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F ederal r es er v e Bank o f Dallas


Circular No. 69-35
February 13, 19^9


To Nonbank Lenders and Others Concerned
in the Eleventh Federal Reserve District:
There is attached for your information a copy of a
press statement issued by the Board of Governors of the Federal
Reserve System relating to proposed amendments to Regulations
G, T, and U to implement the recently enacted "Over-The-Counter
Margin Act".
Copies of the Notice of Proposed Rule Making and the
proposed amended Regulation G, Securities Credit by Persons
Other than Banks, Brokers, or Dealers, will be supplied by this
Bank upon request.

Such requests should be directed to James

0. Russell, Chief Examiner, Station K, Dallas, Texas 75222.
Yours very truly,
P. E. Coldwell
Enclosure (l)

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (


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For release in morning papers
Tuesday, February 11, 1969.

February 10, 1969.

The Board of Governors of the Federal Reserve System announced
today proposals to emend margin Regulations G, T, and U to implement the
recent amendment to the Securities Exchange Act of 1934.

Signed into law

on July 29, 1968, the so called "Over-The-Counter Margin Act" (P.L. 90-437)
broadens the Board's authority over stock market credit to cover certain
securities that are not registered on a national securities exchange, and
leaves to the Board the timing and selection of criteria for the application
of margin

requirements to such "over-the-counter" (OTC) stocks.
Regulation G applies to "Credit By Persons Other Than Banks,


kers, or Dealers for Purpose of Purchasing or Carrying Registered Equity
Securities," Regulation T concerns "Credit By Brokers, Dealers, and Members
of National Securities Exchanges," while Regulation U covers "Credit By

for the Purpose of Purchasing or Carrying Registered Stocks."
The proposals, on which the Board has invited comment through

the Federal Reserve Banks from interested persons by March 17, 1969, are
principally designed to include in the regulations the criteria under which
the Board would select the OTC stocks which would be subject to the margin
and other requirements rf the regulations.
Initially, "OTC margin stock" would be stock, not traded on a
national securities exchange, which the Board determines to have the degree
of national investor interest, the depth and breadth of market, the availabil­
ity of information respecting such stocks and tlieir issuers, and the character

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and permanence of the issuers, to warrant treatment similar to stocks that
are registered on such exchanges.

The Board would publish a list of "OTC

margin stocks" at the time the regulations became effective.
In a related change, bank loans to broker/dealers against inventory
positions in OTC margin stocks used to make a bona fide market would be exempt
from margin regulation in much the same way as are loans to specialists making
a market in stocks registered on exchanges.

The criteria used to determine

which broker/dealers are entitled to the exemption are designed to ensure,
so far as possible, that an "OTC Market Maker" does in fact make a market in
the stock, stands ready at all times (within reason) to buy or sell the stock,
and does not unjustifiably "back away" from the market.

Any registered b r o ­

ker/dealer would be eligible for designation as an "OTC Market Maker" if he
meets the standards set forth in Regulation U, files with the Securities and
Exchange Commission a notice of his intent to begin or continue such marketmaking activity and continues to file such other reports as are required pursu­
ant to a rule to be adopted by the Commission respecting market makers in OTC
margin stocks.
In another change, the definition of "creditor" in Regulation T
would be broadened to cover all brokers and dealers.

This would bring under

provisions of the new margin requirements brokers and dealers who now handle
OTC accounts exclusively.

In addition, exempt credit through a special omnibus

account would be available only to brokers and dealers actually subject to the
At present, Regulation T applies to brokers and dealers who are
members of an exchange or who transact business through a member firm.
which is exempt from margin requirement a c o n


extended by brolcer-dealers

- 3 *

through a special omnibiis account to petsons, including foreign firms, who
certify that they observe the regulation even though they are not subject
to it.
The proposed change is not designed to make foreign banks or bro­
ker-dealers subject to U. S. supervision, but only to limit the use of the
special omnibus account privilege to institutions that certify that they
are actually subject to Regulation T.

The privilege would no longer be

available to organizations--including foreign financial institutions and
others— that prefer not to make such a certification.
A special omnibus account is an account in which a member of an
exchange may make wholesale transactions for other brokers without regard
to margin requirements.

These transactions involve customers' securities

on which margin requirements have already been imposed at the retail level.
The Department of Justice and the SEC recently presented to The House Banking
and Currency Committee evidence of abuses whereby special omnibus accounts
have been used by some foreign financial institutions to avoid U. S. margin
If the proposal is adopted, most firms borrowing in special omnibus
accounts would not be affected.

However, in the case of omnibus account cred­

it extended to brokers or dealers who did not certify that they were subject
to Regulation T, no further substitutions of collateral would be permitted
after ninety days from the adoption of the amended regulation.

Credit extended

in such accounts would have to be brought into conformity with ordinary margin
requirements within a year.
At the same time, the Board incorporated into the current proposal
the broadened coverage of margin Regulations G and U that it originally pro­
posed last December.

This applied to loans on mutual fund shares and would

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bring "equity funding" plans or programs under both regulations.

Under the

current proposal, all brokers or dealers, including those selling equity
funding plans or programs, would be subject to Regulation T.
prohibits loans on mutual fund shares.

Regulation T

The Board, at the request of some

firms engaged in extending credit on such plans or programs, plans shortly
to schedule an oral presentation on this aspect of its proposals.
A number of other conforming changes of a technical nature are
also made throughout the regulation as necessary or appropriate.
In a change unrelated to the implementation of P.L. 90-437, the
provision in Regulation G regarding stock options and employee stock purchase
plans would be amended to make clear that an increase in the current market
value of the collateral may be taken into consideration in determining whether
its maximum loan value is equal to the outstanding credit owing pursuant to
that provision's withdrawal requirements.

In other unrelated changes, the

time for retaining Federal Reserve Forms G-3 and U-l (the "purpose statements"
required by Regulations G and U) would be reduced from six to three years to
ease the burden of record retention, and statements obtained by brokers and
dealers in connection with "non-purpose" extensions of credit collateralized
by regulated securities would be obtained on a new Federal Reserve Form T-4.
Attached are copies of the proposed amended regulations which, with
the exception of the indications of textual changes, are in the form in which
they will be submitted for publication to the Federal Register.



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