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F ederal Reserve Ba nk o f D allas
DALLAS, TE X A S
75222
Circular No. 69-3^February 13, 19&9
PROPOSED AMENDMENTS TO REGULATIONS G, T, AND U
To All Banks
in the Eleventh Federal Reserve District:
There is attached for your information a copy of a
press statement issued by the Board of Governors of the Federal
Reserve System relating to proposed amendments to Regulations
G, T, and U to implement the recently enacted "Over-The-Counter
Margin Act".
Also attached are copies of the Notice of Proposed
Rule Making and the proposed amended Regulation U in the form
in which they are being submitted for publication in the Federal
Register.
Written comments on the proposed amendments may be
forwarded to this Bank, and should be received not later than
March 17, 19^9 •
Yours very truly,
P. E. Coldwell
President
Enclosures (3 )
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
i
f|
FEDERAL
press
RESERVE
release
■•f*4LRt^.•
For release in morning papers
Tuesday, February 11, 1969.
February 10, 1969,
The Board of Governors of the Federal Reserve System announced
today proposals to amend margin Regulations G, T, and U to implement the
recent amendment to the Securities Exchange Act of 1934.
Signed into law
on July 29, 1968, the so called "Over-The-Counter Margin Act" (P.L. 90-437)
broadens the Board's authority over stock market credit to cover certain
securities that are not registered on a national securities exchange, and
leaves to the Board the timing and selection of criteria for the application
of margin
requirements to such "over-the-counter" (OTC) stocks.
Regulation G applies to "Credit By Persons Other Than Banks,
Bro
kers, or Dealers for Purpose of Purchasing or Carrying Registered Equity
Securities," Regulation T concerns "Credit By Brokers, Dealers, and Members
of National Securities Exchanges," while Regulation U covers "Credit By
Banks
for the Purpose of Purchasing or Carrying Registered Stocks."
The proposals, on which the Board has invited corcment through
the Federal Reserve Banks from interested persons by March 17, 1969, are
principally designed to include in the regulations the criteria under which
the Board would select the OTC stocks which would be subject to the margin
and other requirements rf the regulations.
Initially, "OTC margin stock" would be stock, not traded on a
national securities exchange, which the Board determines to have the degree
of national investor interest, the depth and breadth of market, the availabil
ity of information respcct-frig such stocks and their issuers, and the character
- 2 -
and permanence
ofthe issuers, to warrant treatment similar to stocks
are registered on such exchanges.
that
The Board would publish a list of
OTC
margin stocks” at the time the regulations became effective.
In a related change, bank loans to broker/dealers against inventory
positions in OTC margin stocks used to make a bona fide market would be exempt
from margin regulation in much the same way as are loans to specialists making
a market in stocks registered on exchanges.
The criteria used to determine
which broker/dealers are entitled to the exemption are designed to ensure,
so far as possible, that an "OTC Market Maker" does in fact make a market in
the stock, stands ready at all times (within reason) to buy or sell the stock,
and does not unjustifiably "back away" from the market.
Any registered bro
ker/dealer would be eligible for designation as an "OTC Market Maker
if he
meets the standards set forth in Regulation U, files with the Securities and
Exchange Commission a notice of his intent to begin or continue such market
making activity and continues to file such other reports as are required pursu
ant to a rule to be adopted by the Commission respecting market makers in OTC
margin stocks.
In another change, the definition of "creditor" in Regulation T
would be broadened to cover all brokers and dealers.
This would bring under
provisions of the new margin requirements brokers and dealers who now handle
OTC accounts exclusively.
In addition, exempt credit through a special omnibus
account would be available only to brokers and dealers actually subject to the
regulation.
At present, Regulation T applies to brokers and dealers who are
members of an exchange or who transact business through a member firm.
Credit
which is exempt frora margin requirements can be extended by brolcer-dealers
- 3 *
through a special omnibiis account to persons, including foreign firms, who
certify that they observe the regulation even though they are not subject
to it.
The proposed change is not designed to make foreign banks or bro
ker-dealers subject to U. S. supervision, but only to limit the use of the
special omnibus account privilege to institutions that certify that they
are actually subject to Regulation T.
The privilege would no longer be
available to organizations--including foreign financial institutions and
others— that prefer not to make such a certification.
A special omnibus account is an account in which a member of an
exchange may make wholesale transactions for other brokers without regard
to margin requirements.
These transactions involve customers' securities
on which margin requirements have already been imposed at the retail level.
The Department of Justice and the SEC recently presented to The House Banking
and Currency Committee evidence of abuses whereby special omnibus accounts
have been used by some foreign financial institutions to avoid U. S. margin
requirements.
If the proposal is adopted, most firms borrowing in special omnibus
accounts would not be affected.
However, in the case of omnibus account cred
it extended to brokers or dealers who did not certify that they were subject
to Regulation T, no further substitutions of collateral would be permitted
after ninety days from the adoption of the amended regulation.
Credit extended
in such accounts would have to be brought into conformity with ordinary margin
requirements within a year.
At the same time, the Board incorporated into the current proposal
the broadened coverage of margin Regulations G and U that it originally pro
posed last December.
This applied to loans on mutual fund shares and would
- 4 -
bring "equity funding" plans or programs under both regulations.
Under the
current proposal, all brokers or dealers, including those selling equity
funding plans or programs, would be subject to Regulation T.
prohibits loans on mutual fund shares.
Regulation T
The Board, at the request of some
firms engaged in extending credit on such plans or programs, plans shortly
to schedule an oral presentation on this aspect of its proposals.
A number of other conforming changes of a technical nature are
also made throughout the regulation as necessary or appropriate.
In a change unrelated to the implementation of P.L. 90-437, the
provision in Regulation G regarding stock options and employee stock purchase
plans would be amended to make clear that an increase in the current market
value of the collateral may be taken into consideration in determining whether
its maximum loan value is equal to the outstanding credit owing pursuant to
that provision’s withdrawal requirements.
In other unrelated changes, the
time for retaining Federal Reserve Forms G-3 and U-l (the "purpose statements"
required by Regulations G and U) would be reduced from six to three years to
ease the burden of record retention, and statements obtained by brokers and
dealers in connection with "non-purpose" extensions of credit collateralized
by regulated securities would be obtained on a new Federal Reserve Form T-4.
Attached are copies of the proposed amended regulations which, with
the exception of the indications of textual changes, are in the form in which
they will be submitted for publication to the Federal Register.
-0 Attachments.
ATTACHMENT C
FEDERAL RESERVE SYSTEM
[12 CFR
Part 221]
[Reg. U]
CREDIT BY BANKS FOR THE PURPOSE OF PURCHASING
OR CARRYING REGISTERED STOCKS
Notice of Proposed Rule Making
Pursuant to the authority contained in the Securities Exchange
Act of 1934 (15 U.S.C. 78g), as amended by Act of July 29, 1968
(P.L. 90-437; 82 Stat. 452), the Board of Governors of the Federal
Reserve System is considering amending Part 221 (Regulation U) as set
forth below
U
in order to regulate the amount of credit that may be
extended with respect to certain stock that is not registered on a
national securities exchange.
P.L. 90-437 broadens the Board’s authority over stock market
credit to cover "over-the-counter" (OTC) stocks.
The legislation
leaves to the Board the timing and selection of criteria for the
implementation of OTC margin requirements.
The proposed amendments to Regulation U are principally designed
to include in the tegulation the criteria under which the Board will
select the OTC stocks which would be subject to the margin and other
requirements of the regulation.
Initially, such "OTC margin stock"
would be stock, not traded on a national securities exchange, which the
Board has determined to have the degree of national investor interest,
the depth and breadth of market, the availability of information
1/ Copies' of the proposed amended regulation, indicating textual changes,
are available at the offices of the Board of Governors of the Federal
Reserve System, Washington, D. C.
20551.
- 2 -
respecting such stocks and their issuers, and the character and permanence
of the issuers, to warrant treatment similar to stocks that are registered
on such exchanges.
In a related change, bank loans to broker/dealers against
inventory positions in OTC margin stocks used to make a bona fide market
would be exempt from margin regulation.
It has been urged that the functioning of the OTC stock markets
depends on individual broker/dealers who make a market in selected stocks.
The market makers argue that, in order to make effective markets, they
must be able to obtain credit on a liberal basis.
The positions carried
by broker/dealers are largely financed by bank loans.
Accordingly, an
exemption would be created for bank credit to finance such activities.
The criteria used to determine which broker/dealeEr, -Are;
entitled to the exemption are designed to ensure, so far as possible, that
an "OTC Market Maker" does in fact make a market in the stock, stands
ready at all times (within reason) to buy or sell the stock, and does
not unjustifiably "back away" from the market.
Any broker/dealer,
registered pursuant to section 15 of the Securities Exchange Act of 1934
(15 U.S.C, 78o) would be eligible if he met the standards set forth in
the regulation (including maintaining certain minimum net capital), had
filed with the Securities and Exchange Commission a notice of his intent
to begin or continue such market making activity, and continued to file
such other reports as were required pursuant to a rule respecting market
makers in OTC margin stocks that the Commission would adopt.
The ban.*,
would have to obtain a statement on a new form designated F. R. Form U-2,
from the market maker that he is properly registered and will use the
credit for such activities.
- 3 -
The proposal would also introduce to the regulation the term
"regulated stock", which would encompass registered stock, OTC margin
stock, shares of most investment companies registered pursuant to section 8
of the Investment Company Act of 1940 (15 U.S.C. 80a-8), "equity funding"
plans or programs, and debt securities convertible into or carrying war
rants or rights to subscribe to or purchase a regulated stock.
With the
exception of OTC margin stock and equity funding plans or programs, vir
tually all credit for the purpose of purchasing such securities was pre
viously subject to the requirements of this Part.
A proposal to make
credit extended in connection with equity funding plans or programs sub
ject to this Part was published for comment in the Federal Register on
December 17, 1968 (33 F.R. 18630).
Accordingly, the term "regulated
stock" would be substituted where appropriate for the term "registered
stock" throughout this Part, with corresponding conforming changes.
The exception to the regulation in § 221.2(e) for credit on
customers' securities would be limited to brokers or dealers who certify
that they are subject to Part 220 of this Chapter (Regulation T) to re
flect a proposed change in the coverage of that Part.
ing under § 221.2(e) would not be affected.
Most firms borrow
However, in the case of
credit extended under this section to persons or firms who are not pre
pared to certify that they are actually subject to Part 220, (Regulation T),
no substitutions of collateral would be permitted after SO days from the
adoption*of this proposal; and such credit'would be.required to be extin
guished-within one year after that date, if the proposals are adopted.
The proposal would amend the regulation to conform with the
above by including "equity funding" plans or programs within the definition
of "stock", and also clarify that for the purpose of this Part it is
- 4 -
immaterial whether a debt security is convertible, with or without con
sideration, presently or in the future, into a regulated stock, clarify
that credit is indirectly secured if there is any arrangement that may
accelerate the maturity of the credit, and, in order to ease record
retention burdens, reduce the time for retaining Federal Reserve Form
U-l (the "purpose statement" required pursuant to § 221.3(a)) from six
to three years.
The exception to the regulation in § 221.2(e) for cre
dit on customers' securities would be limited to brokers or dealers who
are subject to Part 220 of this Chapter (Regulation T) to reflect a
proposed change in the coverage of that Part.
This notice is published pursuant to section 553(b) of Title 5
United States Code, and § 262.2(a) of the rules of procedure of the
Board of Governors of the Federal Reserve System (12 CFR 262.2(a)).
To aid in the consideration of this matter by the Board, in
terested persons are invited to submit, in writing, relevant data, views
or arguments.
Such material should be submitted to any Federal Reserve
Bank, to be received not later than March 17, 1969.
Under the Board's
rules regarding availability of information (12 CFR 261), such materials
will be made available for inspection and copying to any person upon
request unless the person submitting the material requests that it be
considered confidential.
Dated at Washington, D. C., this 10th day of February, 1969.
By order of the Board of Governors.
(Signed) Robert P. Forrestal
Robert P. Forrestal,
Assistant Secretary.
CREDIT BY BANKS FOR THE
PURPOSE OF PURCHASING OR CARRYING
R£GtS"£L&P REGULATED STOCKS
REGULATIONS
Sec.
221.1
221.2
221.3
221.4
General rule.
Exceptions to general rule.
Miscellaneous provisions.
Supplement.
Authority: The provisions of this Part 221 issued under section 7
of the Securities Exchange Act of 1934 (15 U.S.C. 78g) as amended by P. .
(82 Stat. 452).
§ 221.1
General rule.
(a)
Purpose credit secured by stock. - No bank shall extend any
credit secured directly or indirectly— ^ by any stock— ^ for the purpose of
3/
purchasing or carrying any registered regulated stock— (and no bank shall
extend any credit described in 5 2 2 1 .3 (q) regardless of whether or not such
credit is secured by any stock) in an amount exceeding the maximum loan value
of the collateral, as prescribed from time to time for stocks m
§ 221.4
(the Supplement to Regulation U) and as determined by the bank in good faith
for credit subject to § 221.3(s) for any collateral other than stocks.
Pro
vided, That unless held as collateral for such credit on October 20, 1967,
and continuously thereafter, any collateral other than stock shall have loan
value for the purpose of this Part only as collateral for a credit which is
not secured by stock, as described in § 2 2 1 .3(s), and any collateral consist
ing of convertible debt securities described in § 2 2 1 .3 (t) shall have loan
value only for the purpose of that section, and not for other credit subject
to this Part.
As defined in § 221.3(c).
2/
~ As defined in § 221.3(^).
3 / Sometimes referred to as a "purpose credit".
—
§ 221.3(n)(d).
See § 221.3(b), and
- 2 -
(b)
Substitutions and withdrawals. - Except as permitted in
paragraph (c), of this section, while a bank maintains any credit subject
to this Part, whenever extended, the bank shall not at any time permit any
withdrawal or substitution of collateral unless either (1 ) the credit would
not exceed the maximum loan value of the collateral after such withdrawal
or substitution, or (2 ) the credit is reduced by at least the amount by
which the maximum loan value of any collateral deposited is less than the
"retention requirement" of any collateral withdrawn.
The "retention require
ment" of collateral other than stock is^the same as its maximum loan value
and the "retention requirement" of collateral consisting of stock is pre
scribed from time to time in § 221.4 (the Supplement to Regulation U).
(c)
Same-day transactions. - Except as provided in § 221.3(r)(l),
a bank may permit a substitution of stock whether j?egisfcei?ei regulated or
HHi?egisfeeFed unregulated, effected by a purchase and sale on orders executed
within the same day:
Provided, That (1) if the proceeds of the sale exceed
the total cost of the purchase, the credit is reduced by at least an amount
equal to the "retention requirement" with respect to the sale less the
"retention requirement" with respect to the purchase, or (2 ) if the total
cost of the purchase exceeds the proceeds of the sale, the credit may be
increased by an amount no greater than the maximum loan value of the stock
purchased less the maximum loan value of the stock sold.
If the maximum
loan value of the collateral securing the credit has become less than the
amount of the credit, the amount of the credit may nonetheless be increased
if there is provided additional collateral having maximum loan value at
least equal to the amount of the increase.
- 3 -
(d)
Single credit rule. - For the purpose of this Part, except
for credit subject to § 2 2 1 .3 (s) or (t), the entire amount of the credit
extended to any customer by any bank at any time for the purpose of pur
chasing or carrying sfeeeks-regisfeered-oR-a-nafcienal-seewrifeies-exehange
any regulated stock shall be considered a single credit; and all the collat
eral securing such indebtedness shall be considered in determining whether
or not the loan complies with this Part.
§ 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 8 221 .1 , without regard
to the limitations prescribed therein, or in § 221.3(t)j_ if the credit comes
within any of the following descriptions.
(a)
Any credit extended to a bank or to a foreign banking institu
(b)
Any credit extended to a
tion;
"plan-lender" as defined in § 207.4(a)
of Part 207 of this Chapter (Regulation G) to finance a plan described therein:
Provided, That in no event does the bank have recourse to any stock purchased
pursuant to such plan;
(c)
Any credit extended to a dealer, or to two or more dealers,
to aid in the financing of the distribution of securities to customers not
through the medium of a national securities exchange;
(d)
Any credit extended to a
broker or dealer that is extended
in exceptional circumstances in good faith to meet his emergency needs;
(e)
Any credit extended to a
broker or dealer secured by any
securities which, according to written notice received by the bank from
- 4 -
the broker or dealer pursuant to a rule of the Securities and Exchange
Commission concerning the hypothecation of customers* securities (Rule 8 c-l
(17 CFR § 240.8c-l) or Rule 15c2-l (17 CFR § 240.15c2-l)), are securities
carried for the account of one or more customers:
Provided, That the bank
accepts in good faith^ from the broker or dealer a signed statement to the
effect that he is subject to the provisions of Part 220 of this Chapter
(Regulation T ) (ei?-fehafe->he-4 ee 9 -R©fe-exfeeRd-er-f5ainfea£iii-ei?e££€-fe®-»r-€e*
eusfceraera - e x c e p t - i n - a e e s r d a n e e - f e h e r e v i f e h - a s - i f -he-were -swb^eefe-tsherefce};
(f)
Any credit extended to finance the purchase or sale of secu
rities for prompt delivery which is to be repaid in the ordinary course of
business upon completion of the transaction:
not made to a person described in § 221.3(q):
Provided, That the advance is
And provided further, That
it is either (1 ) extended to a broker or dealer, or (2 ) extended for a
purpose other than to enable the borrower to pay for stock purchased in an
account subject to Part 220 of this Chapter (Regulation T);
(g)
Any credit extended against securities in transit, or surren
dered for transfer, itfhich is payable in the ordinary course of business upon
arrival of the securities or upon completion of the transfer:
Provided,
That the credit is not extended to a person described in § 221.3(q)‘
- And
provided further, That it is either (1) extended to a broker or dealer, or
(2 ) extended for a purpose other than to enable the customer to pay for
stock purchased in an account subject to Part 220 of this Chapter (Regula
tion T);
(h)
it is extended:
Any credit which is to be repaid on the calendar day on which
Provided, That the credit is not extended to a person
4/
As described in § 221.3(a).
- 5 -
described in § 221.3(q):
And provided further, That it is either (1) extended
to a broker or dealer, or (2 ) extended for a purpose other than to enable the
customer to pay for stock purchased in an account subject to Part 220 of this
Chapter (Regulation T);
(i)
Any credit extended outside the States of the United States
and the District of Columbia;
(j)
Any credit extended to a member of a national securities
exchange for the purpose of financing his or his customers' bona fide ar
bitrage transactions in securities.
For the purposes of this paragraph,
the term "arbitrage” means (1 ) a purchase or sale of a security in one
market together with an offsetting sale or purchase of the same security
in a different market at as nearly the same time as practicable, for the
purpose of taking advantage of a difference in prices in the two markets,
or (2 ) a purchase of a security which is, without restriction other than
the payment of money, exchangeable or convertible within 90 calendar days
following the date of its purchase into a second security together with an
offsetting sale at or about the same time of such second security, for the
purpose of taking advantage of a disparity in the prices of the two secu
rities; and
(k)
Any credit extended to a member of a national securities
exchange for the purpose of financing such members' transactions as an
odd-lot dealer in securities with respect to which he is registered on
such national securities exchanges as an odd-lot dealer.
§ 221.3
Miscellaneous provisions.
(a)
Required statement as to stock-secured loan. - In connection
with an extension of credit secured directly or indirectly by any stock,
- 6
the bank shall obtain and retain in its records for at least six three years
after such credit is extinguished a statement in conformity with the require
ments of Federal Reserve Form U-l executed by the recipient of such extension
y
of credit (sometimes referred to as the "customer") and executed and accepted
in good faith by a duly authorized officer of the bank prior to such exten
sion:
Provided, That this requirement shall not apply to any credit described
in paragraph (o) of this section or § 221.2 of this Part except for credit
described in paragraphs 22 1 .2 (f), (g) and (h) extended to persons who are not
brokers or dealers subject to Part 220 of this Chapter (Regulation T).
In
determining whether or not an extension of credit is for the purpose specified
in § 221.1 or for any of the purposes specified in § 2 21 . 2 the bank may rely
on the statement executed by the customer if accepted in good faith.
To
accept the customer's statement in good faith, the officer must (1 ) be alert
to the circumstances surrounding the credit and (2 ) if he has any information
which would cause a prudent man not to accept the statement without inquiry,
have investigated and be satisfied that the customer's statement is truthful.
(b)
Purpose of a credit. - The "purpose of a credit" is determined
by substance rather than form.
(1)
Credit which is for the purpose, whether immediate, incidental,
or ultimate, of purchasing or carrying a regulated Stock is ’-’purpose credit',
despite any temporary application of. funds otherwise.
(2)
Credit to enable the customer to reduce or retire indebtedness
which was originally incurred to purchase a regulated s t o c k ~for the purpose of
"carrying" such a security.
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is s w e d -b y -a n -£ n v e 9 fe m e n te -c e m p a n y -re g i9 fe c rc d -p H t's « a n fe -fe e -s e e fc ie n -8 -« £ -fe h e
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Investment ~G^paay-A&fc-e£-19/+G-£l'5-UrSfG?-8Qa-§)---Vr7kPsa-a&&efcs-cust©!:
aar:iLy
irnelrfck4e-¥egisfee^e4-&feeeksy-i&-i©F-"the-pappP»©-0f-pypebasing-op-eaecyins-such
sfe©ek&r
(c)
Indirectly secured, - The term "indirectly secured" includes
any arrangement with the customer under which the customer's right or ability
to sell,
pledge, or otherwise dispose of stock owned by
the customer is in
any way
restricted so long as thecredit 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 foregoing shall not apply (1 ) if such restriction arises solely by virtue
of an arrangement with the customer vhich pertains generally to the customer'
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:
And provided further,
That the
foregoing 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,
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9 feeek-iregis feezed-©R-a-Rafei©Ral-seettFitIie9-eHehaRg©r
-8 (d)
OTC margin stock. - (1) The term "OTC margin stock" means stock,
not traded on a national securities exchange, which the Board of Governors of
the Federal Reserve System has determined to have the degree of national investor
interest, the depth and breadth of market, the availability of information re
specting the stock and its issuer, and the character and permanence of the issuer
to warrant such treatment.
(2)
The Board will from time to time publish a list of OTC margin
stocks as to which the Board has made the determinations described in subpara
graph (1) of this paragraph (d). Except as provided in subparagraph (4) of this
paragraph (d) such stocks shall meet the requirements that:
(iL)
The stock is subject to registration under § 12(g)(1) of
-Securities Exchange Act of 1934
the
(15 U .S.C. 781(g)(1)). or if issued by
insurance company «=rb jcct to 5 12(g)(2)(G)
an
(15 U.S.C. 781(g)(2)(G)) the issuer
_had at least $1 millior of capital and surplus.
(y*)
— —
ma r^
Five or »rore dealers, stand willing to. and do in fact. make_
— ID— i'ucL— stock ircluding making regularly published bona fide bids_
.andjoffers for such stock for t-W
r own accounts, or the stork is registered.
_on a securities exchance.thgt is exempted by the Securities and Exchange.
Commission from_jre&i_gt:ration as a national .securities p^hange pursuant t.SL
Section
5
of the A c t ( L5__lT.s.C.
78gl ,
(iii) -Xhere _are 1500 or more holders ofrecord of th-P stock
Hpt,o
f
f
who ai£.
.directors, or hfpgficial owners o_f JLO per rent ox. m o re— o£ the stocky
(ty)
— issuer, or .i prpri^rcc;co-r
interest, has.
for at least three vears,
Cy ) _Xh-e_-Stock
(vi)
Ho^n publicly traded for at least_ sixL.taQi
Daily quotations for both bid and asked prices for the stock
are continuously available to the general public,
-
and shall meet
three
(vli)
of
9 -
the four
additional
requirements
that:
There are 500,000 or more shares of such stock outstanding
in addition to shares held beneficially by officers, directors, or benefi
cial owners of more than 10 per cent of the stock,
(viii)
graph
The shares described in subdivision (vii) of this subpara
have a market value in the aggregate of at least $10 million,
(ix)
The minimum average bid price of such stock as determined
by the Board in the latest month, is at least $10 per share, and
(x)
and undivided
(3)
in
The issuer had at least $5 million of capital,, surplus,
profits.
The Board shall from time to time remove from the list described
subparagraph (2 ) of this paragraph (d) stocks that cease to:______
(i)
Exist or for which the issuer ceases to exist, or
(ii) Meet substantially, the provisions of subparagraphs (1)
and (2 ) of this paragraph (d) .
(4)The foregoing
tive,
notwithstanding, the Boardmay, upon
or upon.application by any interested party., omit
its own
initia
or remove any stock
that is not traded on a national securities exchange from or add any such
stock to such list of OTC margin stocks, if in the .judgment of the Board,
such action is necessary or appropriate in the public interest.
(5)
cause
to be
inclusion
is
of
evidence
mission
has
It
shall be unlawful
made,
a
that
in
for
anyrepresentation
security
the
any
on
Board
way
such
or
passed
to
list
the
upon
any
bank
the
of
to
effect
OTC
Securities
the _ merits
make, or
that the
margin stocks
and
Exchange
Com
of, or given approval to-•
- 10 such security or any transaction therein.
Any statement, advertisement,
or other similar communication containing a reference to
In connection
pith,, guch.. stocks or such .list shal 1 constitute such an unlawful representation.
(e)
Renewals and extensions of maturity. - The renewal or exten
sion of maturity of a credit need not be treated as the extension of a credit
if the amount of the credit is not increased except by the addition of in
terest or service charges in respect to the credit or of taxes on transactions
in connection with the credit.
(f)
Transfers. - A bank may, without following the requirements
of this Part as to the extension of a credit, say*?
(1)
or to others:
Permit the transfer of a credit from one customer to another,
Provided, That a statement by the transferor, describing the
circumstances giving rise to the transfer, is accepted in good faith”
and
signed by an officer of the bank as having been so accepted, and kept with
each such transferee account, or
(2)
Accept the transfer of a credit originally extended in conform
ity with the requirements of this Part directly from another bank:
Provided,
That the statement of purpose, executed by the customer in connection with
the original extension of credit and accepted in good faith and signed by
an officer of the bank originally extending such credit in conformity with
the requirements of § 2 2 1 .3 (a), is obtained and kept with each such transferee
account, And provided further, That any transfer pursuant to this paragraph
is made as a bona fide incident to a transaction not undertaken for the
purpose of avoiding the requirements of this Part, the amount of the credit
As described in § 221.3(a).
- 11 -
Is not increased and the collateral for the credit is not changed; and, after1
such transfer, a bank may permit such withdrawals and substitutions of collat
eral as are permitted in respect to a credit it extends subject to this Part.
(g)
Reorganizations and recapitalizations. - Nothing in this Part
shall be construed to prevent a bank from permitting withdrawals or substitu
tions of securities to enable a customer to participate in a reorganization
or recapitalization.
(h)
Mistakes in good faith. - No mistake made in good faith in
connection with the extension or maintenance of a credit shall be deemed to
be a violation of this Part.
(i)
Action for bank*s own protection. - Nothing in this Part shall
be construed as preventing a bank from taking such action as it shall deem
necessary in good faith for its own protection.
(j)
Reports. - Every bank, and every person engaged in the business
of extending credit who, in the ordinary course of business, extends credit
for the purpose of purchasing or carrying securities registered on a national
securities exchange or OTC margin stocks, shall make such reports as the
Boatd of Governors of the Federal Reserve System may require to enable it
to perform the functions conferred upon it by the Securities Exchange Act
of 1934 (15 U.S.C. 78).
(k)
Definitions. - Except as otherwise provided in this Part,
terms herein have the meanings assigned to them in section 3 (a) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)), except that the term
"bank" does not include a bank which is a member of a national securities
exchange.
- 12 -
(1)
Stock. - The term "stock" includes any security commonly
known as a stock; any voting trust certificate or other instrument represent
ing such a security; any security convertible,with or without consideration*
presently or in the future,into such security, certificate or other instrument,
or carrying any warrant or right to subscribe to or purchase such a security;
or any such warrant or right; or any plan, program, or investment contract
offered or sold after April 30, 1969, which provides for the acquisition
, . .
6/
both of any regulated stock- • and of goods, services, other securities, or
investments.
(m)
Credit subject to § 221.1. - A "credit subject to § 221.1"
is a credit which is (1 ) secured directly or indirectly by any stock (or
made to a person described in paragraph (q) of this section), (2 ) extended
for the purpose of purchasing or carrying any regulated stock j?egisfcereel-en
a-HafeieRai-seewrities-exehaRgex-eif-any-seenrity-cenverfcible-- wifeh-er-without
eensiderafeien-into-sweh-a-stoek-or-earrying-any-warrant-or-right-to-swbserifee
fe0 -er-p»rehase-©r-earry-stteh-a-sfeeek7 -er-sny-8weH-warL'aRfc-eif-ifighfc-4 s«eh-f;ecHj?tfcy--'waFFanfe-®g-rigkfe-is-seTfiefei'ffles-ifefeift'ed-fe«-as-a--9eeHFifey“e©HveHfei^le
iHfea-a-sfe@ek-¥egistete4 -eR-a-Rafei0 Rai-8 fteHFifeie9 -e>:ehaHge"^, and (3) not
excepted by § 2 2 1 .2 .
(n)
Segregation of collateral. - (1) The bank shall identify all
the collateral used to meet the requirements of § 2 2 1. 1 (the entire credit
being considered a single credit and collateral being similarly considered,
as required by § 2 2 1 .1 (d)) and shall not cancel the identification of any
portion thereof except in circumstances that would permit the withdrawal of
6/
— See-.ats©T§'-2.Sir3 $F^raRd-4 fe)'7
As defined in £ 221.3(v).
- 13 -
that portion.
Such identification may be made by any reasonable method, and
in the case of a credit outstanding at the opening of business on June 15,
1959, need not be made until immediately before some change in that or other
indebtedness of the customer cr in collateral therefore.
(2)
Only the collateral required to be so identified shall have
loan value for purposes of § 221.1 or be subject to the restrictions therein
specified with respect to withdrawals and substitutions; and
(3)
For any credit extended to the same customer that is not
subject to § 221.1 (other than a credit described in § 221.2(b), (d), (f),
(g), or (h)), the bank shall in good faith require as much collateral not
so identified as the bank would require (if any) if it held neither the
indebtedness subject to § 221.1 nor the identified collateral.
This shall
not be construed, however, to require the bank, after it has extended any
credit, to obtain any collateral therefor because of any deficiency in
collateral already existing at the opening of business on June 15, 1959,
or any decline in the value or quality of the collateral or in the credit
rating of the customer.
(4)
Nothing in this Part shall require a bank to waive or forego
any lien, and nothing in this Part shall apply to a credit extended to enable
the customer to meet emergency expenses not reasonably foreseeable, provided
the extension of credit is supported by a statement executed by the customer
and accepted in good faith and signed by an officer of the bank as having
been so accepted in conformity with the requirements of 5 221.3(a).
For
this purpose, such emergency expenses shall incl.tide expenses arising from
circumstances such as the death or disability of the customer, or some other
- 14 -
change in his circumstances involving extreme hardship, not reasonably fore
seeable at the time the credit was extended.
The opportunity to realize
monetary gain is not a "change in his circumstances" for this purpose.
(0)
Specialist. - In the case of a credit extended to a member
of a national securities exchange who is registered and acts as a specialist
in securities on the exchange for the purpose of financing such member*s
transactions as a specialist in such securities, the maximum loan value of
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 Board of Governors of the Federal Reserve
System as requiring reports suitable for supplying current information regard
ing specialists' use of credit pursuant to this section.
(p)
Subscriptions issued to stockholders. - An extension of credit
need not comply with the other requirements of this Part if it is to enable
the customer to acquire a stock by exercising a right to acquire such stock
which is evidenced by a warrant or certificate issued to stockholders and
expiring within 90 days of issuance:
(1)
Provided, That:
Each such acquisition under this paragraph shall be treated
separately, and the credit when extended shall not exceed 75 per cent of
the current market value of the stock so acquired as determined by any
reasonable method,
(2)
After October 20, 1967, at the time credit is extended pursu
ant to this paragraph, the bank shall compute the amount by which the credit
exceeds the maximum loan value of the collateral as prescribed by § 221.4
and the customer shall reduce the credit by an amount at least equal to
- 15 -
one-fourth of such sum by the end of each of the four succeeding threecalendar month periods or until the credit does not exceed the current
maximum loan value of the stock, whichever shall occur first, and if the
bank fails to obtain the required quarterly reduction or a portion thereof
with respect to a particular acquisition within five full business days
after such reduction is due, the bank shall promptly sell a portion of the
collateral so acquired and apply the proceeds of the sale to reduce the
credit, in an amount at least equal to twice the required payment or portion
thereof for the first two such reductions, at least equal to the required
payment or portion thereof for the third such reduction, and at least suffi
cient so that the remaining credit does not exceed the current maximum loan
value of the remaining collateral after the fourth such reduction:
Provided,
That no such reduction need be in an amount greater than is necessary so
that the remaining credit does not exceed the maximum loan value of the
remaining collateral determined as of the date when the credit was extended:
And provided further, That as to credit extended between October 20, 1967,
and March 11, 1968, such four succeeding periods shall begin on March 11,
1968, and
(3)
While the customer has any credit outstanding at the bank
under this paragraph no withdrawal of cash or substitution or withdrawal
of stock used as collateral for such extension of credit shall be permissible,
except that when the remaining credit has become equal to or less than the
maximum loan value of the remaining stock as prescribed for § 221.1 or
§ 221.3(t) in § 221.4 (the Supplement to Regulation U) whichever is ap
plicable (or with respect to credit extended after October 20, 1967, the
- 16 -
requirements of the preceding clause have been fulfilled) the remaining stock
and related indebtedness shall thereafter be treated as subject to § 221.1
or § 221.3(t), whichever is applicable, instead of this paragraph.
In order
to facilitate the exercise of a right under this paragraph, a bank may permit
the right to be withdrawn from a credit subject to § 221.1 without regard to
any other requirement of this Part.
(q)
Credit to certain lenders. - Any credit extended to a customer
not subject to this Part or to Part 220 of this Chapter (Regulation T) engaged
principally, or as one of the customer's important activities, in the business
of extending credit for the purpose of purchasing or carrying regulated stocks
regisfeei-ed-en-a-fiafeieRat-seettrifeies-exehange-- is a credit for the purpose of
purchasing or carrying such stocks se-regiafcered unless the credit and its
purposes are effectively and unmistakably separated and disassociated from
any financing or refinancing, for the customer or others, of any purchasing
or carrying of stocks so registered.
Any credit extended to any such cus
tomer, unless the credit is so separated and disassociated or is excepted
by § 221.2, is a credit "subject to § 221.1" regardless of whether or not
the credit is secured by any stock; and no bank shall extend any such credit
subject to 5 221.1 to any such customer on or after June 15, 1959, without
collateral or without the credit being secured as i^ould be required by this
Part if it were secured by any stock.
Any such credit subject to 5 221.1
to any such customer, whether or not made after June 15, 1959, shall be
subject to the other provisions of this Part applicable to credit subject
to § 221.1, including provisions regarding withdrawal and substitution of
collateral.
- 17
(r)
Convertible securities. - (1) If, after June 15, 1959, and
prior to October 21, 1967, credit was extended for the purpose of purchasing
or carrying a security convertible into a stock registered on a national secu
rities exchange and the credit was secured by such a security, and after
October 20, 1967, there is substituted any stock as direct or indirect collat
eral for such credit, the credit shall thereupon be treated as subject to
§ 221.1 or § 221.3(t), whichever is applicable.
In any such case, the amount
of the outstanding credit, or such amount plus any increase therein to enable
the customer to acquire a stock so registered through the conversion of the
security pursuant to its terms, shall not be permitted on the date of such
substitution to exceed the maximum loan value of the collateral for the
credit:
Provided, That any reduction in the credit or deposit of collateral
required on that date to meet this requirement may be brought about within
30 days of such substitution?-©!?-fey-Apr£l-107 -19687 -'whiehevei?-£s-lafcei*.
(2)
Any credit extended after October 20, 1967, for the purpose
of purchasing or carrying a security convertible into a stock registered on
a national securities exchange, and any credit extended after fdate OTC mar
gin stock list is published] for the purpose of purchasing or carrying a
security convertible into regulated stock, if the credit is secured, directly
or indirectly, by any stock, is a credit subject to § 2 2 1 . 1 or § 2 2 1 .3(t),
whichever is applicable^--Provided?-That-any-redtietien-©£-fehe-eredife-ordep©sit-©f-e©llafeeral-neeessary-fe©~Tseefc-tke-ireqttiifeHieafes-©f-§-221r4-^fehe
Supplement-fee-Regulate£©n-¥}7 -in-respeefe-fee-sueh-eredife-exfeended-kefsife
Ma i?eh-II7 -1968?-need-H©fc-be-fe¥©ughfe-afe©ufe-fee£©He-Aps£l-107 -1 9 6 8 .
- 18 -
(s)
extend
Credit secured by collateral other than stocks. - A bank may
credit for the purpose of purchasing or carrying a
regulated stock
Hegisfefcred-en-a-nafeieiaal-geetapifeies-axehange secured by collateral other
than stock, and, in the case of such credit, the maximum loan value of the
collateral shall be as determined by the bank in good faith.
(t)
Credit on convertible debt securities. - (1) A bank may extend
credit for the purpose specified in § 221.1 on collateral consisting of any
debt security convertible into a regulated stock Hegisfee*ed-©n-a-nafc£enal
seeHFifeies-exehaiage or any debt security carrying a warrant or right to
subscribe to or purchase such a stock s*-Fegisfc<*i=ed (such a debt security
is sometimes referred to herein as a "convertible security").
(2)
Credit extended under this paragraph shall be subject to the
same conditions as if it were subject to § 221.1 except:
(i) the entire
amount of such credit shall be considered a single credit treated separately
from the single credit specified in § 221.1(d) and all the collateral securing
such credit shall be considered in determining whether or not the credit
complies with this Part, and (ii) the maximum loan value of the collateral
shall be as prescribed from time to time in § 221.4 (the Supplement to
Regulation U).
(3)
Any convertible security originally eligible as collateral
for a credit extended under this paragraph shall be treated as such as long
as continuously held as collateral for such credit even though it ceases to
be convertible or to carry warrants or rights.
(4)
In the event that any stock other than a convertible security
is substituted for a convertible security held as collateral for a credit
- 19
extended under this paragraph, the stock and any credit extended on it in
compliance with this Part shall thereupon be treated as subject to § 221.1
and the credit extended under this paragraph shall be reduced by an amount
equal to the maximum loan value of the security withdrawn.
(u)
Arranging for credit. - No bank shall arrange for the exten
sion or maintenance of any credit for the purpose of purchasing or carrying
any regulated stock regisfeered-eR-a-nafeienal-seetttfifeies-exehaRge, except
upon the same terms and conditions on which the bank itself could extend or
maintain such credit under the provisions of this Part.
(v)
The term "regulated stock'1 means any stock— ^ which is (1) a
8/
Stock registered on a national securities exchange. (2) an OTC margin stock— .
j3) a debt security (i) convertible with or without consideration, presently
or in the future, into a regulated stock or (ii) carrying any warrant or right
to subscribe to or purchase, presently or in the future, a regulated stock, (4)
any such warrant or right. (5) a security issued by an investment company
registered pursuant to S 8 of the Investment Company Act of 1940 (15 U.S.C.
80a-8), unless at least 95 per cent of the assets of such company are contin
uously invested in exempted securities—^. and (6) a plan, program, or invest
ment contract offered or sold after April 30, 1969. which provides for the
acquisition both of any security described in _this_ paragraph (v) and of goods,
services, other securities, or investments.
As defined in § 221.3(1).
As defined in § 221.3(d).
As defined in 15 U.S.C. 78c(a)(12).
- 20 (w)
OTC Market Maker Exemption. - In the case of credit extended
to an OTC Market Maker, as defined in subparagraph (2) of this paragraph
(w), for the purpose of purchasing or carrying an OTC margin stock in order
to conduct the market making activity of such a market maker, the maximum
loan value of any OTC margin stock (except stock that has been identified
as a security held for investment pursuant to a rule of the Commissioner
of Internal Revenue (Regs. Section 1-1236-1(d)) shall be determined by
the bank in good faith: Provided, That in respect of each such stock he
shall have filed with the Securities and Exchange Commission a notice of
his intent to begin or continue such market making activity (Securities
and Exchange Co^-njgsion Form X-17A-12(1)) and all other reports required
to be filed by market makers in OTC margin stocks pursuant to a rule of
the Securities and Exchange Com?i’ission (Rule 17a-12 (17CFR240.17a-12)) and
jhall not have ceased to engage in such market making activity: And
provided further. That the bank shall obtain and retain in its records
for at least three years after such credit is extinguished a statement in
conformity with the requirements of Federal Reserve Form U-2, executed by
the OTC Market-Maker who is the recipient of such credit and executed and
accepted in good faith— ^ by a duly authorized officer of the bank prior
to such extension.
(2)
An OTC Market Maker with respect to an OTC margin stock is
a dealer who has and maintains minimum net capital, as defined in a rule
of the Securities and Exchange Commission (Rule 15c-3-l(17CFR240.15c3-l))
of $25,000 plus $5,000 for each such
10/ As described in § 221.3(a).
stock in excess
of 5 in respect of
- 21 -
which he has filed and not withdrawn the notice on Securities and Exchange
Commission Form X-17A-12(1). (except that he shall not be reouired to have
net capital of more than $250,000 to be an OTC market maker unier the pro
visions of this subparagraph (2)). who is in compliance with such rule of
the Commission, and who, except when such activity is unlawful, meets all
of the following conditions with respect to such stock:
(i) he regularly
publishes bona fide, competitive bid and offer quotations, in a recognized
inter-dealer quotation system, (ii) he furnishes bona fide, competitive bid
and offer quotations to other broker/dealers on request, (iii) he is ready,
willing, and able to effect transactions in reasonable amounts, and at hig
quoted prices, with other brokers and dealers, (iv) he has a reasonable
average rate of inventory turnover.
§ 221.4
Supplement.
(a)
Maximum loan value of stocks. - For the purpose of § 221.1,
the maximum loan value of any stock, whether or not registered on a national
securities exchange, shall be 20 per cent of its current market value, as
determined by any reasonable method.
(b)
Maximum loan value of convertible debt securities subject to
§ 221.3(t). - For the purpose of § 221.3(t), the maximum loan value of any
security against which credit is extended pursuant to § 221.3(t) shall be
40 per cent of its current market value, as determined by any reasonable
method.
(c)
Retention requirement. - For the purpose of § 221.1, in the
case of a loan which would exceed the maximum loan value of the collateral
- 22 -
following a withdrawal of collateral, the "retention requirement" of a
stock, whether or not registered on a national securities exchange, and of
a convertible debt security subject to § 221,3(t), shall be 70 per cent of
its current market value, as determined by any reasonable method.
@FedFRASER