be restrictive only as long as the surplus of the bank remains less than the amount of its capital. After the legally required capital and surplus relationship is established and no further transfers of portions of net profits to surplus must be made, there seems to be no reason for restricting the declaration of dividends to a semiannual basis if there is no conflict with other provisions of law. A clarification of the statute to deal with what appears to be all-inclusive restrictive language would be helpful.

14. INCREASE OF CAPITAL BY VOTE OF SHAREHOLDERS

Existing Law

Title 12, U. S. C., sec. 58.-Any national banking association may, with the approval of the Comptroller of the Currency, by the vote of shareholders owning two-thirds of the stock of such association increase its capital stock, in accordance with existing laws, to any sum approved by the said Comptroller, notwithstanding the limit fixed in its original articles of association and determined by said Comptroller; and no increase of the capital stock of any national banking association either within or beyond the limit fixed in its original articles of association shall be made except in the manner herein provided.

Recommendation:

It is recommended that section 58 be repealed.

Reason:

In 1950 the Attorney General was asked to consider whether or not a stock dividend which amounts to a capital increase could be issued under the provisions of title 12 United States Code section 58. He held that under section 58 a national bank could not lawfully declare stock dividends. Thereafter title 12. United States Code section 57 was amended in order to provide for an increase of capital stock by the declaration of a stock dividend. Since section 57 incorporates the subject matter of section 58, and national banks have availed themselves of section 57 instead of section 58, the latter should be repealed as it is now obsolete and never applied.

15. CUMULATIVE VOTING IN THE ELECTION OF NATIONAL BANK DIRECTORS

Existing law

Title 12, U. S. C., sec. 61 (U. S. R. S., sec. 5144). In all elections of directors, each shareholder shall have the right to vote the number of shares owned by him for as many persons as there are directors to be elected, or to cumulate such shares and give one candidate as many votes as the number of directors multiplied by the number of his shares shall equal, or to distribute them on the same principle among as many candidates as he shall think fit; and in deciding all other questions at meetings of shareholders, each shareholder shall be entitled to one vote on each share of stock held by him; except that (1) this shall not be construed as limiting the voting rights of holders of preferred stock under the terms and provisions of articles of association, or amendments thereto, adopted pursuant to the provisions of section 302 (a) of the Emergency Banking and Bank Conservation Act,

approved March 9, 1933, as amended, (2) in the election of directors, shares of its own stock held by a national bank as sole trustee, whether registered in its own name as such trustee or in the name of its nominee, shall not be voted by the registered owner unless under the terms of the trust the manner in which such shares shall be voted may be determined by a donor or beneficiary of the trust and unless such donor or beneficiary actually directs how such shares shall be voted, (3) shares of its own stock held by a national bank and one or more persons as trustees may be voted by such other person or persons, as trustees, in the same manner as if he or they were the sole trustee, and (4) shares controlled by any holding company affiliate of a national bank shall not be voted unless such holding company affiliate shall have first obtained a voting permit as hereinafter provided, which permit is in force at the time such shares are voted, but such holding company affiliate may, without obtaining such permit, vote in favor of placing the association in voluntary liquidation or taking any other action pertaining to the voluntary liquidation of such association. Shareholders may vote by proxies duly authorized in writing; but no officer, clerk, teller, or bookkeeper of such bank shall act as proxy; and no shareholder whose liability is past due and unpaid shall be allowed to vote. Whenever shares of stock cannot be voted by reason of being held by the bank as sole trustee, such shares shall be excluded in determining whether matters voted upon by the shareholders were adopted by the requisite percentage of shares. Recommendation

Amend the statute in order to eliminate mandatory cumulative voting in the election of directors of national banks but permit such association to retain cumulative voting by so providing in their articles of association.

Reasons

A national bank can best be operated where there is a high degree of unity in the directorate and in the official staff. The successful operation of any bank depends upon confidence of stockholders in the management, confidence of different members of the management body in each other, and confidence of the depositors and the community in the bank as an organization. Confidence is not engendered by having a minority group force itself on the directorate of a bank by the use of the cumulative voting provision, and in cases where such an end has been accomplished it has been the usual experience that the party or parties thus added to the boards have pursued a course of troublemaking, thereby lessening the mutual confidence of the directorate and the confidence of the staff in the directorate, and in some cases, the confidence of the community in the bank.

Cumulative voting is not necessary in national banks because of the protection afforded to all classes of stockholders by the supervision exercised by the Office of the Comptroller of the Currency. National banks are regularly examined by the Office of the Comptroller and violations of law or actions not in the best interests of the stockholders are reported to the Comptroller by his examiners and corrective action is required by his office.

16. RESERVES REQUIRED BY HOLDING COMPANY AFFILIATES

Existing law

Title 12, U. S. C., sec 61 (c) (U. S. R. S., sec. 5144).-Notwithstanding the foregoing provisions of this section after five years. after the enactment of the Banking Act of 1933, (1) any such holding company affiliate the shareholders or members of which shall be individually and severally liable in proportion to the number of shares of such holding company affiliate held by them respectively, in addition to amounts invested therein, for all statutory liability imposed on such holding company affiliate by reason of its control of shares of stock of banks, shall be required only to establish and maintain out of net earnings over and above 6 per centum per annum on the book value of its own shares outstanding a reserve of readily marketable assets in an amount of not less than 12 per centum of the aggregate par value of bank stocks controlled by it, and (2) the assets required by this section to be possessed by such holding company affiliate may be used by it for replacement of capital in banks affiliated with it and for losses incurred in such banks, but any deficiency in such assets resulting from such use shall be made up within such period as the Board of Governors of the Federal Reserve System may by regulation prescribe; and the provisions of this subsection, instead of sub-section (b), shall apply to all holding company affiliates with respect to any shares of bank stock owned or controlled by them as to which there is no statutory liability imposed upon the holders of such bank stock.

Recommendation

It is recommended that this statute be amended to provide that where a holding company affiliate of a member bank is in turn owned by another corporation which by virtue of such ownership becomes a holding company affiliate, which in turn is owned by another corporation which is, therefore, a holding company affiliate, only the holding company affiliate which directly owns or controls a majority of the shares of capital stock of the member bank or the election of a majority of the directors of the member bank, should be required to maintain the requisite reserves.

Reasons

The purpose of this statute is to require that a holding company affiliate of a member bank must establish and maintain out of net earnings over and above 6 percent per annum on the book value of its own shares outstanding a reserve of readily marketable assets in an amount of not less than 12 percent of the aggregate par value of bank stocks controlled by it. The purpose of this requirement is to insure that a holding company affiliate owning bank stock will be in a position to aid the banks by replacement of capital in the event that losses make such replacement necessary. When such a reserve has been established and is maintained by a holding company affiliate directly owning bank stocks, there would seem to be no reason why parent companies of the holding company affiliate should also be required to maintain such reserves. In 1 case which recently came to our attention a single group of banks had 4 holding company, affiliates in vertical alinement. Under these circumstances, and under

the interpretation placed on this statute by the Board of Governors of the Federal Reserve System, each of these parent companies would be required to maintain the specified reserves so that in effect reserves of 48 percent rather than 12 percent would be required. This requirement would be a major deterrent to nonmember State banks owned by the holding company affiliate giving consideration to conversion into national banks. There is no justification for such a requirement and the language of this statute should be rewritten to bring it into conformity with the intent of Congress.

Existing law

17. SHAREHOLDERS' LISTS

Title 12, U. S. C., sec. 62.—The president and cashier of every national banking association shall cause to be kept at all times a full and correct list of the names and residences of all the shareholders in the association, and the number of shares held by each, in the office where its business is transacted. Such list shall be subject to the inspection of all the shareholders and creditors of the association, and the officers authorized to assess taxes under State authority, during business hours of each day in which business may be legally transacted. A copy of such list, verified by the oath of such president or cashier, shall be transmitted to the Comptroller of the Currency within ten days of any demand therefor made by him.

Recommendation

(1) This statute should be amended to eliminate the provision that creditors of the association may inspect the list of shareholders.

(2) This statute should be amended by qualifying the right of the shareholders to inspect the shareholders list by providing that they may inspect the shareholders list only for a proper purpose not inimical to the interests of the bank.

Reason

(1) Double liability of shareholders in national banks has now been eliminated. With the elimination of the double liability there is no longer any reason to permit the creditors of the bank to view the shareholders lists. The purpose of that requirement was so that the creditors would know who were the shareholders against whom double liability might be enforced in the event of the insolvency of the bank.

(2) There appears to be no reason why shareholders of national banks should have any greater right of access to shareholders lists than the shareholders of corporations generally. That right is generally limited to the right to inspect the shareholders list upon the showing of a proper purpose not inimical to the interests of the corporation. The present requirement related back originally to the double liability provisions of law, and there is no longer any need for the provision to be any broader than in the case of corporations generally.

Existing Law

18. SHAREHOLDERS INDIVIDUAL LIABILITY.

Title 12, U. S. C., sec. 63 (U. S. R. S., sec. 5151).-The shareholders of every national banking association shall be held individually responsible, equally and ratably, and not one for another, for all contracts,

debts, and engagements of such association, to the extent of the amount of their stock therein, at the par value thereof, in addition to the amount invested in such shares; except that shareholders of any banking association now existing under State laws, having not less than five millions of dollars of capital actually paid in, and a surplus of twenty per centum on hand, both to be determined by the Comptroller of the Currency, shall be liable only to the amount invested in their shares; and such surplus of twenty per centum shall be kept undiminished, and be in addition to the surplus provided for in this Title; and if at any time there is a deficiency in such surplus of twenty per centum, such association shall not pay any dividends to its shareholders until the deficiency is made good; and in case of such deficiency, the Comptroller of the Currency may compel the association to close its business and wind up its affairs under the provisions of Chapter four of this Title.

Title 12, U.S. C., sec. 64 (Federal Reserve Act, sec. 23, par. 1).—The stockholders of every national banking association shall be held individually responsible for all contracts, debts, and engagements of such association, each to the amount of his stock therein, at the par value thereof in addition to the amount invested in such stock. The stockholders in any national banking association who shall have transferred their shares or registered the transfer thereof within sixty days next before the date of the failure of such association to meet its obligations, or with knowledge of such impending failure, shall be liable to the same extent as if they had made no such transfer, to the extent that the subsequent transferee fails to meet such liability; but this provision shall not be construed to affect in any way any recourse which such shareholders might otherwise have against those in whose names such shares are registered at the time of such failure.

Title 12, U.S. C., sec. 64a. (Banking Act of 1933, sec. 22, as amended by Banking Act of 1935, sec. 304).—The additional liability imposed upon shareholders in national banking associations by the provisions of section 5151 of the Revised Statutes, as amended, and section 23 of the Federal Reserve Act, as amended (U. S. C., title 12, secs. 63 and 64), shall not apply with respect to shares in any such association issued after the date of the enactment of this Act. Such additional liability shall cease on July 1, 1937, with respect to all shares issued by any association which shall be transacting the business of banking on July 1, 1937: Provided, That not less than six months prior to such date, such association shall have caused notice of such prospective termination of liability to be published in a newspaper published in the city, town, or county in which such association is located, and if no newspaper is published in such city, town, or county, then in a newspaper of general circulation therein. If the association fail to give such notice as and when above provided, a termination of such additional liability may thereafter be accomplished as of the date six months subsequent to publication, in the manner above provided. In the case of each association which has not caused notice of such prospective termination of liability to be published prior to May 18, 1953, the Comptroller of the Currency shall cause such notice to be published in the manner provided in this section, and on the date six months subsequent to such publication by the Comptroller of the Currency such additional liability shall cease.

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