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FED ER AL RESERVE BANK O F NEW YORK r Circular No. 7 5 4 1 1 L January 2, 1975 J INTERPRETATION OF MARGIN REGULATION G Extensions of Credit in Certain Stock Option and Stock Purchase Plans To A ll R egulation G R eg istra n ts, and O th ers Concerned, in the Second F ederal R eserve D istric t: On December 2, 1974, the Board of Governors of the Federal Reserve System issued an in terpretation of Regulation G, “ Securities Credit by Persons O ther Than Banks, Brokers or D ealers,” to the effect that certain stock option and employee stock purchase plans involve extensions of credit subject to that Regulation. In the typical employee stock purchase plan contemplated by the B oard’s interpretation, certain shares of stock are offered to some or all employees at the current m arket value. Paym ent for such shares is made by the employee through payroll deductions over a period of weeks or months. The purchaser generally is not entitled to any dividends, has no rights as a stockholder until payment for the shares has been made in full, and may cancel the subscription at any time prior to m aking such full paym ent; upon full payment, stock certificates are issued in the employee’s name. If during the term of scheduled payroll deductions the issuer is unable to make such authorized deductions (because of low earnings due to furloughs, lay-offs, failure to earn sufficient commis sions, term ination of employment, etc.), or in the event a subscription is cancelled, the issuer is em powered to sell the stock allocated to the purchaser and apply the proceeds of the sale to the sub scription price. Any excess of the proceeds of sale over the unpaid portion of the total subscription price is remitted to the purchaser, and any deficiency rem aining after application of the sales pro ceeds to the unpaid portion of the total purchase price is immediately payable by the purchaser to the issuer. Since the purchaser bears the risk of the m arket price of the stock from the time he enters into the agreem ent to purchase the shares, the plan is considered to involve an extension of credit. Enclosed is a copy of the B oard’s interpretation of Regulation G. Additional copies of the enclosure will be furnished upon request. A lfred H a y es , President. Board of Governors of the Federal Reserve System SECURITIES CREDIT BY PERSONS OTHER THAN BANKS, BROKERS, OR DEALERS IN T E R P R E T A T IO N O F R E G U L A T IO N G Stock Option and Stock Purchase Plans § 207.109—Extensions of credit in certain stock option and stock purchase plans. Questions have been raised as to whether certain stock option and stock purchase plans involve extensions of credit subject to Regu lation G when the participant is free to cancel his participation at any time prior to full payment, but in the event of cancellation the participant remains liable for damages. It thus appears that the participant has the opportunity to gain and bears the risk of loss from the time the transaction is executed and payment is de ferred. In some cases brought to the Board’s attention damages are related to the market price of the stock but in others, there may be no such relationship. In either of these circum stances, it is the Board’s view that such plans involve extensions of credit. Accordingly, where the security being purchased is a margin security and the credit is secured, directly or indirectly, by any margin security, the creditor must register and the credit must conform with either the regular margin requirements of sec tion 207.1(c) or the special “plan-lender” pro visions set forth in section 207.4(a) of the regulation, whichever is applicable. This as sumes, of course, that the amount of credit extended is such that the creditor is subject to the registration requirements of section 207.1(a) of the regulation. By order of the Board of Governors, Decem ber 2, 1974. PR IN T E D IN N E W YORK
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