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FE D E R A L R E S E R V E BANK O F N E W YORK r b ir c u la r N o . 681 7” I [ jO c t o b e r 15, 1 9 7 l J TEXT OF NEW REGULATION X , "RU LES GOVERNING BORROWERS WHO OBTAIN SECURITIES CREDIT” Effective November 1, 1971 To A ll P erson s Extending or Obtaining Securities Credit in the Second Federal R eserv e D istrict: Printed below is an excerpt from the Federal Register, dated October 13, 1971, contain ing the text of the new Regulation X, "R u les Governing Borrowers Who Obtain Securities C re d it," adopted by the Board of Governors of the Federal Reserve System effective Novem ber 1, 1971. The Board of Governors is in the process of printing the new Regulation X and reprinting Regulations G, T, and U (margin regulations applicable prim arily to lenders), incorporating all amendments to those regulations to date. These four regulations will be compiled in one printed pamphlet with a single statutory appendix. Copies of the new pamphlet will not be available until later in the year and will be sent to you at that tim e. (Printed pamphlets of Regulations G, T, and U will not be available as single issues after the new pamphlet is distributed.) We suggest that those receiving this circular who extend securities credit bring it to the attention of their custom er-borrow ers. Additional copies of this circular will be furnished upon request. A L F R E D H A Y E S, President. the provisions of title H I of the Financial and Currency and For eign Transactions Reporting Act of 1970 (Public Law 91-508, October 26, 1970), which added a new subsection (f) to section 7 of the Securities Exchange Act of 1934 (15 U.S.C. 78a-jj, as amended), the Board of Governors of the Federal Reserve System adopts, effective November 1,1971, a new Part 224 (Regu Title 12— BANKS AND BANKING Recordkeeping Chapter II— Federal Reserve System SUBCHAPTER A— BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM [Reg. X ] PART 224— RULES GOVERNING BOR ROWERS WHO OBTAIN SECURITIES CREDIT 1. For the purpose of implementing lation X ) as set forth below. 2. The new Part 224 (Regulation X ) provides as to a borrower that any credit he obtains in the United States must comply with the margin regulations ap plicable to his lender, and that If he borrows abroad, his credit must comply with the provisions of the margin regu lation that would have been applicable if the credit had been obtained in the United States. This new part incorpo rates the substance of certain proposed amendments to Parts 207, 220, and 221 (Regulations G, T, and U) which were initially published in the F e d e r a l R e g i s t e r on July 29, 1971, at pages 14030, 14033, and 14035. Other aspects of those proposals are still under consideration by the Board. 3. The new Part 224 (Regulation X ) revises the substance of the amendments as initially published, in the manner set forth below. 4. Section 224.3 exempts from the ap plication of subsection (f) of the Secur ities Exchange Act of 1934 and Part 224 (Regulation X ) (a) U.S. citizens perma nently residing outside the United States who obtain abroad not in excess of $5,000 in purpose credit per year or at any one time, (b) credit to foreign firms who may be controlled by or acting on behalf of or in conjunction with U.S. persons to carry out clearing, marketmaking, and arbitrage transactions in offshore debt securities that are convertible into mar gin securities, and (c) foreign borrowers who are not U.S. persons but are con trolled by or acting on behalf of or in conjunction with U.S. persons if the Board grants a specific exemption after a finding that such an exemption is con sonant with the purposes of the Securi ties Exchange Act of 1934 and the new Part 224 (Regulation X ) and is war ranted by exceptional circumstances. 5. Section 224.4 provides that certain borrowers obtaining credit abroad must prepare and retain a record in conform ity with Federal Reserve Form X - l for a period of 6 years after the credit is extinguished. 6. Section 224.5(a) limits the term “ acting on behalf of or in conjunction with” to relationships in which a U.S. person or a foreign person controlled by a U.S. person has a substantial beneficial interest other than an interest derived solely from ownership of less than 50 percent of stock. 7. Section 224.5(d) defines “ foreign lender” as a non-U.S. person who is not a foreign branch of a broker/dealer, bank, or G-lender, nor a foreign sub sidiary of a broker/dealer, and who in the ordinary course of his business ex tends, maintains, or arranges purpose credit outside the United States. 8. Section 224.5(e) defines “G-lender” as a person not a broker/dealer or a bank who in the ordinary course of his business extends, maintains, or arranges credit secured directly or indirectly by any mar gin securities and who is subject to the registration requirement of § 207.1(a) of Part 207 (Regulation G ) . 9. Section 224.5(f) clarifies that the term “indirectly secured” includes any arrangement under which collateral made available by a third person secures credit obtained by a borrower. 10. Section 224.5(g) defines “lender” as a person who in the ordinary course of his business extends, maintains, or arranges for credit, including a G-lender, a broker/dealer, a bank, and a foreign lender. 11. Section 224.5(h) provides that the term “margin security” will have the meaning of “margin security” in § 207.2 (d) of Part 207 (Regulation G) if the borrower is obtaining credit from a G lender or a foreign lender, the meaning of “margin security” in § 220.2(f) of Part 220 (Regulation T) if the borrower is obtaining credit from a .broker/dealer and the meaning of “ margin stock” in § 221.3(v) of Part 221 (Regulation U) if the borrower is obtaining credit from a bank. 12. Section 224.5(i) defines “offshore debt security" as a debt security offered only outside the United States, the purchase of which, by a U.S. person, would give rise to a liability under the Interest Equalization Tax (26 U.S.C. sec. 4911 et seq.). 13. Section 224.5 (J) defines “purpose credit” as credit for the purpose of pur chasing or carrying securities and lists four examples of purpose credit, one of which includes a presumption that credit secured by any securities is purpose credit unless the borrower has filed the requi site statement of the purpose of the credit under Part 207 (Regulation G ), Part 220 (Regulation T ) , or Part 221 (Regulation U) or can furnish satisfac tory proof to the contrary if the credit is obtained from a foreign lender. 14. Section 224.5(k) explains that the term “obtain credit” means to obtain, receive, or enjoy the beneficial use of credit. 15. Section 224.5(1) provides that the term “ United States” includes any State of the United States, the District of Co lumbia, Puerto Rico, the Canal Zone, the Virgin Islands, or any other possession of the United States. 16. Section 224.6(a) provides that a borrower’s innocent mistake in connec tion with obtaining credit shall not be deemed a violation, if prompt action is taken to correct the mistake. 17. Section 224.6(b) clarifies that any person who wilfully aids and abets any other person in a violation of the new Part 224 (Regulation X ) is also a violator of such part. E ffectiv e d a te: November 1, 1971. The effective date was not deferred for the usual 30-day period because the new Part 224 (Regulation X ) implements an amendment to the Securities Exchange Act of 1934 which takes effect, by its terms, on November 1, 1971. The sub stance of the new part has been published for comment, and comments received from persons who would be affected by the new rules have been taken into ac count in connection with the revisions described above. In these Circumstances, the Board found that it would be in the public interest if the new part became effective simultaneously with the amend ment to the Act. By order of the Board of Governors, October 7, 1971. [ seal] T ynan S m it h , S ecreta ry. Sec. 224.1 224.2 224.3 224.4 224.5 224.6 Scope of part. General rule. Exemptions. Reports and records. Definitions Miscellaneous provisions. A u t h o r i t y : The provisions of this Part 224 (Regulation X ) , issued under sec. 7 (f) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 7 8a -jj, particularly 7 8 g (f) ) . § 224.1 Scope of part. This Part 224 (Regulation X ) contains rules and regulations promulgated by the Board of Governors of the Federal Re serve System (the Board) under the Se curities Exchange Act of 1934 as amended (the Act) and applies to all persons described below who obtain, re ceive, or enjoy the beneficial use of credit for the purpose of purchasing or carrying securities.1 For definitions of technical terms see § 224.5, Parts 207, 220, and 221 of this chapter (Margin Regu lations G, T, and U) and the Statutory Appendix. The purpose of this part (Reg ulation X ) is to prevent the infusion of unregulated credit obtained both outside and within the United States into U.S. securities markets in circumvention of the provisions of the Board’s margin regulations or by borrowers falsely cer tifying the purpose of a loan or otherwise wilfully and intentionally evading the provisions of those regulations. When the term “ obtain credit” is used in this part (Regulation X ) it means “obtain, receive, or enjoy the beneficial use of credit” and when the term “purpose credit” is used, it means “credit for the purpose of pur chasing or carrying securities”. When the term “ borrower” is used, it means a person who obtains credit. This part (Regulation X ) implements section 7(f) of the Act, and generally applies to bor rowers who are: (a) Persons who obtain credit from within the United States, or (b) Those persons who obtain credit from outside the United States who are: (1) U.S. persons,* (2) Foreign persons who are con trolled by U.S. persons,3 or (3) Foreign persons acting on behalf of or in conjunction with 4 U.S. persons. § 224.2 General rule. (a) C redit obtain ed from w ithin th e U nited States. A borrower shall not ob tain any purpose credit from within the United States unless he does so in com pliance with the following conditions: (1) Credit obtained from a G-lender shall conform to the provisions of Part 207 of this chapter (Regulation G ), which is hereby incorporated in this part 1 15 U.S.C. 78g. 2 For definition of the term “United States person,” see Statutory Appendix, sec. 7 (f) (2) (A ). 3 For definition of the term “ foreign persons controlled by a United States person,” see Statutory Appendix, sec. 7 (f) (2) (C ). * For definition of the term “ acting on be half of or in conjunction w ith ," see § 224.5(a) (Regulation X ) . (Regulation X ) . When the term “ G - lender” is used in this part (Regulation lender” is used in this part (Regulation X ) it means any person, other than a X ) , it means a person who is not a U.S. person, who in the ordinary course broker/dealer or bank, who in the ordi of his business extends, maintains, or nary course of his business extends, arranges purpose credit outside the United States and who is not a foreign maintains, or arranges credit that is se cured, directly or indirectly, in whole or branch or subsidiary of a broker/dealer, in part, by collateral that includes any a foreign branch of a bank, or a foreign margin securities, and who is subject to branch of a G-lender. (2) The provisions of subparagraph the registration requirement of § 207.1 (a) of this chapter (Regulation G ). (1) of this paragraph shall not apply to (2) Credit obtained from a broker/ credit extended before November 1, 1971, dealer shall conform to the provisions of except that as to credit extended after Part 220 of this chapter (Regulation T ) , October 26, 1970, the requirements as to which is hereby incorporated in this part withdrawals and substitutions of col (Regulation X ) . When the term “broker/ lateral shall apply after May 1, 1972, as dealer” is used in this part (Regulation follows: The requirements in § 207.1 (j) X ) , it means a person who is a broker of this chapter (Regulation G ) shall ap or dealer, including every member of a ply to credit obtained from a foreign branch of a G-lender or from a foreign national securities exchange, and in cludes a foreign branch or subsidiary of lender; the requirements in § 220.3(b) of a broker/dealer. this chapter (Regulation T) shall apply (3) Credit obtained from a bank shall to credit obtained from a foreign branch conform to the provisions of Part 221 of or subsidiary of a broker/dealer: and the this chapter (Regulation U ) , except for requirements in § 221.1(b) of this chap § 221.2( i ) . Except for such section, Part ter (Regulation U) shall apply to credit 221 of this chapter (Regulation U) is obtained from a foreign branch of a bank. hereby incorporated in this part (Regu lation X ) . When the term “bank” is used (3) R ecord o f credit. Every borrower in this part (Regulation X ) , it means subject to this Part 224 (Regulation X ) a bank that is subject to Part 221 of this who obtains any credit from a lender chapter (Regulation U ).° described in subdivision ( i ) , (iii), or (iv) (b) C red it obtain ed from outside th eof subparagraph (1) of this paragraph U nited States. (1) A U.S. person or for if such credit is secured directly or in eign person controlled by a U.S. person directly, in whole or in part, by col or acting on behalf of or in conjunction lateral that includes any security, shall with such a person shall not obtain any prepare and retain in his records, for at purpose credit8 from outside the United least 6 years after such credit is extin States except in compliance with the fol guished, a record substantially in con formity with the requirements of Federal lowing conditions: (i) Credit obtained from a foreign Reserve Form X - l . branch of a G-lender shall conform to § 224.3 Exemptions. the provisions of Part 207 of this chapter The following classes of persons shall (Regulation G ) , except that the require ment of § 207.1(e) of this chapter as to be exempted from the provisions of sec obtaining a statement of the purpose of tion 7(f) of the Act and this part (Regu lation X ) to the extent described below: the credit shall not apply. (a) A U.S. person whose permanent (ii) Credit obtained from a foreign branch or subsidiary of a broker/dealer residence is outside the United States, shall conform to the provisions of Part and who does not during any calendar year obtain a total of more than $5,000 220 of this chapter (Regulation T ). (iii) Credit obtained from a foreign or have outstanding at any time during branch of a bank shall conform to the any calendar year a total of more than provisions of Part 221 of this chapter $5,000 in credit obtained outside the (Regulation U) which would apply if United States to purchase or carry mar the credit were obtained from the head gin securities. (b) A borrower who is not a U.S. per office of the bank in the United States, son, but is controlled by or acting on except that the requirement of § 221.3(a) of this chapter (Regulation U) as to ob behalf of or in conjunction with such taining a statement of the purpose of the person, who obtains credit for the pur pose of bona fide clearing, marketcredit shall not apply. (iv) Credit obtained from a foreign making, or arbitrage transactions in off lender shall conform to the provisions shore debt securities that are convertible of Part 207 of this chapter (Regulation into margin securities, except that any G ) which would apply if the person ex credit outstanding against collateral con tending, arranging, or maintaining the sisting of such securities shall be brought credit were a G-lender, except that the into conformity with the other provisions requirement of § 207.1(e) of this chapter of this part (Regulation X ) 7 upon the (Regulation G) as to obtaining a state conversion of such securities into mar ment of the purpose of the credit shall gin securities. (c) A borrower who is not a U.S. per not apply. When the term “foreign son, but is controlled by or acting on behalf of or in conjunction with such 5 For a definition of the term "b a n k ” m ean person, who obtains credit from outside ing "bank that is subject to Regulation U ” , see § 224.5(b) (Regulation X ) and Statutory Appendix, sec. 3(a) (6 ). 8 For a definition of the term “purpose credit” see § 224.5(J) (Regulation X ) . 7 Including Parts 207, 220, or 221 of this chapter (Regulations G, T, and U) where applicable. the United States, which borrower has been exempted by the Board of Gover nors of the Federal Reserve System, by order, from the requirements of this part (Regulation X ) , either unconditionally or upon specified terms and conditions or for stated periods, upon a finding that exceptional circumstances warrant the granting of such an exemption, and that the exemption is consonant with the pur poses of section 7(f) of the Act and the provisions of this part (Regulation X ) . § 224.4 Reports and records. Every borrower described in § 224.1 who obtains any credit that is secured directly or indirectly, in whole or in part, by collateral that includes any securities, shall maintain such records and file such reports as may be prescribed by the Board of Governors of the Federal Re serve System to enable it to perform the functions conferred upon it by the Act. § 224.5 Definitions. Unless the context otherwise requires, or it is otherwise specified herein, the terms used in and for the purposes of this part (Regulation X ) have the meanings given them in this section, in sections 3 (a) or 7 ( f ) of the Act, or in Part 207, 220, or 221 of this chapter (Regulation G, T, or U ) . The revelant portions of sections 3(a) and 7(f) of the Act are set forth in the Statutory Appendix. In the case of inconsistency between definitions ap pearing in this section and those ap pearing in Part 207, 220, or 221 of this chapter (Regulation G, T, or U ), the definition appearing in the regulation that applies to the particular credit in volved, whether Part 207, 220, or 221 of this chapter (Regulation G, T, or U) shall prevail. (a) The term “ acting on behalf of or in conjunction with” in reference to a foreign person means obtaining credit for the purpose of purchasing or carrying a security in which, or in the income or gains or losses from which, a U.S. person or a foreign person controlled by a U.S. person has a substantial direct or in direct beneficial interest. Absent these factors the term does not include an in terest derived solely from the ownership of less than 50 percent of the outstand ing capital stock issued by such foreign person who is obtaining such credit. (b) The term “ bank” means a bank as defined in section 3(a) (6) of the Act, in cluding a foreign branch of a bank, ex cept that such term does not include a bank which is a member of a national securities exchange, a foreign affiliate of a bank, or a foreign bank. (c) The term “broker/dealer” means any broker or dealer including every member of a national securities ex change, and includes a foreign branch or subsidiary of a broker/dealer. (d) The term “foreign lender” means a person, other than a U.S. person, who in the ordinary course of his business extends, maintains, or arranges purpose credit outside the United States and who is not a foreign branch or subsidiary of a broker/dealer, a foreign branch of a bank, or a foreign branch of a G-lender. (e) The term “G-lender” means a per son who is not a broker/dealer or bank, who in the ordinary course of his business extends, maintains, or arranges credit that is secured, directly or indirectly, in whole or in part, by collateral that in cludes any margin securities, and who is subject to the registration requirement of § 207.1(a) of this chapter (Regulation G ). (f) The term “indirectly secured” in cludes any arrangement with the lender under which the right or ability to sell, pledge, or otherwise dispose of securities owned by the borrower (or by any other person who has made the use of such securities available to the borrower) is in any way restricted as long as the credit remains outstanding, or under which the exercise of such right, whether by writ ten agreement or otherwise, is or may be cause for acceleration of maturity of the credit. The foregoing shall not apply, however— (1) If such restriction arises solely by virtue of an arrangement with the lender which pertains generally to the borrower’s assets unless a substantial part of such assets consists of margin securities, or (2) If the lender in good faith has not relied upon such securities as collateral in the extension or maintenance of the particular credit, or (3) To securities held by the lender only in the capacity of custodian, deposi tary, or trustee, or under similar circum stances, if the lender in good faith has not relied upon such securities as col lateral in the extension or maintenance of the particular credit. (g) The term “lender” means a per son who in the ordinary course of his business extends, maintains, or arranges for credit, including a G-lender, a broker/dealer, a bank, and a foreign lender. (h) The term “margin security” shall have the meaning of “margin security” as defined in § 207.2(d) of this chapter (Regulation G) if the borrower is ob taining credit from a G-lender or a for eign lender, the meaning of “margin se curity” as defined in § 220.2(f) of this chapter (Regulation T) if the borrower is obtaining credit from a broker/dealer, and the meaning of “margin stock” as defined in § 221.3 (v) of this chapter (Regulation U) if the borrower is obtain ing credit from a bank. (i) The term “offshore debt security,” as to this part (Regulation X ) means a debt security offered only outside the United States, the purchase of which by a U.S. person would give rise to a liability under the Interest Equalization Tax (26 U.S.C. 4911 et seq.). (j) The term “purpose credit” means credit for the purpose of purchasing or carrying securities. The purpose of a credit is determined by substance rather than form. The following are some exam ples of purpose credit. (1) Credit which is for the purpose, whether immediate, incidental, or ulti mate, of purchasing or carrying a secur ity is “purpose credit,” despite any temporary application of the funds otherwise. (2) Credit to enable the borrower to reduce or retire indebtedness which was originally incurred to purchase security is for the purpose of “ carrying” such a security. (3) Credit that is secured directly or indirectly, in whole or in part, by col lateral that includes any securities, is presumed to be for the purpose of pur chasing or carrying securities, unless the borrower has complied with the require ments of Part 207 (Regulation G ) , Part 220 (Regulation T ) , and Part 221 of this chapter (Regulation U) as to the statement of the purpose of a credit, if such requirements are applicable, or in the case of credit obtained from a for eign lender, can furnish satisfactory evi dence of the use of the credit for a pur pose other than purchasing or carrying securities. (4) An extension of credit provided for in a plan, program, or investment con tract offered or sold or otherwise ini tiated after August 31, 1969, which pro vides for the acquisition both of any securities and of goods, services, prop erty interests, or investments. (k) The term “obtain credit” means to obtain, receive, or enjoy the beneficial use of credit. (1) The term “United States” includes any State of the United States, the Dis trict of Columbia, Puerto Rico, the Canal Zone, the Virgin Islands, or any other possession of the United States. § 221.6 Miscellaneous provisions. (a) In n o c en t m istake. An innocent mistake made in good faith by a bor rower in connection with the obtaining of a credit shall not be deemed to be a violation of this part (Regulation X ) if promptly after discovery of the mis take the borrower takes whatever action is practicable to remedy the noncom pliance. (b) Aiding or abettin g. Any person who willfully aids or abets the violation by any other person of any provision of this part (Regulation X ) shall be deemed to be in violation of this part (Regulation X ) . For the purpose of this subsection, the term “ aids or abets” shall include, but not be limited to, counsels, commands, induces, or procures. [FR Doc.71-14996 Filed 1 0 -12 -7 1;8:5 1 am]
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