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F ederal

reserve

Ba n k

of

Dallas

DALLAS, TEXAS 7S222

Circular No. 68-260
Decemb er 10, 1968

PROPOSED AMENDMENTS TO REGULATIONS G AND U

To All Banks, Nonbank Lenders, and Others Concerned
in the Eleventh Federal Reserve District:
There are enclosed copies of a press release and
proposed amendments to Regulations G and U of the Board of
Governors of the Federal Reserve System in the form in which
they are being published in the Federal Register for public
comment.
Written comments on the proposed amendments may be
forwarded to this Bank, and should be received not later than
J anuary 13, 1969•

Yours very truly,
P. E. Coldwell
President
Enclosures

()
3

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

FEDERAL

COVf

press

a

RESERVE

release

f*4L R t^ . • *

For Immediate release

December 10, 1968.

The Board of Governors of the Federal Reserve System announced
today proposals to broadan the coverage of margin Regulations G and U,
especially as they apply to loans on mutual fund shares.
The proposals, on which the Board invited comment through
the Federal Reserve Banks from interested persons by January 13, 1969,
would bring "equity funding" plans or programs under both regulations.
Regulation G applies to "Credit By Persons Other Than Banks,
Brokers, or Dealers for Purpose of Purchasing or Carrying Registered
Equity Securities" while Regulation U covers "Credit By Banks for the
Purpose of Purchasing or Carrying Registered Stocks."

Broker-dealer

firms subject to Regulation T--"Credit By Brokers, Dealers, and Members
of National Securities Exchanges"--are not permitted to make loans on
such shares.
"Equity funding" programs are investment contracts for the
coordinated acquisition of mutual fund shares and insurance or other
goods, services, or investments, the shares being pledged to secure
loans to pay for the other items specified.

Credit extended in connec­

tion with such programs offered or sold after January 31, 1969, would
be subject to the margin and other requirements of the regulations.
Credit extended in connection with programs sold prior to that date
would not be affected.

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Under the margin requirement currently in effect, the maximum
loan value of stock collateral is 207. which means that anyone seeking an
extension of credit on $100 of securities could receive a maximum credit
of $20.
The use of credit in connection with the sale of equity funding
programs, which principally involve the purchase of mutual fund shares,
represents an avenue for the circumvention of margin rules.
The proposed amendments would also make certain technical changes
in the regulations designed to make it easier to determine whether a loan
on mutual fund shares is subject to margin requirements.

Loans are pres­

ently subject to Regulations G and U if the purpose of the loan is to
purchase or carry exchange-registered stocks, or bonds convertible into
such stocks.

Loans to purchase or carry shares in a mutual fund are

deemed to be for the purpose of purchasing or carrying such securities,
and therefore, subject to margin regulation, if the assets of the fund
"customarily include" such stocks or convertible bonds.
To facilitate such determinations, the Board has for some
years published a "List of Stocks Registered on a National Securities
Exchange and of Securities of Certain Investment Companies," the invest­
ment companies on the list being those whose portfolios fall within the
regulatory definition.

It has become apparent that there are very few

mutual funds whose shares would not be subject to margin regulation.
Accordingly, the proposed amendment would provide that all investment
company shares are subject to Regulations G and U unless 95 per cent
of the fund's portfolio is invested continuously in "exempted" (chiefly
government) securities.

This would eliminate the need for publication

- 3 of the investment company list and it would be discontinued as would also
the list of registered stocks.
Attached are the texts of the proposed amendments in the form
in which they will be submitted for publication to the Federal Register.
-

Attachments.

0-

FEDERAL RESERVE SYSTEM
[12 CFR Part 207]
[Reg. G]
CREDIT BY PERSONS OTHER THAN BANKS, BROKERS,
OR DEALERS FOR THE PURPOSE OF PURCHASING OR
CARRYING REGISTERED EQUITY SECURITIES

Notice of Proposed Rule Making
Pursuant to the authority contained in the Securities Exchange
Act of 1934 (15 U.S.C. 78g), the Board of Governors of the Federal Reserve
System is considering amending Part 207 in the following respects:
1.

In section 207.2, paragraph (d)(2) would be amended to read

as follows:
§ 207.2 Definitions.

* * *
(d) Registered equity security.
(2)

*

*

*

Credit for the purpose of purchasing or carrying (i) any sec­

urity convertible with or without consideration into a registered equity
security or carrying any warrant or right to subscribe to or purchase a
registered equity security or any such warrant right, (ii) any security
issued by an investment company registered pursuant to section 8 of the
Investment Company Act of 1940 (15 U.S.C. 80a-8), unless at least 9 5 ’per
cent of the assets of such company are continuously invested in exempted
securities (as defined in 15 U.S.C. 78c(a)(12)), or (iii) credit extended
in furtherance of any plan, program,or investment contract offered or sold
after January 31, 1969, which provides for the acquisition both of securities
described in this paragraph (d) and of goods, services, other securities,
or investments, is for the purpose of purchasing or carrying registered

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2

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equity securities, and such security, warrant or right, or such plan,
program,or investment contract, shall for purposes of this Part be
treated as if it were a registered equity security.

*
2,

*

*

In section 207.4, paragraph (b), relating to the Board of

Governors' "List of Stocks Registered on a National Securities Exchange
and of Securities of Certain Investment Companies," would be revoked.
The purpose of the change in paragraph (d)(2) of section
207,2 is to establish that credit to finance programs for the combined
purchase of registered equity securities (including securities issued by
most investment companies registered pursuant to the Investment Company
Act of 1940) and goods, services, other securities, or investments ("equity
funding") is subject to the regulation.

An additional technical change

would clarify that credit to purchase or carry securities issued by most
investment companies is subject to the regulation*

Paragraph (b) of

section 207.4 would be revoked as unnecessary and reserved for subsequent use
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, interested
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 January 13, 1969.

Under the Boardfs rules regarding avail­

ability of information (12 CFR 261), such materials will be made available

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3

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for inspection and copying to any person upon request unless the person
submitting the material requests that it be considered confinential.

Dated at Washington, D. C., this 10th day of December, 1968.
By order of the Board of Governors.
(Signed) Robert P. Forrestal

Robert P. Forrestal
Assistant Secretary.

FEDERAL RESERVE SYSTEM
[12 CFR Part 221]
[Reg. U]
LOANS BY BANKS FOR THE PURPOSE OF PURCHASING
OR CARRYING REGISTERED STOCKS

Notice of Proposed Rule Making
Pursuant to the authority contained In the Securities Exchange
Act of 1934 (15 U.S.C. 78g), the Board of Governors is considering amending
Part 221 in the following respects:
Section 221.3 would be amended as follows:

Paragraph (b)(3)

would be revised, paragraph (d) would be revoked, and paragraph (m) would
be revised, as follows:
§ 221.3

Miscellaneous Provisions.

*

*

*

(b) Purpose of a credit.
(3)

*

*

*

Credit for the purpose of purchasing or carrying a security

issued by an investment company registered pursuant to section 8 of the
Investment Company Act of 1940 (15 U.S.C. 80a-8), unless at least 95 per
cent of the assets of such company are continuously invested in exempted
securities (as defined in 15 U.S.C. 78c(a)(12)), and credit extended in
furtherance of any plan, program^ or investment contract offered or sold
after January 31, 1969, which provides for the acquisition both of stock
registered on a national securities exchange, any security convertible
into such a stock,or any securities described in this paragraph (b)(3),
and of goods, services, other securities, or investments, is "credit
subject to § 221.1."

•k

*

*

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(d) [revoked]

*

" *
k

(m) 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 paragraph (q) of this section), (2) extended for the purpose of pur­
chasing or carrying any stock registered on a national securities exchange,
or any security convertible with or without consideration into such a
stock, or carrying any warrant or right to subscribe to or purchase or
carry such a stock, or any such warrant or right (such security, warrant,
or right is sometimes referred to as a "security convertible into a stock
registered on a national securities exchange"), or any security described
in § 221.3(b)(3), and (3) not excepted by § 221.2.
*

*

*

The purpose of the change in paragraph (b)(3) is to establish
that credit to finance programs for the combined purchase of registered
equity securities (including securities issued by most investment com­
panies registered pursuant to the Investment Company Act of 1940) and
goods, services, other securities, or investments ("equity funding") is
subject to the regulation.

An additional technical change would clarify

that credit to purchase or carry securities issued by most investment
companies is subject to the regulation.

Paragraph (d), relating to the

Board of Governors1 "List of Stocks Registered on a National Securities
Exchange and of Securities of Certain Investment Companies," would be
revoked as unnecessary and reserved for subsequent use.

Paragraph (m)

would be amended to conform to the change in paragraph (b)(3).

- 3 -

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 January 13, 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
request unless the person submitting the material requests that it be
cons idered conf identia1 .
Dated at Washington, D. C., this 10th day of December, 1968.
By order of the Board of Governors.

(Signed) Robert P. Forrestal

Robert P. Forrestal,
Assistant Secretary.

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