Reg U: Credit by Banks for the Purpose of Purchasing or Carrying Margin Stock Flashcards
What does Reg U cover?
Persons or institutions other than brokers or dealers that extend credit for the purpose of buying or carrying margin stock if the credit is secured directly or indirectly by the margin stock.
Who is an exempted borrower under Reg U?
A member of the national securities exchange or a registered broker or dealer who
- Maintains at least 1,000 active accounts annually for persons other than brokers, dealers, and persons associated with brokers and dealers
- Earns at least $10 million in gross revenues on an annual basis from transactions with persons other than brokers, dealers and persons associated with brokers and dealers
- Earns at least 10% of its gross revenues on an annual basis from transaction with persons other than brokers, dealers and persons associated with brokers and dealers
What if an exempted borrower has been in existence for less than 1 year? Is it still possible to meet the exempted-borrower test?
Yes, it may be based on a 6-mo time period.
What if a member of a national securities exchange or a registered broker or dealer ceases to qualify as an exempted borrower?
It must notify the lender of this fact and all new extensions of credit, renewals of existing loans and additional draws on existing lines of credit to such a borrower must meet the requirements of Reg U.
What is purpose credit as defined by Reg U?
Credit for the immediate, incidental or ultimate purpose of purchasing or carrying margin stock.
Lenders may not extend credit for the purpose of ultimately buying or carrying margin stock in an amount that exceeds the _____________ of the collateral securing the credit.
Maximum loan value
Lenders who are not banks must register with the Federal Reserve on Form FR G-1 within __ days after the end of the calendar quarter during which the amount of credit extended equals or exceeds $______ or the amount of the credit outstanding at any time during the quarter equaled $____ or more.
30
$200,000
$500,000
A registered non-bank lender may deregister by filing Form FR G-2 if it has not had more than $______ of qualified credit outstanding during the preceding ___ calendar months.
$200,000
6
Every registered non-bank lender must file Form FR ____ by _____ of each year
G-4
July 30
Banks must obtain a purpose statement for credit in an amount exceeding $______ that is secured directly or indirectly by margin stock.
$100,000
Reg U: What purpose statement form must be executed by the customer and the bank officer?
FR U-1
Non-bank lenders must require customers to execute Form ____, which must also be signed by a representative of the lender, when extending credit secured directly or indirectly by margin stock, regardless of the amount.
G-3
What is the maximum loan value of margin stock?
50% of the current market value, but this is subject to change by the Federal Reserve.
For revolving credit and multiple-draw loans, if the loan is a purpose credit, the maximum loan value of the collateral must be what?
Must be at least equal to the amount of the funds disbursed or, at the end of any day during which credit is extended, the lender must call for additional collateral to bring the credit into compliance with the maximum loan value requirements.
What is the “single credit rule” under Reg U?
If purpose credit has been extended to a borrower, the lender may not later extend unsecured purpose credit to the same borrower unless the combined credit does not exceed the maximum loan value of the collateral securing the first purpose credit.
When can lenders may permit withdrawals and substitutions of collateral?
Only if the margin situation on that day will not be weakened
What does it mean if an account is undermargined?
The stock value has declined since the loan was made
Reg U: When will a renewal or extension of credit not be considered a new credit?
If the credit is increased only by the addition of interest, service charges or taxes with respect to the credit.
Reg U: When will a transfer of credit not be considered new credit?
If the credit was in compliance when the loan was made, the amount of credit was not increased, the collateral wasn’t changed and the transaction is not meant to evade the requirements of Reg U.
What document must be signed by the transferor and maintained by the lender for Reg U?
If the transfer is between customer of the same lender, the transferor must sign a statement describing the circumstances giving rise to the transfer. This statement must be retained by the lender.
If the transfer is between lenders, the transferee must obtain a copy of what form?
FR U-1 or G-3. Purpose statement for bank and non-bank lenders.
What is the civil penalty for violating Reg U?
$100 per day
What is the criminal penalty for violating Reg U?
Fines up to $100,000 and 5 years in prison
Which of the following credit arrangements would most likely be considered a purpose credit because it is indirectly secured by margin stock?
a. A loan made to purchase margin stock secured by nonmargin stock
b. A loan made to a company for various corporate purposes, including the purchase of margin stock, secured by the corporate assets, which from time to time include margin stock; on the date of the consummation of the transaction approximately 10 percent of the assets of the company are margin stock
c. A loan made to purchase margin stock, guaranteed by an individual who has pledged margin stock as security for the guarantee
d. Bank is the trustee for a qualified pension plan from which the participants may borrow and use their interest in the plan as security; a participant borrows money for the purpose of purchasing margin stock
c. A loan made to purchase margin stock, guaranteed by an individual who has pledged margin stock as security for the guarantee
The Federal Reserve Board has issued a staff opinion letter indicating that if the guarantee is collateralized by margin stock and the purpose of the loan is to purchase stock, then the loan is indirectly secured by margin stock.
