Regulation

Securities Credit

 

books

Regulations that govern the extension of credit for the purpose of purchasing securities.

 

Regulation T

Governing the amount of credit that may be advanced by brokers and dealers to customers for the purchase of securities.

Regulation U

Sets out certain requirements for lenders, other than securities brokers and dealers, who extend credit secured by margin stock.

Regulation X

Extends to borrowers the provisions of regulations governing the extension of credit by brokers and dealers (Regulation T) and by banks and other lenders (Regulation U) for the purpose of purchasing or carrying securities.

The following reports are required by qualifying nonbank entities that make extensions of credit secured by margin stock:

F.R. G-1 (Registration Statement)

F.R. G-2 (Deregistration Statement)

F.R. G-3 (Purpose Statement)

F.R. G-4 (Annual Reporting)

Legal Interpretations

FAQs of Nonbank Lenders Required to File with the Federal Reserve Bank of Richmond

The Board of Governors provides a brief overview of Regulation U, along with several frequently asked questions and answers regarding the regulation's requirements.

Are all nonbank entities required to register once they have granted a margin stock secured extension of credit?

No. Registration is only required if either of the Regulation U materiality thresholds are met ($200,000 in credit extended during a calendar quarter, or if the aggregate amount of credit outstanding at any time during a calendar quarter is $500,000 or more). Nonbank lenders that do not meet either of the thresholds should simply keep up with their activity levels and register if required.

Once one of the thresholds is met, what is the registration deadline?

Registration should occur within 30 days of the calendar quarter once one of the thresholds is met.

What is a compliance inspection, and how often do they occur?

During a compliance inspection, a representative of the Federal Reserve Bank of Richmond will visit the registrant and check documentation to assure compliance with the provisions of Regulation U. The representatives will only request information pertinent to the inspection. New registrants are inspected within the first six months following registration. Thereafter, lenders that only have nonpurpose credit outstanding are inspected every three years, while those with purpose credit outstanding are inspected every two years. During an inspection, the representatives will also spend as much time as necessary to answer questions regarding the requirements.

What are some examples of the types of information looked at during a compliance inspection?

Generally, it is necessary to review documentation that supports the information reported on the registration statement (for an initial inspection), along with supporting documentation for all annual statements filed since the previous inspection. Loan files (including purpose statements) for all margin-secured credits extended since the previous inspection are also reviewed. A trial balance for all margin-stock secured loans outstanding as of a most recent month end is also requested. Additional information may also be necessary, depending on the situation.

Are plan lenders and employee stock ownership plans subject to the same inspection requirements as other nonbank lenders?

No. Employee stock ownership plans (ESOPs) are generally exempt from inspection (assuming no other margin stock secured credit outstanding). Plan lenders are only subject to an initial inspection within the first six months of registration (also assuming no other margin stock secured credit outstanding). This initial inspection is generally performed off-site. Entities with qualifying ESOPs or registered plan lenders that extend other types of margin-stock secured credit are subject to regular inspection in accordance with the schedule in question 3 above.

Are plan lenders and ESOPs required to file annual reports?

Yes. All registrants are required to file form F.R. G-4 by July 30 with the Reserve Bank with which they are registered. Each year, the Federal Reserve Bank of Richmond will mail registrants the form F.R. G-4, along with a cover letter indicating general instructions.

Are registrants required to also send form F.R. G-3 reports (Purpose Statements) to their Reserve Bank?

No. It is not necessary to send Purpose Statements to the Reserve Bank. They should be kept with other loan documentation and will be reviewed during the inspection process.

When are registrants required to deregister?

There is no deregistration requirement for nonbank lenders. Deregistration may occur if the lender has not, during the preceding six calendar months, had more than $200,000 of margin-stock secured credit outstanding. Form F.R. G-2 should be submitted to the Reserve Bank to request deregistration.

Does the 50% maximum loan value apply to all loans secured by margin stock?

No. Nonpurpose, plan lender, and ESOP loans are not subject to the 50% rule. Such loans may have good faith loan value (generally an amount not exceeding 100%).

What happens if the value of margin stock collateral declines after the loan is made?

The 50% maximum loan value rule applies only at the time the loan is initially made. That initial loan value will be checked during the inspection process.

The impetus for securities credit regulation in the United States dates back to the stock market crash of 1929 and the subsequent Great Depression. At the time, some believed that margin lending helped fuel excessive speculation in the stock market, which contributed to the severity of the market crash. The Securities Exchange Act of 1934 was enacted in response to those events and contained a comprehensive set of securities market reforms, including empowering the Federal Reserve System with the responsibility for issuing margin regulations. It was initially believed that margin debt restrictions would serve several purposes: (1) limit the diversion of credit from productive purposes to stock market speculation; (2) protect unsophisticated investors from the risks of excessively leveraged stock holdings; and, (3) mitigate volatility in stock market prices.

Pursuant to the Securities Exchange Act, the Board ofGovernors of the Federal Reserve System issued Regulation T in 1934, which covers extensions of credit by and to brokers and dealers. Following Regulation T, the Federal Reserve issued three additional securities credit regulations: Regulation U in 1936, which covers credit extended by banks for the purpose of purchasing or carrying margin stock; Regulation G in 1968, which covers extensions of credit by persons other than banks, brokers, or dealers (nonbanks); and Regulation X in 1970, which applies the provisions of Regulations T and U to persons who borrow outside the United States for the purpose of purchasing or carrying U.S. securities. Each of the three subsequent regulations was enacted because of evidence that the existing margin restrictions were being circumvented, as borrowers would consistently find alternative sources of financing from lenders not subject to the regulations. In 1998, Regulation U was amended to include the provisions of Regulation G, which reduced the number of Securities Credit Regulations to the current three (T, U, and X).

Under certain circumstances, nonbank entities that make loans secured directly or indirectly by margin stock are required to register with the Federal Reserve Bank of the District where the principal office of the lender is located. Once registered, the lenders are subject to annual reporting requirements and may also be subject to periodic compliance inspections by representatives of the Reserve Bank with which the lender is registered. The Supervision, Regulation & Credit Department of the Federal Reserve Bank of Richmond has the responsibility for compliance inspections for nonbank registrants in the Fifth Federal Reserve District (Maryland, Washington, D.C., Virginia, West Virginia, North Carolina and South Carolina).

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Supervision, Regulation & Credit
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