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FEDERAL R E SE R V E BANK OF DALLAS Station K, Dallas, Texas 7 5 2 2 2 C i r c u la r No. 84-7 January 19, 1984 TO: All member banks and others concerned in the Eleventh Federal Reserve D i s t r i c t ATTENTION: Chief Executive O ffice r SUBJECT: Regulation X — SUMMARY: The Board of Governors of the Federal Reserve System has announced, e f f e c t i v e January 23, 1984, a complete r e v is io n and s i m p l i f i c a t i o n of i t s Regulation X. Regulation X governs borrowers who obtain c r e d i t f o r the purpose of purchasing or c arry in g s e c u r i t i e s . This r e v i s i o n pr eviously was proposed in C ir c u la r No. 83-136 dated November 8, 1983. ATTACHMENTS: Board's press r e l e a s e and the m ate rial fo r p u b lic a tio n in the Federal Register MORE INFORMATION: Legal Department, Extension 6171 ADDITIONAL COPIES: Public A f fa i r s Department, Extension 6289 Borrowers of Securities Credit as submitted Banks and others are encouraged to use the following incoming WATS numbers in contacting this Bank: 1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the extension referred to above. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) FEDERALRESERVEpressre|®2^ For immediate r e l e a s e December 19, 1983 The Federal Reserve Board today adopted a proposal t h a t completely r e v i s e s Regulation X, which a p p l i e s t o borrowers who obtain c r e d i t f o r th e purpose of purchasing or c arrying s e c u r i t i e s (margin c r e d i t ) . The new r u l e becomes e f f e c t i v e January 23, 1984. The r e v is io n of Regulation X i s p a r t of t h e Board's Regulatory Improvement P ro je c t in which t h e Board i s reviewing and r e v is in g a l l i t s r e g u l a t i o n s t o update them, sim plify t h e i r language, e lim in a te o b so le te or unneeded language or pro v isio n s and l i g h t e n t h e burden of compliance. The Board has prev io u sly , under t h i s p r o j e c t , completely revised Regulations G, T an'd U, which apply t o lenders (as d i s t i n g u i s h e d from borrowers under Regulation X) who give c r e d i t f o r purchasing or c arry in g securities. The Board adopted th e revised r e g u la tio n a f t e r a review of comment received on proposed r e v i s i o n s issued in October. The major s u b s t a n t i v e changes t o Regulation X are t h e exclusion of purely domestic borrowings which are already regu lated by margin r u l e s a p p l i c a b l e t o l e n d e r s , and an in c r e a se in t h e exemption f o r margin c r e d i t obtained by U.S. persons r e s i d i n g abroad from $5,00U t o $100,000. The f i n a l r u l e r e f l e c t s a m o d ific atio n from the proposed r u l e in t h a t borrowers who w i l l f u l l y cause c r e d i t t o be extended in co n trav en tion of t h e margin r u le s w ill not be excluded from t h e scope of th e r e g u l a t i o n . The Board's n o tic e i s a t t a c h e d . -0- Federal Reserve System Regulation X (12 CFR 224) [Docket No. R-0487] BORROW ERS O SECURITIES CREDIT F Complete Revision and S i m p lific a tio n of Regulation X AGENCY: Board of Governors of the Federal Reserve System. ACTION: Final Rule. SUM A : The Board has r e v i s e d , i n i t s e n t i r e t y , Regulation X, which M RY governs borrowers who obtain c r e d i t for the purpose of purchasing or carrying s e c u r i t i e s . The newly rev ised Regulation X i s w r i t t e n in s im p lified language, organized in a l o g i c a l fashion and reduced in r e g u l a t o r y burden. EFFECTIVE DATE: January 23, 1984. FOR FURTHER INFORMATION CONTACT: Laura Homer, S e c u r i t i e s C r e d i t O f f i c e r , or Robert Lord, Attorney, Division of Banking Supervision and Regulation (202) 452-2781. SUPPLEM ENTARY INFORMATION: On October 25, 1983, the Board issued f o r public comment a proposal to completely r e v i s e and sim p lify Regulation X, which governs borrowers who obtain c r e d i t to purchase s e c u r i t i e s (48 Fed. Reg. 49295). With the exception of one s u b s t a n t i v e m o d ific a tio n , Regulation X i s being adopted in s u b s t a n t i a l l y the same form as proposed. The re v isio n follows the fbrmat of the r e c e n t l y rev ised Regulations G, T, and U in t h a t i t has been reorganized in a lo gical f a s h i o n , i t s language has been sim p lif ie d and o b so le te provisions have been removed. As proposed, th e major s u b s ta n tiv e change in Regulation X was the exclusion from r e g u la tio n of a l l pu rely domestic borrowings because c r e d i t involved in such t r a n s a c t i o n s i s already regulated by margin ru le s a p p l i cable to len d ers. In response to comments r e c e i v e d , however, the proposed b lan k et exclusion of purely domestic borrowing t r a n s a c t i o n s has been modified to make c l e a r t h a t borrowers who w i l l f u l l y cause c r e d i t to be extended in contravention of the margin reg u latio n s w ill not be excluded from th e scope of the r e g u la tio n o r from § 7 (f) of the S e c u r i t i e s Exchange Act of 1934. The revised Regulation X in c re a se s the exemption f o r purpose c r e d i t obtained by U.S. persons r e s i d i n g abroad from $5,000 to $100,000. - 2 The se c tio n providing f o r an exemption for borrowings made in con nection with c l e a r i n g , market-making, or a r b i t r a g e t r a n s a c t i o n s in c e r t a i n o f fs h o re debt s e c u r i t i e s , the purchase of which gave r i s e to federal tax l i a b i l i t y , has been removed in i t s e n t i r e t y . This exemption i s no longer necessary in l i g h t of i t s very lim ited a p p l i c a t i o n and the repeal of the I n t e r e s t Equ alization Tax (see P.L. 94-455) which c r e a te d the aforemen tioned tax l i a b i l i t y . Although c r e d i t extended to a U.S. person by a foreign branch of a U.S. b r o k e r - d e a l e r w ill s t i l l be s u b je c t to Regulation T, the provision t h a t applied the same treatm ent to c r e d i t extended by a su b s id iary of a b r o k e r - d e a l e r (even when t h a t s u b s i d i a r y i s a merchant bank) has been removed. This w ill p a r a l l e l the s t r u c t u r e in Regulation U concerning bank lending abroad where a U.S. borrower i s s u b j e c t to Regulation U only i f the person borrows from a branch of a U.S. bank. Hence purpose c r e d i t extended to United S tates persons by a foreign s u b s i d i a r y of a b r o k e r- d e a l e r will be su b je c t to the c r e d i t l i m i t a t i o n s of Regulation 6. The "aiding and a b e t t i n g " clause of Regulation X (12 CFR 224.6(b)) has been deleted because such l i a b i l i t y i s already implied in the general body of s e c u r i t i e s law. F i n a l l y , under the new r e g u l a t i o n , the Form X-l w ill no longer be r e q u ire d . Experience has not demonstrated t h a t a requirement t o use the form i s necessary to e f f e c t compliance w ith the Regulation. In any ev e n t, the information r e q u i re d to be maintained on the form could be obtained through legal p r o c e s s . FINAL REGULATORY FLEXIBILITY ANALYSIS: Ttie changes adopted pursuan t to t h i s a c t i o n are p a r t of a program to s im p lif y a ll of the Board's r e g u l a t i o n s and to reduce s p e c i f i c a d m in istr a t i v e and reg u la to ry burdens. The Board c e r t i f i e s f o r purposes of 5 U.S.C. 605 (b ), t h e r e f o r e , t h a t the s i m p l i f i c a t i o n of Regulation X will not have any adverse impact on a s u b s t a n t i a l number of small b u sin e sse s. L i s t o f Subjects in 12 CfR P a r t 224 Banks, Banking, Borrowers, Brokers, C r e d i t , Federal Reserve System, Margin, Margin Requirements. Accordingly, pursuant to se c tio n s 3, 7* 8, 17 and 23 of the S e c u r i t i e s Exchange Act o f 1934, as amended (15 U.S*C. §§ 78c, 78g* 78h, 78q, and 78w)f the Board amends Regulation X in i t s e n t i r e t y to read as follows: REGULATION X 12 CFR 224 BORROW ERS O SECURITIES CREDIT F 224.1 ............................................................ AUTHORITY, PURPOSE 224.2 ............................................................ DEFINITIONS 224.3 ............................................... .... A D SCOPE N M ARGIN REGULATIONS TO BE APPLIED BY NONEXEM PTED BORROW ERS 12 CFR Part 224 — BORROWERS OF SECURITIES CREDIT Section 224.1 - - AUTHORITY, PURPOSE, A D SCOPE N (a) Authority and purpose. Regulation X ( t h i s p a r t ) i s issued by the Board of Governors of the Federal Reserve System (the Board) under the S e c u r i t i e s Exchange Act of 1934, as amended (the A c t ) (15 U.S.C. 78a e t s e q . ) . This p a rt implements s e c t i o n 7 ( f) of the Act (15 U.S.C. 7 8 g ( f ) ) , the purpose of which i s to r e q u ire t h a t c r e d i t obtained within or outside the United S tates complies with the l i m i t a t i o n s of the Board's Margin Regulations G, T, and U (12 CFR 207, 220, and 221, r e s p e c t i v e l y ) . (b) Scope and exemptions. The Act and t h i s p a r t apply the Board's margin r eg ulatio n s to United S tates persons and fo reig n persons c o n t r o l l e d by or a c tin g on behalf of or in conjunction with United S ta te s persons ( h e r e i n a f t e r borrowers), who obtain c r e d i t outsid e the United States t o purchase or carry United S ta tes s e c u r i t i e s , o r within the United S tates to purchase or carry any s e c u r i t i e s (both types of c r e d i t are h e r e i n a f t e r r e ferred to as purpose c r e d i t ) . The following borrowers are exempt from the Act and th is part: (1) any borrower who obtains purpose c r e d i t w ithin the United S t a t e s , unless the borrower w i l l f u l l y causes the c r e d i t to be extended in contravention of Regulations G, T, or U. (2) any borrower whose permanent residence i s o u tsid e the United States and who does not obtain or have o u tstan d in g , during any calendar y e a r , a t o t a l of more than $100,000 in purpose c r e d i t obtained outside the United S t a t e s ; and (3) any borrower who i s exempt by Order upon terms and conditions s e t by the Board. Section 224.2 — DEFINITIONS The terms used in t h i s p a r t have the meanings given to them in se c tio n s 3(a) and 7 (f) of the Act, and in Regulations G, T, and U. Section 7 (f) of the Act contains the following d e f i n i t i o n s : (a) "United S ta te s person" inclu des a person which i s organized o r e x i s t s under the laws of any S t a t e o r , i n the case of a natural perso n , a c i t i z e n or r e s i d e n t of th e United S t a t e s ; a domestic e s t a t e ; or a t r u s t in which one or more of the foregoing persons has a cumulative d i r e c t or i n d i r e c t b e n e f ic ia l i n t e r e s t in excess of 50 per centum of th e value of the tru st. - 2 - (b) "United S tates s e c u r i t y " means a se c u ri t y ( o t h e r than an exempted s e c u r i t y ) issued by a person in co rp orated under the laws of any S t a t e , or whose p rin c ip a l place of busine ss i s within a S t a t e . (c) "Foreign person c o n t r o l l e d by a United S ta tes person" includes any noncorporate e n t i t y in which United S tates persons d i r e c t l y or i n d i r e c t l y have more than a 50 per centum b e n e f i c i a l i n t e r e s t , and any c o r p o ra tio n in which one or more United S tates persons, d i r e c t l y or i n d i r e c t l y , own stock possessing more than 50 per centum of the t o t a l com bined voting power of a l l c la s s e s of stock e n t i t l e d to v o te, or more than 50 per centum of the t o t a l value of shares of a ll c l a s s e s of stock . Section 224.3 - - M ARGIN REGULATIONS TO BE APPLIED BY NONEXEM PTED BORROW ERS (a) Credit Transactions Outside the United S t a t e s . N borrower shall o obtain purpose c r e d i t 1rom o u tsid e the United S tate s unless i t conforms to the following margin r e g u l a t i o n s : (1) Regulation T (12 CFR 220) i f the c r e d i t i s obtained from a foreign branch of a b r o k e r - d e a l e r ; (2) Regulation U(12 CFR 221) i f the c r e d i t is obtained from a foreign branch of a bank, except for the requirement of a purpose statem ent (12 CFR 221.3(b) and ( c ) ); and (3) Regulation G(12 CFR 207) i f the c r e d i t i s obtained from other lender o u tsid e th e United S t a t e s , except for the requirement of a purpose statement (12 CFR 207.3(e) and ( f ) ) . (b) C r e d it Transactions Within the United States* Any borrower w i l l f u l l y causes c r e d i t to be extended in co ntr avention of Regulations T, o r U, and who, t h e r e f o r e , i s not exempted by se c tio n 224.1(b)(1) of p a r t , must conform the c r e d i t to the margin r e g u la tio n t h a t ap p lies to lender. any who G, this the (c) In ad v erten t noncompliance. No borrower who in a d v e r t e n t l y v i o l a t e s t h i s p a r t and who a c t s to remedy t h e v i o l a t i o n as soon as p r a c t i c a b l e sh a ll be deemed in v i o l a t i o n of t h i s p a r t . By o rd e r of the Board of Governors of the Federal Reserve System, December 16, 1983. (signed) William W. Wiles William W Wiles . S ecretary of the Board
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