This refers to Mr.
’s letters of
regarding the seventh paragraph of section
19 of the Federal Reserve Act, which forbids a member bank to “act
as the medium or agent of any nonbanking corporation . . . in making
loans on the security of stocks, bonds, and other investment securities
to brokers or dealers in stocks, bonds, and other investment securities.”
In his letter of
, Mr.
referred
to the possible application of this statutory provision to a situation
where a member bank informs the treasurer of a corporation with excess
short-term balances that a particular government securities dealer
or dealers may wish to borrow short-term funds. The bank would not
participate in the ensuing negotiations between the corporation and
the dealer.
The Board’s views were requested with respect to (1) whether
a bank engaged in such practices should be held to be acting as the
“medium or agent” of the corporation involved and (2) whether such
loans come within the purview of the seventh paragraph of section
19.
The legislative history of the Banking Act of 1933 (of
which said paragraph is a part) does not reveal the purpose of Congress
in using the phrase “medium or agent” therein. Accordingly, it must
be interpreted in the light of the ordinary meaning and legal interpretation
of the words themselves.
The general meaning of the words “medium” and “agent,”
as well as their legal definitions, leads the Board to conclude that
their use in the statute was intended to preclude member banks from
actively participating in bringing nonbanking interests and dealers
together for the purpose of making loans on securities, or arranging
such loans, and to prohibit them from serving in a representative
capacity in such loan transactions. A member bank which simply gives
information concerning the possible placement of excess funds to a
corporate customer requesting such information would not be participating
in bringing the parties together, arranging a loan, or representing
the parties, and, consequently should not be considered a medium or
agent in the transaction.
This interpretation of the statutory provision is applicable
only to the factual situation described. That is to say, so long as
the member bank confines itself strictly to providing information
requested of it concerning the identity of possible borrowers of excess
funds, the bank would not be acting as a medium or agent of the lending
corporation. If, however, the bank were to contact either party or
attempt to bring them together, or participate in the negotiation
of the loan, it might be acting as a medium or agent in violation
of section 19.
It is the Board’s view that the loans of the types which
were described in Mr.
’s letters come within the purview of
the statutory provision. The Senate Banking Committee of the 73rd
Congress stated, in its Report No. 77, that its proposal was intended
to prevent “speculative market loans,” and the Senate Committee of
the 72nd Congress made an identical statement in its Report on S.
4412 (S. Rep. No. 584, 9).
However, these statements were made, according to the
committee itself, to outline “in general broad terms the main objects
. . . , although without endeavoring to do more than suggest the major
features”. In each case the statement was followed by a review of
the actual provisions of the bill “in order to indicate the precise
content of the various sections”. The committee there pointed out
that the relevant section would apply to secured loans to dealers
in “stocks, bonds, and other investment securities” (S. Rep. No. 584, 13-14; S. Rep.
Nos. 77, 13, 15). As will be noted, in this description of the precise
content of the provision, the entire field of “investment securities”
was referred to, and the scope of the provision was not described
as confined to speculative market loans.
In any event, although the comments of a Committee of
the Senate are entitled to some weight, the terms of the statutory
provision enacted by Congress are of principal significance. The seventh
paragraph of section 19, quoted above, refers to “loans” without limitation;
it is not, in terms, confined to speculative loans. It also seems
significant that the statute explicitly refers to loans to dealers
in bonds and other investment securities as well as to dealers in
stocks.
In addition to the legal difficulty in interpreting the
words of the seventh paragraph as confined to speculative loans, it
might be extremely difficult, in practice, to determine whether particular
loans were “speculative.” Since dealers in obligations of the United
States government often deal in other securities as well, it might
be uncertain whether the purpose of the loan was or was not
speculative.
It would seem that this could hardly be determined by
the nature of the collateral; since Congress referred to “loans on
the security of . . . investment securities” generally, it seems clear
that loans subject to the paragraph (including speculative loans)
could be secured by United States government obligations as well as
other securities. This difficulty of distinguishing speculative from
nonspeculative loans may have been one reason for Congress’s decision
to cover loans to brokers and dealers generally, even though the principal
purpose of the legislation was to prevent speculative loans.
It is also to be noted that Congress,
in enacting the Banking Act of 1933, included special provisions relating
to obligations of the United States in situations where this was considered
appropriate. Among these were the amendments to the eighth paragraph
of section 13 of the Federal Reserve Act, the second paragraph of
section 23A of that act, and paragraph Seventh of section 5136 of
the Revised Statutes. In view of this legislative advertence to the
special status of government securities transactions in other sections
of the 1933 act, it would be more difficult to infer that a similar
intent existed with respect to the seventh paragraph of section 19
and that Congress inadvertently failed to express that intent. S-1984;
Feb. 10, 1966.