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FEDERAL RESERVE BANK O F NEW YORK r Circular No. S 5 4 5 1 I M arch 16. 1950 J R E G U L A T IO N U OF TH E B O A R D OF G O V E R N O RS OF TH E FE D E R A L RE SER V E SYSTEM AS AM E N D E D TO JU LY 20, 1949 To all Banks, Members o f National Securities Exchanges, and Other Interested Persons, in the Second Federal Reserve D istrict: Enclosed herewith is a printed copy of Regulation U o f the Board of Governors of the Federal Reserve System as amended to July 20, 1949, relating to loans by banks for the purpose of purchasing or carrying stocks registered on a national securities exchange. The enclosed copy o f Regulation IT incorporates the changes in the regula tion made by Amendment No. 9, effective May 1, 1949, Amendment No. 10, effective May 16, 1949, and Amendment No. 11, effective July 20, 1949, which are the only amendments since the last printing o f the regulation in the form as amended to April 1, 1948. The Supple ment to Regulation U, effective March 30, 1949, remains unchanged. Additional copies o f the regulation and supplement will be fur nished upon request. A l l a n S p r o u l , President. BOARD OF GOVERNORS o f the FEDERAL RESERVE SYSTEM L O A N S B Y B A N K S FO R T H E P U R P O SE O F P U R C H ASIN G O R C A R R Y IN G STO C K S R E G IST E R E D O N A N A T IO N A L SEC U RITIES E X C H A N G E REGULATION U As am ended to July 2 0 , 1949 INQUIRIES REGARDING THIS REGULATION A n y in q u iry relatin g to this reg u la tion sh ou ld be addressed to the F ederal R eserve B an k o f the district in w hich the in q u iry arises. EXPLAN ATORY FO REW O RD (N ot a part o f the reg u la tion ) This regulation is issued pursuant to the provisions o f section 7 of the Securities Exchange Act o f 1934. The regulation does not prevent a bank from taking for any loan collateral in addition to that required by the regulation, nor does it require a bank to reduce any loan, to obtain additional collateral for any outstanding loan, or to call any outstanding loan because of insufficient collateral. N o te .— A mendments N os. 1 through 11 are included in this reprint. REGULATION U am ended to July 2 0 , As 1949 LO A N S B Y B A N K S FO R T H E P U R P O SE OF P U R C H ASIN G O R C A R R Y IN G ST O C K S R E G IST E R E D O N A N A T IO N A L SE C U RITIES E X C H A N G E S E C T IO N 1 . G E N E R A L R U LE On and after M ay 1, 1936, no bank shall make any loan secured directly or indirectly by any stock for the purpose o f purchasing or carrying any stock registered on a national securities exchange in an amount exceeding the maximum loan value o f the collateral, as pre scribed from time to time for stocks in the supplement to this regula tion and as determined by the bank in good faith for any collateral other than stocks. For the purpose o f this regulation, the entire indebtedness o f any borrower to any bank incurred on or after M a y 1, 1936, or at any previous time, for the purpose o f purchasing or carrying stocks regis tered on a national securities exchange shall be considered a single loan,* and all the collateral securing such indebtedness shall be con sidered in determining whether or not the loan complies with this regulation.* W hile a bank maintains any such loan, whenever made, the bank shall not at any time permit withdrawals or substitutions o f collateral that would cause the maximum loan value o f the collateral at such time to be less than the amount o f the loan. In case such maximum loan value has become less than the amount of the loan, a bank shall not permit withdrawals or substitutions that would increase the deficiency; but the amount o f the loan m ay be increased if there is provided additional collateral having maximum loan value at least equal to the amount o f the increase. S E C T IO N 2 . E X C E P T IO N S T O G E N E R A L R U L E Notwithstanding the foregoing, a bank m ay make and m ay main tain any loan for the purpose specified above, without regard to the limitations prescribed above, if the loan comes within any o f the fol lowing descriptions: (a) A ny loan to a bank or to a foreign banking institution; * In applying this provision, especially when the borrower is a broker or dealer in securities, see particularly sections 3 (m ), (n ), and (o). 1 2 R E G U L A T IO N U I b ) A ny loan made prior to July 16, 1945, to any person whose total indebtedness to the bank at the date o f and including such loan does not exceed $1,000; (c) Any loan to a dealer, or to two or more dealers, to aid in the financing o f the distribution o f securities to customers not through the medium o f a national securities exchange; (<I) Any loan to a broker or dealer that is made in exceptional circumstances in good faith to meet his emergency needs; (e) A ny loan to a broker or dealer secured by any securities which, according to written notice received by the bank from the broker or dealer pursuant to a rule o f the Securities and Exchange Commission concerning the hypothecation o f customers’ securities (Rule X -8 C -1 or Rule X -1 5 C 2 -1 ), are securities carried for the account o f one or more customers, provided the bank accepts in good faith from the broker or dealer a signed statement to the effect that he is subject to the provisions o f Regulation T (or that he does not extend or maintain credit to or for customers cxcept in accordance therewith as if he were subject thereto!; (/) Any temporary advance to finance the purchase or sale of securities for prompt delivery which is to be repaid in the ordi nary course o f business upon completion o f the transaction; (</) A ny loan against securities in transit, or surrendered for transfer, which is payable in the ordinary course o f business upon arrival o f the securities or upon completion o f the transfer; ( h) Any loan which is to be repaid on the calendar day on which it is made; (?) Any loan made outside the 48 States o f the United States and the District o f Colum bia; (j ) Any loan to a member o f a national securities exchange for the purpose o f financing his or his customers’ bona fide arbitrage transactions in securities; (A ) Any loan to a member o f a national securities exchange for the purpose o f financing such member’s transactions as an odd-lot dealer in securities with respect to which he is registered on such national securities exchange as an odd-lot dealer. S E C T IO N 3 . M IS C E L L A N E O U S P R O V IS IO N S (а) In determining whether or not a loan is for the purpose specified in section 1 or for any o f the purposes specified in section 2, a bank may rely upon a statement with respect thereto, accepted by the bank in good faith, signed by an officer o f the bank or by the borrower. (б ) N o loan, however it may be secured, need be treated as a loan R E G U L A T IO N U 3 for the purpose o f “ carrying” a stock registered on a national securi ties exchange unless the purpose o f the loan is to enable the borrower to reduce or retire indebtedness which was originally incurred to pur chase such a stock, or, if he be a broker or dealer, to carry such stocks for customers. (c) In determining whether or not a security is a “ stock registered on a national securities exchange,” a bank may rely upon any reason ably current record o f stocks so registered that is published or speci fied in a publication o f the Board o f Governors o f the Federal Reserve System. (d ) The renewal or extension o f maturity o f a loan need not be treated as the making o f a loan if the amount o f the loan is not increased except by the addition o f interest or service charges on the loan or o f taxes on transactions in connection with the loan. (e) A bank may accept the transfer o f a loan from another bank, or permit the transfer o f a loan between borrowers, without following the requirements o f this regulation as to the making o f a loan, pro vided the loan is not increased and the collateral for the loan is not changed; and, after such transfer, a bank may permit such with drawals and substitutions o f collateral as the bank might have per mitted if it had been the original maker o f the loan or had originally made the loan to the new borrower. (/) A loan need not be treated as collateralled by securities which are held by the bank only in the capacity o f custodian, depositary or trustee, or under similar circumstances, if the bank in good faith has not relied upon such securities as collateral in the making or mainte nance o f the particular loan. (g) N othing in this regulation shall be construed to prevent a bank from permitting withdrawals or substitutions o f securities to enable a borrower to participate in a reorganization. (h) N o mistake made in good faith in connection with the making or maintenance o f a loan shall be deemed to be a violation o f this regulation. (i) Nothing in this regulation shall be construed as preventing a bank from taking such action as it shall deem necessary in good faith for its own protection. (;) Every bank shall make such reports as the Board o f Governors o f the Federal Reserve System m ay require to enable it to perform the functions conferred upon it by the Securities Exchange A ct o f 1934. (A-) Terms used in this regulation have the meanings assigned to 4 R E G U L A T IO N U them in such portions o f section 3 fa) o f the Securities Exchange A ct o f 1934 as are printed in the appendix to this regulation, except that the term “ bank” does not include a bank which is a member o f a national securities exchange. (I) The term “ stock” includes any security com m only known as a stock, any voting trust certificate or other instrument representing such a security, and any warrant or right to subscribe to or purchase such a security. (m ) Indebtedness “ subject to section 1” is indebtedness which is secured directly or indirectly by any stock, is for the purpose o f pur chasing or carrying any stock registered on a national securities exchange, and is not excepted by section 2. (n) In the case o f any loan subject to section 1 to a broker or dealer in securities, and in the case o f any such loan to any other borrower whose indebtedness the bank elects to treat for the purposes o f this subsection as if it were that o f a broker or dealer, the bank shall identify all the collateral used to meet the collateral requirements o f section 1 and shall not cancel the identification o f any part thereof except in circumstances that would permit the withdrawal o f that part. Such identification may be made by any reasonable method. In any such case------(1) Only the collateral so identified shall have loan value for purposes o f section 1 or be subject to the restrictions therein speci fied with respect to withdrawals and substitutions; and (2) For any indebtedness o f the same borrower that is not sub ject to section 1 (other than a loan described in section 2 (d ), (f) , (g ), or ( h ) ) , the bank shall in good faith require as much col lateral not so identified as the bank would require (if any) if it held neither the indebtedness subject to section 1 nor the identified collateral. This rule shall not be construed, however, to require the bank, after it has made any loan, to obtain any collateral therefor because o f any decline in the value or quality of the col lateral or in the credit rating o f the borrower. (o) In the case o f a loan to a member o f a national securities exchange who is registered and acts as a specialist in securities on the exchange for the purpose o f financing such member’s transactions as a specialist in such securities, the maximum loan value o f any stock shall be as determined by the bank in good faith provided that the specialist’s exchange, in addition to other requirements applicable to specialists, is designated by the B oard o f Governors o f the Federal Reserve System as requiring reports suitable for supplying current information regarding specialists’ use o f credit pursuant to this section. R E G U L A T IO N U O ip) A loan need not com ply with the other requirements o f this regulation if it is to enable the borrower to acquire a stock by exercising a right to acquire such stock which is evidenced by a warrant or certifi cate issued to stockholders and expiring within 90 days of issuance, provided that (1) each such acquisition under this subsection shall be treated separately, and the loan when made shall not exceed 75 per cent o f the current market value o f the stock so acquired as determined by any reasonable method, ( 2 1 while the borrower has any loan out standing at the bank under this subsection no withdrawal or substitu tion o f stock used to make such loan shall be permissible, except that when the loan has become equal to or less than the maximum loan value of the stock as prescribed for section 1 in the Supplement to this regulation the stock and indebtedness may thereafter be treated as subject to section 1 instead of this subsection, and (3) no loan shall be made under this subsection at any time when the borrower has any such loan at the bank which has been outstanding more than 9 months without becoming eligible to be treated as subject to section 1. In order to facilitate the exercise o f a right under this subsection, a bank may permit the right to be withdrawn from a loan subject to section 1 without regard to any other requirement o f this regulation. R E G U L A T IO N U A PP E N D IX There are printed below certain provisions o f the Securities E x change A ct o f 1934: Sec. 3. (a) * * * (3) The term “ member” when used with respect to an exchange means any person who is permitted either to effect transactions on the exchange without the services o f another person acting as broker, or to make use o f the facilities o f an exchange for trans actions thereon without payment o f a commission or fee or with the payment o f a commission or fee which is less than that charged the general public, and includes any firm transacting a business as broker or dealer o f which a member is a partner, and any partner o f any such firm. (4) The term “ broker” means any person engaged in the busi ness o f effecting transactions in securities for the account o f others, but does not include a bank. (5) The term “ dealer” means any person engaged in the busi ness o f buying and selling securities for his own account, through a broker or otherwise, 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 o f a regular business. (6) The term “ bank” means (A ) a banking institution organ ized under the laws o f the United States, (B ) a member bank of the Federal Reserve System, (C ) any other banking institution, whether incorporated or not, doing business under the laws o f any State or o f the United States, a substantial portion o f the busi ness o f which consists o f receiving deposits or exercising fiduciary powers similar to those permitted to national banks under section 11 (k ) o f the Federal Reserve Act, as amended, and which is supervised and examined by State or Federal authority having supervision over banks, and which is not operated for the purpose o f evading the provisions o f this title, and (D ) a receiver, con servator, or other liquidating agent o f any institution or firm included in clauses ( A ) , ( B ) , or (C ) o f this paragraph. * « « * « (9) The term “ person” means an individual, a corporation, a partnership, an association, a joint-stock com pany, a business trust, or an unincorporated 'organization. (10) The term “ security” means any note, stock, treasury stock, bond, debenture, certificate o f interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment con tract, voting-trust certificate, certificate o f deposit, for a security, or in general, any instrument com m only known as a “ security” ; or any certificate o f interest or participation in, tem porary or 7 REGULATION U interim certificate for, receipt for, or warrant or right to sub scribe to or purchase, any o f the foregoing; but shall not include currency or any note, draft, bill o f exchange, or banker’s accept ance which has a maturity at the time o f issuance o f not exceed ing nine months, exclusive o f days o f grace, or any renewal thereof the maturity o f which is likewise limited. * * * * * Sec. 7 .(a) For the purpose o f preventing the excessive use of credit for the purchase or carrying o f securities, the Board of Governors o f the Federal Reserve System shall, prior to the effec tive date o f this section and from time to time thereafter, pre scribe rules and regulations with respect to the amount o f credit that may be initially extended and subsequently maintained on any security (other than an exempted security) registered on a national securities exchange. F or the initial extension o f credit, such rules and regulations shall be based upon the following standard: An amount not greater than whichever is the higher of— (1) 55 per centum o f the current market price of the security, or (2) 100 per centum o f the lowest market price o f the security during the preceding thirty-six calendar months, but not more than 75 per centum o f the current market price. Such rules and regulations may make appropriate provision with respect to the carrying o f undermargined accounts for limited periods and under specified conditions; the withdrawal o f funds or securities; the substitution or additional purchases o f securi ties; the transfer o f accounts from one lender to another; special or different margin requirements for delayed deliveries, short sales, arbitrage transactions, and securities to which paragraph (2) o f this subsection does not apply; the bases and the methods to be used in calculating loans, and margins and market prices; and similar administrative adjustments and details. F or the pur poses o f paragraph (2) o f this subsection, until July 1, 1936, the lowest price at which a security has sold on or after July 1, 1933, shall be considered as the lowest price at which such security has sold during the preceding thirty-six calendar months. (b ) Notwithstanding the provisions o f subsection (a) o f this section, the Board o f Governors o f the Federal Reserve System, m ay, from time to time, with respect to all or specified securities or transactions, or classes o f securities, or classes o f transactions, by such rules and regulations (1) prescribe such lower margin requirements for the initial extension or maintenance o f credit as it deems necessary or appropriate for the accom modation o f com merce and industry, having due regard to the general credit situa tion o f the country, and (2) prescribe such higher margin require^ ments for the initial extension or maintenance o f credit as it may deem necessary or appropriate to prevent the excessive use of credit to finance transactions in securities. (c) It shall be unlawful for any member o f a national securities exchange or any broker or dealer who transacts a business in R E G U L A T IO N U 9 securities through the medium o f any such member, directly or indirectly to extend or maintain credit or arrange for the exten sion or maintenance o f credit to or for any customer— (1) On any security (other than an exempted security) regis tered on a national securities exchange, in contravention o f the rules and regulations which the Board o f Governors o f the Fed eral Reserve System shall prescribe under subsections (a) and (b ) o f this section. (2) W ithout collateral or on any collateral other than ex empted securities a n d /o r securities registered upon a national securities exchange, except in accordance with such rules and regulations as the Board o f Governors o f the Federal Reserve System may prescribe (A ) to permit under specified conditions and for a limited period any such member, broker, or dealer to maintain a credit initially extended in conform ity with the rules and regulations o f the Board o f Governors o f the Federal R e serve System, and (B ) to permit the extension or maintenance o f credit in cases where the extension or maintenance o f credit is not for the purpose o f purchasing or carrying securities or of evading or circumventing the provisions o f paragraph (1) of this subsection. (d ) It shall be unlawful for any person not subject to sub section (c) to extend or maintain credit or to arrange for the extension or maintenance o f credit for the purpose o f purchasing or carrying any security registered on a national securities ex change, in contravention o f such rules and regulations as the Board o f Governors of the Federal Reserve System shall prescribe to prevent the excessive use o f credit for the purchasing or carry ing o f or trading in securities in circumvention o f the other pro visions o f this section. Such rules and regulations may impose upon all loans made for the purpose o f purchasing or carrying securities registered on national securities exchanges limitations similar to those imposed upon members, brokers, or dealers by subsection (c) o f this section and the rules and regulations there under. This subsection and the rules and regulations thereunder shall not apply (A ) to a loan made by a person not in the ordi nary course o f his business, (B ) to a loan on an exempted security, (C ) to a loan to a dealer to aid in the financing o f the distribution o f securities to customers not through the medium o f a national securities exchange, (D ) to a loan by a bank on a security other than an equity security, or (E ) to such other loans as the Board o f Governors o f the Federal Reserve System shall, by such rules and regulations as it may deem necessary or appropriate in the public interest or for the protection o f investors, exempt, either unconditionally or upon specified terms and conditions or for stated periods, from the operation o f this subsection and the rules and regulations thereunder. (e) The provisions o f this section or the rules and regulations thereunder shall not apply on or before July 1, 1937, to any loan or extension o f credit made prior to the enactment o f this title or to the maintenance, renewal, or extension o f any such loan or R E G U L A T IO N 10 U credit, except to the extent that the Board o f Governors of the Federal Reserve System may by rules and regulations prescribe as necessary to prevent the circumvention o f the provisions o f this section or the rules and regulations thereunder by means o f withdrawals o f funds or securities, substitutions o f securities, or additional purchases or by any other device. Sec. 2 9 .(a) Any condition, stipulation, or provision binding any person to waive compliance with any provision o f this title or o f any rule or regulation thereunder, or o f any rule o f an exchange required thereby shall be void. (b) Every contract made in violation o f any provision o f this title or o f any rule or regulation thereunder, and every contract (including any contract for listing a security on an exchange) heretofore or hereafter made the performance o f which involves the violation of, or the continuance o f any relationship or practice in violation of, any provision o f this title or any rule or regu lation thereunder, shall be void (1) as regards the rights o f any person who, in violation o f any such provision, rule, or regulation, shall have made or engaged in the performance o f any such con tract, and (2) as regards the rights o f any person who, not being a party to such contract, shall have acquired any right there under with actual knowledge o f the facts by reason o f which the making or performance o f such contract was in violation o f any such provision, rule or regulation. * * * (c) Nothing in this title shall be construed (1) to affect the validity o f any loan or extension o f credit (or any extension or renewal thereof) made or o f any lien created prior or subsequent to the enactment o f this title, unless at the time o f the making o f such loan or extension o f credit (or extension or renewal thereof! or the creating o f such lien, the person making such loan or extension o f credit (or extension or renewal thereof) or acquir ing such lien shall have actual knowledge o f facts by reason o f which the making o f such loan or extension o f credit (or exten sion or renewal thereof) or the acquisition o f such lien is a viola tion o f the provisions o f this title or any rule or regulation there under, or (2) to afford a defense to the collection o f any debt or obligation or the enforcement o f any lien by any person who shall have acquired such debt, obligation, or lien in good faith for value and without actual knowledge o f the violation o f any provision o f this title or any rule or regulation thereunder affecting the legality o f such debt, obligation, or lien. Sec. 3 2(a) A ny person who willfully violates any provision of this title, or any rule or regulation thereunder the violation o f which is made unlawful or the observance o f which is required under the terms o f 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 or any undertaking contained in a registration statement as provided in subsection (d ) o f section 15 o f this title, which statement was false or misleading with respect to any material fact, shall upon conviction be fined not 11 R E G U L A T IO N U more than $10,000, or imprisoned not more than two years, or both, except that when such person is an exchange, a fine not exceeding $500,000 m ay be imposed; but no person shall be subject to imprisonment under this section for the violation o f any rule or regulation if he proves that he had no knowledge o f such rule or regulation.