[Federal Register Volume 61, Number 229 (Tuesday, November 26, 1996)]
[Rules and Regulations]
[Pages 60166-60167]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30004]


      

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Part IV





Federal Reserve System





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12 CFR Parts 207, 220, and 221



Securities Credit Transactions; Borrowing by Brokers and Dealers; Final 
Rule and Proposed Rule

  Federal Register / Vol. 61, No. 229 / Tuesday, November 26, 1996 / 
Rules and Regulations  

[[Page 60166]]



FEDERAL RESERVE SYSTEM

12 CFR Parts 207, 220 and 221

[Regulations G, T and U; Docket No. R-0943]


Securities Credit Transactions; Borrowing by Brokers and Dealers

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Interpretation.

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SUMMARY: The Board is issuing an interpretation of its margin 
regulations (Regulations G, T and U) in response to the enactment of 
the National Securities Markets Improvement Act of 1996 (the Markets 
Improvement Act). Under the Markets Improvement Act, the Board no 
longer has the authority to regulate certain loans to registered 
broker-dealers unless it finds that such rules are necessary or 
appropriate in the public interest or for the protection of investors. 
This interpretation makes clear that the Board has not made such a 
finding and that provisions in its margin regulations for which the 
Board no longer has general authority are without effect. The 
interpretation also identifies the regulatory provisions that the Board 
has adopted to implement section 8(a) of the Securities Exchange Act of 
1934 (the Exchange Act), which limits the sources of credit for broker-
dealers, and concludes that these provisions are without effect in 
light of the repeal of section 8(a) contained in the Markets 
Improvement Act.

EFFECTIVE DATE: November 19, 1996.

FOR FURTHER INFORMATION CONTACT: Oliver Ireland, Associate General 
Counsel (202) 452-3625; Gregory Baer, Managing Senior Counsel (202) 
452-3236; or Scott Holz, Senior Attorney (202) 452-2966, Legal 
Division; for the hearing impaired only, Telecommunications Device for 
the Deaf (TDD), Dorothea Thompson (202) 452-3544.

SUPPLEMENTARY INFORMATION: The Markets Improvement Act (Pub. L. 104-
290) affects the Board's margin authority in two ways. First, the 
Markets Improvement Act amends section 7 of the Exchange Act (15 U.S.C. 
78g) to exclude certain loans 1 to broker-dealers 2 from the 
Board's margin setting authority. The Board is nevertheless authorized 
to adopt rules and regulations covering these loans if the Board finds 
such rules are ``necessary or appropriate in the public interest or for 
the protection of investors.'' Second, the Markets Improvement Act 
repeals section 8(a) of the Exchange Act (15 U.S.C. 78h(a)). The Board 
is issuing an interpretation of Regulations G, T and U, which were 
adopted under the authority of sections 7 and 8(a) of the Exchange Act, 
to clarify the application of the regulations in light of the enactment 
of the Markets Improvement Act. In a separate document published 
elsewhere in today's Federal Register, the Board is proposing 
amendments to Regulations G, T and U to implement the recent statutory 
amendments and further the policies behind them.
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    \1\ The excluded loans to broker-dealers are: 1. loans to 
finance market making or underwriting activities, and 2. loans to 
finance any activity if a ``substantial portion'' of the broker-
dealer's ``business consists of transactions with persons other than 
brokers or dealers.''
    \2\ The exact language in the Markets Improvement Act covers ``a 
member of a national securities exchange or a registered broker or 
dealer.'' Although the Exchange Act defines the terms ``broker'' and 
``dealer,'' the Markets Improvement Act language is restricted to 
brokers and dealers who are subject to oversight by the Securities 
and Exchange Commission.
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    The interpretation states that the Board has not made a finding 
that it is ``necessary or appropriate in the public interest or for the 
protection of investors'' to impose rules and regulations on loans to 
members of a national securities exchange or registered brokers or 
dealers if a substantial portion of their business consists of dealing 
with persons other than brokers or dealers or the loan is to finance 
their activities as a market maker or an underwriter. In other words, 
the interpretation concludes that provisions of Regulations G, T and U 
are without effect if the credit extended is within the new statutory 
exclusion. The interpretation also identifies the provisions of the 
Board's margin regulations adopted to implement section 8(a) of the 
Exchange Act and concludes that they are without effect in light of the 
Market Improvement Act's repeal of section 8(a).

List of Subjects in 12 CFR Parts 207, 220 and 221

    Banks, banking, Brokers, Credit, Federal Reserve System, Margin, 
Margin requirements, Reporting and recordkeeping requirements, 
Securities.

    For the reasons set out in the preamble, 12 CFR Parts 207, 220 and 
221 are amended as follows:

PART 207--SECURITIES CREDIT BY PERSONS OTHER THAN BANKS, BROKERS, 
OR DEALERS (REGULATION G)

    1. The authority citation for Part 207 is revised to read as 
follows:

    Authority: 15 U.S.C. 78c, 78g, 78q, and 78w.

    2. Section 207.114 is added to read as follows:


Sec. 207.114  Credit to brokers and dealers.

    (a) The National Securities Markets Improvement Act of 1996 (Pub. 
L. 104-290, 110 Stat. 3416) restricts the Board's margin authority by 
repealing section 8(a) of the Securities Exchange Act of 1934 (the 
Exchange Act) and amending section 7 of the Exchange Act (15 U.S.C. 
78g) to exclude the borrowing by a member of a national securities 
exchange or a registered broker or dealer ``a substantial portion of 
whose business consists of transactions with persons other than brokers 
or dealers'' and borrowing by a member of a national securities 
exchange or a registered broker or dealer to finance its activities as 
a market maker or an underwriter. Notwithstanding this exclusion, the 
Board may impose such rules and regulations if it determines they are 
``necessary or appropriate in the public interest or for the protection 
of investors.''
    (b) The Board's margin regulations, Regulations G, T and U (12 CFR 
Parts 207, 220 and 221, respectively), currently contain rules 
regarding loans to brokers and dealers based on former section 8(a) of 
the Exchange Act and its interplay with the earlier version of section 
7 of the Exchange Act, which instructed the Board to prescribe rules 
and regulations with respect to the amount of credit that may be 
extended on any nonexempted security.
    (c) The Board has not found that it is necessary or appropriate in 
the public interest or for the protection of investors to impose rules 
and regulations regarding loans to brokers and dealers covered by the 
National Securities Markets Improvement Act of 1996. Consequently, the 
Board believes that extensions of securities credit that are 
unregulated under section 7, as amended by the National Securities 
Markets Improvement Act of 1996, currently are not limited by 
Regulations G, T and U, notwithstanding any provisions to the contrary, 
because the provisions of section 7, as amended, supersede conflicting 
provisions of the Board's regulations.
    (d) Section 220.15 of Regulation T (12 CFR 220.15), Sec. 221.4 of 
Regulation U and the reference in Sec. 221.5(a) of Regulation U (12 CFR 
221.5(a)) to ``a member bank and a nonmember bank that is in compliance 
with Sec. 221.4,'' and the introductory text of Sec. 207.4 of 
Regulation G (12 CFR 207.4) were all adopted by the Board to implement 
the requirements of former section 8(a) of the Exchange Act. The Board 
believes that these sections are without effect in

[[Page 60167]]

light of the repeal of section 8(a) of the Exchange Act. Brokers and 
dealers are not restricted as to the type of lender to which they may 
pledge exchange-traded equity securities as collateral for extensions 
of credit. In addition, a bank, as defined in section 3 of the Exchange 
Act (15 U.S.C. 78c) and the rules thereunder, may rely on Sec. 221.5 of 
Regulation U (12 CFR 221.5) in making loans to brokers and dealers 
without regard to membership in the Federal Reserve System or the 
existence of an agreement with the Federal Reserve under former section 
8(a) of the Exchange Act.

PART 220--CREDIT BY BROKERS AND DEALERS (REGULATION T)

    1. The authority citation for Part 220 is revised to read as 
follows:

    Authority: 15 U.S.C. 78c, 78g, 78q, and 78w.

    2. Section 220.132 is added to read as follows:


Sec. 220.132  Credit to brokers and dealers.

    For text of this interpretation, see Sec. 207.114 of this 
subchapter.

PART 221--CREDIT BY BANKS FOR THE PURPOSE OF PURCHASING OR CARRYING 
MARGIN STOCK (REGULATION U)

    1. The authority citation for Part 221 is revised to read as 
follows:

    Authority: 15 U.S.C. 78c, 78g, 78q, and 78w.

    2. Section 221.125 is added to read as follows:


Sec. 221.125 Credit to brokers and dealers.

    For text of this interpretation, see Sec. 207.114 of this 
subchapter.

    By order of the Board of Governors of the Federal Reserve System

    Dated November 19, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-30004 Filed 11-25-96; 8:45 am]
BILLING CODE 6210-01-P