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FEDERAL RESERVE BANK
OF DALLAS
Dallas, Texas, March 13, 1941
REVISED EDITION OF REGULATION U
To All Banking Institutions in the
Eleventh Federal Reserve District:
T h ere is enclosed a revised cop y o f R egu la tion U as am ended to F e b
ru a ry 24, 1941, w h ich has been reprin ted b y th e B oard o f G ov ern ors o f
th e Federal R eserve S ystem f o r th e p u rp ose o f in co rp o ra tin g th erein the
am endm ent fo rw a rd e d to all banks in th e d istrict on Jan u ary 17, 1941.
M em ber banks o f th e F ederal R eserve S ystem are requ ested to in sert
the revised reg u la tion in th e ir rin g bin ders in lieu o f th e S ep tem ber 1, 1937,
edition o f R egu la tion U.
Yours very truly,
R. R. GILBERT
President
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
BOARD OF GOVERNORS
of the
FEDERAL RESERVE SYSTEM
LOANS BY BANKS FOR THE PURPOSE OF
PURCHASING OR CARRYING STOCKS
REGISTERED ON A NATIONAL
SECURITIES EXCHANGE
REGULATION U
As amended to February 24, 1941
INQUIRIES REGARDING THIS REGULATION
Any inquiry relating to this regulation should
be addressed to the Federal Reserve
Bank of the district in which
the inquiry arises.
SUPPLEMENT TO REGULATION U
IS S U E D B Y T H E BOARD OF G O V E R N O R S OF T H E
FED E RA L R ESE RV E S Y S T E M
Effective February 24, 1941
For the purpose of section 1 of Regulation U, the maximum loan
value o f any stock, whether or not registered on a national securities
exchange, shall be 60 per cent o f its current market value, as deter
mined by any reasonable method.
Loans to brokers and dealers.— Notwithstanding the foregoing,
a stock, if registered on a national securities exchange, shall have a
special maximum loan value of 75 per cent of its current market value,
as determined b y any reasonable method, in the case of a loan to a
broker or dealer from whom the bank (1) accepts in good faith a signed
statement to the effect that he is subject to the provisions o f R egu
lation T (or that he does not extend or maintain credit to or for cus
tomers except in accordance therewith as if he were subject thereto),
and (2) receives written notice, pursuant to a rule of the Securities
and Exchange Commission concerning the hypothecation of customers’
securities by brokers or dealers (Rule X -8 C -1 or Rule X -1 5 C 2 -1 ), to
the effect that the stock is a security carried for the account of a
customer.
©
EXPLANATORY FOREW ORD
(Not a part of the regulation)
This regulation is issued pursuant to the provisions of section 7 of
the Securities Exchange A ct of 1934.
The regulation does not prevent a bank from taking for any loan
collateral in addition to that required by the regulation, nor does it
require a bank to reduce any loan, to obtain additional collateral for
any outstanding loan, or to call any outstanding loan because of
insufficient collateral.
REGULATION U
As amended to February 24, 1941
LOANS BY BANKS FOR THE PURPOSE OF
PURCHASING OR CARRYING STOCKS
REGISTERED ON A NATIONAL
SECURITIES EXCHANGE
S E C T IO N
1. G E N E R A L R U L E
On and after M a y 1, 1936, no bank shall make any loan secured
directly or indirectly by any stock for the purpose of purchasing or
carrying any stock registered on a national securities exchange in an
amount exceeding the maximum loan value of the collateral, as pre
scribed from time to time for stocks in the supplement to this regula
tion and as determined by the bank in good faith for any collateral
other than stocks.
For the purpose of this regulation, the entire indebtedness of any
borrower to any bank incurred on or after M a y 1, 1936, or at any
previous time, for the purpose of purchasing or carrying stocks regis
tered on a national securities exchange shall be considered a single
loan,* and all the collateral securing such indebtedness shall be con
sidered in determining whether or not the loan complies with this
regulation.*
W hile a bank maintains any such loan, whenever made, the bank
shall not at any time permit withdrawals or substitutions o f collateral
that would cause the maximum loan value o f the collateral at such
time to be less than the amount of the loan. In case such maximum
loan value has become less than the amount o f the loan, a bank shall
not permit withdrawals or substitutions that would increase the
deficiency; but the amount of the loan m ay be increased if there is
provided additional collateral having maximum loan value at least
equal to the amount of the increase.
S E C T IO N
2. E X C E P T IO N S TO G E N E R A L R U L E
Notwithstanding the foregoing, a bank m ay make and m ay main
tain any loan for the purpose specified above, without regard to the
limitations prescribed above, if the loan comes within any o f the fol
lowing descriptions:
(a) Any loan to a bank or to a foreign banking institution;
(b ) Any loan to any person whose total indebtedness to the
* In applying this provision, especially when the borrower is a broker or dealer in securities, see
particularly sections 3(m ), (n ), and (o ), which were added by amendment effective February 24, 1941.
1
2
REGULATION U
bank at the date of and including such loan does not exceed
$ 1,000;
(c) Any loan to a dealer, or to two or more dealers, to aid in
the financing of the distribution of securities to customers not
through the medium of a national securities exchange;
(d) Any loan to a broker or dealer that is made in exceptional
circumstances in good faith to meet his emergency needs;
(e) Any loan for the purpose o f purchasing a stock from or
through a person who is not a member of a national securities
exchange and is not a broker or dealer who transacts a business in
securities through the medium of any such member, or for the
purpose of carrying a stock so purchased;
(/) Any temporary advance to finance the purchase or sale of
securities for prompt delivery which is to be repaid in the ordi
nary course o f business upon completion of the transaction;
{g) Any loan against securities in transit, or surrendered for
transfer, which is payable in the ordinary course of business upon
arrival of the securities or upon completion of the transfer;
(h) Any loan which is to be repaid on the calendar day on
which it is made;
(i) Any loan made outside the 48 States of the United States
and the District of Colum bia;
(j) Any loan to a member o f a national securities exchange for
the purpose o f financing his or his customers’ bona fide arbitrage
transactions in securities;
(k) Any loan to a member of a national securities exchange for
the purpose of financing such member’s transactions as an odd-lot
dealer in securities with respect to which he is registered on such
national securities exchange as an odd-lot dealer.
S E C T IO N
3.
M IS C E L L A N E O U S P R O V IS IO N S
(a) In determining whether or not a loan is for the purpose specified
in section 1 or for any of the purposes specified in section 2, a bank
may rely upon a statement with respect thereto, accepted by the bank
in good faith, signed by an officer of the bank or by the borrower.
(b) N o loan, however it may be secured, need be treated as a loan
for the purpose of “ carrying” a stock registered on a national securi
ties exchange unless the purpose o f the loan is to enable the borrower
to reduce or retire indebtedness which was originally incurred to pur
chase such a stock, or, if he be a broker or dealer, to carry such stocks
for customers.
(c) In determining whether or not a security is a “ stock registered
on a national securities exchange,” a bank may rely upon any reason
REGULATION U
3
ably current record o f stocks so registered that is published or speci
fied in a publication of the Board of Governors of the Federal Reserve
System.
(d) The renewal or extension of maturity o f a loan need not be
treated as the making of a loan if the amount of the loan is uot
increased except by the addition of interest or service charges on
the loan or o f taxes on transactions in connection with the loan.
(e) A bank may accept the transfer of a loan from another bank,
or permit the transfer of a loan between borrowers, without following
the requirements of this regulation as to the making of a loan, pro
vided the loan is not increased and the collateral for the loan is not
changed; and, after such transfer, a bank may permit such with
drawals and substitutions of collateral as the bank might have per
mitted if it had been the original maker of the loan or had originally
made the loan to the new borrower.
( /) A loan need not be treated as collateralled by securities which
are held by the bank only in the capacity of custodian, depositary or
trustee, or under similar circumstances, if the bank in good faith has
not relied upon such securities as collateral in the making or mainte
nance of the particular loan.
(g) Nothing in this regulation shall be construed to prevent a bank
from permitting withdrawals or substitutions o f securities to enable
a borrower to participate in a reorganization.
(h) N o mistake made in good faith in connection with the making
or maintenance of a loan shall be deemed to be a violation of this
regulation.
(i) Nothing in this regulation shall be construed as preventing a
bank from taking such action as it shall deem necessary in good faith
for its own protection.
(j) Every bank shall make such reports as the Board of Governors
o f the Federal Reserve System m ay require to enable it to perform the
functions conferred upon it by the Securities Exchange A ct of 1934.
( k) Terms used in this regulation have the meanings assigned to
them in such portions o f section 3 (a ) of the Securities Exchange Act
of 1934 as are printed in the appendix to this regulation, except that
the term “ bank” does not include a bank which is a member o f a
national securities exchange.
(l) The term “ stock” includes any security commonly known as a
stock, any voting trust certificate or other instrument representing
such a security, and any warrant or right to subscribe to or purchase
such a security.
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REGULATION U
*(m) Indebtedness “ subject to section 1” is indebtedness which is
secured directly or indirectly by any stock, is for the purpose of pur
chasing or carrying any stock registered on a national securities
exchange, and is not excepted by section 2.
*(n) In the case of any loan subject to section 1 to a broker or
dealer in securities, and in the case of any such loan to any other
borrower whose indebtedness the bank elects to treat for the purposes
of this subsection as if it were that of a broker or dealer, the bank
shall identify all the collateral used to meet the collateral requirements
of section 1 and shall not cancel the identification of any part thereof
except in circumstances that would permit the withdrawal of that part.
Such identification may be made by any reasonable method.
In any such case------(1) Only the collateral so identified shall have loan value for
purposes of section 1 or be subject to the restrictions therein speci
fied with respect to withdrawals and substitutions; and
(2) For any indebtedness of the same borrower that is not sub
ject to section 1 (other than a loan described in section 2 (d ), (f),
(g ), or (h ) ) , the bank shall in good faith require as much col
lateral not so identified as the bank would require (if any) if it
held neither the indebtedness subject to section 1 nor the identified
collateral. This rule shall not be construed, however, to require
the bank, after it has made any loan, to obtain any collateral
therefor because o f any decline in the value or quality of the col
lateral or in the credit rating of the borrower.
* (o ) This subsection applies to any case in which indebtedness of a
broker or dealer that is subject to section 1 is secured by any securities
which, according to written notice received by the bank from the broker
or dealer pursuant to a rule of the Securities and Exchange Commis
sion concerning the hypothecation of customers’ securities (Rule X -8 C -1
or Rule X -1 5 C 2 -1 ), are securities carried for the account of one or more
customers. For the purposes of this regulation—
(1) All such securities and all such indebtedness shall be con
sidered separately from other collateral and indebtedness of the
borrower;
(2) Only such securities shall have loan value for any such
indebtedness; and
(3) All such indebtedness shall be considered a single loan and
all such securities shall be considered in connection therewith,
except that specified indebtedness, together with the securities
treated by the bank as having loan value therefor, may be treated
separately if such securities secure only such specified indebted
ness and the borrower states in writing that they are carried for
the account of a single customer.
* Added by amendment effective February 24, 1941.
APPENDIX
There are printed below certain provisions of the Securities E x
change A ct of 1934:
Sec. 3. (a) * * *
(3) The term “ member” when used with respect to an exchange
means any person who is permitted either to effect transactions
on the exchange without the services of another person acting as
broker, or to make use of the facilities of an exchange for trans
actions thereon without payment of a commission or fee or with
the payment of a commission or fee which is less than that
charged the general public, and includes any firm transacting a
business as broker or dealer of which a member is a partner, and
any partner o f any such firm.
(4) The term “ broker” means any person engaged in the busi
ness of effecting transactions in securities for the account of
others, but does not include a bank.
(5) The term “ dealer” means any person engaged in the busi
ness of buying and selling securities for his own account, through
a broker or otherwise, but does not include a bank, or any person
insofar as he buys or sells securities for his own account, either
individually or in some fiduciary capacity, but not as a part of
a regular business.
(6) The term “ bank” means (A ) a banking institution organ
ized under the laws of the United States, (B ) a member bank of
the Federal Reserve System, (C ) any other banking institution,
whether incorporated or not, doing business under the laws of any
State or of the United States, a substantial portion of the busi
ness of which consists of receiving deposits or exercising fiduciary
powers similar to those permitted to national banks under section
11 (k) of the Federal Reserve Act, as amended, and which is
supervised and examined by State or Federal authority having
supervision over banks, and which is not operated for the purpose
of evading the provisions of this title, and (D ) a receiver, con
servator, or other liquidating agent of any institution or firm
included in clauses (A ), (B ), or (C ) of this paragraph.
#
#
#
(9) The term “ person” means an individual, a corporation, a
partnership, an association, a joint-stock company, a business
trust, or an unincorporated organization.
(10) The term “ security” means any note, stock, treasury
stock, bond, debenture, certificate of interest or participation in
any profit-sharing agreement or in any oil, gas, or other mineral
royalty or lease, any collateral-trust certificate, preorganization
certificate or subscription, transferable share, investment con
tract, voting-trust certificate, certificate of deposit, for a security,
or in general, any instrument commonly known as a “ security” ;
or any certificate of interest or participation in, temporary or
5
6
REGULATION U
interim certificate for, receipt for, or warrant or right to sub
scribe to or purchase, any of the foregoing; but shall not include
currency or any note, draft, bill of exchange, or banker’s accept
ance which has a maturity at the time of issuance of not exceed
ing nine months, exclusive of days of grace, or any renewal
thereof the maturity of which is likewise limited.
*
it
*
*
Sec. 7. (a) For the purpose of preventing the excessive use o f
credit for the purchase or carrying of securities, the Board of
Governors of the Federal Reserve System shall, prior to the effec
tive date of this section and from time to time thereafter, pre
scribe rules and regulations with respect to the amount of credit
that may be initially extended and subsequently maintained on
any security (other than an exempted security) registered on a
national securities exchange. For the initial extension of credit,
such rules and regulations shall be based upon the following
standard: An amount not greater than whichever is the higher of—
(1) 55 per centum of the current market price of the security,
or
(2) 100 per centum of the lowest market price of the security
during the preceding thirty-six calendar months, but not more
than 75 per centum of the current market price.
Such rules and regulations may make appropriate provision with
respect to the carrying of undermargined accounts for limited
periods and under specified conditions; the withdrawal of funds
or securities; the substitution or additional purchases of securi
ties; the transfer of accounts from one lender to another; special
or different margin requirements for delayed deliveries, short
sales, arbitrage transactions, and securities to which paragraph
(2) of this subsection does not apply; the bases and the methods
to be used in calculating loans, and margins and market prices;
and similar administrative adjustments and details. For the pur
poses of paragraph (2) of this subsection, until July 1, 1936, the
lowest price at which a security has sold on or after July 1, 1933,
shall be considered as the lowest price at which such security has
sold during the preceding thirty-six calendar months.
(b) Notwithstanding the provisions of subsection (a) of this
section, the Board of Governors of the Federal Reserve System,
may, from time to time, with respect to all or specified securities
or transactions, or classes of securities, or classes of transactions,
by such rules and regulations (1) prescribe such lower margin
requirements for the initial extension or maintenance of credit as
it deems necessary or appropriate for the accommodation of com
merce and industry, having due regard to the general credit situa
tion of the country, and (2) prescribe such higher margin require
ments for the initial extension or maintenance of credit as it m ay
deem necessary or appropriate to prevent the excessive use of
credit to finance transactions in securities.
(c) It shall be unlawful for any member o f a national securities
exchange or any broker or dealer who transacts a business in
REGULATION U
7
securities through the medium of any such member, directly or
indirectly to extend or maintain credit or arrange for the exten
sion or maintenance of credit to or for any customer—
(1) On any security (other than an exempted security) regis
tered on a national securities exchange, in contravention of the
rules and regulations which the Board of Governors of the Fed
eral Reserve System shall prescribe under subsections (a) and
(b) of this section.
(2) W ithout collateral or on any collateral other than ex
empted securities a n d /or securities registered upon a national
securities exchange, except in accordance with such rules and
regulations as the Board of Governors of the Federal Reserve
System m ay prescribe (A ) to permit under specified conditions
and for a limited period any such member, broker, or dealer to
maintain a credit initially extended in conform ity with the rules
and regulations of the Board of Governors of the Federal R e
serve System, and (B ) to permit the extension or maintenance
of credit in cases where the extension or maintenance of credit
is not for the purpose of purchasing or carrying securities or of
evading or circumventing the provisions of paragraph (1) of
this subsection.
(d) It shall be unlawful for any person not subject to sub
section (c) to extend or maintain credit or to arrange for the
extension or maintenance of credit for the purpose of purchasing
or carrying any security registered on a national securities ex
change, in contravention of such rules and regulations as the
Board of Governors of the Federal Reserve System shall prescribe
to prevent the excessive use of credit for the purchasing or carry
ing of or trading in securities in circumvention o f the other pro
visions o f this section. Such rules and regulations may impose
upon all loans made for the purpose o f purchasing or carrying
securities registered on national securities exchanges limitations
similar to those imposed upon members, brokers, or dealers by
subsection (c) of this section and the rules and regulations there
under. This subsection and the rules and regulations thereunder
shall not apply (A ) to a loan made by a person not in the ordi
nary course of his business, (B ) to a loan on an exempted security,
(C ) to a loan to a dealer to aid in the financing of the distribution
of securities to customers not through the medium of a national
securities exchange, (D ) to a loan by a bank on a security other
than an equity security, or (E ) to such other loans as the Board
of Governors o f the Federal Reserve System shall, by such rules
and regulations as it may deem necessary or appropriate in the
public interest or for the protection of investors, exempt, either
unconditionally or upon specified terms and conditions or for
stated periods, from the operation of this subsection and the rules
and regulations thereunder.
(e) The provisions of this section or the rules and regulations
thereunder shall not apply on or before July 1, 1937, to any loan
or extension o f credit made prior to the enactment o f this title
or to the maintenance, renewal, or extension of any such loan or
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REGULATION U
credit, except to the extent that the Board o f Governors of the
Federal Reserve System may by rules and regulations prescribe
as necessary to prevent the circumvention of the provisions of
this section or the rules and regulations thereunder by means of
withdrawals of funds or securities, substitutions of securities, or
additional purchases or by any other device.
Sec. 29. (a) Any condition, stipulation, or provision binding
any person to waive compliance with any provision of this title
or of any rule or regulation thereunder, or of any rule of an
exchange required thereby shall be void.
(b) Every contract made in violation of any provision o f this
title or of any rule or regulation thereunder, and every contract
(including any contract for listing a security on an exchange)
heretofore or hereafter made the performance of which involves
the violation of, or the continuance of any relationship or practice
in violation of, any provision of this title or any rule or regu
lation thereunder, shall be void (1) as regards the rights of any
person who, in violation of any such provision, rule, or regulation,
shall have made or engaged in the performance of any such con
tract, and (2) as regards the rights of any person who, not being
a party to such contract, shall have acquired any right there
under with actual knowledge of the facts by reason of which the
making or performance of such contract was in violation of any
such provision, rule or regulation. * * *
(c) Nothing in this title shall be construed (1) to affect the
validity of any loan or extension of credit (or any extension or
renewal thereof) made or of any lien created prior or subsequent
to the enactment of this title, unless at the time of the making
of such loan or extension of credit (or extension or renewal
thereof) or the creating of such lien, the person making such loan
or extension of credit (or extension or renewal thereof) or acquir
ing such lien shall have actual knowledge of facts by reason of
which the making of such loan or extension of credit (or exten
sion or renewal thereof) or the acquisition of such lien is a viola
tion of the provisions of this title or any rule or regulation there
under, or (2) to afford a defense to the collection of any debt or
obligation or the enforcement of any lien by any person who shall
have acquired such debt, obligation, or lien in good faith for value
and without actual knowledge o f the violation of any provision
of this title or any rule or regulation thereunder affecting the
legality of such debt, obligation, or lien.
Sec. 32(a) Any person who willfully violates any provision of
this title, or any rule or regulation thereunder the violation of which
is made unlawful or the observance of which is required under
the terms of this title, or any person who willfully and knowingly
makes, or causes to be made, any statement in any application,
report, or document required to be filed under this title or any
rule or regulation thereunder or any undertaking contained in a
registration statement as provided in subsection (d) of section
15 of this title, which statement was false or misleading with
respect to any material fact, shall upon conviction be fined not
REGULATION U
9
more than $10,000, or imprisoned not more than two years, or
both, except that when such person is an exchange, a fine not
exceeding $500,000 may be imposed; but no person shall be subject
to imprisonment under this section for the violation of any rule
or regulation if he proves that he had no knowledge of such rule
or regulation.
©
@FedFRASER