The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
..
48
FEDERAL RESERVE BOARD
X-9425.
WASHINGTON
ADDRESS OFFICIAL CORRESPONDENCE TO
THE FEDERAL RESERVE BOARD
January 11, 1956.
Dear Sir:
There are inclosed herewith six copies of a tentative draft
of Regulation U -- Loans by Banks for the Purpose of Purchasing or
Carrying Equity Securities Hegistered on n National Securities
Ex~
change -- including ns a foreworc1 an explanatory statement to accompany the tentative draft.
Additi0nal copies arc being sent under
separate cover.
This tentative :"lraft is under consideraticn by the Boc.rd}
but before taking action the Boar(1 is submitting it for criticisms
and suggestions.
It will be appreci[lted, therefore, if you and the
officers and counsel of your
ban1~
will study this draft and forward
your comments anc suggesti,)ns thereon as promptly as may be possible.
In addition, please submit copies of
the~
tentative draft and the
explanatory statement to such member and nonmember banks, represent['<ti ves of securities exchanges, etc., as you may consider a.<!visable,
and obtain from them suggestions anc? criticisms in writing, the origi...:.
nals thereof to
b~3
forwarded to the Board as soon as received.
All comments anc: suggestions should be forwr..rrJed to the
Boar':1 within thirty do:ys after the date of this letter.
.........
4-9
-
X-9425
2 -
You will note that section 4 of the tentative draft provides
that the maximum loan values of registered equity securities, for the
purposes of the regulation,
sha~l
be such as the Board may prescribe
from time to time in supplements to the regulation.
Two alternative
drafts of such a supplement are attached to the regulation.
One of
these includes the statutory requirements that were adopted in Regulation T for brokers and dealers.
In the other, the method of determin-
ing margin requirements differs from that in Regulation T.
It is the
present intention of the Board, in the event that a different method
is prescribed for banks when Regulation U is issued, to modify Regulation T so as to bring the method of determining margin requirements
for brokers and dealers into conformity with that for banks.
Attention is called, however, to the fact that the Board has
authority to change
margi~
requirements from time to time, and the in-
elusion of the figures in the tentative supplement to Regulation U
based upon the statutory formula is not to be taken as indicating that
the Board has undertaken to decide at this time what margin requirements
will be included in the regulation when it shall be finally approved
promulgated.
Very truly yours,
Chester Morrill,
Secretary.
TO ALL FEDERAL RESERVE AGENTS.
a~
50
January 10, 1936
(Tentative draft of regulation prepared at direction
of Board of Governors of the Federal ~eserve System
but not yet acted upon by the Board of Governors.)
BOARD OF GOVERlWRS
OF THE FEDERAL RESERVE SYSTEU
LO.ANS BY BA."'rKS
FOR THE PURPOSE OF PURCHASING OR CARRYING
EQ.UITY SECURITIES REGISTERED O::!T A NATIOKA!.. SECURITIES
REGULATION U
EXCHA.~GE
51
(Reverse side of cover page)
INQUIRIES REG.ARDETG THIS R3iGUL.ATI ON
Any inquiry relating to this regulation should be addressed to the Federal Reserve bank of the district in which
the inquiry arises.
''I
52
EXPLANATORY ST.ATE:1E~·JT TO ACCOMP».TY TENT~!iTIVE DRAFT OF REGULATION U
The T'ri:nary purpoae of Re~:;uletion U, of which a tentative ('!'aft is attached, is to prevent circu:.wontion of the objects of Regulation T by borrowing fro:n banks for the purpose of purchasing or carrying stocks on ter:·,s more
favorable tha:c1 those prescribed for security loans by brokers
~me.
dealers.
Borrm·ring fro"' ba."1ks for any pur-vose except the purchasing or carrying
of registered equity securities-- i.e., ic1 ge:1eral, listed stocks-- ls not
subjected to !':'largin re0uire·"1el1ts prescribed in this regulation.
General
bcmkine pre1ctices with respect to loans for industrial, ac;ricultural, a::1d
co":'l::ercial purposes would not be
affecte~.•
recardless of whether these
loans are secured or unsecured, and 'if securec'l., reo:;ardloss of the character of the collateral.
The regulation does not a.'l:?lY to a"ly of a ba:1kr s loa.1s, no Y!!atter for
what purpose, to a borrower none of whose loa;.'ls with the bank are secured by
an equity security registered on a national securities excha:c'1ge.
In case· the collateral for a loan includes registered equi t~r securities,
the loan will be subject to the
re('~ulation
U:'lless the loan is not for the
purpose of purchasing or carrying such securities,
A. bank which wishes to
establish the fact that such a loa:n is not subject to the regulPtion, ::1ay do
so by obtaining
a'1
a}nr•',:n·in.te stater1ent fron the borro•7er.
Loans :"lade for the pur:)ose of purchasing or
not re.e:istered gp_
Nothin,~
Q;
:.1ational_ securities
in the regulation
~·rould
exch~m.::;e
carryin,~
securities that are
are exe:"lpt fro·,., the regulation.
require the liquidation of any
lo~:m
made
before the effective date, or any loan, whene'ITcr r!adc, by reason of a decline
in the narket velue of the collatergl.
53
Explanatory Statement--page 2
Margin requirements to be prescribed :from· time to time by the 'Board
will be promulgated by issuing supplements to this regulation.
of such a supplement are attached to the regulation.
Two
sa~ples
one of these includes
the requirements that were adopted in Regulation T for brokers and dealers.
In the other, the method of d.etermining margi:1 requirements differs from
that in Regulation T.
It is the prese•1t intention of the 'Board., in the
event that this different method is prescribed for banks when Regulation
U is approved and issued, to modify Regulation T s• as to bring the method
of determining margin requirements for brokers and dealers into
with that for banks.
confo~ity
54
CONTENTS
Sec. 1. Scope and effective date of regulation ••••...••••• 1
Sec. 2, Definitions ........................... ~ ...... ., ... • 2
Sec.
3. Reaulated loans and exempted loans
(a) Regulated loans •.••••.••••..•..•. · •. •. • • • 3
(b) Exempted loans •••••••••••••••••.••. • .• · •• 3
Sec.
re~lated loans
(a) Conditions for making re:;u.lated loans ••••
(b) Definition of maximum lo;:m value • • • . . • • • •
(c) Maximum loan value of reF!;istered eaui t~r
securities when re~ypothecated ••··•··•·••
(d) Current market price •• , . . . • . . . . . . . . . . . • • .
(e) Lowest market price ......................
4. Makine of
Sec. 5. Maintenance of rer;ulated loans
(a) Liquidation not required •••.....•.....•••
(b) Definition of required collateral •••.••••
(c) Changes in required collateral ••••..•.•..
(d) Time allowed for changing collateral •• , ••
(e) Securities involved in reorganization ••••
6
6
7
8
9
11
ll
11
12
13
Sec. 6. Loans made before effective date ••••.•........••.• 14
Sec. 7• Miscellaneous provisions
(a) Imposition of additional requirements
(b)
{c)
(d)
(e)
by b a.""lks • • • • • • . • • • • • • • • • • • • • • • • • • • • • • • • • •
15
Renewals and extensions •••..............•
Interest, service charges, etc •••......••
Innocent mistakes ••.....•••••.•.•.....••.
Transactions outside United States ••....•
15
15
15
16
Sec. 8, Violations of this regulation •••••••••••••••••.••• 16
Appendix
(Provisions of Securities Excha~)..e:e Act) •••. , •• 17
Su·:m1emen ts. Haximum loal.l._Y.alues of ro2;i stored ~guity
securities for nurposes of R~~1ation U
55
(Tentative Draft of Re~alation PreEared at Direction
of Board of Governors of the Federal Reserve System
but Not Yet Acted Upon by the Board of Governors.)
REGULATION U
LO.A.~S BY BANKS
FOR THE PURPOSE OF PURCHASIXG OR CARRYING
EQUITY SEC'"URITIES REGISTERED ON A ~ATION.AL SECURITIES EXCEA.JGE
SECTIQ?.T 1.
SCOPE A'J:l
EFFECTI~TE
This regulation is issued
pursua~t
DATE OF P..EGULATIO:T
to
authorit~
contained in
the Securities Exchfu"l::.,e Act of 1934, particularly sub section (d)
of section
7 thereof, to prevent the excessive use of credit for
the purchasing or carr;ring of or trading in securities in circumvention of the other provisions of tl1at section.
It a;Jplies only
to banks; a'1d it relates only to loa"ls for the purpose of purchasinG or
car~ring
equity securities registered on a national securi-
ties exchange.
This regulation shall become effective on
, 1936.
56
- 2SECTION 2.
DEFINITIONS
For the purposes of this regule.tion, unless the context otherwise
requires, the following terms shall have the meanings respectively
assigned to them.
(a)
chasell,
The terms "person", "member", "brokeru, "dealer",
11~11
1
"~"
1
11~ 11
,
"..mg:-
"security", "equity security", "exempted secur+t:r",
and "bank'1 shall have the meanings given them in section 3(a) of the
Securities Exchange .Act of
1934
(printed i:!'l. the appendix of this regula-
tion) except that the term "~" shall not include any member of a
national securities exchange.
(b)
The t_erm "registered egui ty securitytr means an equity security
(other than an exempted security) which--
(1)
Is registered on a r~tional securities excrUlnge:
(2)
In consequence of its having unlisted trading privi-
or
leges on a national securities exchunge, must, under the
provisions of section l2(f) of the Securities :Exchange .Act
of
1934,
be considered a "security registered on a national
securities exchange".
(c)
The terms
11 rep1lated
loaQ" and "exempted loan11 shall have the
meanings given them in section 3 of this regulation; the
ter~s
llmaximu11
loan value 11 , "current market price", and "lowest market price" shall
have the meanings given thom in sectiOl1
4 of this ret:;.llation: and the
term "required collateral" shall have the :r::eardng given it in section
of this regulation.
5
57
- 3SECTION
3.
REGULATED LO.A1·1S .A:'JD EXFl'PTED LOAl\JS
(a) Ref;Ulated loans. - The ter"T.
11 re~.llc?.ter.
loan" means a discount, ad-
v:mce, overdraft or other loa..11 for any of the follo,dng 1)U!"l)Oses, except
that it shall not include any exer:J'9ted loan:
(1) The
~urpose
of purchasing a registered equity security
from or through a broker or dealer who is a member of a national
securities exchange or who tra."lsacts a business in securities
through the mediu--n of any such
~mber;
(2) The purpose of reducing or retiring any indebtedness
which was originally incurred for the purpose of so purchasing a registered equity security and which is secured by a
registered equity security so purchased;
(3) In the case of a loan to a broker or dealer, the
purpose of enabling the borrower to make or maintain loans
to his customers for any of the purposes specified above.
(b) Exe::wted loans. - The ter"n
11 exe'11ptod
loan" means any loan described
below:
( 1) .AAy loan to any t.Jerson so lonf as neither that loan
nor any of the bankl s
secured 1n a:ny
WE>.Y
outst.?:J.~ing
loans to that :?erson is
by any registered equity security;
(2) Any loan (even though secured by a registered. equity
security) which is not for a.11y of the purposes specified in subsection (a) of this section; and, a1though the exemption of a
loan under this provision does not :1ecessaril:r require the obtaining of a state"!lent from the borrower as to the purpose of
the loan, a ba.11k T!l/3Y treat a
loa~1
as not being for any of the
purposes specifietl in subsection (a) if it obtains and accepts in
58
- 4good faith either (A) •
atater~ent
signed by the borrower
to the effect that he is not a broker or dealer in securities and that the loa.n is not for the purpose of purchasing
any securities or retiring or reducing
a1~
indebtedness in-
curred for tl~ purpose of purchasing securities, or (B)
a statement signed by the borrower otherwise showing that
the loan is not for
a~v
of the purposes specified 'in sub-
section (a);
(3)
Any .loan secured exclusi vel~r by exempted securi-
ties (whether registered or unregistered) and/or nonequity
securities (whether registered or unregistered);
(4)
Any loan to a banlc;
(5)
Any
loa~·.
to a dealer, or to two or more dealers
acti:::J.g jointly, to aid in the financing of the distribution of securities to customers not tilrough the medium of
a r..atiorlal securities exchange;
(6)
.A.ny discount of, or advance against, a draft with
securities attac:1ed which is payable on presentation in the
ordir..ary course of busir.ess;
(7) A..l1.Y te:1porary advance to finance the purchase of a
security in connection with which the banlc, as agent of the
purchaser, accepts delivery of and pays for the security
under an agreement, made in good faith and not to evade or
circumvent the provisions of this reglllation, that the lending ba.nlc is to be repaid the full amount of the advance in
cash promptly upon completion of the purchase;
59
- 5(8) .A.ny loan which is maintained for only a fraction of a calendar day;
(9)
~
loan made in exceptional circumstances, in
good faith and not for the purpose of evading or circumventing the provisions of this regM!ation. to meet the
emergency needs of a broker or dealer who is a member
of a national securities
exc~1ge
or who has filed with
the lending bank his written statement that he transacts
a business in securities through the medium of any such
member: Provided, That any bank maldng any such loan
shall, within three
~s,
mal'-e a concise written report
of all material facts relative thereto to the Federal
Reserve agent of the district in which the principal office of the bank is located.
60
- 6SECT ION
(a)
4. V.AKING OF REGULATED LOANS
Conditions for making regulated loans. - Every bank shall
comply with the following requirements in making or increasing any
regulated loan:
(1)
doc~nent,
The loan shall be represented by a note,
or entry which does not represent either
in whole or in part any exempted loan; and
(2)
The bank's total outstanding regulated
loans (including the current loan or increase) to
the same person made on or after the effective date
of this regulation shall be secured by exempted
securities, nonequity securities, and/or registered
equity securities which have a maximum loan value at
least as great as the
a~ount
of the total of such
regulated loans.
(b)
Maximum loan value. - The term "maximu.tn loan value" when
used with rezpect to any item of collateral securing a regulated loan
means the maxi:nu.m regulated loan which a ban};:: may, under the provisions
of this regulation, maJ:e on such item of collateral; and, in the case of
collateral consisting of more than one item, the maximu."ll loan value is the
su.'11 of the maximum loan values of the various items of the collateral.
The follo,ving items shall have the following ma:d1'll\lre loan values:
61
- 7(l)
than
a~
The maximum loan value of everything other
exempted
secu~ity,
a nonequity security, or
a registered equity security, shall be nothing;
(2)
The maximum loa:1 value of an e:cempted
security or a nonequity secUl·ity shall be not more
tha::.
ti~e C'\~rent
(3)
market price of the security;
The maximum loan value of a registered
equity security shall be the ma:;cimux:1 loan value
which the Board of Governors of the Federal Reserve
Systc::1 shall preocribe from time to time ir. supplenents to this regulation, wl1ich will be issued in
advance of the date upon wllich such maxi'!1Um loan
value becomes effective.
(c)
S:geciJ11 ma:d::ru..T. .l2..Qd1 ~for rehy:gothecated securitieg, -
Subject to the conditions specified in this subsection, registered
equity securities which are relwpothecated by a broker or dealer shall
have such special maximum loan value or values as tl:e Board of Governors
of the Federal Reserve Syste;J: shall prescribe from tL::e to time in
supplements to t:;is regulation, which '17ill be issued in advance of
the date on w;.1ich such maximum loa::1 values bec:.J:ne effective,
In
order that registved equity securities ma;:r :b..-:we the special maximuT.
loa~
value or values prescribed purcua:::.t to
t~1ir,
s-u.bsect ion:
62
- 8 ..
(1)
The securities shall secure a regulated
loan to a broker or dealer who is a member of a
national secarities exchange or who has filed with
the lending bank his \-rritten statement that he transacts a business in securities througl1 the medium of
any such member; and
(2)
The broker or dealer must be carrying such
securities for the account of customers; and a bank
may treat such
se~~rities
as being carried for the
account of customers if it obtains and accepts in good
faith a written statement signed by the broJ.:er or dealer
to the effect that they are being so ca..rried.
(d)
Current Market Price. - For the purposes of this regulation
and any supplements thereto, the current market price of a security
may at the option of the bank be considered to be either
t~e
closing
bid price or the closing sale price of the security on any national
securities exchange on the preceding business
~~y:
Provided, That,
in the absence of such a closing sale price, the bank shall have the
further option of using tlwprice at which the last recorded sale of
the security during the currer:.t or preceding caler:.dar month was made
on a national securities exchange: Provided, further, That, if none
of the prices described above is available, the bank may use any
reasonable estimate of the market value of the security.
In ascertaining the foregoing prices, a
bar~
may rely upon any
regularly published reporting or quotation service used by the bank,
including any newspaper or financial publication carrying market reports with respect to an exchange on which the security is registered,
63
- 9In the case of a loan made at the time a security is purchased, or in connection with the purchase of a security to be substituted for collateral previously pledged, the price at which
such security is pu.rchased may be considered by the bo.nk, at its
option, to be the current market price for the purpose of such
transaction.
(e) Lowest ma.rl-:et price. - For the purpose of this regulation
and
~ supple~ents
thereto, the lowest market price of a registered
equity security during a specified period means the lowest price at
which that security has sold during that period on the national
securities exchanges on wl1ich it is or has been registered (ineluding any sales made on such exchanges during the part of the
specified period which preceded thei.r respective registrations as
national securities exchanges under the. Securities Exchange Act of
1934): Provided, That, if the security is a stock upon which there
has been any stoc]:;: dividend a:nounting to more than 10 percent in
any one calendar year, or any reduction or increase in the
~~ber
of shares by calling in the outstanding shares and issuing in substitution therefor a smaller or larger number of shares, or any other
change accomplishing substantially the same result as any such reduction or increase,
a~
prices
~stablished
before that dividend or
change in number of shares or other change shall be adjusted
therefor.
64
- 10 -
A bank using a figure published as such
lowe~t
market price
in any record published or approved by any national securities
exchange mayrely on that figure for the purposes of this regulation.
65
- 11 -
SECTIOH
(a)
5· M.A.IlJTEHA.NCE OF REGULATED LOANS
Liauidation nQi required. - In maintainil1g any regulated
loan, every ba1ik shall comply with the requirements of this section
witt. respect to the withdrawal and substitution of collateral; but
any loan made before the effective date of this regulation or made
in conformity with the requirements of this regulation may be ma.intai:J.ed regardless of changes in mark.)t prices, and nothing in this
regulation sball be construed as requirir.g any bank to reduce any
loan, obtain additional collateral for any loan, or sell any
collateral securing any loan, solely because of changes in market
prices.
(b)
Reqyired collateral. - The term "required collateral"
means an exempted security, a rlonequity secu.ri ty, or a registered
equity security, which secures a regulated loan made on or after the
effective date of this regulation because:
(1)
undel~
It was required for the making of the loan
section 4 of this regulation; or
( 2)
It was req11ired in order to make a cr..ange
in the collateral for that loan ·under the following
subsections of this section.
(c)
Changes in required collateral. - No ba.'11c shall maintain
a regulated loan and at the same time permit the withdrawal of any
required collateral,
~~less--
66
- 12 -
(1)
.After the wi thdra1,73.l the bar~k' s total out-
staLding regulated 10L1r.s to the sar.1e person made on
or after the effective date of tnis regulation are secured by exempted securities, nonequity securities,
and/ or registered equity securities, he..ving a maximum
loan value at least
of
regc~lated
(2)
.::l.S
great
.::l.S
the aznour.t of such total
loans; or
The total amount of such outstanding regulated
loans to such person is reduced, or other exempted securities, nonequity securities, or registered equity securities
are substituted to secure such loans, or both, to such
an extent tl1at
(.A)
the maximu<n loon value of the
securities substituted, plus the amount of
reduction in the regulated loans, is at least
as great as the oaximum loan value of the securities withdrawn, and
(B)
the curre1J.t l!".ar~.:et price of t:c~e securi-
ties substituted, plus the amount of reduction
in the regulated loans, is at least as great as
the cur:r-ent narket price of t1w securities withdr<:mn,
(d)
Time r..llowed
12.!: changing c:::lllaterp,J., ... In order to comply
with the requirements of subsection (c) of tl1is section with respect to·
changes in required collateral, the necessm-y substitution of securities
'"
67
- 13 and/ or reduction in the reg'J.lated loans slw.ll be made on the same
day as the withdrawal of required collateral, except that in the
case of a substitution involving either
(1)
the sale of required
collateral and the purchase a:1d deposit of other collateral to
secure the loan, or (2) the purchase and deposit of other collateral
to secure the loan and the sale of required collateral 1 the bank
may 1 i f boti1 the contract of purchase and contract of sale are made
within a period of two successive business
da~rs,
allow such time for
mal:ing deliveries and otherwise completing the substitution as may
be reasonably necessary.
(e)
Securities involved in reorganization. - Notwithstanding
the foregoing provisions of this section, a barut may permit the withdrawal of any security involved in a reorganization of the issuer of
that security when such withdrawal is reasonably necessary to facilitate
such reorganization:
Provided, That all cash, exempted securities,
nonequity securities, and registered equity securities received, under
the ter:ns of the reorgan.ization, in exchange for the security withdrawn
under this provision, shall promptly be
ap~lied
or substituted for the security withdrawn.
on the regulated loans
68
- 14SECTIOlf 6.
.,
LOANS MA.DE BEFORE EFFECT~VE DA1'E
Nothing in this regulation shall be construed as requiring a balik to obtain the repa.:.'r.1ent or reduction of, or the pledge of additional collateral
for, any loan
w~ich
was made before the effective date of this regulation or
with respect to any renewal or extension of maturity of any such loan:
~.
Pro-
That, notwithstanding any other provision of this regulation:
(1) All
exe~pted
sec-urities, nonequity securities, and
r~gis
tered equity securities securing any regulated loan or group of
regulated loans at the opening of business on the effective date of
this regulation, and all securities thereafter substituted therefor
pursuant to the requirements of this section, shall be identified
·by the ba::lc and shall be treated for the purposes of t11is regulation as if they secured only that loan or group of loans;
(2)
No such identified collateral sltall be taken into account
in deternining whether or not any regulated loan made after the effective date of this regulation is secured in
terns of
(3)
tl~is
!~o
made except
tion
5
co~pliance
with the
regulation; and
withdrat7nl of any such identified collateral shall be
u.~der
the
sa~e
terms and conditions as apply under sec-
of this regulation to a
withdra~al
of required collateral se-
C'Ill'ing a regulated loan made after the effective date of this regulation.
A ba11k may obtain and rely upon a statement signed by the borrower
respecting the purpose for whicr. a loan made before the effective date of
this regulation was obtained, in the
s&~e
manner and with the same effect
as provided by section 3(b) of this regulation for loans made on or after
such effective date.
69
- 15 -
SECTION 7.
(a)
Imposition
2£.
MISCELL;JJEOUS PROVISIONS
additional requiremt7mts
£I. banks. - Nothing
in this regulation shall be construed as restricting the right of any
bank to rec1uirc &.dditional collateral at th;.1 tiroo of, or subsequent
to, the making of any loan, or as restricting the right of any bank to
refuse to make or maintain a loun.
(b)
RenewaJ:§_ ~ extensions. - A renewed or an extension of the
maturity of a loan neod not be treated as the making of a new loan if
the amount of the loan is not
increc>.S(~d
except c;.s permi ttcd in subsection
(c) of this section; :)ut any other incre;_,se in the amount of a loan shall,
to the cxtGnt of tho ineret;.so, be treated as the: making of a loan.
(c)
Intercdt,
.0~!.£.£.
charges, etc. - Nothing in this regulation
shall be construed a.s preventing the addition to a regulated loan of
interest on the loan, sales or tr;.msfer taxes on
tran~>&ctions
ln connection
with the loan, service charges imprJsed by the bank in connection with the
loan or any incidental expenditure made by the bank for its own protection,
regardless of the amount of the loan or the collateral which secures the loan.
(d)
Innocent mistakes. - No innocent mistake made in good faith in
executing a tl:·c.nsaction, recording, detol'mining, or calculating any loan,
me.rket price, loan value, or othor administrc..tive adjustment or detail,
shall be deemed to be a violation of this regulation if the mistake be
corrected as promptly as possible upon its discovGry.
70
- 16 -
(o)
Transactions outside the United States. - The provisions of
this regulation shall not cpply to E.ny transE:ction which is effected
outside the Stctes of the United St<lte8 and the District of Columbia
and is not for the purpose of evading or circumventing the provisions
of this r;gulation.
SECTION 8.
VIOLATI01{5 OF T'.diS REGULATION
Violations of this regulation are subject to the provisions
of section 29 and 32 of the Securities Exchange Act of 1934,
which are printed on p.-:tges _ __ and ___ of the Appendix
to this rebulation.
- 17APPENDIX
There are printed below certain provisions of the Securities Exchange
Act of
1934
which are pertinent to the subject matter of this regulation:
SEC. 3.(a)
* * *
(3) The term "member" when used with respect to an
exchange mear.s a~y person who is permitted either to effect
transactions on the exch£u~e without the services of another
person acti~g as broker, or to make use of the facilities of
an exchange for transactions thereon without payment of a
commission or fee or with the payment of a commission or fee
\7hich is less than that charged the general public, and includes any firm transacting a business as broker or dealer
of \7hich a member is a partner, a:1d any partner of any such
firm.
(4) The term "broker" means acy person engaged in the
business of effecting transactions in se~~rities for the account of others, but does not include a bar..k.
(5) The term "dealer" means any perso::1 engaged in the
business of bu;;ring and selling securities for his 0'.7n account,
through a broker or other\7ise, but does not include a bank,
or any person insofar as he buys or sells securities for his
own account, either individually or in some fiduciary capacity,
but not as a part of a regular business.
(6) The term "bo.::k11 means (A) a ba::lld:~: institution
organized ~~der the laws of the United States, (E) a member
ba1ik of the Federal Reserve System, (C) any other barJdng institution, r:hether incorporated or not, d.oir.g business under
the laws of any State or of the U~1ited States, a substa:1tial
portion of the business of \7hich consists of receiving deposits
or exercising fiduciary p0\7ers similar to tl1ose per;~i tted to
national ba:1ks under sectio;·~ 11 (k) of the Federal Reserve .A.ct,
as amended, and which is supervised and exrunined by State or
Federal authority having supervision over b~:iks, and which is
not operated for the purpose of evadi:~ the provisions of this
title, and (D) a receiver, conservator, or other liquidating
agent of a~y institution or firm included in clauses (A), (E),
or (C) of this paragraph.
(9) 'rhe term "person" means an individual, a corporation, a partnership, an association, a joint~stock company,
a business trust, or an unincorporated orga~1ization.
(10) The term "security" means any note, stock,
treasury stock, bond, debenture, certificate of interest or
participation in any profit-sharing agree,nent or in any oil,
gas, or other mineral royalty or lease, any collateral-trust
certificate, preorganization certificate or subscription,
transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, or in general,
any instruznent commonly known as a "securit:ir"; or any
72
- 18 -
I
..
•.
certificate of interest or participation in, temporary or interim
certificate for, receipt for, O:;t wa!"rant or right to subscrib•
to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or baclcer 1 s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal
thereof the maturity of which is likewise li~ited.
(11) The term "equity security" means any stock or similar security; or ar~ security convertible, with or without consideration, into such a security, or carrying any warrant or
right to subscribe to or purchase such a security; or any such
warrant or right; or any other security which the Commission
shall deem to be of similar natu.re and consider necessary or
appropriate, by such rules and regulations as it may prescribe
in the public interest or for the protection of investors, to
treat as an equity security.
(12) The term 11 exe:npted security" or "exempted securities" shall include securities which are direct obligations of
or obligations guaranteed as to principal or interest by the
United States; such securities issued or guaranteed by corporations in ~hich the United States l1as a direct or indirect interest as shall be designated for exemption by the Secretary
of the Treasury as necessary or appropriate in the public interest or for the protection of investors; securities which
are direct obligations of or obligations guaranteed as to
principal or interest by a State or any political subdivision
thereof or any agency or instr~entality of a State or any
political subdivision thereof or any mU11icipal corporate instrumentality of one or more States; and such other securities
("7hich may include, among others, unregistered securities, the
market in \7hich is predominantly intrastate) as the Commission
may, by such rules and regulations as it deems necessary or
appropriate in the public interest or for the protection of
investors, either unconditionally or upon specified terms and
conditions or for stated periods, exempt from the operation of
any one or more provisions of this title which by their terms
do not apply to an "exempted security" or to "exempted securities."
(13) The terms 11 buy" and "purchase" each include acy
contract to buy, purchase, or otr.eruise acquire.
(14) The terms 11 sale" and "sell 11 each include any contract to sell or othen7ise dispose of.
SEC. 3. (b) The Co~~ission and the Federal Reserve Board, as
to matters r:ithin their respective jurisdictions, shall have
power by rules and regulations to define technical, trade, and
accounting terms used in this title insofar as such definitions
are not inconsistent with the provisions of this title.
- 19SEC. 7. (a) For the purpose of preventing the excessive
use of credit for the purchase or carrying of securities, the
Federal Reserve ~oard shall, prior to the effective date of
this section and f~om time to time thereafter, prescribe rules
and regulations with respect to the amount of credit that may
be initially extended and sUbsequently maintained on any seM
curity (other than an exempted security) registered on a national securities exchange, 1or the initial extension of credit,
such rules and regulations shall be based upon the following standards: An amount not greater than whichever is the higher of-(1) 55 per centum of the current marke~ price
of the security, or
.,
(2) 100 per centu~ of the lowe~t market price of
the security during the preceding thirty-six calendar
months, but not more than 75 per centum of the current
market priee,
Such rules and regulations may make appropriate provision with
respect to the carrying of undermargined accounts for limited
periods and under specified conditions; the withdrawal of funds
or securities; the substitution or additional purchases of securities; the transfer of accoun~s from one lender to another;
special or different margin requirements for delayed deliveries,
short sales, arbitrage transactions, and securities to which
paragraph (2) of this subsection does not apply; the bases and
the methods to be used in calculating loans, and mar gina and market prices; and similar administrative adjustments and details,
For the parposes of paragraPh (2) of this subsection, until July l,
1936, the lowest price at which a security has sold on or after
July 1, 1933, sl~ll be considered as the lowest price at which
such security has sold during the preceding thirty-six calendar
months.
(b) Notwithstanding the provisions of subsection (a) of this
section, the Federal Reserve Boord, may, from time to time, with
respect to all or specified securities or tra~sactions, or classes
of securities, or classes of transactions, by such rules and regulations (1) prescribe such lower margin requirementsfor the initial
extension or maintenance of credit as it deems necessary or appropriate for the accommodation of commerce a~d industry, having due
re~d to the general crGdit situation of the country, and (2) prescribe such higher margi~ requirements for the initial extension or
maintenance of credit as it may deem necessary or apPropriate to
prevent the excessive use of credit to finance transactions in
securities.
(c) It shall be u.'"lla:V~ful for any member of a national securities
exchange or any broker or dealer who transacts a business in securities through the medium of any ~ch member, directly or indirectly
to extend or maintain credit or arrange for the extension or maintenance of credit to or for any customer-(1) On any security (other than an exempted security) registered on a national securitieg exch:;;.ng@, in contravention of the
rules and regulations which the Federal Reserve ~oard shall prescribe u.!der subsections (a) and (b) of this section,
?3
74
- 20-
(2) Without collateral or on ar~ collateral other than
exempted securities and/or securities registered upon a national
securities exchange, e::cept in accorcbnce \71th such rules and
regulations as the Federal Reserve Board may prescribe (A) to
permit u•1der specified conditions and for a lit1i ted period any
such member, broker, or dealer to t1ab.tain a credit initially
extended i:. confor::Jity rli th the rules and regulations of the
Federal Raserve Board, and (B) to permit the exte~sion or maintenance of credit in cases \'there tlle extension or l!lD.intenn:·lce of
credit is not for the purpose of purchasing or carrying securities or of evading or circur::ventir'.g tile provisions of paragraph
(l) of this cuboection.
(d) It sl1all be u.'1lawful for any person not subject to subsection (c) to exte::J.d or IT'..ni:.:-~tain credit or to arrange for the
extensio:1 or rr.aintenance of credit for the purpose of purc:1asing
or carrying D.r;y security registered on a nn.tio:nal securities
exchange, i:t. contravention of nuc:1 rules and regulations as the
Federal Reserve Board s:hall prescribe to prevent the excessive
use of credit for the p1rrchasing or carrying of or trading in
securities in circumvention of the ot1-~er provisions of this section. Such rules and regule1.tions may iopose upon all loans made
for the purpose of purchasing or carrying secuiities registered
on 11.ationnl securities exchanges limitations sir::ilar to those
imposed upon members, br'Jkers, or dealel S by subsection (c) of
this s.:;ction and tl1.:: rul..:Js a:'!.d rogulations t:1orcunder. This
subsection and th0 rules and regulr,tions tl1oreu.nder s~w.ll not
apply (A) to a loan made by a person not in tho ordi:~ry course
of his business, (::S) to a loan on a:;1 exempted security, (C) to
a loan to a dealer to aid in t~1e finv.r-"ci>1g of the distribution
of securities to custor.:1ers ;.1ot through the ocdiur: of a nrttio;.1al
securities e:-:char.ge, (D) to a loo.•1 by a ba.:;.1k ::>:1 a security other
than an equity security, or (E) to such otJ:1er lonns as the Federal
Reserve Boo.rd sr.all, by such rules and regul:.:ttions as it r:ny deen
neccssarJ or apllropriate in t:-.i.e public i::.terest or for the protection of inventors, exempt, either u:1c;:;aditi·:J:1<:1.lly or upon specified
terr.:1s and co::di tions or for stated periods, fron: the operation of
this subsectio:1 and t:1e rulas and. regtJ.lations tl:ere-..:Lnder.
(e) Tl:e provisio:1s of t::is section or t~w l-,1les a::.d regu.l12tions
there;.lndor s1m.ll ::1ot apply on or bef.ore July 1, 193 7, to ru.1:; loa:1
or extensio~:. of cradit na.de prior t J t:1e e'1act::".e::t of t:11s title
or to t:1e ;nc..L:..te:.1:::.;<ce, rNJ.ewal, Qr extension of o.ny sue}-.;. loan or
credit , except t :;~ the ext e:1t t:1.:-~.t the Feder:.:.l :de serve 3oc..rd i"Jc'lY
by rules and regulations prescribe as :·wcessary to preve1~t the circu~::ve:ltion of the provisio:1s of Lis sectio:: or the rules and regulations thereu:1dcr b~r l!'.eans of ili thd.rnwals of fuD.cls or securities,
substitutions of securities, or adLUtio::-nl purchases or by any
other d.evice.
1
SEC. 8 It shall be u:1lm;fd for a~~,. ner.'lber of a !1."-.tioilB.l
securities e;:c::nnge, or ar.;J br·)ker or c.lenl0r >tho transacts a
business in sec1Jri tias thr:mg::. the mecliur:; of a::.y such ne::foer,
directly or indirectly-
75
- 21-
(a) To borrow in the ordinary course of business as a broker
or dealer on any security (other than an exempted security)
registered on a natiorMal securities exchange except (1) from or
through a member bank of the Federal Reserve System, (2) from
any nonmember baru~ which shall have filed with the Federal Reserve Board an agreement, which is still in force and which is
in the form prescribed by the Board, undertaldng to comply with
all provisions of this Act, the Federal Reserve Act, as amended,
and the Banking Act of 1933, which are applicable to member banks
and which relate to the use of credit to finance transactions in
securities, and with such rules and regulations aa may be prescribed lYUrsuant to such provisions of law or for the purpose of
preventing evasi~ns thereof, or (3) in accordance with such rules
and regulations as the Federal Reserve Board may prescribe to
permit loans between 3UCll m~mbers and/or brokers and/or dealers,
or to per;:·,it loans to meet emergency needs, Any such agreement
filed with the Federal Reserve Board shall be subject to termination at any time by order of the Board, after appropriate notice
and opportunity for hearing, because of any failure by such bank
to comply with the provisions thereof or with such provisions of
law or rules or regulations; and, for a:Jy willful violation of
such agreement, such bank s!mll be subject to the penalties provided for violations of rules and regulations prescribed under
this title, The provisions of sections 21 and 25 of this title
shall apply in the case of ~~ such proceeding or order of the
Federal Reserve Board in the same manner as such provisions apply
in the case of proceedings and orders of the Commission.
... ... ... ... ...
(c) In contravention of such rules and regulations as the Commission shall prescribe for the protection of investors to hypothecate
or arrange for the ~ypothecation of any securities carried for the
account of any custo~er under circumstances (1) that will permit
the commingling of his securities without his written consent with
the securities of any other customer, {2) that will permit such
securities to be CO'"!L':lingled with the securities of any person other
than a bona fide customer, or (3) that will pennit such securities
to be hypothecated, or subjected to any lien or claim of the pledgee,
for a sum in excess of the aggregate indebte~~ess of such customers
in respect of such securities.
(d) To lend or arra11ge for the lending of IDlY securities carried
for the account of any customer without the written consent of such
customer,
- 22SEC. 17. (b) .A.ey broker, dealer, or other perso~l extending
credit who is subject to the rules and re~Jlationo prescribed
by the Federal Reserve Board pursuant to this title sl1all make
such reports to the Board as it may require as necessary or ap.
propriate to enable it to perform the functions conferred upon
it by this title. If a~ such broker, dealer, or other person
shall fail to make any such report or fail to furnish full information therein, or, if in the judgment of the Board it is
otherwise necessary, such broker, dealer, or other person. shall
permit such inspections to be made by the Board with respect
to the business operations of such broker, dealer, or other
person as the Board may deem necessary to enable it to obtain
the required information.
SEC. 23. (a) The Co~~ission and the Federal Reserve Board
shall each have power to ma,:;;e such rulea and regulations as may
be necessary for the execution of the functions vested in them
by this title, and may for such purpose classify issuers, securities, exchanges, and other persons or matters within their
respective jurisdictions.
SEC. 29. (a) Ar~ condition, stipulation, or provision binding any person to waive compliance with any provision of this
title or of any rule or regulation thereunder, or of any rule
of an exchange required thereby shall be void.
(b) Every contract made in violation of any provision of
this title or of any rule or regulation thereunder, and every
contract (including any contract for listing a security on an
exchcnge) heretofore or hereafter made the performance of which
involves the violation ot, or the continuance of any relationship or practice in violation of, an.y provision of this title
or any rule or regu.lD,tion therounder, shall be void (1) as
regards the rights of anJ person who, in violation of a~ such
provision, rule, or regulntion, shall hD.ve ronde or engaged in
the performance of rozy such contract, ru1.d ( 2) ns regards the
rights of any person who, not being a party to such contract,
shall hnve acquired a-:1y right thereunder with actual knowledge
of the facts by reasOl'l. of which the mal::ing or performance of
such contrnct was in violc.tion of any such provisio::J., rule or
regule.t iol'l.
(c) Nothing in tl1is title shall be construed (1) to affect
the validity of an~r loan or extension of credit (or any extension or renewal thereof) made or of an;;; lien created prior or
subsequent to the enact~ent of this title, m1less at the time
of the making of such loan or e:x:toncion of credit (or extension
or renewal thereof) or the creating of such lien, the person
making such loan or e:ctension of credit (or ext ens ion or renewal
thereof) or acquiring sue~ lien shall have actual l<nowledge of
facts by reason of \7hich the mnking of such loan or extension
of credit (or extension :Jr renewal thereof) or the acquisition
of such lien is a violation of the provisions of this title or
any rule or regulation thereunder, or (2) to afford c. defense
76
- 23 ...
to the collection of any debt or obligation or the enforcement
of any lien by any pers~n t7ho shall have acquired such debt,
obligation, or lien in good faith for value and without actual
knowledge of the violation of any provision of this title or
any rule or regulation thereunder affecting the 1 egalit~r of
such debt, obligation, or lien,
SEC. 32. Any person who willfully violates any provision
of this title, or e.ny rule or regulation thereunder the violation of ·j1hich is made unlawful or the observance .)f which is
required under the terms of this title, or any person who
willfully and knowingly makes, or causes to be made, any statement in any application, report, or document required to be
filed under this title or any rule or regulation thereunder,
which statement '\7as false or misleading rlith respect to any
material fact, sl1all upon conviction be fined not more than
$10,000, or impris:med ~1ot more than tuo years, or both, except
that t7hen such person is a::-. exchange, a fine not exceeding
$500,000 may be imposed; but no person shall be subject to
imprisonnent under tl1is section for tlw vhlation of any rule
or regulatio:::J. i f he proves that he had no knoY:ledge of such
rule or regulation.
78
SUPPL:lil1!ENT TO pGULATI ON '[
ISSUED BY THE BOAR:> OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Effective
Maxir:m1;~
loan values of registered egui ty securities for
"Ourp~ of Regulation '[
Pursuant to the provisions of section
of
' 1936
7
of the Securities
Exch&~ge
Act
1934 and section 4 of its Regulation U, the Board. of Governors of the
Federal Reserve
Syste~
hereby prescribes the following
of registered equity securities for loans regulated
~axi~~
loan values
~,dcr Re,~lation
U:
{ 1) General ~ r~P,arc.ing maximuTrt loan values. - Except as -provided
in para.graph (2) of this supl?lel':lent, the "llaximu'"!l loan value of a registered equity security securing a regulated
lo~n
shall be whichever is
the higher of:
(A) 55 percent of the current market price of the
sccuri ty; ' r
(B) 100 percent of the lewest market price of the
fJecuri tt durin~ the period of 36 calendar months i.mr:-:ediatoly
prior to the first day of the current ~onth, but not more
thEm 75 parcent of tl1e current market :price: Provided, That
until July 1, 1936, for the purpose of this r~~lllation, the
lowest price at ~hich a security has sold on or after July 1,
1933, but prior to the first day of the current month, shall
be considered as the lowest market price of such security
during the preceding 36 calendar months: and Provided, That
the lowest r:~arket price which could be used under the provisions of this re,;ulation during any calendar month may be
used during the first 7 calendar d?.ys of the succeecing
calendar month.
( 2) Special maxim::1 .1.Q.crl velue for rehy-,>Othecated securities. - The
maxi~um
loan value of a re[·;istered equity security which is ref\.ypothecated
by a broker or dealer s-u.bject to the conc.itions specified in subsection
(c) of section
4 of Regulation V, shall be ___ percent of the current
market price of the security.
79
SU?PLEMEUT TO
REGULATI01~
'[
ISSU3:D 3Y 'l'HE :SOARD OF GOVERNORS OF T'HE FEDERAL RESERV8 SYST::!:M
Effective
' 1936
M.:tx.irum loan. values of registered equi t;:r securi tieo for
purposes .2.[ Reg!lb.tion 1I
Ptu·su;mt to the provisions of r.ection 7 of tl:1e Securities
Exc~:::tnge
Act
of 19:34 ancl section 4 of its Regulation U, the :Board. of Governors of the
Fec~erc:.l Re~erve
System
l1ereb~r
prescribes the follovrL1g maxinn:l!!l lo.-w.'l values
of registered equi t~r securities for loans reguln.ted under Re:;ulation U:
(1) General
~ rognrdi;lb_ r~1a.xinum ~ values. - Except as 1')rovided
in -parasTaph (2) of thil'! SU1')Dleraent, the maxir:mm loa,.'l value of
cquit:r securit;r securing n regulated loan
sh~.ll
be
est m.:trl-::et "!)rice of the securitv during the period of
.'l
registered
percent of the lowca.lendar months
i"-1me<'!.iatel;· "r)rior to the first cla;· of the current rnonth: Pro_vided, Tb..ctt the
T:lc".r~-:et
low.sst
nrice rrhich could be usocl.. under t:1is nrovinion during
calenclar rr.onth ma;:r :1lso be used during the first seven calendar
~my
da~rs
of
tile su.cceed.ing cal e~v1ar month.
( 2) Sr.:>ed~al mnxirrg£ lo:-t.'l value for reh'I'\)Othec:t.ted securities. The :':ulxili.1U:., lo'l...'l value of r:. registered equi t:r securi t:r which is
catec"..
b~i
rel:~rpothe-
a broker or de;\.ler subject to the conditions specified in sub-
sectio;~
(c) of sectio!1 4 of Ro§:Uleltion U, sh:-).11 be _percent of the
curre~1 t
1:nrket uri co of the 3ecuri ty.
@FedFRASER