Full text of Federal Reserve Bank of New York Circulars : 9294. Margin Regulations

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FEDERAL RESERVE BANK
OF NEW YORK

[

Circular No. 9294
May 19, 1982

MARGIN REGULATIONS
Changes in Criteria for Inclusion on List of OTC Margin Stocks

T o A ll B a n k s , B r o k e r s a n d D e a le r s , a n d P e r s o n s E x te n d in g
S e c u r itie s C r e d i t in th e S e c o n d F e d e r a l R e s e r v e D is tr ic t:

F o llo w in g is the text o f a statem ent issu ed by the Board o f G overnors o f the Federal R eserv e S ystem :

The Federal Reserve Board has adopted amendments to its margin regulations that change the criteria for inclusion on
the Board’s list of stocks traded over the counter (OTC list).
Inclusion of a stock on this list makes it possible for brokers and dealers to lend on the stock in conformance to the
Board’s margin requirements. About 1,500 stocks are on the Board’s OTC list.
Further, the Board decided that in the future changes in the OTC list, which is updated three times yearly, will become
effective two weeks after publication rather than immediately.
The changes adopted by the Board, after consideration of comment received on proposals published last November,
are:
1. Inclusion on this list of eligible foreign securities.
2. Setting of mandatory price and capital criteria for determining OTC list eligibility (formerly, stocks, to be eligible,
could satisfy any two out of three criteria: price, capital or market value).
3. Reduction of requirements for initial listing as follows:
— Capital requirement of $4 million (rather than $5 million), and
— Requirement for the number of shares held publicly lowered to 400,000 (rather than 500,000).
4. Reduction of requirements for continued listing as follows:
— Capital, $1 million (rather than $2.5 million).
— Listed price, $2 (rather than $5).
Stocks that no longer meet eligibility requirements under the new criteria for listing on the Board’s OTC list will be
retained on the list for two years. The Board believes the revised criteria reflect changes, since the last major revision of the
criteria in 1976, in stock market conditions and exchange practices.
Printed on the fo llo w in g p a g es is the sum m ary o f the B o a r d ’s a m en d m en ts, e ffe c tiv e June 12, 1 9 8 2 . T h e fu ll
text w ill be p u b lish ed in the

Federal Register,

and w ill a lso be furnished upon request directed to our C irculars

D iv isio n (T el. N o . 2 1 2 -7 9 1 -5 2 1 6 ).
Q u estion s on this m atter m ay be directed to our R eg u la tio n s D iv isio n (T e l. N o . 2 1 2 -7 9 1 -5 9 1 4 ).

A nthony M . S o lo m o n,

President.

FEDERAL RESERVE SYSTEM
Regulations G, T and U
[12 CFR 207, 220 and 221]
[Docket No. R-0372]
SECURITIES CREDIT TRANSACTIONS
Revision of Criteria for Initial and Continued Inclusion
on the List of OTC Margin Stocks
AGENCY:

Board of Governors of the Federal Reserve System.

ACTION:

Final Rule.

SUMMARY: On November 24, 1981, the Board published for comment (46 Fed. Reg.
57532) a proposal to amend its criteria for initial and continued inclusion on
the List of OTC Margin Stocks ("OTC List").
Brokers and dealers may not
extend credit on stocks which are traded over-the-counter unless such stocks
appear on the OTC List. Loans by banks and other lenders that are used to
purchase stocks appearing on the OTC List are subject to the Board's margin
requirements if the loans are secured by margin stock.
In its announcement, the Board proposed to revise OTC List criteria
in three important respects. First, equity securities of foreign issuers
and American Depository Receipts would, for the first time, be eligible for
OTC List inclusion. Second, certain alternative criteria with respect to
price and capital were to be made mandatory. Third, a proposal was made to
relax capital and price criteria to more closely resemble the listing require
ments of major stock exchanges.
In its action today, the Board adopts revisions to OTC List
criteria in substantially the same form as proposed. Specifically, the OTC
List criteria are amended to (1) permit the inclusion of securities of foreign
issuers registered with the Securities and Exchange Commission, (2) eliminate
the alternative market value criterion and make the price and capital criteria
mandatory, (3) reduce the initial listing capital and publicly-held share
criteria to $4 million and 400,000 shares, respectively, and (4) reduce the
continued listing price and capital criteria to $2 and $1 million, respectively.
In response to public commentary, the price requirement for
continued listing adopted by the Board today is higher than that originally
proposed for comment but lower than that in the existing rule. The Board
wishes to make clear that its action today with respect to the inclusion of
foreign issuers on the OTC List is limited to those issuers who have actually
registered with the Securities and Exchange Commission or file reports comparabl
to those filed by domestic companies.

2 -

In order to give brokers and service bureaus time to adjust their
programs to reflect changes in the OTC List, the Board will hereafter publish
the OTC List two weeks in advance of its effective date. This change was
suggested by many commenters.
The Board wishes to make clear that no existing OTC margin stock
which ceases to meet new OTC List criteria will ,be immediately removed from the
OTC List as a result of these amendments; the Board intends to "grandfather"
such stocks for two years. Interested persons should also be aware that special
consideration for inclusion on the List will be given to companies which
voluntarily file an appplication to delist their securities from a national
exchange and are trading in NASDAQ. Such a procedure will prevent any inter
ruption in the marginability of certain securities.
EFFECTIVE DATE:

June 12, 1982.

FOR FURTHER INFORMATION CONTACT: Jamie Lenoci, Financial Analyst, or Robert Lord,
Attorney, Division of Banking Supervision and Regulation (202) 452-2781.
SUPPLEMENTARY INFORMATION: In July 1969, pursuant to the Over the Counter
Market Act of 1968, (Pub. L. 90-437), the Board adopted criteria which, if
met by issuers of over-the-counter stocks, would result in the stocks being
placed on the OTC List and hence afforded the same treatment as exchange
listed stocks for purposes of the Board's margin rules. This meant that
once on the OTC List, over-the-counter stocks were eligible for margin
trading. In addition to criteria for initial eligibility for the OTC List,
criteria for continued eligibility for inclusion on the OTC List were also
established by the Board in 1972.
Changes in the OTC List criteria made today are the result of a
review of recent developments in the securities markets, particularly the OTC
market, staff experience with the administration of the OTC List and the pub
lic commentary. Each change is discussed below.
Foreign Issuers Now Eligible for OTC List Inclusion
Issuers eligible for inclusion on the OTC List will no longer have
to be organized under the laws of the United States or a State. Foreign
issuers were precluded from OTC List eligibility in the past because of the
relative lack of access to such issuers' financial information. The streng
thened disclosure rules of the Securities and Exchange Commission now make
it possible to obtain comprehensive and up to date financial information on
many foreign issuers. Because of these improvements, it is no longer necessary
to restrict OTC List candidates to domestic issuers. Foreign as well as
domestic issuers must, however, be registered or file comparable reports
with the Securities and Exchange Commission in order to be eligible for
inclusion on the OTC List.
Eliminating Alternate Criteria and Making Price and Capital Criteria Mandatory
Another change in OTC List criteria involves the alternative
requirements with respect to the size and character of the issue and issuer.
Prior to these amendments, a stock could fail one of the three criteria of a
$5.00 minimum price, $5 million capital, or $5 million in market value and
still be placed on the OTC List. The criterion requiring an aggregate market

3 -

value of $5 million is of limited value in determining OTC List eligibility
since it only affects stocks worth between $5 and $10 per share. During the
past two years, for example, only seven per cent of the stocks added to the
OTC List failed the aggregate market value test. Accordingly, the retention
of this test is no longer justified.
The remaining alternate criteria for both initial and continued
inclusion on the OTC List -- relating to price per share and minimum capital -are now made mandatory. Doing so will lessen the effect of systemic fluctua
tions which have indirectly been affecting the size and composition of the
OTC List.
The Board originally proposed to lower the price and capital cri
teria for continued listing from $3 and $2.5 million to $1 and $1 million,
respectively. Some public comment, however, reflected the view that the pro
posed criteria may encourage the use of speculative credit. The Board has
decided, therefore, to adopt a higher continued listing price criterion than
that proposed. The new criterion will still be lower than the criterion
existing before these amendments. The capital criterion for initial and
continued listing has been reduced to $4 million and $1 million, respectively.
The initial listing price per share criterion will remain at $5. The continued
listing price per share criterion has been reduced to $2. The initial listing
publicly held share criterion has been reduced to 400,000 shares. These
changes will make the Board's OTC List criteria more comparable to the listing
criteria of the American Stock Exchange.
(NOTE: The remainder of this notice may be obtained from the Federal
Reserve Board or the Federal Reserve Banks.)

Board of Governors of the Federal Reserve System.

ACTION:

Final Rule.

SUMMARY: On November 24, 1981, the Board published for comment (46 Fed. Reg.
57532) a proposal to amend its criteria for initial and continued inclusion on
the List of OTC Margin Stocks ("OTC List").
Brokers and dealers may not
extend credit on stocks which are traded over-the-counter unless such stocks
appear on the OTC List. Loans by banks and other lenders that are used to
purchase stocks appearing on the OTC List are subject to the Board's margin
requirements if the loans are secured by margin stock.
In its announcement, the Board proposed to revise OTC List criteria
in three important respects. First, equity securities of foreign issuers
and American Depository Receipts would, for the first time, be eligible for
OTC List inclusion. Second, certain alternative criteria with respect to
price and capital were to be made mandatory. Third, a proposal was made to
relax capital and price criteria to more closely resemble the listing requice
ments of major stock exchanges.
In its action today, the Board adopts revisions to OTC List
criteria in substantially the same form as proposed. Specifically, the OTC
List criteria are amended to (1) permit the inclusion of securities of foreign
issuers registered with the Securities and Exchange Commission, (2) eliminate
the alternative market value criterion and make the price and capital criteria
mandatory, (3) reduce the initial listing capital and publicly-held share
criteria to $4 million and 400,000 shares, respectively, and (4) reduce the
continued listing price and capital criteria to $2 and $1 million, respectively.
In response to public commentary, the price requirement for
continued listing adopted by the Board today is higher than that originally
proposed for comment but lower than that in the existing rule. The Board
wishes to make clear that its action today with respect to the inclusion of
foreign issuers on the OTC List is limited to those issuers who have actually
registered with the Securities and Exchange Commission or file reports comparable
to those filed by domestic companies.

- 2 -

In order to give brokers and service bureaus time to adjust their
programs to reflect changes in the OTC List, the Board will hereafter publish
the OTC List two weeks in advance of its effective date. This change was
suggested by many commenters.
The Board wishes to make clear that no existing OTC margin stock
which ceases to meet new OTC List criteria will be immediately removed from the
OTC List as a result of these amendments; the Board intends to "grandfather"
such stocks for two years. Interested persons should also be aware that special
consideration for inclusion on the List will be given to companies which
voluntarily file an appplication to delist their securities from a national
exchange and are trading in NASDAQ. Such a procedure will prevent any inter
ruption in the inarginabi lity of certain securities.
EFFECTIVE DATE:

June 12, 1982.

FOR FURTHER INFORMATION CONTACT: Jamie Lenoci, Financial Analyst, or Robert Lord,
Attorney, Division of Banking Supervision and Regulation (202) 452-2781.
SUPPLEMENTARY INFORMATION:
In July 1969, pursuant to the Over the Counter
Market Act of 1968, (Pub. L. 90-437), the Board adopted criteria which, if
met by issuers of over-the-counter stocks, would result in the stocks being
placed on the OTC List and hence afforded the same treatment as exchange
listed stocks for purposes of the Board's margin rules. This meant that
once on the OTC List, over-the-counter stocks were eligible for margin
trading. In addition to criteria for initial eligibility for the OTC List,
criteria for continued eligibility for inclusion on the OTC List were also
established by the Board in 1972.
Changes in the OTC List criteria made today are the result of a
review of recent developments in the securities markets, particularly the OTC
market, staff experience with the administration of the OTC List and the pub
lic commentary. Each change is discussed below.
Foreign Issuers Now Eligible for OTC List Inclusion
Issuers eligible for inclusion on the OTC List will no longer have
to be organized under the laws of the United States or a State. Foreign
issuers were precluded from OTC List eligibility in the past because of the
relative lack of access to such issuers' financial information. The streng
thened disclosure rules of the Securities and Exchange Commission now make
it possible to obtain comprehensive and up to date financial information on
many foreign issuers. Because of these improvements, it is no longer necessary
to restrict OTC List candidates to domestic issuers. Foreign as well as
domestic issuers must, however, be registered or file comparable reports
with the Securities and Exchange Commission in order to be eligible for
inclusion on the OTC List.
Eliminating Alternate Criteria and Making Price and Capital Criteria Mandatory
Another change in OTC List criteria involves the alternative
requirements with respect to the size and character of the issue and issuer.
Prior to these amendments, a stock could fail one of the three criteria of a
$5.00 minimum price, $5 million capital, or $5 million in market value and
still be placed on the OTC List. The criterion requiring an aggregate market

- 3 value of $5 million is of limited value in determining OTC List eligibility
since it only affects stocks worth between $5 and $10 per share. During the
past two years, for example, only seven per cent of the stocks added to the
OTC List failed the aggregate market value test. Accordingly, the retention
of this test is no longer justified.
The remaining alternate criteria for both initial and continued
inclusion on the OTC List -- relating to price per share and minimum capital -are now made mandatory. Doing so will lessen the effect of systemic fluctua
tions which have indirectly been affecting the size and composition of the
OTC List.
The Board originally proposed to lower the price and capital cri
teria for continued listing from $3 and $2.5 million to $1 and $1 million,
respectively. Some public comment, however, reflected the view that the pro
posed criteria may encourage the use of speculative credit. The Board has
decided, therefore, to adopt a higher continued listing price criterion than
that proposed. The new criterion will still be lower than the criterion
existing before these amendments. The capital criterion for initial and
continued listing has been reduced to $4 million and $1 million, respectively.
The initial listing price per share criterion will remain at $5. The continued
listing price per share criterion has been reduced to $2. The initial listing
publicly held share criterion has been reduced to 400,000 shares. These
changes will make the Board's OTC List criteria more comparable to the listing
criteria of the American Stock Exchange.
List of Subject Headings in 12 CFR Part 207
Banks, banking; Credit; Federal Reserve System; Margin; Margin
Requirements; Reporting requirements; Securities
List of Subject Headings in 12 CFR Part 220
Banks; banking; Brokers; Credit; Federal Reserve System; Margin;
Margin Requirements; Investments; Reporting requirements; Securities
List of Subject Heading in 12 CFR Part 221
Banks, banking; Credit; Federal Reserve System; Margin; Margin
Requirements; Reporting requirements; Securities
Accordingly, pursuant to §§ 7 and 23 of the Securities Exchange Act
of 1934, as amended (15 U.S.C. §§ 78g, 78w), the Board amends Regulations G,
T and U (12 CFR Parts 207, 220 and 221, respectively) as follows:
PART 207 —

SECURITIES CREDIT BY PERSONS OTHER THAN BANKS, BROKERS, OR DEALERS

Section 207.5 —
★

(d)

★

Supplement
★

★

Requirements for inclusion on list of OTC margin stocks

(1)
The stock is registered under section 12 of the Act (15 U.S.C.
781), is issued by an insurance company subject to section 12(g)(2)(G)(15 U.S.C
§ 781(g)(2)(G)), is issued by a closed-end investment management company sub
ject to registration pursuant to section 8 of the Investment Company Act of
1940 (15 U.S.C. 80a-8), is an American Depository Receipt of a foreign issuer

- 4 whose securities are registered under section 12 of the Act, or is a stock
of an issuer required to file reports under section 15(d) of the Act (15 U.S.C.
78o(d)),
★

★

(4)
the issuer or a predecessor in interest has been in existence
for at least three years,
★

★

(7) There are 400,000 or more shares of such stock outstanding in
addition to shares held beneficially by officers, directors, or beneficial owners
of more than 10 per cent of the stock,
(8) The minimum average bid price of such stock, as determined by
the Board, is at least $5 per share, and
(9) The issuer has at least $4 million of capital, surplus, and
undivided profits.
(e)

Requirements for continued inclusion on list of PTC margin
stocks

(1)
The stock continues to be registered under section 12 of the
Act (15 U.S.C. 781), or if issued by an insurance company such issuer continues
to be subject to section 12(g)(2)(G)(15 U.S.C. 781(g)(2)(G)), or if issued by
a closed-end investment management company such issuer continues to be sub
ject to registration pursuant to section 8 of the Investment Company Act
of 1940 (15 U.S.C. 80a-8), is an American Depository Receipt of a foreign
issuer whose securities are registered under section 12 of the Act, or is a
stock of an issuer required to file reports under section 15(d) of the Act
(15 U.S.C. 78o(d)),
★

★

(4) Daily quotations for both bid and asked prices for the stock
are continuously available to the general public,
(5) There are 300,000 or more shares of such stock outstanding in
addition to shares held beneficially by officers, directors, or benefical
owners of more than 10 per cent of the stock,
(6) The minimum average bid price of such stocks, as determined
by the Board, is at least $2 per share, and
(7) The issuer has at least $1 million of capital, surplus, and
undivided profits.
PART 220 —

A.
★

CREDIT BY BROKERS AND DEALERS
Section 220.8
★

-- Supplement
★

★

- 5 (h)

Requirements for inclusion on list of PTC margin stocks

(1)
The stock is registered under section 12 of the Act
(15 U.S.C. 781), is issued by an insurance company subject to section
12(g)(2)(G)(15 U.S.C. § 781(g)(2)(G)), is issued by a closed-end investment
management company subject to registration pursuant to section 8 of the
Investment Company Act of 1940 (15 U.S.C. 80a-8), is an American Depository
Receipt of a foreign issuer whose securities are registered under section 12
of the Act, or is a stock of an issuer required to file reports under section
15(d) of the Act (15 U.S.C. 78o(d)),
★

★

(4)
the issuer or a predecessor in interest has been in existence
for at least three years,
★

★

Requirements for continued inclusion on list of PTC margin
stocks

(1) The stock continues to be registered under section 12 of the
Act (15 U.S.C. 781), or if issued by an insurance company such issuer continues
to be subject to section 12(g )(2)(G)(15 U.S.C. 781(g)(2)(G)), or if issued by
a closed-end investment management company such issuer continues to be sub
ject to registration pursuant to section 8 of the Investment Company Act of
1940 (15 U.S.C. 80a-8), is an American Depository Receipt of a foreign issuer
whose securities are registered under section 12 of the Act, or is a stock
of an issuer required to file reports under section 15(d) of the Act (15 U.S.C.
780(d)),
*

- 6 -

(7)
undivided profits.
PART 221 —
III.

The issuer has at least $1 million of capital, surplus, and

CREDIT BY BANKS FOR THE PURPOSE OF PURCHASING OR CARRYING MARGIN
STOCKS
Section 221.4 —

★

(d)

SUPPLEMENT
★

★

Requirements for inclusion on list of PTC margin stocks

(1) The stock is registered under section 12 of the Act (15 U.S.C.
781), is issued by an insurance company subject to section 12(g)(2)(G)(15
U.S.C. § 781(g)(2)(G)), is issued by a closed-end investment management company
subject to registration pursuant to section 8 of the Investment Company Act
of 1940 (15 U.S.C. 80a-8), is an American Depository Receipt of a foreign
issuer whose securities are registered under section 12 of the Act, or is a
stock of an issuer required to file reports under section 15(d) of the Act
(15 U.S.C. 78o(d),
*

★

(4)
the issuer or a predecessor in interest has been in existence
for at least three years,
★

★

(7) There are 400,000 or more shares of such stock outstanding in
addition to shares held beneficially by officers, directors or beneficial owners
of more than 10 per cent of the stock,
(8) The minimum average bid price of such stock, as determined by
the Board, is at least $5 per share, and
(9) The issuer has at least $4 million of capital, surplus, and
undivided profits.
(e)

Requirements for continued inclusion on list of PTC margin
stocks

(1) The stock continues to be registered under section 12 of the
Act (15 U.S.C. 781), or if issued by an insurance company such issuer continues
to be subject to section 12(g)(2)(G)(15 U.S.C. 781(g)(2)(G)), or if issued by
a closed-end investment management company such issuer continues to be sub
ject to registration pursuant to section 8 of the Investment Company Act of
1940 (15 U.S.C. 80a-8), is an American Depository Receipt of a foreign issuer
whose securities are registered under section 12 of the Act, or is a stock
of an issuer required to file reports under section 15(d) of the Act (15 U.S.C.
780(d)),

★

7
(4) Daily quotations for both bid and asked prices for the stock
are continuously available to the general public,
(5) There are 300,000 or more shares of such stock outstanding in
addition to shares held beneficially by officers, directors, or benefical
owners of more than 10 per cent of the stock,
(6) The minimum average bid price of such stock, as determined
by the Board, is at least $2 per share, and
(7) The issuer has at least $1 million of capital, surplus, and
undivided profits.
FINAL REGULATORY FLEXIBILITY ANALYSIS:
The initial regulatory flexibility analysis'indicated that because
the proposals to amend 0TC List criteria involved a mixture of relaxing and
tightening changes, it was not easy to judge the overall impact on small
domestic entities — primarily those small-sized corporations whose stocks
are traded in the over-the-counter market.
No comments were received which would lead the Board to conclude
that the adoption of these amendments would have a significant economic
impact on a substantial number of small entities.
By order of the Board of Governors of the Federal Reserve System,
May 12, 1982.

(Signed) William W, Wiles
William W. Wiles
Secretary of the Board
[SEAL]

Full text of Federal Reserve Bank of New York Circulars : 9294. Margin Regulations

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