Full text of Statements and Speeches of Thomas B. McCabe : Proposed Legislation Regarding Bank Holding Companies : Statement before the Senate Banking and Currency Committee

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PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES

STATEMENT OF THOMAS B. McCABE, CH AIRM AN, BOARD OF GOVERNORS OF THE FEDERAL
RESERVE SYSTEM, BEFORE SENATE BANKING AND CU RREN CY COMMITTEE, M ARCH 1, 1950

M r. Chairman and Members of the Committee:
I believe I could never forget the bank holding
company legislation, because when your Committee
in the spring of 1948 was considering my nomi­
nation as a member of the Federal Reserve Board,
one of your chief concerns was w ith the holding
company bill then pending in Congress. Some of
you w ill recall that after being questioned at some
length I was told to go back and take a sort of a post­
graduate course on bank holding company matters
and to report back to the Committee after m y home­
work was completed. At that time bank holding
company legislation had been carefully considered
by this Committee and had been favorably reported;
and, in this connection, I would like to request that
the report of this Committee with respect to S. 829,
the bank holding company bill in the last Con­
gress, be inserted in the record. Your careful study
of that bill, together with the fact that the present
bill (S . 2318) is in large part sim ilar to it, would
almost seem to render unnecessary any compre­
hensive statement on the subject at this time. How­
ever, in view of the m any other matters which
continuously press upon the members of this Com­
mittee for attention and the fact that there has been
some change in the Committee membership, I am
going to assume that you m ay not have clearly in
mind some of the points regarding this legislation,
and I w ill proceed to state as briefly as I can the
more recent developments in connection with the
proposed legislation and the reasons why the Board
feels that its enactment is necessary and important.
Since S. 829 was under consideration by the 80th
Congress, the legislation has undergone further
careful consideration by the Board, and over a
period of a year and a half we have had numerous
informal conferences with representatives of a num ­
ber of groups who are interested. These include
the American Bankers Association, the Reserve City
Bankers Association, the National Association of
Supervisors of State Banks, the Independent Bank­
ers Associations, and various bank holding com­
panies. These meetings, in most instances, were
attended by the Comptroller of the Currency and




the Chairman of the Federal Deposit Insurance Cor­
poration or their representatives. As a result of
these discussions, various changes have been made
in the bill so as to take into account and give effect
to the best and most constructive suggestions re­
ceived as w ell as we have been able to appraise
them. I have never known a bill which had more
careful and extended study and consideration by all
parties who m ight be interested or affected than
has this bill.
You w ill recall that the principal purposes of this
legislation are (a ) to overcome the inadequacies of
the present law relating to holding company affili­
ates, (b ) to regulate the expansion of bank holding
companies, (c) to require bank holding companies
to give up their investments in nonbanking com­
panies, and (d ) to require bank holding companies
to register, m ake reports, and submit to exami­
nation. In other words, the basic objectives of S.
2318 are the same as those of S. 829 which your
Committee reported favorably in the last Congress.
Although the Senate Calendar was such that it was
not possible to act on the bill at that time, you w ill
recall that S. 829 had the support of the Federal A d­
visory Council of the Federal Reserve System (a
statutory body that is composed of a banker rep­
resentative from each of the twelve Federal Re­
serve Districts and that acts in an advisory capacity
to our Board) and of numerous banking organiza­
tions, as well as the m ajority of the major bank
holding companies. In its report on the holding
company legislation pending in the last Congress,
the Federal Advisory Council pointed out that such
legislation was urgently necessary, and I would like
to submit for the record at this point a letter re­
ceived in the last few days from the Council, which
indicates its general approval of the pending bill.
The need for the enactment by Congress of ap­
propriate and effective bank holding company legis­
lation has been recognized by the American Bank­
ers Association and has been reiterated by the In­
dependent Bankers Associations. Moreover, I am
advised by the Director of the Bureau of the Budget
that the President favors legislation designed to

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REPRINTED FROM
FED ERAL RESERVE BULLETIN
FOR M ARCH 1950

PROPOSED LEGISLATION REGARDING BAN K HOLDING COMPANIES

provide for more effective control of bank holding
companies, although he has not approved any par­
ticular draft of a bill.
I should like to emphasize that this bill is not allembracing. It does not provide a death sentence
for bank holding companies; it does not provide
for freezing all companies in their present situa­
tions; it does not forbid a bank holding company
to establish offices across State lines; it does not
bring an individual under the restrictions applicable
to bank holding companies; and it does not re­
quire holding companies to accumulate any greater
reserves than does the present law. On the other
hand, the bill does require bank holding companies
to rid themselves, with reasonable exceptions, of
the ownership of companies not engaged in the
banking business; it provides for the regulation of
expansion by bank holding companies; and it pro­
vides a means of more effective supervision of bank
holding companies. The bill is in no sense revo­
lutionary; it is evolutionary.
As I have indicated, S. 2318 is very sim ilar to the
bill S. 829 in the 80th Congress, but at this point
I think I should mention some of the principal
differences between the two:
S. 829 included a preamble which contained the
statement that it was the declared policy of Con­
gress “generally to m aintain competition among
banks and to m inim ize the danger inherent in con­
centration of economic power through centralized
control of banks.” After listening to the various
viewpoints expressed as to the desirability of this
declaration of policy, it was the Board’s feeling that
it m ight properly be omitted from the bill, and it is
not included in S. 2318. Some of the groups with
whom we discussed the matter, notably the Inde­
pendent Bankers groups, felt, and I believe still feel,
that it would be desirable to retain a provision of
this kind. Others, however, felt that it was par­
ticularly objectionable and should be omitted.
A related change is that with respect to the pro­
visions of the bill which prescribe certain standards
to guide the supervisory agencies in passing upon
acquisitions by holding companies or banks of
banks or branches. Included among these stand­
ards in S. 829 was consideration of “the national
policy against restraint of trade and undue concen­
tration of economic power and in favor of the m ain­
tenance of competition in the field of banking.”
In S. 2318 the language has been changed to pro­
vide for consideration of “whether or not the effect




of such acquisition may be to expand the size and
extent of a bank holding company system beyond
lim its consistent with adequate and sound banking
and the public interest.” (Sec. 5 (d ).) I w ill com­
ment further on this change a little later.
Another important provision in connection with
the consideration of the acquisition of banks or
branches is that which requires that the appropri­
ate Federal supervisory agency notify the bank
supervisor in the State in which the acquiring bank
is located of the proposed transaction so that he
m ay submit his views and recommendations on the
subject. These must be taken into consideration
by the Federal agency in acting upon the proposal.
(Sec. 5 (e ).) ^
The term “bank holding company” in the new
bill includes any company which controls a bank
operating four or more branches, rather than a bank
operating merely one or more branches as provided
in S. 829. W e feel that the definition as applied
to a bank with one branch is too inclusive. (Sec.
2 ( a ).)
In connection with the authorization to examine
bank holding companies and their subsidiaries, S.
2318 contains a provision, not in the previous bill,
authorizing use of the reports of examination made
by other supervisory authorities to the extent that
the information contained therein is adequate for
the purposes of the law. (Sec. 3 (c ).)
S. 2318 also adds a new provision perm itting a
bank holding company to own up to 5 per cent
of a nonbanking company or to own an investment
company which in turn owns not in excess of 5
per cent of any nonbanking company. W e feel
that this provides a reasonable exception to the re­
quirem ent for the divorcement of nonbanking
assets without in any way breaking down the prin­
ciple which is involved. (Sec. 4 (e ).)
S. 2318 contains a new section specifically pro­
viding that the enactment of the bill “shall not be
construed as preventing any State, to an extent not
inconsistent with this Act, from exercising the same
power and jurisdiction which it now has with re­
spect to banks, bank holding companies, and sub­
sidiaries thereof.” This is intended to elim inate
any implication that Congress in enacting this legis­
lation is depriving the States of any power which
they have in this field, except where such power
would be inconsistent with this bill. (Sec. 13.)
There are other differences between S. 2318 and
the earlier bill, S. 829, but I believe I have described

[2]

PROPOSED LEGISLATION REGARDING BAN K HOLDING COMPANIES

the more important of the changes. Now, be­
fore discussing in more detail the proposed legis­
lation and the inadequacies of the existing law, a
word concerning the nature of bank holding com­
panies m ight be helpful.
The bank holding company problem is, as you
know, not a new one to the Congress. Bank hold­
ing companies had a rapid growth during the 1920’s,
most of the major companies being organized in
that period. After extensive hearings which began
in 1930, Congress recognized the need for and
undertook to provide for the regulation of bank
holding companies. This legislation was a part of
the B anking Act of 1933. However, the inade­
quacy of the law soon became apparent, and there
were recommendations and proposals for new leg­
islation. For example, in a message to Congress
in 1938, President Roosevelt recommended the
enactment of legislation to prohibit further ex­
pansion of bank holding companies and to require
their elimination as soon as practicable. In its
annual report for 1943, the Board pointed out in
some detail the deficiencies in the existing law and
made certain broad recommendations w ith respect
to new legislation. Since then, various bills have
been introduced in Congress; and the Board, as well
as others, has continued to urge enactment of effec­
tive legislation on this subject.
M ay I say at this point that we do not regard
bank holding companies as being necessarily un­
desirable; in some instances, they have been help­
ful in providing better m anagement for banks, in
assisting them financially, and in encouraging im ­
proved banking service. Nevertheless, dangerous
abuses are possible in the absence of effective regu­
lation. One of these is the unlim ited expansion of
control over banks. Of like importance is the com­
bining under the same m anagement of large seg­
ments of our banking structure with miscellaneous
nonbanking businesses. Basically, our view is that
bank holding companies should be regulated in
much the same manner as banks themselves are
regulated.
A bank holding company is most likely to be
a State-chartered corporation organized to own a
m ajority of the stock of a group of banks and to
m anage or supervise these banks. However, there
is a great variety of factual situations in which, by
one method or another, organized groups of per­
sons control banks. A holding company is not nec­
essarily a corporation; it may be a business trust,




[

partnership, or some other organized group. In
addition to controlling banks, a holding company
may be engaged in other businesses, or in the
ownership and control of other businesses, unre­
lated to banking. H olding companies may them­
selves be banks, including national banks as well
as State institutions.
In some instances, there are two or more holding
companies controlling the same banks, directly
or indirectly. The simplest example of this is
where one company owns the controlling stock of
another company which, in turn, owns control of
a group of banks; but there also are other methods
which have been used to establish indirect control.
In this connection, it should be mentioned that,
without owning any of the stock of the banks, a
company m ay indirectly, or even directly, control a
group of banks, as in the case of trust arrange­
ments, as well as in other situations.
O rdinarily, of course, control is based upon stock
ownership, but this does not necessarily mean
m ajority ownership; holding companies can and do
exercise a controlling influence over banks through
the ownership of lesser amounts of stock.
The banks controlled by a bank holding com­
pany m ay include national banks, State member
banks and State nonmember banks, whether or not
insured; and the major holding company groups
usually include more than one class of banks.
Bank holding companies range in size from small
organizations to large, nationally known organiza­
tions controlling a large number of banks in numer­
ous States. Such companies are to be found in
almost every section of the country. The proposed
legislation, therefore, deals with a problem nation­
wide in scope.
In a d e q u ac y

o f P re se n t L aw

A discussion of the major provisions of the pro­
posed legislation w ill be assisted by some explana­
tion of the present, inadequate law concerning
bank holding companies.
As a part of the Banking Act of 1933, Section
5144 of the Revised Statutes was amended by add­
ing several new paragraphs applying exclusively
to bank holding companies (called “holding com­
pany affiliates” ) and placing limitations and re­
strictions upon the right of such companies to vote
the stock which they owned in member banks of
the Federal Reserve System. This section provides

3]

PROPOSED LEGISLATION REGARDING BAN K HOLDING COMPANIES

that a holding company, before it m ay vote its
stock of a member bank, must first obtain a per­
m it to do so from the Board. The Board is au­
thorized in its discretion to grant or deny such
a permit. As a condition to the granting of the
permit, the holding company, on behalf of itself
and its controlled banks, is required to agree to
submit to examinations, to establish a reserve fund,
and to dispose of all interests in securities com­
panies.
Present law is optional. The amendments to Sec­
tion 5144 provided a means for bringing some
bank holding companies under regulation, but
left others, even though m eeting the same defini­
tions, free from regulation. This is because the law
is based solely upon the voting permit. A holding
company becomes subject to the law only if a voting
permit is issued. But there is no mandatory re­
quirement in the law that a holding company
obtain such a permit. Undoubtedly it was believed
that all would do so. Not all have done so, how­
ever. This is because in m any instances holding
companies, as a practical m atter, can control the
operations of banks whether or not they vote their
shares in such banks.
W henever the Board receives an application for
a voting permit, it makes a thorough examination
of the holding company and its affiliated nonbanking organizations and reviews reports of exami­
nations of the affiliated banks to determine what
corrections, if any, are necessary to meet basic
standards. If such corrections appear necessary,
they are made a condition to the granting of the
voting permit. In one important case, however,
when advised of the need for such corrections, the
applying company simply abandoned its application
for a voting permit. It was able to control its banks
without voting the shares which it owned in these
banks, and thus was able to avoid regulation.
Clearly the law should apply to all bank holding
companies alike. This cannot be accomplished by
a law which permits a holding company to elect
not to subject itself to regulation. The law must
be mandatory to be effective. The present bill pro­
vides that all bank holding companies m eeting the
prescribed definition shall register and shall be sub­
ject automatically to all of the regulatory pro­
visions of the statute.
Present definition of holding company is inadequate.

Not only does the present law fail to reach those
companies which elect not to apply for a voting




[4]

permit, but it also fails to reach others because of
inadequacies in the definition of a “holding com­
pany affiliate.” The definition in the existing law
embraces only those holding companies which con­
trol member banks. This excludes from any regu­
lation those companies which operate in all respects
as bank holding companies, but which control
only nonmember banks, even though the latter
include insured banks.
Another and more important defect is in that
portion of the definition in the existing law which
defines a bank holding company as any company
“which owns or controls, directly or indirectly,
either a m ajority of the shares of capital stock of
a member bank or more than 50 per centum of the
number of shares voted for the election of direc­
tors of any one bank at the preceding election,
>5

The purpose underlying this part of the statute is
to reach those companies which control the m an­
agement and policies of banks, and with this basic
premise we are in agreement. However, as pre­
viously pointed out and as Congress and the courts
have long recognized, effective control of one com­
pany by another does not depend upon the owner­
ship or control of a m ajority of the voting shares.
Thus, the present law in this respect does not cover
cases where control is exercised through the owner­
ship of a smaller proportion of the total shares out­
standing, or where control is m aintained without
the ownership of any shares.
Sim ilarly, the number of shares owned or con­
trolled, as compared with the number of shares
voted for the election of directors at the preceding
election, is an unsatisfactory basis for determ ining
whether a holding company relationship exists.
Such a restricted test puts it within the power of
the holding company to establish an absence of
control when, in fact, it is at the same time exer­
cising most effective control. The case in which
regulation is most necessary m ay very w ell be the
case in which the attempt is made to take advantage
of a deficient definition to escape regulation.
The definition of a bank holding company in
Section 2 (a ) of the bill conforms more nearly to
the practical realities of intercorporate relationships.
The first part of the definition extends automatic
coverage to all companies which own 15 per cent
or more of the voting shares of two or more banks,
or of one bank operating four or more branches, or
of one or more other banks in the case of a com­

PROPOSED LEGISLATION REGARDING BAN K HOLDING COMPANIES

pany which is a bank. However, provision is made
for the exemption of such institutions which would
be covered under the definition automatically, if
they can demonstrate that they do not exercise a con­
trolling influence over the m anagem ent or policies
of their subsidiary banks. Subsequent provisions
of the definition permit the Board to declare an
institution to be a bank holding company even
though it does not own the 15 per cent of bank
stock requisite to automatic coverage under the
definition, provided the Board finds, after hearing,
that it does in fact control the specified number of
banks. This definition we believe is practical, just,
and essential in view of the prevailing situations.
A ll institutions sim ilarly situated are affected alike.
Each has a ready procedure for escaping regula­
tion by demonstrating that it does not in fact exert
the kind of influence upon banks which requires
that it be subject to regulation.
Some question has been raised as to that part of
the definition of “bank holding company” in the
bill which authorizes the Board, after notice and
opportunity for hearing, to determine that an insti­
tution is a bank holding company even though it
does not own 15 per cent of the stock of a bank.
I m ay say that we have studied this point very
carefully and have tried to develop a formula which
would constitute a satisfactory definition of the
term without giving the Board any discretionary
authority. W e have approached this problem sym­
pathetically but we have been unable to find a defi­
nition based solely upon an arithm etical formula
which would do the job adequately. W e have also
asked those who had some question about this in
their minds to suggest a satisfactory substitute for
the present definition but no one has brought for­
w ard a suggestion which seemed to us to meet the
situation. The discretionary authority for the de­
term ination of a bank holding company is patterned
after sim ilar authority which is contained in the
Public U tility H olding Company Act and which
has been in operation over a period of some 15
years. The rights of all parties w ill be adequately
protected under the provisions of the bill, since the
Board can determine that a company is a bank
holding company only after notice and hearing
and any action taken by the Board is subject under
the bill to judicial review.




[5]

N o n b a n k i n g A c t i v i t i e s o f B a n k H o l d in g
C o m p a n ie s

One of the most salutary requirements of the
bill is contained in Section 4 and is designed to
lim it the nonbanking activities of bank holding
companies. To that end, a holding company would
be required to divest itself of any securities except
those in companies which are incidental to its
banking operations, those which are eligible for
investment by national banks, or those which repre­
sent investments of a relatively unsubstantial nature.
Such divestment must be accomplished within a
period of two years, or w ithin a maximum period
of five years if additional time should be deemed
necessary to avoid undue hardship.
The reasons underlying this requirement are
simple. Accepted rules of law confine the business
of banks to banking and prohibit them from en­
gaging in extraneous business, such as owning and
operating industrial and m anufacturing concerns.
The lender and borrower or potential borrower
should not be dominated or controlled by the same
m anagement. As indicated earlier, however, the
holding company device has been used to gather
under one m anagement enterprises wholly unre­
lated to the conduct of a banking business.
In keeping with sound banking principles, it
is necessary that a bank holding company should
be required by law to divest itself of any substan­
tial interests in nonbanking ventures. The excep­
tion in the bill which permits a holding company
to own not over 5 per cent of the voting securities
of another company directly or through the instru­
m entality of an investment company, is not incom­
patible, we believe, w ith these principles. If, how­
ever, this exception should be used to evade the
purposes of the law , the bill provides that the hold­
ing company m ay be required to dispose of any
such securities.
W here, pursuant to the requirements of Section
4, a holding company distributes its nonbanking
assets, such a transaction is given appropriate tax
exemption under a provision of the bill prepared
with the assistance of the Treasury tax experts.
(Sec. 1 2 (f).)
Ban k

H o l d in g

C om pan y

E x p a n s io n

The problem of how far bank holding company
systems should be permitted to expand has long

PROPOSED LEGISLATION REGARDING BAN K HOLDING COMPANIES

been of serious concern. It is in this area that one
of the greatest potential evils of bank holding com­
pany operations exist.
Under existing law , a chartered bank m ay be
prevented by the regulatory agency to which it is
subject from expanding its banking offices either
by the establishment of new branches or by taking
over and operating the offices of other banks as
branches. In order to establish branches, national
banks must first obtain permission from the Comp­
troller of the Currency, State member banks from
the Board, and nonmember insured banks from
the Federal Deposit Insurance Corporation. But
a bank holding company is not lim ited by any such
requirements. Through the acquisition by the
holding company of the stock of an existing bank
which thereafter m ay be operated, for all practical
purposes, as a branch of the holding company sys­
tem, the denial of a branch application of a con­
trolled bank m ay become almost meaningless. The
holding company device lends itself readily to the
amassing of vast resources obtained largely from
the public, which can be controlled and used by the
relatively few who comprise the management of
the holding company, giving them a decided ad­
vantage in acquiring additional properties and in
carrying out a program of expansion. Such power
can be used to acquire independent banks by meas­
ures which leave the local m anagem ent and m i­
nority stockholders little w ith which to defend
themselves except their own protests.
Under Section 5 of the bill, this situation would
be remedied by preventing bank acquisitions w ith­
out first obtaining the approval of some agency of
the Federal Government. Under this section, any
acquisition of the stock or assets of banks by a
bank holding company would have to be approved
by the Board. If one of the banks in a holding
company group wished to acquire the assets of
a bank, the acquiring bank, if a national bank,
would have to secure the approval of the Comp­
troller; if a State member bank, it would have to
obtain the approval of the Board; if a nonmember
bank, it would have to obtain the approval of the
Federal Deposit Insurance Corporation.
Section 5 (d ) of the bill enumerates the standards
which would guide the banking agencies in decid­
ing whether to approve any such expansion. First,
they would have to consider the financial history
and condition of the applicant and the banks con­
cerned; their prospects; character of their m anage­




ment; and the needs of the communities involved.
As this Committee pointed out in favorably report­
ing upon this legislation in 1947, these are in gen­
eral the considerations now specified in the law as
the basis for adm inistrative action in connection
with the admission of State banks to membership
in the Federal Reserve System and the granting of
deposit insurance coverage. However, under the
bill the agency concerned would also have to con­
sider whether the proposed expansion of a bank
holding company or of any banking subsidiary in
a bank holding company group would extend the
operation of the holding company group beyond
lim its consistent with adequate and sound banking
and the public interest. In this connection, I should
point out that this represents a difference in lan­
guage from that contained in the bill previously
acted upon by this Committee. The earlier bill
contained language which was objected to by a
number of groups, including nonbanking groups
with whom I have met, on the ground that the
language was so broad as to present serious difficul­
ties in interpretation. The language which has
been inserted in the present bill I believe meets
these objections without in any w ay narrow ing the
considerations which the supervisory agency may
take into account in passing upon questions of hold­
ing company expansion. Chief among these con­
siderations, as this Committee pointed out in 1947,
is the anti-monopoly principle enunciated in the
Sherman and Clayton Acts.
In the discussions which we have had on this bill
with the interested groups, the suggestion was
made, particularly by the State bank supervisors,
that it would be well for the Comptroller, the Fed­
eral Deposit Insurance Corporation, or the Board,
in considering any proposal for the acquisition of
banks or the establishment of branches under this
bill, to consult with the appropriate State bank
supervisory authority and get his consent before
approving the transaction. W e discussed this at
great length with various groups and among our­
selves and with others and we did not feel that
it would be practicable to go so far as to give to
the State supervisor what in effect would be a veto
in the matter. W e have included in the bill a pro­
vision which requires that in any such case the
bank supervisor in a State must be notified and
given 30 days in which to submit his views and
recommendations. (Sec. 5 (e ).) As a practical
matter, in emergency cases the State supervisor

PROPOSED LEGISLATION REGARDING B AN K HOLDING COMPANIES

w ould, of course, be expected to submit his views
very promptly. These must be taken into account
by the Federal agency in acting upon the matter
and they become a part of the record in the case.
The views of the State authorities w ill thus be fully
considered in each instance and a decision w ill be
reached only in the light of their recommendations.
S. 2318, like S. 829 in the last Congress, provides
that the Federal Reserve Board shall be the adm in­
istering agency, because the Board is named as the
adm inistering agency in the existing law enacted
in 1933 relating to holding company affiliates. H ow­
ever, we are more concerned in this bill with the
principles which would be established by it than
we are with the question of what agency adm in­
isters it. It is our view that, regardless of what
agency is selected for the purpose, only one agency
should be charged with the responsibility for ad­
m inistering it. W e are unalterably opposed to the
adm inistration of this Act by a board made up of
various supervisory agencies for the obvious rea­
sons of efficiency and economy as w ell as time sav­
ing on the part of the executives of the different
agencies. Only by nam ing one agency can there
be effective administration of the legislation and
responsibility clearly fixed for the carrying out of
the Congressional purpose.
Section 3 (c) of the bill authorizes the Board to
m ake such examinations of a holding company and
of its subsidiaries, including bank subsidiaries, as
shall be necessary to disclose fully the relations
between the holding company and its subsidiaries,
but it also provides that the Board m ay use reports
of examination made by the Comptroller of the
Currency, the Federal Deposit Insurance Corpora­
tion, or the appropriate State bank supervisory
authority to the extent that the information con­
tained therein is adequate. As a matter of prac­
tice, of course, so far as banks are concerned, we
would expect to rely almost wholly upon reports
of examinations made by these agencies, instead of
m aking the examinations ourselves. Accordingly,
if the Committee should consider it advisable, the
Board would have no objection to putting a pro­
vision in the bill which would require that the
Board obtain the consent of the Federal Deposit
Insurance Corporation before it makes an exam ina­
tion of any nonmember insured bank that is a
subsidiary of a bank holding company, and the con­
sent of the appropriate State supervisory authority
for an examination of a subsidiary nonmember




uninsured bank. As to national banks, the exam ­
ination practice and the relationship between the
Comptroller of the Currency and the Board in that
regard have been long established under existing
provisions of the law ; this has worked very satis­
factorily and the present provisions of the bill
would not change the effect of existing law.
O t h e r A s p e c t s o f P r o p o se d L e g is l a t io n

Under the present law , the only provision which
implies a degree of adm inistrative supervision of
bank holding companies relates to such examina­
tions “as shall be necessary to disclose fully the
relations between” the holding company and its
controlled banks, and the further provision that,
for violation of the statute or of its agreement with
the Board prerequisite to its obtaining a voting
permit, such permit of a holding company may be
revoked. In that event, certain penalties affecting
the banks in the holding company system may be
applied. W hen considered in the light of the vol­
untary aspects of the existing law, such provision
falls far short of providing effective regulation.
In the first place, the Board’s right to examine a
holding company is not coupled with the specific
power to require corrections. Secondly, the penal­
ties for violation of the statute or of a holding com­
pany’s agreement with the Board are directed prin­
cipally at the controlled banks, rather than at the
bank holding company.
The provisions of the present bill, as previously
indicated, would require registration of all bank
holding companies (Sec. 3 ( a ) ) . A bank holding
company would be required to file periodic reports.
(Sec. 3 (b ).) It, as each of its subsidiaries, would
be subject to examination. (Sec. 3 (c ).) The more
important requirements of the present statute re­
garding reserve funds of bank holding companies
are included as a part of the bill (Sec. 8). Invest­
ments by a subsidiary bank in the capital stock of
its bank holding company would be forbidden and
loans by such a bank to its holding company or its
other subsidiaries would be regulated (Sec. 6 (a)
and 6 ( c )) . The terms of any management or serv­
ice contracts between a holding company and its
bank would be open to surveillance (Sec. 7). F i­
nally, the Board would be authorized to make such
rules, regulations, and orders as m ight be neces­
sary to enable it to adm inister and carry out the
purposes of the Act. (Sec. 9.)

PROPOSED LEGISLATION REGARDING B A N K HOLDING COMPANIES

W ith respect to its effective adm inistration, the
bill provides certain sanctions believed to be neces­
sary to assure compliance with its provisions. Thus,
if it is found, after notice and hearing, that a bank
holding company has w illfully violated the Act or
any rules, regulations, or orders issued thereunder,
the holding company m ay be forbidden to pay the
salary of its officials who participated in the viola­
tion, to receive dividends or managem ent or service
fees from its subsidiary banks, or to participate in
any w ay in the m anagem ent or control of any sub­
sidiary bank (Sec. 1 1 (a )). In addition, the bill
provides for the crim inal prosecution of w illful
violators (Sec. 1 1 (b )).
The bill extends a statutory right of judicial re­
view to anyone aggrieved by any action of the
Board taken under any of the various regulatory
provisions of the bill (Sec. 1 0 (d )). This provision
is sim ilar to that contained in comparable legisla­
tion in other fields.
At this time I would like to suggest for the con­
sideration of the Committee two proposed amend­
ments to the bill which w e believe are desirable
changes. These amendments, which are of a tech­
nical nature and consistent w ith the general pur­
poses of the bill, reflect the results of further con­
sultation with interested parties.
Under the first proposed amendment, a bank
would not be a “bank holding company” merely
because it m ay have a subsidiary trust company
located in the same city or town. In such a situa­
tion, the subsidiary stands in much the same posi­
tion as a bank’s own trust department.
The second proposed amendment would exclude
from the definition of “bank,” those organizations
which are engaged principally in international or
foreign banking and in whose shares national banks
may invest with the Board’s permission. This pro­
posal is merely a clarification of the provision al­
ready in the bill excluding banks which do not do
business within the United States.

I ask that these two proposed amendments which
I now submit be included in the record.*
Before concluding this statement, I would per­
sonally like to express m y deep appreciation to the
various banking groups and individuals who have
given so much of their time and attention to the
consideration of the various points in connection
with this proposed legislation and have united w ith
us in tryin g to bring forth a sound and effective bill
which would meet the views of as m any varying
interests as possible. They have all been most help­
ful in the discussions of the matter and in sub­
m itting constructive suggestions. W e are also most
appreciative of the helpful consideration which we
have had from the Attorney General’s office, the
Bureau of the Budget, and other Government agen­
cies. W e have felt free to call upon any and all
of these groups and agencies at any time for their
points of view. T heir assistance has been most
generously given and our discussions have been
carried on in a most cordial atmosphere.
As I said at the commencement of this statement,
the bank holding company problem first came for­
cibly to my attention when I was before this Com­
mittee nearly two years ago. In view of the intense
interest of this Committee in the subject, I have
made an extensive and what I consider a completely
objective and fresh approach to the problem w ith­
out personal prejudice in the subject, and have
reached the conclusion on my own that legislation
on this subject is highly desirable from the stand­
point of the public interest. It is also desirable in
my judgm ent in order to give the bank holding
companies a sort of yardstick by which they can
operate, so that they w ill know what they are law ­
fully permitted to do and what they m ay not do.
The necessity for appropriate legislation in the field
is generally recognized and on behalf of the Board,
therefore, I respectfully urge upon your Commit­
tee the desirability of prompt and favorable action.

S. 2318, A BILL TO PROVIDE FOR CON TROL AND REGULATION
COMPANIES, AND FOR OTHER PURPOSES

Be it enacted by the Senate and House of Repre­
sentatives of the United States of America in Con­
gress assembled, T hat this Act m ay be cited as the

“Bank H olding Company Act of 1949.”
S e c . 2. D e f i n i t i o n s .— (a ) “Bank holding com­
pany” means (1 ) any company which directly or
indirectly owns, controls, or holds w ith power to
vote 15 per centum or more of the voting shares




[8]

OF

BAN K

HOLDING

of each of two or more banks or of a company
which is a bank holding company by virtue of this
section, or any company which is a bank and which
directly or indirectly owns, controls, or holds with
power to vote 15 per centum or more of the voting

* F or fu ll text o f proposed am endm ents, see p. 16.

PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES

shares of one or more other banks, or any company
which directly or indirectly owns, controls, or holds
with power to vote 15 per centum or more of the
voting shares of one bank provided such bank
operates four or more branches, unless the Board as
hereinafter provided by order declares such com­
pany not to be a bank holding company; (2 ) any
company which the Board determines, after notice
and opportunity for hearing, directly or indirectly,
exercises (either alone or pursuant to an arrange­
ment or understanding w ith one or more other
persons) such a controlling influence over the m an­
agement or policies of two or more banks or of
only one bank if such bank operates four or more
branches as to m ake it necessary or appropriate in
the public interest or for the protection of investors
or depositors that such company be subject to the
obligations, duties, and liabilities imposed in this
Act upon bank holding companies; and (3 ) any
company which is a bank and which the Board
determines after notice and opportunity for hear­
ing, directly or indirectly, exercises (either alone or
pursuant to an arrangem ent or understanding with
one or more other persons) such a controlling in­
fluence over the m anagem ent or policies of one or
more other banks as to m ake it necessary or appro­
priate in the public interest or for the protection of
investors or depositors that such company be sub­
ject to the obligations, duties, and liabilities imposed
in this Act upon bank holding companies.
The Board, upon application, shall by order de­
clare that a company is not a bank holding com­
pany under clause (1 ) above if the Board finds that
the applicant does not, either alone or pursuant to
an arrangem ent or understanding with one or more
other persons, exercise such a controlling influence
over the managem ent or policies of the stated
number of banks as to m ake it necessary or appro­
priate in the public interest or for the protection of
investors or depositors that such company be subject
to the obligations, duties, and liabilities imposed in
this Act upon bank holding companies.
(b ) “Bank” means any national bank, or any
State bank, banking association, savings bank, or
trust company, but shall not include any organiza­
tion which does not receive deposits nor conducts a
trust business w ithin the United States. “State mem­
ber bank” means any State bank which is a mem­
ber of the Federal Reserve System. “District bank”
means any State bank organized or operating under
the Code of L aw for the District of Columbia.
(c ) “Company” means any bank, corporation,
partnership, joint-stock company, business trust,
voting trust, association, or any sim ilar organized
group of persons, whether incorporated or not, or
any receiver, trustee, or other liquidating agent of
any of the foregoing in his capacity as such; exclud­




ing, however, any such company which is owned
by the United States.
(d ) “Board” means the Board of Governors of
the Federal Reserve System.
(e ) “Subsidiary,” with respect to a specified bank
holding company, means (1 ) any company 15 per
centum or more of whose outstanding voting shares
(excluding shares owned by the United States or
by any company wholly owned by the United
States) is owned or controlled by such bank holding
company, unless the Board as hereinafter provided
by order declares such company not to be a sub­
sidiary of such bank holding com pany; or (2 ) any
company the managem ent and policies of which the
Board determines, after notice and opportunity for
hearing, are subject to a controlling influence by
the specified bank holding company.
The Board, upon application, shall by order de­
clare that a company is not a subsidiary company
of a specified bank holding company under clause
(1 ) above if the Board finds that the m anagement
or policies of the applicant are not subject to a
controlling influence, directly or indirectly, by such
bank holding company (either alone or pursuant to
an arrangement or understanding with one or more
other persons).
(f) For the purposes of this section there shall
be excluded from consideration all voting shares
of banks acquired or held by m utual savings banks;
also, there shall be excluded from consideration all
voting shares of banks or other companies acquired
or held by a bank in a fiduciary capacity; except
where such voting shares are acquired or held for
the benefit of all or a m ajority of the persons bene­
ficially interested in such bank or except where the
Board, after notice and opportunity for hearing
finds that such acquisition or holding is resulting in
the violation or evasion of any of the purposes or
provisions of this Act.
S e c . 3.
R e g ist r a t io n , R e p o r t s, a n d E x a m in a ­
t io n s .—(a ) W ithin ninety days after the effective
date of this Act, or within ninety days after be­
coming a bank holding company, whichever is later,
every bank holding company shall register w ith the
Board on forms prescribed by the Board, which
shall include, w ith such other information as the
Board may require, statements showing (1 ) its
financial condition at the end of its fiscal year last
preceding the date of registration, including therein
the amount of its accumulated net income at such
time; (2 ) name and address of each of the bank
holding company’s subsidiary banks and address of
each branch of each such bank; (3 ) name and ad­
dress of each other bank of which the bank holding
company or its subsidiaries own shares; (4 ) num ­
ber of shares of each class of stock of each bank

[9 ]

PROPOSED LEGISLATION REGARDING B A N K HOLDING COMPANIES

owned by the bank holding company or its sub­
sidiaries; (5 ) information concerning the manner
in which such shares are owned; (6 ) name, address,
and nature of business of each of the bank holding
company’s subsidiaries, other than banks, and the
manner in wrhich the relationship arises; and (7 )
such information as the Board may deem necessary
or appropriate.
The Board m ay, in its discretion, extend the
time within which a bank holding company shall
register and file the requisite statement.
(b ) Each bank holding company shall furnish
to the Board from time to time such reports as
m ay be required by the Board and in such form
and detail as the Board m ay prescribe. Such reports
shall contain such information concerning the bank
holding company and its subsidiaries as the Board
shall deem necessary to disclose fully the relations
among such companies, the effect of such relations
upon the affairs of the subsidiary banks, and
whether the provisions of this Act have been com­
plied with.
(c ) Each bank holding company and each sub­
sidiary thereof shall be subject to such examina­
tions by examiners selected or approved by the
Board as shall be necessary to disclose fully the
relations between such bank holding company and
its subsidiaries, the effect of such relations upon the
affairs of the subsidiary banks, and whether the
provisions of this Act or of the Board’s orders, rules,
or regulations have been complied w ith; and the
examiner m aking such an examination shall have
power to adm inister oaths and to examine any of
the officers, directors, employees, and agents of such
bank holding company or subsidiary under oath.
The expenses of any such examination m ay, in the
discretion of the Board, be assessed against the bank
holding company and, when so assessed, shall be
paid by such bank holding company. To the extent
that the information contained therein is adequate
for the purposes of this section the Board is author­
ized to use the reports of examination made by the
Comptroller of the Currency, the Federal Deposit
Insurance Corporation, or the appropriate State
bank supervisory authority.
S ec.

4.

I n te r e st s

in

N o n b a n k in g

O r g a n iz a ­

—(a ) Except as otherwise provided in this
Act, it shall be unlaw ful for any bank holding
company, after two years after the effective date
hereof, to own any shares or other securities or obli­
gations of any company other than a bank or to
engage in any business other than that of banking
or m anaging or controlling subsidiary banks. The
Board is authorized, upon application by a bank
holding company, to extend this period from time
to time as to such company for not more than one
t io n s .




year at a time if, in its judgm ent, such an exten­
sion would not be detrimental to the public inter­
est. However, nothing herein provided shall be
construed to authorize the Board to extend any such
period beyond a date five years after the enactment
hereof.
(b ) The prohibitions in this section shall not
apply to shares or other securities or obligations
owned or acquired by a bank holding company in
any company engaged solely in holding and operat­
ing property in which the bank premises are located,
or engaged solely in conducting a safe-deposit busi­
ness, or engaged solely in the business of furnish­
ing m anagerial, auditing, supervisory, purchasing,
and other sim ilar sefvices to such bank holding
company and its subsidiaries, or solely in the busi­
ness of liquidating assets acquired from such bank
holding company and its subsidiaries, or in any
other company all the activities of which the Board
has determined are so closely related to the business
of m anaging, operating, or controlling banks as to
be a proper incident thereto.
(c ) Nor shall the prohibitions in this section
apply to shares or securities or obligations acquired
by a bank holding company from any of its subsidi­
aries which have been requested to dispose of such
voting shares, securities, or obligations by any Fed­
eral or State authority having statutory power to
examine such subsidiaries or which have been
acquired from such subsidiaries with the prior
approval of the Board; but such bank holding com­
pany shall dispose of such shares, securities, or obli­
gations w ithin a reasonable time. If, w hile such
bank holding company owns or controls such
shares, securities, or obligations, the Board, after
notice and opportunity for hearing, determines that
the ownership or control of such shares, securities,
or obligations is resulting in the violation or eva­
sion of any of the purposes or provisions of this
Act, it m ay by order require such bank holding
company to dispose of all or any part thereof forth­
with.
(d ) Nor shall the prohibitions of this section
apply to shares or other securities or obligations
which are held or acquired by a bank, which is
a bank holding company, in a fiduciary capacity or
which are otherwise law fully owned by such bank
or any of its wholly owned subsidiaries on the effec­
tive date of this Act; nor as to any bank holding
company shall the prohibitions in this section apply
to investment securities of the kinds and amounts
eligible for investment by national banks under
the provisions of section 5136 of the Revised Stat­
utes. If, w hile such bank or bank holding company
owns or controls such shares, securities, or other
obligations, the Board, after notice and opportunity

[ 10]

PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES

for hearing, determines that the ownership or con­
(c ) No plan, undertaking, or agreement by or
trol of such shares, securities, or obligations is result­ on behalf of a banking subsidiary of a bank hold­
ing in the violation or evasion of any of the pur­ ing company to acquire all or substantially all of
poses or provisions of this Act, it m ay by order the assets of any bank shall be consummated, effec­
require such bank or bank holding company to tuated, or completed except w ith the prior approval
dispose of all or any part thereof forthwith.
of (1 ) the Comptroller of the Currency if the
(e )
Nor shall the prohibitions of this section acquiring bank is a national bank or district bank;
apply to the ownership by a bank holding company or (2 ) the Board if the acquiring bank is a State
of shares or other securities or obligations of any
member bank, or (3 ) the Federal Deposit Insur­
company which do not include more than 5 per ance Corporation in the case of any other acquir­
centum of the outstanding voting securities of such ing bank. Nor shall any State member bank (not
company, and do not have a value greater than 5
including a district bank) which is a subsidiary
per centum of the value of the total assets of the of a bank holding company, establish any branch
bank holding company, as determined under regu­ within the lim its of the city, town, or village in
which the head office of such bank is located
lations prescribed by the Board; nor shall they
apply to the ownership by a bank holding company, except with the prior approval of the Board.
in excess of such lim itations, of shares or other
(d ) In determ ining whether to approve any
securities or obligations of an investment company acquisition subject to paragraphs (a ) , (b ), or (c)
which is not engaged in any business other than
of this section consideration shall be given to the
investing in securities if the bank holding company financial history and condition of the applicant
and all such investment companies (in which the and the banks concerned; their prospects; the
bank holding company has investments in excess character of their m anagem ent, the convenience,
of such lim itations) do not together own shares or needs, and welfare of the communities and the
other securities or obligations of any one other com­ area concerned; and whether or not the effect of
pany which are in excess of the foregoing lim ita­ such acquisition m ay be to expand the size and
tions. If, while such bank holding company owns extent of a bank holding company system beyond
or controls such shares, securities, or obligations, limits consistent w ith adequate and sound bank­
the Board, after notice and opportunity for hearing, ing and the public interest. The factors stated in
determines that the ownership or control of such this section shall likewise be considered by the
shares, securities, or obligations is resulting in the Board, the Comptroller of the Currency, or the
violation or evasion of any of the purposes or pro­ Federal Deposit Insurance Corporation in deter­
visions of this Act, it m ay by order require such m ining whether to approve an application of any
bank holding company to dispose of all or any part bank, which is a part of a bank holding company
system, to establish a branch or branches of such
thereof forthwith.
bank.
S e c . 5 . A c q u is it io n s o f B a n k S h a r e s or B a n k
(e ) Before determ ining whether to approve any
A s s e t s .— (a ) No plan, undertaking, or agreement
by or on behalf of any company which would result acquisition or application pursuant to this section,
in that company becoming a bank holding com­ the Comptroller of the Currency, the Federal De­
pany, as defined in section 2 (a ) (1 ) of this Act, posit Insurance Corporation, or the Board, as the
and no plan, undertaking, or agreement by or on case may be, shall notify the bank supervisory au­
behalf of any bank holding company to acquire thority in the State in which the acquiring or apply­
either directly or indirectly any voting shares of ing bank is located and shall afford such State bank­
a bank, shall be consummated, effectuated, or com­ ing authority a period of th irty days w ithin which
pleted except with the prior approval of the Board: to submit a w ritten statement of his views and
Provided, however, T hat nothing herein contained recommendations as to whether such acquisition or
shall be construed to apply to the acquisition by a application should be approved. Such statement
bank holding company of any additional voting and recommendation shall be taken into considera­
shares of a bank in any case where such bank hold­ tion by the Comptroller of the Currency, the Federal
ing company, prior to such acquisition, owned a Deposit Insurance Corporation, or the Board, as
the case m ay be, in determ ining whether to ap­
m ajority of the voting shares thereof.
(b )
No plan, undertaking, or agreement by or prove any acquisition or application pursuant to
on behalf of any bank holding company or any this section, and such statement and recommenda­
of its nonbanking subsidiaries to acquire all or tion shall be made a part of the record upon which
substantially all of the assets of any bank shall be such acquisition or application is approved or re­
consummated, effectuated, or completed except with jected.
the prior approval of the Board.
S e c . 6.
B o r r o w i n g b y B a n k H o l d in g C o m ­




[1
1]

PROPOSED LEGISLATION REGARDING BAN K HOLDING COMPANIES
p a n y o r I t s S u b s i d i a r i e s . — (a ) No bank shall invest
any of its funds in the capital stock of (1 ) a bank
holding company of which it is a subsidiary, or (2 )
a subsidiary of such bank holding company.
(b ) No bank shall accept the capital stock of
(1 ) a bank holding company of which it is a sub­
sidiary, or (2 ) a subsidiary of such bank holding
company as collateral security for advances made
to any person, partnership, association, or corpora­
tion: Provided, however, T hat any bank m ay, with
the prior approval of the Board, accept such capital
stock as a security for debts previously contracted.
(c ) No bank shall (1 ) make any loan or any
extension of credit to, or purchase securities under
repurchase agreement from, (a ) a bank holding
company of which it is a subsidiary, or (b ) a sub­
sidiary of such bank holding company; or (2 )
invest any of its funds in the bonds, debentures,
or other such obligations of any such bank holding
company or subsidiary; or (3 ) accept the bonds,
debentures, or other such obligations of any such
bank holding company or subsidiary as collateral
security for loans or advances made to any person,
partnership, association, or corporation, if, in the
case of all such bank holding companies and sub­
sidiaries, the aggregate amount of such loans, exten­
sions of credit, repurchase agreements, investments,
and advances against such collateral security will
exceed 20 per centum of the capital stock and sur­
plus of such bank. Non-interest-bearing deposits to
the credit of a bank shall not be deemed to be a
loan or advance to the bank of deposit, nor shall the
giving of im m ediate credit to a bank upon uncol­
lected items received in the ordinary course of
business be deemed to be a loan or advance to the
depositing bank. W ithin the foregoing limitations,
each loan or extension of credit of any kind or char­
acter to such bank holding company or subsidiary
shall be secured by collateral in the form of stocks,
bonds, debentures, or other such obligations having
a m arket value at the time of m aking the loan or
extension of credit of at least 20 per centum more
than the amount of the loan or extension of credit,
or of at least 10 per centum more than the amount
of the loan or extension of credit if it is secured by
obligations of any State or of any political subdivi­
sion or agency thereof: Provided, That no margin
of collateral shall be required when such loan or
extension of credit is secured by obligations of the
United States Government, the Federal intermediate
credit banks, the Federal land banks, the Federal
home-loan banks, or the Home Owners’ Loan Cor­
poration, or by such notes, drafts, bills of exchange,
or bankers’ acceptances as are eligible for redis­
count or for purchase by Federal Reserve banks.
(d ) The provisions of this section shall not apply




to (1 ) any company of the types described in
section 4 (b ) of this Act, or (2 ) any company whose
subsidiary status has arisen out of a bona fide debt
to the bank contracted prior to the date of the crea­
tion of such status, or (3 ) any company whose
subsidiary status exists by reason of the ownership
or control of voting shares thereof by the bank as
executor, adm inistrator, trustee, receiver, agent, or
depositary, or in any other fiduciary capacity, ex­
cept where such shares are held for the benefit of
all or a m ajority of the stockholders of such bank.
S e c . 7. S e r v ic e F e e s o r B e n e f i t s .—The Board
is authorized, if in its opinion such action is neces­
sary or appropriate for the protection of depositors
or investors and after appropriate notice and oppor­
tunity for hearing, to determine the reasonableness
of any service, m anagement, or sim ilar charge or
fee or benefit obtained by a bank holding company
or any of its subsidiaries from a subsidiary bank
of such bank holding company, and to order that
all or any part of such charges or fees or benefits
which it finds to be unreasonable shall be discon­
tinued. It shall be unlaw ful for such bank holding
company or any of its subsidiaries thereafter to
assess or obtain any such charge or fee or benefit
in contravention of the Board’s order.
S e c . 8. R e s e r v e F u n d .—After the effective date
of this Act, every corporate bank holding company
shall use all its net earnings over and above 6 per
centum per annum of the book value of its own
shares to accumulate a fund, and every noncorporate
bank holding company shall accumulate a fund in
accordance w ith the terms prescribed by the Board,
in an amount equal to at least 12 per centum of the
aggregate par value of all bank shares owned by it.
Such fund shall consist of readily marketable assets,
other than bank stocks, and shall be identified in an
appropriate m anner and kept free and clear of any
lien, pledge, or hypothecation of any kind or
nature. Such assets m ay be used by the bank hold­
ing company to replace capital of its subsidiary
banks and to elim inate losses and depreciation from
the assets of such banks, and, with the prior ap­
proval of the Board, to increase the capital or sur­
plus of its subsidiary banks, but, except as per­
mitted by the Board, shall not be used by the bank
holding company for any other purpose, and any
deficiency in such assets resulting from such use
shall be replaced in the same manner as above pro­
vided.
S e c . 9 . R e g u l a t i o n s .—The Board shall have the
authority to m ake and issue such rules, regulations,
and orders, not inconsistent w ith the provisions of
this Act, as m ay be necessary to enable it to adm in­
ister and carry out the purposes of this Act and
prevent evasions thereof and it shall likewise have

[12]

PROPOSED LEGISLATION REGARDING BAN K HOLDING COMPANIES

authority to amend, modify, or rescind any such
rules, regulations, or orders so made or issued. All
powers and functions of the Board prescribed by
this Act, other than the issuance, amendment, modi­
fication, or rescission of rules, regulations, and
orders and the determination of matters of gen­
eral policy, m ay be performed through such mem­
bers of the Board or such officers and employees
thereof or such Federal Reserve banks or officers or
employees thereof as the Board m ay deem advisable
in order to facilitate the administration of this Act.
S e c. 10.

H e a r i n g s , I n v e s t i g a t io n s , a n d C o u r t

R e v i e w o f O r d e r s .— (a )

In addition to the hearings
authorized in this Act, the Board also shall have
authority to m ake such investigations as may be
necessary to determine whether any proceeding
under this Act should be instituted against a par­
ticular person or persons, or with respect to a
particular transaction or transactions; and the Board
shall keep appropriate records of all hearings and
investigations.
(b ) For the purpose of any hearing or investi­
gation under this Act, any member of the Board, or
any officer thereof designated by it, is empowered
to administer oaths and affirmations, subpena w it­
nesses, compel their attendance, take evidence, and
require the production of any books, records, or
other papers which are relevant or material to
the inquiry. Such attendance of witnesses and the
production of any such papers m ay be required
from any place in any State or in any Territory or
other place subject to the jurisdiction of the United
States at any designated place where such a hear­
ing is being held or investigation is being made.
(c ) In case of refusal to obey a subpena issued
to, or contumacy by, any person, the Board may
invoke the aid of any court of the United States
w ithin the jurisdiction of which such hearing or
investigation is carried on, or where such person
resides or carries on business, in requiring the at­
tendance and testimony of witnesses and the pro­
duction of books, records, or other papers. And
such court may issue an order requiring such person
to appear before the Board or member or officer
designated by the Board, there to produce records,
if so ordered, or to give testimony touching the
matter under investigation or in question; and any
failure to obey such order of the court may be pun­
ished by such court as a contempt thereof. All
process in any such case m ay be served in the
judicial district whereof such person is an inhabit­
ant or wherever he m ay be found. No person shall
be excused from attending and testifying or from
producing books, records, or other papers in obedi­
ence to a subpena issued under the authority of this
Act on the ground that the testimony or evidence,




documentary or otherwise, required of him may
tend to incrim inate him or subject him to penalty
or forfeiture; but no individual shall be prosecuted
or subject to any penalty or forfeiture for or on
account of any transaction, matter, or thing concern­
ing which he is compelled to testify or produce evi­
dence, documentary or otherwise, after having
claimed his privilege against self-incrimination, ex­
cept that such individual so testifying shall not be
exempt from prosecution and punishment for per­
jury committed in so testifying. A ny person who
without just cause shall fail or refuse to attend and
testify or to answer any law ful inquiry or to produce
books, records, or other papers in obedience to the
subpena of the Board, if in his or its power so to
do, shall be guilty of a misdemeanor and upon con­
viction shall be subject to a fine of not more than
$1,000 or to imprisonment for a term of not more
than one year, or both.
(d )
A ny person or party aggrieved by any final
action of the Board under this Act m ay obtain a
review of such order in the circuit court of appeals
of the United States within any circuit wherein
such person resides or has his principal place of
business, or in the United States Court of Appeals
for the District of Columbia, by filing in such
court, within sixty days after the entry of such
order, a written petition praying that the order of
the Board be modified or set aside in whole or in
part. A copy of such petition shall be forthwith
served upon any member of the Board or upon the
Board’s secretary at its offices in the C ity of W ash­
ington, and thereupon the Board shall certify and
file in the court a transcript of the record upon
which the order complained of was entered. Upon
the filing of such transcript such court shall have
exclusive jurisdiction to affirm, modify, or set aside
such order in whole or in part. No objection to
the order of the Board shall be considered by the
court unless such objection shall have been urged
before the Board or unless there were reasonable
grounds for failure so to do. The finding of the
Board as to the facts, if supported by substantial
evidence, shall be conclusive. If application is made
to the court for leave to adduce additional evidence,
and it is shown to the satisfaction of the court that
such additional evidence is m aterial and that there
are reasonable grounds for failure to adduce such
evidence in the proceeding before the Board, the
court may order such additional evidence to be
taken before the Board and to be adduced upon the
hearing in such m anner and upon such terms and
conditions as to the court m ay seem proper. The
Board may modify its findings as to the facts by
reason of the additional evidence so taken, and it
shall file with the court such modified or new find­

[ 13 ]

PROPOSED LEGISLATION REGARDING BAN K HOLDING COMPANIES

ings, which, if supported by substantial evidence, lows the colon and by inserting in lieu thereot the
shall be conclusive, and its recommendation, if any, following: “Provided, T hat whenever any member
for the modification or setting aside of the original banks w ithin the same Federal Reserve district are
order. The judgm ent and decree of the court affirm­ subsidiaries of the same bank holding company
ing, m odifying, or setting aside, in whole or in part, within the m eaning of the Bank H olding Company
any such order of the Board shall be final, subject Act of 1949, participation in any such nomination
to review by the Supreme Court of the United States or election by such member banks, including such
upon certiorari or certification as provided in bank holding company if it is also a member bank,
section 1254 of title 28, United States Code. The shall be confined to one of such banks, which m ay
commencement of proceedings to review an order be designated for the purpose by such bank hold­
of the Board issued under this Act shall not oper­ ing company.”
ate as a stay of the Board’s order unless the court
(b ) (1 ) The eighteenth paragraph of section 9
otherwise orders.
of the Federal Reserve Act is amended by striking
out the last sentence of such paragraph.
S e c . 11. P e n a l t i e s .— (a ) If, after notice and
(2 ) The twenty-first paragraph of section 9 of
opportunity for hearing, the Board finds that a
bank holding company has w illfully violated any the Federal Reserve Act is repealed.
of the provisions of this Act, or of any rules, regu­
(c ) Subsection (c ) of section 2 of the Banking
lations, or orders of the Board issued pursuant Act of 1933, as amended, is repealed.
thereto, or has know ingly permitted or assented
(d ) Section 5144 of the Revised Statutes, as
to or participated in any such violation by any sub­ amended, is amended to read as follows:
sidiary, the Board m ay issue an order, effective for
“ S e c . 5144. In all elections of directors, each
such period as m ay be fixed by the order and con­ shareholder shall have the right to vote the number
taining any one or more of the following prohibi­ of shares owned by him for as many persons as
tions: ( i) T hat such bank holding company shall there are directors to be elected, or to cumulate
not pay any salary or other remuneration to any such shares and give one candidate as m any votes
officer or director of the company found by the as the number of directors m ultiplied by the num ­
Board to have w illfully participated in such viola­ ber of his shares shall equal, or to distribute them
tion or violations and who was made a party to on the same principle among as m any candidates as
such hearing by the Board; ( ii) that no subsidiary he shall think fit; and in deciding all other ques­
bank of such bank holding company shall pay divi­ tions at meetings of shareholders, each shareholder
dends on shares owned by such bank holding com­ shall be entitled to one vote on each share of stock
pany or pay or become liable to pay to such bank held by him ; except that (1 ) this shall not be con­
holding company or any of its subsidiaries any serv­ strued as lim iting the voting rights of holders of
ice, managem ent, or sim ilar charges or fees, or ren­ preferred stock under the terms and provisions of
der any specified benefit; and (iii) that such bank articles of association, or amendments thereto,
holding company shall not directly or indirectly adopted pursuant to the provisions of section 302
(a ) of the Emergency Banking and Bank Con­
vote the shares owned by it or otherwise participate
in the managem ent or control of any subsidiary servation Act, approved March 9, 1933, as amended;
(2 ) in the election of directors, shares of its own
bank.
(b )
Any person who w illfully violates any pro­ stock held by a national bank as sole trustee,
vision of this Act or any rule, regulation, or order whether registered in its own name as such trustee
issued by the Board pursuant thereto shall upon or in the name of its nominee, shall not be voted
conviction be fined not more than $10,000 or im­ by the registered owner unless under the terms of
prisoned not more than two years, or both. Every the trust the manner in which such shares shall
officer, director, agent, and employee of a bank be voted m ay be determined by a donor or bene­
holding company shall be subject to the same pen­ ficiary of the trust and unless such donor or bene­
alties for false entries in any book, report, or state­ ficiary actually directs how such shares shall be
ment of such bank holding company as are appli­ voted; and (3 ) shares of its own stock held by a
cable to officers, directors, agents, and employees of national bank and one or more persons as trustees
member banks for false entries in any books, m ay be voted by such other person or persons, as
reports, or statements of member banks under sec­ trustees, in the same manner as if he or they were
the sole trustee. Shareholders m ay vote by proxies
tion 1005 of title 18, United States Code.
duly authorized in w ritin g; but no officer, clerk,
S ec. 12. T echnical A mendments.— ( a) The last
teller, or bookkeeper of such bank shall act as
sentence of the sixteenth paragraph of section 4 of
proxy; and no shareholder whose liability is past
the Federal Reserve A ct, as amended, is amended
due and unpaid shall be allowed to vote. W hen­
by striking out all o f the language therein which fol­




[ 14]

PROPOSED LEGISLATION REGARDING BAN K HOLDING COMPANIES

ever shares of stock cannot be voted by reason of
being held by the bank as sole trustee, such shares
shall be excluded in determ ining whether matters
voted upon by the shareholders were adopted by
the requisite percentage of shares.”
(e ) The second paragraph of section 5211 of the
Revised Statutes is amended by striking out the
second sentence of such paragraph.
(f ) (1 ) Subsection (d ) of section 26 of the
Internal Revenue Code, as amended, is amended to
read as follows:
“(d ) B a n k H o l d in g C o m p a n i e s .—In the case
of a bank holding company (as defined in the Bank
H olding Company Act of 1949), the amount of
the earnings or profits which the Board of Gov­
ernors of the Federal Reserve System certifies to
the Commissioner has been devoted by such com­
pany during the taxable year to the acquisition of
readily marketable assets in compliance with section
8 of the Bank H olding Company Act of 1949. The
aggregate of the credits allowable under this sub­
section for all taxable years shall not exceed the
amount required to be devoted under such section
8 to such purposes, and the amount of the credit
for any taxable year shall not exceed the adjusted
net income for such year.”
(2 ) Subdivision (3 ) of subsection (b ) of section
27 of the Internal Revenue Code, as amended, is
amended to read as follows:
“(3 ) The bank holding company credit provided
in section 26 ( d ) .”
(3 ) Section 112 (b ) of the Internal Revenue
Code is amended by inserting at the end thereof
the following:
“(11)

D is tr ib u tio n s

and

exchanges

suant to an order of the Board of Governors
of the Federal Reserve System authorizing, ap­
proving or directing such exchange as effectuat­
ing the policy of the Bank H olding Company
Act of 1949, transfers property not permitted
to be owned by a bank holding company under
the provisions of section 4 of such Act, to a
corporation organized to receive such property
solely in exchange for all of the stock of such
transferee corporation and such stock is dis­
tributed forthwith in a distribution subject to
the provisions of subparagraph (A ).
“(C ) Application of subparagraphs (A ) and
(B ).—The provisions of subparagraphs (A )
and (B ) of this paragraph shall not apply unless
the Board of Governors of the Federal Reserve
System shall certify that such distribution or
exchange was of property not permitted to be
owned under the provisions of section 4 of the
Bank H olding Company Act of 1949 and was
necessary or appropriate to effectuate the pro­
visions of such Act. In such certification, the
Board of Governors of the Federal Reserve
System shall specify and itemize the stock, se­
curities or other property so distributed or
exchanged.”
(4 )
Section 113 (a ) of the Internal Revenue Code
is amended by inserting at the end thereof the
following:

p u rsu ­

a n t TO BANK HOLDING COMPANY ACT OF 1949 .—

“(A ) Distributions.—In the case of a distri­
bution of property not permitted to be owned
by a bank holding company under the provi­
sions of section 4 of the Bank H olding Com­
pany Act of 1949, held by a bank holding
company on the date of enactment of such
Act or thereafter legally acquired pursuant to
such Act, made pursuant to an order of the
Board of Governors of the Federal Reserve
System authorizing, approving or directing
such distribution as effectuating the policy of
the Bank H olding Company Act of 1949, to
a shareholder in such bank holding company
as defined in such Act, without the surrender
by such shareholder of stock or securities in
such company, no gain to the distributee shall
be recognized.
“(B ) Exchanges.—No gain or loss shall be
recognized if a bank holding company, pur­




[ 15]

“(23)

P r o p e r t y a c q u ir e d in d is t r ib u t io n p u r ­

s u a n t to b a n k h o l d in g c o m p a n y a c t o f

1949.—

“(a ) If property other than stock or secu­
rities is acquired in a distribution subject to
the provisions of section 112 (b ) (1 1 ), then the
basis of such property shall be the same as it
would be in the hands of the company dis­
tributing such property; and an amount equal
to the adjusted basis which such property had
in the hands of such distributing company at
the time of such distribution shall be applied
against and reduce the adjusted basis of the
stock in respect of which the distribution was
made, and if in excess of such basis, such excess
shall be taxable in the same manner as a gain
from the sale or exchange of property.
“(b ) If stock or securities is acquired in a
distribution subject to the provisions of section
112 (b ) (1 1 ), then the basis in the case of the
stock in respect of which the distribution was
made shall be apportioned, under regulations
prescribed by the Commissioner with the ap­
proval of the Secretary, between such stock and
the stock or securities acquired in such dis­
tribution.

PROPOSED LEGISLATION REGARDING B AN K HOLDING COMPANIES

“ (c ) W here stock or securities and property
other than stock or securities are acquired in
a distribution subject to the provisions of sec­
tion 112 (b ) (1 1 ), subparagraph (a ) of this
paragraph shall be applied before subparagraph (b ).

“(d ) If stock is acquired by a bank holding
company in an exchange subject to the pro­
visions of section 112 (b ) (11) (B ), then the
basis of such stock shall be the same as in the
case of the property exchanged; and when, in
a distribution subject to the provisions of sec­
tion 112 (b ) (1 1 ) ( A ) , such stock is acquired
by a distributee of such company, then the basis
shall be determined as though the stock were
property other than stock or securities.
“(e ) If property is acquired by a corporation
in a transfer from a bank holding company
subject to the provisions of section 112 (b )
(1 1 ) (B ), then the basis of such property shall
be the same as it would be in the hands of such
bank holding company.”

company affiliate, as defined in the Banking Act
of 1933” to read “or any bank holding company,
as defined in the Bank H olding Company Act of
1949, or any banking subsidiary or any other sub­
sidiary thereof which is exempt from section 4 by
reason of the provisions of subsection (b ) thereof as
defined in said Act.”
(h )
Subsection (b ) of section 2 of the Banking
Act of 1933, as amended, is amended by adding the
following paragraphs:
“(4 ) which owns or controls, directly or in ­
directly, either a m ajority of the shares of cap­
ital stock of a member bank or more than 50 per
centum of the number of shares voted for the
election of directors of any one bank at the pre­
ceding election, or controls in any m anner the
election of a m ajority of the directors of any one
bank; or
“(5 ) for the benefit of whose shareholders or
members all or substantially all of the capital stock
of a member bank is held by trustees.”

S e c . 13. R e s e r v a t io n o f R ig h t s t o S t a t e s .—The
(g )
(1 ) Paragraph 4 of subsection (c ) of section 3 enactment by Congress of the Bank H olding Com­
of the Investment Company Act of 1940 is amended pany Act of 1949 shall not be construed as pre­
to read as follows:
venting any State, to an extent not inconsistent with
“(4 ) Any bank holding company which is regis­ this Act, from exercising the same power and juris­
tered w ith the Board of Governors of the Federal diction which it now has with respect to banks,
Reserve System pursuant to the Bank H olding Com­ bank holding companies and subsidiaries thereof.
pany Act of 1949, or any banking subsidiary or
S e c . 14. S e p a r a b i l i t y o f P r o v is i o n s .—If any pro­
any other subsidiary thereof which is exempt from vision of this Act, or the application of such pro­
section 4 by reason of the provisions of subsection vision to any person or circumstance, shall be held
(b ) thereof as defined in said Act.”
invalid, the rem ainder of the Act, and the applica­
(2 )
Paragraph (1 1 ) of subsection (a ) of section tion of such provision to persons or circumstances
202 of the Investment Advisers Act of 1940 is other than those to which it is held invalid, shall
amended by changing the words “or any holding not be affected thereby.

AMENDMENTS PROPOSED BY CH AIRM AN M cCABE TO S. 2318

I.
Amend subsection (a ) of section 2 by inserting not substantially engaged in commercial banking
between the first and second paragraphs thereof a business, and operates no branches outside of such
new paragraph reading as follows:
m unicipality.”
“N otwithstanding the foregoing, no company
shall be a bank holding company by reason of the
fact that one bank (or stockholders of such bank
or trustees for their benefit) owns, controls, or holds
voting shares, or exercises a controlling influence
over the m anagem ent or policies, of one other bank,
if the principal offices of both banks are located in
the same m unicipality and one of them is a trust
company principally engaged in trust business, is




II.
Amend the first sentence of subsection (b ) of
section 2 to read as follows:
“ ‘Bank’ means any national bank, or any State
bank, banking association, savings bank, or trust
company, but shall not include any organization
operating under section 25 or 25 (a) of the Federal
Reserve Act or any organization which does not do
business within the United States.”

[1 ]
6