Full text of Federal Reserve Bank of New York Circulars : 6761. Loans to Provide Capital to Broker-Dealer Firms

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Federal
of

Reserve
N

ew

Y

Bank

ork

r Circular No. 6 7 6 I "I
L
July 12, 1971
i

LOANS TO PROVIDE CAPITAL TO BROKER-DEALER FIRMS
— Revised Proposals to Amend Regulations G, T, and U
— Amendment to Regulation U, Effective July 10, 1971

To All Persons Extending Securities Credit
in the Second Federal Reserve District;

Following is the text of a statement issued July 9 by the Board of Governors of the Federal
Reserve System:
The Board of Governors of the Federal Reserve System today issued revised proposed amendments to its
Regulations G, T, and U setting forth conditions under which credit may be obtained without regard to
initial margin requirements for the purpose of providing capital to broker-dealer firms.
The amendments were initially proposed on April 16, 1971, and would have become effective on July 16.
Under the re-issued proposals, the amendments would become effective October 1. Comments on the revised
proposals should be submitted to the Board by August 20.
The Board also revised its exemption — originally issued April 16 as an interim measure while it con­
siders these proposals — from initial margin requirements for credit by banks for the purpose of providing
capital to broker-dealer firms. The revision makes it clear that this exemption is not available to finance
public trading in stock of such firms.
Regulation U applies to credit extended by banks for the purpose of purchasing or carrying margin
stocks; Regulation T applies to such credit extended by brokers and dealers, while Regulation G applies to
such credit extended by persons other than banks and brokers and dealers.
The B oard’s proposed revisions of the amendment to its regulations included the following:
(1) Elimination of the requirement that lenders hold collateral sufficient to secure a loan before they
could extend credit for the purpose of providing capital to a broker-dealer. Instead, a requirement would
be substituted that a committee of a stock exchange or national securities association of which the brokerdealer is a member approve the loan, on the basis of a finding that the credit will not increase the amount
of the broker-dealer’s trading in securities for its own account.
(2) Provide that credit extended by banks directly to broker-dealers would be subject to the same
conditions as loans made to third persons for the purpose of providing capital to the broker-dealers.

Enclosed is a copy of the amendment, effective July 10, 1971, to Regulation IT, which makes it
clear that exempt credit is not available for public purchases of publicly traded stock in brokerdealer firms. The text of the revised proposals to amend Regulations G, T, and U will be sent to you
shortly.
Additional copies of the enclosure will be furnished upon request.




A

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President .

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R eser ve S y s t e m

CREDIT BY BANKS FOR THE PURPOSE
OF PURCHASING OR CARRYING MARGIN STOCKS
AMENDMENT TO REGULATION U
Effective July 10, 1971, § 221.2 is amended
by revising paragraph (m) as follows:
SECTION 221.2 — EXCEPTIO N S TO
GENERAL RULE
Notwithstanding the provisions of § 221.1,
a bank may extend and may maintain any
credit for the purpose specified in § 221.1,
without regard to the limitations prescribed
therein, or in § 221.3 ( t ), if the credit comes
within any of the following descriptions.
*

*

*

(m) Any credit extended to or maintained
for a customer for the purpose of making a
loan or contribution of capital to a broker or
dealer subject to Part 220 (Regulation T) if
the loan or contribution is in conformity with
the requirements regarding satisfactory sub­
ordination agreements or equities in the
accounts of partners of a rule of the Secu­
rities and Exchange Commission (Rule
15e3-l(c) (2) ( A ) , ( c ) ( 4 ) , and ( c ) ( 7 ) ) (17




CFR 240.15c3-l(c) (2) ( A ) ,
(c)(4),
and
(c) ( 7) ) or the capital rules of an exchange of
which the broker or dealer is a member if the
members thereof are exempt therefrom by Rule
15c3-l(b)(2) of the Commission (17 CFR
240.15c-l(b) ( 2) ) or to purchase stock in a
broker or dealer wrhich is a corporation when
such stock is purchased directly from the issuer
and not as part of a public distribution: Pro­
vided, That any such credit extended after
April 16, 1971, shall become subject upon re­
newal to such additional restrictions as the
Board of Governors may impose by regulation
concerning the conditions upon which credit
may be extended for the purpose of making
such loan or contribution: And provided fa r­
ther, That (i) all of the proceeds of such ex­
tension of credit are so loaned or contributed
to the capital of the broker or dealer, and (ii)
that all of the proceeds of any withdrawal of
such loan or contribution of capital from the
broker or dealer by the customer or redemp­
tion of such stock shall be used to reduce or
retire said extension of credit.

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