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FEDERAL RESERVE BANK
OF NEW YORK
Fiscal Agent of the United States
r Circular No. 1813 T
L January 14, 1938 J
Public Notice of Offering of $50,000,000, or thereabouts, of Treasury Bills
Dated January 19, 1938
Maturing April 20, 1938
To all Incorporated Banks and Trust Companies in the
Second Federal Reserve District and Others Concerned:
Following is the text of a notice today made public by the Treasury Department with respect to a new
offering of Treasury bills payable at maturity without interest to be sold on a discount basis to the highest
bidders.
STATEMENT BY ACTING SECRETARY MAGILL
,_^
The Secretary of the Treasury gives notice that tenders are invited for Treasury bills to the amount of $50,000,000,
or thereabouts. They will be 91-day bills; and will be sold on a discount basis to the highest bidders. Tenders will be
received at the Federal Reserve Banks, or the branches thereof, up to two o'clock p.m., Eastern Standard time, on
Monday, January 17, 1938. Tenders will not be received at the Treasury Department, Washington.
The Treasury bills will be dated January 19, 1938, and will mature on April 20, 1938, and on the maturity
date the face amount will be payable without interest. They will be issued in bearer form only, and in amounts or
denominations of $1,000, $10,000, $100,000, $500,000, and $1,000,000 (maturity value).
It is urged that tenders be made on the printed forms and forwarded in the special envelopes which will be supplied
by the Federal Reserve Banks or branches upon application therefor.
No tender for an amount less than $1,000 will be considered. Each tender must be in multiples of $1,000. The
price offered must be expressed on the basis of 100, with not more than three decimal places, e. g., 99.125. Fractions
must not be used.
Tenders will be accepted without cash deposit from incorporated banks and trust companies and from responsible
and recognized dealers in investment securities. Tenders from others must be accompanied by a deposit of 10 per cent
of the face amount of Treasury bills applied for, unless the tenders are accompanied by an express guaranty of payment
by an incorporated bank or trust company.
Immediately after the closing hour for receipt of tenders on January 17, 1938, all tenders received at the
Federal Reserve Banks or branches thereof up to the closing hour will be opened and public announcement of the
acceptable prices will follow as soon as possible thereafter, probably on the following morning. The Secretary of the
Treasury expressly reserves the right to reject any or all tenders or parts of tenders, and to allot less than the amount
applied for, and his action in any such respect shall be final. Those submitting tenders will be advised of the acceptance
or rejection thereof. Payment at the price offered for Treasury bills allotted must be made at the Federal Reserve Banks
in cash or other immediately available funds on January 19, 1938.
The Treasury bills will be exempt, as to principal and interest, and any gain from the sale or other disposition
thereof will also be exempt, from all taxation, except estate and inheritance taxes. (Attention is invited to Treasury
Decision 4550, ruling that Treasury bills are not exempt from the gift tax.) No loss from the sale or other disposition
of the Treasury bills shall be allowed as a deduction, or otherwise recognized, for the purposes of any tax now or
hereafter imposed by the United States or any of its possessions.
Treasury Department Circular No. 418, as amended, and this notice prescribe the terms of the Treasury bills
and govern the conditions of their issue. Copies of the circular may be obtained from any Federal Reserve Bank or
branch thereof.
In accordance with the above announcement tenders will be received at the Securities Department of
this bank (2nd floor, 33 Liberty Street, New York City) or at the Buffalo Branch of this bank (272 Main
Street, Buffalo, New York) until two o'clock p.m., Eastern Standard time, on Monday, January 17, 1938.
It is requested that tenders be submitted on special form and in special envelope enclosed herewith.
Attention is invited to the fact that payment for the Treasury bills cannot be made by credit through the
War Loan Deposit Account. Payment must be made in cash or other immediately available funds.
GEORGE L. HARRISON,
President.
No
TENDER FOR 91-DAY TREASURY BILLS
Dated January 19, 1938.
Maturing April 20, 1938.
Dated at
To THE FEDERAL RESERVE BANK OF N E W YORK,
1938
Fiscal Agent of the United States,
New York City, N. Y.
Pursuant to the provisions of Treasury Department Circular No. 418, as amended, and to
the provisions of the public announcement on January 14, 1938, as issued by the Acting Secretary of
the Treasury, the undersigned offers to pay
* for a total amount
(Rate per 100)
of $
(maturity value) of the Treasury bills therein described, or for any less
amount
that
may be allotted, payment therefor
to be made at your bank in cash or other
immediately available funds on the date stated in the public announcement.
The Treasury bills for which tender is hereby made are to be dated January
19, 1938,
and are to mature on April 20, 1938.
This tender will be inserted in special envelope entitled "Tender for Treasury bills."
IMPORTANT INSTRUCTIONS:
1. No tender for less than $1,000 will be considered, and each tender must be for an amount in multiples
of $1,000 (maturity value). Also, if more than one price is offered, a separate form must be executed at each
price.
2. If the person making the tender is a corporation, the form should be signed by an officer of the corporation authorized to make the tender, and the signing of the form by an officer of the corporation will be
construed as a representation by him that he has been so authorized. If the tender is made by a partnership, it
should be signed by a member of the firm, who should sign in the form "
,a
copartnership, by
, a member of the firm."
3. Tenders will be accepted without cash deposit from incorporated banks and trust companies and from
responsible and recognized dealers in investment securities. Tenders from others must be accompanied by a
deposit of 10 per cent of the face amount of Treasury bills applied for, unless the tenders are accompanied by
an express guaranty of payment by an incorporated bank or trust company.
4. If the language of this form is changed in any respect, which, in the opinion of the Secretary of the
Treasury, is material, the tender may be disregarded.
Payment by credit through War Loan Deposit Account will not be permitted.
Before signing fill in all required spaces.
Bank or Trust Company....
Post Office Address.
State
Official signature required.
SPACES BELOW ARE FOR THE USE OF THE FEDERAL RESERVE BANK
Examined
Allotment
Classified
Carded
Figured
Checked
Ledger
Advised
Acknowledged
Method of Payment
Disposition
Amount
Date Released
By
1
Received
Checked
TENTB-389-a
Recorded
Window
Custody
* Price should be expressed on the basis of 100, with not more than
three decimal places, e. g., 99.125. Fractions must not be used.
Mail
Other Departments
FEDERAL RESERVE BANK
OF NEW YORK
r Letter RU.l 1
L January 15, 1938 J
Rulings of the Board of Governors of the Federal Reserve System
Regarding Regulation U
To Each Nonmember Bank in the
Second Federal Reserve District:
In order to assist you in keeping currently informed regarding interpretations of
Regulation U of the Board of Governors of the Federal Reserve System which relates
to loans by banks, whether or not members of the Federal Reserve System, for the
purpose of purchasing or carrying stocks registered on a national securities exchange,
we transmit to you herewith copies of all rulings which have been published to date in
the Federal Reserve Bulletin. A copy of Regulation U, as amended to September 1,
1937, was transmitted to you by the Board of Governors of the Federal Reserve
System when the regulation was last reprinted. Further rulings under Regulation U
which may be published hereafter in the Federal Reserve Bulletin will be transmitted
in due course to all banks in the Second Federal Reserve District which are not
members of the Federal Reserve System.
We shall be pleased to be of assistance to you in connection with any questions
arising under Regulation U. Inquiries regarding the regulation should be submitted
to this bank.
GEORGE L. HARRISON,
President.
FEDERAL RESERVE BANK
OF NEW YORK
accompany Letter RU.l T
January 15, 1938 j
t Todated
Reprints of rulings of the Board of Governors of the Federal Reserve System
published in the Federal Reserve Bulletin to January 1, 1938, regarding Regulation U
which relates to loans by banks for the purpose of purchasing or carrying stocks registered
on a national securities exchange.
(May 1936 Bulletin, p. 325—In so far as the following ruling relates to
transfers of loans from lenders other than banks, it was superseded
by amendment No. 2 of Regulation U, as published at page 550 of
the July 1936 Federal Reserve Bulletin and included in section 3(e)
of the current reprint of Regulation U.)
Transfers of loans
Ruling No. 1 interpreting Regulation U.—
In response to an inquiry from certain banks
in New York City concerning section 3(e)
of Regulation U, the Board of Governors of
the Federal Reserve System rules as follows:
A bank may accept the transfer of a loan
from another lender, provided the loan is not
increased and the collateral for the loan is not
changed, even though the "maximum loan
value" of the collateral be less than the
amount of the loan, but may not thereafter
permit at any time withdrawals or substitutions of collateral that would increase the
deficiency at such time.
(June 1936 Bulletin, p. UZO—Part 3 of the following ruling was superseded by amendment No. 2 incorporated in section 3(e) of the
current reprint of Regulation U.)
Interpretations of Regulation U
The Board has recently been asked to rule
on the following questions under Regulation
U, which relates to loans by banks for the
purpose of purchasing or carrying stocks
registered on a national securities exchange:
1. Whether, in subsection (b) of section 2,
which exempts "any loan to any person whose
total indebtedness to the bank at the date of
and including such loan does not exceed
$1,000," the term "total indebtedness" means
the total of all loans regardless of their purposes or the total of all loans for the purpose
of purchasing or carrying stocks registered
on a national securities exchange?
In response to this inquiry the Board stated
that the term "total indebtedness" means
total indebtedness for all purposes and is not
restricted to total indebtedness for the purpose of purchasing or carrying stocks registered on a national securities exchange.
2. The Board has also been asked, under
subsection (a) of section 3 if the statement
signed by an officer, upon which a bank may
rely 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,
must be based only on facts related to the
officer by the prospective borrower or if it
may be based also on facts within the knowledge of the officer not specifically stated by
the borrower.
In response to this inquiry the Board ruled
that the officer's statement might be based not
only on statements or representations made
to him by the prospective borrower but also
upon any other information which the officer
had obtained from any source.
3. The Board has also been asked whether
in subsection (e) of section 3 permitting a
bank to accept the transfer of a loan from
"another lender," the term "another lender"
refers solely to a bank or includes any other
lender.
In response to this question the Board ruled
that the term quoted includes not only a bank
but also any other lender.
(July 1936 Bulletin, p. Si9.)
Applicability of section 2(c) of Regulation U to
security dealers "making a market" in registered
stocks or purchasing an inventory of such stocks
for resale
The Board has recently received a request
for a ruling on the question whether section
2(c) of the Board's Regulation U, excepting
from the limitations prescribed in section 1
of the regulation "any loan to a dealer, or to
two or more dealers, to aid in the financing of
REPRINTS OF RULINGS REGARDING REGULATION U
the distribution of securities to customers not
through the medium of a national securities
exchange," applies to the following loans by
a bank to a dealer:
(1) The borrower is a dealer, a part of
whose business consists of "making a market" in a stock registered on a national securities exchange. In this business he purchases
this stock from time to time for his own account on the exchange or "over the counter"
from or through members of a national securities exchange or brokers or dealers who
transact a business in securities through the
medium of such members. In this business
he also sells the stock for his own account on
the exchange but more often "over the counter" to his customers or to other persons, his
sales in either case being on a cash basis. The
bank loan to the dealer is secured by this stock
and is for the purpose of enabling him to purchase the stock and to carry it pending its
sale.
(2) The borrower is a dealer who is a
member of a national securities exchange. A
part of his business consists of purchasing
on the exchange stocks registered thereon and
of selling them on a cash basis to his customers or to other persons "over the counter."
The bank loan in question is for the purpose
of enabling him to purchase these stocks and
to carry them pending their sale. The loan
might be expected to be outstanding for several months and to be reduced or increased
several times during its life.
On the basis of the facts as stated above,
the Board ruled that neither of the foregoing
loans comes within the exception contained
in section 2(c) of Regulation U because
neither loan is a loan to aid in the financing of
the distribution of securities within the meaning of the term "distribution" as used in such
section.
(July 1936 Bulletin, p. 51,9—The following ruling was superseded by
amendment No. 3 of Regulation U, as published at page 718 of the
August 1937 Federal Reserve Bulletin and incorporated in the
current reprint of Regulation U.)
Applicability to collateral for loans made prior to
May 1, 1936, of provisions in Regulation U governing withdrawal or substitution of collateral
The Board has recently been presented
with the question whether Regulation U restricts the substitution or withdrawal of collateral securing loans made before May 1,
1936. In response, the Board expressed the
view that as a general rule the provisions of
Regulation U are not applicable to the with-
drawal or substitution of collateral for any
loan made prior to May 1, 1936.
The Board, however, stated that this general rule is subject to the following qualification: If a bank has made another loan on or
after that date (other than a loan excepted
by section 2 of the regulation) which is secured directly or indirectly by any stock and
is for the purpose of purchasing or carrying
a stock registered on a national securities exchange, and if the terms of the bank's agreements with the borrower are such that the
collateral securing the first loan also secures
the second loan, the bank must then combine
the collateral for both loans in determining
whether any of the collateral for either loan
may be withdrawn. The bank may not, in
this case, permit withdrawal of such an
amount of collateral as would cause the maximum loan value of the remainder to be less
than the amount of the second loan.
{July 19S6 Bulletin, p. 5U9.)
Applicability of section 2(f) of Regulation U to a
loan to a dealer to purchase securities to comply
with orders from customers
An inquiry has been received by the Board
from a member bank as to whether a temporary loan to a dealer for the purpose of completing a transaction, in which he purchases
securities to comply with a bona fide order
from a customer, is exempted from the provisions of Regulation U by section 2(f)
thereof, which excepts from the limitation of
the regulation any temporary advance to
finance the purchase or sale of securities for
prompt delivery which is to be repaid in the
ordinary course of business upon completion
of the transaction. In reply the Board, without passing upon all possible situations covered by the question, expressed the view that
a loan of the following description would be
excepted from the regulation under the provisions of section 2(f):
A dealer in securities receives an offer from a
customer to purchase a registered stock. It is agreed
between the dealer and the customer that the dealer
will deliver the stock to the customer promptly, and
that the customer will pay for the stock promptly
upon delivery of the security. The dealer purchases
the security, instructing the seller to deliver it to
a designated bank against payment. The bank,
knowing the facts of the case and understanding
that it will be repaid by the dealer as soon as the
dealer can arrange for his customer to take delivery
of and pay for the stock, makes a loan to the dealer
for the purpose of paying the seller of the stock.
REPRINTS OF RULINGS REGARDING REGULATION U
(April 19S7 Bulletin, p. 294.)
Determination of market value of stock for loan
under Regulation U.
The Board recently considered a question regarding the determination of the market value of a stock in connection with a loan
on the stock under Regulation U. In the case
presented, a bank made an agreement with
an out-of-town customer to lend a certain
sum of money on a registered stock, the
amount being 45 percent of its then market
value and the purpose being to purchase registered stocks. The borrower delivered the
stock and the note as promptly as possible on
the next day, but the market value of the
stock had become lower in the interval so that
the amount the bank had agreed to lend was
in excess of 45 percent. The question arose
as to whether Regulation U permits the bank
to carry out its commitment.
It appeared that the bank had entered into
an enforceable commitment, the details of the
loan had been perfected in so far as practicable on the first day, and the negotiations
for and completion of the loan were to take
place as nearly contemporaneously as the circumstances of the case would permit. In the
circumstances, the Board expressed the view
that the market value of the stock for the purpose of completing the loan might properly
be determined as of the time when the bank
and the customer agreed upon the amount
and terms of the loan. The Board pointed
out, however, that any clearly foreseeable
change in the stock during the interval, such
as a split-up of shares or the stock selling
"ex" a dividend of any kind, should be taken
into account in such a determination.
quick sale was in prospect and they would be
disposed of promptly. The securities purchased were often unregistered securities,
but some registered stocks were so purchased
and the inquiry was, in effect, whether such
purchases of registered stocks caused the
loan to be subject to the regulation. No question was presented to the Board as to whether
or not, in the event the dealer should treat
certain of the transactions separately and
obtain loans from time to time for particular
purposes, some of these loans to the dealer
might be excluded from the operation of the
regulation.
It seemed clear from the borrower's business as a dealer that one purpose of the loan
in question was to purchase or carry registered stocks. Therefore, the Board expressed
the opinion that, while the loan might also
have certain other purposes, the loan should
be considered to be a loan for the purpose of
purchasing or carrying registered stocks.
(August 1937 Bulletin, p. 715—As indicated in the footnote to the
following ruling, a portion of the ruling was superseded by amendment
No. 3 incorporated in the current reprint of Regulation U.)
Transfers of loans under Regulation U.
The Board has recently considered a number of questions regarding the transfer of
loans pursuant to section 3(e) of Regulation
U which provides in part as follows:
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, provided the
loan is not increased and the collateral for the loan is
not changed; * * *
1. ESSENTIALS OF THE TRANSFER
OF A
LOAN.—The first question presented in connection with this provision was whether a
(May 1937 Bulletin, p. S9S.)
bank should be regarded as accepting the
Application of Regulation U to a loan to a Securities transfer of a loan if it makes a loan to a cusDealer for the Purpose of Purchasing Both Regis- tomer to enable him to reduce or retire existtered and Unregistered Stocks.
ing indebtedness at another bank or to replace
The Board recently considered a question funds which the borrower has used to reduce
as to whether a certain loan to be made to a or retire indebtedness at another bank.
securities dealer and secured by stocks should
A transaction such as that described should
be considered to be a loan for the purpose of not be considered to be the accepting of the
purchasing or carrying stocks registered on transfer of a loan pursuant to section 3(e).
a national securities exchange, and thus be The provisions of section 3(e) apply only to
considered to be subject to Regulation U.
a loan which is transferred by the process of
It appeared that the proceeds of the loan payment by the transferee bank to the transwould not be employed immediately but feror bank against the receipt of the proper
would be kept available for use in acquiring collateral, and a transaction such as that deregistered or unregistered securities. The scribed above does not come within the prosecurities were only to be acquired when a visions of the section.
REPRINTS OF RULINGS REGARDING REGULATION U
2. THE INDEBTEDNESS AND COLLATERAL TO
BE TRANSFERRED.1—Questions also were
raised as to the indebtedness and the collateral to be transferred. In general, two different types of cases were presented in this connection, one relating to indebtedness incurred
on or after May 1, 1936, and the other to indebtedness incurred prior to that date. Since
no question was presented as to the requirements that might affect the transferor bank,
the two types of cases were considered only
with respect to the requirements that affect
the transferee bank.
Loans made on or after May 1, 1936.—The
first type of case involved indebtedness that
was for the purpose of purchasing or carrying stocks registered on a national securities
exchange, that was not excepted from the
regulation, and that was incurred on or after
May 1, 1936. Although the transferor bank
may have treated certain portions of this indebtedness as separate loans for certain purposes, the agreement between the customer
and the bank was such that all the collateral
for any of the described indebtedness secured
all such indebtedness.
In this connection, it is to be noted that the
second paragraph of section 1 of Regulation
U provides:
* * * the entire indebtedness of any borrower to
any bank incurred on or after May 1, 1936, for the
purpose of purchasing or carrying stocks registered
on a national securities exchange shall be considered
a single loan; and all the collateral securing such indebtedness shall be considered in determining whether
or not the loan complies with this regulation.
In view of this provision, it is evident that
the regulation contemplates that, in certain
connections, the aggregate of the described
indebtedness and all the collateral that secures
the indebtedness should be considered a unit,
regardless of whether or not the transferor
bank may have treated a portion of such indebtedness as a separate loan and assigned
particular collateral to that portion. It is
clear that it would be permissible under section 3(e) for a transferee bank to accept the
transfer of the aggregate of such indebtedness accompanied by the aggregate collateral,
but there was presented the additional question of whether it is permissible under section
3(e) to accept the transfer of a portion of this
s
In view of Amendment No. 3 of Regulation U which eliminates
the distinction between loans made on or after May 1, 1936, and
loans made before that date, that portion of part 2 of this ruling
which relates to loans made before May 1, 1936, will no longer
be applicable after September 1, 1937, the effective date of Amendment No. 3. On and after this effective date, transfers of all loans
should be treated as if the loan had been made after May 1, 1936.
aggregate indebtedness accompanied by a
proportionate part of the aggregate collateral.
If a portion of the aggregate indebtedness
is transferred to a bank and the transferred
portion is accompanied by a corresponding
portion of the collateral so that the ratio of
the part of the indebtedness transferred to
the part of the collateral transferred is the
same as that of the aggregate indebtedness
to the aggregate collateral, it may properly
be considered that "the collateral for the loan
is not changed" and the transferee bank may
in accordance with section 3(e) of the regulation accept such a transfer "without following the requirements of this regulation as to
the making of a loan".
Loans
made
before May
1,
1936.—The
other type of case involved indebtedness that
was for the purposes of purchasing or carrying registered stocks, that was not excepted
from the regulation, but that was incurred
prior to May 1, 1936.
It will be noted that the provision of section 1 of the regulation quoted above with
respect to the treatment of aggregate indebtedness and aggregate collateral as a unit
does not apply to indebtedness incurred prior
to May 1, 1936. In the case of such an old
loan, therefore, identification of the loan and
the collateral therefor, all or part of which
are to be transferred, should be made on the
basis of the practice which the transferor
bank and the borrower have consistently
followed in good faith in dealing with the
loan. Any indebtedness which has been
treated as constituting a single loan, and collateral which has been treated as having loan
value for the purposes of the loan and as not
having loan value for other purposes, should
be considered as a unit, and they should be
so considered without regard to a customers'
agreement under which collateral for one
loan secures another.
Accordingly, if the entire amount of such
an old loan thus identified is to be accepted
by the transferee bank pursuant to section
3(e), it should be accompanied by all the
collateral which, as indicated above, has been
treated as having loan value for the purposes
of the loan and as not having loan value for
other purposes. Similarly, if a portion of
such a loan is to be accepted by the transferee
bank pursuant to section 3(e), it should be
accompanied by a corresponding portion of
the collateral so that the collateral will not be
changed, i.e., the ratio of the part of the
indebtedness transferred to the part of the
REPRINTS OF RULINGS REGARDING REGULATION U
collateral transferred is the same as that of
the indebtedness originally treated as a single
loan to the collateral treated as having loan
value only for the purposes of such loan.
3. DETERMINATION OF FACTS REGARDING
TRANSFER OF LOAN.—A question was also
presented as to the method which a transferee
bank may use to determine whether or not the
conditions necessary for the transfer of a loan
pursuant to section 3(e) are being followed.
Specifically, the question was raised whether
the transferee bank may rely upon a signed
statement of the borrower or the transferor
bank which it accepts in good faith to determine these facts.
The Board pointed out that, as in the case
of a number of other facts that are relevant
to operations under the regulation, no specific
method of determining these facts is required. The requirement is that the bank
act diligently and in entire good faith, and
in doing this it may utilize various methods
for ascertaining the facts in particular cases.
As one method of determining the facts' in
connection with the transfer of a loan, a
transferee bank acting in good faith would
be justified in relying upon a signed statement of the borrower or the transferor bank.
(.August 1937 Bulletin, p. 716.)
Application of Regulation U to the purchase of debentures.
The Board recently considered the question whether the purchase of certain debentures by a national bank is subject to the
Board's Regulation U, which relates to loans
by banks for the purpose of purchasing or
carrying stocks registered on a national securities exchange.
It appeared that the debentures in question
were issued for the purpose of obtaining
funds to acquire certain stocks which were
registered on a national securities exchange.
These stocks were pledged with a trustee that
was to maintain the collateral for the debentures at a certain level, calling debentures for
redemption and liquidating collateral as
might be necessary for this purpose.
It seemed clear that the purpose of the
issue of debentures was to purchase or carry
stocks registered on a national securities exchange, but it was noted that Regulation U
is expressed almost entirely in terms of
"loans" instead of using the somewhat
broader term of "extend credit" which ap-
pears in the provisions of section 7 of the
Securities Exchange Act of 1934 under which
the regulation is issued. This, of course,
would not prevent the scope of the regulation
from being broadened in this respect if such
a change should appear to be advisable.
The information in the inquiry was not
entirely clear as to the status of the debentures; but it was the view of the Board that,
if the debentures complied with the requirements of section 5136 of the Revised Statutes
and the regulations of the Comptroller of the
Currency issued thereunder with respect to
the purchase of investment securities, the
purchase of the debentures, whether directly
from the issuer or from some other source,
would not be subject to the present provisions of Regulation U since the regulation
is at present expressed in terms of loans. If
the debentures were securities that failed to
meet these requirements, the inability of the
national bank to purchase the debentures
would have prevented any question from arising in the present case as to the application
of Regulation U.
The Board further stated that, if the facts
are such that the debentures should not be
considered to be securities and thus would
not be subject to section 5136, they should,
of course, be treated as loans. The facts
stated in the inquiry seemed to indicate that,
if the debentures should be treated as loans,
they would be loans subject to Regulation U.
{August 1937 Bulletin, p. 717.)
Application of Regulation U to a loan to an investment trust to retire debentures.
The Board has considered a question as to
whether Regulation U applies to a loan to a
corporate investment trust on stocks to enable the investment trust to retire certain
debenture bonds issued by it prior to the enactment of the Securities Exchange Act of
1934. It was understood that the debentures
were originally issued to obtain funds for
the usual operations of the investment trust
which consist very largely of purchasing and
carrying listed stocks.
Since the loan was to retire the debentures
of the investment trust, it appeared not to
be for the purpose of purchasing stocks registered on a national securities exchange and,
therefore, the question was whether the loan
was for the purpose of carrying such stocks.
5
REPKINTS OF RULINGS REGARDING REGULATION U
It appeared from the nature of the loan
that it was one for the purpose of carrying
registered stocks unless some provision of
the regulation removed it from that category.
In this connection section 3(b) of the regulation provides:
No loan, however it may be secured, need be treated
as a loan for the purpose of "carrying" a stock registered on a national securities exchange unless the purpose of the loan is to enable the borrower to reduce or
retire indebtedness which was originally incurred to
purchase such a stock, or, if he be a broker or dealer,
to carry such stocks for customers.
It will be seen that section 3(b) was intended to exempt from the regulation loans
which might otherwise be considered to be
for the purpose of "carrying" registered
stocks merely because they happen to be
secured by such stocks. This was to afford
banks more certainty in their operations
under the regulation.
It was the view of the Board that the debentures in question constituted indebtedness
within the meaning of section 3(b) and that
the purpose of the loan must be considered
to be the retirement of these debentures
rather than merely their purchase. It also
was felt that in connection with matters of
this kind the present status of the stocks
should be considered and that, therefore,
since the stocks in question had become registered after the passage of the Act, the debentures should be considered to be indebtedness originally incurred for the purchase of
registered stocks within the meaning of section 3(b). Furthermore, the reference in
the section to brokers and dealers indicates
that the section was not intended to exempt
loans which are closely connected with trading in registered stocks and emphasizes the
fact that loans of the type under consideration do not come within the general purposes
of the exemption contained in the section.
In view of these facts, the Board expressed
the opinion that the loan in question was subject to the provisions of Regulation U.
(October 19S7 Bulletin, p. 995.)
Applicability of Regulation U to Stock Registered
after Loan is made
The Board recently considered an inquiry
regarding the applicability of Regulation U,
as amended to September 1, 1937, to a loan
originally made for the purpose of purchasing or carrying a stock which was not then
registered on a national securities exchange
but which became registered subsequently.
The Board pointed out that the regulation
is applicable, with certain exceptions, to any
loan initially made for the purpose of purchasing or carrying a stock "registered on a
national securities exchange," and stated that
the phrase quoted has reference to the present status of the stock. Accordingly, a loan
for the purpose of purchasing or carrying a
particular stock is for the purpose of purchasing or carrying a registered stock if that
particular stock is now registered, and this
would be true even if the stock were not
registered at the time the loan was originally
made, as would be the case, for example, if
the loan had been made prior to the enactment of the Securities Exchange Act of 1934.
@FedFRASER