Full text of Federal Reserve Bank of New York Circulars : 6922. Interpretation of Regulation T

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FED ER AL RESERVE BANK
O F NEW YORK

| C ir c u la r N o. 6922~ J
r< M arch 2 8 , 1972

INTERPRETATION OF REGULATION T
To A l l B roke rs and D e a l e r s , and Members o f N a tio n a l S e c u r i t ie s E x c h a n g e s,
in the S e c o n d F e d er a l R e s e r v e D i s t r i c t:

Printed below is the text of an interpretation of Regulation T, "Credit by Brokers and
D ealers," adopted March 23 by the Board of Governors of the Federal R eserve System . The
interpretation contains a ruling by the Board of Governors that the sale by a broker or
dealer of "tax-shelter programs" that provide for payment in instalm ents is a violation of
the regulation.
Additional copies of this circular w ill be furnished upon request.
Alfred Hayes,
President.

(Reg. T)
P A R T 220 - C R E D IT BY BROKERS AND D E A L E R S
Instalment sale of tax-shelter programs

§220.124 Instalment sale of tax-sh elter pro­
gram s as "arranging" for credit.
(a) The Board has been asked whether the
sale by brokers and dealers of tax-shelter
program s containing a provision that payment
for the program may be made in instalm ents
would constitute "arranging" for credit in
violation of Part 220. For the purposes of
this interpretation, the term "tax-shelter
program" means a program which is required
to be registered pursuant to section 5 of the
Securities Act of 1933 (15 U.S.C. §77e), in
which tax benefits, such as the ability to
deduct substantial amounts of depreciation or
oil exploration expenses, are made available
to a person investing in the program. The
programs may take various legal form s and
can relate to a variety of industries including,
but not lim ited to, oil and gas exploration
program s, real estate syndications (except
real estate investment trusts), citrus grove
developments and cattle program s.
(b) The m ost common type of tax-shelter
program takes the form of a lim ited partner­



ship. In the case of the program s under con­
sideration, the investor would commit him ­
se lf to purchase and the partnership would
commit itse lf to se ll the in terests. The in­
vestor would be entitled to the benefits, and
become subject to the risk s of ownership at
the time the contract is made, although the
full purchase price is not then required to be
paid. The balance of the purchase price after
the down payment usually is payable in in­
stalm ents which range from one to ten years
depending on the program. Thus, the partner­
ship would be extending credit to the pur­
chaser until the time when the la tter's con­
tractual obligation has been fulfilled and the
final payment made.
(c)
With an exception not applicable here,
§220.7(a) of Regulation T provides that:
M creditor [broker or dealer] may
A
arrange for the extension or maintenance
of credit to or for any custom er of such
creditor by any person upon the same
term s and conditions as those upon which
the creditor, under the provisions of this
part, may him self extend or maintain
such credit to such custom er, but only
upon such term s and conditions (em phasis
supplied). .."
(Over)

(d) In the case of credit for the purpose
of purchasing or carrying secu rities (purpose
credit), §220.8 of the regulation (the Supple­
ment to Regulation T) does not perm it any
loan value to be given secu rities that are
not registered on a national secu rities ex ­
change, included on the Board’s OTC Margin
L ist, or exempted by statute from the regu­
lation.
(e) The courts have consistently held in­
vestm ent program s such as those described
above to be " secu rities” for purposes of
both the Securities Act of 1933 and the S ec­
u rities Exchange Act of 1934. The courts
have also held that the two statutes are to be
construed together. T ax-shelter program s,




accordingly, are secu rities for purposes of
Regulation T. They also are not registered
on a national secu rities exchange, included
on the B o a rd s OTC Margin L ist, or ex ­
empted by statute from the regulation.
(f)
Accordingly, the Board concludes thatthe sale by a broker/dealer of tax-sh elter
program s containing a provision that pay­
ment for the program may be made in in­
stalm ents would constitute "arranging" for
the extension of credit to purchase or carry
secu rities in violation of the prohibitions of
§§220.7(a) and 220.8 of Regulation T.
(Interprets or applies 15 U.S.C. 78g(c).)