Background and Summary of Regulation U

Regulation U (12 CFR 221), “Credit by Banks and Persons Other Than Brokers or Dealers for the Purpose of Purchasing or Carrying Margin Stocks,” became effective May 1, 1936, and contains the securities credit rules governing banks. It is less restrictive than Regulation T, because its purpose is preventing the circumvention of the rules applicable to brokers and dealers and the statute expressly excludes from its coverage credit on straight debt securities. All bank loans secured by margin stock that are made for the purchase of margin stock are subject to credit limitations of Regulation U. Margin stock, in general, includes stock listed on exchanges, stocks designated for trading in the National Market System, certain convertible bonds, and most mutual fund shares. A purpose statement must be taken for all loans secured by margin stock. Only those loans that are for the purpose of purchasing margin stock, however, are subject to the credit limitations and other restrictions of Regulation U.

To avoid fostering evasion of the margin rules by allowing borrowers to have both secured and unsecured purpose loans, the regulation contains a single-credit rule, which requires that all purpose credit extended to the same customer be considered together and compared with the collateral supporting it. The withdrawal-and-substitution rules are similar to those found in Regulation T. The regulation also contains several exceptions, many of which are designed to facilitate the marketing of securities by broker-dealers and implement 1996 amendments to the act that exempted certain broker-dealers from the Board’s margin authority.

Effective April 1, 1998, Regulation U was amended to cover all lenders other than broker-dealers, including lenders formerly subject to Regulation G.

Regulation G

A special Securities and Exchange Commission (SEC) study of the securities markets, submitted to Congress in 1963, contained a chapter on lenders not subject to margin regulation, noting that sizable amounts of credit were apparently emanating from such lenders into the securities markets. In its conclusion and recommendations, the SEC recommended that the Federal Reserve invoke its authority under section 7 of the Securities Exchange Act and extend its regulation of securities credit to all lenders not covered by Regulations T and U. The Federal Reserve concurred and adopted Regulation G (12 CFR 207), “Securities Credit by Persons Other Than Banks, Brokers, or Dealers,” effective March 11, 1968. Regulation G was repealed effective April 1, 1998, when lenders other than banks, brokers, or dealers were made subject to a revised Regulation U.

The principal difference in the application of Regulation U to nonbank lenders is the requirement that all those who extend credit above a stipulated amount on margin stock, whether that credit is purpose credit or not, to register with a Federal Reserve Bank. In addition, one of the most frequently used provisions for nonbank lenders, from the standpoint of total credit outstanding, was created for corporations with stock option and stock purchase plans for their employees. Under the so-called plan-lender provision, credit may be extended without regard to the usual limitations if the plan is duly approved by shareholders. Loans to employee stock ownership plans (ESOPs) that qualify under the Internal Revenue Code may also be made on a good faith basis.

Margin Requirements¹ for Credit Extended Under Regulation U