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F ederal r es er v e Bank o f Dallas
DALLAS, TEXAS

75222

Circular No. 69-36
February 13, 1969

PROPOSED AMENDMENTS TO REGULATIONS G, T, AND U

To Brokers, Dealers, and Members of National Securities
Exchanges 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".
Also attached are copies of the Notice of Proposed
Rule Making and the proposed amended Regulation T in the form
in which they are being submitted for publication in the Federal
Register.
Written comments on the proposed amendments may be
forwarded to this Bank, and should be received not later than
March 17, 1969*
Yours very truly,
P. E. Cold-well
President

Enclosures (3)

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

FEDERAL
press

RESERVE

release

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 amend 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 Act1 (P.L. 90-437)
1
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,

Bro­

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
Banks

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 cf 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 respect-inf* such stocks and their issuers, and the character

- 2

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 bro­

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
regulation.
At present, Regulation T applies to brokers and dealers who are
members of an exchange or who transact business through a member firm.

Credit

which is exempt from margin requirements c a n bo e x t e n d e d by brolcer-dealers

- 3 *

through a spedial omnibiis account to persons, 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
requirements.
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

4 -

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 statemerts 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.

-0Attachments.

ATTACHMENT B

FEDERAL RESERVE SYSTEM
[12 CFR Part 220]
[Reg. T]
CREDIT BY BROKERS, DEALERS, AND MEMBERS OF
NATIONAL SECURITIES EXCHANGES
Notice of Proposed Rule Making

Pursuant to the authority contained in the Securities Exchange
Act of 1934 (15 U.S.C. 78g), as amended by Act of July 29, 1968 (P.L. 90-437;
82 Stat. 452), the Board of Governors of the Federal Reserve System is consid­
ering amending Part 220 (Regulation T) as set forth below— ^ in order to regu­
late the amount of credit that may be extended with respect to certain secu­
rities that are not registered on a national securities exchange.
P.L. 90-437 broadens the Board's authority over stock market credit
to cover "over-the-counter" (OTC) stocks.

The legislation leaves to the

Board the timing and selection of criteria for the implementation of OTC
margin requirements.
The proposed amendments to Regulation T are principally designed
to include in the regulation criteria under which the Board will select
OTC stocks which would be subject to the margin and other requirements of
the regulation.

Initially, such "OTC margin stock" would be stock, not

traded on a national securities exchange, which the Board has determined
to have the degree of national investor interest, the depth and breadth
of market, the availability of information respecting such stocks and
their issuers, and the character and permanence of the issuers, to warrant
treatment similar to stocks that are registered on such exchanges.

—

Copies of the proposed amended regulation, indicating textual changes,
are available at the offices of the Board of Governors of the Federal
Reserve System, Washington, D. C.
20551

- 2 -

Under the proposed regulatory framework, any broker/dealer would
be permitted to lend his customers the amount the regulation permits
(currently 20 per cent) against 01C margin stocks, but he could not bor­
row more than this against such stocks from a bank (with certain exceptions
set forth in Part 221--Regulation U) or other lender unless he was rehypo­
thecating his customers' securities or was registered as an OTC marketmaker in the stock to be pledged, and such stock was being used in the
performance of his function as such a market-maker.
In a related change, the definition of "creditor" would be
broadened to cover any broker or dealer, whether or not a member of a
national securities exchange or transacting a business in securities
through the medium of such a member.

A conforming change would be made

in the special omnibus account provision (§ 220.4(b)) so that exempt
credit, presently extended on their customers' securities to brokers or
dealers who merely undertake to observe the requirements of Regulation T,
would be limited in the future to those who are prepared to certify that
they are actually subject to this Part.
§ 220.4(b) would not be affected.

Most firms borrowing under

However, in the case of credit extended

under this section to persons or firms who are not prepared to certify
that they are actually subject to this Part (Regulation T), no substitutions
of collateral would be permitted aft<*r 90 d . * from the* adoption, of this
ry>
proposal; and such credit would be required to be extinguished within one
year aftar that date, if the proposals are adopted.
The proposal would also introduce to the regulation the term
"regulated security" wUcli vioMld Mirompass registered securities and

- 3 -

OTC margin stock.

Accordingly, regulated equity securities would be

treated throughout this Part as registered equity securities now are,
with corresponding conforming changes as necessary or appropriate.
The proposed amendments would also provide for a committee of
* national securities association to extend the five-day period, within

which the required deposit must be made in connection with transactions
in the general (margin) account, corresponding to the procedure presently
followed by a committee of a national securities exchange.
It is also proposed that statements be obtained on a new form
(Federal Reserve Form T-4) in connection with "non-purpose” extensions
of credit collateralized by regulated securities.
In addition, the proposal would clarify that for the purpose
of Part 220 it is immaterial whether a debt security is convertible,
with or without consideration, presently or in the future, into a regu­
lated stock.
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)).
To aid in the consideration of this matter by the Board, in­
terested persons are invited to submit, in writing, relevant data, views,
or arguments.

Such material should be submitted to any Federal Reserve

Bank, to be received not later than March 17, 1969.

Under the Board's

rules regarding availability of information (12 CFR 261), such materials
will be made available for inspection and copying to any person upon

- 4 -

request unless the person submitting the material requests that it be
considered confidential.

Dated at Washington, D. C., this 10th day of February, 1969.
By order of the Board of Governors.

(Signed) Robert P. Forrestal

Robert P. Forrestal,
Assistant Secretary.

CREDIT BY BROKERS AND DEALERS AMD
INCLUDING MEMBERS OF NATIONAL SECURITIES EXCHANGES

REGULATIONS

Sec.
220.1
220.2
220.3
220.4
220.5
220.6
220.7
220.8

Scope of Part.
Definitions.
General accounts.
Special accounts.
Borrowing by members, brokers, and dealers.
Certain technical details.
Miscellaneous provisions.
Supplement.

Authority: The provisions of this Part 220 issued under sections 7
and 8(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78g, 78h(a))aa
amended by P.L. 90-437 (82 Stat. 452).
§ 220.1

Scope of part.
This Part is issued by the Board of Governors of the Federal

Reserve System (hereinafter called the "Board") pursuant to the Securities
Exchange Act of 1934 (called the "Act" in this Part), particularly sections
7 and 8(a) thereof (15 U.S.C. 78g, 78h(a), as amended), and applies to
every RepRfeeF-ftf-a-RafeieRal-soewyifcies-exehaRge-aRd-fce-eveEy broker or
dealer, whw-feFARsaefes-a-kHsiRess-iR-seeHFifciefl-fchFfcHgh-fehe-ffie^iHEa-ef-aay
including every member of a national securities exchange.
§ 220.2

Definitions.
For the purposes of this Part, unless the context otherwise

requires:
(a)

The terras "person", "member", "broker", "dealer", "buy",

purchase", "sale", "sell", "security", "equity security", and "bank"
have the meanings given them in section 3(a) of the Act (15 U.S.C. 78c(a)).
(b)

The term "creditor" means any KesBfeeF-ef-a-Rafei^Ral-seeHFi-

ties-ejcekaflge-QF-aRy broker or dealer wh©-fei?ansaefe8-a-kHs£Ress-4H-

- 2 -

seeuFifeieg-fchFeagh-fehe-mediHa-ef-aay-SHek-raeabaF including every member
of a national securities exchange.
(c)

The term "customer" includes any person, or any group of

persons acting jointly, (1) to or for whom a creditor is extending or
maintaining any credit, or (2) who, in accordance with the ordinary usage
of the trade, would be considered a customer of the creditor.

It includes,

in case the creditor is a firm, any partner in the firm who would be con­
sidered a customer of the firm if he were not a partner, and includes any
joint adventure in which a creditor participates and which would be con­
sidered a customer of the creditor if the creditor were not a participant.
(d)

The term "registered security" means any security which

(1) is registered on a national securities exchange; or (2) in consequence
of its having unlisted trading privileges on a national securities exchange
is deemed, under the provisions of section 12(f) of the Act (15 U.S.C. 781),
to be registered on a national securities exchange; or (3) is exempted by
the Securities and Exchange Commission from the operation of section 7(c)(2)
of the Act (15 U.S.C. 78g(c)(2)) only to the extent necessary to render law­
ful any direct or indirect extension or maintenance of credit on such security
or any direct or indirect arrangement therefor which would not have been un­
lawful if such security had been a security (other than an exempted security)
registered on a national securities exchange.
(<0 (1)

The term "OTC margin stock" means stock, not traded on

a national securities exchange, which the Board of Governors of the Federal
Reserve System has determined to have the degree of national investor
interest, the depth and breadth of market, the availability

- 3 -

of information respecting the stock and its Issuer, and the character and
permanence of the issuer to warrant such treatment.
(2)

The Board will from time to time publish a list of OTC margin

stock as to which the Board has made the determinations described in sub­
paragraph (1) of this paragraph (e).

Except as provided in subparagraph (4)

of this paragraph (e), such stocks shall meet the requirements that:
(A)

The stock is subject to registration under § 12(g)(1) of the

Securities Exchange Act of 1934 (15 U.S.C. 781(g)(1)), or if issued by an
insurance company subject to § 12(g)(2)(G)

(15 U.S.C. 781(g)(2)(G)), the

issuer had at least $1 million of capital and Burplus,
(ii)

Five or more dealers, stand willing to, and do in fact, make

a market in such stock including making regularly published bona fide bids
and offers for such stock for their own accounts, or the stock is registered
on a securities exchange that is exempted by the Securities and Exchange
Commission from registration as a national securities exchange pursuant to
section 5 of the Act (15 U.S.C. 78e),
(iii)

There are 1500 or more holders of record of the stock who

are not officers, directors, or beneficial owners of 10 per cent or more
of the stock,
(iv)

The issuer, or a predecessor in interest, has been in

existence for at least three years,
(v)

The stock has been publicly traded for at least six months, and

(vi)

Daily quotations>for both bid and asked prices for the stock

are continuously available to the general public;
gnd shall meet three of the four additional requirements that:
(vii)

There are 500,000 or more shares of such stock outstanding in

addition to shares held beneficially_by officers, directors, or beneficial
owners of more than 10 per cent of the stock,

- 4 -

(viii)

The shares described in subdivision (vli) of this sub­

paragraph have a market value in the aggregate of at least $10 million,
(ix) The minimum average bid price of such
by the Board in the latest month, is at least $10 per
(x)

stock, as determined
share, and

The issuer had at least $5 million of capital, surplus

and undivided profits.
Q.)

The Board shall from time to time remove from the list

described in subparagraph (2) of this paragraph (e) stocks that cease to:
(i
_)

Exist or for which the issuer ceases to exist, or

(ii)

Meet substantially, the provisions of subparagraph (1)

of this paragraph (e).
(4)

The foregoing notwithstanding, the Board may, upon

owninitiative, or upon application by any interested

party, emit

its
or remove any

stock that is not traded on a national securities exchange from or add
any such stock to such list of OTC margin stocks if in the judgment pi
the Board, such action is necessary or appropriate in the public interest.
(>
J)
to

be

made,

on

such

lis t

any
of

It shall be unlawful for any creditor to make, or cause
re p re s e n ta tio n

OTC

m a rg in

to

sto ck s

th e
is

e ffe c t
e v id e n c e

th a t
th a t

th e
th e

in c lu s io n
B oard

or

of
th e

a

s e c u rity
S e c u ritie s

and Exchange Commission has in any way passed upon the merits of, or given
approval to, such security or any transaction therein.

Any statement, adver^

tlaement, or other similar coininunlcation containing a reference to the Board in
connection with such stocks or such list shall constitute such an unlawful repre­
sentation.
(f) The term "regulated security" means any registered security
or OTC margin stock.
The term "exempted security" has the meaning given it
in section 3(a) of the Act (15 U.S.C. 78c(a)(12)), except that the term

- 5 -

does not include a security which is exempted by the Securities and
Exchange Commission from the operation of section 7(c)(2) of the Act
(15 U.S.C. 78g(c)(2)) only to the extent described in paragraph (d)(3)
of this section.
■(#}(h)

The term "non-equity security" means any security other

than an equity security or an exempted security.
§ 220.3

General accounts.
(a)

Contents of general account.— All financial relations

between a creditor and a customer, whether recorded in one record or in
more than one record, shall be included in and be deemed to be part

of

the customer's general account with the creditor, except that the rela­
tions which § 220.4 permits to be included in any special account provided
for by that section may be included in the appropriate special account,
and all transactions in commodities, and, except to the extent provided
in paragraph (b)(2) of § 220.3, all transactions in non-equity securities,
exempted securities, and in other securities having no loan value in a
general account under the provisions of § 220.3(c) and § 220.8 (the Sup­
plement to Regulation T) (except unissued securities, short sales and
purchases to cover short sales, securities positions to offset short sales,
and contracts involving an endorsement or guarantee of any put, call, or
other option), shall be included in the appropriate special account pro­
vided for by § 220.4.

During any period when such § 220.8 specifies that

regulated equity securities shall have no loan value in a
general account or special convertible debt security account subject to
S 221.4(1), any transaction consisting of a purchase of a security other than

« 6 •
a purchase of a security to reduce or close out a short position shall be
effected in the special cash account provided for by § 220.4(c) or in some
other appropriate special account provided for by § 220.4.
(b)

General rule.—

(1) A creditor shall not effect for or

with any customer in a general account, special bond account subject to
§ 220.4(i), or special convertible debt security account (sometimes
referred to herein as "special convertible security account") subject to
§ 220.4(j) any transaction which, in combination with the other trans­
actions effected in such account on the same day, creates an excess of
the adjusted debit balance of such account over the maximum loan value
of the securities in such account, or increases any such excess, unless
in connection therewith the creditor obtains, as promptly as possible
and in any event before the expiration of five full business days follow­
ing the date of such transaction, the deposit into such account of
cash or securities in such amount that the cash deposited plus the loan
value of the securities deposited equals or exceeds the excess so created
or the increase so caused.
(2)

Except as permitted in this subparagraph, no withdrawal

of cash or ¥@gisfcei=@d regulated or exempted securities shall be permissible
if the adjusted debit balance of the account (whether the general account,
the special bond account subject to § 220.4 (i) or the special convertible
security account subject to § 220.4(j)) would exceed the maximum loan
value of the securities in such account after such withdrawal.

The ex­

ceptions are available only in the event no cash or securities need to be
deposited in such account in connection with a transaction on a previous
day and none would need to be deposited thereafter in connection with any

- 7

withdrawal of cash or securities on the current day.

The permissible

exceptions are (i) registered non-equity securities or exempted securities
held in the general account on March 11, 1968, and continuously thereafter
may be withdrawn upon the deposit in the account of cash (or FegisfceFed
regulated equity securities counted at their maximum loan value) at least
equal to the "retention requirement" of such withdrawn securities, or
(ii) except as provided in (i) of this subparagraph, securities having
loan value in the general account, the special bond account subject to
§ 220.4(i), or the special convertible security account subject to
§ 220.4 (j)

may be withdrawn upon the deposit in such account of cash

or

securities having loan value in such account counted at the maximum loan
value at least equal to the "retention requirement" of those securities,
or (iii) cash may be withdrawn upon the deposit in the general account,
the special bond account subject to § 220.4(i), or the special converti­
ble security account subject to § 220.4(j) of securities having a maximum
loan value in such account at least equal to the amount of cash withdrawn,
or (iv) upon the sale (other than the short sale) of securities having
loan value

in the general account, special bond account subject to

§ 220.4(i)or special convertible security account subject to §

220.4(j)

there may be withdrawn in cash an amount equal to the difference between
the current market value of the securities sold and the "retention require­
ment0 of such securities, or (v) upon the sale (other than the short sale)
of a registered non-equity security or an exempted security that was held
in the general account on March 11, 1968 and continuously thereafter there
may be withdrawn in cash an amount equal to the difference between the
current market value of the securities sold and the "retention requirement"
of those securities as prescribed in § 220.8 (the Supplement to Regulation T)«

- 8 (3)Rules for computing the maximum loan value of
in a general account, special bond account

the securities

subject to § 220.4(1) or

special convertible security account subject to § 220.4(j) and the adjusted
debit balance

of such account are provided in paragraphs (c) and (d) of

this section,

and certain modifications of and exceptions to the general

rule stated in this paragraph are provided in the subsequent paragraphs
of this section and in § 220.6.
(c)

Maximum loan value and current market value.—

(1)

The

maximum loan value of the securities in a general account, special bond
account subject to § 220.4(1), or special convertible security account
subject to § 220.4(j) is the sum of the maximum loan values of the indi­
vidual securities in such account, including securities (other than
unissued securities) bought for such account but not yet debited thereto,
but excluding securities sold for such account whether or not payment has
been credited thereto.
(2)

Except as otherwise provided in this paragraph, the maximum

loan value of a security in a general account, special bond account

sub­

ject to § 220.4(1), or special convertible security account subject to
§ 220.4(j) shall be such maximum loan value as the Board shall prescribe
from time to time in 5 220.8 (the Supplement to Regulation T).

No col­

lateral other than an exempted security or a registered non-equity securi­
ty held in such account on March 11, 1968 and continuously thereafter, or
fegisfceEed regulated equity security shall have any loan value in a general
account except that a registered equity security eligible for a special
convertible security account pursuant to § 220.4(j) shall have loan value
in a general account only if held in the account on March 11, 1968 and
continuously thereafter.

-

(3)

9 -

A warrant or certificate which evidences only a right to

subscribe to or otherwise acquire any security and which expires within
ninety days of issuance shall have no loan value in a general account,
special bond account subject to § 220.4(i), or special convertible securi­
ty account subject to § 220.4(j); but, if the account contains the securi­
ty to the holder of which such warrant or certificate has heen issued and
such warrant or certificate is held in an appropriate account maintained
by the creditor for the customer the current market value of such securi­
ty (if such security is a i?e»gisfee¥e4 regulated security) shall, for the
purpose of calculating its maximum loan value, be increased by the current
market value of such warrant or certificate.
(4)

For the current market value of a security throughout the

day of its purchase or sale, the creditor shall use its total cost or the
net proceeds of its sale, as the case may be, and at any other time shall
use the closing sale price of the security on the preceding business day
as shown by any regularly published reporting or quotation service.

In the

absence of any such closing sale price, the creditor may use any reasonable
estimate of the market value of such security as of the close of business
on such preceding business day.
(d)
the

Adjusted debit balance.—

For the purpose of this Part,

adjusted debit balance of a general account, special bond account sub­

ject to § 220.4 (i) or special convertible security account subject to
§
220.4 (j) shall be calculated by taking

the sum of the following items:

(1)

the net debit balance, if any, of such account;

(2)

the total cost of any securities (other than unissued

securities) bought for such account but not yet debited thereto;

- i o ­

cs)

the current market value of any securities (other than

unissued securities) sold short in the general account plus, for each
security (other than an exempted security), such amount as the Board
shall prescribe from time to time in § 220.8 (the Supplement to Regula­
tion T) as the margin required for such short sales, except that such
amount so prescribed in such § 220.8 need not be included when there are
held

in the general account the same securities or securities exchange­

able

or convertible within 90 calendar days, without restriction other

than

the payment of money,
(4)

into such securities sold short;

the amount of margin specified by paragraph (h) of this

section for every net commitment in such account in unissued securities,
plus all unrealized losses on each commitment in unissued securities and
minus all unrealized gains (not exceeding the required margin) on each
commitment in unissued securities; and
(5)

the amount of any margin customarily required by the creditor

in connection with his endorsement or guarantee of any put, call or other
option;
and deducting there from the sum of the following items:
(6)
(7)
unissued

the net credit balance, if any, of such account; and
the net proceeds of sale of any securities (other than

securities) sold for such account but for which payment has not

yet been credited thereto.
In case such account is the account of a partner of the creditor
or the account of a joint

venture

in which the creditor participates, the

adjusted debit balance shall be computed according to the foregoing rule
and the supplementary rules prescribed in § 220.6(a) and (b).

- 11 -

(e)

•f

1/

Liquidation in lieu of deposit? — ’ -

In any case in which

the deposit required by paragraph (b) of this section, or any portion
thereof, is not obtained by the creditor within the five-day period
specified therein, registered regulated nonexempted securities shall be
sold (or, to the extent that there are insufficient registered regulated
nonexempted securities in the general account, special bond account sub­
ject to § 220.4(i), or special convertible security account subject to
§ 220.4(j) other liquidating transactions shall be effected in such
account), prior to the expiration of such five-day period, in such amount
that the resulting decrease in the adjusted debit balance of such account
exceeds, by an amount at least as great as such required deposit or the
undeposited portion thereof, the "retention requirement" of any registered
regulated or exempted securities sold:

Provided, That a creditor is not

required to sell securities or to effect other liquidating transactions
specified by this paragraph in an amount greater than necessary to elimi­
nate the excess of the adjusted debit balance of such account over the
maximum loan value of the securities remaining in such account after such
liquidation.
(f)

Extensions of time.

-

In exceptional cases, the five-

day period specified in paragraph (b) of this section may, on application
of the creditor, be extended for one or more limited periods commensurate
with the circumstances

(_
1)

by any regularly constituted committee of

a national securities exchange having jurisdiction over the business
conduct of its members, of which exchange

* \_f This requirement relates to the action to be taken when a customer
fails to make the deposit required by § 220.3(b), and it is not intended
to countenance on the part of customers the practice commonly known as
"free-riding", to prevent which the principal national securities exchanges
have adopted certain rules. See the rules of such exchanges and § 220.7(e).

- 12 -

the creditor is a member or through which his transactions are effected,
or (2) in instances where the procedure described above is not readily
available or appropriate, by a committee of a national securities associ­
ation; Provided, That such committee is satisfied that the creditor is
acting in good faith in making the application and that the circumstances
are in fact exceptional and warrant such action.
(g)

Transactions on given day.—

For the purposes of paragraph

(b) of this section, the question of whether or not an excess of the ad­
justed debit balance of a general account, special bond account subject
to § 220.4 (i), or special convertible security account subject to
§ 220.4 (j) over the maximum loan value of the securities in such account
is created or increased on a given day shall be determined on the basis
of all the transactions in the account on such day exclusive of any
deposit of cash, deposit of securities, covering transaction or other
liquidation that has been effected on such day, pursuant to the require­
ment of paragraphs (b) or (e) of this section, in connection with a trans­
action on a previous day.

In any case in which an excess so created, or

increase so caused, by transactions on a given day does not exceed $100,
the creditor need not obtain the deposit specified therefor in subpara­
graph (b)(1) of this section.

Any transaction which serves to meet the re­

quirements of paragraph (e) of this section or otherwise serves to permit
any offsetting transaction in an account shall, to that extent, be
unavailable to permit any other transaction in such account.

For the pur­

poses of this Part (Regulation T), if a security has maximum loan value
under subparagraph (c)(1) of this section in a general account, a sale

- 13 -

of the same security (even though not the same certificate) in such
account shall be deemed to be a long sale and shall not be deemed to be
or treated as a short sale.
(h)

Unissued securities.—

(1)

The amount to be included in

the adjusted debit balance of a general account, special bond account
subject to § 220.4(1), or special convertible security account subject
to § 220.4(j) as the margin required for a net long commitment in unissued
securities shall be the current market value of the net amount of unissued
securities long minus the maximum loan value which such net amount of
securities would have if they were issued Fegisfc©Fed regulated securities
held in such account; and the amount to be so included as the margin
required for a net short commitment in unissued securities shall be the
amount which would be required as margin for the net amount of unissued
securities short if such securities were issued securities and were sold
short in such account: Provided, That no amount need be included as mar­
gin for a net short commitment in unissued securities when there are held
in such account securities in respect of which the unissued securities
are to be issued, nor for any net position in unissued securities that are
exempted securities.
(2)

Whenever a creditor, pursuant to a purchase of an unissued

security for a customer, receives an issued security which is not a
Fegi«feeFed regulated or exempted security, the creditor shall treat any
payment by him for such issued security as a transaction (other than a
withdrawal) which increases the adjusted debit balance of a general account,
special bond account subject to § 220.4(i), or special convertible security
account subject to § 220.4(j) by the amount of the payment minus the amount

- 14 -

required to be included in the adjusted debit balance of such account, at
the time of and in connection with the purchase of the unissued security,
as the margin required for such purchase.

- 15 -

§ 220.4

Special accounts.
(a)

establish

General rule. - (1) Pursuant to this section,

forany customer one
(2)

acreditor may

or more special accounts.

Each such special account shall be recorded separately and

shall be confined to the transactions and relations specifically authorized
for such account by the appropriate paragraph of this section and to trans­
actions and relations incidental to those specifically authorized.

An

adequate record shall be maintained showing for each such account the full
details of all transactions in the account.
(3)

A special account established pursuant to this section shall

not be used in any way for the purpose of evading or circumventing any of
the provisions of this Part.

If a customer has with a creditor both a gen­

eral account and one or more such special accounts, the creditor shall treat
each such special account as if the customer had with the creditor no general
account, special bond account subject to § 220.4(i), or special convertible
security account subject to § 220.4(j).
(4)

The only other conditions to which transactions in such special

accounts shall be subject under the provisions of this Part shall be such
conditions as are specified in the appropriate paragraph of this seetion and
in

§§220.2, 220.6, er220.7, or 220.8.
(b)

Special omnibus account. - In a special omnibus

account,

a

member of a national securities exchange may effect and finance transactions
for a broker or dealer, from whom the member accepts in good faith?/ a signed
statement to the effect that he is subject to the provisions of this Part
{ep-fehafe-he-dees-n©fe-exteend-er-ma£ntea£n-ered£fe-fee-©r-£or-eti8teeraer8-exee?fc-in
eeeerdanee-feherewiteh-as-if-he-were-subjeefe-feherefee) and from whom the member
—I As defined in § 220.7(c).

- 16 -

receives (1) written notice, pursuant to a rule of the Securities and Exchange
Commission concerning the hypothecation of customers’ securities by brokers
or dealers (Rule 8c-l (17 CFR § 240.8c-l) or Rule 15c2-l (17 CFR § 240.15c2-l)),
to the effect that all securities carried in the account will be carried for
the account of the customers of the broker or dealer and (2) written notice
that any short sales effected in the account will be short sales made in
behalf of the customers of the broker or dealer other than his partners.
(c)

Special cash account. - (1) In a special cash account, a

creditor may effect for or with any customer bona fide cash transactions in
securities in which the creditor may:
(1)

Purchase any security for, or sell any security to, any cus­

tomer, provided funds sufficient for the purpose are already held in the
account or the purchase or sale is in reliance upon an agreement accepted
by the creditor in good faith that the customer will promptly make full cash
payment for the security and that the customer does not contemplate selling
the security prior to making such payment.
(ii)

Sell any security for, or purchase any security from, any

customer, provided the security is held in the account or the creditor is
informed that the customer or his principal owns the security and the pur­
chase or sale is in reliance upon an agreement accepted by the creditor in
good faith that the security is to be promptly deposited in the account.
(2)

In case a customer purchases a security (other than an

exempted security) in the special cash account and does not make full cash
payment for the security within 7 days after the date on which the security
is so purchased, the creditor shall, except as provided in subparagraphs

- 17 -

(3)-(7) of this paragraph, promptly cancel or otherwise liquidate the trans­
action or the unsettled portion thereof.
(3)

If the security when so purchased is an unissued security,

the period applicable to the transaction under subparagraph (2) of this
paragraph shall be 7 days after the date on which the security is made avail­
able by the issuer for delivery to purchasers.

If the security when so pur­

chased is a "when distributed1 security which is to be distributed in accord­
1
ance with a published plan, the period applicable to the transaction under
subparagraph (2) of this paragraph shall be 7 days after the date on which
the security is so distributed.

If the security when so purchased is a new

security issued or to be issued for the purpose of refunding outstanding
securities which mature, or are to be payable upon presentation for redemption,
within 35 days of the date on which the new security is made available by the
issuer for delivery to purchasers, the period applicable to the transaction
under subparagraph (2) of this paragraph shall be 7 days after such maturity
or payment date:

Provided, That this sentence shall apply only to the payment

of that portion of the purchase price that does not exceed 103 per cent of
the amount that will be payable to the purchaser of the new security upon
such maturity of, or payment for, securities owned by him at the time of
the purchase.
(4)

If any shipment of securities is incidental to the consumation

of the transaction, the period applicable to the transaction under subparagraph
(2) of this paragraph shall be deemed to be extended by the number of days
required for all such shipments, but not by more than 7 days.
(5)

If the creditor, acting in good faith in accordance with

subparagraph (1) of this paragraph, purchases a security for a customer, or

- 18 -

sells a security to a customer, with the understanding that he is to deliver
the security promptly to the customer, and the full cash payment to be made
promptly by the customer is to be made against such delivery, the creditor
may at his option treat the transaction as one to which the period applicable
under subparagraph (2) of this paragraph is not the 7 days therein specified
but 35 days after the date of such purchase or sale.
(6)

If an appropriate committee of a national securities exchange

or a national securities association is satisfied that the creditor is acting
in good faith in making the application, that the application relates to a
bona fide cash transaction, and that exceptional circumstances warrant such
action, such committee, on application of the creditor, may (i) extend any
period specified in subparagraphs (2), (3), (4) or (5) of this paragraph for
one or more limited periods commensurate with the circumstances, or (ii), in
case a security purchased by the customer in the special cash account is a
regiafeered regulated or exempted security, authorize transfer of the trans­
action to a general account, special bond account subject to § 220.4(i),
special convertible security account subject to § 220.4(j), or special om­
nibus account and completion of the transaction pursuant to the provisions
of this Part relating to such an account.
(7)
business days.

The 7-day periods specified in this paragraph refer to 7 full
The 35-day period and the 90-day period specified in this

paragraph refer to calendar days, but if the last day of any such period is
a Saturday, Sunday, or holiday, such period shall be considered to end on
the next full business day.

For the purposes of this paragraph, a creditor

may, at his option, disregard any sum due by the customer not exceeding $100.

- 19 -

(8)

Unless funds sufficient for the purpose are already in the

account, no security other than an exempted security shall be purchased for,
or sold to, any customer in a special cash account ■with the creditor if any
security other than an exempted security has been purchased by such customer
in such an account during the preceding 90 days, and then, for any reason
whatever, without having been previously paid for in full by the customer,
the security has been sold in the account or delivered out to any broker or
dealer:

Provided, That an appropriate committee of a national securities

exchange or a national securities association, on application of the creditor,
may authorize the creditor to disregard for the purposes of this subparagraph
any given instance of the type therein described if the committee is satisfied
that both creditor and customer are acting in good faith and that circumstances
warrant such authorization.

For the purposes of this subparagraph, the cancela­

tion of a transaction, otherwise than to correct an error, shall be deemed to
constitute a sale.

The creditor may disregard for the purposes of this sub­

paragraph a sale without prior payment provided full cash payment is received
within the period described by subparagraph (2) of this paragraph and the
customer has not withdrawn the proceeds of sale on or before the day on which
such payment (and also final payment of any check received in that connection)
is received.

The creditor may so disregard a delivery of a security to another

broker or dealer provided such delivery was for deposit into a special cash
account which the latter broker or dealer maintains for the same customer
and in which account there are already sufficient funds to pay for the secu­
rity so purchased; and for the purpose of determining in that connection the
status of a customer's account at another broker or dealer, a creditor may

- 20 -

rely upon a written statement which he accepts in good faith from such other
broker or dealer.
(d)

Special arbitrage account. - In a special arbitrage account,

a member of a national securities exchange may effect and finance for any
customer bona fide arbitrage transactions in securities.

For the purposes

of this paragraph, the term "arbitrage" means (1) a purchase or sale of a
security in one market together with an offsetting sale or purchase of the
same security in a different market at as nearly the same time as practicable,
for the purpose of taking advantage of a difference in prices in the two mar­
kets , or (2) a purchase of a security which is, without restriction other
than the payment of money, exchangeable or convertible within 90 calendar
days following the date of its purchase into a second security together with
an offsetting sale at or about the same time of such second security, for
the purpose of taking advantage of a disparity in the prices of the two
securities.
(e)

Special commodity account. - In a special commodity account,

a creditor may effect and carry for any customer transactions in commodities.
(f)

Special miscellaneous account. - In a special miscellaneous

account, a creditor may:
(1)

With the approval of any regularly constituted committee of

a national securities exchange having jurisdiction over the business conduct
of its members, extend and maintain credit to meet the emergency needs of
any creditor;
(2)(i)

Extend and maintain credit, (a) to or for any partner of

a firm which is a member of a national securities exchange to enable such
partner to make a contribution of capital to such firm, or to purchase stock

- 21 -

in an affiliated corporation of such firm; or (b) to or for any person who
is or will become the holder of stock of a corporation which is a member of
a national securities exchange to enable such person to purchase stock in
such corporation, or to purchase stock in an affiliated corporation of such
corporation; provided the lender as well as the borrower is a partner in
such member firm or a stockholder in such member corporation, or the lender
is a firm or a stockholder in such member corporation, or the lender is a
firm or corporation which is a member of a national securities exchange and
the borrower is a partner in such firm or a stockholder in such corporation;
(ii)

Extend and maintain subordinated credit to another creditor

for capital purposes:
(a)

Provided, That,

Either the lender or the borrower is a firm or corporation

which is a member of a national securities exchange, the other party to the
credit is an affiliated corporation of such member firm or corporation, and,
in addition to the fact that an appropriate committee of the exchange is
satisfied that the credit is not in contravention of any rule of the exchange,
the credit has the approval of such committee, or
(b)

The lender as well as the borrower is a member of such exchange,

the credit has the approval of an appropriate committee of the exchange, and
the committee, in addition to being satisfied that the credit is not in
contravention of any rule of the exchange, is satisfied that the credit is
outside the ordinary course of the lender’s business, and that, if the bor­
rower's firm or corporation or an affiliated corporation of such firm or
corporation does any dealing in securities for its own account, the credit
is not for the purpose of increasing the amount of such dealing.

- 22 -

(iii)

For the purpose of subdivisions (i) and (ii) of this sub­

paragraph, the term "affiliated corporation" means a corporation all the
common stock of which is owned directly or indirectly by the member firm
or general partners and employees of the firm, or by the member corporation
or holders of voting stock and employees of the corporation and an appro­
priate committee of the exchange has approved the member firm's or member
corporation's affiliation with such affiliated corporation.
(3)

Furchase any security from any customer who is a broker or

dealer, or sell any security to such customer:

Provided, That the creditor

acting in good faith purchases or sells the security for delivery, against
full payment of the purchase price, as promptly as practicable in accordance
with the ordinary usage of the trade;
(4)

Effect and finance, for any member of a national securities

exchange who is registered and acts as odd-lot dealer in securities on the
exchange, such member's transactions as an odd-lot dealer in such securities,
or effect and finance, for any joint venture in which the creditor partic­
ipates, any transactions in any securities of an issue with respect to which
all participants, or all participants other than the creditor, are registered
and act on a national securities exchange as odd-lot dealers;
(5)

Effect transactions for and finance any joint venture or

group in which the creditor participates and in which all participants are
dealers (whether such participants be acting jointly or severally), or any
member thereof or participant therein, for the purpose of facilitating the
underwriting or distributing of all or part of an issue of securities (i)
not through medium of a national securities exchange, or (ii) the distribution

- 25 -

shall promptly liquidate a portion of the collateral so acquired and apply
the proceeds of the sale to reduce the credit, in an amount equal to at least
twice the required payment or portion thereof for the first two such liquida­
tions, at least equal to the required payment or portion thereof for the
third such liquidation, and at least sufficient so that the remaining credit
does not exceed the current maximum loan value of the remaining collateral
after the fourth such liquidation:

Provided, That, no such liquidation need

be in an amount greater than is necessary so that the remaining credit does
not exceed the maximum loan value of the remaining collateral determined as
of the date the credit was extended:

And provided further, That as to loans

made between October 20, 1967, andMarch 11,1968 such four succeeding

periods

shall begin on March 11, 1968; and
(3)

The creditor shall not permit any withdrawal of cash or secu­

rities from the account sc long as the remaining credit excccds the maximum
loan value of the remaining collateral in the account, except that when the
remaining credit extended in connection with a given acquisition of secu­
rities in the account has become equal to or less than the maximum loan value
of such securities as prescribed in § 220.8 (the Supplement to Regulation T)
(or in connection with an acquisition after October 20, 1967, the requirements
of subparagraph (2) of this section have been fulfilled), such securities
shall be transferred to the general account (or, if eligible, to a special
convertible security account pursuant
remaining portion of such credit.

to § 220.4(j)) together with any

In order to facilitate the exercise of

a right in accordance with the provisions of this paragraph, a creditor may
permit the right to be transferred from a general account to the special
subscriptions account without regard to any other requirement of this Part.

- 26 -

(1)

Special bond account. - In a special bond account a creditor

may effect and finance transactions in exempted securities and registered
non-equity securities for any customer.
(j)

Special convertible debt security account. - (1) In a special

convertible debt security account a creditor may extend credit on any reg­
istered regulated

security consisting of a debt security convertible

ifcto regulated stock or a debt security carrying a warrant or right to sub­
scribe to or purchase such stock.

(2)

A special convertible debt security account shall be subject

to the same conditions to which it would be subject if it were a general
account except that the maximum loan value of the securities in the account
shall be as prescribed from time to time in § 220.8 (the Supplement to Regula­
tion T).
(3)

Any security which ceases to be an equity security while held

in this account shall continue to be treated as an equity security as long
as it is continuously held in this account.
(4)

In the

held in this account,

event any stock is to be substituted fora security
or if a security held in this account is to

be used

to offset a short sale in the general account, such security shall thereupon
be transferred to the customer's general account against a deposit of cash
or registered regulated equity securities eligible for an extension of credit
in this account (counted at

their maximum loan value) equal to at

maximum loan value ofthe security for x/hich such substitution
out regard to the retention requirement of § 220.3(b)(2).

is

least the
made, with­

- 27 -

§ 220.5

Borrowing by members, brokers, and dealers.
(a)

General rule. - It is unlawful for any creditor, directly or

indirectly, to borrow in the ordinary course of business as a broker or dealer
on any registered security (other than an exempted security) except:
(1)

from or through a member bank of the Federal Reserve System;

(2)

from any nonmember bank which shall have filed with the Board

an agreement which is still in force and which is in the form prescribed by
this Part; or
(3)

to the extent to which, under the provisions of this Part,

loans are permitted between members of a national securities exchange and/or
brokers and/or dealers, or loans are permitted to meet emergency needs.
(b)

Agreements of nonmember banks. - An agreement filed pursuant

to section 8(a) of the Act (15 U.S.C. 78h(a)) by a bank not a member of the
Federal Reserve System shall be substantially in the form contained in Form
F.R. T-2 if the bank has its principal place of business in a territory or
insular possession of the United States, or if it has an office or agency
in the United States and its principal place of business outside the United
States.

The agreement filed by any other nonmember bank shall be in substan­

tially the form contained in Form F.R. T-l.

Any nonmember bank which has

executed any such agreement may terminate the agreement if it obtains the
written consent of the Board.

Blank forms of such agreements, information

regarding their filing or termination, and information regarding the names
of nonmember banks for which such agreements are in force, may be obtained
from any Federal Reserve Bank.

- 28 -

(c)

Borrowing from other creditors. - A creditor may borrow from

another creditor in the ordinary course of business as a broker or dealer
on any registered security to the extent and subject to the terms upon which
the latter may extend credit to him in accordance with the provisions of
this Part, and subject to any other applicable provisions of law.
§ 220.6

Certain technical details.
(a)

Accounts of partners. - In case a general account, special

bond account subject to 5 220.4(i), or special convertible security account
subject to § 220.4(j) is the account of a partner of the creditor, the
creditor, in calculating the adjusted debit balance of such account and the
maximum loan value of the securities therein, shall disregard the partner's
financial relations with the firm as reflected in his capital and ordinary
drawing accounts.
(b)

Contribution to joint venture.

-

in case a general account,

special bond account subject to § 220.4(i), or special convertible security
account subject to § 220.4(j) is the account of a joint venture in which
the creditor participates, the adjusted debit balance of such account shall
include, in addition to the items specified in § 220.3(d), any amount by
which the creditor's contribution to the joint venture exceeds the contribu­
tion which he would have made if he had contributed merely in proportion to
hisright to share in the
(c)

Guaranteed

shallbe given

any effect

(d)

profits of the joint venture.
accounts. - No guarantee of a customer'saccount
for purposes of this Part.

Transfer of accounts. - (1) In the event of thetransfer

of

a general account, special bond account subject to § 220.4(i), or special

- 29 -

convertible security account subject to § 220.4(j) from one creditor to
another, such account may be treated for the purposes of this Part as if it
had been maintained by the transferee from the date of its origin:

Provided,

That, the transferee accepts in good faith a signed statement of the trans­
feror that no cash or securities need be deposited in such account in connec­
tion with any transaction that has been effected in such account or, in case
he finds that it is not practicable to obtain such a statement from the
transferor, accepts in good faith such a signed statement from the customer.
(2)

In the event of the transfer of a general account, special

bond account subject to § 220.4(i), or special convertible security account
subject to § 229.4(j), from one customer to another, or to others, as a
bona fide incident to a transaction that is not undertaken for the purpose
of avoiding the requirements of this Part, each such transferee account may
be treated by the creditor for the purposes of this Part as if it had been
maintained for the transferee from the date of its origin:

Provided, That,

the creditor accepts in good faith and keeps with such transferee account
a signed statement of the transferor describing the circumstances giving
rise to the transfer.
(e)

Reorganizations. - A creditor may, without regard to the

other provisions of this Part, effect for a customer the exchange of any
J?egi9feei!e4 regulated or exempted security in a general account, special
bond account subject to § 220.4(i), or special convertible security account
subject to § 220.4(j), for the purpose of participating in a reorganization
or recapitalization in which the security is involved:

Provided, That if

an unregistered unregulated non-exempted security is acquired in exchange,

- 30 -

the creditor shall not, for a period of 60 days following such acquisition,
permit the withdrawal of such security or the proceeds of its sale from
such account except to the extent that such security or proceeds could be
withdrawn if the security were a pegisfeered regulated security.
(f)

Time of receipt of funds or securities. - For the purposes

of this Part, a creditor may, at his option (1) treat the receipt in good
faith of any check or draft drawn on a bank which in the ordinary course
of business is payable on presentation, or any order on a savings bank with
passbook attached which is so payable, as receipt of payment of the amount
of such check, draft or order; (2) treat the shipment of securities in good
faith with sight draft attached as receipt of payment of the amount of such
sight draft; and (3) in the case of the receipt in good faith of written
or telegraphic notice in connection with a special omnibus account of a cus­
tomer not located in the same city that a specified security or a check or
draft has been dispatched to the creditor, treat the receipt of such notice
as receipt of such security, check or draft:

Provided, however, That if

the creditor receives notice that such check, draft, order, or sight draft
described in subparagraphs (1), (2), or (3) of this paragraph is not paid
on the day of presentation, or if such security, check or draft described
in subparagraph (3) of this paragraph is not received by the creditor within
a reasonable time, the creditor shall promptly take such action as he would
have been required to take by the appropriate provisions of this Part if
the provisions of this paragraph had not been utilized.
(g)

Interest, service charges, etc. - (1) Interest on credit

maintained in a general account, special bond account subject to § 220.4(i),
or special convertible security account subject to § 220.4(j), communication

- 31 -

charges with respect to transactions in such account, shipping charges,
premiums on securities borrowed in connection with short sales or to effect
delivery, dividends or other distributions due on borrowed securities, and
any service charges (other than commissions) which the creditor may impose,
may be debited to such account in accordance with the usual practice and
without regard to the other provisions of this Part, but such items so debited
shall be taken into consideration in calculating the net credit or net debit
balance of such account.
(2)

A creditor may permit interest, dividends or other distribu­

tions received by the creditor with respect to securities in a general account,
special bond account subject to § 220.4(i), or special convertible security
account subject to § 220.4(j), to be withdrawn from such account only on
condition that the adjusted debit balance of such account does not exceed
the maximum loan value of the securities in such account after such with­
drawal, or on condition that (i) such withdrawal is made within 35 days
after the day on which, in accordance with the creditor's usual practice,
such interest, dividends or other distributions are entered in such account,
(ii) such entry in the account has not served in the meantime to permit in
the account any transaction which could not otherwise have been effected
in accordance with this Part, and (iii) any cash withdrawn does not represent
any arrearage on the security with respect to which it was distributed, and
the current market value of any securities withdrawn does not exceed 10 per
cent of the current market value of the security with respect to which they
were distributed.

Failure by a creditor to obtain in a general account,

special bond account subject to § 220.4(1), or special convertible security

-

32 -

account subject to § 220.4(j), any cash or securities that are distributed
with respect to any security in such account shall, except to the extent
that withdrawal would be permitted under the preceding sentence, be deemed
to be a transaction in such account which occurs on the day on which the
distribution is payable and which requires the creditor to obtain in
accordance with § 220.3(b) a deposit of cash or securities having a maximum
loan value e»f-seetn?ifeies at least as great as that of the distribution.
(h)

Borrowing and lending securities. - Without regard to the

other provisions of this Part, a creditor (1) may make a bona fide deposit
of cash in order to borrow securities (whether registered regulated or
wHFeg£sfeei?ed unregulated for the purpose of making delivery of such secu­
rities in the case of short sales, failure to receive securities he is
required to deliver, or other similar cases, and (2) may lend securities
for such purpose against such a deposit.
(i)

Credit for clearance of securities. - The extension or

maintenance of any credit which is maintained for only a fraction of a
day (that is, for only part of the time between the beginning of business
and midnight on the same day) shall be disregarded for the purposes of this
Part, if it is incidental to the clearance of transactions in securities
directly between members of a national securities exchange or through an
agency organized or employed by such members for the purpose of effecting
such clearance.
(j)

Foreign currency. - If foreign currency is capable of being

converted without restriction into United States currency, a creditor acting
in good faith may treat any such foreign currency in an account as a credit
to the account in an amount determined in accordance with customary practice.

- 33 -

(k)

Innocent mistakes. - If any failure to comply with this Part

results from a mechanical mistake make in good faith in executing a trans­
action, recording, determining, or calculating any loan, balance, market
price or loan value, or other similar mechanical mistake, the creditor shall
not be deemed guilty of a violation of this Part if promptly after the discov­
ery of such mistake he takes whatever action may be practicable in the cir­
cumstances to remedy such mistake.
§ 220.7

Miscellaneous provisions.
(a)

Arranging for loans by others. - A creditor may arrange for

the extension or maintenance of credit to or for any customer of such creditor
by any person upon the same terms and conditions as those upon which the
creditor, under the provisions of this Part, may himself extend or maintain
such credit to such customer, but only upon such terms and conditions, except
that this limitation shall not apply with respect to the arranging by a
creditor for a bank subject to Part 221 of this Chapter (Regulation U) to
extend or maintain credit on registered regulated securities or exempted
securities.
(b)

Maintenance of credit. - Except as otherwise specifically

forbidden by this Part, any credit initially extended without violation of
this Part may be maintained regardless of (1) reductions in the customer’s
equity resulting from changes in market prices, (2) the fact that any secu­
rity in an account ceases to be registered regulated or exempted, and (3)
any change in the maximum loan values or margin requirements prescribed by
the Board under this Part.

In maintaining any such credit, the creditor

may accept or retain for his own protection additional collateral of any
description, including unregistered unregulated securities.

- 34 -

(c)

Declaration as to purpose of loan. - Every extension of credit

on a registered regulated security (other than an exempted security) shall
be deemed to be for the purpose of purchasing or carrying or trading in
securities, unless the creditor has accepted in good faith a written state­
ment by-fehe-eHsfeeraer-signed-by-the-ettsfcoRer-whieh-shali-sfcafee-the-ase-fca
fee-sade-ef-sHek-eredife-and-whiek-aha41-sfcate-speeifieally-thafi-SHeh-eredife
4s-neither-for-fehe-parpcse-o£-ptirehasing-er-earrying-or-fcrading-in-seeu-

Fifeie8-R0F-i0¥-the-pHFp08e-©f-evadiHg-eF-eiFeHH5veHtiHg-fehe-pF0visi©Bs-©f
this-Part to the contrary in conformity with the requirements of Federal
Reserve Form T-4 executed by the customer and executed and accepted in
good faith by the creditor prior to such extension.

The creditor shall

retain such statement in his records for at least three years after such
credit is extinguished.

To accept the customer's statement in good faith,

the creditor must (1) be alert to the circumstance surrounding the extension
of credit and (2) if he has any information which would cause a prudent man
not to accept the statement without inquiry, have investigated and be satisfied
that the customer's statement is truthful.

A creditor may rely upon such a

written statement if accepted in accordance with this paragraph.
(d)

Reports. - Every creditor shall make such reports as the Board

may require to enable the Board to perform the functions conferred upon it
by the Act.
(e)

Additional requirements by exchanges and creditors. -

Nothing

in this Part shall (1) prevent any exchange from adopting and enforcing any
rule or regulation further restricting the time or manner in which its members
must obtain initial or additional margin in customers' accounts because of

- 35 -

transactions effected in such accounts, or requiring such members to secure
or maintain higher margins, or further

restricting the amount

of credit which

may be extended or maintained by them,

or (2) modify or restrict the right

of any creditor to require additional security for the maintenance of any
credit, to refuse to extend credit, or to sell any securities

or property

held as collateral for any loan or credit extended by him.
§ 220.8

Supplement.
(a)

Maximum loan value for general accounts. - The maximum loan

value of securities in a general account subject to § 220.3 shall be:
(1)
March 11,

of a registered non-equity security held in the account on

1968, and continuously thereafter and of a registered regulated

equity security (except as provided in § 220.3(c) and § 220.8(b) and (c)),
20 per cent of the current market value of such securities.
(2)

of an exempted security held in the account on March 11, 1968,

andcontinuously thereafter the maximum loan value

of the security, as deter­

mined by the creditor in good faith.
(b)

Maximum loan value for a special bond account. - The maximum

loan value of an exerapfe exempted security and of a registered non-equity
security pursuant to § 220.4(i) shall be the maximum loan value of the secu­
rity as determined by the creditor in good faith.
(c)

Maximum loan value for special convertible debt security

account. - The maximum loan value of a FegisfeeFed regulated equity security
eligible for a special convertible security account pursuant to § 220.4(j)
shall be 40 per cent of the current market value of the security.
(d)

Margin required for short sales. - The amount to be included

In the adjusted debit balance of a general account, pursuant to § 220.3(d)(3),

- 36 -

as margin required for short sales of securities (other than exempt exempted
securities) shall be 80 per cent of the current market value of each security.
(e)

Retention requirement. - In the case of an account which would

have an excess of the adjusted debit balance of the account over the maximum
loan value of the securities in the account following a withdrawal of cash
or securities from the account, pursuant to 5 220.3(b)(2):
(1)

The "retention requirement" of an exempted security held in

the general account on March 11, 1968, and continuously thereafter shall be
equal to its maximum loan value as determined by the creditor in good faith,
and the "retention requirement" of a registered non-equity security held in
such account on March 11, 1968, and continuously thereafter and of a registered
regulated security shall be 70 per cent of the current market value of the
security.
(2)

In the case of a special bond account subject to § 220.4(i),

the retention requirement of an exempted security and of a registered non-equity
security shall be equal to the maximum loan value of the security.
(3)

In the case of a special convertible security account subject

to § 220.4(j) which would have an excess of the adjusted debit balance of
the account over the maximum loan value of the securities in the account
following a withdrawal of cash or securities from the account, the retention
requirement of a security having loan value in the account shall be 70 per
cent of the current market value of the security.
(4)

For the purpose of effecting a transfer from a general account

to a special convertible security account subject to § 220.4(j), the retention
requirement of a security described in § 220.4(j), shall be 70 per cent of its
current market value.

- 37 -

(f)

Security having no loan value in general account. - No secu­

rities other than an exempted security or registered non-equity security
held in the account on March 11, 1968, and continuously thereafter, and a
Fegiefeepei regulated security shall have any loan value in a general account
except that a Hegiafceped regulated security eligible for the special convert­
ible security account pursuant to § 220.4(j) shall have loan value only if
held in the account on March 11, 1968, and continuously thereafter.

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