THE LEGAL INVESTMENTS OF CERTAIN CLASSES OF FINANCIAL INSTITUTIONS

309 Pages·13.247 MB·English

by  GROSSNICKLE, EDWIN EUGENE

THE LEGAL INVESTMENTS OP CERTAIN CLASSES
OP FINANCIAL INSTITUTIONS
Dissertation
Presented in Partial Fulfillment of the
Requirements for the Degree of Doctor
of Philosophy in the Graduate
School of the Ohio State
University
By
Edwin Eugene Grossnickle, B. A., A. M.
The Ohio State University
1952
Approved by
Advi
TABLE OF CONTENTS
Page
Introduction.......................................... 1
The Natuira of theR egulating Sta tut es........... 44
Some Aspects of theR ecord of Performance . . . 159
The Administration of the Laws Governing
Financial Institutions ........................ 165
S u m m a r y ................................. * ..............220
Appendix-A........................................... 251
Appendix-B............................................... 248
Appendix-C .............................................261
Appendix-D............................................ 27 6
Appendix-E..............................................297
Appendlx-F............................................... 299
Bibliography........................ 501
Autobiography..........................* ..............505
i
SJSCT42
LIST OP TABLES
Table Page
1. Estimated Savings of Individuals in Selected
Media, 1920 to 1950......................... 14
2. Relation of the Net Long-Term Private Debt in
the United States to the Assets of Life Insur­
ance Companies, Mutual Savings Banks, and Sav­
ings and Loan Associations..................... 16
3. Mutual Savings Banks in the United States,
1820 to 1945 ......................... 21
4. Principal Forms of Assets Held By Mutual Sav­
ings Banks, December 31, 1950................... 26
5. General Summary of the Statutes Authorizing
the Investment of Savings Bank Assets. . . 51, 52
6. General Summary of the Statutes Authorizing
the Investment of the Assets of Trust Compa­
nies 75, 76
7. General Summary of the Statutes Authorizing
the Investment of the Assets of Life Insur­
ance Companies.............................. 94, 95
8. General Summary of the Statutes Authorizing
the Investment of the Assets of Savings and
Loan Associations. Ill, 112
9. Comparison of Times-Interest-Earned Require­
ments for First Mortgage Bonds by Classes of
Issuers. , ..................................... 133
10. Comparison of Requirements for Periods of No
Default for First Mortgage Bonds by Classes
of Issuers....................................... 134
11. Comparison of Portfolio Limits Permitted in
Eligible Groups of Securities by Classes of
Issuers............................................135
ii
Table Page
12. Comparison of Number of Particular Corporate
Security Issues in the 1928 Legal List for
New York Savings Banks, 1928 and 1951...........149
13. Corporate Securities Withdrawn from the 1928
Legal List for New York Savings Banks During
the Period 1S23 to 1 9 5 1 . ...................... .. 150
14. Corporate Securities Withdrawn from the 1928
Legal List for New York Savings Banks During
the Period 1928 to 1951 (per c e nt).............. 152
15. Number of Years After 1928 Until Railroad
Bonds in the New York Savings Bank Legal List
Turned Non-Legal ............................... 153
16. Comparison of the Yearly Low Prices of Rail­
road Bonds in the 1928 Savings Bank Legal List
for New York with Prices of the Dow-Jones Ten
High-Grade Rails ............................... 156
17. Comparison of Yearly Low Prices After 1928
with the 1928 Price to Determine Potential
Loss ...............................................158
18. Comparison of the Yearly Low Prices of Non-
Legal Utility Bonds in the 1928 Savings Bank
Legal List for New York with the Yearly Low
Prices of the Dow-Jones Ten High-Grade Utility
Bonds................................................. 160
19. Comparison of Yearly Low Prices after 1928
with the 1928 Price to Determine Potential
Gain or Loss ................................... 161
20. Title of State Regulatory Officer Responsible
for Legal Investments................ 168
21. Prevalence of the Prudent Man R u l e ..............169
22. Frequency of Checking Investments................ 170
23. Responsibility upon the Institutions for Proof
of Conformity of Portfolio........................171
24. Institutional Conformity to Requirements Re­
sulting In Self-Administration................... 172
iii
Table Page
12. Comparison of Number of Particular Corporate
Security Issues In the 1928 Legal List for
New York SavingsB anks, 1928 and 1951...........149
13. Corporate Securities Withdrawn from the 1928
Legal List for New York Savings Banks During
the Period 1928 to 1951..........................150
14. Corporate Securities Withdrawn from the 1928
Legal List for New York Savings Banks During
the Period 1928 to 1951 (per cent) . . . . . . 152
15. Number of Years After 1928 Until Railroad
Bonds In the New York Savings Bank Legal List
Turned Non-Legal.................................153
16. Comparison of the Yearly Low Prices of Rail­
road Bonds in the 1928 Savings Bank Legal List
for New York with Prices of the Dow-Jones Ten
High-Grade Rails ............................... 156
IV. Comparison of Yearly Low Prices After 1928
with the 1928 Price to Determine Potential
L o s s ................................................. 158
18. Comparison of the Yearly Low Prices of Non-
Legal Utility Bonds in the 1928 Savings Bank
Legal List for New York with the Yearly Low
Prices of the Dow-Jones Ten High-Grade Utility
Bonds................................................. 160
19. Comparison of Yearly Low Prices after 1928
with the 1928 Price to Determine Potential
Gain or L o s s ........................................ 161
20. Title of State Regulatory Officer Responsible
for Legal Investments...............................168
21. Prevalence of the Prudent Man R u l e ..............169
22. Frequency of Checking Investments................ 170
23. Responsibility upon the Institutions for Proof
of Conformity of Portfolio........................171
24. Institutional Conformity to Requirements Re­
sulting in Self-Administration................... 172
ill
Table Page
25. Adjustment Period for an Institution Needing
to Place Investments In Conformity with the
Law............................................. 173
26. Selected Factors in the Demand for Investment
Funds, 1920-1950 ............................. 188
27. New Capital Issues of All Corporations and
Retained Earnings............................. 192
23. Limits on Common Stock Holdings by Life
Insurance Companies.......................194, 195
29. Principal Statutory Standards of Selection
of Common Stocks Imposed upon Life Insurance
Companies............. 198, 199
30. The Expansion of the New York Savings Bank
Legal List, 1928-1951......................... 214
31. The Expansion of the New York Savings Bank
Legal List, 1947-1951......................... 215
32. Comparative Consolidated Balance Sheets of
New York Savings Banks, September 30, 1951 . 217
33. Comparison of the Securities Placed in the
New York Savings Bank Legal List with the
Amounts of Securities Qualifying under Stat­
utory Tests, 1947-1951 .................... » 218
iv
THE LEGAL INVESTMENTS OF CERTAIN CLASSES
OF FINANCIAL INSTITUTIONS
INTRODUCTION
Purpose and Scope. The purpose of this study
is to inquire into the nature of legal investments.
An attempt will be made to observe what the aims may
be for establishing legal controls over the investment
activities of the Institutions and agencies which are
regulated. The inquiry will include a comparison of
the regulating statutes, a survey of one legal list
to ascertain investment performance, and an analysis
of trends in regulation.
Four of the primary institutional investing
classes which are affected will be examined. These
four are savings banks, trust companies, life insur­
ance companies, and savings and loan associations. As
a class, the savings banks will be revealed to be the
pace-setting class and In most cases the example group.
The analysis of the statutes will be completed in
1
detail for the four classes, but policies, trends, and
the implications of the efficacy of legal investments
will be examined primarily within the operating experi­
ence of the savings banks.
B. The mean ing of the term, legal investments, and
the financial institutiona affected. For many years the
selling agencies of marketable securities have used the
primary quality stamped by the investing public upon le­
gal investment securities as a strong selling point for
such securities. Investors have attached extra strength
to the "legals", and security issuers frequently have been
zealous of obtaining or maintaining, as the case might
be, this coveted legality status. Such a status carried
not alone the embellishments of superior quality, but In
addition presented opportunities to reduce the costs of
funded debt. Interest, therefore, has been of the first
magnitude in the characteristics of the legal invest­
ments, even though there has been relatively little eval­
uation of the merit which the status commonly commanded.
Legal investments are investments which are either
declared or established as legal for some purpose by an
agency of government. More precisely, therefore, legal
Investments are investments authorized by law. One court
had occasion to define legal Investments as those author­
ized by law, Irrespective of whether Inclusion of a
3
particular class of securities was prudent exercise of
legislative discretion.^
In some states regulation has been under the juris­
diction of the banking department or a related body com­
missioned with regulatory power. This department pre­
pares annually or less frequently a list of securities
or Investments that are prescribed as of approved quali-
ity for the commitment of funds by those defined by the
statutes as subject to such regulation. Such a list
constitutes a so-called "legal list". Regulation in
other states Is under the common law. Investment dis­
cretion is lodged with the regulated groups. These
groups are charged with the responsibility of employing
such good faith In the investment of funds In their jur­
isdiction as could be expected of a prudent investor in
such a position. We can expand our definition, there­
fore, as given above. From the statutes and from that
part of the common law pertaining to the authorized
commitment of funds, the term, legal investment, Is
construed to be an investment ascertained by the regu­
lating authorities to be In conformity with such stand­
ards of quality that it is selected for inclusion In a
list approved for such commitments, or, Is an Investment
of such quality that it could be included in the port-
^In re Froelich's Estate, a trust case, Wordg and
Phrases, West Publishing Company, St. Paul, Vo'l. £'4,
p. 56l.
4
folio of a prudent investor responsible for the invest­
ment of resources subject to legal investment regula­
tions .
Subject to the legal or authorized investment stat­
utes are an array of people, agencies, and institutions.
They may be classified as mobilizers of savings. In­
cluded are trustees and trust companies, administrators,
executors, guardians, and fiduciaries generally. The
financial institutions affected are savings banks, com­
mercial banks, savings and loan associations, credit
unions, life insurance companies, and others. Within a
miscellaneous group are business corporations chartered
by the state, cemetery associations, charitable and
eleemosynary Institutions, and educational institutions,
as they may be affected in each case by legal Instru­
ments or by legal regulation. Certain governmental
units, agencies, and political subdivisions are also
required to place the funds gathered for or by them In
an authorized deposit or Investment form.
For the purposes of fulfilling the objectives of
this study, as will be given below, it is thought that
the treatment should embrace the most fundamental of
the Institutions classified as affected. The institu­
tions observed to be the most fundamental of the large
group are savings banks, trust companies, life insurance