The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
FEDERAL RESERVE BANK O F N EW YORK r Circular N o . 7 2 9 7 "I L December 18, 1973 -I C R E D IT I N C O N N E C T IO N W I T H IN V E S T M E N T C O N T R A C T S Am endm ent to R egulation T , Effective June 21, 1974 To A ll B rokers and Dealers, and M em bers of National Securities Exchanges, in the Second Federal Reserve D istrict: Following- is the text o f a statement issued December 14 by the Board o f Governors o f the Federal Reserve System: The Board of Governors of the Federal Reserve System today announced an amendment to its Regula tion T—extension of credit on securities by brokers or dealers—withdrawing permission for brokers or dealers to sell certain kinds of investment contract securities on credit. The amendment, to become effective June 21, 1974, would provide uniform treatment of every security, for credit purposes, as an indivisible whole. The amendment was published for comment July 5, 1973. The amendment relates to, but is not limited to, the arrangement for credit by securities brokers or dealers in the sale of investment contract securities such as a program to own and feed cattle, or to own and rent, through a related rental arrangement, a condominium unit. In general, it is the combination, in one package, of both property ownership and provision for services such as cattle feeding or rental management, that makes the product a “security” subject to securities credit regulation. The Board has held that, in most cases, securities brokers and dealers are not permitted, under Regulation T, to arrange credit for the sale of such investment contract securities, but it had made an exception where the property sale and the management contract were separate items and the credit involved is connected only with the property. The amendment negates that exception, and makes the extension of credit on any part of such an invest ment an extension of credit on the whole. This makes it impermissible for securities brokers and dealers to arrange for such credit unless collateral is supplied meeting the requirements of the Regulation. Others may continue to sell such investment programs on credit. In submitting the amendment for publication in the Federal Register, the Board of G ov ernors made the following additional statement: On page 18690 of the Federal Register of July 13, 1973, the Board of Governors proposed, pursuant to authority of Section 7 of the Securities Exchange Act of 1934 (15 U.S.C. 78g), to add paragraph (1) to §220.6 of Regulation T. Interested persons were given 28 days in which to submit written data, views, or arguments concerning the proposal. On page 26009 of the Federal Register of September 17, 1973, such time for comment was extended to September 25, 1973. This amendment provides uniform treatment, for credit purposes, of every security as an indivisible whole. This amendment negates previous Board interpretations which stated that broker/dealers would not be deemed to be arranging credit which they could not extend, as prohibited by §220.7(a), when they sold investment contracts which included credit extended solely on the real estate or chattel part of the contract. The Board has stated its view that a broker/dealer who sells certain programs including an installment feature is arranging for the extension of credit to purchase the programs (12 CFR §120.124 (1973)). That is, the broker/dealer is regarded as having “arranged” credit by the act of selling an investment contract security including a credit feature. Regulation T would not apply, of course, unless the subject of the sale were a security. * * * Enclosed is a copy of the amendment; additional copies will be furnished upon request. A lfred H ayes , President. Board of Governors of the Federal Reserve System CREDIT BY BROKERS AND DEALERS A M E N D M E N T T O R E G U L A T IO N T Effective June 21, 1974, section 220.6 is amended by adding a new paragraph ( 1) thereto, to read as follows: SECTION 220.6—CERTAIN TECHNICAL DETAILS * * * (1) Credit related to portion of a security. Credit for the purpose of purchasing or carry ing any part of an investment contract security (for example, but not limited to, the cattle ownership portion of a program to own and feed cattle, or the condominium ownership part of a program to own and rent a unit through a rental pool or otherwise) shall be deemed to be credit on the entire security. P R IN TE D tN N E W YORK
@FedFRASER