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F ederal







Circular No. 73-17^+
July 17, 1973

( C r e d i t i n C o n n e c tio n w ith I n v e s tm e n t C o n t r a c t s )

To A l l Banks, B r o k e r / D e a l e r s , and O th ers Concerned
i n t h e E l e v e n t h F e d e r a l R eserv e D i s t r i c t :

The Board o f G overnors o f t h e F e d e r a l R eserv e System
p r o p o s e s t o amend i t s R e g u l a ti o n T " C r e d i t by B ro k e rs and D e a le rs "
t h a t would w ith d ra w p e r m i s s i o n f o r b r o k e r s o r d e a l e r s t o s e l l
c e r t a i n k in d s o f in v e s t m e n t c o n t r a c t s on c r e d i t .
A copy o f t h e p r e s s r e l e a s e and p r o p o s e d amendment i s
a tta c h e d .
I n t e r e s t e d p e r s o n s s h o u ld su b m it r e l e v a n t d a t a , views o r
argu m en ts t o t h e S e c r e t a r y , Board o f G overnors o f t h e F e d e r a l
R eserv e System, W ashington, D. C. 20551? t o be r e c e i v e d no l a t e r
t h a n August 10, 1973.
Yours very truly,
P. E. C o ld w e ll,


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For immediate release

July 5, 1973

The Board of Governors of the Federal Reserve System announced today
a proposed amendment to its Regulation T -- extension of credit on securities
by brokers or dealers -- that would withdraw permission for brokers or dealers
to sell certain kinds of investment contracts on credit.
The programs in question involve sales of property together with a
separate management contract.

Examples include sales of shares in cattle

herds, citrus groves and a type of resort condominium where the purchaser buys
a hotel room but agrees to rent it for part of each year, through centralized

Both the property purchase and the management services may in­

volve credit in these arrangements.

The Board has held that, in most cases,

where the credit feature of such sales is an integral part of a "program" of
investment, broker/dealers may not arrange such credit under Regulation T.
However, the Board has previously interpreted its rule as not applying where
a property sale and the management contract were separate items, and any
credit involved is connected with the property and not with the contract.
The proposed amendment, if adopted, would have the effect of negating
that interpretation, and would provide that credit extended on any part of
such a program would be deemed to have been extended on the whole program.
This would make it impermissible for securities brokers or dealers to arrange
such credit, although issuers of the investment program who are not brokers or
dealers could continue to sell the programs on credit.
The Board invited comment, to be sent to the Secretary of the Board,
up to August 10, 1973.
A copy of the proposal is attached.

- 0 -

[Reg. T]
Credit in connection with Investment contracts

Pursuant to authority of Section 7 of the Securities Exchange
Act of 1934 (15 U.S.C. 78g) notice is hereby given that the Board of
Governors p r o v e s

to add paragraph (1) to § 220.6 of Regulation T,

"Credit by Brokers and Dealers" (12 CFR 220.6) to provide that credit
extended on any part of an investment contract will be deemed to be
extended on the whole security.

The proposed new paragraph is set forth

SECTION 220.6 —







Investment contract securities.

Credit for the purpose

of purchasing or carrying any part of an investment contract security (for
example, the cattle ownership portion of a program to own and feed cattle,
or the condominium ownership part of a program to own and rent a unit
through a rental pool) shall be deemed to be credit on the entire security.
The purpose of the proposed amendment is to negate previous
Board interpretations which stated that broker/dealers would not be
deemed to be arranging credit w hich they could not extend, as px-obihited
by § 220.7(a) of this Part, when they sold investment contracts which
included credit extended solely on the real estate or chattel part of
the contract.

If adopted, this amendment will provide uniform treatment, for
credit purposes, of every security as an indivisible whole in a manner
consistent with that followed by the Securities and Exchange Commission
in its area of regulation.
Interested persons are invited to submit relevant data, views,
or arguments concerning this proposal.

Any such material should be

submitted in writing to the Secretary, Board of Governors of the Federal
Reserve System, Washington, D. C.
August 10, 1973.

20551, to be received not later than

Such material will be made available for inspection

and copying upon request, except as provided in § 261.6(a) of the Board's
Rules Regarding Availability of Information.
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)).
By order of the Board of Governors, July 3, 1973.

(Signed) Chester B. Feldberg

Chester B. Feldberg
Secretary of the Board

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