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federal

reserve

Ba n k

DALLAS, TEXAS

of

Dallas

75222

Circular No. 7 b -72
March 20, 197*+

Interpretation of Regulations G and U
(Credit in Connection with Insurance Premium Funding Companies)

To All Banks, Brokers/Dealers, Regulation G-Registrants
and Others Concerned in the Eleventh Federal Reserve District:

The Board of Governors of the Federal Reserve System
has issued an interpretation of margin Regulation G, "Securities
Credit By Persons Other Than Banks, Brokers, or Dealers" and
Regulation U, "Credit By Banks For The Purpose Of Purchasing Or
Carrying Margin Stocks" dated February 27, 197*+ in the format of
questions and answers on the applicability of margin requirements
to credit extended in connection with insurance premiums funding
p r o g r am s .
The text of the interpretation as it appeared in the
Federal Register on March 11, 197*+ is reproduced in this attach­
ment for your information.

Yours very truly,
P. E. Coldwell,
President
Attachment

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

the guidelines. Under a typical insurance throughout th e day of purchase of the fund
premium funding program, a borrower shares. At any other tim e, th e fund shares
be valued at no higher than the redemp­
acquires m utual fund shares for cash, or may price.
takes fund shares which he already owns, tion Q : A program provides for an annual in­
2.
and th en uses the loan value (currently surance premium of $300 and- Interest
40 percent as set by the Board) to buy charged in advance in th e am ount of $24 for
insurance. Usually, a funding company a total extension of credit of $324. What is
(the issuer) will sell both the fund shares the collateral requirement?
A: $810. The collateral requirement may be
and th e insurance through either inde­
determined (and
pendent broker/dealers or subsidiaries or following formula: proved) by applying the
affiliates of the issuer. A typical plan may
run for 10 or 15 years with annual in ­ Extension of credit X collateral requirement
percentage=collateral requirement X maxi­
surance premiums due. To illustrate, as­
mum loan valu e= exten sion of credit
suming an annual insurance premium of
or
$300, the participant is required to put
$324 X 250% =$810X 40% =$324
up m utual fund shares eqivalent to 250
percent of the premium or $750 (the 250% collateral requirement percentage
($750x40 percent loan value equals $300 is determ ined by the 40% special maximum
the am ount of the insurance premium loan value)
3. (a) Q: Using the example in question
which is also the am ount of the credit
number 2, assume th at fund shares are pur­
extended).
chased on the same day th e credit of $324 is
(b)
These guidelines also (1) clarify
an earlier 1969 Board interpretation to extended. On what basis m ay the fund shares
valued?
show th a t the public offering price of beA: The fund shares may be valued at no
m utual fund shares (which includes the higher than the public offering price. Ac­
front load, or sales commission) may be cordingly, the customer would purchase fund
used as a measure of their current m ar­ shares w ith a public offering price of at least
ket value when the shares serve as col­ $810.
(b) Q: Assume instead that under the
lateral on a purpose credit throughout
arrangements the
shares are
the day of the purchase of the fund program in or are deposited fund e accoxmt.
already
in th
shares, and (2) relax a 1965 Board posi­ The shares may have been purchased prior
tion in connection with accepting pur­ to the actual date of the extension of credit,
pose statem ents by mail. I t is the Board’s either in a lump am ount, say a m onth or so
Title 12— Banks and Banking
view th a t when it is clearly established earlier, or as m ight apply in a m onthly in ­
CHAPTER II— FEDERAL RESERVE SYSTEM th a t a purpose statem ent supports a p u r ­ vestm ent plan. On what basis may the fund
pose credit then such statem ent executed shares be valued?
SUBCHAPTER A— BOARD OF GOVERNORS OF
A: The fund shares may be valued at no
TH E FEDERAL RESERVE SYSTEM
by the borrower may be accepted by mail,
than the redem ption price.
[Regs. G & U]
provided it is received and also executed higher the customer would have to Accord­
ingly,
deposit
PART 207— SECURITIES CREDIT BY PER­ by tiie lender before the credit is ex­ in his account, if the 6hares are n ot already
in the account, fund shares w ith a net asset
SONS OTHER THAN BANKS; BROKERS tended.
value «f a* least $810.
4. Q: Is the addition of Interest t« the
outstanding debt i s a program treated as a
new extension of credit which m ust be
margined?
For text of this interpretation, see
A: The margin regulations do not require
§ 207.108 of this subchapter.
th at interest added to a debt be treated as
a new extension of credit if the am ount of
Q uestions and answers in connection with
§ 2 0 7 .1 0 8 A p plicab ility o f M argin R e­ th e credit provisions in § 207.4(f) Regulation the credit is not otherwise Increased. By
qu irem en ts to Credit in co n n ection G, and § 221.3 (x) Regulation U, as they apply contrast, interest charged In advance on new
w ith In su ran ce P rem iu m F u n d in g to the combined purchase of m utual fund debt forms part of the new credit.
The follow ing illustrates the first few years
shares and insurance (usually referred to as
P rogram s.
"insurance premium funding program” and of a 10-year program commencing July 1,
(a)
The Board has been asked num er­som etim es referred to herein as '‘program”) 1970 th a t provides for annual insurance
ous questions regarding purpose credit in February 1974 Board of Governors of the premium loans of $300 each w ith Interest at
the rate of 8% per annum.
connection w ith insurance premium Federal Reserve System.
1.
Q: At w hat price may m utual fund In Illustration A, Interest Is charged- In
funding programs. The inquiries are in­
cluded in a set of guidelines in the form at shares be valued when they serve as collat­ advance, whereas in Illustration B, Interest
of questions and answers which follow. A eral for an extension of credit in connection Is added at the end of each year. The Illus­
glossary of terms customarily used in w ith an Insurance prem ium funding pro­ trations do n ot Include service charges, cus­
todial fees or
inistration fees which
connection w ith insurance premium gram?The fund shares may be valued a t no would, of course,admconsidered in an actual
A:
be
funding credit activities is included in higher than the public offering price program.

OR DEALERS
PART 221— CREDIT BY BANKS FOR THE
PURPOSE OF PURCHASING OR CARRY­
ING MARGIN STOCKS
Credit in Connection With Insurance
Premium Funding Programs

§ 2 2 1 .1 2 2 - A p plicab ility o f M argin R e­
qu irem en ts to C redit in co n n ection
w ith In su ran ce P rem iu m F u n d in g
P rogram s.

FEDERAL REGISTER, VOL. 39, NO. 48— MONDAY, MARCH 11, 1974

RULES AND REGULATIONS
tial margin requirements may be applied
against a new extension of credit.
8. (a) Q: Using Illustration A in th e an­
D a te
extensio n
swer to question number 4 wherein interest
is charged in advance, assume m utual fund
shares w ith a redemption value of $2,000100
Ju ly 1,1970 Insurance prem ium _________ ___________________ _____ _______________
$800.00
were in the account and collateralized the
24.00
Interest ($300X8%)............................................... ......................................... .........
extension of credit as of July 1, 1971 In the
am ount of $349.92. What is the am ount of
C o llate ral w ith a v ain e of $810 Is req u ired for th is am o u n t b ased on In itia l
margin requirements. . ______ ____________________________ ________ _______ _
$324.00 excess collateral based on initial margin re­
July 1,1971 Interest on total prior debt ($324X8%)__________________________ ____-...................
25.92 quirements, if any, which could be applied
against the July t, 1971' extension of credit?
Make computation to determine whether.there is any excess collateral, based
A: $1,125.20. Proof:
on initial margin requirements and valued at redemption price of fund
shares, on this amount........................... ......... .............. _................................................__
349.92
$34 9 .9 2 X 250% -$ 8 7 4 .8 0 X40=$349.92
(No additional collateral required even though the account is in a so$2,000.00—$874.80 = $1,125.20.
called restricted status but above program's minimum collateral
(b) Q: Would th is excess collateral based
requirements.)
on initial margin requirements be sufficient
New extension of credit:
Insurance premium.......... -................... ........... ................... „........................
300.00 _________
to margin th e July 1, 1971 extension of credit
Interest thereon...... ...................................................... .................................
24.00 ................... in the am ount of $324?
A: Yes. The collateral requirem ent on the
Collateral with a value of $810 is required for this amount based on initial
new extension of credit would be $810
margin requirements; any excess collateral based on initial margin require­
ments may be applied toward this collateral requirement............................................. 324.00 ($324X250% =$810X 40 % =$324) and would
Total____________________________________________ , __________ ______
673.92 leave excess collateral based on initial margin
53.91 requirements in the am ount of $315.20
July 1,1972 Interest on total prior debt ($673.92X8%)............ , ..................................... ........................
($1,125.20 —$810.00=$315.20).
Make computation to determine whether there is any excess collateral, based
(c) Q: Could the excess collateral based on
on initial margin requirements and valued at redemption price of fund
shares, on this -amount.................... ...... ............................... ......... ................. .................
727.83 initial requirements computed as of July 1,
1971, in the am ount of $315.20 be pre­
(No additional collateral required even though account may be in a soserved and applied against a subsequent ex­
called restricted status, but above program’s minimum collateral
requirements.)
tension of credit, presumably at the tim e
New extension of credit:
of the next anniversary of the program on
Insurance premium___ ____ ___________________________ _________
300.00
July 1,1972?
Interest thereon_________________ _________ ____________________
24.00
A: No. Regulations G and U do not pro­
Collateral with a value of $810 is required for this amount based on initial
vide for the recapture of previously com ­
margin requirements; any excess collateral based on initial margin require­
324.00 puted excess collateral. The account m ust be
ments may be applied toward this collateral requirem ent.............. ...............................
refigured as of any given point in tim e based
Total......................................... ........... ......................................................... ..............
1,051.83 upon th e redemption value of the m utual
fund shares and the debt in the account ou
such date. Prior com putations of the amount
I l l u s t r a t i o n B . —Interest added at end of each year
of excess collateral are irrelevant.
Date
Total
9. Q: A participant’s account is in a socalled restricted status. The participant pur­
chases m utual fund shares on a m onthly in ­
vestm ent basis in an am ount intended to
July 1,1970 Insurance premium—collateral with a value of $750 is required for this amount based on
initial margin requirements___________________________________________________ $300.00
equal V of 250% of the am ount of the an­
12
July 1,1971 Interest ($300X8%)...................................................................... ........................................... .
24.00 nual premium. Assuming the anniversary
date in his program is July 1, may he be as­
Make computation to determine whether there is any excess collateral, based on initial mar­
gin requirements and valued at redemption price of fund shares, on this amount________ 324.00 sured that fund shares purchased between
New extension of credit: Insurance premium—collateral with a value of $750 is required for
July 1, 1972 and June 30, 1973, for example,
this amount based on initial margin requirements; any excess collateral based on initial
margin requirements may be applied toward this collateral requirement______________ 300.00 will be sufficient t6 margin his July 1, 1973
extension of credit?
T otal____ ____ ____ ___________________________ __________ ____ ________ 624.00
A: Not necessarily. Unless such fund
July 1,11172 Interest ($624X8%)........ ................... .............................................. ............................................
49.92 shares purchased between July 1„ 1972 and
June 30, 1973 have been deposited in a sep­
Make computation to determine whether there is any excess collateral, based on initial
margin requirements and valued at redemption price of fund shares, on this amount____ 673.92 arate (for Regulation U purposes) or escrow
New extension of credit: Insurance premium—collateral with a value of $750 is required for
(for Regulation G purposes) account for the
this amount based on initial margin requirements; any excess collateral based on initial
margin requirements aiay be applied toward this collateral requirement_______________ 300.00 purpose of being deposited in to the cus­
tom er’s loan account as collateral to margin
Total___________ ____ _______________________ ______________ -.___________ 973.92 the July 1, 1973 extension of credit, the reg­
ular loan account would include the shares
5.
Q: Using Illustration A I n answer to cess collateral based on initial margin purchased in a m onthly investm ent plan.
Thus, the participant may find when the
question number 4 wherein interest is requirements?
charged in advance, assume m utual fund
A: There is no excess collateral in the account is refigured that it is in a so-called
shares w ith a redem ption yalue in th« account. In fact, the account is in a so-called restricted status w ith Insufficient excess
collateral in the account to margin! the new
am ount of $1,050 were in th e account and restricted status in the am ount of $174.80.
extension of credit. The account may be
Proof:
collateralized an extension of credit as of
restricted for a number of reasons. The re­
July 1, 1971 in the am ount of $349.92. W hat
$349.92X250 %=$874.80 - $700.00=$ 174.80
7.
(a) Q: Same as question number 6.dem ption value of the fund shares serving as
is the am ount of excess collateral based on
initial margin requirements, If any, which Assume the program prospectus requires, for collateral in the account may have fallen; or
could be applied against the July 1, 1971 maintenance purposes, th at fund shares the fund shares purchased on a m onthly in ­
extension of credit in the am ount of $324?
pledged as collateral m ust always have a re­ vestm ent plan m ight not be sufficient to
dem ption value at least equal to 150% of margin the July 1, 1973 extension of credit.
A: $175.20. Proof:
debt. On July 1. 1971 with a debt of $349.92 Unless the redemption value of such fund
$349.92 X 250% =$874.80 X 40% =$349.92
shares purchased during the preceding 12Redemption value of fund shares. $1,050.00 and fund shares with a redemption value of m onth period is equal to at least 250% of
$700.00, did the custom er’s account have
Am ount that would be needed to
any excess collateral based on m aintenance the new credit at the time it is extended on
m aintain in itial collateral re­
July 1, 1973, additional fund shares m ust be
quirem ents ___________________
874.80 requirements?
A: Yes. The account had excess collateral supplied to properly collateralize the July 1,
based on m aintenance requirements in the 1973 extension of credit. (Of course, the
Excess collateral based on initial
customer would be required to supply no
175.20 am ount of $175.12.
r eq u ire m en ts_________________
more th an is needed to support the new ex­
Proof:
This excess collateral could sup­
tension of credit.)
$349.92 X 150 %=$524.88
port new credit in th e am ount
Ilhistration
$700.00—$524.88 = $175.12
of ($175.20xmaxlmum loan val­
(b)
Q: May the excess collateral based on
ue 40%) _____________________
70.80
On 7/1/73 the account stands as follows:
m aintenance requirements in th e am ount of
Redemption value of fund shares in
6.
Q: Same as question number 5 except
account, including shares pur­
th at the m utual fund shares in the account $175.12 be applied to margin the July 1, 1971
extension of credit in the am ount of $324?
chased w ithin th e latest year under
have a redemption value of $700.00 on July 1,
m onthly investm ent plan_________$3, 500
1971. W hat Is the am ount. If any, of the ex­
A: No. Only excess collateral based on ini­
I ll u s tr a ti o n A .—In te re s t ch w ged ta ad v a n ce

JLnnnnI
T o ta l d e b t
of c re d it

FEDERAL REGISTER, VOL. 3 9 , NO. 4 8 — MONDAY, MARCH 11, T974

RULES AND REGULATIONS
Previous debt_____________________ 3,000
New extension of credit_____ _____
324
In itia l collateral requirem ent:
(D ebt) $2,000 X (Initial collateral re­
quirem ent
percentage)
250%
= (Initial collateral requ irem ent)_$5,000
Less: Redem ption value of fu n d
shares in account_______________ 8,500
Am ount of restriction—based on
in itial collateral requirem ent_____ $1,500
Therefore, additional fund shares In
th e am ount of 9810 ($324x250% )
m ust be supplied to m argin a new
extension of credit (n et offering
price may be used If fu n d shares are
purchased on th e same day as th e
extension of c re d it).
T he account would th e n stan d as follows:
Value of fund shares_______________ $4,310
T otal d ebt_______________________I 2,324
In itial collateral requirem ent $2,324
X 250% = ______________________ 5,810
A ccount would still be In a so-called
restricted statu s based on in itial
m argin requirem ents b u t Regula­
tions would n o t require custom er
to supply additional m argin.
M aintenance collateral requirem ents:
$2,324X 150% =___ „______________ $3,486
A ccount would be above program
m aintenance requirem ents.
10. Q: A program Issuer analyzes cus­
tom ers’ accounts a m onth or so prior to th e
anniversary date of th e program s to deter­
mine w hether there is any excess collateral
based on in itial m argin requirem ents In th e
accounts and w hether additional fun d shares
w ill be required to m argin th e forthcom ing
extensions of credit. M ust th e issuer refigure
each account when th e credit is extended?
A: Yes. A prelim inary com putation would
n o t necessarily assure th a t a forthcom ing
extension of credit will be m argined prop­
erly. For example, even though the account
may appear to be m argined properly and
have sufficient excess collateral a t th e tim e
of th e prelim inary analysis, a decline In th e
value of th e fu nd shares before th e credit
is extended could cause th e custom er’s ac­
co unt to become restricted, or have Insuf­
ficient excess collateral in th e account to
m argin th e new extension of credit entirely.
Accordingly, th e analysis would have to be
updated on th e basis of th e cu rren t m arket
value of th e fund shares In th e account w hen
th e credit te extended.
If th e preftfcntaary analysis took in to con­
sideration any and all an ticipated charges
incidental to th e account and th e redem p­
tio n price of th e fund shares did n o t decline
between th e tim e of th e analysis an d th e
date a t th e extension of credit, of course, no
fu rth er adjustm ent of th e account would be
required a t th a t tim e.
11. Q: A prospectus furnished to th e p ar­
ticip an t describes a program w hich provides
for only th e annual acquisition of insurance
on credit and does n o t include a feature per­
m itting insurance prem ium s to be paid w ith
cash, for exam ple (to prevent lapsing). The
p articip an t’s account Is in a so-called re­
stricted status. At th e tim e of th e scheduled
annual review of the program , th e p artici­
p a n t finds th a t he is unable to purchase su f­
ficient fu nd shares to collateralize a new ex­
tension of credit based on th e insurance
prem ium for a fu ll year. May th e issuer allow
th e p articip an t to renew th e insurance por­
tio n of his program for less th a n one year,
and thereby extend new credit on a quarterly
or sem i-annual basis, still applying th e spe­
cial m axim um loan value set fo rth in th e reg­
u lations on w hatever fu n d shares may be
available?

A: No. The special m axim um loan value dividing th e n e t assets of th e fund by th e
provision set forth in Regulations G and U Is to ta l num ber of shares outstanding. T he re­
available only for an extension of purpose dem ption price Is som etim es referred to as
credit provided for in a program registered th e bid price.
R estricted account—An account In which
w ith th e Securities and Exchange Commis­
sion under th e Securities Act of 1933 (15 th e debt exceeds th e m axim um loan value of
U.S.C. 77). Accordingly, th e frequency of th e th e collateral. In connection w ith an in su r­
extensions of credit m ust conform w ith th e ance prem ium funding program, It may also
be defined as an account In which th e col­
program.
12.
Q: May an issuer accept by m all a p u r­ lateral requirem ent exceeds th e redem ption
pose statem ent in connection w ith a program , value of th e fund shares in th e account.
In terp rets and applies 12 CFR 207.4(f) and
provided th e particip an t has properly com­
pleted th a t p a rt of th e statem en t which he 12 CFR 221.3(x).
Is required to complete?
By order of the Board of Governors,
A: Yes. Since all credit in connection w ith
such program s is purpose credit, a face-to- February 27,1974.
face m eeting between the Issuer and th e par­
[s e a l]
C h e s te r B. F e ld b e rg ,
ticip a n t for th e purpose of accepting such
Secretary of the Board.
statem ent is n o t essential.
[FR Doc.74-5309 Filed 3-8-74;8:45 am]
Glossary
Far th e purpose of these guidelines th e
following term s are Intended to represent
term inology commonly used In connection
w ith tnsuranoe prem ium funding program s as
well as Regulations O and U and have th e
following m eanings:
Collateral requirem ent—Expressed In dol­
lars, th e collateral requirem ent. In th e form
of m utu al fund shares valued a t eith er th e
public offering price or th e redem ption price,
is th e sum of th e am ount of th e extension
of credit (the debt) X the collateral require­
m ent percentage.
Collateral requirem ent percentage—T his is
determ ined by dividing th e m axim um loan
value percentage into 100% (100% -5-40% spe­
cial m axim um loan value=250% collateral
requirem ent percentage).
Excess collateral—The am ount of collateral
In an account, valued a t redem ption price,
In excess of th e m inim um required to m eet
eith er in itial or m aintenance m argin require­
m ents.
In itia l m argin requirem ent—In th e case of
insurance prem ium funding credit, a cus­
tom er p u ts up m argin in th e form of m utual
fluid shares. The am ount of th e requirem ent
Is determ ined by taking th e am ount of th e
extension of credit x th e collateral require­
m ent percentage.
M aintenance margin requirem ent—T his Is
th e m inim um value of m utual fund shares
in an account, valued a t redem ption prloe,
pledged to secure th e extension of credit
which m ust be m aintained a t all tim es under
contract w ith th e issuer, n o t because of a
Board requirem ent. The am ount of m ainte­
nance m argin, som etimes referred to as m ini­
m um equity requirem ent, is set fo rth by th e
lender in th e prospectus.
UttKimum loan value—The Maximum loan
value Is th e maximum am ount of credit
which th e lender may extend on m utual fu n d
shares. A special maximum loan value of 40%
is set fo rth in th e m argin regulations by th e
Board of Governors of th e Federal Reserve
System.
Prospectus—This Is th e abbreviated form
of th e R egistration S tatem ent on th e in su r­
ance prem ium funding program security re­
quired to. be filed by th e Issuer in accordance
w ith th e Securities Act of 1933. T he pros­
pectus m ust be presented to each prospec­
tive participant in th e program.
Public offering price—T his represents the
to tal cost to the Investor in m utual fund
shares and includes th e sales commission or
fro n t load, som etimes referred to as th e asked
price.
R edem ption price—T his is usually the n et
asset value of m utual fund Shares which th e
Investor would receive if he liquidated such
fund shares. (Some broker/dealers, i t Is u n ­
derstood, may Impose a sm all service charge
upon liquidation if, for example, th e fund
Shares were n o t purchased through th e m ).
H ie actual per share value Is arrived a t by

FEDERAL REGISTER, VOL 39, NO. 4 8 — MONDAY, MARCH 11, 197v
4

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