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F ed er a l R eser ve Ba n k o f D allas
DALLAS, TE X A S
75222
Circular No. 72-227
October 12, 1972
AMENDMENT TO REGULATIONS T, U AND
SUPPLEMENT TO REGULATION U
(Special Insurance Premium Funding Account
and Exemption from Margin Requirements
on Certain Credit Extended, to So-Called
Block Positioners and ThirdMarket Makers)
To All Member Banks and Others Concerned,
in the Eleventh Federal Reserve District:
On September 5, 1972, the Board of Governors of the Federal
Reserve System adopted amendments to Regulation T, Section 220.b. This
amendment is concerned with the special insurance premium funding account.
To be effective October l6 , 1972, the Board has adopted amend
ments to Regulation T, Regulation U and. Supplement to Regulation U. These
amendments will exempt from margin requirements certain credit extended to
so-called, "block positioners" and. third-market makers.
The Board’s amendments, which also apply new reporting require
ments to exchange specialists, were adopted simultaneously with registration
and reporting requirements imposed by the Securities and. Exchange Commission
in this field.
Block positioners are securities firms that stand ready to hold
amounts of stock for their own account sufficient to facilitate the sale
or purchase by their customers--primarily institutions--of quantities too
large to be absorbed by normal exchange transactions.
The minimum block of stock that could, qualify for the exemption
from margin requirements would have a market value of $200,000. A block
would also have to be sold, by the block positioner within 20 business days
although limited, extensions of 5 days at a time could, be allowed by the
stock exchanges or the National Association of Securities Dealers.
Third-market makers are firms that make a market off the exchanges
in stocks that are listed for exchange trading.
Under the new amendments to Regulations T and U stock exchange
specialists will be required to report block transactions acquired on exempt
credit to the Board.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
Regulations T and U pertain to security credit by brokers and
dealers and banks, respectively.
A copy of the Board's amendments is attached.
Yours very truly,
P. E. Coldwell,
President
Attachment
BOARD OF GOVERNORS OF THE FEDERAL RESERVE BANK
AMENDMENTS
REG U LA T IO N T f
Effective Septem ber 5, 1972, section
(k) is am ended to read as follows:
220.4
S EC T IO N 220.4— SPE C IA L A C C O U N T S
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(k ) Special insurance premium funding ac
count. In a special insurance prem ium funding ac
count a creditor may arrange fo r the extension or
m aintenance of credit, not in excess of the p re
miums on the insurance policy (plus any applica
ble in terest), on a security issued by an investment
com pany registered p ursuant to section 8 of the
Investm ent Com pany A ct of 1940 (15 U.S.C.
8 0 a-8 ) that serves as collateral under a plan,
program , or investment contract registered with
the Securities and Exchange Commission under
the Securities A ct of 1933 (15 U.S.C. 77), that
provides for the acquisition both of a security
issued by such investment com pany and of insur
ance: P r o v i d e d , T hat such credit is extended or
m aintained by a lender subject to P art 207 of
this C hapter (Regulation G ) or a bank subject to
P art 221 of this C hapter (Regulation U ) . A cred
itor arranging credit in a special insurance p re
mium funding account shall not extend, arrange,
or m aintain credit in the general account or any
other special account in §220.3 and this section,
except for transactions involving the purchase of
shares, in the special cash account described in
paragraph (c) of this section, in investment com
panies which are so registered.
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Effective October 16, 1972, paragraph (g) of
section 220.4 is am ended as follows:
S EC T IO N 220.4— S PE C IA L A C C O U N T S
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(g) Specialist’s account. (1 ) In a special ac
count designated as a specialist’s account, a cred
itor m ay effect and finance, fo r any m em ber of a
national securities exchange w ho is registered and
acts as a specialist in securities on the exchange,
such m em ber’s transactions as a specialist in such
securities, or effect and finance, for any joint ven
ture in which the creditor participates, any trans
actions in any securities of an issue with respect to
which all participants, o r all participants other
than the creditor, are registered and act on a n a
tional securities exchange as specialists.
(2 )
Such specialist’s account shall be subject to
the same conditions to w hich it w ould be subject
if it w ere a general account except that if the spe
cialist’s exchange is a national securities exchange
which requires and submits to the Board of G ov
ernors of the Federal Reserve System reports suit
able for supplying current inform ation regarding
specialist’s use of credit pursuant to this paragraph
(g ), the requirem ents of § 2 20 .6 (b ) regarding
joint ventures shall not apply to such accounts and
the m axim um loan value of a registered security in
such account (except a security that has been
identified as a security held for investment p u r
suant to a rule of the Com missioner of Internal
Revenue (Regs, section 1-1236-1 ( d ) ) ) shall be
as determ ined by the creditor in good faith.
t For this Regulation to be complete as amended effective October 16,
1972, retain:
1) Printed Regulation Pamphlet containing Regulations G, T, U and
X dated November 1971.
2) Amendment effective May 15, 1972.
3) Amendment effective September 18, 1972.
4) Supplement effective September 18, 1972.
5) This Slip Sheet.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE BANK
AMENDMENTS
R EG U LA TIO N U t
Effective O ctober 16, 1972, paragraph ( a ) , ( o ),
( w )> (y) and (z) of section 221.3 is am ended as
follows:
SEC T IO N 221.3— M ISC E LL A N E O U S
PRO V ISIO N S
quires and submits to the Board of G overnors of
the F ederal Reserve System reports suitable for
supplying current inform ation regarding special
ists’ use of credit pursu an t to this section.
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(w ) OTC market maker exemption. (1 ) In the
case of credit extended to an O TC m arket maker,
as defined in subparagraph (2) of this paragraph
secured directly or indirectly by any stock, the
(w ), for the purpose of purchasing or carrying an
bank shall obtain and retain in its records for at
O TC m argin stock in order to conduct the m arketleast 3 years after such credit is extinguished a
m aking activity of such a m arket maker, the m ax
statem ent in conform ity with the requirem ents of
im um loan value of any O TC m argin stock (ex
Federal Reserve F o rm U -l executed by the re
cept stock that has been identified as a security
cipient of such extension of credit (sometimes re
held for investment pursuant to a rule of the C om
ferred to as the “custom er” ) and executed and
missioner of Internal Revenue (Regs, section 1
accepted in good faith by a duly authorized officer
1236-1 ( d ) ) ) shall be determ ined by the bank in
of the bank prior to such extension: P r o v i d e d ,
good faith: P r o v i d e d , T h at in respect of each
T hat this requirem ent shall not apply to any credit
such stock the OTC m arket m aker shall have filed
described in paragraphs ( o ), (w ), ( y ), or (z) of
with the Securities and Exchange Com mission a
this section or § 221.2 of this p art except for credit
notice of his intent to begin or continue such
described in paragraphs 2 2 1 .2 (f), (g ), and (h)
m arket-m aking activity (Securities and Exchange
extended to persons who are not brokers or dealers
Commission Form X-17A -12 ( 1 ) ) and all other
subject to P art 220 of this C hapter (Regulation
reports required to be filed by m arket m akers in
T ) . In determining whether or not an extension
O TC margin stock pursuant to a rule of the Com
of credit is fo r the purpose specified in § 221.1 or
mission (R ule 17a-12(17 C F R 2 4 0 .1 7 a-1 2 )), shall
for any of the purposes specified in § 221.2 or
not have ceased to engage in such m arket-m aking
this section the bank may rely on the statement
activity, and shall have a reasonable average rate
executed by the custom er if accepted in good faith.
of inventory turnover in such stock: A n d p r o v i d e d
To accept the custom er’s statem ent in good faith,
f u r t h e r , T hat the bank shall obtain and retain in
the officer m ust (1) be alert to the circumstances
its records for at least 3 years after such credit is
surrounding the credit and (2) if he has any in
extinguished a statem ent in conform ity with the
form ation which would cause a prudent m an not
requirem ents of F ederal Reserve F o rm U-2, ex
to accept the statem ent w ithout inquiry, have in
ecuted by the O TC m arket m aker who is the
vestigated and be satisfied that the custom er’s
recipient of such credit and executed and accepted
statem ent is truthful.
in good faith9 by a duly authorized officer of the
bank prior to such extension. In determ ining
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w hether or not an extension of credit is for the
purpose of conducting such m arket-m aking activ
(o )
Specialist. In the case of credit extended to
ity, a bank may rely on such a statem ent if ex
a m em ber of a national securities exchange who is
ecuted and accepted in accordance with the re
registered and acts as a specialist in securities on
quirem ents of this paragraph (w ) and paragraph
the exchange for the purpose of financing such
(a) of this section.
m em ber’s transactions as a specialist in such se
curities, the m axim um loan value of any stock
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(except stock that has been identified as a security
held fo r investment pursuant to a rule of the
(y) Third-market maker exemption. (1 ) In the
Commissioner of Internal Revenue (Regs, section
case of credit extended to a third-m arket maker,
1-1236-1 ( d ) ) ) shall be as determ ined by the bank
as defined in subparagraph (2 ) of this paragraph
in good faith: P r o v i d e d , T hat the specialist’s ex
change is a national securities exchange which re
9 As described in paragraph (a) of this section.
(a) Required statement as to stock-secured
credit. In connection with an extension of credit
( y ), for the purpose of purchasing or carrying a
stock that is registered on a national securities ex
change (other than a convertible debt security de
scribed in paragraph (t) (1) of this section) in
order to conduct the m arket-m aking activity of
such a m arket maker, the m axim um loan value of
any stock (except (i) a convertible debt security
described in paragraph (t) (1) of this section,
and (ii) stock that has been identified as a security
held for investment pursuant to a rule of the C om
missioner of Internal Revenue (Regs, section 1
1236-1 ( d ) ) ) shall be determ ined by the bank in
good faith: P r o v i d e d , T hat in respect of each such
stock he shall, at least five full business days prior
to such extension of credit, have filed with the
Securities and Exchange Commission a notice of
his intent to begin or continue such market-m aking
activity, and thereafter all other reports required to
be filed by third-m arket m akers pursuant to a rule
of the Securities and Exchange Commission and,
except when such activity is unlawful, shall not
have ceased to engage in such market-m aking ac
tivity: A nd p r o v i d e d f u r t h e r , T hat the bank shall
obtain and retain in its records for at least 3 years
after such credit is extinguished a statem ent in
conform ity with the requirem ents of F ederal R e
serve F o rm U-3, executed by the third-m arket
m aker who is the recipient of such credit and ex
ecuted and accepted in good faith10 by a duly
authorized officer of the bank prior to such exten
sion. In determ ining w hether or not an extension
of credit is for the purpose of conducting such
m arket-m aking activity, a bank may rely on such
a statement, if executed and accepted in accor
dance with the requirem ents of this paragraph (y)
and paragraph (a) of this section.
quotations to other brokers and dealers, in the
stocks for which he makes a m arket, at all times
on request, (ii) he is ready, willing, and able to
effect transactions for his own account in reason
able amounts, and at his quoted prices, with other
brokers and dealers, and (iii) he has a reasonable
average rate of inventory turnover in the stock.
(3 )
If all or a portion of the credit extended
pursuant to this paragraph (y) ceases to be for
the purpose specified in subparagraph (1 ) of this
paragraph or the dealer to w hom the credit is
extended ceases to be a third-m arket m aker as
defined in subparagraph (2 ) of this paragraph,
the credit or such portion thereof shall thereupon
be treated as “a credit subject to § 221.1” .
(z) Block positioner exemption. (1) In the case
of credit extended to a block positioner, as defined
in subparagraph (2) of this paragraph (z ), for the
purpose of financing the activity of block position
ing, the m axim um loan value of any margin stock
obtained in the ordinary course of the activity of
block positioning as described in subparagraph (2)
of this paragraph (z) (except (i) a convertible
debt security described in paragraph (t) (1) of
this section and (ii) stock that has been identified
as a security held for investment pursuant to a rule
of the Com missioner of Internal Revenue (Regs,
section 1-1236-1 ( d ) ) ) shall be determ ined by the
bank in good faith: P r o v i d e d , T h at in respect of
such activity he shall have filed with the Securities
and Exchange Commission a notice of undertaking
such activity as prescribed by the Commission, and
all reports required to be filed by block-positioners:
A n d p r o v i d e d f u r t h e r , T hat the bank shall obtain
and retain in its records fo r at least 3 years after
such credit is extinguished a statem ent in con
(2 )
A third-m arket m aker with respect to a
form ity with the requirem ents of Federal Reserve
stock that is registered on a national securities ex
F o rm U-5 and paragraph (a) of this section, ex
change is a dealer who has and maintains net cap
ecuted by the block positioner who is the recipient
ital, as defined in a rule of the Securities and Ex
of such credit and executed and accepted in good
change Commission (R ule 15c3-l (17 C FR
faith11 by a duly authorized officer of th e bank
2 4 0 .1 5 c 3 -l)), or in the capital rules of an ex
prior to such extension. In determining w hether or
change of which he is a m em ber if the members
not an extension of credit is fo r the purpose of
thereof are exem pt therefrom by Rule 15c3conducting such block positioning activity, a bank
1 ( b ) ( 2 ) of the Commission (17 C F R 240.15c3may rely on such a statem ent if executed and ac
1 ( b ) ( 2 ) ) , of $100,000 plus $20,000 for each
cepted in accordance with the requirem ents of this
stock in excess of five in respect of w hich he has
paragraph (z) and paragraph (a) of this section.
filed and not w ithdraw n a notice with the Secur
In determining whether or not an extension of
ities and Exchange Commission (b ut in no case
time has been granted pursuant to subparagraph
does this subparagraph (2) require net capital of
(4) of this paragraph (z) and whether or not such
m ore than $500,000) who is in com pliance with
extension of tim e is com m ensurate with the cir
such rule of the Commission and who, except
cumstances the bank may rely on a statement
when such activity is unlawful, meets all the fol
executed by an officer of the exchange or asso
lowing conditions' w ith respect to such stock: (i)
ciation on behalf of the com m ittee in conform ity
H e furnishes bona fide, com petitive bid and offer
10 As described in paragraph (a) of this section.
11 As described in paragraph (a) of this section.
with the requirem ents of F ederal Reserve F orm
U-6 and p aragraph (a ) of this section.
of this section to be an acquisition fro m a single
source.
(2 )
A block positioner is a dealer who (i) is
(3 ) N o credit shall be extended or m aintained
registered with the Securities and Exchange C om
pursuant to this paragraph (z) in respect of any
such block of stock o r portion thereof which the
mission under section 15 of the Securities E x
block positioner has held continuously for m ore
change A ct of 1934 (15 U.S.C. 78o) and has a
than 20 business days, and any credit extended
m inim um net capital, as defined in a rule of the
pursuant to this paragraph (z) shall be extin
S e c u ritie s a n d E x c h a n g e C o m m issio n ( R u le
guished or brought into conform ity with the initial
15c3-l (17 C F R 240 .15 c3 -l) ) or in the capital
margin requirem ents of §§ 221.1 and 221.4 be
rules of an exchange of which he is a m em ber
fore the expiration of such 20-day period. F o r
if the members thereof are exempt therefrom by
the purposes of this subparagraph, a block or
Rule 15c3-l ( b ) ( 2 ) of the Commission (17 C F R
portion thereof shall be treated as not having
2 4 0 .1 5 c3 -l(b ) (2) ), of $1 million, (ii) engages
been held continuously only to the extent that
in the activity of purchasing long or selling short
there has been a net sale (or in the case of short
as principal, from time to time, from or to a
positions, net purchase) of such securities (w hether
custom er (other than a partner or a joint venture
or not represented by the same certificate) during
or other entity in which a partner of the dealer,
such 20-day period.
o r th e d e a le r itself, p a r tic ip a te s o r a p e rso n
“ associated with” such dealer as defined in sec
(4) In exceptional cases the 20-day period spec
tion 3 (a ) (1 8) of the Securities Exchange Act
ified in subparagraph (3) of this paragraph (z)
of 1934) a block of stock (other than a con
may on the application of the block-positioner, be
v e rtib le d e b t s e c u rity as d e s c rib e d in p a r a
extended for one or m ore periods limited to 5
graph (t) (1 ) of this section) with a current
business days each com m ensurate with the cir
m arket value of $200,000 or m ore in a single tran s
cum stances by any regularly constituted com mittee
action or in several transactions at approxim ately
of a national securities exchange having jurisdic
the same time from a single source to facilitate a
tion over the business conduct of its members, of
sale or purchase by such customer, (iii) certifies
which the block positioner is a m em ber or through
to the lending bank that he has determ ined in the
which his block transaction was effected, or by a
exercise of reasonable diligence that the block
com m ittee of a national securities association, if
could not be sold to or purchased from others
effected in the over-the-counter m arket: P r o v i d e d ,
on equivalent or better terms, and (iv) sells the
T hat such com mittee is satisfied that the blockshares com prising such block as rapidly as pos
positioner is acting in good faith in m aking the
sible com m ensurate with the circumstances. In
application and th at the circumstances in fact
the case where a block positioner acquires a block
w arrant such treatm ent.
from a broker who acts as agent for several sell
ers, such acquisition shall be deemed for purposes
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t For this Regulation to be complete as amended effective October 16, 1972,
Retain:
1) Printed Regulation Pamphlet containing Regulations G, T, U, and
X dated November 1971.
2) Amendment effective May 15, 1972.
3) Amendment effective September 18, 1972.
4) Supplement effective October 16, 1972.
5) This Slip Sheet.
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BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
SUPPLEMENT TO REGULATION U
Effective October 16,1972*
SEC TIO N 221.4 — S U P P L E M E N T
(a) Maximum loan value of stocks. F o r the
purpose of § 221.1, the m axim um loan value of
any stock, w hether or not registered on a national
securities exchange, shall be 45 per cent of its
current m ark et value, as determ ined by any rea
sonable method.
(b ) Maximum loan value of convertible debt
securities subject to § 221.3(t). F o r the purpose
of § 221.3 ( t) ,
curity against
to § 221.3 (t)
m arket value,
method.
the m axim um loan value of any se
w hich credit is extended pursuant
shall be 50 per cent of its current
as determ ined by any reasonable
(c) Retention requirement. F o r the purpose of
§ 221.1, in the case of a credit which w ould exceed
the m axim um loan value of the collateral follow
ing a withdraw al of collateral, the “retention re
quirem ent” of a stock, w hether or not registered
on a national securities exchange, and of a con
vertible debt security subject to § 221.3 ( t) , shall
be 70 per cent of its current m arket value, as de
term ined by any reasonable method.
(d ) Requirements for inclusion on list of O TC
margin stock. E xcept as provided in subparagraph
(4) of § 2 2 1 .3 (d ), O TC margin stock shall m eet
the requirem ents that:
(1 ) The stock is subject to registration under
§ 12(g) (1 ) of the Securities Exchange A ct of
1934 (15 U.S.C. 78/(g) ( 1 ) ) , or if issued by an
insurance com pany subject to § 12(g) (2 ) (G )
(15 U.S.C. 787(g) (2) ( G ) ) the issuer h ad at least
$1 million of capital and surplus,
(2 ) Five or m ore dealers stand willing to, and
do in fact, m ake a m arket in such stock including
making regularly published b o n a f i d e bids and of
fers fo r such stock for their own accounts, or the
stock is registered on a securities exchange th at is
exempted by the Securities and Exchange C om
mission from registration as a national securities
exchange pursuant to § 5 of the A ct (15 U.S.C.
78e),
(3 ) T here are 1,500 or m ore holders of record
of the stock who are not officers, directors, or
beneficial owners of 10 per cent or m ore of the
stock,
(4 ) The issuer is organized under the laws of
the U nited States or a State12 and it, or a predeces
sor in interest, has been in existence for at least
3 years,
(5 ) T he stock has been publicly traded for at
least 6 months, and
(6 ) Daily quotations fo r both bid and asked
prices for the stock are continuously available to
the general public;
and shall m eet 3 of the 4 additional requirem ents
that:
(7 ) T here are 500,000 or m ore shares of such
stock outstanding in addition to shares held bene
ficially by officers, directors, or beneficial owners
of m ore than 10 per cent of the stock,
(8 ) The shares described in subparagraph (7)
of this paragraph have a m arket value in the
aggregate of at least $10 million,
(9 ) T he m inim um average bid price of such
stock, as determ ined by the Board in the latest
m onth, is at least $10 per share, and
(1 0 ) T he issuer had at least $5 million of capi
tal, surplus, and undivided profits.
(e)
Requirements for continued inclusion on
list of O TC margin stock.
(1) T he stock continues to be subject to regis
tration und er § 12(g) (1 ) of the Securities Ex
change A ct of 1934 (15 U.S.C. 1 8 1 ( g ) ( 1 ) ) , or
if issued by an insurance com pany such issuer con
tinues to be subject to § 12(g) (2 ) (G ) (15
U.S.C. 787(g) (2) ( G ) ) and has at least $1 mil
lion of capital and surplus.
(2) F o u r or m ore dealers stand willing to, and
do in fact, m ake a m arket in such stock including
12 As defined in 15 U.S.C. 78c('ft) (16).
*Effective date of addition of Paragraph (e). There have been
no changes in maximum loan values or retention requirement
since December 6, 1971.
(OVER)
making regularly published b o n a f i d e bids and of
fers for such stock fo r their own accounts, or the
stock is registered on a securities exchange that is
exem pted by the Securities and Exchange C om
mission from registration as a national securities
exchange p ursuant to § 5 of the Securities E x
change A ct of 1934 (15 U.S.C. 7 8e),
(3 ) T here continue to be 1,000 or m ore holders
of record of the stock w ho are not officers, direc
tors, or beneficial owners of 10 per cent o r m ore
of the stock,
the general public; and shall m eet 3 of the 4 addi
tional requirem ents that:
(6 ) 400,000 or m ore shares
m ain outstanding in addition to
ficially by officers, directors, or
of m ore than 10 p er cent of the
of such stock re
shares held bene
beneficial owners
stock,
(7) T he shares described in subparagraph (6 )
of this paragraph continue to have a m arket value
in the aggregate of at least $5 million,
(4 ) T he issuer continues to be a U.S. corpora
tion,
(8 ) T he m inim um average bid price of such
stock, as determ ined by the Board, is at least $5
per share, and
(5 ) D aily quotations for both bid and asked
prices fo r the stock are continuously available to
(9 ) T he issuer continues to have at least $2.5
million of capital, surplus, and undivided profits.
@FedFRASER