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F ederal r eser ve Ban k o f Dallas DALLAS, TEXAS 75222 Circular No. 71-251 October 22, 1971 REGULATION X "RULES GOVERNING BORROWERS WHO OBTAIN SECURITIES CREDIT" (Effective November 1, 1971) To All Banks, Brokers/Dealers, Regulation G Registrants and Others Concerned in the Eleventh Federal Reserve District: Enclosed is a pamphlet containing new Federal Reserve Regulation X, "Rules Governing Borrowers Who Obtain Securities Credit", effective November 1, 1971? and an explanatory press release prepared by the Board of Governors of the Federal Reserve System. The regulation, issued pursuant to Title III of P.L. 91-508? imposes responsibility for compliance with the Board's margin regulations (Regulations G? T and U) on borrowers of securities credit as well as lenders. The cooperation of banks and firms engaged in extending securities credit is requested in advising borrowers, particularly those outside the United States, of the requirements of Regulation X. Because of the increased difficulty of informing borrowers outside the United States, banks and firms in this Federal Reserve District with foreign branches and subsidiaries are particularly encouraged to inform their U. S. borrowers residing abroad. A pamphlet containing the present margin regulations G, T and U as well as new Regulation X, will soon be available for distri bution. You may request copies of this pamphlet for internal use and for distribution to customers here and overseas from the Regulations Department, Federal Reserve Bank of Dallas, Station K, Dallas, Texas 75222. Requests will be filled as soon as the pamphlets are available. Yours very truly, P. E. Coldwell President Enclosures This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) ;oL£2vv : .. FEDERAL RESERVE l ^ press The Board i ss u e d release of G o v e r n o r s a new regulation to c o m p l y w i t h m a r g i n lation to regulations out provisions 91-508 enacted ments. Credit" of T i t l e That Act for 1970) first comply w i t h m a r g i n regulations l a t io n s previously applied Establishment the proposal is su e d ing m a r g i n regulations Margin of credit to all securities applies margin other to c r e d i t stoc ks , while t ha n b an ks , As persons by t i me Borrowers Who R e g u l a t i o n X. Bank Secrecy that r e l a t e to It w i l l A c t (P ub l ic m a r g i n credit to transactions. Law require The to regu lenders. 26 w h i c h w o u l d h a v e a m e n d e d are d e s i g n e d extended b a nk s for brokers, to p re v e n t transactions. by brokers the p u r p o s e Regulation G applies in the J u l y carry specifically requires borrowers in s e c u r i t i e s securities c re di t Th e r e g u in f o r m f ro m t he t h r e e exist c ov er b o r r o w e r s . regulations in f i n a n c i n g the F o r e i g n primarily July to borrowers transactions. of a separate regulation differs on t o d ay that r e q u i r e s "Rules Governing is d e s i g n a t e d II I of the in s e c u r i t i e s is e n t i t l e d a nd O c t o b e r 26, legislation System 1. The new regula t i o n Securities the F e d e r a l R e s e r v e implement is e f f e c t i v e N o v e m b e r Obtain of the excessive Regulation and d e a l e r s ; of T applies Regulation U p u r c h a s i n g or to suc h c re d i t use carrying by p e r s o n s or d e a l e r s . proposal, the n e w r e g u l a t i o n w i l l borrowing in the U n i t e d S ta t e s lation applicable to the to c o m p l y w i t h l en de r e x t e n d i n g h i m credit require the m a r g i n r e g u on s e c u r i t i e s . If - 2 - a U.S. person borrows the m a r g i n regulation the U n i t e d a br oad , he m u s t that w o u l d comply with provisions maintained after the e f f e c t i v e margin October date, the apply c re d i t to credit were extended, Commencing May restrictions a c c o u n t s wi l l the da t e 31. apply if the of Sta te s. The regulation w ill apply the 1972, on substitutions to c r e d i t legislation became 1, extended obtained arranged or six m o n t h s af ter an d w i t h d r a w a l s a f t er October 26, in from 1970, law. The new Regulation X w ill exempt the following f r o m its provisions: 1. S ta t e s w h o purpose d e bt c re d i t Credit c le a r i n g , 3. of U. is w a r r a n t e d Securities ment S. by market-making tha t are a br o a d outside no m o r e the U n i t e d than $ 5 , 0 0 0 f o r e i g n a f f i l i a t e s o f U. S. or arbitrage convertible p e r s o ns , provided by e x c e p t i o n a l of in the Th e B o a r d into m a r g i n are 1934 retain and to securities. controlled circumstances f ir ms t r a n s a c t i o n s in o f f s h o r e by or the B o a r d d e t e r m i n e s acting on th at an e x e m p t i o n is c o n s i s t e n t w i t h the an d R e g u l a t i o n X. the n e w r e g u l a t i o n , abroad must describing proposals outstanding obtained Exchange Act credit permanently residing Foreign borrowers who Under rities citizens per year. securities behalf S. o b t a i n or h a v e 2. finance U. certain borrowers who obtain in t h e i r r e c o r d s for si x y e a r s secu a state transaction. s t i ll h a s is s ue d o n J u l y 26, c a t i o n of m a r g i n regulations broker-dealers. A under consideration particularly to t h os e foreign branches certain aspects relating of U. c o py of R e g u l a t i o n X is a tt a ch ed . - 0 - to of the the a p p l i S. b a n k s and U. S. (Regulation X ) . W hen th e term “G- len der” is used in this p a r t (Regulation lender” is used in this p a r t (Regulation X) it m eans any person, other th a n a X ) , it m eans a person who is n o t a U.S. person, who in th e ordinary course broker/dealer or bank, who in th e ordi of his business extends, m aintains, or n ary course of his business extends, arranges purpose credit outside th e m aintains, or arran ges credit th a t is se United States and who is no t a foreign cured, directly or indirectly, in whole or b ran ch or subsidiary of a broker/dealer, A u t h o r i t y : T he provisions of th is P a rt in part, by collateral th a t includes any a foreign bran ch of a bank, or a foreign 224 (Regulation X ) , issued u n d e r sec. 7(f) of m argin securities, an d who is subject to b ra n c h of a G-lender. the Securities Exchange Act of 1934, as th e registration requirem ent of § 207.1 (2) The provisions of sub paragraph amended (15 U.S.C. 78a-jj, particularly (a) of this ch ap ter (Regulation G ) . (1) of this para g ra p h shall no t apply to 78g(f)). (2) Credit obtained from a b ro ker/ credit extended before November 1, 1971, § 2 2 4 .1 Scope of p a rt. dealer shall conform to th e provisions of except th a t as to credit extended a fte r This P a r t 224 (Regulation X) contains P a r t 220 of this ch ap ter (Regulation T ) , October 26, 1970, th e requirem ents as to rules a nd regulations prom ulgated by the which is hereby incorporated in this p a rt w ithdraw als an d substitutions of col Board of Governors of th e Federal R e (Regulation X ) . W hen the term “brok er/ lateral shall apply a fte r May 1, 1972, as serve System (the Board) u nd er th e S e dealer” is used in this p a rt (Regulation follows: The requirem ents in § 207.1 (j ) curities Exchange Act of 1934 as X ) , it m eans a person who is a broker of this chapter (Regulation G) shall a p amended (the Act) and applies to all or dealer, including every member of a ply to credit obtained from a foreign Persons described below who obtain, re n atio n al securities exchange, and i n b ran ch of a G -lender or from a foreign ceive, or enjoy th e beneficial use of cludes a foreign branch or subsidiary of lender; the requirem ents in § 220.3(b) of this ch ap ter (Regulation T) shall apply credit for th e purpose of purchasing or a broker/dealer. (3) Credit obtained from a bank shall to credit obtained from a foreign branch carrying securities.1 F or definitions of technical term s see § 224.5, P a rts 207, 220, conform to th e provisions of P a r t 221 of or subsidiary of a broker/dealer: and the and 221 of this c h a p te r (Margin* Regu this c h a p te r (Regulation U ) , except for requirem ents in § 221.1(b) of this ch ap lations G, T, an d U) and th e S tatu to ry § 221.2(i). Except for such section, P a r t te r (Regulation U) shall apply to credit Appendix. The purpose of this p a rt (Reg 221 of this ch ap ter (Regulation U) is obtained from a foreign bran ch of a ulation X) is to prevent th e infusion of hereby incorporated in this p a r t (Regu bank. (3) Record of credit. Every borrower un egulated credit obtained both outside lation X ) . W hen th e term “b an k ” is used and within th e United S tates into U.S. in this p a r t (Regulation X ) , it m eans subject to this P a r t 224 (Regulation X) securities m arkets in circum vention of a bank th a t is subject to P a r t 221 of this who obtains any credit from a lender described in subdivision ( i) , (iii), or (iv) the provisions of th e B oard ’s m argin c h a p te r (Regulation U) (b) Credit obtained from outside theof subp arag raph (1) of this p arag rap h regulations or by borrowers falsely cer tifying the purpose of a loan or otherwise United States. (1) A U.S. person or fo r if such credit is secured directly or in wilfully and intentionally evading the eign person controlled by a U.S. person directly, in whole or in p art, by col Provisions of those regulations. W hen the or acting on behalf of or in conjunction lateral th a t includes any security, shall term “obtain cred it” is used in this p a rt w ith such a person shall n o t obtain any prepare an d retain in his records, for a t Regulation X) it m eans “obtain, receive. purpose c r e d it” from outside th e United least 6 years a fte r such credit is e x tin °r enjoy the beneficial use of cred it” and S tates except in compliance w ith the fol guished, a record substantially in con form ity w ith th e requirem ents of Federal when the term “purpose cred it” is used, lowing conditions: (i) C redit obtained from a foreign Reserve F orm X -l. it means “credit for the purpose of p u r chasing or carrying securities”. W hen b ran ch of a G -lender shall conform to § 224,3 E xem ptions. the term “borrow er” is used, it m eans a th e provisions of P a r t 207 of this chap ter T he following classes of persons shall Person who obtains credit. T his p a rt (Regulation G ), except th a t th e require 'Regulation X) im plem ents section 7(f) m e n t of § 207.1(e) of this ch ap ter as to be exempted from the provisions of sec °t the Act, and generally applies to bor obtaining a sta te m en t of th e purpose of tion 7(f) of th e Act and this p a rt (Regu lation X) to th e extent described below: th e credit shall n o t apply. rowers who are: (a) A U.S. person whose perm anent (ii) Credit obtained from a foreign <a) Persons who obtain credit from b ran ch or subsidiary of a broker/dealer residence is outside th e United States, within th e U nited States, or an d who does n o t during any calendar fb> Those persons who obtain credit shall conform to th e provisions of P a r t year obtain a total of more th a n $5,000 220 of this ch a p te r (Regulation T ) . ,rom outside th e U nited S tates who are: (iii) Credit obtained from a foreign or have outstanding a t any tim e during •1) U.S. persons,2 any calendar year a total of more th a n (2) Foreign persons who are con b ran c h of a b ank shall conform to the $5,000 in credit obtained outside th e provisions of P a r t 221 of this ch ap ter trolled by U.S. persons,'1or (Regulation U) which would apply if U nited S tates to purchase or carry m a r <3) Foreign persons acting on behalf th e credit were obtained from the head gin securities. °f or in conjunction w ith 1 U.S. persons. office of th e bank in th e United States, (b) A borrower who is no t a U.S. p er except t h a t the requirem ent of § 221.3(a) son, b u t is controlled by or acting on § 224.2 G eneral rule. of this ch ap ter (Regulation U) as to ob behalf of or in conjunction w ith such (a) Credit obtained fro m w ithin the taining a sta te m en t of th e purpose of the person, who obtains credit for the p u r United States. A borrower shall n o t ob credit shall n o t apply. pose of bona fide clearing, m ark ettain any purpose credit from w ithin the (iv) Credit obtained from a foreign making, or arbitrage transactions in off United S tates unless he does so in com lender shall conform to th e provisions shore debt securities th a t are convertible pliance with th e following conditions: of P a rt 207 of this chapter (Regulation into m argin securities, except th a t any (1) Credit obtained from a G -lender G) which would apply if th e person ex credit outstanding against collateral con shall conform to th e provisions of P a rt tending, arranging, or m aintaining the sisting of such securities shall be brought 207 of this ch ap ter (Regulation G ) , credit were a G -lender, except th a t the into conform ity w ith th e o ther provisions which is hereby incorporated in this p art requirem ent of § 207.1(e) of this chapter of this p a rt (Regulation X ) ’ upon the (Regulation G) as to obtaining a sta te conversion of such securities into m a r 115 U.S.C. 78g. m ent of the purpose of th e credit shall gin securities. (c) A borrower who is n o t a U.S. p er ' For definition of th e term “U nited S tates n o t apply. W hen the term “foreign Person,” see S ta tu to ry Appendix, sec. 7 (f) (2) son, b u t is controlled by or acting on (A). behalf of or in conjunction w ith such 0 For a definition of th e term “b a n k ” m ea n person, who obtains credit from outside 1For definition of th e term "foreign persons REGULATION X controlled by a U n ited S ta te s person,” see Statutory Appendix, sec. 7 (f) (2) (C ) . *For definition of th e te rm "actin g on be half of or in c o n ju n c tio n w ith ,” see § 224.5(a) •Regulation X ) . ing “b ank t h a t is subject to R egulation U ” , see § 224.5(b) (R egulation X) and S ta tu to ry Appendix, sec. 3(a) (6). ” For a definition of th e term “purpose c re d it” see § 224.5(j) (R egulation X ) . 1 Inclu d in g P a rts 207, 220, or 221 of th is c h ap te r (R egulations G, T, and U) where applicable. th e U nited States, which borrower has been exempted by th e Board of Gover nors of the Federal Reserve System, by order, from th e requirem ents of this p a rt (Regulation X ), either unconditionally or upon specified term s an d conditions or for stated periods, upon a finding th a t exceptional circum stances w a rra n t th e grantin g of such an exemption, an d th a t th e exemption is consonant w ith th e p u r poses of section 7(f) of th e Act and th e provisions of this p a rt (Regulation X ) . § 224.4 R eporls and records. Every borrower described in § 224.1 who obtains any credit th a t is secured directly or indirectly, in whole or in part, by collateral th a t includes any securities, shall m ain tain such records an d file such reports as m ay be prescribed by the B oard of Governors of th e Federal R e serve System to enable it to perform th e functions conferred upon it by th e Act. § 224.5 D efinitions. Unless th e context otherwise requires, or it is otherwise specified herein, th e term s used in and for th e purposes of this p a rt (Regulation X) have th e m eanings given th em in this section, in sections 3 (a) or 7 (f) of th e Act, or in P a r t 207, 220, or 221 of this ch ap ter (Regulation G, T, or U ) . The revelant portions of sections 3(a) and 7(f) of th e Act are set fo rth in the S tatutory Appendix. In th e case of inconsistency between definitions a p pearing in this section an d those a p pearing in P a r t 207, 220, or 221 of this ch ap ter (Regulation G, T, or U ) , the definition appearing in th e regulation t h a t applies to the p articu la r credit in volved, w hether P a r t 207, 220, or 221 of this chapter (Regulation G, T, or U) shall prevail. (a) The term “acting on behalf of or in conjunction w ith” in reference to a foreign person m eans obtaining credit for th e purpose of purchasing or carrying a security in which, or in th e income or gains or losses from which, a U.S. person or a foreign person controlled by a U.S. person has a substantial direct or in direct beneficial interest. Absent these factors th e term does not include an in terest derived solely from the ownership of less th a n 50 percent of the o u tstan d ing capital stock issued by such foreign person who is obtaining such credit. (b) The term “b an k ” m eans a bank as defined in section 3(a) (6) of th e Act, in cluding a foreign b ran c h of a bank, ex cept th a t such term does not include a bank which is a mem ber of a national securities exchange, a foreign affiliate of a bank, or a foreign bank. (c) The te rm “b ro k er/d ea le r” means any broker or dealer including every mem ber of a n ation al securities ex change, and includes a foreign branch or subsidiary of a broker/dealer. (d) The term “foreign len der” m eans a person, other th a n a U.S. person, who in the ordinary course of his business extends, m aintains, or arranges purpose credit outside th e United S tates and who is not a foreign branch or subsidiary of a broker/dealer, a foreign branch of a bank, or a foreign branch of a G-lender. (e) The term “G -len der” means a p e r (2) Credit to enable the borrow er te son who is n o t a b roker/dealer or bank, reduce or retire indebtedness w h ich was who in the o rdinary course of his business originally in cu rred to purchase security extends, m aintains, or arranges credit is for th e purpose of “carry ing” such a th a t is secured, directly or indirectly, in security. whole or in p art, by collateral th a t in (3) Credit th a t is secured directly or cludes any m argin securities, and who is indirectly, in whole or in p a rt, by colsubject to the registration requirem ent lateral th a t includes any securities, is of § 207.1(a) of this ch ap ter (Regulation presum ed to be for th e purpose o f p u r chasing or carrying securities, unless the G ). (f) The term “indirectly secured” in borrower has complied w ith the require cludes any arran g em en t with th e lender m ents of P a r t 207 (R egulation G). under w hich the rig h t or ability to sell, P a r t 220 (Regulation T ) , and P a r t 221 pledge, or otherwise dispose of securities of th is chapter (Regulation U) as to the owned by the borrower (or by any other statem en t of the purpose of a credit, if person who h as m ade th e use of such such requirem ents are applicable, or in securities available to the borrower) is in th e case of credit obtained from a for any way restricted as long as th e credit eign lender, can furnish satisfacto ry evi rem ains outstanding, or u nder which th e dence of th e use of th e credit for a pur exercise of such right, w hether by w rit pose other th a n purchasing or carrying ten agreem ent or otherwise, is or may be securities. (4) An extension of credit provided for cause for acceleration of m atu rity of the credit. T he foregoing shall n o t apply, in a plan, program, or investm ent con tr a c t offered or sold or otherw ise inihowever— (1) If such restriction arises solely tiated afte r August 31, 1969, w hich pro by virtue of an arran gem ent with the vides for th e acquisition b oth of any lender w hich p ertains generally to the securities and of goods, services, prop borrow er’s assets unless a substantial erty interests, or investments. (k) The term “obtain cred it” means p a rt of such assets consists of m argin to obtain, receive, or enjoy the beneficial securities, or (2) If th e lender in good fa ith has not use of credit. (1) T he term “United S ta te s” includes relied upon such securities as collateral in th e extension or m aintenance of the any S tate of the U nited States, th e Dis tric t of Columbia, Puerto Rico, the particu lar credit, or (3) To securities held by th e lender Canal Zone, the Virgin Islands, or ar only in the capacity of custodian, deposi other possession of the U nited States tary, or trustee, or under sim ilar circum § 22 1.6 M iscellaneous provisions, stances, if the lender in good faith has (a) Innocent mistake. An innocent no t relied upon such securities as col m istake m ade in good faith by a bor la tera l in the extension or m aintenance rower in connection with the obtaining of th e p articu lar credit. of a credit shall not be deemed to be a (g) The term “lend er” means a p e r violation of this p a rt (R egulation X son who in th e ordinary course of his if prom ptly afte r discovery of th e mis business extends, m aintains, or arranges tak e the borrower takes w hatever action for credit, including a G-lender, a is practicable to remedy th e noncombroker/dealer, a bank, and a foreign pliance. lender. <b) Aiding or abetting. Any person (h) T he term “m argin security” shall who willfully aids or abets the violation have the m eaning of “m argin security” by any other person of any provision of as defined in I 207.2(d) of this chapter this p a rt (Regulation X) shall be deemed (Regulation G) if th e borrower is ob to be in violation of this p a rt (Regulation tainin g credit from a G -lender or a fo r X ) . For the purpose of this subsection eign lender, the m eaning of “m argin se th e term “aids or abets” shall include, but cu rity ” as defined m 1 220.2(f) of this no t be limited to, counsels, commands ch ap ter (Regulation T) if th e borrower induces, or procures. is obtaining credit from a broker/dealer, [FR Doc.71-14996 Filed 10-12-71;8 :51 ami an d th e m eaning of “m argin stock” as defined in I 221.3 (v) of this chapter (Regulation U) if th e borrower is o b tain ing credit from a bank. (i) The term “offshore debt security,” as to this p a r t (Regulation X) means a debt security offered only outside the U nited States, th e purchase of which by a U.S. person would give rise to a liability un der th e In terest Equalization Tax (26 U.S.C. 4911 et seq.). (j) T he term “purpose credit” means credit for th e purpose of purchasing or carrying securities. T he purpose of a credit is determ ined by substance ra th e r th a n form. T he following are some exam ples of purpose credit. (1) Credit w hich is for th e purpose, w hether im mediate, incidental, or u lti m ate, of purchasing or carrying a secur ity is “purpose credit,” despite any tem porary application of th e funds otherwise. . I } > 1 |