FORM FOR REPORT ON THE TRUST DEPARTMENT OF A NATIONAL BANK-Continued

accounts of various classes; and (2) to make sure that the securities that are held probably represent wise investments and certainly represent investments that are legal, that is, in accord with the trust instruments as well as in accord with the local laws so far as the latter apply. It is also to be noted that the method of supervision evinces a determination to make sure that there is no fusion of trust securities and the like with those of the bank itself, but that there is complete and distinct separation between them for the reasons which have already been fully set forth.

Use of Trust Powers

The question whether trust powers should be undertaken by a bank is one which is still very much in controversy. There is an insufficient supply of well equipped men for service as trust officers who can be had at salaries which are within the reach of banks of moderate size. In some cities the development of satisfactory trust business-especially individual trusts-has been slow and it has sometimes seemed as if the profits of the department were not as large as had been hoped or as would warrant the expense involved. Elsewhere the local (state) requirements governing the undertaking of trust business have proved so onerous that national banks of the smaller size, or state commercial banks, have not thought it worth while to become active in the field. The question of going into this branch of business should be carefully discussed with a view to the obligations entailed by it and the amount of business reasonably to be expected before fiduciary powers are undertaken.

Some indication of the experience of national banks is afforded by an inquiry made by the Board under date of October 12, 1921, addressed to all national banks (1,387 in number) which has been granted permits to act in fiduciary capacities. The Board summarizes its general conclusions from this investigation as follows:

Replies were received from 1,301 banks, but 411 of those reported that they had not established trust departments, so that only 890 were really qualified to answer the questionnaire. Altogether, 221 of these banks reported that they had not advertised for or solicited trust business and had made no effort to obtain such business. Several explained that they merely obtained the powers for the sake of the added advertisement or prestige which the possession of such powers afforded, and many others explained that, on account of lack of space, pressure of other business, or other causes, they either had not been able to establish their trust departments or had not been able to push their development. Many of these banks stated that they expected shortly to begin active campaigns to develop and build up their trust departments.

Of those which had established trust departments and advertised for or solicited trust business, many reported that they were meeting with much greater success than they had anticipated and were operating trust departments very successfully. As a rule, the city banks were the most successful, and many of the country banks reported that the people in their communities were slow to appreciate the advantages of corporate fiduciaries and the value of the services which they offered through their trust departments. A surprising number of the banks in the smaller towns, however, reported good progress in the development of their trust departments, and many of them were very optimistic as to their prospects for further success in this field.

Many of the banks replying to the questionnaire expressed the opinion that the main problem in developing a trust department is to educate the public as to the superior advantages of corporate fiduciaries, and that it takes time, therefore, to build up a profitable trust business. Most banks which are operating trust departments, however, are of the opinion that their trust departments bring new business into their banking departments and also enable them to retain business of their own customers which otherwise might be diverted to competing, trust companies. Several of those which are located in small communities where there are no competing trust companies felt that through their trust departments they were providing a much-needed service to their communities.

One very encouraging feature of the information obtained through the questionnaire is the fact that the opposition on the part of the state authorities which existed at first in many of the states has very largely disappeared, and that in all but three or four of the states national banks are permitted to exercise fiduciary powers on a basis of substantial equality with state trust companies, at least so far as the provisions of the state laws and the policy of the state authorities are concerned, and thus the purpose of Congress in amending section 11 (k) of the Federal Reserve Act by the Act of September 26, 1918, is being successfully accomplished.

Detailed statistical information obtained in answer to various queries raised may be presented as follows:

1. Have you advertised for or in any way solicited trust business?

2. In general terms, what success have you had in the operation of your trust department?

3. In how many instances have you acted in any of the following capacities?

4. In general terms, what additional business of this character is in prospect for your institution?

6. In your opinion, does the trust department bring new business into the bank?

7. In your opinion, is it valuable in assisting you to retain the accounts of your bank customers which otherwise might be diverted to competing trust companies?

No Competing Trust Companies.... 44

8. Do your customers seem to appreciate and value the additional facilities offered them through your trust department?

9. What, if any, difficulty have you had with the courts in receiving appointments to act in fiduciary capacities and in qualifying under appointments made by individuals?

10. What other difficulties, if any, have you encountered in the operation of your trust department?

Conflict of State Laws

At the present time the states may be divided into some three distinct groups as regards their attitude toward the exercise of fiduciary powers by national banks.

1. Group 1 includes those states which expressly authorize national banks to exercise trust powers. These include Colorado, Indiana, Iowa, Ohio (which permits the functions of trustee and registrar only, and then only when capital

is over $100,000), South Dakota, Vermont, Virginia, Washington (which requires a paid-up capital of $50,000), Delaware (which limits the functions to those of trustee, executor, administrator, and registrar), Washington (which has certain limitations), and Georgia (which permits the powers of trustee, executor, administrator, and registrar)."

2. Group 2 includes those states which apparently permit the exercise of fiduciary powers by implication as not being in contravention of state law: Alabama, Arizona, Arkansas, California (registrar only), Connecticut, Delaware, District of Columbia, Florida, Georgia, Idaho, Illinois, Kansas, Kentucky, Louisiana, Maine (trustee, executor, and registrar), Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire (trustee and registrar), New Jersey (if organized prior to March 24, 1899), New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, West Virginia, Wisconsin, Wyoming, and Utah. The overlapping in part between the first two groups reflects later definite enactment of part or all of the implied powers previously granted by implication.

3. Group 3 includes states in which there is an absolute prohibition of the exercise of fiduciary powers by national banks. Where such prohibition is expressed and positive and where it either directly or by necessary implication prohibits the exercise of fiduciary powers, the question to be settled first of all is whether or not some competing institution in the state, such as a state bank, trust company or other corporation is permitted to exercise the powers in question. In the event that it is, the Board may issue a permit in any event," but if not, the powers granted under the Federal Reserve Act do not permit it to do so.

As a result of this conflict of state laws, considerable litigation has developed with respect to the exercise of these powers. The following extract from the Federal Reserve Board's annual report for 1923 gives a condensed summary of the situation and is therefore reproduced.

The Board's annual report for 1922 discussed the preliminary stages of the litigation in Pennsylvania which concerned the right of the Corn Exchange National Bank of Philadelphia to act in a fiduciary capacity. It will be recalled that the Orphans' Court, in which the question first arose, refused to recognize the bank's right to act as guardian or to appoint it as such, on the ground that the exercise of trust powers by national banks in Pennsylvania was in contravention of the state law. The court based this conclusion upon certain conflicts between the state law relating to the administration of trusts by state banking institutions and the provisions of section 11 (k) of the Federal Reserve Act. On appeal, the Superior Court of Pennsylvania reversed the Orphans' Court and upheld in all respects the rights of national banks in Pennsylvania to exercise trust powers. An appeal was then taken to the Supreme Court of Pennsylvania by the Commonwealth, which had intervened in the proceeding.

On April 9, 1923, the Supreme Court of Pennsylvania rendered its decision in this case, affirming the decision of the Superior Court and finally establishing Digest, XI (k), 200, p. 14, contains specific references to Bulletin.

1919 Bulletin, p. 363; Digest, XI (k), 400, p. 14.