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Reserve Board in sponsoring this legislation. In both its annual report to Congress in 1943 and in the testimony of Mr. Eccles before this committee on May 26, 1947, the Board stated that the purpose of the bill was to prevent the existence of "hybrid" corporations which are neither bank-holding companies under the Banking Act of 1933 nor investment companies under the Investment Company Act of 1940. Thus, in its thirtieth annual report, the Federal Reserve Board stated as follows:
66* * * When the bank holding company has thus expended its operations into other and unrelated activities, it tends more and more to have the characteristics of the type of institution to which the Investment Company Act of 1940 was addressed. Yet, if the company controls banks and has a voting permit for any one of such controlled banks, it is exempted from the provisions of that act. Board believes that such a company should be required, by law, to adjust its affairs so as to become either a bank-holding company or an investment company. In no event should it be permitted to remain a hybrid beyond the period necessary for it to adjust its affairs in this respect."
American General has already conformed to the questionable theory of the Federal Reserve Board that a holding company must be either a bank-holding company or an investment company. It is and has been an investment company from the very inception of the Investment Company Act. It is only by virtue of the broad, all-inclusive definition in the bill that American General and the Equity Corp. would become a bank-holding company.
While under the supervision of the Investment Company Act, American General acquired the stock of Morris Plan in accordance with its investment policy previously filed with the Securities and Exchange Commission. At the time of the acquisition of Morris Plan, that Corporation was not a bank-holding company and will only become a bank-holding company if the proposed bill is enacted into legislation. Thus, American General, which is not now a hybrid company, will become one by legislative fiat.
The effect of such double classification on American General, or on any corporation in like position, is that such corporation will be required to forfeit its status as a registered investment company or to dispose of all of its direct or indirect ownership of bank stock. This result is mandatory under the provisions of the proposed bill, section 5 of which requires any company classified as a bank-holding company to dispose of all securities of any company other than a bank and to engage in no business other than that of managing or controlling subsidiary banks. Obviously, the only alternative would be for American General to free itself from its classification as a bank-holding company by disposing of all of its banking investments.
I submit that the requirement that registered investment companies dispose of their direct or indirect ownership of bank stock is indefensible. Such requirement goes far beyond any need which may exist with respect to regulation of banks and their stockholder relationships. It assumes that there is something essentially evil in the mere ownership of bank stock by any corporation or group which also owns other investments. I do not believe that the Federal Reserve Board, or any other regulating agency, can prove the validity of such an assumption.
In the case of American General, to require it to divest itself of its assets other than bank stocks would be to destroy a long-range program on which this company has been engaged for years. I have stated above that it has interests in various "special situations." In many of these cases, American General (or the Equity Corp.) has invested money, time, experience and know-how toward the building up of a corporation or through giving it needed funds has permitted it to develop to a point where it can in the future expect to have an increased value to its security holders. To cavalierly instruct American General to divest itself of these holdings within 2 years is tantamount to asking it to sacrifice the long-range benefits for which its has expended its money and efforts over the past years. At the moment, for instance, American General owns substantial interests in corporations which have been developing products for the postwar markets. Certain of these corporations are actually at the moment operating at a loss and they could only be disposed of at a very heavy discount of their cost and still heavier discount of their potential value. It would, therefore, be unwise financially, and extremely unfair, to require divestment of its nonbank assets. It may be argued that under these circumstances American General would be better advised to dispose of its interest in Morris Plan. Unfortunately, the situation here is similar to that of its other assets. Since the acquisition by American General of control of Morris Plan it has been working for the development of the business of Morris Plan and its banks, and because of its ownership of this stock,
Morris Plan has been able to obtain public financing, the benefits of which cannot hope to accrue to the security holders, including American General, for a considerable period of time. The whole basis of operations of investment companies such as American General and the Equity Corp. is to develop the companies in which they are interested, and not merely to buy stock-market securities and put them on the shelf.
The requirement of enforced disposition of bank stock by registered investment companies is not only unjust in theory, but it will actually result in serious financial consequence to such companies. For example, American General's investment in Morris Plan represents a cost to American General of $7,628,123.23, the book value of which constitutes over 22 percent of the book value of all other assets of American General. If the Morris Plan stock were to be sold after enactment of this bill it is problematical whether American General could realize thereon anything near the original cost. That is so principally for the following reasons:
(1) The stock would have to be sold immediately. Otherwise American General could not purchase a single share of stock for its investment portfolio while a bank holding company.
(2) Sale of such a large amount of stock to the public would probably depress the market for such stock.
(3) Sale of the stock as a block would probably be impossible since ownership of such stock by any corporation would carry with it the “death sentence" prescribed in section 5 of the bill.
(4) The value of the stock will certainly drop sharply in view of the financial ruin the bill would cause for Morris Plan and about which Colonel Huntington has already testified.
American General Corp. has some 40,000 stockholders, most of whom have only modest holdings. The passage of this bill will inevitably result in severe losses to such stockholders. The day-to-day asset value of American General's stock in large measure controls the market value of such stock. The depreciation in asset values which will be caused by the serious financial consequence of this bill on Morris Plan and by the forced sale of the Morris Plan stock will be considerable. American General's stockholders will bear the brunt of those losses.
The foregoing consequences of the bill to American General and its stockholders are palpably unjust. The American General investor has regarded his investment a safe one by reason of the fact that the activities and investment policies of his company are controlled by the Securities and Exchange Commission. How can Congress justify to him the financial losses he must suffer by virtue of the inevitable devaluation of his stock which this bill will bring about?
The policy of Congress to vest the regulation of investment policies of investment companies in the Securities and Exchange Commission has been established for 7 years. Registered investment companies and their stockholders have relied on the guidance of the Securities and Exchange Commission and the Investment Company Act in pursuing their investment policies. Investment by such companies in bank stock has never been prohibited. To prohibit such investments now will be a rude shock to registered investment companies and their stockholders. The American businessman had been hoping that an end had come to ill-considered measures like the proposed bill.
II. REGULATION BY THE SECURITIES AND EXCHANGE COMMISSION IS ADEQUATE TO PREVENT UNFAIR DEALINGS BETWEEN REGISTERED INVESTMENT COMPANIES AND THEIR BANKING SUBSIDIARIES
If the purpose of this bill is to prevent unfair dealings between holding companies and their subsidiary banks, it is completely unnecessary insofar as it applies to registered investment companies. The Investment Company Act of 1940 accomplishes that purpose—and more thoroughly than does the proposed bill. Under the Investment Company Act, Morris Plan is an "affiliated person" of a registered investment company. Morris Plan's subsidiaries, banking and nonbanking, are "affiliated persons" of Morris Plan. Accordingly, dealings between American General and Morris Plan, between American General and any of the subsidiaries of Morris Plan, and between Morris Plan's subsidiaries come within the provisions of section 17 (a) of the Investment Company Act.
Section 17 (a) of the Investment Company Act governs all purchases and sales of property, including securities, and all loans and borrowing between American General and Morris Plan, between Morris Plan and its subsidiaries, and between such subsidiaries. In most cases such transactions are absolutely forbidden and in the remaining cases the Securities and Exchange Commission must first approve such transactions as fair and reasonable.
The investment Company Act requires American General to submit periodic reports of its financial condition and activities, including all dealings between it and Morris Plan and Morris Plan's subsidiaries. Similar information must be furnished by American General with respect to Morris Plan and those of its subsidiaries.
I don't think anyone will deny that American General, in all of its transactions, and particularly those involving its subsidiaries, is more controlled and regulated by the Government than any financial company in the country, bank or otherwise. That being so, it is difficult to imagine that there can be any overreaching between American General and the banking subsidiaries of Morris Plan.
I do not know whether the inclusion of registered investment companies in the definition of a bank holding company was an inadvertence. But whether by inadvertence or otherwise, the bill should not apply to registered investment companies which are already thoroughly controlled by the Securities and Exchange Commission.
Re Senate bill 829.
ETHELBERT WARFIELD, Attorney for American General Corp.
THE COMMITTEE ON BANKING AND CURRENCY,
FIRST KENTUCKY CO., Louisville, Ky., May 29, 1947.
United States Senate, Washington, D. C.
GENTLEMEN: We submit herewith an exhibit in behalf of the First Kentucky Co., a nonbanking affiliate of the First National Bank Trustees, a bank holding company.
It is not contended, nor has it ever been charged, that the First Kentucky Co. has been guilty of any of the harmful acts alledgedly aimed at by the proponents of this bill. On the contrary, it is submitted and we believe would be conceded, that the First Kentucky Co. has aided and supported the development of sound banking institutions in the holding-company group. Furthermore, it has operated profitably for the benefit of its stockholders without departure from orthodox investment practice.
Mr. Eccles, in effect, says that a dangerous dog is abroad and that therefore all dogs must be killed. The First Kentucky Co., one of the dogs in question, has never bitten anybody and does not want to be killed. We are perfectly willing to be muzzled, in a reasonable fashion, if necessary for the public's protection against rabies. We believe, if you will permit the simile, there are hundreds of other innocent dogs in every State which will find themselves in this dog catcher's net and marked for destruction if holding companies are redefined as proposed by S-829.
We earnestly request you to examine the record presented in our exhibit in opposition to S-829, as it now stands, and the suggestion we offer for its amend
FIRST NATIONAL BANK TRUSTEES, By H. Y. OFFUTT, Secretary.
STATEMENT OF THE FIRST National Bank Trustees, of Louisville, Ky., in OPPOSITION TO CERTAIN PORTIONS OF S. 829 AS Now DRAWN
WHO THE FIRST NATIONAL BANK TRUSTEES ARE
(1) On July 1, 1925, a trust agreement was entered into by the stockholders of the First National Bank of Louisville with various other corporations whereby all of the stock of the bank (except qualifying shares) and all of the stock (except qualifying shares) of the Kentucky Title Savings Bank & Trust Co., now the Kentucky Trust Co., was deposited with seven trustees. Assets of the trust also include, today, 4,306 shares out of 5,000 shares of the stock of the St. Matthews National bank, a small bank located in a suburban community just beyond the present city limits of Louisville,
(2) The trust also owns an investment company known as the First Kentucky Co., which is entirely concerned with investing its own money in readily market
able securities in the manner of a management type investment trust. As of December 31, 1946, this company showed a capital and surplus of $3,215,739.24, book value, and a market value of $4,620,397.29.
(3) The trust also owns a small fire insurance company known as the First Kentucky Fire Insurance Co. This company operates through the reinsurance of approximately 65 percent of its risks on an extremely conservative basis. (4) The foregoing are all of the assets of the trust other than cash.
(5) The consolidated statement of the trust as of December 31, 1946, showed assets and liabilities of $130,479,392.84. (See exhibit.)
THE POSITION OF THE TRUSTEES
(6) We have no quarrel with the general purpose of S. 829.
(7) We are concerned, seriously and sincerely, in the preservation of our right to continue to hold the stock of the First Kentucky Co. because we believe that it has been and will continue to be a tremendous aid to sound banking and to the safe operation of the banks which we own. While the First Kentucky Co. has been a profitable operation since its inception, it is primarily a reserve fund or cushion for the protection of the depositors of the banks and the beneficiaries of estates held by the trust company. It represents the most liquid type of risk capital that can be used to meet the exigencies arising in any one of the three banks.
(8) We believe that sections 5-a and 5-b, or both, of S. 829 should be amended in substantially the manner hereafter suggested in order to preserve our right to continue to operate the First Kentucky Co. as an adjunct to our banks.
FIRST KENTUCKY CO.
(9) First Kentucky Co., incorporated January 14, 1926, has been operated consistently through this entire period as a company investing its assets in marketable securities or using its assets for the benefit of its bank affiliates. None of its activities have been affected by the Banking Acts of 1933 or 1935. It does not underwrite or distribute securities as a broker or dealer. A consolidated operating statement of the First Kentucky Co. for the period since its incorporation through December 31, 1946, is attached (exhibit B). In this period there was paid into the capital and surplus of First Kentucky Co. $5,545,000 (this includes $1,080,000 paid into First Kentucky Co. by merger with its predecessor, the Louisville Securities Co., which was established in 1909 with a capital of $6,000). In the period 1926-46, inclusive, earnings total $4,460,000. Expenses before taxes and dividends were $1,536,000, including salaries of $490,000, an average salary pay roll of $24,500 a year. Cash dividends paid and distributed to participants in the trust total $2,898,000. In addition, a cash dividend of $700,000 was declared by First Kentucky Co. to the trust which, in turn, paid this money into the surplus of the First National Bank of Louisville. This action was taken to support the growing business of this commercial bank. Similarly $150,000 was paid by First Kentucky Co. to the trust and, in turn, a like sum paid from the trust to the First-Owensboro Bank & Trust Co., a former affiliate. In this period the First Kentucky Co. invested $500,000 in additional shares of the First National Bank of Louisville, again to increase the bank's capital in support of its growing business, and conveyed the shares of First National Bank so received as a dividend in kind to the trust. Similar action was taken with respect to other affiliates of First Kentucky Co. and resulted in dividends in kind of $754,000. The sum of cash dividends and dividends in kind $5,000,000. At December 31, 1946, First Kentucky Co. had a capital and surplus of $3,215,000; the market value of its investments was $4,620,000.
(10) On March 9, 1932, directors of the First Kentucky Co. voluntarily adopted the following resolution:
"Whereas the trustees under the 'trust agreement with reference to stock in the First National Bank of Louisville, Ky., and other corporations, dated July 1, 1925,' own the entire beneficial interest in all except qualifying directors shares of the stock of the First Kentucky Co., the First National Bank of Louisville, Ky., and the Kentucky Title Trust Co., and
"Whereas it is to the interest of all concerned that the value of the bonds and securities now or hereafter carried in the investment accounts of said First National Bank of Louisville and said Kentucky Title Trust Co. be stabilized without regard to the market fluctuations of said bonds and securities: Now therefore, "In consideration of the premises, be it resolved as follows:
"The First Kentucky Co. does hereby guarantee to all persons, firms, or corporations, who are or might be affected thereby that the value of the bonds and securities now or hereafter carried on the books of the said First National Bank of Louisville and with said Kentucky Title Trust Co. is the true value thereof, and that no person, firm, or corporation will suffer any loss by reason of the market value of said bonds and securities being at any time different from the book value thereof, as shown on the books of the said First National Bank of Louisville and with said Kentucky Title Trust Co. Nothing herein is intended to or shall in any wise interfere with the power of the officers and directors of said First National Bank of Louisville and said Kentucky Title Trust Co. and said First Kentucky Co. to hold, sell, exchange or otherwise deal in or with said or any securities."
THE KENTUCKY TRUST CO.
(11) The Kentucky Trust Co., a corporation founded in 1900 as the Kentucky Title Savings Bank & Trust Co. (which has twice simplified its name, Kentucky Title Trust Co., the Kentucky Trust Co.) was for many years operated as a savings bank and, in addition to the business of receiving time deposits, loaned money secured by first mortgages on real estate. In 1926 this company seriously undertook the acquisition of trust business. Book value of trust assets at the end of 1926 was $1,302,000; at the end of 5 years, 1930, $6,144,000; end of 1935, $15,714,000; end of 1940, $33,262,000; end of 1945, $47,792,000; end of 1946, $53,048,000. The growth of this department has been nurtured and supported in large part by investment personnel trained and, through the early days of the development of this department, paid by First Kentucky Co. Similarly, competent investment personnel has contributed to the excellent investment record of the First National Bank.
(12) Since the bill to provide for control and regulation of bank holding companies and for other purposes as introduced in the Senate and known as Senate bill 829, requires that within 2 years from its enactment a company, such as an affiliate of a bank owned by a holding company such as the First Kentucky Co., must be separated from the bank holding company, we respectfully suggest the following amendments to the bill:
(13) Amend section 5, "Interests in Nonbanking Organizations" as follows: (14) Amend section 5-a, page 7, line 4, by adding after the word "Bank": or company investing solely in securities eligible for purchase by national banks under the provisions of section 5136 of the United States Revised Statutes and in readily marketable securities listed on a national securities exchange, provided not more than 2% percentum of the company s total assets are invested in the securities of any one company, and that the company does not own more than 21⁄2 percentum of the outstanding securities of any one company.'
(15) Amend section 5-b, page 7, line 16, by adding after the word “operating" the words "aiding and strengthening" so that section 5-B, as amended, will read: "The prohibitions in this section shall not apply to the voting shares or other securities or obligations owned or acquired by a bank holding company in any company engaged solely in holding and operating property in which the banking premises are located, or engaged solely in conducting a safety deposit business, or in any other company the activities of which the board has determined are so closely related to the business of managing, operating, aiding, strengthening, or controlling banks as to be a proper incident thereto."
(16) We are acutely aware of the evils which S. 829 is designed to meet. We do not believe, however, that the operation we are conducting is open to criticism in any particular and we shall be pleased to answer any questions about it that the committee may have so far as we are able. We submit that the public interest is served by our method of conducting our business and we urge that the committee permit us to continue. Respectfully submitted.
FIRST NATIONAL BANK TRUSTEES,
By HENRY Y. OFFUTT,