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FEDERAL RESERVE BANK
OF N EW YORK
r Circular No. 6 2 9 5 "I
L February 19, 1969 J
Proposed Amendment of Regulation U
To All Banking Institutions in the Second Federal Reserve District:
P r in t e d b e lo w is an e x c e r p t fr o m th e Federal Register o f F e b r u a r y 15, c o n ta in in g th e t e x t o f
the p r o p o s e d a m e n d m e n t o f m a r g in R e g u la t io n U
o f th e B o a r d o f G o v e r n o r s
o f th e F e d e r a l
R e s e r v e S y s te m , w h ic h w o u ld e x te n d th e r e g u la tio n to c o v e r c e r ta in s e c u r itie s th a t a r e n o t r e g is
te r e d on a n a t io n a l s e c u r itie s e x c h a n g e .
C o m m e n ts on th e p r o p o s e d a m e n d m e n t m a y b e s u b m itte d b y M a r c h 17, 1969 a n d s h o u ld b e
sen t to o u r B a n k E x a m in a tio n s D e p a r tm e n t.
A d d it io n a l c o p ie s
o f th e t e x ts
o f th e
p rop osed
a m e n d m e n ts o f th is r e g u la tio n a n d o f the B o a r d ’ s m a r g in R e g u la t io n s G a n d T w ill b e fu r n is h e d
u p o n re q u e s t.
A lfred H a y e s ,
President.
[1 2 CFR Part 221 1
[Reg. U]
REGISTERED STOCKS
Credit by Banks
Pursuant to the authority contained
in the Securities Exchange Act of 1934
(15 U.S.C. 78g), as amended by Act of
July 29, 1968 (Public Law 90-437; 82
Stat. 452), the Board of Governors of
the Federal Reserve System is consider
ing amending Part 221 (Regulation U)
as set forth below in order to regulate
the amount of credit that may be ex
tended with respect to certain stock that
is not registered on a national securities
exchange.
Public Law 90-437 broadens the
Board’s authority over stock market
credit
to
cover
“over-the-counter”
(OTC) stocks. The legislation leaves to
the Board the timing and selection of
criteria for the implementation of OTC
margin requirements.
The proposed amendments to Regula
tion U are principally designed to include
in the regulation the criteria under which
the Board will select the OTC stocks
which would be subject to the margin
and other requirements of the regulation.
Initially, such “OTC margin stock”
would be stock, not traded on a national
securities exchange, which the Board has
determined to have the degree of na
tional investor interest, the depth and
breadth of market, the availability of in
formation respecting such stocks and
their issuers, and the character and per
manence of the issuers, to warrant treat
ment similar to stocks that are registered
on such exchanges.
In a related change, bank loans to
broker/dealers against inventory posi
tions in OTC margin stocks used to make
a bona fide market would be exempt
from margin regulation.
It has been urged that the functioning
of the OTC stock markets depends on in
dividual broker/dealers who make a
market in selected stocks. The market
makers argue that, in order to make ef
fective markets, they must be able to
obtain credit on a liberal basis. The posi
tions carried by broker/dealers are
largely financed by bank loans. Accord
ingly, an exemption would be created for
bank credit to finance such activities.
The criteria used, to determine which
broker/dealers are entitled to the exemp
tion are designed to ensure, so far as
possible, that an “OTC Market Maker”
does in fact make a market in the stock,
stands ready at all times (within reason)
to buy or sell the stock, and does not
unjustifiably “back away” from the
market. Any broker/dealer, registered
pursuant to section 15 of the Securities
Exchange Act of 1934 (15 U.S.C. 78o)
would be eligible if he met the standards
set forth in the regulation (including
maintaining certain minimum net capi
tal), had filed with the Securities and
Exchange Commission a notice of his in
tent to begin or continue such market
making activity, and continued to file
such other reports as were required pur
suant to a rule respecting market makers
in OTC margin stocks that the Commis
sion would adopt. The bank would have
to obtain a statement on a new form
designated F.R. Form U-2, from the
market maker that he is properly regis
tered and will use the credit for such
activities.
The proposal would also introduce to
the regulation the term “regulated
stock”, which would encompass regis
tered stock, OTC margin stock, shares of
most investment companies registered
pursuant to section 8 of the Investment
Company Act of 1940 (15 U.S.C. 80a-8),
“ equity funding” plans or programs, and
debt securities convertible into or carry
ing warrants or rights to subscribe to or
purchase a regulated stock. W ith the
exception of OTC margin stock and
equity funding plans or programs, vir
tually all credit for the purpose of pur
chasing such securities was previously
subject to the requirements of this part.
A proposal to make credit extended in
connection with equity funding plans or
programs subject to this part was pub
lished for comment in the F e d e r a l
R e g i s t e r on December 17, 1968 (33 F.R.
18630). Accordingly, the term “regulated
stock” would be substituted where ap
propriate for the term “registered stock”
throughout this part, with corresponding
conforming changes.
The exception to the regulation in
§ 221.2(e) for credit on customers’ se
curities would be limited to brokers or
dealers who certify that they are subject
to Part 220 of this chapter (Regulation
T) to reflect a proposed change in the
coverage of that part. Most firms bor
rowing under § 221.2(e) would not be
affected. However, in the case of credit
extended under this section to persons
or firms who are not prepared to certify
that they are actually subject to Part
220 (Regulation T ), no substitutions of
collateral would be permitted after 90
days from the adoption of this proposal;
and such credit would be required to be
extinguished within 1 year after that
date, if the proposals are adopted.
The proposal would amend the regula
tion to conform with the above by in
cluding “equity funding” plans or pro
grams within the definition of “stock”,
stocks: Provided, That unless held as
collateral for such credit on October 20;
1967,-and continuously thereafter, any
collateral other than stock shall have
loan value for the purpose of this part
only as collateral for a credit which is not
secured by stock, as described in § 221.3
(s ), and any collateral consisting of
convertible debt securities described in
§ 221.3 (t) shall have loan value only for
the purpose of that section, and not for
other credit subject to this part.
(b) Substitutions and withdrawals.
Except as permitted in paragraph (c ),
of this section, while a bank maintains
any credit subject to this part, whenever
extended, the bank shall not at any time
permit any withdrawal or substitution
of collateral unless either (1) the credit
would not exceed the maximum loan
value of the collateral after such with
drawal or substitution, or (2) the credit
is reduced by at least the amount by
which the maximum loan value of any
collateral deposited is less than the “re
tention requirement” of any collateral
withdrawn. The “retention requirement”
of collateral other than stock is the same
as its maximum loan value and the “re
tention requirement” of collateral con
sisting of stock is prescribed from time
to time in § 221.4 (the Supplement to
Regulation U ) .
(c) Sam e-d ay transactions. Except as
provided in § 221.3(r) (1 ), a bank may
permit a substitution of stock whether
regulated or unregulated, effected by a
purchase and sale on orders executed
within the same day: Provided, That (1>
Dated at Washington, D.C., this 10th if the proceeds of the sale exceed the
day of February 1969.
total cost of the purchase, the credit is
By order of the Board of Governors. reduced by at least an amount equal to
the “retention requirement” with respect
[seal]
R o bert P . F orrestal,
to the sale less the “retention require
Assistant S ecretary.
ment” with respect to the purchase, or
C r e d it b y B a n k s f o r t h e P u r p o s e o f
(2) if the total cost of the purchase ex
P u r c h a s in g o r C a r r y in g R e g u l a t e d
ceeds the proceeds of the sale, the credit
S tocks
may be increased by an amount no
greater than the maximum loan value of
r e g u l a t io n s
Sec.
the stock purchased less the maximum
221.1 G eneral rule.
loan value of the stock sold. If the maxi
221.2 E xceptions to general rule.
mum loan value of the collateral secur
221.3 M iscellaneou s provisions.
ing the credit has become less than the
221.4 S up p lem en t.
amount of the credit, the amount of the
A u t h o r it y : T h e p rovision s o f th is P art 221 credit may nonetheless be increased if
Issued un d er sec. 7 o f th e Securities E xch an ge
there is provided additional collateral
A ct o f 1934 (15 U.S.C. 78g) as am en d ed b y
having maximum loan value at least
P u b lic Law 90-437 ( 82‘Stat. 4 5 2 ).
equal to the amount of the increase.
§ 221.1 General rule.
(d) Single credit rule. For the purpose
(a)
Purpose credit secured by stock.of this part, except for credit subject to
No bank shall extend any credit secured § 221.3 (s) or (t), the entire amount of
directly or indirectly1 by any stock2 for the credit extended to any customer by
the purpose o f purchasing or carrying any bank at any time for the purpose of
any regulated stock8 (and no bank shall purchasing or carrying any regulated
extend any credit described in § 221.3 (q) stock shall be considered a single credit;
regardless of whether or not such credit and all the collateral securing such in
is secured by any stock) in an amount debtedness shall be considered in deter
exceeding the maximum loan value of the mining whether or not the loan complies
collateral, as prescribed from time to time with this part.
for stocks in § 221.4 (the Supplement to
Regulation U) and as determined by the § 221.2 Exceptions to general rule.
bank in good" faith for credit subject to
Notwithstanding the provisions of
§ 221.3 (s) for any collateral other than §221.1, a bank may extend and may
maintain any credit for the purpose
specified in § 221.1, without regard to
1 As d efined in § 2 2 1 .3 (c).
the limitations prescribed therein, or in
»A s defined in § 221.3(I).
8 S om etim es referred to as a "p u rp ose cred
§ 221.3 ( t ) , if the credit comes within any
i t ” . See § 2 2 1 .3 (b ), an d § 22 1.3(m ) ( d ) .
of the following descriptions.
and also clarify that for the purpose of
this part it is immaterial whether a debt
security is convertible, with or without
consideration, presently or in the future,
into a regulated stock, clarify that
credit is indirectly secured if there
is any arrangement that may ac
celerate the maturity of the credit,
and, in order to ease record reten
tion burdens, reduce the time for re
taining Federal Reserve Form U - l (the
“purpose statement” required pursuant
to § 221.3(a)) from 6 to 3 years. The ex
ception to the regulation in § 221.2(e)
for credit on customers’ securities would
be limited to brokers or dealers who are
subject to Part 220 of this chapter (Reg
ulation T) to reflect a proposed change
in the coverage of that part.
This notice is published pursuant to
section 553(b) of title 5, United States
Code, and § 262.2(a) of the rules of pro
cedure of the Board of Governors of the
Federal Reserve System
(12 CFR
262.2(a)).
To aid in the consideration of this mat
ter by the Board, interested persons are
invited to submit, in writing, relevant
data, views, or arguments. Such material
should be submitted to any Federal Re
serve Bank, to be received not later than
March 17, 1969. Under the Board’s rules
regarding availability of information (12
CFR Part 261), such materials will be
made available for inspection and copy
ing to any person upon request unless the
person submitting the material-requests
that it be considered confidential.
2
(a) Any credit extended to a bank or purpose of financing his or his cus
tomers’ bona fide arbitrage transactions
to a foreign banking institution;
(b) Any credit extended to a “plan- in securities. For the purposes of this
lender” as defined in § 207.4(a) of Part paragraph, the term “ arbitrage” means
207 of this chapter (Regulation G) to (1) a purchase or sale of a security in
finance a plan described therein: Pro one market together with an offsetting
vided, That in no event does the bank sale or purchase of the same security
have recourse to any stock purchased in a different market at as nearly the
same time as practicable, for the pur
pursuant to such plan;
(c) Any credit extended to a dealer, pose of taking advantage of a difference
or to two or more dealers, to aid in the in prices in the two markets, or (2) a
financing of the distribution of securi purchase of a security which is, without
ties to customers not through the me restriction other than the payment of
dium of a national securities exchange; money, exchangeable or convertible
(d) Any credit extended to a broker or within 90 calendar days following the
dealer that is extended in exceptional date of its purchase into a second security
circumstances in good faith to meet his together with an offsetting sale at or
about the same time of such second
emergency needs;
(e) Any credit extended to a broker or security, for the purpose of taking ad
dealer secured by any securities which, vantage of a disparity in the prices of the
according to written notice received by two securities; and
the bank from the broker or dealer pur
(k) Any credit extended to a member
suant to a rule of the Securities and of a national securities exchange for the
Exchange Commission concerning the purpose of financing such members’
hypothecation of customers’ securities transactions as an odd-lot dealer in se
(Rule 8c—1 (17 CFR 240.8C-1) or Rule curities with respect to which he is
1 5 c2 -l (17 CFR 240.15C2-1)) , are securi registered on such national securities ex
ties carried for the account of one or changes as an odd-lot dealer.
more customers: Provided, That the §221.3 Miscellaneous provisions.
bank accepts in good faith4 from the
(a) Required statement as to stockbroker or dealer a signed statement to
the effect that he is subject to the provi secured loan: In connection with an
sions of Part 220 of this chapter (Regu extension of credit secured directly or in
directly by any stock, the bank shall
lation T ) ;
(f) Any credit extended to finance the obtain and retain in its records for at
purchase or sale of securities for prompt least 3 years after such credit is extin
delivery which is to be repaid in the guished a statement in conformity with
ordinary course of business upon comple the requirements of Federal Reserve
tion of the transaction: Provided, That Form U -l executed by the recipient of
the advance is not made to a person de such extension of credit (sometimes
scribed in § 221.3 ( q ) : And provided referred to as the “ customer” ) and
further, That it is either (1) extended to executed and accepted in good faith by
a broker or dealer, or (2) extended for a a duly authorized officer of the bank
purpose other than to enable the bor prior to such extension: Provided, That
rower to pay for stock purchased in an this requirement shall not apply to any
account subject to Part 220 of this chap credit described in paragraph (o) of this
section or § 221.2 of this part except for
ter (Regulation T ) ;
(g) Any credit extended against se credit described in paragraphs 221.2 (f),
curities in transit, or surrendered for (g ), and (h) extended to persons who are
transfer, which is payable in the ordinary not brokers or dealers subject to Part 220
course of business upon arrival of the of this chapter (Regulation T ) . In deter
securities or upon completion of the mining whether or not an extension of
transfer: Provided, That the credit is credit is for the purpose specified in
not extended to a person described in § 221.1 or for any of the purposes speci
§ 221.3 ( q ) : And provided further, That it fied in § 221.2 the bank may rely on the
is either (1) extended to a broker or statement executed by the customer if
dealer, or (2) extended for a purpose accepted in good faith. To accept the cus
other than to enable the customer to tomer’s statement in good faith, the offi
pay for stock purchased in an account cer must (1) be alert to the circumstances
subject to Part 220 of this chapter (Reg surrounding the credit and (2) if he has
any information which would cause a
ulation T ) ;
Ch) Any credit which is to be repaid prudent man not to accept the statement
on the calendar day on which it is ex without inquiry, have investigated and
tended: Provided, That the credit is not be satisfied that the customer’s state
extended to a person described in ment is truthful.
§221.3(q): And provided further, That
(b) Purpose of a credit: The “ purpose
It is either (1) extended to a broker or of a credit” is determined by substance
dealer, or (2) extended for a purpose rather than form.
other than to enable the customer to pay
(1) Credit which is for the purpose,
for stock purchased in an account sub whether immediate, incidental, or ulti
ject to Part 220 of this chapter (Regula mate, of purchasing or carrying a regu
tion T ) ;
lated stock is “ purpose credit” , despite
(i)
Any credit extended outside theany temporary application of funds
States of the United States and the Dis otherwise.
trict of Columbia;
(2) Credit to enable the customer to
(j) Any credit extended to a member reduce or retire indebtedness which was
of a national securities exchange for the originally incurred to purchase a regu
lated stock is for the. purpose of “carry
* As described in { 221.3(a).
ing” such a security.
3
(c) Indirectly secured: The term “in
directly secured” includes any arrange
ment 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 other
wise, is or may be 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 customer’s as
sets 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, depos
itary, or trustee, or under similar cir
cumstances, if the bank in good faith has
not relied upon such stock as collateral in
the extension or maintenance of the par
ticular credit.
(d) OTC margin stock: (1) The term
“ OTC margin stock” means stock, not
traded on a national securities exchange,
which the Board of Governors of the
Federal Reserve System has determined
to have the degree of national investor
interest, the depth and breadth of mar
ket, the availability of information re
specting the stock and its issuer, and the
character and permanence of the issuer
to warrant such treatment.
(2)
The Board will from time to time
publish a list of OTC margin stocks as
to which the Board has made the deter
minations described in subparagraph (1)
of this paragraph. Except as provided in
subparagraph (4) of this paragraph (d)
such stocks shall meet the requirements
that:
(i) The stock is subject to registration
under section 12(g) (1) of the Securities
Exchange Act of 1934 (15 U.S.C. 781(g)
(1 )), or if issued by an insurance com
pany subject to section 12(g) (2) (G) (15
U.S.C. 781(g) (2) (G )) the issuer had at
least $1 million of capital and surplus,
(ii) Five or more dealers, stand willing
to, and do in fact, make a market in such
stock including making regularly pub
lished bona fide bids and offers for such
stock for their own accounts, or the stock
is registered on a securities exchange that
is exempted by the Securities and Ex
change Commission from registration as
a national securities exchange pursuant
to section 5 of the Act (15 U.S.C. 78e),
(iii) There are 1,500 or more holders of
record of the stock who are not officers,
directors, or beneficial owners of 10 per
cent or more of the stock,
(iv) The issuer, or a predecessor in in
terest, has been in existence for at least
3 years,
(v) The stock has been publicly traded
for at least 6 months, and
(vi) Daily quotations for both bid and
asked prices for the stock are continuous
ly available to the general public,
and shall meet three of the four addi
tional requirements that:
(vii) There are 500,000 or more shares
of such stock outstanding In addition to
shares held beneficially by officers, direc
tors, or beneficial owners of more than
10 percent of the stock,
(viii) The shares described In subdivi
sion (vii) of this subparagraph have a
market value in the aggregate of at least
$10 million,
(ix) The minimum average bid price
of such stock as determined by the Board
In the latest month, is at least $10 per
share, and
(x) The issuer had at least $5 million
of capital, surplus, and undivided profits.
(3) The Board shall from time to time
remove from the list described in subp a r a g T a p h (2) of this p a r a g r a p h stocks
that cease to :
(i) Exist or for which the issuer ceases
to exist, or
(ii) Meet substantially, the provisions
of subparagraphs (1) and (2) of this
paragraph.
(4) The foregoing notwithstanding,
the Board may, upon its own initiative,
or upon application by any interested
party, omit or remove any stock that is
not traded on a national securities ex
change from or add any such stock to
such list of OTC margin stocks, if in the
judgment of the -Board, such action is
necessary or appropriate in the public
interest.
(5) It shall be unlawful for any bank
to make, or cause to be made, any repre
sentation to the effect that the inclusion
of a security on such list of OTC margin
stocks is evidence that the Board or the
Securities and Exchange Commission
has in any way passed upon the merits
of, or given approval to such security
or any transaction therein. Any state
ment, advertisement, or other similar
communication containing a reference
to the Board in connection with such
stocks or such list shall constitute such
an unlawful representation.
(e) Renewals and extensions of ma
turity: The renewal or extension of
maturity of a credit need not be treated
as the extension of a credit if the amount
of the credit is not increased except by
the addition of interest or service
charges in respect to the credit or of
taxes on transactions in connection with
the credit.
(f) Transfers: A bank may, without
following the requirements of this part
as to the extension of a credit,
(1) Permit the transfer of a credit
from one customer to another, or to oth
ers: Provided, That a statement by the
transferor, describing the circumstances
giving rise to the transfer, is accepted in
good fa ith 5 and signed by an officer of
the bank as having been so accepted, and
kept with each such transferee account,
or
(2) Accept the transfer of a credit
originally extended in conformity with
the requirements of this part directly
from another bank: Provided, That the
statement of purpose, executed by the
customer in connection with the original
extension of credit and accepted in good
BAs d escribed in 5 2 2 1 .3 (a ).
faith and signed by an officer of the bank ing or carrying any regulated stock, and
originally extending such credit in con
(3) not excepted by § 221.2.
formity with the requirements of
(n) Segregation of collateral: (1) The
8 221.3(a), is obtained and kept with bank shall identify all the collateral used
each such transferee account: And pro to meet the requirements of § 221.1 (the
vided further, That any transfer pursu entire credit being considered a single
ant to this paragraph is made as a bona credit and collateral being similarly con
fide incident to a transaction not Under sidered, as required by § 221.1(d)) and
taken for the purpose of avoiding the shall not cancel the identification of any
requirements of this part, the amount of portion thereof except in circumstances
the credit is not increased and the col that would permit the withdrawal of that
lateral for the credit is not changed; and, portion. Such identification may be made
after such transfer, a bank may permit by any reasonable method, and in the
such withdrawals and substitutions of case of a credit outstanding at the open
collateral as are permitted in respect to ing of business on June 15, 1959, need not
a credit it extends subject to this part. be made until immediately before some
(g) Reorganizations and recapitaliza change in that or other indebtedness of
tions: Nothing in this part shall be con the customer or in collateral therefore.
strued to prevent a bank from permitting
(2) Only the collateral required to be
withdrawals or substitutions of securi so identified shall have loan value for
ties to enable a customer to participate purposes of § 221.1 or be subject to the
in a reorganization or recapitalization. restrictions therein specified with respect
(h) Mistakes in good faith: No mis to withdrawals and substitutions; and
take made in good faith in connection
(3) For any credit extended to the
with the extension or maintenance of a same customer that is not subject to
credit shall be deemed to be a violation § 221.1 (other than a credit described in
of this part.
§221.2 (b), (d), (f), (g ), or (h ) ), the
(i) Action for bank’s own protection: bank shall in good faith require as much
Nothing in this part shall be construed collateral not so identified as the bank
as preventing a bank from taking such would require (if any) if it held neither
action as it shall deem necessary in good the indebtedness subject to § 221.1 nor
faith for its own protection.
the identified collateral. This shall not be
(j) Reports: Every bank, and every construed, however, to require the bank,
person engaged in the business of ex after it has extended any credit, to ob
tending credit who, in the ordinary tain any collateral therefor because of
course of business, extends credit for the any deficiency in collateral already exist
purpose of purchasing or carrying securi ing at the opening of business on June 15,
ties registered on a national securities 1959, or any decline in the value or
exchange or OTC margin stocks, shall quality of the collateral or in the credit
make such reports as the Board of Gov rating of the customer.
ernors of the Federal Reserve System
(4) Nothing in this part shall require
may require to enable it to perform the a bank to waive or forego any lien, and
functions conferred upon it by the Se nothing in this part shall apply to a
curities Exchange Act of 1934 (15 U.S.C. credit extended to enable the customer
78).
to meet emergency expenses not reason
(k) Definitions: Except as otherwise ably foreseeable, provided the extension
provided in this part, terms herein have of credit is supported by a statement
the meanings assigned to them in section executed by the customer and accepted
3(a) of the Securities Exchange Act of in good faith and signed by an officer of
1934 (15 U.S.C. 78c(a )), except that the the bank as having been so accepted in
term “ bank” does not include a bank conformity with the requirements of
which is a member of a national securi § 221.3(a). For this purpose, such emer
gency expenses shall include expenses
ties exchange.
(1)
Stock: The term “stock” includesarising from circumstances such as the
any security commonly known as a death or disability of the customer, or
stock; any voting trust certificate qr some other change in his circumstances
other instrument representing such a se involving extreme hardship, not reason
curity; any security convertible, with or ably foreseeable at the time the credit
without consideration, presently or in the was extended. The opportunity to realize
future, into “Such security, certificate or monetary gain is not a “change in his
other instrument, or carrying any war circumstances” for this purpose.
(o)
Specialist: In the case of a credit
rant or right to subscribe to or purchase
such a security; or any such warrant or extended to a member of a national
right; or any plan, program, or invest securities exchange who is registered and
ment contract offered or sold after April acts as a specialist In securities on the
30, 1969, which provides for the acquisi exchange for the purpose of financing
tion both of any regulated stock* and such member’s transactions as a spe
of goods, services, other securities, or cialist in such securities, the maximum
loan value of any stock shall be as deter
investments.
(m) Credit subject to § 221.1: A mined by the bank in good faith: Pro
"credit subject to § 221.1” is a credit vided, That the specialist’s exchange, in
which is (1) secured directly or indirectly addition to other requirements applicable
by any stock (or made to a person de to specialists, is designated by the Board
scribed in paragraph (q) of this section) , of Governors of the Federal Reserve Sys
(2) extended for the purpose of purchas tem as requiring reports suitable for
supplying current information regard
ing specialists' use of credit pursuant to
« As d efin ed in § 221.3 ( v ) .
this section.
4
(p) Subscriptions issued to stock
holders: An extension of credit need not
comply with the other requirements of
this part if it is to enable the customer
to acquire a stock by exercising a right
to acquire such stock which is evidenced
by a warrant or certificate issued to
stockholders and expiring within 90 days
of issuance: Provided, That:
(1) Each such acquisition under this
paragraph shall be treated separately,
and the credit when extended shall not
exceed 75 percent of the current market
value of the stock so acquired as deter
mined by any reasonable method.
(2) After October 20, 1967, at the time
credit is extended pursuant to this para
graph, the bank shall compute the
amount by which the credit exceeds the
maximum loan value of the collateral as
prescribed by § 221.4 and the customer
shall reduce the credit by an amount at
least equal to one-fourth of such sum
by the end of each of the four succeeding
3-calendar-month periods or until the
credit does not exceed the current maxi
mum loan value of the stock, whichever
shall occur first, and if the bank fails to
obtain the required quarterly reduction
or a portion thereof with respect to a par
ticular acquisition within 5 full business
days after such reduction is due, the bank
shall promptly sell a portion of the col
lateral so acquired and apply the
proceeds of the sale to reduce the credit,
in an amount at least equal to twice the
required payment or portion thereof for
the first two such reductions, at least
equal to the required payment or portion
thereof for the third such reduction, and
at least sufficient so that the remaining
credit does not exceed the current maxi
mum loan value of the remaining collat
eral after the fourth such reduction:
Provided, That no such reduction need
be in an amount greater than is neces
sary so that the remaining credit does
not exceed the maximum loan value of
the remaining collateral determined as
of the date when the credit was ex
tended : And provided further, That as to
credit extended between October 20,
1967, and March 11, 1968, such four suc
ceeding periods shall begin on March 11,
1968, and
(3) While the customer has any
credit outstanding at the bank under
this paragraph no withdrawal of cash
or substitution or withdrawal of stock
used as collateral for such extension of
credit shall be permissible, except that
when the remaining credit has become
equal to or less than the maximum loan
value of the remaining stock as pre
scribed for § 221.1 or § 221.3 (t) in § 221.4
(the Supplement to Regulation U)
whichever is applicable (or with respect
to credit extended after October 20, 1967,
the requirements of the preceding clause
have been fulfilled) the remaining stock
and related indebtedness shall thereafter
be treated as subject to § 221.1 or
§ 221.3 ( t ) , whichever is applicable, in
stead of this paragraph. In order to
facilitate the exercise of a right under
this paragraph, a bank may permit the
right to be withdrawn from a credit
subject to § 221.1 without regard to any
other requirement of this part.
(t) Credit on convertible debt securi
(q) Credit to certain lenders: Any
credit extended to a customer not subject ties: (1) A bank may extend credit for
to this part or to Part 220 of this chapter the purpose specified in § 221.1 on col
(Regulation T) engaged principally, or lateral consisting of any debt security
as one of the customer’s important ac convertible into a regulated stock or any
tivities, in the business of extending debt security carrying a warrant or right
credit for the purpose of purchasing or to subscribe to or purchase such a stock
carrying regulated stocks is a credit for (such a debt security is sometimes re
the purpose of purchasing or carrying ferred to herein as a “convertible
such stocks unless the credit and its pur security” ) .
(2) Credit extended under this para
poses are effectively and unmistakably
separated and disassociated from any graph shall be subject to the same con
financing or refinancing, for the cus ditions as if it were subject to § 221.1 ex
tomer or others, of any purchasing or cept: (i) The entire amount of such
carrying of stocks so registered. Any credit shall be considered a single cred
credit extended to any such customer, it treated separately from the single
unless the credit is so separated and dis credit specified in § 221.1(d) and all the
associated or is excepted by § 221.2, is a collateral securing such credit shall be
credit “subject to § 221.1” regardless of considered in determining whether or
whether or not the credit is secured by not the credit complies with this part,
any stock; and no bank shall extend any and (ii) the maximum loan value of the
such credit subject to § 221.1 to any such collateral shall be as prescribed from
customer on or after June 15, 1959, with time to time in § 221.4 (the Supplement
out collateral or without the credit being to Regulation TJ).
secured as would be required by this part
(3) Any convertible security originally
if it were secured by any stock. Any such eligible as collateral for a credit extended
credit subject to § 221.1 to any such cus under this paragraph shall be treated as
tomer, whether or not made after June such as long as continuously held as col
15, 1959, shall be subject to the other lateral for such credit even though it
provisions of this part applicable to ceases to be convertible or to carry war
credit subject to § 221.1, including provi
rants or rights.
sions regarding withdrawal and substi
(4) In the event that any stock other
tution of collateral.
than a convertible security is substituted
(r) Convertible securities: (1) If, after for a convertible security held as col
June 15, 1959, and prior to October 21, lateral for a credit extended under this
1967, credit was extended for the pur paragraph, the stock and any credit ex
pose of purchasing or carrying a security tended on it in compliance with this
convertible into a stock registered on a part shall thereupon be treated as sub
national securities exchange and the ject to § 221.1 and the credit extended
credit was secured by such a security, under this paragraph shall be reduced
and after October 20, 1967, there is sub by an amount equal to the maximum
stituted any stock as direct or indirect loan value of the security withdrawn.
collateral for such credit, the credit shall
(u)
Arranging for credit: No bank
thereupon be treated as subject to § 221.1 shall arrange for the extension or main
or § 221.3(t), whichever is applicable. In tenance of any credit for the purpose of
any such case, the amount of the out purchasing or carrying any regulated
standing credit, or such amount plus any stock, except upon the same terms and
increase therein to enable the customer conditions on which the bank itself
to acquire a stock so registered through could extend or maintain such credit
the conversion of the security pursuant under the provisions of this part.
to its terms, shall not be permitted on
(v)
The term “regulated stock” means
the date of such substitution to exceed any stock7which is (1) a stock registered
the maximum loan value of the collateral on a national securities exchange, (2)
for the credit: Provided, That any re an OTC margin stock,8 (3) a debt secu
duction in the credit or deposit of col rity (i) convertible with or without con
lateral required on that date to meet sideration, presently or in the future,
this requirement may be brought about into a regulated stock or (ii) carrying
within 30 days of such substitution.
any warrant or right to subscribe to or
(2)
Any credit extended after Octo purchase, presently or in the future, a
ber 20, 1967, for the purpose of purchas regulated stock, (4) any such warrant
ing or carrying a security convertible or right, (5) a security issued by an in
into a stock registered on a national se vestment company registered pursuant
curities exchange, and any credit ex to § 8 of the Investment Company Act
tended after (date OTC margin stock list of 1940 (15 U.S.C. 80a^-8), unless at least
is published) for the purpose of purchas 95 percent of the assets of such company
ing or carrying a security convertible in are continuously invested in exempted
to regulated stock, if the credit is secured, securities,* and (6) a plan, program,
directly or indirectly, by any stock, is a or investment contract offered or sold
credit subject to §221.1 or §221.3(t), after April 30, 1969, which provides for
the acquisition both of any security de
whichever is applicable.
(s) Credit secured by collateral other scribed in this paragraph and of goods,
than stocks: A bank may extend credit services, other securities, or investments.
(w) OTC Market Maker Exemption:
for the purpose of purchasing or carry
ing a regulated stock secured by collat In the case of credit extended to an OTC
eral other than stock, and, in the case of
such credit, the maximum loan value of
* As defined in 5 221.3 ( I) .
•As d efin ed in 5 2 2 1 .3 (d ).
the collateral shall be as determined by
•As defined in 15 U.S.O. 78c(a)(12).
the bank in good faith.
5
Market Maker, as defined in subpara
graph (2) of this paragraph, for the pur
pose of purchasing or carrying an OTC
margin stock in order to conduct the
market making activity of such a
market maker, the maximum loan
value of any OTC margin stock (ex
cept stock that has been identified as
a security held for investment pursuant
to a rule of the Commissioner of Internal
Revenue (Regs. Section 1-1236-1 (d ))
shall be determined by the bank in good
faith: Provided, That in respect of each
such stock he shall have filed with the
Securities and Exchange Commission a
notice of his intent to begin or continue
such market making activity (Securi
ties and Exchange Commission Form
X-17A-12(1)) and all other reports re
quired to be filed by market makers in
OTC margin stocks pursuant to a rule
of the Securities and Exchange Com
mission (Rule 17a^l2 (17 CFR 240.17a12)) and shall not have ceased to engage
in such market making activity: And
provided further, That the bank shall
obtain and retain in its records for at
least 3 yearts after such credit is ex
tinguished a statement in conformity
with the requirements of Federal Re
serve Form U-2, executed by the OTC
Market-Maker who is the recipient of
such credit and executed and accepted
in good faith 10 by a duly authorized reasonable average rate of inventory
officer of the bank prior to such turnover.
extension.
§ 221.4 Supplement.
(2)
An OTC Market Maker with re
(a) Maximum loan value of stocks. For
spect to an OTC margin stock is a dealer
who has and maintains minimum net the purpose of § 221.1, the maximum loan
capital, as defined in a rule of the Securi value of any stock, whether or not regis
ties and Exchange Commission (Rule tered on a national securities exchange,
15C-3-1 (17 CFR 2 4 0 .1 5 c3 -l) ) of $25,000 shall be 20 percent of its current market
plus $5,000 for each such stock in excess value, as determined by any reasonable
of five in respect of which he has filed method.
(b) Maximum loan value of convert
and not withdrawn the notice on Securi
ties and Exchange Commission Form ible debt securities subject to § 221.3(t).
X-17A-12(1) (except that he shall not For the purpose of § 221.3 (t), the maxi
be required to have net capital of more mum loan value of any security against
than $250,000 to be an OTC market which credit is extended pursuant to
maker under the provisions of this sub- § 221.3 (t) shall be 40 percent of its cur
paragraph (2 )), who is in compliance rent market value, as determined by any
with such rule of the Commission, and reasonable method.
who, except when such activity is un
(c) Retention requirement. For the
lawful, meets all of the following condi purpose of § 221.1, in the case of a loan
tions with respect to such stock: (i) He which would exceed the maximum loan
regularly publishes bona fide, competitive value of the collateral following a with
bid and offer quotations, in a recognized drawal of collateral, the “retention re
interdealer quotation system, (ii) he fur quirement” of a stock, whether or not
nishes bona fide, competitive bid and registered on a national securities ex
offer quotations to other broker/dealers change, and of a convertible debt security
on request, (iii) he is ready, willing, and
able to effect transactions in reasonable subject to § 221.3 (t), shall be 70 percent
amounts, and at his quoted prices, with of its current market value, as deter
other brokers and dealers, (iv) he has a mined by any reasonable method.
10 As described in § 221.3(a).
c
[F.R. Doc. 69-1985; Filed, Feb. 14, 1969;
8:48 a.m.]
@FedFRASER