In the event that any such contract or agreement does not at the effective date of this Act comply with the requirements of this subsection (i) and is not amended to comply therewith prior to the expiration of said one year, this subsection shall not be deemed to have been violated if prior to said expiration date each such investment adviser or principal underwriter shall have filed with the Commission a waiver in writing of any protective provision of the contract or agreement to the extent that it does not comply with this subsection.

THE MORRIS PLAN CORP., OF AMERICA,

420 Lexington Ave., New York 17, N. Y., June 17, 1947.

'COMMITTEE ON BANKING AND CURRENCY,

Senate Office Building, Washington, D. C.

Attention of Mr. Robert C. Hill, Secretary.

DEAR MR. HILL: I am enclosing herewith 25 printed copies of my supplemental statement which is being filed on the assumption that the extension of time for filing, requested in my telegram of Saturday, the 14th, will be granted. It was utterly impossible for us to obtain printing service which would have made these copies of the statement available at an earlier date.

I trust this delay has not too greatly inconvenienced Senator Tobey and the other members of the committee.

With many thanks for your kindness, I am

Sincerely yours,

ELLERY C. HUNTINGTON, Jr.

SUPPLEMENTAL STATEMENT OF ELLERY C. HUNTINGTON, JR., BEFORE THE BANKING AND CURRENCY COMMITTEE, UNITED STATES SENATE, IN OPPOSITION TO BANK HOLDING COMPANY BILL (S. 829), JUNE 12, 1947

PRELIMINARY STATEMENT

This supplemental statement is being submitted for the purpose of answering a portion of Mr. Eccles' testimony of June 11, 1947, as it relates to the position of the Morris Plan Corp. of America with respect to S. 829.

There are also made a part of this supplemental statement, suggested amendments to present law designed to correct, in a simple, reasonable and democratic manner, the evils of bank stock ownership which, Mr. Eccles has contended, cannot otherwise be checked or controlled.

ANSWER TO TESTIMONY OF MR. ECCLES

While a transcript of the testimony of Mr. Eccles has not yet been made available, certain points made by him at the hearing of June 11, 1947, will be answered from recollection:

First. The allegation that the Morris Plan Corp. is opposing S. 829 because it fears regulation

A. Mr. Eccles neglected to remind the committee that the Morris Plan Corp. and all of its affiliates (including underlying banks) are subject to the provisions of the Investment Company Act of 1940.

This fact has been made amply clear in the record of these proceedings (Statement of June 2, 1947, pp. 2 and 23; Outline of May 24, 1947, pp. 3, 21, and 22). The record also shows that the Investment Company Act strictly limits and controls all transactions between parents and subsidiaries and between cosubsidiaries, including underlying banks.

The rigid prohibitions of the Investment Company Act under which the Morris Plan Corp. and all affiliates must operate are in striking contrast to S. 829. This bill actually prohibits nothing except investments by banks in stocks of parents and cosubsidiaries (sec. 7). These are transactions which would not be countenanced, in any event, by the Comptroller, the Federal Deposit Insurance Corp., any State Department, or by the Federal Reserve Board itself. No other dealings of any sort are completely forbidden under S. 829. They may or may not be entered into as the Federal Reserve Board may decide.

B. Mr. Eccles also neglected to reimnd the committee that the underlying banks in which the Morris Plan Corp. has a majority interest have (or have applied for) insured status with FDIC and are under the supervision of competent State banking authorities. Overreaching on the part of parent companies or

cosubsidiaries as against underlying banks or minority stockholders is, therefore, subject to the scrutiny-and control-of three regulatory authorities.

C. Finally, Mr. Eccles neglected to remind the committee that the Morris Plan Corp. has already suggested amendments to existing law designed to meet Mr. Eccles' avowed objectives.

It should be apparent, under the circumstances, not only that Mr. Eccles' statement was palpably unfair, but that the Morris Plan Corp. is not objecting to control. Its real objection is to the piling of unnecessary regulation on regulation.

Second. The allegation that the Morris Plan Corp. is in error in stating that the bill is not a threat to our dual system of banking

Mr. Eccles answered his own assertion when he stated that he would like to see all State banks within the Federal Reserve orbit. He seemed to feel that the Morris Plan Corp. was guilty of some crime because its banks are not Federal Reserve members.

The fact is, of course, that Congress has never seen fit to compel Federal Reserve membership. The fact is, also, that no good reason has ever been disclosed to the mangements of Morris Plan banks for subjecting their small institutions to the costs and other burdens of additional supervision. This is especially true in view of the lack of any need, at the moment, for rediscount facilities, beyond those which the large banks can offer, and because Morris Plan banks are not, today, sufficiently large to attract correspondent accounts.

The Federal Reserve concept has never been criticized by the Morris Plan Corp. It is recognized as the heart and core of the credit machinery of our country and it has made possible the mobilization and stabilization of our banking resources. But, until Congress decides otherwise, should the Morris Plan Corp. or the little banks in which it is interested, be censored for not applying for Federal Reserve facilities which they do not need?

It is not the Federal Reserve System, then, which the Morris Plan Corp. has sought to criticize, but S. 829, its unrealistic assumptions and its dangerous implications.

Third. The allegation that the Morris Plan Corp. has made unfair charges against the bill

Mr. Eccles sought to show that the following characterizations of the bill were untrue:

A. That it does not set up standards; and

B. That it does not make adequate provision for the review.

These questions are highly technical and have been fully covered in documents made a part of the record (Outline May 24, 1947, pp. 8, 9, and 10). No further argument of the points is believed to be necessary other than to call attention to the fallacy of the defense interposed by Mr. Eccles on June 11, 1947.

The

Mr. Eccles sought to prove that standards and review are provided under the bill by comparing S. 829 with the Public Utility Holding Company Act. comparison was convenient but scarcely relevant.

The Public Utility Holding Company Act bears no relationship to S. 829. It was an act designed to put an end to holding company existence at least within a class. S. 829, on the other hand, is an act under which existing operations are to be continued-and even expanded-but are to be more stringently supervised. There is a vast difference, also, between the wording of section 3 of S. 829 and that of paragraph 7 of section 2 of the Public Utility Holding Company Act. It is this difference which is important. Whether or not Mr. Eccles has observed the difference, it is certainly a fact that he did not call it to the attention of this committee at the earing on June 11. The difference is clearly discernible:

In paragraph 7, section 2 of the Public Utility Holding Company Act, we find the following words:

"The filing of an application hereunder in good faith by a company other than a registered holding company shall exempt the applicant from any obligation, duty, or liabiliy imposed in this title upon the applicant as a holding company, until the Commission has acted upon such application, within a reasonable time after the receipt of any application hereunder, the Commission shall enter an order granting, or, after notice and opportunity for hearing, denying or otherwise disposing of such application.'

This is typical of the Public Utility Holding Company Act, which is careful, throughout, to provide that the Commission shall not act against the interests of any party without the entry of an order and, under the act, orders are specifically reviewable by a court of competent jurisdiction.

This customary procedure is not provided under S. 829.

Fourth. Who is being unfair to whom?

Mr. Eccles, on June 11, failed to mention some of the other charges which The Morris Plan Corp. has made against S. 829:

For not only does The Morris Plan Corp. allege that proper standards are not fixed nor adequate review provided, but also:

A. That section 6 vitiates statutory and contractual rights of stockholders to purchase even their pro rata of new offerings of underlying bank stock; and that this section could easily operate, not only to force a change in bank ownership but, also, to nullify orders of State departments, the Comptroller and the FDIC (Outline, May 24, 1947, p. 13).

B. That section 9 is an important modification of the existing reserve fund section of the law (R. S. 5144) and may well place minority as well as majority corporate stockholders of hanks in a position where dividends cannot be paid or other third party obligations met (Outline, May 24, 1947, pp. 11 and 12).

C. That section 9 is unfair and undemocratic in that it involves the possibility, if not the probability, that minority stockholders (including individuals) may find themselves acting as guarantors against bank losses over which they have no control.

D. That section 5 establishes a novel basis for legislative action in that it contains the possibility of compelling a group of investors (who might be minority stockholders) within a common class to abandon a primary (but "unrelated") activity or sacrifice their bank investment (Statement, June 2, 1947, p. 28); and E. That the bill actually eliminates only one evil of the many at which it is theoretically directed (viz: Bank purchase of parent and cosubsidiary stocks under section 7) and that it accomplishes nothing, therefore, except to put the little fellow in the position where he must go, hat in hand, to the Federal Reserve Board to ask for favors (Outline, May 24, 1947; pp. 22 and 23).

SUGGESTIONS FOR MEETING PROBLEMS AT WHICH S. 829 IS ALLEGED TO BE DIRECTED

While, as heretofore pointed out, previous suggestions of the Morris Plan Corp. have been sufficiently broad to cover bank-stock ownership even of nonmember banks, it is the position of the Morris Plan Corp. that increased Federal Reserve authority should be related to member-bank ownership. For this reason the only specific amendments herein included are those which are so limited.

In presenting the amendments, it will be necessary, first, to discuss the evils of which Mr. Eccles is complaining, and, then, to relate to these the proposed amendments.

DISCUSSION OF AMENDMENTS

Point I. Expansion through the establishment of branches—Fallacy of Federal Reserve Board position

With respect to this point, certain facts should be reemphasized:

The only case of bank expansion to which Mr. Eccles has referred is that of Bank of America-Transamerica. The greater part of this expansion, however, must have come within Bank of America itself, since of the 619 banking offices mentioned by Mr. Eccles, 578 are branches and most, if not all, of these must be branches of Bank of America. Mr. Eccles has, of course, admitted in his testimony that Federal agencies could have used their power to halt development by this means.1

Other figures given by Mr. Eccles support the contention that the alleged "banking empire" of Transamerica was the result, in reality, of the expansion of but a single bank. For Mr. Eccles has stated that total bank deposits of all Transamerica banks were about 61⁄2 billion dollars. Since nearly 51⁄2 billion dollars (as at the end of 1946) were Bank of America deposits, there can be little doubt about where the real expansion in Transamerica's banking interests took place nor about where its banking business is to be found.

As a matter of fact, as everyone knows, the only real concentration of banking assets in the United States are those lodged in our big city banks. If, therefore, there has been undue expansion anywhere it has resulted from the establishment of branches and not because there are or have been holding companies. This type of expansion is controllable under existing authority (exhibit A attached);

1 As could have been done through use of the voting permit authority under R. S. 5144 or because of the control over branches given under R. S. 5155 and under sec. 9 of the Federal Reserve Act and sec. 12B (V) of that act.

there can be no dispute, in truth, that it has always been thus controllablecertainly since 1933.2

Point II. Expansion through stock purchase-How extensive could this be?

All but about 15 percent of the banking assets of the country are now under Federal Reserve supervision and additional holding company purchases are, therefore, thoroughly controllable through the exercise of Federal Reserve board discretion under the voting-permit section of the law (Rev. Stat. 5144); or by the Federal Reserve Board and other agencies under the unsafe and unsound practices clauses of the several applicable statutes which are mentioned below.

It is submitted, therefore, that not only does the opportunity for expansion through stock purchase not exist today in any appreciable degree but that, even if it does exist, it can be checked through an application of power now vested in Federal and State agencies.

Point III. Unrelated activities and unconscionable dealing

Even if the Federal Reserve Board could be convinced, however, that the expansion of bank control by whatever means is not a menace, the Board would still, apparently, contend that bank holding companies must be regulated in order to avoid the evils which flow from the common ownership of banks and other businesses. The theory must be that unrelated activities lead automatically to overreaching on the part of dominant owners (or cosubsidiaries) as against underlying banks. No evidence has been offered substantiating this position and it has been stated-in opposition-that no instance of unfair dealing on the part of any holding company entity (at least subsequent to 1933) has been found in a review of the pertinent decisions.

The powers of the Federal and State authorities are, of course, now ample to prevent the plundering of banks by stockholders or officers as the references to existing law (exihbit A attached) indicate. If, on the other hand, it is the belief of the Federal Reserve Board that industrial bigness is bad per se or bad when coupled with the banking business-or that there are other valid reasons for separating bank-stock investments from other investments-and if Congress agrees with this, there is still no need for new, authoritarian legislation. The accompanying amendments are suggested in support of this thesis.

PROPOSED AMENDMENTS TO EXISTING LAW

A. Segregation of nonbanking activities

A slight amendment of the voting-permit section of the law (R. S. 5144) could compel a segregation of unrelated activities into a separate company and the registration of such separate company under the Investment Company Act of 1940.

The necessary amendment would involve an enlargement of the provisions of R. S. 5144 so that the Federal Reserve Board would have the right, by order, to withhold or terminate voting permits in cases where the holding company owns or holds, directly or indirectly, a controlling interest in any business or activity which the Board determines is not so closely related to the banking business as to be a proper incident thereto.1

B. Restriction of bank stock purchases

Amendments are not needed to enable the Federal Reserve Board to control holding-company expansion through the purchase of stocks of member banks. If

2 Expansion through merger, consolidation or the purchase of assets has not been separately treated as Federal and State agencies have fully as much control over these proceedings as over the establishment of branches as the subsequent reference to statutes indicates.

1 Note 1: Regulation P and outstanding voting-permit agreements would have to be altered accordingly. Note 2: The above would be effective not only with respect to national banks (par. (e) of R. S. 5144), but also to State member banks as well. This is because holding companies owning only stocks of State member banks are holding company affiliates under sec. 2 of the Banking Act of 1933 and because State member bank holding company affiliates are made subject to the provisions of R. S. 5144 under sec. 9 (21) of the Federal Reserve Act.

Note 3: Since revocation of a voting permit carries with it the right to put underlying national banks out of business (par. (e) R. S. 5144) and denies to State member banks the privileges of Federal Reserve membership (Federal Reserve Act, sec. 9 (8) (21) the penalty of revocation is amply severe to insure compliance with Federal Reserve Board directives.

Note 4: It is doubted that any amendment of sec. (3) of the Investment Company Act of 1940 would be needed since, if activities were segregated, there would probably be no exemption under which registration could be avoided.

Note 5: This suggestion has the merit of being a thoroughly democratic solution of the problem as well as a simple solution. An order would be requires so that any decision on whether or not control exists or whether or not activities are related would be appealable just as decisions on control are now appealable under sec. 2 (C) of the Banking Act of 1933. No such appeal, of course, is contemplated from determinations to be made under sec. 3 of S. 829.

the stock of a new national bank were acquired, the Federal Reserve Board could simply refuse to issue a voting permit (R. §. 5144) and section 9 (21) of the Federal Reserve Act gives the same right with respect to State member banks. If the voting permit does not issue, then the membership of all other banks owned by the holding company is cancelable (id.). It is evident, therefore, that Federal Reserve Board power is now sufficient to stop bank expansion by stock purchase if such power is exercised.

If, however, Congress concludes that more is needed in controlling bank stock purchases, then all that is required, certainly, is an addition to paragraph (A) of R. S. 5144 inserting, as a new condition (5) of the voting permit agreement, a clause limiting any further bank stock purchases without an order of the Federal Reserve Board in which it is held, that such a purchase would be detrimental to the public interest as tending toward monopoly and undue influence. Here, again, if there should be a grievance an appeal could be taken.

C. Correction of existing situations where voting permits have not been requested If existing relationships between the Federal Reserve Board and holding companies are not satisfactory (due, for example, to the fact that holding companies do not request voting permits) another condition could be added to the (voting permit) agreement, as condition (6) giving the Federal Reserve Board power to terminate membership unless permits are requested for all banks under common ownership. Reasonable notice and an order should be required as in the case of condition (5).

It is doubtful that any such change as this is really needed. The Federal Reserve Board has full power to compel underlying banks to obtain voting-permit agreements and if this authority is exercised and, if necessary, if new agreements are demanded existing difficulties will be corrected automatically. Respectfully submitted.

EXHIBIT Α

ELLERY C. HUNTINGTON, Jr.

DIGEST OF EXISTING LAWS CONTROLLING EXPANSION AND MONOPOLY IN BANKING AND UNCONSCIONABLE DEALINGS BETWEEN BANKS AND THEIR STOCKHOLDERS

The following is a summary of pertinent legislation which is now in existence through which expansion of banks, monopoly and unconscionable dealings between banks and their dominant stockholders may be controlled.1

(a) Antitrust laws

The Sherman Act (15 U. S. C. 1) expressly forbids every combination in restraint of trade of commerce among the several States or with foreign nations. Section 7 of the Clayton Act (15 U. S. C. 18) expressly forbids the acquisition of a whole or any part of the stock of one corporation by another, where the effect of such acquisition may lessen substantially competition between such corporations. The Federal Reserve Board is authorized by the Clayton Act to enforce compliance with the provisions of section 7 thereof in the case of banks.

Section 8 of the Clayton Act (15 U. S. C. 19) expressly forbids officers, directors, and employees of any member bank of the Federal Reserve System from being an officer, director, or employee of any other bank, unless the Federal Reserve Board permits such relationship.

(b) Control of expansion of branch banking

Comptroller of the Currency.-Section 5155 of the Revised Statutes (12 U. S. C. 36) gives the Comptroller of the Currency the power to approve or disapprove of the establishment of new branches by national banks. No branch bank may be established by a national bank within any State if the law of such State does not expressly authorize the establishment of branch banks. Restrictions of State law as to the establishment of branch banks within certain areas or geographical limits are also made expressly applicable to branches of national banks.2 Federal Reserve Board.-Section 9 of the Federal Reserve Act (12 U. S. C. 321) provides that State member banks shall be subject to the same restrictions in the establishment of branch banks as are applicable to the establishment of branches by national banks, except that the approval of the Federal Reserve Board, instead

1 With respect to State legislation on the subject, reference will only be made to the New York State banking law which is representative of most State banking laws.

2 In this connection it is noteworthy that in many jurisdictions branch banking is expressly forbidden and in almost all jurisdictions the opening of branch banks is confined to certain designated reas within the State.