"The aggregate amount of the obligations (including repurchase agreements) of all the affiliates of a national banking association shall not at any time exceed 10 per centum of the capital stock of such association actually paid in and unimpaired and 10 per centum of its unimpaired surplus fund: Provided, That loans collateraled by Government bonds, or by bonds issued by the State in which such bank is situated, or issued by any political subdivision of such State, shall not be included within the foregoing limitations if actually owned by the borrower from such bank.

"Within three years after this section as amended takes effect every affiliate shall be capitalized through the sale of its own stock, which shall be paid for in full in cash upon the same terms and conditions as provided in section 5140 of the Revised Statutes, as amended, in the case of national bank stock; and no national bank shall establish or capitalize an affiliate through cash or stock dividend declarations made from its surplus or from undivided profits. No affiliate shall at any time during such three-year period hold, or lend upon, more than 10 per centum of the shares of the capital stock of the parent institution."

SEC. 26. Nothing in section 5200 of the Revised Statutes, as amended, shall be construed to permit a member bank to lend to any individual or corporation upon collateral security an amount in excess of 10 per centum of its capital stock actually paid in and unimpaired and 10 per centum of its unimpaired surplus fund, or an amount in excess of the percentage of such capital and surplus fund as shall from time to time be designated by the Federal Reserve Board in accordance with subsection (m) of section 13 of the Federal reserve act, as amended, whichever is the smaller.

SEC. 27. Section 5211 of the Revised Statutes, as amended, is amended by adding at the end thereof the following new paragraph:

"Each affiliate of a national banking association shall make and furnish to the president of the association, for transmission by him to the Comptroller of the Currency, not less than three reports during each year, in such form as the Comptroller may prescribe, verified by the oath or affirmation of the president of such other officer as may be designated by the board of directors of such affiliate to verify such reports, covering the condition of such affiliate on dates identical with those for which the comptroller shall during such year require the reports of the condition of the association. Each such report of an affiliate shall be transmitted to the comptroller at the same time as the corresponding report of the association; except that the comptroller may, in his discretion, extend such time for good cause shown. Each such report shall exhibit in detail and under appropriate heads, the holdings of the affiliate in question, their cost and present value, the expenses of operation for the preceding year, and the balance sheet of the enterprise. It shall be the duty of the president of such association to satisfy himself as to the correctness of the report before transmitting the same to the comptroller. The reports of its affiliates shall be published by the association under the same conditions as govern its own condition reports. The comptroller shall also have power to call for special reports with respect to any such affiliate whenever in his judgment the same are necessary in order to obtain a full and complete knowledge of the conditions of the association with which it is affiliated. Any affiliate which fails to make and furnish any report required of it under this section, and any assocation whose president fails to transmit as required by this section any such report furnished to him, shall be subject to a penalty of $100 for each day during which such failure continues: Provided, That every affiliate which shall be indebted to any bank or banks to an amount exceeding 5 per centum of the capital and surplus of its parent bank shall publish its entire portfolio at a date and in a manner to be prescribed by the Comptroller of the Currency but not oftener than once annually, and every affiliate which shall be so indebted to an amount in excess of 10 per centum of the capital and surplus of its parent bank shall be required to publish its portfolio in at least one daily newspaper issued in the place where such bank is located within ten days after receiving notice therefor from the comptroller, but such publication shall not be considered as a substitute for the annual publication hereinbefore required.”

SEC. 28. The first paragraph of section 5240 of the Revised Statutes, as amended, is amended by inserting before the period at the end thereof a colon and the following proviso: "Provided, That during the period of three years after this section as amended takes effect. in making the examinationof any national bank or of any other member bank, the examiner shall inclule

an examination of the affairs of all affiliates of such bank, and in the event of the refusal to give any information required in the course of the examination of any such affiliate, or in the event of the refusal to permit such examination, all the rights, privileges, and franchises of the bank shall be thereby forfeited, if a national bank, and if a bank or trust company organized under the law of any State, membership in the Federal reserve bank of its district shall be forfeited and no notice of the termination of such membership shall be required. The Comptroller of the Currency shall have power, and he is hereby authorized, to publish the report of his examination of any national banking association or affiliate which shall not within one hundred and twenty days after notification of, the recommendations or suggestions of the comptroller, based on said examination, have complied with the same to his satisfaction. Ninety days' notice prior to such publicity shall be given to the bank or affiliate."

SEC. 29. Whenever, in the opinion of the Comptroller of the Currency, any director or officer of a national bank, or of a bank or trust company doing business in the District of Columbia, or whenever, in the opinion of a Federal reserve agent, any director or officer of a member bank of his district (other than a national bank) shall have persistently violated any law relating to such bank or trust company or shall have continued unsafe or unsound practices in conducting the business of such bank or trust company, the comptroller, or the Federal reserve agent, as the case may be, shall certify the facts to the governor of the Federal Reserve Board. Thereupon the governor of the Federal Reserve Board shall serve notice upon such director or officer to appear before a committee consisting of the governor, the Comptroller of the Currency, and the Federal reserve agent of the district in which such bank or trust company is located to show cause why he should not be removed from office. If upon such hearing the committee finds that such director or officer has persistently violated any such provision or has been responsible for the continuance of any such unsafe and unsound practices the committee may, in its discretion, by a majority vote order that he be removed from office. A copy of each such order shall be served upon such director or officer and upon the bank or trust company of which he is a director or officer. Any such director or officer upon whom any such order has been served as herein provided and who thereafter participates in any manner in the management of such bank or trust company shall be fined not more than $5,000 or imprisoned not more than five years, or both.

SEC. 30. The right to alter, amend, or repeal this act is hereby expressly reserved. If any clause, sentence, paragraph, or part of this act shall for any reason be adjudged by any court of competent jurisdiction to be invalid, such judgment shall not affect, impair, or invalidate the remainder of this act, but shall be confined in its operation to the clause, sentence, paragraph, or part thereof directly involved in the controversy in which such judgment shall have been rendered.

The CHAIRMAN. The first witness will be Mr. Pope, president of the Investment Bankers' Association of America. If Mr. Pope will come around to the committee table and take a seat opposite the committee reporter we will be glad to hear him.

STATEMENT OF ALLAN M. POPE, PRESIDENT INVESTMENT BANKERS' ASSOCIATION OF AMERICA, BOSTON, MASS.

Mr. POPE. Shall I proceed, Mr. Chairman?

The CHAIRMAN. Just give your name, address, and business for the purpose of the record.

Mr. POPE. I am speaking as the president of the Investment Bankers' Association of America. My name is Allan M. Pope, and I am executive vice president of the First National-Old Colony Corpora

tion of Boston.

The CHAIRMAN. Do any members of the committee desire to ask Mr. Pope any questions?

Senator GLASS. Were you heard at the prolonged hearings held by a subcommittee of the Committee on Banking and Currency last spring?

Mr. POPE. Yes, sir. I should like if possible to make a statement at this time.

Senator GORE. Might I suggest, Mr. Chairman, that the witness be permitted to first make his own statement in his own way, and then the members of the committee will ask him questions?

The CHAIRMAN. Very well. Proceed.

Mr. POPE. I should like to state in part that I am here as a representative of the Investment Bankers' Association of America. That association is composed of approximately 500 members engaged in the investment banking business of the country. The investment banking business of the country is the medium providing long-term credits to States, municipalities, public utilities, railways, and to industry in the same way that

Senator BROOKHART (interposing). And how about agriculture? Mr. POPE. To agriculture also.

The CHAIRMAN. You may continue.

Mr. POPE. In the same way that commercial bankers provide shortterm credits.

The mechanism and organization of the Investment Bankers' Association was the same means by which at the time of the World War the Liberty loan bonds were sold. The success of the floating of those loans was in a measure provided by the members of this association placing at the disposal of the authorities their entire organization in most cases.

Investment bankers it should be understood are not primarily, and in fact very few of them are members of any stock exchange. Those that are members of a stock exchange have that part of their business separate and distinct from that classed as investment banking.

The investment banking business is not that of trading on an exchange, but is the distribution of securities, some of which, and in some cases many of which, are listed on an exchange, but the dealing is not on an exchange but off or over the counter.

I recently made a trip as president of the Investment Bankers' Association of America to 11 or 12 of the largest cities of the country, at which time I was privileged to talk to several hundred members of the Investment Bankers' Association, as senior executives and in some cases junior executives; and in the most of those cities with the presidents and other officials of commercial banks.

Because of the fact that the bill known as S. 3215, which was introduced by Senator Glass in January, was very much in the minds of investment bankers, it was discussed with all those whom I met. I am obliged to say that without a single exception each one of those gentlemen, numbering several hundred, was without question opposed to the bill at the present time, on the ground that we are at the moment engaged in an attempt to stem the tide of deflation, that we have emergency legislation enacted for that purpose, and that the results of that bill were diametrically opposed to such legislation because of the extreme deflationary character or the general character, I might say, of that bill.

Senator FLETCHER. How does that bill differ from S. 4115 which we now have before us?

Mr. POPE. The present bill is in its general character so like so far as it affects the situation, meaning the deflationary character of the bill, that the same attitude of investment bankers is directed toward this bill, S. 4115.

In addition to the fact of its extreme deflationary character, which makes it essential for the best interests of the country that the general principles of banking be not thus changed to-day, there is in the present bill, at least as we consider it, four sections and probably more in which there is such discrimination against national banks the we are of opinion it might be the natural result that such banks would be obliged to surrender their national charters and become State banks. This would so alter the character of the banking system of the country as to be considered decidedly dangerous.

Senator GLASS. In this connection in order that we may judge whether history will repeat itself, may I remind you that we were confronted with that threat by nearly all the national banks of the country when we adopted the Federal reserve act?

Mr. POPE. Investment bankers I should like to bring to your attention recognize very clearly, and have for some time, certain defects in the present banking system. Some of the executives of the Investment Bankers' Association of America testified at the hearings held by the subcommittee in relation to the bill S. 3215, and in their testimony they recommended an examination of bank affiliates, reports by bank affiliates, limitation of borrowing power of bank affiliates from parent institutions, both separately and in the aggregate; and they have also recommended that loans for the account of others be discontinued.

There are certain sections which affect the Investment Bankers' Association of America included in this bill which I should like now to recite by sections. There are many sections in the bill which either are of no importance to investment bankers as a whole or are technically commercial banking problems with which investment bankers do not feel capable of giving opinions.

In section 2 the definition of affiliates is too broad. It would require reports and examinations, for example, of any corporation of which stockholders of the bank hold 50 per cent of the stock.

That would mean that in many cities and in many towns of this country where influential citizens are stockholders of banks and who in the total as stockholders own more than 50 per cent of purely business corporations, those business corporations would have to be examined by the examiners of the Federal reserve system.

Also in this section in certain instances very large corporations are placed in the category of affiliates because of their ownership of a majority of the stock of small banks which they have taken over by force of circumstances to aid the industrial and banking situation. I know of at least one instance where one of these corporations, and one of the largest corporations in the United States I might say, would have to be examined and make reports as a banking affiliate for that reason.

Senator COUZENS. Right there let me ask you: Could you name that institution?

Mr. POPE. I prefer not to do so.

Senator COUZENS. I wish you would so that we might have the information.

Mr. POPE. I might recite this without any consultation or direct knowledge of the facts and only from information which I have received: I understand that in one instance, or more, the Bethlehem Steel Corporation for the purpose of protecting the interests and deposits of their employees were obliged to take over the stock of a bank. By owning the stock of that bank you would make the Bethlehem Steel Corporation a bank affiliate.

Senator BARKLEY. Right there let me ask you: If the majority of the stock is owned by the Bethlehem Steel Corporation and is controlled by it, why shouldn't it be considered an affiliate?

Mr. POPE. I am not questioning as to whether or not it is an affiliate, but I do question the fact as to whether it is necessary or practicable for the examiners of the Federal Reserve System to examine at stated intervals a corporation of the size of the Bethlehem Steel Corporation and should require them to make the same reports that are required to be made under this bill. I can not see how they would want it to be an affiliate.

Senator COUZENS. Does not that seem to be stretching the point when the stockholders of the Bethlehem Steel Corporation or the officers of the Bethlehem Steel Corporation could easily dispose of their bank stock to outside interests?

Mr. POPE. I am not prepared to state what the Bethlehem Steel Corporation could do.

Now, as to section 3 of the bill: If properly interpreted, we say it makes provision prohibiting the undue, unauthorized, or improper use of credit facilities by Federal reserve member banks, and as such investment bankers or anyone else I take it would agree. But investment bankers do not agree with the broad general statement, the intent of which is carried through this bill, and this bill is designed to carry out this statement and is a most deflationary measure, certainly to the detriment of the best interests of the country to-day. Invesment bankers do not agree with this statement, which is really he general purport of the bill as is understood by us, that credit facilities shall not be extended to member banks for the purpose of making or carrying loans for investment or facilitating the carrying of or trading in such securities other than Government obligations. Senator BULKLEY. What are you reading from?

Mr. POPE. An extract from a paragraph in the bill, found on page 3 at line 19.

Senator GLASS. You, of course, are aware that that is the exact prohibition of section 13 of the Federal reserve act and has been for 18 years.

Mr. POPE. Yes, but it is not the question of what that statement is. I did not state that that was what was objected to. I said it was the method in this bill which corrected or carried out those statements, first, that was objected to.

Senator BULKLEY. Then you do not object to the statement itself? Mr. POPE. No, sir; but this is what I say