3. To Act as Trustee and Fiscal Agent. The Federal Reserve Board is authorized to grant by special permits to national banks applying therefor, when not in contravention of state or local law, the right to act as trustee, executor, administrator, or registrar of stocks and bonds, under rules and regulations prescribed by the board. This law gave national banks the power to compete with trust companies which do commercial banking. The law of some states definitely prohibited national banks from doing trust busi ness, others clearly permitted it, while still others had doubtful laws on the subject. After the passage of the federal statute some states of the first group passed laws enabling national banks to engage in trust business; in others the efforts at similar legislation failed. In some states the trust companies became very hostile and contested in court whether the trust clause—Section II (k)— of the act is constitutional, and whether the exercise of such pow ers in that state was in contravention of the state law. Test cases were carried to the Supreme Court from Michigan, and the constitutionality of the law was upheld (Fellows v. First National Bank, June i 1917). The board does not grant such power un less it is plainly within the law of the state, and unless it appears that the granting of the power is to the best interests of the apply ing bank.
The trust company section of the American Bankers' Associa tion, as well as other interested parties, felt that trust funds of national banks should be segregated from their commercial funds and the two businesses handled separately, as is required by law in most states; otherwise, instead of Section i 1 (k) simply put ting national banks on the same competitive basis with state banks and trust companies, the advantage would be with the national banks. On September 26, 1918, the so-called Phelan Bill became law, and among its various sections is one amending Section i 1 (k) of the Federal Reserve Act, to the following effect: That the Federal Reserve Board has power to grant by special permit to national banks applying therefor, when not in contraven tion of state or local law, the right to act in any fiduciary capacity in which state banks, trust companies, or other corporations which come into competition with national banks are permitted to act under the laws of the state in which the national bank is located.
Whenever the laws of such state authorize or permit the exer cise of any of these powers by its institutions which compete with national banks, the granting to and the exercise of such powers by national banks shall not be deemed to be in contravention of state or local law within the meaning of this act.
National banks exercising any of these fiduciary powers must segregate all assets held in any fiduciary capacity from its general assets and keep a separate set of books and records for these trans actions, which books and records must be open to inspection by the state authorities to the same extent as the books and records of those operating under state law. This amendment does not
authorize state authorities to examine the books, records, and assets of the national bank when such assets are not thus held in trust.
No national bank may receive in its trust department deposits of current funds, subject to check, or the deposit of checks, drafts, bills of exchange, or other items for collection or exchange pur poses. Funds deposited or held in trust by the bank awaiting in vestment must be carried in a separate account and 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 ap proved by the Federal Reserve Board.
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 estate of the bank.
Whenever the laws of the 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 shall be required to make similar deposits, and the securities so deposited shall be held for those purposes, as provided by the state law.
National banks in such cases shall not be required to execute the bond usually required of individuals, if state corporations un der similar circumstances are exempt from this requirement.
National banks are authorized to execute such bond when so required by the laws of the state.
In case the laws of the state require a corporation acting in a fiduciary capacity to take an oath or make an affidavit, the presi dent, vice-president, cashier, or trust officer of such national bank may take the necessary oath or execute the necessary affidavit.
It is unlawful under penalty for any national bank to lend any officer, director, or employee, any funds held in trust under powers conferred by this act.
In passing upon applications for permission to exercise the above powers, the Federal Reserve Board may take into considera tion the amount of capital and surplus of the applying bank, whether or not such capital and surplus is sufficient under the circumstances of the case, the needs of the community to be served and any other circumstances that seem to it proper, and may grant or refuse the application accordingly. No permit shall be issued to a bank having a capital and surplus less than the capital and surplus required by the state law of state banks, trust companies, and corporations exercising such powers.