Full text of Federal Reserve Bank of New York Circulars : 6720. Text of Proposed Amendments to Regulations G, T, and U

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FEDERAL RESERVE BANK
OF NEW YORK

C ir cu la r N o . 6720
A p ril 27, 1971

[

j

T E X T OF PROPOSED AMENDMENTS TO REGULATIONS G, T , AND U

To A ll P erson s Extending S ecurities Credit
in the Second Federal R eserv e D istrict:

Printed below is an excerpt from the Federal Register of April 24, containing the text of
the proposed amendments to margin Regulations G, T, and U that were announced by the
Board of Governors of the Federal Reserve System on April 16; the text of that announcement
was contained in our Circuiar No. 6714, which was sent to you on that date. The proposed
amendments set forth conditions under which credit can be obtained for the purpose of pro­
viding capital to broker-dealer firm s without regard to initial margin requirements. Com ­
ments thereon should be submitted by May 24 and may be sent to our Consumer Information
and Securities Regulations Department, or directly to the Board of Governors with copies
to this Bank.
Additional copies of this circular will be furnished upon request.
Alfred Hayes,
President.

credit for the purpose of purchasing or
carrying any margin security to any
broker or dealer who is subject to Part
[ 12 CFR Parts 207, 220, 221 ]
220 of this Chapter (Regulation T ) , and
[Regs. Q, T, and U]
after July 16,1971, no lender shall extend
CREDIT TO CONTRIBUTE CAPITAL TO any credit to any customer to enable the
customer to contribute capital to any
BROKERS A ND DEALERS
broker or dealer who is subject to such
Notice of Proposed Rule M aking
Part, whether such contribution is in
Pursuant to the authority contained the form of a loan to such broker or
in the Securities Exchange Act of 1934 dealer (whether subordinated or not)
(15 U.S.C. 78g), the Board of Governors or of equities in the account of partners,
proposes to amend Parts 207, 220, and or to purchase stock in, any broker or
dealer who is subject to such part,
221 in the following respects:
1.
Paragraph (f) of § 207.1 would be whether with or without collateral.
Where the credit or the proceeds of the
amended as set forth below:
loan or other contribution or purchase of
§ 2 0 7.1 General Rule.
stock is to be used in the ordinary course
*
»
•
•
*
of business of such customer or such
(f) Credit exten d ed to broker or broker or dealer, such credit is presumed
dealer su b ject to R egulation T. (1) No to be for the purpose of purchasing or
lender shall extend or maintain any carrying margin securities unless the

FEDERAL RESERVE SYSTEM




lender has in his records a statement to
the contrary obtained and executed in
conformity with the requirements of
paragraph (e) of this section.
(2)
The prohibition of this para­
graph (f) shall not apply to credit which
is secured by collateral other than regis­
tered securities which is (i) made to a
dealer1 (whether or not secured) to aid
in the distribution of securities to cus­
tomers not through the medium of a na­
tional securities exchange, or (ii) ex­
tended to a broker or dealer subject to
Part 220 of this chapter or to a customer
for the purpose of making a loan or con­
tribution of capital to such a broker or
dealer if the extension of credit, loan or
other contribution is in conformity with
the requirements regarding satisfactory
* As defined In 15 U.S.C. 78c(a) (5).

(Over)

PROPOSED RULE MAKING
agreements or equities in the account of of investors: Provided, That the Se­ an appropriate committee of the ex­
partners of a rulp of the Securities and curities Investor Protection Corporation change has approved the member firm’s
shall have certified to the Board that or member corporation’s affiliation with
Exchange Commission (Rule 15c3-l (c)
such affiliated corporation.
(2) (A ), (c )(4 ). and (c )(7 )) (17 CFR such action is appropriate under the cir­
cumstances.
240.15C3-1 (c )(2 )(A ), (c )(4 ), and (c)
(iv)
No credit shall be extended pur­
2.
Section 220.4 would be amended by suant to this subparagraph after July 16,
(7 )) or of the capital rules of an ex­
change of which the broker or dealer is revising paragraph (f) (2) as set forth
1971, and no such credit extended be­
below:
a member if the members thereof are ex­
tween April 16, 1971, and July 16, 1971,
empt therefrom by Rule 15c3-l(b )(2)
shall be renewed unless (a) in no event
§ 2 2 0 .4
Special accounts.
of the Commission (17 CFR 240.15c3-l
other than the death, disability, or (in
•
*
#
*
*
(b) (2)) or to purchase stock in a broker
the case of a borrower who is a partner,
(f
)
Special
m
i
s
c
e
l
l
a
n
e
o
u
s
a
c­
or dealer which is a corporation: P ro­
officer, or employee of the firm or cor­
count.
*
*
*
vided, That in the case of credit de­
poration to which the subordinated loan
(2)
(i) Subject to the provisions of or other contribution of capital is made
scribed in this paragraph that is ex­
subdivisions
(iii)
and
(iv)
of
this
subtended after July 16, 1971, and in the
or in which the stock is purchased) in­
case of any renewal of such credit ex­ paragraph extend and maintain credit,
voluntary retirement of the borrower
(a)
to
or
for
any
partner
of
a
firm
tended between April 17, 1971, and
may the subordinated loan or contribu­
which
is
a
member
of
a
national
securi­
July 17, 1971, such extension of credit is
tion of capital be repaid or the stock be
ties exchange to enable such partner to redeemed until 1 year after such loan
subject to the following conditions:
(i) In the case of credit extended to make a contribution of capital to such or contribution was first made or such
enable
a
customer
to
make
a firm, or to purchase stock in an affili­
stock first purchased and thereafter un­
loan or other contribution of capital ated corporation of such firm, or (b) to til 6 months after the giving of written
to, or purchase stock in, such a or for any person who is or will become notice by the borrower to the firm, the
broker or dealer the lender holds in its the holder of stock of a corporation Securities ahd Exchange Commission
possession collateral adequate in good which is a member of a national se­ and the Securities Investor Protection
faith, to secure the amount of the credit, curities exchange to enable such person Corporation of intent to demand repay­
(ii) in no event other than the death, to purchase stock in such corporation, ment of such loan or contribution or re­
disability, or (in the case of a lender or or to purchase stock in an affiliated cor­ demption of such stock, (b) in no event
poration of such corporation; provided may such loan or other contribution of
customer who is a partner, officer, or em­
the lender as well as the borrower is a capital be repaid or the stock be re­
ployee of the broker or dealer) involun­
partner in such member firm or a stock­ deemed by a creditor to whom the loan
tary retirement of the lender or customer
holder in such member corporation, or or contribution was made or whcse stock
may the subordinated extension of credit,
the lender is a firm or a stockholder in was the subject of purchase, if the effect
loan or contribution be repaid or the
such member corporation, or the lender of such payment or redemption would
stock be redeemed until 1 year after the
is a firm or corporation which is a mem­ reduce the net capital of such creditor
subordinated extension of credit, loan, or
ber of a national securities exchange and below the amount required by the net
contribution was first made or stock first
the borrower is a partner in such firm or capital rule or capital rule to which such
purchased and thereafter until 6 months
a stockholder in such corporation;
creditor is subject, or would otherwise
after the giving of written notice by the
(ii) Subject to the provisions of sub­ be inconsistent with such rule; (c) all of
lender (in the case of a subordinated ex­
divisions (iii) and (iv) of this subpara­ the proceeds of such extensions of credit
tension of credit) or customer (in the graph extend and maintain subordinated
are so loaned or contributed to the cap­
case of a subordinated loan, contribution
credit to another creditor for capital ital of such firm or affiliated corporation
of capital, or purchase of stock) to such purposes: Provided, That:
or used to purchase such stock and (d>
broker or dealer, the Commission, and the
(a) Either the lender or the borrower the proceeds of any withdrawal of such
Securities Investor Protection Corpora­ is a firm or corporation which is a mem­
tion of intent to demand repayment of ber of a national securities exchange, the loan or contribution of capital from
such creditor or redemption of such stock
the extension of credit, loan, or contribu­
other party to the credit is an affiliated
tion or redemption of the stock, (iil) -in corporation of such member firm or cor­ shall be used to reduce or retire said
no event may such credit, loan or con­ poration, and, in addition to the fact extension of credit.
3.
Section 221.2 would be amended by
tribution be repaid or the stock be re­ that an appropriate committee of the
deemed if the effect of such payment or exchange is satisfied that the credit is revising paragraph (m) and § 221.3
redemption would reduce the net capital not in contravention of any rule of the would be amended by adding subpara­
of such broker or dealer below the exchange, the credit has the approval of graph (b) (4) and revising paragraph
(c) by redesignating the first sentence
amount required by the net capital rule such committee, or
as subparagraph (1) and adding a new
or capital rule to which such broker or
(b) The lender as well as the borrower subparagraph (2 ), as set forth below:
dealer is subject, or would otherwise be
is a member of such exchange, the credit
inconsistent with such rule, (iv) all of
§ 2 2 1 .2
Exceptions to General Huh*.
the proceeds of such extension of credit has the approval of an appropriate com­
*
•
*
*
*
mittee of the exchange, and the com­
are so loaned or contributed to the capi­
mittee, in addition to being satisfied that
(m)
Any
credit
extended
to
a
cus­
tal of such broker or dealer or used to
the credit is not in contravention of any tomer for the purpose of making a loan
purchase such stock, and (v) the pro­
rule of the exchange, is satisfied that the or contribution of capital to a broker
ceeds of any withdrawal of such loan or
credit is outside the ordinary course of or dealer subject to Part 220 (Regulation
contribution of capital from such broker
the lender’s business, and that, if the T ) if the loan or contribution is in con­
or dealer by the customer or redemp­
borrower’s firm or corporation or an formity with the requirements regard­
tion of such stock shall be used to reduce
affiliated corporation of such firm or cor­ ing satisfactory subordination agree­
or retire said extension of credit.
poration does any dealing in securities ments or equities in the accounts of
(3)
The Board of Governors of the
for its own account, the credit is not for partners of a rule of the Securities and
Federal Reserve System may by Order
exempt from the prohibitions of this the purpose of increasing the amount of Exchange Commission (Rule 15c3-l (c)
(2) (a ), (c )(4 ), and (c) (,7) (17 CFR
paragraph (f) and the requirements of such dealing.
(iii) For the purpose of subdivisions 240.15c3-l (c )( 2 )(a ), (c )(4 ), and (c)
this part, either unconditionally or
upon specified terms and conditions or (i) and (ii) of this subparagraph, the (7 )) or the capital rules of an ex­
for stated periods, any loan for the pur­ term “ affiliated corporation” means a change of which the broker or dealer
pose of making a loan or providing capi­ corporation all the common stock of is a member if the members thereof are
tal to a person who is subject to Part which is owned directly or indirectly by exempt therefrom by Rule 15c3-l(b) (2)
220 of this chapter (Regulation T ) , upon the member firm or general partners and of the Commission (17 CFR 240.15c3-l
(b) (2 )) or to purchase stock in a broker
a finding that the granting of such an employees of the firm, or by the member
or dealer which Is a corporation: Pro­
exemption is necessary or appropriate, in corporation or holders of voting stock
vided, That in the case of credit de­
the public interest or for the protection and employees of the corporation and




PROPOSED RULE MAKING
scribed In this paragraph that is ex­
tended after July 16, 1971, and any re­
newal of such credit extended between
April 16, 1971 and July 16, 1971, such
subordinated loan, contribution, or pur­
chase of stock is subject to the follow­
ing further conditions: (1) The bank
holds in its possession collateral fur­
nished by the customer adequate, in good
faith, to secure the amount of the credit,
<2> in no event other than the death,
disability, or (in the case of a partner,
officer, or employee of the broker or
dealer involuntary retirement of the cus­
tomer can the subordinated loan or con­
tribution be repaid or the stock be re­
deemed until 1 year after the subordi­
nated loan or contribution was first
made or stock first purchased and there­
after until 6 months after the giving of
written notice by the customer to the
broker or dealer, the Commission, and
the Securities Investor Protection Cor­
poration of intent to demand repayment
of the loan or contribution or redemp­
tion of the stock, (3) in no event may
such loan or contribution be repaid or
the stock be redeemed if the effect of
such payment or redemption would re­
duce the net capital of the broker or
dealer below the amount required by
any net capital or capital rule to which
the broker or dealer is subject, or would
otherwise be inconsistent with such rule,
(4) all of the proceeds of such extension
of credit are so loaned or contributed to
the capital of such firm or affiliated cor­
poration. or used to purchase such stock,
and <5> the proceeds of any withdrawal
of such loan or contribution of capital
from such broker or dealer or redemp­
tion of such stock shall be used to reduce
or retire said extension of credit.
§ 2 2 1 .3
*

M Urellancoii* provisions.
*

*

*

*

«b * Purpose o f a credit. * * *
(4> Credit extended to enable a cus­
tomer to contribute capital to a broker
or dealer subject to Part 220 of this
chapter (Regulation T ), whether such
contribution is in the form of a loan
to the broker or dealer (whether sub­
ordinated or n ot), or of equities in the
accounts of partners, or a purchase of
stock in an incorporated broker or
dealer, or otherwise, is “purpose” credit.
(c> In directly secured. (1) The term
“indirectly secured" includes any ar­
rangement 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 ex­
ercise of such right, whether by written
agreement or otherwise, is or may be
cause for acceleration of the maturity




of the credit: Provided, That the fore­
going shall not apply (i) if such
restriction arises solely by virtue of an ar­
rangement with the customer which per­
tains generally to the customer’s assets
unless a substantial part of such assets
consists of stock, or (ii) 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 fu rth er, That the fore­
going shall not apply to stock held by
the bank only in the capacity of cus­
todian, depositary, or trustee, or under
similar circumstances, if the bank in
good faith has not relied upon such
stock as collateral in the extension or
maintenance of the particular credit.
(2) Credit described in paragraph
(b )(4) of this section is deemed to be
indirectly secured by any stock owned
by the broker or dealer unless such
credit is in conformity with the require­
ments of § 221.2(m).
4. The proposed revision of paragraph
(f) in § 207.1 would restrict the ability
of lenders to extend credit to broker/
dealers, or to other customers for the
purpose of providing capital to broker/
dealers in conformity with proposed
amendments to Parts 220 and 221 (Reg­
ulations T and U ) .
5. The proposed revision of paragraph
(f) (2> in § 220.4 would restrict the abil­
ity of creditors to extend credit to other
creditors or to the partners, officers or
employees of creditors (or the partners,
officers or employees of affiliated corpo­
rations of creditors) for the purpose of
purchasing the capital stock of or other­
wise providing capital to a creditor or
to an affiliated corporation of a creditor
in conformity with proposed amend­
ments to Parts 207 and 221 (Regulations
G and U ) .
6. The proposed revision of paragraph
(m) in § 221.2 would permit banks to
extend credit for the purpose of enabling
the customer to provide capital to a
broker/dealer firm, whether in the form
of a subordinated loan, equities in the
accounts of partners, or a purchase of
stock in a corporation or otherwise, with­
out regard to the initial margin require­
ments of §§ 221.1 and 221.4 (the Sup­
plement to Regulation U) only on the
following conditions. The bank must
hold adequate collateral to secure the
credit, so that the bank does not look
to the broker/dealer for repayment as
an assignee or successor in interest to
the customer or otherwise. The terms
under which the capital is provided to
the broker/dealer, must be subject to the
rules of the exchange of which the
broker/dealer Is a member or the net
capital rule of the Securities and Ex­
change Commission. In addition, the

capital must not be withdrawable (ex­
cept in the event of the death, disability,
or retirement by the customer from serv­
ice with the broker/dealer) until a year
has elapsed and only after an adequate
period of notice so that the broker/dealer
will not be forced to liquidate securities
in order to permit the withdrawal of
such capital. All the proceeds of the ex­
tension of credit must be used to provide
capital for the broker/dealer and the
proceeds of any withdrawal of capital
must be used to reduce or retire the
credit. The Board considers that subject­
ing credit extended for the purpose of
providing capital to broker/dealer firms
to these conditions would tend to reduce
the destabilizing potential of such credit.
Such credit would not, of course, be
available under the proposals to pur­
chase or carry stock in broker/dealer
firms which was publicly traded.
The proposed new paragraph (b) (4)
of § 221.3 would codify an interpretation
of the Board issued in 1946, and would
apply the principle of the interpretation
to credit extended to purchase stock in
an incorporated broker/dealer.
The proposed paragraph (c) (2) of
§ 221.3 would provide that bank credit
extended to make it possible for the cus­
tomer to contribute capital to a broker/
dealer is deemed to be indirectly secured
by any stock owned by the broker/dealer
unless the conditions of proposed § 221.2
(m) are satisfied.
If adopted by the Board, the changes
will apply to credit extended by banks,
broker/dealers, and persons subject to
Regulation G after July 16, 1971, and
to renewals after July 16, 1971, of credit
extended by banks after April 16, 1971.
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 these
matters by the Board, interested persons
are invited to submit relevant data,
views, or arguments. Any such material
should be submitted in writing to the
Secretary, the Board of Governors of the
Federal Reserve System, Washington,
D.C. 20551, to be received not later than
May 24, 1971. Such material will be made
available for inspection and copying
upon request, except as provided in
§ 261.6(a) of the Board’s Rules Regard­
ing Availability of Information.
By order of the Board of Governors,
April 16, 1971.
[s e a l]

A. K e n y o n ,
D epu ty S ecretary.

K en n eth

[F R Doc.71-5729 F ile d 4-23-71;8:47 am]