The opinion of the Board of
Governors of the Federal Reserve System has been requested recently
with respect to the proposed sale of “thrift notes” by a bank holding
company for the purpose of supplying capital to its wholly owned nonbanking
subsidiaries.
The thrift notes would bear the name of the holding company,
which in the case presented, was substantially similar to the name
of its affiliated banks. It was proposed that they be issued in denominations
of $50 to $100 and initially be of 12-month or less maturities. There
would be no maximum amount of the issue. Interest rates would be variable
according to money market conditions but would presumably be at rates
somewhat above those permitted by Regulation Q ceilings. There would
be no guarantee or indemnity of the notes by any of the banks in the
holding company system and, if required to do so, the holding company
would place on the face of the notes a negative representation that
the purchase price was not a deposit, nor an indirect obligation of
banks in the holding company system, nor covered by deposit insurance.
The notes would be generally available for sale to members
of the public, but only at offices of the holding company and its
nonbanking subsidiaries. Although offices of the holding company may
be in the same building or quarters as its banking offices, they would
be physically separated from the banking offices. Sales would be made
only by officers or employees of the holding company and its nonbanking
subsidiaries. Initially, the notes would only be offered in the state
in which the holding company was principally doing business, thereby
complying with the exemption provided by section 3(a)(11) of the Securities
Act of 1933 (15 USC 77c) for “intra-state” offerings. If it was decided
to offer the notes on an interstate basis, steps would be taken to
register the notes under the Securities Act of 1933. Funds from the
sale of the notes would be used only to supply the financial needs
of the nonbanking subsidiaries of the holding company. These nonbank
subsidiaries are, at present, a small loan company, a mortgage banking
company and a factoring company. In no instance, would the proceeds
from the sale of the notes be used in the bank subsidiaries of the
holding company nor to maintain the availability of funds in its bank
subsidiaries.
The sale of the thrift notes, in the specific manner proposed,
is an activity described in section 20 of the Banking Act of 1933
(12 USC 377), that is, “the issue, flotation, underwriting, public
sale or distribution . . . of . . . notes, or other securities.” Briefly
stated, this statute prohibits a member bank to be affiliated with
a company “engaged principally” in such activity. Since the continued
issuance and sale of such securities would be necessary to permit
maintenance of the holding company’s activities without substantial
contraction and would be an integral part of its operations, the Board
concluded that the issuance and sale of such notes would constitute
a principal activity of a holding company within the spirit and purpose
of the statute. (For prior Board decisions in this connection, see
1934 at
3-414.9, 12 CFR 250.403, 250.404, and 250.400.)
In reaching this conclusion, the
Board distinguished the proposed activity from the sale of short-term
notes commonly known as “commercial paper,” which is a recognized
form of financing for bank holding companies. For purposes of this
interpretation, “commercial paper” may be defined as notes, with maturities
not exceeding nine months, the proceeds of which are to be used for
current transactions, which are usually sold to sophisticated institutional
investors, rather than to members of the general public, in minimum
denominations of $10,000 (although sometimes they may be sold in minimum
denominations of $5,000). Commercial paper is exempt from registration
under the Securities Act of 1933 by reason of the exemption provided
by section 3(a)(3) thereof (15 USC 77c). That exemption is inapplicable
where the securities are sold to the general public (17 CFR 231.4412).
The reasons for such exemption, taken together with the abuses that
gave rise to the passage of the Banking Act of 1933 (“the Glass-Steagall
Act”) have led the Board to conclude that the issuance of commercial
paper by a bank holding company is not an activity intended to be
included within the scope of section 20. 1974 Fed. Res. Bull. 36; 12 CFR 250.221.
