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n7 F E D E R A L R E S E R V E BANK O F N EW YORK June 12, 1969 INTERPRETATION OF REGULATION G To P e r s o n s E xten d in g S e cu rities C red it, O ther Than B a n k s, B rok ers, and D e a le r s , in the S econ d F e d era l R e s e r v e D is tr ic t: Printed below is an excerpt from the Federal Register of June 10, containing the text of an interpretation by the Board of Governors of the Federal Reserve System of its Regulation G. Additional copies of this circular will be furnished upon request. Alfred Hayes, President. Title 12— BANKS AND BANKING Chapter II— Federal Reserve System SUBCHAPTER A— BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM I Reg. G ] PART 207— C R E D IT BY PERSONS OTHER THAN BANKS, BROKERS, OR DEALERS FOR THE PURPOSE OF PURCHASING OR CA RRYING REGISTERED EQUITY SECURITIES Contribution to Joint Venture as Extension of Credit § 207.104 Contribution to joint venture as extension o f credit when the rontribution is disproportionate to the contributor's share in the venture’ s profits or losses. (a) The B oard recently considered the question whether a jo in t venture, structured so that the am ount o f capital contribution to the venture would be dis proportionate to the right o f participa tion in profits or losses, constitutes an “ extension o f credit” for the purpose of Regulation G. (b ) An individual and a corporation plan to establish a jo in t venture to en gage in the business o f buying and sell ing securities, including registered equity securities. The individual would c o n tribute 20 percent o f the capital and re ceive 80 percen t o f the profits or losses; the individual— like a custom er w ho b o r rows to purchase securities— puts up only 20 percent o f their cost, is entitled to the principal portion o f any apprecia tion in their value, bears the principal risk o f loss should that value decline, and does n ot stand to gain or lose except through a change in value o f the securi ties purchased. (e) T h e B oard is o f the opinion that where the right o f an individual to share in profits and losses o f such a jo in t ven ture is disproportionate to his con tribu tion to the v en tu re: (1) T he jo in t venture involves an ex <c) In general, the relationship o f tension o f credit by the corporation to join t venture is created when two or m ore the in dividu al; persons com bine their m oney, property, (2) T h e extension o f credit is to pu r or time in the condu ct o f som e particular chase or carry registered equity secu line o f trade or some particular business rities, and is collateralized by such se and agree to share jointly, or in propor curities; and tion to capital contributed, the profits (3) I f the corporation -is neither a and losses o f the undertaking. bank subject to R egulation U n or a (d) T he incidents o f the jo in t venture broker or dealer subject to Regulation described above, however, closely paral T, the credit is o f the kind described by lel those o f an extension o f m argin credit, § 207.1(a) o f R egulation G. with the corporation as lender and the (15 U.S.C. 78g. In terprets or applies 15 U.S.C. individual as borrower. T h e corporation 78g) supplies 80 percent o f the purchase price o f securities in exchange fo r a net return D ated at W ashington, D.C., this 13th o f 8 percent o f the am ount advanced day o f M ay 1969. plus 20 percent o f any gain. Like a lender By order o f the B oard o f G overnors. o f securities credit, the corporation is [s e a l] R o b e r t P. F o r r e s t a l , insulated against loss by retraining the right to liquidate the collateral before Assistant S ecreta ry. the securities decline in price below the [F.R. D oc. 69-6772; P iled, Ju ne 9, 1969; am ount o f its contribution. Conversely, 8:45 a.m .] the corporate share w ould be the reverse. In com puting profits or losses, each par ticipant w ould first receive interest at the rate o f 8 percent on his respective capital contribution. A lthough purchases and sales would be m utually agreed upon, the corporation could liquidate the jo in t p ortfolio if the individual’s share o f the losses equaled or exceeded his 20 percent contribution to the venture. The corpora tion would hold the securities, and upon term ination o f the venture, the assets w ould first be applied to repaym ent o f capital contributions.
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