arises to take bonds into the investment portfolio which might not otherwise have been purchased, or to take such bonds into the investment portfolio in larger quantities than might have otherwise been done. (4) Possible conflicts of interest may also arise with regard to the obligations of those banks holding trust powers and their interests as underwriters. No bank, presumably, would purchase from itself, for its own trust accounts, revenue bonds which it is underwriting. But is there not the temptation to purchase bonds in the open market after a syndicate has been terminated in order to assist in the disposition of an unsold underwriting participation?3 (5) Finally, would a bank's attitude toward a borrower be more liberal if such borrowers were also purchasers of revenue bonds underwritten by the bank? By raising these possibilities we are not in any way impugning the character of the bankers of our country. We are simply applying the principle which Congress adopted when, in its wisdom, it developed certain conflicts-of-interest laws for men assuming governmental posts. It is common sense to take protective action of this type, particularly with regard to banking upon which the economy of our country in large part rests. Accordingly, the National Association of Supervisors of State Banks opposes the passage of 7539. One related matter: the committee is aware of the change in the long-established distinction between general obligation and revenue bonds which the Comptroller has adopted, and with which the Federal Reserve Board does not agree. This conflict has resulted in establishing different ground rules for the National and State member banks. We again urge that this conflict be resolved by legislation and would support the definition of general obligations submitted by the Federal Reserve Board at the 1963 hearings. We respectfully request that this letter be placed in the record of your proceedings on this matter. Very truly yours, F. SHELBY CULLOM, Chairman of the Legislative Committee. NATIONAL ASSOCIATION OF COUNTIES, Subject: H.R. 7539. A bill to authorize national banks to underwrite and deal in securities issued by State and local governments. Hon. WRIGHT PATMAN, Chairman, Committee on Banking and Currency, DEAR CHAIRMAN PATMAN: With reference to the above-mentioned legislation, the National Association of Counties devoted a considerable amount of time and study to this question. A history of this activity and our conclusions are set forth in the enclosed memorandum of November 22, 1964. On behalf of the National Association of Counties, I request that this letter and the accompanying memorandum be made a part of the official record of the committee hearing. I appreciate your consideration in this matter, and I remain, Very truly yours, EDWIN G. MICHAELIAN, President. NATIONAL ASSOCIATION OF COUNTIES, To: National Association of Counties Board of Directors Pursuant to the resolution adopted on August 12, 1964, by the National Association of Counties at its annual conference, in Washington, D.C., President Edwin G. Michaelian appointed an ad hoc committee to study in depth the proposal to 3 We note that H.R. 7539 would include a prohibition of sales from a national bank's underwriting account to its trust account unless permitted by court order. That no more than incorporates the general rule against self-dealing generally applicable to all banks. allow commercial banks to underwrite revenue bonds. At the present time Federal law precludes commercial banks from engaging in such activity. The committee was directed to consider this question and to relay their findings and recommendations to the National Association of Counties' board of directors at their 1964 midwinter business meeting. At that time, the board was authorized by terms of the August 12 resolution to establish a policy for the association. The ad hoc committee's findings were not to be binding upon the board, but were to be considered by it in reaching its own conclusions. The ad hoc committee has met for the last 2 days and has made an extensive study of the question. Representatives from the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the investment banking industry, and the commercial banking industry were invited to participate, and in fact did fully take part throughout the entire meeting. A list of the persons taking part in that meeting as guests is attached. The committee was composed of 17 county officials of which number 14 were in attendance. They were appointed by President Michaelian to provide the widest and most diverse representation possible. The committee's prime consideration was to recommend a policy which would provide for all our securities as competitive and financially sound market as possible. All major arguments and opinions were considered and in the view of the committee, the most important ones are as follow: 1. Commercial banks' entry into the field of underwriting revenue bonds would increase competition among bidders for new issues, with the result of more bids and a corresponding decrease in the interest rates counties are required to pay. 2. The Comptroller of the Currency's opinion is that there are sufficient safeguards to prevent abusements and conflict of interest by the entry of the commercial banks into this field and in fact, such action would be a healthy and contributing factor to the overall good of the market. 3. For over 30 years, the commercial banks and the investment banks have participated in the underwriting of general obligation bonds. Both the representative of the Comptroller of the Currency's Office and the Board of Governors of the Federal Reserve System agree that this situation has resulted in slight, if any, indication of abuses or conflict of interest on the part of either the investment bankers or commercial bankers. Further there is no indication that the commercial banks have dominated or are intending to dominate the general obligation market. 4. The statistical data provided by the opponents pointed to the conclusion that there is relatively little difference in the interest rates between revenue and general obligation bonds of similar quality. Furthermore, there was no proof or apparently no way to conclusively show that the interest rate would be decreased by this action. 5. If commercial banks' underwriting of revenue bonds were to result in some lessening of the existing rate of these bonds, the cost of underwriting general obligation bonds might increase due to the commercial banks devoting less attention to them as a result of their activity in the revenue bond field. 6. The enormous financial resources of the commercial banks might allow them to dominate the entire underwriting field should they be allowed to underwrite revenue bonds as well as general obligation bonds. One result of such a situation might be the driving out of business of many of the smaller investment bankers who presently serve many of our small communities. 7. The principle of separation of commercial banking from investment banking (including underwriting and dealing), is a sound and significant one. It tends to minimize the possibility of banks being subjected to conflict of interest that might affect adversely their ability to devote themselves singlemindedly to their primary function of serving their depositors, borrowers, correspondents, and trust accounts. The following motion was proposed and seconded: The committee feels that the entry of commercial banks into the field of underwriting revenue bonds of States and political subdivisions thereof, would be beneficial to counties. The vote was 7 votes for and 7 votes against. Based upon this action, it is the recommendation of the committee that the National Association of Counties neither opposes nor supports this proposal; however, it is the sense of this committee that the question should not be avoided by Congress, and the National Association of Counties should convey to the President of the United States and to the appropriate congressional leaders a message strongly urging that congressional hearings be held at the earliest possible date to consider this question. Further, it is desirable not only to obtain the necessary legislative judgment on this proposal, but additionally desirable to clarify the present confusion that exists in this area by different interpretations and opinions of the Board of Governors of the Federal Reserve System and the Comptroller of the Currency regarding the definition of general obligation bonds. The division of the committee has led to the conclusion that it would be unwarranted for the National Association of Counties to take a position on this subject which would propose to represent county governments throughout the country; however, this same division does lead us to the conclusion that this question should be decided by Congress at the earliest possible time and we urge the appropriate congressional committee to hold the necessary hearings in the early part of 1965. (Signed) GORDON A. HOWE, Chairman. The board of directors of the National Association of Counties unanimously adopted the recommendations of the committee and does hereby direct the executive director of the National Association of Counties, Bernard F. Hillenbrand, to carry out the directive of the report. (Signed) DONALD M. NEFF, Chairman. COMMITTEE MEMBERS IN ATTENDANCE Gordon A. Howe, chairman, Monroe County Manager, 110 Courthouse, Rochester, Jay Stemmer, Union County freeholder, 900 Raritan Road, Clark, N.J. William O. Beach, Montgomery County judge, 5 Thayer Lane, Clarksville, Tenn. Robert B. Mathias, Prince Georges County attorney, County Courthouse, Upper Marlboro, Md. Daniel T. Murphy, chairman, board of auditors and county administrators, Oakland County Courthouse, Pontiac, Mich. Robert Williamson, police juror, East Baton Rouge Parish, 3361 South Alameda Drive, Baton Rouge, La. Benjamin B. Stout, Harrison County commissioner, County Courthouse, Clarksburg, W. Va. Elmer S. Peters, Sedgwick County commissioner, County Courthouse, Wichita, Kans. Bernard A. Reynolds, Dallas County judge, County Courthouse, Selma, Ala. John L. Chambers, executive secretary, State Association of County Commissioners, 106 Maple Park, Olympia, Wash. Dudley Henderson, Linn County supervisor, County Courthouse, Cedar Rapids, Iowa. Durward Jones, Guilford County attorney, County Courthouse, Greensboro, N.C. Laurel W. Hause, Waukesha County supervisor, County Courthouse, Waukesha, Wisc. GUESTS Mr. David B. Hexter, Board of Governors of the Federal Reserve System. Mr. Richard Lane, attorney at law, Washington, D.C., representative of commercial banks. Mr. Chester Laing, chairman, Committee for Study of Revenue Bond Financing, representative of investment banks. (Whereupon, at 11:30 a.m., the committee proceeded into executive session.) |