TABLE 6 First Chicago Hong Kong Limited Hong Kong SAFEGUARDS AGAINST CONFLICTS OF INTEREST AND UNFAIR PRACTICI S First Chicago Limited United Kingdom 1. Extensions of Credit to an Affiliate Section 23A First Interstate Capital Markets, United Kingdom Manufacturers Hanover Trust Irving Trust International Limited United Kingdom Section 23A of the Federal Reserve Act (12 U.S.C. 371c) regulates The Federal Reserve Board may exempt transactions from the requirements 2. Transactions with Affiliates Section 23B Under the Competitive Equality Banking Act, a new Section 238 was added In addition to extensions of credit and the other transactions covered Under Section 238, all of the transactions described above between a majority of the bank's directors who are not officers or employees of the bank. A bank may not purchase as a fiduciary any securities or assets of an affiliate unless specifically authorized by the trust agreement, court order, or other law governing the fiduciary relationship. Finally, a bank may not publish any advertisement or enter into any agreement stating or suggesting that the bank shall be responsible for the obligations of an affiliate. The Federal Reserve may exempt certain transactions from the requirements of this section if such exemption is found to be in the public interest. subsidiary thereof, or provide an additional credit, property or service to the bank or holding company. An exception is made to permit a bank to require that the customer obtain an additional loan, discount, deposit or trust service, and for additional conditions that related to and usually required in connection with the bank service in question, as well as conditions imposed by the bank to assure the soundness of the credit. For purposes of these restrictions, a "bank" is defined in the same manner as under the Bank Holding Company Act, which now includes FDIC insured banks. 3. Purchase of Securities From Directors Section 22(d) of the Federal Reserve Act (12 U.S.C. 375) provides that a member bank may not purchase from any of its directors any securities or other property unless such purchase is made in the regular course of business and on an "arms length" basis, or when such purchase is approved by a majority of the bank's board of directors. Similarly, a member bank may only sell securities or other property to a director is such sale is on an arms length basis and in the regular course of business. 6. Restrictions on Dividends National banks may not pay any dividends if its losses equal or exceed its undivided profits, after subtracting losses and bad debts. (12 U.S.C. 56). The approval of the Comptroller of the Currency is required before any dividends may be declared in excess of the institution's net profits for that year, combined with its retained net profits of the preceding two years (less any required transfers to surplus). (12 U.S.C. 60). Restrictions on dividends declared by state chartered banks may also be imposed under state laws. 4. Loans to Officers, Directors and Major Shareholders Section 22(g) and (h) of the Federal Reserve Act (12 U.S.C. 375a-b) regulates extensions of credit by an FDIC insured bank to officers, directors and major shareholders of that institution. A major shareholder is defined as any person or group of persons with the power to vote 10 percent or more of any class of the bank's voting securities. These restrictions also apply to extensions of credit to an officer, director or major shareholder of an affiliated company or a parent bank holding company, or a company controlled by such persons, or to a political action committee controlled by or established for the benefit of such persons. Such loans may only be made on an "arms length" basis, and may not involve more than the normal risk of repayment. Various approvals and restrictions are placed on the amount and purposes for which these loans may be made. Extensions of credit made to officers, directors and major shareholders of correspondent banks are similarly regulated. (12 U.S.C. 1972) 5. Anti-Tying Provisions The Bank Holding Company Act Amendments of 1970 (12 U.S.C. 1971 et. seq.) generally provide that a bank may not furnish any service or change the cost of any service, on the condition that a customer obtain some additional service from that bank or the parent holding company or 7. Management Interlocks The Depository Institution Management Interlocks Act (12 U.S.C. 3201 et. seq.) generally provides that a management official of a depository institution or holding company may not serve as a management official with another depository institution or holding company not affiliated with the first institution, if an office of both institutions are located within the same metropolitan area. However, a management official of an institution with $1 billion or more in assets may not serve as a management official in any other nonaffiliated depository institution with assets of $ 500 million Pursuant to section 12(1) of the Securities and Exchange Act of 1934 (15 U.S.C. 781(1)), FDIC insured banks are exempt from the registration requirements of that Act with respect to their own securities. However, the federal bank regulatory agencies are directed by that statutory provision to promulgate regulations which are substantially similar to the regulations issued by the SEC. Thus, banks with 500 or more shareholders and at least $ 1 million in assets are required to file registration statements and periodic reports, issue proxy statements and make other public disclosures is a similar manner as other publicly held corporations. (See, e.g. 12 C.F.R. pt. 206). 9. Anti-Fraud Provisions Banks are not exempt from the anti-fraud provisions of the Securities Act of 1933 or the Securities and Exchange Act of 1934. Under these laws it is unlawful to employ any device, scheme or artifice to defraud or to make any untrue statement of a material fact, or to omit to make a statement necessary to make a statement already made not misleading, or to engage in any other act or practice or course of business which would operate as a fraud on a person in connection with the purchase or sale of any security. (See, e.g. 17 C.F.R. 240.10b-5). Under these provisions, for example, has been held that a bank cannot take actions which have the effect of manipulating the market for a security, and cannot trade based on inside information. 10. Capital Adequacy it The federal bank regulatory agencies determine minimum capital ratios through administrative actions. In general, the bank agencies have set the minimum ratio of total capital to adjusted total assets at 6%. The agencies have the authority to establish higher capital ratios as may be necessary, either on an individual basis or through general regulations. Thus, for example, a newly chartered bank, a bank receiving special supervisory attention, or a bank having a high proportion of off-balance sheet risks (such as standby letters of credit) may be required to have a higher capital ratio. In addition, under the International Lending Supervision Act (12 U.S.C. 3907), a banking agency may issue a directive to a particular institution requiring that institution to establish a plan to increase its capital. (12 C.F.R. 221.8.) Section 11(d) of the Securities and Exchange Act (15 U.S.C. 781) prohibits a securities firm from arranging for an extension of credit to or for a customer on any security which was part of a new issue the securities firm participated in the distribution of within the past 30 days. In addition, both sections 23A and 238 of the Federal Reserve Act cover loans made to third parties which are used for the benefit of an affiliate, and thus would appear to include extensions of credit used to purchase securities from an affiliate. 13. Conversion of Bad Bank Loans Into Bond Issues The disclosure requirements of the Securities Act of 1933 (15 U.S.C. 11. Authority to Examine Affiliates Under the Bank Holding Company Act (12 U.S.C. 1844), the Federal Reserve Board is authorized to conduct examinations of all subsidiaries of a holding company, including the nonbanking subsidiaries. In addition, under the Federal Reserve Act (12 U.S.C. 338), the Board may examine all affiliates of a state member bank. Similar authority is granted to the FDIC with respect to affiliates of insured banks (12 U.S.C. 1820(b)), and the Comptroller of the Currency, with respect to national banks (12 U.S.C. 481). 12. Bank Loans Used to Purchase Securities From Affiliates Section 7 of the Securities and Exchange Act (15 U.S.C. 78g) authorizes The CHAIRMAN. Thank you very much, Mr. Crutchfield. Our next witness is the president of the Bryn Mawr Trust Co., Bryn Mawr, PA, Robert Stevens. STATEMENT OF ROBERT STEVENS, PRESIDENT, BRYN MAWR TRUST CO., BRYN MAWR, PA Mr. STEVENS. Thank you, Mr. Chairman. Senator Proxmire, Senator Garn, Senator Riegle, I'm happy to be here this morning to try to persuade you to help the banks continue to serve their communities. I represent the Bryn Mawr Trust Co. We are a $250 million bank that serves the western suburbs of Philadelphia. We operate five full service branches. We operate two facilities in life care communities in our market area, and we also operate on two college campuses automatic teller machines. We have been a trust company and commercial bank for 98 years. We serve our community with a fierce pride in our independence. We have been subject to two takeover battles in the last several years. The last one included a full-blown proxy fight that lasted 2 years. We've looked right down the barrel of the gun, and we are intent on maintaining our independence and on continuing to serve our communities. I'd like to tell you a little bit about what I mean when I say "serve our community". I polled our officers and directors-they total in number about 55 men and women. I found that we are on the library board. We're represented on the hospital board. We're represented on five school boards, four of them as chairman, president or treasurer. We're involved in eight church related boards, including church investment committees. We serve on three fire companies, two college boards of trustees, one junior college advisory board, two museum boards, four local governments as commissioner or committeemen, the YMCA board and the Boy Scout Council board in our area. In addition, this year the bank will spend $75,000 in charitable community contributions. About 40 percent of that goes to a series of summer concerts that we run outdoors. We had in excess of 3,000 people from our community enjoy these free concerts last summer. In short, gentlemen, we represent something to our community. We believe that we serve it well, and we want the chance to continue to do that. Our bank has done very well over the decade of the 1980's-our assets have grown at a rate of 18 percent. Now if you'll turn to the statement of Charles Pistor, which I believe you have, exhibit 5 shows the rate of growth of other financial institutions for the period 1980-1985. The bar on the left representing commercial banks shows an annual growth rate of about 8 percent. On the other hand, mutual funds have grown or an annual rate of 33 percent. Our bank split the difference. We grew at an 18 percent rate-strong, solid numbers. But because of the restrictions on our lines of revenue, we have only been able to add back 7 percent to our capital over this same period of time. So the proportion of capital to the assets the bank holds is decreasing as we go forward. Because we started from a strong capital base, we are all right for a while. But that while is running out. The reason for the increase in assets and the slower rate of growth of capital is that our net interest margins-I submit because of the competition-over this 8-year period have dropped 35 percent. The net interest margin is off 35 percent during the decade of the 1980's. We need new lines of revenue in order to support our capital, in order to continue to provide the community and our customers the services we now offer. I looked about competition. I got the yellow pages out for what they call the Eastern Main Line. It covers about half our market area. There were 20 banks listed under banks in the yellow pages. Eleven of them were commercial banks, five were savings and loans, three mutual savings banks, and one listing under banks was the GMAC Mortgage Co. I looked under stock brokers. There were 22 listings. We face an abundance of competition in what isn't even the entire market that we serve. I'd like to finish my statement this morning with a story. A woman we'll call Mrs. Phillips came into the bank. She had decided-this was some months ago-but she had decided that she wanted to rearrange her investments. She thought the stock market was getting a bit overpriced and wanted to buy some gold stocks. She came into the bank to seek my advice about buying gold stocks. I regretted to have to tell her that we were precluded from giving her any advice about gold stocks. Though we have three investment people in our trust department who are professional, competent, and fully capable of giving that advice, we are restricted by really ancient laws from providing her this advice. She had to leave. She was unsettled, banged her cane and walked out, saying that she had to go see the stock broker down the street. She had two choices. I don't know which one she chose, but I do know she was upset that the bank could not help her. She said she really didn't want to go see that stock broker, but she had to because we were precluded from giving her advice about gold stocks. So I ask, gentlemen, that we kill the moratorium, not the banks; give us the powers we need to expand our lines of revenue so that we can continue to attract the capital necessary in our business. We need to continue to serve our community as we have. We need to continue to serve our customers. To do so fully we need additional powers. Thank you very much. The CHAIRMAN. Thank you very much, Mr. Stevens. Last week before this committee, Chairman Ruder, Chairman of the SEC, recommended that the SEC Act of 1934 be amended to remove the provisions providing for bank exemption from brokerdealer regulation. He said that the regulation of bank security activities under the Federal banking law is not an adequate substitute for Commission regulation. Do you agree with Chairman Ruder's prescription for reducing investor protection problems? |