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F ederal r es er v e Bank o f Dallas
DALLAS, TE X A S

75222

Circular No. 69-37
February 13, 1969

PROPOSED AMENDMENTS TO REGULATIONS G, T, AND U

To the Regulation G Registrant Addressed:
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 G 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, 1 9 6 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)

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 comment 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 respect1

such stocks atid tlieir issuers, and the character

- 2 -

and permanence of the issuers, to warrant treatment similar to stocks that
are registered on such exchanges.

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 marketmaking 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.
which is exempt from margin requlrements cnu

Credit

©xtPiiHed by broker-dealers

- 3 *

through a spedial omnibuls account f o persons, including foreign firms, who
c
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.
-

Attachments.

0-

ATTACHMENT A

FEDERAL RESERVE SYSTEM
[12 CFR Part 207]
[Reg. G]
CREDIT BY PERSONS OTHER THAN BANKS, BROKERS,
OR DEALERS FOR THE PURPOSE OF PURCHASING OR
CARRYING REGISTERED EQUITY SECURITIES
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 the 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 207 (Regulation G) as set
forth below-^ in order to regulate the amount of credit that may be
extended with respect to certain securities that are 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" (<5TC) 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 G are principally designed
to include in the regulation the criteria under which the Board will select
OTC stocks which would be subject to the margin and other requirements of
the regulation.

Initially, such "OTC margin stock" would be stocks, 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 respecting such stocks and
their issuers, and the character and permanence of the issuers to warrant
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 -

treatment similar to stocks that are registered on such exchanges.
The proposal would also introduce to the regulation the term
"regulated equity security", which would encompass registered equity securi­
ties, 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 warrants or rights to subscribe to or purchase a regulated
equity security.

With the exception of OTC margin stock and equity fund­

ing plans or programs, virtually all of these securities have hitherto been
included within the definition of "registered equity security."

A pro­

posal to include "equity funding" plans or programs within the coverage
of the regulation was published for comment in the Federal Register on
December 17, 1968 (33 F.R. 18629).

Accordingly, the term "regulated

equity security" would be substituted where appropriate for the term
"registered equity security" throughout this Part, with corresponding
conforming changes.
The proposal would amend the regulation to include a definition
of "stock" substantially similar to that contained in Regulation U
(12 CFR Part 221).

In addition it would clarify that for the purpose

of Part 207 it is immaterial whether a debt security is convertible, with
or without consideration, presently or in the future, into a regulated
equity security.
In a change unrelated to the implementation of P.L. 90-437,
the provisions regarding stock options and employee stock purchase plans
would be amended to clarify that an increase in the c’
.irrent market value

f

- 3 of the collateral may be taken into consideration in determining whether
its maximum loan value is equal to the outstanding credit owing pursuant
to the withdrawal requirements of § 207.4(a)(2)(iii)(B) and to make the
provisions of § 207.4(a)(3) conform to the parallel provision in Regulation U
(12 CFR 221.2(b)).

In other unrelated changes, the definition of "indirectly

secured" would be clarified to indicate that credit is indirectly secured
if there is any arrangement that may accelerate the maturity of the credit,
and, to ease record retention burdens, the time for retaining Federal Reserve
Form G-3, (the "purpose statement" required pursuant to § 207.1(e)) would be
reduced from six to three years.
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, interested
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 inspec­
tion and copying to any person upon request unless the person submitting the
material requests that it be considered confidential.
4

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.

SECURITIES CREDIT BY. TERSONS OTHER THAN BANKS,
BROKERS, OR DEALERS F©R-«JR*eSE-©F
*«R€HAS1N6-9R-CARRYING-RESiSTEREB

KQra¥-8BGHR5?!HS
REGULATIONS
Sec.
207.1
207.2
207.3
207.4
207.5

General rule.
Def initions.
Reports and records.
Miscellaneous provisions.
Supplement.

Authority: The provisions of this Part 207 issued under section 7
of the Securities Exchange Act of 1934 (15 U.S.C. 78g) as amended by P.L. 90-437
(82 Stat. 452).
§ 207.1

General rule.
(a)

Registration. - Every person who, in the ordinary course of

his business!/, during any calendar quarter ended after .October 20, 1-967,
extends or arranges for the extension of a total of ftffey-fchetisand-dollars
{$50,000} or more or has outstanding at any time during the calendar quarter,
a total of eHe-hwA4*ed-teh©H3and-«dellar8 4$100,000} or more, in credit, secured
directly or indirectly, in whole or in part, by collateral that includes any
veg&sfeeved regulated equity securities, unless such person is subject to
Part 220 (Regulation T) or Part 221 (Regulation U) of this Chapter, is subject
to the registration requirements of this paragraph and shall, within 30 days
following the end of the calendar quarter during which the person becomes
subject to such registration requirements, register with the Board of Gov­
ernors of the Federal Reserve System by filing a statement in conformity with
the requirements of Federal Reserve Form G-l with the Federal Reserve Bank
of the district in which the principal office of such person is located*

-expended

- 2

(b)

Termination of registration. - Any person so registered who

has not, during the preceding six calendar months, extended or maintained
or arranged for the extension or maintenance of any credit secured directly
or indirectly, in whole or in part, by collateral that includes any registered
regulated equity securities may apply for termination of such registration by
filing Federal Reserve Form G-2 with the Federal Reserve Bank of the district
in which the principal office of such person is located.
(c)

Definition of lender and applicability of margin requirements.

Any person subject to the registration requirements of paragraph (a) of this
section who, in the ordinary course of his business,

extends or maintains or

arranges for the extension or maintenance of any credit for the purpose of
iii/

purchasing or carrying any registered regulated equity security—

(hereinafter

.
9/ 3 /
called "purpose credit"), if such credit is secured directly or indirectly— =
in whole or in part by collateral that includes any such security, is a
"lender" subject to this Part and shall not after February 1, 1968, except
as provided in § 207.4(a), extend or arrange for the extension of any pur­
pose credit in an amount exceeding the maximum loan value of the collateral,
as prescribed from time to time for registered regulated equity securities
in § 207.5 (the Supplement to Regulation G), or as determined by the lender
in good faith for any collateral other than registered regulated equity secu­
rities:

Provided, That any collateral consisting of convertible securities

described in paragraph (d) of this section shall have loan value only as
provided in that paragraph-* — And-pr©vided--£«irfeker7-5hafc--in-respeet-te-a

1/ 2/ See 5 207.2(d).
2/ 3/:S6e §.207.2(g)(i)

- 3

ered£t-extended-after'February-I?-L968?-and-befere-Hareh-1968;-any-redtoefci©n-in-the-eredit-©r-depesit-o£-e©liateral-req«ired-ta-raeet-this-reqtiireraent8
shall-be-aeeenplished-by-April-l@7-l968 .
(d)

Credit on convertible debt securities. - (1) A lender may

extend credit for the purpose specified in paragraph (c) of this section on
collateral consisting of any debt security (i) convertible with or without
consideration, presently or in the future, into a registered regulated equity
security or (ii) any-defet-security carrying a any warrant or right to sub­
scribe to or purchase such a registered regulated equity security (such a
convertible 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 any other credit subject to this section except:{A)(1) the
entire amount of such credit shall be considered a single credit treated
separately from the single credit specified in paragraph (g) of this section
and all the collateral securing such credit shall be considered in determining
whether or not the credit complies with this Part, and -^B^-(ii) the maximum loan
value of the collateral shall be as prescribed from time to time in § 207.5(b)
(the Supplement to Regulation G).
(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 registered regulated

steek equity secu­

rity other than a convertible security is substituted for a convertible

- 4 -

security held as collateral for a credit extended under this section, such
yegisteeeed steek regulated equity security and any? credit extended on it
i i compliance with this Part shall thereupon be treated as subject to
i
paragraph (c) of this section and not to this paragraph and the credit
extended under- this paragraph shall be reduced by an amount equal to the
maximum loan value of the security withdrawn.
(e)

Statements as to purpose of credit. - In connection with

any extension of credit secured directly or indirectly, in whole or in
part, by collateral that includes any registered regulated equity secu­
rity, every person who is subject to the registration requirement of para­
graph (a) of this section shall, prior to such extension, obtain a statement
in conformity with the requirements of Federal Reserve Form G-3 executed by
the customer and executed and accepted in good faith by such person.

Such

person shall retain such statement in his records for at least six three
years after such credit is extinguished.

In determining whether credit is

"purpose credit", such person may rely on the statement executed by the
customer if accepted in good faith.

To accept the customer's statement

in good faith, such person must (1) be alert to the circumstances surround­
ing the credit and (2) if he has any further 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.

Circumstances

which could indicate that such person has not exercised reasonable diligence
in so acquainting himself and so investigating would include, but are not
limited to, facts such as that (1) the proceeds of the credit were paid to
a broker or to a bank in connection with contemporaneous delivery of reg™
isteved regulated equity securities, whether or not payment was made against

- 5 -

delivery, (2) there were frequent substitutions of registered regulated
equity securities serving as collateral for the credit, or (3) the amount
of the credit was disproportionate, or the terms inappropriate, to the
stated purpose.
(f)

Credit extended to person subject to Regulation T. - (1)

No

lender shall extend or maintain any credit for the purpose of purchasing or
carrying any registered regulated equity security to any persen customer who
is subject to Part 220 of this Chapter (Regulation T) without collateral or
on collateral consisting of registered regulated securities (other than
exempted securities 1^ &/).

Where the credit is to be used in the ordinary

course of business of such persen customer, such credit is presumed to be
for the purpose of purchasing or carrying registered regulated equity
securities unless the lender has in his records a statement to the contrary
obtained and executed in conformity with the requirements of paragraph (e)
of this section.
(2)

The prohibition of this paragraph (f) shall not apply to a

credit which is unsecured or secured by collateral other than registered
regulated equity securities, and which is (i) made to a dealer (as defined
in § 220.2(a) of Regulation T) to aid in the distribution of securities to
customers not through the medium of a national securities exchange, or (ii)
subordinated to the claims of general creditors by a subordination agreement
approved by an appropriate committee of a national securities exchange or
by a ’satisfactory subordination agreement" as defined in paragraph (e)(7)
’
of Rule 240-15c3-l of the Securities and Exchange Commission.
(g)

Combining purpose credit extended to the same customer. -

For the purpose of this Part, except for a credit subject to paragraph (d)
of this section, the aggregate of all outstanding purpose credit extended
3/ 4/ As defined In 15 U.S.C. 78c(a)(12).

- 6 to a person customer by a lender after February 1, 1968, shall be considered
a single credit and, except as provided in paragraphs (d) and (i) of this
section, all the collateral securing such a credit, whether directly or
indirectly, in whole or in part, shall be considered in determining whether
the credit complies with this Part.
(h)

Purpose and nonpurposs credit extended to the same person. -

No lender shall after February 1, 1968, extend or arrange for the extension
of any purpose credit, or maintain or arrange for the maintenance of any
purpose credit extended after February 1, 1968, if the credit is secured
directly or indirectly, in whole or in part, by collateral that includes
any registered regulated equity security which also secures, directly or
indirectly, in whole or in part, any other credit in excess of $5,000
extended to the same customer after February 1, 1968; and no lender shall
have outstanding at the same time to the same customer both such purpose
credit and any such other credit; Provided, That the prohibitions of this
paragraph shall not apply to (i) credit extended for the purpose of pur­
chasing, constructing, maintaining, or improving a dwelling which is
occupied or to be occupied by the customer as his principal residence, and
is secured by a first lien on such dwelling; or (ii) to credit secured by
a share account or other claim acquired by the customer from the lender
independently of the credit and payable (or entitling the holder to a loan
thereon) in a dollar amount determined without regard to the market value
of the assets supporting the claim.
(i)

Purpose credit secured by both tegisfcesrod regulated equity

securities and by other collateral. - In the case of any purpose credit
extended or arranged after February 1, 1968, secured, directly or indirectly,

- 7 -

in whole or in part, by any regisfeerad regulated equity security, no other
collateral shall have any loan value in respect to such credit for the
purpose of this Part:

Provided, however, That a share account or other

claim acquired by the customer from the lender independently of the credit
and payable (or entitling the holder to a loan thereon) in a dollar amount
determined without regard to the market value of the assets supporting the
claim shall have a maximum loan value as determined by the lender in good
faith.
(j)
rule.

Withdrawals and substitutions of collateral. - (1) General

Except as permitted by the next subparagraph and by § 207.4(a), while

a lender maintains any purpose credit extended after February 1, 1968, the
lender shall not at any time permit any withdrawal or substitution of collat­
eral unless either (i) the credit would not exceed the maximum loan value
of the collateral after such withdrawal or substitution, or (ii) 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 collat­
eral withdrawn.

The retention requirement of collateral other than registered

regulated equity securities is the same as its maximum loan value and the
retention requirement of collateral consisting of registered regulated equity
securities or debt securities convertible into registered regulated equity
securities is prescribed from time to time in § 207.5 (the Supplement to
Regulation G).
(2)

Same-day substitution of collateral.- Except as prohibited

by § 207.4(a) a lender may permit a substitution of registered regulated
equity securities effected by a purchase and sale on orders executed within
the same day:

Provided, That (i) 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 in respect to the sale less the retention require­
ment in respect to the purchase, or (ii) 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 securities purchased less the
maximum loan value of the securities 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 cridit may nonetheless be increased if there is provided
additional collateral having maximum loan value at least equal to the amount
of increase, or the credit is extended pursuant to § 207.4(a).
§ 207.2

Definitions.

For the purpose of this Part, unless the context otherwise requires:
(a)

The term "person" means an individual, a corporation, a part­

nership, an association, a joint stock company, a business trust, or an
unincorporated organization.
(b)

The term "in the ordinary course of his business" means

occurring or reasonably expected to occur from time to time in the course
of any activity of a person for profit or the management and preservation
of property or in addition, in the case of a person other than an individual,
carrying out or in furtherance of any business purpose.
(c)

The "purpose" of a credit is determined by substance rather

than form.
(1)

Credit which is for the purpose, whether immediate, inciden­

tal, or ultimate, of purchasing or carrying a

registered regulated equity

security is "purpose credit", despite any temporary application of funds
otherwise.

- 9 -

(2)

to reduce or retire

indebtedness

which was originally incurred to purchase a regisfeeFed regulated

equity secu­

rity

Credit to enable the customer

isfor the purpose of "carrying" such a
(d)

Regulated equity security.

security" means any equity security — ^

-

security.
The term "regulated equity

which is (1) a registered equity

security, (2) an OTC margin stock, (3) a debt security (i) convertible with or
without consideration, presently or in the future, into a regulated equity
security, or (ii) carrying any warrant or right to subscribe to or purchase,
presently cr in the future, a regulated equity security, (4) any such warrant
or right, (5) a security issued by an investment company registered pursuant
to section 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 continuously invested
in exempted securities —! and (6) a plan, program, or investment contract
offered or sold after April 30, 1969. which provides for the acquisition both
of any securities described in this paragraph (d) and of goods, services, other
securities, or investments.
(d)(e)

Registered equity security. - (1) The term "registered

equity security" means any equity security ^
a national securities exchange, (ii)(,2)

which (i)(J-) is registered on

has unlisted trading privileges on

a national securities exchange, or £ii£)(3) is exempted by the Securities
and Exchange Commission from the operation of section 7(c)(2) of the Secu­
rities Exchange Act of 1934 (15 U.S.C. 78g(c)(2)) only to the extent nec­
essary to render lawful any direct or indirect extension or maintenance of
credit on such security.
4/ 5/ As defined in 15 U.S.C. 78c(a)(ll).
6/ Aa defined in 15 U.S.C. 78c(a)(12).

- 10

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were-a-registered-equity-security.
(?
f)

OTC margin stock.

-

(1) The term

"O TC

margin stock'1 means

stock, not traded on a national securities exchange, which the 3oard 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 respecting the stock and its issuer, and the
character and permanence of the issuer to warrant such treatment.
The Board will from time to time publish a list of OTC margin

(2)

stocks as to which the Board has made the determinations described in
subparagraph (1) of this paragraph (f).

Except as provided in subparagraph (4)

of this paragraph (j:), such stocks shall meet the requirements that:
(.
i)

The stock is subject to registration under

§ 12 (g)(1) of the Securities Exchange Act of 1934
(15 U.S.C. 781(g)(1)), or if issued by an insurance
company subject to 5 12(g)(2)(G)

(15 U.S.C. 781(g)(2)

(G)) the issuer had at least $1 million of capital and
surplus ,

- 11 -

(11)

Five or more dealers, stand willing to, and do in

fact, make a market in such stock including making regularly
published bona fide bids and offers for such stock for their
own accounts, or the stock is registered on a securities
exchange that is exempted by the Securities and Exchange
Commission from registration as a national securities exchange
pursuant to section 5 of the Act (15 U.S.C. 78e),
(iii)

There are 1500 or more holders

of record of the

stock who are not officers, directors, or beneficial owners
of

10 per cent or more of the stock,
(iv)The issuer, or a predecessor in

interest, has been

in existence for at least three years,
(v)

The stock has been publicly traded for at least six

months, and
(vi)

Daily quotations for both bid and asked prices for

the stock are continuously available to the general public ;
and shall meet three of the four additional requirements that:
(vii)

There are 500,000 or more shares of such stock

oustanding in addition to shares held beneficially by officers,
directors.or beneficial owners of more than 10 per cent of the
stock,
(viii)

The shares described in subdivision (vii) of this

subparagraph have a market value in the aggregate of at leastL
$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

- 12 -

(x)

The issuer had at least $5 million of capital,

surp1us, and undivided profits.
(3)

The Board shall from time to time remove from the list described

in subparagraph (2) of this paragraph (f) stocks that cease to:
(i)

Exist or for which the issuer ceases to exist, or

(ii)

Meet substantially, the provisions of subpara­

graphs (1) and (2) of this paragraph (f).

(4)

The foregoing notwl thstanrHn?

the Board mav. upon its own ini-

tiative, or upon application by any interested party, omit or remove any stock
that is not traded on a national spcuritles 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)

I t shall be unlawful for anv nprson f:o make, or cause to be made.

any representation to the effert

t-ho in rln d n n of a security on such list

of OTC margin stocks is evidence that the Board or the Securities and Exchange
Commission has in any wav passed upon the merits of. or given approval to such
security or any transaction therein.

Any statement, advertisement., or other

similar communication containing a reference to the Board in connection with
-_ c, . Stogks_or_sush_ 1J.st_ shall, constitute such aa unlawful_representation.
su, h
(e)(g)

(1) The term "purchase" includes any contnact to buy, pur­

chase, or otherwise acquire.
(2)

The term "sale" includes any contract to sell or otherwise

dispose of.
(£)(h)

The term "customer" includes any recipient of the credit

to whom credit is extended directly or indirectly for the use of the customer,

- 13

and also Includes any person engaged in a joint venture, or as a member of a
syndicate or a group, with the customer with respect to a purpose loan.
4g}(i)

The term "indirectly secured" includes, except as provided

in § 207.4(a)(3), any arrangement with the customer under which the customer's
right or ability to sell, pledge, or otherwise dispose of registered regulated
equity securities owned by the customer is in any way restricted as 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»f<5r-aicele£ation of
the maturity of the credit;

Provided, That the foregoing shall not appiy (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 registered regulated equity securities,
if the lender in good faith has not relied upon such securities
in the extension or maintenance of the particular credit:

or (2)

as collateral

And provided further,

That the foregoing shall not apply to stock held by the lender only in the
capacity of custodian, depositary or trustee, or under similar circumstances,
if the lender in good faith has not relied upon such securities

as collateral

in the extension or maintenance of the particular credit.
(_
j)

The term "stock" includes any security commonly known as a

stock; any voting trust certificate or other instrument representing such a
security; any security convertible with or without consideration 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.
§ 207.3

Reports and records.
(a)

Every person who is registered pursuant to 5 207.1(a) of this

Part shall within thirty 430) days following the end of each succeeding

- 14

calendar quarter file a report on Federal Reserve Form G-4 with the Federal
Reserve Bank of the district in which the principal office of the lender Is
located.
(b)

Every person who has registered pursuant to § 207.1(a) of this

Part shall maintain such records as shall be prescribed by the Board of Gov­
ernors of the Federal Reserve System to enable it to perform the functions
conferred upon it by the Securities Exchange Act of 1934.
§ 207.4

(15 U.S.C. 78).

Miscellaneous provisions.
(a)

Stock option and employee stock purchase plans. - In respect

to any credit extended and maintained by a corporation, by a lender wholly
controlled by such corporation, or by a lender which is a membership thrift
organization whose membership is limited to employees and former employees
of such corporation, its subsidiaries, or affiliates (such corporations and
such lenders are both sometimes referred to as "plan-lenders"), to an officer
or employee of the corporation, subsidiary or affiliate thereof to finance
the exercise of rights granted such officer or employee under a stock option
plan or employee stock purchase plan adopted by the corporation and approved
by a majority of its stockholders to purchase registered regulated equity
securities of such corporation, subsidiary or affiliate,
(1)

Sections 207.1(c),.(d)# (f), (g), (h), (1) and (j) of this

Part shall not apply (i) to any such credit extended to finance the exercise
of such rights granted to any named officer or employee prior to February 1,
1968, and effectively exercised by such officer or employee prior to Feb­
ruary 1, 1969, or (ii) to any credit extended prior to February 1, 1969, to
a plan-lender pursuant to a bona fide written commitment in existence on
February 1, 1968, to finance the exercise of such rights and by such

- 15 -

plan-lender from the proceeds of such credit to any officer or employee to
finance the exercise of rights granted pursuant to a stock purchase plan under
which the exercise price does not exceed 50 per cent of the market value of
the stock subject to purchase, valued as of the offering date thereof.
(2)

The restrictions imposed by § 207.1(c) and (d) and § 207.5

(the Supplement to this Part) on the maximum loan value of segisfee¥©4 regu­
lated equity securities serving as collateral for purpose credit shall not
apply to securities purchased, and serving as direct or indirect collateral
for credit extended, pursuant to such a plan, Provided, That
(i)

The entire amount of credit extended to any officer or em­

ployee pursuant to this pai?agi?apk subparagraph (2) in connection with the
exercise of rights under such plan or plans shall be considered a single
credit;
(ii)

At the time when credit is extended under a plan subject to

this pai?»g¥apk subparagraph, (A) the plan-lender computes the amount by
which the credit exceeds the maximum loan value of the collateral as pre­
scribed by § 207.5 (the Supplement to Regulation G), (the "deficiency"),
and (B) the agreement under which the credit is extended provides that except
as permitted by the proviso in 9w1
=>pa]?ag¥af»h

subdivision (iii) of this

subparagraph the officer or employee shall, in respect to such deficiency,
make equal repayments to the plan-lender at least quarterly and equivalent
to at least 20 per cent of such deficiency per annum, or such lesser amount
as the Board of Governors, upon application, may permit, for at least three
years from the extension of the credit;
(iii)

The officer or employee is not permitted under such plan or

agreement to sell, withdraw, pledge, or otherwise dispose of all or any part
of such collateral until (A) all repayments have been made for at least the

- 16 -

three-year period provided in sabparagraph-^is) subdivision (ii) of this
subparagraph and the deficiency has been repaid, or (B) as a result of the
repayments described in subdivision (ii) of this subparagraph, or of a
change in the current market value of the collateral, the maximum loan
value of the collateral, as prescribed by § 207.5 (the Supplement to
Regulation G), is at least equal to the credit which remains owing from
the officer or employee to the plan-lender, whichever shall occur first:
Provided, That this restriction need not apply where such collateral is
required to be sold to meet emergency expanses arising from circumstances
not reasonably foreseeable at the time of the extension of the credit (for
this purpose such emergency expenses shall include the death, disability,
or involuntary termination of employment of the officer or employee or some
other change in his circumstances, involving extreme hardship, not reasonably
foreseeable at the time the credit is extended.

The opportunity to realize

monetary gain is not a "change in his circumstances" for this purpose); and
(iv)

At such time as either of the conditions with respect to

sale, withdrawal, pledge, or other disposition of collateral specified in
flHfeparagraph-^iii} subdivision (iii) of this subparagraph are satisfied
the credit is thereafter treated as a credit subject to all the requirements
of this Part.
(3)

No extension of credit to a plan-lender to finance such a

plan shall be deemed to be indirectly secured by a regiafeered regulated
equity security purchased pursuant to the plan provided:

Provided. That

such security is not repledged by the plan-lender to secure such extension
of credit to the plan-lender and in no event does the person extending such
credit have recourse to such security and:

Provided further. That the

- 17 -

amount of the credit does not exceed the total amount of credit currently
extended by such plan-lender pursuant to such plan.
{fe)

tisfc-of-seewirifeiesr-- ln-defcerraining-whefeher-a-security-is

a -registered-eqtiifcy-seetH?ifey-er-a-seettricy-eetivertiible-infee-sueh-seeurifey 7
er-a-seetirifey-©§-the-k£fid-deeer£feed-in-§-2 ©?r2 {d}42 }7 -a-leBder-»ay-Fely
upem-the-latest-lisfc-ef-equifey-seeurities-regiatered-en-a-natienal-seewrities-exchange-and-9 eewrifeie9 -ef-fche-kind-described-iR-§-20 ?r2 {d}(2 }
i98tied-ky-fehe-Beard-ef-Severner8-ef-fehe-Federal-Re9erve-Sy9feeaT
{e}(b)

Extensions and renewals. - The renewal or extension 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 bythe addition of

in­

terest or service

charges on the credit or of taxeson transactions

in

connection with the credit.
{d}(c)

Reorganization or recapitalization. - Nothing in this

Part shall be construed to prohibit withdrawal or substitution of secu­
rities to enable a customer to participate in a reorganization or recap­
italization.
{e}(d)

Mistakes in good faith. - Failuretocomply with this

Part due to a mechanical mistake made in good faith in determining,
recording, or calculating any credit, balance, market price or loan value,
or other similar mechanical mistake, shall not constitute a violation of
this Part if promptly after discovery of the mistake the lender takes
whatever action is practicable to remedy the noncompliance.
^f^(e)

Arranging for credit. - A lender may arrange for the

extension or maintenance of credit by any person upon the seme terms and
conditions as those upon which the lender, under the provisions of this

*

- 18 -

Part, may himself extend or maintain such credit, but only upon such terms
and conditions, except that this limitation shall not apply with respect
to the arranging by a lender for a bank subject to Part 221 of this Chapter
(Regulation U) to extend or maintain credit on registered regulated equity
securities or exempted securities.
§ 207.5

Supplement.
(a)

Maximum loan value of Fegisfcei?ei regulated equity securities. -

For the purpose of 5 207.1, the maximum loan value of any-regiafeepfcri regulated
equity security, except convertible securities subject to § 207.1(d), 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 § 207.1(d). - For the purpose of § 207.1, the maximum loan value of any
security against which credit is extended pursuant to § 207.1(d) shall be
40 per cent of its current market value, as determined by any reasonable
method.
(c)

Retention requirement.- For the purpose of § 207.1, in the

case of a loan which would exceed the maximum loan value of the collateral
following a withdrawal of collateral, the "retention requirement" of a
regis^e^ed regulated equity security and of a security against which credit
is extended pursuant to § 207.1(d) shall be 70 per cent of its current mar­
ket value, as determined by any reasonable method.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102