less than 50 percent of the market value of such Fund is in a Common Stock Trust, the Administrator may approve, upon application by the Operator, the transfer to such Common Stock Trust of an amount up to the total of such deposit: Provided, That any such transfer shall not cause the Common Stock Trust to be in excess of 50 percent of the respective Reserve Fund.

(iii) Payments and withdrawals from Capital and Special Reserve Funds. When payments are made or funds are withdrawn from the Capital or Special Reserve Fund, as authorized in this paragraph, (a) if 50 percent or more of the market value of such Capital Reserve Fund or Special Reserve Fund, as of the date of such payment or withdrawal, is in a Common Stock Trust, an amount shall be withdrawn from such Common Stock Trust to the order of a particular Reserve Fund in the proportion that the market value of such Common Stock Trust bears to the total market value of such Reserve Fund; or (b) if less than 50 percent of the total market value of the Capital or Special Reserve Fund, as of the date of such payment or withdrawal is in a Common Stock Trust, the Administrator may, upon application by the Operator, approve the allocation of the payment or withdrawal entirely to the non-trust portion of such Capital Reserve Fund or Special Reserve Fund, or the Administrator may approve the allocation of such payment or withdrawal between the Common Stock Trust and the non-trust portion of such Capital Reserve Fund or Special Reserve Fund in any proportion, so long as the market value of the Common Stock Trust immediately after such withdrawal does not exceed 50 percent of the market value of such Capital or Special Reserve Fund. If the allocation requested in such application is not approved by the Administrator or if the Operator makes no application, then such payment or withdrawal shall be made from the Common Stock Trust in the proportion that the market value of the Trust bears to the market value of the entire Capital or Special Reserve Fund.

(iv) Applications under subdivisions (ii) and (iii) (b) of this subparagraph. Applications of the Operator required by subdivisions (ii) and (iii) (b) of this subparagraph shall include a statement reporting the amount to be deposited into or withdrawn from the Capital Reserve Fund and Special Reserve Fund,

the cash and securities on deposit in the non-trust portion of the respective funds, the cash and investments in the respective Common Stock Trust and the obligations payable from the Capital and Special Reserve Funds.

(4) Instruments of transfer and withdrawal; countersignature of. (i) Checks, drafts or other instruments of transfer drawn on the Capital Reserve Fund or Special Reserve Fund to the order of the Capital Reserve Fund-Common Stock Trust or Special Reserve Fund-Common Stock Trust, after execution by the Operator, shall be forwarded to the Administrator, and such instruments after countersignature on behalf of the Maritime Administration will be forwarded to the Trustee, or returned to the Trustee, or returned to the Operator, as the Operator requests.

(ii) As representatives of the Maritime Administration, the incumbents of the positions as Comptroller, Deputy Comptroller, and Chief, Division of Audits, as duly certified by the Maritime Administration, are jointly and severally authorized to execute and deliver or cause to be delivered, on behalf of the Maritime Administration, checks, drafts or other instruments of withdrawal, drawn against the Capital Reserve Fund and the Special Reserve Fund: Provided, That each such instrument of transfer or withdrawal shall be countersigned on behalf of the Administration by its Secretary or Assistant Secretary.

(iii) Withdrawals from the Capital and/or Special Reserve Fund-Common Stock Trusts shall be in accordance with the provisions of subparagraphs (7) (ii) and (8) (i) of this paragraph.

(5) Expenses of the Common Stock Trusts. (i) Brokerage fees and expenses incurred in acquiring or disposing of securities shall be paid from the principal of the respective Trusts and shall be deemed, in the case of acquisitions, to be part of the cost of the acquired security and, in the case of dispositions, to be a reduction of the price received. Before incurring any other fees or expenses, the written or telegraphic consent of the Administrator must be obtained.

(ii) Trustees' fees shall be paid out of the principal of the Trusts.

(6) Powers and duties common to the Trustees of the respective Trusts. The Trustees of the Capital Reserve FundCommon Stock Trust and the Special Reserve Fund-Common Stock Trust shall have the following powers and duties:

(i) To hold the principal for the purpose of investing and reinvesting in common stocks:

(a) Which are issued by corporations organized and existing under the laws of the United States or of the District of Columbia or of any State of the United States; and

(b) Which are currently fully listed and registered upon an exchange registered with the Securities and Exchange Commission as a national securities exchange; and

(c) Which would be acquired by prudent men of discretion and intelligence in such matters who are seeking a reasonable income and the preservation of their capital.

Provided, however, That, during the existence of the Trusts the Trustees may hold the principal (and, as to the Capital Reserve Fund-Common Stock Trust only, any accumulated income derived from such principal as well as amounts transferred to said Trust from the Special Reserve Fund-Common Stock Trust) uninvested and in cash in such amounts and for such periods of time as shall be prudent and for the best interests of the respective Trust.

(ii) To retain for such length of time as shall be prudent any common stocks acquired pursuant to the provisions of subdivision (i) of this subparagraph and to invest and reinvest any cash received for investment or from sale of common stock or property (meaning property received in liquidation) received by virtue of common stock holdings, and to dispose of such common stocks and any property whether received in liquidation or as a dividend upon such terms and conditions as shall be prudent and for the best interests of the Trust.

(iii) In its discretion, to exercise any conversion privilege and exercise or sell any subscription right available in connection with any common stock at any time held by it; to consent to the reorganization, consolidation, merger or readjustment of the finances of any corporation, or to the sale, mortgage, pledge or lease of property of any corporation (any of the common stock of which may at any time be held by it) and to do any act with reference thereto, including the exercise of options, the making of agreements or subscriptions and the payment of expenses, assessments or subscriptions which may be deemed necessary or advisable in connection therewith, and to

hold or dispose of any common stock which it may so acquire in connection with the terms and conditions of the trust agreement.

(iv) To vote personally or by general or limited proxy, any shares of stock which may be held by it at any time, to exercise personally or by general or by limited power of attorney any right appurtenant to any common stock held by it at any time, and to enter into any voting trust or other similar agreement.

(v) To register any common stock held by it under the trust agreement in its own name or in the name of a nominee: Provided, That, the Trustee maintains on its books a clear record of the fact that each such common stock holding is for the trust.

(vi) To keep an accurate and detailed record of all receipts and disbursements of the trust, separated as to income and principal transactions.

(vii) To render to the Administrator and to the Operator within fifteen days after the close of each month a report in triplicate of activities relative to the Common Stock Trust. The original of the report shall be sent to the Administrator, and the duplicate and triplicate copies to the Operator who shall promptly forward one copy of the report to the District Comptroller, Maritime Administration. The report shall reflect for the period, (a) number of shares of common stock purchased, (b) date acquired, (c) book value, (d) sales, (e) date sold, (ƒ) sales price, (g) stock dividends, (h) cash dividends, (i) stock rights, subscription rights, options and conversion privileges received, exercised or sold, (j) income transferred from the Special Reserve Fund-Common Stock Trust to the Capital Reserve Fund-Common Stock Trust, or to the Capital Reserve Fund as directed, (k) amounts paid from the principal and/or accumulated income of the Capital Reserve FundCommon Stock Trust, or to the Capital Reserve Fund as directed, (1) amounts paid from the principal of the Special Reserve Fund-Common Stock Trust to the Special Reserve Fund as directed, (m) payments of those fees and expenses specified in subparagraph (5) of this paragraph, (n) the total market value of the Common Stock Trust, and (0) any other known factor affecting the book value of the investments.

(7) Additional powers and duties of Trustee; Capital Reserve Fund-Common Stock Trust. The Trustee of the Capital

Reserve Fund-Common Stock Trust shall have the following powers and duties in addition to those described in subparagraph (6) of this paragraph:

(i) To hold any accumulated income of the Capital Reserve Fund-Common Stock Trust as well as amount of common stock transferred to such Trust from the Special Reserve Fund-Common Stock Trust, for the purpose of investing and reinvesting in common stocks as specified in subparagraph (6) (i) of this paragraph.

(ii) Upon reasonable notice in writing signed by the Administrator and the Operator, to pay to the Capital Reserve Fund from the principal and/or accumulated income of the Trust such amount or amounts, in cash, as the Administrator and the Operator direct.

(iii) If, pursuant to the terms of the Common Stock Trust Agreement, the Trust terminates or is revoked by the Administrator, to reduce the principal and accumulated income to cash and to pay such cash to the Capital Reserve Fund in the amount or amounts and within such period of time as the Administrator and the Operator direct. In the event of such termination or revocation, or in the event of the resignation or removal of a Trustee, to supply a statement reporting the information required under subparagraph (6)(vii) of this paragraph with copies distributed as provided therein.

(8) Additional powers and duties of Trustee; Special Reserve Fund-Common Stock Trust. The Trustee of the Special Reserve Fund-Common Stock Trust shall have the following powers and duties in addition to those described in subparagraph (6) of this paragraph:

(i) Upon reasonable notice in writing signed by the Administrator and the Operator, to pay to the Special Reserve Fund from the principal of the Trust such amount or amounts, in cash, as the Administrator and the Operator direct.

(ii) To pay the entire income of the Trust (which income shall not be invested or reinvested by the Trustee of the Special Reserve Fund-Common Stock Trust) from time to time, but at least monthly, to the Capital Reserve FundCommon Stock Trust, or if there be no such Trust at the time then to pay to the Capital Reserve Fund such amount or amounts as the Administrator and the Operator direct.

(iii) After the Administrator advises the Trustee that a statutory and/or con

tractual recapture period under the Operator's Operating-Differential Subsidy Agreement has terminated, to transfer from the Trust, to the extent such amount is in the Trust, an amount determined by the Administrator to be equal to the sum of the value of (a) the net capital gains made (whether realized or not), (b) the stock dividends declared and (c) the rights to purchase stock issued to the Trust; all made, declared and/or issued during such recapture period:

(1) In cash or in stock to the Capital Reserve Fund-Common Stock Trust; or

(2) In cash, if there be no Capital Reserve Fund-Common Stock Trust, to the Capital Reserve Fund in the amount or amounts as the Administrator and the Operator direct.

(iv) If, pursuant to the terms of the Common Stock Trust Agreement, the Trust terminates or is revoked by the Administrator, to reduce the principal to cash and to pay such cash to the Special Reserve Fund in the amount or amounts and within such period of time as the Administrator and the Operator direct. In the event of such termination or revocation, or in the event of the resignation or removal of a Trustee, to supply a statement reporting the information required under subparagraph (6) (vii) of this paragraph with copies distributed as provided therein.

(v) To render, at such time as the Administrator advises the Trustee that a statutory and/or contractual recapture period under the Operator's OperatingDifferential Subsidy Agreement has terminated, a statement of the Special Reserve Fund-Common Stock Trust showing the sum of the value of (a) the net capital gains made (whether realized or not), (b) the stock dividends declared, and (c) the rights to purchase stock issued to the Trust, and showing any other known factor affecting the book value of the investments.

(9) Identification of approved depositories and Trustees. Upon the creation of a Common Stock Trust, the Administrator shall advise the Trustee in writing of (i) the approved depositories in which are maintained Capital Reserve Fund Joint Account or Accounts and the Special Reserve Fund Joint Account or Accounts in the name of the Maritime Administration and the Operator, and (ii) in the event there is in existence a Common Stock Trust, the identity of the Trustee of such existing Common Stock

Trust. The Administrator shall advise the Trustee in writing of any changes in the foregoing.

(10) Modification or alteration of Trust Agreement. The Administrator and the Operator may by mutual agreement modify or alter the Trust Agreement as to all or any part of the Trust Agreement without the consent of the Trustee upon ten days (excluding Saturdays, Sundays and national holidays) notice in writing to the Trustee; except as to the Trustee's compensation, which shall only be changed by mutual consent of all parties to the Trust Agreement.

(11) Examination of Trustee's records. The Administrator and the Operator shall have access to and the right to examine and make photostatic or other copies of any books, documents, papers and/or records of the Trustee involving transactions related to the Trust.

(12) Resignation or removal of the Trustee. Any Trustee may resign at any time by giving sixty days (excluding Saturdays, Sundays, and national holidays) notice in writing to the Administrator and the Operator. The Administrator and the Operator acting jointly may remove any Trustee at any time after giving thirty days (excluding Saturdays, Sundays and national holidays) notice in writing. In the case of the resignation or removal of any Trustee the Operator shall with the prior written approval of the Administrator appoint a successor Trustee and the predecessor Trustee shall at the direction of the Administrator forthwith transfer and deliver the trust fund in its entirety to such successor Trustee.

(13) Statements required from the Operator. The Operator shall render semiannually to the Administrator within thirty days after the close of each calendar half year, a report, in duplicate, of the Capital Reserve Fund-Common Stock Trust and/or Special Reserve Fund-Common Stock Trust consisting of a detailed list of assets held in the Trust at the end of the period showing the book value and the current market value of the investments, also a summary reporting the total book value of the trust fund at the beginning and at the end of the period, the capital gains or losses realized during the period, and the Trustee's fees paid out on the principal of the Trust during the period. The original of the report shall be sent to the Administrator, and the duplicate

copy to the District Comptroller, Maritime Administration.

(14) Revocation and termination of the Common Stock Trusts. Any Common Stock Trust (1) may be revoked by the Administrator at any time after notice to the Operator, and an opportunity to be heard, or by the Operator with the prior written or telegraphic approval of the Administrator; and (ii) shall terminate (a) when no longer permitted by law, and (b) immediately upon written notice from the Administrator to the Trustee that the Operator has ceased to be a subsidized operator.

(15) Determination of controlling provisions. If the rules and regulations prescribed in this paragraph should conflict with the provisions of any applicable statute or of a Common Stock Trust Agreement, such provisions shall govern. The resolutions referred to in this section shall be retained in accordance with the provisions of § 380.24 of this chapter. [G.O. 31, 2d Rev., 25 F.R. 3714, Apr. 28, 1960, as amended at 30 F.R. 12356, Sept. 28, 1965] § 286.3 Capital necessarily employed in the business.

(a) Fundamental basis. (1) Capital necessarily employed in the business or capital investment necessarily employed in the operation of the subsidized vessels, services, routes, and lines (such terms hereinafter being referred to as "capital employed") shall be determined upon the basis of the net worth reported by the operator in its balance sheet as at the end of the month preceding the effective date of the agreement (or in the last previous balance sheet deemed by the Maritime Administrator to present fairly the financial position of the operator, but adjusted to take into account subsequent changes in net worth and such other changes as the Maritime Administrator may deem essential to a proper determination of capital employed as at the end of such month), and as at each succeeding December 31 during the effective period of the agreement, adjusted as hereinafter provided. For the purpose of this determination, net worth shall be as stated in the operator's balance sheet, prepared in accordance with the Uniform System of Accounts for Operating-Differential Subsidy Contractors, as adopted by the Maritime Administrator in Part 282 of this chapter. Net worth shall be deemed to include capital stock, capital surplus, and earned surplus: Provided, That cap

ital stock subscribed but not issued as at the date of this determination, or any part thereof, shall be deemed to be so included only from the date on which, and to the extent that, payments are made on account of such subscriptions. The net worth of the operator shall be adjusted to recognize the excess or deficiency of the underlying book value of wholly-owned subsidiary companies as compared with the investment of the operator therein, provided such companies with the prior written approval of the Maritime Administrator, perform services or supply facilities coming within the purview of section 803 of the Merchant Marine Act, 1936, as amended, or the Subsidy Agreement of the operator. Net worth, as thus stated, shall be further adjusted in such manner as the Maritime Administrator may determine to be fair and reasonable, including the elimination of appreciation, adequate statement of the liabilities, and such other adjustments as are consistent with sound accounting principles. the computation of net worth, goodwill and other intangibles not actually acquired for cash or for a consideration determined by the Maritime Administrator to be the equivalent thereof and stock held in treasury shall be excluded, and in instances where, in the judgment of the Maritime Administrator, goodwill and other intangibles were acquired improvidently or at an excessive price, the amount thereof shall be excluded also, or reduced, as the Maritime Administrator may determine.

In

(2) In determining capital employed, based on the net worth of the operator, certain limitations shall be applied as follows:

LIMITATION (1)

CAPITAL RESERVE FUND

Interest Accruals for Deposit in Statutory [Capital] Reserve Funds

The excess, if any, of the sum of the balances in the Capital Reserve Fund and Interest Accruals for Deposit in Statutory [Capital] Reserve Funds accounts (as said accounts are hereinafter defined and after interim adjustments thereof are made as provided under paragraph (d) of this section) over the sum of (1) and (i) as set forth below shall be deemed to be Capital Held in Reserve, and shall not be taken into account in determining capital employed:

(1) The total depreciation, computed in accordance with Part 284 of this chapter, deposited or accrued for deposit in the Capital Reserve Fund on the vessels assigned under the Operating-Differential Subsidy

Agreement at the beginning of the year or other accounting period with respect to which the determination is made.

(ii) The amount (exclusive of approved transfers not actually effected) in the Capital Reserve Fund determined by the Maritime Administrator as being committed by the operator to complete the equity payments (that is, the cost of vessel designs and plans, other capitalizable items, and the sum of progress payments to be made by the operator during the period of construction or reconstruction) (after deduction of any trade-in allowance otherwise allowed for capital employed) of the operator's cost of a vessel, or vessels, covered by a construction, reconstruction, or Construction-Differential Subsidy Agreement, which vessel(s) is (are) to be assigned under an Operating-Differential Subsidy Agreement.

For the purpose of applying this limitation, the aggregate of the balances in the Capital Reserve Fund and Interest Accruals for Deposit in Statutory [Capital] Reserve Funds accounts, as of the date of the balance sheet on which the determination of capital employed is based, shall include only the following:

The sum of

(a) The actual amount on deposit (including securities valued as provided under applicable regulations) in the Capital Reserve Fund of the operator;

(b) The balance of account entitled Interest Accruals for Deposit in Statutory [Capital] Reserve Funds;

(c) All other accrued deposits (except voluntary deposits) into the Capital Reserve Fund as follows:

(1) Accrued depreciation on vessels required to be deposited,

(2) Proceeds from sale or loss of vessels and other amounts which, upon collection, are required to be deposited.

(d) Approved transfers from the Special Reserve Fund;

(e) Less-amounts reflected in the balance sheet (other than Mortgage Notes-Vessels) which are payable from the Capital Reserve Fund and which are excluded from Working Capital for the purpose of determining capital employed.

LIMITATION (2)

SPECIAL RESERVE FUND

Deferred Operating-Differential Subsidy Receivable Less: Recapturable Profits-Maritime Administration

The excess, if any, of the sum of the balances in the Special Reserve Fund and Deferred Operating-Differential Subsidy Receivable account, less the balance in the Recapturable Profits-Maritime Administration account (as hereinafter defined and after interim adjustments provided under paragraph (d) of this section) over five (5) percent of capital employed, computed without regard to the Special Reserve Fund and related accounts as determined in accordance