Mr. POPE. Further as to section 18 of the bill: This section prevents any member bank from being a correspondent of any other bank or security dealer. That is the interpretation given to that paragraph. Such a provision would practically stop the security and industrial business of the country. It is possible that that is not the intention of the section, but

Senator GLASS (interposing). What section is that?

Mr. POPE. Section 18. The word "correspondent" used in that section is not defined in law. I am quite naturally taking the general interpretation on the street of the meaning of the term. This appears to mean, however, that no bank could have deposits with any other bank or security dealer as it is worded. I do not know what the intention was. But I assume certainly that the probable intention was that securities could not be delivered in various parts of the country through any bank because security dealers could not have correspondents. Therefore dealers would be prohibited in the matter of using them and it would mean the mechanism of distributing securities throughout the country almost impracticable.

In the matter of section 21, the Investment Bankers Association of America did not feel they are familiar enough with the commercial banking business to pass on it, but they have no objection to the paragraph which permits branch banking. But, as I say, they are not qualified to discuss that subject.

Now, as to section 25: This section restricts the aggregate of all loans to all dealers to 10 per cent of the capital and surplus of banks, and in some cases less to bank affiliates. This reduces the present amount dealers can borrow against Government securities and bankers' acceptances, which would make it difficult for them to properly handle the business.

I will say that this whole section is highly discriminatory as it does not apply to State banks.

This section appears to be intended to divorce all affiliates of national banks within three years. It is not possible for us to determine the exact meaning of that section, but we judge it to mean as stated. If it does

Senator GORE (interposing). Let me ask you a question right there: You stated that the stockholders in the First National Bank owned the stock in the First National-Old Colony Corporation. Mr. POPE. No, sir; I said it did not own it.

Senator GLASS. You said the bank did not own it?

Mr. POPE. Yes, sir.

Senator GORE. But you said the stockholders did.
Mr. POPE. Yes, sir.

Senator GORE. Are they at liberty to sell or withdraw that stock? Mr. POPE. The stock is trusteed for the benefit of the stockholders of the First National Bank.

Senator GORE. Then it is really bound up. If they sell their stock in the First National Bank of Boston they must dispose of their stock in the First National-Old Colony Corporation?

Mr. POPF. I should think you are correct.

Senator GLASS. You say this section would circumscribe the holdings of Government securities by banks 10 per cent. Mr. POPE. Yes, sir.

Senator GLASS. Have you read this provision? [Reading:]

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.

Mr. POPE. Without the bill in front of me, I will say that the exception is in the case of affiliates to which I refer.

Now, this section is intending also to divorce, as I have said, the affiliates of national banks within three years. This would mean, of course, the disintegration, probably, of such institutions at once. If it does, it eliminates some of the largest distributors of securities in the country to-day. And in some of the large cities of the country it reduces the distributing power in those cities to a very large extent, to a substantial extent.

Senator BROOKHART. If these large distributors, like yourself, in 1929 kept distributing this stuff at the inflated values, isn't it about time they ought to be eliminated?

Mr. POPE. Well, perhaps you will think I am not answering your questions, but I can only say that the people of the country in a general way buy whatever they want to buy, and if the demand is great for securities from dealers, members of stock exchanges, affiliates of member banks, they would sell such.

Senator BROOK HART. You think, then, that the salesmanship part of it has no effect? You put all of it on the board?

Mr. POPE. I do not think it is all on the board, but I say that is a fact. If they want the securities they will be purchased.

Senator BROOKHART. If these big distributors are not going to find out the honest and reliable course of values so the public can rely on them in the matter of making investments, they might better be abolished entirely than to be used in the way they were used in 1929.

Mr. POPE. Of course you are referring to affiliates as having done that. I can tell you only from the figures of the Investment Bankers' Association of America, but the affiliates are a little less than 25 per cent of the total number of investment banking members.

Senator BROOKHART. Then let us put only 25 per cent of them in it. Did they only handle 25 per cent of the business?

Mr. POPE. I can not tell you.

Senator BROOKHART. Let us only put on them the proportion of the business they handled. If they put out 25 per cent of it, then it is a big item, isn't it? And in being affiliated with the big banks probably they handled more than 25 per cent.

Mr. POPE. Possibly.

Senator TOWNSEND. What effect, if any, would this provision have upon national banks becoming State banks? Would there be a tendency toward a change from national to State banks?

Mr. POPE. Of course, I can not answer for any national bank, but it is the opinion of investment bankers that the important provisions of this bill are so discriminatory that it would certainly necessitate some change of national-bank charters into State-bank charters. But that is only an opinion.

Senator TOWNSEND. Consolidation or the reverse.

Mr. POPE. It would certainly not do the reverse in any circum

stances.

Senator GLASS. Mr. Pope, you seem to be in disagreement with the vice chairman of the First National Bank of Boston, Mr. B. W. Trafford, whom we regarded as a man of such experience and good judgment that we called him down here before the subcommittee. I believe that he was in favor of complete separation of national banks and their affiliates.

Mr. POPE. Do you mean when you say complete, by not having interlocking directors?

Senator GLASS. Well, I do not know what he meant. I do not undertake to interpret what he meant.

Mr. POPE. That is what I think he meant.

Senator GLASS. Here is what he said. After agreeing with certain restrictions which we have embodied in this bill, that should be put upon affiliates, he was asked [reading]:

Would you place any further restrictions on them in order to get a more complete separation between the bank and the affiliate?

And then he answered [reading]:

Well, I would try completely to separate them. I would try to have the funds that support the security business segregated from the commercial bank. Then he was asked [reading]:

How would you do that?

And he answered [reading]:

By putting the stock in the hands of trustees for the benefit of the stockholders of the bank and let the affiliate have its own capital and stand on its own feet.

That is what we have undertaken to do in this bill.

Mr. POPE. I have suggested exactly that, to the best of my ability. I have stated that they should trustee the stock and have the corporation stand on its own feet, and that is exactly what this corporation I have described does.

Senator GLASS. Well, but you not only do not want complete separation, but you want the officers of the bank to be the managers of the affiliate.

Mr. POPE. No, sir. The recommendation by many bank affiliate officers who appeared here I believe from the testimony, if I recall it as given before your subcommittee, recommended that the directors be different; and certainly as far as we are concerned and as far as many others I know of are concerned, the question of interlocking officers is of no degree of importance.

Senator GLASS. In order that it may be in the record and in order to show that the subcommittee had not acted in a whimsical way but has for weeks after weeks gone over these matters with the utmost care and sought the advice of experienced and tested bankers and experts, I want to read into the record what was said by Mr. Broderick, the superintendent of banks in New York, with respect to affiliates [reading]:

With reference to affiliate companies, we are recommending that no officer of any bank be permitted to be an officer of any affiliate or holding company; that the stock of the affiliate or holding company be represented by individual certificates and not coupled in any way with the certificates of the bank.

He recommends also a blanket provision as to the limiting to 10 per cent of the capital stock of a banking institution for all loans

made to a company of its affiliates, investments in stock, and the like, so that the aggregate of all shall not exceed 10 per cent of the capital and surplus of such institutions.

I also at this point want to put in the record the testimony of Mr. Owen D. Young, who I think is a director in the New York Federal Reserve Bank, who said [reading]:

I am clear that the ownership of the security companies and of the bank should be identical.

In other words, I take it that he meant that the bank should be responsible for the operations of the securities company, which is just the contrary to what you said in response to a question from me a while ago, that it had no responsibility in the matter. He said [reading]:

No other kind of affiliate should be permitted. If there is a divided interest then I think it would be better to prohibit affiliates altogether.

And further, Mr. Young insisted that there should be public statements of their condition by affiliates, to which I understand you to object, Mr. Pope.

Mr. POPE. No, sir.

Senator GLASS. Oh, yes.

Mr. POPE. Do you mean in the previous testimony?

Senator GLASS. Yes.

Mr. POPE. If I did, and I think I did say it at that time.
Senator GLASS. Well, that is what I am talking about.

Mr. POPE. I am not objecting to that now.

Senator GLASS. Well, you are making a sweeping objection to this provision, and it requires publicity and examination.

Mr. POPE. Not to-day, Senator. I have stated just the opposite to-day.

Senator GLASS. All right. And I hope to-morrow you will change your mind about some of the other provisions of the bill.

Mr. POPE. That was a technical situation in regard to a public statement or not, which made me change my mind.

Senator GORE. You stated that the officers of the First National Bank of Boston owned stock in the First National-Old Colony Corporation. Will you put in the record the exact reasons why the bank organized this alter ego or double instead of endeavoring to transact the same business itself? Was it because under the law affiliates could do some things a bank could not do, or that the bank could shift the responsibility to the affiliate? Or what was the

reason?

Mr. POPE. I can not tell you. The question of the legal matters coming up on consolidations are very difficult to follow. And I was not even in Boston at the time it was done. But I can assure you it was not done for the purpose of evading any law or as a subterfuge. However, I can not tell you the technical legal reason why the exact method was employed.

Senator GORE. You admit it has been employed pretty generally over the country in late years, however?

Mr. POPE. I think there are a great many, not identical though. There are some small differences in each case, but such affiliates do exist.

Senator FLETCHER. What other section do you wish to speak on? Mr. POPE. I will now come to section 26. This limits the borrowing of an individual or corporation on loans of collateral security to 10 per cent of a member bank's capital and surplus. It thus repeals all exceptions in section 5200 of the Revised Statutes, which section is particularly severe, and I only bring this to your attention, particularly severe on bankers' acceptances, Government bonds, and on industry and agriculture, to the extent that it restricts loans secured by shipping documents.

Section 27 provides for reports of national bank affiliates. In general this report is in accordance with recommendations made at hearings of the subcommittee and as such is in accordance with the opinion of investment bankers. However, the requirements that an affiliate publish its holdings if borrowing over 5 per cent of the parent bank's capital and surplus from any bank or banks is not only against the best interests of the affiliate but is derogatory to the investment market.

It discloses, for example, if the report occurred on the date of issue of securities, it would then undoubtedly show that the entire participation of the affiliate was held by the affiliate. The report going out a few days later would give to the public the impression that the affiliate had been unable to sell those securities; the impression would be that they were not satisfactorily taken by the public, and the public would start to sell them. This would hurt the affiliate and would hurt the bond market.

Senator BROOKHART. Upon that proposition let me ask you: If that is what would happen, isn't the public entitled to know it? Mr. POPE. No, sir; because it is not a fact.

Senator BROOKHART. It would be if the securities did not move. Mr. POPE. But I did not say that. I say when they are purchased it may take two or three days for them to be sold, but the payment on them frequently does not occur and usually does not occur for at least 10 days in the case of new issues.

Senator GLASS. After all the committee was not so much interested in the effect upon the public as in the effect upon the bank and the management itself. However, the fact that the bank would be required to do this would operate as a deterrent, wouldn't it, on reckless management?

Mr. POPE. Well, sir, the question would seem to me to be that the publication of a portfolio of an affiliate was no more important than the publication of a portfolio of the bank, the parent institution.

Senator GLASS. Well, that takes us back to the original inquiry, why the affiliate? Why not organize on its own basis and responsibility and conduct the business of investment banker rather than hooking up with a commercial bank, or rather than have a commercial bank institute an affiliate to do what the national bank act prohibited it from doing?

Mr. POPE. Now section 28: This section requires examination of all bank affiliates. This section is in general in conformity with the general feeling among all affiliate officials, and is highly recommended.

I have nothing further to say.