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Board Rulings and Staff Opinions Interpreting Regulation X

5-980

ACTING ON BEHALF OF OR IN CONJUNCTION WITH

A United States corporation has a wholly owned foreign subsidiary that proposes to obtain a 40 percent interest in another foreign company. An individual nonresident alien will purchase the remaining 60 percent and will borrow essentially all the purchase price from a foreign source. Since the business of the second foreign company is to invest in equity securities, the credit extended to the individual is purpose credit, and that individual is deemed to be acting on behalf of or in conjunction with the wholly owned foreign subsidiary. The purpose credit obtained by him will result in the acquisition of securities in which the wholly owned foreign subsidiary, being a U.S.-controlled person within the meaning of Regulation X, has a substantial beneficial interest. STAFF OP. of Dec. 8, 1977.
Authority: 12 CFR 224.5(a).
5-981

ACTING ON BEHALF OF OR IN CONJUNCTION WITH

Further elaboration on staff opinion dated December 8, 1977. The terms of Regulation X will apply to a foreign person who obtains credit for the purpose of purchasing or carrying a security in which a foreign person controlled by a U.S. person has a substantial direct interest in the income or gains or losses therefrom. STAFF OP. of March 22, 1978.
Authority: 12 CFR 224.5(a).
5-981.1

ACTING ON BEHALF OF OR IN CONJUNCTION WITH

A foreign corporation (Company A) intends to purchase a substantial portion of the shares of a U.S. corporation (Company B). To do so, Company A will borrow funds from a foreign (that is, non-U.S.) lender. Company A will effect the purchase of the stock of Company B through one of its subsidiaries. The subsidiary is a U.S. corporation, Company C, that has been newly organized solely to purchase and hold shares of Company B and that initially will have only nominal capital and assets. Company A will contribute the funds it borrowed from the foreign lender to Company C so that it can purchase the stock of Company B. (As an alternative, Company A may effect its purchase of the stock of Company B by purchasing a U.S. limited-liability company whose assets consist entirely of the stock of Company B.) In either case, the stock of Company B, which is traded on the New York Stock Exchange and therefore constitutes margin stock under either Regulation T or U, will be pledged to the foreign lender as collateral for the loan to Company A.
Board staff was asked whether Company A would be subject to Regulation X. Regulation X applies to persons who obtain credit from outside the U.S. if they are (1) U.S. persons; (2) foreign persons who are controlled by U.S. persons; or (3) foreign persons acting on behalf of, or in conjunction with, U.S. persons. Since Company A is not a U.S. person or a foreign person controlled by a U.S. person, the only way Company A could be subject to Regulation X is if it were acting on behalf of, or in conjunction with, U.S. persons (in this case, with Company C or the U.S. limited-liability company). Because Company A is employing the use of Company C, or the limited-liability company, as “a mere vehicle of convenience” for financing its purchase of the stock of Company B, it would fall under the terms of the staff opinion at 5-982.1. Therefore, Company A would not be subject to Regulation X. STAFF OP. of Sept. 14, 1998.
Authority: 12 CFR 224.1(b).

CARRYING LOAN

See 5-878.
5-982

CREDIT OBTAINED OUTSIDE THE UNITED STATES—Grandfathered

A sum was extended by a bank prior to the effective date of Regulation X and therefore grandfathered under the exemptive provisions of section 224.2(b)(2). Credit is deemed to have been extended on the date a commitment to extend credit becomes binding. The basic purpose of the grandfather clause of Regulation X was to avoid interference with outstanding credits or existing contract rights. Once a credit is paid down or a credit line eliminated, the grandfather clause is no longer applicable. STAFF OP. of March 3, 1977.
Authority: 12 CFR 224.2(b).
5-982.1

CREDIT OBTAINED OUTSIDE THE UNITED STATES—Funds Advanced to Subsidiary

A foreign corporation plans to purchase a substantial portion of the shares of a U.S. corporation. If it borrows funds to make the purchase, it will do so from a foreign lender. It will purchase the shares of the U.S. corporation directly and will not “act on behalf of or in conjunction with a U.S. person.” Under these circumstances, Regulation X is not applicable.
The foreign corporation might form a U.S. subsidiary solely to purchase and hold the shares of the U.S. corporation. The subsidiary would have only nominal capital and assets until the eve of consummation of the purchase, at which time the foreign corporation would contribute and/or lend to the U.S. subsidiary the necessary funds, including the proceeds of any borrowings. The advancement of any funds to the U.S. subsidiary will be designated a loan solely for tax purposes. Although the U.S. subsidiary of the foreign corporation would be the record owner of the target company shares, the foreign parent would be the beneficial owner of all the shares. Under a literal reading of Regulation X, the U.S. subsidiary of the foreign corporation would be a U.S. person obtaining purpose credit from a foreign lender, namely the foreign corporation. In such a case, Regulation X requires that the credit conform with the provisions of Regulation G. The “loan” to the U.S. subsidiary would be unsecured, and the stock obtained pursuant to the tender offer would not be pledged with the original lenders to secure the original loan. Regulation G and the margin requirements would not apply.
The foreign corporation could be regarded as the borrower for purposes of Regulation X because it is obtaining credit, and it could be considered a “foreign person acting on behalf of or in conjunction with U.S. persons.” However, the U.S. subsidiary would be a mere vehicle of convenience, and Regulation X would therefore not apply. STAFF OP. of July 24, 1980.
Authority: 12 CFR 224.5(a)
See also 5-981.1.
5-982.2

CREDIT OBTAINED OUTSIDE THE UNITED STATES

A Swiss Bank without branches or offices in the United States is not subject to the Board’s margin regulations. However, borrowers who are U.S. residents must comply with Regulation X.
Regulation X applies to a “United States person” who obtains credit outside the U.S. to purchase or carry a “United States security.” Both of these terms are defined in section 7(f)(2) of the Securities and Exchange Act of 1934 (15 USC 78g(f)(2)(B)) and these definitions are incorporated into Regulation X in section 224.2. “United States person” includes a U.S. resident. The statutory authority for Regulation X does not cover loans to purchase or carry “margin securities” or “margin stock” if the securities are not “U.S. securities.” For example, Regulation X does not cover a loan to buy a Canadian security that is listed on the New York Stock Exchange.
Counsel for a Swiss bank suggested that, for those loans subject to Regulation X, the borrowers will need to conform the credit to Regulation U, “since the lender is a foreign bank.” Section 224.3(a) requires compliance with Regulation U only if the credit is obtained from a “foreign branch of a bank.” Regulation X incorporates the definition of “bank” found in section 3(a)(6) of the Securities Exchange Act of 1934 (15 USC 78c(a)(6)); foreign banks are not covered. Since the Swiss bank is not the foreign branch of a “bank,” Regulation X requires that the credit conform to Regulation G. In any event, the requirements under Regulations G and U are identical in this area.
Under section 207.3(b) of Regulation G, margin stock securing a loan used to purchase or carry margin stock is limited to a loan value of 50 percent of its current market value. The contemplated loans will be secured by shares of U.S. companies. If this collateral qualifies as margin stock (defined in section 207.2(i)), the 50 percent limitation will apply when loan proceeds are used to purchase margin stock, assuming that the purchased securities are “U.S. securities” as defined in the Securities Exchange Act of 1934 and Regulation X.
In summary, U.S. residents borrowing abroad from a foreign bank are subject to Regulation X when they purchase or carry “U.S. securities.” If these securities are “margin stock,” the loan value limitations of Regulation G apply. STAFF OP. of Oct. 30, 1992.
Authority: 12 CFR 224.3(a).
5-983

FOREIGN BANK—Applicability of Regulation X to

A State Department official inquired about the applicability of Regulation X to a foreign bank. Staff mentioned several areas in which Regulation X could affect the operations of a foreign bank.
The assets of a foreign bank, held in the United States, might be attached in a criminal action in which it was alleged that the bank had knowingly conspired with, or assisted, a borrower in violating the regulation. It is also possible that a U.S. borrower might defend a lawsuit by a Swiss bank, to collect monies borrowed from that bank, on the ground that the lender had knowingly assisted the borrower to violate Regulation X.
As a borrower, a Swiss bank that was a subsidiary or affiliate of a U.S. entity might be subject to Regulation X. As a lender, such a bank might be subject to Regulation G. STAFF OP. of May 25, 1972.
Authority: 12 CFR 224.1(b) and 224.6(b).
5-984

FOREIGN BANK—Site of Credit Extension

A Canadian corporation (“bidder”), which has several U.S. subsidiaries, proposed to make a tender offer for the stock of a U.S. corporation (“subject”). This stock is listed on a national securities exchange and is therefore margin stock. The bidder planned to obtain credit to finance the tender offer from a Canadian bank, collateralizing the loan with subject stock. The bank has branches and agencies in the United States, but in this transaction all activities relating to arranging and extending the purpose credit will be done in Canada.
Staff concluded that Regulations G, U, and X would not apply to the particular circumstances involved in the proposed tender offer. Regulation X does not apply unless the bidder plans to have the subject merged into one of the bidder’s U.S. subsidiaries, in which case the bidder would be deemed a “foreign person acting on behalf of or in conjunction with a U.S. person.” Regulation U is not applicable, since all activities connected with the arranging and extension of credit will occur outside the United States, the sole exception being that a U.S. branch of the lender will act as a depository for shares tendered pursuant to the offer. Regulation G is not applicable in the case of wholly foreign lender unless Regulation X applies to the borrower, in which case the borrower would be responsible for seeing that the credit complies with the provisions of Regulation G. STAFF OP. of July 3, 1980.
Authority: 12 CFR 224.1(b).
5-985

FOREIGN BORROWER—Nonresident Aliens

Margin requirements would not apply to nonresident aliens unless such aliens were controlled by, or were acting on behalf of or in conjunction with, a U.S. person. American citizens, wherever located, are subject to Regulation X. Liability of a foreign bank could be within the area of aiding and abetting a borrower’s violation. (Also contains a discussion on United States v. Weisscredit, 325 F. Supp. 1384 (S.D.N.Y. 1971).) STAFF OP. of Aug. 23, 1971.
Authority: 12 CFR 224.1 and 224.6(b).
5-986

FOREIGN BORROWER—Credit Extended by Foreign Lender

A borrower proposes to make a tender offer for the shares of Company A, which owns 49 percent of the borrower. The lender bank is a foreign lender under Regulation X. The credit, therefore, will not be obtained from within the United States.
The borrower is not a foreign person controlled by a United States person, for purposes of Regulation X. A borrower who is either a “United States person or a foreign person controlled by a United States person or acting on behalf of or in conjunction with such person” is subject to the conditions of section 224.2(b). Since the borrower is none of the above, it is staff opinion that the borrowing for the purpose of financing the tender offer would not be subject to section 7(f) or Regulation X. STAFF OP. of Feb. 17, 1978.
Authority: 12 CFR 224.2(b).
5-987

FOREIGN BORROWER—Credit Extended by Foreign Lender

A Canadian corporation whose stock is registered on the NYSE intends to establish an executive stock ownership plan. Under the plan, the company will extend credit to an independent trustee (a Canadian bank), and the trustee, in turn, will purchase shares of the company’s stock on behalf of the employees. The employees will pay for their shares by promissory notes to the bank, secured by these securities. Only company officers and directors who are Canadian citizens would be eligible to participate in the plan, while officers and directors who are U.S. citizens would be excluded.
Section 7(f) of the Securities Exchange Act and Regulation X do not apply to purpose credit extended to foreign persons by a foreign bank or corporation. Similarly, neither a foreign corporation extending purpose credit to a trustee who is a foreign bank nor a foreign bank extending purpose credit to a foreign national would be subject to Regulation G. STAFF OP. of Nov. 8, 1979.
Authority: SEA § 7(f), 15 USC 78g(f); 12 CFR 224.1 and 224.2(b).
5-987.1

FOREIGN BORROWER—Acquisition-Financing Legislation

In response to questions from a member of the Securities Subcommittee of the Senate Committee on Banking, Housing and Urban Affairs, Governor Partee provided what he believed to be the Board’s views regarding recently introduced legislation to broaden the application of the margin regulations through an amendment to the Securities Exchange Act of 1934 (the 1934 act). The Board has commented on similar legislation introduced in the House of Representatives and the Senate, and these comments are equally applicable to the new legislation proposed in the Senate (S. 1436, 97 Cong., 1 Sess. (1981)).
First, the Board believes that the coverage of the proposed legislation should extend only to acquisitions of control-size blocks of publicly traded stock, i.e., those acquisitions that would require the filing of a 13D or 14D statement with the Securities and Exchange Commission. Such coverage would be consistent with the goal of providing equity between significant U.S. and foreign stock purchases involving purpose credit, while avoiding the practical problems of policing margin compliance for the large number of small transactions abroad entered into by foreign investors.
The Board is also in agreement with legislation, such as that proposed earlier in the House and the Senate, that places legal responsibility for compliance upon foreign borrowers rather than lenders. It is the Board’s sense that to subject foreign lending institutions to the margin requirements would unnecessarily strain relations between U.S. and foreign financial institutions, would be un-workable, and would risk the threat of unwelcome retaliatory measures.
The Board has, in the past, gone on record in support of a private right of action for persons aggrieved by violations of the margin regulations, and it is believed that some sort of private right of action would be an effective and economical means of aiding enforcement responsibilities under the 1934 act (See amicus brief in Stern v. Merrill Lynch, 603 F.2d 1073 (4th Cir. 1979)).
Also requested was the Board’s view on disclosing the identity of any bank involved in financing a purchase of securities which requires the filing of a form 13D or 14D with the Securities and Exchange Commission. A letter dated October 31, 1967 presented the Board’s view that disclosure of the names of financing banks would be desirable. There is no reason to believe that the Board today would have a contrary view. BD. LETTER of July 29, 1981.
Authority: SEA, 12 USC 78; 12 CFR 224.
5-987.2

FOREIGN BORROWER—Controlled by a U.S. Person

A foreign limited partnership (the “master fund”) has been formed for the purpose of investing and trading in securities and other financial instruments both inside and outside of the United States. Profits and losses generated by the master fund flow to two existing funds (respectively, the “domestic fund” and the “offshore fund”). The domestic fund is a U.S. limited partnership which will receive 35 percent of the master fund’s profits and losses. The offshore fund is a foreign corporation which will receive 65 percent of the master fund’s profits and losses. Approximately 31 percent of the offshore fund’s voting shares are owned by U.S. persons.
The definition of a “foreign person controlled by a United States person” includes “any noncorporate entity in which United States persons directly or indirectly have more than 50 per centum beneficial interest.” The domestic fund is a “United States person” under Regulation X with a 35 percent beneficial interest in the master fund. In addition, 31 percent of the foreign fund’s 65 percent interest in the master fund is beneficially held by U.S. persons, which works out to an additional 20 percent. When combined, the beneficial interest in the master fund held by U.S. persons equals 55 percent. Board staff believes that in these circumstances the master fund is a foreign person controlled by a United States person for purposes of Regulation X. STAFF OP. of Oct. 22, 1999.
Authority: 12 CFR 224.2(c).

FOREIGN BORROWER—Transfer of Credit to U.S. Borrower

See 5-958.2.
5-988

FOREIGN BRANCH OR SUBSIDIARY—Credit from

A registered broker-dealer proposes to invite a number of institutional investors—U.S. corporations or companies controlled by, or acting on behalf of or in conjunction with, U.S. corporations—to become limited partners in a closed-end investment company to be organized in a foreign country. The partnership would invest in securities traded only on foreign exchanges. At least 95 percent of the initial capital would be provided by loans from foreign branches of U.S. banks under terms that would cause them to be indirectly secured by stock. As long as none of the proceeds are used to purchase U.S. securities, some of which are listed on foreign exchanges, neither Regulation X nor U would be applicable. STAFF OP. of Oct. 24, 1972.
Authority: 12 CFR 224.2(b).
See also 5-934.01, 5-989.1, and 5-996.1
5-989

FOREIGN LENDER

Regulation X provides that if credit is obtained abroad from a foreign lender not subject to Regulations G, T, or U, then the borrower’s loan is required to conform with Regulation G as though the lender were subject to that regulation.
Regulation G provides that when a borrower obtains credit to purchase or carry margin securities and the credit is secured directly or indirectly in whole or in part by collateral that includes any margin security, the margin requirements apply. If the purpose of the credit is to buy a margin security and the collateral for the credit consists of a nonmargin security, the margin requirements in Regulation G would not apply. STAFF OP. of Nov. 1, 1973.
Authority: 12 CFR 224.2(b).
5-989.01

FOREIGN LENDER—Swiss Banks

Some general questions were asked about the effect of Regulation X on the operation of Swiss banks. Regulation X was issued to implement title III of the Financial Record Keeping and Currency and Foreign Transactions Reporting Act of 1970. This act was enacted because Congress had for some time been concerned about a loophole in margin regulations that existed because of the availability of low-margin credit from Swiss banks, among other foreign lenders, to United States borrowers. The Board’s authority to regulate margin credit, under section 7 of the Securities Exchange Act of 1934, was directed at lenders, however, not borrowers.
Regulation X might conceivably affect the operations of a Swiss bank in several ways. For example, if a bank extended credit to a U.S. borrower who was borrowing in violation of the regulation, it is conceivable that the bank’s assets held in the United States might be attached in a criminal action in which it was alleged that the bank had knowingly conspired with, or assisted, the borrower in violating the regulation. It is also possible that in a lawsuit brought by a Swiss bank against a U.S. borrower to collect monies borrowed from that bank, the borrower might take the position that the lender had knowingly assisted the violation of Regulation X.
As a borrower, a Swiss bank that was a subsidiary or affiliate of a U.S. entity might be subject to the regulation. As a lender, such a bank might perhaps be found to be subject to the Board’s Regulation G, although the law in this area is somewhat unsettled. STAFF OP. of May 25, 1972.
Authority: 12 CFR 224.1.
5-989.1

FOREIGN LENDER

If brokerage firms doing business outside the United States are not foreign branches or subsidiaries of U.S. banks, but actually foreign lenders, U.S. persons transacting business at such brokerage firms are governed by section 224.2(b)(iv) of Regulation X, which requires loans to conform with Regulation G. If the stock purchased is not a “margin security,” as that term is defined in section 207.2(d) of Regulation G, the credit extended by the brokers (assuming they are foreign lenders) will not be regulated. If, however, the stock is a margin security, the U.S. borrower may not obtain more than the stock’s maximum loan value (currently 50 percent).
If the foreign brokers, however, are branches or subsidiaries of U.S. broker-dealers, U.S. persons transacting business at such brokers are governed by section 224.2(b)(1)(ii) of Regulation X, which requires loans to conform to the requirements of Regulation T. If the stock purchased is not a “margin security,” as that term is defined in section 220.2(f) of Regulation T, it can have no loan value as collateral in a margin account for the purpose of compliance with Regulation X. If the stock, however, is a margin security, its loan value in such case would be limited to the maximum loan value prescribed in section 220.8 (currently 50 percent). STAFF OP. of May 30, 1972.
Authority: 12 CFR 224.1, and 224.2(b)(1)(ii) and (iv).
5-990

FOREIGN STOCK—Purchase of

A registered broker-dealer performs investment banking and private placement services for a United Kingdom corporation that wants to borrow from institutional lenders to finance the purchase of a South African corporate stock. The stock involved in the transaction, which constitutes a private placement, is not margin stock under Regulation U or a margin security under Regulation G. It is listed on the Johannesburg (South Africa) Stock Exchange but is not traded outside South Africa.
Staff concluded that neither section 220.7(a) of Regulation T nor Regulation X would be applicable to the proposed transaction if the United Kingdom corporation does not sell any shares of the South African corporation in the United States until the borrowings to finance its purchase are repaid and uses its best efforts to prevent any other South African corporation shares from being sold in the United States. STAFF OP. of Feb. 18, 1975.
Authority: 12 CFR 224.2(b).

INDIRECTLY SECURED

See 5-908.1, 5-906, and 5-909.
5-992

MAINTENANCE MARGIN REQUIREMENTS

Since Regulation X requires a customer to comply with Regulation T only when T is applicable, there is no violation if an account fails to meet margin maintenance requirements because the broker has failed to inform the customer of the declining value of the equity in the account.
Margin maintenance requirements result from rules of the stock exchanges and of the brokerage firms themselves. The sanctions applicable to violations of Regulation X are not available to enforce the requirements of brokerage maintenance requirements, although section 220.7(e) of Regulation T does provide that nothing in that regulation shall prevent brokerage firms from imposing additional-security or other requirement in connection with an extension of credit. BD. RULING of Nov. 3, 1971.
Authority: 12 CFR 224.2(b).
5-993

PUBLIC OFFERING OF DEBT SECURITIES

Company X, whose stock is listed on AMEX, is planning an exchange offer with its own shareholders, which, in the opinion of company counsel, would constitute a public offering. Notes and cash will be exchanged for common stock, provided a certain minimum amount of shares are tendered. The notes will be secured by a mortgage on company assets. The notes are exempt from SEC registration requirements, pursuant to section 3(a)(9) of the Securities Act of 1933.
A public offering of debt securities has heretofore not been considered as bringing the issuer within the provisions of Regulation X. Neither is the purchaser subject to treatment as a lender under Regulations G, T, or U. STAFF OP. of Oct. 12, 1979.
Authority: Securities Act of 1933 § 3(a)(9), 15 USC 77c(a)(9); 12 CFR 224.1.
See also Arranging—Public Offering of Debt Securities under “Board Rulings and Staff Opinions Interpreting Regulation T.”
5-993.1

PUBLIC OFFERING OF DEBT SECURITIES—Exchange Offer

An offer of exchange will be made to shareholders of a publicly traded United Kingdom trust. For each share of the trust, shareholders will be offered a unit consisting of shares and debt securities of a Bermuda corporation. The shares and the debt securities will then be listed and publicly traded on the London Stock Exchange. Neither the shares nor the debt securities will be registered under the Securities Act of 1933. In general, the offer precludes the sale or delivery of the securities in the United States or to or for the account of any U.S. person. The trust, a closed-end investment company, has a portfolio consisting chiefly of shares of other United Kingdom investment trusts. Most shares are held by United Kingdom institutional investors such as insurance companies and pension trusts.
In such offerings in the United Kingdom, shareholders are customarily permitted to elect to receive cash instead of the shares or the debt securities, or both, and it is anticipated that many shareholders will elect to receive cash. The merchant bank underwriting the offer is expected to take up the debt securities or shares that are not accepted by the shareholders and to line up standby institutional purchasers for the securities of shareholders receiving cash. The issuer intends to liquidate the trust and invest the proceeds in its business, which typically involves the purchase of margin stock.
Because the issuer of the debt securities may be a “foreign person controlled by a United States person,” Regulation X would be involved and Regulation G conformance would be required if the debt securities were viewed as privately placed. Privately placed debt securities have always been treated as credit extensions subject to the margin rules if they are secured directly or indirectly by any margin stock. These debt securities will be directly secured by marketable securities, including margin stock. The issuer in this transaction would not be restricted by the application of Regulation G through Regulation X because (1) the transaction is in a foreign market; (2) the debt security will be traded on a foreign exchange; and (3) the issuer considers the offering a public offering of debt securities, which Board staff has traditionally viewed as not involving an extension of credit for the margin rules. STAFF OP. of Aug. 8, 1986.
Authority: 12 CFR 224.3.
5-994

PURPOSE CREDIT—Segregation of Proceeds

Various insurance companies propose to purchase promissory notes from a company in a private placement. The company will use the proceeds to pay debt previously incurred to purchase property. The company has outstanding other debt incurred, in part, to purchase margin securities. None of the proceeds of the proposed private placement, however, will be used to repay any debt incurred to purchase margin security. Staff concluded that Regulations G and X would not be violated, since the proceeds of the proposed borrowing are earmarked for the specific purpose of repaying nonpurpose credit and are properly segregated to ensure such use. STAFF OP. of March 22, 1978.
Authority: 12 CFR 224.1 and 224.2.
5-994.1

PURPOSE CREDIT—Foreign Lenders; Foreign Securities

The definitions of “securities” and therefore of “purpose credit” in Regulations G, T, and U. Regulation G defines “purpose credit” as credit for the purpose of purchasing or carrying a margin security (§ 207.2(c)(1)). The term “margin security,” for purposes of Regulation G, is defined in section 207.2(d). Furthermore, in order for a purpose credit to be subject to Regulation G, it must be collateralized by margin securities.
Regulation T states that “every extension of credit on a margin security . . . shall be deemed to be for the purpose of purchasing or carrying or trading in securities” (§ 220.7(c)). Regulation T employs a more restrictive collateral test than either Regulation G or U, in that a broker cannot extend purpose credit unless it is collateralized by margin securities. The definition of “margin security” in section 220.2(f) of Regulation T differs from the definitions in section 221.3(v) of Regulation U and section 207.2(d) of Regulation G.
It would have been extremely cumbersome to define “purpose credit” in Regulation X so as to take into account all the nuances in the definitions in Regulations G, T, and U. Regulation X was written in simple language so that it could be understood by the lay person. It seemed sufficient to define “purpose credit” as credit obtained to purchase securities in general. Whether the credit is also subject to Regulations G, T, or U can be determined only by consulting the definitions in those regulations (see the preamble of section 224.5 of Regulation X).
Because Regulation X incorporates by reference Regulations G, T, or U, depending upon the status and location of the lender (see section 224.2(a) and (b) of Regulation X), the broad definition of “purpose credit” in Regulation X would not ipso facto subject to that regulation credit obtained outside the United States for the purpose of purchasing or carrying foreign securities outside the United States. It is always necessary to look to Regulation G, T, or U to determine whether a particular credit is subject to one of these regulations.
A few illustrative examples may help explain the scheme of Regulations X, G, T, and U.
  • 1.
    A U.S. person (or a person controlled by or acting on behalf of or in conjunction with a U.S. person) obtains credit in the United States from Commercial Credit Corporation (a U.S. collateral lender) to purchase margin securities and collateralizes the loan by margin securities. The loan would be subject to Regulation G.
  • 2.
    If the same person obtains the credit from a foreign branch of Commercial Credit Corporation, the facts being otherwise the same as in example 1, the loan would likewise be subject to Regulation G.
  • 3.
    If the person obtains credit abroad from Schweizerische Bankverein (which may also be a foreign broker or dealer), the facts being otherwise the same as in example 1, the loan would be subject to Regulation G (although the lender is not governed by that regulation).
  • 4.
    If the person obtains credit from Bache & Co., New York City, to purchase securities collateralized by margin securities, Regulation T applies. It should be noted that a broker-dealer cannot extend credit to purchase securities without collateral or on collateral other than margin securities.
  • 5.
    If credit is obtained from a foreign branch or subsidiary of Bache & Co., the facts being otherwise the same as in example 4, it would likewise be subject to Regulation T. This means that this particular borrower cannot obtain credit from a foreign branch or subsidiary of a U.S. broker-dealer for the purpose of purchasing any security (domestic or foreign), unless the credit is collateralized by margin securities having sufficient loan value as prescribed in the supplement to Regulation T.
  • 6.
    If credit is obtained from Chase Manhattan Bank, New York, New York, for the purchase of margin securities collateralized by any stock, it would be subject to Regulation U.
  • 7.
    If credit is obtained from a foreign branch of Chase Manhattan Bank, the facts being otherwise as in example 6, it would likewise be subject to Regulation U.
  • 8.
    If the person obtains credit from a foreign affiliate of Chase Manhattan Bank, the credit would be subject to Regulation G if it were for the purpose of purchasing margin securities and is collateralized by margin securities.
A U.S. person (or a person controlled by or acting on behalf of or in conjunction with a U.S. person) can obtain credit from foreign lenders (except foreign branches or subsidiaries of U.S. brokers or dealers) for the purpose of purchasing or carrying foreign securities without regard to Regulations X, G, or U. If the foreign security is also a margin security, at least those lenders subject to Regulations G, T, or U would be governed by those regulations because the security is a margin security.
These is admittedly some doubt whether a U.S. borrower obtaining credit abroad for the purpose of purchasing or carrying foreign margin securities abroad could likewise be subjected to these regulations since the definition of “United States security” in section 7(f) of the Securities Exchange Act of 1934 does not appear to encompass a foreign “margin” security. However, because of the definitional problems discussed and the desirability of keeping the language of Regulation X as simple as possible, it might be preferable to clarify this point through amendments to Regulations G, T, and U dealing with the problems of foreign branches. STAFF OP. of March 10, 1972.
Authority: 12 CFR 224.2.
5-995

REGULATION X—Duty of Enforcement

In section 7 of the Securities Exchange Act, Congress directed the Board to regulate credit extended for the purchasing or carrying of securities. The duty of enforcing the regulations was assigned to the SEC by section 21 of the act. Criminal violations are enforced by the Justice Department. Under some circumstances, the courts have read a private right of recovery into the statute. STAFF OP. of Aug. 25, 1970.
Authority: 12 CFR 224.1.
5-996

REGULATION X—General

For a detailed discussion of the relationship between Regulations U and X, see this letter. STAFF OP. of Sept. 2, 1977.
5-996.1

REGULATION X—General

Regulation X was adopted by the Board to be effective November 1, 1971. This regulation prohibits a U.S. person from borrowing abroad for the purpose of purchasing or carrying any U.S. security (other than an exempted security) on terms more favorable than that person could receive from a lender in the United States. If a broker doing business abroad is a foreign branch or subsidiary of a U.S. broker, a U.S. person would not be able to borrow in a margin account on terms more lenient than those required of a broker in the United States under Regulation T. If the foreign broker is not subject to Regulation T, the borrowings would be required to meet the credit provisions of Regulation G. In general, Regulation G regulates the amount of credit extended for the purpose of purchasing or carrying margin securities (basically exchange registered securities, mutual fund shares, and securities on the Board’s list of OTC margin stocks) and collateralized by any margin securities. Other details, such as the records that the borrower must keep, can be found in the text of Regulation X and the other regulation it defines as applicable. STAFF OP. of April 20, 1973.
Authority: 12 CFR 224.1.
5-997

REGULATION X—History

The present Regulation X places restrictions on borrowers of securities credit, and it was adopted by the Board in 1971 to carry out provisions of the Foreign Bank Secrecy Act of 1970. The old Regulation X was the residential real estate credit control regulation. It was issued in 1950 to help reduce inflationary pressures by restricting the flow of funds into the mortgage market and was suspended by the Board in 1952. STAFF OP. of March 21, 1980.
Authority: 12 CFR 224.1.
5-997.1

REGULATION X—Aiding and Abetting Violation of

The aiding-and-abetting clause previously in Regulation X was removed when the regulation was revised in 1983. It was considered unnecessary because the liability for aiding and abetting already existed in the law. Section 224.6(b) read as follows:
Any person who willfully aids or abets the violation by any other person of any provision of this part (Regulation X) shall be deemed to be in violation of this part (Regulation X). For the purpose of this paragraph, the term “aids or abets” shall include, but not be limited to, counsels, commands, induces, or procures.
Although a foreign branch of a United States bank would not violate Regulation U if it extended purpose credit to a United States person in excess of the amount permitted on margin stock, the bank could be found to have aided and abetted the borrower’s violation of Regulation X. The exemption in section 221.6(c) of Regulation U for credit extended outside the United States does not provide an exemption for anyone knowingly aiding a borrower in violating Regulation X. STAFF OP. of Oct. 18, 1985.
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