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F ederal Reserve Ba n k o f D allas DALLAS, TEXAS 75222 Circular No. 72-72 April 13, 1972 INTERPRETATION OF REGULATION T (Tax Shelter Programs) To All Banks, Broker/Dealers, and Others Concerned in the Eleventh Federal Reserve District: The Board of Governors of the Federal Reserve System announced on March 23, 1972, the adoption of an interpretation of Regulation T prohibiting a broker/dealer from making instal ment sales of certain tax shelter programs that provide for payment in instalments. The interpretation is printed on the reverse of this circular. Yours very truly, P. E. Coldwell President This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM CREDIT BY BROKERS AND DEALERS INTERPRETATION OF REGULATION T SECTION 220.124 — INSTALMENT SALE OF TAX-SHELTER PROGRAMS AS “ARRANGING” FOR CREDIT. (a) The Board has been asked whether the sale by brokers and dealers of tax-shelter programs containing a provision that payment for the pro gram may be made in instalments would constitute “arranging” for credit in violation of Part 220. For the purposes of this interpretation, the term “tax-shelter program” means a program which is required to be registered pursuant to section 5 of the Securities Act of 1933 (15 U.S.C. § 77e), in which tax benefits, such as the ability to deduct substantial amounts of depreciation or oil explora tion expenses, are made available to a person in vesting in the program. The programs may take various legal forms and can relate to a variety of industries including, but not limited to, oil and gas exploration programs, real estate syndications (ex cept real estate investment trusts), citrus grove developments and cattle programs. “A creditor [broker or dealer] may arrange for the extension or maintenance of credit to or for any customer of such creditor by any person upon the same terms and conditions as those upon which the creditor, under the provisions of this part, may himself extend or maintain such credit to such customer, but only such terms and conditions (emphasis supplied) . . .” (d) In the case of credit for the purpose of purchasing or carrying securities (purpose credit), § 220.8 of the regulation (the Supplement to Regulation T) does not permit any loan value to be given securities that are not registered on a national securities exchange, included on the Board’s OTC Margin List, or exempted by statute from the regulation. (e) The courts have consistently held invest ment programs such as those described above to be “securities” for pupose of both the Securities Act of 1933 and the Securities Exchange Act of 1934. The courts have also held that the two statutes are to be construed together. Tax-shelter programs, accordingly, are securities for purposes of Regulation T. They also are not registered on a national securities exchange, included on the Board’s OTC Margin List, or exempted by statute from the regulation. (b) The most common type of tax-shelter pro gram takes the form of a limited partnership. In the case of the programs under consideration, the investor would commit himself to purchase and the partnership would commit itself to sell the interests. The investor would be entitled to the benefits, and become subject to the risks of owner ship at the time the contract is made, although the full purchase price is not then required to be paid. The balance of the purchase price after the down payment usually is payable in instalments which range from one to ten years depending on the pro gram. Thus, the partnership would be extending credit to the purchaser until the time when the latter’s contractual obligation has been fulfilled and the final payment made. (f) Accordingly, the Board concludes that the sale by a broker/dealer of tax-shelter programs containing a provision that payment for the pro gram may be made in instalments would constitute “arranging” for the extension of credit to purchase or carry securities in violation of the prohibitions of §§ 220.7(a) and 220.8 of Regulation T. (c) With an exception not applicable here, § 220.7(a) of Regulation T provides that: 3/23/72