Sec.

PART 1-INVESTMENT SECURITIES REGULATION

Sec.

1.1 Further definition of the term "in- 1.3 Exception to limitations and revestment securities". strictions.

1.2 Further limitations and restrictions

on purchase and sale of investment securities for bank's own account.

Section 1.1 Further definition of the term "investment securities". An obligation of indebtedness which may be purchased for its own account by a national bank or a State member bank of the Federal Reserve System, in order to come within the classification of "investment securities" within the meaning of paragraph Seventh (R.S. 5136; 12 U.S.C. 24 and Sup.) must be a marketable security as designated by the express language of said paragraph, and can be purchased for the bank's own account only under the limitations and restrictions provided in said paragraph and the provisions of the regulations in this part.

Under ordinary circumstances the term "marketable" means that the security in question has such a market as to render sales at intrinsic values readily available.

In determining whether a given security is marketable, it must meet the following minimum requirements:

(a) That the issue be of a sufficiently large total to make marketability possible;

(b) (1) That a public distribution of the securities must have been provided for or made in a manner to protect or insure the marketability of the issue, or, in the alternative

(2) Other existing securities of the issuer have such a public distribution as to protect or insure the marketability of the issue under consideration, and such issue must be registered under the provisions of the Securities Act of 1933 (48 Stat. 74; 15 U.S.C. 77a-77aa) as amended, unless it is exempt from registration under section 3 thereof (48 Stat. 75, as amended; 15 U.S.C. 77c and Sup.).

(c) That where the security is issued under a trust agreement, the agreement must provide for a trustee independent of the obligor, and such trustee must be a bank or trust company.

Particular attention is called to the statutory provision that the investment securities which may be purchased, must be "in the form of bonds, notes, and/or debentures, commonly known as investment securities." If an obligation is in the form of a security, it must comply with the regulations in this part as to "marketability" as a condition to the bank's right to invest therein.

Any such security which fails to comply with the law and the regulations in this part, will not be deemed legally acquired, even though the bank considers the transaction as being a loan rather than a purchase of "investment securities", except where such security evidences real estate loans made pursuant to section 24 of the Federal Reserve Act (38 Stat. 273; 12 U.S.C. 371) where the obligations actually represent an initial loan by the bank, or where the obligations were purchased pursuant to said section, in which case the bank is

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required thereby to purchase the entire issue. (R.S. 5136 Seventh; 12 U.S.C. 24 and Sup.) [Sec. I, Reg., Feb. 15, 1936]

ABBREVIATIONS: The following abbreviations are used in this chapter:

Reg.

Regs.

Investment securities regulation, Comptroller of the Currency. Feb. 15, 1936.

Regulations governing national banks in acting as insurance agents and as brokers or agents in making or procuring loans on real estate, Comptroller of the Currency. Dec. 1, 1916.

1.2 Further limitations and restrictions on purchase and sale of investment securities for bank's own account. (a) Although the bank is permitted to purchase "investment securities" for its own account for purposes of investment under the provisions of R. S. 5136 (12 U.S.C. 24 and Sup.) and this part, the bank is not permitted otherwise to participate as a principal in the marketing of securities.

(b) The statutory limitation on the amount of the investment securities of any one obligor or maker which may be held by the bank, is to be determined on the basis of the par or face value of the securities, and not on their market value.

(c) The purchase of "investment securities" in which the investment characteristics are distinctly or predominantly speculative, or "investment securities" of a lower designated standard than those which are distinctly or predominantly speculative, is prohibited.1 The purchase of securities which are in default, either as to principal or interest, is also prohibited.

(d) Purchase of an "investment security" at a price exceeding par is prohibited, unless the bank shall:

(1) Provide for the regular amortization of the premium paid, so that the premium shall be entirely extinguished at or before the maturity of the security and the security (including premium) shall at no intervening date be carried at an amount in excess of that at which the obligor may legally redeem such security; or

(2) Set up a reserve account in order to amortize the premium, said account to be credited periodically with an amount not less than the amount required for amortization under (a).

(e) Purchase of securities convertible into stock at the option of the issuer is prohibited.

(f) As to purchase of securities under repurchase agreement, subject to the limitations and restrictions set forth in the law and this part:

(1) It is permissible for the bank to purchase "investment securities" from another under an agreement whereby the bank has an option or an absolute right to require the seller of the securities to repurchase them from the bank at a price stated or at a price subject to determination under the terms of the agreement, but in no case less than the market value at the time of repurchase.

(2) It is permissible for the bank to purchase "investment securities" from another under an agreement whereby the seller or a third party guarantees the bank against loss on resale of the securities.

1

The terms employed herein may be found in recognized rating manuals, and where there is doubt as to the eligibility of a security for purchase, such eligibility must be supported by not less than two rating manuals.

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(3) It is not permissible for the bank to purchase "investment securities" from another under an agreement whereby the seller reserves the absolute right or the option to repurchase said securities itself or through its nominee at a price stated or at a price subject to determination under the terms of the agreement, notwithstanding the fact that the bank may also, under such agreement, have the absolute right or option to compel the seller to repurchase the securities at a price stated or at a price subject to determination under the terms of the agreement.

(g) As to sales of securities under repurchase agreement:

(1) It is permissible for the bank to sell securities to another under an agreement whereby the bank has an option or an absolute right to repurchase the securities from the buyer at a price stated or at a price subject to determination under the terms of the agreement, but in no case in excess of the market value at the time of repurchase.

(2) It is not permissible for the bank to sell securities to another under an agreement whereby the purchaser reserves the absolute right or the option to require the bank to repurchase said securities at a price stated or at a price subject to determination under the terms of the agreement, notwithstanding the fact that the bank may also, under such agreement, have the option or absolute right to repurchase the securities from the buyer at a price stated or at a price subject to determination under the terms of the agreement.

In view of the fact that some banks may have bought or sold securities under a form of agreement above indicated as prohibited, the bank should either terminate or modify same so as to conform to this part, where such action may lawfully be taken. Existing agreements of the prohibited type must not be renewed. (R.S. 5136 Seventh; 12 U.S.C. 24 and Sup.) [Sec. II, Reg., Feb. 15, 1936]

1.3 Exception to limitations and restrictions. The restrictions and limitations of this part do not apply to securities acquired through foreclosure on collateral, or acquired in good faith by way of compromise of a doubtful claim or to avert an apprehended loss in connection with a debt previously contracted. (R.S. 5136 Seventh; 12 U.S.C. 24 and Sup.) [Sec. II, Reg., Feb. 15, 1936]

PART 2-NATIONAL BANKS ACTING AS INSURANCE AGENTS AND AS BROKERS OR AGENTS IN MAKING OR PROCURING LOANS ON REAL ESTATE

Sec.

2.1 Statutory requirements to be com

plied with by national bank desiring to act as insurance agent. 2.2 Regulations for national banks which may undertake to act as agents for insurance companies. 2.3 Statutory requirements to be complied with by national bank desiring to act as broker or agent in Section 2.1 Statutory requirements to be complied with by national bank desiring to act as insurance agent. (a) The bank

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must be located in a place the population of which does not exceed 5,000 as shown by the last preceding decennial census.

(b) The insurance company for which the bank acts as agent must have been authorized by the authorities of the State in which the bank is located to do business in that State.

(c) The activities of the bank as such agent must be restricted to the soliciting and selling of insurance and the collection of premiums on policies issued by the insurance company.

(d) The bank may receive for services so rendered such lawful fees or commissions as may be agreed upon between the bank and the insurance company for which it may act as agent.

(e) The bank is prohibited from assuming or guaranteeing the payment of any premium on insurance policies issued, through its agency, by its principal.

(f) The bank is prohibited from guaranteeing the truth of any statement made by an assured in filing his application for insurance. (g) The powers conferred are to be exercised under such regulations as may be prescribed by the Comptroller of the Currency. (Sec. 13, 39 Stat. 753; 12 U.S.C. 92) [Regs., Dec. 1, 1916]

2.2 Regulations for national banks which may undertake to act as agents for insurance companies. (a) Each contract of agency must be formally accepted by the board of directors of the agent bank by a resolution spread upon the minutes in the following form:

Be it resolved that the contract of agency entered into on 19. between the

National Bank of dent) and

ratified and approved.

Insurance Company and the
by

president (or vice presicashier, a copy of which is on file in this bank, is hereby

(b) A certified copy of such resolution, attested by the president or vice president and by the cashier and by a majority of the directors of the bank, must be forwarded to this office on forms to be furnished by this office.

(c) There should be on file in the bank, available for inspection by the Examiner, the following documents:

(1) An authoritative statement showing the population of the town according to the last preceding decennial census.

(2) A proper certificate from the authorities of the State in which the bank is located showing as to each insurance company for which the bank is acting as agent that such company has received authority from the said State to transact business in that State.

(3) A proper certificate or other writing of each insurance company for which the bank acts, authorizing the bank to act as its agent, setting forth that the bank does not guarantee the payment of any premium on insurance policies issued through its agency by its principal, and stating that the bank is not to be held responsible for the truth of any statement made by an assured in filing his application for insurance.

(4) Copies of all reports made by the agent bank to each insurance company which it represents.

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(d) The bank will be required to keep a record as to each company for which it acts as agent, showing: For fire insurance: The amount of each policy, the rate and premium, date of commencement, term, and date of expiration, as well as a description of property insured, with name of assured and to whom loss is payable. As to life insurance: Amount and date of policy, with premium, and a statement as to under what form the insurance is written, giving also name of assured and beneficiary. As to any and all other forms of insurance: The fullest possible particulars as to amounts, dates, rates, premiums, and what is insured by the policy, and of collection of all premiums collected for account of the company, refunds made, the proportion of premium credited to the profits of the bank under its agreement with the company, the proportion due the company, the amounts and dates of all remittances made to the insurance company on account of premiums collected, and the balance, if any, due from the bank to the insurance company.

(e) The bank will be required to carry on its general ledger an account which will, at all times, show the amount due to insurance companies for which it is acting as agent, on account of premiums collected but not remitted, and this liability must be shown in reports of condition and in the published statements of the bank under the heading "other liabilities-on account of insurance premiums collected and not remitted," unless specifically provided for in the report.

(f) The bank should also keep such records as may be required by each insurance company in the manner and under the forms prescribed by the various companies; all of which should be available for inspection by the Examiner on request.

(g) The agent bank must not assume any responsibility or liability for either the adjustment, settlement, or payment of losses under any policy issued by or through its agency.

(h) The records of all profits derived from the insurance agency should be carried in a separate account on the books of the bank, and the records should be so kept as to enable the Examiner readily to trace to the source all items of profit derived in this connection. (Sec. 13, 39 Stat. 753; 12 U.S.C. 92) [Regs., Dec. 1, 1916]

2.3 Statutory requirements to be complied with by national bank desiring to act as broker or agent in making or procuring loans on real estate. (a) The bank must be located in a place the population of which does not exceed 5,000 as shown by the last preceding decennial census.

(b) The real estate by which the loans negotiated are secured must be located within 100 miles of the place in which the negotiating bank is located.

(c) The bank may receive for such services a reasonable fee or com

mission.

(d) The bank shall in no case guarantee either the principal or interest of any such loans.

(e) The powers conferred are to tions as may be prescribed by the (Sec. 13, 39 Štat. 753; 12 U.S.C. 92)

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be exercised under such regulaComptroller of the Currency. [Regs., Dec. 1, 1916]