A bank has an outstanding loan for the purchase of nonmargin stock of a corporation in which the customer was an executive at the time the credit was extended. The loan was secured by the stock. The customer then ended his association with the company and the price of the stock decreased to a point at which the bank felt it inadequate to collateralize the loan. The bank proposed to sell the stock and purchase debentures convertible into OTC margin stock, thinking that income from the debentures would make it possible to undertake a systematic program of paying off the loan. The bank asks (1) whether the exchange of collateral was permitted under section 221.3(i) of Regulation U and (2) whether the loan would henceforth be subject to the retention and withdrawal requirements of the regulation.

A work-out plan wherein a bank will become the owner of a note secured by a margin stock does not violate Regulation U, since section 221.3(i) states, “Nothing in this part shall be construed as preventing a bank from taking such action as it shall deem necessary in good faith for its own protection.” STAFF OP. of Jan. 6, 1978.

Authority: 12 CFR 221.3(i) (revised 1998; now 12 CFR 221.3(j)).

A company asked about the applicability of Regulation U to a proposed refinancing of credits extended to the company and its only two shareholders. The company, certain of its affiliates, and the shareholders filed for protection under chapter 11 of the Bankruptcy Code (11 USC 1101 et seq.) in November 1982. Unless the outstanding loans are refinanced, several banks will seek permission to foreclose on the assets securing the loans.

A savings and loan association had previously made a real estate loan for the purchase of two parcels of land. The loan went into default, and the S &L acquired the parcels and four notes receivable by foreclosure. Three of the guarantors of the original loan offered to buy the parcels and notes as part of a workout. The S&L will lend approximately $110 million, of which approximately $7 million will be purpose credit secured by 2.5 million shares of margin stock with a current market value of approximately $20 million. The stock used to secure this credit will also serve as part of the collateral securing the real estate loans.

As a result of bank mergers and changes in state banking laws, a national bank (“current lender”) now holds three loans to the same borrower, all of which were originally made in compliance with Regulation U. One loan is a nonpurpose loan secured by margin stock, another an unsecured purpose loan, and the third a purpose loan secured by margin stock.

Some banks made purpose loans to an acquisition vehicle (shell) that were properly secured by stock of the target at the time the loans were made. The price of the target stock, as reflected by the portion still in public hands, has decreased significantly. The target stock is the shell’s only asset.

The staff was asked about the application of Regulation U to possible free-riding activities by individuals and business clients of custodial agency account customers of a bank. Securities were received and paid for by the bank on behalf of the customers on a delivery-versus-payment basis.

During 1972 and 1973, a company purchased shares of its own common stock, which is listed on the NYSE.

A question was raised about the applicability of Regulation U to two loans involving single-premium variable life insurance policies and mutual funds. Prior to the 1983 revisions of the margin regulations, there were specific rules for the combined purchase of mutual fund shares and insurance. Major changes in the regulations, however, made those rules unnecessary. When the combined-purchase rules were adopted, the margin requirements were relatively high so that the allowance of a 40 percent maximum loan value for the mutual fund shares was a considerable concession. The maximum loan value for mutual fund shares is now 50 percent of their current market value.

In answer to an inquiry into whether certain debentures with warrants attached thereto constitute a convertible debt security under the Board’s margin regulations, staff indicated that they do and will continue to do so until they no longer carry the right to receive the warrants. STAFF OP. of May 6, 1970.

When borrowing from a bank, a broker-dealer who does not come within one of the exceptions is treated the same as any other customer. If a security is bought and sold on the same day, the exemption under section 221.2(f) is available, but if the security is bought on day one and sold on day four, the exemption is not available until day four. Regulation U does not permit the general financing of a firm’s stock trading on an exemption basis. Each transaction must be supported by documentation attesting to its eligibility for exemption. STAFF OP. of Jan. 16, 1979.

A credit union (CU) wants to institute a new program enabling members to purchase stock on the NYSE or AMEX. This plan will be voluntary and will operate through preauthorized payroll deductions. The CU will make book entries of the members’ names and the amounts deducted for the plan; collect and hold the monies; and make quarterly transfers of these funds to a broker-dealer, who will purchase the stock for the participants. The CU will not extend credit to its members for the purchase of stock under this plan, monies deposited into its account will not be used as collateral, and the broker-dealer will not extend any credit in connection with the plan. The plan will not violate Board margin regulations since the CU is not extending or arranging any purpose credit. STAFF OP. of Nov. 8, 1978.

The National Credit Union Administration (NCUA) Central Liquidity Facility is not the type of lender to which Regulation G was intended to apply. A review of the procedures to be followed when the facility extends credit indicates that such credit, in all probability, would not be indirectly secured by margin securities for purposes of Regulation G. Furthermore, and more important, section 3(c) of the Securities Exchange Act of 1934 makes section 7 of the act and the Board’s margin regulations adopted thereunder (including Regulation G) inapplicable to the NCUA facility. Section 3(c) states that “no provision of this title shall apply to . . . any . . . lending agency which is wholly owned, directly or indirectly, by the United States, or any officer, agent, or employee of any such department, establishment, or agency, acting in the course of his official duty as such, provision makes specific reference to such department, establishment, or agency.” STAFF OP. of Sept. 18, 1979.

A parent and a wholly owned subsidiary were established as separate corporations for valid business reasons and not as a means of circumventing the Board’s margin regulations. To retire debt incurred to purchase margin securities, the subsidiary proposes to issue notes to two insurance companies. As a result, the insurance companies will become lenders under Regulation G. Different rules will apply under Regulation G if the parent and subsidiary are considered to be one customer rather than two separate customers, since the insurance companies are also lending to the other corporation. The Board concluded that, for purposes of the proposed transaction, the parent and subsidiary would not be regarded as the same customer. BD. RULING of March 26, 1976.

A question is raised about the application of Regulation U to a multiple-advance revolving note that a bank has committed to extend. Staff held that, consistent with Board interpretation 12 CFR 221.102 (at 5-798.2), under certain circumstances the date of a firm commitment could be viewed as controlling for purposes of applying the margin regulations. Here, the terms of the loan define maximum loan parameters without specifying an exact amount of credit to be extended. The note agreement lacks certain features of a firm commitment since it has not bound the parties to amount, interest rate, term, and principal conditions of the credit. The bank has indicated that each advance will be accompanied by Form U-1 and is to be regarded as a separate extension of credit, but each advance should be governed by the margin requirements in effect at that time. STAFF OP. of July 11, 1975.

The proceeds of a private placement will be used to acquire a publicly held company. After the acquisition, the stock will cease to be publicly held. An investment banker wants to begin marketing the private placement at a time when the stock of the target company is still publicly held.

A closed-end investment company will be organized pursuant to the Investment Company Act of 1940 and, with capital to be raised through a public offering of the fund’s shares, will make loans to officers and employees of unrelated companies to finance the exercise of their stock options. The loans will be secured by a pledge of the optioned stock.

The single-credit rule in section 207.1(g) of Regulation G does not apply when a borrower who has outstanding credit under an earlier plan is extended unsecured credit under a new plan. The single-credit rule operates separately and apart from the provisions of section 207.4(a). Accordingly, unless any credits to any employees under earlier plans (or any other credits) are subject to the general rule, new unsecured credits to the same employees would not be subject to Regulation G margin requirements. STAFF OP. of Sept. 17, 1973.

A proposed employee stock option plan involves the employee’s delivery of nonrecourse notes to the employer upon exercise of an option to buy shares of common stock. Those shares are then pledged as security. The employee will pay off the notes in 10 equal installments on the anniversary dates of the purchase. After exercise of the option, but before repayment of the notes, the pledged shares are registered in the name of the employee, who has all shareholder rights. The employee also has the right to forfeit the shares by nonpayment of the note.

A company proposes to extend 90 percent credit on a new series of preference stock convertible into NYSE-listed common stock to its employees and its subsidiaries. The company also has another series of preference stock listed on the NYSE. The preference stock upon which credit is to be extended will not be listed on any exchange and will not be transferable to anyone but the issuer. It differs substantially from the listed preference stock in that it will carry no voting rights, will not have any liquidation preferences, and will have a different annual dividend rate, conversion rate, and redemption provision.

A United States parent company is considering an employee stock option plan to be offered to the foreign employees of its wholly owned foreign subsidiaries. The stock involved is NYSE-listed parent stock and is, therefore, a “margin security,” as defined in section 207.2(d) of Regulation G. The subsidiaries have no place of business in the United States, and the parent deals at arm’s length with the subsidiaries. The option eligibility formula would not include any employee who comes within the definition of “United States person” (15 USC 78g(g)(2)(A)). Each subsidiary will determine if it will offer loans to employees to exercise options and, if so, will also fund the loans, since the parent will not finance any of the loans. If loans are offered, the subsidiary will retain possession of the parent stock as security for the loan.

A company proposes a plan to facilitate the exercise and sale of company stocks by certain key employees who obtain the stock under two option plans. The company proposes to open a brokerage account with a NYSE member firm so that its employees may sell their securities more easily. It intends to extend unsecured credit to allow employees to exercise their options. The credit will be evidenced by a demand promissory note, which will be interest-free until demand has been made.

The fact that a credit union includes members of the immediate families of employees of any corporation or group of affiliated corporations should not bar that credit union from acting as a plan-lender for employees acquiring a margin stock under a qualified plan. A member of the immediate family of an employee, however, would not be able to finance the acquisition, under a stock option plan, of margin stock of a totally unrelated company or the margin stock of the employee’s company.

A lender may include funds to pay the income tax due as a result of the exercise of an employee stock option in the loan covered by section 207.5 of Regulation G. Although a loan to pay taxes is not by itself a purpose loan for any of the margin regulations, the Board concluded in a 1980 interpretation (12 CFR 207.111, now 12 CFR 221.123 at 5-798.52) that the combined credit could be treated as a purpose loan under the plan-lender provisions of Regulation G. To conclude otherwise, the Board indicated, would frustrate the purposes of the special provision. STAFF OP. of Sept. 7, 1983.

The question was raised whether all credit extended to a particular borrower under section 207.5 of Regulation G must be aggregated and considered a single credit for the purpose of determining whether a lender has exceeded the good faith loan value limitation imposed by section 207.5(b)(1). Prior to the recent revision, Regulation G expressly provided that credit extended under the plan-lender section could be treated separately from any other credit extended either under the plan-lender section or under the general provisions of the regulation (see former section 207.4(a)(2)(i)). The revised Regulation G (§ 207.5(b)(2)) is not intended to change the policy of allowing separate treatment of such credits. There is no Regulation G requirement, therefore, that credit extended under that section to a single borrower be aggregated pursuant to the single-credit rule. Each credit extended to a single borrower must, of course, stand on its own, i.e., be supported by the appropriate amount of collateral, as under the former regulation.

A company may wish to hold shares of its common stock (listed on the AMEX) as collateral for loans extended to employees pursuant to an eligible plan (§ 207.5(a)(2)). The loans would be used to exercise options on the common stock and to pay for the tax liability incurred as a result thereof.

A corporation (the company) adopted a stock option plan that was approved by the shareholders in May 1981. The company is now considering adopting a loan program to finance the exercise of options granted under the plan. The question was raised whether the credit terms must be submitted to the shareholders for their approval.

A company has a qualified stock option purchase plan for its employees. A credit union makes loans to company employees for the purchase of stock under the plan. The credit union now makes these loans under the general provisions of Regulation G but would like to avail itself of the plan-lender provision when making these loans. Approximately 80 percent of the credit union members are employees of the company; part of the remaining membership consists of employees in other related companies.

A domestic corporation maintains a stock purchase plan organized as a trust under section 401(k) of the Internal Revenue Code. The trust is authorized, under certain circumstances, to make loans to employees for purchases of shares of stock in the corporation. These loans do not require a pledge of the corporation’s stock. The trust sells securities held in the employee’s trust account in an amount large enough to cover the loan. When the employee repays the loan, the trust purchases additional securities on the employee’s behalf at the then-current price.

It is generally agreed that outside directors are not employees of a corporation and that inside directors are employees only because they have additional responsibilities that make them employees apart from their status as directors. For purposes of Regulation G, a director is not, merely by virtue of his or her position, an employee of a corporation. To qualify for special credit under section 207.5 of Regulation G, a director must have a separate job function that confers employee status. STAFF OP. of April 4, 1986.

A corporation was the sole stockholder of a company until the corporation underwent a voluntary liquidation. All common stock of the company was distributed to the stockholders of the corporation. Prior to the distribution, the board of directors of the corporation authorized the company to adopt a stock purchase and loan plan for its employees. The stock of the company is now margin stock because it is listed on several stock exchanges.

A company has made loans to employees to exercise stock options given by the company. The employees pledged the resulting company common stock as collateral. In some cases, the employees pledged additional shares to comply with Regulation G. In 1984, the company agreed to cancel the employees’ indebtedness when the loans mature in exchange for the shares of stock acquired with the loan proceeds. The company asks whether the requirements of section 207.3(i) of Regulation G continue to apply to the additional shares pledged to the company.

A number of entities have shareholder-approved stock option plans under which the borrower will receive a loan backed by a pledge of the stock purchased under the option. These loans will be made based upon the good faith loan value of the pledged shares. The staff was asked if the plan lender may release from pledge any or all of the margin securities held as collateral at any time while the credit remains outstanding, even if any

A corporation has granted stock to employees pursuant to a plan adopted by the corporation and approved by the shareholders. The employees must pay the par value of 1¢ per share; the company will take a pledge of some of the stock and lend the employees money to pay income tax payable due to receipt of the stock. The plan specifies that the stock will be valued at 50 percent of its current market value.

The board of directors of a corporation has approved a stock purchase and loan plan. The plan will be submitted to stockholders for approval at the next annual meeting. Under Regulation G, no credit may be extended until after the shareholder approval is received. As long as no credit is extended under the plan until after this approval is obtained, the plan would be consistent with the requirements of section 207.5.

See Guaranty.

See 5-621.7.

A loan would be made by a bank to thesponsor of an ESOP for the exclusive purpose of being re-lent to the ESOP. The loan would be secured by certain of the sponsor’s non-margin-stock collateral and also by the margin stock purchased by the ESOP.

A question was raised about the applicability of the margin regulations to the purchase of a bank holding company’s margin stock by a qualified defined benefit plan. The plan covers employees of a bank that is wholly owned by the bank holding company.

Under both alternatives, participants would be credited with the stock in their accounts at its current market price immediately after they reallocated their account balances.

The staff opinion at 5-884.61 concluded that a bank loan to an ESOP sponsor, the proceeds of which are expeditiously re-lent to theESOP, is exempt under section 221.6(d). New section 133(b)(1)(B) of the Internal Revenue Code expands the types of loans (defined as “securities acquisition loans”) to ESOPs that warrant special tax treatment. An immediate-allocation loan involves a bank loan to an ESOP sponsor and the subsequent (within 30 days) contribution by the sponsor of employee securities to the ESOP in an amount equal to the principal of the loan. The securities must be allocable to accounts of plan participants within one year of the date of the loan, and the loan maturity may not exceed seven years.

A privately owned corporation has an ESOP qualified under section 401 of the Internal Revenue Code (IRC). The common stock of the corporation is not margin stock. The corporation received a bank loan that it then reloaned to the ESOP to purchase some of the corporation’s common stock. The transaction qualifies as a securities-acquisition loan under section 133 of the IRC. The corporation pledged receivables as collateral for the loan. The sellers of the common stock pledged certificates of deposit and other nonequity securities to the bank as additional collateral.

A number of registered investment companies (the funds) hold margin stock and are permitted under terms of their prospectuses to pledge it as well as other securities in order to borrow for temporary purposes in amounts not in excess of 33⅓ percent of net assets. Shareholders are generally permitted to redeem all or a portion of their shares on any business day at the net asset value calculated following the receipt and acceptance of the redemption request. Proceeds of the redeemed shares usually either are sent to the shareholder or, if the shareholder requests, are used to purchase shares in another one of the other funds on the next business day following the redemption.

A bank proposes to make a securities-acquisition loan to the trustees of an ESOP under section 133 of the Internal Revenue Code. Securities-acquisition loans qualify as exempt credit under section 220.6(d) of Regulation U (see 5-884.64). Section 221.6(d) allows banks to extend and maintain purpose credit without regard to Regulation U if it is extended “to an employee stock ownership plan (ESOP) qualified under section 401 of the Internal Revenue Code.” At the time of the proposed loan, the employer would not have received a favorable determination letter from the Internal Revenue Service, but the employer has no reason to believe that a favorable determination letter will not be issued. The employer is required by the terms of the loan agreement to submit the plan for a determination letter and to amend the plan to comply with additional requirements imposed by the IRS after it reviews the plan.

A Canadian corporation (bidder) plans a takeover bid for another Canadian corporation (target). The target has shares listed on the American Stock Exchange as well as the Toronto Stock Exchange. The stock involved, therefore, is margin stock. The bidder expects the financing to come from a group made up of two Canadian banks and one or more Canadian subsidiaries of U.S. banks.

The National Securities Clearing Corporation (NSCC) is a clearing agency registered with the Securities and Exchange Commission under section 17A of the Securities Exchange Act of 1934. NSCC is currently modifying and increasing a liquidity facility it has with a bank.

A depository trust company (DTC) has a prearranged line of credit with a group of banks. The line of credit is currently secured by collateral other than margin stock. The DTC would like to expand this agreement to include margin stock as possible collateral.

The National Securities Clearing Corporation proposes to enter into a revolving credit facility similar to the one discussed in the staff opinion at 5-884.68. The exemption in section 221.6(f) of Regulation U is equally applicable to the proposed credit facility. Bank counsel notes that the rules of NSCC require it to liquidate the stock collateral promptly, unless in its opinion to do so would create a disorderly market. To allow for this possibility, loans to NSCC under the facility in some cases may have a term of up to 60 days. One of the conditions of section 221.6(f) of Regulation U is that the loan be “repaid in the ordinary course of business upon completion of the transaction.” This phrase encompasses NSCC’s obligation to avoid creating a disorderly market; therefore the 60-day term is not inconsistent with section 221.6(f). STAFF OP. of Feb. 9, 1996.

Midwest Clearing Corporation (MCC) is a clearing agency registered with the Securities and Exchange Commission (SEC) pursuant to section 17A of the Securities Exchange Act of 1934. In January 1996, it ceased providing securities clearing services.

See 5-951.22.

See 5-942.15 and 5-942.2.

For purposes of Regulation U, the term “foreign banking institution,” is an institution that is neither formed under the laws of the United States or any state nor doing business under such laws, a substantial portion of the or any state nor doing business under such laws, a substantial portion of the business of which consists of receiving deposits or exercising fiduciary powers similar to those permitted a U.S. bank. BD. RULING of May 20, 1970.

Bank of England was requiring additional U.S. securities valued at 115 percent of the amount of a loan extended by a bank to a U.K. branch of a U.S. life insurance company. This additional collateral may or may not include some “margin stock,” as that term is defined in Regulation U section 221.3(v). Staff informed bank counsel that if the collateral included common stock or debt securities convertible into common stock and if any part of the proceeds of the loan were used to purchase margin stock, the loan would be subject to the Board’s margin regulations. STAFF OP. of June 6, 1973.

If an “English private commercial bank” is actually located in England and is a commercial bank in the sense ordinarily used in the United States, it would be a foreign banking institution. Therefore, a loan to it by a bank would be exempted from the credit restrictions of Regulation U, section 221.2(a). STAFF OP. of June 6, 1974.

Authority: 12 CFR 221.2(a) (revised 1998; now 12 CFR 221.6(a) and (b)).

Under Regulation X, if credit to purchase or carry securities is obtained abroad from a foreign lender not subject to Regulations G, T, or U, then the borrower is required to conform with Regulation G as though the lender were subject to that regulation. Regulation G provides that when a credit is extended to a borrower 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. Here the purpose of the credit is to buy a margin security, but the collateral consists of nonmargin securities. Therefore, Regulation G and the margin requirements do not apply. STAFF OP. of Nov. 1, 1973.

See 5-942.65.

A savings bank proposed a program of extending revolving credit secured by shares of investment companies. The mutual funds that would be involved are managed by an affiliate of the bank, are fully owned by the borrower, and are not being held in a margin account at a broker-dealer. Before the line of credit is established, the bank would send a facsimile of Form G-3 to each applicant but would not require a face-to-face interview. The form would list the name, number of shares, market price per share, and total market value of each mutual fund account to be pledged. The G-3 would indicate that the purpose of the line of credit may include buying or carrying margin stock.

Form U-1 must be obtained by a bank making any stock-secured loan, for the following reasons:

BD. RULING of Feb. 13, 1970.

Form U-1 is a statement of the purpose of the credit, and must be completed by the bank and customer if the credit is secured by collateral that includes any stock, regardless of the purpose of the credit. STAFF OP. of June 14, 1972.

A holding company is applying for a revolving credit of $50,000,000. Although it does not intend to purchase or carry margin stock with the proceeds of the credit, it might decide to in the future and therefore wants to reflect that possibility at the time the credit agreement is signed. The credit agreement contains a negative covenant that places certain restrictions on the holding company’s assets for the life of the debt. A substantial part of those assets consist of stock of the holding company’s operating subsidiaries. The maximum loan value of this stock would be considerably more than the $50,000,000 credit. Therefore, if the restrictions in the agreement are deemed to make the credit indirectly secured by the stock of the operating subsidiaries and the loan is deemed purpose credit, the credit would be in compliance with section 221.1(a) of Regulation U.

A borrower and an insurance company have entered into an agreement constituting a long-term loan, which will be secured by margin securities but is not for the purchase or carrying of margin securities. The insurance company is a registrant under Regulation G and will obtain a Form G-3 documenting this loan.

Since banks make loans for many purposes, secured by all types of collateral, and rely on the general worth of the borrower as well as the specific collateral, the Board was aware that administrative burdens would occur if banks had to ascertain the purpose of every loan. Because loans to purchase stock are commonly secured by stock, usually including the stock purchased with the proceeds of the loan, the Board decided to use stock collateral as an indicator of a possible “purpose” loan.

A bank makes a loan to a borrower on an unsecured note, with no collateral of any type being pledged. The bank accepts a guarantee of this same loan from another individual, who collateralizes the guarantee with stock. The intent of Regulation U would best be served by having the guarantor sign the form, since his stock is actually being pledged. The form could easily be modified to indicate the guarantor’s status. STAFF OP. of Feb. 15, 1979.

A state instrumentality plans to privately place tax-exempt revenue bonds with three national banks. The proceeds of the bond sale will be loaned to a private university for the purpose of constructing, refurbishing, and refinancing various educational buildings. The university will give its promissory note to the state instrumentality secured by a pledge of securities, including margin stocks. The state instrumentality will assign the note and the collateral to the trustee under the bond indenture and will have no residual obligations to the bond holders.

A Form U-1 must be executed in either of the following situations:

Before March 31, 1982, if a bank loan was secured directly or indirectly by any stock, the bank was required to complete Form U-1. If the purpose of the loan was to purchase margin stock, the bank was subject to the credit limitations and other restrictions of Regulation U. Contracts made in violation of Regulation U are voidable under section 29(b) of the Securities Exchange Act of 1934. STAFF OP. of May 5, 1982.

Authority: 12 CFR 221.1 and 221.3(a) (revised 1998; now 12 CFR 221.1(b), 221.2(f)(2), 221.3(a), (b), and (c), and 221.8(b)).

After March 31, 1982, a bank loan secured directly or indirectly by margin stock triggers the requirement that a properly executed Form U-1 be obtained. If a loan secured by margin stock is for the purpose of purchasing or carrying margin stock, the loan is also subject to the credit limitations and related requirements of Regulation U.

A Form U-1 must be taken from a customer whenever a bank extends credit secured directly or indirectly by margin stock, regardless of the purpose of the loan (§ 221.3(b)). If the credit is a revolving line of credit or a multiple-draw credit, the bank may take a purpose statement at the time a commitment to lend the funds is made or at the time each disbursement under the credit agreement is made. If the revolving or multiple-draw credit is a purpose loan, the revised Regulation U effective August 31, 1983 specifically permits a bank that has opted to take only one purpose statement as of the date of the credit commitment, merely to obtain and attach to the already executed Form U-1 a current list of collateral adequate to meet the margin requirements for the amount actually disbursed. The list of collateral needs to be supplemented with a revised list only if the disbursed credit would exceed the maximum loan value of the collateral presently held. If the collateral presently held is sufficient to support the entire line of credit at the onset of the loan agreement, the bank never has to require additional collateral and a revised collateral list during the life of the agreement.

A bank asked whether it could print its own Form U-1 instead of using the form supplied by the Board. The bank’s form would be identical to the Board-supplied form but would not carry the OMB number and form expiration date and would display the bank’s name.

The question was raised whether a loan collateralized by an interest in a limited partnership that invests in margin stock could be used for the purchase of a new similar limited partnership interest. Neither interest is registered on a national securities exchange.

A bank has entered into a revolving-credit agreement with a corporate customer for the lesser of $150,000,000 or the maximum amount permitted under Regulation U. The credit is indirectly secured by a negative pledge of margin stock. At the execution of the agreement, a Form U-1 was completed indicating that the loan would be for the purpose of purchasing or carrying margin stock. The maximum loan value of the stock, based on its current market value at that time, was $120,000,000. The market value of the collateral has since declined.

A Form FR U-1 must be obtained whenever a bank extends credit in an amount exceeding $100,000, secured directly or indirectly by any margin stock. If a bank makes more than one margin stock-secured loan, the $100,000 is determined on an aggregate basis. In the case of two purpose loans, this result is dictated by the single-credit rule, which states that “all purpose credit extended to a customer shall be treated as a single credit.” Thus if a bank made a purpose loan for $75,000 to a customer and later made another purpose loan for $50,000, a purpose statement would be required for the $50,000 loan. It would not be necessary to get a Form U-1 for the first loan. The staff believes that all credit secured directly or indirectly by margin stock, whether purpose or nonpurpose credit, should be aggregated to determine whether any particular credit requires a purpose statement.

A bank wants to extend revolving credit to a borrower who will use the proceeds for various purposes, including the purchase or carrying of margin stock. The bank and the borrower are willing to treat the entire credit as a purpose credit. The loans will be directly secured by a pledge of various securities, some of which will be margin stock. Frequent substitution and withdrawal of collateral is anticipated.

There is nothing to prevent a lender from treating all loans under a revolving-credit agreement as purpose loans even though some of the proceeds may not in fact be used for the purpose of purchasing or carrying margin stock.

It is permissible to have all of the collateral secure both the margin-stock-secured portion and the non-margin-stock-secured portion of the loans, as long as each portion is itself properly collateralized. If both portions are fully collateralized, there is no reason that any collateral that is excess after one portion is paid off cannot be applied to the other portion. In a case such as this, the cross-collateralization is not necessary to bring the loan into conformity with Regulation U. It is merely additional comfort to the lender. Indeed, under the single-credit rule, purpose credit is considered to be secured by all of the collateral, both margin and nonmargin.

Delivery of the Form U-1 and a current collateral list. If a loan is to be sold (transferred) to another bank, a copy of the original Form U-1 must be sent to the transferee bank. It is unclear from the letter whether a borrower, upon entering into a revolving-credit agreement with the bank, will (1) pledge enough collateral at the start to cover the entire amount that may be borrowed under the agreement or (2) pledge only enough collateral to cover the first draw. Either method may be used under section 221.3(c). If sufficient collateral is pledged up front, Regulation U does not require that a current list of collateral be attached to the Form U-1 when subsequent draws are made under the agreement. In this case, as long as transferee banks have a copy of the original U-1, they are in compliance with section 221.3(i). However, when proceeding under the second scenario, section 221.3(c) requires that the bank “obtain and attach to the executed Form FR U-1 a current list of collateral which adequately supports all credit extended under the agreement.” In this case, a transferee bank would need a copy of the U-1 with the attached current list of collateral.

Activities of participants as affecting loans under the facility. The sale of participations raises the question whether other dealings between a participant and the borrower (such as extension of unrelated purpose credit by a participant to the borrower) might affect analysis of whether the loans comply with the margin rules. The staff was asked about various aspects of this issue.

The current market value of all collateral, whether margin stock, nonmargin stock, or nonstock, must be determined in accordance with the definition of “current market value” in section 221.2.

The bank has an existing revolving-credit line with the borrower. Loans under this agreement are not for the purpose of purchasing or carrying margin stock. The agreement contains covenants restricting the sale or pledge of the borrower’s assets, which may include margin stock. Such covenants are generally viewed as creating indirect security. Therefore, the staff could not confirm that this nonpurpose line of credit is outside the coverage of Regulation U. However, the bank may value the borrower’s assets, including any margin stock, on a good faith basis. As long as the nonpurpose line of credit and the purpose line of credit are treated separately, as required in section 221.3(d)(4), no problems should arise. Nonetheless, the inclusion of restrictive covenants in the new purpose revolving-credit agreement would represent collateral in excess of that required under section 221.3(a)(1). STAFF OP. of Feb. 29, 1988.

A corporation obtained revolving credit from a bank, the proceeds of which could be used to purchase margin stock. The borrower contemplated acquiring an interest in a target company before making a tender offer for some or all of its margin stock. The borrower felt its investment in the target would be adversely affected if any of the following information were disclosed: the identity of the target, the number of shares of margin stock of the target then held by the borrower or to be purchased by the borrower, the market price per share of the target’s margin stock, and other information relating to the target or the borrower’s investment in the target (collectively referred to as the “confidential information”). Under the terms of the credit arrangement, if the borrower determined that disclosure of the confidential information concerning the target could adversely affect its investment in the target’s margin stock or its plans to acquire more of the target’s stock, the confidential information would not be disclosed to the bank.

Form U-1 is required for all loans in excess of $100,000 that are secured by margin stock. The only exception to this requirement is in the case of a revolving-credit or multiple-draw agreement where the lender has the option of executing a U-1 each time a disbursement is made, or taking the U-1 at the time the credit is established. If the latter option is taken, an updated list of collateral that supports the amount of credit extended under the agreement should be attached to the U-1 each time the collateral changes.

In 1967, a company made a public offering of convertible debentures. To facilitate purchases of these debentures by its own employees, the company guaranteed bank loans to employees who purchased debentures. During 1968 and 1969, interest rates went up, money became tighter, and the stock market declined. As a result, the bank informed the company that it intended to call the loans and called attention to the guaranties. The company waived formal notice and itself took over the credits, including the collateral. The company argues that by taking these steps it was in effect implementing its guaranties to the bank, continuing to extend to its employees margin-exempt credit that was first extended before the adoption of Regulation G.

A private individual will guarantee a $7 million bank loan, the proceeds of which will be used to purchase control of a corporation whose securities are margin securities. The guarantor will secure the bank loan with a $7 million CD. He will also be backed by a guarantor group. The guarantors will receive as security 56 percent of the stock of a company listed on the AMEX, and other collateral, primarily real estate mortgages.

A company arranges a loan facility with a bank to help qualified employees finance the purchase of common stock of the Company pursuant to the terms of its qualified stock option plans. Under the terms of the loan facility, the bank is solely responsible for determining the creditworthiness of each qualified employee. The loans are extended in compliance with Regulation U and secured by the company stock. The company guarantees the loans up to a specified aggregate amount.

The Board views a guaranty by a corporation of an unsecured bank loan to enable an employee to exercise an option to purchase the stock of the corporation as an extension of credit for the purposes of Regulation G. If that guaranty is secured, directly or indirectly, by the stock, as in a situation where the corporation holds the purchased shares as collateral to secure it against loss on the guaranty, the guarantor could be subject to registration and regulation under Regulation G. Registration is required if the stock involved is margin stock and if the amount of the guaranty together with other covered extensions of credit in a calendar quarter equals $200,000 or more.

A nonbank, non-broker-dealer makes a loan to an entity whose principal guarantees the loan and secures the guaranty with a pledge of margin stock. The loan is a working-capital loan by a nonbank subsidiary of a bank holding company. The loan exceeds $200,000 and is secured by assets of the borrower. These assets include inventory and receivables, but not securities. In addition to this collateral, the loan is personally guaranteed by an individual. The individual (1) secures the guarantee by pledging margin stock to the lender, (2) secures the guaranty with a negative pledge on his margin stock, or (3) does not secure the guarantee but owns margin stock.

Bank A extended a purpose loan to a company. It treated the loan as unsecured, although it held a margin security in “safekeeping” with blank stock powers. The bank had the right to call the loan whenever it felt insecure. Bank A also made two purpose loans to officers of that company. Only one was treated as secured by stock; the other was treated as unsecured, or secured by other assets. In each case, the total value of the collateral was less than would support the two loans, if combined, under Regulation U.

An extension of credit to a diversified open-end investment company (fund) was indirectly secured by the fund’s portfolio of securities in view of the fact (1) that the portfolio was held by the lending bank’s trust department as custodian, and (2) that the fund agreed to maintain a fixed asset coverage at all times and could not amend or cancel the custodian agreement without 60 days’ notice, giving the bank ample opportunity to call the loan. Since the loan was for the purpose of purchasing or carrying margin stock, the credit may not exceed the maximum loan value of the securities in the portfolio. BD. RULING of Aug. 25, 1970.

A credit union extends nonpurpose credit secured by a collateral assignment of a specified portion of the borrower’s respective amount in a company-sponsored savings plan, which is invested in margin stock. Each account is credited with the number of shares purchased on the employee’s behalf. Should the borrower default, the credit union may notify the trustee of the savings plan, who is then obliged to liquidate the individual’s interest in the corpus of the savings plan trust to the extent necessary to repay the loan to the credit union. Upon withdrawal from the savings plan, employees may request that the shares credited to their accounts be distributed to them.

A bank proposes to extend two credits to a company; each credit is to be evidenced by a separate agreement. Credit A is collateralized by a nonmargin stock and is for the purpose of providing working capital. Credit B is for the same amount as A but is for the purpose of purchasing and carrying margin stock. Credit B is not directly collateralized by any stock. The borrower is willing to grant crossover rights to the stock collateral from Credit A to Credit B, but the bank will not avail itself of such rights if those rights would be deemed to be indirect security, in the form of stock, for Credit B.

A bank loan to an investment company (fund) is indirectly secured by stock, under the circumstances presented, hence subject to Regulation U, even though the bank is not custodian for the fund’s portfolio if the borrower’s assets consist largely of stock. Generally, the Board’s interpretations have turned on whether the bank would be protected by any sort of effective restrictions on disposal of stock in the portfolio while the credit remained outstanding.

A company plans to make a tender offer for shares of its own stock. To finance the offer, the company will use approximately $10 million of $30 million credit originally extended by a bank for general corporate purposes. The loan agreement contains a negative covenant prohibiting the company from encumbering any of its property, which includes margin stock. Staff stated that any part of the credit extended under the agreement that is subsequently used to purchase margin stock becomes purpose credit. Even if the credit is purpose credit, however, it would not become regulated unless directly or indirectly secured by margin stock.

Credits extended under an executive stock purchase plan would be indirectly secured, as defined in Regulation G section 207.2(i), since the maturity of the credit would be accelerated upon disposition of the collateral by the borrower. The plan’s terms stated that the “unpaid principal amount of any loan made under the Plan . . . shall become due and payable thirty days after the loan participant sells, pledges, disposes of . . . all or a portion of the stock purchased with such loan.” STAFF OP. of May 8, 1975.

If a bank has specifically contracted with a borrower for a continuing security interest in all stock held for any indebtedness of the borrower, all such indebtedness will be deemed indirectly secured by that stock. A Form U-1 is required for each credit extended while such a dragnet provision is in effect. STAFF OP. of Sept. 9, 1975.

A corporation whose stock is margin stock has established an employee stock ownership trust for the benefit of its employees. The trust will be qualified as an employee stock ownership plan. As an ESOP, the trust will then buy corporation shares with proceeds from the sale of notes to a lender. All payments due to the lender from the ESOP will be unconditionally guaranteed by the company. Although the proposed extension of credit is purpose credit, there is no undertaking by the ESOP that would make it indirectly secured within the meaning of Regulation G. The lender is relying only on the company’s guarantee and the financial covenants contained in the note agreement. The guarantee itself, running between the company and the ESOP, is unsecured. The absence of a negative covenant acceleration, clause or other restrictions in the proposed note agreement indicates that the loan is not secured indirectly by margin stock. Staff concludes that the proposed transactions would not violate Regulation G or X. STAFF OP. of May 12, 1976.

A proposed subordinated loan agreement between a bank and a registered broker-dealer and member of the New York Stock Exchange would not violate Regulation U or X. The subordinated loan agreement contains a negative covenant whereby the borrower agrees that it will not “incur, from the date of its organization on a cumulative basis, losses before income taxes, after giving effect to any profits generated during such period, in excess of an aggregate amount of $1,000,000.” A breach of this covenant would entitle the bank to accelerate the subordinated loan on the last business day of the sixth full calendar month after the date on which notice of such breach is given. Staff concluded that the addition of the negative covenant would not violate either Regulation U or X. STAFF OP. of March 24, 1977.

Authority: 12 CFR 221.3(c) (revised 1998; now 12 CFR 221.2).

Whether a loan to a holding company is indirectly secured by the stock of its subsidiaries by virtue of negative covenants in the loan agreement can be determined only by an examination of all the facts and circumstances in each individual case. STAFF OP. of May 27, 1977.

A multibank credit agreement contains a negative covenant precluding the creation of liens on the properties of the borrower and its sub-sidiaries. There is also a restriction on the disposition of the assets or shares of the subsidiaries; however, this clause allows sale or disposal of such shares so long as fair consideration is received. The bank is looking to the consolidated cash flow of the borrower and its net worth, from whatever source derived.

On the basis of 12 CFR 221.117 (at 5-805), a loan to a company whose assets consist substantially or entirely of stock of its operating subsidiaries (a holding company) need not be treated as indirectly secured merely because the loan agreement contains routine negative covenants, if the bank, in good faith, did not rely upon the stock as collateral.

A U.S. branch of a foreign bank proposes to extend purpose credit to a U.S. borrower. To secure the loan, the borrower will agree not to pledge any of its assets, with certain exceptions. If a substantial part of these assets consist of stock, the loan will be deemed indirectly secured by that stock.

A publicly held corporation (A) whose stock is listed on AMEX intends to merge with a wholly owned subsidiary of corporation (B). Concurrent with the merger, the existing shares of A will be cancelled and delisted, and the present shareholders will receive cash subject to exercise of appraisal rights. The surviving corporation’s capital will consist of 1,000 shares of common stock, which will not be a margin security.

If the credit agreement between a holding company and a bank contains a clause permitting sale or disposal of any stock covered by a negative covenant so long as fair consideration is received, staff’s view is that the loan would not necessarily be viewed as indirectly secured by such stock. STAFF OP. of Aug. 6, 1979.

A company proposes to extend credit to certain key employees in connection with the exercise of their stock options and the payment of the applicable withholding tax. The company would guarantee an unsecured line of credit established at a designated bank. An employee wishing to exercise a stock option would be able to pay for the purchased shares and the withholding tax by drawing down on the line of credit. It is anticipated that after purchasing the shares the employee will sell them on the open market through a designated broker-dealer and use the proceeds to liquidate the bank loan. The stock would actually be under the control of the company until the loan was repaid.

A bank loan will be secured by a guaranty with the guarantor pledging securities to back up the guaranty. Staff stated that the bank loan could be indirectly secured by the securities pledged to back up the guaranty, but before such a determination could be made, all the relevant documents would have to be examined. STAFF OP. of Dec. 4, 1980.

Authority: 12 CFR 221.3(c) (revised 1998; now 221.2).

Loan agreements with various banks presently require ratable security for the bank loans in the event of any pledge of “restricted property” and prepayment of the loans from the proceeds of the sale of “restricted property.” The definition of “restricted property” includes certain assets that are important to the operation of the borrower’s business as well as stock of the borrower’s subsidiaries. A proposed change in the loan agreements would exclude stock from the definition of “restricted property” but would provide that if stock of a subsidiary were sold, pledged, or otherwise disposed of, the borrower would be required to transfer the “restricted property” owned directly or indirectly by the subsidiary to the borrower or another wholly owned subsidiary of the borrower.

Several domestic banks (lenders) will participate in a revolving loan to a public business development company (company) regulated under the Investment Company Act of 1940. The company is operated for the purpose of making investments in securities and providing managerial assistance to the issuers of those securities. The company’s assets consist primarily of securities, a substantial portion of which are margin stock.

A recent amendment to Regulation U notwithstanding, the August 3, 1981 staff opinion at 5-917.11 may continue to be relied upon. That opinion stated that certain alternative restrictions in a bank loan agreement were actually restrictions on the sale, pledge, or disposition of nonstock assets that were important to the operation of the borrower’s business rather than restrictions on the stock itself. After February 15, 1982, the theory of that opinion would permit the lender (1) to place restrictions on nonmargin stock as well as equipment, buildings, and other nonstock assets without obtaining a Federal Reserve Form U-1 and (2) to limit the value placed on the nonmargin stock covered by the negative covenant to the 50 percent loan value currently in Regulation U. STAFF OP. of February 26, 1982.

Authority: 12 CFR 221.3(c) (revised 1998; now 12 CFR 221.2).

A closely held corporation (the parent) will organize a wholly owned subsidiary to purchase shares in a company whose stock is margin stock. The subsidiary will obtain a loan from a G-lender and use the proceeds to purchase the margin stock. The parent will guarantee the loan and may secure its guarantee by pledging the shares of subsidiary stock, which is nonmargin stock.

A bank serves as the trustee for numerous pension and profit-sharing plans and associated trusts. Many of these qualified plans allow plan participants to borrow funds from the trust using the individual participant’s vested account balance as collateral. The purpose of the borrowing by the customer may be to purchase margin securities. The assets of the trust include margin securities. In some cases, the bank’s common trust funds are also used. The lending agreement permits the bank to look to the customer’s vested account balance for repayment in the event of default. The qualified plans in question are not mutual funds.

A privately held corporation (borrower) proposes to borrow $100 million from a bank (bank) to purchaser the margin stock issued by a publicly held company (issuer). The borrower’s objective is to acquire the entire equity interest in the issuer and then divest the issuer’s assets as expeditiously as practicable.

A closely held corporation (the parent) will organize a new wholly owned subsidiary (the subsidiary) for the purpose of purchasing shares of common stock that are listed on a national securities exchange (the margin stock). The margin stock is currently held in the portfolio of an insurance subsidiary of a holding company. The subsidiary’s purchase of the margin stock will be financed by the holding company’s insurance subsidiary (the lender), and the loan will be evidenced by a term note (the note). The parent will guarantee the note and will secure its guarantee by pledging to the lender the shares of the subsidiary stock, which will be nonmargin stock.

Under a revolving-credit agreement, the borrower may use the proceeds of loans for various corporate purposes, including the purchase of margin stock. Although no direct security is granted to the banks, the credit agreement contains various provisions restricting the borrower’s right to sell, pledge, or otherwise dispose of its assets, including any margin stock owned by it. Thus, it was believed that the loans made pursuant to the credit agreement would be indirectly secured by margin stock for the purpose of Regulation U unless section 221.2(g)(2)(i) applied. The question was raised whether the satisfaction of section 221.2(g)(2)(i) may be determined at the time of entering into the credit agreement.

Company A proposes to acquire Company B. As part of the transaction, Company A wants to sell its stock, which is margin stock, to key employees of Company B and lend those employees the full cost of the securities. Each employee will sign a note payable in full in 10 years at a 6.9 percent interest rate; however, that rate will be increased to two points over the prime rate if the employee sells the stock while still an employee of Company A or one of its subsidiaries. If the employee leaves Company A or one of its subsidiaries, the note will be due in 90 days and during that 90-day period will carry an interest rate of two points over the prime rate.

The term “indirectly secured” does not apply to a situation in which “not more than 25 percent of the value . . . of the assets subject to the arrangement is represented by margin stock” (§ 221.1(g)(2)(i)). This exemption typically involves a corporate loan, with the lending bank placing a negative covenant on all of the borrower’s assets, which are in large part represented by plant and equipment. It was not designed to cover a situation in which all of the assets of the borrower are margin stock, as is the case with a holding company or shell corporation prior to the effectuation of a merger. Over the course of the years, many corporations own or intend to own in addition to plant and equipment, some margin stock. The bank lending to such a corporation may wish to use a general negative covenant in the loan agreement. Without the exception provided in Regulation U, even a de minimus holding of margin stock would make the loan a regulated loan. The exception from the coverage of the term “indirectly secured” is not available when the only assets of the borrower are margin stock. STAFF OP. of June 15, 1984.

Certain subordinated debentures involved in the proposed acquisition financing transaction described below should not be considered a credit indirectly secured by margin stock for purposes of Regulation G.

A lender proposes to finance employees’ purchases of the lender’s margin stock (not under the plan-lender section of Regulation G (§ 207.5)). A loan provision would require repayment of any market appreciation in the stock to the lender if the stock is sold within three years of its acquisition. The stock would be purchased by key employees of a company acquired by the lender, and this provision is designed to provide an incentive to retain key employees in the employ of the Lender. An employee’s disposition of the stock is not restricted. Although there may be a strong economic incentive for the employee not to leave the employ of the lender because of the potentially large sum of money that must then be repaid, the employee is free to leave the lender’s employ and to retain the stock, subject to the above penalty. In fact, whether the employee leaves voluntarily or not, there may be a great incentive to keep the stock for the three-year holding period so as to make certain sufficient funds are available to pay the penalty. If the employee does not repay the lender upon leaving the lender’s employ within three years of the stock’s purchase, the lender is in the position of an unsecured creditor, free to sue on the contractual loan provision or not. After the three-year period, an employee is no longer subject to this provision, and any market appreciation belongs to the employee. Obviously, this provision is designed primarily as an incentive to retain key employees.

A corporation (parent) will form a wholly owned subsidiary (subsidiary) that will make an offer to purchase approximately two-thirds of the publicly traded stock of another corporation (ABC Corporation). The stock is listed on a national securities exchange and is therefore margin stock. To purchase the ABC Corporation stock, the subsidiary will obtain a bank loan of approximately $100 million. The parent will guarantee the loan and may secure its guarantee by pledging to the bank all of its shares of the subsidiary stock, which is nonmargin stock. The parent will own no margin stock and will in no event secure its guarantee by any margin stock.

A holding company with a broker-dealer subsidiary intends to issue commercial paper to finance activities of the broker-dealer and other parent subsidiaries. The terms of the commercial paper will require the parent to ensure that the amount of commercial paper outstanding does not exceed an amount approximately equal to the amount of unencumbered margin securities owned by the broker-dealer.

A syndicate of banks will make available a revolving credit facility to a corporation (the borrower), which intends to use the proceeds from time to time to purchase or carry margin stock or to provide the proceeds to one or more of its subsidiaries (investment subsidiaries) to be used to purchase or carry margin stock. While the credit will not be secured directly, it is proposed that it will be indirectly secured by margin stock as well as non-margin-stock collateral.

The staff was asked to reconsider its opinion at 5-919.111 on single-premium variable life insurance policies funded by mutual funds. At issue is the staff’s conclusion that a loan by a lender other than the insurance company issuing the policy may be indirectly secured by the mutual fund shares funding the policy if the borrower pledges the policy as collateral for the loan. The inquirer raised three issues. First, the argument is made that the mutual fund shares (which are margin stock) are not serving indirectly as collateral because the collateral is the net cash surrender value of the policy. The staff believes that this reinforces its view. According to the policy prospectus, the net cash surrender value “varies each day based on investment performance,” the entire premium is invested in mutual funds, and no minimum value is guaranteed. It is the staff’s view that in taking the net cash surrender value of the policy as collateral, a lender is indirectly relying on the mutual funds that determine that value.

The SEC asked for guidance in determining whether the terms of an unsolicited bid by one company (“bidder”) for all (but not less than two-thirds of) the outstanding shares of common stock of another company (“target”) whose stock is margin stock complies with the Board’s margin regulations. The tender offer is being made through the bidder’s indirect, wholly owned subsidiary with financing to be obtained by another subsidiary. Both subsidiaries are shell corporations formed for the purpose of accomplishing the acquisition. If the tender offer is successful, the bidder will merge the target and one of the subsidiaries. Although the bidder is an operating company, it currently has negative cash flow and a negative net worth.

An insurance company registered under Regulation G on the basis of investments in senior notes issued in a private placement by a company that operates through three major subsidiaries (“the parent company”). The debt securities contain a negative pledge on all assets of the parent-issuer and its domestic subsidiaries. Two of these subsidiaries are not wholly owned by the parent, and their stock is margin stock. The question raised is whether 25 percent or more of the parent’s assets is margin stock, causing the credit to be indirectly secured by that stock.

A bank has loan agreements with two groups of open-end investment companies. The first group consists of mutual funds with 25 percent or less of their assets invested in margin stock and the other of mutual funds with 65 percent or more of their assets invested in margin stock. None of the loans are to be directly secured by any margin stock.

A group of banks proposes to make some loans to a parent company and one of its subsidiaries that will effectively be jointly and severally liable for the loans. The loans will be treated as purpose credit but will not be directly secured by any collateral. The banks have asked the borrowers to maintain a portfolio of liquid assets with an aggregate value in excess of the sum of the bank loans and all other debt of the borrowers. This portfolio will consist of margin stock and other marketable securities such as government securities, corporate bonds, money market instruments, commercial paper, and certificates of deposit. The banks are not concerned about the mix of this portfolio.

A proposed limited partnership (“the acquisition partnership”) would be formed for the purpose of acquiring the margin and nonmargin stock of a public company (“the target”). The cost of the target securities is $60 million. The partners of the acquisition partnership would contribute $5 million in equity. The target securities would be pledged to the affiliate of a U.S. bank, a Regulation G lender, to support a loan of approximately $27 million. In addition, the partnership would obtain another loan from another lender for approximately $28 million. Because the acquisition partnership has no additional assets to pledge, the $28 million loan would be guaranteed by one of the partners of the acquisition partnership. This partner, a corporation, has agreed to secure its guarantee with an indirect security interest in corporate operating assets with a loan value at least equal to $28 million. None of these assets would be margin stock.

An investment advisor has several clients who have purchased two series of notes issued by a partnership (“the borrower”). The notes are guaranteed by a related entity (“the guarantor”), which owns almost 70 percent of the stock of a New York Stock Exchange-listed company (“the margin stock”). The note agreements specifically provide the note purchasers with the option of accelerated prepayment of the notes if the guarantor engages in any issue, sale, or other disposition of the margin stock that results in the guarantor’s no longer owning 50 percent of the voting stock of the issuer of the margin stock.

United States banks and other lenders plan to finance the acquisition of a United Kingdom company whose securities are registered on the New York and London Stock Exchanges. The corporate acquisition involves the use of a shell acquisition vehicle, which raises questions about Board interpretation 12 CFR 221.124 (at 5-805.1), regarding purchase of debt securities to finance corporate takeovers. The proposed acquisition will be financed with a number of loans, some of which will be guaranteed by companies that have substantial non-margin-stock assets or cash flow. The presumption of indirect security contained in the interpretation does not apply to these guaranteed loans. As to the other loans funding the acquisition, it is necessary to determine whether there are other factors to rebut the presumption of indirect security.

Staff was asked about certain extensions of credit represented by privately placed notes. The issuer of the notes will be a special-purpose vehicle that plans to invest in a variety of financial assets, some of which may qualify as “margin stock,” as defined in section 221.2 of Regulation U. The notes will be composed of two classes, and the proceeds received from investors in each class will be accounted for separately. The senior notes will be directly secured by the assets of the issuer, but the proceeds will not be invested in margin stock. The junior notes will not be directly secured by these assets, but the proceeds may be invested in margin stock. The overall amount of margin stock held by the issuer will be limited to less than 25 percent of the value of the issuer’s assets.

A general discussion of tax shelters, outlining the features that may and may not make them subject to the margin regulations.

Board interpretations at 5-798.2 and 5-830, as they pertain to insurance premium funding program credits, indicate that if the order for certain mutual fund shares is in fact placed on the same date when a firm commitment to extend credit occurs, then the public offering price of the fund shares may be used throughout the day to determine maximum loan value of such fund shares.

Regulation G was completely revised effective August 31, 1983. One of the most significant revisions was the elimination of the special provisions governing insurance premium funding programs. The current margin regulations afford more liberal credit provisions than those permitted for insurance premium funding programs in the past (50 percent loan value replacing 40 percent).

A registered G-lender wants to offer its customers the choice of having the monthly interest charges on their purpose loans automatically added to their existing principal balances. Customers would not make any cash interest payments, but their principal balances would increase each month by the amount of accrued interest. Section 207.4(b) implies that the mere addition of interest will not affect a loan. Since borrowers will not obtain any additional money, the plan will not be a violation of Regulation G.

The maximum loan value of any margin security generally shall be 50 percent of its current market value, determined by any reasonable method. In other words, if one pledges as collateral a stock registered on a national exchange or a stock on the Board’s OTC list, a lender (including a credit union) registered under Regulation G may extend credit in an amount up to 50 percent of the market value of the collateral for the purpose of purchasing margin securities. A purchase of nonmargin securities would not be subject to the credit limitations of Regulation G. STAFF OP. of April 13, 1977.

The Board has long held the view that for purposes of Regulation U, a guaranty of a loan is not “collateral” and therefore cannot be attributed any loan value. STAFF OP. of Feb. 2, 1982.

An inquiry was made regarding the determination of maximum loan value of margin stock in a tender offer when a premium is included in the price paid. Board interpretation 12 CFR 221.110 (at 5-803) supports the view that the “current market value” of the stock being acquired through the tender offer is the price at which the actual purchase is made. Section 221.2(d)(1)(iii) of Regulation U defines “current market value” as the total cost of purchase. Therefore, purpose credit can be extended under Regulation U in an amount up to 50 percent of the actual price paid for the shares of stock used to secure the loan. STAFF OP. of May 9, 1985.

A question was raised about the treatment of two stock purchases under Regulation U. In the first example, a customer seeks to finance the purchase of 100 shares of a listed company on margin through a bank. The second example involves a purchase of 100 percent of the shares of the same company.

A warrant to buy margin stock is itself margin stock under Regulations U and G. In addition, a warrant may qualify as margin stock under all of the Board’s margin regulations if it is trading on a national securities exchange, trading over the counter in the National Market System, or listed as an OTC margin stock.

See 5-917.19.

In the past, a bank has extended credit to employees of a registered broker-dealer (merger partner) to be used for the purchase of stock and convertible subordinated debentures of the merger partner. These securities are not “margin stock” as that term is defined in section 221.2 of Regulation U. The credit extension has not been directly secured but may have been indirectly secured by the terms of a “comfort letter,” issued by an officer of the merger partner, directing the merger partner, should it repurchase its securities from an employee, to retire the employee’s related indebtedness to the bank before paying any of the proceeds to the employee.

The corporate general partner of several limited partnerships has provided cash capital contributions to those partnerships. The cash contributions were in part derived from a bank line of credit, but it is impossible to distinguish between the partnership contributions and general corporate fund usages. The limited partnership interests are not “margin stock” as that term is defined in section 207.2(i) of Regulation G. However, pursuant to an exchange offer, both the general partnership and limited partnership interests may be exchanged for units of a master limited partnership, which will be traded on a national securities exchange. Therefore, the units are margin stock. The general partner wants to borrow money from a G-lender to repay the debt incurred under the original bank line of credit. This new loan will be secured by a pledge of the margin stock received in the exchange offer. The question raised is whether the margin requirements of Regulation G pertain to the second loan.

A bank proposes making a purpose loan secured by margin stock in compliance with Regulation U. For the first four years, no principal payments will be required. In addition, if the borrower so desires and certain conditions are met, the bank will fund all accrued interest with additional loans secured by the collateral already securing the purpose loan. Interest on additional loans may also be capitalized.

Securities issued by a small business investment company licensed under the Small Business Investment Company Act of 1958 (15 USC 661) are specifically excluded from the definition of “margin stock.” Accordingly, Regulation U does not restrict a bank’s extending credit for the purchase or carrying of such securities. BD. RULING of April 28, 1970.

An issuer is offering a security, as defined in the Securities Act of 1933, but not in a public offering, as defined by section 4(2) of the act. It is therefore exempt from the section 5 provision regarding the filing of a registration statement. Nevertheless, it is of a class registered on a national securities exchange and falls within the definition of margin stock in Regulation U. STAFF OP. of May 30, 1975.

Authority: Securities Act of 1933 § 4(2), 15 USC 77d(2); 12 CFR 221.3(v) (revised 1998; now 12 CFR 221.2).

A question has been raised regarding the applicability of Regulation U to transactions taking place after March 31, 1982, when an amendment to Regulation U adopted by the Board on January 13, 1982, is effective. Under a proposed transaction, a corporation would issue a new class of preferred shares, which would be convertible into common shares that are margin stock.

A company has instituted a convertible debenture plan that provides for the sale of floating-interest-rate convertible subordinated debentures to certain key employees of the company and its subsidiaries. The debentures will be convertible into preferred stock of the company at any time after one year from the date of issue. The preferred stock will not be publicly traded and will not come within the definition of “margin stock” in Regulation U. The preferred stock is convertible into shares of common stock of the company; the common stock is margin stock under Regulation U.

The staff received an inquiry regarding single-premium variable life insurance policies and the possibility that they might be considered margin stock under Regulations G and U. The policies in question are registered with the Securities and Exchange Commission under the Securities Act of 1933. The insurance company that issues the policies establishes separate accounts to fund the policies. Although the insurance company is not registered under the Investment Company Act, the accounts are. The accounts invest in various securities, primarily equity securities. The policies contain variable death and cash values that vary directly with the investment experience of the underlying account. The insurance policies are securities, but they are not margin stock.

A company proposes to issue preferred stock that is convertible into margin stock and that will be supported by a letter of credit issued by a bank for the account of the issuer and for the benefit of the holder of the preferred stock. Previous staff opinions have consistently held that although credit to purchase preferred stock convertible into margin stock is purpose credit, the convertible preferred stock is not margin stock unless it meets the definition in its own right. In none of the situations reviewed, however, was the nonmargin stock supported by a letter of credit. This added feature would not alter the staff’s previous conclusion (at 5-919.1) that preferred stock convertible into margin stock is not margin stock when used as collateral for a loan. STAFF OP. of Dec. 6, 1989.

A question was raised about the status of preferred stock issued by a closed-end registered investment company (the fund). The stock is not registered on any exchange nor is it sold in the over-the-counter market. Proceeds from the sale of the preferred stock, issued under section 18 of the Investment Company Act of 1940, were used to acquire additional securities for the benefit of the common stockholders of the fund. The fund invests primarily in medium-term high-yield debt instruments. An AAA-rated policy has been issued by a financial guaranty insurer guaranteeing payment of all dividends and redemption price or liquidation value of the preferred stock. The fund is required to redeem the stock when the value of its assets falls below a certain level.

A question was raised about the applicability of Regulation U to the purchase and sale of commodity futures. The commodity futures involved are not stock index futures.

A United Kingdom company has American Depositary Shares registered on the New York Stock Exchange. The ordinary shares are also registered on the New York Stock Exchange, although the Securities and Exchange Commission Form 20-F for the U.K. company notes that the ordinary shares are “listed, not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.”

A broker-dealer has developed a structured finance proposal that includes three parts. The first part involves the establishment of a trust that holds a portfolio of convertible bonds that qualify as margin stock and the issuance of beneficial interest securities by the trust. There will be two classes of these instruments, to be known as bond receipts and options receipts. The bond receipts will represent the beneficial interest in principal and interest payments for a specific convertible bond. The option receipts will represent the beneficial interest in the convertibility rights for a specific convertible bond. The right to direct the trustee to sell a specific bond will belong to the option receipt holder and not to the bond receipt holder. The second part of the transaction involves the sale of the bond and option receipts. The bond receipts will be sold to an offshore special-purpose entity (SPE), which may hold liquid investments and financial derivatives in addition to the bond receipts. In the third part of the transaction, the SPE will issue debt securities, payments on which will be supported by the cash flows and the assets of the SPE. The SPE will sell these notes to investors pursuant to SEC Rule 144A.

The loan value of securities indirectly securing a purpose loan is the same as the loan value of securities directly securing such a loan. The word “collateral,” as used in Regulation U, refers to assets that secure loans both directly and indirectly.

A group of banks will make a loan to the borrower to finance a tender offer. This loan will be secured by the margin stock acquired in the tender offer and an irrevocable stock subscription agreement. The stock subscription agreement provides that a limited partnership, which will be the sole stockholder of the borrower, will agree to purchase additional common stock of the borrower. A similar irrevocable subscription agreement, by which the limited partners will agree to make additional capital contributions to the partnership, will also serve as security for the loan. The obligations under both subscription agreements will be payable on demand and the agreements will be assigned to the banks as collateral; the banks will have the right to demand that payment be made. The borrower may sign one or two notes to each bank (one secured by each type of collateral with cross-collateralization).

Although a company will extend purpose credit for the purchase of securities other than mutual funds, it will accept only mutual fund shares as collateral for any loan, purpose or nonpurpose. Whether credit will be extended will depend solely on (1) whether the mutual fund shares have sufficient loan value and (2) whether the usury rate in the borrower’s home state exceeds the company’s costs in extending the credit. If the collateral value will support the loan and the company is permitted to perfect a security interest in the mutual fund shares, there will be no further investigation into the borrower’s creditworthiness.

The common stock of a company is listed on AMEX. The company proposes to adopt a nonstatutory stock option plan for the benefit of certain key employees. Under the plan, the board of directors may grant the optionee the right to pay for the stock in installment payments, which must be completed before the option expires. No stock covered by the plan would be issued to the optionee until the full purchase price had been paid by the optionee.

Credit extended by a corporation to finance an employee stock purchase plan is credit extended in the ordinary course of business of the corporation. If margin securities collateralize a credit to finance the exercise of rights to purchase margin securities granted under an employee stock purchase plan, the person extending the credit would be a lender under section 207.1(c) of Regulation G. If the security collateralizing the credit is not a margin security, the provisions of Regulation G would not apply. STAFF OP. of April 23, 1971.

A company proposes to extend $391,000 credit to its president to cover the purchase of the company’s common stock. The company contends that the credit is “a one-time transaction designed to provide further economic inducements for the President and founder of the Company to remain employed.” Staff concluded that the credit benefited the company by enabling it to attract able personnel. By thus promoting the interest of the company, and its shareholders, the credit was extended “in furtherance of a business purpose.” Therefore, it should register as a G-lender and bring the credit in conformity with section 207.1. STAFF OP. of Dec. 3, 1976.

A privately held corporation recently discovered that its president had misappropriated, for his own personal use, approximately $1,800,000 of corporation funds and demanded repayment. The president was unable to meet the demand immediately but anticipated that he would be able to do so in the near future. Rather than pursue legal remedies, the corporation agreed to accept a 30-day promissory note. The note was guaranteed by a corporation with which the president is affiliated, and the guarantee was secured by shares of margin stock owned by the affiliated corporation.

A state instrumentality will make a public offering of bonds, the proceeds of which will be loaned to a private university within the state for the purpose of building dormitories and a parking garage. The bonds will be partly secured by university-owned securities, some of which are margin stocks. The state agency has no obligation to the purchasers of the bonds, and the securities to be deposited are to be held for the benefit of the bond holders. The purchaser of a bond in a public distribution has never been regarded as a lender subject to Regulations G, T, or U. STAFF OP. of March 26, 1974.

Corporation X proposes to make an exchange offer to shareholders of Corporation Y. Corporation X stock is publicly traded in the over-the-counter market, while Corporation Y stock is traded on the NYSE. Corporation Y shareholders have a choice of receiving a Corporation X bond or an amount of Corporation X stock. No cash is involved. Since the exchange is a public offering and will be registered as such, the exchange of stock for bonds would not be an extension of credit by Y shareholders and would not violate the Board’s margin regulations. STAFF OP. of Oct. 18, 1978.

Authority: 12 CFR 207.1(c) (revised 1998; now 12 CFR 221.3(b)(1)).

As of April 1, 1998, all lenders other than brokers and dealers are subject to Regulation U.

See also Arranging—Public Offering of Debt Securities under “Board Rulings and Staff Opinions Interpreting Regulation T.”

Company X’s common stock is a margin security. Banks and insurance companies have extended to Company X nonpurpose credit, which, by reason of negative convenants in the loan agreement, is secured indirectly by the stock of the company’s wholly owned subsidiaries. The stock serving as security is nonmargin stock.

A bank has extended an unsecured purpose credit loan to a customer. The customer later requests a secured nonpurpose credit loan. The single-credit rule does not apply, and nothing in Regulation U prohibits this type of transaction.

Board staff was asked about a bank’s ability under Regulation U to extend credit against an investor’s margin account maintained at a broker-dealer when the credit is used to meet the short sale margin requirements of Regulation T. The bank is affiliated with the broker-dealer. The investors wish to purchase margin equity securities on credit and sell other margin equity securities short. For their long positions, the investors borrow up to 50 percent of the purchase price of margin equity securities from their broker-dealer. The investor satisfies the 50 percent margin requirement for this transaction without borrowing from the bank.

Two conditions must be met before a bank loan is subject to Regulation U. First, the loan must be for the purpose of carrying margin stocks. Second, the loan must be collateralized by some stock. Under section 221.3(v)(5), mutual fund shares are margin stock unless 95 percent of the assets of the fund are continuously invested in exempted securities.

If a bank extends credit for the purchase of a nonmargin stock and the loan is secured by such stock, the loan will become regulated and therefore subject to the withdrawal-and-substitution restrictions of Regulation U if the stock later becomes a margin stock. BD. RULING of April 24, 1970.

Authority: 12 CFR 221.1(a) (revised 1998; now 12 CFR 221.1(b), 221.3(a), and 221.3(f)).

See also 5-933.1.

A borrower obtained a bank loan to purchase nonmargin stock and pledged that stock as collateral. Two or three months later, the nonmargin stock was sold and margin stock was bought on the same day. The margin stock was pledged as collateral for the loan. The loan was never increased, but it was once renewed. The bank may continue to treat the loan as a nonpurpose loan unless it has knowledge that the original purpose of the loan was to purchase margin stock and that the purchase of nonmargin stock was a subterfuge. STAFF OP. of April 30, 1975.

A tender offer was made for shares of a company listed on the AMEX. Long-term financing was arranged but was not available for three or four months hence. Interim financing was obtained through four banks; the credit was unsecured and did not rely on the stock to be purchased by the tender offer. Once obtained, the target shares were delisted; thus, when the long-term financing became available, the acquired shares were no longer margin stock. Since the present status of the stock controls and the stock is currently neither a margin security nor a margin stock, a credit secured by such stock would not be subject to regulation. STAFF OP. of June 25, 1975.

A credit transaction involved an insurance company and its wholly owned subsidiary. The subsidiary is registered as a G-lender in connection with extensions of credit separate and apart from that discussed below.

A bank proposes to lend funds to Company A, which owns 83 percent of the stock of Company B, which is a margin OTC stock. Company A would use the proceeds of the proposed loan to purchase the remaining 17 percent of the stock of B.

Board staff has never considered a public offering of debt securities to be covered by the term “extension of credit” for purposes of the margin regulations. STAFF OP. of Feb. 4, 1977.

Although the Board itself has never considered the question, it is the staff’s view that the purchaser of a debt security in a public distribution is not considered a lender subject to the margin regulations. STAFF OP. of June 15, 1977.

A corporation intends to sell promissory notes to three insurance companies. Part of the proceeds will be used to repay a loan originally incurred to purchase a margin security. The shares, once listed on the AMEX, have since been delisted. Since the present status of the stock controls, the present refinancing is not a purpose loan under the terms of Regulation G. STAFF OP. of July 27, 1977.

A company has a revolving line of bank credit that is not directly secured by stock. The loan agreement has a negative covenant running to assets generally, and the assets include stock. To date, the revolving credit has not been used to purchase any margin stock. The company now wants to buy some of its own stock, which is a margin stock. The company intends to retire this stock instead of keeping it as treasury stock.

Several insurance companies will purchase $75 million in promissory notes from a company in a private placement. The company will use the proceeds to repay a loan originally incurred to purchase inventory and equipment. None of the proceeds will be used to purchase or carry any margin stock.

Neither the public sale nor the underwriting of long-term debentures, the proceeds of which will be used to purchase publicly held securities, involves an extension or arranging of credit of the kind intended to be regulated by section 7 of the Securities Exchange Act of 1934. STAFF OP. of March 24, 1978.

In connection with the purchase of assets of a target corporation, the buyer intends to obtain a bank loan to purchase 40 percent of that corporation’s stock. The stock is listed on an exchange and will be part of the collateral securing the loan.

An extension of credit for the purchase of a membership on a securities exchange is not a loan for the purpose of purchasing or carrying securities. Under Regulations G, T, and U, such a loan (or the guarantee of such a loan, which, under the theory expressed in 12 CFR 221.118 (at 5-802), is a separate extension of credit to the borrower by the guarantor) may be treated as any nonpurpose loan. STAFF OP. of Aug. 14, 1978.

A bank proposes to make a loan to finance the purchase of all of the outstanding shares of a margin stock. After the acquisition, the stock will be removed from NASDAQ, but the company will continue to exist, at least for a while, as a wholly owned subsidiary of the acquiring company or one of its affiliates.

A corporation proposes to acquire the stock of another and then merge its subsidiary into the acquired company. To accomplish this, the corporation and its subsidiary will borrow separately from a bank and an insurance company. The present common stock of the target company is listed on an exchange but will be delisted immediately following the merger. Any new stock created will not be a margin stock. At no time will the loan from the insurance company have a margin security as collateral. Regulation G is therefore not applicable. No opinion concerning Regulation U was requested. STAFF OP. of Jan. 8, 1979.

Credit extended by a bank for the sole purpose of allowing the customer to pay income tax due upon the exercise of nonqualified stock options is not purpose credit within the meaning of Regulation U despite the fact that the stock obtained upon the option exercise is margin stock. STAFF OP. of March 21, 1979.

The purchaser of a debt security in a public distribution is not a lender covered by the margin regulations. STAFF OP. of June 29, 1979.

Although the Board has not addressed the question, Board staff has repeatedly stated its view that a public offering of debt securities does not constitute an extension of credit for the purposes of the margin regulations. STAFF OP. of Aug. 28, 1979.

A principal stockholder of a company whose common stock is listed on the American Stock Exchange proposes to form a new corporation (Company A) which would, in turn, form another company (Company B). From two banks, Company A would borrow sufficient funds to pay for all of the listed company’s stock not now owned by the principal stockholder and would advance that sum to Company B either as a loan or a contribution to capital. Company B would then be merged into the listed company, and the cash from the bank loans would be used to pay for the shares owned by persons other than the principal stockholder.

Although the Board itself has not addressed the question, the staff has never viewed a public offering of debt securities as making the issuer or purchaser subject to the Board’s margin regulations. STAFF OP. of Oct. 12, 1979.

A corporation obtained a bank loan for the purpose of purchasing stock. Subsequent to the date of the loan commitment, the stock was added to the Board’s list of OTC margin stocks [and therefore met the definition of “margin stock”].

A Delaware corporation intends to obtain a bank loan to purchase its own stock for retirement. The stock in question is a margin stock and the retirement will be effected by filing a certificate of reduction under Delaware law. The stated capital of the corporation will be reduced by the par value of the shares purchased, and the shares will be marked “cancelled and retired.”

A loan will be made by a U.S. bank to a U.S. company (the borrower) to finance the acquisition of another U.S. company (the target), whose common stock is listed on a national securities exchange. The acquisition will be accomplished through a statutory merger between the target and a subsidiary of the borrower. All the common stock of the target will be cancelled, and the stock of the subsidiary will be converted into shares of a new class of common stock of the target. The new class will not be listed on a national securities exchange or otherwise publicly traded and will be pledged by the borrower to the bank as collateral for the loan. Although the loan is a purpose loan, it is not subject to Regulation U, because the collateral is not margin stock. STAFF OP. of June 4, 1982.

An insurance holding company proposes to enter into a loan agreement with a bank. The holding company’s subsidiaries have experienced rapid growth in the last ten years. To be within the acceptable ratio of net premiums written to policyholders’ surplus, the holding company has borrowed funds and contributed them to the capital of its subsidiaries. The loan agreement between the bank and the holding company would contain certain provisions that might be interpreted as giving the lenders an indirect security interest in margin stock. This possibility occurs because the consolidated portfolio of the subsidiaries, although presently showing an investment of approximately 10 percent in margin stock, also holds a substantial amount of “conversions.”

A bank has been asked by insurance companies engaged primarily in the reinsurance business to issue a standby letter of credit meeting applicable state insurance regulatory requirements as the security for reserves imposed by the state upon the reinsurers. This security covers loss reserves and premium reserves mandated by statute for those insurance risks which the reinsurer has assumed.

Several questions were raised about the use of debit and credit cards in connection with the purchase of mutual funds, stocks and bonds.

A debit card transaction is usually considered a cash transaction. If the debit card directly accesses a customer’s bank account, it may be used to purchase shares of mutual funds, stocks, and bonds.

The purchase of any security with a credit card is problematic. A broker-dealer, bank, or mutual fund is unlikely to deliver the shares until payment is received, and the securities would in effect be held as collateral. The requirements of Regulations G, T, and U would not be satisfied in such a situation because the shares may not be used as collateral for 100 percent of their market value, even if a hybrid limited-credit/debit card is used. Although a hybrid card could ensure full payment within the period permitted under the margin regulations, there would still be an initial period of unsecured or undercollateralized credit.

The inquirer asked if the availability of ready collateral would change the answers to any of these questions. If any purchase is adequately collateralized, obviously there is no problem. If the purchase is covered by adequate collateral however, there would be no need for a credit card or hybrid card. The maximum loan value of qualified securities is usually less than 100 percent of the current market value of the securities. Therefore, additional collateral would be required to satisfy the margin requirements; a credit or hybrid card could not be used to make up this difference. STAFF OP. of Oct. 17, 1985.

The staff was asked for its opinion on the purchase of margin stock upon the exercise of warrants and the method of payment for the shares. The individual shares in this case are restricted securities not registered or qualified under the Securities Act of 1933, although the common stock of the company is traded on the New York Stock Exchange.

A customer enters into an agreement with a bank whereby the bank will act as agent for delivery-versus-payment/receipt-versus-payment transactions executed by the customer at various broker-dealers. The customer’s account at the bank has numerous sub-accounts. The customer opens cash accounts at many broker-dealers with the same names as those on the sub-accounts at the bank. Without depositing any money at the bank, the customer begins buying and selling securities, the majority of which are margin stock, at the various broker-dealers. More often than not, the securities are purchased and sold through different broker-dealers on the same day. The bank receives confirmations of the trades and accepts the securities against payment from one broker-dealer, apparently relying on the fact that it knows the security has been sold and money will soon be coming into the bank from another broker-dealer. This arrangement has been in place for a number of years.

A shell corporation is purchasing a portfolio of securities including margin stock and nonmargin stock. The purchase will be made using a combination of funds received from an equity contribution and a bank loan. The borrower plans to use the entire portfolio as security for a loan. The question raised is whether the bank loan would be deemed a purpose loan if the proceeds of the loan were allocated to the purchase of the nonmargin-stock assets while proceeds of the separate funding (the equity contribution) were used to purchase the margin stock.

A holding company whose stock is margin stock adopted a liquidation plan in 1990. Until recently, the company owned operating subsidiaries that were engaged in insurance and financial-service activities.

An investment adviser (“customer”) opened an account at a national bank to facilitate the purchase and sale of securities through multiple broker-dealers. All trades were for the customer’s own account. The customer always sold the securities on the same day as their purchase but used different brokers for each side of the trade. All purchases and sales were executed on a delivery versus payment/receipt versus payment basis. On those days when more than one purchase was made, all purchases were ordered before any sales. In all cases the bank accepted delivery of all securities and made full payment for them, regardless of the cash balance in the customer’s account.

A broker-dealer, a bank, and one or more customers propose to enter into an agreement whereby the bank would loan money to the customers secured by stock dividends that have been declared but not paid. The customers are one or more broker-dealers, each with a margin account at another broker-dealer (“the clearing broker-dealer”). The margin stock on which the dividends are paid is held by the customers at the clearing broker-dealer in street name. The ex-dividend date is four business days before the record date.

Three banks served in succession as delivery-versus-payment/receive-versus-payment agents for custodial trust accounts opened by a group of customers. The customers also opened numerous cash accounts at various different broker-dealers. Generally the customers did not have sufficient funds to pay for the securities they purchased in these cash accounts. The securities purchased were margin stock as defined in Regulation U. The banks affirmed the purchases through a depository trust company, accepted the securities from the selling brokers, and made payment on behalf of the customers. Because the customers did not have sufficient funds on deposit with the banks to pay for the purchases, the banks made the payments in reliance on proceeds they anticipated receiving from offsetting sales of the same securities by the customers. Sometimes the proceeds of the sales were less than the costs incurred to purchase securities; sometimes there were no offsetting sales at all. Either of these situations would cause the “custodial accounts” to fall into overdraft status.

Board staff answered yes to the first two questions and no to the third.

1. Does Regulation U apply? Yes. Regulation U covers banks “that extend credit for the purpose of buying or carrying margin stock if the credit is secured directly or indirectly by margin stock” (§ 221.1(b)). If a bank’s trust department, in the course of settling customer securities transactions, extends purpose credit secured directly or indirectly by margin stock, the bank is subject to Regulation U unless an exemption is available. Board staff does not believe any regulatory exemptions apply in this case. The exemptions suggested by the banks are discussed in question 3 below.

2. Was the credit secured by margin stock? Yes. Regultion U applies to credit that is secured directly or indirectly by margin stock. In some cases the banks accepted securities on behalf of the customers, despite the fact that insufficient customer funds were available, in reliance on proceeds they anticipated receiving from offsetting sales of the same securities by the customers. Reliance on the proceeds of sale of securities is the same as reliance on the stock itself (see 5-942.15) and brings the transaction within the Board’s concept of “indirectly secured.” Board staff believes that any credit extended by the banks to settle the customers’ securities transactions was indirectly secured by margin stock that flowed through the customers’ accounts at the banks.

3. Were the transactions subject to an exemption in Regulation U? At least some of the banks have asserted that their actions were exempted from coverage under Regulation U pursuant to section 221.6(f) or 221.3(k). The exemption in section 221.6(f) of Regulation U is inapplicable, as explained in a staff opinion at 5-942.15. In addition, the predecessor section to section 221.6(f) specifically required that credit extended pursuant to this section be “for a purpose other than to enable the borrower to pay for stock purchased in an account subject to part 220 of this chapter (Regulation T).” The credit extended by the banks clearly enabled the customers to pay for stock purchased in a Regulation T account and was therefore not exempted by this section. Although the restrictive language was dropped in 1983, the Board stated at the time that “[u]nless otherwise noted, no substantive changes have been made to the regulation.”

Board staff received a series of questions from a bank concerned about the application of Regulation U to securities transactions delivered to or from custodial accounts maintained at a bank. These accounts are generally referred to as delivery-versus-payment accounts.

Federal Reserve examiners, state member banks, bank holding companies, and U.S. branches and agencies of foreign banks should be aware of recent targeted examinations and investigations by the Federal Reserve and the Enforcement Division of the Securities Exchange Commission (SEC), as well as court actions, that have found banks in violation of Regulation U (12 CFR 221) (Credit by Banks for the Purpose of Purchasing or Carrying Margin Stock) in connection with extensions of credit by bank trust departments, using bank or other fiduciary funds, to individuals involved in illegal “day trading” or “free-riding” schemes. These activities also involved the aiding and abetting of violations of two other securities credit regulations: Regulation T (12 CFR 220) (Credit by Brokers and Dealers) and Regulation X (12 CFR 224) (Borrowers of Securities Credit). Day trading and free-riding schemes involve the purchase and sale of stock on the same day (or within a very short period of time) and the funding of the purchases by the sales’ proceeds.

The free-riding conduct in question typically involves individuals trading large amounts of securities without depositing the necessary money or appropriate collateral in their customer accounts. The customer seeks to free-ride—that is, purchase and sell the same securities and pay for the purchase with the proceeds of the sale. Often, free-riding schemes involve initial public offerings because broker-dealers are prohibited from financing these new issues. If the money to pay for the securities is not in the account when the securities are delivered in a delivery-versus-payment or receive-versus-payment (DVP) transaction, a bank or other financial institution that permits completion of the transaction creates a temporary overdraft in the customer’s account. This overdraft is an extension of credit that is subject to Regulation U.

Regulation U. Because there is no exemption in Regulation U for trust activities in a bank or other financial institution,¹ any extension of credit in the course of settling customer securities transactions must comply with all of the provisions of Regulation U.² This includes the requirement that all extensions of credit that are secured by marginable stock be within the 50 percent margin limit set by Regulation U.

Regulations T and X. Because the custodial agency accounts described above are used to settle transactions effected by the customer at broker-dealers, a banking organization that opens this type of account should have some general understanding of how Regulation T restricts the customer’s use of the account at the institution. Regulation T requires the use of a cash account for customer purchases or sales on a DVP basis. Section 220.8(a) of Regulation T specifies that cash-account transactions are predicated on the customer’s agreement that he or she will make full cash payment for securities before selling them and does not intend to sell them before making such payment. Therefore, free-riding is prohibited in a cash account. A customer who instructs his or her agent bank or other financial institution to pay for a security in reliance on the proceeds of its sale in a DVP transaction is causing, or aiding or abetting, the broker-dealer to violate the credit restrictions of Regulation T. Regulation X, which generally prohibits borrowers from willfully causing credit to be extended in contravention of Regulations T or U, also applies to the customer in such cases.

Trust examiners, as well as commercial examiners, should make sure that all banking organizations follow appropriate written policies and procedures concerning the establishment of custodial agency accounts or any new account involving customer securities transactions. They should address, among other things, ways an institution can protect against free-riding schemes. One of the ways financial institutions can protect themselves is to obtain adequate background and credit information from new clients, including whether the customer intends to obtain bank credit to use the account for transactions as if it were a margin account at a broker-dealer. This type of activity requires more extensive monitoring than the typical DVP account in which no credit is extended. It would be prudent to inquire why a new customer is not utilizing the margin account services of its broker-dealers. Regulation U Form FR U-1 must be obtained and constantly updated if the account is to be used as a margin account.

As noted earlier, the SEC has exercised its broad authority to enforce the Board’s securities credit regulations. This has included the initiation of several enforcement actions in federal district court against banks involved in activities similar to those outlined above, as well as the preparation of other cases that are pending. In each completed case, the SEC obtained permanent injunctions against future violations from the banks involved. The SEC also required the banks to establish credit compliance committees to formulate written policies and procedures concerning the extension of purpose credit in their securities clearance business, establish training programs for bank personnel responsible for the conduct of their securities-clearance business, and submit to outside audits to ascertain whether the banks met their undertakings under the injunctions.

The staff opinion at 5-942.19 concerns a bank’s ability to extend credit secured by a dividend receivable on margin stock held in a margin account at a broker-dealer. It concluded that a customer may assign his or her right to receive the dividend to a bank after the ex-dividend date without the bank being deemed to be relying on margin stock as collateral. In a subsequent letter, counsel for the bank maintained that in most cases the bank will need a “limited security interest in the Subject Stock solely to perfect its security interest in the Assigned Dividend.”

A firm intends to borrow money, possibly from a bank, to finance a going-private transaction. The firm’s stock is margin stock, and approximately 12 percent is not owned by affiliates of the firm.

Party A is the principal shareholder of three businesses, and Party B has just purchased the assets of these businesses. Party B paid $2.5 million in cash and gave a note for the balance. It was assumed that this transaction did not involve the purchase of margin stock and the note is not secured, directly or indirectly, by margin stock. Party A intends to use his portion of the sale proceeds and other funds to purchase $2.5 million worth of margin stock.

A holding company is the sole owner of an insurance company, which proposes to establish a line of credit for the benefit of the parent. The subsidiary will sell equity securities it owns to fund the line of credit, which the parent will use to invest in margin stock. The line of credit will be secured by the margin stock to be acquired by the parent. The proposed transaction has been approved by the state insurance authorities.

A bank (the issuer) is considering entering into a “cash-settled forward equity purchase agreement” with a foreign bank as counterparty (the counterparty). The terms of the proposed transaction are similar to the forward transaction described at 5-964. The primary difference is that the terms of this transaction call for cash settlement, although the counterparty will have the option to deliver stock of the issuer in lieu of cash.

A bank is proposing to lend money to a corporate borrower to purchase all the shares of a target corporation. The target corporation’s stock is not margin stock; however, the target corporation’s principal asset is approximately 57 percent of the shares of a company whose stock is margin stock. The collateral for the loan will be the margin stock owned by the target corporation, which is worth approximately $4.3 million. The target corporation has agreed to be merged into the borrower.

See 5-615.958 and 5-715.

See 5-884.65.

Company preferred stock will be purchased under an employee stock option plan. The preferred stock is convertible into the common stock of the company, which was placed on the Board’s margin list after the inception of the plan.

Nine institutional lenders will be making a nonpurpose loan indirectly secured by collateral that includes margin securities. Although the loan agreement has been signed, certain conditions must be fulfilled before any funds can be paid out. If the conditions cannot be met, no credit will be extended.

An insurance company that is not registered under Regulation G has outstanding many nonpurpose loans not directly secured by any collateral. Most of the loan agreements contain covenants generally restricting the right to sell, pledge, or otherwise dispose of assets (including any margin securities). Violation of these covenants would be cause for acceleration of the maturity of the loan. When the loans were made, the borrowers either had no margin securities or had an insubstantial amount, and did not expect that margin securities would become a substantial part of their assets during the loan term. It is possible, however, that margin securities could eventually become a substantial enough portion of assets as to fall within the definition of “indirectly secured.” Staff concluded that as long as the margin securities were not a substantial part of the borrower’s assets at the time the loans were made, there would be no need for the insurance company to register. STAFF OP. of April 19, 1979.

Regulation G applies to those persons who extend credit for purchase or carrying of any margin security that is collateralized by such security. If the collateral does not include margin securities, the lender is not a G-lender and the extension of credit is not subject to margin regulations. STAFF OP. of July 20, 1979.

A company will borrow funds from three insurance companies and issue promissory notes secured in part by units in a limited partnership whose depository receipts are publicly traded and are margin stock within the Regulation G definition. The partnership units will not be listed on a national securities exchange, although, upon default, they may be redeposited with the depository banks for the purpose of exchange for the publicly traded depository receipts. The question was raised whether the limited partnership units partially securing the loans would be considered margin stock, thus making the loans subject to Regulation G.

In MGM v. Transamerica, 303 F. Supp. 1354 (S.D.N.Y. 1969), the Court held that Regulation G did not cover credit extended by a foreign lender because the regulation provided no place for the lender to register. The Board has not amended the registration section of Regulation G; therefore, Regulation G does not apply unless the lender has a principal place of business in a Federal Reserve District. STAFF OP. of March 24, 1989.

A person that is neither a bank nor a broker-dealer proposes to sell a portfolio of securities. A small portion of the securities in the portfolio is margin stock. The cost of the margin stock will be approximately 5 percent of the total cost of the portfolio. The purchaser will be a special-purpose entity whose activities will be limited to owning and managing the portfolio.

Amendments to section 207.1 of Regulation G and section 220.14 of Regulation T in October 1991 basically permitted clearing agencies regulated by the Commodities Futures Trading Commission (CFTC) or the SEC to accept deposits of margin stock without registration under Regulation G. The Chicago Mercantile Exchange (CME) asks that the Board’s exemptive amendments be interpreted so as to allow nonclearing futures commission merchants (FCMs) to accept margin securities from their customers without registering under Regulation G. It is assumed that the deposited securities could then be deposited with the FCM that can use the securities at the clearinghouse level under the 1991 amendments.

A large pension plan has contracted with an advisor to manage and invest a portion of the plan’s assets on a discretionary basis. The plan has similarly contracted with other advisors to manage and invest other portions of the plan’s assets. Each advisor has control over and information regarding only those assets over which it has investment discretion.

The Board and its staff have held that persons who purchase debt securities in a private placement may be “lenders” for purposes of Regulation G, if the debentures are secured directly or indirectly by margin stock. (See the Board interpretation 12 CFR 221.124 at 5-805.1.) Board staff has indicated that persons who purchase debt securities in a public offering are not subject to Regulation G. (See the staff opinion at 5-939.1.) In the Federal Register notice adopting the Board interpretation at 5-805.1, the Board indicated that the staff opinions regarding publicly offered debt securities may continue to be relied on as long as the sale in actual practice does not resemble a private placement. (See 51 Fed. Reg. 1,775.)

Before July 1, 1996, section 220.3(i) of Regulation T provided that any insurance company that sold variable-annuity contracts or conducted a general securities business (and was therefore subject to registration as a broker-dealer with the Securities and Exchange Commission) was subject to Regulation T only for transactions in connection with those activities. “Conventional lending practices” of the insurance company were subject to Regulation G. In 1995 and 1996, the Board proposed to delete and subsequently deleted section 220.3(i), stating that “no substantive change is intended.” In addition, Regulation G was incorporated into Regulation U in 1998. In light of the Board’s action, Board staff believes it is most appropriate to treat the conventional lending practices of an insurance company that sells variable-annuity contracts as subject to Regulation U. STAFF OP. of October 26, 1999.

See 5-880.51.

See 5-917.23.

Regulation U limits the amount a bank may lend on collateral consisting of stocks, but does not require a bank to make a loan. Accordingly, a banker’s decision whether or not to make a loan is not subject to Regulation U.

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. Aug. 25, 1970.

Regulation U was promulgated pursuant to subsection 7(d) of the Securities Exchange Act of 1934, as amended (15 USC 78g(d)), which authorized the Board to regulate credit extended in the ordinary course of business for the purchase or carrying of securities. This statute was enacted as a result of congressional investigation into the causes of the stock market crash of 1929 and the depression that followed. The Congress concluded that one major reason for the widespread deterioration in business conditions after 1929 was the excessive use of credit in the stock market, which had a destabilizing effect on securities prices, and, through them, on business conditions generally. Therefore, the Congress directed the Board to issue regulations restricting the amount of credit flowing into the U.S. securities markets.

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

A company made a loan to its president to enable him to purchase shares of company stock. Payment was made by a check and nine interest-bearing notes of equal amount. This indebtedness was not secured by the stock purchased, nor did the company rely on the stock purchased as collateral, since there were sufficient other assets to support the loan on an unsecured basis.

A bank extended credit for the purchase of margin stock and secured the credit, directly and indirectly, with the margin stock. At the time of the loan, the bank did not obtain sufficient collateral to satisfy the margin requirements under Regulation U. The borrowers executed notes providing for payment of the credit. Each year, the bank requests and the borrowers agree to execute additional notes in order to renew the original notes. The terms of the later notes are the same as the original notes. The bank does not request an increase in collateral, and the margin requirements under Regulation U remain unsatisfied. After the applicable statute of limitations ran on the original notes, a dispute arose between the bank and the borrowers concerning the payment of the notes and the application of Regulation U.

In all of its long-term credit documentation, a bank provides that advances of funds will be made as a series of short-term (generally no more than one year) loans, with the term of the loan dependent on the length of the applicable interest period, rather than as a single long-term loan having a series of shorter-term interest periods. If certain preconditions are met, another loan in the same principal amount is made at the maturity of each loan. The proceeds of this loan are not advanced to the borrower but rather are used by the bank to repay the maturing loan. The bank either credits such proceeds to its own loan account or, if it has sold the maturing loan to another bank in accordance with section 221.3(i) of Regulation U, pays the proceeds to the transferee bank. Interest on the maturing loan is paid separately by the borrower.

The question was raised whether section 221.3 (d)(2) of Regulation U precludes a bank’s making an unsecured loan to a broker-dealer for one of the specialized purposes enumerated in section 221.5(c) when the bank has outstanding to that same broker-dealer a secured purpose credit that is not of a type described in section 221.5(c). The single-credit rule does not prohibit the making of a special-purpose loan to a broker-dealer by a bank that already has an outstanding secured purpose loan to the same broker-dealer that does not qualify for special-purpose treatment under section 221.5(c). Since the inception of Regulation U, the Board has recognized that banks make certain specialized loans to brokers and dealers that are either short-term loans to facilitate the settlement and clearance of securities transactions or loans already regulated at another level. These loans, therefore, have always been treated differently than regular margin loans have (see 48 Fed. Reg. 35,075 (1983)). STAFF OP. of Jan. 24, 1984.

A question was raised concerning the effect of the single-credit rule in Regulation U (§ 221.3(d)(2)) on a subordinated loan to be extended by a bank to a broker-dealer who has an existing hypothecation loan at the bank. A broker-dealer’s subordinated loan is generally viewed as an unsecured loan for the purposes of Regulation U. If the single-credit rule were to be applicable to the hypothecation loan, the broker-dealer, in most instances, could not obtain the subordinated loan without depositing additional collateral.

A bank proposes to make several loans to the same borrower. One of the loans (the ESOP loan) will be made to the sponsor of an employee stock ownership plan (ESOP) qualified under section 401 of the Internal Revenue Code for the sole purpose of being relent to the ESOP. The ESOP loan will be secured by an assignment of the note from the ESOP evidencing the relending of the proceeds of the ESOP loan and a security interest in a pledge of margin stock by the ESOP. The remaining loans will be purpose loans but will not be directly or indirectly secured by margin stock.

A foreign bank with a U.S. branch proposes to make two loans to a company which is not a U.S. person and is not controlled by or acting on behalf of or in conjunction with U.S. persons. The customer will use the proceeds to pay costs incurred to acquire margin stock. The customer has substantial assets other than margin stock.

The value of the margin stock securing a purpose loan has declined since the loan was made. The lender has been asked to make a second purpose loan to the same borrower secured by additional shares of the same company. The lender is willing to lend the maximum loan value of the additional shares. The staff was asked whether the single-credit rule requires additional collateral for the first loan in addition to sufficient shares at the current maximum loan value for the new loan or only enough collateral to support the new loan.

A thrift institution sold some margin stock and provided financing equal to 100 percent of the purchase price of the margin stock. Although this was part of a single overall transaction (and is referred to as such in certain of the related documentation), the thrift structured the loan in two steps: the first, a nominally unsecured advance evidenced by a note and then, approximately four days later, a second advance evidenced by a second note secured by all of the margin stock purchased with the proceeds of both advances. The note for the second advance provided that the collateral for that note secured all present and future liabilities of the maker to the thrift. The purpose for structuring the transaction in this two-step fashion was an attempt to enable the thrift to provide 100 percent financing yet still comply with Regulation G.

See 5-951.2.

See 5-621.13.

See 5-697.

An individual obtained an $80,000 nonpurpose loan, secured by stock, from a bank. The stock was subsequently converted into savings certificates because of a decline in its value. The borrower now would like to transfer the credit to another bank and convert part of the savings certificates into margin stock. He proposes to take down $35,000 of the CD money and add an additional $15,000, for a total of $50,000, to purchase margin stock, which would be held by the bank as part collateral on the existing credit of $80,000 (the remaining $45,000 in CDs will continue to serve as collateral as well). Staff concluded that the loan would not be subject to the margin regulations. STAFF OP. of March 31, 1972.

A bank proposes to refinance a loan currently at another bank. It asks whether the original purpose of the loan applies so that it may treat the refinancing of the existing loan as a nonpurpose loan.

The transfer of a regulated credit from one bank to another would not be considered a new extension of credit merely because the transferred collateral is increased by the addition of more securities. STAFF OP. of Jan. 18, 1985.

A Canadian entity indirectly controls, through non-United States persons, a subsidiary Netherlands Antilles corporation (foreign borrower) that received purpose loans from three non-United States banks last October. The foreign borrower is to be liquidated for valid business reasons, and its assets and obligations will be assumed by a U.S. subsidiary (U.S. borrower) of the Canadian entity.

The executive officer of a company has a bank loan that is subject to Regulation U because it is purpose credit secured by margin stock and other collateral. The company would like to take over the loan as a transfer under section 207.3 (l) of Regulation G. All of the requirements of that section will be met. The transfer will not be made to evade Regulations G and U, the amount of credit will not be increased, and the collateral will not be changed. The bank loan would have been permissible under Regulation G.

See 5-950.1.

A borrower obtained a bank loan to be used in part to finance cash payments to present holders of a corporation whose stock was listed on AMEX. The borrower owns approximately 85.8 percent of the outstanding corporation stock.

This inquiry concerned Regulation U’s applicability to a bank loan collateralized by restricted securities. The term “restricted securities” includes any stock owned by controlling persons of the issuer, stock acquired from the issuer in a private placement, and stock received by officers of merged or acquired companies as part of the merger or acquisition.

A bank wants to extend to Company A a loan, for the carrying of a margin stock, secured by the common stock of Company B, which is also margin stock. The shares of common stock of Company B that will secure the loan were purchased by Company A in a series of arm’s-length transactions.

The price of a margin security is expected to increase during the course of a large volume of open market purchases made by a purchaser. The purchaser is considering a tender offer for the margin securities at a price exceeding the current open market price.

A bank is not required to use different methods of valuing direct and indirect security. Although Regulation U is not specific on the point, it is the staff’s opinion that a bank should not attribute any value to an asset that at the time of the bank’s commitment already directly or indirectly secures another loan. If the value of the asset exceeds the amount needed to secure the outstanding loan properly, the excess could be used to support a new loan. This opinion is consistent with various provisions of all the margin regulations prohibiting the double-counting of collateral. STAFF OP. of Jan. 2, 1981.

An individual proposes to purchase the common stock of a publicly held company (the target) from a group of large shareholders (the group) and from other public investors. Earlier this year, when the price of the target’s common stock was approximately $30 per share, the purchaser publicly announced his intention to take the target private at a price of $48 per share. Currently, the market price of the target’s common stock is $44 per share.

The staff was asked about the valuation standards for assets of substantial operating companies for purposes of Board interpretation 12 CFR 221.124 (at 5-805.1). Board staff has always considered “fair market value” to be an appropriate measure when Board margin rules require valuation “by any reasonable method.” The “book value” is not required.

A company owns 20 percent of another company whose common stock is margin stock and plans to increase its ownership of this company. It will finance these transactions through a private placement of notes that will be purchased by insurance companies and other institutional investors. The notes will be secured directly or indirectly by a combination of margin stock and other collateral. However, until the proceeds of the private placement are used for the margin stock purchases, the notes will also be secured by an account holding the proceeds. The note purchasers will, by book entry, identify an “A loan” secured by margin stock and a “B loan” secured by the remainder of the collateral, including the proceeds account. As the proceeds are taken from the collateral securing the B loan for the purchase of margin stock, the principal amount of the B loan will be deemed to be reduced by fifty cents and the value of the nonmargin collateral will be reduced by one dollar for each dollar withdrawn. Concurrently, the principal amount of the A loan will be deemed to be increased by fifty cents. Thus, the aggregate principal amount of the A loan and B loan will remain the same while the collateral is shifted to reflect the changing nature of the loans.

A bank (“the issuer”) has entered into a forward purchase of its own stock from another bank (“the seller”) in order to address certain shareholder dilution issues. The transaction has been arranged by a broker-dealer affiliate of the seller. Payment will be made with the issuer’s common stock. Therefore, on delivery date the seller and the issuer will each have an obligation to deliver common stock of the issuer to each other. The obligations will be netted so that only one party will in fact deliver common stock of the issuer. No cash will be exchanged.

Fifteen years ago, a bank extended purpose credit secured by margin stock in conformity with Regulation U. The loan is still outstanding and is secured with exempted margin and nonmargin securities, with a Regulation U loan value in excess of the loan balance. The loan is currently under renegotiation and the bank is considering releasing the margin- and nonmargin-stock collateral. The bank has evaluated the borrower’s current creditworthiness and would be willing to maintain the loan with collateral that does not have sufficient value to support the entire credit, which would result in a portion of the loan being unsecured. Specifically, the bank would be willing to maintain the loan collateralized solely with exempted securities that have a value of 90 percent of the loan.