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

does not conceal the beneficial ownership of each trust asset. Violations of law, regulation, or sound fiduciary principles discovered by the examiner are criticized in the report of examination. Such criticisms are followed up by this Office until satisfactory correction is made. In addition, all trust holdings of stock of the trustee bank and affiliated companies are reported to this Office in the report of examination. Thus, over the years there has been no lack of knowledge on the part of this Office as to what was held by national bank trust departments, or identity of the beneficiaries of each account being administered. What I have discussed thus far indicates that the report of examination deals with specific criticisms and with trust holdings of securities of the bank and its affiliates. Where additional information has been needed, it has been obtained by requiring the filing of other reports. Thus, national banks have since the 1930's been required to file annual reports with this Office, setting forth the amounts of trust department assets held by category-stocks, bonds, real estate, and so forth. In 1963, this Office amended this system of reports to require market value figures, rather than the often inaccurate book values which had prevailed theretofore. The other banking agencies followed our lead in this revision a couple of years later, and it was this method of reporting which was adopted by Chairman Patman's subcommittee in its report on "Commercial Banks and Their Trust Activities,' published in 1968.

Since 1963, this Office has also required all banks operating common trust funds and national banks operating pooled trusts for the collective investment of pension and profit-sharing funds, to file their annual reports for such funds with us, and to make them available upon request to anyone. Previously, under the regulations of the Federal Reserve Board, banks were prohibited from disseminating information regarding common trust funds. The 1963 amendments of this Office required the disclosure by national banks of the assets held in all collective funds. As you know, these funds are used by banks collectively to invest the assets of separate trusts. As such, the funds represent the largest asset pools within banks, and thus are the most relevant sources of information for one who is interested in ascertaining what the investment policies and holdings of given banks may be. At the same time, these reports do not reflect the individual accounts which are invested in the collective funds, or their beneficiaries; thus, their disclosure does not interfere with the confidentiality of individual holdings.

In an effort to provide further information on bank fund holdings, this Office in 1965 initiated an annual questionnaire to all banks operating common trust funds. This questionnaire elicits information as to common fund holdings as of a given date, thus furnishing a basis of comparison for such holdings. These data have been assembled annually in tabular form and made available to the public by this Office, occasionally accompanied by analyses of their investment composition and performance as against other types of funds, prepared by members of our Department of Economics.

In April of this year, this Office published for comment proposed regulations requiring national banks to make disclosures of trust department holdings of individual securities. Under these proposals, national banks having trust assets of $100 million or more would be required to file this additional report with this Office. Holdings in

excess of 10,000 shares of any one company will be reported. This report would require disclosure of the degree of investment responsibility and voting power over the shares held. In addition, the proposed rules would require national banks to file reports quarterly on all transactions which have occurred during that period which are in excess of 10,000 shares or $500,000 in value.

This additional reporting system we believe is desirable in view of the increased awareness and interest of the public in this subject. As I stated in announcing these proposals in February of this year: "They no longer accept things on faith, but demand to be informed-to make their own judgments. And as much as possible it is necessary, therefore, that they be informed as to the operation of bank trust departments, and the extent of the relationships with the bank's commercial customers. Disclosure of the stock holdings-indeed, of all the assets held-in trust departments is essential to enable banks to continue to hold the confidence of the public. Knowing what assets an institution possesses, and what it has done with those assets by way of purchases and sales, may well counter much of the criticism which has been made of bank trust departments. For few actual abuses of the banktrust department relationship have occurred; most of the criticism is based upon supposition, upon conjecture; in a word, upon ignorance. Dispelling this ignorance, even if it doesn't end the criticism, may make it more constructive, and lessen the opportunities for other interests to play upon it for their own selfish objectives."

It is our understanding that the other banking agencies are preparing similar reporting requirements. At present, 224 national banks would be covered by the proposal. If the Federal Reserve were to adopt a similar requirement, 80 State member banks would be affected. If the FDIC were to do likewise, another 39 State banks would be subject to the rules. Our Office plans to make the information contained in these reports available to other Government agencies, and the public. The period for comment on the proposed rules has just expired, and we are in the process of analyzing the comments we have received. We hope to be able to make the regulations final in the near future and to receive the first annual report of holdings as of December 31, 1974, along with the initial quarterly report of transactions, covering the last quarter of this year.

We believe that between the requirements of disclosure which we are going to impose, and the supervision of trust departments which we are performing through the examination function, the necessary protection to the public can be achieved with the minimum interference with business, while similarly keeping the expansion of the Federal bureaucracy under restraint.

Our philosophy throughout the period which I have just reviewed, has been one of requiring increased disclosure by bank trust departments. We have endeavored to provide the maximum of meaningful disclosure while imposing a minimum of burdensome reporting requirements, and also avoiding any unwarranted governmental intrusion into the privacy of individual estates. We have not, and we do not now intend, to require public disclosure of the holdings of individual accounts, or of the persons holding beneficial interests in them. Frankly, we can see no justification for proceeding so far into the private financial affairs of individuals. Adequate authority exists for the