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Under the above scheme, bank regulatory agencies would retain sole responsibility for bank solvency, and the SEC would collect information about investment activities. The proposed disclosure system would not be onerous; 126 for it would parallel internal reports presently prepared by bank trust departments. Furthermore, the exclusion of some trust accounts from reporting and disclosure requirements would apply the burden only to those with sufficient size and/or discretion to produce potential for abuse.

IV. Conclusion

The proposed regulatory reforms outlined in Parts II and III obviate the need for legislatively imposed constraints on bank trust department investment activities-constraints which would petrify one day's perceptions of a fast-changing field. 127 An alternative to these reforms would be separate incorporation of the trust department outside the bank complex.128 Advocates of separate incorporation have argued that its implementation would reduce the potential conflicts of interest which exist within bank complexes and would reduce the disproportionate concentration of trust and commercial assets in the largest banks.120 However, few of the 3,000 new trust companies which would result from separate incorporation could survive at the present level of trust commission fees.130 Trust companies spun off from small banks,

81,462 (1972); Survey of Investment Company Incentive Fee Arrangements, SEC Investment Company Act Release No. 7130 (April 17, 1972), (1971-1972 Transfer Binder] CCH FED. SEC. L. REP. 78,700 at 81,480 (1972).

126. On January 5, 1973, the SEC released the report of its Advisory Committee on Investment Companies and Advisers. SEC Urged to Simplify Reporting for Advisers, Investment Concerns, Wall St. J., Jan. 5, 1973, at 8, col. 3. That report on the paperwork filed by investment advisers and investment companies recommended: (1) establishing an integrated investment company filing system; (2) simplifying investment company prospectuses; (3) climinating quarterly reporting of portfolio transactions of investment companies; and (4) requiring annual reporting with quarterly up-dating for investment advisers. SEC ADVISORY COMMITTEE ON INVESTMENT COMPANIES AND ADVISERS, RECOMMENDATIONS FOR IMPROVEMENT OF REPORTING REQUIREMENTS AND RELATED AREAS FOR INVESTMENT COMPANIES and INVESTMENT ADVISERS vii-xi (Dec. 29, 1972), [1971-1972 Transfer Binder] CCH FED. SEC. L. REP. 79,159, at 82.524 (1973).

127. See Hearings on H.R. 5700, supra note 98, pts. 1 and 2.

128. See, eg, J. REMINGTON, TRUST BUSINESS IN THE FUTURE: ITS ASSOCIATION WITH BANKING 17 (1938). For a discussion of problems which separate incorporation might create, see Griswold, Divorcement of Trust Functions from Commercial Bank, 63 TRUST COMPANIES 293 (1936).

129. The 100 largest commercial banks, measured in terms of deposits, hold just less than fifty percent of all commercial bank deposits in the country; the 100 largest bank trust departments hold over eighty-two percent of all bank assets. PATMAN REPORT, supra note 2, at 2.

130. Some trust commission fees could be raised unilaterally. Others, such as the fees from personal estates, are usually fixed by state law. Even if trust commission fees could be raised across the whole spectrum of trust accounts, a very large increase would seriously impair banks' continuing ability to provide reasonably priced services to small accounts. But see Fowler, Investment Clubs: Leverage for the Little Guy, N.Y. Times,

which presently exercise their trust powers simply to provide a needed service in their local community, would be especially hard hit.131 Finally, one potential abuse of separate incorporation-“sweetheart” reciprocal demand deposit arrangements between old bank complexes and new trust companies-would have side-effects more pernicious than either fixed minimum commission rates or any present bank reciprocal practice.132

Nonetheless, the alternative to incorporation envisioned in this Article-increased reliance on trust examiners-will succeed only if these individuals receive better training from the bank regulatory agencies in trust law, securities regulation, and modern investment practices. A commercial bank examiner who is assigned occasionally to do a trust examination simply will not be sensitive enough to the nuances of trust department investment practices. To encourage specialization in trust examination work, bank regulatory agencies must provide additional incentives, in the form of increased pay at the very least. This means higher congressional appropriations and increased spending by bank regulatory agencies.

Many of the proposals of this Article assume the willingness of bank trust departments and bank regulatory agencies themselves to formu. late sound, reasonable policies. However, the constant threat of litigation and the possibility of inhibiting legislation should provide sufficient impetus for banks and bank regulatory agencies to adopt needed reforms.

Oct. 31, 1971, § 3 (Finance) at 2: Hammer, Advisory Services for Small Investor Grow, N.Y. Times, April 9, 1972, § 3 (Finance) at 2. Yet the SEC is presently considering allowing the mass merchandising of investment and management services for small investors. SEC ADVISORY COMM. ON INVESTMENT MANAGEMENT SERVICES FOR INDIVIDUAL INVESTORS REPORT, [Current] CCH FED. SEC. L. Rep. € 79.198, at 82,620 (1973).

Trust commissions presently charged by existing trust companies were quite similar to those charged by banks according to interviewed trust company officials. Trust companies, however, because they are not "banks" for local law purposes, have been allowed under state law to invest their capital base in growth stocks. This extra revenue source for improving the net return on capital for trust companies reportedly exceeds the credit on demand deposits received by some bank trust departments. An alternative to increasing the commission fees of new trust companies would be to spin off a larger share of the bank's complex capital base. This base could be invested in the way trust companies do now, possibly compensating for the loss of demand deposits revenue.

131. Banks which are outside major money centers, and which therefore have smaller capital bases, would not be capable of spinning off sufficient assets to allow new trust companies to survive. Estate planning in many sections of the United States places great importance on the availability of a corporate trustee whose services would be lost if such trust companies failed.

132. If the new trust company merely deposited the uninvestable cash as a demand deposit with the old bank, the old bank would be forced to reward the trust company for the deposit with a panoply of "free" computer or research services since it could not pay interest on or give internal credit for the demand deposit. Even if new trust companies were prohibited from depositing cash with the old bank complexes, conceivably a complicated system of cross-deposits and cross-services might develop among the nation's banks.

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The Yale Law Journal Company hereby grants permission to Senator Lee Metcalf to reprint the following material, "Regulation of Bank Trust Department Investment Activities" by Lybecker in hearing record Part III for Subcommittee on Budgeting, Management and Expenditures and Subcommittee on Intergovernmental Relations subject to the following conditions:

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Reprinted by permission of The Yale Law Journal Company and Fred B. Rothman & Company from The Yale Law Journal, Vol. 82, pp. 977-1002

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EXCERPTS FROM U.S. CODE, TITLE 12, BANKS AND BANKING; TITLE 15, COMMERCE AND TRADE; AND TITLE 18, CRIMES AND CRIMINAL PROCEDURE

Statutes Relating to Powers of Federal Reserve Board, Comptroller, and Federal Deposit Insurance Corporation to Require and Enforce Reporting by Banks and Bank Holding Companies

A. FEDERAL RESERVE BOARD

§ 221a. Same; extension.

TITLE 12-BANKS AND BANKING

As used in this chapter

(a) The terms "banks", "national bank", "national banking association", "member bank”, “board", "district", and "reserve bank" shall have the meanings assigned to them in section 221 of this title.

(b) Except where otherwise specifically provided, the term "affiliate" shall include any corporation, business trust, association, or other similar organization

(1) Of which a member bank, directly or indirectly, owns or controls either a majority of the voting shares or more than 50 per centum of the number of shares voted for the election of its directors, trustees, or other persons exercising similar functions at the preceding election, or controls in any manner the election of a majority of its directors, trustees, or other persons exercising similar functions; or

(2) Of which control is held, directly or indirectly, through stock ownership or in any other manner, by the shareholders of a member bank who own or control either a majority of the shares of such bank or more than 50 per centum of the number of shares voted for the election of directors of such bank at the preceding election, or by trustees for the benefit of the shareholders of any such bank; or

(3) Of which a majority of its directors, trustees, or other persons exercising similar functions are directors of any one member bank; or

(4) Which owns or controls, directly or indirectly, either a majority 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 directors of a member bank at the preceding election, or controls in any manner the election of a majority of the directors of a member bank, or for the benefit of whose shareholders or members all or substantially all the capital stock of a member bank is held by trustees.

(June 16, 1933, ch. 89; § 2, 48 Stat. 162; Aug. 23, 1935, ch. 614, § 301, 48 Stat. 707; July 1, 1966, Pub. L. 89-485, § 13(a), (b), 80 Stat. 242.)

§ 248. Enumerated powers.

The Board of Governors of the Federal Reserve System shall be authorized and empowered.

(a) Examination of accounts and affairs of banks; publication of weekly statements.

To examine at its discretion the accounts, books, and affairs of each Federal reserve bank and of each member bank and to require such statements and reports as it may deem necessary. The said board shall publish once each week a statement showing the condition of each Federal reserve bank and a consolidated statement for all Federal reserve banks. Such statements shall show in detail the assets and liabilities of the Federal reserve banks, single and combined, and shall furnish full information regarding the character of the money held as reserve and the amount, nature, and maturities of the paper and other investments owned or held by Federal reserve banks.

(f) Suspending or removing officers or directors of reserve banks.

To suspend or remove any officer or director of any Federal reserve bank, the cause of such removal to be forthwith communicated in writing by the Board of Governors of the Federal Reserve System to the removed officer or director and to said bank.

(h) Suspending operations of or liquidating or reorganizing banks.

To suspend, for the violation of any of the provisions of this chapter, the operations of any Federal reserve bank, to take possession thereof, administer the same during the period of suspension, and, when deemed advisable, to liquidate or reorganize such bank.

§ 324. Laws applicable on becoming members.

All banks admitted to membership under authority of this section shall be required to comply with the reserve and capital requirements of this chapter, to conform to those provisions of law imposed on national banks which prohibit such banks from lending on or purchasing their own stock and which relate to the withdrawal or impairment of their capital stock, and to conform to the provisions of sections 56 and 60(b) of this title with respect to the payment of dividends; except that any reference in any such provision to the Comptroller of the Currency shall be deemed for the purposes of this sentence to be a reference to the Board of Governors of the Federal Reserve System. Such banks and the officers, agents, and employees thereof shall also be subject to the provisions of and to the penalties prescribed by sections 334, 656, and 1005 of Title 18, and shall be required to make reports of condition and of the payment of dividends to the Federal Reserve bank of which they become a member. Not less than three of such reports shall be made annually on call of the Federal Reserve bank on dates to be fixed by the Board of Governors of the Federal Reserve System. Failure to make such reports within ten days after the date they are called for shall subject the offending bank to a penalty of $100 a day for each day that it fails to transmit such report; such penalty to be collected by the Federal Reserve bank by suit or otherwise. Such reports of condition shall be in such form and shall contain such information as the Board of Governors of the Federal Reserve System may require and shall be published by the reporting banks in such manner and in accordance with such regulations as the said Board may prescribe. (Dec. 23, 1913, ch. 6, § 9, 38 Stat. 259; June 21, 1917, ch. 32, § 3, 40 Stat. 232; Aug. 23, 1935, ch. 614, § 320, 49 Stat. 713; Sept. 3, 1954, ch. 1263, § 27, 68 Stat. 1236; Sept. 8, 1959, Pub. L. 86–230, § 21(b), 73 Stat. 466.) § 334. Reports from affiliates; penalty for failure to furnish.

Each bank admitted to membership under sections 321 to 329 and 330 to 338 of this title shall obtain from each of its affiliates other than member banks and furnish to the Federal reserve bank of its district and to the Board of Governors of the Federal Reserve System not less than three reports during each year. Such reports shall be in such form as the Board of Governors of the Federal Reserve System may prescribe, shall be verified by the oath or affirmation of the president or such other officer as may be designated by the board of directors of euch affiliate to verify such reports, and shall disclose the information hereinafter provided for as of dates identical with those fixed by the Board of Governors of the Federal Reserve System for reports of the condition of the affiliated member bank. Each such report of an affiliate shall be transmitted as herein provided at the same time as the corresponding report of the affiliated member bank, except that the Board of Governors of the Federal Reserve System may, in its discretion, extend such time for good cause shown. Each such report shall contain such information as in the judgment of the Board of Governors of the Federal Reserve System shall be necessary to disclose fully the relations between such affiliate and such bank and to enable the board to inform itself as to the effect of such relations upon the affairs of such bank. The reports of such affiliates shall be published by the bank under the same conditions as govern its own condition reports.

Any such affiliated member bank may be required to obtain from any such affiliate such additional reports as in the opinion of its Federal reserve bank or the Board of Governors of the Federal Reserve System may be necessary in order to obtain a full and complete knowledge of the condition of the affiliated member bank. Such additional reports shall be transmitted to the Federal reserve bank and the Board of Governors of the Federal Reserve System and shall be in such form as the Board of Governors of the Federal Reserve System may prescribe.

Any such affiliated member bank which fails to obtain from any of its affiliates and furnish any report provided for by the two preceding paragraphs of this section shall be subject to a penalty of $100 for each day during which such failure continues, which, by direction of the Board of Governors of the Federal Reserve System, may be collected, by suit or otherwise, by the Federal reserve bank of the district in which such member bank is located. (Dec. 23, 1913, ch. 6, § 9 (par.), as added June 16, 1933, ch. 89, § 5(c), 48 Stat. 165, and amended Aug. 23, 1935, ch. 614, § 203 (a), 49 Stat. 704; July 1, 1966, Pub. L. 89-485, § 13(f), 80 Stat. 243.)

§ 338. Examination of affiliates; forfeiture of membership on refusal of affiliate to give information or pay expense.

In connection with examinations of State member banks, examiners selected or approved by the Board of Governors of the Federal Reserve System shall make such examinations of the affairs of all affiliates of such banks as shall be necessary to disclose fully the relations between such banks and their affiliates and the effect of such relations upon the affairs of such banks. The expense of examination of affiliates of any State member bank may, in the discretion of the Board of Governors of the Federal Reserve System, be assessed against such bank and, when so assessed, shall be paid by such bank. In the event of the refusal to give any information requested in the course of the examination of any such affiliate, or in the event of the refusal to permit such examination, or in the event of the refusal to pay any expense so assessed, the Board of Governors of the Federal Reserve System may, in its discretion, require any or all State member banks affiliated with such affiliate to surrender their stock in the Federal Reserve bank and to forfeit all rights and privileges of membership in the Federal Reserve System, as provided in sections 321 to 329 and 330 to 338 of this title. (Dec. 23, 1913, ch. 6, § 9 (par.), as added June 16, 1933, ch. 89, § 5(c), 48 Stat. 166, an amended Aug. 23, 1935, ch. 614, § 203 (a), 49 Stat. 704.)

and

§348a. Transactions with foreign banks; supervision of Board of Governors of the Federal Reserve System.

The Board of Governors of the Federal Reserve System shall exercise special supervision over all relationships and transactions of any kind entered into by any Federal reserve bank with any foreign bank or banker, or with any group of foreign banks or bankers, and all such relationships and transactions shall be subject to such regulations, conditions, and limitations as the Board may prescribe. No officer or other representative of any Federal reserve bank shall conduct negotiations of any kind with the officers or representatives of any foreign bank or banker without first obtaining the permission of the Board of Governors of the Federal Reserve System. The Board of Governors of the Federal Reserve System shall have the right, in its discretion, to be represented in any conference or negotiations by such representative or representatives as the Board may designate. A full report of all conferences or negotiations, and all understandings or agreements arrived at or transactions agreed upon, and all other material facts appertaining to such conferences or negotiations, shall be filed with the Board of Governors of the Federal Reserve System in writing by a duly authorized officer of each Federal reserve bank which shall have participated in such conferences or negotiations. (Dec. 23, 1913, ch. 6, §14(g), as added June 16, 1933, ch. 89, §10, 48 Stat. 181, and amended Aug. 23, 1935, ch. 614, §203 (a), 49 Stat. 704.)

§ 375. Purchases from directors; sales to directors.

Any member bank may contract for, or purchase from, any of its directors or from any firm of which any of its directors is a member, any securities or other property, when (and not otherwise) such purchase is made in the regular course of business upon terms not less favorable to the bank than those offered to others, or when such purchase is authorized by a majority of the board of directors not interested in the sale of such securities or property, such authority to be evidenced by the affirmative vote or written assent of such directors: Provided, however, That when any director, or firm of which any director is a member, acting for or on behalf of others, sells securities or other property to a member bank, the Board of

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