CHAPTER XX.

Rules and Regulations of the Federal Reserve Board Governing the Procedure of Banking Corporations Organized Under the Edge Law.

The rules and regulations relating to the organization and operation of banking corporations organized under the provisions of Section 25 (a) of the Federal Reserve Act, viz., under the Edge Law, are printed in full in Appendix, Exhibit 9.

Reserve Act Permits Limited Foreign Banking Activity.

As far back as September 6, 1916, Congress, in Section 25 of the Reserve Act, granted authorization to national banks with capital and surplus exceeding $1,000,000 to invest to a limited extent in the stocks of domestic corporations principally engaged in international or foreign banking; but in the absence of legislation permitting the formation of such corporations under Federal charters, our national banks could only purchase stocks in state-chartered corporations operating mainly in New York and intended to obtain a share in the world's dealings in acceptances and other forms of exchange. Except in pre-war Germany and to a limited extent in other commercial countries, this business has continued almost exclusively a feature of London's financial section, where it is conducted by long established and very strongly organized bodies locally styled "trusts." The tolls collected for such fiscal services form a considerable factor in England's "invisible exports" which comprise among other items insurance in various forms, interest upon loans, freight upon overseas shipping; and, in the aggregate, the revenues thus derived greatly exceed the balance of import trade, and serve to materially enhance the national wealth of the United Kingdom.

Edge Act Grants Autonomy With Extensive Powers.

When the problems of post-wartime legislation in large measure had been disposed of, and Congress was at liberty to deal with private interests desirous of engaging in international finance, the Edge Law was enacted (December 24, 1919), prescribing a method for the incorporation of foreign banking companies under Federal charters, and materially extending the powers conferred under the Federal Reserve Act of 1916. To the Federal Reserve Board was relegated the duty and responsibility of providing suitable rules and regulations, which appear upon page 454 and to which reference should be made in connection with these comments.

In this Chapter the word "Board" relates to the Federal Reserve Board.

Wherever reference is made to a corporation organized under the Edge Law (Section 25 (a) of the Federal Reserve Act)the word "Corporation" will be spelled with a capital "C."

RULES AND REGULATIONS.

FORMATION OF CORPORATION.

Five or More Individuals May Organize.

The organization can be effected by any number of natural persons, not less than five.

Articles of Association.

The organizing members may adopt Articles of Association upon Federal Reserve Form 151 (see page 477), and they are at liberty to add any other provision which does not conflict with law. Each member signs the Articles, which are then forwarded to the office of the Federal Reserve Board, where the paper is placed on file.

Organization Certificate.

An Organization Certificate is next required, which must be executed upon Form 152 (page 480). The name assumed by the

Corporation, the place or places where its operations are to be carried on and sundry other particular items of information must be set forth under the hands of the organizers (for specific items, see Section 3 of Regulations). The paper must contain a certificate of acknowledgment, and when duly executed, should be forwarded to the Board for its files.

Special Requirements Control Selection of Name.

Owing to the importance of preventing duplication of names, a preliminary application should be made for the reservation of the title selected for the proposed organization; and a special form, No. 150, page 476, is provided for this purpose. Upon receipt of this paper, the Board will reserve the name selected, for a period of 30 days, while passing upon the suitability of the title. No foreign trade banking corporation organized under Section 25 (a) is authorized to employ the word "Federal," where the word "bank" appears as a part of the title. A further requirement negativing the right to employ the term "bank" in cases where the corporation issues its own bonds, debentures or other like obligations, calls for more than passing notice and for some explanation. This distinction and special limitation is due to the basic banking principle that banks of deposit are under primary obligation to hold their corporate funds and current moneys intact and free from entangling obligations, in order that the cheques and other forms of demands by customers may be met when due. Bonds, debentures and acceptances when issued by the corporation direct and not dealt in as a matter of purchase and investment, are a paramount obligation upon the financial resources which should be reserved for depositors and customers of that unsecured class; hence it follows that a financial institution engaged in discounts and guarantees of general finance is a broker and dealer in discounts and exchange rather than a conventional "bank"; and the public should be protected from the use of the term "bank” where commissions and discounts, and not the handling of deposits, is the principal source of revenue and the main object in view.

The distinction here noted occupies a prominent place in these Rules and Regulations; and it will be again referred to as this banking principle is from time to time applied therein.

Final Steps Antecedent to Engaging in Business.

When these preliminaries have been completed, the association becomes a body corporate and is possessed of corporate powers; but these powers are suspended until the corporation has secured from the Board a written authority to commence business. The president or cashier and three members of the Board of Directors must execute and file a certificate signed by them, setting forth:

(a) That each director is a citizen of the United States; (b) That a majority of the shares of capital stock is owned by persons or interests owing allegiance to the United States;

(c) That the initial payment, 25%, upon the authorized capital stock, has been made pursuant to law. Later payments will be the subject of certification by the cashier, as and when they are made in regular course.

CAPITAL STOCK AND TRANSFER THEREOF.

Amount and Nature of Stock.

A minimum of stock, $2,000,000, is specified in the statute. The Regulations prescribe that the Articles of Incorporation must set forth the par value of the individual share, with a clear description of the nature, obligations, rights and principles appertaining thereto, to the end that every stockholder shall possess due and complete information. Stocks of no par value are prohibited.

Reason for Safeguarding Transfer of Stock.

The subject of transfers of stock is dealt with very minutely in the Regulations. This elaborate provision is necessary to insure that the majority at all times shall be owned by citizens

of the United States. The requirements cover acquisition of capital stock by individuals, corporations, firms or companies. Every application for the issue or transfer of shares must be accompanied by affidavits proving the citizenship, etc., of the applicant; and no shares shall be issued or transferred except upon the books of the Company.

Stockholding Based Upon Citizenship.

Where the holder of shares ceases to be a citizen or becomes subject to control by foreign interests, two months of "grace" are allotted for transfer to a qualified owner; and ownership of the shares confers no right of vote after notice by the directors that such transfer is required. The by-laws must contain provisions regulating the registration of shares of stock in a manner calculated to insure ownership by persons, corporations or firms owing allegiance to the United States; and appropriate words explanatory of the nature and effect of these requirements as to ownership, must be contained in each certificate of stock.

OPERATIONS-WHERE CARRIED ON.

Only business incidental to international or foreign transactions shall be conducted in the United States. Agencies may, however, be established within the home jurisdiction, with the consent and approval of the Board; but these agencies must be conducted for and confined to certain specified purposes. branches shall be established in the United States; but branches may be established elsewhere, with the consent of the Board.

INVESTMENT IN THE STOCKS OF OTHER CORPORATIONS.

Regulations Prescribe Extent of Corporate Stock Ownership.

In furtherance of the obvious purpose of the authorization and creation of the Corporation, wide power and scope on in