Compliance Guide to Small EntitiesRegulation U: Credit by Banks or Persons other than Brokers or Dealers for the Purpose of Purchasing or Carrying Margin StocksThis description should not be interpreted as a comprehensive statement of the regulation. Rather, it is intended to give a broad overview of the regulation's requirements. The full regulation is available on the Government Printing Office web site. Show Regulation U sets out certain requirements for lenders, other than securities brokers and dealers, who extend credit secured by margin stock. Margin stock includes any equity security registered on a national securities exchange, such as the New York Stock Exchange or the American Stock Exchange; any over-the-counter (OTC) security trading in the Nasdaq Stock Market's National Market; any debt security convertible into a margin stock; and most mutual funds. The regulation covers entities that are not brokers or dealers, including commercial banks, savings and loan associations, federal savings banks, credit unions, production credit associations, insurance companies, and companies that have employee stock option plans. Regulation U has covered securities credit extended by commercial banks since 1936. Two significant events occurred in 1968 and 1998. First, in 1968 the Federal Reserve Board adopted Regulation G to cover securities credit extended by lenders other than banks, brokers, and dealers. Regulation G was merged into Regulation U in 1998. Second, in 1968 the Board received the authority to publish a list of OTC stocks that were subject to Regulation U to the same extent as exchange-traded stocks. In 1998, the Board ceased publication of its OTC list in favor of reliance on the listing standards for the Nasdaq Stock Market's National Market. A general description of the regulation, by section, follows. Section 221.1 Authority, purpose, and scope Section 221.2 Definitions Margin stock is any equity security trading on a national securities exchange; any OTC security trading in the Nasdaq Stock Market's National Market; any debt security convertible into a margin stock or carrying a warrant or right to subscribe to or purchase a margin stock; any warrant or right to subscribe to or purchase a margin stock; or any security issued by an investment company registered under section 8 of the Investment Company Act of 1940 (with certain exceptions). Indirectly secured includes any arrangement with a customer under which (1) the customer's right or ability to sell, pledge, or otherwise dispose of margin stock owned by the customer is in any way restricted while the credit remains outstanding or (2) the exercise of such right is or may be cause for accelerating the maturity of the credit. Purpose credit is any credit for the purpose, whether immediate, incidental, or ultimate, of buying or carrying margin stock. Maximum loan value is the percentage of current market value assigned by the Board under section 221.7 (the supplement) to specified types of collateral. The maximum loan value of margin stock is stated as a percentage of its current market value and has been set at 50 percent since 1974. Options, including puts, calls, and combinations thereof, have no loan value, unless they are publicly traded. Publicly traded options qualify as margin stock. All other collateral has good faith loan value. Section 221.3 General requirements The borrower and the lender may be required to complete the form G-3 or U-1 statement of purpose for each extension of credit. A commercial bank is always subject to Regulation U when it extends credit secured by margin stock. A nonbank lender becomes subject when it meets one of two threshold tests for the amount of margin-stock-secured credit extended or outstanding--specifically, if $200,000 or more in such credit was extended in the most recent calendar quarter; or if at any time in the most recent quarter the amount of margin-stock-secured credit outstanding was $500,000 or more. A nonbank lender must register with the Federal Reserve Bank in whose District it is located by filling out and submitting form G-1 (available by calling the local Federal Reserve Bank or via the Board's web site) within thirty days of the end of the calendar quarter in which one of the two threshold tests is met and must file annual reports (form G-4) thereafter. Form G-1 is a simple four-page form that requires the registrant-lender to provide the following information:
Section 221.4 Employee stock option,
purchase, and ownership plans If the lender is a nonbank lender extending credit under this section, it must still comply with the registration requirements and file annual reports, but it need not obtain the statement of purpose for each extension of credit. Section 221.5 Special-purpose loans to brokers and dealers Section 221.6 Exempted transactions Section 221.7 Supplement: Maximum loan value of margin stock and other collateral The following paragraphs review key aspects of Regulation U: What responsibilities does a lender take on once it registers with a Federal Reserve Bank as a nonbank lender?
What are the responsibilities of a bank lender under Regulation U?
What is a nonpurpose loan under Regulation U? What are the requirements of Regulation U for a nonpurpose loan? What are forms G-3 and
U-1? What is a plan-lender? Does Regulation U contain any special rules for employee stock ownership plans (ESOPs)? Under Regulation U, what reports must a nonbank lender file with the Federal Reserve Bank? When is a nonbank lender eligible to deregister? What is the effect of deregistering? Where can a lender get more information? What does Regulation T apply?Regulation T governs cash accounts and the amount of credit that broker-dealers can extend to investors for the purchase of securities. Investors who want to purchase securities using broker-dealer credit need to apply for a margin account.
Who is exempt from Regulation T?An “exempted borrower,” as defined in Regulation T, is a broker/dealer of which “a substantial portion of whose business consists of transactions with persons other than brokers or dealers.”3 The amendments codify this exemption from Regulation T by excluding “exempted borrowers,” as defined in Regulation T, from the ...
What is Regulation T margin?Overview of Margin Requirements
In general, under Federal Reserve Board Regulation T, firms can lend a customer up to 50 percent of the total purchase price of a margin security for new, or initial, purchases.
What is a Regulation T call?A federal call, (i.e., a Regulation T - Reg T call) is an initial margin call that is only issued as a result of an opening transaction. Under Federal Reserve Board Regulation T, brokers can lend an investor up to 50% of the total purchase price of a stock for new, or initial, purchases. This is called initial margin.
|