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FED ER A L R ESERV E BANK OF DALLAS DALLAS. TEXAS 75222 Circular No. 68-69 March 14, 1968 T E C H N I C A L A M E N D M E N T S T O R E G U L A T I O N S T, U, A N D G T o All B a n k s a n d Others Concerned in the Eleventh Federal Reserve District: The Board of Governors of the Federal Reserve System has adopted technical amendments to Regulations T, U, and G, effective March 11, 1968. Attached is a copy of the press statement regarding the amendments. Copies of the amendments are enclosed. Member banks are requested to insert the amendments in the ring binder containing the Regulations of the Board of Governors and the Bulletins of this Bank. Yours very truly, P. E. Coldwell President Enclosures (4) This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) FEDERAL RESERVE release p r e s s For immediate r e l e a s e . March 8 , 1968. The Board o f Governors o f t h e F e d e r a l R e se r v e System announced to d a y t h e a d o p t i o n o f t e c h n i c a l amendments to i t s regu l a t i o n s g o v e r n in g t h e u s e o f c r e d i t i n s t o c k market t r a n s a c t i o n s . These r e g u l a t i o n s a r e R e g u l a t i o n T, a p p l y i n g t o b r o k e r s and d e a l e r s , R e g u l a t i o n U, a p p l y i n g t o b a n k s, and R e g u l a t i o n G, c o v e r i n g s e c u r i t i e s l o a n s by o t h e r s . A l l o f t h e amendments a r e t e c h n i c a l i n n a t u r e and d e s i g n e d t o c l a r i f y c e r t a i n changes i n t h e margin r e g u l a t i o n s announced by t h e Board on February 1, 1968, t o become e f f e c t i v e on March 11, 1968. The amendments, w hich a l s o become e f f e c t i v e March 11, 1968, w i l l : 1. C l a r i f y t h a t th e 50 per c e n t margin r e q u ir e m e n ts a p p l i c a b l e t o c o n v e r t i b l e s e c u r i t i e s was i n te n d e d to apply o n l y to c o n v e r t i b l e d e b t s e c u r i t i e s and n o t t o p r e f e r r e d s t o c k s . 2. Sharpen th e d e f i n i t i o n o f t h e term " i n d i r e c t l y s e c u r e d ” i n R e g u l a t i o n s U and G t o make i t c l e a r t h a t s e c u r i t i e s owned by a borrower w i l l n o t be t r e a t e d as c o l l a t e r a l f o r a loan under t h i s s e c t i o n m e r e ly b e c a u s e a n a g a t i v e cove n an t ( e . g . , r e s t r i c t i o n s on s a l e or p l e d g e o f a s s e t s w i t h o u t t h e c o n s e n t o f t h e l e n d e r ) h a s b een i n c l u d e d i n t h e lo a n agr e em e n t, s o lo n g as th e bank or o t h e r le n d e r h a s i n good f a i t h n o t r e l i e d on t h e s e c u r i t i e s i n making t h e l o a n . As p r e v i o u s l y p u b l i s h e d , th e d e f i n i t i o n o f ' -2 - t h i s term c o u ld have b e e n i n t e r p r e t e d as i n c l u d i n g r o u t i n e n e g a t i v e c o v e n a n t arrangements common i n f i n a n c i a l t r a n s a c t i o n s . T h is change w i l l a l s o e l i m i n a t e c e r t a i n t e c h n i c a l and a d m in is t r a t i v e d i f f i c u l t i e s which would o t h e r w i s e a r i s e i n com p leting t h e s t a t e m e n t as t o t h e purpose o f t h e l o a n which i s r e q u i r e d under R e g u l a t i o n s U and G. 3. E l i m i n a t e t h e r e q u ire m e n t t h a t banks o b t a i n "purpose s t a t e m e n t s " i n c o n n e c t i o n w i t h r o u t i n e t r a n s a c t i o n s i n v o l v i n g lo a n s t o b r o k e r s and d e a l e r s , who are s u b j e c t to s u p e r v i s i o n and c o n t r o l under o t h e r governm ental r e g u l a t i o n s and c e r t a i n l o a n s t h a t are exempt from r e g u l a t i o n , r e g a r d l e s s o f p u r p o s e . 4. C l a r i f y t h e method by which s h o r t s a l e s o f c o n v e r t i b l e bonds are t o be c a r r i e d out under R e g u l a t i o n T. The Board to o k no a c t i o n to d a y on a proposed amendment to R e g u l a t i o n U t h a t w o u ld , i f a d o p te d , exempt from margin r e g u l a t i o n l o a n s by banks t o b r o k e r / d e a l e r f ir m s t o f i n a n c e t h e i r marketmaking a c t i v i t i e s i n c o n v e r t i b l e b ond s. When t h i s proposed amend ment was announced on February I , f ir m s t h a t b e l i e v e d th e y mi£,ht be e l i g i b l e f o r such an exem ption were i n v i t e d to f i l e , as prom ptly as p o s s i b l e , r e p o r t s on t h e i r a c t i v i t i e s i n t h i s r e g a r d . The Board has n o t y e t r e c e i v e d s u f f i c i e n t d a t a t o form a b a s i s f o r a d e t e r m i n a t i o n as to w h eth e r such an exem ption i s j u s t i f i e d and a c t i o n has b een d e f e r r e d p ending r e c e i p t and a n a l y s i s o f a d d i t i o n a l rep orts. The t e x t o f t h e amendments w i l l be p u b l i s h e d i n t h e F e d e r a l R e g i s t e r and w i l l be a v a i l a b l e a t the F e d e r a l R eserve Board and t h e F e d e r a l R e s e r v e Banks. -0 - CREDIT B Y BANKS F O R T H E PURPOSE OF PURCHASING O R CARRYING REGISTERED STOCKS TECHNICAL AMENDMENTS TO REGULATION U (1 2 CFR 2 2 1 ) E ffe c tiv e M a r c h 1 1 , 1 9 6 8 ISSU E D BY THE BOARD OF GOVERNORS OF THE F E D E R A L R E SE R V E SYSTEM 1. Section 221.3(a) is amended to read as follows: SECTION 221.3 — M ISCELLANEOUS PROVISION S. ( a) Required statement as to stock-secured loan. In connection with an extension of credit secured directly or indirectly by any stock, the bank shall obtain and retain in its records for at least six years after such credit is extinguished a statement in conformity with the require ments of Federal Reserve Form U-l executed by the recipient of such extension of credit (sometimes referred to as the “customer” ) and exe cuted and accepted in good faith by a duly authorized officer of the bank prior to such extension: Provided, That this requirement shall not apply to any credit described in paragraph (o) of this section or section 221.2 of this Part except for credit described in paragraphs 221.2(f), (g) and (h) extended to persons who are not brokers or dealers subject to Part 220 of this Chapter (Regulation T ). In determining whether or not an extension of credit is for the purpose specified in section 221.1 or for any of the purposes specified in section 221.2 the bank may rely on the state ment executed by the customer if accepted in good faith. To accept the customer’s statement in good faith, the officer must (1) be alert to the circumstances surrounding the credit and (2) if he has any information which would cause a prudent man not to accept the statement without inquiry, have investigated and be satisfied that the customer’s statement is truthful. * * * 2. Section 221.3(c) is amended to read as follows: SECTION 221.3 — M ISCELLANEOUS PROVISION S. * * * (c) Indirectly secured. The term “indirectly secured’’ includes any arrangement with the customer under which the customer’s right or ability to sell, pledge, or otherwise dispose of stock owned by the customer is in any way restricted so long as the credit remains outstanding, or under which the exercise of such right, whether by written agreement or otherwise, is cause for acceleration of the maturity of the credit: Pro vided, That the foregoing shall not apply (1) if such restriction arises solely by virtue of an arrangement with the customer which pertains generally to the customer’s assets unless a substantial part of such assets consists of stock, or (2) if the bank in good faith has not relied upon such stock as collateral in the extension or maintenance of the particular credit: And provided further, That the foregoing shall not apply to stock held by the bank only in the capacity of custodian, depositary, or trustee, or under similar circumstances, if the bank ingood faith has notrelied upon such stock as collateral in the extension or maintenance of the particular credit * * * 3. Section 221.3(t) (1) and (4) are amended to read as follows: SECTION 221.3 — M ISCELLANEOUS PROVISION S. * * * ( t) Credit on convertible debt securities. (1) a bank may extend crcdit for the purpose specified in section 221.1 on collateral consisting of any debt security convertible into a stock registered on a national securities exchange or any debt security carrying a warrant or right to subscribe to or purchase a stock so registered (such a debt security is sometimes referred to herein as a “convertible security” ). * * * (4) In the event that any stock is substituted for a convertible secu rity held as collateral for a credit extended under this paragraph, the stock and any credit extended on it in compliance with this Part shall thereupon be treated as subject to section 221.1 and the credit extended under this paragraph shall be reduced by an amount equal to the max imum loan value of the security withdrawn. * * * 4. Section 221.4(b) and (c) is amended to read as follows: SECTION 221.4— SU PPLEM EN T. * * * (b) M a x i m u m loan value of convertible debt securities subject to section 2 2 1 .3 (t). For the purpose of section 221.3 (t), the maximum loan value of any security against which credit is extended pursuant to section 221.3 (t) shall be 50 per cent of its current market value, as determined by any reasonable method. (c) Retention requirement. For the purpose of section 221.1, in the case of a loan which would exceed the maximum loan value of the collateral following a withdrawal of collateral, the “retention require ment” of a stock, whether or not registered on a national securities ex change, and of a convertible debt security subject to section 221.3 (t), shall be 70 per cent of its current market value, as determined by any reasonable method. * * * * * CREDIT B Y PER S O N S O T H E R T H A N BANKS, BROKERS, O R DEALERS FOR THE PURPOSE OF PURCHASING OR C A R R Y I N G R E G I S T E R E D E Q U I T Y SECURITIES TECHNICAL A M E N D M E N T S TO REGULATION G (12 CFR 207) Effective March 11, 1968 ISSU E D BY THE BOARD OF GOVERNORS OF THE F E D E R A L R E SE R V E SYSTEM 1. Section 207.1(d) (1) and (4) is amended to read as follows: SECTION 207.1— GENERAL RULE. * * * (d) Credit o n convertible debt securities. (1) A lender may extend credit for the purpose specified in paragraph (c) of this section on collateral consisting of any debt security convertible into a registered equity security or any debt security carrying a warrant or right to sub scribe to or purchase such a registered equity security (such a convertible debt security is sometimes referred to herein as a “convertible security” ). * * * (4) In the event that any registered stock is substituted for a con vertible security held as collateral for a credit extended under this sec tion, such registered stock and any credit extended on it in compliance with this Part shall thereupon be treated as subject to paragraph (c) of this section and not to this paragraph and the credit extended under this paragraph shall be reduced by an amount equal to the maximum loan value of the security withdrawn. * * * 2. Section 207.2(g) is amended to read as follows: SECTION 207.2 — D E FIN IT IO N S. * * * (g) The term “indirectly secured” includes, except as provided in section 207.4(a) (3), any arrangement with the customer under which the customer’s right or ability to sell, pledge, or otherwise dispose of regis tered equity securities owned by the customer is in any way restricted so long as the credit remains outstanding, or under which the exercise of such right, whether by written agreement or otherwise, is cause for acceleration of the maturity of the credit: Provided, That the foregoing shall not apply (1) if such restriction arises solely by virtue of an arrangement with the customer which pertains generally to the cus tomer’s assets unless a substantial part of such assets consists of registered equity securities, or (2) if the lender in good faith has not relied upon such securities as collateral in the extension or maintenance of the par ticular credit: And provided further, That the foregoing shall not apply to stock held by the lender only in the capacity of custodian, depositary or trustee, or under similar circumstances, if the lender in good faith has not relied upon such securities as collateral in the extension or mainte nance of the particular credit. * 3. * * Section 207.4(a) (1) is amended to read as follows: SEC TIO N 207.4 — M ISCELLANEOUS PROVISION S. (a) Stock option a n d employee stock purchase plans.* * * (1) Sections 207.1(c), (d), (f), (g), (h), (i),a n d (j) of this Part shall not apply (i) to any such credit extended to finance the exercise of such rights granted to any named officer or employee prior to February 1, 1968, and effectively exercised by such officer or employee prior to Feb ruary 1, 1969, or (ii) to any credit extended prior to February 1, 1969, to a plan-lender pursuant to a bona fide written commitment in existence on February 1, 1968, to finance the exercise of such rights and by such plan-lender from the proceeds of such credit to any officer or employee to finance the exercise of rights granted pursuant to a stock purchase plan under which the exercise price does not exceed 50 per cent of the market value of the stock subject to purchase, valued as of the offering date thereof. * * * 4. Section 207.5(b) is amended to read as follows: (b) M a x i m u m loan value of convertible debt securities subject to section 207.1(d). — For the purpose of section 207.1, the maximum loan value of any security against which credit is extended pursuant to section 207.1(d) shall be 50 per cent of its current market value, as determined by any reasonable method. % jjc jJc
