Full text of Federal Reserve Bank of New York Circulars : 10366. Interpretation of Regulation T

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FEDERAL RESERVE BANK
OF NEW YORK

[

Circular No. 10366
August 8, 1990

"1

INTERPRETATION OF REGULATION T
Clarification of SEC Rule 144A Regarding the Purchase and
Sale of Debt Securities

To All Banks, Brokers and Dealers, and Others Extending
Securities Credit in the Second Federal Reserve District:
F o llo w in g is th e tex t o f a sta te m e n t issu e d b y th e B o a rd o f G o v e rn o rs o f th e
F e d e ra l R e s e rv e S y stem :

The Federal Reserve Board has announced adoption of an interpretation on the
applicability of Regulation T (Credit by Brokers and Dealers) to unregistered securi­
ties sold and traded pursuant to the Securities and Exchange Commission’s new Rule
144A.
The interpretation clarifies that broker-dealers may purchase debt securities from
an issuer for resale pursuant to Rule 144A and may make markets in such securities under
the investment banking service exception to the arranging section in Regulation T.
The interpretation eliminates any uncertainty broker-dealers might have that their
purchase of securities in compliance with Rule 144A could result in a violation of sec­
tion 7(c) of the Securities Exchange Act of 1934 and Regulation T adopted under the
Act.
P r in te d o n th e re v e rse sid e is th e te x t o f th e B o a r d ’s in te rp re ta tio n , w h ic h h a s
b e e n re p rin te d fro m th e

Federal Register o f Ju ly

2 0 . Q u e s tio n s o n th is m a tte r m ay

b e d ire c te d to o u r C o m p lia n c e E x a m in a tio n s D e p a rtm e n t (Tel. No. 2 1 2 -7 2 0 -8 1 3 6 ).
E . G e r a l d C o r r ig a n ,

President.

(OVER)

prohibits the extension of purpose credit
by a creditor if the credit is unsecured,
[Regulation T; Docket No. R-07Q2}
(15 U.S.C. 78c. 78g, 78h, 78q. and 78w).
secured by collateral other than
2.
Section 220.131 is added to read as securities, or secured by any security
Application of the Arranging Section
(other than an exempted security) in
follows:
to Broker-Dealer Activities
contravention of Federal Reserve
§ 220.131 Application of the arranging
AGENCY: Board of Governors of the
regulations. If a debt security sold
section to broker-dealer activities under
pursuant to Rule 144A represents
Federal Reserve System.
SEC Rule 144A.
purpose credit and is not properly
a c t i o n : Interpretation.
(a) The Board has been asked whether collateralized by securities, the statute
s u m m a r y : The Board is adopting an
and Regulation T can be viewed as
the purchase by a broker-dealer of debt
interpretation to darify that brokerpreventing the broker-dealer from taking
securities for resale in reliance on Rule
dealers may purchase debt securities
the security into inventory in spite of the
144A of the Securities and Exchange
from an issuer for resale pursuant to
Commission (17 CFR 230.144A) 1 may be fact that the broker-dealer intends to
Securities and Exchange Commission
immediately resell the debt security.
considered an arranging of credit
Rule 144A (17 CFR 23(X144A} and may
permitted as an "investment banking
(d) Under § 220.13 of Regulation T, a
make markets in such securities under
service” under § 220.13(a) of
creditor may arrange credit it cannot
the investment banking service
Regulation T.
itself extend if the arrangement is an
exception to the arranging section in
"investment banking service" and the
(b) SEC Rule 144A provides a safe
Regulation T (12 CFR 220.13). The
credit does not violate Regulations G
harbor exemption from the registration
interpretation essnecessary to avoid
and U. Investment banking services are
requirements of the Securities Act of
frustrating the goals of the SEC in
defined to include, but not be limited to,
1933 for resales of restricted securities
adopting Rake 144A. It will eliminate the to "qualified institutional buyers," as
"underwritings, private placements, and
uncertainty broker-dealers might have
advice and other services in connection
defined in the rule. In general, a
that compliance with the procedures,
with exchange offers, mergers, or
“qualified institutional buyer1* is an
laid out in Rule 144A could result in a
acquisitions, except for underwritings
institutional investor that in the
violation of section 7(c) of the Securities aggregate owns and invests on a
that involve the public distribution of an
Exchange Act of 1934 and Regulation T discretionary basis at least $100 million
equity security with installment or other
adopted thereunder (12 CFR part 220).
deferred-payment provisions.” To
in securities of issuers that are not
EFFECTIVE DATE: Ju ly 16, 1990.
comply with Regulations G and U where
affiliated with the buyer. Registered
the proceeds of debt securities sold
FOR FURTHER INFORMATION CONTACT:
broker-dealers need only own and
under Rule 144A may be used to
Laura Homer, Securities Credit Officer, invest on a discretionary basis at least
purchase or carry margin stock and the
$10 million of securities in order to
or Scott Holz, Attorney, Division of
debt securities are secured in whole or
purchase as principal under the rule.
Banking Supervision and Regulation,
(202) 452-2761. For the hearing impaired Section 4(2) of the Securities Act of 1933 in part, directly or indirectly by margin
stock (see 12 CFR 207.2(f), 207.112, and
provides an exemption from the
only, Tefeconmmnfcations Service For
221.2(g)), the margin requirements of the
registration requirements for
the Deaf, Eamestine Hill or Dorothea
"transactions by an issuer not involving regulations must be met.
Thompson, (202) 452-3544.
(e) The SEC's objective in adopting
any public offering." Securities acquired
Rule 144A is to achieve "a more liquid
SUPPLEMENTARY INFORMATION:
in a transaction under section 4(2)
and efficient institutional resale market
cannot be resold without registration
Public Comment
for unregistered securities." To further
under the Act or an exemption
this objective, the Board believes it is
The procedures of 5 U.S.C. 553(b)
therefrom. Rule 144A provides a safe
appropriate for Regulation T purposes to
regarding notice, public comment, and
harbor exemption for resales of such
characterize the participation of brokerdeferred effective date were not
securities. Accordingly, broker-dealers
dealers in this unique and limited
followed in connection with this
that previously acted only as agents in
market as an “investment banking
interpretation because such rulemaking intermediating between issuers and
service." The Board is therefore of the
procedures do not apply to
purchasers of privately-placed
view that the purchase by a creditor of
interpretations.
securities, due to the lack of such a safe
debt securities for resale pursuant to
harbor, now may purchase privatelylis t of Subjects hr 12 CFR Part 220
SEC Rule 144A may be considered an
placed securities from issuers as
investment banking service under the
Banks, Banking, Brokers, Credit
principal and resell such securities to
arranging section of Regulation T. The
Federal Reserve System* Investments*
"qualified institutional buyers" under
market-making activities of brokerMargin, Margin requirements. National Rule 144A.
Market System (NMS Security),
(c) The Board has consistently treated dealers who hold themselves out to
other institutions as willing to buy and
Reporting and recordkeeping
the purchase of a privately-placed debt
sell Rule 144A securities on a regular
requirements, Securities.
security as an extension of credit
and continuous basis may also be
Under the Board's authority pursuant subject to the margin regulations. If the
considered an arranging of credit
issuer
uses
the
proceeds
to
buy
to sections 7 and 23 of the Securities and
securities, the purchase of the privately- permissible under § 220.13(a) of
Exchange Act of 1934. aa amended (15
Regulation T.
U.S.C. 78g and 78wJ, 12 CFR part 2211 is placed debt security by a creditor
represents an extension of “purpose
By order of the Board of Governors of the
amended as follows:
Federal Reserve System, July 16,1990.
credit” to the issuer. Section 7(c) of the
William W. Wiles,
Securities Exchange Act of 1934
PART 220— CRED IT BY BROKERS
AND DEALERS
Secretary of the Board.
1R aJteM 4A .t7 CFR 230144A. w t* oitgkuitty
[FR Doc. 90-16994 Filed 7-19-90; 8:45 am]
I.
The authority citation for part 220 published in the Federal Ragieier at 54 FR 17933.
BILLJNO CODE 6210-01-*
April 3a 1990.
continues to read as- follows:
12 CFR Part 220




Authority: Secs. 3, 7, a,17 and 23 of the
Securities Exchange A ct of 1934, as am ended

PRINTED IN NEW YORK, FROM FEDERAL REGISTER, VOL. 55, NO. 140, pp. 29566-29567