Deposit Insurance Corporation, and to continue in effect until July 1, 1935, the instructions regarding Charges for examinations contained in the Board's letter of March 2, 1934, X-7810a. The Board feels that the views of the representatives of the various Federal Reserve Agents on this subject -,ould be helpful in connection with the further consideration of this most important matter. "It is believed that a constructive program can be prepared based upon practical problems which have arisen in the course of examinations and upon any anticipated problems due to recently enacted banking legislation. It is understood that many questions of a controversial nature have arisen during the past year in connection with examinations of trust 1 ,epartments and it is believed that consideration by the conierence of such questions may prove to be mutually beneficial." Approved unanimously. Thereupon the meeting adjourned. Assistant Secretary. APProved: Vice Chairman.
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