Full text of District Notices (Federal Reserve Bank of Dallas) : Proposed Amendments to Regulations G, T, and U - Amendment to Regulation U, Circular No. 71-94

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F ederal Reserve Bank o f Dallas

DALLAS, TEXAS

75222
Circular No. 71-9^
April 22, 1971

PROPOSED AMENDMENTS TO REGULATIONS G, T, AND U
(Provision of credit for broker-dealer capital)
AMENDMENT TO REGULATION U
(interim exemption for broker-dealer credit by banks)

To All Banks, Broker/Dealers, Nonbank Lenders and
Others Concerned in the Eleventh Federal Reserve District:
Effective April l6 , 1971, the Board of Governors of
the Federal Reserve System announced proposed amendments to
Regulations G, T, and U setting forth the conditions under which
credit providing capital to broker-dealer firms may be obtained
without regard to initial margin requirements.
The Board also amended section 221.2 of Regulation U
by adding paragraph (m) to permit hanks to extend credit to
enable customers to contribute capital to broker-dealer firms
without regard to initial margin requirements. Such credit
extended after April l6 , 1971, and prior to adoption of the
proposals mentioned above would become subject upon renewal to
any restrictions imposed by such amendments.
A copy of the amendment to Regulation U is enclosed.
It should be filed in the Binder of Federal Reserve Regulations
furnished to all member hanks. A current version of the regula­
tion consists of the pamphlet, revised effective July 8 , 19&9;
the Supplement, effective May 6 , 1970; amendments effective
August 13, 1969, May 1, 1970, and March 30, 1971; and the
enclosed amendment.
Copies of the proposed amendments to Regulations G,
T, and U are also enclosed. Comments on the proposals should
he submitted in order to reach the Board in Washington, D. C.,
by May 2 k , 1 9 7 1 .
Yours very truly,
P. E. Coldwell
P r e sid e n t

Enclosures

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

CREDIT BY BANKS FOR THE PURPOSE
OF PURCHASING OR CARRYING MARGIN STOCKS

A M E N D M E N T TO REGULATION U

Effective April 16, 1971, § 221.2 is amended
by deleting “and” at the end of paragraphs (j)
and (k), by deleting the period at the end of
paragraph (1) and inserting in its place and”,
and by adding a new paragraph (m) as follows:
SECTION 221.2— EXCEPTIONS TO
GENERAL RULE
Notwithstanding the provisions of § 221.1, a
bank may extend and may maintain any credit
for the purpose specified in § 221.1, without re­
gard to the limitations prescribed therein, or in
§ 221.3(t), if the credit comes within any of the
following descriptions.
sjs

He

Hs

H5

$

(m) Any credit extended to or maintained for a
customer for the purpose of making a loan or con­
tribution of capital to a broker or dealer subject
to Part 220 (Regulation T) if the loan or con­
tribution is in conformity with the requirements

regarding satisfactory subordination agreements
or equities in the accounts of partners of a rule of
the Securities and Exchange Commission (Rule
15c3-l(c) (2) (A), (c)(4), and (c)(7)) (17 CFR
240.15c3-l(c) (2) (A), (c)(4), and (c)(7)) or
the capital rules of an exchange of which the
broker or dealer is a member if the members
thereof are exempt therefrom by Rule 15c3-l
(b)(2) of the Commission (17 CFR 240.15c-l
(b)(2)) or to purchase stock in a creditor which
is a corporation: Provided , That any such credit
extended after April 16, 1971, shall become sub­
ject upon renewal to such additional restrictions
as the Board of Governors may impose by reg­
ulation concerning the conditions upon which
credit may be extended for the purpose of making
such loan or contribution: And provided further,
That (i) all of the proceeds of such extension of
credit are so loaned or contributed to the capital
of the broker or dealer, and (ii) that the proceeds
of any withdrawal of such loan or contribution
of capital from the broker or dealer by the cus­
tomer or redemption of such stock shall be used
to reduce or retire said extension of credit.

rGOV^,

FEDERAL
press

RESERVE

release

f* A L

For immediate release

April 16, 1971

The Board of Governors of the Federal Reservje System today
proposed amendments to its Regulations G, T, and U setting forth con­
ditions under which credit may be obtained for the purpose of pto*
viding capital to broker-dealer firms without regard to initial margin
requirements.

The amendments are designed to facilitate the raising

of longer term capital by such firms.
As proposed, the amendments would become effective in three
months--on July 16.

Comments on the proposals sh.ould be submitted to

the Board by May 24,
As an interim measure, while it is considering these proposals,
the Board granted an exemption from initial margin requirements for
credit by banks for the purpose of providing capital to broker-dealer
firms.
Regulation U applies to credit extended by banks for the
purpose of purchasing or carrying margin stocks; Regulation T applies
to such credit extended by brokers and dealers, while Regulation G
applies to such credit extended by persons other than banks and brokers
and dealers.
Under the proposed amendments a lender would be required to
hold collateral sufficient to secure a loan before he could extend credit
to a third party for the purpose of
dealer.

pro v id i ng

capital to a broker-

The proposals would permit such a loan to be made if the pro­

viding of capital is subject to the applicable rules of either the

- 2Securities and Exchange Commission or a stock exchange, or both, and
if the capital is subject to the following five conditions:
1.

It must be provided for at least one year.

2;

It can be, withdrawn after that only after six months1

notice has been given to the broker-dealer, the SEC and the Securities
Investor^ Protection Corporation.
3>

A withdrawal of capital could* only be made if it would

not place the broker-dealer in ‘
.violation of the net capital rule to
which it is subject.
4:.. All proceeds of the loan must be .contributed to a brokerdealer <as capital;.
5.

Any withdrawal of capital must be u*sed to reduce the

amount of the loan*
As,proposed, the amendments would apply not only to new credits
extended after the effective date;but also to renewals of credit ini­
tially made between today and July 16.
Copies of the exemptibn and:•the' proposed amendments are
attached.
-0-

FEDERAL RESERVE SYSTEM

[12 CFR PARTS 207, 220, and 221]
[Regs. 6, T, and U]
SECURITIES CREDIT BY PERSONS OTHER THAN BANKS, BROKERS, OR DEALERS
CREDIT BY BROKERS AND DEALERS
CREDIT BY BANKS FOR THE PURPOSE OF PURCHASING OR CARRYING MARGIN STOCK

Credit to Contribute Capital
to Brokers and Dealers

Pursuant to the authority contained in the Securities Exchange
Act of 1934 (15 U.S.C, 78g), the Board of Governors proposes to amend
Parts 207, 220, and 221 in the following respects:
1.

Paragraph (f) of section 207.1 would be amended as set

forth below:
§ 207.1 General Rule

* * * * *
(f)

Credit extended to broker or dealer subject to Regulation T .

(1) No lender shall extend or maintain any credit for the purpose of
purchasing or carrying any margin security to any broker or dealer who
is subject to Part 220 of this Chapter (Regulation T), and after July 16,
1971, no lender shall extend any credit to any customer to enable the
customer to contribute capital to any broker or dealer who is subject to
such Part, whether such contribution is in the form of a loan to such
broker or dealer (whether subordinated or not) or of equities in the
account of partners, or to purchase stock in, any broker or dealer who
is subject to such Part, whether with or without collateral

Where the

2 -

credit or the proceeds of the loan or other contribution or purchase
of stock is to be used in the ordinary course of business of such
customer or such broker or dealer, such credit is presumed to be for
the purpose of purchasing or carrying margin securities unless the
lender has in his records a statement to the contrary obtained and ex­
ecuted in conformity with the requirements of paragraph (e) of this
section.
(2)

The prohibition of this paragraph (f) shall not apply

to credit which is secured by collateral other than registered secu­
rities which is (i) made to a dealer*/(whether or not secured) to aid
in the distribution of securities to-customers not through the medium
of a national securities exchange, or (ii) extended to a broker or
dealer subject to Part 220 or to a customer for the purpose of making
a loan or contribution of capital to such a broker or dealer if the
extension of credit, loan or other contribution is in conformity with
the requirements regarding satisfactory agreements or equities in the
account of partners of a rule of the Securities and Exchange Commission
(Rule 15c3-l(c)(2)(A), (c)(4), and (c)(7) (17 CFR 240.15c3-l (c)(2)(A),
(c)(4), and (c)(7)) or of the capital rules of an exchange of which the
broker or dealer is a member if the members thereof are exempt therefrom
by Rule 15c3-l(b)(2) of the Commission (17 CFR 240,15c3-l(b)(2)) or to
purchase stock in a broker or dealer which is a corporation:

l/ As defined in 15 U.S.C. 78c(a)(5).

Provided,

That in the case of credit described in this paragraph that is ex­
tended after July 16, 1971, and in the case of any renewal of such
credit extended between April 17, 1971 and July 17, 1971, such
extension of credit is subject to the following conditions:

(i)

in the case of credit extended to enable a customer to make a loan
or other contribution of capital to, or purchase stock in,such a
broker or dealer the lender holds in its possession collateral
adequate in good faith, to secure the amount of the credit, (ii) in
no event other than the death, disability, or (in the case of a lender
or customer who is a partner, officer, or employee of the broker or dealer)
involuntary retirement of the lender or customer may the subordinated
extension of credit, loan or contribution be repaid or the stock be
redeemed until one year after the subordinated extension of credit,
loan, or contribution was first made or stock first purchased and
thereafter until six months after the giving of written notice by the
lender (in the case of a subordinated extension of credit) or customer
(in the case of a subordinated loan, contribution of capital, or purchase
of stock) to such broker or dealer, the Commission, and the Securities
Investor Protection Corporation of intent to demand repayment of the
extension of credit, loan, or contribution or redemption of the stock,
(iii) in no event may such credit, loan or contribution be repaid or
the stock be redeemed if the effect of such payment or redemption would
reduce the net capital of such broker or dealer below the amount

4

required by the -net capital rule or capital rule to which such broker
or dealer is subject, or would otherwise be inconsistent with such
rule, (iv) all of the proceeds of such extension of credit are so
loaned or contributed to the capital of such broker or dealer or
used to purchase such stocky and (v) the proceeds of any withdrawal
of such loan or contribution of capital from such broker or dealer
by the customer or redemption of such stock shall be used to reduce
or retire said extension of credit.
(3)

The Board Of Governors of the Federal Reserve System

may by Order'exempt from the*prohibitions of this paragraph (f) and
the requirements of this part, either unconditionally, or upon specified
terms and conditions or for stated periods, any loan for the purpose
of making a loan or providing capital to a person who is subject to
Part 220 of this Chapter (Regulation T), upon a finding that the
granting of such an exemption is necessary or appropriate, in the
public interest or for the protection of investors; Provided, That
the Securities Investor Protection Corporation shall have certified
to the Board; that such action is appropriate under the circumstances.

5

2.

-

Section 220.4 would be amended by revising subparagraph

(f)(2) as set forth below:
S 220.4 Special Accounts

* * 4c * *
(f) Special Miscellaneous account.

* * * * *
(2)(i) Subject to the provisions of subdivisions (iii)
and (iv) of this subparagraph extend and maintain credit, (a) to or for
any partner of a firm which is a member of a national securities exchange
to enable such partner to make a contribution of capital to such firm, or
to purchase stock in an affiliated corporation of such firm, or (b) to or
for any person who is or will become the holder of stock of a corporation
which is a member of a national securities exchange to enable such person
to purchase stock in such corporation, or to purchase stock in an affiliated
corporation of such corporation; provided the lender as well as the
borrov/er is a partner in such member firm or a stockholder in such member
corporation, or the lender is a firm or a stockholder in such member
corporation, or the lender is a firm or corporation

which is a member of

a national securities exchange and the borrower is a partner in such firm
or a stockholder in such corporation;
(ii) Subject to the provisions of subdivisions (iii) and
(iv) of this subparagraph extend and maintain subordinated credit to
another creditor for capital purposes:

Provided, That

-

6

-

(a) Either the lender or the borrower is a firm or corpora­
tion which is a member of a national securities exchange, the other
party to the credit is an affiliated corporation of such member firm or
corporation, and> in addition to the fact that an appropriate committee
of the exchange is satisfied that the credit is not in contravention of
any rule of the exchange, the credit has the approval of such committee, or
(b) The lender as well as the borrower is a member of such
exchange, the credit has the approval of an appropriate committee of the
exchange, and the committee, in addition to being satisfied that the
credit is not in contravention of any rule of the exchange, is satisfied
that the credit is outside the ordinary course of the lender's business,
and thaty if the borrower's firm or corporation or an affiliated corporation
of such firm or corporation does any dealing in securities for its own
account, the credit is not for the purpose of increasing the amount of such
dealing.
(iii)

For the purpose of subdivisions (i) and (ii) of this

subparagraph, the term "affiliated corporation" means a corporation all
the common stock of which is owned directly or indirectly by the member
firm or general partners and employees of the firm, or by the member
corporation or holders of voting stock and employees of the corporation
and an appropriate committee of the exchange has approved the member firm's
or member corporation's affiliation with such affiliated corporation.

-

(iv)

7 -

No credit shall be extended pursuant to this sub­

paragraph after July 16, 1971, and no such credit extended between
April 16, 1971, and July 16, 1971, shall be renewed unless (_a) in
no event other than the death, disability, or (in the case of a
borrower who is a partner, officer, or employee of the firm or
corporation to which the subordinated loan or other contribution
of capital is made or in which the stock is purchased) involuntary
retirement of the borrower may the subordinated loan or contribution
of capital be repaid or the stock be redeemed until one year after
such loan or contribution was first made or such stock first purchased
and thereafter until six months after the giving of written notice by
the borrower to the firm, the Securities and Exchange Commission and
the Securities Investor Protection Corporation of intent to demand
repayment of such loan or contribution or redemption of such stock,
(1)) in no event may such loan or other contribution of capital be
repaid or the stock be redeemed by a creditor to whom the loan or
contribution was made or whose stock was the subject of purchase,
if the effect of such payment or redemption would reduce the net
capital of such creditor below the amount required by the net capital
rule or capital rule to which such creditor is subject, or would
otherwise be inconsistent with such rule; (c) all of the proceeds of
such extensions of credit are so loaned or contributed to the capital
of such firm or affiliated corporation or used to purchase such stock
and (d) the proceeds of any withdrawal of such loan or contribution of
capital from such creditor or redemption of such stock shall be used to
reduce or retire said extension of credit.

- 3 -

3.

Section 221.2 would be amended by revising paragraph (m) and section

221.3 would be amended by adding subparagraph (b) (4) and revising paragraph (c)
by redesignating the first sentence as subparagraph (1) and adding a new sub­
paragraph (2), as set forth below:
I

221.2 Exceptions to General Rule.

***** *
(m)

Any credit extended to a cuacomer for the purpose of making a

loan or contribution of capital to a broker or dealer subject to Part 220
tion T)if the loan or contribution is in conformity with
satisfactory subordination agreements or equities in

(Regula­

the requirements regarding

the accounts of partners of a

rule of the Securities and Exchange Commission (Rule 15c3-1(c)(2)(a), (c)(4),
and (c)(7) (17 CFR 240.15c3-1(c)(2)(a), (c)(4), and (c)(7)) or the capital rules
of an exchange of which the broker or dealer is a member if the members thereof
are exempt therefrom by Rule 15c3-l(b)(2) of the Commission (17 CFR 240.15c3-l
(b)(2)) or to purchase stock in a broker or dealer which is a corporation:
Provided, That in the case of credit described in this paragraph that is extended
after July 16, 1971, and any renewal of such credit extended between April 16,
1971 and July 16, 1971, such subordinated loan, contribution, or purchase of
stock is subject to the following further conditions:

(1)

the bank holds in

its possession collateral furnished by the customer adequate, in good faith, to
secure the amount of the credit, (2) in no event other than the death, disability,
or (in the case of a partner, officer, or employee of the broker or dealer
involuntary retirement of the customer can the subordinated loan or contribution be
repaid or the stock be redeemed until one yeat aftet

the subordinated loan or

contribution was first made or stock first purchased

and thereafter until six

months after the giving of written notice by the customer to the broker or
dealer, the Commission, and the Securities Investor Protection Corporation of
intent to demand repayment of the loan or contribution or redemption of the stock,

- 9 (3) in no event may such loan or contribution be repaid or the stock be redeemed
if the effect of such payment or redemption would reduce the net capital of the
broker or dealer below the amount requited by any net capital or capital rule
to which the broker or deal is subject, or would otherwise be inconsistent
with such rule, (4) all of the proceeds of such extension of credit are so
loaned or contributed to the capital of such firm or affiliated corporation, or
used to purchase such stock and (5) the proceeds 6f any withdrawal of such loan
or contribution of capital from such broker or dealer'or redemption of such
stock shall be used to reduce or retire' said extension of credit.
I

221.3 Miscellaneous provisions

* * * * *
(b)

Purpose of a credit. * * *

* * * * *
(4)

Credit extended to enable a customer to contribute capital to a

broker or dealer subject to Part 220 (Regulation T ) , whether such contribution
is in the form of a loan to the broker or dealer whether subordinated or not),
or of equities in the accounts of partners, or a purchase of stock in an
incorporated broker or dealer, or otherwise, is "purpose11 credit.
(c)

Indirectly secured.

(1) The term "indirectly secured" includes

any arrangement with the customer under which the customer's aright or ability
to sell, pledge, or otherwise dispose of stock owned by the customer is in any
way restricted so long as the credit remains outstanding, or under which the
exercise of such right, whether by written agreement or otherwise, is or may be
cause for acceleration of the maturity of the credit:

Provided» That the fore­

going shall not apply (1) if such restriction arises solely by virtue of an
arrangement with the customer which pertains generally to the customer's assets
unless a substantial part of such assets consists of stock, or (2) if the bank in
good faith has not relied upon such stock as collateral in the extension or

-

maintenance of the particular credit:

10

-

And provided further,

That the fore­

going shall not apply to stock held by the bank only in the capacity of
custodian, depositary, or trustee, or under similar

circumstances, if the bank

in good faith has not relied upon such stock as collateral in the extension or
maintenance of the particular credit.
(2)

Credit described in I 221.3(b)(4) is deemed to be indirectly

secured by any stock owned by the broker or dealer unless such credit is in
conformity with the requirements of I 221.2(m)

-11

4.

-

The proposed revision of paragraph (f) in § 207v.1

would restrict the ability of lenders to extend credit to
broker/dealers, ot to other customers for the purpose of providing
capital to broker/dealers in conformity with proposed amendments
to Parts 229 and 221 (Regulations T and U).
5.

The proposed revision of subparagraph (f)(2) in

§ 220.4 would restrict the ability of creditors to extend credit to
other creditors or to the partners, officers or employees of
creditors (or the partners, officers or employees of affiliated
corporations of creditors) for the purpose of purchasing the capital
stock of or otherwise prdViding capital to a creditor or to an
affiliated corporation of a creditor in conformity with proposed
amendments to Parts 207 and 221 (Regulations G and U).
6.

The proposed revision of paragraph (m) in § 221.2

would permit banks to extend credit for the purpose of enabling the
customer to provide capital to a broker/dealer firm, whether

in the fotm of a subordinated loan, equities in the accounts of
partners, or a purchase of stock in a corporation or otherwise,
without regard to the initial margin requirements of §§ 221,1 and
221,4 (the Supplement to Regulation U) only on the following
conditions.

The bank must hold adequate collateral to secure

the credit, so that the bank does not look to the broker/dealer
for repayment as an assignee or successor in interest to the
customer or otherwise.

The terms under which the capital is

provided to the broker/dealer, must be subject to the rules
of the sschae.ge of which the broker/dealer is a member or the
net capital rule of the Securities and Exchange Commission.

In

addition, the capital must not be withdrawable (except in the
event of the death, disability, or retirement by the customer
from service with the broker/dealer) until a year has elapsed
and only after an adequate period of notice so that the broker/dealer
will not be forced to liquidate securities

-

13 -

in order to permit the withdrawal of such capital.

All the proceeds of

the extension of credit must be used to provide capital for the broker/
dealer and the proceeds of any x;ithdrawal of capital must be used to
reduce or retire the credit.

The Board considers that subjecting credit

extended for the purpose of providing capital to broker/dealer firms to
these conditions would tend to reduce the. destabilizing potential of such
credit.
The proposed new subparagraph (b)(4) of § 221.3 would codify
an interpretation of the Board issued in 1946, and

would apply the

principle of the interpretation to credit extended

to purchase stock

in

an incorporated broker/dealer.
The proposed subparagraph (c)(2) of § 221.3 would provide that
bank credit extended to

make it possible for the customer to contribute

capital to a broker/dealer is deemed to be indirectly secured by any stock
owned by the broker/dealer unless the conditions of proposed § 221.2(m)
are satisfied.
If adopted by the Board, the changes will apply to credit
extended by banks, broker/dealers, and persons subject to Regulation G
after July 16, 1971, and to renewals after July 16, 1971, of credit
extended by banks after April 15, 1971.
This notice is published pursuant to section 553(b) of Title 5,
United States Code, and § 252.2(a) of the rules of

procedure oftheBoard

of Governors of the Federal Reserve System (12 CFR

252.2(a)).

- 14 To aid in the consideration of these matters by the Board,
interested persons are invited to submit relevant data, views, or
arguments.

Any such material should be submitted in writing to the

Secretary, the Board of Governors of the Federal Reserve System,
Washington, D. C.

20551, to be received not later than May 24, 1971.

Such material will be made available for inspection and copying upon
request, except as provided in i 261.6(a) of the Board's Rules Regarding
Availability of Information.
By order of the Board of Governors, April 16, 1971.

Kenne th A . Kenyon,
Deputy Secretary