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F ederal R eserve Ba n k o f D allas DALLAS, TE X A S 75222 Circular No. 72-73 April 1^, 1972 REGULATION G MAILINGS (Securities Credit "by Persons Other Than Banks, Brokers, or Dealers) To All Nonbank Lenders and Others Concerned in the Eleventh Federal Reserve District: We are planning to decrease the number of lenders that we regularly circularize concerning changes in Federal Reserve Regulation G, "Securities Credit by Persons Other Than Banks, Brokers, or Dealers". In the future, we will mail interpretations, amendments, and proposed amendments to Regulation G only to persons or firms that are registered under the regulation, except when the materials affect the registration requirements themselves. In this latter event, we will circularize our entire mailing list of nonbank lenders in the Eleventh Federal Reserve District, and will make appropriate contacts with trade associa tions and news media as well. In addition, we plan to circularize our entire mailing list annually with a reminder of the registration requirements, whether or not the requirements are changed. A copy of this reminder is included with this circular for your information. Inquiries concerning Regulation G by any lender, whether registered or not, can be directed to the Regulations Department of this Bank at our Dallas office. The telephone is area code 2lk, 7^2-3271 (ext. 257). Yours very truly, P. E. Coldwell, President Enclosure This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) REGISTRATION A N D OTHER REQUIREMENTS UNDER REGULATION G S ecu rities C red it by Persons other than Banks, Brokers or D ea le rs Questions & Answers These questions and answers concern the registration requirements of Regulation G and, to some extent,com pliance w ith the regulation after registration. They are intended for the general guidance of lenders in the Eleventh Federal Reserve D is tric t; because they summarize some of the requirements of the regulation, the regulation its e lf should be consulted when s p e c ific questions arise. The regulation may be found in T itle 12 of the Code of Federal Regulations, Part 207, as well as in several commercially-published loose-leaf services dealing w ith securities regulations. Copies of the regulation, forms, and other information may be obtained from: Regulations Department Federal Reserve Bank o f D a lla s Station K Dallas, Texas 75222 Telephone: 214-742-3271 (ext. 257) Question: What is Regulation G? Answer: One of the credit regulations issued by the Board of Governors of the Federal Reserve System under the Securities Exchange A ct of 1934 and intended to prevent excessive use of credit for the purchase or carrying of se curities. These regulations are sometimes called the margin regulations. Question: Who is covered by Regulation G? Answer: Any person, firm, or other organization, other than a bank (covered by Regulation U) and a broker or dealer in securitie s (covered by Regulation T), that extends or arranges for credit in the ordinary course of business in excess of specified amounts, when such cred it is secured by collateral that includes margin securities. Question: Name the most common types of organizations that may be subject to Regulation G. Answer: Insurance companies. Mortgage companies. Credit unions. Finance companies. Pension and retirement trusts. Individuals who regularly make loans including collateral lenders and factors. Production cred it associations. Insurance premium funding companies. Corporations that extend credit in connection with executive and employee stock purchase plans. Question: What does Regulation G require of a person, firm or other organization (referred to hereafter as a ''c r e d ito r ’ ’ )? Answer: Question: Answer: Nothing until the creditor comes w ithin the registration requirements of the regulation. When is that? When, in any calendar quarter, the creditor either extends, arranges for, or has outstanding, the requisite amount of credit secured d ire c tly or ind ire ctly, in whole or in part, by margin securities. Question: What is the requisite amount? Answer: For credit extended or arranged for during the quarter, $50,000. For cred it outstanding at any time during the quarter, $100,000. Question: Answer: What are margin securities? In general, they are: (a) Equity securities that are registered ( " l i s t e d ” ) on a national securitie s exchange. (b) OTC margin stocks. (c) Securities of any type which are convertible into either of the above (for example, warrants or convertible stocks and debentures). (d) Shares of most mutual funds. Question: What is OTC margin stock? Answer: Stock traded over the counter (not " l i s t e d " on a national se curities exchange) which appears on the l is t OTC margin stocks published p e rio d ic a lly by the Board of Governors of the Federal Reserve System. Copies of the l is t or information as to the current status of particular stocks can be obtained from the Regulations Department of the Federal Reserve Bank o f Dallas. Question: When is a cred it secured d ire c tly or in d ire c tly by margin securities? Answer: A cred it is secured d ire c tly when margin securities are pledged to secure it. security is not always obvious. Existance o f d irect For example, in many cases margin securities which are pledged to secure one cred it w ill actually secure later credits by the same lender under a so-called " a l l d e b ts " clause in the original pledge agreement, even though the later credits may not be thought o f as secured. Indirect security is a more d if fic u lt concept; under section 207.2(i) of the regulation, it includes any arrangement under which the customer's right to sell, pledge, or otherwise dispose of margin securities is restricted in any way for the term of the credit, or under which the exercise of such rights may cause acceleration of the maturity of the credit. One example of indirect security is a specific negative pledge covenant, under which the borrower agrees not to pledge any margin securitie s he may own elsewhere during the term of the credit. Question: Answer: What is required when a creditor fir s t comes under the registration requirements of Regulation G? In general, he must: (1) Obtain an F. R. Form G-3 purpose statement with each cred it extended or arranged which is secured d ire c tly or in d ire c tly by margin securities. (This requirement applies to the transaction which brings the creditor under the registration requirements and all subsequent transactions of the same type.) (2) In connection with purpose credit, obtain s u ffic ie n t collateral to comply w ith the margin requirements of Regulation G, and comply with the substitution and withdrawal requirements when applicable. (These requirements apply to the transaction which brings the creditor under the registration requirements, i f it is purpose credit, and all subsequent transactions of the same type.) (3) Within 30 days fo llo w in g the end of the quarter, register by f ilin g F. R. Form G-1 w ith the Regulations Department of the Federal Reserve Bank of D allas. (4) Within 30 days after the close of each succeeding quarter, f i l e a quarterly report on F. R. Form G-4 with the Regulations Department of the Federal Reserve Bank of Dallas (forms are supplied to all registrants in advance of the time for filin g ). (5) Except for home purchase, construction, maintenance, or improvement cred its, and credits secured by share accounts, refrain from extending more than $5,000 of non-purpose credit to any customer i f secured by the same margin securities which secure an extension of purpose credit. Question: What is purpose credit? Answer: Credit extended, arranged, or maintained in the ordinary course of business for the purpose of purchasing or carrying margin securities by a lender subject to the registration requirements. Question: Answer: What about credit extended prior to coming under the registration requirements? Purpose credit extended after February 1, 1968 and prior to the time a lender comes under the registration requirements becomes subject to Regulation G, but the lender is not required to bring the loan up to a fu lly margined status. Thus, no additional collateral is required at the time of registration. However, such credits become subject to the withdrawal and substitution requirements of Regulation G; before a borrower can withdraw or substitute c o lla te ra l, if his credit is undermargined (that is, does not have s u ffic ie n t collateral to meet the margin requirements at the time he seeks to withdraw or substitute), he generally w ill be required to supply additional colla teral or reduce his cred it balance. If any of these pre-existing purpose credits is increased after the lender comes under the registration requirements, the increase is subject to the requirement of a purpose statement and proper margin is required. However, a renewal or extension of a pre-existing credit, with no increase in princip al, requires no purpose statement or increase in colla teral. Question: Are there any other rules regarding compliance with the regulation of which a registrant should be aware? Answer: Yes, there are a number o f additional rules and exceptions not detailed in this release. For example, there is a requirement that purpose credit secured by margin securities which are convertible debt securitie s (as opposed to stocks) must be treated separately from stock-secured purpose credit for purposes of the margin, withdrawal, and substitution requirements. A lso, there is a single credit rule, the effect of which, in general, prevents a borrower who has credit subject to the margin requirements from thereafter obtaining unsecured purpose credit from the same lender. Finally, there are several exceptions and special rules for particular lenders and types o f credit. Question: What are the penalties for v io la tin g Regulation G? Answer: For a w illfu l viola tion , upon conviction , a fine of not more than $10,000, or imprisonment of not more than fiv e years, or both. Federal Reserve Regulation X imposes on the customer a duty to see that credit extended to him complies with Regulation G and imposes the same penalties on the customer for w illfu l v io la tio n s . Section 29 of the Securities Exchange A ct provides, among other things, that contracts made in v io la tio n of Regulation G, with certain exceptions, are void. Question: Can a registrant ever de-register? Answer: Yes. , If a registrant during a period of six calendar monthsSas neither extended, arranged for, or had outstanding any credit secured d ire c tly or ind ire ctly, in whote' or in part, by margin securities, application for de-registration may be made on F. R. Form G-2 through the Regulations Department of the Federal Reserve Bank of D allas.