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FE D E R A L RESER VE BANK
O F N E W YORK

C ir cu la r N o. 6775
A u g u st 4 , 197

[

PROPOSED AMENDMENTS TO REGULATIONS G, T, AND U

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

Following is the text of a statement issued July 26 by the Board of Governors of the
Federal Reserve System:
The Board of Governors of the Federal Reserve System today proposed regulatory
amendments to carry out the provisions of Title III of the Foreign Bank Secrecy Act
(Public Law 91-508 enacted October 26, 1970) that relate to margin credit requirements.
Comments on the proposals should be submitted to the Board by September 10.
That Act for the first time specifically requires borrowers to comply with margin
regulations in securities transactions. These regulations previously applied only to
lenders. This part of the Act will go into effect with the effective date of the Board's
regulatory amendments, but in no case later than November 1, 1971.
Margin regulations are designed to prevent the excessive use of credit in financing
securities transactions. Regulation T applies to all securities credit extended by brokers
and dealers; Regulation U applies to credit by banks for the purpose of purchasing or
carrying margin stocks, while Regulation G applies to securities credit by persons
other than banks, brokers, or dealers.
Major provisions of the proposals would:
1. Require that all U.S. citizens and residents comply with margin regulations when
they borrow from a lender, domestic or foreign. This provision would also apply to
foreigners controlled by U.S. borrowers or persons acting in behalf or in conjunction
with a U.S. borrower.
2. Provide that the restrictions on borrowers apply to credit extended, arranged or
maintained after the effective date of the amendments. Six months after the effective
date of the amendments, restrictions on substitutions and withdrawals from margin
accounts would apply to credit extended after October 26, 1970.




3.
Clarify the applicability of the registration, reporting and other requirements of
Regulation G. A U.S. person or foreigner controlled by U.S. persons, whose office is
located outside the United States, would be required to register with the Federal Reserve
Bank of New York.
4.
Provide that foreign branches or affiliates of U.S. broker-dealers may extend
purpose credit to foreign customers without regard to U.S. margin requirements.
5.
Impose parallel restrictions on credit extended by foreign offices or affiliates of
U.S. banks which are now exempt from margin regulation.
6.
Provide that a foreign subsidiary of a U.S. corporation may extend exempt credit
to its foreign employes to exercise options to buy stock in the U.S. parent.
At the same time, the Board proposed amendments that would make several technical
changes in the regulations relating to the treatment of short sales and so-called "c le a r ­
ance” transactions by banks and lenders subject to Regulation G.
Printed below is an excerpt from the Federal Register of July 29, containing the text of
the proposed amendments. Comments thereon should be submitted by September 10 and may
be sent to our Consumer Information and Securities Regulations Department.
Alfred Hayes,
President.

graph (a) in § 207.1 would clarify that a
person is not subject to registration under
this paragraph unless such person is a
U.S. person, or under the control of a
[ 1 2 CFR Part 207 1
U.S. person or acting on behalf of or in
IR e g . G ]
conjunction with such person; would proSECURITIES CREDIT
BY
PERSONS vide that the determination as to whether
OTHER THAN BANKS, BROKERS, OR a person has extended, maintained, or
arranged credit in the minimum amount
DEALERS
necessary to bring the person within the
registration requirement shall be made
Notice of Proposed Rule M aking
as of any calendar or fiscal quarter; and
J uly 26,1971.
would provide that a person whose prin1. The Board of Governors proposes cipal office is not located in any Federal
to amend Part 207 (Regulation G) to Reserve district may register with the
implement the provisions of title in of Federal Reserve Bank of New York.
3. The proposed amendment of parathe Financial Recordkeeping and Cur­
rency and Foreign Transactions Report­ graph (b) of § 207.1 would provide that
ing Act of 1970 (Public Law 91-508, Oc­ a registrant whose principal office is not
tober 26, 1970). This would be accom­ located in any Federal Reserve district
plished by amending §§ 207.1 (a) and may deregister with the Federal Reserve
(b ), 207.2 (i), 207.3 (a) and (b ), 207.4 Bank of New York.
4. The proposed new paragraph (k) of
(a) and (d ), and by adding §§ 207.0,
207.l ( k ) , and 207.2 (k) and (1), as set S 207.1 would implement the provisions
of title m of the Financial Recordkeepforth below.
2. The proposed amendment to para­ ing and Currency and Foreign Transac-

FEDERAL RESERVE SYSTEM




- 2

-

tlons Reporting Act of 1970 (Public Law
No. 91-508, October 26, 1970) by providing that customers who are U.S. persons or foreign persons controlled by
such persons, or acting on behalf of or
in conjunction with such persons, may
not obtain credit except in compliance
with applicable margin regulations of
the Board of Governors, and that if the
extender of the credit is not subject to
such regulations, the credit must comply
with the provisions of this part. The requirements of paragraph (k) would apply to credit extended after the effective
date of the amendments, and such credit
already extended at that time would be
subject to the retention and withdrawal
requirements of paragraph (j) of § 207.1
beginning 6 months after such date,
5. The proposed amendment of paragraph (i) of § 207.2 would clarify that
credit extended to a customer by a person whether or not subject to the registration requirement of 5 207.1(a) (for
example, by a foreign person who is not
controlled by or acting in conjunction

1

PROPOSED RULE MAKING
with or on behalf of a U.S. person) is In­
directly secured by margin stock if de­
scribed in that paragraph.
6. The proposed new paragraph (k) of
§ 207.2 incorporates the statutory defini­
tion of “U.S. person” .
7. The proposed new paragraph (1) of
§ 207.2 incorporates the statutory defini­
tion of “foreign person controlled by a
U.S. person”.
8. The proposed amendment of para­
graph (a) of § 207.3 provides that a per­
son subject to the registration require­
ment of § 207.1(a) whose principal office
is not located in a Federal Reserve dis­
trict shall file required quarterly reports
with the Federal Reserve Bank of New
York.
9. The proposed amendment of para­
graph (b) of § 207.3 provides that U.S.
persons and foreign persons controlled
by such persons who obtain, receive, or
enjoy the beneficial use of any purpose
credit shall maintain such records, and
that all such persons, and all persons
registered pursuant to § 207.1(a), shall
file such reports as the Board shall pre­
scribe to enable it to perform the func­
tions conferred upon it by the Securities
Exchange Act of 1934 (15 U.S.C. 78).
10. The proposed new paragraph
(a) (4) of § 207.4 provides that a foreign
plan-lender extending credit solely to
foreign persons is not subject to this part
if any U.S. person who extends, arranges,
or has outstanding any credit extended
to or by such foreign plan-lender com­
plies with the registration and reporting
requirements of §§ 207.1(a) and 207.3.
11. The proposed amendment to para­
graph (d) of § 207.4 provides that me­
chanical mistakes made in good faith by
a customer, as well as by a lender, shall
not constitute a violation of this part
if prompt action is taken to remedy the
noncompliance.
12. At the time the proposed amend­
ments are adopted, footnotes 5 and 6 in
§ 207.1(f) will be redesignated footnotes
7 and 8, respectively.
To aid in the consideration by the
Board of this matter, interested persons
are invited to submit relevant data, views,
or arguments. Any such material should
be submitted in writing to the Secretary,
Board of Governors of the Federal Re­
serve System, Washington, D.C. 20551,
to be received not later than September
10, 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 Regarding Avail­
ability of Information.
By order of the Board of Governors,
July 22, 1971.
[s e a l]

§ 20 7.0

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

K e n n e th

Scope o f part.

This part contains rules and regula­
tions promulgated by the Board of Gov­
ernors of the Federal Reserve System
under the Securities Exchange Act of
1934 applicable to certain persons (other




than banks, brokers, and dealers) who
extend, arrange, maintain, or obtain
credit.
§ 207.1

General rule.

(a) Registration. Every person who is
a U.S. person1 or a foreign person con­
trolled by a U.S. person2 or acting on
behalf of or in conjunction with such
person or who extends, arranges, or has
outstanding credit of the kind described
in this paragraph in the United States
and who, in the ordinary course of his
business,3 during any calendar (or fiscal)
quarter ended after October 20, 1967, ex­
tends or arranges for the extension of a
total of $550,000, or more or has out­
standing at any time during such quar­
ter, a total of $100,000 or more, in credit,
secured directly or indirectly,* in whole
or in part, by collateral that includes any
margin securities,5 unless such person is
subject to Part 220 (Regulation T) or
Part 221 (Regulation U) of this chapter,
Is subject to the registration require­
ments of this paragraph and shall, with­
in 30 days following the end of such
quarter during which the person becomes
subject to such registration require­
ments, register with the Board of Gov­
ernors of the Federal Reserve System by
filing a statement in conformity with the
requirements of Federal Reserve Form
G - l with the Federal Reserve Bank of
the district in which the principal office
of such person is located: P resided , That
in the case of a person whose principal
office is not located in a Federal Reserve
district, such statement shall be filed
with the Federal Reserve Bank of New
York: And provided fu rth er, That in the
case of credit so secured by collateral
that includes any OTC margin stock *
and/or debt securities convertible into
OTC margin stock and no other margin
security, such date shall be July 8, 1969,
instead of October 20, 1967.
(b) T erm ination o f registration. Any
person so registered who has not, during
the preceding 6 calendar months, ex­
tended or arranged for the extension or
maintenance of or had outstanding any
credit secured directly or indirectly, in
whole or in part, by collateral that in­
cludes any margin securities may apply
for termination of such registration by
filing Federal Reserve Form G -2 with
the Federal Reserve Bank of the district
in which the principal office of such per­
son is located: Provided, TTmt in the
case of a person whose principal office is
not located in a Federal Reserve district,
such statement shall be filed with the
Federal Reserve Bank of New York. A
registration shall be deemed terminated
when such application is approved by
the Board of Governors of the Federal
Reserve System.
•

•

*

*

•

1 A s d e fin e d in § 207.2 ( k ) .
* A s d e fin e d in § 2 0 7 .2 (Z ).
* S ee } 2 0 7 .2 ( b ) .
‘ S ee § 2 0 7 .2 ( i ) .
‘ S ee 5 2 0 7 .2 ( d ) .
* S ee § 2 0 7 . 2 ( f ) . “ O T C s t o c k ” is s t o c k w h ic h
is t r a d e d “ o v e r t h e c o u n t e r ” .

-3-

(k) Application to custom er. (1) No
U.S. person * or foreign person con­
trolled by a U.S. person 1 or acting on
0
behalf of or in conjunction with such
person shall obtain, receive, or enjoy the
beneficial use of any loan or extension of
credit for the purpose of purchasing or
carrying any margin security (without
regard to whether the person extending,
maintaining, or arranging the credit is
subject to this part, Part 220 (Regula­
tion T ), or Part 221 (Regulation U ), of
this chapter, and without regard to
whether the office or place of business of
such person is In a State or the transac­
tion occurred in whole or in part within
a State) unless the loan or other credit
transaction is permitted in the case of
credit extended, maintained, or ar­
ranged by a person subject to this part,
Part 220 (Regulation T ), or Part 221
(Regulation U) of this chapter or if the
person extending, arranging, or main­
taining the credit is not so subject, the
credit would be permitted in the case of
a person subject to the registration re­
quirement of paragraph (a) of this sec­
tion: Provided, That, in' the case of
credit obtained from a person not sub­
ject to the registration requirement of
paragraph (a) of this section, the re­
quirement of paragraph (e) of this sec­
tion as to a statement of the purpose of
the credit shall not apply.
(2) The provisions of subparagraph
(1) of this paragraph shall not apply to
credit extended before_____________ [ef­
fective date of the amendment] except
that a fte r _____________ [6 months after
effective date] the requirements of para­
graph (j) of this section as to with­
drawals and substitutions of collateral
shall apply to credit extended after Octo­
ber 26,1970.
§ 2 0 7.2

Definitions.

*
*
*
*
*
(i)
The term “indirectly secured” in­
cludes, except as provided in § 207.4(a)
(3), any arrangement with the customer
under which the customer’s right or
ability to sell, pledge, or otherwise dis­
pose of margin securities owned by the
customer is in any way restricted as 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 custom­
er’s assets unless a substantial part of
such assets consist of margin securities,
or (2) if the person extending such credit
in good faith has not relied upon such
securities as collateral in the extension
or maintenance of the particular credit:
A nd provided fu rth er, That the fore­
going shall not apply to stock held by
the person extending such credit only
• As defined in § 207.2 ( k ) .
’" A s defined in § 20 7 .2 (1 ).

PROPOSED RULE MAKING
in the capacity of custodian, depositary,
(d) M istakes in good faith. Failure to the purpose specified in paragraph (c)
or trustee, or under similar circum­ comply with this part due to a mechan­ of this section on collateral consisting of
stances, if such person in good faith has ical mistake made in good faith in de­ any debt security (i) convertible with or
not relied upon such securities as col­ termining, recording or calculating any without consideration, presently or in
lateral in the extension or maintenance credit, balance, market price, or loan the future, into a margin security or (ii)
of the particular credit.
value, or other mechanical mistake, shall carrying any warrant or right to sub­
♦
*
*
*
*
not constitute a violation of this part if scribe to or purchase such a margin
(k) The term “U.S. person” includes promptly after discovery of the mistake security.
a person which is organized or exists there is taken whatever action is prac­
(2) Credit extended under this para­
under the laws of any State or, in the ticable to remedy the noncompliance.
graph shall be subject to the same condi­
case of a natural person, a citizen or
*
*
*
*
*
tions as any other credit subject to this
resident of the United States; a domestic
section except: (i) The entire amount
[F R D o c .7 1 -1 0 8 0 0 P ile d 7 - 2 8 - 7 1 ;8 :5 1 a m ]
estate; or a trust in which one or more of
of such credit shall be considered a single
the foregoing persons has a cumulative
credit treated separately from the single
direct or indirect beneficial interest in
[ 1 2 CFR Part 2071
credit specified in paragraph (g) of this
excess of 50 per centum of the value of
section and all the collateral securing
[R e g . G ]
the trust.
such credit shall be considered in deter­
(1)
The term “foreign person con­ SECURITIES
CREDIT
BY
PERSONS mining whether or not the credit com­
trolled by a U.S. person” includes any
OTHER THAN BANKS, BROKERS, OR plies with this part, and (ii) the maxi­
noncorporate entity in which U.S. per­
mum loan value of the collateral shall
DEALERS
sons directly or indirectly have more
be as prescribed from time to time in
than a 50 per centum beneficial interest,
§ 207.5(b) (the Supplement to Regula­
Notice of Proposed Rule M aking
and any corporation in which one or
tion G ) .
1. The Board of Governors proposes
more U.S. persons, directly or indirectly,
(3) Any convertible debt security
own stock possessing more than 50 per to amend Part 207 (Regulation G) to originally eligible as collateral for credit
make certain technical changes. This
centum of the total combined voting
extended under this paragraph shall be
power of all classes of stock entitled to would be accomplished by amending treated as such as long as continuously
§§ 207.1(d), 207.1(1) and 207.2(d).
vote, or more than 50 per centum of
2. The proposed amendment of para­ held as collateral for such credit even
the total value of shares of all classes of
graph (d) of § 207.1 would clarify that though it ceases to be convertible or to
stock.
securities are not eligible for the prefer­ carry warrants or rights.
(4) In the event that any margin
§ 2 0 7 .3
Reports and records.
ential margin provided by this section
security other than a convertible debt
(a) Every person who is registered unless they are debt securities.
3. The proposed new paragraph (1) of security is substituted for a convertible
pursuant to § 207.1(a) shall within 30
§ 207.1 would clarify that a person sub­ debt security held as collateral for credit
days following the end of each succeed­
extended under this section, such margin
ing quarter file a report on Federal ject to the registration requirement of
§ 207.1(a) may not handle “clearance” security and any credit extended on it in
Reserve Form G -4 with the Federal Re­
compliance with this part shall there­
serve Bank of the district in which the for any customer of securities purchased
upon be treated as subject to paragraph
principal office of the person is located, through a broker or dealer unless the (c) of this section and not to this para­
or in the case of a person whose prin­ customer deposits the amount of the graph and the credit extended under this
cipal office is not located in a Fed­ purchase price with the lender within paragraph shall be reduced by an
eral Reserve district, with the Federal 7 full business days, and in any event, amount equal to the maximum loan value
before delivering the security to any
Reserve Bank of fJew York.
other person; or in the case of sales, of the security withdrawn.
(b) Every person who has registered
promptly receives from the customer the
*
*
*
*
*
pursuant to § 207.1(a) and every per­ security that has been sold, and does not
(1) Clearance credit— (1) Purchases.
son described in § 207.1 (k) or (1) who
accept payment for such security sold
obtains, receives or enjoys the beneficial until he has received the security from No lender shall extend any credit,
whether or not such credit is secured di­
use of any purpose credit shall maintain the customer.
rectly or indirectly by any margin secu­
such records and file such reports as shall
4. The proposed amendment of para­ rities, for the purpose of clearing any
be prescribed by the Board of Governors graph (d) of § 207.2 would clarify that
of the Federal Reserve System to en­ a convertible preferred stock is a margin unpaid purchase of a security in an ac­
able it to perform the functions con­ security if the security into which such count described in Part 220 of this Chap­
ferred upon it by the Securities Ex­ stock is convertible is such a security. ter (Regulation T) unless the lender
obtains from the customer as promptly
change Act of 1934 (15 U.S.C. 78).
To aid in the consideration by the as possible and in any event before the
Board of this matter, interested persons expiration of 7 full business days follow­
§ 2 0 7 .4
Miscellaneous provisions.
are invited to submit relevant data, ing the date of such purchase the full
(a) * * *
views, or arguments. Any such material
(4) A plan-lender which is not a citi­ should be submitted in writing to the amount of the purchase price of such
zen or resident of the United States and Secretary, Board of Governors of the security (notwithstanding that the de­
which does not extend, arrange, or have Federal Reserve System, Washington, livery of the security may be delayed be­
outstanding credit of the kind described D.C. 20551, to be received not later than yond the seventh day following such
in § 207.1(a) in the United States (here­ September 10, 1971. Such material will date), and in no event may the lender
inafter referred to as a “foreign plan- be made available for inspection and deliver such purchased security to any
lender” ) shall not be subject to the re­ copying upon request, except as provided other person until he has been paid such
quirements of this part if such foreign in § 261.6(a) of the Board’s Rules Re­ purchase price by the customer.
(2) Sales. No lender shall effect for a
plan-lender extends, arranges, or main­ garding Availability of Information.
customer, or knowingly assist a cus­
tains credit solely to persons who are not
By order of the Board of Governors, tomer in effecting the sale of a security
citizens or residents of the United
in an account described in Part 220 of
States: Provided, That U.S. persons who July 22, 1971.
this chapter (Regulation T) unless the
extend, arrange, or have outstanding any
[s e a l]
K e n n e t h A. K e n y o n ,
lender obtains from the customer, as
credit extended to or by a foreign planD eputy Secretary.
promptly as possible, the security sold,
lender shall be subject to the require­
and in no event may the lender accept
ments of §§ 207.1(a) and 207.3 if such § 207.1 General rule.
*
*
*
*
*
payment for any such security from any
requirements would be applicable but for
tins subparagraph.
(d)
Credit on convertible debt secu r­ other person until he has received the
ities. (1) A lender may extend credit for security from the customer.
*
*
*
*
*




PROPOSED RULE MAKING
tion of “Foreign person controlled by a
United States person” .
(d)
M argin security. The term “margin 5. The proposed new paragraph (1) of
security” means any equity security1 § 220.4 would provide a special account
1
which is (1) a registered equity security, in which a foreign branch of a creditor,
(2) an OTC margin stock, (3) a security or an affiliate of a creditor if all the of­
(i) convertible with or without consid­ fices of such affiliate are situated abroad,
eration, presently or in the future, into may, without regard to the other re­
a margin security, or (ii) carrying any quirements of this part, extend securi­
warrant or right to subscribe to or pur­ ties credit to persons who are neither
chase, presently or in the future, a U.S. persons nor foreign persons con­
margin security, (4) any such warrant trolled by or acting on behalf or in con­
or right, (5) a security issued by an in­ junction with such persons.
6. At the time the proposed amend­
vestment company, other than a small
business investment company licensed ments are adopted footnotes 1 through 5
under the Small Business Investment will be redesignated footnotes 3 through
Company Act of 1958 (15 U.S.C. 661), 7, respectively.
To aid in the consideration by the
registered pursuant to section 8 of the
Investment Company Act of 1940 (15 Board of this matter, interested persons
U.S.C. 80a-8), unless at least 95 percent are invited to submit relevant data,
of the assets of such company are con­ views, or arguments. Any such material
tinuously invested in exempted secu­ should be submitted in writing to the
Secretary, Board of Governors of the
rities.1
3
Federal Reserve System, Washington,
*
*
*
*
•
D.C. 20551, to be received not later than
[F R D oc.7 1 -1 0 8 0 1 P lie d 7 - 2 8 - 7 1 ;8 :5 1 a m ]
September 10, 1971. Such material will
be made available for inspection and
copying upon request, except as provided
[ 1 2 CFR Part 2201
in § 261.6(a) of the Board’s Rules Re­
[R e g . T ]
garding Availability of Information.
§ 20 7.2
*

Definitions.
*

*

*

*

CREDIT BY BROKERS A ND DEALERS
Notice of Proposed Rule M aking
J u l y 26, 1971.

1. The Board of Governors proposes
to amend Part 220 (Regulation T) to im­
plement the provisions of title m of the
Financial Recordkeeping and Currency
and Foreign Transactions Reporting Act
of 1970 (Public Law No. 91-508, Oct. 26,
1970). This would be accomplished by
amending §220.1(b), and by adding
§§ 220.2 (i) and (j) and 220.4(1), as set
forth below.
2. The proposed new paragraph (b)
of § 220.1 would implement the provi­
sions of title III of the Financial Record­
keeping and Currency and Foreign
Transactions Reporting Act of 1970
(Public Law No. 91-508, Oct. 26, 1970)
by providing that customers who are
U.S. persons or foreign persons con­
trolled by such persons, or acting on be­
half of or in conjunction with such per­
sons, may not obtain credit except in
compliance with applicable margin reg­
ulations of the Board of Governors, and
that if the extender of the credit is not
subject to such regulations, the credit
must comply with the provisions of Part
207 (Regulation G ) . The requirements of
paragraph (b) would apply to credit ex­
tended after the effective date of the
amendments, and such credit that had
already been extended at that time would
be subject to the retention and with­
drawal requirements of § 220.3(b) (2)
beginning 6 months after such date.
3. The proposed new paragraph (i)
of § 220.2 incorporates the statutory
definition of “United States person”.
4. The proposed new paragraph (j) of
§ 220.2 incorporates the statutory defini­
1 As defined in 15 U.S.C. 7 8 c(a ) (1 1 ).
1
> As defined in 15 U.S.C. 7 8 c(a ) (1 2 ).
5




By order of the Board of Governors,
July 22, 1971.
[s e a l]

§ 220.1

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

K e n n e th

Scope of part.

This part is issued by the Board of
Governors of the Federal Reserve Sys­
tem (hereinafter called the “Board” )
pursuant to the Securities Exchange
Act of 1934 (called the “Act” in this
part), particularly sections 7 and 8(a)
thereof (15 U.S.C. 78g, 78h(a), as
amended).
(a) A pplication to broker or dealer.
This part applies to every broker or
dealer, including every member of a na­
tional securities exchange.
(b) A pplication to custom er. No U.S.
person 1 or foreign person controlled by
a U.S. person, or acting on behalf of or in
conjunction with such person,2 shall ob­
tain, receive, or enjoy the beneficial use
of any loan or extension of credit for the
purpose of purchasing or carrying any
margin security (without regard to
whether the person extending, maintain­
ing, or arranging the credit is subject to
this part, Part 207 (Regulation G ) , or
Part 221 (Regulation U) of this chapter,
and without regard to whether the office
or place of business of such person is in
a State or the transaction occurred in
whole or in part within a State) unless
the loan or other credit transaction is
permitted in the case of credit extended,
maintained, or arranged by a person sub­
ject to this part, Part 207 (Regulation
G ), or in Part 221 of this chapter (Reg­
ulation U ), or if the person extending,
arranging or maintaining the credit is
not so subject, the credit would be per­
mitted in the case of a person .subject
1 As defined in § 2 2 0 .2 ( i) .
5 As defined in § 220.2 ( j ) .

to the registration requirement of
§ 207.1(a) of Part 207 of this Chapter
(Regulation G ) : Provided, That the pro­
visions of this paragraph shall not apply
to credit extended b e fo r e _____________
[effective date of the amendment] except
that a fte r _____________ [6 months after
effective date] the requirements of
§ 220.3(b) (2) as to substitutions and
withdrawals of collateral shall apply to
credit extended after October 26, 1970.
§ 220.2 Definitions.
*
*
*
*
*
(i)
The term “United States person”
includes a person organized or existing
under the laws of any State or, in the
case of a natural person, a citizen or resi­
dent of the United States; a domestic
estate; or a trust in which one or more
of the foregoing persons has a cumulative
direct or indirect beneficial interest in
excess of 50 per centum of the value
of the trust.
(j) The term “Foreign person con­
trolled by a United States person” in­
cludes any noncorporate entity in which
U.S. persons directly or indirectly have
more than a 50 per centum beneficial in­
terest, and any corporation in which one
or more U.S. persons, directly or indi­
rectly, own stock possessing more than
50 per centum of the total combined vot­
ing power of all classes of stock entitled
to vote, or more than 50 per centum of
the total value of shares of all classes of
stock.
*

§ 220.4
*

*

*

*

*

Special accounts.

*

*

*

*

(1)
Special foreig n account. A creditor
may, in a special foreign account, per­
mit a branch if the branch is situated
outside the United States, or an affiliated
person if all the offices of such affiliated
person are situated outside the United
States, to purchase or carry securities for
customers who are not U.S. persons or
foreign persons controlled by U.S. per­
sons or acting on behalf of or in con­
junction with such persons.
[F R Doc.71-10803 F ile d 7 -2 8-71 ;8 :51 am]

[ 1 2 CFR Part 2 2 0 ]
[R eg. T ]

CREDIT BY BROKERS A ND DEALERS
Notice of Proposed Rule M aking
1. T h e Board o f G overnors proposes to
am end Part 220 (R egulation T ) to make
certain technical changes. This would be
accom plished by am ending §§ 2 2 0 .2 (f);
220.3 (a) and ( d ) ; 220.4 (c ) and ( j ) ;
and 220.7(c), as set forth below.
2. The proposed new paragraph (f> (2 >
o f § 220.2 supplies a definition o f the
term “ m argin equity security” .
3. The proposed am endm ent to p a ra­
graph (a) o f s 220.3 provides that certain
short sales may be effected in the special
convertible debt security accoun t d e­
scribed in § 220.4'j i.
4. The proposed am endm ent to p a ra­
graph i d i o f ? 220.3 makes a conform in g

PROPOSED RULE MAKING
change In regard to short sales to be ef­
fected In the special convertible debt se­
curity account described in S 220.4 (j).
5. The proposed amendment to para­
graph (c) of § 220.4 incorporates the sub­
stance of an interpretation of the Board
published at § 220.123 (36 F.R. 27772778 (Feb. 10, 1971)).
6. The proposed amendments to para­
graph (j) of § 220.4 provide that short
sales of margin equity securities into
w hich convertible debt securities held in
th at account are convertible may be ef­
fected in the special convertible debt
security account.
7. The proposed amendment to para­
graph (c) of § 220.7 provides that a
creditor must obtain a statement of pur­
pose in regard to all extensions of credit
made by him, other than for the pur­
pose of purchasing or carrying margin
securities.
To aid in the consideration by the
Board of this matter, interested persons
are invited to submit relevant data, views,
or arguments. Any such material should
be submitted in writing to the Secretary,
Board of Governors of the Federal Re­
serve System, Washington, D.C. 20551,
to be received not later than Septem­
ber 10, 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.

§ 220.4(j) (5) of this part, purchases to If the security when so purchased is a
cover short sales, and contracts involv­ new security issued or to be issued for
ing an endorsement or guarantee of any the pinpose of refunding outstanding
put, call, or other option), shall be in­ securities which mature, or are payable
cluded in the appropriate special account upon presentation for redemption, within
provided for by § 220.4. During any pe­ 35 days of the date on which the new
riod when such S 220.8 specifies that security is made available by the issuer
margin equity securities shall have no for delivery to purchasers, the period ap­
loan value in a general account or spe­ plicable to the transaction under subcial convertible debt security account paragraph (2) of this paragraph shall
(sometimes referred to herein as “spe­ be 7 days after such maturity or pay­
cial convertible security account”) sub­ ment date: Provided, That this sentence
ject to § 220.4(j), any transaction con­ shall apply only to the payment of that
sisting of a purchase of a security other portion of the purchase price that does
than a purchase of a security to reduce not exceed 103 percent of the amount
or close out a short position shall be ef­ that will be payable to the purchaser
fected in the special cash account pro­ of the new security upon such maturity
vided for by S 220.4(c) or in some other of, or payment for, securities owned by
appropriate special account provided for him at the time of the purchase.
by 8 220.4.
•
•
*
*
*
*
*
*
*
*
(j) Special convertible debt security
(d)
A djusted debit balance. For theaccount. * * *
purpose of this part, the adjusted debit
(4) In the event any convertible se­
balance of a general account, special curity held in this account is to be con­
bond account, or special convertible se­ verted to a stock, such security shall
curity account shall be calculated by tak­ upon conversion be transferred to the
ing the sum of the following items:
customer’s general account against a
*
*
*
*
*
deposit of cash or margin securities eligi­
(3)
the current market value of anyble for an extension of credit in this ac­
securities (other than unissued securi­ count (counted at their maximum loan
ties) sold short in the general account value) equal to at least the maximum
plus, for each security (other than an loan value of the security for which
exempted security), such amount as the such substitution is made, without
Board shall prescribe from time to time regard to the retention requirement of
in § 220.8 (the Supplement to Regulation § 220.3(b) (2).
By order of the Board of Governors, T) as the margin required for such short
(5) In a special convertible debt se­
July 22, 1971.
sales, except that such amount so pre­ curity account the amount of margin
scribed in such § 220.8 need not be in­ equity securities into which a margin
[s e a l]
K e n n e t h A. K e n y o n ,
cluded when there are held in the gen­ debt security held in the account is con­
D epu ty S ecretary.
eral account or special convertible debt vertible may be sold short without re­
§ 2 2 0.2
Definitions.
security account the same securities or gard to the margin required for short
*
*
•
*
*
securities exchangeable or convertible sales in 5 220.8(d) (Supplement to Reg­
(f) M argin security. (1) The term within 90 calendar days, without restric­ ulation T ) , and such short position may
“margin security” means any registered tion other than the payment of money, be carried in the special convertible debt
security account in conformity with the
into such securities sold short;
security or OTC margin stock.
exception provided in 5 220.3(d)(3) of
(2)
The term “margin equity security”
*
*
*
*
*
this part.
means any margin security which is an § 2 2 0 .4 Special accounts.
*
*
*
*
*
equity security.*
*
•
*
*
*
*
*
*
*
*
§ 2 2 0 .7 Miscellaneous provisions.
(c) Special cash account. • * *
•
•
•
•
•
§ 2 2 0.3
General accounts.
(3)
If the security when so purchased
(c)
S tatem en t o f purpose o f loan.
(a)
C on ten ts o f general accou n t. Allis an unissued security the period appli­
financial relations between a creditor cable to the transaction under subpara­ Every extension of credit by a creditor
and a customer, whether recorded In one graph (2) of this paragraph shall be 7 shall be deemed to be for the purpose of
record or in more than one record, shall days after the date on which the security purchasing or carrying or trading in
be included in and be deemed to be part Is made available by the issuer for deliv­ securities, unless the creditor has ac­
of the customer's general account with ery to purchasers, except that where a cepted in good faith a written statement
the creditor, except that the relations portion consisting of 10 percent or more to the contrary in conformity with the
which § 220.4 permits to be included in of an issue of nonequity securities is is­ requirements of Form F.R. T -4 executed
any special account provided for by that sued pursuant to contracts entered into by the customer and executed and ac­
section may be included in the appro­ at the time of the initial underwriting cepted in good faith by the creditor prior
priate special account, and all transac­ between the issuer and the purchasers to such extension. The creditor shall re­
tions in commodities, and, except to the of such portion providing for delayed is­ tain such statement in his records for
extent provided in paragraph (b) (2) of sue of nonequity securities in amounts at least 3 years after such credit is ex­
this section, all transactions in non­ of $250,000 or more per contract, such tinguished. To accept the customer’s
equity securities, exempted securities, period shall be 7 days after the date statement in good faith, the creditor
and in other securities having no loan fixed by contract between the issuer and
must (1) be alert to the circumstances
value in a general account under the pro­ the purchasers of such portion. If the
visions of paragraph (c) of this section security when so purchased is a “when surrounding the extension of credit and
(2) if he has any information which
and § 220.8 (the Supplement to Regula­ distributed” security which is to be dis­
tion T) (except unissued securities, short tributed in accordance with a published would cause a prudent man not to accept
sales and securities positions to offset plan, the period applicable to the trans­ the statement without inquiry, have in­
short sales other than those permitted in action under subparagraph (2) of this vestigated and be satisfied that the cus­
paragraph shall be 7 days after the date tomer’s statement is truthful. A creditor
on which the security is so distributed. may rely upon such a written statement
*As defined In 15 U.S.C. 78c (a) (11).




-6 -

PROPOSED RULE MAKING
if accepted in
paragraph.
*
*

accordance
•

with

*

this
*

[F R D o c .7 1 -1 0 8 0 2 F ile d 7 - 2 8 -7 1 ;8 :5 1 a m ]

[ 1 2 CFR Part 221 1

or arguments. Any such material should
be submitted in writing to the Secre­
tary, Board of Governors of the Federal
Reserve System, Washington, D.C. 20551,
to be received not later than Septem­
ber 10, 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 Regarding Avail­
ability of Information.

14035
U.S. persons7 or foreign persons con­
trolled by U.S. persons' or acting on be­
half of or in conjunction with such
persons.
*
*
*
*
*
§ 221.3

Miscellaneous provisions.

*
*
*
*
*
[R e g . U ]
(k) D efinitions. (1) For the purposes
of this part, except as provided in subCREDIT BY BANKS FOR THE PURPOSE
paragraphs (3) and (4) of this para­
OF PURCHASING OR CARRYING
By order of the Board of Governors, graph unless the context otherwise re­
M A RG IN STOCKS
July 22, 1971.
quires, the terms herein have the mean­
ings assigned to them in section 3(a">
[SEAL]
K e n n e t h A. K e n y o n ,
Notice of Proposed Rule M aking
of the Securities Exchange Act of 1934
D epu ty Secretary.
J u l y 26, 1971.
(15 U.S.C. 78c(a)).
1. The Board of Governors proposes to § 2 2 1.0 Scope o f pari.
*
*
*
*
*
amend Part 221 (Regulation U) to im­
This part contains rules and regula­
(3) The term “United States person-’
plement the provisions of title III of the tions promulgated by the Board of Gov­
Financial Recordkeeping and Currency ernors of the Federal Reserve System includes a person organized or existing
under the laws of any State or;, in the
and Foreign Transactions Reporting Act under the Securities Exchange Act of
case of a natural person, a citizen or
of 1970 (Public Law No. 91-508, Oct. 26, 1934 applicable to banks. This part also
resident of the United States; a domes­
1970). This would be accomplished by applies to certain persons who obtain
tic estate; or a trust in which one or
amending §8 221.1(a), 221.2(i), 221.3(k), credit on securities from banks.
more of the foregoing persons have a
and by adding § 221.0, as set forth below.
§ 221.1
General rule.
cumulative direct or indirect beneficial
2. The proposed amendment of para­
interest in excess of 50 per centum of
(a) * * *
graph (a) of § 221.1 would add a new
(4)
A pplication to custom er. No U.S.the value of the trust.
subparagraph (4) implementing the pro­
(4) The term “ foreign person con­
visions of title H I of the Financial Rec­ person5 or foreign person controlled by
trolled by a United States person” in­
ordkeeping and Currency and Foreign a U.S. person • or acting on behalf of or
cludes any noncorporate entity in which
Transactions Reporting Act of 1970 in conjunction with such person shall
U.S. persons directly or indirectly have
(Public Law No. 91-508, Oct. 26, 1970) by obtain, receive, or enjoy the beneficial
more than a 50 per centum beneficial
providing that customers who are U.S. use of any loan or extension of credit
interest, and any corporation in which
persons or foreign persons controlled by for the purpose of purchasing or carry­
ing any margin stock (without regard to one or more U.S. persons, directly or
such persons, or acting on behalf of or
indirectly, own stock possessing more
in conjunction with such persons, may whether the person extending, main­
than 50 per centum of the total com­
not obtain credit except in compliance taining, or arranging the credit is sub­ bined voting power of all classes of stock
with applicable margin regulations of the ject to this part, Part 207 (Regulation
entitled to vote, or more than 50 per
Board of Governors, and that if the ex­ G ) , or Part 220 of this section (Regula­
centum of the total value of shares of
tender of the credit is not subject to such tion T ) , and without regard to whether all classes of stock.
regulations, the credit must comply with the office or place of business of such
*
*
*
*
*
the provisions of Part 207 (Regulation person is in a State or the transaction
[F R D o c .7 1 -1 0 8 0 4 F ile d 7 - 2 8 - 7 1 ;8 :5 1 a m ]
G ). The requirements of subparagraph occurred in whole or in part within a
(4) would apply to credit extended after State) unless the loan or other credit
the effective date of the amendments, transaction is permitted in the case of
[ 1 2 CFR Part 221 ]
and such credit already extended at that credit extended, maintained, or arranged
[R e g . U ]
by a person subject to this part, Part 207,
time would be subject to the retention
and withdrawal requirements of § 221.1 or Part 220 of this section, or if the per­
CREDIT BY BANKS FOR THE PURPOSE
(b) beginning 6 months after such date. son extending, arranging, or maintain­
OF PURCHASING OR CARRYING
3. The proposed amendment to para­ ing the credit is not so subject the credit
M A RG IN STOCKS
graph (i) of § 221.2 would provide that would be permitted in the case of a per­
“purpose” credit extended, arranged, or son subject to the registration require­
Notice of Proposed Rule M aking
maintained by a foreign branch of a ment of § 207.1(a) of this chapter (Regu­
1. The Board of Governors proposes to
bank, or an affiliate of the bank of which lation G ) : Provided, That the provisions
all the offices of such affiliate are situated of subparagraph (1) of this paragraph amend Part 221 (Regulation U) to make
abroad, is subject to the requirements of shall not apply to credit extended be­ certain technical changes. This would be
[effective date of the accomplished by amending §§ 221.1(a)
this part if such credit is extended to fore
and 221.3 (k), (m ), (s), and (v) as set
customers who are U.S. persons or for­ amendment] except that a ft e r ________
forth below.
eign persons controlled by or acting on ------ [6 months after effective date] the
2. The proposed amendment of para­
behalf of or in conjunction with such requirements of paragraph (b) of this
graph (a) of § 221.1 would eliminate a
persons. “Purpose” credit extended to section as to substitutions and with­
others is not subject to the requirements drawals of collateral shall apply to credit superfluous reference; would add a new
extended after October 26, 1970.
subparagraph (2) clarifying that a per­
of this part.
son subject to this part may not handle
*
*
*
*
*
4. The proposed amendments to para­
“clearance” for any customers of securi­
graph (k) of 5 221.3 would add a new § 221.2 Exceptions to general rule.
ties purchased through a broker or
subparagraph (3) incorporating the
*
*
*
*
*
dealer unless the customer deposits the
statutory definition of “United States
(i)
Any credit extended by a branchamount of the purchase price with the
person” ; and would add a new subpara­
graph (4) incorporating the statutory of a bank if the branch is situated out­ lender within 7 full business days,
definition of “Foreign person controlled side the United States, or by an affiliated and in any event, before delivering the
person of a bank if all the offices of such security to any other person; or in the
by a United States person” .
5. At the time the proposed amend­ affiliated person are situated outside the case of sales promptly receives from the
ments are adopted, footnote 5 will be United States, to purchase or carry mar­ customer the security that has been
gin stocks for customers who are not sold, and does not accept payment for
redesignated footnote 9.
To aid in the consideration by the
Board of this matter, interested persons
• A s d e fin e d in § 2 2 1 .3 (k ) ( 3 ) .
7As d e fin e d in § 2 2 1 .3 (k ) ( 3 ) .
are invited to submit relevant data, views,
• A s d e fin e d In § 2 2 1 .3 (k ) ( 4 ) .
* As d e fin e d in § 2 2 1 .3 (k ) ( 4 ) .




_

7

—

i

PROPOSED RULE MAKING
such security sold until he has received
the security from the customer, and
would renumber the present subpara­
graph (2) as subparagraph (3).
3. The proposed amendments to para­
graph (k) of 5 221.3 would add a new
subparagraph (2) for the definition of a
bank which is a member of national
securities exchange.
4. The proposed amendments to para­
graph (m) of 5 221.3 would clarify cer­
tain cross-references.
5. The proposed amendments to para­
graph (s) of § 221.3 would clarify certain
cross-references.
6. The proposed amendment to para­
graph (v) of § 221.3 would clarify that
a convertible preferred stock is a margin
stock if the stdck into which such pre­
ferred stock is convertible is a margin
stock.
To aid in the consideration by the
Board of this matter, interested persons
are invited to submit relevant data, views,
or arguments. Any such material should
be submitted in writing to the Secretary,
Board of Governors of the Federal Re­
serve System, Washington, D.C. 20551,
to be received not later them September
10, 1971. Such material will be made
available for inspection and copying upon
request, except as provided in S 261.6(a)
of the Board’s Rules Regarding Availa­
bility of Information.
By order of the Board of Governors,
July 22, 1971.
[s e a l]

§ 2 2 1 .1

A. K e n y o n ,
D epu ty Secretary.

K e n n e th

General rule.

(a) (1) P urpose cred it secured by
stock. Except as otherwise provided in
this part no bank shall extend any credit
secured directly or indirectly1 by any
stock1 for the purpose of purchasing or
carrying any margin stock * in an amount
exceeding the maximum loan value of
the collateral, as prescribed from time to
time for stocks in § 221.4 (the supplement
to Regulation U) and as determined by
the bank in good faith for credit subject
to § 221.3 (s) for any collateral other
1 A s d e fin e d I n § 2 2 1 . 3 ( c ) .
* As d e fin e d i n § 2 2 1 .3 (1 ).
• S o m e t im e s r e fe r r e d t o a s a “ p u r p o s e
c r e d i t ” . S e e § 2 2 1 .3 ( b ) . T h e t e r m “ m a r g in
s t o c k ” is d e fin e d In § 221.3 ( v ) .




than stocks: Provided, That unless held registered under section 15 of the Se­
as collateral for such credit on October curities Exchange Act of 1934 (15 U.S.C.
20, 1967, and continuously thereafter, 78o).
any collateral other than stock shall
*
*
+
•
*
have loan value for the purpose of this § 2 2 1.3 Miscellaneous provisions.
part only as collateral for a credit which
*
•
»
*
*
is not secured by stock, as described in
(k) Definitions:
! 221.3 (s), and any collateral consisting
(2)
The term “bank” does not include
of convertible debt securities described in a bank which is a member of a national
§ 221.3 (t) shall have loan value only for
securities exchange.
the purpose of that section, and not for
*
•
•
*
*
any other credit subject to this part.
(m) Credit subject to § 221.1: A
(2) C learance credit— (i) Purchases.
No bank shall extend any credit, whether “credit subject to S 221.1” is a credit
or not such credit is secured directly or which is (1) secured directly or indi­
indirectly by any stock, for the purpose rectly by any stock (or described in
of clearing any unpaid purchase of a § 221.1(a) or paragraph (q) of this sec­
security in an account described in Part tion), (2) extended for the purpose of
220 of this chapter (Regulation T) unless purchasing or carrying any margin stock,
the bank obtains from the customer as and (3) not otherwise excepted by this
promptly as possible and in any event part.
*
*
•
•
•
before the expiration of 7 full business
days following the date of such pur­
(s) Credit secured by collateral other
chase the full amount of the purchase than stocks: Except as provided in
price of such security (notwithstanding § 221.1(a) and paragraph (q) of this
that the delivery of the security may be section a bank may extend credit for the
delayed beyond the seventh day follow­ purpose erf purchasing or carrying a
ing such date), and in no event may the margin stock secured, by collateral other
bank deliver such purchased security to than stock, and, In the case of such
any other person until the bank has been credit, the maximum loan value of the
paid such purchase price by the cus­ collateral shall be as determined by the
bank in good faith.
tomer.
(ii)
Sales. No bank shall effect for a
•
0
*
*
*
customer, or knowingly assist a customer
(v)
The term “margin stock” means
in effecting the sale of a security in an any stock “ which is (1) a stock regis­
account described in Part 220 of this tered on a national securities exchange,
chapter (Regulation T) unless the bank (2) an OTC margin stock,1 (3) a security
1
obtains from the customer, as promptly (i) convertible with or without consid­
as possible, the security sold, and in no eration, presently or in the future, into a
event may the bank accept payment for margin stock or (ii) carrying any war­
any such security from any other person rant or right to subscribe to or purchase,
until it has received the security from presently or In the future, a margin
the customer.
stock, (4) any such warrant or right, (5)
(3) O TC margin stock credit extended any security issued by an investment
prior to certain dates. Credit extended company other than a small business in­
prior to July 8, 1969, for the purpose of vestment company licensed under the
purchasing or carrying any OTC margin Small Business Investment Company Act
stock4 or any debt security convertible of 1958 (15 U.S.C. 661) registered pur­
into such stock (and no other margin suant to section 8 of the Investment
stock) Is not purpose credit, except that Company Act of 1940 (15 U.S.C. 80a-8),
with respect to any OTC margin stock unless at least 95 percent of the assets of
such date shall be August 7, 1969, if ex­ such company are continuously invested
tended to a member of a national se­ in exempted securities.1
3
curities exchange or a broker or dealer
[FR Doc.71-10805 Plied 7 -2 8-71 :8 :51 am]
* A s d e fin e d In 2 2 1 .3 ( d ) , “ O T C s t o c k ” h e r e ­
i n a f t e r r e fe r s t o s t o c k t r a d e d “ o v e r t h e
c o u n t e r ."

“ A s d e fin e d I n 8 2 2 1 .3 (1 ).
11 A s d e fin e d In 5 221.3 ( d ) .
“ A s d e fin e d In 15 U .S.C . 7 8c ( a ) ( 1 2 ) .

E R R A T U M

In section 207*1 (a) of the proposed amendment to Regula­
tion G, as printed in the Federal Register of July 29 (page 3 of the
enclosed circular), the amount "$550,000" is incorrect. This amount
should he "$50,000."
Circulars Division
Federal Reserve Bank of New York
August 4, 1971




Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102