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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 10 or acting on 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 security and any credit extended on it in § 207.1(a) may not handle “clearance” 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 security11 § 220.4 would provide a special account 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.13 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 11 As defined in 15 U.S.C. 7 8 c(a ) (1 1 ). >5 As defined in 15 U.S.C. 7 8 c(a ) (1 2 ). 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 one or more U.S. persons, directly or ing any margin stock (without regard to such persons, or acting on behalf of or indirectly, own stock possessing more whether the person extending, main in conjunction with such persons, may 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,11 (3) a security 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.13 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