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FEDER L RESERVE BO RD

W SHINGTON

x-3385

April

19, 1922.

SUBJECT: Ruling

on

Reserves Against Liabilities Resulting

from Receipt and Use of Trust lUnds.

Dear Sir:

For some time past the Federal Reserve -Board has

had under consideration the question of reserves against

liabilities which result from the receipt and use of trust

funds.

At the

meeting

of the

Board today

a

formal ruling

on this question was adopted, a copy of which is enclosed

herewith for your information.

Very truly yours,

G o v e r n o r .

(Enclosure)

TO ALL F. R. AGENTS

COPIES TO GOVERNORS.

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RESERVES AGAINST LIABILITIES RESULTING FROM RECEIPT AND USE OF TRUST FUNDS.

X-33S5*

A national bank exercising fiduciary powers need not

carry reserves against trust funds, which it keeps

segregated and apart from it* generpl aglets, or de-

posits in another institution. It , however, such funds

are mingled with the general assets of the bank under

authority of Section 11(k), Federal Reserve Act, a

deposit liability thereby arises against which reserves

must be carried.

All funds received by a national bank, including funds

deposited

by a

corporate debtor

to

meet

the

corporation's

maturing obligations, give rise to deposit liabilities

against which reserves must

be

carried, unless

the

funds

are

received

as

trust funds

and are

kept segregated from

the

general assets

of the

bank.

In computing reserve requirements, trust funds deposited

by a national bank in another institution must, be clas-

sified by the latter as an individual deposit rather than

a bank deposit.

Whether funds received under certain circumstances are

trust funds depends in each case upon the particular cir-

cumstances.

These principles are equally applicable to State member

banks

and

trust companies receiving

and

using funds under

like circumstances.

A number of inquiries have been received relating directly or indirectly

to the subjects discussed in the two rulings published on p. 1^35 of the

Federal Reserve Bulletin for December, 1^21, and the Board has deemed it

advisable to issue this further ruling dealing generally with the same

subjects and discussing also certain related questions which have been

raised since that time.

Section 11(i) of the Federal Reserve Act, which authorizes the Federal

Reserve Board to grant permission to national banks to exercise dfiduciary

powers, provides

in

part that:

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-2-

X-33S5a

National banks exercising any or all of the powers

enumerated

in

this subsection shall segregate

all

assets held in any fiduciary capacity from the general

assets

of the

bank

and

shall keep

a

separate

set of

books and records showing in proper detail all trans-

actions engaged in under authority of this subsection.

If this provision were not qualified in a subsequent paragraph

of the section, all funds received by a national bank in a fiduciary

capacity would have to be kept separate and apart from the general assets

of the

bank

and

could

not be

mingled with other funds received

by the

bank

in the

course

of its

strictly banking business. This provision

is

merely

a

statement

of the

general rule

of law

that

a

trustee must keep

property which it holds in trust segregated from property belonging to

the trustee individually or to other trusts. The national bank could,

however, unless prohibited by the terms of the trust to which the particu-

lar funds belonged, deposit them in another bank for the account of the

national bank

as

fiduciary,

for

this would

not be

mingling trust funds

with

the

funds

of the

bank acting

as

fiduciary.

It is to be noted, however, that a subsequent provision of Section

11(k)

modifies

the

prohibition against mingling funds held

in a

fiduciary

capacity with the general assets of the bank. The provision in question

reads

as

follows

J

Funds deposited or held in trust by the bank awaiting

investment shall

be

carried

in a

separate account

and

snail not be used by the bank in the conduct of its'

business unless it shall first set aside in the trust

department United States bonds cr ether securities

approved by the Federal Reserve Board.

Construing this latter provision, the Federal Reserve Board has,

by its Regulation F, Series of 1920, provided as follows:

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-3- • X-33S5a

Funds received

or

held

in the

trust department

of a

n at ...una* uaxua. aw ax ling inve stzadnt or distribution may

be deposited in the commercial department of the bank

to the credit of the trust department, provided that

the bank first delivers to the trust department, as

collateral security, United States bonds, or other

readily marketable securities owned by the bank, which

collateral security shall

at all

times

be

equal

in

market

value to the amount of the funds so deposited.

Consequently, unless prohibited from

so

doing

by the

terms

of the

particular trust, a national bank may deposit in its commercial department

funds which

it has

received

in a

fiduciary capacity

and

which

are

held

temporarily awaiting investment or distribution, that is, it may mingle

such funds with the general funds of the bank, provided it deposits proper

collateral

in its

trust department

as the

security

to the

trust estate

for

the funds thus used. When, however, trust funds are thus deposited in

the

bank's commercial department,

the

bank incurs

a

deposit liability

against which reserves must be carried, since, in effect, the trust de-

partment has become an ordinary depositor in the commercial department,

and the deposit constitutes in the hands of the commercial department,

funds which may be used generally in the conduct of its business.

The result is that if funds received by a national bank in its

fiduciary capacity are kept separate from the bank's general funds, so

that the property of the trust estate can always be identified, or if the

trust funds

are

deposited

in

another institution

to the

credit

of the

trust

department, the national bank is, with respect to such funds, subject to

no deposit liability against which it need carry reserves; but as soon as

the bank mingles those trust funds with its general funds, it thereupon

incurs a deposit liability against which it must maintain reserves. To

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- 4 - X - 3 3 8 5 a

s t a t e t h e s e p r o p o s i t i o n s i n a n o t h e r f o r m ? B o d e p o s i t l i a b i l i t y r e s u l t s

f r o m t r u s t f u n d s d e p o s i t e d i n a n a t i o n a l b a n k s o l o n g a s s u c h f u n d s a r e

c a r r i e d a s t r u s t f u n d s a n d k e p t s e g r e g a t e d f r o m t h e b a n k s g e n e r a l

a s s e t s .

I f t h e

t e r m s

o f t h e

t r u s t p e r m i t ,

t h e

t r u s t f u n d s

m a y b e e m -

p l o y e d i n o r d i n a r y c o m m e r c i a l b a n k i n g i n t w o w a y s , b o t h o f w h i c h , h o w e v e r ,

w i l l g i v e r i s e t o d e p o s i t l i a b i l i t i e s ; i t m a y t r a n s f e r t h e f u n d s t o i t s

c o m m e r c i a l d e p a r t m e n t ,

a s

p r o v i d e d

i n

S e c t i o n

1 1 ( k ) o f t h e

F e d e r a l R e s e r v e

A c t a n d P a r a g r a p h V o f t h e B o a r d s R e g u l a t i o n F , i n w h i c h e v e n t t h e

n a t i o n a l b a n k w i l l b e s u b j e c t t o r e s e r v e r e q u i r e m e n t s o n a c c o u n t o f t h i s

d e p o s i t

i n i t s

c o m m e r c i a l d e p a r t m e n t ,

o r i t m a y

m a k e

a

g e n e r a l d e p o s i t

o f t h e f u n d s i n a n o t h e r i n s t i t u t i o n f o r t h e a c c o u n t o f i t s t r u s t d e p a r t -

m e n t , a n d i n t h i s e v e n t t h e d e p o s i t a r y i n s t i t u t i o n w i l l b e r e q u i r e d t o

c a r r y r e s e r v e s a g a i n s t s u c h d e p o s i t .

I f t h e n a t i o n a l b a n k r e c e i v i n g f u n d s i n i t s f i d u c i a r y c a p a c i t y

d e p o s i t s t h o s e f u n d s i n a n o t h e r i n s t i t u t i o n , t h e l i a b i l i t y o f t h a t o t h e r

i n s t i t u t i o n

i s , a s

s t a t e d a b o v e ,

a

d e p o s i t l i a b i l i t y a g a i n s t w h i c h

i t

m u s t c a r r y a r e s e r v e b a l a n c e w i t h i t s F e d e r a l R e s e r v e B a n k , i f i t i s a

m e m b e r b a n k . S u c h a d e p o s i t s h o u l d b e d e s i g n a t e d i n s o m e w a y a s a d e p o s i t

f o r a c c o u n t o f t h e n a t i o n a l b a n k a s f i d u c i a r y a n d t h e d e p o s i t a r y b a n k m u s t

t r e a t

i t a s a n

i n d i v i d u a l d e p o s i t r a t h e r t h a n

a

b a n k d e p o s i t ; t h a t

i s ,

i n c o m p u t i n g i t s r e q u i r e d r e s e r v e , t h e d e p o s i t a r y b a n k m a y n o t i n c l u d e

i t s

l i a b i l i t y

t o t h e

n a t i o n a l b a n k

a s

f i d u c i a r y a m o n g

t h e

a m o u n t s

d u e t o

o t h e r b a n k s f r o m w h i c h t h e a m o u n t s d u e f r o m o t h e r b a n k s m a y b e d e d u c t e d .

T h i s n e c e s s a r i l y r e s u l t s f r o m t h e f a c t t h a t t h e t r a n s f e r o f t r u s t f u n d s

t o t h e .

d e p o s i t a r y b a n k c o n s t i t u t e s

a

d e p o s i t

b y t h e

n a t i o n a l b a n k

a s

f i d u c i a r y a n d n o t a d e p o s i t b y s u c h b a n k i n i t s o w n r i g h t a n d c o n s e q u e n t l y

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- 5 - x _ 3 3 8 5 a

t h e d e p o s i t i s n o t a n i t e m d u e t o b a n k s g e n e r a l l y , b u t i s a n i t e m d u e

t o t h e n a t i o n a l b a n k a s f i d u c i a r y a n d s o a n a l o g o u s t o a n i n d i v i d u a l

d e p o s i t .

T h e s a m e p r i n c i p l e s m u s t a l s o d e t e r m i n e w h e t h e r f u n d s w h i c h a r e

r e c e i v e d

b y a

n a t i o n a l b a n k f r o m

a

c o r p o r a t e d e b t o r

t o

m e e t

t h e

c o r p o r a -

t i o n s m a t u r i n g o b l i g a t i o n s ( s u c h a s b o n d s a n d c o u p o n s ) c o n s t i t u t e

d e p o s i t l i a b i l i t i e s w i t h i n t h e m e a n i n g o f S e c t i o n 1 9 o f t h e F e d e r a l R e -

s e r v e

- A c t . I f t h e

f u n d s

s o

r e c e i v e d

a r e

t r u s t f u n d s

a n d a r e

k e p t

a t a l l

t i m e s s e g r e g a t e d f r o m t h e b a n k s g e n e r a l a s s e t s , t h e b a n k i n c u r s n o

d e p o s i t l i a b i l i t y

a n d

n e e d c a r r y

n o

r e s e r v e a g a i n s t s u c h f u n d s . T h i s

i s

t r u e i r r e s p e c t i v e o f t h e m a t u r i t y o f t h e o b l i g a t i o n s . I f , o n t h e o t h e r

h a n d ,

t h e

f u n d s

a r e

m i n g l e d w i t h

t h e

b a n k s g e n e r a l f u n d s ,

a

d e p o s i t

l i a b i l i t y i s t h e r e b y c r e a t e d a g a i n s t w h i c h r e s e r v e s m u s t b e c a r r i e d .

W h e t h e r o r n o t i n a n y g i v e n c a s e f u n d s r e c e i v e d b y a b a n k t o m e e t

a c o r p o r a t e d e b t o r s m a t u r i n g o b l i g a t i o n s c o n s t i t u t e t r u s t f u n d s d e p e n d s

u p o n t h e e x p r e s s o r i m p l i e d t e r m s o f t h e a g r e e m e n t u n d e r w h i c h t h e f u n d s

a r e r e c e i v e d a n d t h e o t h e r c i r c u m s t a n c e s o f t h e p a r t i c u l a r c a s e . I f t h e

b a n k i s a c t i n g a s t r u s t e e u n d e r a d e e d o f t r u s t f o r t h e h o l d e r s o f t h e

o b l i g a t i o n s w h i c h a r e t o b e p a i d , t h e p r e s u m p t i o n w o u l d b e , i n t h e a b s e n c e

o f e v i d e n c e t o t h e c o n t r a r y , t h a t i t w a s t h e i n t e n t i o n o f t h e p a r t i e s t h a t

t h e f u n d s r e c e i v e d s h o u l d b e h e l d a s t r u s t f u n d s s u b j e c t t o t h e t e r m s o f

t h e

d e e d

o f

t r u s t .

O n t h e

o t h e r h a n d ,

i f t h e

b a n k

h a s n o

d u t y

t o t h e

h o l d e r s o f t h e o b l i g a t i o n s , a n d t h e r e i s n o s p e c i a l a g r e e m e n t s e t t i n g f o r t h

t h e

b a n k s d u t i e s

i n

r e g a r d

t o

h a n d l i n g

t h e

f u n d s ,

t h e

b a n k b e i n g a u t h o r i z e d

m e r e l y t o p a y t h e o b l i g a t i o n s w h e n a n d a s p r e s e n t e d , t h e p r e s u m p t i o n w o u l d

b e t h a t t h e t r a n s a c t i o n w a s i n t e n d e d t o g i v e r i s e t o a n o r d i n a r y d e p o s i t

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- 6 -

x-3385a

t

l i a b i l i t y , t h e b a n k h a v i n g a u t h o r i t y t o m i n g l e t h e f u n d s w i t h i t s

g e n e r a l a s s e t s

a n d

a c t i n g m e r e l y

a s t h e

a g e n t

o f t h e

c o r p o r a t e d e b t o r

i n

p a y i n g

t h e

o b l i g a t i o n s .

I n t h e t w o

r u l i n g s p u b l i s h e d

o n p *

I U 3 6

o f t h e 1 9 2 1

F e d e r a l

R e s e r v e B u l l e t i n ,

t h e

B o a r d p a s s e d u p o n

t h e

f a c t s

o f t w o

s p e c i f i c

s i t u a t i o n s

b u t d i d n o t

a t t e m p t

t o l a y

d o w n d e f i n i t e r u l e s

f o r

d i f f e r -

e n t i a t i n g b e t w e e n d e p o s i t s w h i c h c o n s t i t u t e t r u s t f u n d s

a n d

d e p o s i t s

w h i c h g i v e r i s e

t o a

l i a b i l i t y a g a i n s t w h i c h r e s e r v e s m u s t

b e

c a r r i e d .

I n t h e

p r e s e n t r u l i n g , h o w e v e r ,

t h e

B o a r d l a y s d o w n

t h e

b r o a d r u l e

t h a t

a l l

f u n d s r e c e i v e d

b y a

b a n k

i n t h e

c o u r s e

o f i t s

c o m m e r c i a l

o r

f i d u c i a r y b u s i n e s s m u s t b e t r e a t e d e i t h e r a s d e p o s i t s a g a i n s t w h i c h

r e s e r v e s m u s t b e c a r r i e d , o r a s t r u s t f u n d s s u b j e c t t o t h e o r d i n a r y

r e s t r i c t i o n s a n d s a f e g u a r d s i m p o s e d u p o n t h e c u s t o d y a n d u s e o f t r u s t

f u n d s , a n d t h a t w h e t h e r a c e r t a i n d e p o s i t f a l l s i n o n e c a t e g o r y o r t h e

o t h e r m u s t d e p e n d

i n

e a c h c a g e u p o n

t h e

p a r t i c u l a r t e r m s

a n d

c o n d i t i o n s

u n d e r w h i c h i t w a s m a d e .

F o r

c o n v e n i e n c e ,

t h e

i n s t i t u t i o n r e c e i v i n g

t h e

f u n d s

i n

q u e s t i o n

h a s

b e e n r e f e r r e d

t o

t h r o u g h o u t

t h e

r u l i n g

a s a

n a t i o n a l b a n k .

I t i s

t o b e

u n d e r s t o o d ,

o f

c o u r s e , t h a t

t h e

p r i n c i p l e s h e r e i n s t a t e d

a r e

e q u a l l y

a p p l i c a b l e t o S t a t e m e m b e r b a n k s a n d t r u s t c o m p a n i e s r e c e i v i n g a n d u s i n g

f u n d s u n d e r l i k e c i r c u m s t a n c e s .

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