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1588 A meeting of the Board of Governors of the Federal Reserve System was held in Washington on Friday, December 3, 1937, at 11:00 ra. PRESENT: Mr. Mr. Mr. Mr. Mr. Eccles, Chairman Ransom, Vice Chairman Szynczak McKee Davis Mr. Morrill, Secretary Mr. Bethea, Assistant Secretary Mr. Carpenter, Assistant Secretary Mr. Clayton, Assistant to the Chairman Mr. Thurston, Special Assistant to the Chairman Mr. Wyatt, General Counsel Mr. Paulger, Chief of the Division of Examinations Mr. Goldenweiser, Director of the Division of Research and Statistics Mr. Smead, Chief of the Division of Bank Operations Mr. Parry, Chief of the Division of Security Loans Mr. Dreibelbis, Assistant General Counsel Mr. Leonard, Assistant Chief of the Division of Examinations Mr. Bradley, Assistant Chief of the Division of Security Loans Mr. Solomon, Assistant Counsel Mr. Dembitz, Research Assistant in the Division of Security Loans Prior to this meeting there had been sent to each member of the '1°1z.d a draft of a revision of Regulation T, Extension and Maintenance ()t r"-- • `'-uedit by Brokers, Dealers, and Members of National Securities Exwhioh had been prepared by the Division of Security Loans With the cooperation of Counsel's Office following the receipt of suge -tio,, of the Federal reserve banks, the Securities and Exchange 81°n and national securities exchanges, and the suggestions made 1,589 12/3/37 -2- by the senior staff of the Board. At the request of Mr. Szymczak conies Of the revised draft had been sent to the Securities and Exchange Cornthe Federal Reserve Bank of New York and the New York Stock ehenge and the changes which they had suggested to the extent to which it was felt by the Division of Security Loans and Counsel's Office that they sh°41d be adopted were incorporated in a second revised draft of the ' :nulation which had been furnished to the members of the Board beror e this meeting. MI'. Parry stated that the revised regulation had been prepared with a view to making it as simple and clear as possible and that the On now proposed was less restrictive and more practicable than the regulstion how in effect. He also stated that the Federal Reserve Bank or Nev 111°rk, the Securities Exchange Commission and the New York Stock 4.ehar, -ge were either in agreement with all important matters of subtoe in the proposed regulation or were reconciled thereto, with the PosaiblQ exception of the question whether subsection 4(f)(1) of the regilletion should provide that in a special miscellaneous account a el ' eclitormight, with the approval of any regularly constituted committee rlational securities exchange having jurisdiction over the conduct it8 members, make and maintain loans only to meet the emergency needs (1'111Y. creditor, or whether specific provision should also be made for 14:1" ror capital purposes to or for any partner of a firm which is a keraber Of such exchange. In this connection, Mr. Parry outlined the IllEittere which had been considered by the Division of Security Loans 1,590 12/3/37 -3- And C ounsel's Office in reaching the conclusion that the subsection 811°111d authorize only loans to meet emergency needs of any creditor. Nd.. Parry then reviewed certain provisions which it was felt 11°111d liberalize substantially the requirements of the proposed regulatio4 "oampared with the regulation now in effect. He also explained Drovi 04 °Ions which would be regarded as more restrictive in certain re4sets than the existing regulation. During the course of Mr. Parry's 8t4tenlent the various Provisions referred to by him were discussed. At 1:00 p.m. the meeting recessed and reconvened at 2:40 p.m. Nita the same attendance as at the morning session except that Messrs. kea and Goldenweiser were not present. The discussion of the provisions of the proposed Regulation T Itit8 resumed. Toward the end of the discussion Chairman Eccles and 141 Salead joined the meeting. Upon motion by !tr. Szymczak, Regulation T, Extension and Maintenance of Credit by Brokers, Dealers, and Members of National Securities Exchanges, including the supplement thereto, was approved and adopted by unanimous vote in the following form, to become effective on January 1, 1938. In taking this action it was understood that the regulation would be released by the Board for publication in the morning papers of Sunday, December 5, 1937, and that prior thereto the Federal reserve banks would be advised by wire of the Board's action which advice would contain a statement of the important changes in the regulation from the draft sent to the Federal reserve banks under date of July 27, 1937, for their comments and suggestions. It was 1591 12/3/37 -4also understood that copies of the revised regulation would be printed as soon as possible and a supply sent to the Federal reserve banks for distribution to interested parties: "REGULATION T Revised Effective January 1, 1938. "EXTENSION AND MAINTENANCE OF CREDIT BY BROKERS, DEALERS, AND MEMBERS OF NATIONAL SECURITIES EXCHANGES "SECTION 1. SCOPE OF REGULATION "This regulation is issued by the Board of Governors Of the Federal Reserve System (hereinafter called the 'Board') Pursuant to the Securities Exchange Act of 1934 (hereinafter called the 'Act'), particularly sections 7 and 8(a) thereof, and applies to every member of a national securities exchange and to every broker or dealer who transacts a business in securities through the medium of any such member. "SECTION 2. DEFINITIONS t "For the purposes of this regulation, unless the conext otherwise requires: (a) The terms 'person', 'member', 'broker', 'dealer', ) purchase', 'sale', 'sell', 'security', and 'bank' have the meanings given them in section 3(a) of the Act, Pertinent parts of which are printed in the appendix to this regulation. (b) The term 'creditor' means any member of a national ! ecarities exchange or any broker or dealer who transacts business in securities through the medium of any such member (c) The term 'customer' includes any person, or any of persons acting jointly, (1) to or for whom a credi'or is extending or maintaining any credit, or (2) who, in accordance with the ordinary usage of the trade, would be considered a customer of the creditor. It includes, in case the creditor is a firm, any Pjrtner in the firm who would be considered a customer of tilue firm if he were not a partner, and includes any joint venture in which a creditor participates and which would e considered a customer of the creditor if the creditor Were not a participant. (d) The term 'registered security' means any security Whi, kl) is registered on a national securities exchange; , r (2) in consequence of its having unlisted trading privi' -ges on a national securities exchange is deemed, under O i 1592 12/3/37 -5- "the provisions of section 12(f) of the Act, to be registered on a national securities exchange; or (3) is exempted by the Securities and Exchange Commission from the operation of section 7(c)(2) of the Act only to the extent necessary to render lawful any direct or indirect extension or maintenance of credit on such security or any direct or indarect arrangement therefor which would not have been unlawful if such security had been a security (other than an exempted security) registered on a national securities exchange. (e) The tern 'exempted securiAx' has the meaning given 1- t in section 3(a) of the Act except that the term does not include a security which is exempted by the Securities and Exchange Commission from the operation of section 7(c)(2) of the Act only to the extent described in subdivision (3) Of section 2(d) of this regulation. "SECTION 3. GENERAL ACCOUNTS "(a) Contents of general account. - All financial relations between a creditor and a customer, whether recorded in one record or in more than one record, shall be included in and be deemed to be parts of the customer's general accsunt with the creditor, except that the relations which section 4 permits to be included in any special account Provided for by that section may be included in the appropriate sPedal account, and all transactions in commodities for or with any customer shall be included in the special commodity account provided for by sections 4(a) and 4(e). "(b) General rule. - A creditor shall not effect for or . : 1li th any customer in a general account any transaction which, ' 11 combination with the other transactions effected in the !ccount on the same day, creates an excess of the adjusted ”bit balance of the account over the maximum loan value of Ine securities in the account, or increases any such excess, Unless in connection therewith the creditor obtains, as Promptly as possible and in any event before the expiration °f three full business days following the date of such transticln, the deposit into the account of cash or securities in such amount that the cash deposited plus the maximum e°an value of the securities deposited equals or exceeds the xeess so created or the increase so caused. "A transaction consisting of a withdrawal of cash or ' egistered or exempted securities from a general account all be permissible only on condition that no cash or se'2Urities need be deposited in the account in connection with b( transaction on a previous day and that, in addition, the r 1593 12/3/37 -6- "transactions (including such withdrawal) on the day of such Withdrawal would not create an excess of the adjusted debit balance of the account over the maximum loan value of the securities in the account or increase any such excess. "Rules for computing the maximum loan value of the securities in a general account and the adjusted debit balance ) c f such an account are provided in sections 3(c) and 3(d), and certain modifications of and exceptions to the general rule stated above are provided in the subsequent subsections of this section and in section 6. No) Maximum loan value and current market value. The maximum loan value of the securities in a general account is the smn of the maximum loan values of the individual securities in the account, including securities (other than Unissued securities) bought for the account but not yet debited thereto, but excluding securities sold for the account whether or not payment has been credited thereto. "Except as otherwise provided in this section 3(c), the maximum loan value of a registered security (other than an exempted security) in a general account shall be sUch maximum loan value as the Board shall prescribe for general accounts from time to time in the supplement to u nis regulation, and the maximum loan value of an exempted !ecurity shall be as determined by the creditor in good -Leith. No collateral other than registered securities or exemPted securities shall have any loan value in a general a ccount. "A warrant or certificate which evidences only a right to subscribe to or otherwise acquire any security and which exPires within ninety days of issuance shall have no loan i value in a general account; but, if the account contains, addition to such warrant or certificate, the security to holder of which such warrant or certificate has been isslaed, the current market value of such security (if the security be a registered security) shall, for the purpose of alculating its maximum loan value, be increased by the cur; ant market value of such warrant or certificate. "For the current market value of a security throughout the day of its purchase or sale, the creditor shall use its -potal cost or the net proceeds of its sale, as the case may os, and at any other time shall use the closing sale price ! n the security on the preceding business day as shown by i"1",Y regularly published reporting or quotation service. In ulle use absence of any such closing sale price, the creditor may anY reasonable estimate of the market value of such seIlritY as of the close of business on such preceding busi, -ess day. 1594 12/3/3? -7- "(d) Adjusted debit balance. - For the purposes of this regulation, the adjusted debit balance of a general account shall be calculated by taking the gum of the following items: (1) the net debit balance, if any, of the account; (2) the total cost of any securities (other than unissued securities) bought for the account but not Yet debited thereto; (3) the current market value of any securities (other than unissued securities) sold short in the account .plus, for each such security (other than an exempted security), such amount as the Board shall Prescribe from time to time in the supplement to this regulation as the margin required for such short "lea, except that such amount so prescribed in the Supplement need not be included when there are held in the account securities exchangeable or convertible Within a reasonable time, without restriction other than the payment of money, into such securities sold Short; (4) the amount of margin specified by section 3(h) for every net commitment in the account in unisaUed securities, plus all unrealized losses on each commitment in unissued securities and minus all unrealized gains (not exceeding the required margin) on each commitment in unissued securities; and (5) the amount of any margin customarily required by the creditor in connection with his endorsement or guarantee of any put, call or other oPtion; • deductinE therefrom the sum of the following items: (6) the net credit balance, if any, of the account; and (7) the net proceeds of sale of any securities (other than unissued securities) sold for the account but for which payment has not yet been credited thereto. "in case the general account is the account of a part• of Of the creditor, the account of a joint adventure in tr• a the creditor participates, a guaranteed account, or account of a customer who has guaranteed the account of : 1 1;?thar customer, the adjusted debit balance shall be combed according to the foregoing rule and the supplementary rule.Q Prescribed in sections 6(a), 6(b), and 6(c). 1595 12/3/37 -8- "(e) Lieuidation in lieu of deposit.* - In any case in which the deposit required by section 3(b), or any portion thereof, is not obtained by the creditor within the three-day period specified in that section, securities Shall be sold or covering or other liquidating transactions shall be effected in the account, prior to the expiration of such three-day period, in such amount that the resulting decrease in the adjusted debit balance of the account exceeds, by an amount at least as great as such required dePosit or the undeposited portion thereof, any resulting decree maximum loan value of the securities in 1 the ac::u .1t.the "(f) Extensions of time. - In exceptional cases, the ree-daY period specified in section Mb) may, on applition of the creditor, be extended for one or more limited Periods commensurate with the circumstances by any reguerlY constituted committee of a national securities exchange uevin6 jurisdiction over the business conduct of its members, ?r which exchange the creditor is a member or through which ais transactions are effected, provided such committee is fitisfied that the creditor is acting in good faith in making the application and that the circumstances are in fact ex ceptional and warrant such action. "(g) Transactions on riven day. - For the purposes Or section 3(b), the question of whether or not an excess (tr Il the adjusted debit balance of a general account over ihe maximum loan value of the securities in the account ereated or increased OP a given day shall be determined ( ) tn the basis of all the transactions in the account on e!1,at day exclusive of any deposit of cash, deposit of se1,'Ilties, covering transaction or other liquidation that 4'as been effected on the given day, pursuant to the reTlirezents of section 3(b) or 3(e), in connection with a c-ansection on a previous day. '(h) Unissued securities. - The amount to be included the adjusted debit balance of a general account as the loartgin required for a net long commitment in unissued se-11tie5 shall be the current market value of the net amount n t/* This requirement relates to the action to be taken when ' • ' 3 eustamer fails to make the deposit required by section (b) and it is not intended to countenance on the part of : t s is .t°11fiers the practice commonly known as 'free-riding' or s'uree-day riding', to prevent which the principal national ,!earities exchanges have adopted certain rules. See the • es of such exchanges and section 7(e) of this regulation. 1596 12/3/37 -9- of unissued securities long minus the maximum loan value Which such net amount of securities would have if they were issued registered securities held in the account; and the amount to be so included as the margin required for a net short canmitment in unissued securities shall be the amount which would be required as margin for the net amount of unissued securities short if such securities were issued securities and were sold short in the account: Provided, That no amount need be included as margin for a net short commitment in unissued securities when there are held in the account securities in respect of which the unissued securities are to be issued, nor for any net position in unissued securities that are exempted securities. . "Wherever a creditor, pursuant to a purchase of an unlssued security for a customer, receives an issued security which is not a registered or exempted security, the creditor shall treat any payment by him for such issued security as a transaction (other than a withdrawal) which i ncreases the adjusted debit balnnce of the account by the amount of the payment minus the amount required to be included in the adjusted debit balance of the account, at the time of and in connection with the purchase of the unissued security, as the margin required for such purchase. "SECTION 4. SPECIAL ACCOUNTS "(a) General rule. - Pursuant to this section 4, a lr;:may establish for any customer one or more special cliiiit co Ze "Each such special account shall be recorded separately 8nd shall be confined to the transactions and relations sPecifically authorized for such account by the appropriate 7"section of this section and to transactions and relations In cidental to those specifically authorized. An adequate .. e()r(1 shall be maintained showing for each such account the : 'ull details of all transactions in the account. "A special account established pursuant to this sec,. 110n shall not be used in any way for the purpose of eyed: or circumventing any of the provisions of this regulaclOn- If a customer has with a creditor both a general acInt and one or more such special accounts, the creditor : hils-11 treat each such special account as if the customer ad with the creditor no general account. "The only other conditions to which transactions in Lich special accounts shall be subject under the provisions 13 . this regulation shall be such conditions as are speci4 ed in the appropriate subsection of this section and in -ections 2, 6 and 7. 1597 12/3/3? -10- "(b) Special omnibus account. - In a special omnibus account, a member of a national securities exchange may effect for a customer transactions which are effected in reliance upon a signed statement which the member has accepted from the customer in good faith, and a duplicate original of which has been filed by the member with the secretary of a national securities exchange of which he "a member, that the customer is a broker or dealer who is subject to the provisions of this regulation or has plFces of business only in foreign countries; and such a special omnibus account shall be subject to all the conditions to which it would be subject if it were a general account except that -(1) In such a special omnibus account, no securities shall have loan value and no short sales of securities shall be carried, except securities and short sales as to which the member shall have accepted in good faith a signed statement of the customer that he is in turn carrying such securities and such short sales for the account of his customers other than his partners; (2) The maximum loan value of a registered securitY (other than an exempted security) having loan value in Each a special omnibus account shall be such special maximum loan value, and the amount to be included in the adjusted debit balance of such an account as the margin required for short sales shall be such special amount, as the Board shall prescribe from time to time for special omnibus accounts in the supplement to this regulation; and (3) If the maximum loan value of the securities in the account shall have equalled or exceeded the adjusted debit balance of the account after all the transactions in the account on any day within the Period specified in section 3(b), the liquidating or covering transactions required by section 3(e) need not be effected. account. - In a special cash acC°unt"(c) Special cash , a creditor may effect for or with any customer bona cash transactions in securities in which the creditor may (1) purchase any security for, or sell any security to, any customer, provided funds sufficient lor the purpose are already held in the account or the purchase or sale is in reliance upon an agreement accepted by the creditor in good faith that the customer will promptly make full cash payment for such security; or 1598 12/3/37 -11- "(2) sell any security for, or purchase any security from, any customer, provided the security is held in the account or the purchase or sale is in reliance upon an agreement accepted by the creditor in good faith that the security is to be promptly deposited in the account. "Except as otherwise provided in this section 4(c), in case a customer does not make full cash payment for a security Purchased by him in the account, or does not deposit in the account a security sold by him in the account, within seven daYs after the date on which the security was purchased or sold/ the creditor shall promptly cancel, cover, or otherwise liquidate, the transaction or the unsettled Portion thereof. "If the security was purchased for the customer subject t° a customary 'seller's option' as to the time of delivery, c'r if the security was purchased for, or sold to, the cust°111er and the creditor 'failed to receive' the security at the usual time of delivery, the period referred to in the Preceding paragraph shall be five days from the day on which the creditor acting in good faith was able to obtain the sefuritY. If the security was sold for the customer subject '° a customary 'seller's option' as to the time of delivery, Ch Period shall end with the day on which the option exPlrea. If the security when purchased or sold was an un1,ssued security, such period shall be seven days from the !aY on which the security was made available by the issuer Or delivery to purchasers of the security. "If any regularly constituted committee of a national • s ecilrities exchange having jurisdiction over the business li°11duct of its members, of which exchange the creditor is a ic 1)er or through which his transactions are effected, is ,atisfied that the creditor is acting in good faith in makthe application, that the application relates to a bona ,lde cash transaction, and that exceptional circumstances "rrant such action, such committee, on application of the creditor, may (A) extend any period specified in the two receding paragraphs for one or more limited periods cornwith the circumstances, or (B) in the case of the Irchase of a registered or exempted security which has been fl-facted by the customer in the account, authorize the transber of the transaction to a general account or special omni, account and the completion of the transaction pursuant b° the provisions of this regulation relating to such acc(lutts. g V 1599 12/3/37 -12- "The days specified in this section 4(c) are calendar days, but if the last day of any period specified herein is a.Saturday, Sunday, or holiday, such period shall be conslaered to end on the next full business day. For the pur1,?,osaa of this section 4(c), a creditor may, at his option, ulsregard any sum due by the customer not exceeding t5O. "(d) Special arbitrage account. - In a special arbitrage account, a member of a national securities exchange May effect and finance for any customer bona fide arbitrage transactions in securities. For the purposes of this sub-ection, the term 'arbitrage' means (1) a purchase or sale of a security in one market together with an offsetting sale or Purchase of the same security in a different market at as nearly the same time as practicable, for the purpose of ta ing advantage of a difference in prices in the two markets, purchase of a security which is, without restric'ion other than the payment of money, exchangeable or convertible within a reasonable time into a second security together with an offsetting sale at or about the same time of sorb second security, for the purpose of taking advantage a disparity in the prices of the two securities. "(e) Special commodity account.-In a special commodity !ccount, a creditor may effect and carry for any customer Iransactions in commodities. "(f) Special miscellaneous account. - In a special ' Ilscellaneous account, a creditor may -(1) With the approval of any regularly constituted committee of a national securities exchange having jurisdiction over the business conduct of its members, make and maintain loans to meet the emergency needs of any creditor; (2) Effect and finance, for any joint adventure in which the sole participants are the creditor and one or more members of a national securities exchange who are registered on such exchange as odd-lot dealers and acting as such, any transactions in securities with respect to which all participants, or all participants other than the creditor, are so registered and so act; (3) Effect transactions for and finance any . Joint adventure or group in which the creditor par- icipates and in which all participants are dealers lWhether such participants be acting jointly or severally), or any member thereof or participant therein, for the purpose of facilitating the underwriting or distributing of all or part of an issue °F (2) 8 1600 12/3/37 -13"of securities (A) not through the medium of a national securities exchange, or (B) the distribution of which has been approved by the appropriate committee of a national securities exchange; (4) Effect for any customer the collection or exchange (other than by sale or purchase) of securities deposited by the customer specifically for such Purposes, and (subject to any other applicable provisions of law) receive from or for any customer, and Pay out or deliver to or for any customer, any money or securities; (5) Effect and carry for any customer transacvlons in foreign exchange; and (6) Extend and maintain credit to or for any customer without collateral or on any collateral whatever for any purpose other than purchasing or carrying or trading in securities. "SECTION 5. BORROWINGS a meivii3RS BROKERS, AND DEALERS "(a) General rule. - It is unlawful for any creditor, directly or indirectly, to borrow in the ordinary course of Ifpusiness as a broker or dealer on any registered security tether than an exempted security) except (1) from or through a member bank of the Federal Reserve 3ystem; or (2) from any nonmember bank which shall have filed with the Board an agreement which is still in force and which is in the form prescribed by this regulation; or (3) to the extent to which, under the provisions Of this regulation, loans are permitted between members of a national securities exchange and/or brokers and/or dealers, or loans are permitted to meet energoncy needs. "(b) Agreements of nonmember banks. - An agreement filed PtIrsuant to section 8(a) of the Act by a bank not a member the Federal Reserve System shall be substantially in the ?In' contained in Form F.R. T-2 if the bank has its principal !!-Lace of business in a territory or insular possession of ? United States, or if it has an office or agency in the nited States and its principal place of business outside e United States. The agreement filed by any other nonmemer bank shall be in substantially the form contained in F.R. T-1. Any nonmember bank which has executed any Uch agreement may terminate the agreement if it obtains Ile written consent of the Board. Blank forms of such agree- n 1601 12/3/37 -14- nments, information regarding their filing or termination, and information regarding the names of nonmember banks for which zuch agreements are in force, may be obtained from anY Federal Reserve bank. "(c) Borrowiu from other creditors. - A creditor may borrow from another creditor in the ordinary course of business ES a broker or dealer on any registered security to the extent and subject to the terms upon which the latter may extend credit to him in accordance with the provisions of this regulation, and subject to any other applicable provisions of law. "SECTION 6. CERTAIN TECENICAL DETAILS "(a) Accounts of partners. - In case a general account iS the account of a partner of the creditor, the creditor, in calculating the adjusted debit balance of Each account ad the maximum loan value of the securities therein, shall dlsregard the partner's financial relations with the firm as reflected in his capital end ordinary drawing accounts. "(b) Contribution to joint adventure. - In case a general account is the account of a joint adventure in which T'lle creditor participates, the adjusted debit balance of the account shall include, in addition to the items specified in section 3(d), any amount by which the creditor's . _?ntribution to the joint adventure exceeds the contribu-on which he would have made if he had contributed merely ,n Proportion to his right to Share in the profits of the Joint adventure. "(c) Guaranteed accounts. - In case a general account Inaintained by a creditor for one customer is guaranteed in by another customer for whom the creditor maintains 7 Ceneral account, the adjusted debit balance of the guaran”ed account may, at the option of the creditor, be computed deducting from the sum of the items specified in section 1(d) an amount not greater than the excess of the maximum °en value of the securities in the guarantor's general account over the adjusted debit balance of such guarantor's !'ccount calculated without the addition thereto prescribed °Y the following paragraph, provided (1) the guarantor is creditor, (2) a duplicate original of the guarantee uas been filed with the secretary of a national securities !chanEe of which the creditor is a member or through ich his transactions are effected, and (3) the guarantee Permits the creditor to use funds and securities in the '1.1arantor's account to carry the guaranteed account without V 1602 12/3/37 -15- "restriction, except that the guarantee may be limited to a specified amount and in that event the deduction shall not exceed such amount. "In case a guarantee has served to permit in the guaranteed account any transaction which could not otherwise have been effected in accordance with this regulation: (A) the adjusted debit balance of the guarantor's account Shahl be computed by adding to the sum of the items specified in section 3(d) an amount equal to the deduction made pursuant to the preceding paragraph; (B) the creditor shall not subsequently decrease the amount of such deduction, or the amount of the consequent addition to the adjusted debit , b_alance of the guarantor's account, unless the adjusted debit ualance of the guaranteed account, after such decrease and after all transactions in such guaranteed account on the date of such decrease, does not exceed the maximum loan value of the securities in such guaranteed account; and (C) if the guarantee is terminated or the amount thereof reduced, the creditor shall require that, after all the transactions (including such termination or reduction) on the date of such termination or reduction, the adjusted debit balance of the guaranteed account shall not exceed the maximum loan value of the securities in the account. "(d) Transfer of accounts. - In the event of the transfer of a general account from one creditor to another, such "count may be treated for the purposes of this regulation as if it had been maintained by the transferee from the date (: 4,f its origin: Provided, That the transferee accepts in good 1"aith the signed statement of the transferor that no cash or securities need be deposited in the account in connection with any transaction that has been effected in the account or, in case he finds that it is not practicable to obtain 84ch a statement from the transferor, accepts in good faith Such a signed statement from the customer. "In the event of the transfer of a general account from One customer to another, such account may be treated by the creditor for the purposes of this regulation as if it had been maintained for the transferee from the date of its origin. "(e) Reorganizations. - A creditor may, without regard to the other provisions of this regulation, effect for a ?Ustomer the exchange of any registered or exempted security ln a general account for the purpose of participating in a Fe°rE;anization or recapitalization in which the security is Involved: Provided, That if an unregistered non-exempted seCUlty is acquired in exchange, the creditor shall not, for a Period of sixty days following such acquisition, penult 1603 12/3/37 -16- "the withdrawal of such security or the proceeds of its sale from the customer's account except to the extent that such security or proceeds could be withdrawn if the security were a registered security. "(f) Time of receipt of funds or securities. - For the Purposes of this regulation, a creditor may, at his option (1) treat the receipt in good faith of any check or draft drawn on a bank which in the ordinary course of business ls payable on presentation, or any order on a savings bank With passbook attached which is so payable, as receipt of PaYment of the amount of sacn check, draft or order; (2) treat the shipment of securities in good faith with sight draft attached as receipt of payment of the amount of such sight draft; and (3) in the case of the receipt in good faith of written or telegraphic notice in connection with a special omnibus account of a customer not located in the same city that a specified security or a check or draft has been dispatched to the creditor, treat the receipt of such . lotice as receipt of such security, check or draft: Provided, 2qever, That if the creditor receives notice that such Check, draft, order, or sight draft described in clause (1), (2) or (3) is not paid on the day of presentation, or if slIch security, check or draft described in clause (3) is not received by the creditor within a reasonable time, the creditor shall promptly take such action as he would have been equired to take by the appropriate provisions of this reaui. f the provisions of this subsection had not been ilned 11Zt l "(g) Interest, service charges, etc. - Interest on credit Illaintained in a general account, communication charges with respect to transactions in the account, shipping Charges, premiums on securities borrowed in connection with short sales O' to effect delivery, dividends or other distributions due cn borrowed securities, and any service charges (other than ! cilmissions) which the creditor may impose, may be debited the account in accordance with the usual practice and lt,:rithout regard to the other provisions of this regulation, rit such items so debited shall be taken into consideration 4.T1 calculating the net credit or net debit balance of the account. "A creditor may, without regard to the other provisions "this regulation, pay to or for a customer from a general !ccount interest or cash dividends collected by the creditor such account, if such payment is made within 35 days after the day on which, in accordance with the creditor's 1604 12/3/3? -17- "usual practice, such interest or dividends are credited to the account, and if the crediting thereof has not served in the meantime to permit in the account any purchase of securities or other transactions which could not otherwise have been effected in accordance with this regulation. "(h) Borrowing and lending securities. - Without regard to the other provisions of this regulation, a creditor (1) IllaY make a bona fide deposit of cash in order to borrow securities (whether registered or unregistered) for the lourPose of making delivery of such securities in the case of Short sales, failure to receive securities he is required to deliver, or other similar cases, and (2) may lend securities for such purpose against such a deposit. "(i) Credit for clearance of securities. - The extension °I' maintenance of any credit which is maintained for only a fraction of a day (that is, for only part of the time between the beginning of business and midnight on the same daY) shall be disregarded for the ourposesof this regulation, if it is incidental to the clearance of transactions in securities directly between members or through an agency oror employed by the members of a national securities exchange for the purpose of effecting such clearance. "(J) Foreign currena. - If foreiRn currency is capable Of being converted without restriction into United States currency, a creditor acting in good faith may treat any sUch foreign currency in an account as a credit to the account in an amount determined in accordance with customary Practice. "(k) Innocent mistakes. - If any failure to comply with is regulation results from a mistake made in good faith "h executing a transaction, recording, determining, or calculating any loan, balance, market price or loan value, or "her similar matter, the creditor shall not be deemed guilty a violation of this regulation if promptly after the dis.2?verY of the mistake he takes whatever action may be prac41 cable in the circumstances to remedy the mistake. "SECTION 7. MISCELLANEOUS PROVISIONS "(a) Arranging for loans la others. - A creditor may ?range for the extension or maintenance of credit to or 'Or any customer of such creditor by any person upon the same terms and conditions as those upon which the creditor, Ilader the provisions of this regulation, may himself extend ?r maintain such credit to such customer, but only upon such es and conditions, except that this limitation shall not 1605 12/3/37 -18- aPply with respect to the arranging by a creditor for a bank subject to Regulation U to extend or maintain credit on registered securities or exempted securities. "(b) Maintenance of credit. - Except as otherwise specificallY forbidden by this regulation, any credit initially extended without violation of this regulation may be maintained regardless of (1) reductions in the customer's equity resulting from changes in market prices, (2) the fact that any security in an account ceases to be registered or exempted, and (3) any change in the maximum loan values or margin requirements prescribed by the Board under this regulation. In maintaining any such credit, the creditor may accept or retain for his own protection additional collateral of any description, including unregistered securities. "(c) Declaration as to purpose of loan. - Every extension Of credit on a registered security (other than an exempted security) shall be deemed to be for the purpose of purchasing Or carrying or trading in securities, unless the customer shall file with the creditor a written declaration signed bY the customer which shall state the use to be made of such credit and which shall state specifically that such credit 18 neither for the purpose of purchasing or carrying or trading in securities nor for the purpose of evading or circumITTIting the provisions of this regulation. In connection ' 14 th any extension of credit, a creditor may rely upon such a written declaration unless he knows the statement to be false or has information which would put a prudent man upon inquiry and if investigated with reasonable diligence would -Lead to the discovery of the falsity of the statement. "(d) Reports. - Every creditor shall make such reports as the Board may require to enable the Board to Perform the f'unctions conferred upon it by the Act. "(e) Additional requirements 12-L exchanges and creditors. Nothing in this regulation shall (1) prevent any exchange from adopting and enforcing any rule or regulation further restricting the time or manner in which its members must obtain initial or additional margin in customers' accounts hecause of transactions effected in such accounts, or requirlng such members to secure or maintain higher margins, or rurther restricting the amount of credit which may be extended or maintained by them, or (2) modify or restrict the right of any creditor to require additional security for the Maintenance of any credit, to refuse to extend credit, or t° sell any securities or property held as collateral for 113-Y* loan or credit extended by him." 1.606 12/3/37 -19"SUPPLEMENT TO REGULATION T "ISSUED BY TJTE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Effective January 1, 1938. 'Maximum loan value for general accounts. - The maximum loan value of a registered security (other than an exempted security) in a general account, subject to section 3 of Regulation T, shall be 60 percent of its current market value. "Maximum loan value for _special omnibus accounts. - The maXimum loan value of a registered security (other than an exempted security) in a special omnibus account, subject to section 4 of Regulation T, shall be 75 percent of its current market value. 7AaWn required for short sales. - The amount to be included in the adjusted debit balance of a general account Pursuant to section 3(d)(3) of Regulation T, as margin required for short sales of securities (other than exempted securities) shall be 50 percent of the current market value Of each such security, and in the case of a special omnibus account with another member, broker or dealer, such amount Shahl be 35 percent of such current market value." In connection with his vote, Kr. Ransom stated that while he had voted to adopt the revised Regulation T and felt that it was a difficult task well done, and while he agreed that substantial margins should be required by law as being in the public interest, he was of the opinion that the provisions of law requiring the establishment of margins by the Board of Governors might not be the best approach to the problem and that in the light of experience serious consideration should be given to the question whether the procedure was an effective means of credit control and, if so, whether it should be vested in the Board or elsewhere. He added that he wished to make this statement for the record for the reason that, in the event the question comes before the Board in the future and an opportunity is afforded to consider some other solution of the problem, he did not wish to have his vote on Regulation T misinterpreted. taro, J-vaw f 12/3/37 -20Mr. Parry referred to his memorandum of December 1, 1937, e°Pies Of which were distributed to the members of the Board yesterday, with which he submitted a proposed amendment to the existing Regulati°11 T which would prescribe the method by which brokers, prior to 3.41a4s17 1, 1938, should separate customers' outstanding commitments itt e°Plmodity futures from customers' security accounts, thus placing th.saz On the separate basis on which the revised Regulation T beginning 411113rY 1 would require then to be. He explained that the suggested kaerwment was a necessary change in the existing regulation preparatory tothe revised regulation becoming effective and would expire with the t)ld regulation. Thereupon Mr. Szymczak moved the adoption of the following resolution: BE IT RESOLVED, That effective December 6, 1937, Regulation T, as amended, is further amended by adding at the end thereof after section 12 a new section reading as follows: "SECTION 13. SPECIAL COMMODITY ACCOUNT Notwithstanding any other provision of this regulation: (a) In a special commodity account recorded separately, creditor may effect and carry for any customer transactions In commodities, and such a special account when so recorded ail be excluded from all calculations involving any camnad account or any other special account; and On or before December 31, 1937, the creditor shall tr (b) snsfer to the special commodity account of a customer 0 ' 4' 10'm the combined account and from any other special account 1 such customer (1) all open trades or contracts in camities carried in such combined account or such other scial account, together with (2) funds in an amount equal the amount of margin customarily required by the creditor ' 4 all such open trades or contracts so transferred plus 44Y net loss on such open trades or contracts OR minus any V 2 j 1.608 12/3/37 -21- net profit (not exceeding such margin) on such open trades oI' contracts. A special commodity account established -pursuant to this section shall not be used in any way for the purpose of evading or circumventing any of the provisions of this regulation. If a custamer has with a creditor both a combined account and such a special commodity account, the creditor shall treat the special coianodity account as if the customer had wlth the creditor no combined account." Carried unanimously, with the understanding that the amendment would be released to the press for publication in the morning papers of Sunday, December 5, and that prior thereto it would be wired to the Federal reserve banks with a request that they print the amendment and distribute copies thereof to interested persons. Mr. McKee referred to a draft of a reply to a letter received Ilndar date of November 10, 1937, from Mr. Sam H. Hoefer representing the, "linkers Association of Lafayette-Ray Counties, Missouri, with furtiler regard to the suggested transfer of thirteen counties in western Mi es°url• from the Eighth to the Tenth Federal Reserve District. The Propo,, oed reply stated that, before reaching its conclusion in the matt01% 'the Board made a careful study of the situation and was of the 141.011 that sufficient information was available to enable the Board to r each a decision without calling upon the banks requesting the transfer r Ol* the compilation of any additional information, and that it conider ea the services now available to member and nonmember banks and the P°8sible advantages of a transfer from the Eighth to the Tenth 4de Reserve District and felt that it would not be warranted in razatit the proposed change. After a discussion of the question 609 12/3/37 -22whether further steps should be taken by the Board to determine whether there was any information with respect to the suggested transfer which had not been brought to its attention, it was agreed that a representative of the Board from the Division of Bank Operations or Division of Examinations, as determined upon by Messrs. Smead and Paulger, should be sent to make an investigation to ascertain definitely whether there was any additional information that should be considered by the Board. It was also understood that the letter to Mr. Hoefer would be revised to state that, while the Board felt that adequate steps had been taken to obtain all the important information in connection with the suggested transfer and did not feel that it would be warranted in making the proposed change, arrangements were being made for a representative of the Board to make an investigation to determine definitely whether additional important information was available. At this point Messrs. Parry, Bradley, Solomon and Dembitz with- drew Irem the meeting. There was presented the following draft of letter to President teEteb ' 1 of the Federal Reserve Bank of Richmond, which had previously beea circulated among the members of the Board: letter of September 7, 197, tra "Reference is made to your nemitting a letter dated August 31, 1937, from Mr. George Cutler, President of Safe Deposit and Trust Company, faltimore, Maryland, in which he submits for the consideralon of the Board alternative amendments to Regulatior. L, he Purpose of which is to permit a director, officer or e410Ployee of a member beilk of the Federal Reserve System to !erve at the same time as a director, officer or employee Pot more than one trust company all or substantially all the business of which is acting in a fiduciary capacity. "Section 8 of the Clayton Act, as amended by the Banking Act of 1935, specifies in some detail the classes of c"as exempted from the general prohibitior of the statute Z 1,610 12/3/37 -23- "and leaves to the Board only a power to permit exceptions bY regulation. In approving a revision of its Regulation L, following the amendment of the law, the Board decided that exceptions should be allowed only in certain classes of eases which appeared to be clearly in harmony with the general Purpose and structure of the amended law. "The Board has given serious consideration to the amendments proposed by Mr. Cutler but feels that the underlying Purpose of these amendments is contrary to the spirit and PUrpose of section 8 of the Clayton Act, inasmuch as either of them would permit interlocking relationships between inatitutions engaged in the same class or classes of business in the same community, for example, a trust company engaged s°1elY in acting in fiduciary capacities and a member bank exercising trust powers. "Accordingly, the Board does not believe that the proPosed amendments are consonant with the spirit and purpose or the structure of section 8 of the Clayton Act as amended bY the Banking Act of 1935. Please inform Mr. Cutler of the Board's views in the matter." Upon motion by Mr. Szymczak, the letter was approved, Mr. Ransom voting "no" for the reason that he felt that if the trust company would agree to do no commercial banking business, to accept no commercial deposits, and otherwise not to engage in the same class or classes of business as the commercial bank, there would be no objection to interlocking directorates between the bank and trust company for the reason that such a relation was not the kind contemplated by the amended Clayton Act. Following the above action, Messrs. Paulger and Leonard left the room. It was stated that, in accordance with the procedure heretofore Owed by the Banking and Currency Committee of the Senate, the totird waS beginning to receive routine requests for reports on bills Nrer red to the committee; that in the past such requests had been Neei Ired for reports on a number of bills in connection with which 1611. 12/3/37 -24-- there was little likelihood that the legislation would receive considn; that an attempt to answer all these requests carefully would resUlt in substantial increase in the work of the Board, and that it h" been the policy during recent years to hold such requests without "tion until it appeared that there was something in the situation sUrrounding a particular bill which made it advisable to submit a rePort. It was agreed that the same procedure should be followed during the present special session and the succeeding regular session of Congress, with the understanding that Counsel's office would keep in touch with all banking legislation and would submit to the Board for consideration a report on any bill when it appeared that, because of its nature or any special consideration that was being given to it by either house of Congress, such a report would be made upon request by a committee of Congress. In this connection it was understood that at the first opportunity the Chairman would discuss the matter with Chairman Wagner. In further connection with the above matter, reference was made to a r equest received under date of December 3, 1937, from Chairman Weer'r 6 of the Senate Banking and Currency Committee for a report on S. 19 901 a bill for the regulation and stabilization of agricultural Etzd ec)Irlimodity prices through the regulation and stabilization of the 1,4114 e °f the dollar, pursuant to the power conferred on the Congress bY 4.4tregraph 5 of section 8 of article I of the Constitution, and for , ()the Purposes. It was stated that under date of July 29, 1937, the 1.612 12/3/37 -25- addressed a letter to Senator Smith of the Committee on Agriculture and Forestry, inclosing a statement on the subject "Objectives Ot monetary policy" which reflected the views of the Board of Governors with respect to the important questions raised by bill S. 1990, and that it aPPeared from the copy of the bill inclosed with Senator Wagner's letter that the bill had been discharged from the Committee on Agri- ellitlire and Forestry and referred to the Committee on Banking and Cur- The Secretary was requested to send a letter to Senator Wagner transmitting a copy of the Board's letter of July 29 to Senator Smith, together with a copy of the statement inclosed therewith. There was then presented a memorandum dated November 4, 1937, *Ora "i1 Jr r- Morrill referring to the appointment of Mr. Sampson H. Bass °4 a temporary basis as voucher clerk in the Secretary's office, and his Inability to pass the usual physical examination, and recommending that, for the reasons stated in the memorandum, Mr. Bass be given a Pertle'rient appointment as voucher clerk in the Secretary's office with 41*Y at the rate of 42,700 per annum, and that he be made a member or the them Retirement System. The memorandum had been circulated among "ers of the Board together with a memorandum dated November 22, 1937) from Mr. Smead with respect to physical examinations of employees the Board and the Federal reserve banks in connection with admission to raenlb ership in the Retirenent System. Upon motion by Mr. Szymczak, Mr. Morrill's recommendation was approved 1613 12/3/37 -26unanimously, to became effective December 16, 1937, with the understanding that Mr. Bass would be admitted to membership in the Retirement System as of that date. At this point Messrs. Thurston, Wyatt, Smead and Dreibelbis the meeting and consideration waa then given to each of the matters here4 riefter referred to and the action stated with respect thereto was ten by the Board: The minutes of the meeting of the Board of Governors of the 4deral Reserve System held on December 2, 1937, were approved unani- Telegrams to Mr. Sanford, Assistant Secretary of the Federal Re 8041.... ''Llfe Bank of New York, Mr. Austin, Chairman of the Federal Reserve of Philadelphia, and Mr. Clark, Secretary of the Federal Reserve Bank , 04 Atlanta, stating that the Board approves the establishment with- olt oh --ange by the New York bank on December 2, 1937, and by the Phila.4E1 and Atlanta banks today, of the rates of discount and purchase thei --r existing schedules. Approved unanimously. Memorandum dated November 27, 1937, from Mr. Morrill, recomfor the reasons stated in the memorandum, that Mr. Seburn E. r be appointed as a supply and duplicating clerk in the Office of tIte ecretary, with salary at the rate of S;1,620 per annum, effective Ets or the date upon which he enters upon the performance of his duties ex, having passed satisfactorily the usual physical examination. Approved unanimously. Ii 12/3/37 -27Memorandum dated November 24, 1937, from Mr. Noell, Assistant 8ecretarY, recommending, for the reason stated in the memorandum, that I4t1edge R. Wheeler, porter, be granted additional leave of absence With Pay on account of illness for a period not to exceed sixty days *0111 November 26, 1937. Approved unanimously. Letter to Mr. Leo Rullman, United States Customs Service, New 'York New York, reading as follows: "Reference is made to your letter of October 18, 1937, with respect to the amount paid to Mrs. Kit7miller by the Retirement System of the Federal Reserve Banks on the death c't her husband, a former employee of the Board. "Prior to the receipt of your letter the Board had reviewed this matter in the light of the rules and reguleons of the Retirement System and the practice of the mooard and the Federal reserve banks in the retirement of their employees. When the decision was made that Mr. KitzMiller should be retired on December 31, 1937, the Board euthorized the payment to the Retirement System, for the .PUrPose of increasing the retirement allowance which Mr. ?.itzmiller would receive, the sum of 41,800, and since, he ' jf had lived until the first of next year such a payrient would have been made, the Board felt it would be JU stified in making the payment to Mrs. Kitzmiller. Ace°rdingly, I am pleased to advise that, because of the sPecial circumstances involved including the long and faith- service of Mr. Kitzmiller which is deeply appreciated uY the Board, it has authorized the payment to Mrs. Kitz'l'sller of 41,800 in addition to the amount due her under e rules and regulations of the Retirement System. "Mr. Kitzmiller attained age 65 on May 5, 1937, and could have retired on his own application on the first day ° 1)f any month thereafter. He did not apply for retirement, e°wever, and in fact did not wish to retire at that time, inasmuch as he was rendering satisfactory service the q'd decided to permit him to remain in its service until ' Jecember 31, 1937. The amount payable on the death of a N V 1615 12/3/37 -28- member of the Retirement System, whether ir active service or after retirement, is definitely determined on an actuarial basis and there was no way by which any additional payment coula be made to Mrs. Kitzmiller from the funds of the Retirement System." Approved unanimously. Memorandum dated November 29, 1937, from Mr. Smead, Chief of he Division of Bank Operations, submitting a letter dated November 24 rrolz Mr. Schaller, President of the Federal Reserve Bank of Chicago, Ihicla requested approval by the Board of changes in the personnel ciesBificetion plan of the bank to provide for changes in the maximum sal"lea for the positions of "Supervisor" in the Mail Department, and "SUPe_rvisor" and "Security Mail Teller" in the Bond Department, and °t the PaYment of a salary in excess of the maximum provided in the Pere^ vnnel classification plan for the position of "Junior Clerk h.". The In amorandum stated that the proposed changes and the request for the, 1411Ymant of salary in excess of the maximum had been reviewed and tilt t was recommended that they be approved. Approved unanimously. Letter to the board of directors of "The Farmers State Bank Or mo ntague, Michigan", Montague, Michigan, stating that, subject to the . eonditions of membership numbered 1 to 3 contained in the Board's 4 H and the following special conditions, the Board approves the b Etnk's application for membership in the Federal Reserve System and .i. or the appropriate amount of stock in the Federal Reserve Bank 1616 12/3/37 -29- Of Chicago: "4. Such bank shall make adequate provision for depreciation in its banking house and furniture and fixtures. As soon as practicable, such bank shall dispose of any loans which may be secured in whole or in part by its own stock, or obtain the substitution of other adequate security for each such loan." Approved unanimously, for transmission through the Federal Reserve Bank of Chicago. Letter to Mr. Stewart, Chairman of the Federal Reserve Bank of Silla Francisco, reading as follows: "Receipt is acknowledged of your letter of November 18) 1937, advising the Board of the results of the coneideration by your board of directors of the report of a survey of the Auditing Department of your bank transmitted to You with the Board's letter of October 29, 1937. "The Board appreciates the completeness of your review of the matters contained in this report of survey and has noted with interest the changes being made in the auditProcedure at your bank." Approved unanimously. Letter to Mr. Logan, Vice President of the Federal Reserve Bank or New York, reading as follows: "In response to your letter of November 17, 1937, ?oil are advised that the Board approves payment of -1 1000 to Jenkins, Deyo & Hitchcock, Esquires, attorneys sal* Binghamton, New York, as an additional fee for services rendered since January 1, 1934, in disposing of a suit to establish a preferred claim against the closed State Bank of Binghamton, Binghamton, New York." Approved unanimously. Thereupon the meeting adjourned.
@FedFRASER