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Statement of
Andrew F , Brimmer
Member, Board of Governors of the Federal Reserve System
before the
Committee on Banking and Currency
House of Representatives
H.R. 13884
To Prohibit Federally Insured Banks from Voting Their Own Stock and
Provide for Cumulative Voting in Federally Insured Banks

July 17, 1968

H.R. 13884 is designed to do two things:

(1) prohibit

Federally insured banks from voting their own stock, and (2) require
that such banks conduct their elections for directors on the basis of
cumulative voting by shareholders.
Bank Voting of Own Stock
The Board recognizes that inherent in a bank voting its
own stock is a potential conflict between the self-interest of the
bank's management and the best interests of its shareholders.

As the

Board has earlier indicated to this Committee, it considers the practice
of a bank's voting its own stock held by it in trust ''undesirable and
has triad by persuasion to encourage State member banks to eliminate,
as far as possible, voting of such stock except by direction or
instruction from others.


(1967 Hearings entitled "Meetings with

Department and Agency Officials , page 172.)
In attempting to develop an appropriate legislative line
between what is to be prohibited and what is to remain permissible, it
always seems desirable to use existing laws in the area as a framework for

Under section 5144 of the Revised Statutes, in an election

of directors a national bank is permitted to vote stock held by it as sole
trustee only if "under the terms of the trust the manner in which such
shares shall be voted may be determined by a donor or beneficiary of
the trust and . .


such donor or beneficiary actually directs how


such shares shall be voted .

That section also provides that, if the

bank owns such stock as co-trustee, the other trustee may vote the
stock as if he were the sole trustee,
A question arises whether the best solution to the problems
involved in this area might be to prohibit a bank from holding its
own stock in any capacity.

That would entirely avoid any potential

conflict and would also avoid denying certain owners voting rights-which results from permitting banks to hold their own stock in a
fiduciary capacity but not to vote it.
Prohibiting a bank from owning its own stock would be a
simple solution to the problems in this area but one that may be more
drastic than is necessary.

It might deprive the trustee of the

opportunity of making a sound investment on behalf of the beneficiary
of the trust.

Conceivably, it might encourage bank trust departments

to increase their holdings of stock in competing commercial banks,
which would aggravate another situation that may already have undesirable
Certainly, prohibiting a bank from owning its own stock in
any capacity would prevent a person with full knowledge of the facts
from establishing with a bank a trust that expressly authorizes the
purchase of stock of the bank.

On balance, the Board believes that

it would be desirable to allow such a person to establish a trust
authorizing the purchase of stock of the bank, despite the possibility

3that a bank could take advantage of its role as financial adviser and
suggest the merits of including such a provision in the trust agreement.
It might be noted that, as a practical matter, prohibiting a
bank from voting its own stock—which is the approach adopted by
H.R. 13884—may strongly discourage ownership of such stock and thus
have some of the effect of a prohibition against ownership.


of stock is an attribute of ownership, and a trustee, depending upon
the terms of the trust instrument, might be considered negligent in
the performance of his duties if he invested in stock in which he cquld
not exercise the normal incidents of ownership.
Returning to section 5144 of the Revised Statutes, from the
standpoint of the beneficial owners of the stock, the existing
provisions of that section assure that such owners will not be deprived
of having basic ownership rights exercised in their behalf.

The Board

is unaware of any harmful consequences resulting from these provisions,
although, to the extent that owners are denied voting rights, the
value of such rights of the remaining owners is proportionately
In sum, it seems to the Board that the need for legislation
in this area at this time would be fulfilled if State banks were
subject to limitations comparable to those of section 5144.


the Board suggests that consideration should be given to modifying the
apparently unqualified prohibition in H.R. 13884 against an insured

-4bank exercising voting rights of its capital stock to make clear that
the stock of any such bank held by it in a fiduciary capacity may be
voted in the ways presently authorized by section 5144 of the Revised
Before turning to the cumulative voting provisions of
H.R. 13384 let me comment briefly regarding one of the situations
to which the prohibition against a bank voting its own stock is

As this Committee's recent report on trust activities of

banks points out, the Cleveland Trust Company, an Ohio-chartered member
bank of the Federal Reserve System, owns in a fiduciary capacity
approximately 33 per cent of the outstanding stock of the bank and,
despite much adverse criticism, continues to vote much of such stock.
Through such voting, the management of the bank effectively controls
the election of its board of directors.
At the present time, the legality of the Cleveland Trust
Company voting its own stock is solely a question of Ohio law.


an effort to clarify its authority in this respect, the bank itself
initiated a suit for declaratory judgment.

In June 1967, the Common

Pleas Court of Cuyahoga County held against the bank, concluding that
"no corporate fiduciary is permitted to vote any shares issued by it
under the existing statutory law of Ohio.
this decision.


The bank is appealing

•5As a member bank of the Federal Reserve System, Cleveland
Trust Company is, of course, subject to supervision by the Board of

On occasion, the Chairman of this Committee has suggested

that the Board should investigate the bank s practice of voting its
own stock.

The Board has been and is aware of the undesirable aspects

of the Cleveland Trust situation v

While it encourages banks under its

supervision to dispose of their own stock held by them in a fiduciary
capacity, the Board is reluctant to engage in interpreting closelydisputed questions of State law.

In other words, the Board considers

that its supervisory responsibilities in this respect relate principally
to assuring that the soundness of the bank and its trust accounts are
not adversely affected by the investments in the bank's own stock.
Where a bank such as Cleveland Trust is subject to the

Board s Regulation F , which relates to public disclosure of information
concerning stock of certain member State banks, the Board has the duty
to assure that the bank fairly discloses all information necessary to
enable an investor to make an intelligent decision with respect to
ownership of the bank's stock.

The Board believes that it fulfills

this duty with respect to the stock of the Cleveland Trust Company, as
well as with respect to the stock of other banks within its jurisdiction.
Cumulative Voting
The general aim of cumulative voting is to allow a minority
to secure representation on the board of directors.

Under such method

-6o£ voting, where several directors are to be voted upon at the same
time, a shareholder is entitled, if he desires, to cast votes equal
to the whole number of shares held by him, multiplied by the number of
directors to be elected, for one candidate.
The danger in this method of voting is that an unwary
majority may find that a vigilant minority has deprived the majority
of control.

This could arise by the majority spreading their votes

over too many offices.

However, this danger can be overcome by the

majority foregoing any attempt to elect a complete board and cumulating
their votes on such a proportion of the members of the board as the
number of their shares bears to the total number of shares which will
be voted at the election.
The question of whether bank shareholders should have
cumulative voting rights is controversial.

In fact, in 1956, the

Senate passed a bill that would have modified the present requirement
for cumulative voting in elections of directors of national banks so

that such method of voting would apply only if the bank s articles
of association so provided.

A similar modification was considered

in connection with the proposed "Financial Institutions Act of 1957".
Much of the debate on the merits of cumulative voting centers
around the question of what should be the proper role of a board of

Some argue that a board of directors should be similar to

the cabinet in the government of the United Kingdom—all representing

the satite interests involved in h common effort to ascertain and
administer effectively the policies of the corporation.

Others say

that a board of directors should be similar to a legislature--policies
should be questioned and debated by persons representing diverse
Insofar as banking is concerned, it seems particularly
desirable that the board of directors should serve more like a

The Board believes-'-and we think this has been borne

out in both Federal and State legislation--that a bank must consider
and act to a greater degree with regard to the public interest than
the typical industrial or commercial corporation.

Banks should be

responsive to the convenience and needs of their communities.
Accordingly, efficiency in the decision-making process and the
maximization of profits must, on occasion, play a secondary role
to community service.
Certainly not all of the stock even of a local bank is
owned by persons interested in the community.
owned by outside investors.

Many such shares are

Nevertheless we do hope and believe that

there is sufficient stock ownership of the local bank by persons
interested in the community that we should reject such arguments
against cumulative voting as "If you don't like the policies of the
corporation, sell your stock.



We are well aware of the danger from ''mandatory


voting of a minority of shareholders impairing corporate action.
However, an unchallenged management is more likely to be unresponsive
to the needs of the community.

On balance, the Board considers that

the dangers of dissidence are outweighed by the advantages of an
airing of viewpoints.
To be effective, cumulative voting for directors requires
on the part of shareholders accurate and detailed knowledge of the
strength of the competing interests, their strategies, and candidates.
This could be cited as a danger of cumulative voting, but belief in and
reliance upon an intelligent and informed electorate is the basis of
democracy, either corporate or political.
It might be noted that, in the past, regulation of State banks
under Federal banking laws has generally been directed toward assuring
the soundness of such banks, rather than toward protecting the interests
of shareholders of banks, as H.R. 13884 would do.

Nevertheless, State-

chartered banks have been made subject to a number of the provisions of
the Federal securities laws, including those directed against insiders
taking unfair advantage of their position—one of the principal purposes
of H.R. 13884.
In conclusion, the Board of Governors supports the objectives
of H.R. 13884.

The Board would, however, favor a provision limiting an

insured bank voting its own stock held by it in a fiduciary capacity more
along the lines of section 5144 of the Revised Statutes,