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FEDERAL RESERVE BANK
OF N EW YORK
r Circular No. 3 3 3 2 1
L
May 5, 1948
J
REGULATION U OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM AS AMENDED TO A PR IL 1, 1948
To All Banks, Members of National Securities Exchanges,
and Other Interested Persons, in the
Second Federal Reserve District:
Enclosed herewith is a printed copy of Regulation U of the Board
of Governors of the Federal Reserve System as amended to April 1,
1948, relating to loans by banks for the purpose of purchasing or carry
ing stocks registered on a national securities exchange, and a printed
copy of the current Supplement to Regulation U effective since Febru
ary 1, 1947.
The copy of Regulation U incorporates all changes in
the regulation since the last printing in the form as amended to February
24, 1941.
Additional copies of Regulation U and Supplement will be fur
nished upon request.
A
llan
S proul,
President.
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 am ended to A pril 1, 1948
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.
EXPLANATORY FOREWORD
(Not a part of the regulation)
This regulation is issued pursuant to the provisions of section 7 of
the Securities Exchange Act 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.
N o t e .—
Amendments Nos. 1 through 8 are included in this reprint.
REGULATION U
As am ended to April 1, 1948
LOANS BY BANKS FOR THE PURPOSE OF
PURCHASING OR CARRYING STOCKS
REGISTERED ON A NATIONAL
SECURITIES EXCHANGE
SECTION 1. GENERAL RULE
On and after M ay 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 ay 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.*
While a bank maintains any such loan, whenever made, the bank
shall not at any time permit any withdrawal or substitution of collat
eral if, after such withdrawal or substitution, the loan exceeds the maxi
mum loan value of the collateral, except that the bank may permit such
a withdrawal or substitution provided the loan is reduced, other collat
eral is deposited, or both, such that the maximum loan value of the col
lateral deposited (plus the amount of any reduction in the loan) is at
least as great as the maximum loan value of the collateral withdrawn,
and the current market value of the collateral deposited (plus the
amount of any reduction in the loan) is at least as great as the current
market value of the collateral withdrawn. If the maximum loan value
of the collateral has become less than the amount of the loan, such
amount may nevertheless be increased if there is provided additional
collateral having a maximum loan value at least equal to the amount
of the increase.
* In applying this provision, especially when the borrower is a broker or dealer in securities, see
particularly sections 3(m), (n), and (o).
2
REG U LATIO N U
SECTION 2. EXCEPTIONS TO GENERAL RULE
Notwithstanding the foregoing, a bank may make and may main
tain any loan for the purpose specified above, without regard to the
limitations prescribed above, if the loan comes within any of the fol
lowing descriptions:
(a) Any loan to a bank or to a foreign banking institution;
(b ) Any loan made prior to July 16, 1945, to any person whose
total indebtedness to the bank at the date of and including such
loan does not exceed SI,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 to a broker or dealer 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 Commission concerning the hypothecation of customers’
securities (Rule X-8C -1 or Rule X-15C 2-1), are securities carried
for the account of one or more customers, provided the bank
accepts in good faith from the broker or dealer a signed statement
to the effect that he is subject to the provisions of Regulation T
(or that he does not extend or maintain credit to or for customers
except in accordance therewith as if he were subject thereto);
(/) Any temporary advance to finance the purchase or sale of
securities for prompt delivery which is to be repaid in the ordi
nary course of 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 Columbia;
(;) Any loan to a member of a national securities exchange for
the purpose of 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.
REG U LATIO N U
3
SECTION 3. MISCELLANEOUS PROVISIONS
(а) 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.
(б) 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 of 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
ably current record of 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 of a loan need not be
treated as the making of a loan if the amount of the loan is not
increased except by the addition of interest or service charges on
the loan or of 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 of 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
4
REG U LATIO N U
for its own protection.
(j) Every bank shall make such reports as the Board of Governors
of the Federal Reserve System may require to enable it to perform the
functions conferred upon it by the Securities Exchange Act of 1934.
(k ) Terms used in this regulation have the meanings assigned to
them in such portions of 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 of a
national securities exchange.
(Z) 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.
(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 of any decline in the value or quality of the col
lateral or in the credit rating of the borrower.
(o )
A loan to a member of a national securities exchange who is
registered and acts as a specialist in securities on the exchange for
the purpose of financing such member’s transactions as a specialist
in such securities shall not be subject to the provisions of the third
paragraph of section 1, but the bank shall not at any time permit
REG U LA TIO N U
5
withdrawals or substitutions of collateral for such a loan that would
create or increase a deficiency in the maximum loan value of the col
lateral below the amount of the loan, nor shall the bank increase the
amount of a loan if the collateral is deficient unless additional col
lateral is provided having maximum loan value at least equal to the
amount of the increase.
(p) In connection with the making of a loan the sole purpose of
which is to enable the borrower to acquire stock in a corporation by
exercising a warrant or certificate evidencing a right to acquire such
stock, which right expires within 90 days of issuance and was issued
to him as a stockholder of such corporation or as a stockholder of a
company distributing the stock in order to effectuate the provisions
of section 11 of the .Public Utility Holding Company Act of 1935, a
bank may treat any stock received as collateral in connection with
the making of such loan as having a maximum loan value of 50 per
cent of its current market value as determined by any reasonable
method. After the loan has been made, the stock so received shall
have only the maximum loan value, if any, prescribed in the supple
ment to this regulation. The right shall be deemed to have been
issued to the borrower as a stockholder if he actually owned the stock
giving rise to the right when such right accrued, even though such
stock was not registered in his name; and in determining such fact
the bank may rely upon a signed statement of the borrower which
the bank accepts in good faith.
REG U LATIO N U
APPENDIX
There are printed below certain provisions of the Securities Ex
change Act 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 of 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
7
REG U LATIO N 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.
* * * * *
Sec. 7. (a) For the purpose of preventing the excessive use of
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 may
deem necessary or appropriate to prevent the excessive use of
credit to finance transactions in securities.
(c) It shall be unlawful for any member of a national securities
exchange or any broker or dealer who transacts a business in
R EG U LATIO N U
9
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) Without collateral or on any collateral other than ex
empted securities and/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 may 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 conformity with the rules
and regulations of the Board of Governors of the Federal Re
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 of the other pro
visions of this section. Such rules and regulations may impose
upon all loans made for the purpose of 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
o f Governors of 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 of credit made prior to the enactment of this title
or to the maintenance, renewal, or extension of any such loan or
REG U LATIO N U
credit, except to the extent that the Board of 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 I 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 of 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
fhe 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 of 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
REG U LATIO N U
11
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.
SUPPLEMENT TO REGULATION U
I ssu ed
by t h e
B oa rd
of
G overnors
of t h e
E f f e c t i v e February 1,
For the p u r p o s e o f s e c t i o n
F ederal R
e serve
System
1947
1 o f R e g u l a t i o n U,
maximum loa n v alu e o f any s t o c k ,
the
whether or not r e g i s
tered on a n a tio n a l s e c u r i t i e s exchange, s h a l l be 25 per
ce n t o f i t s
rea so n a b le
cu rren t market v a l u e ,
as determined by any
m ethod.
Loans t o s p e c i a l i s t s . — Notwithstanding the fo r e g o in g ,
a st o c k ,
sh all
i f r eg ister ed on a national s e c u r i t i e s exchange,
have a maximum lo a n v a l u e o f 50 per ce n t o f i t s
c u r r e n t market v a l u e ,
method,
as determined by any r e a s o n a b le
in the case o f a loan to a member o f a n a tio n a l
sec u rities
exchange who i s
re g iste re d
and a c t s
as a
s p e c i a l i s t in s e c u r i t i e s on the exchange fo r the purpose
o f f i n a n c i n g such member's t r a n s a c t i o n s as a s p e c i a l i s t
in
se c u ritie s.
@FedFRASER