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F E D E R A L R E S E R V E B ANK O F N E W YORK f Circular No. 6 5 2 1 1 L April 10, 1970 J Applicability of Regulations G, T, and U to AT&T Issue of Debentures To A ll P erson s E xten din g S ecu rities C redit in the Second F ederal Reserve D is tr ic t: Following is the text of a letter from the Board of Governors of the Federal Reserve System to a national securities exchange regarding the applicability to the forthcoming issue of American Telephone & Telegraph Company (AT&T) debentures of the Board’s margin regulations: A num ber of questions have been raised w ith the B oard of Governors regarding the applicability to the forthcom ing issue of A m erican Telephone & Telegraph Company (AT & T) debentures of the B o a rd ’s m argin regulations, R egulation G, “ Securities C redit by Persons other th an Banks, Brokers, or D ealers,” R egulation T, “ C redit by B rokers and D ealers,” and R egulation U, “ C redit by Banks for the Purpose of P urchasing or C arrying M argin Stock.” Briefly, on Monday, A p ril 13, 1970, AT & T will issue to its stockholders rights to subscribe to one $100 debenture fo r each 35 shares of stock held. These rights expire on May 18, 1970. Each debenture will bear a legend certifying th a t the record holder is the owner of w arran ts to purchase two additional shares of stock which will be issued in detachable form in November 1970, to the person who was the holder of record of the debenture on October 15, 1970. The w arran ts m ay be exercised a t any tim e between November 15, 1970 and May 15, 1975, when they expire. I t is expected th a t beginning A p ril 13, the u n its (debenture plus w a rra n ts), will trad e on a when-issued basis. In addition, some of the debentures m ay be trad e d w ithout w arran ts (“ strip p e d ” ) by means of an agreem ent on the p a rt of the record holder to redeliver the w arran ts when received in November. Thus, it can be expected th a t the debentures and w arran ts will also trad e separately, initially on a when-issued basis. Rights, debentures (as a u n it including w a rra n ts), debentures w ithout w arrants (“ s trip p e d ” ) and w arrants will be listed on the New York Stock Exchange and other exchanges. Sections 207.1(d) of R egulation G, 220.4(j) of R egulation T, and 221.3(t) of R egulation U define a ‘ ‘ convertible debt security ’ ’ to include any m argin debt security ‘ ‘ carrying a w a rra n t or rig h t to subscribe to or pu rch ase” a m argin security or stock. The existence of a collateral agreem ent obligating the recipient to redeliver the w arran ts will not affect the provision of the debenture itself u n d er which the record holder is entitled to receive w arran ts exchangeable fo r stock of AT & T, which is, of course, a m argin security or stock. Accordingly, the B oard of Governors considers th a t the debenture will continue to be a convertible debt security, w hether or not such “ s trip p in g ” agreem ent has been executed, un til the debenture itself no longer carries the rig h t to receive the w a rra n t (record date October 15, 1970). The three regulations provide th a t convertible debt securities pledged as collateral for credit extended under §§ 207.1(d) of R egulation G, 220.4(j) of R egulation T, or 221.3 (t) of R egulation U, shall be treated as “ equity securities” or “ convertible debt securities” as long as continuously so held. The retention requirem ents of the three regulations ap p ly to w ithdraw als of securities held as collateral fo r such credit (§§ 207.5(c) of R egulation G, 220.8(e) (3) of R egulation T, and 221.4(c) of R egulation U ). Accordingly, AT & T debentures acquired as convertible debt securities and held as collateral fo r such credit cannot be w ithdraw n, even a fte r the w a rran ts have been detached, unless 70 per cent of the cu rren t m arket value of the debenture is deposited to im prove the statu s of the credit (or such lesser am ount as will suffice to bring the credit into a fu lly m argined s ta tu s ). Customers newly acquiring the debentures and becoming holders of record a fte r October 15, 1970, will not be entitled to receive the w arran ts and can pledge the debentures as collateral for credit under § 220.4 (i) of R egulation T o r § 221.3 (s) of R egulation U. Collateral eligible for such credit is entitled to good fa ith loan value. C redit extended to such customers is not “ purpose c re d it” under Regulation G. If you should have any further questions on the above matter, you may direct them to our Consumer Information and Securities Regulations Department (Telephone 212-732-5700, Exten sion 8209). A lfred H ayes, President.
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