CIRCULARS AND REGULATIONS. Special instructions to Federal Reserve Agents in connection with the reports which they will make to the Federal Reserve Board to enable it to act upon applications filed under the Kern amendment to the Clayton Act, were sent out on July 6, 1916. With the issue of these instructions the Federal Reserve Board adopts the policy of issuing as "special instructions" circulars not of general interest to member banks of the system, but intended primarily for the assistance of Federal Reserve Agents and the 12 Federal Reserve Banks. Following the special instructions will be found the blanks to be filled out by those desiring to make application under the Kern amendment. These blanks can be obtained from the Federal Reserve Board. Section 8 of the Clayton Act does not become effective until October 15, 1916, but in order that those who will be affected by its provisions may have ample time to take such action as may be necessary to comply with the law, the Board is making the forms and instructions available at this time. SPECIAL INSTRUCTIONS. NO. 1 OF 1916. WASHINGTON, July 6, 1916. To All Federal Reserve Agents: The prohibitions of section 8 of the Clayton Act which relate to interlocking bank directors go into effect on October 15, 1916. These prohibitions relate to banks organized or operating under the laws of the United States, and therefore apply to State banks or trust companies which are members of the Federal Reserve System as well as to national banks. For convenience, therefore, banks “organized or operating under the laws of the United States" will be referred to as "member banks." ANALYSIS OF SECTION 8 OF THE ACT. As originally enacted, section 8 of the Clayton Act provides, in substance (a) That no person shall be a director, officer, or employee of a member bank having resources aggregating more than $5,000,000 and at the same time a director, officer, or employee of any other member bank. (b) That no private banker or person who is a director of a nonmember bank having resources aggregating more than $5,000,000 shall be eligible to serve at the same time as a director in any member bank. (c) That no member bank in a city of more than 200,000 inhabitants shall have as a director or other officer or employee any private banker or any director or other officer or employee of any other bank or trust company located in the same place. EXCEPTIONS. The provisions of section 8 capital stock represented by shares. (1) Do not apply to mutual savings banks not having a (2) Do not prohibit a person from being at the same time (a) a Class A director of a Federal Reserve Bank and also an officer or director, or both an officer and a director, in one member bank; (b) an officer, director, or employee of one member bank and one other bank or trust company, whether a member bank or nonmember bank, where the entire capital stock of one is owned by the stockholders of the other. THE KERN AMENDMENT. By an act of Congress approved May 15, 1916, section 8 was amended by the addition of a further proviso reading as follows: * "Nothing in this act shall prohibit any officer, director, or employee of any member bank, or Class A director of a Federal Reserve Bank, who shall first procure the consent of the Federal Reserve Board * * from being an officer, director, or employee of not more than two other banks * * if such other bank * * is not in substantial competition with such member bank." The duty imposed upon the Federal Reserve Board in passing upon any application made under authority of this amendment is to determine whether or not the two * * banks in question (or either of them) are in substantial competition with the member bank. If both are nonmember banks the act does not require that they shall not be in substantial competition with each other. In reaching a conclusion on this point it will be necessary for the Board to call upon the Federal Reserve Agent, as its local representative, to make investigation of the facts in each case, to report the same to the Board and to give the Board the benefit of his recommendation whether the consent applied for shall be granted or refused. It is therefore necessary to call to the attention of the Federal Reserve Agents some of the factors which must be considered in determining the question of whether or not the banks involved are in substantial competition. PURPOSES OF THE ACT AND THE AMENDMENT. The significance of the language "substantial competition" can not be fully understood without considering the purpose of the original Act as well as that of the amend ment. As outlined by the Judiciary Committee, in reporting the original bill to the House, the purpose of section 8 of the original Clayton Act was "to prevent as far as possible control of great aggregations of money and capital through the medium of common directors between banks and banking associations, the object being to prevent the concentration of money or its distribution through a system of interlocking directorates." It will be observed that the Act does not undertake to prevent interlocking directorates of banks located in small cities and having small aggregate resources. It applies in terms to the qualification of directors, officers, and employees of banks (a) in cities of more than 200,000 inhabitants or (b) having resources aggregating more than $5,000,000. While the general purpose of the Act, as indicated by its title, was "to supplement existing laws against unlawful restraints and monopolies," and while monopolies are created by a restraint of legitimate competition, a literal interpretation of section 8 as originally enacted would prohibit a person from serving at the same time as a director, officer, or employee of two or more banks, under certain circumstances, whether or not such banks were competitors. The Kern amendment, however, authorizes the Board to permit a director, officer, or employee of a member bank, who otherwise would be ineligible, to serve as a director, officer, or employee of not more than two other banks or trust companies, whether State or national, provided such other banks or trust companies are not in substantial competition with such member bank. It should be borne in mind that the Act does not vest an arbitrary discretion in the Board to permit the same person to serve on the board of directors of any two or more banks, when such banks come within the restrictive language of the Act as originally passed; but it merely confers authority upon the board to permit interlocking directorates when such banks are not in substantial competition within the meaning of the Act. SUBSTANTIAL COMPETITION, It is manifest that no fixed rule can be prescribed by which this question can be automatically determined. The facts in each case must be carefully considered and it is the duty of the Board to withhold its consent in any case in which it would defeat the purposes of the Act to permit the same person to serve as an officer, director, or employee of more than one bank. If the two banks in question are not competitors in any respect, no question arises. If they do compete, the very difficult question arises whether or not the competition is "substantial." It is necessary to keep in mind that the main purpose of the Act was to prevent the monopolization and centralization of credit through interlocking directorates of banking institutions. One of the injurious results of such conditions is that the public is deprived of the bene fit of legitimate competition. In general, therefore, two banks coming within the prohibition of the original Act would be deemed to be in substantial competition within the meaning of the language used in the amendment if the business engaged in by such banks under natural and normal conditions conflicts or interferes, or if the cessation of competition between the two would be injurious to customers or would-be customers, or would probably result in appreciably lessening the volume of business or kinds of business of either institution. It is realized that some difficulty will be experienced in the application of this test. Two banks engaged in the same character of business (for example, where both receive commercial deposits and make commercial loans) would be regarded as in substantial competition if their fields of activity extended over the same geographical territory If their operations were not carried on in the same geographical territory, then, although they engaged in the same class of business, they would not necessarily be regarded as substantial competitors. Again, if they conducted their operations in the same place, but because of their comparatively small size in relation to the total banking opportunities of the locality, and because of the fact that they did not deal with the same class of customers, the cessation of competition between them might, from the public point of view, be unimportant, they would not necessarily be deemed to be in substantial competition. Or if their operations were conducted in the same locality, but the character of business engaged in differs fundamentally (for example, where one does only an essentially commercial banking business, while the other does only an essentially trust-company or fiduciary business), such banks need not be regarded as in substantial competition. It is therefore necessary to consider the scope or extent of territory that a bank's operations cover and the character and kinds of business it engages in. Size, measured by aggregate resources, will constitute one of the factors to be considered, since to increase the volume of loanable funds usually increases the radius of a bank's operations. A bank with $100,000,000 resources would seek investments in a larger area and of a more diverse character than a bank with $5,000,000, and so might come into competition with banks located some distance away, while the bank with $5,000,000 resources might not extend its activities to any real extent beyond the borders of the city in which it is located. For example, a bank in New York might come into substantial competition with a bank in Chicago if both were engaged in the same class of business and if both had become so large as to be more than local institutions. Where the operations of the two banks cover a common territory from a geographical standpoint, it is necessary to consider carefully the character of business engaged in. As a very large proportion of the member banks do a commercial banking business, the volume of this business within the territory covered by the operations of the banks city of all applications received before August 15, 1916, on or before September 15, 1916. in question becomes an important factor. In RÉSUMÉ. It is therefore necessary that consideration should be given (1) To the size in aggregate resources of banks involved. (2) To the character of business engaged in, i. e., the extent of commercial business and extent of purely investment or trust company business of the two institutions. (3) Whether the operations of the two banks cover the same geographical territory. Form 94. APPLICATION FOR PERMISSION OF THE FEDERAL RESERVE BOARD TO SERVE AT THE SAME TIME AS DIRECTOR, OFFICER, OR EMPLOYEE Pursuant to the provisions of section 8 of an act of Congress entitled "An act to supplement existing laws against unlawful restraints and monopolies, and for other purposes," approved October 15, 1914, and amended by an act of Congress approved May 15, 1916, I hereby make (Director, officer, or employee.) a corporation created and organized under the laws of named are not in substantial competition with the member bank or by the said banking institutions, which are made a part of this applica tion. (Date.) (Name of applicant.) Washington, D. C. THE APPLICANT IS REQUESTED TO ANSWER THE QUESTIONS ON THE (4) Whether the two banks actually compete to any appreciable extent in any important activity, for example, (a) in soliciting deposits on demand or on time from other banks or individuals, (b) in the purchase or sale of commercial paper or other securities, (c) in the purchase or sale of foreign exchange, (d) in soliciting trusteeships, etc. The form of application approved by the Board is To the FEDERAL Reserve Board, intended to furnish an analysis of the character of business of the banks involved as far as it is possible to determine this from the books of the bank. The Federal Reserve Agent should supplement this, however, with any information he may be able to obtain and should base his recommendation upon the facts in each case. If he concludes that there is substantial competition between the banks or that interlocking directorates or common officers or employees of the two banks might result in any injury to the public, or in any substantial restraint of or detriment to the business of either bank, he should recommend that the application be refused. The Board, in reaching a decision, will carefully consider the recommen. dation of the Federal Reserve Agent and will base its conclusion upon the report and recommendation of the agent together with other information which its own investigation may disclose. * * The Kern amendment authorizes the Federal Reserve Board at its discretion to revoke such consent." In order that the Federal Reserve Board may revoke its consent at any time it becomes necessary, Federal Reserve Agents should keep it advised of any change either in local business conditions or in the resources or character of business conducted by the banks which may tend to make them substantial competitors. In view of the great amount of time necessary to an adequate consideration of each case, it is desirable that directors, officers, and employees file their applications as soon as possible. The Board will endeavor to act upon 53038-16- 4 Name of applicant Principal business or occupation Business address... List of firms of which applicant is a member and the corporations of which he is a director, officer, or employee: Firm or corporation. Form 94a. This letter was sent out by the Board on July 18: Where two or more persons desire to make application for the Board's consent, under the Kern amendment to the Clayton Act, to serve on the boards of directors of the same two banks, it will be sufficient if one Form 94a is filed by each bank for the first applicant and reference is made to this form by subsequent applicants desiring to serve on the same two boards, provided, however, if either bank is required to make a report of its condition to the Comptroller of the Currency or to the State authorities after Form 94a has been filed, a new Form 94a should be filed with the first application subsequent to such report. To complete the records of the Board and to facilitate its Work it is desired that Form 94a shall be filed by the two banks involved in each case where the question of substantial competition is to be to serve on the boards of Bank A and Bank B passed upon. Thus if the same persons desire and the first applicant has filed Form 94a for Bank A and also one for Bank B, subsequent applicants may refer to these forms until either Bank A or Bank B has been required to make a later report of its condition to the Comptroller of the Currency or to the State authorities. Bank B for applicants desiring to serve with If Form 94a has been filed by Bank A and these two banks, it will not be sufficient for an applicant desiring to serve on the boards of Bank A and Bank C to refer to Form 94a filed by Bank A in connection with Bank B. INFORMAL RULINGS OF THE BOARD. Below are reproduced letters sent out from time to time over the signatures of the officers of the Federal Reserve Board which contain information believed to be of general interest to Federal Reserve Banks and member banks of the system: Membership of State Banks and Trust Companies. Your memorandum in reference to Circular No. 14 and Regulation M, series of 1915, which relates to State banks and trust companies as members of the Federal Reserve system, has been submitted to and considered by the Board. It appears that you are of the opinion that many of the State banks and trust companies are apprehensive that membership in the system may involve an undue restriction of their corporate activities as a result of future regulations of the Board and you feel that some assurance should be given to applying banks that, as members, their status, so far as the exercise of legitimate banking and trust company powers is concerned, should be more definitely determined. As the extent of the Board's power to adopt any specific regulation involves a question of law which must be determined by the facts in each case, it is, of course, impracticable to outline definitely the scope of all future regulations. In order, however, that the attitude of the Board may be made clear, I am instructed to state to you that the Board understands that it is not its function to undertake to impose on the activities of member banks any restrictions that are not contemplated by the Act, but only to prescribe such regulations as are designed to carry out the purposes of the Act. There are a great many decisions of our courts dealing with the subject of the scope of authority of administrative bodies to promulgate regulations. The principles established by these decisions will, of course, be adhered to by the Board in adopting its regulations. While Congress could not delegate its power to make a law, it can, as stated in Field v. Clark, 148 U. S., 649, 694, "make a law to delegate a power to determine some fact or state of things upon which the law makes or intends to make its own action depend," or, as expressed in the case of Locke's Appeal, 72 Pa. St., 491, 498 "The legislature can not delegate its power to make law, but it can make a law to delegate a power to determine some fact or state of things upon which the law makes or intends would be to stop the wheels of government. to make its own action depend. To deny this, There are many things upon which wise and useful legislation must depend which can not be known to the lawmaking power and must therefore be a subject of inquiry and determination outside of the halls of legislation." The Board does not feel that it is one of its functions to undertake to restrict State banks or trust companies in the exercise of true banking or trust-company powers as defined by the laws of the State in which they are created. In passing upon the applications of State banks and trust companies, however, it believes it to be its duty to admit only those institutions which are solvent and sound and whose membership will not constitute an element of weakness in the system. The Board does not consider that it is a prerequisite to the admission of any State bank or trust company that it should possess any certain amount of paper eligible for rediscount with a Federal Reserve Bank. Congress has provided that the privileges and advantages of membership may be extended to State banks and trust companies, thus creating one compact banking system while still preserving the integrity of both the State and national systems. Leaving aside any question of their duty to the country, it is manifestly to the best interest of every strong and sound State bank and trust company to contribute its share to the strength and protective power of the Federal Reserve system by subscribing to the capital stock of its Federal Reserve. Bank and by maintaining its required reserve. This is true whether the State bank or trust company has a small proportion of its assets in liquid paper eligible for rediscount or has any paper of such description at all. The fact that it has little eligible paper would not of itself make its membership an element of weakness or danger, and it is obvious that as a member of the system it would be in a position to contract for loans and to obtain cash from other member banks having paper eligible for rediscount and thus indirectly to obtain the desired accommodation. The ability to lend assistance to member banks directly and indirectly will be increased as the strength of the |