frsbog_mim_v10_0102.pdf

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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.

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:

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.

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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 .

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- 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.

frsbog_mim_v10_0102.pdf

Documents

t ha t

t i t s meeting

r t e r g

i n t e r p r e t e

t h e r e f o r e

secur ing t i t

s secured e i t h e

c t i o n s