tions in consultation with a group of, I believe, 10 trust officers-8 or 10 anyway-pretty broadly dispersed geographically, and representing banks with a fairly good size range, down to the 100 million level.

I then announced my intention to propose these regulations before the ABA's national trust conference in San Francisco back in February. At least if there was latent unhappiness in the audience, I was not stoned; indeed I was warmly received.

I think smaller institutions were somewhat concerned as to the burdens of preparation, but since we are dealing with 100 million as the set cutoff point, I think we are going to be dealing with departments which, by and large, are computerized.

It is merely a matter of getting that computer programed up to our reporting requirements. I think it will be a fairly simple process thereafter.

Mr. RYTER. Is there any concern on your part that as this addition is made to the declaration or assets with regard to any particular custodial accounts that it will mislead people as to thinking about the control that banks have over these types of accounts?

Mr. SMITH. This reporting will not include custodial activity. It will be applicable only to those assets in which the bank exercises some investment role. It will include investment advisory activities of banks, whether or not they physically hold the assets.

Mr. RYTER. How large are national bank holdings of assets over which the bank exercises some investment role?

Mr. SMITH. I can't give you any precise detail except to say that with most major banks the investment advisory role is a fairly substantial one. Dean, do you have any dimensions on that?

Mr. MILLER. I think that it is in the annual report, Mr. Ryter, if I can find the appropriate table to come up with it-possibly it would be quicker if I just submitted it to you afterwards.

[The information referred to follows:]

National banks' holdings of assets over which the banks exercise some investment control is $41,887,000,000.

Mr. SMITH. This would be a circumstance in which the bank's trust department would be assisting someone else with respect to investment and whether or not that investment advice is, in fact, utilized is beyond

Mr. RYTER. As far as the declaration of holding of that particular asset, it would be included in the banks as sort of an inflation of the value of whatever the bank holds?

Mr. SMITH. Yes; right.

Mr. RYTER. Do you have any concerns in the areas of assets held of closely held corporations and the evaluations of that asset at any particular point in time with regard to the regulations?

Mr. SMITH. We have provided ourselves the latitude in the regulations to either bar from public disclosure or to delay public disclosure on certain information where, one, it would tend to identify the beneficial owners of individual trust accounts.

We think we have to be sensitive to that.

Second, we have provided that on request we will consider the delay of publication of transactional information where it would tend to reveal an investment strategy.

This is a reservation which is also applicable in the SEC's reporting requirements on mutual funds. We think that is a necessary thing. Mr. RYTER. So you are possibly considering the exclusion of one category, in particular those of not highly traded or not often traded. or largely traded securities?

Mr. SMITH. Yes; we might have circumstances where we would have a permanent exclusion from public disclosure there. In the case of the transactional reporting, we are not contemplating permanent exclusion, but perhaps deferred publication so that we don't reveal an investment strategy in the process.

Mr. RYTER. Senator Metcalf covered very well the concerns of Senator Brock, particularly in the area of directors of banks and other corporations. Could you comment in some fashion as to how you characterize a director's participation, whether it be banks or outside director participation? Do they actively participate in the innerworkings? When someone goes to a board meeting is it with the sheaf of papers under his arms and with many, many hours of study and contemplation?

Mr. SMITH. I don't think that you can fairly generalize on that director's behavior. With most major banks today, I don't think that you get much detailed involvement in the course of the periodic board meeting itself.

You do have directors who serve in specialized capacities as perhaps chairman of the loan review committee, a member of the trust investment committee, or chairman of the employee compensation committee.

In those capacities with major banks, those directors tend to earn their scale, if you will, but those are individual situations, not the board as a whole.

By way of reference, I understood that the committee had had some interest in a piece that was written in one of the Baltimore papers, I guess the Sun, about the utility over there and the fact that 12 directors of the utility were also directors of the banks in Baltimore.

You could theorize out of that a very sinister conspiratorial web, but that seems to proceed from the assumption that a person is a director of the utility because he is also a director of the bank.

I don't think that is true at all. He is a director of the utility and he is a director of the bank because he is a very prominent business figure in that community. I would be willing to bet dollars to doughnuts that of the directorships of every major corporation in the United States, 65 to 75 percent of them are also directors of banks someplace.

They are directors of both types of corporations because they are very substantial individuals with a good bit of experience and knowledge who are useful to the institutions on which they serve as directors. Mr. TURNER. Would counsel yield on that point?

Mr. RYTER. Surely.

Mr. TURNER. The document that I gave you, Mr. Smith, represents the officers and board of directors of the First City Bancorporation of Texas. On that holding-company bank board sits George Brown, of Brown, Root & Haliburton, a chief executive officer of one of the largest oil construction companies in the world.

He also owns oil properties according to this document; the public records will show it. He is also a chief executive officer of a gas transmission pipeline, and on the same board with Mr. Brown sits Myron Wright, of Exxon, chairman of Exxon, a totally integrated oil producer, Howard Keck, the president of Superior Oil, Alfred Glassell, from El Paso Natural Gas, another pipeline system, possibly competitive in some way, maybe not, and numbers of suppliers and lawyers. John B. Connally, Secretary of the Treasury is on there.

Mr. SMITH. But Mr. Counsel, their role as directors of the First City Bancorporation is with respect to the business of that corporation. That is where their director liabilities run.

They are not there serving as directors of First City Bancorporation, you know, to conduct the business of El Paso or Borwn & Root, or whatever. They are there to conduct the business of the First City Bancorporation.

The director liabilities run to that responsibility. If they conduct them in a manner that is detrimental to the best interests of the shareholders of that corporation, they are subject to director liabilities that could involve them in considerable individual pecuniary loss.

Mr. TURNER. That is correct. Indeed they may pursue their work with respect to the bank in a proper fashion, but they are also sitting on a board which could possibly be a forum for discussions of business that has nothing to do with the bank.

Isn't there a potential here, in terms of indirect interlocks, of using the bank corporation as a means of developing or agreeing on policy I am not saying they are doing that. I am not alleging anything. I am saying don't you see a possibility for abuse in a situation like that?

Mr. SMITH. In our society today, as complex as it is, there are all manners of potentials for conflict for all of us.

Mr. TURNER. Thank you.

Mr. RYTER. One final question: I think the chairman has shown a great deal of personal concern about the role of your bank examiners. I think we are interested very much in knowing the powers of the examiners, the extent to which their recommendations are acted upon in a timely manner.

I think we are interested in finding out a little bit more about whether or not you feel the examiners have need for more mandatory or more power, enforcement. What are your feelings in these areas?

Mr. SMITH. Let me say first that we, as an organization, do endeavor to be responsible to the recommendations of our examiners. They are, after all, the people best equipped to judge a particular bank's condition by reason of their onsite presence in the bank.

They normally examine the bank three or four times running at a minimum, so that they develop some familiarity with that bank's management and the way it functions.

I think that we may well, out of our experience in San Diego, have some judgments that, not the examiner per se, but our office may need some additional authority.

Today in terms of the application of our limitations on affiliated borrowings, these are organizations that are affiliates of the bank and there are in law very strict limitations on both the amount and the nature of lending to affiliates, with collateralization requirements, and so forth.

We do feel handicapped today in that you have to find ownership of over 50 percent of the equity interest of the bank before you can qualify that affiliate relationship. That is a totally unrealistic standard and in the case of U.S. National Bank, there is no question as to who controlled that bank, even though Mr. Smith did not personally hold over 50 percent of the share interest.

I think there is another point. We are all utilizing, I think, with somewhat greater frequency, powers given to the Federal Banking agencies in 1965 or 1966, in the so-called Financial Institutions Supervisory Act. We used this with respect to the issuance of cease-anddesist orders directing banks either to follow certain procedures or desist from certain procedures.

We also have under that same act officer removal powers. In the case of officer removal, we have to be able to show that the particular act not only threatens the safety and solvency of banks, but it involves some element of personal fraud or dishonesty.

I can conceive of circumstances where we have banks that are just ill-managed. As I have said, I don't care what the reasons are, whether they are reasons of cupidity or stupidity, the result is equally disastrous.

I think where we find circumstances of repetitive violation of law and regulation, even though that repetitive violation does not occur out of any personal dishonesty, we ought to be able to move in those circumstances to remove officers. We have no such power today.

Mr. RYTER. You feel there is need for additional authorization, or do you feel there is an intermediate legal step that can be established before taking action directly with the Board of Directors?

I think one question you are hedging about here is what exactly is the official status of a bank examiner's warnings?

Does it go into the record? Is it part of the examiner's report? In other words, do they look up the bank president and say I want to tell you, you are doing a rotten job in this particular area and then he walks away?

Is it signed into his report and he says this is the second warning I have given? What is the status of that?

Mr. SMITH. Those criticisms, at least those that can be documented by the examiner are part of what is known as the open section of the report of examination. That open section is made available to bank management, to the directors of the bank, to the counsel for the bank, and to the independent auditors of the bank.

There is a confidential section in the report, the so-called yellow pages, which are not available. It is in that section that we let a bank examiner, if you will, draw on the sensitivities of his experience to tell us that, "maybe I can't document a particular thing, but I have a feeling here that there is something we have got to keep our eye out for-well, matters that ought properly not be said before a Board of Directors without further documentation."

All of these reports of examination are reviewed first at the regional office level. They then come in here for review. We have recently established a regularized procedure for review of reports of examination and reports of visitation on our so-called problem bank list and when the Comptroller is not off on the road, we conduct a meeting every Monday morning in my office so that I am personally involved in that process.

Mr. RYTER. Thank you.

Senator METCALF. Thank you very much. Thank you, Mr. Smith, for coming and thank you for your efforts in doing a greater job for disclosure and the publication in this very important field.

Mr. SMITH. Thank you, Mr. Chairman. We look forward to working with you and the committee staff.

Senator METCALF. Some of the matters you and your staff will work on, I am sure.

[The prepared statement of Mr. Smith follows:]

PREPARED STATEMENT OF HON. JAMES E. SMITH, COMPTROLLER OF THE CURRENCY

We appreciate having the opportunity to testify here today. The area of your inquiry is a very vital one; one in which our Office has for years been concerned. It has been a matter of some surprise to us in the past few years to observe that much of the public discussion of bank trust departments and their supervision has not taken cognizance of the role of the bank regulators in this area, both present and potential. So it is that we welcome this invitation here this morning, hopefully, to add some perspective to this subject.

Some background of the activities of the Office of the Comptroller of the Currency might be useful. This Office has the primary regulatory authority over the national banks of this country. However, until 1962, this authority was shared with the Federal Reserve Board with respect to the trust departments of national banks. National banks had to obtain the approval of the Federal Reserve before they could establish such a department, and to conform to the Federal Reserve's rules-then regulation F-in the operation of that department. At the same time, they were examined and otherwise supervised by this Office.

In 1962, Congress corrected this anomaly and transferred the licensing and regulation-making authority over national bank trust departments to this Office. In the same act, the regulation-making authority over common trust funds of all banks and pooled pension and profit-sharing trusts of national banks was also placed in the Comptroller.

The trust departments of all national banks have been regularly examined by this Office since the mid-1930's. In addition to the examinations which we conduct at least three times each 2 years of the national banks' commercial operations, a specialized examination is conducted annually of their trust departments. These examinations are performed by trust specialists. Neither the examinations of the banks nor of the trust departments are rigidly compartmentalized, so that examiners of either function may and do obtain the necessary information through reference to the records found in either section of the bank.

In the course of their examination of a bank's trust department, our representatives scrutinize very carefully the investments of the trust portfolios. They look for conflicts of interest, self-dealing, or other violations of the law of trusts, as well as applicable State and Federal laws. In the performance of this examination they as a matter of course ascertain which securities are owned by each account, and who the beneficial owners of those securities are. The fact that the trustee bank holds entrusted securities in the name of a nominee