[Code of Federal Regulations]
[Title 12, Volume 3]
[Revised as of January 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 12CFR250.403]

[Page 686-687]
 
                       TITLE 12--BANKS AND BANKING
 
                   CHAPTER II--FEDERAL RESERVE SYSTEM
 
PART 250--MISCELLANEOUS INTERPRETATIONS--Table of Contents
 
Sec. 250.403  Service of member bank and real estate investment company.

    (a) The Board recently considered two inquiries regarding the 
question whether proposed real estate investment companies would be 
subject to the provisions of sections 20 and 32 of the Banking Act of 
1933 (12 U.S.C. 377 and 78). These sections relate to affiliations 
between member banks and companies engaged principally in the issue, 
flotation, underwriting, public sale or distribution of stocks, bonds, 
or similar securities, and interlocking directorates between member 
banks and companies primarily so engaged. In both instances the 
companies, after their organization, would engage only in the business 
of financing real estate development or investing in real estate 
interests, and not in the type of business described in the statute. 
However, each of the companies, in the process of its organization, 
would issue its own stock. In one instance, it appeared that the stock 
would be issued over a period of from 30 to 60 days; in the other 
instance it was stated that the stock would be sold by a firm of 
underwriters and that distribution was expected to

[[Page 687]]

be completed in not more than a few days.
    (b) On the basis of the facts stated, the Board concluded that the 
companies involved would not be subject to sections 20 and 32 of the 
Banking Act of 1933, since they would not be principally or primarily 
engaged in the business of issuing or distributing securities but would 
only be issuing their own stock for a period ordinarily required for 
corporate organization. The Board stated, however, that if either of the 
companies should subsequently issue additional shares frequently and in 
substantial amounts relative to the size of the company's capital 
structure, it would be necessary for the Board to reconsider the matter.
    (c) Apart from the legal question, the Board noted that an 
arrangement of the kind proposed could involve some dangers to an 
affiliated bank because the relationship might tend to impair the 
independent judgment that should be exercised by the bank in appraising 
its credits and might cause the company to be so identified in the minds 
of the public with the bank that any financial reverses suffered by the 
company might affect the confidence of the public in the bank.
    (d) Because of the foregoing conclusion that the companies would not 
be subject to sections 20 and 32, it seems advisable to clarify 
Sec. 218.102, in which the Board took the position that a closed-end 
investment company which was in process of organization and was actively 
engaged in issuing and selling its shares was subject to section 32 as 
long as this activity continued. That interpretation should be regarded 
as applicable only where the circumstances are such as to indicate that 
the issuance of the company's stock is a primary or principal activity 
of the company. For example, such circumstances might exist where the 
initial stock of a company is actively issued over a period of time 
longer than that ordinarily required for corporate organization, or 
where, subsequent to organization, the company issues its own stock 
frequently and in substantial amounts relative to the total amount of 
shares outstanding.

[26 FR 868, Jan. 28, 1961. Redesignated at 61 FR 57289, Nov. 6, 1996]