regulations, if it is of such a character as to be successfully discharged by a bank chartered by Congress, Congress has authority to give the bank power to transact such private business. This rule precludes the state-although it may in a general sense possess authority to regulate such businessfrom using its authority to prohibit such business by national banks, since to do so would be an effort on the part of state authority to prohibit Congress from exercising a power which under the Constitution it has been given ample authority to exercise. The Chief Justice further points out that it follows that, although a business is of such character that it is not necessarily susceptible of being included by Congress in the powers conferred on national banks, yet such powers could be conferred if by state law, state banking corporations, trust companies, or others which are rivals or quasi rivals of national banks, were permitted to carry on such business. This must be the case, since the state may not by legislation give an advantage to the competitors of national banks and at the same time deny the power of Congress to meet such created competitive condition by legislation appropriate to avoid the injury which otherwise would be suffered by the national agency.2 § 474. All State Rules Must Be Obeyed In order that any bank, either national or state, or any trust company, may maintain a trust department, it is a condition precedent, established by the laws of each state and by the Federal Reserve Act, § II K, that the statutes of the state where the bank or the trust company is located, be complied with. For example, it is usually provided that the bank or the trust company must have a certain minimum capitalization, fully paid, and a certain surplus. Bonds equal to a certain See also Hamilton et al. decided April, 1920, in the Supreme Court of Connecticut; In re Estate of Stauchfield, Supreme Court of Wisconsin, June, 1920. (These cases have not yet been published in the law reports, but will appear shortly.) percentage of the capital must be deposited with the superintendent of banks or other state official vested with control of such matters. In New York State the minimum paid-in capital of a trust company must be $100,000 in a city with not over 25,000 population, increasing to $500,000 in cities of over 250,000. Also, each stockholder is liable for an additional amount equal to the par value of his stock. Bonds equal to 10 per cent of the total capitalization must be deposited with the superintendent of banks. This deposit is to secure trust funds and the operations of the trust department. In the case of insolvency of the bank or the trust company, the beneficiaries of trust funds have a prior lien or right as to this deposit. The deposit may be in securities acceptable to the state banking department or, in some states, in the form of a surety company bond. These rules apply to all banks maintaining a trust department, and to national banks, as well as to state banks or trust companies. § 475. How Trust Assets Are Protected 3 National banks exercising any or all of the powers given them under the act must segregate all assets held in any fiduciary capacity from the general assets of the bank and must keep a separate set of books and records showing in proper detail all transactions engaged in under authority of the act. Such books and records are open to inspection by the state authorities to the same extent as the books and records of corporations, organized under state law, that exercise fiduciary powers. There is nothing in this act, however, authorizing the state authorities to examine the books, records, and assets of a national bank which are not held in trust under authority of this act. No national bank may receive in its trust department de See Federal Reserve Act, § 11 K. posits of current funds subject to check or the deposit of checks, drafts, bills of exchange, or other items for collection or exchange purposes. Funds deposited or held in trust by the bank, awaiting investment, must be carried in a separate account and shall not be used by the bank in the conduct of its business unless it first sets aside, in the trust department, United States bonds or other securities approved by the Federal Reserve Board, to an equal amount. In the event of the failure of such bank, the owners of the funds held in trust for investment shall have a lien on the bonds or other securities so set apart, in addition to their claim against the general assets of the bank. Whenever the laws of a state require corporations acting in a fiduciary capacity to deposit securities with the state authorities for the protection of private or court trusts, national banks so acting are required to make similar deposits; and securities so deposited shall be held for the protection of private or court trusts, as provided by the state law. National banks in such cases are not required to execute the bond usually required of individuals if state corporations, under similar circumstances, are exempt from this requirement. National banks have power to execute such a bond when so required by the law of the state. In any case in which the laws of a state require that a corporation acting as trustee, executor, administrator, or in any capacity specified in this section, shall take an oath or make an affidavit, the president, vice-president, cashier, or trust officer of such national bank may take the necessary oath or execute the necessary affidavit. It is unlawful for any national banking association to lend any officer, director, or employee any funds held in trust under the powers conferred by this section. Any officers, director, or employee making such loan or to whom such loan is made, may be fined not more than $5,000, or imprisoned not more than five years, or may be both fined and imprisoned, at the discretion of the court. § 476. Rules as to Issuance of Permits to National Banks 4 In passing upon an application for permission to exercise the powers enumerated in this act, the Federal Reserve Board may take into consideration the amount of capital and surplus of the applying bank, whether or not such capital and surplus are sufficient under the circumstances of the case, the needs of the community to be served, and any other facts and circumstances that seem to it proper, and may grant or refuse the application accordingly: Provided, That no permit shall be issued to any national Application by national banks should be made to the Federal Reserve Board on forms provided by that board. § 477. Management of Trust Funds by National Banks The trust department of a national bank must keep books and records separate and distinct from the books and records of the commercial departments. They must be open for inspection of federal or state authorities at all times. The trust department of a national bank and all trust securities and investments must be placed under the management and joint control of two officers or other employees designated by the board of directors and whose duties are prescribed by the said board. All such officers or employees should be bonded. Because of the difference in the laws of the various states governing the relation of fiduciary and beneficiary, the Federal Reserve Board has not considered it practicable to formulate a uniform set of by-laws for national banks which See Federal Reserve Act, § 11 K. have been granted authority to exercise trust powers. Nor has it in any other manner attempted to define the duties and powers of the officer or officers in charge of the trust department of national banks. The precise duties and powers of these officers is a matter for the determination of the board of directors of each bank. When national banks about to open trust departments have asked the Federal Reserve Board for information as to the proper manner of conducting those departments, the board has suggested in each case that the trust department be placed under the management of a competent and experienced trust officer, and that competent local counsel be employed to assist in prescribing the duties of that trust officer and to advise with reference to the exercise of the bank's trust powers. § 478. Rules as to the Investment of Trust Funds In connection with § 11 K and in answer to inquiries, the Federal Reserve Board has promulgated certain regulations known as Regulations F. Before a national bank attempts to instal a trust department, a careful study of Regulations F, as well as § 11 K, is necessary. Only part of these regulations are given in the text. Funds held in trust must be invested in strict accordance with the terms of the will, deed, or other instrument creating the trust. Where the instrument creating the trust contains provisions authorizing the bank, its officers, or its directors to exercise their discretion in the matter of investments, funds held in trust may be invested only in those classes of securities which are approved by the directors of the bank. It was not intended, however, to require that each particular investment of trust funds be specifically approved by the board of directors, but merely that the directors define the classes of securities in which trust funds may be invested in those cases where the bank is authorized to exercise its discretion. Where the instrument creating the trust does not |