Pursuant to the Merchant Marine Act, 1936, as amended, particularly section 607(d) thereof, the Maritime Administration hereby adopts §§ 286.1 to 286.6 for the establishment and maintenance of the statutory Capital and Special Reserve Funds, including the making of tentative deposits in the said funds in advance of completion of accounting between the Maritime Administration and the other party to an Operating-Differential Subsidy Agreement (therein referred to as the operator) for the year or other accounting period involved; and the determination of capital necessarily employed in the business and net earnings for the purposes of applying the

§ 286.2

Creation and maintenance of statutory reserve funds.

(a) Application of operator and authoritative orders. (1) At or before the time of the first deposit required to be made therein, the operator shall select, and make written application to the Maritime Administrator for approval of, the depository or depositories with whom it proposes to establish and maintain the Capital Reserve Fund and Special Reserve Fund.

(2) When such depository or depositories have been so designated and approved, the Maritime Administrator will adopt an appropriate order authorizing the establishment of the reserve fund involved, setting forth the conditions and restrictions under which it is to be maintained and with respect to withdrawals therefrom, and designating those authorized to execute, on behalf of the Maritime Administrator, instruments of withdrawal therefrom.

(3) A certified copy of such order will be furnished the depository for its guidance in honoring Instruments of with

drawal and acting upon other instructions regarding the fund. The operator also will be furnished a certified copy of such order, promptly upon receipt of which its Board of Directors shall adopt an appropriate resolution with respect to the fund in conformity with the action of the Maritime Administrator, and a certified copy thereof shall be furnished the Maritime Administrator for his records.

(b) Amounts required to be deposited and authorized to be withdrawn—(1) Mandatory deposits. (1) Mandatory deposits (i.e., deposits which are required to be made in the statutory reserve funds, either by the provisions of the act or of the agreement or by direction of the Maritime Administrator under the authority of the act or of the agreement) shall be made by the operator at the times and in the amounts so required without prior application to the Maritime Administrator and, when based upon preliminary or tentative calculations, shall be subject to adjustment upon the completion of final accounting for the year or other accounting period involved.

(ii) The amount of income earned on investments (including interest on bank deposits) in the statutory reserve funds which, pursuant to the provisions of the act and of the agreement, is required to be deposited in the statutory reserve funds, shall be deducted (to the extent allocated to subsidized operations under the other sections of this part) only for the purpose of determining the amount, if any, of the net earnings of the operator in excess of ten (10) percent per annum on the operator's capital necessarily employed (remaining after deducting any other payments made from such net earnings into the Capital Reserve Fund) which, pursuant to the provisions of the act and of the agreement, is required to be deposited in the Special Reserve Fund.

(2) Voluntary deposits and transfers. Voluntary deposits (i.e., deposits which, under the provisions of the act and of the agreement, the operator may be permitted to make in the statutory reserve funds, but which are not mandatory) and transfers from the Special Reserve Fund to the Capital Reserve Fund, or from such statutory reserve funds to the general funds of the operator, shall be made only upon written application to, and receipt of written approval thereof from, the Maritime Administrator. Such application shall include a full statement of facts as to the desirability or necessity

of making the deposit or transfer and, when required, shall be supported by adequate financial data.

(3) Withdrawals. Withdrawals from the statutory reserve funds (including transfers between the funds) shall be made only at the times and in the amounts authorized by the provisions of the act or of the agreement or by the Maritime Administrator under the authority of the act or of the agreement. Checks, drafts, or other instruments of withdrawal, after having been executed by the operator, shall be forwarded to the Maritime Administrator at Washington with appropriate explanation of the purposes of the proposed withdrawal, including properly certified invoices or other supporting papers. Such instruments of withdrawal, after countersignature on behalf of the Maritime Administrator, will be forwarded to the payees or returned to the operator, as the operator requests. Transfers between accounts in the same depository and for the same statutory reserve fund shall not be deemed withdrawals for the purpose of this paragraph.

(4) Constructive deposits and withdrawals. Except where specifically provided for in other general orders, no transaction shall be treated as a constructive deposit into, or a constructive withdrawal from, the statutory reserve funds, without the prior written consent of the Maritime Administrator. Adjustments of tentative deposits will be treated as provided in paragraph (f) of this section and such are not deemed to be constructive deposits or withdrawals.

(5) Reporting requirements. (i) The operator shall promptly notify the Comptroller, Maritime Administration, Washington, D.C. 20235, of all deposits into the statutory reserve funds, giving full details with respect thereto.

(1) The detail of activities in the statutory reserve funds shall be reported by the operator to the appropriate District Comptroller of the Maritime Administration at such times and in such form as prescribed by the Comptroller.

(c) Investment of statutory reserve funds in securities. (1) The Maritime Administrator hereby approves the deposit of marketable interest-bearing direct obligations of the United States or obligations fully guaranteed as to principal and interest by the United States in the Capital Reserve Fund or Special Reserve Fund in lieu of cash and

the purchase of such obligations with cash on deposit in the said funds: Provided, however, That in no event shall an operator, without prior written approval of the Maritime Administrator, purchase, with moneys on deposit in the statutory reserve funds, evidences of indebtedness which are guaranteed by the United States pursuant to Title XI of the Merchant Marine Act, 1936, as amended.

(2) Subject to the further limitations prescribed in the applicable provisions of the act and the agreement, the operator shall make written application to the Maritime Administrator in all instances involving the deposit of any other securities in the Capital Reserve Fund or Special Reserve Fund in lieu of cash or the purchase thereof with (and to replace) cash on deposit in such funds, the transfer of securities from the Special Reserve Fund to the Capital Reserve Fund, or vice versa, and the replacement of securities on deposit in such funds with cash or securities from the general funds of the operator. The operator shall not consummate any such transaction until the written consent of the Maritime Administrator shall have been received. The application shall describe fully the securities and explain the desirability of the transaction and shall include a statement of the availability of cash in the statutory reserve funds in excess of sums required to meet maturing obligations or other demands to be liquidated with amounts on deposit in such funds. Every approval by the Maritime Administrator of an application from an operator for permission to deposit securities other than marketable interest-bearing direct obligations of the United States or obligations fully guaranteed as to principal and interest by the United States in the statutory reserve funds in lieu of cash, or to purchase such securities with cash on deposit in the said funds, shall be conditioned upon agreement by the operator to dispose of such securities forthwith upon subsequent request by the Maritime Administrator.

(3) Immediately upon the purchase of any securities for deposit in the statutory reserve funds, the operator shall advise the Maritime Administrator, giving the date of purchase, a description of the securities, and the price paid therefor (net, brokerage and other charges, and gross).

(4) Income earned on investments held in either the Capital Reserve Fund or Special Reserve Fund shall be deposited when received in the Capital Reserve Fund: Provided, That, upon receipt of the first interest payment following the purchase of securities for deposit in the Special Reserve Fund, the amount, if any, of accrued interest which was included in the cost of the securities (and, therefore, does not constitute an earning) shall be retained in the Special Reserve Fund, and the balance thereof, if any, shall be deposited in the Capital Reserve Fund.

(5) Interest paid by a depository or depositories on the cash balance (including time deposits) in the Capital Reserve Fund or Special Reserve Fund shall be retained in the fund with respect to which such interest payment is made.

(d) Valuation of securities in statutory reserve funds. The bases for valuation of securities in transactions involving the statutory reserve funds shall be as follows:

(1) Securities deposited in the statutory reserve funds in lieu of cash or in exchange for securities then on deposit in such funds shall be valued at market at the time of such deposit, unless otherwise determined by the Maritime

Administrator.

(2) Securities transferred from the Special Reserve Fund to the Capital Reserve Fund, or vice versa, shall (subject to adjustment for accrued interest) be valued at the same amount as when deposited in the fund from which they are transferred, unless the Maritime Administrator in approving such transfer shall determine otherwise.

(3) The net proceeds derived from the disposal of securities on deposit in either of the statutory reserve funds shall be retained in the reserve fund from which such securities are withdrawn, except that with respect to securities in the Special Reserve Fund purchased at a discount and disposed of at a profit, so much of such profit as represents the difference between the cost and the par or face value thereof shall be deemed to be interest and shall be deposited in the Capital Reserve Fund.

(4) If securities on deposit in either of the statutory reserve funds are replaced by cash or securities from the general funds of the operator, the amount of cash or the value of securities to be deposited in such reserve fund,

in lieu thereof, shall be the equivalent of the amount at which such replaced securities were valued at the time of their deposit in said fund (with adjustment on account of accrued interest), or the market value thereof at the time of withdrawal, whichever is the higher.

(5) For the purposes of this part, the market value of securities shall be determined in the following manner:

(1) With respect to transactions involving the purchase of securities with cash on deposit in the statutory reserve funds or the sale of securities on deposit therein, market value shall be the gross price paid or the net price received after proper brokerage and transfer taxes, if any, and adjusted for accrued interest: Provided, That if such securities are purchased or sold otherwise than upon a registered exchange, the price shall be within the range of transactions on the exchange on the date of such purchase or sale, or if there were no such transactions, then the market value thereof shall be determined by the Maritime Administrator on such basis as he may deem to be fair and reasonable in each individual case.

(ii) Where no actual purchase or sale is involved, such as the initial deposit of securities in the statutory reserve funds in lieu of cash or the replacement of securities on deposit therein by cash from the general funds of the operator, the last published sales price thereof on the day the transfer was made shall be deemed to be the market value thereof, or if no such sales were made, the market value thereof shall be determined by the Maritime Administrator on such basis as he may deem to be fair and reasonable in each individual case.

(e) Time deposits. Deposits in the statutory reserve funds not invested in securities may be placed in time deposits when, in the judgment of the Maritime Administrator and the operator, it is desirable and feasible so to do. No such time deposits requiring withdrawal notice of more than thirty (30) days shall be made, however, until the written consent of the Maritime Administrator frst shall have been obtained.

(f) Adjustment of tentative deposits. (1) When the amount deposited in the Capital Reserve Fund or the Special Reserve Fund. based on preliminary or tentative calculations, is less than the amount required to be deposited therein, as determined upon the completion of final accounting for the year or other

accounting period involved, the deficiency shall be cured promptly by the operator.

(2) When the amount deposited in the Capital Reserve Fund or the Special Reserve Fund, based on preliminary or tentative calculations, exceeds the amount required to be deposited therein, as determined upon the completion of final accounting for the year or other accounting period involved, adjustment thereof shall be accomplished by deducting such over-deposit from amounts subsequently required to be deposited in the fund involved: Provided, That to the extent such overdeposits in the Special Reserve Fund are sufficient to cure under-deposits in the Capital Reserve Fund, the adjustment, with the prior written approval of the Maritime Administrator, may be accomplished by transfer from the former to the latter.

(g) Investment of statutory reserve funds in Common Stocks-(1) Definitions for purposes of this paragraph. (i) The term "Administrator" means the Maritime Administrator.

(ii) The term "Operator" (referred to as the "Settlor" in the Common Stock Trust Agreement) means a steamship company having an Operating-Differential Subsidy Agreement.

(ii) The term "Trustee" means an organization approved by the Administrator, incorporated as a bank or trust company under the laws of the United States, or of any State or of the District of Columbia, which is authorized under such laws to exercise trust powers and is subject to supervision by Federal, State or District of Columbia authority.

(iv) The term "Capital Reserve FundCommon Stock Trust" means a Common Stock Trust authorized by section 607(d) of the Merchant Marine Act, 1936, as amended, the funds for the establishment of which are transferred from the Capital Reserve Fund for investment through a trustee in common stocks as specified in subparagraph (6) (i) of this paragraph. Such Common Stock Trust shall at all times remain a part of the Capital Reserve Fund.

(v) The term "Special Reserve FundCommon Stock Trust" means a Common Stock Trust authorized by section 607(d) of the Merchant Marine Act, 1936, as amended, the funds for the establishment of which are transferred from the Special Reserve Fund for investment through a trustee in common stocks as

specified in subparagraph (6) (1) of this paragraph. Such Common Stock Trust shall at all times remain a part of the Special Reserve Fund.

(vi) (a) The term "market value" in relation to the Common Stock Trust, means the last published sales price for a common stock on the principal exchange (the New York Stock Exchange or the American Stock Exchange as opposed to a regional exchange, in the event of a multiple listing) on which the security is listed on the day the valuation is made. If there are no transactions in the security on the date of valuation, the market value shall be determined to be the most recent published sales price on the principal exchange or the mean between the most recent bid and asked quotations, whichever is later.

(b) The term "market value" in relation to approved securities approved by the Administrator on deposit in the non-trust portions of the Capital Reserve Fund and the Special Reserve Fund means the closing bid quotation in the over-the-counter market on the date the valuation is made, as reported in any recognized daily financial newspaper; or if not reported in a recognized daily financial newspaper, the term market value means the bid quotations for the date of valuation, obtained from a dealer trading in securities which may or may not be quoted in the daily lists of the quotation services.

(vii) The term "book value" as applied to the common stocks in the Common Stock Trusts means the cost of acquisition of such securities, adjusted to include brokerage fees, commissions, and expenses incurred, if any, in acquiring such securities. In the case of receipt of stock dividends and stock rights or any other transactions where the adjusted basis for Federal income tax purposes would be other than such adjusted cost of acquisition, the book value shall be the same as the adjusted basis that would be used under the Federal income tax law and regulations in effect at the time the valuation is made for the purpose of determining the capital gain (or capital loss when book value is being used to compute a capital loss) from the sale or other disposition of the securities. In such determination the adjusted basis shall be that which it would be if the securities had been held by the Operator in its general funds.

(viii) The term "income" means the amount received by the Trustee of the Common Stock Trust which would be ordinary taxable income under the Federal income tax law and regulations in effect when said amount is received: Provided, That all cash dividends when declared and property received, other than that received in liquidation, shall be considered as income.

(ix) The term "principal" means the original amount of the Common Stock Trust and subsequent transfers thereto made in accordance with subparagraph (3)(ii) of this paragraph, together with accretions not considered to be income. Capital gains, stock dividends, distributions of stock (not subject to ordinary Federal income tax), stock rights and the proceeds from the sale of stock rights and property received in liquidation shall be considered principal.

(x) The terms "capital gain" and "capital loss" mean the difference between the net proceeds from the sale or other disposition of securities or other interests and the book value of such securities or other interests. In the case of disposition, brokerage fees, commissions and expenses and Federal and/or State transfer taxes are to be a reduction of the price received.

(xi) The terms "unrealized capital gain" and "unrealized capital loss" mean, as applied to securities in the Common Stock Trusts at the end of a recapture period, the difference between the book value of the securities and the market value of the securities on the last business day of the recapture period.

(xii) The term "securities" in relation to the Common Stock Trusts means common stock as defined and referred to in subparagraph (6) (i) of this paragraph. The term "securities" in relation to the non-trust portions of the statutory reserve funds means those securities as defined and referred to in paragraph (c) of this section.

(2) Application of the Operator. (1) An Operator may make written application, in quadruplicate, to the Administrator for approval of (a) the establishment of a Common Stock Trust or Trusts; (b) the Trustee or Trustees with whom it proposes to establish and maintain a Capital Reserve Fund-Common Stock Trust and/or a Special Reserve FundCommon Stock Trust. Separate trusts shall be established for the receipt of

Capital Reserve Fund or Special Reserve Fund monies, although such trusts may have a common trustee.

(ii) The application shall include:

(a) A statement, as of the date of the application, of cash and the market value of securities, if any, on deposit in the Capital Reserve Fund or the Special Reserve Fund. Said statement shall be amended at a later date with respect to any security for which the market value is unavailable at the date of application, and at such times as the Administrator directs;

(b) A statement, as of the close of the calendar year preceding the date of the application, of accrued mandatory deposits into the Capital Reserve Fund and the Special Reserve Fund; and showing subsequent deposits made to the date of the application on account of such accrued deposits;

(c) A statement of the obligations payable from the Capital Reserve Fund and the Special Reserve Fund, including, but not limited to the financial requirements for vessel replacements pursuant to the applicable terms of the applicant's operating-differential subsidy agreement;

(d) Information necessary for the determination of the eligibility of the proposed trustee including a certificate of the Secretary or another appropriate officer of the trustee certifying as to the corporate status of the proposed trustee and the jurisdiction under whose laws the proposed trustee is organized and the latest available report of its financial condition; and

(e) The proposed trust agreement (copies obtainable from the Maritime Comptroller), in the form promulgated by the Maritime Administrator, completed to indicate the dollar amount proposed to be transferred from the Capital Reserve Fund or the Special Reserve Fund to create the respective Common Stock Trust, including Exhibit B thereto, indicating the rate of fees and the terms of compensation to be paid the proposed trustee.

(3) Proportion of Capital Reserve Fund and Special Reserve Fund that may be transferred to Common Stock Trusts—(1) Initial Transfers. Upon approval by the Administrator of the application pursuant to subparagraph (2) (i) of this paragraph, an amount not to exceed 50 percent of the cash and securities on deposit in the Capital Re