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F ederal Reserve Bank of Dallas DALLAS, TEXAS 7 5 2 2 2 Circular No. 68-31 February 6, 1968 AMENDMENTS TO REGULATION U To All Banks in the Eleventh Federal Reserve District: Effective March 11, 1968, the Board of Governors of the Federal Reserve System adopted a number of changes to broaden the coverage of, and, in most respects, to tighten its regulations governing the use of credit in stock market transactions. The changes were explained in the press release of the Board dated February 1, 1968, a copy of which was furnished you with our circular letter of February 2, 1968. The supplement to Regulation U has also been amended to include margin requirements of convertible securities which have initially been set at 50 per cent. Enclosed are copies of the regulation and supplement revised to include these amendments. Member banks are requested to remove the copies of the regulation as amended to May 1, 1962, and supplement effective November 6, 1963, from their ring binders and substitute the enclosed copies therefor. Additional copies will be furnished upon request. You will note that in connection with an extension of credit secured directly or indirectly by any stock, a statement in conformity with the require ments of Federal Reserve Form U -l must be obtained from the recipient of such extension of credit. A specimen of the form is shown in the regulation. A supply of Form U -l will be furnished upon request. Yours very truly, P. E. Coldwell President Enclosures (2) This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) SUPPLEMENT TO REGULATION U Section 221.4— SUPPLEMENT Issu e d by t h e B oard o f G o v ern o rs o f t h e F e d e r a l R e se r v e S y ste m Effective March 11, 1968 (a) Maximum loan value of stocks.— For the purpose of § 221.1, the maximum loan value of any stock, whether or not registered on a national securities exchange, shall be 30 per cent of its current market value, as determined by any reasonable method. ( b) Maximum loan value of convertible securities subject to § 2 2 1 .3 ( f) .— For the purpose of § 221.3(f), the maximum loan value of any security against which credit is extended pursuant to § 221.3(f) shall be 50 per cent of its current market value, as determined by any reasonable method. (c) Retention requirement.— For the purpose of § 221.1, in the case of a loan which would exceed the maximum loan value of the collateral following a withdrawal of collateral, the “reten tion requirement” of a stock, whether or not registered on a national securities exchange, and of a convertible security sub ject to § 2 2 1 . 3 ( 0 , shall be 70 per cent of its current market value, as determined by any reasonable method. BOARD OF GOVERNORS of the FEDERAL RESERVE SYSTEM CREDIT BY BANKS FOR THE PURPOSE OF PURCHASING OR CARRYING REGISTERED STOCKS T REGULATION U (1 2 C FR 2 2 1 ) As A m e n d e d e ffe c tiv e M a rc h 1 1 , 1 9 6 8 INQUIRIES REGARDING THIS REGULATION Any inquiry relating to this regulation should he addressed to the Federal Reserve Bank of the district in which the inquiry arises. FORM The form furnished with this copy of the Regulation has been reduced in size and is for information only. Copies of the form for actual use can he obtained from any Federal Reserve Bank. CONTENTS Page S ec. 221.1. General R ule .......................................................................... (a) Purpose credit secured by stock ................................ ( b ) Substitutions and w i t h d r a w a l s ...................................... (c) Same-day transactions .................................................... (d ) Single credit rule ................................................................ 1 1 1 1 2 S ec. 221.2. E xceptions GeneralR ule ..................................................... 2 S ec. 221.3. MiscellaneousP rovisions ........................................................... (a) Required statem ent as to stock-secured l o a n ............ ( b ) Purpose of a credit ........................................................... (c) Indirectly secured ............................................................. (d ) List of registered s t o c k s ................................................... (e) Renewals and extensions of m a t u r i t y ......................... ( /) T ra n sfers .............................................................................. (g) Reorganizations and r e c a p ita liz a tio n s ......................... (/() Mistakes in good faith ..................................................... (i ) Action for b ank’s own p r o te c tio n ................................. O') R e p o r t s ................................................................................... (fc) Definitions ............................................................................ (I) Stock ....................................................................................... (m) A credit subject to § 221.1 ............................................ (n ) Segregation of collateral ................................................. (o) Specialist .............................................................................. (p ) Subscriptions issued to stockholders ........................... (q ) Credit to certain lenders ................................................ (?•) Convertible securities ...................................................... (s) Credit secured by collateral other than s t o c k s ......... ( t ) Credit on convertible securities ................................... (u ) Bank acting as agent ....................................................... (v ) A rran g in g for credit ....................................................... 4 4 4 5 5 5 5 6 6 6 6 6 6 6 7 8 8 9 9 10 10 11 11 A ppendix ................................................................................................................... 12 F orm ............................................................................................................................ 20 to REGULATION U (12 C P R 221) A s A m ended effective M arch 11, 1968 CREDIT BY BANKS FOR THE PURPOSE OF PURCHASING OR CARRYING REGISTERED STOCKS S E C T IO N 221.1— G E N E R A L R U L E (a) Purpose credit secured by stock.— No bank shall extend any credit secured directly or indirectly 1 by any stock - for the purpose of purchasing or c a rry in g any stock registered on a national securities exchange 3 (and no bank shall extend any credit described in § 221.3 (q) regardless of w hether or not such c redit is secured by any stock) in an am ount exceeding the m axi m um loan value of th e collateral, as prescribed from tim e to tim e fo r stocks in § 221.4 (the Supplem ent to Regulation U) and as determ ined by the bank in good fa ith fo r credit subject to § 221.3(s) fo r any collateral other th a n stocks: Provided, T h a t unless held as collateral for such credit on October 20, 1967, and continuously th ere a fte r, any collateral other th an stock shall have loan value for the purpose of this P a r t only as collateral fo r a c re d it which is not secured by stock, as described in § 221.3 (s), and any collateral consisting of convertible securities described in § 221.3(f) shall have loan value only fo r the purpose of th a t section, and not for other credit subject to this P art. ( b ) Substitutions and withdrawals.— Except as perm itted in p a ra g ra p h (c), of this section, while a bank m aintains any credit su b ject to this P a rt, whenever extended, the bank shall not at any tim e perm it any w ithdraw al or substitution of collateral unless either (1) the credit would not exceed the maxim um loan value of the collateral a fte r such w ithdraw al or substitution, or (2) the credit is reduced by a t least the am ount by which the m axim um loan value of any collateral deposited is less th an the “ retention requirem ent” of any collateral w ithdraw n. The “ re tention requirem ent” of collateral other th an stock is the same as its m axim um loan value and the “ retention requirem ent” of collateral consisting of stock is prescribed from time to tim e in § 221.4 (the Supplem ent to R egulation U ) . ( c) S a m e -d a y t r a n s a c t i o n s . — E x c e p t a s p r o v i d e d in § 2 2 1 .3 ( r ) ( l ) , a bank m ay perm it a substitution of stock 1 A s defined in § 221 .3(c). 2 A s defined in § 221.3 ( I ). 3 Sometimes referred to as a “ purpose credit” . See § 2 2 1 .3 (6 ), § 221.3(0* and § 221.3 (m ). 1 2 REGULATION U S e c s . 2 2 1 .1 - 2 2 1 .2 w hether registered or unregistered, effected by a purchase and sale on orders executed w ithin the same day: Provided, T h a t (1) if the proceeds of the sale exceed the total cost of the p u r chase, th e credit is reduced by a t least an am ount equal to the “ retention requirem ent” w ith respect to the sale less the “ re tention requirem ent” w ith respect to the purchase, or (2) if the total cost of the purchase exceeds th e proceeds of the sale, th e credit m ay be increased by an am ount no g re a te r th an th e m axim um loan value of the stock purchased less the m axim um loan value of the stock sold. If the m axim um loan value of th e collateral securing the credit has become less th a n the am ount of the credit, the am ount of the credit m ay nonetheless be in creased if there is provided additional collateral having m axi m um loan value a t least equal to the am ount of the increase. (d) Single credit rule.— F o r the purpose of th is P a rt, except fo r credit subject to § 221.3(s) or ( t) , th e entire am ount of the credit extended to any custom er by any bank a t any time for th e purpose of purchasing or c a rry in g stocks registered on a national securities exchange shall be considered a single credit; and all the collateral securing such indebtedness shall be considered in determ ining w hether or not the loan complies w ith this P a rt. S E C T IO N 221.2— E X C E P T IO N S TO G E N E R A L R U L E N otw ithstanding the provisions of § 221.1, a bank may extend and m ay m aintain any credit fo r the purpose specified in § 221.1, w ithout reg ard to the lim itations prescribed therein, or in § 221.3(4) if the credit comes w ithin any of the following de scriptions : (a) A ny credit extended to a bank or to a foreign banking institution; (b) A ny credit extended to a “ plan-lender” as defined in § 207.4(a) of P a r t 207 of th is C hapter (Regulation G) to finance a plan described th e r e in : Provided, T h a t in no event does the bank have recourse to any stock purchased p u rsu a n t to such plan; (c) A ny credit extended to a dealer, or to two or more dealers, to aid in the financing of the distribution of securities to cus tom ers not thro u g h the medium of a national securities exchange; (d) A ny credit extended to a bro k er or dealer th a t is extended in exceptional circum stances in good faith to meet his emergency needs; (e) A ny credit extended to a broker or dealer secured by any securities which, according to w ritte n notice received by the bank from the broker or dealer p u rsu a n t to a rule of the Securities and S e c . 2 2 1 .2 REGULATION U 3 Exchange Commission concerning the hypothecation of cus to m ers’ securities (Rule 8c-l (17 CFR § 240.8c-l) or Rule 15c2-l (17 CFR § 240.15c2-l)), are securities carried for the account of one or more custom ers: Provided, T hat the bank accepts in good f a ith 4 from the broker or dealer a signed statem ent to the effect th a t he is subject to the provisions of P a r t 220 of this C hapter (Regulation T) (or th a t he does not extend or m aintain credit to or fo r custom ers except in accordance therew ith as if he were subject th e r e to ) ; (/) Any credit extended to finance the purchase or sale of securities for prom pt delivery which is to be repaid in the o rdinary course of business upon completion of the transaction: Provided, T hat the advance is not made to a person described in § 221.3 (q) : A n d provided further, T h at it is e ith e r (1) extended to a broker or dealer, or (2) extended fo r a purpose other th an to enable the borrow er to pay fo r stock purchased in an account subject to P a r t 220 of this C hapter (Regulation T ) ; (g) Any credit extended against securities in tra n sit, or s u r rendered for tra n s fe r, which is payable in the ordinary course of business upon a rriv al of the securities or upon completion of the tra n sfe r: Provided, T h at the credit is not extended to a person described in § 221.3(g): A n d provided further, T h at it is either (1) extended to a broker or dealer, or (2) extended for other th a n to enable the custom er to pay fo r stock purchased in an account subject to P a r t 220 of this C hapter (Regulation T ) ; (h) A ny credit which is to be repaid on the calendar day on which it is e xtended: Provided, T h at the credit is not extended to a person described in § 2 2 1 .3 (g ): A n d -provided further, T h at it is either (1) extended to a broker or dealer, or (2) extended for a purpose other th a n to enable the custom er to pay for stock purchase in an account subject to P a r t 220 of this C hapter (Reg ulation T ) ; (i ) A ny credit extended outside the States of the United States and the D istrict of Columbia; (j) Any credit extended to a m em ber of a national securities exchange for the purpose of financing his or his custom ers’ bona fide a rb itra g e transactions in securities. F o r the purposes of this p ara g ra p h , the term “a rb itra g e ” m eans (1) a purchase or sale of a security in one m arket together w ith an offsetting sale or purchase of the same security in a different m arket a t as nearly the same tim e as practicable, for the purpose of taking advantage of a difference in prices in the two m arkets, or (2) ‘ As described in § 2 2 1 .3 (a ). 4 REGULATION U S e c s . 2 2 1 .2 - 2 2 1 .3 a purchase of a security which is, w ithout restriction other th a n the paym ent of money, exchangeable or convertible w ithin 90 calendar days following the date of its purchase into a second security together w ith an offsetting sale a t or about the sam e tim e of such second security, for the purpose of tak in g advantage of a disparity in the prices of the two securities; and (k ) Any credit extended to a m em ber of a national securities exchange fo r the purpose of financing such m em bers’ tra n s a c tion as an odd-lot dealer in securities w ith respect to which he is registered on such national securities exchange as an odd-lot dealer. SECTION 221.3—MISCELLANEOUS PROVISIONS (a) Required statement as to stock-secured loan.— In connec tion w ith an extension of credit secured directly or indirectly by any stock, the bank shall obtain and reta in in its records f o r a t least six years a fte r such credit is extinguished a statem en t in conform ity w ith the requirem ents of Federal Reserve F o rm U -I executed by the recipient of such extension of credit (som e tim es refe rre d to as the “ custom er” ) and executed and ac cepted in good fa ith by a duly authorized officer of the b a n k p rio r to such extension. In determ ining w hether or not an exten sion of credit is for the purpose specified in § 221.1 or fo r any of th e purposes specified in § 221.2 the bank m ay rely on th e statem ent executed by the custom er if accepted in good faith . To accept the custom er’s statem ent in good faith, the officer m u st (1) be alert to the circum stances surrounding the credit and (2) if he has any inform ation which would cause a p ru d e n t m an not to accept the statem ent w ithout inquiry, have investi gated and be satisfied th a t the custom er’s statem ent is tru th fu l. (b ) Purpose of a credit.— The “purpose of a cre d it” is d eter m ined by substance ra th e r than form . (1) Credit which is fo r the purpose, w hether imm ediate, incidental, or ultimate, of purchasing or c a rry in g a stock is “ purpose credit”, despite any tem porary application of funds otherwise. (2) Credit to enable th e custom er to reduce or retire in debtedness which was originally incurred to purchase a stock is fo r the purpose of “c a rry in g ” such a security. (3) Credit fo r the purpose of purchasing or carry in g a se cu rity issued by an investm ent company registered p u rsu a n t to section 8 of the Investm ent Company A ct of 1940 (15 U.S.C. 80a-8), whose assets custom arily include registered stocks, is fo r the purpose of purchasing or c a rry in g such stocks. S e c . 2 2 1 .3 REGULATION U 5 (c) Indirectly secured.— The term “ indirectly secured” in cludes any arra n g e m e n t as to assets of the custom er which (1) serves to protect the in terest of the bank, (2) serves to make assets of the custom er more readily available to the bank th an to o ther creditors of the customer, or (3) under which the cus tom er su rre n d e rs th e rig h t to dispose of assets so long as the credit rem ains outstanding: Provided, T h a t the foregoing shall not apply to securities held by the bank only in the capacity of custodian, depositary or trustee, or under sim ilar circumstances, if th e bank in good fa ith has not relied upon such securities as collateral in the extension or m aintenance of the p articu lar credit. (d ) List of registered stocks.— In determ ining w hether a security is a “ stock registered on a national securities exchange” or a security described in p a ra g ra p h ( b) (3) of th is section, a bank m ay rely upon any reasonably c u rre n t record of such securities th a t is published or specified in a publication of the Board of Governors of the Federal Reserve System. A bank m ay also rely upon such a record to determ ine w hether a stock into which a security, w a rra n t, or rig h t is convertible or exchange able is a stock registered on a national securities exchange. (e) Renewals and extensions of maturity.— The renew al or extension of m a tu rity of a credit need not be tre a te d as the ex tension of a credit if th e am ount of the credit is not increased except by the addition of in terest or service charges in respect to the credit or of taxes on transactions in connection w ith the credit. ( /) Transfers.— A bank, w ithout following the requirem ents of th is P a r t as to the extension of a credit may: (1) perm it the tra n s fe r of a credit fro m one custom er to another, or to others: Provided, T hat a statem ent by the tr a n s feror, describing the circum stances giving rise to the tra n s fe r, is accepted in good fa ith 5 and signed by an officer of the bank as h aving been so accepted, and kept w ith each such tra n sfe re e account, or (2) accept the tra n s fe r of a credit originally extended in conform ity w ith the requirem ents of this P a r t directly from another b a n k : Provided, T h a t the statem ent of purpose, executed by the custom er in connection w ith the original extension of credit and accepted in good fa ith and signed by an officer of the bank originally extending such credit in conform ity w ith the requirem ents of § 221.3(a), is obtained and kept w ith each such tra n sfe re e account, 6 As described in § 22 1 .3 (a ). 6 REGULATION U S e c . 2 2 1 .3 A n d provided further, T h at any tra n s fe r p u rsu a n t to this p a ra g rap h is m ade as a bona fide incident to a transaction not undertaken fo r the purpose of avoiding the requirem ents of th is P a rt, the am ount of the credit is not increased and th e collateral for the credit is not changed; and, a fte r such tra n sfe r, a bank m ay p erm it such w ithdraw als and substitutions of collateral as are perm itted in respect to a credit it extends subject to th is P a rt. (g ) Reorganizations and recapitalizations.— N othing in th is P a r t shall be construed to prevent a bank from p erm ittin g w ith draw als or substitutions of securities to enable a custom er to participate in a reorganization or recapitalization. ( h ) Mistakes in good faith.— No m istake made in good faith in connection w ith the extension or m aintenance of a credit shall be deemed to be a violation of this P a rt. (i) Action for bank’s own protection.— N othing in this P a r t shall be construed as preventing a bank from tak in g such action as it shall deem necessary in good faith fo r its own protection. (j) Reports.— E very bank, and every person engaged in the business of extending credit who, in the o rdinary course of business, extends credit for the purpose of purchasing or c a rry ing securities registered on a national securities exchange, shall make such reports as the Board of Governors of the Federal Reserve System m ay require to enable it to p erform the func tions conferred upon it by the Securities E xchange Act of 1934 (15 U.S.C. 78). ( k ) Definitions.— Except as otherwise provided in this P a rt, term s herein have the m eanings assigned to them in section 3 (a) of the Securities Exchange Act of 1934 (15 U.S.C. 7 8 c ( a ) ), except th a t the te rm “ bank” does not include a bank which is a m em ber of a national securities exchange. (I) Stock.— The term “stock” includes any security commonly known as a stock; any voting tr u s t certificate or other in stru m ent represen ting such a s e c u rity ; any security convertible w ith or w ithout consideration into such security, certificate or other instrum ent, or carry in g any w a rra n t or r ig h t to subscribe to or purchase such a security; or any such w a r ra n t or right. (to) Credit subject to § 221.1.— A “credit subject to § 221.1” is a credit which is (1) secured directly or indirectly by any stock (or made to a person described in p a ra g ra p h (q) of th is section), (2) extended for the purpose of purchasing or c a rry in g any stock registered on a national securities exchange, or any S e c . 2 2 1 .3 REGULATION U 7 security convertible0 w ith or w ithout consideration into such a stock or c a rry in g any w a r ra n t or rig h t to subscribe to or p u r chase or c a rry such a stock, or any such w a r ra n t or rig h t (such security, w a r ra n t or rig h t is sometimes refe rre d to as a “security convertible into a stock registered on a national securities ex change” ), and (3) not excepted by § 221.2. (n) Segregation of collateral.— (1) The bank shall identify all the collateral used to meet the requirem ents of § 221.1 (the entire credit being considered a single credit and collateral being sim ilarly considered, as required by § 221.1(d) ) and shall not cancel the identification of any portion thereof except in cir cumstances t h a t would p erm it the w ithdraw al of th a t portion. Such identification m ay be made by any reasonable method, and in the case of a credit outstanding a t the opening of business on June 15, 1959, need not be made until immediately before some change in th a t or other indebtedness of the custom er or in collateral therefore. (2) Only the collateral required to be so identified shall have loan value fo r purposes of § 221.1 or be subject to th e restric tions therein specified w ith respect to w ithdraw als and su b stitu tions; and (3) F o r any credit extended to the same custom er th a t is not subject to § 221.1 (other th an a credit described in § 221.2( b ) , ( d ), ( / ) , (g ), or (h ) ), the bank shall in good faith require as such collateral not so identified as the bank would require (if any) if it held neither the indebtedness subject to § 221.1 nor th e identified collateral. This shall not be construed, however, to require the bank, a fte r it has extended any credit, to obtain any collateral therefor because of any deficiency in collateral already existing a t the opening of business on June 15, 1959, or any decline in the value or quality of the collateral or in the credit ra tin g of the customer. (4) Nothing in this P a r t shall require a bank to waive or forego any lien, and nothing in this P a r t shall apply to a credit extended to enable the custom er to meet emergency expenses not reasonably foreseeable, provided the extension of credit is supported by a statem ent executed by the custom er and accepted in good fa ith and signed by an officer of the bank as having been so accepted in conform ity w ith the requirem ents of § 221.3 ( a ) . F o r this purpose, such emergency expenses shall include expenses a risin g from circumstances such as the death or disability of th e customer, or some other change in his circumstances in« See also § 221.3 ( r ) a n d ( t ) . 8 REGULATION U S e c . 2 2 1 .3 volving extrem e hardship, not reasonably foreseeable a t the tim e the credit was extended. The opportunity to realize m onetary gain is not a “change in his circum stances” for this purpose. (o) Specialist.— In the case of a credit extended to a m em ber of a national securities exchange who is registered and acts as a specialist in securities on the exchange for th e purpose of financing such m em ber’s transactions as a specialist in such securities, the m axim um loan value of any stock shall be as de term ined by the bank in good f a ith : Provided, T h a t the spe cialist’s exchange, in addition to other requirem ents applicable to specialists, is designated by the Board of Governors of the Federal Reserve System as requiring reports suitable for supply ing c u rre n t inform ation regarding specialists’ use of credit p u r suant to this section. (p) Subscriptions issued to stockholders.— An extension of credit need not comply w ith the other requirem ents of this P a r t if it is to enable the custom er to acquire a stock by exercising a rig h t to acquire such stock which is evidenced by a w a rra n t or certificate issued to stockholders and expiring w ithin 90 days of issuance: Provided, That: (1) each such aquisition under this p a ra g ra p h shall be treated separately, and the credit when extended shall not ex ceed 75 per cent of th e c u rre n t m arket value of the stock so acquired as determined by any reasonable method; (2) a fte r October 20, 1967, a t th e tim e credit is extended pursuant to this paragraph, the bank shall compute the am ount by which the credit exceeds the maxim um loan value of the collateral as prescribed by § 221.4 and the custom er shall reduce the credit by an am ount a t least equal to one-fourth of such sum by the end of each of the four succeeding three-calendar month periods or until the credit does not exceed the c u rre n t m axim um loan value of the stock, whichever shall occur first, and if the bank fails to obtain the required quarterly reduction or a portion thereof w ith respect to a p a rticu la r acquisition w ithin five full business days a fte r such reduction is due, the bank shall prom ptly sell a portion of the collateral so acquired and apply the proceeds of the sale to reduce the credit, in an am ount a t least equal to twice the required paym ent or portion thereof for the first two such reductions, a t least equal to the required paym ent or portion thereof fo r the th ird such reduction, and a t least sufficient so th a t the rem aining credit does not exceed the c u rre n t maxim um loan value of the rem aining collateral a fte r the fourth such reduction: Provided, T h at no such reduction need be in an S e c . 2 2 1 .3 REGULATION U 9 am ount g re a te r th a n is necessary so th a t the rem aining credit does not exceed the m axim um loan value of the rem aining collateral determ ined as of the date when the credit was ex tended : A n d provided further, T hat as to c redit extended between October 20, 1967, and M arch 11, 1968, such four succeeding periods shall begin on M arch 11, 1968; and (3) while the custom er has any credit outstanding a t the bank under this p a ra g ra p h no w ithdraw al of cash or substitution or w ithdraw al of stock used as collateral fo r such extension of credit shall be permissible, except th a t when the rem aining credit has become equal to or less th a n the m axim um loan value of the rem aining stock as prescribed fo r § 221.1 or § 221.3(4) in § 221.4 (the Supplement to Regulation U) whichever is applicable (or w ith respect to credit extended a fte r October 20, 1967, the requirem ents of the preceding clause have been fulfilled) the rem aining stock and related indebtedness shall th e re a fte r be tre a te d as subject to § 221.1 o r § 221.3(4), whichever is ap plicable, instead of this paragraph. In order to facilitate the exercise of a rig h t under this parag rap h , a bank m ay perm it the rig h t to be w ith d raw n from a credit subject to § 221.1 w ithout reg ard to any other requirem ent of th is P a rt. (q ) Credit to certain lenders.—Any credit extended to a custom er not subject to this P a r t or to P a r t 220 of this C hapter (Regulation T) engaged principally, or as one of the custom er’s im p o rta n t activities, in the business of extending credit for the purpose of purchasing or c arrying stocks registered on a national securities exchange, is a credit fo r th e purpose of purchasing or c a rry in g stocks so registered unless the credit and its purposes a re effectively and unm istakably separated and disassociated from any financing or refinancing, fo r th e custom er or others, of any purchasing or c a rry in g of stocks so registered. A ny credit extended to any such customer, unless the credit is so separated and disassociated or is excepted by § 221.2, is a credit “subject to § 221.1” regardless of w hether or not the credit is secured by any stock; and no bank shall extend any such credit subject to § 221.1 to any such custom er on or a f te r June 15, 1959, w ithout collateral or w ithout the credit being secured as would be re quired by this P a r t if it were secured by any stock. A ny such credit subject to § 221.1 to any such customer, w hether or not m ade a fte r Ju n e 15, 1959, shall be subject to the other provisions of th is P a r t applicable to credit subject to § 221.1, including pro visions reg ard in g w ithdraw al and substitution of collateral. (r) Convertible securities.— (1) If, a fte r Ju ne 15, 1959, and 10 REGULATION U S e c . 2 2 1 .3 prior to October 21, 1967, credit was extended for the purpose of purchasing or carrying a security convertible into a stock registered on a national securities exchange and the credit was secured by such a security, and a fte r October 20, 1967, there is substituted any stock as direct or indirect collateral for such credit, the credit shall thereupon be treated as subject to § 221.1 or § 221.3(4), whichever is applicable. In any such case, the am ount of the outstanding credit, or such am ount plus any increase therein to enable the custom er to acquire a stock so registered through the conversion of the security p u rsu a n t to its term s, shall not be perm itted on the date of such substitution to exceed the m axim um loan value of the collateral for the c r e d it: Provided, T h a t any reduction in the credit or deposit of collateral required on th a t date to m eet this requirem ent m ay be brought about w ithin 30 days of such substitution, or by A pril 10, 1968, whichever is later. (2) Any credit extended a fte r October 20, 1967, fo r the p u r pose of purchasing or carrying a security convertible into a stock registered on a national securities exchange, if the credit is secured, directly or indirectly, by any stock, is a credit subject to § 221.1 or § 221.3(4), whichever is applicable: Provided, T h a t any reduction of the credit or deposit of collateral necessary to meet the requirem ents of § 221.4 (the Supplement to Regulation U) in respect to such credit extended before M arch 11, 1968, need not be brought about before April 10, 1968. (s) Credit secured by collateral other than stocks.— A bank may extend credit for the purpose of purchasing or carrying a stock registered on a national securities exchange secured by collateral other th a n stock, and, in the case of such credit, the m axim um loan value of the collateral shall be as determ ined by the bank in good faith. (t) Credit o n convertible securities.— (1) A bank may extend credit fo r the purpose specified in § 221.1 on collateral consisting of any security convertible into a stock registered on a national securities exchange or any security carrying a w a r ra n t or rig h t to subscribe to or purchase a stock so registered. (2) C redit extended under this p ara g ra p h shall be subject to the same conditions as if it were subject to § 221.1 except: (i) the entire am ount of such credit shall be considered a single credit treated separately from the single credit specified in § 221.1(d) and all the collateral securing such credit shall be considered in determ ining w hether or not the credit complies w ith this P a rt, and (ii) the m axim um loan value of the collateral S ec. 221.3 REGULATION U 11 shall be as prescribed from tim e to tim e in § 221.4 (the Supple m ent to Regulation U ) . (3) Any convertible security originally eligible as collateral for a credit extended under this p a ra g ra p h shall be treated as such as long as continuously held as collateral for such credit even though it ceases to be convertible or to c a rry w a rra n ts or rights. (4) In the event th a t any stock is substituted for a convertible security held as collateral for a credit extended under this p a ra graph, the stock and any credit extended on it in compliance w ith this P a r t shall thereupon be treated as subject to § 221.1 and the credit extended under this p a ra g ra p h shall be reduced by an am ount equal to the m axim um loan value of the security w ith draw n less the m axim um loan value of any convertible security described in su b p arag rap h (1) of this p a ra g ra p h deposited as collateral. (u) B a n k acting as agent.— No bank shall act as ag en t of any person extending credit which the bank knows or should know is secured directly or indirectly by any registered security unless the bank accepts in good f a ith 7 a statem ent signed by such person th a t he does not extend or m aintain credit to or for custom ers in violation of P a r t 207, 220, or 221 of this C hapter (Regulations G, T, or U ). F o r this purpose, such activities of an “ag en t” include, for example, receiving securities to be used as collateral for such credit, determ ining w hether the m ark et value of the collateral for such credit is adequate, and requiring the deposit of additional collateral or the reduction of such credit. In de term in in g w hether th ere has been an extension of credit subject to the provisions of such P a rt, and w hether it can rely in good faith on the statem ent described herein, the bank shall (1) be alert to the circumstances surrounding the extension of credit and (2) if it has inform ation th a t would cause a prudent m an not to accept the statem ent w ithout inquiry, m ust have investi gated and be satisfied th a t the credit either is not subject to such P a r t or is extended or m aintained in conform ity w ith the provisions of such P art. ( v ) Arranging for credit.— No bank shall a rra n g e for the extension or m aintenance of any credit for the purpose of p u r chasing or c a rry in g any stock registered on a national securities exchange, except upon the same term s and conditions on which the bank itself could extend or m aintain such credit under the provisions of this P a rt. 7 As described in § 2 2 1 .3 (a ). APPENDIX There a re printed below certain provisions of the Securities Exchange Act of 1934: (15 U.S.C., 78): D E F IN IT IO N S Sec. 3. (a) * * * (3) The term “m em ber” when used w ith respect to a n exchange means any person who is perm itted either to effect transactions on the exchange w ithout the services of a n o th e r person acting as broker, or to make use of the facilities of an exchange fo r transactions thereon w ithout paym ent of a commission or fee or w ith the paym ent of a commission or fee which is less th a n t h a t charged the general public, and includes any firm tra n sa c tin g a business as broker o r dealer of which a member is a p artn er, and any p a rtn e r of any such firm. (4) The term “b roker” means any person engaged in th e business of effecting transactions in securities fo r the ac count of others, but does not include a bank. (5) The term “ dealer” means any person engaged in the business of buying and selling securities fo r his own account, th ro u g h a broker or otherwise, bu t does not include a bank, o r an y person insofar as he buys or sells securities fo r his own account, either individually or in some fiduciary ca pacity, bu t not as a p a rt of a regular business. (6) The term “bank” means (A) a banking institution organized under the laws of the United States, (B) a m em ber bank of the Federal Reserve System, (C) any other banking institution, w hether incorporated or not, doing business under the laws of any State or o f the United States, a substantial portion of the business of which consists of receiving deposits or exercising fiduciary powers sim ilar to those perm itted to national banks under section 11 (k) of the Federal Reserve Act, as amended, and which is su p er vised and examined by S tate or Federal au th o rity having supervision over banks, and which is not operated f o r the purpose of evading the provisions of this title, and (D) a receiver, conservator, or other liquidating agent of any in12 REGULATION U APPENDIX stitu tio n or firm included in clauses (A ), (B ), or (C) of this p a ra g ra p h . * * * (9) The term “ person” means an individual, a corpora tion, a p artnership, an association, a joint-stock company, a business tru st, or an unincorporated organization. (10) The te rm “security” m eans any note, stock, tre a su ry stock, bond, debenture, certificate of in terest or participa tion in any profit-sharing agreem ent or in any oil, gas, or other m ineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, tran sferab le share, investm ent contract, voting-trust certificate, certifi cate of deposit, fo r a security, or in general, any instrum ent commonly known as a “ security” ; or any certificate of in tere st or participation in, tem porary or interim certificate for, receipt for, or w a r ra n t or rig h t to subscribe to or p u r chase, any of the foregoing; bu t shall not include currency or any note, d raft, bill of exchange, or b a n k e r’s acceptance which has a m a tu rity a t the tim e of issuance of not exceed ing nine months, exclusive of days of grace, o r any renewal thereof the m a tu rity of which is likewise limited. * * * (13) The term s “ buy” and “purchase” each include any contract to buy, purchase, or otherwise acquire. (14) The term s “ sale” and “ sell” each include any con tr a c t to sell or otherw ise dispose of. * * * (16) The term “ S ta te ” m eans any State of the United States, the D istrict of Columbia, Puerto Rico . . . the Canal Zone, th e V irgin Islands, or any other possession of the U nited States. * * * M A R G IN R E Q U IR E M E N T S Sec. 7. (a) F o r the purpose of preventing the excessive use of credit fo r the purchase or carrying of securities, the B o ard of Governors of the Federal Reserve System shall, p r io r to the effective date of this section and from tim e to tim e th ere a fte r, prescribe rules and regulations w ith respect REGULATION U APPENDIX 14 to the am ount of credit th a t m ay be initially extended and subsequently m aintained on any security (other th an an exempted security) registered on a national securities ex change. F o r th e initial extension of credit, such rules and regulations shall be based upon the following standard: A n am ount not g re a te r th a n whichever is the higher of— (1) 55 per centum of the c u rre n t m ark e t price of the security, or (2) 100 p er centum of the lowest m ark e t price of th e security d u ring the preceding thirty-six calendar m onths, but not more th a n 75 per centum of the c u rre n t m ark e t price. Such rules and regulations m ay m ake appropriate provision w ith respect to the c a rry in g of underm argined accounts fo r limited periods and under specified conditions; the w ith draw al of funds or securities; the substitution or additional purchases of securities; the tra n s fe r of accounts from one lender to another; special or different m arg in requirem ents fo r delayed deliveries, sh o rt sales, a rb itra g e transactions, and securities to which p a ra g ra p h (2) of this subsection does not apply; the bases and the methods to be used in cal culating loans, and m argins and m ark e t prices; and sim ilar adm inistrative adjustm ents and details. F o r the purposes of p a ra g ra p h (2) of this subsection, until July 1, 1936, the lowest price a t which a security has sold on or a fte r July 1, 1933, shall be considered as the lowest price a t which such security has sold during the preceding th irty -six calendar months. (b) N otw ithstanding the provisions of subsection (a) of this section, the Board of Governors of the Federal Reserve System, may, from tim e to time, w ith respect to all or specified securities or transactions, or classes of securities, or classes of transactions, by such rules and regulations (1) prescribe such lower m arg in requirem ents for the initial extension or m aintenance of credit as it deems necessary or a ppropriate fo r the accommodation of commerce and in dustry, having due reg ard to the general credit situation of the country, and (2) prescribe such higher m arg in require m ents fo r the initial extension or m aintenance of credit as it m ay deem necessary or appropriate to prevent the ex cessive use of credit to finance transactions in securities. REGULATION U APPENDIX (c) It shall be unlaw ful fo r any m em ber of a national securities exchange or any broker or dealer who tran sacts a business in securities through the medium of any such member, directly or indirectly to extend or m aintain credit or a rra n g e fo r the extension or m aintenance of credit to or fo r any custom er— (1) On any security (other than an exempted security) registered on a national securities exchange, in contra vention of the rules and regulations w hich the Board of Governors of the Federal Reserve System shall prescribe under subsections (a) and (b) of this section. (2) W ithout collateral or on any collateral other than exempted securities a n d /o r securities registered upon a national securities exchange, except in accordance w ith such rules and regulations as the Board of Governors of the Federal Reserve System m ay prescribe (A) to perm it under specified conditions and for a limited period any such member, broker, or dealer to m aintain a credit initially extended in conform ity with the rules and regu lations of the Board of Governors of the Federal Reserve System, and (B) to perm it the extension or m aintenance of credit in cases where the extension or m aintenance of credit is not fo r the purpose of purchasing or carrying securities or of evading or circum venting the provisions of p a ra g ra p h (1) of this subsection. (d) It shall be unlaw ful fo r any person not subject to subsection (c) to extend or m aintain credit or to a rra n g e f o r the extension or m aintenance of credit fo r the purpose of purchasing or c a rry in g any security registered on a national securities exchange, in contravention of such rules and regulations as th e Board of Governors of the Federal Reserve System shall prescribe to prevent the excessive use of credit for the purchasing or c arrying of or tra d in g in securities in circum vention of the other provisions of this section. Such rules and regulations m ay impose upon all loans made fo r th e purpose of purchasing or c arrying secu rities registered on national securities exchanges limitations sim ilar to those imposed upon members, brokers, or dealers by subsection (c) of this section and th e rules and regu lations thereunder. This subsection and the rules and reg ulations thereunder shall not apply (A) to a loan made by a person not in the ordinary course of his business, (B) to a loan on an exempted security, (C) to a loan to a dealer to REGULATION U APPENDIX 16 aid in th e financing of th e distribution of securities to cus tom ers not through the medium of a national securities exchange, (D) to a loan by a bank on a security other th a n an equity security, or (E) to such other loans as the Board of Governors of th e Federal Reserve System shall, by such rules and regulations as it m ay deem necessary or appro p ria te in the public in te rest or for the protection of in vestors, exempt, either unconditionally or upon specified term s and conditions or for stated periods, fro m th e opera tion of this subsection and th e rules and regulations th e re under. * ;|c * R E S T R IC T IO N S O N B O R R O W IN G BY M E M B E R S , BROKERS, AN D D EA LERS Sec. 8. It shall be unlawful for any m em ber of a n a tional securities exchange, or any broker or dealer who tra n sa cts a business in securities through the medium of any such member, directly or indirectly— (a) To borrow in the ordinary course of business as a b roker or dealer on any security (other th a n an exempted security) registered on a national securities exchange except (1) fro m or through a m em ber bank of the Federal Reserve System, (2) fro m any nonm em ber bank which shall have filed w ith the Board of Governors of the Federal R eserve System an agreem ent, which is still in force and which is in the form prescribed by the Board, undertak in g to comply w ith all provisions of this Act, the Federal Reserve Act, as amended, and the B anking Act of 1933, which a re applicable to m em ber banks and which relate to the use of credit to finance transactions in securities, and w ith such rules and regulations as m ay be prescribed p u rsu a n t to such provisions of law or fo r the purpose of preventing evasions thereof, or (3) in accordance w ith such rules and regula tions as the Board of Governors of th e Federal Reserve System m ay prescribe to perm it loans between such m em bers a n d /o r brokers a n d /o r dealers, or to perm it loans to m eet emergency needs. Any such agreem ent filed w ith th e Board of Governors of the Federal Reserve System shall be subject to term ination a t any tim e by order of the Board, a fte r appropriate notice and opportunity fo r hearin g be cause of any failure by such bank to comply w ith the provi sions thereof or w ith such provisions of law or rules o r REGULATION U APPENDIX regulation; and, fo r any willful violation of such agreem ent, such bank shall be subject to the penalties provided for violations of rules and regulations prescribed under this title. The provisions of sections 21 and 25 of this title shall apply in the case of any such proceeding or order of the Board of Governors of the Federal Reserve System in the same m anner as such provisions apply in the case of pro ceedings and orders of the Commission. (b) To perm it in the ordinary course of business as a broker his ag gregate indebtedness to all other persons, including custom ers’ credit balances (but excluding in debtedness secured by exempted securities), to exceed such percentage of the net capital (exclusive of fixed assets and value of exchange m em bership) employed in the business, but not exceeding in any case, 2,000 per centum, as the Commission m ay by rules and regulations prescribe as neces sa ry or appropriate in the public interest or for the protec tion of investors. (c) In contravention of such rules and regulations as the Commission shall prescribe for the protection of in vestors to hypothecate or a rra n g e fo r the hypothecation of any securities carried for the account of any customer under circumstances (1) th a t will perm it the commingling of his securities w ithout his w ritten consent w ith the secu rities of any other customer, (2) th a t will perm it such securities to be commingled w ith the securities of any per son other th an a bona fide customer, or (3) th a t will perm it such securities to be hypothecated, or subjected to any lien or claim of the pledgee, fo r a sum in excess of the aggregate indebtedness of such custom ers in respect of such securities. (d) To lend or a rra n g e fo r the lending of any securities carried fo r the account of any customer w ithout the w ritten consent of such customer. ♦ 55s ♦ A CCO U N T S A N D RECORDS, REPORTS, E X A M IN A T IO N S Sec. 17. (b) Any broker, dealer, or other person extend ing credit who is subject to the rules and regulations p re scribed by the Board of Governors of the Federal Reserve System p u rsu a n t to this title shall make such reports to the B oard as it m ay require as necessary or ap p ro p riate to en REGULATION U APPENDIX 18 able it to perform the functions conferred upon it by th is title. If any such broker, dealer, or other person shall fail to make any such rep o rt or fail to fu rn ish full in fo rm a tion therein, or, if in the judgm ent of the Board it is o th er wise necessary, such broker, dealer, or other person shall p e rm it such inspections to be made by the Board w ith respect to the business operations of such broker, dealer, or other person as the Board m ay deem necessary to enable it to obtain the required inform ation. * * * V A L ID IT Y O F C O N T R A C T S Sec. 29. (a) A ny condition, stipulation, or provision bind ing any person to waive compliance w ith any provision of th is title or of any rule or regulation thereunder, or of any rule of a n exchange required thereby shall be void. (b) E very contract made in violation of any provision of this title or of any rule or regulation thereunder, and every contract (including any contract fo r listing a security on a n exchange) heretofore or he re a fte r made the perform ance of which involves the violation of, or th e continuance of any relationship or practice in violation of, any provision of this title or any rule or regulation thereunder, shall be void (1) as regards the rig h ts of any person who, in violation of any such provision, rule, or regulation, shall have m ade or engaged in the perform ance of any such contract, and (2) as reg a rd s the rights of any person who, not being a p a rty to such contract, shall have acquired any rig h t th ere u n d e r w ith actual knowledge of the facts by reason of w hich the m aking or perform ance of such contract was in violation of any such provision, rule or regulation. * * * (c) N othing in this title shall be construed (1) to affect the validity of any loan or extension of credit (or any ex tension or renewal thereof) made or of any lien created p rio r or subsequent to the enactm ent of this title, unless a t the tim e of the m aking of such loan or extension of credit (or extension o r renew al thereof) or the creating of such lien, the person m aking such loan or extension of credit (or extension or renew al thereof) or acquiring such lien shall have actual knowledge of facts by reason of which th e m aking of such loan or extension of credit (or extension or REGULATION U APPENDIX renew al thereof) or the acquisition of such lien is a viola tion of the provisions of this title or any rule or regulation thereunder, or (2) to afford a defense to the collection of any debt or obligation or the enforcem ent of any lien by any person who shall have acquired such debt, obligation, or lien in good faith fo r value and w ithout actual knowledge of the violation of any provision of th is title or any rule or regula tion th ereunder affecting the legality of such debt, obliga tion, or lien. * * * P E N A L T IE S Sec. 32. (a) A ny person who willfully violates any pro vision of this title, or any rule or regulation thereunder the violation of which is made unlaw ful or the observance of which is required under the term s of this title, or any person who willfully and knowingly makes, or causes to be made, any statem ent in any application, report, or document re quired to be filed under this title or any rule or regulation th ereunder or any undertaking contained in a registration statem ent as provided in subsection (d) of section 15 of this title, which statem ent was false or m isleading w ith re spect to any m aterial fact, shall upon conviction be fined not m ore th an $10,000, or imprisoned not more than two years, or both, except t h a t when such person is an exchange, a fine of not exceeding $500,000 m ay be imposed; bu t no person shall be subject to im prisonm ent under this section for the violation of any rule or regulation if he proves th a t he had no knowledge of such rule or regulation. 20 S P E C IM E N O N LY BOARD O F GOVERNORS OF T H E F E D E R A L R E S E R V E SYSTEM S T A T E M E N T O F P U R P O S E O F T H E P R O C EE D S OF A STOCK-SECURED E X T E N S IO N O F C R ED IT BY A BANK. (F E D E R A L R E S E R V E FORM U - l ) A FALSE OR DISHONEST STATEMENT BY THE CUSTOMER OR THE OFFICER OF THE BANK ON THIS FORM MAY BE PUNISHABLE BY FINE OR IMPRISONMENT (U .S. CODE, TITLE 15, SECTION 78ff, AND TITLE 18, SECTION 1 0 0 1 ). Please p r in t o r type (if space is inadequate attach se para te sheet). I ( w e ) ,._________________________________________________ _ have applied fo r an extension of credit fro m (n am e(s)) _____________ _______________________________________in the am ount of $________________ secured in whole ( n a m e o f bnnk) or in p a r t by stock as follow s: P a r t I. Stock Collateral N u m b e r of sh ares Stock ( list s e p ara te ly b y Issue) P a r t II. Source o f valuation w here 10 (in $) TO B E C O M P L E T E D BY T H E B A N K M a rk e t va lu e Sourc e o f valu atio n (in *) M axim um loan v alue u nd e r O ther Collateral L ist collate ral (Ite m iz e p e r c e n t o r m o re ) M a r k e t value RpfnitnHnn M ark et value (in $) S ource o f va lu ation T o ta l : * TT $ M a r k e t value (in *> Sour ce o f v alu ation T o tal: s Good f a i t h loan va lu e ( in $> T otal: T otal: * s Total amount of credit granted $ . P a r t III. 1. The proceeds of this credit are to be used fo r (describ e in detail) 2. I (we) have owned the stock collateral securing this credit continuously fo r (check one) □ six m onths o r m ore □ less th an six months. 1 (W E) H A V E REA D T H IS FORM AND H E R E B Y C E R T IF Y A ND A F F IR M T H A T TO T H E BE ST OF MY (OUR) KNOW LED GE AND B E L IE F T H E S T A T E M E N T S R E Q U IR E D O F ME (US) ARE TRUE, ACCURATE, AND COM PLETE. Manual signature of customer ( s ) : D A T E _________________________________ (SIG N E D ) _______________________________________ ( P r i n t n a m e u n d e r each sig n a tu r e ) ( S tr e e t add ress) P a r t IV. TO BE COMPLETED BY BANK 1. S ta te am ount of any other credit extended to th e customer (s) (a) secured in whole or in p art, di rectly o r indirectly, by any portion of collateral listed in P a r ts I and II: $___________________ and (b) unsecured credit in excess of $5,000 in the aggregate $____________________ 2. Is the collateral listed in P a r t I to be delivered o r has the collateral been delivered from a bank, broker, dealer, or a person o ther th an the customer?---------------------- A gainst p a y m e n t? __________ I HA V E S U P P L IE D T H E IN FO RM A TIO N R E Q U IR E D O F T H E BANK A ND A CC EPT T H E CUSTOM ER’S S T A T E M E N T ON T H IS FORM IN GOOD F A IT H AS D E F IN E D BELOW.* I AM FA M IL IA R W IT H T H E PROVISIO NS O F R E G U L A TIO N U. D A T E _________________________________ (SIG N E D ) _______________________________________ ( P r i n t n am e a nd title of sig n in g officer u n d e r sig n a tu re ) ( N a m e of b a n k ) * Regulation U requh’es that the customer’s statement on this form be accepted by an officer of the bank acting in good faith. Good faith requires that such officer (1) must be alert to the circumstances surrounding the credit, and (2) if he has any information which would cause a prudent man not to accept the statement without inquiry, has investigated and is satisfied that the statement is truthful. This form m ust be retained by the bank fo r a t least six years a fte r the term ination of the credit. F E D E R A L R E S E R V E BANK O F D A LL A S ADVANCES TO A m e n d m e n t N o. 2 E f fe c tiv e F e b r u a r y 8 , 1 9 6 8 to B u l le t in N o. 1 2 D a ted J u ly 14, 1966 A N D DISCOUNTS F O R MEMBER BANKS To All Member Banks in the Eleventh Federal Reserve District: Previously, when a member bank paid before maturity all or part of its collateral note, or prepaid discounted paper, the unearned discount was rebated at the discount rate at which the advance or discount was made or at the current rate, whichever was lower. Effective immediately, this policy is changed so that such rebate will be made at the discount rate at which the advance or discount was made. Therefore, the final paragraph of our Bulletin No. 1, dated November 20, 1967, is no longer in effect and will be omitted at the next revision. Also, paragraph 49 and its heading of this Bank’s Bulletin No. 12, dated July 14, 1966, is hereby amended to read as follows: Rebate of Unearned Discount 49. If a member bank pays before maturity all or part of its col lateral note, or prepays discounted paper, the Federal Reserve Bank will rebate the unearned discount at the discount rate at which the advance or discount was made. Yours very truly, P. E. Coldwell President
@FedFRASER