University of Virginia Library

I have delayed answering your letter of the 5th the contents of which I discussed with
you and Messrs. Mears and Talbott after the last meeting of the Board, until I could obtain copies
of Regulation F promulgated by the Federal Reserve System for the guidance of national banks administering
"common trust" funds. I have now obtained a copy of the pamphlet containing this regulation
and enclose it herewith.

You will find this subject treated as Section 17 page 12 et seq. and I believe you will
find the pertinent provisions embodied in subparagraph (c)(4) at page 15, dealing with the periodic
determination of the value of assets in such a fund.

I have also discussed this matter at some length with Mr. Burrell Gunn, Vice President
and Trust Officer of the State-Planters Bank and Trust Company, who is conversant with the provisions
of Regulation F and the method of its application and operation. He gives me the following
very simple illustration

Assume there are two original participants who put in $10,000 each

So long as the common fund continues in this status the income is divided by 20 units to
determine the amount to be distributed to the owner of each unit. But assume that a year later,
or on some quarterly period when a valuation is had, the investments in the common trust fund are
at market worth $25,000. Each unit is therefore then worth $1,250, but there are still only 20
units.

At this point C contributes $10,000 to the common fund. If he were issued 10 units the
interest of A and B, the original participants, would be diluted as follows:

To state it a little differently, C will immediately realize a profit of $166.66 upon
each $1,000 contribution made by him and A and B, the old members, will suffer a proportionate reduction
in their unit values.

To correct such an inequity, the provisions of Section (c)(4) of the Regulation contemplate
quarterly valuations, or, more specifically, at the time any new funds are admitted, by dividing
the number of units then outstanding into the then established market value, and in this
manner determine the then value of each unit.

Using the above illustration, we had a $1,250 valuation for each of the original 20
units contributed by A and B - reflecting their value of the total fund value of $25,000 on the
date of the valuation. When C contributes his $10,000 as of the valuation date, we have a fund
of $35,000, and as a simple matter of arithmetic the $10,000 which he contributes would represent
8 units of valuation of $1,250 each. So that thereafter the respective contributors would own
units and receive proportionate distributions of income as follows.

I take it from your letter that you can and will set up such a system of accounting,
and it might be well to determine in advance that all new funds received after January 1, 1952,
would be held and turned over quarterly to the Bank for investment in the common fund - you making,
with the Bank's assistance, a valuation of the fund as of each quarterly date, and thereby
determining the periodic value of each unit and the participating value on a unit basis of the
new funds currently contributed.

From the December 25, 1951 statement of the Bank the aggregate market value of the Consolidated
Fund was $6,444,134.27. If we employ $10,000 as a suitable unit value, there existed in
the Fund at that time approximately 645 units of the value of $10,000 each, and all future contributions
of funds in units of, say $10,000 each, would acquire a participating unit value on
the basis of the aggregate market value of the fund at the time of their contribution in the
manner heretofore outlined.

Our Committee has no doubt of the authority of the Board to merge all funds and treat
them as a common trust fund, and to segregate income between (1) units represented in the value of
the fund as of December 25, 1951, and (2) the units contributed to the common fund subsequent to
that date, on a unit basis.