frsbog_mim_v10_0102.pdf
Transcript of frsbog_mim_v10_0102.pdf
7/17/2019 frsbog_mim_v10_0102.pdf
http://slidepdf.com/reader/full/frsbogmimv100102pdf 1/4
E x O F F I C I O M e m b e r s
C A R T E R G L A S S
SECRETARY o r T H E TREASURY
CHAIRMAN
JOHN SKELTON WILLIAMS
COMPTROLLER OF THE CURRENCY
FEDERAL RESERVE BOARD
w a s h i n g t o n
1.053
W.
P.
G.
HARDING,
GOVERNOR
ALBERT STRAUSS. VICE GOVERNOR
ADOLPH C. MILLER
CHARLES
S.
HAMLIN
J . A . BRODERICK. SECRETARY
L . C . ADELSON, ASSISTANT SECRETARY
W . T . CHAPMAN, ASSISTANT SECRETARY
W . M . IMLAY, FISCAL AGENT
a d d r e s s r e p l y t o
F E D E R A L R E S E R V E B O A R D
March
3, 1919.
SUBJECT: Domestic Acceptances,
x * a 4:05' '3-
Dear S i r :
There i s sent to you herewith, f o r your
information
and
guidance, copy
of
opinion
by th e
General Counsel
of the
Board under date
of
February
8 bearing upon security of acceptances in excess
of 10^.
This opinion
w as
approved
by the
Federal
Re-
serve Board a t i t s meeting today.
Very truly yours,
Governor.
7/17/2019 frsbog_mim_v10_0102.pdf
http://slidepdf.com/reader/full/frsbogmimv100102pdf 2/4
:
X-14C5
1 O i
FEDERAL RESERVE BOARD
WASHINGTON.
February 26,1919,
•'T'..'GR/.HEUM
FOR THE
BOARD,
Subject: Domestic Acceptances,
From
t h e
accompanying f i l e
i t
appears that some confusion
of
thought
ex i s t s
i n t h e
Kinds
of
ce r t a in o f f i ce r s
of
Federal reserve banks
and
tr.ac.ber
banks
a s t o t h e
Board ' s in te rpre ta t ion
of
those provis ions
of
Section
13 of
t h e Federal Reserve Act.which relate
(1 ) To th e power of member banks t o accept drafts drawn in
domestic transactions;
(2 ) Tc th e
e l i g i b i l i t y
f o r
rediscount
by
Feder al r ese rve
banks
of
member bank acceptances.
The
understanding
of
t h i s o f f i c e
cf th e
provis ions
i n
quest ion
a s
i n t e rp re t ed
b y t h e
Board
i s a s
follows:
Subject t o t h e limitations prssc-ribad by th e A ct , mzmber banks a r e
authorized
-
(a) To accept d ra f t s o r b i l l s of exchange which grow cut of t r ansac t ions
involving
t h e
domestic shipment
of
.goods, p rovided- shipping documents
conveying
o r
secu r ing t i t l e
a r e
attached;..at
t h e
time
of
acceptance.
(b) To
accept dra f t s
o r
b i l l s
of
exchange which
a r e
secured
a t t h e
time
— by
warehouse receipts
o r
other such documents convoying
o r
secu ring t i t l e covering rea dil y marketable stap les*
A l l
draf t s accepted
in
domestic transactions must therefore
be
secured
a t t h e
time
of
acceptance ei ther
by
shipping.documents
o r
warehouse receipts
o r
other such documents,
a s
spec i f i ed
i n t h e l a w . I f t h e
aggregate amount
of
draf ts accepted
f o r o n e
person, firm
o r
corporation exceeds
a sum
equal
t o
t e n p e r
cent ,
of the
cap i t a l
and
surp lus
o f the
accep ting bank, such d ra f ts ,
whether
in a
fo re ign
o r
domestic transaction^ must retrain secured throughout
t h e l i f e o f the draf t s ince t h e A c t provides that -
No member bank sh a l l a cc ep t, whether in a fore ign o r domestic transaction,
fo r any one
person,
* *
1
* * * t o an
amount equal
a t any
time
i n t h e aggregate'
t o more than t e n percentua: cf i t s paid up and unimpaired cap it al stock and
surp lus , un less
t h e
bank
i s
secured ei ther
by
attached documents
or by
some
other actual security growing
ou t o f the
same transaction
a s t h e
acceptance.
7/17/2019 frsbog_mim_v10_0102.pdf
http://slidepdf.com/reader/full/frsbogmimv100102pdf 3/4
X-1405
To
give th i s language
any
meaning
i t
must
be
assumed that
t h e
accepting
bank
may, if i t
chooses, release
t h e
secu r i ty
in any
case
in
which
t h e
to ta l
amount accepted for any one customer does n o t excedd t e n pe r cent , of i t s capital
stock
and
surpl us. Unless th is in ter pre tat ion
i s
placed upon
t h e
s t a t u t e ,
the
provision just quoted would be meaningless i n so f a r a s i t r e l a t e s t o domestic
transact ions since a l l drafts accepted in domestic transactions must be secured
a t t he
time
of
acceptance.
In any case, however, where t h e total amount accepted for any one customer
exceeds
t e n pe r
cent,
of the
capital stock
and
surplus
of the
accepting bank
t h e security legally cannot be released unless some other actual security grow-
ing out of the same transaction a s t he acceptance i s substituted therefor. This
immediately raises
t h e
question
as to
whether
o r no t t he
ordinary trust receipt
subst i tu ted f o r shipping documents, warehouse receipts, e t c . , const i tu tes an
actual security such a s i s required by th is provision of the ac t . In an opinion
f i l e d
by
th i s o f f i ce
on
October 12,1917,
an d
printed
on
page
881 of the
November,1917, Bulletin, i t was stated -
that a trust receipt which permits t h e purchaser of the goods
t o obtain control of those goods either f o r mil l ing o r other
purposes
is not an
actual security within
t h e
meaning
of the
a c t , a nd that, therefore, acceptances secured by such trust
r ece ipt s corns within t he 10 pe r cent limitation imposed by
sect ion
13.
A d i f f ere n t s i tua t ion resu l t s , of course, in any case
where th e t rus t receip t is of such a character as not to permit
t h e
purchaser
t o
gain control
of the
goods
as
where they
a r e
held f o r t h e account of the acceptor by some person, warehouse,
o r corporation independent of the borrower*
The view expressed in this opinion has been followed by the Federal
Reserve Board in various rulings relating n o t only t o t he purchaser in a
transaction involving
a
sa le ,
bu t
also
to any
customer
f o r
whom
a
d r a f t
i s
accepted regardless of whether o r no t there is an actual sale of the goods
covered by t h e documents attached t o t he d ra f t ,
ELIGIBILITY FOR REDISCOUNT OF MEMBER
BANK ACCEPTANCES.
Under t h e terms of sect ion 13 any d r a f t o r b i l l of exchange vhich a
member bank
h a s t h e
power
t o
accept under
t h e
provisions
of
that section,
i s techn ical ly e l ig ib le f o r rediscount by a Federa l Reserve Bank. This does
n o t mean, however, that Federal Reserve Banks a r e required by l aw to re -
discount every such acceptance tendered to^
a t n
for that purpose.
In
develop-
ing a general market f o r acceptances t h e Federal Reserve Banks a r e necessari ly
called upon
t o
carry
a
large amount
of
th is c lass
of
paper,
but i t i s
important
that t h e Federal Reserve Board and the Federal Reserve Banks should take a l l
necessary steps t o insure conservatism i n t he exerc ise of the acceptance
power
by
member banks.
The
policy
of the
Board, therefore,
a s
r e f l e c t e d
in
i t s various rul ings, h a s been t o caution Federal Reserve Banks that i n r e -
discounting drafts accepted in domestic transactions they should consider and
in
many
cases inves t igat e , t h e circumstances under which t h e d r a f t w as accepted
in order t o determine whether o r no t t he p ar t i cu la r t rans act ion complies with
t h e
s p i r i t
a s
well
a s t h e
l e t t e r
of the
s t a t u t e .
7/17/2019 frsbog_mim_v10_0102.pdf
http://slidepdf.com/reader/full/frsbogmimv100102pdf 4/4
- 3 -
X-1405
I t was in view of this policy that t h e Federal Reserve Beard has con-
si st en tl y re fr ai ne d from encouraging Federal Reserve Banks
t o
rediscount
c r
purchase warehouse acceptances after t h e warehouse receipts have been r e -
leased though there i s nothing in the law which prohibits t h e rediscount of
such acceptancesx I t i s recognized, however, that an unrestr ic ted pol icy
of rediscount ing o r purchasing such acceptances after t h e warehouse receipts
nave been re le as ed tight very probably le ad
to an
abuse
of the
domestic
acceptance privilege by f a c i l i t a t i n g the use of the warehouse receipt as a
rrere cloak f o r a stra ight loan in v io la t ion of the provis ions of Section
5200. I t can n o t be sta ted, of course, a s a hard and fast rule that the
acceptance c£ a draft secured by a warehouse receipt was no t a bona fide
t ransac t ion ire re ly and solely because t h e warehouse receipt h a s been s u r -
rendered before t h e acceptance i s presented t o t h e Federal Reserve Bank
f o r
rediscount .
I t
should, however,
pu t t he
bank
on
not ice
anu.
should
suggest extreme caution in order t o determine whether in f a c t t h e acceptance
complies
in
every
way
with both
t h e
l e t t e r
an d
s p i r i t
of the
law* When
Congress granted t h e power t o accept drafts in domestic transactions, i t
Clearly intended
t o
facilitate domestic commeros
and did not
contemplate
that this power should be used f o r t h e purpose of extending unreasonable
l i n e s of cred i t t o individual borrowers in subs tan t ia l v io la t ion of the
l im i t a t i ons
of
Section 5800
of th e
Revised Statutes.
If
Congress
had
intended t o g i fe grea te r l a t i tude t o banks under i t s ju r i sd i c t i on in the
n a t t e r
of
loans
of
this charactsr
a
much more direct method would have
been
t o
remove o r
to
broaden t h e l imi t a t i ons
of
Section
5200.
The Board h a s ^recognized t h e fact, however, that in th e ordinary
course of business, shipping documents securing accepted drafts ®ust be
released
in
order that
t h e
customer
f o r
whom
t h e
d ra f t
was
accepted rray
procure t h e goods represented by such documents. I t also recognizes the
fact that where such drafts a r e secured by warehouse receipts i t i s probable
that a t some period during t h e l i f e of the d r a f t i t may be necessary f o r t h e
rece ip t
to be
surrendered
t o t h e
customer
f o r
whom
th e
d r a f t
i s
accepted
in order that t h e transaction involved nay be consummated, In th e case
of shipping documents i t i s ordinar i ly necessary t o re lease t h e documents
at an earlier period than in the case of warehouse receipts<
In
ei ther case,
as a
matter
of
policy
t h e
security should
n o t b e su r -
rendered by the acce pti ng bank u n t i l t h i s becomes nec ess ary in order f o r
th e t ransac t ion to be consummated, an d even when su rr en de re d, banking p r u -
dence requires that
t h e
bank protect | tself
b^
procuring ei ther
a
t rus t
rece ip t c r a definite agreement
on
t h e par t
of
t h e customer t o
who#
the
secu r i t y
i s
surrendered that t h e proceeds der ived from t h e sa l s of the goods
represented by the shipping documents o r warehouse receipts will be de-~
posited with
t h e
accepting bank when available
to pay the
d r a f t
a t
maturity
an d w i l l no t be used by th e customer f o r other purposes, I t should b e r e -
membered, however,
a s
previously s ta ted, that
in any
case where
a
t rus t
receipt i s subs t i t u t ed t h e t e n p e r cent l imit applies i f t he trust receipt
i s such as to give control over t h e goods t o t h e borrowers or t he customer
f o r whom th e d r a f t was accepted.
Respectful ly ,
(Signed) M.C. ELLIOTT
General Counsel.