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					                                                                                                                    12
                                                                                                                    Parts 220 to 299
                                                                                                                    Revised as of January 1, 2009



                                                                                                                    Banks and Banking

                                                                                                                    Containing a codification of documents
                                                                                                                    of general applicability and future effect

                                                                                                                    As of January 1, 2009

                                                                                                                    With Ancillaries

                                                                                                                    Published by
                                                                                                                    Office of the Federal Register
                                                                                                                    National Archives and Records
                                                                                                                    Administration


                                                                                                                    A Special Edition of the Federal Register
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                                                                                             Table of Contents
                                                                                                                                                                                    Page
                                                                     Explanation ................................................................................................     v



                                                                     Title 12:


                                                                                Chapter II—Federal Reserve System (Continued) ...........................                              3


                                                                     Finding Aids:


                                                                           Table of CFR Titles and Chapters .......................................................                 1037


                                                                           Alphabetical List of Agencies Appearing in the CFR .........................                             1057


                                                                           List of CFR Sections Affected .............................................................              1067
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                                                                                                   Cite this Code:                 CFR

                                                                                                   To cite the regulations in
                                                                                                    this volume use title,
                                                                                                    part and section num-
                                                                                                    ber. Thus, 12 CFR
                                                                                                    220.1 refers to title 12,
                                                                                                    part 220, section 1.
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                                                                                                                    Explanation
                                                                        The Code of Federal Regulations is a codification of the general and permanent
                                                                     rules published in the Federal Register by the Executive departments and agen-
                                                                     cies of the Federal Government. The Code is divided into 50 titles which represent
                                                                     broad areas subject to Federal regulation. Each title is divided into chapters
                                                                     which usually bear the name of the issuing agency. Each chapter is further sub-
                                                                     divided into parts covering specific regulatory areas.
                                                                        Each volume of the Code is revised at least once each calendar year and issued
                                                                     on a quarterly basis approximately as follows:
                                                                          Title 1 through Title 16..............................................................as of January 1
                                                                          Title 17 through Title 27 .................................................................as of April 1
                                                                          Title 28 through Title 41 ..................................................................as of July 1
                                                                          Title 42 through Title 50 .............................................................as of October 1
                                                                        The appropriate revision date is printed on the cover of each volume.
                                                                     LEGAL STATUS
                                                                        The contents of the Federal Register are required to be judicially noticed (44
                                                                     U.S.C. 1507). The Code of Federal Regulations is prima facie evidence of the text
                                                                     of the original documents (44 U.S.C. 1510).
                                                                     HOW TO USE THE CODE OF FEDERAL REGULATIONS
                                                                        The Code of Federal Regulations is kept up to date by the individual issues
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                                                                     mine the latest version of any given rule.
                                                                        To determine whether a Code volume has been amended since its revision date
                                                                     (in this case, January 1, 2009), consult the ‘‘List of CFR Sections Affected (LSA),’’
                                                                     which is issued monthly, and the ‘‘Cumulative List of Parts Affected,’’ which
                                                                     appears in the Reader Aids section of the daily Federal Register. These two lists
                                                                     will identify the Federal Register page number of the latest amendment of any
                                                                     given rule.
                                                                     EFFECTIVE AND EXPIRATION DATES
                                                                        Each volume of the Code contains amendments published in the Federal Reg-
                                                                     ister since the last revision of that volume of the Code. Source citations for
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                                                                     the text.
                                                                     OMB CONTROL NUMBERS
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                                                                       The Paperwork Reduction Act of 1980 (Pub. L. 96–511) requires Federal agencies
                                                                     to display an OMB control number with their information collection request.

                                                                                                                           v



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                                                                     Many agencies have begun publishing numerous OMB control numbers as amend-
                                                                     ments to existing regulations in the CFR. These OMB numbers are placed as
                                                                     close as possible to the applicable recordkeeping or reporting requirements.
                                                                     OBSOLETE PROVISIONS
                                                                        Provisions that become obsolete before the revision date stated on the cover
                                                                     of each volume are not carried. Code users may find the text of provisions in
                                                                     effect on a given date in the past by using the appropriate numerical list of
                                                                     sections affected. For the period before January 1, 1986, consult either the List
                                                                     of CFR Sections Affected, 1949–1963, 1964–1972, or 1973–1985, published in seven sep-
                                                                     arate volumes. For the period beginning January 1, 1986, a ‘‘List of CFR Sections
                                                                     Affected’’ is published at the end of each CFR volume.
                                                                     INCORPORATION BY REFERENCE
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                                                                     by statute and allows Federal agencies to meet the requirement to publish regu-
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                                                                     where. For an incorporation to be valid, the Director of the Federal Register
                                                                     must approve it. The legal effect of incorporation by reference is that the mate-
                                                                     rial is treated as if it were published in full in the Federal Register (5 U.S.C.
                                                                     552(a)). This material, like any other properly issued regulation, has the force
                                                                     of law.
                                                                        What is a proper incorporation by reference? The Director of the Federal Register
                                                                     will approve an incorporation by reference only when the requirements of 1 CFR
                                                                     part 51 are met. Some of the elements on which approval is based are:
                                                                        (a) The incorporation will substantially reduce the volume of material pub-
                                                                     lished in the Federal Register.
                                                                        (b) The matter incorporated is in fact available to the extent necessary to
                                                                     afford fairness and uniformity in the administrative process.
                                                                        (c) The incorporating document is drafted and submitted for publication in
                                                                     accordance with 1 CFR part 51.
                                                                        What if the material incorporated by reference cannot be found? If you have any
                                                                     problem locating or obtaining a copy of material listed in the Finding Aids of
                                                                     this volume as an approved incorporation by reference, please contact the agency
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                                                                     Federal Register, National Archives and Records Administration, Washington DC
                                                                     20408, or call 202-741-6010.
                                                                     CFR INDEXES AND TABULAR GUIDES
                                                                        A subject index to the Code of Federal Regulations is contained in a separate
                                                                     volume, revised annually as of January 1, entitled CFR INDEX AND FINDING AIDS.
                                                                     This volume contains the Parallel Table of Statutory Authorities and Agency
                                                                     Rules (Table I). A list of CFR titles, chapters, and parts and an alphabetical
                                                                     list of agencies publishing in the CFR are also included in this volume.
                                                                        An index to the text of ‘‘Title 3—The President’’ is carried within that volume.
                                                                        The Federal Register Index is issued monthly in cumulative form. This index
                                                                     is based on a consolidation of the ‘‘Contents’’ entries in the daily Federal Reg-
                                                                     ister.
                                                                        A List of CFR Sections Affected (LSA) is published monthly, keyed to the
                                                                     revision dates of the 50 CFR titles.
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                                                                     REPUBLICATION OF MATERIAL
                                                                       There are no restrictions on the republication of material appearing in the
                                                                     Code of Federal Regulations.
                                                                     INQUIRIES
                                                                       For a legal interpretation or explanation of any regulation in this volume,
                                                                     contact the issuing agency. The issuing agency’s name appears at the top of
                                                                     odd-numbered pages.
                                                                       For inquiries concerning CFR reference assistance, call 202–741–6000 or write
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                                                                     Administration, Washington, DC 20408 or e-mail fedreg.info@nara.gov.
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                                                                     ELECTRONIC SERVICES
                                                                        The full text of the Code of Federal Regulations, the LSA (List of CFR Sections
                                                                     Affected), The United States Government Manual, the Federal Register, Public
                                                                     Laws, Public Papers, Weekly Compilation of Presidential Documents and the Pri-
                                                                     vacy Act Compilation are available in electronic format at www.gpoaccess.gov/
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                                                                        The Office of the Federal Register also offers a free service on the National
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                                                                     to NARA’s web site at www.archives.gov/federal-register. The NARA site also con-
                                                                     tains links to GPO Access.

                                                                        RAYMOND A. MOSLEY,
                                                                        Director,
                                                                        Office of the Federal Register.
                                                                        January 1, 2009.
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                                                                                                                    THIS TITLE

                                                                        Title 12—BANKS AND BANKING is composed of seven volumes. The parts in these
                                                                     volumes are arranged in the following order: parts 1–199, 200–219, 220–299, 300–499,
                                                                     500–599, part 600–899, and 900–end. The first volume containing parts 1–199 is com-
                                                                     prised of chapter I—Comptroller of the Currency, Department of the Treasury.
                                                                     The second and third volumes containing parts 200–299 are comprised of chapter
                                                                     II—Federal Reserve System. The fourth volume containing parts 300–499 is com-
                                                                     prised of chapter III—Federal Deposit Insurance Corporation and chapter IV—
                                                                     Export-Import Bank of the United States. The fifth volume containing parts 500–
                                                                     599 is comprised of chapter V—Office of Thrift Supervision, Department of the
                                                                     Treasury. The sixth volume containing parts 600–899 is comprised of chapter VI—
                                                                     Farm Credit Administration, chapter VII—National Credit Union Administration,
                                                                     chapter VIII—Federal Financing Bank. The seventh volume containing part 900–
                                                                     end is comprised of chapter IX—Federal Housing Finance Board, chapter XI—
                                                                     Federal Financial Institutions Examination Council, chapter XIV—Farm Credit
                                                                     System Insurance Corporation, chapter XV—Department of the Treasury, chapter
                                                                     XVII—Office of Federal Housing Enterprise Oversight, Department of Housing
                                                                     and Urban Development and chapter XVIII—Community Development Financial
                                                                     Institutions Fund, Department of the Treasury. The contents of these volumes
                                                                     represent all of the current regulations codified under this title of the CFR as
                                                                     of January 1, 2009.

                                                                        For this volume, Jonn Lilyea was Chief Editor. The Code of Federal Regula-
                                                                     tions publication program is under the direction of Michael L. White, assisted
                                                                     by Ann Worley.
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                                                                                Title 12—Banks and
                                                                                       Banking
                                                                                                    (This book contains parts 220 to 299)




                                                                                                                                                                         Part

                                                                     CHAPTER II—Federal                 Reserve System (Continued) ................                      220
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                                                                                                                           1



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                                                                                CHAPTER II—FEDERAL RESERVE SYSTEM


                                                                       SUBCHAPTER A—BOARD OF GOVERNORS OF THE FEDERAL RESERVE
                                                                                               SYSTEM

                                                                     Part                                                                                                Page
                                                                     220            Credit by brokers and dealers (Regulation T) .........                                 5
                                                                     221            Credit by banks and persons other than brokers or
                                                                                      dealers for the purpose of purchasing or carrying
                                                                                      margin stock (Regulation U) ................................                        34
                                                                     222            Fair credit reporting (regulation V) .......................                          55
                                                                     223            Transactions between member banks and their af-
                                                                                      filiates (Regulation W) .........................................                   85
                                                                     224            Borrowers of securities credit (Regulation X) .........                              110
                                                                     225            Bank holding companies and change in bank con-
                                                                                      trol (Regulation Y) ...............................................                112
                                                                     226            Truth in lending (Regulation Z) ..............................                       350
                                                                     227            Unfair or deceptive acts or practices (Regulation
                                                                                      AA) .......................................................................        621
                                                                     228            Community reinvestment (Regulation BB) .............                                 624
                                                                     229            Availability of funds and collection of checks (Reg-
                                                                                      ulation CC) ...........................................................            645
                                                                     230            Truth in savings (Regulation DD) ...........................                         779
                                                                     231            Netting eligibility for financial institution (Regu-
                                                                                      lation EE) .............................................................           818
                                                                     232            Obtaining and using medical information in con-
                                                                                      nection with credit (Regulation FF) ....................                           819
                                                                     233            Prohibition on funding of unlawful internet gam-
                                                                                      bling (Regulation GG) (Eff. 1–19–09) ......................                        824
                                                                     250            Miscellaneous interpretations .................................                      834
                                                                     261            Rules regarding availability of information ...........                              863
                                                                     261a           Rules regarding access to personal information
                                                                                      under the Privacy Act of 1974 ...............................                      880
                                                                     261b           Rules regarding public observation of meetings. ....                                 886
                                                                     262            Rules of procedure ...................................................               891
                                                                     263            Rules of practice for hearings .................................                     899
                                                                     264            Employee responsibilities and conduct ...................                            945
                                                                     264a           Post-employment restrictions for senior examiners                                    945
                                                                     264b           Rules regarding foreign gifts and decorations ........                               947
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                                                                     265            Rules regarding delegation of authority .................                            949
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                                                                                                                                            12 CFR Ch. II (1–1–09 Edition)

                                                                     Part                                                                                                Page
                                                                     266            Limitations on activities of former members and
                                                                                      employees of the Board ........................................                     968
                                                                     267            Rules of organization and procedure of the Con-
                                                                                      sumer Advisory Council .......................................                     970
                                                                     268            Rules regarding equal opportunity .........................                          972
                                                                     269            Policy on labor relations for the Federal Reserve
                                                                                      banks ....................................................................         1006
                                                                     269a           Definitions ..............................................................           1011
                                                                     269b           Charges of unfair labor practices ............................                       1012
                                                                                   SUBCHAPTER B—FEDERAL OPEN MARKET COMMITTEE

                                                                     270            Open market operations of Federal Reserve banks                                      1022
                                                                     271            Rules regarding availability of information ...........                              1023
                                                                     272            Rules of procedure ...................................................               1030
                                                                     281            Statements of policy ...............................................                 1032
                                                                     SUBCHAPTER C—FEDERAL RESERVE SYSTEM LABOR RELATIONS PANEL

                                                                     290–299        [Reserved]
                                                                     SUPPLEMENTARY PUBLICATIONS: The Federal Reserve Act, as amended through December 31, 1976,
                                                                      with an Appendix containing provisions of certain other statutes affecting the Federal Reserve
                                                                      System. Rules of Organization and Procedure—Board of Governors of the Federal Reserve System.
                                                                      Regulations of the Board of Governors of the Federal Reserve System. The Federal Reserve Sys-
                                                                      tem—Purposes and Functions. Annual Report. Federal Reserve Bulletin. Monthly. Federal Re-
                                                                      serve Chart Book Quarterly; Historical Chart Book issued in September.
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                                                                     SUBCHAPTER A—BOARD OF GOVERNORS OF THE FEDERAL
                                                                                     RESERVE SYSTEM

                                                                        PART 220—CREDIT BY BROKERS                             220.128 Treatment of simultaneous long and
                                                                                                                                   short positions in the same margin ac-
                                                                        AND DEALERS (REGULATION T)                                 count when put or call options or com-
                                                                                                                                   binations thereof on such stock are also
                                                                     Sec.                                                          outstanding in the account.
                                                                     220.1 Authority, purpose, and scope.                      220.129–220.130 [Reserved]
                                                                     220.2 Definitions.                                        220.131 Application of the arranging section
                                                                     220.3 General provisions.                                     to broker-dealer activities under SEC
                                                                     220.4 Margin account.                                         Rule 144A.
                                                                     220.5 Special memorandum account.                         220.132 Credit to brokers and dealers.
                                                                     220.6 Good faith account.
                                                                     220.7 Broker-dealer credit account.                         AUTHORITY: 15 U.S.C. 78c, 78g, 78q, and 78w.
                                                                     220.8 Cash account.
                                                                                                                                 EDITORIAL NOTE: A copy of each form re-
                                                                     220.9 Clearance of securities, options, and
                                                                                                                               ferred to in this part is filed as a part of the
                                                                         futures.
                                                                                                                               original document. Copies are available upon
                                                                     220.10 Borrowing and lending securities.
                                                                     220.11 Requirements     for   the    list of              request to the Board of Governors of the
                                                                         marginable OTC stocks and the list of                 Federal Reserve System or any Federal Re-
                                                                         foreign margin stocks.                                serve Bank.
                                                                     220.12 Supplement: margin requirements.
                                                                                                                               § 220.1     Authority, purpose, and scope.
                                                                                      INTERPRETATIONS
                                                                                                                                 (a) Authority and purpose. Regulation
                                                                     220.101 Transactions of customers who are                 T (this part) is issued by the Board of
                                                                         brokers or dealers.                                   Governors of the Federal Reserve Sys-
                                                                     220.102 [Reserved]                                        tem (the Board) pursuant to the Secu-
                                                                     220.103 Borrowing of securities.
                                                                     220.104 [Reserved]
                                                                                                                               rities Exchange Act of 1934 (the Act) (15
                                                                     220.105 Ninety-day rule in special cash ac-               U.S.C.78a et seq.). Its principal purpose
                                                                         count.                                                is to regulate extensions of credit by
                                                                     220.106–220.107 [Reserved]                                brokers and dealers; it also covers re-
                                                                     220.108 International Bank Securities.                    lated transactions within the Board’s
                                                                     220.109 [Reserved]                                        authority under the Act. It imposes,
                                                                     220.110 Assistance by Federal credit union
                                                                                                                               among other obligations, initial mar-
                                                                         to its members.
                                                                     220.111 Arranging for extensions of credit to             gin requirements and payment rules on
                                                                         be made by a bank.                                    certain securities transactions.
                                                                     220.112 [Reserved]                                          (b) Scope. (1) This part provides a
                                                                     220.113 Necessity for prompt payment and                  margin account and four special pur-
                                                                         delivery in special cash accounts.                    pose accounts in which to record all fi-
                                                                     220.114–220.116 [Reserved]                                nancial relations between a customer
                                                                     220.117 Exception to 90-day rule in special
                                                                                                                               and a creditor. Any transaction not
                                                                         cash account.
                                                                     220.118 Time of payment for mutual fund                   specifically permitted in a special pur-
                                                                         shares purchased in a special cash ac-                pose account shall be recorded in a
                                                                         count.                                                margin account.
                                                                     220.119 Applicability of margin require-                    (2) This part does not preclude any
                                                                         ments to credit extended to corporation               exchange, national securities associa-
                                                                         in connection with retirement of stock.               tion, or creditor from imposing addi-
                                                                     220.120 [Reserved]                                        tional requirements or taking action
                                                                     220.121 Applicability of margin require-
                                                                         ments to joint account between two                    for its own protection.
                                                                         creditors.                                              (3) This part does not apply to:
                                                                     220.122 ‘‘Deep in the money put and call op-                (i) Financial relations between a cus-
                                                                         tions’’ as extensions of credit.                      tomer and a creditor to the extent that
                                                                     220.123 Partial delayed issue contracts cov-              they comply with a portfolio mar-
                                                                         ering nonconvertible bonds.                           gining system under rules approved or
                                                                     220.124 Installment sale of tax-shelter pro-              amended by the SEC;
                                                                         grams as ‘‘arranging’’ for credit.
                                                                     220.125–220.126 [Reserved]                                  (ii) Credit extended by a creditor
                                                                     220.127 Independent broker/dealers arrang-                based on a good faith determination
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                                                                         ing credit in connection with the sale of             that the borrower is an exempted bor-
                                                                         insurance premium funding programs.                   rower;

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                                                                     § 220.2                                                                12 CFR Ch. II (1–1–09 Edition)

                                                                       (iii) Financial relations between a                     fined in section 3(a)(18) of the Act), ex-
                                                                     customer and a broker or dealer reg-                      cept for business entities controlling or
                                                                     istered only under section 15C of the                     under common control with the cred-
                                                                     Act; and                                                  itor.
                                                                       (iv) Financial relations between a                        Current market value of:
                                                                     foreign branch of a creditor and a for-                     (1) A security means:
                                                                     eign person involving foreign securi-                       (i) Throughout the day of the pur-
                                                                     ties.                                                     chase or sale of a security, the secu-
                                                                     [Reg. T, 63 FR 2820, Jan. 16, 1998]                       rity’s total cost of purchase or the net
                                                                                                                               proceeds of its sale including any com-
                                                                     § 220.2 Definitions.                                      missions charged; or
                                                                        The terms used in this part have the                     (ii) At any other time, the closing
                                                                     meanings given them in section 3(a) of                    sale price of the security on the pre-
                                                                     the Act or as defined in this section as                  ceding business day, as shown by any
                                                                     follows:                                                  regularly     published    reporting    or
                                                                        Affiliated corporation means a cor-                    quotation service. If there is no closing
                                                                     poration of which all the common                          sale price, the creditor may use any
                                                                     stock is owned directly or indirectly by                  reasonable estimate of the market
                                                                     the firm or general partners and em-                      value of the security as of the close of
                                                                     ployees of the firm, or by the corpora-                   business on the preceding business day.
                                                                     tion or holders of the controlling stock                    (2) Any other collateral means a
                                                                     and employees of the corporation, and                     value determined by any reasonable
                                                                     the affiliation has been approved by                      method.
                                                                     the creditor’s examining authority.                         Customer excludes an exempted bor-
                                                                        Cash equivalent means securities                       rower and includes:
                                                                     issued or guaranteed by the United                          (1) Any person or persons acting
                                                                     States or its agencies, negotiable bank                   jointly:
                                                                     certificates of deposit, bankers accept-                    (i) To or for whom a creditor extends,
                                                                     ances issued by banking institutions in                   arranges, or maintains any credit; or
                                                                     the United States and payable in the
                                                                                                                                 (ii) Who would be considered a cus-
                                                                     United States, or money market mu-
                                                                                                                               tomer of the creditor according to the
                                                                     tual funds.
                                                                                                                               ordinary usage of the trade;
                                                                        Covered option transaction means any
                                                                     transaction involving options or war-                       (2) Any partner in a firm who would
                                                                     rants in which the customer’s risk is                     be considered a customer of the firm
                                                                     limited and all elements of the trans-                    absent the partnership relationship;
                                                                     action are subject to contemporaneous                     and
                                                                     exercise if:                                                (3) Any joint venture in which a cred-
                                                                        (1) The amount at risk is held in the                  itor participates and which would be
                                                                     account in cash, cash equivalents, or                     considered a customer of the creditor if
                                                                     via an escrow receipt; and                                the creditor were not a participant.
                                                                        (2) The transaction is eligible for the                  Debit balance means the cash amount
                                                                     cash account by the rules of the reg-                     owed to the creditor in a margin ac-
                                                                     istered national securities exchange                      count after debiting amounts trans-
                                                                     authorized to trade the option or war-                    ferred to the special memorandum ac-
                                                                     rant or by the rules of the creditor’s                    count.
                                                                     examining authority in the case of an                       Delivery against payment, Payment
                                                                     unregistered option, provided that all                    against delivery, or a C.O.D. transaction
                                                                     such rules have been approved or                          refers to an arrangement under which a
                                                                     amended by the SEC.                                       creditor and a customer agree that the
                                                                        Credit balance means the cash amount                   creditor will deliver to, or accept from,
                                                                     due the customer in a margin account                      the customer, or the customer’s agent,
                                                                     after debiting amounts transferred to                     a security against full payment of the
                                                                     the special memorandum account.                           purchase price.
                                                                        Creditor means any broker or dealer                      Equity means the total current mar-
                                                                     (as defined in sections 3(a)(4) and 3(a)(5)               ket value of security positions held in
                                                                     of the Act), any member of a national                     the margin account plus any credit bal-
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                                                                     securities exchange, or any person as-                    ance less the debit balance in the mar-
                                                                     sociated with a broker or dealer (as de-                  gin account.

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                                                                     Federal Reserve System                                                                              § 220.2

                                                                       Escrow agreement means any agree-                         (2) Is deemed to have a ‘‘ready mar-
                                                                     ment issued in connection with a call                     ket’’ under SEC Rule 15c3–1 (17 CFR
                                                                     or put option under which a bank or                       240.15c3–1) or a ‘‘no-action’’ position
                                                                     any person designated as a control lo-                    issued thereunder.
                                                                     cation under paragraph (c) of SEC Rule                      Foreign person means a person other
                                                                     15c3–3 (17 CFR 240.15c3–3(c)), holding                    than a United States person as defined
                                                                     the underlying asset or required cash                     in section 7(f) of the Act.
                                                                     or cash equivalents, is obligated to de-                    Foreign security means a security
                                                                     liver to the creditor (in the case of a                   issued in a jurisdiction other than the
                                                                     call option) or accept from the creditor                  United States.
                                                                     (in the case of a put option) the under-                    Good faith with respect to:
                                                                     lying asset or required cash or cash                        (1) Margin means the amount of mar-
                                                                     equivalent against payment of the ex-                     gin which a creditor would require in
                                                                     ercise price upon exercise of the call or                 exercising sound credit judgment;
                                                                     put.                                                        (2) Making a determination or ac-
                                                                       Examining authority means:                              cepting a statement concerning a bor-
                                                                       (1) The national securities exchange                    rower means that the creditor is alert
                                                                     or national securities association of                     to the circumstances surrounding the
                                                                     which a creditor is a member; or                          credit, and if in possession of informa-
                                                                       (2) If a member of more than one self-                  tion that would cause a prudent person
                                                                     regulatory organization, the organiza-                    not to make the determination or ac-
                                                                     tion designated by the SEC as the ex-                     cept the notice or certification without
                                                                     amining authority for the creditor.                       inquiry, investigates and is satisfied
                                                                       Exempted borrower means a member                        that it is correct.
                                                                     of a national securities exchange or a                      Margin call means a demand by a
                                                                     registered broker or dealer, a substan-                   creditor to a customer for a deposit of
                                                                     tial portion of whose business consists                   additional cash or securities to elimi-
                                                                     of transactions with persons other than                   nate or reduce a margin deficiency as
                                                                     brokers or dealers, and includes a bor-                   required under this part.
                                                                     rower who:
                                                                                                                                 Margin deficiency means the amount
                                                                       (1) Maintains at least 1000 active ac-
                                                                                                                               by which the required margin exceeds
                                                                     counts on an annual basis for persons
                                                                                                                               the equity in the margin account.
                                                                     other than brokers, dealers, and per-
                                                                                                                                 Margin equity security means a mar-
                                                                     sons associated with a broker or dealer;
                                                                                                                               gin security that is an equity security
                                                                       (2) Earns at least $10 million in gross
                                                                                                                               (as defined in section 3(a)(11) of the
                                                                     revenues on an annual basis from
                                                                                                                               Act).
                                                                     transactions with persons other than
                                                                     brokers, dealers, and persons associ-                       Margin excess means the amount by
                                                                     ated with a broker or dealer; or                          which the equity in the margin ac-
                                                                       (3) Earns at least 10 percent of its                    count exceeds the required margin.
                                                                     gross revenues on an annual basis from                    When the margin excess is represented
                                                                     transactions with persons other than                      by securities, the current value of the
                                                                     brokers, dealers, and persons associ-                     securities is subject to the percentages
                                                                     ated with a broker or dealer.                             set forth in § 220.12 (the Supplement).
                                                                       Exempted securities mutual fund means                     Margin security means:
                                                                     any security issued by an investment                        (1) Any security registered or having
                                                                     company registered under section 8 of                     unlisted trading privileges on a na-
                                                                     the Investment Company Act of 1940 (15                    tional securities exchange;
                                                                     U.S.C. 80a-8), provided the company has                     (2) After January 1, 1999, any security
                                                                     at least 95 percent of its assets con-                    listed on the Nasdaq Stock Market;
                                                                     tinuously invested in exempted securi-                      (3) Any non-equity security;
                                                                     ties (as defined in section 3(a)(12) of the                 (4) Any security issued by either an
                                                                     Act).                                                     open-end investment company or unit
                                                                       Foreign margin stock means a foreign                    investment trust which is registered
                                                                     security that is an equity security                       under section 8 of the Investment Com-
                                                                     that:                                                     pany Act of 1940 (15 U.S.C. 80a–8);
                                                                       (1) Appears on the Board’s periodi-                       (5) Any foreign margin stock;
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                                                                     cally published List of Foreign Margin                      (6) Any debt security convertible into
                                                                     Stocks; or                                                a margin security;

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                                                                     § 220.3                                                                12 CFR Ch. II (1–1–09 Edition)

                                                                       (7) Until January 1, 1999, any OTC                      upon receipt of a valid exercise notice
                                                                     margin stock; or                                          or as otherwise required by the option
                                                                       (8) Until January 1, 1999, any OTC se-                  contract.
                                                                     curity designated as qualified for trad-                    (2) A short put that is not cash-set-
                                                                     ing in the national market system                         tled obligates the customer to purchase
                                                                     under a designation plan approved by                      the underlying asset at the exercise
                                                                     the Securities and Exchange Commis-                       price upon receipt of a valid exercise
                                                                     sion (NMS security).                                      notice or as otherwise required by the
                                                                       Money market mutual fund means any                      option contract.
                                                                     security issued by an investment com-                       (3) A short call or a short put that is
                                                                     pany registered under section 8 of the                    cash-settled obligates the customer to
                                                                     Investment Company Act of 1940 (15                        pay the holder of an in the money long
                                                                     U.S.C. 80a–8) that is considered a                        put or long call who has, or has been
                                                                     money market fund under SEC Rule                          deemed to have, exercised the option
                                                                     2a–7 (17 CFR 270.2a–7).                                   the cash difference between the exer-
                                                                       Non-equity security means a security                    cise price and the current assigned
                                                                     that is not an equity security (as de-                    value of the option as established by
                                                                     fined in section 3(a)(11) of the Act).                    the option contract.
                                                                       Nonexempted security means any secu-                      Underlying asset means:
                                                                     rity other than an exempted security
                                                                                                                                 (1) The security or other asset that
                                                                     (as defined in section 3(a)(12) of the
                                                                                                                               will be delivered upon exercise of an
                                                                     Act).
                                                                                                                               option; or
                                                                       OTC margin stock means any equity
                                                                     security traded over the counter that                       (2) In the case of a cash-settled op-
                                                                     the Board has determined has the de-                      tion, the securities or other assets
                                                                     gree of national investor interest, the                   which comprise the index or other
                                                                     depth and breadth of market, the avail-                   measure from which the option’s value
                                                                     ability of information respecting the                     is derived.
                                                                     security and its issuer, and the char-                    [Reg. T, 63 FR 2821, Jan. 16, 1998]
                                                                     acter and permanence of the issuer to
                                                                     warrant being treated like an equity                      § 220.3     General provisions.
                                                                     security treaded on a national securi-
                                                                                                                                  (a) Records. The creditor shall main-
                                                                     ties exchange. An OTC stock is not
                                                                                                                               tain a record for each account showing
                                                                     considered to be an OTC margin stock
                                                                                                                               the full details of all transactions.
                                                                     unless it appears on the Board’s peri-
                                                                     odically published list of OTC margin                        (b) Separation of accounts—(1) In gen-
                                                                     stocks.                                                   eral. The requirements of one account
                                                                       Payment period means the number of                      may not be met by considering items
                                                                     business days in the standard securi-                     in any other account. If withdrawals of
                                                                     ties settlement cycle in the United                       cash or securities are permitted under
                                                                     States, as defined in paragraph (a) of                    this part, written entries shall be made
                                                                     SEC Rule 15c6–1 (17 CFR 240.15c6–1(a)),                   when cash or securities are used for
                                                                     plus two business days.                                   purposes of meeting requirements in
                                                                       Purpose credit means credit for the                     another account.
                                                                     purpose of:                                                  (2) Exceptions. Notwithstanding para-
                                                                       (1) Buying, carrying, or trading in se-                 graph (b)(1) of this section:
                                                                     curities; or                                                 (i) For purposes of calculating the re-
                                                                       (2) Buying or carrying any part of an                   quired margin for a security in a mar-
                                                                     investment contract security which                        gin account, assets held in the good
                                                                     shall be deemed credit for the purpose                    faith account pursuant to § 220.6(e)(1)(i)
                                                                     of buying or carrying the entire secu-                    or (ii) may serve in lieu of margin;
                                                                     rity.                                                        (ii) Transfers may be effected be-
                                                                       Short call or short put means a call op-                tween the margin account and the spe-
                                                                     tion or a put option that is issued, en-                  cial memorandum account pursuant to
                                                                     dorsed, or guaranteed in or for an ac-                    §§ 220.4 and 220.5.
                                                                     count.                                                       (c) Maintenance of credit. Except as
                                                                       (1) A short call that is not cash-set-                  prohibited by this part, any credit ini-
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                                                                     tled obligates the customer to sell the                   tially extended in compliance with this
                                                                     underlying asset at the exercise price                    part may be maintained regardless of:

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                                                                     Federal Reserve System                                                                              § 220.4

                                                                       (1) Reductions in the customer’s eq-                    its acquisition shall be treated as if the
                                                                     uity resulting from changes in market                     security is a margin security.
                                                                     prices;                                                      (g) Arranging for loans by others. A
                                                                       (2) Any security in an account ceas-                    creditor may arrange for the extension
                                                                     ing to be margin or exempted; or                          or maintenance of credit to or for any
                                                                       (3) Any change in the margin require-                   customer by any person, provided the
                                                                     ments prescribed under this part.                         creditor does not willfully arrange
                                                                       (d) Guarantee of accounts. No guar-                     credit that violates parts 221 or 224 of
                                                                     antee of a customer’s account shall be                    this chapter.
                                                                     given any effect for purposes of this                        (h) Innocent mistakes. If any failure to
                                                                     part.                                                     comply with this part results from a
                                                                                                                               mistake made in good faith in exe-
                                                                       (e) Receipt of funds or securities. (1) A
                                                                                                                               cuting a transaction or calculating the
                                                                     creditor, acting in good faith, may ac-
                                                                                                                               amount of margin, the creditor shall
                                                                     cept as immediate payment:
                                                                                                                               not be deemed in violation of this part
                                                                       (i) Cash or any check, draft, or order                  if, promptly after the discovery of the
                                                                     payable on presentation; or                               mistake, the creditor takes appropriate
                                                                       (ii) Any security with sight draft at-                  corrective action.
                                                                     tached.                                                      (i) Foreign currency. (1) Freely con-
                                                                       (2) A creditor may treat a security,                    vertible foreign currency may be treat-
                                                                     check or draft as received upon written                   ed at its U.S. dollar equivalent, pro-
                                                                     notification from another creditor that                   vided the currency is marked-to-mar-
                                                                     the specified security, check, or draft                   ket daily.
                                                                     has been sent.                                               (2) A creditor may extend credit de-
                                                                       (3) Upon notification that a check,                     nominated in any freely convertible
                                                                     draft, or order has been dishonored or                    foreign currency.
                                                                     when securities have not been received                       (j) Exempted borrowers. (1) A member
                                                                     within a reasonable time, the creditor                    of a national securities exchange or a
                                                                     shall take the action required by this                    registered broker or dealer that has
                                                                     part when payment or securities are                       been in existence for less than one year
                                                                     not received on time.                                     may meet the definition of exempted
                                                                       (4) To temporarily finance a cus-                       borrower based on a six-month period.
                                                                     tomer’s receipt of securities pursuant                       (2) Once a member of a national secu-
                                                                     to an employee benefit plan registered                    rities exchange or registered broker or
                                                                     on SEC Form S–8 or the withholding                        dealer ceases to qualify as an exempted
                                                                     taxes for an employee stock award                         borrower, it shall notify its lender of
                                                                     plan, a creditor may accept, in lieu of                   this fact before obtaining additional
                                                                     the securities, a properly executed ex-                   credit. Any new extensions of credit to
                                                                     ercise notice, where applicable, and in-                  such a borrower, including rollovers,
                                                                     structions to the issuer to deliver the                   renewals, and additional draws on ex-
                                                                     stock to the creditor. Prior to accept-                   isting lines of credit, are subject to the
                                                                     ance, the creditor must verify that the                   provisions of this part.
                                                                     issuer will deliver the securities                        [Reg. T, 63 FR 2822, Jan. 16, 1998]
                                                                     promptly and the customer must des-
                                                                     ignate the account into which the secu-                   § 220.4 Margin account.
                                                                     rities are to be deposited.                                  (a) Margin transactions. (1) All trans-
                                                                       (f) Exchange of securities. (1) To enable               actions not specifically authorized for
                                                                     a customer to participate in an offer to                  inclusion in another account shall be
                                                                     exchange securities which is made to                      recorded in the margin account.
                                                                     all holders of an issue of securities, a                     (2) A creditor may establish separate
                                                                     creditor may submit for exchange any                      margin accounts for the same person
                                                                     securities held in a margin account,                      to:
                                                                     without regard to the other provisions                       (i) Clear transactions for other credi-
                                                                     of this part, provided the consideration                  tors where the transactions are intro-
                                                                     received is deposited into the account.                   duced to the clearing creditor by sepa-
                                                                       (2) If a nonmargin, nonexempted se-                     rate creditors; or
                                                                     curity is acquired in exchange for a                         (ii) Clear transactions through other
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                                                                     margin security, its retention, with-                     creditors if the transactions are
                                                                     drawal, or sale within 60 days following                  cleared by separate creditors; or

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                                                                     § 220.4                                                                12 CFR Ch. II (1–1–09 Edition)

                                                                        (iii) Provide one or more accounts                     feree from the date of its origin, if the
                                                                     over which the creditor or a third                        transferee accepts, in good faith, a
                                                                     party investment adviser has invest-                      signed statement of the transferor (or,
                                                                     ment discretion.                                          if that is not practicable, of the cus-
                                                                        (b) Required margin—(1) Applicability.                 tomer), that any margin call issued
                                                                     The required margin for each long or                      under this part has been satisfied.
                                                                     short position in securities is set forth                   (ii) A margin account that is trans-
                                                                     in § 220.12 (the Supplement) and is sub-                  ferred from one customer to another as
                                                                     ject to the following exceptions and                      part of a transaction, not undertaken
                                                                     special provisions.                                       to avoid the requirements of this part,
                                                                        (2) Short sale against the box. A short                may be treated as if it had been main-
                                                                     sale ‘‘against the box’’ shall be treated                 tained for the transferee from the date
                                                                     as a long sale for the purpose of com-                    of its origin, if the creditor accepts in
                                                                     puting the equity and the required                        good faith and keeps with the trans-
                                                                     margin.                                                   feree account a signed statement of the
                                                                        (3) When-issued securities. The re-                    transferor      describing      the     cir-
                                                                     quired margin on a net long or net                        cumstances for the transfer.
                                                                     short commitment in a when-issued se-                       (8) Sound credit judgment. In exer-
                                                                     curity is the margin that would be re-                    cising sound credit judgment to deter-
                                                                     quired if the security were an issued                     mine the margin required in good faith
                                                                     margin security, plus any unrealized                      pursuant to § 220.12 (the Supplement),
                                                                     loss on the commitment or less any un-                    the creditor shall make its determina-
                                                                     realized gain.                                            tion for a specified security position
                                                                        (4) Stock used as cover. (i) When a                    without regard to the customer’s other
                                                                     short position held in the account                        assets or securities positions held in
                                                                     serves in lieu of the required margin                     connection      with    unrelated    trans-
                                                                     for a short put, the amount prescribed                    actions.
                                                                     by paragraph (b)(1) of this section as                      (c) When additional margin is re-
                                                                     the amount to be added to the required                    quired—(1) Computing deficiency. All
                                                                     margin in respect of short sales shall                    transactions on the same day shall be
                                                                     be increased by any unrealized loss on                    combined to determine whether addi-
                                                                     the position.                                             tional margin is required by the cred-
                                                                        (ii) When a security held in the ac-                   itor. For the purpose of computing eq-
                                                                     count serves in lieu of the required                      uity in an account, security positions
                                                                     margin for a short call, the security                     are established or eliminated and a
                                                                     shall be valued at no greater than the                    credit or debit created on the trade
                                                                     exercise price of the short call.                         date of a security transaction. Addi-
                                                                        (5) Accounts of partners. If a partner of              tional margin is required on any day
                                                                     the creditor has a margin account with                    when the day’s transactions create or
                                                                     the creditor, the creditor shall dis-                     increase a margin deficiency in the ac-
                                                                     regard the partner’s financial relations                  count and shall be for the amount of
                                                                     with the firm (as shown in the part-                      the margin deficiency so created or in-
                                                                     ner’s capital and ordinary drawing ac-                    creased.
                                                                     counts) in calculating the margin or                        (2) Satisfaction of deficiency. The addi-
                                                                     equity of the partner’s margin account.                   tional required margin may be satis-
                                                                        (6) Contribution to joint venture. If a                fied by a transfer from the special
                                                                     margin account is the account of a                        memorandum account or by a deposit
                                                                     joint venture in which the creditor par-                  of cash, margin securities, exempted
                                                                     ticipates, any interest of the creditor                   securities, or any combination thereof.
                                                                     in the joint account in excess of the in-                   (3) Time limits. (i) A margin call shall
                                                                     terest which the creditor would have                      be satisfied within one payment period
                                                                     on the basis of its right to share in the                 after the margin deficiency was cre-
                                                                     profits shall be treated as an extension                  ated or increased.
                                                                     of credit to the joint account and shall                    (ii) The payment period may be ex-
                                                                     be margined as such.                                      tended for one or more limited periods
                                                                        (7) Transfer of accounts. (i) A margin                 upon application by the creditor to its
                                                                     account that is transferred from one                      examining authority unless the exam-
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                                                                     creditor to another may be treated as                     ining authority believes that the cred-
                                                                     if it had been maintained by the trans-                   itor is not acting in good faith or that

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                                                                     Federal Reserve System                                                                              § 220.5

                                                                     the creditor has not sufficiently deter-                    (ii) Premiums on securities borrowed
                                                                     mined that exceptional circumstances                      in connection with short sales or to ef-
                                                                     warrant such action. Applications shall                   fect delivery;
                                                                     be filed and acted upon prior to the end                    (iii) Dividends, interest, or other dis-
                                                                     of the payment period or the expiration                   tributions due on borrowed securities;
                                                                     of any subsequent extension.                                (iv) Communication or shipping
                                                                       (4) Satisfaction restriction. Any trans-                charges with respect to transactions in
                                                                     action, position, or deposit that is used                 the margin account; and
                                                                     to satisfy one requirement under this                       (v) Any other service charges which
                                                                     part shall be unavailable to satisfy any                  the creditor may impose.
                                                                     other requirement.                                          (2) A creditor may permit interest,
                                                                       (d) Liquidation in lieu of deposit. If any              dividends, or other distributions cred-
                                                                     margin call is not met in full within                     ited to a margin account to be with-
                                                                     the required time, the creditor shall                     drawn from the account if:
                                                                     liquidate securities sufficient to meet                     (i) The withdrawal does not create or
                                                                     the margin call or to eliminate any                       increase a margin deficiency in the ac-
                                                                     margin deficiency existing on the day                     count; or
                                                                     such liquidation is required, whichever                     (ii) The current market value of any
                                                                     is less. If the margin deficiency created                 securities withdrawn does not exceed 10
                                                                     or increased is $1000 or less, no action                  percent of the current market value of
                                                                     need be taken by the creditor.                            the security with respect to which they
                                                                       (e) Withdrawals of cash or securities.                  were distributed.
                                                                     (1) Cash or securities may be with-
                                                                                                                               [Reg. T, 63 FR 2823, Jan. 16, 1998]
                                                                     drawn from an account, except if:
                                                                       (i) Additional cash or securities are                   § 220.5     Special memorandum account.
                                                                     required to be deposited into the ac-
                                                                     count for a transaction on the same or                      (a) A special memorandum account
                                                                     a previous day; or                                        (SMA) may be maintained in conjunc-
                                                                       (ii) The withdrawal, together with                      tion with a margin account. A single
                                                                     other transactions, deposits, and with-                   entry amount may be used to represent
                                                                     drawals on the same day, would create                     both a credit to the SMA and a debit to
                                                                     or increase a margin deficiency.                          the margin account. A transfer be-
                                                                                                                               tween the two accounts may be ef-
                                                                       (2) Margin excess may be withdrawn
                                                                                                                               fected by an increase or reduction in
                                                                     or may be transferred to the special
                                                                                                                               the entry. When computing the equity
                                                                     memorandum account (§ 220.5) by mak-
                                                                                                                               in a margin account, the single entry
                                                                     ing a single entry to that account
                                                                                                                               amount shall be considered as a debit
                                                                     which will represent a debit to the
                                                                                                                               in the margin account. A payment to
                                                                     margin account and a credit to the spe-
                                                                                                                               the customer or on the customer’s be-
                                                                     cial memorandum account.
                                                                                                                               half or a transfer to any of the cus-
                                                                       (3) If a creditor does not receive a dis-               tomer’s other accounts from the SMA
                                                                     tribution of cash or securities which is                  reduces the single entry amount.
                                                                     payable with respect to any security in
                                                                                                                                 (b) The SMA may contain the fol-
                                                                     a margin account on the day it is pay-
                                                                                                                               lowing entries:
                                                                     able and withdrawal would not be per-
                                                                                                                                 (1) Dividend and interest payments;
                                                                     mitted under this paragraph (e), a
                                                                     withdrawal       transaction    shall     be                (2) Cash not required by this part, in-
                                                                     deemed to have occurred on the day                        cluding cash deposited to meet a main-
                                                                                                                               tenance margin call or to meet any re-
                                                                     the distribution is payable.
                                                                                                                               quirement of a self-regulatory organi-
                                                                       (f) Interest, service charges, etc. (1)
                                                                                                                               zation that is not imposed by this part;
                                                                     Without regard to the other provisions
                                                                                                                                 (3) Proceeds of a sale of securities or
                                                                     of this section, the creditor, in its
                                                                                                                               cash no longer required on any expired
                                                                     usual practice, may debit the following
                                                                                                                               or liquidated security position that
                                                                     items to a margin account if they are
                                                                                                                               may be withdrawn under § 220.4(e); and
                                                                     considered in calculating the balance
                                                                     of such account:                                            (4) Margin excess transferred from
                                                                                                                               the margin account under § 220.4(e)(2).
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                                                                       (i) Interest charged on credit main-
                                                                     tained in the margin account;                             [Reg. T, 63 FR 2824, Jan. 16, 1998]

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                                                                     § 220.6                                                                12 CFR Ch. II (1–1–09 Edition)

                                                                     § 220.6    Good faith account.                              (e) Nonpurpose credit. (1) A creditor
                                                                                                                               may:
                                                                        In a good faith account, a creditor
                                                                                                                                 (i) Effect and carry transactions in
                                                                     may effect or finance customer trans-                     commodities;
                                                                     actions in accordance with the fol-                         (ii) Effect and carry transactions in
                                                                     lowing provisions:                                        foreign exchange;
                                                                        (a) Securities entitled to good faith mar-               (iii) Extend and maintain secured or
                                                                     gin—(1) Permissible transactions. A cred-                 unsecured nonpurpose credit, subject
                                                                     itor may effect and finance trans-                        to the requirements of paragraph (e)(2)
                                                                     actions involving the buying, carrying,                   of this section.
                                                                     or trading of any security entitled to                      (2) Every extension of credit, except
                                                                     ‘‘good faith’’ margin as set forth in                     as provided in paragraphs (e)(1)(i) and
                                                                     § 220.12 (the Supplement).                                (e)(1)(ii) of this section, shall be
                                                                        (2) Required margin. The required                      deemed to be purpose credit unless,
                                                                     margin is set forth in § 220.12 (the Sup-                 prior to extending the credit, the cred-
                                                                     plement).                                                 itor accepts in good faith from the cus-
                                                                        (3) Satisfaction of margin. Required                   tomer a written statement that it is
                                                                     margin may be satisfied by a transfer                     not purpose credit. The statement shall
                                                                     from the special memorandum account                       conform to the requirements estab-
                                                                     or by a deposit of cash, securities enti-                 lished by the Board.
                                                                     tled to ‘‘good faith’’ margin as set
                                                                                                                               [Reg. T, 63 FR 2824, Jan. 16, 1998]
                                                                     forth in § 220.12 (the Supplement), any
                                                                     other asset that is not a security, or                    § 220.7 Broker-dealer credit account.
                                                                     any combination thereof. An asset that
                                                                                                                                  (a) Requirements. In a broker-dealer
                                                                     is not a security shall have a margin
                                                                                                                               credit account, a creditor may effect or
                                                                     value determined by the creditor in
                                                                                                                               finance transactions in accordance
                                                                     good faith.
                                                                                                                               with the following provisions.
                                                                        (b) Arbitrage. A creditor may effect                      (b) Purchase or sale of security against
                                                                     and finance for any customer bona fide                    full payment. A creditor may purchase
                                                                     arbitrage transactions. For the purpose                   any security from or sell any security
                                                                     of this section, the term ‘‘bona fide ar-                 to another creditor or person regulated
                                                                     bitrage’’ means:                                          by a foreign securities authority under
                                                                        (1) A purchase or sale of a security in                a good faith agreement to promptly de-
                                                                     one market together with an offsetting                    liver the security against full payment
                                                                     sale or purchase of the same security                     of the purchase price.
                                                                     in a different market at as nearly the                       (c) Joint back office. A creditor may
                                                                     same time as practicable for the pur-                     effect or finance transactions of any of
                                                                     pose of taking advantage of a dif-                        its owners if the creditor is a clearing
                                                                     ference in prices in the two markets; or                  and servicing broker or dealer owned
                                                                        (2) A purchase of a security which is,                 jointly or individually by other credi-
                                                                     without restriction other than the pay-                   tors.
                                                                     ment of money, exchangeable or con-                          (d) Capital contribution. A creditor
                                                                     vertible within 90 calendar days of the                   may extend and maintain credit to any
                                                                     purchase into a second security to-                       partner or stockholder of the creditor
                                                                     gether with an offsetting sale of the                     for the purpose of making a capital
                                                                     second security at or about the same                      contribution to, or purchasing stock of,
                                                                     time, for the purpose of taking advan-                    the creditor, affiliated corporation or
                                                                     tage of a concurrent disparity in the                     another creditor.
                                                                     prices of the two securities.                                (e) Emergency and subordinated credit.
                                                                        (c) ‘‘Prime broker’’ transactions. A                   A creditor may extend and maintain,
                                                                     creditor may effect transactions for a                    with the approval of the appropriate
                                                                     customer as part of a ‘‘prime broker’’                    examining authority:
                                                                     arrangement in conformity with SEC                           (1) Credit to meet the emergency
                                                                     guidelines.                                               needs of any creditor; or
                                                                        (d) Credit to ESOPs. A creditor may                       (2) Subordinated credit to another
                                                                     extend and maintain credit to em-                         creditor for capital purposes, if the
                                                                     ployee stock ownership plans without                      other creditor:
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                                                                     regard to the other provisions of this                       (i) Is an affiliated corporation or
                                                                     part.                                                     would not be considered a customer of

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                                                                     Federal Reserve System                                                                              § 220.8

                                                                     the lender apart from the subordinated                      (ii) The creditor accepts in good faith
                                                                     loan; or                                                  the customer’s agreement that the cus-
                                                                       (ii) Will not use the proceeds of the                   tomer will promptly make full cash
                                                                     loan to increase the amount of dealing                    payment for the security or asset be-
                                                                     in securities for the account of the                      fore selling it and does not con-
                                                                     creditor, its firm or corporation or an                   template selling it prior to making
                                                                     affiliated corporation.                                   such payment;
                                                                       (f) Omnibus credit (1) A creditor may                     (2) Buy from or sell for any customer
                                                                     effect and finance transactions for a                     any security or other asset if:
                                                                     broker or dealer who is registered with                     (i) The security is held in the ac-
                                                                     the SEC under section 15 of the Act and                   count; or
                                                                     who gives the creditor written notice                       (ii) The creditor accepts in good faith
                                                                     that:                                                     the customer’s statement that the se-
                                                                       (i) All securities will be for the ac-                  curity is owned by the customer or the
                                                                     count of customers of the broker or                       customer’s principal, and that it will
                                                                     dealer; and                                               be promptly deposited in the account;
                                                                       (ii) Any short sales effected will be                     (3) Issue, endorse, or guarantee, or
                                                                     short sales made on behalf of the cus-                    sell an option for any customer as part
                                                                     tomers of the broker or dealer other                      of a covered option transaction; and
                                                                     than partners.                                              (4) Use an escrow agreement in lieu
                                                                       (2) The written notice required by                      of the cash, cash equivalents or under-
                                                                     paragraph (f)(1) of this section shall                    lying asset position if:
                                                                     conform to any SEC rule on the                              (i) In the case of a short call or a
                                                                     hypothecation of customers’ securities                    short put, the creditor is advised by
                                                                     by brokers or dealers.                                    the customer that the required securi-
                                                                       (g) Special purpose credit. A creditor                  ties, assets or cash are held by a person
                                                                     may extend the following types of cred-                   authorized to issue an escrow agree-
                                                                     it with good faith margin:                                ment and the creditor independently
                                                                       (1) Credit to finance the purchase or                   verifies that the appropriate escrow
                                                                     sale of securities for prompt delivery,                   agreement will be delivered by the per-
                                                                     if the credit is to be repaid upon com-                   son promptly; or
                                                                     pletion of the transaction.                                 (ii) In the case of a call issued, en-
                                                                       (2) Credit to finance securities in                     dorsed, guaranteed, or sold on the same
                                                                     transit or surrendered for transfer, if                   day the underlying asset is purchased
                                                                     the credit is to be repaid upon comple-                   in the account and the underlying
                                                                     tion of the transaction.                                  asset is to be delivered to a person au-
                                                                       (3) Credit to enable a broker or dealer                 thorized to issue an escrow agreement,
                                                                     to pay for securities, if the credit is to                the creditor verifies that the appro-
                                                                     be repaid on the same day it is ex-                       priate escrow agreement will be deliv-
                                                                     tended.                                                   ered by the person promptly.
                                                                       (4) Credit to an exempted borrower.                       (b) Time periods for payment; cancella-
                                                                       (5) Credit to a member of a national                    tion or liquidation—(1) Full cash pay-
                                                                     securities    exchange    or   registered                 ment. A creditor shall obtain full cash
                                                                     broker or dealer to finance its activi-                   payment for customer purchases:
                                                                     ties as a market maker or specialist.                       (i) Within one payment period of the
                                                                       (6) Credit to a member of a national                    date:
                                                                     securities    exchange    or   registered                   (A) Any nonexempted security was
                                                                     broker or dealer to finance its activi-                   purchased;
                                                                     ties as an underwriter.
                                                                                                                                 (B) Any when-issued security was
                                                                     [Reg. T, 63 FR 2824, Jan. 16, 1998]                       made available by the issuer for deliv-
                                                                                                                               ery to purchasers;
                                                                     § 220.8    Cash account.                                    (C) Any ‘‘when distributed’’ security
                                                                       (a) Permissible transactions. In a cash                 was distributed under a published plan;
                                                                     account, a creditor, may:                                   (D) A security owned by the cus-
                                                                       (1) Buy for or sell to any customer                     tomer has matured or has been re-
                                                                     any security or other asset if:                           deemed and a new refunding security of
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                                                                       (i) There are sufficient funds in the                   the same issuer has been purchased by
                                                                     account; or                                               the customer, provided:

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                                                                     § 220.9                                                                12 CFR Ch. II (1–1–09 Edition)

                                                                        (1) The customer purchased the new                     payment is received or any check or
                                                                     security no more than 35 calendar days                    draft in payment has cleared and the
                                                                     prior to the date of maturity or re-                      proceeds from the sale are not with-
                                                                     demption of the old security;                             drawn prior to such payment or check
                                                                        (2) The customer is entitled to the                    clearance; or
                                                                     proceeds of the redemption; and                             (ii) The purchased security was deliv-
                                                                        (3) The delayed payment does not ex-                   ered to another broker or dealer for de-
                                                                     ceed 103 percent of the proceeds of the                   posit in a cash account which holds
                                                                     old security.                                             sufficient funds to pay for the security.
                                                                        (ii) In the case of the purchase of a                  The creditor may rely on a written
                                                                     foreign security, within one payment                      statement accepted in good faith from
                                                                     period of the trade date or within one                    the other broker or dealer that suffi-
                                                                     day after the date on which settlement                    cient funds are held in the other cash
                                                                     is required to occur by the rules of the                  account.
                                                                     foreign securities market, provided                         (d) Extension of time periods; transfers.
                                                                     this period does not exceed the max-                      (1) Unless the creditor’s examining au-
                                                                     imum time permitted by this part for                      thority believes that the creditor is not
                                                                     delivery against payment transactions.                    acting in good faith or that the cred-
                                                                        (2) Delivery against payment. If a cred-               itor has not sufficiently determined
                                                                     itor purchases for or sells to a cus-                     that exceptional circumstances war-
                                                                     tomer a security in a delivery against                    rant such action, it may upon applica-
                                                                     payment transaction, the creditor shall                   tion by the creditor:
                                                                     have up to 35 calendar days to obtain                       (i) Extend any period specified in
                                                                     payment if delivery of the security is                    paragraph (b) of this section;
                                                                     delayed due to the mechanics of the                         (ii) Authorize transfer to another ac-
                                                                     transaction and is not related to the                     count of any transaction involving the
                                                                     customer’s willingness or ability to                      purchase of a margin or exempted secu-
                                                                     pay.                                                      rity; or
                                                                        (3) Shipment of securities, extension. If                (iii) Grant a waiver from the 90 day
                                                                     any shipment of securities is incidental                  freeze.
                                                                     to consummation of a transaction, a                         (2) Applications shall be filed and
                                                                     creditor may extend the payment pe-                       acted upon prior to the end of the pay-
                                                                     riod by the number of days required for                   ment period, or in the case of the pur-
                                                                     shipment, but not by more than one                        chase of a foreign security within the
                                                                     additional payment period.                                period specified in paragraph (b)(1)(ii)
                                                                        (4) Cancellation; liquidation; minimum                 of this section, or the expiration of any
                                                                     amount. A creditor shall promptly can-                    subsequent extension.
                                                                     cel or otherwise liquidate a transaction
                                                                     or any part of a transaction for which                    [Reg. T, 63 FR 2825, Jan. 16, 1998]
                                                                     the customer has not made full cash
                                                                     payment within the required time. A                       § 220.9 Clearance of securities, options,
                                                                                                                                   and futures.
                                                                     creditor may, at its option, disregard
                                                                     any sum due from the customer not ex-                       (a) Credit for clearance of securities.
                                                                     ceeding $1000.                                            The provisions of this part shall not
                                                                        (c) 90 day freeze. (1) If a nonexempted                apply to the extension or maintenance
                                                                     security in the account is sold or deliv-                 of any credit that is not for more than
                                                                     ered to another broker or dealer with-                    one day if it is incidental to the clear-
                                                                     out having been previously paid for in                    ance of transactions in securities di-
                                                                     full by the customer, the privilege of                    rectly between members of a national
                                                                     delaying payment beyond the trade                         securities exchange or association or
                                                                     date shall be withdrawn for 90 calendar                   through any clearing agency registered
                                                                     days following the date of sale of the                    with the SEC.
                                                                     security. Cancellation of the trans-                        (b) Deposit of securities with a clearing
                                                                     action other than to correct an error                     agency. The provisions of this part
                                                                     shall constitute a sale.                                  shall not apply to the deposit of securi-
                                                                        (2) The 90 day freeze shall not apply                  ties with an option or futures clearing
                                                                     if:                                                       agency for the purpose of meeting the
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                                                                        (i) Within the period specified in                     deposit requirements of the agency if:
                                                                     paragraph (b)(1) of this section, full                      (1) The clearing agency:

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                                                                     Federal Reserve System                                                                              § 220.11

                                                                       (i) Issues, guarantees performance                      tion, OTC margin stock shall meet the
                                                                     on, or clears transactions in, any secu-                  following requirements:
                                                                     rity (including options on any security,                     (1) Four or more dealers stand willing
                                                                     certificate of deposit, securities index                  to, and do in fact, make a market in
                                                                     or foreign currency); or                                  such stock and regularly submit bona
                                                                       (ii) Guarantees performance of con-                     fide bids and offers to an automated
                                                                     tracts for the purchase or sale of a                      quotations system for their own ac-
                                                                     commodity for future delivery or op-                      counts;
                                                                     tions on such contracts;                                     (2) The minimum average bid price of
                                                                       (2) The clearing agency is registered                   such stock, as determined by the
                                                                     with the Securities and Exchange Com-                     Board, is at least $5 per share;
                                                                     mission or is the clearing agency for a                      (3) The stock is registered under sec-
                                                                     contract market regulated by the Com-                     tion 12 of the Act, is issued by an insur-
                                                                     modity Futures Trading Commission;                        ance company subject to section
                                                                     and                                                       12(g)(2)(G) of the Act, is issued by a
                                                                       (3) The deposit consists of any mar-                    closed-end investment management
                                                                     gin security and complies with the                        company subject to registration pursu-
                                                                     rules of the clearing agency that have                    ant to section 8 of the Investment
                                                                     been approved by the Securities and                       Company Act of 1940 (15 U.S.C. 80a-8), is
                                                                     Exchange Commission or the Com-                           an American Depository Receipt (ADR)
                                                                     modity Futures Trading Commission.                        of a foreign issuer whose securities are
                                                                                                                               registered under section 12 of the Act,
                                                                     [Reg. T, 63 FR 2826, Jan. 16, 1998]                       or is a stock of an issuer required to
                                                                                                                               file reports under section 15(d) of the
                                                                     § 220.10 Borrowing and lending securi-                    Act;
                                                                         ties.
                                                                                                                                  (4) Daily quotations for both bid and
                                                                       (a) Without regard to the other provi-                  asked prices for the stock are
                                                                     sions of this part, a creditor may bor-                   continously available to the general
                                                                     row or lend securities for the purpose                    public;
                                                                     of making delivery of the securities in                      (5) The stock has been publicly trad-
                                                                     the case of short sales, failure to re-                   ed for at least six months;
                                                                     ceive securities required to be deliv-                       (6) The issuer has at least $4 million
                                                                     ered, or other similar situations. If a                   of capital, surplus, and undivided prof-
                                                                     creditor reasonably anticipates a short                   its;
                                                                     sale or fail transaction, such borrowing                     (7) There are 400,000 or more shares of
                                                                     may be made up to one standard settle-                    such stock outstanding in addition to
                                                                     ment cycle in advance of trade date.                      shares held beneficially by officers, di-
                                                                       (b) A creditor may lend foreign secu-                   rectors or beneficial owners of more
                                                                     rities to a foreign person (or borrow                     than 10 percent of the stock;
                                                                     such securities for the purpose of re-                       (8) There are 1,200 or more holders of
                                                                     lending them to a foreign person) for                     record, as defined in SEC Rule 12g5–1
                                                                     any purpose lawful in the country in                      (17 CFR 240.12g5–1), of the stock who
                                                                     which they are to be used.                                are not officers, directors or beneficial
                                                                       (c) A creditor that is an exempted                      owners of 10 percent or more of the
                                                                     borrower may lend securities without                      stock, or the average daily trading vol-
                                                                     regard to the other provisions of this                    ume of such stock as determined by the
                                                                     part and a creditor may borrow securi-                    Board, is at least 500 shares; and
                                                                     ties from an exempted borrower with-                         (9) The issuer or a predecessor in in-
                                                                     out regard to the other provisions of                     terest has been in existence for at least
                                                                     this part.                                                three years.
                                                                     [Reg. T, 63 FR 2826, Jan. 16, 1998]                          (b) Requirements for continued inclu-
                                                                                                                               sion on the list of marginable OTC stocks.
                                                                     § 220.11 Requirements for the list of                     Except as provided in paragraph (f) of
                                                                         marginable OTC stocks and the list                    this section, OTC margin stock shall
                                                                         of foreign margin stocks.                             meet the following requirements:
                                                                        (a) Requirements for inclusion on the                     (1) Three or more dealers stand will-
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                                                                     list of marginable OTC stocks. Except as                  ing to, and do in fact, make a market
                                                                     provided in paragraph (f) of this sec-                    in such stock and regularly submit

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                                                                     § 220.11                                                               12 CFR Ch. II (1–1–09 Edition)

                                                                     bona fide bids and offers to an auto-                       (5) The issuer or a predecessor in in-
                                                                     mated quotations system for their own                     terest has been in existence for at least
                                                                     accounts;                                                 five years.
                                                                        (2) The minimum average bid price of                     (d) Requirements for continued inclu-
                                                                     such stocks, as determined by the                         sion on the list of foreign margin stocks.
                                                                     Board, is at least $2 per share;                          Except as provided in paragraph (f) of
                                                                        (3) The stock is registered as speci-                  this section, a foreign security shall
                                                                     fied in paragraph (a)(3) of this section;                 meet the following requirements to re-
                                                                        (4) Daily quotations for both bid and                  main on the List of Foreign Margin
                                                                     asked prices for the stock are continu-                   Stocks:
                                                                     ously available to the general public; ;                    (1) The security continues to meet
                                                                        (5) The issuer has at least $1 million                 the requirements specified in para-
                                                                     of capital, surplus, and undivided prof-                  graphs (c) (1) and (2) of this section;
                                                                     its;                                                        (2) The aggregate market value of
                                                                        (6) There are 300,000 or more shares of                shares, the ownership of which is unre-
                                                                     such stock outstanding in addition to                     stricted, is not less than $500 million;
                                                                     shares held beneficially by officers, di-                 and
                                                                     rectors, or beneficial owners of more                       (3) The average weekly trading vol-
                                                                     than 10 percent of the stock; and                         ume of such security during the pre-
                                                                        (7) There continue to be 800 or more                   ceding six months is either at least
                                                                     holders of record, as defined in SEC                      100,000 shares or $500,000.
                                                                     Rule 12g5–1 (17 CFR 240.12g5–1), of the                     (e) Removal from the list. The Board
                                                                     stock who are not officers, directors, or                 shall periodically remove from the lists
                                                                     beneficial owners of 10 percent or more                   any stock that:
                                                                     of the stock, or the average daily trad-                    (1) Ceases to exist or of which the
                                                                     ing volume of such stock, as deter-                       issuer ceases to exist; or
                                                                     mined by the Board, is at least 300                         (2) No longer substantially meets the
                                                                     shares.                                                   provisions of paragraphs (b) or (d) of
                                                                        (c) Requirements for inclusion on the                  this section or the definition of OTC
                                                                     list of foreign margin stocks. Except as                  margin stock.
                                                                     provided in paragraph (f) of this sec-
                                                                                                                                 (f) Discretionary authority of Board.
                                                                     tion, a foreign security shall meet the
                                                                                                                               Without regard to other paragraphs of
                                                                     following requirements before being
                                                                                                                               this section, the Board may add to, or
                                                                     placed on the List of Foreign Margin
                                                                                                                               omit or remove from the list of
                                                                     Stocks:
                                                                                                                               marginable OTC stocks and the list of
                                                                        (1) The security is an equity security
                                                                                                                               foreign margin stocks an equity secu-
                                                                     that is listed for trading on or through
                                                                                                                               rity, if in the judgment of the Board,
                                                                     the facilities of a foreign securities ex-
                                                                                                                               such action is necessary or appropriate
                                                                     change or a recognized foreign securi-
                                                                                                                               in the public interest.
                                                                     ties market and has been trading on
                                                                                                                                 (g) Unlawful representations. It shall
                                                                     such exchange or market for at least
                                                                                                                               be unlawful for any creditor to make,
                                                                     six months;
                                                                                                                               or cause to be made, any representa-
                                                                        (2) Daily quotations for both bid and
                                                                                                                               tion to the effect that the inclusion of
                                                                     asked or last sale prices for the secu-
                                                                                                                               a security on the list of marginable
                                                                     rity provided by the foreign securities
                                                                                                                               OTC stocks or the list of foreign mar-
                                                                     exchange or foreign securities market
                                                                                                                               gin stocks is evidence that the Board
                                                                     on which the security is traded are
                                                                                                                               or the SEC has in any way passed upon
                                                                     continuously available to creditors in
                                                                                                                               the merits of, or given approval to,
                                                                     the United States pursuant to an elec-
                                                                     tronic quotation system;                                  such security or any transactions
                                                                                                                               therein. Any statement in an adver-
                                                                        (3) The aggregate market value of
                                                                                                                               tisement or other similar communica-
                                                                     shares, the ownership of which is unre-
                                                                                                                               tion containing a reference to the
                                                                     stricted, is not less than $1 billion;
                                                                                                                               Board in connection with the lists or
                                                                        (4) The average weekly trading vol-
                                                                                                                               stocks on those lists shall be an unlaw-
                                                                     ume of such security during the pre-
                                                                                                                               ful representation.
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                                                                     ceding six months is either at least
                                                                     200,000 shares or $1 million; and                         [Reg. T, 63 FR 2826, Jan. 16, 1998]

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                                                                     Federal Reserve System                                                                          § 220.101

                                                                     § 220.12 Supplement: margin require-                      or foreign currency, the amount, or
                                                                           ments.                                              other position specified by the rules of
                                                                        The required margin for each secu-                     the registered national securities ex-
                                                                     rity position held in a margin account                    change or the registered securities as-
                                                                     shall be as follows:                                      sociation authorized to trade the op-
                                                                        (a) Margin equity security, except for                 tion or warrant, provided that all such
                                                                     an exempted security, money market                        rules have been approved or amended
                                                                     mutual fund or exempted securities                        by the SEC; or
                                                                     mutual fund, warrant on a securities                        (2) In the case of all other puts and
                                                                     index or foreign currency or a long po-                   calls, the amount, or other position,
                                                                     sition in an option: 50 percent of the                    specified by the maintenance rules of
                                                                     current market value of the security or                   the creditor’s examining authority.
                                                                     the percentage set by the regulatory
                                                                                                                               [Reg. T, 63 FR 2827, Jan. 16, 1998]
                                                                     authority where the trade occurs,
                                                                     whichever is greater.
                                                                                                                                              INTERPRETATIONS
                                                                        (b) Exempted security, non-equity se-
                                                                     curity, money market mutual fund or                       § 220.101 Transactions of customers
                                                                     exempted securities mutual fund: The                          who are brokers or dealers.
                                                                     margin required by the creditor in good
                                                                     faith or the percentage set by the regu-                     The Board has recently considered
                                                                     latory authority where the trade oc-                      certain questions regarding trans-
                                                                     curs, whichever is greater.                               actions of customers who are brokers
                                                                        (c) Short sale of a nonexempted secu-                  or dealers.
                                                                     rity, except for a non-equity security:                      (a) The first question was whether
                                                                        (1) 150 percent of the current market                  delivery and payment under § 220.4(f)(3)
                                                                     value of the security; or                                 must be exactly simultaneous (such as
                                                                        (2) 100 percent of the current market                  in sight draft shipments), or whether it
                                                                     value if a security exchangeable or                       is sufficient if the broker-dealer cus-
                                                                     convertible within 90 calendar days                       tomer, ‘‘as promptly as practicable in
                                                                     without restriction other than the pay-                   accordance with the ordinary usage of
                                                                     ment of money into the security sold                      the trade,’’ mails or otherwise delivers
                                                                     short is held in the account, provided                    to the creditor a check in settlement of
                                                                     that any long call to be used as margin                   the transaction, the check being ac-
                                                                     in connection with a short sale of the                    companied by instructions for transfer
                                                                     underlying security is an American-                       or delivery of the security. The Board
                                                                     style option issued by a registered                       ruled that the latter method of setting
                                                                     clearing corporation and listed or trad-                  the transaction is permissible.
                                                                     ed on a registered national securities                       (b) The second question was, in ef-
                                                                     exchange with an exercise price that                      fect, whether the limitations of
                                                                     does not exceed the price at which the                    § 220.4(c)(8) apply to the account of a
                                                                     underlying security was sold short.                       customer who is himself a broker or
                                                                        (d) Short sale of an exempted secu-                    dealer. The answer is that the provi-
                                                                     rity or non-equity security: 100 percent                  sion applies to any ‘‘special cash ac-
                                                                     of the current market value of the se-                    count,’’ regardless of the type of cus-
                                                                     curity plus the margin required by the                    tomer.
                                                                     creditor in good faith.                                      (c) The third question was, in effect,
                                                                        (e) Nonmargin, nonexempted equity                      whether a purchase and a sale of an
                                                                     security: 100 percent of the current                      unissued security under § 220.4(f)(3) may
                                                                     market value.                                             be offset against each other, or wheth-
                                                                        (f) Put or call on a security, certifi-                er each must be settled separately by
                                                                     cate of deposit, securities index or for-                 what would amount to delivery of the
                                                                     eign currency or a warrant on a securi-                   security to settle one transaction and
                                                                     ties index or foreign currency:                           its redelivery to settle the other. The
                                                                        (1) In the case of puts and calls issued               answer is that it is permissible to off-
                                                                     by a registered clearing corporation                      set the transactions against each other
                                                                     and listed or traded on a registered na-
                                                                                                                               without physical delivery and redeliv-
                                                                     tional securities exchange or a reg-
                                                                                                                               ery of the security.
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                                                                     istered securities association and reg-
                                                                     istered warrants on a securities index                    [11 FR 14155, Dec. 7, 1946]

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                                                                     § 220.102                                                              12 CFR Ch. II (1–1–09 Edition)

                                                                     § 220.102     [Reserved]                                  There, the broker wished to borrow
                                                                                                                               stocks with the understanding that he
                                                                     § 220.103 Borrowing of securities.                        ‘‘would offer to lend this stock in the
                                                                        (a) The Board of Governors has been                    ‘loan crowd’ on a national securities
                                                                     asked for a ruling as to whether                          exchange.’’ There was no assurance
                                                                     § 220.6(h), which deals with borrowing                    that the stocks would be used for the
                                                                     and lending of securities, applies to a                   purpose specified in § 220.6(h); they
                                                                     borrower of securities if the lender is a                 might be, or they might merely be held
                                                                     private individual, as contrasted with a                  idle while the person lending the
                                                                     member of a national securities ex-                       stocks had the use of the funds depos-
                                                                     change or a broker or dealer.                             ited against them. The ruling held in
                                                                        (b) Section 220.6(h) does not require                  effect that since the borrowing could
                                                                     that the lender of the securities in such                 not qualify under § 220.6(h) it must
                                                                     a case be a member of a national secu-                    comply with other applicable provi-
                                                                     rities exchange or a broker or dealer.                    sions of the regulation.
                                                                     Therefore, a borrowing of securities                        (e) The second requirement is that
                                                                     may be able to qualify under the provi-                   the deposit of cash against the bor-
                                                                     sion even though the lender is a private                  rowed securities must be ‘‘bona fide.’’
                                                                     individual, and this is true whether the                  This requirement naturally cannot be
                                                                     security is registered on a national se-                  spelled out in detail, but it requires at
                                                                     curities exchange or is unregistered. In                  least that the purpose of the broker in
                                                                     borrowing securities from a private in-                   making the deposit should be to obtain
                                                                     dividual under § 220.6(h), however, it be-                the securities for the specified purpose,
                                                                     comes especially important to bear in                     and that he should not use the arrange-
                                                                     mind two limitations that are con-                        ment as a means of accommodating a
                                                                     tained in the section.                                    customer who is seeking to obtain
                                                                        (c) The first limitation is that the                   more funds than he could get in a gen-
                                                                     section applies only if the broker bor-                   eral account.
                                                                     rows the securities for the purpose                         (f) The Board recognizes that even
                                                                     specified in the provision, that is, ‘‘for                with these requirements there is still
                                                                     the purpose of making delivery of such                    some possibility that the provision
                                                                     securities in the case of short sales,                    may be misapplied. The Board is reluc-
                                                                     failure to receive securities he is re-                   tant to impose additional burdens on
                                                                     quired to deliver, or other similar                       legitimate transactions by tightening
                                                                     cases’’. The present language of the                      the provision. If there should be evi-
                                                                     provision does not require that the de-                   dence of abuses developing under the
                                                                     livery for which the securities are bor-                  provision, however, it would become
                                                                     rowed must be on a transaction which                      necessary to consider making it more
                                                                     the borrower has himself made, either                     restricted.
                                                                     as agent or as principal; he may borrow                   [12 FR 5278, Aug. 2, 1947]
                                                                     under the provision in order to relend
                                                                     to someone else for the latter person to                  § 220.104    [Reserved]
                                                                     make such a delivery. However, the
                                                                     borrowing must be related to an actual                    § 220.105 Ninety-day rule in special
                                                                     delivery of the type specified—a deliv-                        cash account.
                                                                     ery in connection with a specific trans-                     (a) Section 220.4(c)(8) places a limita-
                                                                     action that has already occurred or is                    tion on a special cash account if a secu-
                                                                     in immediate prospect. The provision                      rity other than an exempted security
                                                                     does not authorize a broker to borrow                     has been purchased in the account and
                                                                     securities (or make the related deposit)                  ‘‘without having been previously paid
                                                                     merely in order that he or some other                     for in full by the customer * * * has
                                                                     broker may have the securities ‘‘on                       been * * * delivered out to any broker
                                                                     hand’’ or may anticipate some need                        or dealer.’’ The limitation is that dur-
                                                                     that may or may not arise in the fu-                      ing the succeeding 90 days the cus-
                                                                     ture.                                                     tomer may not purchase a security in
                                                                        (d) The ruling in the 1940 Federal Re-                 the account other than an exempted se-
                                                                     serve Bulletin, at page 647, is an exam-                  curity unless funds sufficient for the
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                                                                     ple of a borrowing which, on the facts                    purpose are held in the account. In
                                                                     as given, did not meet the requirement.                   other words, the privilege of delayed

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                                                                     Federal Reserve System                                                                          § 220.110

                                                                     payment in such an account is with-                       er or not limited in scope), and any securi-
                                                                     drawn during the 90-day period.                           ties guaranteed by the bank as to both prin-
                                                                       (b) The Board recently considered a                     cipal and interest, shall be deemed to be ex-
                                                                     question as to whether the following                      empted securities within the meaning of
                                                                     situation makes an account subject to                     * * * paragraph (a)(12) of section 3 of the [Se-
                                                                                                                               curities Exchange] Act of June 6, 1934, as
                                                                     the 90-day disqualification: A customer
                                                                                                                               amended (15 U.S.C. 78c). * * *.
                                                                     purchases registered security ABC in a
                                                                     special cash account. The broker exe-                        (b) In response to inquiries with re-
                                                                     cutes the order in good faith as a bona                   spect to the applicability of the margin
                                                                     fide cash transaction, expecting to ob-                   requirements of this part to securities
                                                                     tain full cash payment promptly. The                      issued or guaranteed by the Inter-
                                                                     next day, the customer sells registered                   national Bank for Reconstruction and
                                                                     security XYZ in the account, prom-                        Development, the Board has replied
                                                                     ising to deposit it promptly in the ac-                   that, as a result of this enactment, se-
                                                                     count. The proceeds of the sale are                       curities issued by the Bank are now
                                                                     equal to or greater than the cost of se-                  classified as exempted securities under
                                                                     curity ABC. After both sale and pur-                      § 220.2(e). Such securities are now in the
                                                                     chase have been made, the customer re-
                                                                                                                               same category under this part as are
                                                                     quests the broker to deliver security
                                                                                                                               United States Government, State and
                                                                     ABC to a different broker, to receive
                                                                     security XYZ from that broker at                          municipal bonds. Accordingly, the spe-
                                                                     about the same time, and to settle with                   cific percentage limitations prescribed
                                                                     the other broker—such settlement to                       by this part with respect to maximum
                                                                     be made either by paying the cost of                      loan value and margin requirements
                                                                     security XYZ to the other broker and                      are no longer applicable thereto.
                                                                     receiving from him the cost of security                   [14 FR 5505, Sept. 7, 1949]
                                                                     ABC, or by merely settling any dif-
                                                                     ference between these amounts.                            § 220.109    [Reserved]
                                                                       (c) The Board expressed the view that
                                                                     the account becomes subject to the 90-                    § 220.110 Assistance by Federal credit
                                                                     day disqualification in § 220.4(c)(8). In                     union to its members.
                                                                     the instant case, unlike that described                     (a) An inquiry was presented recently
                                                                     at 1940 Federal Reserve Bulletin 772,
                                                                                                                               concerning the application of this part
                                                                     the security sold is not held in the ac-
                                                                                                                               or part 221 of this subchapter, to a plan
                                                                     count and is not to be deposited in it
                                                                                                                               proposed by a Federal credit union to
                                                                     unconditionally. It is to be obtained
                                                                     only against the delivery to the other                    aid its members in purchasing stock of
                                                                     broker of the security which had been                     a corporation whose subsidiary appar-
                                                                     purchased. Hence payment can not be                       ently was the employer of all the credit
                                                                     said to have been made prior to such                      union’s members.
                                                                     delivery; the purchased security has                        (b) From the information submitted,
                                                                     been delivered out to a broker without                    the plan appeared to contemplate that
                                                                     previously having been paid for in full,                  the Federal credit union would accept
                                                                     and the account becomes subject to the                    orders from its members for registered
                                                                     90-day disqualification.                                  common stock of the parent corpora-
                                                                                                                               tion in multiples of 5 shares; that
                                                                     [13 FR 2368, May 1, 1948]
                                                                                                                               whenever orders had been so received
                                                                     §§ 220.106–220.107        [Reserved]                      for a total of 100 shares, the credit
                                                                                                                               union, as agent for such members,
                                                                     § 220.108 International Bank Securi-                      would execute the orders through a
                                                                          ties.                                                brokerage firm with membership on a
                                                                        (a) Section 2 of the Act of June 29,                   national securities exchange; that the
                                                                     1949 (Pub. L. 142—81st Congress),                         brokerage firm would deliver certifi-
                                                                     amended the Bretton Woods Agree-                          cates for the stock, registered in the
                                                                     ments Act by adding a new section                         names of the individual purchasers, to
                                                                     numbered 15 providing, in part, that—                     the credit union against payment by
                                                                       Any securities issued by International                  the credit union; that the credit union
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                                                                     Bank for Reconstruction and Development                   would prorate the total amount so
                                                                     (including any guaranty by the bank, wheth-               paid, including the brokerage fee,

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                                                                     § 220.111                                                              12 CFR Ch. II (1–1–09 Edition)

                                                                     among the individual purchasers ac-                       who transacts a business in securities
                                                                     cording to the number of shares pur-                      through the medium of’’ a member
                                                                     chased by them; and that a savings in                     firm solely because of its activities as
                                                                     brokerage fee resulting from the 100-lot                  contemplated by the proposal in ques-
                                                                     purchases would be passed on by the                       tion. The Board stated that the part
                                                                     credit union to the individual pur-                       rather clearly would not apply if there
                                                                     chasers of the stock. However, amounts                    appeared to be nothing other than
                                                                     of the stock less than 100 shares would                   loans by the credit union to its mem-
                                                                     be purchased by the credit union                          bers to finance purchases made directly
                                                                     through the brokerage firm for any                        by them of stock of the parent corpora-
                                                                     members willing to forego such sav-                       tion of the employer of the member-
                                                                     ings.                                                     borrowers. The additional fact that the
                                                                       (c) It appeared further that the Fed-                   credit union, as agent, would purchase
                                                                     eral credit union members for whom                        such stock for its members (even
                                                                     stock was so purchased would reim-                        though all such purchases might not be
                                                                     burse the credit union (1) by cash pay-                   financed by credit union loans) was not
                                                                     ment, (2) by the proceeds of withdrawn                    viewed by the Board as sufficient to
                                                                     shares of the credit union, (3) by the                    make the regulation applicable where,
                                                                     proceeds of an installment loan from                      as from the facts presented, it did not
                                                                     the credit union collateraled by the                      appear that the credit union in any
                                                                     stock purchased, or by (4) by a com-                      case was to make any charge or receive
                                                                     bination of two or more of the above                      any compensation for assisting in such
                                                                     methods. To assist the collection of                      purchases or that the credit union oth-
                                                                     any such loan, the employer of the                        erwise was engaged in securities activi-
                                                                     credit union members would provide                        ties. However, the Board stated that
                                                                     payroll deductions. Apparently, sales                     matters of this kind must be examined
                                                                     by the credit union of any of the stock                   closely for any variations that might
                                                                     purchased by one of its members would                     suggest the inapplicability of the fore-
                                                                     occur only in satisfaction of a delin-                    going.
                                                                     quent loan balance. In no case did it                     [18 FR 4592, Aug. 5, 1953]
                                                                     appear that the credit union would
                                                                     make a charge for arranging the execu-                    § 220.111 Arranging for extensions of
                                                                     tion of transactions in the stock for its                      credit to be made by a bank.
                                                                     members.                                                     (a) The Board has recently had occa-
                                                                       (d) The Board was of the view that,                     sion to express opinions regarding the
                                                                     from the facts as presented, it did not                   requirements which apply when a per-
                                                                     appear that the Federal credit union                      son subject to this part (for conven-
                                                                     should be regarded as the type of insti-                  ience, called here simply a broker) ar-
                                                                     tution to which part 221 of this sub-                     ranges for a bank to extend credit.
                                                                     chapter, in its present form, applied.                       (b) The matter is treated generally in
                                                                       (e) With respect to this part, the                      § 220.7(a) and is also subject to the gen-
                                                                     question was whether the activities of                    eral rule of law that any person who
                                                                     the Federal credit union under the pro-                   aids or abets a violation of law by an-
                                                                     posal, or otherwise, might be such as to                  other is himself guilty of a violation. It
                                                                     bring it within the meaning of the                        may be stated as a general principle
                                                                     terms ‘‘broker’’ or ‘‘dealer’’ as used in                 that any person who arranges for cred-
                                                                     the part and the Securities Exchange                      it to be extended by someone else has a
                                                                     Act of 1934. The Board observed that                      responsibility so to conduct his activi-
                                                                     this, of course, was a question of fact                   ties as not to be a participant in a vio-
                                                                     that necessarily depended upon the cir-                   lation of this part, which applies to
                                                                     cumstances of the particular case, in-                    brokers, or part 221 of this subchapter,
                                                                     cluding the manner in which the ar-                       which applies to banks.
                                                                     rangement in question might be car-                          (c) More specifically, in arranging an
                                                                     ried out in practice.                                     extension of credit that may be subject
                                                                       (f) On the basis of the information                     to part 221 of this subchapter, a broker
                                                                     submitted, however, it did not appear                     must act in good faith and, therefore,
                                                                     to the Board that the Federal credit                      must question the accuracy of any non-
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                                                                     union should be regarded as being sub-                    purpose statement (i.e., a statement
                                                                     ject to this part as a ‘‘broker or dealer                 that the loan is not for the purpose of

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                                                                     Federal Reserve System                                                                          § 220.113

                                                                     purchasing or carrying registered                         § 220.112    [Reserved]
                                                                     stocks) given in connection with the
                                                                     loan where the circumstances are such                     § 220.113 Necessity for prompt pay-
                                                                     that the broker from any source knows                          ment and delivery in special cash
                                                                                                                                    accounts.
                                                                     or has reason to know that the state-
                                                                     ment is incomplete or otherwise inac-                        (a) The Board of Governors recently
                                                                     curate as to the true purpose of the                      received an inquiry concerning whether
                                                                     credit. The requirement of ‘‘good                         purchases of securities by certain mu-
                                                                     faith’’ is of vital importance. While the                 nicipal employees’ retirement or pen-
                                                                     application of the requirement will                       sion systems on the basis of arrange-
                                                                                                                               ments for delayed delivery and pay-
                                                                     necessarily vary with the facts of the
                                                                                                                               ment, might properly be effected by a
                                                                     particular case, the broker, like the
                                                                                                                               creditor subject to this part in a spe-
                                                                     bank for whom the loan is arranged to
                                                                                                                               cial cash account under § 220.4(c).
                                                                     be made, must be alert to the cir-                           (b) It appears that in a typical case
                                                                     cumstances surrounding the loan.                          the supervisors of the retirement sys-
                                                                     Thus, for example, if a broker or dealer                  tem meet only once or twice each
                                                                     is to deliver registered stocks to secure                 month, at which times decisions are
                                                                     the loan or is to receive the proceeds of                 made to purchase any securities wished
                                                                     the loan, the broker arranging the loan                   to be acquired for the system. Al-
                                                                     and the bank making it would be put                       though the securities are available for
                                                                     on notice that the loan would probably                    prompt delivery by the broker-dealer
                                                                     be subject to part 221 of this sub-                       firm selected to effect the system’s
                                                                     chapter. In any such circumstances                        purchase, it is arranged in advance
                                                                     they could not in good faith accept or                    with the firm that the system will not
                                                                     rely upon a statement to the contrary                     accept delivery and pay for the securi-
                                                                     without obtaining a reliable and satis-                   ties before some date more than seven
                                                                     factory explanation of the situation.                     business days after the date on which
                                                                     The foregoing, of course, applies the                     the securities are purchased. Appar-
                                                                     principles contained in § 221.101 of this                 ently, such an arrangement is occa-
                                                                     subchapter.                                               sioned by the monthly or semimonthly
                                                                       (d) In addition, when a broker is ap-                   meetings of the system’s supervisors.
                                                                     proached by another broker to arrange                     It was indicated that a retirement sys-
                                                                                                                               tem of this kind may be supervised by
                                                                     extensions of credit for customers of
                                                                                                                               officials who administer it as an inci-
                                                                     the approaching broker, the broker ap-
                                                                                                                               dental part of their regular duties, and
                                                                     proached has a responsibility not to ar-                  that meetings requiring joint action by
                                                                     range any extension of credit which the                   two or more supervisors may be nec-
                                                                     approaching broker could not himself                      essary under the system’s rules and
                                                                     arrange. Accordingly, in such cases the                   procedures to authorize issuance of
                                                                     statutes and regulations forbid the ap-                   checks in payment for the securities
                                                                     proached broker to arrange extensions                     purchased. It was indicated also that
                                                                     of credit on unregistered securities for                  the purchases do not involve exempted
                                                                     the purpose of purchasing or carrying                     securities, securities of the kind cov-
                                                                     either registered or unregistered secu-                   ered by § 220.4(c)(3), or any shipment of
                                                                     rities. The approaching broker would                      securities as described in § 220.4(c).
                                                                     also be violating the applicable re-                         (c) This part provides that a creditor
                                                                     quirements if he initiated or otherwise                   subject thereto may not effect for a
                                                                     participated in any such forbidden                        customer a purchase in a special cash
                                                                     transactions.                                             account under § 220.4(c) unless the use
                                                                       (e) The expression of views, set forth                  of the account meets the limitations of
                                                                     in this section, to the effect that cer-                  § 220.4(a) and the purchase constitutes a
                                                                     tain specific transactions are forbid-                    ‘‘bona fide cash transaction’’ which
                                                                     den, of course, should not in any way                     complies with the eligibility require-
                                                                     be understood to indicate approval of                     ments of § 220.4(c)(1)(i). One such re-
                                                                     any other transactions which are not                      quirement is that the purchase be
                                                                                                                               made ‘‘in reliance upon an agreement
                                                                     mentioned.
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                                                                                                                               accepted by the creditor (broker-deal-
                                                                     [18 FR 5505, Sept. 15, 1953]                              er) in good faith’’ that the customer

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                                                                     §§ 220.114–220.116                                                     12 CFR Ch. II (1–1–09 Edition)

                                                                     will ‘‘promptly make full cash pay-                       ments for delayed delivery and pay-
                                                                     ment for the security, if funds suffi-                    ment in the case presented would pre-
                                                                     cient for the purpose are not already in                  vent this condition from being met,
                                                                     the account; and, subject to certain ex-                  since the customer could not be re-
                                                                     ceptions, § 220.4(c)(2) provides that the                 garded as having agreed to make full
                                                                     creditor shall promptly cancel or liq-                    cash payment ‘‘promptly’’. Further-
                                                                     uidate the transaction if payment is                      more, such arrangements clearly would
                                                                     not made by the customer within seven                     be inconsistent with the requirement
                                                                     business days after the date of pur-                      of § 220.4(c)(5) that the creditor ‘‘deliver
                                                                     chase. As indicated in the Board’s in-                    the security promptly to the cus-
                                                                     terpretation at 1940 Federal Reserve                      tomer’’.
                                                                     Bulletin 1172, a necessary part of the                      (f) Section 220.4(c)(5) was discussed in
                                                                     customer’s undertaking pursuant to                        the Board’s published interpretation,
                                                                     § 220.4(c)(1)(i) is that he ‘‘should have                 referred to above, which states that ‘‘it
                                                                     the necessary means of payment read-                      is not the purpose of (§ 220.4 (c)(5)) to
                                                                     ily available when he purchases a secu-                   allow additional time to customers for
                                                                     rity in the special cash account. He                      making payment. The ‘prompt deliv-
                                                                     should expect to pay for it imme-                         ery’ described in (§ 220.4 (c)(5)) is deliv-
                                                                     diately or in any event within the pe-                    ery which is to be made as soon as the
                                                                     riod (of not more than a very few days)                   broker or dealer can reasonably make
                                                                     that is as long as is usually required to                 it in view of the mechanics of the secu-
                                                                     carry through the ordinary securities                     rities business and the bona fide usages
                                                                     transaction.’’                                            of the trade. The provision merely rec-
                                                                        (d) The arrangements for delayed de-                   ognizes the fact that in certain cir-
                                                                     livery and payment in the case pre-                       cumstances it is an established bona
                                                                     sented to the Board and outlined above                    fide practice in the trade to obtain pay-
                                                                     clearly would be inconsistent with the                    ment against delivery of the security
                                                                     requirement of § 220.4(c)(1)(i) that the                  to the customer, and the further fact
                                                                     purchase be made in reliance upon an                      that the mechanics of the trade, unre-
                                                                     agreement accepted by the creditor in                     lated to the customer’s readiness to
                                                                     good faith that the customer will                         pay, may sometimes delay such deliv-
                                                                     ‘‘promptly’’ make full cash payment                       ery to the customer’’.
                                                                     for the security. Accordingly, the                          (g) In the case presented, it appears
                                                                     Board said that transactions of the                       that the only reason for the delay is re-
                                                                     kind in question would not qualify as a                   lated solely to the customer’s readiness
                                                                     ‘‘bona fide cash transaction’’ and,                       to pay and is in no way attributable to
                                                                     therefore, could not properly be ef-                      the mechanics of the securities busi-
                                                                     fected in a special cash account, unless                  ness. Accordingly, it is the Board’s
                                                                     a contrary conclusion would be justi-                     view that the exception in § 220.4(c)(5)
                                                                     fied by the exception in § 220.4(c)(5).                   should not be regarded as permitting
                                                                        (e) Section 220.4(c)(5) provides that if               the transactions in question to be ef-
                                                                     the creditor, ‘‘acting in good faith in                   fected in a special cash account.
                                                                     accordance with’’ § 220.4(c)(1), pur-
                                                                     chases a security for a customer ‘‘with                   [22 FR 5954, July 27, 1957]
                                                                     the understanding that he is to deliver
                                                                     the security promptly to the customer,                    §§ 220.114–220.116      [Reserved]
                                                                     and the full cash payment is to be
                                                                     made promptly by the customer is to                       § 220.117 Exception to 90-day rule in
                                                                                                                                   special cash account.
                                                                     be made against such delivery’’, the
                                                                     creditor may at his option treat the                        (a) The Board of Governors has re-
                                                                     transaction as one to which the period                    cently interpreted certain of the provi-
                                                                     applicable under § 220.4(c)(2) is not the                 sions of § 220.4(c)(8), with respect to the
                                                                     seven days therein specified but 35 days                  withdrawal of proceeds of a sale of
                                                                     after the date of such purchase. It will                  stock in a ‘‘special cash account’’ when
                                                                     be observed that the application of                       the stock has been sold out of the ac-
                                                                     § 220.4 (c)(5) is specifically conditioned                count prior to payment for its pur-
                                                                     on the creditor acting in good faith in                   chase.
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                                                                     accordance with § 220.4(c)(1). As noted                     (b) The specific factual situation pre-
                                                                     above, the existence of the arrange-                      sented may be summarized as follows:

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                                                                     Federal Reserve System                                                                          § 220.117
                                                                       Customer purchased stock in a special cash              course of business is payable on presen-
                                                                     account with a member firm on Day 1. On                   tation, * * * as receipt of payment of the
                                                                     Day 3 customer sold the same stock at a                   amount of such check, draft or order; * * *
                                                                     profit. On Day 8 customer delivered his
                                                                     check for the cost of the purchase to the                 This is a general provision substan-
                                                                     creditor (member firm). On Day 9 the cred-                tially the same as language found in
                                                                     itor mailed to the customer a check for the               section 4(f) of Regulation T as origi-
                                                                     proceeds of the sale.                                     nally promulgated in 1934. The lan-
                                                                       (c) Section 220.4(c)(8) prohibits a                     guage of the subject exception to the
                                                                     creditor, as a general rule, from effect-                 90-day rule of § 220.4(c)(8), i.e., the ex-
                                                                     ing a purchase of a security in a cus-                    ception based expressly on final ‘‘pay-
                                                                     tomer’s special cash account if any se-                   ment of any check,’’ was added to the
                                                                     curity has been purchased in that ac-                     regulation in 1949 by an amendment di-
                                                                     count during the preceding 90 days and                    rected at a specific type of situation.
                                                                     has then been sold in the account or                      Because the exception is a special,
                                                                     delivered out to any broker or dealer                     more recent provision, and because
                                                                     without having been previously paid                       § 220.6(f), if controlling, would permit
                                                                     for in full by the customer. One excep-                   the exception to undermine, to some
                                                                     tion to this general rule reads as fol-                   extent, the effectiveness of the 90-day
                                                                     lows:                                                     rule, sound principles of construction
                                                                                                                               require that the phrase ‘‘final payment
                                                                       * * * The creditor may disregard for the                of any check’’ be given its literal and
                                                                     purposes of this subparagraph (§ 220.4(c) (8)) a
                                                                     sale without prior payment provided full
                                                                                                                               intended effect.
                                                                     cash payment is received within the period                   (4) There is no fixed period of time
                                                                     described by subparagraph (2) of this para-               from the moment of receipt by the
                                                                     graph (seven days after the date of purchase)             payee, or of deposit, within which it is
                                                                     and the customer has not withdrawn the pro-               certain that any check will be paid by
                                                                     ceeds of sale on or before the day on which               the drawee bank. Therefore, in the rare
                                                                     such payment (and also final payment of any               case where the operation of the subject
                                                                     check received in that connection) is re-                 exception to § 220.4(c)(8) is necessary to
                                                                     ceived. * * *
                                                                                                                               avoid application of the 90-day rule, a
                                                                       (d) Final payment of customer’s                         creditor should ascertain (from his
                                                                     check: (1) The first question is: When is                 bank of deposit or otherwise) the fact
                                                                     the creditor to be regarded as having                     of payment of a customer’s check given
                                                                     received ‘‘final payment of any check                     for the purchase. Having so determined
                                                                     received’’ in connection with the pur-                    the day of final payment, the creditor
                                                                     chase?                                                    can permit withdrawal on any subse-
                                                                       (2) The clear purpose of § 220.4(c) (8) is              quent day.
                                                                     to prevent the use of the proceeds of                        (e) Mailing as ‘‘withdrawal’’: (1) Also
                                                                     sale of a stock by a customer to pay for                  presented is the question whether the
                                                                     its purchase—i.e., to prevent him from                    mailing to the customer of the credi-
                                                                     trading on the creditor’s funds by being                  tor’s check for the sale proceeds con-
                                                                     able to deposit the sale proceeds prior                   stitutes a withdrawal of such proceeds
                                                                     to presentment of his own check to the                    by the customer at the time of mailing
                                                                     drawee bank. Thus, when a customer                        so that, if the check for the sale pro-
                                                                     undertakes to pay for a purchase by                       ceeds is mailed on or before the day on
                                                                     check, that check does not constitute                     which the customer’s check for the
                                                                     payment for the purchase, within the                      purchase is finally paid, the 90-day rule
                                                                     language and intent of the above-                         applies. It may be that a check mailed
                                                                     quoted exception in § 220.4(c)(8), until it               one day will not ordinarily be received
                                                                     has been honored by the drawee bank,                      by the customer until the next. The
                                                                     indicating the sufficiency of his ac-                     Board is of the view, however, that
                                                                     count to pay the check.                                   when the check for sale proceeds is
                                                                       (3) The phrase ‘‘final payment of any                   issued and released into the mails, the
                                                                     check’’ is interpreted as above notwith-                  proceeds are to be regarded as with-
                                                                     standing § 220.6(f), which provides that:                 drawn by the customer; a more liberal
                                                                       For the purposes of this part (Regulation               interpretation would open a way for
                                                                     T), a creditor may, at his option (1) treat the           circumvention. Accordingly, the credi-
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                                                                     receipt in good faith of any check or draft               tor’s check should not be mailed nor
                                                                     drawn on a bank which in the ordinary                     the sale proceeds otherwise released to

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                                                                     § 220.118                                                              12 CFR Ch. II (1–1–09 Edition)

                                                                     the customer ‘‘on or before the day’’ on                  7-day period after which a purchase
                                                                     which payment for the purchase, in-                       transaction must be liquidated or can-
                                                                     cluding final payment of any check                        celled for nonpayment should run, in
                                                                     given for such payment, is received by                    the case of mutual fund shares, from
                                                                     the creditor, as determined in accord-                    the time when a certificate for the pur-
                                                                     ance with the principles stated herein.                   chased shares is available for delivery
                                                                        (2) Applying the above principles to                   to the purchaser, instead of from the
                                                                     the schedule of transactions described                    date of the purchase.
                                                                     in the second paragraph of this inter-                      (d) Under the general rule of § 220.4
                                                                     pretation, the mailing of the creditor’s                  (c)(2) that is applicable to purchases of
                                                                     check on ‘‘Day 9’’ would be consistent                    outstanding securities, the 7-day period
                                                                     with      the    subject   exception    to                runs from the date of purchase without
                                                                     § 220.4(c)(8), as interpreted herein, only                regard to the time required for the me-
                                                                     if the customer’s check was paid by the                   chanical acts of transfer of ownership
                                                                     drawee bank on ‘‘Day 8’’.                                 and delivery of a certificate. This rule
                                                                     [27 FR 3511, Apr. 12, 1962]                               is based on the principles governing the
                                                                                                                               use of special cash accounts in accord-
                                                                     § 220.118 Time of payment for mutual                      ance with which, in the absence of spe-
                                                                          fund shares purchased in a special                   cial circumstances, payment is to be
                                                                          cash account.                                        made promptly upon the purchase of
                                                                        (a) The Board has recently considered                  securities.
                                                                     the question whether, in connection                         (e) The purpose of § 220.4(c)(3) is to
                                                                     with the purchase of mutual fund                          recognize the fact that, when an issue
                                                                     shares in a ‘‘special cash account’’                      of securities is to be issued at some
                                                                     under the provisions of this part 220,                    fixed future date, a security that is a
                                                                     the 7-day period with respect to liq-                     part of such issue can be purchased on
                                                                     uidation for nonpayment is that de-                       a ‘‘when-issued’’ basis and that pay-
                                                                     scribed in § 220.4(c)(2) or that described                ment may reasonably be delayed until
                                                                     in § 220.4(c)(3).                                         after such date of issue, subject to
                                                                        (b) Section 220.4(c)(2) provides as fol-               other basic conditions for transactions
                                                                     lows:                                                     in a special cash account. Thus,
                                                                       In case a customer purchases a security                 unissued securities should be regarded
                                                                     (other than an exempted security) in the spe-             as ‘‘made available for delivery to pur-
                                                                     cial cash account and does not make full                  chasers’’ on the date when they are
                                                                     cash payment for the security within 7 days               substantially as available as out-
                                                                     after the date on which the security is so                standing securities are available upon
                                                                     purchased, the creditor shall, except as pro-             purchase, and this would ordinarily be
                                                                     vided in subparagraphs (3)–(7) of this para-              the designated date of issuance or, in
                                                                     graph, promptly cancel or otherwise liq-
                                                                     uidate the transaction or the unsettled por-
                                                                                                                               the case of a stock dividend, the ‘‘pay-
                                                                     tion thereof.                                             ment date’’. In any case, the time re-
                                                                                                                               quired for the mechanics of transfer
                                                                     Section 220.4(c)(3), one of the excep-                    and delivery of a certificate is not ma-
                                                                     tions referred to, provides in relevant                   terial under § 220.4(c)(3) any more than
                                                                     part as follows:                                          it is under § 220.4(c)(2).
                                                                       If the security when so purchased is an                   (f) Mutual fund shares are essentially
                                                                     unissued security, the period applicable to               available upon purchase to the same
                                                                     the transaction under subparagraph (2) of                 extent as outstanding securities. The
                                                                     this paragraph shall be 7 days after the date             mechanics of their issuance and of the
                                                                     on which the security is made available by                delivery of certificates are not signifi-
                                                                     the issuer for delivery to purchasers.
                                                                                                                               cantly different from the mechanics of
                                                                       (c) In the case presented, the shares                   transfer and delivery of certificates for
                                                                     of the mutual fund (open-end invest-                      shares of outstanding securities, and
                                                                     ment company) are technically not                         the issuance of mutual fund shares is
                                                                     issued at the time they are sold by the                   not a future event in a sense that
                                                                     underwriter and distributor. Several                      would warrant the extension of the
                                                                     days may elapse from the date of sale                     time for payment beyond that afforded
                                                                     before a certificate can be delivered by                  in the case of outstanding securities.
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                                                                     the transfer agent. The specific inquiry                  Consequently, the Board has concluded
                                                                     to the Board was, in effect, whether the                  that a purchase of mutual fund shares

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                                                                     Federal Reserve System                                                                          § 220.119

                                                                     is not a purchase of an ‘‘unissued secu-                  cordingly, the provisions of this part
                                                                     rity’’ to which § 220.4(c)(3) applies, but                are not intended to prevent the use of
                                                                     is a transaction to which § 220.4(c)(2)                   credit where the transaction will not
                                                                     applies.                                                  have the effect of increasing the vol-
                                                                     [27 FR 10885, Nov. 8, 1962]                               ume of credit in the securities mar-
                                                                                                                               kets.
                                                                     § 220.119 Applicability of margin re-                       (e) It appears that the instant trans-
                                                                          quirements to credit extended to                     action would have no such effect. When
                                                                          corporation in connection with re-                   the transaction was completed, the eq-
                                                                          tirement of stock.
                                                                                                                               uity interest of the dealer was trans-
                                                                        (a) The Board of Governors has been                    muted into a dollar-obligation interest;
                                                                     asked whether part 220 was violated                       in lieu of its status as a stockholder of
                                                                     when a dealer in securities transferred                   the corporation, the dealer became a
                                                                     to a corporation 4,161 shares of the                      creditor of that corporation. The cor-
                                                                     stock of such corporation for a consid-                   poration did not become the owner of
                                                                     eration of $33,288, of which only 10 per-                 any securities acquired through the use
                                                                     cent was paid in cash.                                    of credit; its outstanding stock was
                                                                        (b) If the transaction was of a kind                   simply reduced by 4,161 shares.
                                                                     that must be included in the corpora-                       (f) The meaning of ‘‘sale’’ and ‘‘pur-
                                                                     tion’s ‘‘general account’’ with the deal-
                                                                                                                               chase’’ in the Securities Exchange Act
                                                                     er (§ 220.3), it would involve an exces-
                                                                                                                               has been considered by the Federal
                                                                     sive extension of credit in violation of
                                                                                                                               courts in a series of decisions dealing
                                                                     § 220.3 (b)(1). However, the transaction
                                                                                                                               with corporate ‘‘insiders’’ profits under
                                                                     would be permissible if the transaction
                                                                                                                               section 16(b) of that Act. Although the
                                                                     came within the scope of § 220.4(f)(8),
                                                                                                                               statutory purpose sought to be effec-
                                                                     which permits a ‘‘creditor’’ (such as
                                                                                                                               tuated in those cases is quite different
                                                                     the dealer) to ‘‘Extend and maintain
                                                                                                                               from the purpose of the margin regula-
                                                                     credit to or for any customer without
                                                                                                                               tions, the decisions in question support
                                                                     collateral or on any collateral what-
                                                                                                                               the propriety of not regarding a trans-
                                                                     ever for any purpose other than pur-
                                                                     chasing or carrying or trading in secu-                   action as a ‘‘purchase’’ where this ac-
                                                                     rities.’’ Accordingly, the crucial ques-                  cords with the probable legislative in-
                                                                     tion is whether the corporation, in this                  tent, even though, literally, the statu-
                                                                     transaction, was ‘‘purchasing’’ the 4,161                 tory definition seems to include the
                                                                     shares of its stock, within the meaning                   particular transaction. See Roberts v.
                                                                     of that term as used in this part.                        Eaton (CA 2 1954) 212 F. 2d 82, and cases
                                                                        (c) Upon first examination, it might                   and other authorities there cited. The
                                                                     seem apparent that the transaction                        governing principle, of course, is to ef-
                                                                     was a purchase by the corporation.                        fectuate the purpose embodied in the
                                                                     From the viewpoint of the dealer the                      statutory or regulatory provision being
                                                                     transaction was a sale, and ordinarily,                   interpreted, even where that purpose
                                                                     at least a sale by one party connotes a                   may conflict with the literal words.
                                                                     purchase by the other. Furthermore,                       U.S. v. Amer. Trucking Ass’ns, 310 U.S.
                                                                     other indicia of a sale/purchase trans-                   534, 543 (1940); 2 Sutherland, Statutory
                                                                     action were present, such as a transfer                   Construction (3d ed. 1943) ch. 45.
                                                                     of property for a pecuniary consider-                       (g) There can be little doubt that an
                                                                     ation. However, when the underlying                       extension of credit to a corporation to
                                                                     objectives of the margin regulations                      enable it to retire debt securities would
                                                                     are considered, it appears that they do                   not be for the purpose of ‘‘pur-
                                                                     not encompass a transaction of this na-                   chasing * * * securities’’ and therefore
                                                                     ture, where securities are transferred                    would come within § 220.4(f)(8), regard-
                                                                     on credit to the issuer thereof for the                   less of whether the retirement was
                                                                     purpose of retirement.                                    obligatory (e.g., at maturity) or was a
                                                                        (d) Section 7(a) of the Securities Ex-                 voluntary ‘‘call’’ by the issuer. This is
                                                                     change Act of 1934 requires the Board                     true, it is difficult to see any valid dis-
                                                                     of Governors to prescribe margin regu-                    tinction, for this purpose, between (1)
                                                                     lations ‘‘For the purpose of preventing                   voluntary retirement of an indebted-
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                                                                     the excessive use of credit for the pur-                  ness security and (2) voluntary retire-
                                                                     chase or carrying of securities.’’ Ac-                    ment of an equity security.

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                                                                     § 220.120                                                              12 CFR Ch. II (1–1–09 Edition)

                                                                       (h) For the reasons indicated above,                    made in accordance with the agree-
                                                                     it is the opinion of the Board of Gov-                    ment between the two firms, which
                                                                     ernors that the extension of credit here                  provides that profits and losses shall be
                                                                     involved is not of the kind which the                     shared equally on a fifty-fifty basis.
                                                                     margin requirements are intended to                       However, all transactions are con-
                                                                     regulate and that the transaction de-                     firmed and reconfirmed between the
                                                                     scribed does not involve an unlawful                      two on a daily basis.
                                                                     extension of credit as far as this part is                  (c) Section 220.3(a) provides that
                                                                     concerned.
                                                                       (i) The foregoing interpretation re-                      All financial relations between a creditor
                                                                                                                               and a customer, whether recorded in one
                                                                     lates, of course, only to cases of the
                                                                                                                               record or in more than one record, shall be
                                                                     type described. It should not be re-                      included in and be deemed to be part of the
                                                                     garded as governing any other situa-                      customer’s general account with the cred-
                                                                     tions; for example, the interpretation                    itor, * * *.
                                                                     does not deal with cases where securi-
                                                                     ties are being transferred to someone                     and § 220.2(c) defines the term ‘‘cus-
                                                                     other than the issuer, or to the issuer                   tomer’’ to include
                                                                     for a purpose other than immediate re-                      * * * any person, or any group of persons
                                                                     tirement. Whether the margin require-                     acting jointly, * * * to or for whom a cred-
                                                                     ments are inapplicable to any such sit-                   itor is extending or maintaining any credit
                                                                     uations would depend upon the rel-                        * * *
                                                                     evant facts of actual cases presented.
                                                                                                                               In the course of a normal month’s oper-
                                                                     [27 FR 12346, Dec. 13, 1962]                              ations, both Firm X and Firm Y are at
                                                                     § 220.120     [Reserved]                                  one time or another extending credit to
                                                                                                                               the joint account, since both make pur-
                                                                     § 220.121 Applicability of margin re-                     chases for the account that are not
                                                                          quirements to joint account be-                      ‘‘settled’’ until the month’s end. Con-
                                                                          tween two creditors.                                 sequently, the account would be a
                                                                        (a) The Board has recently been                        ‘‘customer’’ within the above defini-
                                                                     asked whether extensions of credit in a                   tion.
                                                                     joint account between two brokerage                          (d) Section 220.6(b) provides, with re-
                                                                     firms, a member of a national securi-                     spect to the account of a joint adven-
                                                                     ties exchange (‘‘Firm X’’) and a mem-                     ture in which a creditor participates,
                                                                     ber of the National Association of Se-                    that
                                                                     curities Dealers (‘‘Firm Y’’) are subject                   * * * the adjusted debit balance of the ac-
                                                                     to the margin requirements of this part                   count shall include, in addition to the items
                                                                     (Regulation T). It is understood that                     specified in § 220.3(d), any amount by which
                                                                     similar joint accounts are not uncom-                     the creditor’s contribution to the joint ad-
                                                                     mon, and it appears that the margin                       venture exceeds the contribution which he
                                                                     requirements of the regulation are not                    would have made if he had contributed mere-
                                                                     consistently applied to extensions of                     ly in proportion to his right to share in the
                                                                     credit in the accounts.                                   profits of the joint adventure.
                                                                        (b) When the account in question was                   In addition, the final paragraph of
                                                                     opened, Firm Y deposited $5,000 with                      § 220.2(c) states that the definition of
                                                                     Firm X and has made no further de-                        ‘‘customer’’
                                                                     posit in the account, except for the
                                                                     monthly settlement described below.                         * * * includes any joint adventure in which
                                                                     Both firms have the privilege of buying                   a creditor participates and which would be
                                                                                                                               considered a customer of the creditor if the
                                                                     and selling specified securities in the
                                                                                                                               creditor were not a participant.
                                                                     account, but it appears that Firm X
                                                                     initiates most of the transactions                          (e) The above provisions clearly
                                                                     therein. Trading volume may run from                      evince the Board’s intent that the reg-
                                                                     half a million to a million dollars a                     ulation shall cover trading accounts in
                                                                     month. Firm X carries the ‘‘official’’                    which a creditor participates. If addi-
                                                                     ledger of the account and sends Firm Y                    tional confirmation were needed, it is
                                                                     a monthly statement with a complete                       supplied by the fact that the Board
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                                                                     record of all transactions effected dur-                  found it needful specifically to exempt
                                                                     ing the month. Settlement is then                         from ordinary margin requirements

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                                                                     Federal Reserve System                                                                          § 220.122

                                                                     credit extended to certain joint ac-                         (c) The option embodied in the nor-
                                                                     counts in which a creditor participates.                  mal put or call is exercisable either at
                                                                     These include the account in which                        the market price of the security at the
                                                                     transactions of odd-lot dealers may be                    time the option is written, or some
                                                                     financed under § 220.4(f) (4), and the spe-               ‘‘points away’’ from the market. The
                                                                     cialist’s account under § 220.4(g). Ac-                   price of a normal option is modest by
                                                                     cordingly, the Board concluded that                       comparison with the margin required
                                                                     the joint account between Firm X and                      to take a position. Writers of normal
                                                                     Firm Y is a ‘‘customer’’ within the                       options are persons who are satisfied
                                                                     meaning of the regulation, and that ex-                   with the current price of a security,
                                                                     tensions of credit in the account are                     and are prepared to purchase or sell at
                                                                     subject to margin requirements.                           that price, with the small profit pro-
                                                                     [31 FR 7169, May 17, 1966]                                vided by the fee. Moreover, since a
                                                                                                                               large proportion of all options are
                                                                     § 220.122 ‘‘Deep in the money put and                     never exercised, a person who custom-
                                                                         call options’’ as extensions of credit.               arily writes normal options can antici-
                                                                        (a) The Board of Governors has been                    pate that the fee would be clear profit
                                                                     asked to determine whether the busi-                      in many cases, and he will not be obli-
                                                                     ness of selling instruments described as                  gated to buy or sell the stock in ques-
                                                                     ‘‘deep in the money put and call op-                      tion.
                                                                     tions’’ would involve an extension of                        (d) The stock exchanges require that
                                                                     credit for the purposes of the Board’s                    the writer of an option deposit and
                                                                     regulations governing margin require-                     maintain in his margin account with
                                                                     ments for securities transactions. Most                   the indorser 30 percent of the current
                                                                     of such options would be of the ‘‘call’’                  market price in the case of a call (un-
                                                                     type, such as the following proposal                      less he has a long position in the stock)
                                                                     that was presented to the Board for its                   and 25 percent in the case of a put (un-
                                                                     consideration:                                            less he has a short position in the
                                                                       If X stock is selling at $100 per share, the            stock). Many indorsing firms in fact re-
                                                                     customer would pay about $3,250 for a con-                quire larger deposits. Under § 220.3(a) of
                                                                     tract to purchase 100 shares of X at $70 per              Regulation T, all financial relations
                                                                     share within a 30-day period. The contract                between a broker and his customer
                                                                     would be guaranteed by an exchange mem-                   must be included in the customer’s
                                                                     ber, as are standard ‘‘puts’’ and ‘‘calls’’.              general account, unless specifically eli-
                                                                     When the contract is made with the cus-
                                                                     tomer, the seller, who will also be the writer
                                                                                                                               gible for one of the special accounts
                                                                     of the contract, will immediately purchase                authorized by § 220.4. Accordingly, the
                                                                     100 shares of X at $100 per share through the             writer, as a customer of the member
                                                                     guarantor member firm in a margin account.                firm, must make a deposit, which is in-
                                                                     If the customer exercises the option, the                 cluded in his general account.
                                                                     shares will be delivered to him; if the option               (e) In order to prevent the deposit
                                                                     is not exercised, the writer will sell the
                                                                     shares in the margin account to close out                 from being available against other
                                                                     the transaction. As a practical matter, it is             margin purchases, and in effect count-
                                                                     anticipated that the customer will exercise               ed twice, § 220.3(d)(5) requires that in
                                                                     the option in almost every case.                          computing the customer’s adjusted
                                                                       (b) An ordinary ‘‘put’’ is an option                    debit balance, there shall be included
                                                                     given to a person to sell to the writer                   ‘‘the amount of any margin custom-
                                                                     of the put a specified amount of securi-                  arily required by the creditor in con-
                                                                     ties at a stated price within a certain                   nection with his endorsement or guar-
                                                                     time. A ‘‘call’’ is an option given to a                  antee of any put, call, or other option’’.
                                                                     person to buy from the writer a speci-                    No other margin deposit is required in
                                                                     fied amount of securities at a stated                     connection with a normal put or call
                                                                     price within a certain time. To be free-                  option under Regulation T.
                                                                     ly saleable, options must be indorsed,                       (f) Turning to the ‘‘deep in the
                                                                     or guaranteed, by a member firm of the                    money’’ proposed option contract de-
                                                                     exchange on which the security is reg-                    scribed above, the price paid by the
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                                                                     istered. The guarantor charges a fee for                  buyer can be divided into (1) a deposit
                                                                     this service.                                             of 30 percent of the current market

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                                                                     § 220.122                                                              12 CFR Ch. II (1–1–09 Edition)

                                                                     value of the stock, and (2) an addi-                      effect, he would purchase the stock for
                                                                     tional fixed charge, or fee. To the ex-                   the account, or use, of the buyer, on
                                                                     tent that the price of the stock rose                     what might be described as a deferred
                                                                     during the 30 ensuing days the pro-                       payment arrangement. Like an ordi-
                                                                     posed instrument would produce re-                        nary broker, the writer of the contract
                                                                     sults similar to those in the case of an                  described above would put up funds to
                                                                     ordinary profitable call, and the con-                    pay for the difference between the
                                                                     tract right would be exercised. But                       price of securities the customer wished
                                                                     even if the price fell, unlike the situa-                 to purchase and the customer’s own
                                                                     tion with a normal option, the buyer                      contribution. His only risk would be
                                                                     would still be virtually certain to exer-                 that the price of the securities would
                                                                     cise his right to purchase before it ex-                  decline in excess of the customer’s con-
                                                                     pired, in order to minimize his loss.                     tribution. True, he would be locked in,
                                                                     The result would be that the buyer                        and could not liquidate the customer’s
                                                                     would not have a genuine choice                           collateral for 30 days even if the mar-
                                                                     whether or not to buy. Rather, the in-                    ket price should fall in excess of 30 per-
                                                                     strument would have made it possible                      cent, but the risk of such a decline is
                                                                     for him, in effect, to purchase stock as                  extremely slight.
                                                                     of the time the contract was written by                     (j) Like any other broker who ex-
                                                                     depositing 30 percent of the stock’s                      tends credit in a margin account, the
                                                                     current market price.                                     writer who was in the business of writ-
                                                                        (g) It was suggested that the pro-                     ing and selling such a contract would
                                                                     posed contract is not unusual, since                      be satisfied with a fixed predetermined
                                                                     there are examples of ordinary options                    amount of return on his venture, since
                                                                     selling at up to 28 percent of current                    he would realize only the fee charged.
                                                                     market value. However, such examples                      Unlike a writer of ordinary puts and
                                                                     are of options running for 12 months,                     calls, he would not receive a substan-
                                                                     and reflect expectations of changes in                    tial part of his income from fees on
                                                                     the price of the stock over that period.                  unexercised contract rights. The simi-
                                                                     The 30-day contracts discussed above                      larity of his activities to those of a
                                                                     are not comparable to such 12-month                       broker, and the dissimilarity to a writ-
                                                                     options, because instances of true ex-                    er of ordinary options, would be under-
                                                                     pectations of price changes of this                       scored by the fact that his fee would be
                                                                     magnitude over a 30-day period would                      a fixed predetermined amount of return
                                                                     be exceedingly rare. And a contract                       similar to an interest charge, rather
                                                                     that does not reflect such true expecta-                  than a fee arrived at individually for
                                                                     tions of price change, plus a reasonable                  each transaction according to the vola-
                                                                     fee for the services of the writer, is not                tility of the stock and other individual
                                                                     an option in the accepted meaning of                      considerations.
                                                                     the term.                                                   (k) The buyer’s general account with
                                                                        (h) Because of the virtual certainty                   the writer would in effect reflect a
                                                                     that the contract right would be exer-                    debit for the purchase price of the
                                                                     cised under the proposal described                        stock and, on the credit side, a deposit
                                                                     above, the writer would buy the stock                     of cash in the amount of 30 percent of
                                                                     in a margin account with an indorsing                     that price, plus an extension of credit
                                                                     firm immediately on writing the con-                      for the remaining 70 percent, rather
                                                                     tract. The indorsing firm would extend                    than the maximum permissible 20 per-
                                                                     credit in the amount of 20 percent of                     cent.
                                                                     the current market price of the stock,                      (l) For the reasons stated above, the
                                                                     the maximum permitted by the current                      Board concluded that the proposed con-
                                                                     § 220.8 (supplement to Regulation T).                     tracts would involve extensions of
                                                                     The writer would deposit the 30 percent                   credit by the writer as broker in an
                                                                     supplied by the buyer, and furnish the                    amount exceeding that permitted by
                                                                     remaining 50 percent out of his own                       the current supplement to Regulation
                                                                     working capital. His account with the                     T. Accordingly, the writing of such
                                                                     indorsing firm would thus be appro-                       contracts by a brokerage firm is pres-
                                                                     priately margined.                                        ently prohibited by such regulation,
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                                                                        (i) As to the buyer, however, the                      and any brokerage firm that endorses
                                                                     writer would function as a broker. In                     such a contract would be arranging for

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                                                                     Federal Reserve System                                                                          § 220.123

                                                                     credit in an amount greater than the                        (d) Securities sold pursuant to such
                                                                     firm itself could extend, a practice that                 arrangements are high quality debt
                                                                     is prohibited by § 220.7(a).                              issues (or their equivalent). The pur-
                                                                     [35 FR 3280, Feb. 21, 1970]                               chasers buy with a view to investment
                                                                                                                               and do not resell or otherwise dispose
                                                                     § 220.123 Partial delayed issue con-                      of the contract prior to its completion.
                                                                          tracts    covering    nonconvertible                 Delayed issue arrangements are not ac-
                                                                          bonds.                                               ceptable to issuers unless a substantial
                                                                        (a) During recent years, it has be-                    portion of an issue, not less than 10
                                                                     come customary for portions of new                        percent, is involved.
                                                                     issues of nonconvertible bonds and pre-                     (e) Sections 3(a) (13) and (14) of the
                                                                     ferred stocks to be sold subject to par-                  Securities Exchange Act of 1934 provide
                                                                     tial delayed issue contracts, which                       that an agreement to purchase is
                                                                     have customarily been referred to in                      equivalent to a purchase, and an agree-
                                                                     the industry as ‘‘delayed delivery’’ con-                 ment to sell to a sale. The Board has
                                                                     tracts, and the Board of Governors has                    hitherto expressed the view that credit
                                                                     been asked for its views as to whether
                                                                                                                               is extended at the time when there is a
                                                                     such transactions involve any viola-
                                                                                                                               firm agreement to extend such credit
                                                                     tions of the Board’s margin regula-
                                                                     tions.                                                    (1968 Federal Reserve Bulletin 328; 12
                                                                        (b) The practice of issuing a portion                  CFR 207.101; ¶ 6800 Published Interpre-
                                                                     of a debt (or equivalent) security issue                  tations of the Board of Governors). Ac-
                                                                     at a date subsequent to the main un-                      cordingly, in instances of the kind de-
                                                                     derwriting has arisen where market                        scribed above, the issuer may be re-
                                                                     conditions made it difficult or impos-                    garded as extending credit to the insti-
                                                                     sible, in a number of instances, to place                 tutional purchaser at the time of the
                                                                     an entire issue simultaneously. In in-                    underwriters’ closing, when the obliga-
                                                                     stances of this kind, institutional in-                   tions of both become fixed.
                                                                     vestors (e.g., insurance companies or                       (f) Section 220.7(a) of the Board’s
                                                                     pension funds) whose cash flow is such                    Regulation T (12 CFR 220.7(a)), with an
                                                                     that they expect to have funds avail-                     exception not applicable here, forbids a
                                                                     able some months in the future, have                      creditor subject to that regulation to
                                                                     been willing to subscribe to a portion,                   arrange for credit on terms on which
                                                                     to be issued to them at a future date.                    the creditor could not itself extend the
                                                                     The issuer has been willing to agree to                   credit. Sections 220.4(c) (1) and (2) (12
                                                                     issue the securities in two or more                       CFR 220.4(c) (1) and (2)) provide that a
                                                                     stages because it did not immediately                     creditor may not sell securities to a
                                                                     need the proceeds to be realized from                     customer except in good faith reliance
                                                                     the deferred portion, because it could                    upon an agreement that the customer
                                                                     not raise funds on better terms, or be-                   will promptly, and in no event in more
                                                                     cause it preferred to have a certain                      than 7 full business days, make full
                                                                     portion of the issue taken down by an
                                                                                                                               cash payment for the securities. Since
                                                                     investor of this type.
                                                                                                                               the underwriters in question are credi-
                                                                        (c) In the case of such a delayed issue
                                                                                                                               tors subject to the regulation, unless
                                                                     contract, the underwriter is authorized
                                                                     to solicit from institutional customers                   some specific exception applies, they
                                                                     offers to purchase from the issuer, pur-                  are forbidden to arrange for the credit
                                                                     suant to contracts of the kind de-                        described above. This result follows be-
                                                                     scribed above, and the agreement be-                      cause payment is not made until more
                                                                     comes binding at the underwriters’                        than 7 full business days have passed
                                                                     closing, subject to specified conditions.                 from the time the credit is extended.
                                                                     When securities are issued pursuant to                      (g) However, § 220.4(c)(3) provides
                                                                     the agreement, the purchase price in-                     that:
                                                                     cludes accrued interest or dividends,                       If the security when so purchased is an
                                                                     and until they are issued to it, the pur-                 unissued security, the period applicable to
                                                                     chaser does not, in the case of bonds,                    the transaction under subparagraph (2) of
                                                                     have rights under the trust indenture,                    this paragraph shall be 7 days after the date
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                                                                     or, in the case of preferred stocks, vot-                 on which the security is made available by
                                                                     ing rights.                                               the issuer for delivery to purchasers.

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                                                                     § 220.124                                                              12 CFR Ch. II (1–1–09 Edition)

                                                                       (h) In interpreting § 220.4(c)(3), the                  § 220.124 Installment sale of tax-shel-
                                                                     Board has stated that the purpose of                          ter programs as ‘‘arranging’’ for
                                                                     the provision:                                                credit.
                                                                        * * * is to recognize the fact that, when an              (a) The Board has been asked wheth-
                                                                     issue of securities is to be issued at some fu-           er the sale by brokers and dealers of
                                                                     ture fixed date, a security that is part of               tax-shelter programs containing a pro-
                                                                     such issue can be purchased on a ‘‘when-                  vision that payment for the program
                                                                     issued’’ basis and that payment may reason-               may be made in installments would
                                                                     ably be delayed until after such date of issue,           constitute ‘‘arranging’’ for credit in
                                                                     subject to other basic conditions for trans-              violation of this part 220. For the pur-
                                                                     actions in a special cash account. (1962 Fed-             poses of this interpretation, the term
                                                                     eral Reserve Bulletin 1427; 12 CFR 220.118;               ‘‘tax-shelter program’’ means a pro-
                                                                     ¶ 5996, Published Interpretations of the Board            gram which is required to be registered
                                                                     of Governors.)                                            pursuant to section 5 of the Securities
                                                                                                                               Act of 1933 (15 U.S.C. section 77e), in
                                                                     In that situation, the Board distin-
                                                                                                                               which tax benefits, such as the ability
                                                                     guished the case of mutual fund shares,
                                                                                                                               to deduct substantial amounts of de-
                                                                     which technically are not issued until
                                                                                                                               preciation or oil exploration expenses,
                                                                     the certificate can be delivered by the                   are made available to a person invest-
                                                                     transfer agent. The Board held that                       ing in the program. The programs may
                                                                     mutual fund shares must be regarded                       take various legal forms and can relate
                                                                     as issued at the time of purchase be-                     to a variety of industries including, but
                                                                     cause they are:                                           not limited to, oil and gas exploration
                                                                       * * * essentially available upon purchase               programs, real estate syndications (ex-
                                                                     to the same extent as outstanding securities.             cept real estate investment trusts), cit-
                                                                     The mechanics of their issuance and of the                rus grove developments and cattle pro-
                                                                     delivery of certificates are not significantly            grams.
                                                                     different from the mechanics of transfer and                 (b) The most common type of tax-
                                                                     delivery of certificates for shares of out-               shelter program takes the form of a
                                                                     standing securities, and the issuance of mu-              limited partnership. In the case of the
                                                                     tual fund shares is not a future event in the             programs under consideration, the in-
                                                                     sense that would warrant the extension of                 vestor would commit himself to pur-
                                                                     the time for payment beyond that afforded
                                                                                                                               chase and the partnership would com-
                                                                     in the case of outstanding securities. (ibid.)
                                                                                                                               mit itself to sell the interests. The in-
                                                                     The issuance of debt securities subject                   vestor would be entitled to the bene-
                                                                     to delayed issue contracts, by contrast                   fits, and become subject to the risks of
                                                                     with that of mutual fund shares, which                    ownership at the time the contract is
                                                                     are in a status of continual under-                       made, although the full purchase price
                                                                     writing, is a specific single event tak-                  is not then required to be paid. The
                                                                                                                               balance of the purchase price after the
                                                                     ing place at a future date fixed by the
                                                                                                                               downpayment usually is payable in in-
                                                                     issuer with a view to its need for funds
                                                                                                                               stallments which range from 1 to 10
                                                                     and the availability of those funds
                                                                                                                               years depending on the program. Thus,
                                                                     under current market conditions.                          the partnership would be extending
                                                                       (i) For the reasons stated above the                    credit to the purchaser until the time
                                                                     Board concluded that the nonconvert-                      when the latter’s contractual obliga-
                                                                     ible debt and preferred stock subject to                  tion has been fulfilled and the final
                                                                     delayed issue contracts of the kind de-                   payment made.
                                                                     scribed above should not be regarded as                      (c) With an exception not applicable
                                                                     having been issued until delivered, pur-                  here, § 220.7(a) of Regulation T provides
                                                                     suant to the agreement, to the institu-                   that:
                                                                     tional purchaser. This interpretation
                                                                                                                                 A creditor [broker or dealer] may arrange
                                                                     does not apply, of course, to fact situa-                 for the extension or maintenance of credit to
                                                                     tions different from that described in                    or for any customer of such creditor by any
                                                                     this section.                                             person upon the same terms and conditions
                                                                                                                               as those upon which the creditor, under the
                                                                     [36 FR 2777, Feb. 10, 1971]                               provisions of this part, may himself extend
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                                                                                                                               or maintain such credit to such customer,
                                                                                                                               but only such terms and conditions * * *

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                                                                     Federal Reserve System                                                                          § 220.128

                                                                       (d) In the case of credit for the pur-                  the sale and arranging of credit in con-
                                                                     pose of purchasing or carrying securi-                    nection with such insurance premium
                                                                     ties (purpose credit), § 220.8 of the regu-               funding programs.
                                                                     lation (the Supplement to Regulation                        (b) The 1972 amendment eliminated
                                                                     T) does not permit any loan value to be                   from § 220.4(k) the requirement that, to
                                                                     given securities that are not registered                  be eligible for the provisions of the sec-
                                                                     on a national securities exchange, in-                    tion, a creditor had to be the issuer, or
                                                                     cluded on the Board’s OTC Margin List,                    a subsidiary or affiliate of the issuer, of
                                                                     or exempted by statute from the regu-                     programs which combine the acquisi-
                                                                     lation.                                                   tion of both mutual fund shares and in-
                                                                       (e) The courts have consistently held                   surance. Thus the amendment permits
                                                                     investment programs such as those de-                     an independent broker/dealer to sell
                                                                     scribed above to be ‘‘securities’’ for                    such a program and to arrange for fi-
                                                                     purpose of both the Securities Act of                     nancing in that connection. In reach-
                                                                     1933 and the Securities Exchange Act of                   ing such decision, the Board again re-
                                                                     1934. The courts have also held that the                  lied upon the earlier understanding
                                                                     two statutes are to be construed to-                      that independent broker/dealers who
                                                                     gether. Tax-shelter programs, accord-                     would sell such programs would not be
                                                                     ingly, are securities for purposes of                     engaged in transacting a general secu-
                                                                     Regulation T. They also are not reg-                      rities business.
                                                                     istered on a national securities ex-                        (c) In response to a specific view re-
                                                                     change, included on the Board’s OTC                       cently expressed, the Board agrees that
                                                                     Margin List, or exempted by statute                       under Regulation T:
                                                                     from the regulation.
                                                                                                                                 * * * a broker/dealer dealing in special in-
                                                                       (f) Accordingly, the Board concludes                    surance premium funding products can only
                                                                     that the sale by a broker/dealer of tax-                  extend credit in connection with such prod-
                                                                     shelter programs containing a provi-                      ucts or in connection with the sale of shares
                                                                     sion that payment for the program                         of registered investment companies under
                                                                     may be made in installments would                         the cash accounts * * * (and) cannot engage
                                                                     constitute ‘‘arranging’’ for the exten-                   in the general securities business or sell any
                                                                     sion of credit to purchase or carry se-                   securities other than shares * * * (in) reg-
                                                                     curities in violation of the prohibitions                 istered investment companies through a cash
                                                                                                                               account or any other manner involving the
                                                                     of §§ 220.7(a) and 220.8 of Regulation T.                 extension of credit.
                                                                     [37 FR 6568, Mar. 31, 1972]
                                                                                                                                 (d) There is a way, of course, as has
                                                                     § 220.125–220.126        [Reserved]                       been indicated, that an independent
                                                                                                                               broker/dealer might be able to sell
                                                                     § 220.127 Independent broker/dealers                      other than shares of registered invest-
                                                                          arranging credit in connection with                  ment companies without creating any
                                                                          the sale of insurance premium                        conflict with the regulation. Such sales
                                                                          funding programs.                                    could be executed on a ‘‘funds on hand’’
                                                                        (a) The Board’s September 5, 1972,                     basis and in the case of payment by
                                                                     clarifying amendment to § 220.4(k) set                    check, would have to include the col-
                                                                     forth that creditors who arrange credit                   lection of such check. It is understood
                                                                     for the acquisition of mutual fund                        from industry sources, however, that
                                                                     shares and insurance are also per-                        few if any independent broker/dealers
                                                                     mitted to sell mutual fund shares with-                   engage solely in a ‘‘fund on hand’’ type
                                                                     out insurance under the provisions of                     of operation.
                                                                     the special cash account. It should be                    [38 FR 11066, May 4, 1973]
                                                                     understood, of course, that such ac-
                                                                     count provides a relatively short credit                  § 220.128 Treatment of simultaneous
                                                                     period of up to 7 business days even                          long and short positions in the
                                                                     with so-called cash transactions. This                        same margin account when put or
                                                                     amendment was in accordance with the                          call options or combinations there-
                                                                     Board’s understanding in 1969, when                           of on such stock are also out-
                                                                     the insurance premium funding provi-                          standing in the account.
                                                                     sions were adopted in § 220.4(k), that                      (a) The Board was recently asked
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                                                                     firms engaged in a general securities                     whether under Regulation T, ‘‘Credit
                                                                     business would not also be engaged in                     by Brokers and Dealers’’ (12 CFR part

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                                                                     § 220.128                                                              12 CFR Ch. II (1–1–09 Edition)

                                                                     220), if there are simultaneous long and                    (c) Rule 431 of the New York Stock
                                                                     short positions in the same security in                   Exchange requires that a creditor ob-
                                                                     the same margin account (often re-                        tain a minimum deposit of 25 percent
                                                                     ferred to as a short sale ‘‘against the                   of the current market value of the
                                                                     box’’), such positions may be used to                     optioned stock in connection with his
                                                                     supply the place of the deposit of mar-                   issuance or guarantee of a put, and at
                                                                     gin ordinarily required in connection                     least 30 percent in the case of a call
                                                                     with the guarantee by a creditor of a                     (and that such position be ‘‘marked to
                                                                     put or call option or combination                         the market’’), but permits a short posi-
                                                                     thereof on such stock.                                    tion in the stock to serve in lieu of the
                                                                        (b) The applicable provisions of regu-                 required deposit in the case of a put
                                                                     lation T are § 220.3(d)(3) and (5) and                    and a long position to serve in the case
                                                                     § 220.3(g)(4) and (5) which provide as fol-               of a call. Thus, where the appropriate
                                                                     lows:                                                     position is held in an account, that po-
                                                                                                                               sition may serve as the margin re-
                                                                       (d) * * * the adjusted debit balance of a               quired by § 220.3(d)(5).
                                                                     general account * * * shall be calculated by
                                                                                                                                 (d) In a short sale ‘‘against the box,’’
                                                                     taking the sum of the following items:
                                                                                                                               however, the customer is both long and
                                                                                                                               short the same security. He may have
                                                                           *          *         *        *          *          established either position, properly
                                                                                                                               margined, prior to taking the other, or
                                                                       (3) The current market value of any securi-             he may have deposited fully paid secu-
                                                                     ties (other than unissued securities) sold                rities in his margin account on the
                                                                     short in the general account plus, for each               same day he makes a short sale of such
                                                                     security (other than an exempted security),               securities. In either case, he will have
                                                                     such amount as the board shall prescribe                  directed his broker to borrow securities
                                                                     from time to time in § 220.8(d) (the supple-
                                                                                                                               elsewhere in order to make delivery on
                                                                     ment to regulation T) as the margin required
                                                                     for such short sales, except that such                    the short sale rather than using his
                                                                     amount so prescribed in such § 220.8(d) need              long position for this purpose (see also
                                                                     not be included when there are held in the                17 CFR 240.3b–3).
                                                                     general account * * * the same securities or                (e) Generally speaking, a customer
                                                                     securities exchangeable or convertible with-              makes a short sale ‘‘against the box’’
                                                                     in 90 calendar days, without restriction                  for tax reasons. Regulation T, however,
                                                                     other than the payment of money, into such                provides in § 220.3(g) that the two posi-
                                                                     securities sold short;
                                                                                                                               tions must be ‘‘netted out’’ for the pur-
                                                                                                                               poses of the calculations required by
                                                                           *          *         *        *          *          the regulation. Thus, the board con-
                                                                                                                               cludes that neither position would be
                                                                       (5) The amount of any margin customarily                available to serve as the deposit of
                                                                     required by the creditor in connection with               margin required in connection with the
                                                                     his endorsement or guarantee of any put,                  endorsement by the creditor of an op-
                                                                     call, or other option;                                    tion.
                                                                                                                                 (f) A similar conclusion obtains
                                                                                                                               under § 220.3(d)(3). That section pro-
                                                                           *          *         *        *          *          vides, in essence, that the margin oth-
                                                                                                                               erwise required in connection with a
                                                                       (g) * * * (4) Any transaction which serves
                                                                     to meet the requirements of paragraph (e) of              short sale need not be included in the
                                                                     this section or otherwise serves to permit                account if the customer has in the ac-
                                                                     any offsetting transaction in an account                  count a long position in the same secu-
                                                                     shall, to that extent, be unavailable to per-             rity. In § 220.3(g) (4), however, it is pro-
                                                                     mit any other transaction in such account.                vided that ‘‘[A]ny transaction which
                                                                       (5) For the purposes of this part (regula-              * * * serves to permit any offsetting
                                                                     tion T), if a security has maximum loan                   transaction in an account shall, to that
                                                                     value under paragraph (c)(1) of this section              extent, be unavailable to permit any
                                                                     in a general account, or under § 220.4(j) in a
                                                                                                                               other transaction in such account.’’
                                                                     special convertible debt security account, a
                                                                     sale of the same security (even though not                Thus, if a customer has, for example, a
                                                                     the same certificate) in such account shall               long position in a security and that
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                                                                     be deemed to be a long sale and shall not be              long position has been used to supply
                                                                     deemed to be or treated as a short sale.                  the margin required in connection with

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                                                                     Federal Reserve System                                                                          § 220.131

                                                                     a short sale of the same security, then                   only own and invest on a discretionary
                                                                     the long position is unavailable to                       basis at least $10 million of securities
                                                                     serve as the margin required in connec-                   in order to purchase as principal under
                                                                     tion with the creditor’s endorsement of                   the rule. Section 4(2) of the Securities
                                                                     a call option on such security.                           Act of 1933 provides an exemption from
                                                                        (g) A situation was also described in                  the registration requirements for
                                                                     which a customer has purported to es-                     ‘‘transactions by an issuer not involv-
                                                                     tablish simultaneous offsetting long                      ing any public offering.’’ Securities ac-
                                                                     and short positions by executing a                        quired in a transaction under section
                                                                     ‘‘cross’’ or wash sale of the security on                 4(2) cannot be resold without registra-
                                                                     the same day. In this situation, no                       tion under the Act or an exemption
                                                                     change in the beneficial ownership of                     therefrom. Rule 144A provides a safe
                                                                     stock has taken place. Since there is                     harbor exemption for resales of such
                                                                     no actual ‘‘contra’’ party to either                      securities. Accordingly, broker-dealers
                                                                     transaction, and no stock has been bor-                   that previously acted only as agents in
                                                                     rowed or delivered to accomplish the                      intermediating between issuers and
                                                                     short sale, such fictitious positions                     purchasers of privately-placed securi-
                                                                     would have no value for purposes of the                   ties, due to the lack of such a safe har-
                                                                     Board’s margin regulations. Indeed, the                   bor, now may purchase privately-
                                                                     adoption of such a scheme in connec-                      placed securities from issuers as prin-
                                                                     tion with an overall strategy involving                   cipal and resell such securities to
                                                                     the issuance, endorsement, or guar-                       ‘‘qualified institutional buyers’’ under
                                                                     antee of put or call options or combina-                  Rule 144A.
                                                                     tions thereof appears to be manipula-                        (c) The Board has consistently treat-
                                                                     tive and may have been employed for                       ed the purchase of a privately-placed
                                                                     the purpose of circumventing the re-                      debt security as an extension of credit
                                                                     quirements of the regulations.                            subject to the margin regulations. If
                                                                                                                               the issuer uses the proceeds to buy se-
                                                                     [38 FR 12098, May 9, 1973]
                                                                                                                               curities, the purchase of the privately-
                                                                     §§ 220.129–220.130        [Reserved]                      placed debt security by a creditor rep-
                                                                                                                               resents an extension of ‘‘purpose cred-
                                                                     § 220.131 Application of the arranging                    it’’ to the issuer. Section 7(c) of the Se-
                                                                          section to broker-dealer activities                  curities Exchange Act of 1934 prohibits
                                                                          under SEC Rule 144A.                                 the extension of purpose credit by a
                                                                        (a) The Board has been asked wheth-                    creditor if the credit is unsecured, se-
                                                                     er the purchase by a broker-dealer of                     cured by collateral other than securi-
                                                                     debt securities for resale in reliance on                 ties, or secured by any security (other
                                                                     Rule 144A of the Securities and Ex-                       than an exempted security) in con-
                                                                     change Commission (17 CFR 230.144A) 1                     travention of Federal Reserve regula-
                                                                     may be considered an arranging of                         tions. If a debt security sold pursuant
                                                                     credit permitted as an ‘‘investment                       to Rule 144A represents purpose credit
                                                                     banking service’’ under § 220.13(a) of                    and is not properly collateralized by se-
                                                                     Regulation T.                                             curities, the statute and Regulation T
                                                                        (b) SEC Rule 144A provides a safe                      can be viewed as preventing the
                                                                     harbor exemption from the registration                    broker-dealer from taking the security
                                                                     requirements of the Securities Act of                     into inventory in spite of the fact that
                                                                     1933 for resales of restricted securities                 the broker-dealer intends to imme-
                                                                     to qualified institutional buyers, as de-                 diately resell the debt security.
                                                                     fined in the rule. In general, a qualified                   (d) Under § 220.13 of Regulation T, a
                                                                     institutional buyer is an institutional                   creditor may arrange credit it cannot
                                                                     investor that in the aggregate owns                       itself extend if the arrangement is an
                                                                     and invests on a discretionary basis at                   ‘‘investment banking service’’ and the
                                                                     least $100 million in securities of                       credit does not violate Regulations G
                                                                     issuers that are not affiliated with the                  and U. Investment banking services are
                                                                     buyer. Registered broker-dealers need                     defined to include, but not be limited
                                                                                                                               to, ‘‘underwritings, private placements,
                                                                       1 Rule 144A, 17 CFR 230.144A, was originally            and advice and other services in con-
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                                                                     published in the FEDERAL REGISTER at 55 FR                nection with exchange offers, mergers,
                                                                     17933, April 30, 1990.                                    or       acquisitions,     except       for

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                                                                     § 220.132                                                              12 CFR Ch. II (1–1–09 Edition)

                                                                     underwritings that involve the public                     221.5 Special purpose loans to brokers and
                                                                     distribution of an equity security with                       dealers.
                                                                     installment or other deferred-payment                     221.6 Exempted transactions.
                                                                                                                               221.7 Supplement: Maximum loan value of
                                                                     provisions.’’ To comply with Regula-
                                                                                                                                   margin stock and other collateral.
                                                                     tions G and U where the proceeds of
                                                                     debt securities sold under Rule 144A                                      INTERPRETATIONS
                                                                     may be used to purchase or carry mar-                     221.101 Determination and effect of purpose
                                                                     gin stock and the debt securities are                         of loan.
                                                                     secured in whole or in part, directly or                  221.102 Application to committed credit
                                                                     indirectly by margin stock (see 12 CFR                        where funds are disbursed thereafter.
                                                                     207.2(f), 207.112, and 221.2(g)), the mar-                221.103 Loans to brokers or dealers.
                                                                     gin requirements of the regulations                       221.104 Federal credit unions.
                                                                     must be met.                                              221.105 Arranging for extensions of credit to
                                                                       (e) The SEC’s objective in adopting                         be made by a bank.
                                                                     Rule 144A is to achieve ‘‘a more liquid                   221.106 Reliance in ‘‘good faith’’ on state-
                                                                                                                                   ment of purpose of loan.
                                                                     and efficient institutional resale mar-
                                                                                                                               221.107 Arranging loan to purchase open-end
                                                                     ket for unregistered securities.’’ To                         investment company shares.
                                                                     further this objective, the Board be-                     221.108 Effect of registration of stock subse-
                                                                     lieves it is appropriate for Regulation                       quent to making of loan.
                                                                     T purposes to characterize the partici-                   221.109 Loan to open-end investment com-
                                                                     pation of broker-dealers in this unique                       pany.
                                                                     and limited market as an ‘‘investment                     221.110 Questions arising under this part.
                                                                     banking service.’’ The Board is there-                    221.111 Contribution to joint venture as ex-
                                                                     fore of the view that the purchase by a                       tension of credit when the contribution
                                                                                                                                   is disproportionate to the contributor’s
                                                                     creditor of debt securities for resale                        share in the venture’s profits or losses.
                                                                     pursuant to SEC Rule 144A may be con-                     221.112 Loans by bank in capacity as trust-
                                                                     sidered an investment banking service                         ee.
                                                                     under the arranging section of Regula-                    221.113 Loan which is secured indirectly by
                                                                     tion T. The market-making activities                          stock.
                                                                     of broker-dealers who hold themselves                     221.114 Bank loans to purchase stock of
                                                                     out to other institutions as willing to                       American Telephone and Telegraph Com-
                                                                     buy and sell Rule 144A securities on a                        pany under Employees’ Stock Plan.
                                                                     regular and continuous basis may also                     221.115 Accepting a purpose statement
                                                                                                                                   through the mail without benefit of face-
                                                                     be considered an arranging of credit                          to-face interview.
                                                                     permissible under § 220.13(a) of Regula-                  221.116 Bank loans to replenish working
                                                                     tion T.                                                       capital used to purchase mutual fund
                                                                     [Reg. T, 55 FR 29566, July 20, 1990]                          shares.
                                                                                                                               221.117 When bank in ‘‘good faith’’ has not
                                                                     § 220.132 Credit to brokers and deal-                         relied on stock as collateral.
                                                                          ers.                                                 221.118 Bank arranging for extension of
                                                                                                                                   credit by corporation.
                                                                        For text of this interpretation, see                   221.119 Applicability of plan-lender provi-
                                                                     § 221.125 of this subchapter.                                 sions to financing of stock options and
                                                                                                                                   stock purchase rights qualified or re-
                                                                     [Reg. T, 61 FR 60167, Nov. 26, 1996, as amend-                stricted under Internal Revenue Code.
                                                                     ed at 72 FR 70486, Dec. 12, 2007]                         221.120 Allocation of stock collateral to pur-
                                                                                                                                   pose and nonpurpose credits to same cus-
                                                                     PART 221—CREDIT BY BANKS AND                                  tomer.
                                                                       PERSONS OTHER THAN BROKERS                              221.121 Extension of credit in certain stock
                                                                                                                                   option and stock purchase plans.
                                                                       OR DEALERS FOR THE PURPOSE                              221.122 Applicability of margin require-
                                                                       OF PURCHASING OR CARRYING                                   ments to credit in connection with Insur-
                                                                       MARGIN STOCK (REGULATION                                    ance Premium Funding Programs.
                                                                       U)                                                      221.123 Combined credit for exercising em-
                                                                                                                                   ployee stock options and paying income
                                                                                                                                   taxes incurred as a result of such exer-
                                                                     Sec.
                                                                                                                                   cise.
                                                                     221.1 Authority, purpose, and scope.
                                                                                                                               221.124 Purchase of debt securities to fi-
                                                                     221.2 Definitions.
                                                                                                                                   nance corporate takeovers.
                                                                     221.3 General requirements.
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                                                                                                                               221.125 Credit to brokers and dealers.
                                                                     221.4 Employee stock option, purchase, and
                                                                         ownership plans.                                        AUTHORITY: 15 U.S.C. 78c, 78g, 78q, and 78w.

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                                                                     Federal Reserve System                                                                              § 221.2
                                                                      SOURCE: Reg. U, 63 FR 2827, Jan. 16, 1998,                 (ii) Any other subsidiary of such
                                                                     unless otherwise noted.                                   bank holding company; and
                                                                                                                                 (iii) Any other corporation, business
                                                                     § 221.1    Authority, purpose, and scope.                 trust, association, or other similar or-
                                                                        (a) Authority. Regulation U (this                      ganization that is an affiliate as de-
                                                                     part) is issued by the Board of Gov-                      fined in section 2(b) of the Banking Act
                                                                     ernors of the Federal Reserve System                      of 1933 (12 U.S.C. 221a(c));
                                                                     (the Board) pursuant to the Securities                      (2) For nonbank lenders, affiliate
                                                                     Exchange Act of 1934 (the Act) (15                        means any person who, directly or indi-
                                                                     U.S.C. 78a et seq.).                                      rectly, through one or more inter-
                                                                        (b) Purpose and scope. (1) This part                   mediaries, controls, or is controlled by,
                                                                     imposes credit restrictions upon per-                     or is under common control with the
                                                                     sons other than brokers or dealers                        lender.
                                                                     (hereinafter lenders) that extend credit                    Bank—(1) Bank. Has the meaning
                                                                     for the purpose of buying or carrying                     given to it in section 3(a)(6) of the Act
                                                                     margin stock if the credit is secured di-                 (15 U.S.C. 78c(a)(6)) and includes:
                                                                     rectly or indirectly by margin stock.                       (i) Any subsidiary of a bank;
                                                                     Lenders include ‘‘banks’’ (as defined in                    (ii) Any corporation organized under
                                                                     § 221.2) and other persons who are re-                    section 25(a) of the Federal Reserve Act
                                                                     quired to register with the Board under                   (12 U.S.C. 611); and
                                                                     § 221.3(b). Lenders may not extend more                     (iii) Any agency or branch of a for-
                                                                     than the maximum loan value of the                        eign bank located within the United
                                                                     collateral securing such credit, as set                   States.
                                                                     by the Board in § 221.7 (the Supple-                        (2) Bank does not include:
                                                                     ment).                                                      (i) Any savings and loan association;
                                                                        (2) This part does not apply to clear-                   (ii) Any credit union;
                                                                     ing agencies regulated by the Securi-                       (iii) Any lending institution that is
                                                                     ties and Exchange Commission or the                       an instrumentality or agency of the
                                                                     Commodity Futures Trading Commis-                         United States; or
                                                                     sion that accept deposits of margin                         (iv) Any member of a national securi-
                                                                     stock in connection with:                                 ties exchange.
                                                                        (i) The issuance of, or guarantee of,                    Carrying credit is credit that enables
                                                                     or the clearance of transactions in, any                  a customer to maintain, reduce, or re-
                                                                     security (including options on any se-                    tire indebtedness originally incurred to
                                                                     curity, certificate of deposit, securities                purchase a security that is currently a
                                                                     index or foreign currency); or                            margin stock.
                                                                        (ii) The guarantee of contracts for                      Current market value of:
                                                                     the purchase or sale of a commodity                         (1) A security means:
                                                                     for future delivery or options on such                      (i) If quotations are available, the
                                                                     contracts.                                                closing sale price of the security on the
                                                                        (3) This part does not apply to credit                 preceding business day, as appearing on
                                                                     extended to an exempted borrower.                         any regularly published reporting or
                                                                                                                               quotation service; or
                                                                        (c) Availability of forms. The forms
                                                                                                                                 (ii) If there is no closing sale price,
                                                                     referenced in this part are available
                                                                                                                               the lender may use any reasonable esti-
                                                                     from the Federal Reserve Banks.
                                                                                                                               mate of the market value of the secu-
                                                                     § 221.2    Definitions.                                   rity as of the close of business on the
                                                                                                                               preceding business day; or
                                                                       The terms used in this part have the                      (iii) If the credit is used to finance
                                                                     meanings given them in section 3(a) of                    the purchase of the security, the total
                                                                     the Act or as defined in this section as                  cost of purchase, which may include
                                                                     follows:                                                  any commissions charged.
                                                                       Affiliate means:                                          (2) Any other collateral means a
                                                                       (1) For banks:                                          value determined by any reasonable
                                                                       (i) Any bank holding company of                         method.
                                                                     which a bank is a subsidiary within the                     Customer excludes an exempted bor-
                                                                     meaning of the Bank Holding Company                       rower and includes any person or per-
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                                                                     Act of 1956, as amended (12 U.S.C.                        sons acting jointly, to or for whom a
                                                                     1841(d));                                                 lender extends or maintains credit.

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                                                                     § 221.2                                                                12 CFR Ch. II (1–1–09 Edition)

                                                                       Examining authority means:                                Indirectly secured. (1) Includes any ar-
                                                                       (1) The national securities exchange                    rangement with the customer under
                                                                     or national securities association of                     which:
                                                                     which a broker or dealer is a member;                       (i) The customer’s right or ability to
                                                                     or                                                        sell, pledge, or otherwise dispose of
                                                                       (2) If a member of more than one self-                  margin stock owned by the customer is
                                                                     regulatory organization, the organiza-                    in any way restricted while the credit
                                                                     tion designated by the Securities and                     remains outstanding; or
                                                                     Exchange Commission as the exam-                            (ii) The exercise of such right is or
                                                                     ining authority for the broker or deal-                   may be cause for accelerating the ma-
                                                                     er.                                                       turity of the credit.
                                                                       Exempted borrower means a member                          (2) Does not include such an arrange-
                                                                     of a national securities exchange or a                    ment if:
                                                                     registered broker or dealer, a substan-                     (i) After applying the proceeds of the
                                                                     tial portion of whose business consists                   credit, not more than 25 percent of the
                                                                     of transactions with persons other than                   value (as determined by any reasonable
                                                                     brokers or dealers, and includes a bor-                   method) of the assets subject to the ar-
                                                                     rower who:                                                rangement is represented by margin
                                                                       (1) Maintains at least 1000 active ac-                  stock;
                                                                     counts on an annual basis for persons                       (ii) It is a lending arrangement that
                                                                     other than brokers, dealers, and per-                     permits accelerating the maturity of
                                                                     sons associated with a broker or dealer;                  the credit as a result of a default or re-
                                                                       (2) Earns at least $10 million in gross                 negotiation of another credit to the
                                                                     revenues on an annual basis from                          customer by another lender that is not
                                                                     transactions with persons other than                      an affiliate of the lender;
                                                                     brokers, dealers, and persons associ-                       (iii) The lender holds the margin
                                                                     ated with a broker or dealer; or                          stock only in the capacity of custo-
                                                                       (3) Earns at least 10 percent of its                    dian, depositary, or trustee, or under
                                                                     gross revenues on an annual basis from                    similar circumstances, and, in good
                                                                     transactions with persons other than                      faith, has not relied upon the margin
                                                                     brokers, dealers, and persons associ-                     stock as collateral; or
                                                                     ated with a broker-dealer.
                                                                                                                                 (iv) The lender, in good faith, has not
                                                                       Good faith with respect to:
                                                                                                                               relied upon the margin stock as collat-
                                                                       (1) The loan value of collateral means
                                                                                                                               eral in extending or maintaining the
                                                                     that amount (not exceeding 100 per
                                                                                                                               particular credit.
                                                                     cent of the current market value of the
                                                                                                                                 Lender means:
                                                                     collateral) which a lender, exercising
                                                                     sound credit judgment, would lend,                          (1) Any bank; or
                                                                     without regard to the customer’s other                      (2) Any person subject to the reg-
                                                                     assets held as collateral in connection                   istration requirements of this part.
                                                                     with unrelated transactions.                                Margin stock means:
                                                                       (2) Making a determination or ac-                         (1) Any equity security registered or
                                                                     cepting a statement concerning a bor-                     having unlisted trading privileges on a
                                                                     rower means that the lender or its duly                   national securities exchange;
                                                                     authorized representative is alert to                       (2) Any OTC security designated as
                                                                     the circumstances surrounding the                         qualified for trading in the National
                                                                     credit, and if in possession of informa-                  Market System under a designation
                                                                     tion that would cause a prudent person                    plan approved by the Securities and
                                                                     not to make the determination or ac-                      Exchange Commission (NMS security);
                                                                     cept the notice or certification without                    (3) Any debt security convertible into
                                                                     inquiry, investigates and is satisfied                    a margin stock or carrying a warrant
                                                                     that it is correct;                                       or right to subscribe to or purchase a
                                                                       In the ordinary course of business                      margin stock;
                                                                     means occurring or reasonably ex-                           (4) Any warrant or right to subscribe
                                                                     pected to occur in carrying out or fur-                   to or purchase a margin stock; or
                                                                     thering any business purpose, or in the                     (5) Any security issued by an invest-
                                                                     case of an individual, in the course of                   ment company registered under section
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                                                                     any activity for profit or the manage-                    8 of the Investment Company Act of
                                                                     ment or preservation of property.                         1940 (15 U.S.C. 80a–8), other than:

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                                                                     Federal Reserve System                                                                              § 221.3

                                                                       (i) A company licensed under the                        under which the lender itself may ex-
                                                                     Small Business Investment Company                         tend or maintain purpose credit under
                                                                     Act of 1958, as amended (15 U.S.C. 661);                  this part.
                                                                     or                                                           (b) Registration of nonbank lenders; ter-
                                                                       (ii) A company which has at least 95                    mination of registration; annual report—
                                                                     percent of its assets continuously in-                    (1) Registration. Every person other
                                                                     vested in exempted securities (as de-                     than a person subject to part 220 of this
                                                                     fined in 15 U.S.C. 78c(a)(12)); or                        chapter or a bank who, in the ordinary
                                                                       (iii) A company which issues face-                      course of business, extends or main-
                                                                     amount certificates as defined in 15                      tains credit secured, directly or indi-
                                                                     U.S.C. 80a–2(a)(15), but only with re-                    rectly, by any margin stock shall reg-
                                                                     spect of such securities; or                              ister on Federal Reserve Form FR G–1
                                                                       (iv) A company which is considered a                    (OMB control number 7100–0011) within
                                                                     money market fund under SEC Rule                          30 days after the end of any calendar
                                                                     2a–7 (17 CFR 270.2a–7).                                   quarter during which:
                                                                       Maximum loan value is the percentage                       (i) The amount of credit extended
                                                                     of current market value assigned by                       equals $200,000 or more; or
                                                                     the Board under § 221.7 (the Supple-
                                                                                                                                  (ii) The amount of credit outstanding
                                                                     ment) to specified types of collateral.
                                                                                                                               at any time during that calendar quar-
                                                                     The maximum loan value of margin
                                                                                                                               ter equals $500,000 or more.
                                                                     stock is stated as a percentage of its
                                                                     current market value. Puts, calls and                        (2)    Deregistration.  A     registered
                                                                     combinations thereof that do not qual-                    nonbank lender may apply to termi-
                                                                     ify as margin stock have no loan value.                   nate its registration, by filing Federal
                                                                     All other collateral has good faith loan                  Reserve Form FR G–2 (OMB control
                                                                     value.                                                    number 7100–0011), if the lender has not,
                                                                       Nonbank lender means any person                         during the preceding six calendar
                                                                     subject to the registration require-                      months, had more than $200,000 of such
                                                                     ments of this part.                                       credit outstanding. Registration shall
                                                                       Purpose credit is any credit for the                    be deemed terminated when the appli-
                                                                     purpose, whether immediate, inci-                         cation is approved by the Board.
                                                                     dental, or ultimate, of buying or car-                       (3) Annual report. Every registered
                                                                     rying margin stock.                                       nonbank lender shall, within 30 days
                                                                                                                               following June 30 of every year, file
                                                                     § 221.3 General requirements.                             Form FR G–4 (OMB control number
                                                                        (a) Extending, maintaining, and ar-                    7100–0011).
                                                                     ranging credit—(1) Extending credit. No                      (4) Where to register and file applica-
                                                                     lender, except a plan-lender, as defined                  tions and reports. Registration state-
                                                                     in § 221.4(a), shall extend any purpose                   ments, applications to terminate reg-
                                                                     credit, secured directly or indirectly by                 istration, and annual reports shall be
                                                                     margin stock, in an amount that ex-                       filed with the Federal Reserve Bank of
                                                                     ceeds the maximum loan value of the                       the district in which the principal of-
                                                                     collateral securing the credit.                           fice of the lender is located.
                                                                        (2) Maintaining credit. A lender may                      (c) Purpose statement—(1) General
                                                                     continue to maintain any credit ini-                      rule—(i) Banks. Except for credit ex-
                                                                     tially extended in compliance with this                   tended under paragraph (c)(2) of this
                                                                     part, regardless of:                                      section, whenever a bank extends cred-
                                                                        (i) Reduction in the customer’s eq-                    it secured directly or indirectly by any
                                                                     uity resulting from change in market                      margin stock, in an amount exceeding
                                                                     prices;                                                   $100,000, the bank shall require its cus-
                                                                        (ii) Change in the maximum loan                        tomer to execute Form FR U–1 (OMB
                                                                     value prescribed by this part; or                         No. 7100–0115), which shall be signed
                                                                        (iii) Change in the status of the secu-                and accepted by a duly authorized offi-
                                                                     rity (from nonmargin to margin) secur-                    cer of the bank acting in good faith.
                                                                     ing an existing purpose credit.                              (ii) Nonbank lenders. Except for credit
                                                                        (3) Arranging credit. No lender may                    extended under paragraph (c)(2) of this
                                                                     arrange for the extension or mainte-                      section or § 221.4, whenever a nonbank
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                                                                     nance of any purpose credit, except                       lender extends credit secured directly
                                                                     upon the same terms and conditions                        or indirectly by any margin stock, the

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                                                                     § 221.3                                                                12 CFR Ch. II (1–1–09 Edition)

                                                                     nonbank lender shall require its cus-                       (d) Single credit rule. (1) All purpose
                                                                     tomer to execute Form FR G–3 (OMB                         credit extended to a customer shall be
                                                                     control number 7100–0018), which shall                    treated as a single credit, and all the
                                                                     be signed and accepted by a duly au-                      collateral securing such credit shall be
                                                                     thorized representative of the nonbank                    considered in determining whether or
                                                                     lender acting in good faith.                              not the credit complies with this part,
                                                                       (2) Purpose statement for revolving-                    except that syndicated loans need not
                                                                     credit or multiple-draw agreements or fi-                 be aggregated with other unrelated
                                                                     nancing of securities purchases on a pay-                 purpose credit extended by the same
                                                                     ment-against-delivery basis—(i) Banks. If                 lender.
                                                                     a bank extends credit, secured directly                     (2) A lender that has extended pur-
                                                                     or indirectly by any margin stock, in                     pose credit secured by margin stock
                                                                     an amount exceeding $100,000, under a                     may not subsequently extend unse-
                                                                     revolving-credit or other multiple-draw                   cured purpose credit to the same cus-
                                                                     agreement, Form FR U–1 must be exe-                       tomer unless the combined credit does
                                                                     cuted at the time the credit arrange-                     not exceed the maximum loan value of
                                                                     ment is originally established and                        the collateral securing the prior credit.
                                                                     must be amended as described in para-                       (3) If a lender extended unsecured
                                                                     graph (c)(2)(iv) of this section for each                 purpose credit to a customer prior to
                                                                     disbursement if all of the collateral for                 the extension of purpose credit secured
                                                                     the agreement is not pledged at the                       by margin stock, the credits shall be
                                                                     time the agreement is originally estab-                   combined and treated as a single credit
                                                                     lished.                                                   solely for the purposes of the with-
                                                                       (ii) Nonbank lenders. If a nonbank                      drawal and substitution provision of
                                                                     lender extends credit, secured directly                   paragraph (f) of this section.
                                                                     or indirectly by any margin stock,                          (4) If a lender extends purpose credit
                                                                     under a revolving-credit or other mul-                    secured by any margin stock and non-
                                                                     tiple-draw agreement, Form FR G–3                         purpose credit to the same customer,
                                                                     must be executed at the time the credit                   the lender shall treat the credits as
                                                                     arrangement is originally established                     two separate loans and may not rely
                                                                     and must be amended as described in                       upon the required collateral securing
                                                                     paragraph (c)(2)(iv) of this section for                  the purpose credit for the nonpurpose
                                                                     each disbursement if all of the collat-                   credit.
                                                                     eral for the agreement is not pledged at                    (e) Exempted borrowers. (1) An exempt-
                                                                     the time the agreement is originally                      ed borrower that has been in existence
                                                                     established.                                              for less than one year may meet the
                                                                       (iii) Collateral. If a purpose statement                definition of exempted borrower based
                                                                     executed at the time the credit ar-                       on a six-month period.
                                                                     rangement is initially made indicates                       (2) Once a member of a national secu-
                                                                     that the purpose is to purchase or                        rities exchange or registered broker or
                                                                     carry margin stock, the credit will be                    dealer ceases to qualify as an exempted
                                                                     deemed in compliance with this part if:                   borrower, it shall notify its lenders of
                                                                       (A) The maximum loan value of the                       this fact. Any new extensions of credit
                                                                     collateral at least equals the aggregate                  to such a borrower, including rollovers,
                                                                     amount of funds actually disbursed; or                    renewals, and additional draws on ex-
                                                                       (B) At the end of any day on which                      isting lines of credit, are subject to the
                                                                     credit is extended under the agree-                       provisions of this part.
                                                                     ment, the lender calls for additional                       (f) Withdrawals and substitutions. (1) A
                                                                     collateral sufficient to bring the credit                 lender may permit any withdrawal or
                                                                     into compliance with § 221.7 (the Sup-                    substitution of cash or collateral by
                                                                     plement).                                                 the customer if the withdrawal or sub-
                                                                       (iv) Amendment of purpose statement.                    stitution would not:
                                                                     For any purpose credit disbursed under                      (i) Cause the credit to exceed the
                                                                     the agreement, the lender shall obtain                    maximum loan value of the collateral;
                                                                     and attach to the executed Form FR                        or
                                                                     U–1 or FR G–3 a current list of collat-                     (ii) Increase the amount by which the
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                                                                     eral which adequately supports all                        credit exceeds the maximum loan value
                                                                     credit extended under the agreement.                      of the collateral.

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                                                                     Federal Reserve System                                                                              § 221.4

                                                                        (2) For purposes of this section, the                  ing the purpose of the loan and the col-
                                                                     maximum loan value of the collateral                      lateral securing it.
                                                                     on the day of the withdrawal or substi-                     (j) Action for lender’s protection. Noth-
                                                                     tution shall be used.                                     ing in this part shall require a bank to
                                                                        (g) Exchange offers. To enable a cus-                  waive or forego any lien or prevent a
                                                                     tomer to participate in a reorganiza-                     bank from taking any action it deems
                                                                     tion, recapitalization or exchange offer                  necessary in good faith for its protec-
                                                                     that is made to holders of an issue of                    tion.
                                                                     margin stock, a lender may permit sub-                      (k) Mistakes in good faith. A mistake
                                                                     stitution of the securities received. A
                                                                                                                               in good faith in connection with the ex-
                                                                     nonmargin, nonexempted security ac-
                                                                                                                               tension or maintenance of credit shall
                                                                     quired in exchange for a margin stock
                                                                     shall be treated as if it is margin stock                 not be a violation of this part.
                                                                     for a period of 60 days following the ex-                 § 221.4 Employee stock option,              pur-
                                                                     change.                                                       chase, and ownership plans.
                                                                        (h) Renewals and extensions of matu-
                                                                     rity. A renewal or extension of matu-                       (a) Plan-lender; eligible plan. (1) Plan-
                                                                     rity of a credit need not be considered                   lender means any corporation, (includ-
                                                                     a new extension of credit if the amount                   ing a wholly-owned subsidiary, or a
                                                                     of the credit is increased only by the                    lender that is a thrift organization
                                                                     addition of interest, service charges, or                 whose membership is limited to em-
                                                                     taxes with respect to the credit.                         ployees and former employees of the
                                                                        (i) Transfers of credit. (1) A transfer of             corporation, its subsidiaries or affili-
                                                                     a credit between customers or between                     ates) that extends or maintains credit
                                                                     lenders shall not be considered a new                     to finance the acquisition of margin
                                                                     extension of credit if:                                   stock of the corporation, its subsidi-
                                                                        (i) The original credit was extended                   aries or affiliates under an eligible
                                                                     by a lender in compliance with this                       plan.
                                                                     part or by a lender subject to part 207                     (2) Eligible plan. An eligible plan
                                                                     of this chapter in effect prior to April                  means any employee stock option, pur-
                                                                     1, 1998, (See part 207 appearing in the 12
                                                                                                                               chase, or ownership plan adopted by a
                                                                     CFR parts 200 to 219 edition revised as
                                                                                                                               corporation and approved by its stock-
                                                                     of January 1, 1997), in a manner that
                                                                                                                               holders that provides for the purchase
                                                                     would have complied with this part;
                                                                        (ii) The transfer is not made to evade                 of margin stock of the corporation, its
                                                                     this part;                                                subsidiaries, or affiliates.
                                                                        (iii) The amount of credit is not in-                    (b) Credit to exercise rights under or fi-
                                                                     creased; and                                              nance an eligible plan. (1) If a plan-lend-
                                                                        (iv) The collateral for the credit is                  er extends or maintains credit under an
                                                                     not changed.                                              eligible plan, any margin stock that di-
                                                                        (2) Any transfer between customers                     rectly or indirectly secured that credit
                                                                     at the same lender shall be accom-                        shall have good faith loan value.
                                                                     panied by a statement by the trans-                         (2) Credit extended under this section
                                                                     feror customer describing the cir-                        shall be treated separately from credit
                                                                     cumstances giving rise to the transfer                    extended under any other section of
                                                                     and shall be accepted and signed by a                     this part except § 221.3(b)(1) and (b)(3).
                                                                     representative of the lender acting in                      (c) Credit to ESOPs. A nonbank lender
                                                                     good faith. The lender shall keep such                    may extend and maintain purpose cred-
                                                                     statement with its records of the trans-                  it without regard to the provisions of
                                                                     feree account.                                            this part, except for § 221.3(b)(1) and
                                                                        (3) When a transfer is made between                    (b)(3), if such credit is extended to an
                                                                     lenders, the transferee shall obtain a
                                                                                                                               employee stock ownership plan (ESOP)
                                                                     copy of the Form FR U–1 or Form FR
                                                                                                                               qualified under section 401 of the Inter-
                                                                     G–3 originally filed with the transferor
                                                                     and retain the copy with its records of                   nal Revenue Code, as amended (26
                                                                     the transferee account. If no form was                    U.S.C. 401).
                                                                     originally filed with the transferor, the
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                                                                     transferee may accept in good faith a
                                                                     statement from the transferor describ-

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                                                                     § 221.5                                                                12 CFR Ch. II (1–1–09 Edition)

                                                                     § 221.5 Special purpose loans to bro-                     pose of taking advantage of a dif-
                                                                           kers and dealers.                                   ference in prices in the two markets; or
                                                                        (a) Special purpose loans. A lender                      (ii) Purchase of a security that is,
                                                                     may extend and maintain purpose cred-                     without restriction other than the pay-
                                                                     it to brokers and dealers without re-                     ment of money, exchangeable or con-
                                                                     gard to the limitations set forth in                      vertible within 90 calendar days of the
                                                                     §§ 221.3 and 221.7, if the credit is for any              purchase into a second security, to-
                                                                     of the specific purposes and meets the                    gether with an offsetting sale of the
                                                                     conditions set forth in paragraph (c) of                  second security at or about the same
                                                                     this section.                                             time, for the purpose of taking advan-
                                                                        (b) Written notice. Prior to extending                 tage of a concurrent disparity in the
                                                                     credit for more than a day under this                     price of the two securities.
                                                                     section, the lender shall obtain and ac-                    (6) Market maker and specialist loans.
                                                                     cept in good faith a written notice or                    Credit to a member of a national secu-
                                                                     certification from the borrower as to                     rities exchange or registered broker or
                                                                     the purposes of the loan. The written                     dealer to finance its activities as a
                                                                     notice or certification shall be evi-                     market maker or specialist.
                                                                     dence of continued eligibility for the
                                                                                                                                 (7) Underwriter loans. Credit to a
                                                                     special credit provisions until the bor-
                                                                                                                               member of a national securities ex-
                                                                     rower notifies the lender that it is no
                                                                     longer eligible or the lender has infor-                  change or registered broker or dealer
                                                                     mation that would cause a reasonable                      to finance its activities as an under-
                                                                     person to question whether the credit                     writer.
                                                                     is being used for the purpose specified.                    (8) Emergency loans. Credit that is es-
                                                                        (c) Types of special purpose credit. The               sential to meet emergency needs of the
                                                                     types of credit that may be extended                      broker-dealer business arising from ex-
                                                                     and maintained on a good faith basis                      ceptional circumstances.
                                                                     are as follows:                                             (9) Capital contribution loans. Capital
                                                                        (1) Hypothecation loans. Credit se-                    contribution loans include:
                                                                     cured by hypothecated customer secu-                        (i) Credit that Board has exempted by
                                                                     rities that, according to written notice                  order upon a finding that the exemp-
                                                                     received from the broker or dealer,                       tion is necessary or appropriate in the
                                                                     may be hypothecated by the broker or                      public interest or for the protection of
                                                                     dealer under Securities and Exchange                      investors, provided the Securities In-
                                                                     Commission (SEC) rules.                                   vestor Protection Corporation certifies
                                                                        (2) Temporary advances in payment-                     to the Board that the exemption is ap-
                                                                     against-delivery transactions. Credit to                  propriate; or
                                                                     finance the purchase or sale of securi-                     (ii) Credit to a customer for the pur-
                                                                     ties for prompt delivery, if the credit is                pose of making a subordinated loan or
                                                                     to be repaid upon completion of the                       capital contribution to a broker or
                                                                     transaction.                                              dealer in conformity with the SEC’s
                                                                        (3) Loans for securities in transit or                 net capital rules and the rules of the
                                                                     transfer. Credit to finance securities in                 broker’s or dealer’s examining author-
                                                                     transit or surrendered for transfer, if                   ity, provided:
                                                                     the credit is to be repaid upon comple-
                                                                                                                                 (A) The customer reduces the credit
                                                                     tion of the transaction.
                                                                                                                               by the amount of any reduction in the
                                                                        (4) Intra-day loans. Credit to enable a
                                                                     broker or dealer to pay for securities, if                loan or contribution to the broker or
                                                                     the credit is to be repaid on the same                    dealer; and
                                                                     day it is extended.                                         (B) The credit is not used to purchase
                                                                        (5) Arbitrage loans. Credit to finance                 securities issued by the broker or deal-
                                                                     proprietary or customer bona fide arbi-                   er in a public distribution.
                                                                     trage transactions. For the purpose of                      (10) Credit to clearing brokers or
                                                                     this section bona fide arbitrage means:                   dealers. Credit to a member of a na-
                                                                        (i) Purchase or sale of a security in                  tional securities exchange or registered
                                                                     one market, together with an offset-                      broker or dealer whose nonproprietary
                                                                     ting sale or purchase of the same secu-                   business is limited to financing and
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                                                                     rity in a different market at nearly the                  carrying the accounts of registered
                                                                     same time as practicable, for the pur-                    market makers.

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                                                                     Federal Reserve System                                                                          § 221.101

                                                                     § 221.6    Exempted transactions.                           (b) Maximum loan value of nonmargin
                                                                                                                               stock and all other collateral. The max-
                                                                        A bank may extend and maintain
                                                                                                                               imum loan value of nonmargin stock
                                                                     purpose credit without regard to the
                                                                                                                               and all other collateral except puts,
                                                                     provisions of this part if such credit is
                                                                                                                               calls, or combinations thereof is their
                                                                     extended:
                                                                                                                               good faith loan value.
                                                                        (a) To any bank;
                                                                                                                                 (c) Maximum loan value of options. Ex-
                                                                        (b) To any foreign banking institu-                    cept for options that qualify as margin
                                                                     tion;                                                     stock, puts, calls, and combinations
                                                                        (c) Outside the United States;                         thereof have no loan value.
                                                                        (d) To an employee stock ownership
                                                                     plan (ESOP) qualified under section 401                                  INTERPRETATIONS
                                                                     of the Internal Revenue Code (26 U.S.C.
                                                                     401);                                                     § 221.101 Determination and effect of
                                                                        (e) To any plan lender as defined in                       purpose of loan.
                                                                     § 221.4(a) to finance an eligible plan as                   (a) Under this part the original pur-
                                                                     defined in § 221.4(b), provided the bank                  pose of a loan is controlling. In other
                                                                     has no recourse to any securities pur-                    words, if a loan originally is not for the
                                                                     chased pursuant to the plan;                              purpose of purchasing or carrying mar-
                                                                        (f) To any customer, other than a                      gin stock, changes in the collateral for
                                                                     broker or dealer, to temporarily fi-                      the loan do not change its exempted
                                                                     nance the purchase or sale of securities                  character.
                                                                     for prompt delivery, if the credit is to                    (b) However, a so-called increase in
                                                                     be repaid in the ordinary course of                       the loan is necessarily on an entirely
                                                                     business upon completion of the trans-                    different basis. So far as the purpose of
                                                                     action and is not extended to enable                      the credit is concerned, it is a new
                                                                     the customer to pay for securities pur-                   loan, and the question of whether or
                                                                     chased in an account subject to part                      not it is subject to this part must be
                                                                     220 of this chapter;                                      determined accordingly.
                                                                        (g) Against securities in transit, if                    (c) Certain facts should also be men-
                                                                     the credit is not extended to enable the                  tioned regarding the determination of
                                                                     customer to pay for securities pur-                       the purpose of a loan. Section 221.3(c)
                                                                     chased in an account subject to part                      provides in that whenever a lender is
                                                                     220 of this chapter; or                                   required to have its customer execute a
                                                                        (h) To enable a customer to meet                       ‘‘Statement of Purpose for an Exten-
                                                                     emergency expenses not reasonably                         sion of Credit Secured by Margin
                                                                     foreseeable, and if the extension of                      Stock,’’ the statement must be accept-
                                                                     credit is supported by a statement exe-                   ed by the lender ‘‘acting in good faith.’’
                                                                     cuted by the customer and accepted                        The requirement of ‘‘good faith’’ is of
                                                                     and signed by an officer of the bank                      vital importance here. Its application
                                                                     acting in good faith. For this purpose,                   will necessarily vary with the facts of
                                                                     emergency expenses include expenses                       the particular case, but it is clear that
                                                                     arising from circumstances such as the                    the bank must be alert to the cir-
                                                                     death or disability of the customer, or                   cumstances surrounding the loan. For
                                                                     some other change in circumstances in-                    example, if the loan is to be made to a
                                                                     volving extreme hardship, not reason-                     customer who is not a broker or dealer
                                                                     ably foreseeable at the time the credit                   in securities, but such a broker or deal-
                                                                     was extended. The opportunity to real-                    er is to deliver margin stock to secure
                                                                     ize monetary gain or to avoid loss is                     the loan or is to receive the proceeds of
                                                                     not a ‘‘change in circumstances’’ for                     the loan, the bank would be put on no-
                                                                     this purpose.                                             tice that the loan would probably be
                                                                                                                               subject to this part. It could not accept
                                                                     § 221.7 Supplement: Maximum loan                          in good faith a statement to the con-
                                                                         value of margin stock and other col-                  trary without obtaining a reliable and
                                                                         lateral.                                              satisfactory explanation of the situa-
                                                                       (a) Maximum loan value of margin                        tion.
                                                                     stock. The maximum loan value of any                        (d) Furthermore, the purpose of a
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                                                                     margin stock is fifty per cent of its                     loan means just that. It cannot be al-
                                                                     current market value.                                     tered by some temporary application of

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                                                                     § 221.102                                                              12 CFR Ch. II (1–1–09 Edition)

                                                                     the proceeds. For example, if a bor-                      ed or used by the bank failed to call for
                                                                     rower is to purchase Government secu-                     answers which would indicate whether
                                                                     rities with the proceeds of a loan, but                   or not the loan was of the kind dis-
                                                                     is soon thereafter to sell such securi-                   cussed elsewhere in this section.
                                                                     ties and replace them with margin
                                                                     stock, the loan is clearly for the pur-                   § 221.104 Federal credit unions.
                                                                     pose of purchasing or carrying margin                        For text of the interpretation on
                                                                     stock.                                                    Federal credit unions, see 12 CFR
                                                                                                                               220.110.
                                                                     § 221.102 Application to committed
                                                                          credit where funds are disbursed                     § 221.105 Arranging for extensions of
                                                                          thereafter.                                              credit to be made by a bank.
                                                                        The Board has concluded that the                          For text of the interpretation on Ar-
                                                                     date a commitment to extend credit                        ranging for extensions of credit to be
                                                                     becomes binding should be regarded as                     made by a bank, see 12 CFR 220.111.
                                                                     the date when the credit is extended,
                                                                     since:                                                    § 221.106 Reliance in ‘‘good faith’’ on
                                                                        (a) On that date the parties should be                      statement of purpose of loan.
                                                                     aware of law and facts surrounding the                       (a) Certain situations have arisen
                                                                     transaction; and                                          from time to time under this part
                                                                        (b) Generally, the date of contract is                 wherein it appeared doubtful that, in
                                                                     controlling for purposes of margin reg-                   the circumstances, the lending banks
                                                                     ulations and Federal securities law, re-                  may have been entitled to rely upon
                                                                     gardless of the delivery of cash or secu-                 the statements accepted by them in de-
                                                                     rities.                                                   termining whether the purposes of cer-
                                                                                                                               tain loans were such as to cause the
                                                                     § 221.103 Loans to brokers or dealers.                    loans to be not subject to the part.
                                                                        Questions have arisen as to the ade-                      (b) The use by a lending bank of a
                                                                     quacy of statements received by lend-                     statement in determining the purpose
                                                                     ing banks under § 221.3(c), ‘‘Purpose                     of a particular loan is, of course, pro-
                                                                     Statement,’’ in the case of loans to                      vided for by § 221.3(c). However, under
                                                                     brokers or dealers secured by margin                      that paragraph a lending bank may ac-
                                                                     stock where the proceeds of the loans                     cept such statement only if it is ‘‘act-
                                                                     are to be used to finance customer                        ing in good faith.’’ As the Board stated
                                                                     transactions involving the purchasing                     in the interpretation contained in
                                                                     or carrying of margin stock. While                        § 221.101, the ‘‘requirement of ‘good
                                                                     some such loans may qualify for ex-                       faith’ is of vital importance’’; and, to
                                                                     emption under §§ 221.1(b)(2), 221.4, 221.5                fulfill such requirement, ‘‘it is clear
                                                                     or 221.6, unless they do qualify for such                 that the bank must be alert to the cir-
                                                                     an exemption they are subject to this                     cumstances surrounding the loan.’’
                                                                     part. For example, if a loan so secured                      (c) Obviously, such a statement
                                                                     is made to a broker to furnish cash                       would not be accepted by the bank in
                                                                     working capital for the conduct of his                    ‘‘good faith’’ if at the time the loan
                                                                     brokerage business (i.e., for purchasing                  was made the bank had knowledge,
                                                                     and carrying securities for the account                   from any source, of facts or cir-
                                                                     of customers), the maximum loan                           cumstances which were contrary to the
                                                                     value prescribed in § 221.7 (the Supple-                  natural purport of the statement, or
                                                                     ment) would be applicable unless the                      which were sufficient reasonably to put
                                                                     loan should be of a kind exempted                         the bank on notice of the questionable
                                                                     under this part. This result would not                    reliability or completeness of the
                                                                     be affected by the fact that the margin                   statement.
                                                                     stock given as security for the loan                         (d) Furthermore, the same require-
                                                                     was or included margin stock owned by                     ment of ‘‘good faith’’ is to be applied
                                                                     the brokerage firm. In view of the fore-                  whether the statement accepted by the
                                                                     going, the statement referred to in                       bank is signed by the borrower or by an
                                                                     § 221.3(c) which the lending bank must                    officer of the bank. In either case,
                                                                     accept in good faith in determining the                   ‘‘good faith’’ requires the exercise of
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                                                                     purpose of the loan would be inad-                        special diligence in any instance in
                                                                     equate if the form of statement accept-                   which the borrower is not personally

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                                                                     Federal Reserve System                                                                          § 221.108

                                                                     known to the bank or to the officer                       good faith’’, and that ‘‘good faith’’ re-
                                                                     who processes the loan.                                   quires, among other things, reasonable
                                                                        (e) The interpretation set forth in                    diligence to learn the truth.
                                                                     § 221.101 contains an example of the ap-
                                                                     plication of the ‘‘good faith’’ test.                     § 221.107 Arranging loan to purchase
                                                                     There it was stated that ‘‘if the loan is                     open-end   investment   company
                                                                     to be made to a customer who is not a                         shares.
                                                                     broker or dealer in securities, but such                    For text of the interpretation on Ar-
                                                                     a broker or dealer is to deliver margin                   ranging loan to purchase open-end in-
                                                                     stock to secure the loan or is to receive                 vestment company shares, see 12 CFR
                                                                     the proceeds of the loan, the bank                        220.112.
                                                                     would be put on notice that the loan
                                                                     would probably be subject to this part.                   § 221.108 Effect of registration of stock
                                                                     It could not accept in good faith a                           subsequent to making of loan.
                                                                     statement to the contrary without ob-                        (a) The Board recently was asked
                                                                     taining a reliable and satisfactory ex-                   whether a loan by a bank to enable the
                                                                     planation of the situation’’.                             borrower to purchase a newly issued
                                                                        (f) Moreover, and as also stated by                    nonmargin stock during the initial
                                                                     the     interpretation    contained    in                 over-the-counter trading period prior
                                                                     § 221.101, the purpose of a loan, of                      to the stock becoming registered (list-
                                                                     course, ‘‘cannot be altered by some                       ed) on a national securities exchange
                                                                     temporary application of the proceeds.                    would be subject to this part. The
                                                                     For example, if a borrower is to pur-                     Board replied that, until such stock
                                                                     chase Government securities with the                      qualifies as margin stock, this would
                                                                     proceeds of a loan, but is soon there-                    not be applicable to such a loan.
                                                                     after to sell such securities and replace                    (b) The Board has now been asked
                                                                     them with margin stock, the loan is                       what the position of the lending bank
                                                                     clearly for the purpose of purchasing or                  would be under this part if, after the
                                                                     carrying margin stock’’. The purpose of                   date on which the stock should become
                                                                     a loan therefore, should not be deter-                    registered, such bank continued to hold
                                                                     mined upon a narrow analysis of the                       a loan of the kind just described. It is
                                                                     immediate use to which the proceeds of                    assumed that the loan was in an
                                                                     the loan are put. Accordingly, a bank                     amount greater than the maximum
                                                                     acting in ‘‘good faith’’ should carefully                 loan value for the collateral specified
                                                                     scrutinize cases in which there is any                    in this part.
                                                                     indication that the borrower is con-                         (c) If the stock should become reg-
                                                                     cealing the true purpose of the loan,                     istered, the loan would then be for the
                                                                     and there would be reason for special                     purpose of purchasing or carrying a
                                                                     vigilance if margin stock is substituted                  margin stock, and, if secured directly
                                                                     for bonds or nonmargin stock soon                         or indirectly by any margin stock,
                                                                     after the loan is made, or on more than                   would be subject to this part as from
                                                                     one occasion.                                             the date the stock was registered.
                                                                        (g) Similarly, the fact that a loan                    Under this part, this does not mean
                                                                     made on the borrower’s signature only,                    that the bank would have to obtain re-
                                                                     for example, becomes secured by mar-                      duction of the loan in order to reduce
                                                                     gin stock shortly after the disburse-                     it to an amount no more than the spec-
                                                                     ment of the loan usually would afford                     ified maximum loan value. It does
                                                                     reasonable grounds for questioning the                    mean, however, that so long as the
                                                                     bank’s apparent reliance upon merely a                    loan balance exceeded the specified
                                                                     statement that the purpose of the loan                    maximum loan value, the bank could
                                                                     was not to purchase or carry margin                       not permit any withdrawals or substi-
                                                                     stock.                                                    tutions of collateral that would in-
                                                                        (h) The examples in this section are,                  crease such excess; nor could the bank
                                                                     of course, by no means exhaustive.                        increase the amount of the loan bal-
                                                                     They simply illustrate the funda-                         ance unless there was provided addi-
                                                                     mental fact that no statement accept-                     tional collateral having a maximum
                                                                     ed by a lender is of any value for the                    loan value at least equal to the amount
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                                                                     purposes of this part unless the lender                   of the increase. In other words, as from
                                                                     accepting the statement is ‘‘acting in                    the date the stock should become a

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                                                                     § 221.109                                                              12 CFR Ch. II (1–1–09 Edition)

                                                                     margin stock, the loan would be sub-                      a case of this kind, the loan would be
                                                                     ject to this part in exactly the same                     subject to this part, for the following
                                                                     way, for example, as a loan subject to                    reasons:
                                                                     this part that became under-margined                         (i) The Board has long held, in the
                                                                     because of a decline in the current                       closely related purpose area, that the
                                                                     market value of the loan collateral or                    original purpose of a loan should not be
                                                                     because of a decrease by the Board in                     determined upon a narrow analysis of
                                                                     the maximum loan value of the loan                        the technical circumstances under
                                                                     collateral.                                               which a loan is made. Instead, the fun-
                                                                                                                               damental purpose of the loan is consid-
                                                                     § 221.109 Loan to open-end investment                     ered to be controlling. Indeed, ‘‘the
                                                                          company.                                             fact that a loan made on the borrower’s
                                                                        In response to a question regarding a                  signature only, for example, becomes
                                                                     possible loan by a bank to an open-end                    secured by registered stock shortly
                                                                     investment company that customarily                       after the disbursement of the loan’’ af-
                                                                     purchases stocks registered on a na-                      fords reasonable grounds for ques-
                                                                     tional securities exchange, the Board                     tioning whether the bank was entitled
                                                                     stated that in view of the general na-                    to rely upon the borrower’s statement
                                                                     ture and operations of such a company,                    as to the purpose of the loan. 1953 Fed.
                                                                     any loan by a bank to such a company                      Res. Bull. 951 (See, § 221.106).
                                                                     should be presumed to be subject to                          (ii) Where security is involved, stand-
                                                                     this part as a loan for the purpose of                    ards of interpretation should be equal-
                                                                     purchasing or carrying margin stock.                      ly searching. If, for example, the origi-
                                                                     This would not be altered by the fact                     nal agreement between borrower and
                                                                     that the open-end company had used,                       lender contemplated that the loan
                                                                     or proposed to use, its own funds or                      should be secured by margin stock, and
                                                                     proceeds of the loan to redeem some of                    such stock is in fact delivered to the
                                                                     its own shares, since mere application                    bank when available, the transaction
                                                                     of the proceeds of a loan to some other                   must be regarded as fundamentally a
                                                                     use cannot prevent the ultimate pur-                      secured loan. This view is strengthened
                                                                     pose of a loan from being to purchase                     by the fact that this part applies to a
                                                                     or carry registered stocks.                               loan ‘‘secured directly or indirectly by
                                                                                                                               margin stock.’’
                                                                     § 221.110 Questions arising under this                       (2) Loan to acquire controlling shares.
                                                                          part.                                                (i) The second question is whether this
                                                                        (a) This part governs ‘‘any purpose                    part governs a margin stock-secured
                                                                     credit’’ extended by a lender ‘‘secured                   loan made for the business purpose of
                                                                     directly or indirectly by margin stock’’                  purchasing a controlling interest in a
                                                                     and defines ‘‘purpose credit’’ as ‘‘any                   corporation, or whether such a loan
                                                                     credit for the purpose, whether imme-                     would be exempt on the ground that
                                                                     diate, incidental, or ultimate, of buy-                   this part is directed solely toward pur-
                                                                     ing or carrying margin stock, ‘‘ with                     chases of stock for speculative or in-
                                                                     certain exceptions, and provides that                     vestment purposes. The Board an-
                                                                     the maximum loan value of such mar-                       swered that a margin stock-secured
                                                                     gin stock shall be a fixed percentage                     loan for the purpose of purchasing or
                                                                     ‘‘of its current market value.’’                          carrying margin stock is subject to
                                                                        (b) The Board of Governors has had                     this part, regardless of the reason for
                                                                     occasion to consider the application of                   which the purchase is made.
                                                                     the language in paragraph (a) of this                        (ii) The answer is required, in the
                                                                     section to the two following questions:                   Board’s view, since the language of this
                                                                        (1) Loan secured by stock. First, is a                 part is explicitly inclusive, covering
                                                                     loan to purchase or carry margin stock                    ‘‘any purpose credit, secured directly
                                                                     subject to this part where made in un-                    or indirectly by margin stock.’’ More-
                                                                     secured form, if margin stock is subse-                   over, the withdrawal in 1945 of the
                                                                     quently deposited as security with the                    original section 2(e) of this part, which
                                                                     lender, and surrounding circumstances                     exempted ‘‘any loan for the purpose of
                                                                     indicate that the parties originally                      purchasing a stock from or through a
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                                                                     contemplated that the loan should be                      person who is not a member of a na-
                                                                     so secured? The Board answered that in                    tional securities exchange . . .’’ plainly

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                                                                     Federal Reserve System                                                                          § 221.112

                                                                     implies that transactions of the sort                     retaining the right to liquidate the col-
                                                                     described are now subject to the gen-                     lateral before the securities decline in
                                                                     eral prohibition of § 221.3(a).                           price below the amount of its contribu-
                                                                                                                               tion. Conversely, the individual—like a
                                                                     § 221.111 Contribution to joint venture                   customer who borrows to purchase se-
                                                                          as extension of credit when the con-
                                                                          tribution is disproportionate to the                 curities—puts up only 20 percent of
                                                                          contributor’s share in the venture’s                 their cost, is entitled to the principal
                                                                          profits or losses.                                   portion of any appreciation in their
                                                                        (a) The Board considered the ques-                     value, bears the principal risk of loss
                                                                     tion whether a joint venture, struc-                      should that value decline, and does not
                                                                     tured so that the amount of capital                       stand to gain or lose except through a
                                                                     contribution to the venture would be                      change in value of the securities pur-
                                                                     disproportionate to the right of partici-                 chased.
                                                                     pation in profits or losses, constitutes                    (e) The Board is of the opinion that
                                                                     an ‘‘extension of credit’’ for the pur-                   where the right of an individual to
                                                                     pose of this part.                                        share in profits and losses of such a
                                                                        (b) An individual and a corporation                    joint venture is disproportionate to his
                                                                     plan to establish a joint venture to en-                  contribution to the venture:
                                                                     gage in the business of buying and sell-                    (1) The joint venture involves an ex-
                                                                     ing securities, including margin stock.                   tension of credit by the corporation to
                                                                     The individual would contribute 20 per-                   the individual;
                                                                     cent of the capital and receive 80 per-
                                                                                                                                 (2) The extension of credit is to pur-
                                                                     cent of the profits or losses; the cor-
                                                                                                                               chase or carry margin stock, and is
                                                                     porate share would be the reverse. In
                                                                     computing profits or losses, each par-                    collateralized by such margin stock;
                                                                     ticipant would first receive interest at                  and
                                                                     the rate of 8 percent on his respective                     (3) If the corporation is not a broker
                                                                     capital contribution. Although pur-                       or dealer subject to Regulation T (12
                                                                     chases and sales would be mutually                        CFR part 220), the credit is of the kind
                                                                     agreed upon, the corporation could liq-                   described by § 221.3(a).
                                                                     uidate the joint portfolio if the individ-
                                                                     ual’s share of the losses equaled or ex-                  § 221.112 Loans by bank in capacity as
                                                                     ceeded his 20 percent contribution to                         trustee.
                                                                     the venture. The corporation would                          (a) The Board’s advice has been re-
                                                                     hold the securities, and upon termi-                      quested whether a bank’s activities in
                                                                     nation of the venture, the assets would                   connection with the administration of
                                                                     first be applied to repayment of capital                  an employees’ savings plan are subject
                                                                     contributions.                                            to this part.
                                                                        (c) In general, the relationship of                      (b) Under the plan, any regular, full-
                                                                     joint venture is created when two or                      time employee may participate by au-
                                                                     more persons combine their money,                         thorizing the sponsoring company to
                                                                     property, or time in the conduct of
                                                                                                                               deduct a percentage of his salary and
                                                                     some particular line of trade or some
                                                                                                                               wages and transmit the same to the
                                                                     particular business and agree to share
                                                                                                                               bank as trustee. Voluntary contribu-
                                                                     jointly, or in proportion to capital con-
                                                                     tributed, the profits and losses of the                   tions by the company are allocated
                                                                     undertaking.                                              among the participants. A participant
                                                                        (d) The incidents of the joint venture                 may direct that funds held for him be
                                                                     described in paragraph (b) of this sec-                   invested by the trustee in insurance,
                                                                     tion, however, closely parallel those of                  annuity contracts, Series E Bonds, or
                                                                     an extension of margin credit, with the                   in one or more of three specified secu-
                                                                     corporation as lender and the indi-                       rities which are listed on a stock ex-
                                                                     vidual as borrower. The corporation                       change. Loans to purchase the stocks
                                                                     supplies 80 percent of the purchase                       may be made to participants from
                                                                     price of securities in exchange for a net                 funds of the trust, subject to approval
                                                                     return of 8 percent of the amount ad-                     of the administrative committee,
                                                                     vanced plus 20 percent of any gain.                       which is composed of five participants,
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                                                                     Like a lender of securities credit, the                   and of the trustee. The bank’s right to
                                                                     corporation is insulated against loss by                  approve is said to be restricted to the

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                                                                     § 221.113                                                              12 CFR Ch. II (1–1–09 Edition)

                                                                     mechanics of making the loan, the pur-                    agreement includes the following
                                                                     pose being to avoid cumbersome proce-                     terms, which are material to the ques-
                                                                     dures.                                                    tion before the Board:
                                                                       (c) Loans are secured by the credit                        (1) Fund X agrees to have an ‘‘asset
                                                                     balance of the borrowing participants                     coverage’’ (as defined in the agree-
                                                                     in the savings fund, including stock,                     ments) of 400 percent of all its bor-
                                                                     but excluding (in practice) insurance                     rowings, including the proposed bor-
                                                                     and annuity contracts and government                      rowing, at the time when it takes down
                                                                     securities. Additional stocks may be,                     any part of the loan.
                                                                     but, in practice, have not been pledged                      (2) Fund X agrees to maintain an
                                                                     as collateral for loans. Loans are not                    ‘‘asset coverage’’ of at least 300 percent
                                                                     made, under the plan, from bank funds,                    of its borrowings at all times.
                                                                     and participants do not borrow from                          (3) Fund X agrees not to amend its
                                                                     the bank upon assignment of the par-                      custody agreement with Bank Y, or to
                                                                     ticipants’ accounts in the trust.                         substitute another custodian without
                                                                       (d) It is urged that loans under the                    Bank Y’s consent.
                                                                     plan are not subject to this part be-
                                                                                                                                  (4) Fund X agrees not to mortgage,
                                                                     cause a loan should not be considered
                                                                                                                               pledge, or otherwise encumber any of
                                                                     as having been made by a bank where
                                                                                                                               its assets elsewhere than with Bank Y.
                                                                     the bank acts solely in its capacity of
                                                                     trustee, without exercise of any discre-                     (c) In § 221.109 the Board stated that
                                                                     tion.                                                     because of ‘‘the general nature and op-
                                                                       (e) The Board reviewed this question                    erations of such a company’’, any
                                                                     upon at least one other occasion, and                     ‘‘loan by a bank to an open-end invest-
                                                                     full consideration has again been given                   ment company that customarily pur-
                                                                     to the matter. After considering the ar-                  chases margin stock * * * should be
                                                                     guments on both sides, the Board has                      presumed to be subject to this part as
                                                                     reaffirmed its earlier view that, in con-                 a loan for the purpose of purchasing or
                                                                     formity with an interpretation not                        carrying margin stock’’ (purpose cred-
                                                                     published in the Code of Federal Regu-                    it). The Board’s interpretation went on
                                                                     lations which was published at page 874                   to say that: ‘‘this would not be altered
                                                                     of the 1946 Federal Reserve Bulletin                      by the fact that the open-end company
                                                                     (See 12 CFR 261.10(f) for information on                  had used, or proposed to use, its own
                                                                     how to obtain Board publications.),                       funds or proceeds of the loan to redeem
                                                                     this part applies to the activities of a                  some of its own shares * * *.’’
                                                                     bank when it is acting in its capacity                       (d) Accordingly, the loan by Bank Y
                                                                     as trustee. Although the bank in that                     to Fund X was and is a ‘‘purpose cred-
                                                                     case had at best a limited discretion                     it’’. However, a loan by a bank is not
                                                                     with respect to loans made by it in its                   subject to this part unless: it is a pur-
                                                                     capacity as trustee, the Board con-                       pose credit; and it is ‘‘secured directly
                                                                     cluded that this fact did not affect the                  or indirectly by margin stock’’. In the
                                                                     application of the regulation to such                     present case, the loan is not ‘‘secured
                                                                     loans.                                                    directly’’ by stock in the ordinary
                                                                                                                               sense, since the portfolio of Fund X is
                                                                     § 221.113 Loan which is secured indi-                     not pledged to secure the credit from
                                                                          rectly by stock.                                     Bank Y. But the word ‘‘indirectly’’
                                                                        (a) A question has been presented to                   must signify some form of security ar-
                                                                     the Board as to whether a loan by a                       rangement other than the ‘‘direct’’ se-
                                                                     bank to a mutual investment fund is                       curity which arises from the ordinary
                                                                     ‘‘secured * * * indirectly by margin                      ‘‘transaction      that  gives    recourse
                                                                     stock’’     within    the   meaning    of                 against a particular chattel or land or
                                                                     § 221.(3)(a), so that the loan should be                  against a third party on an obligation’’
                                                                     treated as subject to this part.                          described in the American Law Insti-
                                                                        (b) Briefly, the facts are as follows.                 tute’s Restatement of the Law of Secu-
                                                                     Fund X, an open-end investment com-                       rity, page 1. Otherwise the word ‘‘indi-
                                                                     pany, entered into a loan agreement                       rectly’’ would be superfluous, and a
                                                                     with Bank Y, which was (and still is)                     regulation, like a statute, must be con-
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                                                                     custodian of the securities which com-                    strued if possible to give meaning to
                                                                     prise the portfolio of Fund X. The                        every word.

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                                                                     Federal Reserve System                                                                          § 221.114

                                                                       (e) The Board has indicated its view                    the bank ‘‘has not relied’’ upon the
                                                                     that any arrangement under which                          margin stock deposited with it.
                                                                     margin stock is more readily available                       (2) A borrower may not deposit his
                                                                     as security to the lending bank than to                   margin stock with the bank, but agree
                                                                     other creditors of the borrower may                       not to pledge or encumber his assets
                                                                     amount to indirect security within the                    elsewhere while the loan is out-
                                                                     meaning of this part. In an interpreta-                   standing. Such an agreement may be
                                                                     tion published at § 221.110 it stated:                    difficult to police, yet it serves to some
                                                                     ‘‘The Board has long held, in the * * *                   extent to protect the interest of the
                                                                     purpose area, that the original purpose                   bank if only because the future credit
                                                                     of a loan should not be determined                        standing and business reputation of the
                                                                     upon a narrow analysis of the technical                   borrower will depend upon his keeping
                                                                     circumstances under which a loan is                       his word. If the assets covered by such
                                                                     made * * * . Where security is involved,                  an agreement include margin stock,
                                                                     standards of interpretation should be                     then, the credit is ‘‘indirectly secured’’
                                                                     equally searching.’’ In its pamphlet                      by the margin stock within the mean-
                                                                     issued for the benefit and guidance of                    ing of this part.
                                                                     banks and bank examiners, entitled                           (3) The borrower may deposit margin
                                                                     ‘‘Questions and Answers Illustrating                      stock with a third party who agrees to
                                                                     Application of Regulation U’’, the                        hold the stock until the loan has been
                                                                     Board said: ‘‘In determining whether a                    paid off. Here, even though the parties
                                                                     loan is ‘‘indirectly’’ secured, it should                 may purport to provide that the stock
                                                                     be borne in mind that the reason the                      is not ‘‘security’’ for the loan (for ex-
                                                                     Board has thus far refrained * * * from                   ample, by agreeing that the stock may
                                                                     regulating loans not secured by stock                     not be sold and the proceeds applied to
                                                                     has been to simplify operations under                     the debt if the borrower fails to pay),
                                                                     the regulation. This objective of sim-                    the mere fact that the stock is out of
                                                                     plifying operations does not apply to                     the borrower’s control for the duration
                                                                     loans in which arrangements are made                      of the loan serves to some extent to
                                                                     to retain the substance of stock collat-                  protect the bank.
                                                                     eral while sacrificing only the form’’.                      (g) The three instances described in
                                                                       (f) A wide variety of arrangements as                   paragraph (f) of this section are merely
                                                                     to collateral can be made between                         illustrative. Other methods, or com-
                                                                     bank and borrower which will serve, to                    binations of methods, may serve a
                                                                     some extent, to protect the interest of                   similar purpose. The conclusion that
                                                                     the bank in seeing that the loan is re-                   any given arrangement makes a credit
                                                                     paid, without giving the bank a con-                      ‘‘indirectly secured’’ by margin stock
                                                                     ventional direct ‘‘security’’ interest in                 may, but need not, be reinforced by
                                                                     the collateral. Among such arrange-                       facts such as that the stock in question
                                                                     ments which have come to the Board’s                      was purchased with proceeds of the
                                                                     attention are the following:                              loan, that the lender suggests or insists
                                                                       (1) The borrower may deposit margin                     upon the arrangement, or that the loan
                                                                     stock in the custody of the bank. An                      would probably be subject to criticism
                                                                     arrangement of this kind may not, it is                   by supervisory authorities were it not
                                                                     true, place the bank in the position of                   for the protective arrangement.
                                                                     a secured creditor in case of bank-                          (h) Accordingly, the Board concludes
                                                                     ruptcy, or even of conflicting claims,                    that the loan by Bank Y to Fund X is
                                                                     but it is likely effectively to strength-                 indirectly secured by the portfolio of
                                                                     en the bank’s position. The definition                    the fund and must be treated by the
                                                                     of indirectly secured in § 221.2, which pro-              bank as a regulated loan.
                                                                     vides that a loan is not indirectly se-
                                                                     cured if the lender ‘‘holds the margin                    § 221.114 Bank loans to purchase stock
                                                                     stock only in the capacity of custo-                          of American Telephone and Tele-
                                                                     dian, depositary or trustee, or under                         graph Company under Employees’
                                                                     similar circumstances, and, in good                           Stock Plan.
                                                                     faith has not relied upon the margin                        (a) The Board of Governors inter-
                                                                     stock as collateral,’’ does not exempt a                  preted this part in connection with
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                                                                     deposit of this kind from the impact of                   proposed loans by a bank to persons
                                                                     the regulation unless it is clear that                    who are purchasing shares of stock of

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                                                                     § 221.115                                                              12 CFR Ch. II (1–1–09 Edition)

                                                                     American Telephone and Telegraph                          amount approximately equal to the
                                                                     Company pursuant to its Employees’                        amount he would pay for such shares.
                                                                     Stock Plan.                                               In these circumstances, the loan by the
                                                                       (b) According to the current offering                   bank must be regarded as a loan ‘‘for
                                                                     under the Plan, an employee of the                        the purpose of purchasing’’ the stock,
                                                                     AT&T system may purchase shares                           and therefore it is subject to the limi-
                                                                     through regular deductions from his                       tations prescribed by this part. This
                                                                     pay over a period of 24 months. At the                    conclusion follows from the provisions
                                                                     end of that period, a certificate for the                 of this part, and it may also be ob-
                                                                     appropriate number of shares will be                      served that a contrary conclusion
                                                                     issued to the participating employee by                   could largely defeat the basic purpose
                                                                     AT&T. Each employee is entitled to                        of the margin regulations.
                                                                     purchase, as a maximum, shares that                         (e) Accordingly, the Board concluded
                                                                     will cost him approximately three-                        that a loan of the kind described may
                                                                     fourths of his annual base pay. Since                     not be made in an amount exceeding
                                                                     the program extends over two years, it                    the maximum loan value of the collat-
                                                                     follows that the payroll deductions for                   eral, as prescribed by the current § 221.7
                                                                     this purpose may be in the neighbor-                      (the Supplement).
                                                                     hood of 38 percent of base pay and a
                                                                     larger percentage of ‘‘take-home pay.’’                   § 221.115 Accepting a purpose state-
                                                                     Deductions of this magnitude are in ex-                       ment through the mail without ben-
                                                                     cess of the saving rate of many employ-                       efit of face-to-face interview.
                                                                     ees.                                                        (a) The Board has been asked wheth-
                                                                       (c) Certain AT&T employees, who                         er the acceptance of a purpose state-
                                                                     wish to take advantage of the current                     ment submitted through the mail by a
                                                                     offering under the Plan, are the owners                   lender subject to the provisions of this
                                                                     of shares of AT&T stock that they pur-                    part will meet the good faith require-
                                                                     chased under previous offerings. A                        ment of § 221.3(c). Section 221.3(c) states
                                                                     bank proposed to receive such stock as                    that in connection with any credit se-
                                                                     collateral for a ‘‘living expenses’’ loan                 cured by collateral which includes any
                                                                     that will be advanced to the employee                     margin stock, a nonbank lender must
                                                                     in monthly installments over the 24-                      obtain a purpose statement executed
                                                                     month period, each installment being                      by the borrower and accepted by the
                                                                     in the amount of the employee’s                           lender in good faith. Such acceptance
                                                                     monthly payroll deduction under the                       requires that the lender be alert to the
                                                                     Plan. The aggregate amount of the ad-                     circumstances surrounding the credit
                                                                     vances over the 24-month period would                     and if further information suggests in-
                                                                     be substantially greater than the max-                    quiry, he must investigate and be satis-
                                                                     imum loan value of the collateral as                      fied that the statement is truthful.
                                                                     prescribed in § 221.7 (the Supplement).                     (b) The lender is a subsidiary of a
                                                                       (d) In the opinion of the Board of                      holding company which also has an-
                                                                     Governors, a loan of the kind described                   other subsidiary which serves as under-
                                                                     would violate this part if it exceeded                    writer and investment advisor to var-
                                                                     the maximum loan value of the collat-                     ious mutual funds. The sole business of
                                                                     eral. The regulation applies to any                       the lender will be to make ‘‘non-pur-
                                                                     margin stock-secured loan for the pur-                    pose’’ consumer loans to shareholders
                                                                     pose of purchasing or carrying margin                     of the mutual funds, such loans to be
                                                                     stock (§ 221.3(a)). Although the pro-                     collateralized by the fund shares. Most
                                                                     posed loan would purport to be for liv-                   mutual funds shares are margin stock
                                                                     ing expenses, it seems quite clear, in                    for purposes of this part. Solicitation
                                                                     view of the relationship of the loan to                   and acceptance of these consumer
                                                                     the Employees’ Stock Plan, that its ac-                   loans will be done principally through
                                                                     tual purpose would be to enable the                       the mail and the lender wishes to ob-
                                                                     borrower to purchase AT&T stock,                          tain the required purpose statement by
                                                                     which is margin stock. At the end of                      mail rather than by a face-to-face
                                                                     the 24-month period the borrower                          interview. Personal interviews are not
                                                                     would acquire a certain number of                         practicable for the lender because
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                                                                     shares of that stock and would be in-                     shareholders of the funds are scattered
                                                                     debted to the lending bank in an                          throughout the country. In order to

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                                                                     Federal Reserve System                                                                          § 221.116

                                                                     provide the same safeguards inherent                      § 221.116 Bank loans to replenish
                                                                     in face-to-face interviews, the lender                        working capital used to purchase
                                                                     has developed certain procedures de-                          mutual fund shares.
                                                                     signed to satisfy the good faith accept-                    (a) In a situation considered by the
                                                                     ance requirement of this part.                            Board of Governors, a business concern
                                                                        (c) The purpose statement will be                      (X) proposed to purchase mutual fund
                                                                     supplemented with several additional                      shares, from time to time, with pro-
                                                                     questions relevant to the prospective                     ceeds from its accounts receivable,
                                                                     borrower’s investment activities such                     then pledge the shares with a bank in
                                                                     as purchases of any security within the                   order to secure working capital. The
                                                                     last 6 months, dollar amount, and obli-                   bank was prepared to lend amounts
                                                                     gations to purchase or pay for previous                   equal to 70 percent of the current value
                                                                     purchases; present plans to purchase                      of the shares as they were purchased by
                                                                     securities in the near future, participa-                 X. If the loans were subject to this
                                                                     tions in securities purchase plans, list                  part, only 50 percent of the current
                                                                     of unpaid debts, and present income                       market value of the shares could be
                                                                     level. Some questions have been modi-                     lent.
                                                                     fied to facilitate understanding but no                     (b) The immediate purpose of the
                                                                     questions have been deleted. If addi-                     loans would be to replenish X’s work-
                                                                     tional inquiry is indicated by the an-                    ing capital. However, as time went on,
                                                                     swers on the form, a loan officer of the                  X would be acquiring mutual fund
                                                                     lender will interview the borrower by                     shares at a cost that would exceed the
                                                                     telephone to make sure the loan is                        net earnings it would normally have
                                                                     ‘‘non-purpose’’. Whenever the loan ex-                    accumulated, and would become in-
                                                                                                                               debted to the lending bank in an
                                                                     ceeds the ‘‘maximum loan value’’ of
                                                                                                                               amount approximately 70 percent of
                                                                     the collateral for a regulated loan, a
                                                                                                                               the prices of said shares.
                                                                     telephone interview will be done as a
                                                                                                                                 (c) The Board held that the loans
                                                                     matter of course.
                                                                                                                               were for the purpose of purchasing the
                                                                        (d) One of the stated purposes of Reg-                 shares, and therefore subject to the
                                                                     ulation X (12 CFR part 224) was to pre-                   limitations prescribed by this part. As
                                                                     vent the infusion of unregulated credit                   pointed out in § 221.114 with respect to
                                                                     into the securities markets by bor-                       a similar program for putting a high
                                                                     rowers falsely certifying the purpose of                  proportion of cash income into stock,
                                                                     a loan. The Board is of the view that                     the borrowing against the margin
                                                                     the existence of Regulation X (12 CFR                     stock to meet needs for which the cash
                                                                     part 224), which makes the borrower                       would otherwise have been required, a
                                                                     liable for willful violations of the mar-                 contrary conclusion could largely de-
                                                                     gin regulations, will allow a lender sub-                 feat the basic purpose of the margin
                                                                     ject to this part to meet the good faith                  regulations.
                                                                     acceptance requirement of § 221.3(c)                        (d) Also considered was an alter-
                                                                     without a face-to-face interview if the                   native proposal under which X would
                                                                     lender adopts a program, such as the                      deposit proceeds from accounts receiv-
                                                                     one described in paragraph (c) of this                    able in a time account for 1 year, be-
                                                                     section, which requires additional de-                    fore using those funds to purchase mu-
                                                                     tailed information from the borrower                      tual fund shares. The Board held that
                                                                     and proper procedures are instituted to                   this procedure would not change the
                                                                     verify the truth of the information re-                   situation in any significant way. Once
                                                                     ceived. Lenders intending to embark on                    the arrangement was established, the
                                                                     a similar program should discuss pro-                     proceeds would be flowing into the
                                                                     posed plans with their district Federal                   time account at the same time that
                                                                     Reserve Bank. Lenders may have exist-                     similar amounts were released to pur-
                                                                     ing or future loans with the prospec-                     chase the shares, and over any ex-
                                                                     tive customers which could complicate                     tended period of time the result would
                                                                     the efforts to determine the true pur-                    be the same. Accordingly, the Board
                                                                                                                               concluded that bank loans made under
                                                                     pose of the loan.
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                                                                                                                               the alternative proposal would simi-
                                                                                                                               larly be subject to this part.

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                                                                     § 221.117                                                              12 CFR Ch. II (1–1–09 Edition)

                                                                     § 221.117 When bank in ‘‘good faith’’                       (b) The Board understood that any
                                                                          has not relied on stock as collateral.               officer or employee included under the
                                                                        (a) The Board has received questions                   corporation’s stock option plan who
                                                                     regarding the circumstances in which                      wished to exercise his option could ob-
                                                                     an extension or maintenance of credit                     tain a loan for the purchase price of
                                                                     will not be deemed to be ‘‘indirectly se-                 the stock by executing an unsecured
                                                                     cured’’ by stock as indicated by the                      note to the bank. The corporation
                                                                     phrase, ‘‘if the lender, in good faith,                   would issue to the bank a guaranty of
                                                                     has not relied upon the margin stock                      the loan and hold the purchased shares
                                                                     as collateral,’’ contained in paragraph                   as collateral to secure it against loss
                                                                     (2)(iv) of the definition of indirectly se-               on the guaranty. Stock of the corpora-
                                                                     cured in § 221.2.                                         tion is registered on a national securi-
                                                                        (b) In response, the Board noted that                  ties exchange and therefore qualifies as
                                                                     in amending this portion of the regula-                   ‘‘margin stock’’ under this part.
                                                                     tion in 1968 it was indicated that one of                   (c) A nonbank lender is subject to the
                                                                     the purposes of the change was to                         registration and other requirements of
                                                                     make clear that the definition of indi-                   this part if, in the ordinary course of
                                                                     rectly secured does not apply to certain
                                                                                                                               his business, he extends credit on col-
                                                                     routine negative covenants in loan
                                                                                                                               lateral that includes any margin stock
                                                                     agreements. Also, while the question of
                                                                                                                               in the amount of $200,000 or more in
                                                                     whether or not a bank has relied upon
                                                                     particular stock as collateral is nec-                    any calendar quarter, or has such cred-
                                                                     essarily a question of fact to be deter-                  it outstanding in any calendar quarter
                                                                     mined in each case in the light of all                    in the amount of $500,000 or more. The
                                                                     relevant circumstances, some indica-                      Board understood that the corporation
                                                                     tion that the bank had not relied upon                    in question had sufficient guaranties
                                                                     stock as collateral would seem to be af-                  outstanding during the applicable cal-
                                                                     forded by such circumstances as the                       endar quarter to meet the dollar
                                                                     fact that:                                                thresholds for registration.
                                                                        (1) The bank had obtained a reason-                      (d) In the Board’s judgment a person
                                                                     ably current financial statement of the                   who guarantees a loan, and thereby be-
                                                                     borrower and this statement could rea-                    comes liable for the amount of the loan
                                                                     sonably support the loan; and                             in the event the borrower should de-
                                                                        (2) The loan was not payable on de-                    fault, is lending his credit to the bor-
                                                                     mand or because of fluctuations in                        rower. In the circumstances described,
                                                                     market value of the stock, but instead                    such a lending of credit must be consid-
                                                                     was payable on one or more fixed ma-                      ered an ‘‘extension of credit’’ under
                                                                     turities which were typical of matu-                      this part in order to prevent cir-
                                                                     rities applied by the bank to loans oth-                  cumvention of the regulation’s limita-
                                                                     erwise similar except for not involving                   tion on the amount of credit that can
                                                                     any possible question of stock collat-                    be extended on the security of margin
                                                                     eral.                                                     stock.
                                                                     § 221.118 Bank arranging for extension                      (e) Under § 221.2, the term in the ordi-
                                                                          of credit by corporation.                            nary course of business means ‘‘occurring
                                                                                                                               or reasonably expected to occur in car-
                                                                        (a) The Board considered the ques-
                                                                     tions whether:                                            rying out or furthering any business
                                                                        (1) The guaranty by a corporation of                   purpose. * * *’’ In general, stock option
                                                                     an ‘‘unsecured’’ bank loan to exercise                    plans are designed to provide a com-
                                                                     an option to purchase stock of the cor-                   pany’s employees with a proprietary
                                                                     poration is an ‘‘extension of credit’’ for                interest in the company in the form of
                                                                     the purpose of this part;                                 ownership of the company’s stock.
                                                                        (2) Such a guaranty is given ‘‘in the                  Such plans increase the company’s
                                                                     ordinary course of business’’ of the cor-                 ability to attract and retain able per-
                                                                     poration, as defined in § 221.2; and                      sonnel and, accordingly, promote the
                                                                        (3) The bank involved took part in ar-                 interest of the company and its stock-
                                                                     ranging for such credit on better terms                   holders, while at the same time pro-
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                                                                     than it could extend under the provi-                     viding the company’s employees with
                                                                     sions of this part.                                       additional incentive to work toward

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                                                                     Federal Reserve System                                                                          § 221.120

                                                                     the company’s future success. An ar-                      lender, conforms with the requirements
                                                                     rangement whereby participating em-                       of the regulation, the fact that option
                                                                     ployees may finance the exercise of                       and credit are provided for in separate
                                                                     their options through an unsecured                        documents is immaterial. It should be
                                                                     bank loan guaranteed by the company,                      emphasized that the Board does not ex-
                                                                     thereby facilitating the employees’ ac-                   press any view on the preferability of
                                                                     quisition of company stock, is likewise                   qualified as opposed to nonqualified op-
                                                                     designed to promote the company’s in-                     tions; its role is merely to prevent ex-
                                                                     terest and is, therefore, in furtherance                  cessive credit in this area.
                                                                     of a business purpose.                                      (c) Section 221.4(a) provides that a
                                                                        (f) For the reasons indicated, the                     plan-lender may include a wholly-
                                                                     Board concluded that under the cir-                       owned subsidiary of the issuer of the
                                                                     cumstances described a guaranty by                        collateral (taking as a whole, corporate
                                                                     the corporation constitutes credit ex-                    groups including subsidiaries and affili-
                                                                     tended in the ordinary course of busi-                    ates). This clarifies the Board’s intent
                                                                     ness under this part, that the corpora-                   that, to qualify for special treatment
                                                                     tion is required to register pursuant to                  under that section, the lender must
                                                                     § 221.3(b), and that such guaranties may                  stand in a special employer-employee
                                                                     not be given in excess of the maximum                     relationship with the borrower, and a
                                                                     loan value of the collateral pledged to                   special relationship of issuer with re-
                                                                     secure the guaranty.                                      gard to the collateral. The fact that
                                                                        (g) Section 221.3(a)(3) provides that                  the Board, for convenience and prac-
                                                                     ‘‘no lender may arrange for the exten-                    tical reasons, permitted the employing
                                                                     sion or maintenance of any purpose                        corporation to act through a subsidiary
                                                                     credit, except upon the same terms and                    or other entity should not be inter-
                                                                     conditions on which the lender itself                     preted to mean the Board intended the
                                                                     may extend or maintain purpose credit                     lender to be other than an entity whose
                                                                     under this part’’. Since the Board con-                   overriding interests were coextensive
                                                                     cluded that the giving of a guaranty by                   with the issuer. An independent cor-
                                                                     the corporation to secure the loan de-                    poration, with independent interests
                                                                     scribed above constitutes an extension                    was never intended, regardless of form,
                                                                     of credit, and since the use of a guar-                   to be at the base of exempt stock-plan
                                                                     anty in the manner described could not                    lending.
                                                                     be effectuated without the concurrence
                                                                     of the bank involved, the Board further                   § 221.120 Allocation of stock collateral
                                                                     concluded that the bank took part in                          to purpose and nonpurpose credits
                                                                     ‘‘arranging’’ for the extension of credit                     to same customer.
                                                                     in excess of the maximum loan value of                       (a) A bank proposes to extend two
                                                                     the margin stock pledged to secure the                    credits (Credits A and B) to its cus-
                                                                     guaranties.                                               tomer. Although the two credits are
                                                                     § 221.119 Applicability of plan-lender                    proposed to be extended at the same
                                                                          provisions to financing of stock op-                 time, each would be evidenced by a sep-
                                                                          tions and stock purchase rights                      arate agreement. Credit A would be ex-
                                                                          qualified or restricted under Inter-                 tended for the purpose of providing the
                                                                          nal Revenue Code.                                    customer with working capital (non-
                                                                        (a) The Board has been asked wheth-                    purpose credit), collateralized by mar-
                                                                     er the plan-lender provisions of                          gin stock. Credit B would be extended
                                                                     § 221.4(a) and (b) were intended to apply                 for the purpose of purchasing or car-
                                                                     to the financing of stock options re-                     rying margin stock (purpose credit),
                                                                     stricted or qualified under the Internal                  without collateral or on collateral
                                                                     Revenue Code where such options or                        other than stock.
                                                                     the option plan do not provide for such                      (b) This part allows a bank to extend
                                                                     financing.                                                purpose and nonpurpose credits simul-
                                                                        (b) It is the Board’s experience that                  taneously or successively to the same
                                                                     in some nonqualified plans, particu-                      customer. This rule is expressed in
                                                                     larly stock purchase plans, the credit                    § 221.3(d)(4) which provides in substance
                                                                     arrangement is distinct from the plan.                    that for any nonpurpose credit to the
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                                                                     So long as the credit extended, and par-                  same customer, the lender shall in
                                                                     ticularly, the character of the plan-                     good faith require as much collateral

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                                                                     § 221.121                                                              12 CFR Ch. II (1–1–09 Edition)

                                                                     not already identified to the cus-                        credit is secured, directly or indirectly,
                                                                     tomer’s purpose credit as the lender                      by any margin security, the creditor
                                                                     would require if it held neither the pur-                 must register and the credit must con-
                                                                     pose loan nor the identified collateral.                  form with either the regular margin re-
                                                                     This rule in § 221.3(d)(4) also takes into                quirements of § 221.3(a) or the special
                                                                     account that the lender would not nec-                    ‘‘plan-lender’’ provisions set forth in
                                                                     essarily be required to hold collateral                   § 221.4, whichever is applicable. This as-
                                                                     for the nonpurpose credit if, consistent                  sumes, of course, that the amount of
                                                                     with good faith banking practices, it                     credit extended is such that the cred-
                                                                     would normally make this kind of non-                     itor is subject to the registration re-
                                                                     purpose loan without collateral.                          quirements of § 221.3(b).
                                                                        (c) The Board views § 221.3(d)(4), when
                                                                     read in conjunction with § 221.3(c) and                   § 221.122 Applicability of margin re-
                                                                     (f), as requiring that whenever a lender                      quirements to credit in connection
                                                                     extends two credits to the same cus-                          with Insurance Premium Funding
                                                                                                                                   Programs.
                                                                     tomer, one a purpose credit and the
                                                                     other nonpurpose, any margin stock                          (a) The Board has been asked numer-
                                                                     collateral must first be identified with                  ous questions regarding purpose credit
                                                                     and attributed to the purpose loan by                     in connection with insurance premium
                                                                     taking into account the maximum loan                      funding programs. The inquiries are in-
                                                                     value of such collateral as prescribed                    cluded in a set of guidelines in the for-
                                                                     in § 221.7 (the Supplement).                              mat of questions and answers. (The
                                                                        (d) The Board is further of the opin-                  guidelines are available pursuant to
                                                                     ion that under the foregoing cir-                         the Board’s Rules Regarding Avail-
                                                                     cumstances Credit B would be indi-                        ability of Information, 12 CFR part
                                                                     rectly secured by stock, despite the                      261.) A glossary of terms customarily
                                                                     fact that there would be separate loan                    used in connection with insurance pre-
                                                                     agreements for both credits. This con-                    mium funding credit activities is in-
                                                                     clusion flows from the circumstance                       cluded in the guidelines. Under a typ-
                                                                     that the lender would hold in its pos-                    ical insurance premium funding pro-
                                                                     session stock collateral to which it                      gram, a borrower acquires mutual fund
                                                                     would have access with respect to Cred-                   shares for cash, or takes fund shares
                                                                     it B, despite any ostensible allocation                   which he already owns, and then uses
                                                                     of such collateral to Credit A.                           the loan value (currently 50 percent as
                                                                                                                               set by the Board) to buy insurance.
                                                                     § 221.121 Extension of credit in certain                  Usually, a funding company (the
                                                                         stock option and stock purchase                       issuer) will sell both the fund shares
                                                                         plans.                                                and the insurance through either inde-
                                                                       Questions have been raised as to                        pendent broker/dealers or subsidiaries
                                                                     whether certain stock option and stock                    or affiliates of the issuer. A typical
                                                                     purchase plans involve extensions of                      plan may run for 10 or 15 years with an-
                                                                     credit subject to this part when the                      nual insurance premiums due. To illus-
                                                                     participant is free to cancel his partici-                trate, assuming an annual insurance
                                                                     pation at any time prior to full pay-                     premium of $300, the participant is re-
                                                                     ment, but in the event of cancellation                    quired to put up mutual fund shares
                                                                     the participant remains liable for dam-                   equivalent to 250 percent of the pre-
                                                                     ages. It thus appears that the partici-                   mium or $600 ($600 × 50 percent loan
                                                                     pant has the opportunity to gain and                      value equals $300 the amount of the in-
                                                                     bears the risk of loss from the time the                  surance premium which is also the
                                                                     transaction is executed and payment is                    amount of the credit extended).
                                                                     deferred. In some cases brought to the                      (b) The guidelines referenced in para-
                                                                     Board’s attention damages are related                     graph (a) of this section also:
                                                                     to the market price of the stock, but in                    (1) Clarify an earlier 1969 Board inter-
                                                                     others, there may be no such relation-                    pretation to show that the public offer-
                                                                     ship. In either of these circumstances,                   ing price of mutual fund shares (which
                                                                     it is the Board’s view that such plans                    includes the front load, or sales com-
                                                                     involve extensions of credit. Accord-                     mission) may be used as a measure of
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                                                                     ingly, where the security being pur-                      their current market value when the
                                                                     chased is a margin security and the                       shares serve as collateral on a purpose

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                                                                     Federal Reserve System                                                                          § 221.124

                                                                     credit throughout the day of the pur-                     which, by their terms, would be unse-
                                                                     chase of the fund shares; and                             cured. If the tender offer is successful,
                                                                       (2) Relax a 1965 Board position in con-                 the shell corporation would seek to
                                                                     nection with accepting purpose state-                     merge with Company B. However, the
                                                                     ments by mail.                                            tender offer seeks to acquire fewer
                                                                       (c) It is the Board’s view that when it                 shares of Company B than is necessary
                                                                     is clearly established that a purpose                     under state law to effect a short form
                                                                     statement supports a purpose credit                       merger with Company B, which could
                                                                     then such statement executed by the                       be consummated without the approval
                                                                     borrower may be accepted by mail, pro-                    of shareholders or the board of direc-
                                                                     vided it is received and also executed                    tors of Company B.
                                                                     by the lender before the credit is ex-                       (c) The purchase of the debt securi-
                                                                     tended.                                                   ties issued by the shell corporation to
                                                                                                                               finance the acquisition clearly involves
                                                                     § 221.123 Combined credit for exer-                       purpose credit (as defined in § 221.2). In
                                                                         cising employee stock options and                     addition, such debt securities would be
                                                                         paying income taxes incurred as a                     purchased only by sophisticated inves-
                                                                         result of such exercise.
                                                                                                                               tors in very large minimum denomina-
                                                                        (a) Section 221.4(a) and (b), which                    tions, so that the purchasers may be
                                                                     provides special treatment for credit                     lenders for purposes of this part. See
                                                                     extended under employee stock option                      § 221.3(b). Since the debt securities con-
                                                                     plans, was designed to encourage their                    tain no direct security agreement in-
                                                                     use in recognition of their value in giv-                 volving the margin stock, applicability
                                                                     ing an employee a proprietary interest                    of the lending restrictions of this part
                                                                     in the business. Taking a position that                   turns on whether the arrangement con-
                                                                     might discourage the exercise of op-                      stitutes an extension of credit that is
                                                                     tions because of tax complications                        secured indirectly by margin stock.
                                                                     would conflict with the purpose of                           (d) As the Board has recognized, indi-
                                                                     § 221.4(a) and (b).                                       rect security can encompass a wide va-
                                                                        (b) Accordingly, the Board has con-                    riety of arrangements between lenders
                                                                     cluded that the combined loans for the                    and borrowers with respect to margin
                                                                     exercise of the option and the payment                    stock collateral that serve to protect
                                                                     of the taxes in connection therewith                      the lenders’ interest in assuring that a
                                                                     under plans complying with § 221.4(a)(2)                  credit is repaid where the lenders do
                                                                     may be regarded as purpose credit with-                   not have a conventional direct security
                                                                     in the meaning of § 221.2.                                interest in the collateral. See § 221.124.
                                                                                                                               However, credit is not ‘‘indirectly se-
                                                                     § 221.124 Purchase of debt securities                     cured’’ by margin stock if the lender in
                                                                         to finance corporate takeovers.                       good faith has not relied on the margin
                                                                        (a) Petitions have been filed with the                 stock as collateral extending or main-
                                                                     Board raising questions as to whether                     taining credit. See § 221.2.
                                                                     the margin requirements in this part                         (e) The Board is of the view that, in
                                                                     apply to two types of corporate acqui-                    the situation described in paragraph (b)
                                                                     sitions in which debt securities are                      of this section, the debt securities
                                                                     issued to finance the acquisition of                      would be presumed to be indirectly se-
                                                                     margin stock of a target company.                         cured by the margin stock to be ac-
                                                                        (b) In the first situation, the acquir-                quired by the shell acquisition vehicle.
                                                                     ing company, Company A, controls a                        The staff has previously expressed the
                                                                     shell corporation that would make a                       view that nominally unsecured credit
                                                                     tender offer for the stock of Company                     extended to an investment company, a
                                                                     B, which is margin stock (as defined in                   substantial portion of whose assets
                                                                     § 221.2). The shell corporation has vir-                  consist of margin stock, is indirectly
                                                                     tually no operations, has no significant                  secured by the margin stock. See Fed-
                                                                     business function other than to acquire                   eral Reserve Regulatory Service 5–
                                                                     and hold the stock of Company B, and                      917.12. (See 12 CFR 261.10(f) for informa-
                                                                     has substantially no assets other than                    tion on how to obtain Board publica-
                                                                     the margin stock to be acquired. To fi-                   tions.) This opinion notes that the in-
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                                                                     nance the tender offer, the shell cor-                    vestment company has substantially
                                                                     poration would issue debt securities                      no assets other than margin stock to

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                                                                     § 221.124                                                              12 CFR Ch. II (1–1–09 Edition)

                                                                     support indebtedness and thus credit                      presumed to be relying on the assets of
                                                                     could not be extended to such a com-                      the target for repayment.
                                                                     pany in good faith without reliance on                      (g) In addition, the Board is of the
                                                                     the margin stock as collateral.                           view that the debt securities described
                                                                       (f) The Board believes that this ra-                    in paragraph (b) of this section are in-
                                                                     tionale applies to the debt securities                    directly secured by margin stock be-
                                                                     issued by the shell corporation de-                       cause there is a practical restriction on
                                                                     scribed in paragraph (b) of this section.                 the ability of the shell corporation to
                                                                     At the time the debt securities are                       dispose of the margin stock of the tar-
                                                                     issued, the shell corporation has sub-                    get company. Indirectly secured is de-
                                                                     stantially no assets to support the
                                                                                                                               fined in § 221.2 to include any arrange-
                                                                     credit other than the margin stock
                                                                                                                               ment under which the customer’s right
                                                                     that it has acquired or intends to ac-
                                                                     quire and has no significant business                     or ability to sell, pledge, or otherwise
                                                                     function other than to hold the stock                     dispose of margin stock owned by the
                                                                     of the target company in order to fa-                     customer is in any way restricted while
                                                                     cilitate the acquisition. Moreover, it is                 the credit remains outstanding. The
                                                                     possible that the shell may hold the                      purchasers of the debt securities issued
                                                                     margin stock for a significant and in-                    by a shell corporation to finance a
                                                                     definite period of time, if defensive                     takeover attempt clearly understand
                                                                     measures by the target prevent con-                       that the shell corporation intends to
                                                                     summation of the acquisition. Because                     acquire the margin stock of the target
                                                                     of the difficulty in predicting the out-                  company in order to effect the acquisi-
                                                                     come of a contested takeover at the                       tion of that company. This under-
                                                                     time that credit is committed to the                      standing represents a practical restric-
                                                                     shell corporation, the Board believes                     tion on the ability of the shell corpora-
                                                                     that the purchasers of the debt securi-                   tion to dispose of the target’s margin
                                                                     ties could not, in good faith, lend with-                 stock and to acquire other assets with
                                                                     out reliance on the margin stock as                       the proceeds of the credit.
                                                                     collateral. The presumption that the                        (h) In the second situation, Company
                                                                     debt securities are indirectly secured                    C, an operating company with substan-
                                                                     by margin stock would not apply if                        tial assets or cash flow, seeks to ac-
                                                                     there is specific evidence that lenders
                                                                                                                               quire Company D, which is signifi-
                                                                     could in good faith rely on assets other
                                                                                                                               cantly larger than Company C. Com-
                                                                     than margin stock as collateral, such
                                                                                                                               pany C establishes a shell corporation
                                                                     as a guaranty of the debt securities by
                                                                     the shell corporation’s parent company                    that together with Company C makes a
                                                                     or another company that has substan-                      tender offer for the shares of Company
                                                                     tial non-margin stock assets or cash                      D, which is margin stock. To finance
                                                                     flow. This presumption would also not                     the tender offer, the shell corporation
                                                                     apply if there is a merger agreement                      would obtain a bank loan that complies
                                                                     between the acquiring and target com-                     with the margin lending restrictions of
                                                                     panies entered into at the time the                       this part and Company C would issue
                                                                     commitment is made to purchase the                        debt securities that would not be di-
                                                                     debt securities or in any event before                    rectly secured by any margin stock.
                                                                     loan funds are advanced. In addition,                     The Board is of the opinion that these
                                                                     the presumption would not apply if the                    debt securities should not be presumed
                                                                     obligation of the purchasers of the debt                  to be indirectly secured by the margin
                                                                     securities to advance funds to the shell                  stock of Company D, since, as an oper-
                                                                     corporation is contingent on the shell’s                  ating business, Company C has sub-
                                                                     acquisition of the minimum number of                      stantial assets or cash flow without re-
                                                                     shares necessary under applicable state                   gard to the margin stock of Company
                                                                     law to effect a merger between the ac-                    D. Any presumption would not be ap-
                                                                     quiring and target companies without                      propriate because the purchasers of the
                                                                     the approval of either the shareholders                   debt securities may be relying on as-
                                                                     or directors of the target company. In                    sets other than margin stock of Com-
                                                                     these two situations where the merger
                                                                                                                               pany D for repayment of the credit.
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                                                                     will take place promptly, the Board be-
                                                                     lieves the lenders could reasonably be

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                                                                     Federal Reserve System                                                                               § 222.1

                                                                     § 221.125      Credit to brokers and deal-                       Subpart D—Medical Information
                                                                         ers.
                                                                                                                                222.30 Obtaining or using medical informa-
                                                                        (a) The National Securities Markets                         tion in connection with a determination
                                                                     Improvement Act of 1996 (Pub. L. 104–                          of eligibility for credit.
                                                                     290, 110 Stat. 3416) restricts the Board’s                 222.31 Limits on redisclosure of informa-
                                                                     margin authority by repealing section                          tion.
                                                                                                                                222.32 Sharing medical information with af-
                                                                     8(a) of the Securities Exchange Act of                         filiates.
                                                                     1934 (the Exchange Act) and amending
                                                                     section 7 of the Exchange Act (15                                      Subparts E–H [Reserved]
                                                                     U.S.C. 78g) to exclude the borrowing by
                                                                     a member of a national securities ex-                      Subpart I—Duties of Users of Consumer Re-
                                                                     change or a registered broker or dealer                       ports Regarding Address Discrep-
                                                                     ‘‘a substantial portion of whose busi-                        ancies and Records Disposal
                                                                     ness consists of transactions with per-
                                                                                                                                222.80–222.81 [Reserved]
                                                                     sons other than brokers or dealers’’ and                   222.82 Duties of users regarding address dis-
                                                                     borrowing by a member of a national                            crepancies.
                                                                     securities exchange or a registered                        222.83 Disposal of consumer information.
                                                                     broker or dealer to finance its activi-
                                                                     ties as a market maker or an under-                             Subpart J—Identity Theft Red Flags
                                                                     writer. Notwithstanding this exclusion,                    222.90 Duties regarding the detection, pre-
                                                                     the Board may impose such rules and                            vention, and mitigation of identity theft.
                                                                     regulations if it determines they are                      222.91 Duties of card issuers regarding
                                                                     ‘‘necessary or appropriate in the public                       changes of address.
                                                                     interest or for the protection of inves-                   APPENDIX A TO PART 222 [RESERVED]
                                                                     tors.’’                                                    APPENDIX B TO PART 222—MODEL NOTICES OF
                                                                        (b) The Board has not found that it is                      FURNISHING NEGATIVE INFORMATION
                                                                     necessary or appropriate in the public                     APPENDIX C TO PART 222—MODEL FORMS FOR
                                                                                                                                    OPT-OUT NOTICES
                                                                     interest or for the protection of inves-                   APPENDICES D–I TO PART 222 [RESERVED]
                                                                     tors to impose rules and regulations re-                   APPENDIX J TO PART 222— INTERAGENCY
                                                                     garding loans to brokers and dealers                           GUIDELINES ON IDENTITY THEFT DETEC-
                                                                     covered by the National Securities                             TION, PREVENTION, AND MITIGATION
                                                                     Markets Improvement Act of 1996.                             AUTHORITY: 15 U.S.C. 1681a, 1681b, 1681c,
                                                                                                                                1681m, 1681s, 1681s-2, 1681s-3, 1681t, and 1681w;
                                                                     PART 222—FAIR CREDIT REPORTING                             Secs. 3 and 214, Pub. L. 108–159, 117 Stat. 1952.
                                                                             (REGULATION V)                                      SOURCE: Reg. V, 68 FR 74469, Dec. 24, 2003,
                                                                                                                                unless otherwise noted.
                                                                                Subpart A—General Provisions
                                                                                                                                   Subpart A—General Provisions
                                                                     Sec.
                                                                     222.1   Purpose, scope, and effective dates.               § 222.1 Purpose, scope, and effective
                                                                     222.2   Examples.                                               dates.
                                                                     222.3   Definitions.
                                                                                                                                   (a) Purpose. The purpose of this part
                                                                                    Subpart B [Reserved]                        is to implement the Fair Credit Re-
                                                                                                                                porting Act. This part generally ap-
                                                                                Subpart C—Affiliate Marketing                   plies to persons that obtain and use in-
                                                                                                                                formation about consumers to deter-
                                                                     222.20 Coverage and definitions.                           mine the consumer’s eligibility for
                                                                     222.21 Affiliate marketing opt-out and ex-                 products, services, or employment,
                                                                         ceptions.                                              share such information among affili-
                                                                     222.22 Scope and duration of opt-out.
                                                                                                                                ates, and furnish information to con-
                                                                     222.23 Contents of opt-out notice; consoli-
                                                                         dated and equivalent notices.
                                                                                                                                sumer reporting agencies.
                                                                     222.24 Reasonable opportunity to opt out.
                                                                                                                                   (b) Scope. (1) [Reserved]
                                                                     222.25 Reasonable and simple methods of                       (2) Institutions covered. (i) Except as
                                                                         opting out.                                            otherwise provided in this part, the
                                                                     222.26 Delivery of opt-out notices.                        regulations in this part apply to banks
                                                                     222.27 Renewal of opt-out.                                 that are members of the Federal Re-
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                                                                     222.28 Effective date, compliance date, and                serve System (other than national
                                                                         prospective application.                               banks) and their respective operating

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                                                                     § 222.1                                                                12 CFR Ch. II (1–1–09 Edition)

                                                                     subsidiaries that are not functionally                      (iv) Section 313(a), concerning action
                                                                     regulated within the meaning of sec-                      regarding complaints;
                                                                     tion 5(c)(5) of the Bank Holding Com-                       (v) Section 611, concerning commu-
                                                                     pany Act, as amended (12 U.S.C.                           nications for certain employee inves-
                                                                     1844(c)(5)), branches and Agencies of                     tigations; and
                                                                     foreign banks (other than Federal                           (vi) Section 811, concerning clerical
                                                                     branches, Federal Agencies, and in-                       amendments.
                                                                     sured State branches of foreign banks),                     (3) Provisions effective December 1,
                                                                     commercial lending companies owned
                                                                                                                               2004—(i) Section 112, concerning fraud
                                                                     or controlled by foreign banks, organi-
                                                                                                                               alerts and active duty alerts;
                                                                     zations operating under section 25 or
                                                                     25A of the Federal Reserve Act (12                          (ii) Section 114, concerning proce-
                                                                     U.S.C. 601 et seq., and 611 et seq.), and                 dures for the identification of possible
                                                                     bank holding companies and affiliates                     instances of identity theft;
                                                                     of such holding companies, but do not                       (iii) Section 115, concerning trunca-
                                                                     apply to affiliates of bank holding com-                  tion of the social security number in a
                                                                     panies that are depository institutions                   consumer report;
                                                                     regulated by another federal banking                        (iv) Section 151(a)(1), concerning the
                                                                     agency or to consumer reporting agen-                     summary of rights of identity theft
                                                                     cies.                                                     victims;
                                                                        (ii) For purposes of appendix B to                       (v) Section 152, concerning blocking
                                                                     this part, financial institutions as de-                  of information resulting from identity
                                                                     fined in section 509 of the Gramm-                        theft;
                                                                     Leach-Bliley Act (12 U.S.C. 6809), may                      (vi) Section 153, concerning the co-
                                                                     use the model notices in appendix B to                    ordination of identity theft complaint
                                                                     this part to comply with the notice re-                   investigations;
                                                                     quirement in section 623(a)(7) of the
                                                                                                                                 (vii) Section 154, concerning the pre-
                                                                     Fair Credit Reporting Act (15 U.S.C.
                                                                     1681s–2(a)(7)).                                           vention of repollution of consumer re-
                                                                        (c) Effective dates. The applicable pro-               ports;
                                                                     visions of the Fair and Accurate Credit                     (viii) Section 155, concerning notice
                                                                     Transactions Act of 2003 (FACT Act),                      by debt collectors with respect to
                                                                     Pub. L. 108–159, 117 Stat. 1952, shall be                 fraudulent information;
                                                                     effective in accordance with the fol-                       (ix) Section 211(c), concerning a sum-
                                                                     lowing schedule:                                          mary of rights of consumers;
                                                                        (1) Provisions effective December 31,                    (x) Section 212(a)–(d), concerning the
                                                                     2003—(i) Sections 151(a)(2), 212(e), 214(c),              disclosure of credit scores;
                                                                     311(b), and 711, concerning the relation                    (xi) Section 213(c), concerning en-
                                                                     to state laws; and                                        hanced disclosure of the means avail-
                                                                        (ii) Each of the provisions of the                     able to opt out of prescreened lists;
                                                                     FACT Act that authorizes an agency to                       (xii) Section 217(a), concerning the
                                                                     issue a regulation or to take other ac-                   duty to provide notice to a consumer;
                                                                     tion to implement the applicable provi-                     (xiii) Section 311(a), concerning the
                                                                     sion of the FACT Act or the applicable
                                                                                                                               risk-based pricing notice;
                                                                     provision of the Fair Credit Reporting
                                                                     Act, as amended by the FACT Act, but                        (xiv) Section 312(a)–(c), concerning
                                                                     only with respect to that agency’s au-                    procedures to enhance the accuracy
                                                                     thority to propose and adopt the imple-                   and integrity of information furnished
                                                                     menting regulation or to take such                        to consumer reporting agencies;
                                                                     other action.                                               (xv) Section 314, concerning improved
                                                                        (2) Provisions effective March 31, 2004—               disclosure of the results of reinvestiga-
                                                                     (i) Section 111, concerning the defini-                   tion;
                                                                     tions;                                                      (xvi) Section 315, concerning recon-
                                                                        (ii) Section 156, concerning the stat-                 ciling addresses;
                                                                     ute of limitations;                                         (xvii) Section 316, concerning notice
                                                                        (iii) Sections 312(d), (e), and (f), con-              of dispute through reseller; and
                                                                     cerning the furnisher liability excep-
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                                                                     tion, liability and enforcement, and
                                                                     rule of construction, respectively;

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                                                                     Federal Reserve System                                                                              § 222.20

                                                                       (xviii) Section 317, concerning the                       (j) [Reserved]
                                                                     duty to conduct a reasonable reinves-                       (k) Medical information means:
                                                                     tigation.                                                   (1) Information or data, whether oral
                                                                     [68 FR 74469, Dec. 24, 2003, as amended at 69
                                                                                                                               or recorded, in any form or medium,
                                                                     FR 6530, Feb. 11, 2004; 69 FR 33284, June 15,             created by or derived from a health
                                                                     2004; 69 FR 77618, Dec. 28, 2004; 72 FR 62954,            care provider or the consumer, that re-
                                                                     Nov. 7, 2007]                                             lates to:
                                                                                                                                 (i) The past, present, or future phys-
                                                                     § 222.2 Examples.                                         ical, mental, or behavioral health or
                                                                        The examples in this part are not ex-                  condition of an individual;
                                                                     clusive. Compliance with an example,                        (ii) The provision of health care to an
                                                                     to the extent applicable, constitutes                     individual; or
                                                                     compliance with this part. Examples in                      (iii) The payment for the provision of
                                                                     a paragraph illustrate only the issue                     health care to an individual.
                                                                     described in the paragraph and do not                       (2) The term does not include:
                                                                     illustrate any other issue that may                         (i) The age or gender of a consumer;
                                                                     arise in this part.                                         (ii) Demographic information about
                                                                     [70 FR 70678, Nov. 22, 2005]
                                                                                                                               the consumer, including a consumer’s
                                                                                                                               residence address or e-mail address;
                                                                     § 222.3 Definitions.                                        (iii) Any other information about a
                                                                                                                               consumer that does not relate to the
                                                                        For purposes of this part, unless ex-
                                                                                                                               physical, mental, or behavioral health
                                                                     plicitly stated otherwise:
                                                                                                                               or condition of a consumer, including
                                                                        (a) Act means the Fair Credit Report-
                                                                                                                               the existence or value of any insurance
                                                                     ing Act (15 U.S.C. 1681 et seq.).
                                                                        (b) Affiliate means any company that                   policy; or
                                                                     is related by common ownership or                           (iv) Information that does not iden-
                                                                     common corporate control with an-                         tify a specific consumer.
                                                                     other company.                                              (l) Person means any individual, part-
                                                                        (c) [Reserved]                                         nership, corporation, trust, estate co-
                                                                        (d) Company means any corporation,                     operative, association, government or
                                                                     limited liability company, business                       governmental subdivision or agency, or
                                                                     trust, general or limited partnership,                    other entity.
                                                                     association, or similar organization.                     [Reg. V, 70 FR 70678, Nov. 22, 2005, as amend-
                                                                        (e) Consumer means an individual.                      ed at 72 FR 63756, Nov. 9, 2007]
                                                                        (f)–(h) [Reserved]
                                                                        (i) Common ownership or common cor-                                Subpart B [Reserved]
                                                                     porate control means a relationship be-
                                                                     tween two companies under which:
                                                                        (1) One company has, with respect to                      Subpart C—Affiliate Marketing
                                                                     the other company:
                                                                        (i) Ownership, control, or power to                     SOURCE: Reg. V, 72 FR 62955, Nov. 7, 2007,
                                                                     vote 25 percent or more of the out-                       unless otherwise noted.
                                                                     standing shares of any class of voting
                                                                                                                               § 222.20 Coverage and definitions.
                                                                     security of a company, directly or indi-
                                                                     rectly, or acting through one or more                        (a) Coverage. Subpart C of this part
                                                                     other persons;                                            applies to member banks of the Federal
                                                                        (ii) Control in any manner over the                    Reserve System (other than national
                                                                     election of a majority of the directors,                  banks) and their respective operating
                                                                     trustees, or general partners (or indi-                   subsidiaries that are not functionally
                                                                     viduals exercising similar functions) of                  regulated within the meaning of sec-
                                                                     a company; or                                             tion 5(c)(5) of the Bank Holding Com-
                                                                        (iii) The power to exercise, directly                  pany Act, as amended (12 U.S.C.
                                                                     or indirectly, a controlling influence                    1844(c)(5)), branches and Agencies of
                                                                     over the management or policies of a                      foreign banks (other than Federal
                                                                     company, as the Board determines; or                      branches, Federal Agencies, and in-
                                                                        (2) Any other person has, with re-                     sured State branches of foreign banks),
                                                                     spect to both companies, a relationship                   commercial lending companies owned
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                                                                     described       in  paragraphs       (i)(1)(i)            or controlled by foreign banks, and or-
                                                                     through (i)(1)(iii) of this section.                      ganizations operating under section 25

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                                                                     § 222.20                                                               12 CFR Ch. II (1–1–09 Edition)

                                                                     or 25A of the Federal Reserve Act (12                       (ii) Examples of pre-existing business re-
                                                                     U.S.C. 601 et seq., and 611 et seq.).                     lationships. (A) If a consumer has a
                                                                        (b) Definitions. For purposes of this                  time deposit account, such as a certifi-
                                                                     subpart:                                                  cate of deposit, at a depository institu-
                                                                        (1) Clear and conspicuous. The term                    tion that is currently in force, the de-
                                                                     ‘‘clear and conspicuous’’ means reason-                   pository institution has a pre-existing
                                                                     ably understandable and designed to                       business relationship with the con-
                                                                     call attention to the nature and signifi-                 sumer and can use eligibility informa-
                                                                     cance of the information presented.                       tion it receives from its affiliates to
                                                                        (2) Concise—(i) In general. The term                   make solicitations to the consumer
                                                                     ‘‘concise’’ means a reasonably brief ex-                  about its products or services.
                                                                     pression or statement.                                      (B) If a consumer obtained a certifi-
                                                                        (ii) Combination with other required                   cate of deposit from a depository insti-
                                                                     disclosures. A notice required by this                    tution, but did not renew the certifi-
                                                                     subpart may be concise even if it is                      cate at maturity, the depository insti-
                                                                     combined with other disclosures re-                       tution has a pre-existing business rela-
                                                                     quired or authorized by federal or state                  tionship with the consumer and can
                                                                     law.                                                      use eligibility information it receives
                                                                        (3) Eligibility information. The term                  from its affiliates to make solicita-
                                                                     ‘‘eligibility information’’ means any                     tions to the consumer about its prod-
                                                                     information the communication of                          ucts or services for 18 months after the
                                                                     which would be a consumer report if                       date of maturity of the certificate of
                                                                     the exclusions from the definition of                     deposit.
                                                                     ‘‘consumer        report’’    in      section               (C) If a consumer obtains a mortgage,
                                                                     603(d)(2)(A) of the Act did not apply.                    the mortgage lender has a pre-existing
                                                                     Eligibility information does not in-                      business relationship with the con-
                                                                     clude aggregate or blind data that does                   sumer. If the mortgage lender sells the
                                                                     not contain personal identifiers such as                  consumer’s entire loan to an investor,
                                                                     account numbers, names, or addresses.                     the mortgage lender has a pre-existing
                                                                        (4) Pre-existing business relationship—                business relationship with the con-
                                                                     (i) In general. The term ‘‘pre-existing                   sumer and can use eligibility informa-
                                                                     business relationship’’ means a rela-                     tion it receives from its affiliates to
                                                                     tionship between a person, or a per-                      make solicitations to the consumer
                                                                     son’s licensed agent, and a consumer                      about its products or services for 18
                                                                     based on—                                                 months after the date it sells the loan,
                                                                        (A) A financial contract between the                   and the investor has a pre-existing
                                                                     person and the consumer which is in                       business relationship with the con-
                                                                     force on the date on which the con-                       sumer upon purchasing the loan. If,
                                                                     sumer is sent a solicitation covered by                   however, the mortgage lender sells a
                                                                     this subpart;                                             fractional interest in the consumer’s
                                                                        (B) The purchase, rental, or lease by                  loan to an investor but also retains an
                                                                     the consumer of the person’s goods or                     ownership interest in the loan, the
                                                                     services, or a financial transaction (in-                 mortgage lender continues to have a
                                                                     cluding holding an active account or a                    pre-existing business relationship with
                                                                     policy in force or having another con-                    the consumer, but the investor does
                                                                     tinuing relationship) between the con-                    not have a pre-existing business rela-
                                                                     sumer and the person, during the 18-                      tionship with the consumer. If the
                                                                     month period immediately preceding                        mortgage lender retains ownership of
                                                                     the date on which the consumer is sent                    the loan, but sells ownership of the
                                                                     a solicitation covered by this subpart;                   servicing rights to the consumer’s
                                                                     or                                                        loan, the mortgage lender continues to
                                                                        (C) An inquiry or application by the                   have a pre-existing business relation-
                                                                     consumer regarding a product or serv-                     ship with the consumer. The purchaser
                                                                     ice offered by that person during the                     of the servicing rights also has a pre-
                                                                     three-month period immediately pre-                       existing business relationship with the
                                                                     ceding the date on which the consumer                     consumer as of the date it purchases
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                                                                     is sent a solicitation covered by this                    ownership of the servicing rights, but
                                                                     subpart.                                                  only if it collects payments from or

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                                                                     Federal Reserve System                                                                              § 222.20

                                                                     otherwise deals directly with the con-                    receives from its affiliated depository
                                                                     sumer on a continuing basis.                              institution to make solicitations to the
                                                                        (D) If a consumer applies to a deposi-                 consumer about its products or serv-
                                                                     tory institution for a product or serv-                   ices for three months after the date of
                                                                     ice that it offers, but does not obtain a                 the inquiry.
                                                                     product or service from or enter into a                      (iii) Examples where no pre-existing
                                                                     financial contract or transaction with                    business relationship is created. (A) If a
                                                                     the institution, the depository institu-                  consumer makes a telephone call to a
                                                                     tion has a pre-existing business rela-                    centralized call center for a group of
                                                                     tionship with the consumer and can                        affiliated companies to inquire about
                                                                     therefore use eligibility information it                  the consumer’s existing account at a
                                                                     receives from an affiliate to make so-                    depository institution, the call does
                                                                     licitations to the consumer about its                     not constitute an inquiry to any affil-
                                                                     products or services for three months                     iate other than the depository institu-
                                                                     after the date of the application.                        tion that holds the consumer’s account
                                                                        (E) If a consumer makes a telephone                    and does not establish a pre-existing
                                                                     inquiry to a depository institution                       business relationship between the con-
                                                                     about its products or services and pro-                   sumer and any affiliate of the account-
                                                                     vides contact information to the insti-                   holding depository institution.
                                                                     tution, but does not obtain a product                        (B) If a consumer who has a deposit
                                                                     or service from or enter into a finan-                    account with a depository institution
                                                                     cial contract or transaction with the                     makes a telephone call to an affiliate
                                                                     institution, the depository institution                   of the institution to ask about the af-
                                                                     has a pre-existing business relationship                  filiate’s retail locations and hours, but
                                                                     with the consumer and can therefore                       does not make an inquiry about the af-
                                                                     use eligibility information it receives                   filiate’s products or services, the call
                                                                     from an affiliate to make solicitations                   does not constitute an inquiry and does
                                                                     to the consumer about its products or                     not establish a pre-existing business re-
                                                                     services for three months after the                       lationship between the consumer and
                                                                     date of the inquiry.                                      the affiliate. Also, the affiliate’s cap-
                                                                        (F) If a consumer makes an inquiry                     ture of the consumer’s telephone num-
                                                                     to a depository institution by e-mail                     ber does not constitute an inquiry and
                                                                     about its products or services, but does                  does not establish a pre-existing busi-
                                                                     not obtain a product or service from or                   ness relationship between the con-
                                                                     enter into a financial contract or                        sumer and the affiliate.
                                                                     transaction with the institution, the                        (C) If a consumer makes a telephone
                                                                     depository institution has a pre-exist-                   call to a depository institution in re-
                                                                     ing business relationship with the con-                   sponse to an advertisement that offers
                                                                     sumer and can therefore use eligibility                   a free promotional item to consumers
                                                                     information it receives from an affil-                    who call a toll-free number, but the ad-
                                                                     iate to make solicitations to the con-                    vertisement does not indicate that the
                                                                     sumer about its products or services                      depository institution’s products or
                                                                     for three months after the date of the                    services will be marketed to consumers
                                                                     inquiry.                                                  who call in response, the call does not
                                                                        (G) If a consumer has an existing re-                  create a pre-existing business relation-
                                                                     lationship with a depository institu-                     ship between the consumer and the de-
                                                                     tion that is part of a group of affiliated                pository institution because the con-
                                                                     companies, makes a telephone call to                      sumer has not made an inquiry about a
                                                                     the centralized call center for the                       product or service offered by the insti-
                                                                     group of affiliated companies to in-                      tution, but has merely responded to an
                                                                     quire about products or services offered                  offer for a free promotional item.
                                                                     by the insurance affiliate, and provides                     (5) Solicitation—(i) In general. The
                                                                     contact information to the call center,                   term ‘‘solicitation’’ means the mar-
                                                                     the call constitutes an inquiry to the                    keting of a product or service initiated
                                                                     insurance affiliate that offers those                     by a person to a particular consumer
                                                                     products or services. The insurance af-                   that is—
                                                                     filiate has a pre-existing business rela-                    (A) Based on eligibility information
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                                                                     tionship with the consumer and can                        communicated to that person by its af-
                                                                     therefore use eligibility information it                  filiate as described in this subpart; and

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                                                                     § 222.21                                                               12 CFR Ch. II (1–1–09 Edition)

                                                                       (B) Intended to encourage the con-                      loan products. The depository institu-
                                                                     sumer to purchase or obtain such prod-                    tion does not have a pre-existing busi-
                                                                     uct or service.                                           ness relationship with the consumer
                                                                       (ii) Exclusion of marketing directed at                 and none of the other exceptions apply.
                                                                     the general public. A solicitation does                   The depository institution is prohib-
                                                                     not include marketing communica-                          ited from using eligibility information
                                                                     tions that are directed at the general                    received from its insurance affiliate to
                                                                     public. For example, television, general                  make solicitations to the consumer
                                                                     circulation magazine, and billboard ad-                   about its home equity loan products
                                                                     vertisements do not constitute solici-                    unless the consumer is given a notice
                                                                     tations, even if those communications                     and opportunity to opt out and the
                                                                     are intended to encourage consumers                       consumer does not opt out.
                                                                     to purchase products and services from                       (3) Affiliates who may provide the no-
                                                                     the person initiating the communica-                      tice. The notice required by this para-
                                                                     tions.                                                    graph must be provided:
                                                                       (iii) Examples of solicitations. A solici-                 (i) By an affiliate that has or has pre-
                                                                     tation would include, for example, a                      viously had a pre-existing business re-
                                                                     telemarketing call, direct mail, e-mail,                  lationship with the consumer; or
                                                                     or other form of marketing commu-                            (ii) As part of a joint notice from two
                                                                     nication directed to a particular con-                    or more members of an affiliated group
                                                                     sumer that is based on eligibility infor-                 of companies, provided that at least
                                                                     mation received from an affiliate.                        one of the affiliates on the joint notice
                                                                       (6) You means a person described in                     has or has previously had a pre-exist-
                                                                     paragraph (a) of this section.                            ing business relationship with the con-
                                                                                                                               sumer.
                                                                     § 222.21 Affiliate marketing opt-out                         (b) Making solicitations—(1) In general.
                                                                           and exceptions.                                     For purposes of this subpart, you make
                                                                        (a) Initial notice and opt-out require-                a solicitation for marketing purposes
                                                                     ment—(1) In general. You may not use                      if—
                                                                     eligibility information about a con-                         (i) You receive eligibility informa-
                                                                     sumer that you receive from an affil-                     tion from an affiliate;
                                                                     iate to make a solicitation for mar-                         (ii) You use that eligibility informa-
                                                                     keting purposes to the consumer, un-                      tion to do one or more of the following:
                                                                     less—                                                        (A) Identify the consumer or type of
                                                                        (i) It is clearly and conspicuously dis-               consumer to receive a solicitation;
                                                                     closed to the consumer in writing or, if                     (B) Establish criteria used to select
                                                                     the consumer agrees, electronically, in                   the consumer to receive a solicitation;
                                                                     a concise notice that you may use eli-                    or
                                                                     gibility information about that con-                         (C) Decide which of your products or
                                                                     sumer received from an affiliate to                       services to market to the consumer or
                                                                     make solicitations for marketing pur-                     tailor your solicitation to that con-
                                                                     poses to the consumer;                                    sumer; and
                                                                        (ii) The consumer is provided a rea-                      (iii) As a result of your use of the eli-
                                                                     sonable opportunity and a reasonable                      gibility information, the consumer is
                                                                     and simple method to ‘‘opt out,’’ or                      provided a solicitation.
                                                                     prohibit you from using eligibility in-                      (2) Receiving eligibility information
                                                                     formation to make solicitations for                       from an affiliate, including through a
                                                                     marketing purposes to the consumer;                       common database. You may receive eli-
                                                                     and                                                       gibility information from an affiliate
                                                                        (iii) The consumer has not opted out.                  in various ways, including when the af-
                                                                        (2) Example. A consumer has a home-                    filiate places that information into a
                                                                     owner’s insurance policy with an insur-                   common database that you may access.
                                                                     ance company. The insurance company                          (3) Receipt or use of eligibility informa-
                                                                     furnishes eligibility information about                   tion by your service provider. Except as
                                                                     the consumer to its affiliated deposi-                    provided in paragraph (b)(5) of this sec-
                                                                     tory institution. Based on that eligi-                    tion, you receive or use an affiliate’s
                                                                     bility information, the depository in-                    eligibility information if a service pro-
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                                                                     stitution wants to make a solicitation                    vider acting on your behalf (whether an
                                                                     to the consumer about its home equity                     affiliate or a nonaffiliated third party)

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                                                                     Federal Reserve System                                                                              § 222.21

                                                                     receives or uses that information in                      consumer, such as the identity of the
                                                                     the manner described in paragraphs                        affiliated companies whose products or
                                                                     (b)(1)(i) or (b)(1)(ii) of this section. All              services may be marketed to the con-
                                                                     relevant facts and circumstances will                     sumer by the service provider, the
                                                                     determine whether a person is acting                      types of products or services of affili-
                                                                     as your service provider when it re-                      ated companies that may be marketed,
                                                                     ceives or uses an affiliate’s eligibility                 and the number of times the consumer
                                                                     information in connection with mar-                       may receive marketing materials, and
                                                                     keting your products and services.                        periodically evaluates the service pro-
                                                                       (4) Use by an affiliate of its own eligi-               vider’s compliance with those terms
                                                                     bility information. Unless you have used                  and conditions;
                                                                     eligibility information that you re-                         (C) Your affiliate requires the service
                                                                     ceive from an affiliate in the manner                     provider to implement reasonable poli-
                                                                     described in paragraph (b)(1)(ii) of this                 cies and procedures designed to ensure
                                                                     section, you do not make a solicitation                   that the service provider uses the af-
                                                                     subject to this subpart if your affiliate:                filiate’s eligibility information in ac-
                                                                       (i) Uses its own eligibility informa-                   cordance with the terms and conditions
                                                                     tion that it obtained in connection                       established by the affiliate relating to
                                                                     with a pre-existing business relation-                    the marketing of your products or
                                                                     ship it has or had with the consumer to                   services;
                                                                     market your products or services to                          (D) Your affiliate is identified on or
                                                                     the consumer; or                                          with the marketing materials provided
                                                                       (ii) Directs its service provider to use                to the consumer; and
                                                                     the affiliate’s own eligibility informa-
                                                                                                                                  (E) You do not directly use your af-
                                                                     tion that it obtained in connection
                                                                                                                               filiate’s eligibility information in the
                                                                     with a pre-existing business relation-
                                                                                                                               manner described in paragraph (b)(1)(ii)
                                                                     ship it has or had with the consumer to
                                                                                                                               of this section.
                                                                     market your products or services to
                                                                     the consumer, and you do not commu-                          (ii) Writing requirements. (A) The re-
                                                                     nicate directly with the service pro-                     quirements of paragraphs (b)(5)(i)(A)
                                                                     vider regarding that use.                                 and (C) of this section must be set
                                                                       (5) Use of eligibility information by a                 forth in a written agreement between
                                                                     service provider—(i) In general. You do                   your affiliate and the service provider;
                                                                     not make a solicitation subject to Sub-                   and
                                                                     part C of this part if a service provider                    (B) The specific terms and conditions
                                                                     (including an affiliated or third-party                   established by your affiliate as pro-
                                                                     service provider that maintains or ac-                    vided in paragraph (b)(5)(i)(B) of this
                                                                     cesses a common database that you                         section must be set forth in writing.
                                                                     may access) receives eligibility infor-                      (6) Examples of making solicitations. (i)
                                                                     mation from your affiliate that your                      A consumer has a deposit account with
                                                                     affiliate obtained in connection with a                   a depository institution, which is affili-
                                                                     pre-existing business relationship it                     ated with an insurance company. The
                                                                     has or had with the consumer and uses                     insurance company receives eligibility
                                                                     that eligibility information to market                    information about the consumer from
                                                                     your products or services to the con-                     the depository institution. The insur-
                                                                     sumer, so long as—                                        ance company uses that eligibility in-
                                                                       (A) Your affiliate controls access to                   formation to identify the consumer to
                                                                     and use of its eligibility information by                 receive a solicitation about insurance
                                                                     the service provider (including the                       products, and, as a result, the insur-
                                                                     right to establish the specific terms                     ance company provides a solicitation
                                                                     and conditions under which the service                    to the consumer about its insurance
                                                                     provider may use such information to                      products. Pursuant to paragraph (b)(1)
                                                                     market your products or services);                        of this section, the insurance company
                                                                       (B) Your affiliate establishes specific                 has made a solicitation to the con-
                                                                     terms and conditions under which the                      sumer.
                                                                     service provider may access and use                          (ii) The same facts as in the example
                                                                     the affiliate’s eligibility information to                in paragraph (b)(6)(i) of this section,
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                                                                     market your products and services (or                     except that after using the eligibility
                                                                     those of affiliates generally) to the                     information to identify the consumer

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                                                                     § 222.21                                                               12 CFR Ch. II (1–1–09 Edition)

                                                                     to receive a solicitation about insur-                    tify depository institution consumers
                                                                     ance products, the insurance company                      who meet the criteria and to send the
                                                                     asks the depository institution to send                   insurance company’s marketing mate-
                                                                     the solicitation to the consumer and                      rials to those consumers. The insur-
                                                                     the depository institution does so. Pur-                  ance company does not communicate
                                                                     suant to paragraph (b)(1) of this sec-                    directly with the service provider re-
                                                                     tion, the insurance company has made                      garding the use of the depository insti-
                                                                     a solicitation to the consumer because                    tution’s information to market its
                                                                     it used eligibility information about                     products to the depository institution’s
                                                                     the consumer that it received from an                     consumers. Pursuant to paragraph
                                                                     affiliate to identify the consumer to re-                 (b)(4)(ii) of this section, the insurance
                                                                     ceive a solicitation about its products                   company has not made a solicitation to
                                                                     or services, and, as a result, a solicita-
                                                                                                                               the consumer.
                                                                     tion was provided to the consumer
                                                                     about the insurance company’s prod-                         (v) An affiliated group of companies
                                                                     ucts.                                                     includes a depository institution, an
                                                                       (iii) The same facts as in the example                  insurance company, and a service pro-
                                                                     in paragraph (b)(6)(i) of this section,                   vider. Each affiliate in the group places
                                                                     except that eligibility information                       information about its consumers into a
                                                                     about consumers that have deposit ac-                     common database. The service provider
                                                                     counts with the depository institution                    has access to all information in the
                                                                     is placed into a common database that                     common database. The depository in-
                                                                     all members of the affiliated group of                    stitution controls access to and use of
                                                                     companies may independently access                        its eligibility information by the serv-
                                                                     and use. Without using the depository                     ice provider. This control is set forth in
                                                                     institution’s eligibility information,                    a written agreement between the de-
                                                                     the insurance company develops selec-                     pository institution and the service
                                                                     tion criteria and provides those cri-                     provider. The written agreement also
                                                                     teria, marketing materials, and related                   requires the service provider to estab-
                                                                     instructions to the depository institu-                   lish reasonable policies and procedures
                                                                     tion. The depository institution re-                      designed to ensure that the service pro-
                                                                     views eligibility information about its                   vider uses the depository institution’s
                                                                     own consumers using the selection cri-                    eligibility information in accordance
                                                                     teria provided by the insurance com-                      with specific terms and conditions es-
                                                                     pany to determine which consumers                         tablished by the depository institution
                                                                     should receive the insurance company’s                    relating to the marketing of the prod-
                                                                     marketing materials and sends mar-                        ucts and services of all affiliates, in-
                                                                     keting materials about the insurance                      cluding the insurance company. In a
                                                                     company’s products to those con-                          separate written communication, the
                                                                     sumers. Even though the insurance                         depository institution specifies the
                                                                     company has received eligibility infor-                   terms and conditions under which the
                                                                     mation through the common database
                                                                                                                               service provider may use the deposi-
                                                                     as provided in paragraph (b)(2) of this
                                                                                                                               tory institution’s eligibility informa-
                                                                     section, it did not use that information
                                                                                                                               tion to market the insurance com-
                                                                     to identify consumers or establish se-
                                                                     lection criteria; instead, the depository                 pany’s products and services to the de-
                                                                     institution used its own eligibility in-                  pository institution’s consumers. The
                                                                     formation. Therefore, pursuant to                         specific terms and conditions are: A
                                                                     paragraph (b)(4)(i) of this section, the                  list of affiliated companies (including
                                                                     insurance company has not made a so-                      the insurance company) whose prod-
                                                                     licitation to the consumer.                               ucts or services may be marketed to
                                                                       (iv) The same facts as in the example                   the depository institution’s consumers
                                                                     in paragraph (b)(6)(iii) of this section,                 by the service provider; the specific
                                                                     except that the depository institution                    products or types of products that may
                                                                     provides the insurance company’s cri-                     be marketed to the depository institu-
                                                                     teria to the depository institution’s                     tion’s consumers by the service pro-
                                                                     service provider and directs the service                  vider; the categories of eligibility in-
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                                                                     provider to use the depository institu-                   formation that may be used by the
                                                                     tion’s eligibility information to iden-                   service provider in marketing products

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                                                                     Federal Reserve System                                                                              § 222.21

                                                                     or services to the depository institu-                    terms and conditions. Because the
                                                                     tion’s consumers; the types or cat-                       terms and conditions are not specific,
                                                                     egories of the depository institution’s                   the requirements of paragraph (b)(5) of
                                                                     consumers to whom the service pro-                        this section have not been satisfied.
                                                                     vider may market products or services                       (c) Exceptions. The provisions of this
                                                                     of depository institution affiliates; the                 subpart do not apply to you if you use
                                                                     number and/or types of marketing com-                     eligibility information that you re-
                                                                     munications that the service provider                     ceive from an affiliate:
                                                                     may send to the depository institu-                         (1) To make a solicitation for mar-
                                                                     tion’s consumers; and the length of                       keting purposes to a consumer with
                                                                     time during which the service provider                    whom you have a pre-existing business
                                                                     may market the products or services of
                                                                                                                               relationship;
                                                                     the depository institution’s affiliates
                                                                     to its consumers. The depository insti-                     (2) To facilitate communications to
                                                                     tution periodically evaluates the serv-                   an individual for whose benefit you
                                                                     ice provider’s compliance with these                      provide employee benefit or other serv-
                                                                     terms and conditions. The insurance                       ices pursuant to a contract with an em-
                                                                     company asks the service provider to                      ployer related to and arising out of the
                                                                     market insurance products to certain                      current employment relationship or
                                                                     consumers who have deposit accounts                       status of the individual as a partici-
                                                                     with the depository institution. With-                    pant or beneficiary of an employee ben-
                                                                     out using the depository institution’s                    efit plan;
                                                                     eligibility information, the insurance                      (3) To perform services on behalf of
                                                                     company develops selection criteria                       an affiliate, except that this subpara-
                                                                     and provides those criteria, marketing                    graph shall not be construed as permit-
                                                                     materials, and related instructions to                    ting you to send solicitations on behalf
                                                                     the service provider. The service pro-                    of an affiliate if the affiliate would not
                                                                     vider uses the depository institution’s                   be permitted to send the solicitation as
                                                                     eligibility information from the com-                     a result of the election of the consumer
                                                                     mon database to identify the deposi-                      to opt out under this subpart;
                                                                     tory institution’s consumers to whom                        (4) In response to a communication
                                                                     insurance products will be marketed.                      about your products or services initi-
                                                                     When the insurance company’s mar-                         ated by the consumer;
                                                                     keting materials are provided to the                        (5) In response to an authorization or
                                                                     identified consumers, the name of the                     request by the consumer to receive so-
                                                                     depository institution is displayed on                    licitations; or
                                                                     the insurance marketing materials, an
                                                                                                                                 (6) If your compliance with this sub-
                                                                     introductory letter that accompanies
                                                                                                                               part would prevent you from com-
                                                                     the marketing materials, an account
                                                                                                                               plying with any provision of State in-
                                                                     statement that accompanies the mar-
                                                                                                                               surance laws pertaining to unfair dis-
                                                                     keting materials, or the envelope con-
                                                                                                                               crimination in any State in which you
                                                                     taining the marketing materials. The
                                                                     requirements of paragraph (b)(5) of this                  are lawfully doing business.
                                                                     section have been satisfied, and the in-                    (d) Examples of exceptions—(1) Example
                                                                     surance company has not made a solic-                     of the pre-existing business relationship
                                                                     itation to the consumer.                                  exception. A consumer has a deposit ac-
                                                                       (vi) The same facts as in the example                   count with a depository institution.
                                                                     in paragraph (b)(6)(v) of this section,                   The consumer also has a relationship
                                                                     except that the terms and conditions                      with the depository institution’s secu-
                                                                     permit the service provider to use the                    rities affiliate for management of the
                                                                     depository institution’s eligibility in-                  consumer’s securities portfolio. The de-
                                                                     formation to market the products and                      pository institution receives eligibility
                                                                     services of other affiliates to the depos-                information about the consumer from
                                                                     itory institution’s consumers whenever                    its securities affiliate and uses that in-
                                                                     the service provider deems it appro-                      formation to make a solicitation to the
                                                                     priate to do so. The service provider                     consumer about the depository institu-
                                                                     uses the depository institution’s eligi-                  tion’s wealth management services.
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                                                                     bility information in accordance with                     The depository institution may make
                                                                     the discretion afforded to it by the                      this solicitation even if the consumer

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                                                                     § 222.21                                                               12 CFR Ch. II (1–1–09 Edition)

                                                                     has not been given a notice and oppor-                    formation about how to save and invest
                                                                     tunity to opt out because the deposi-                     for a child’s college education without
                                                                     tory institution has a pre-existing                       specifying the type of product in which
                                                                     business relationship with the con-                       the consumer may be interested. Infor-
                                                                     sumer.                                                    mation about a range of different prod-
                                                                        (2) Examples of service provider excep-                ucts or services offered by the deposi-
                                                                     tion. (i) A consumer has an insurance                     tory institution and one or more affili-
                                                                     policy issued by an insurance company.                    ates of the institution may be respon-
                                                                     The insurance company furnishes eligi-                    sive to that communication. Such
                                                                     bility information about the consumer                     products or services may include the
                                                                     to its affiliated depository institution.                 following: Mutual funds offered by the
                                                                     Based on that eligibility information,                    institution’s mutual fund affiliate; sec-
                                                                     the depository institution wants to                       tion 529 plans offered by the institu-
                                                                     make a solicitation to the consumer                       tion, its mutual fund affiliate, or an-
                                                                     about its deposit products. The deposi-                   other securities affiliate; or trust serv-
                                                                     tory institution does not have a pre-ex-                  ices offered by a different financial in-
                                                                     isting business relationship with the                     stitution in the affiliated group. Any
                                                                     consumer and none of the other excep-                     affiliate offering investment products
                                                                     tions in paragraph (c) of this section                    or services that would be responsive to
                                                                     apply. The consumer has been given an                     the consumer’s request for information
                                                                     opt-out notice and has elected to opt                     about saving and investing for a child’s
                                                                     out of receiving such solicitations. The                  college education may use eligibility
                                                                     depository institution asks a service                     information to make solicitations to
                                                                     provider to send the solicitation to the                  the consumer in response to this com-
                                                                     consumer on its behalf. The service                       munication.
                                                                     provider may not send the solicitation                      (iii) A credit card issuer makes a
                                                                     on behalf of the depository institution                   marketing call to the consumer with-
                                                                     because, as a result of the consumer’s                    out using eligibility information re-
                                                                     opt-out election, the depository insti-                   ceived from an affiliate. The issuer
                                                                     tution is not permitted to make the so-                   leaves a voice-mail message that in-
                                                                     licitation.                                               vites the consumer to call a toll-free
                                                                        (ii) The same facts as in paragraph                    number to apply for the issuer’s credit
                                                                     (d)(2)(i) of this section, except the con-                card. If the consumer calls the toll-free
                                                                     sumer has been given an opt-out no-                       number to inquire about the credit
                                                                     tice, but has not elected to opt out.                     card, the call is a consumer-initiated
                                                                     The depository institution asks a serv-                   communication about a product or
                                                                     ice provider to send the solicitation to                  service and the credit card issuer may
                                                                     the consumer on its behalf. The service                   now use eligibility information it re-
                                                                     provider may send the solicitation on                     ceives from its affiliates to make so-
                                                                     behalf of the depository institution be-                  licitations to the consumer.
                                                                     cause, as a result of the consumer’s not                    (iv) A consumer calls a depository in-
                                                                     opting out, the depository institution                    stitution to ask about retail locations
                                                                     is permitted to make the solicitation.                    and hours, but does not request infor-
                                                                        (3) Examples of consumer-initiated com-                mation about products or services. The
                                                                     munications. (i) A consumer who has a                     institution may not use eligibility in-
                                                                     deposit account with a depository in-                     formation it receives from an affiliate
                                                                     stitution initiates a communication                       to make solicitations to the consumer
                                                                     with the depository institution’s credit                  about its products or services because
                                                                     card affiliate to request information                     the consumer-initiated communication
                                                                     about a credit card. The credit card af-                  does not relate to the depository insti-
                                                                     filiate may use eligibility information                   tution’s products or services. Thus, the
                                                                     about the consumer it obtains from the                    use of eligibility information received
                                                                     depository institution or any other af-                   from an affiliate would not be respon-
                                                                     filiate to make solicitations regarding                   sive to the communication and the ex-
                                                                     credit card products in response to the                   ception does not apply.
                                                                     consumer-initiated communication.                           (v) A consumer calls a depository in-
                                                                        (ii) A consumer who has a deposit ac-                  stitution to ask about retail locations
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                                                                     count with a depository institution                       and hours. The customer service rep-
                                                                     contacts the institution to request in-                   resentative asks the consumer if there

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                                                                     Federal Reserve System                                                                              § 222.22

                                                                     is a particular product or service about                  preprinted boilerplate language stating
                                                                     which the consumer is seeking infor-                      that by applying to open an account
                                                                     mation. The consumer responds that                        the consumer authorizes or requests to
                                                                     the consumer wants to stop in and find                    receive solicitations from the credit
                                                                     out about certificates of deposit. The                    card issuer’s affiliates. The consumer
                                                                     customer service representative offers                    has not authorized or requested solici-
                                                                     to provide that information by tele-                      tations from the card issuer’s affili-
                                                                     phone and mail additional information                     ates.
                                                                     and application materials to the con-                       (e) Relation to affiliate-sharing notice
                                                                     sumer. The consumer agrees and pro-                       and opt-out. Nothing in this subpart
                                                                     vides or confirms contact information                     limits the responsibility of a person to
                                                                     for receipt of the materials to be                        comply with the notice and opt-out
                                                                     mailed. The depository institution may                    provisions of section 603(d)(2)(A)(iii) of
                                                                     use eligibility information it receives                   the Act where applicable.
                                                                     from an affiliate to make solicitations
                                                                     to the consumer about certificates of                     § 222.22 Scope and duration of opt-out.
                                                                     deposit because such solicitations                           (a) Scope of opt-out—(1) In general. Ex-
                                                                     would respond to the consumer-initi-                      cept as otherwise provided in this sec-
                                                                     ated communication about products or                      tion, the consumer’s election to opt
                                                                     services.                                                 out prohibits any affiliate covered by
                                                                       (4) Examples of consumer authorization                  the opt-out notice from using eligi-
                                                                     or request for solicitations. (i) A con-                  bility information received from an-
                                                                     sumer who obtains a mortgage from a                       other affiliate as described in the no-
                                                                     mortgage lender authorizes or requests                    tice to make solicitations to the con-
                                                                     information about homeowner’s insur-                      sumer.
                                                                     ance offered by the mortgage lender’s                        (2) Continuing relationship—(i) In gen-
                                                                     insurance affiliate. Such authorization                   eral. If the consumer establishes a con-
                                                                     or request, whether given to the mort-                    tinuing relationship with you or your
                                                                     gage lender or to the insurance affil-                    affiliate, an opt-out notice may apply
                                                                     iate, would permit the insurance affil-                   to eligibility information obtained in
                                                                     iate to use eligibility information                       connection with—
                                                                     about the consumer it obtains from the                       (A) A single continuing relationship
                                                                     mortgage lender or any other affiliate                    or multiple continuing relationships
                                                                     to make solicitations to the consumer                     that the consumer establishes with you
                                                                     about homeowner’s insurance.                              or your affiliates, including continuing
                                                                       (ii) A consumer completes an online                     relationships established subsequent to
                                                                     application to apply for a credit card                    delivery of the opt-out notice, so long
                                                                     from a credit card issuer. The issuer’s                   as the notice adequately describes the
                                                                     online application contains a blank                       continuing relationships covered by
                                                                     check box that the consumer may                           the opt-out; or
                                                                     check to authorize or request informa-                       (B) Any other transaction between
                                                                     tion from the credit card issuer’s affili-                the consumer and you or your affiliates
                                                                     ates. The consumer checks the box.                        as described in the notice.
                                                                     The consumer has authorized or re-                           (ii) Examples of continuing relation-
                                                                     quested solicitations from the card                       ships. A consumer has a continuing re-
                                                                     issuer’s affiliates.                                      lationship with you or your affiliate if
                                                                       (iii) A consumer completes an online                    the consumer—
                                                                     application to apply for a credit card                       (A) Opens a deposit or investment ac-
                                                                     from a credit card issuer. The issuer’s                   count with you or your affiliate;
                                                                     online application contains a pre-se-                        (B) Obtains a loan for which you or
                                                                     lected check box indicating that the                      your affiliate owns the servicing
                                                                     consumer authorizes or requests infor-                    rights;
                                                                     mation from the issuer’s affiliates. The                     (C) Purchases an insurance product
                                                                     consumer does not deselect the check                      from you or your affiliate;
                                                                     box. The consumer has not authorized                         (D) Holds an investment product
                                                                     or requested solicitations from the                       through you or your affiliate, such as
                                                                     card issuer’s affiliates.                                 when you act or your affiliate acts as a
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                                                                       (iv) The terms and conditions of a                      custodian for securities or for assets in
                                                                     credit card account agreement contain                     an individual retirement arrangement;

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                                                                     § 222.22                                                               12 CFR Ch. II (1–1–09 Edition)

                                                                       (E) Enters into an agreement or un-                     consumer subsequently establishes an-
                                                                     derstanding with you or your affiliate                    other continuing relationship with you
                                                                     whereby you or your affiliate under-                      or your affiliate(s) and the consumer’s
                                                                     takes to arrange or broker a home                         eligibility information is to be used to
                                                                     mortgage loan for the consumer;                           make a solicitation. The new opt-out
                                                                       (F) Enters into a lease of personal                     notice must apply, at a minimum, to
                                                                     property with you or your affiliate; or                   eligibility information obtained in con-
                                                                       (G) Obtains financial, investment, or                   nection with the new continuing rela-
                                                                     economic advisory services from you or                    tionship. Consistent with paragraph (b)
                                                                     your affiliate for a fee.                                 of this section, the consumer’s decision
                                                                       (3) No continuing relationship—(i) In                   not to opt out after receiving the new
                                                                     general. If there is no continuing rela-
                                                                                                                               opt-out notice would not override a
                                                                     tionship between a consumer and you
                                                                                                                               prior opt-out election by the consumer
                                                                     or your affiliate, and you or your affil-
                                                                     iate obtain eligibility information                       that applies to eligibility information
                                                                     about a consumer in connection with a                     obtained in connection with a termi-
                                                                     transaction with the consumer, such as                    nated     relationship,   regardless   of
                                                                     an isolated transaction or a credit ap-                   whether the new opt-out notice applies
                                                                     plication that is denied, an opt-out no-                  to eligibility information obtained in
                                                                     tice provided to the consumer only ap-                    connection with the terminated rela-
                                                                     plies to eligibility information ob-                      tionship.
                                                                     tained in connection with that trans-                       (ii) Example. A consumer has a check-
                                                                     action.                                                   ing account with a depository institu-
                                                                       (ii) Examples of isolated transactions.                 tion that is part of an affiliated group.
                                                                     An isolated transaction occurs if–                        The consumer closes the checking ac-
                                                                       (A) The consumer uses your or your                      count. One year after closing the
                                                                     affiliate’s ATM to withdraw cash from                     checking account, the consumer opens
                                                                     an account at another financial insti-                    a savings account with the same depos-
                                                                     tution; or                                                itory institution. The consumer must
                                                                       (B) You or your affiliate sells the                     be given a new notice and opportunity
                                                                     consumer a cashier’s check or money                       to opt out before the depository insti-
                                                                     order, airline tickets, travel insurance,                 tution’s affiliates may make solicita-
                                                                     or traveler’s checks in isolated trans-                   tions to the consumer using eligibility
                                                                     actions.
                                                                                                                               information obtained by the depository
                                                                       (4) Menu of alternatives. A consumer
                                                                                                                               institution in connection with the new
                                                                     may be given the opportunity to
                                                                                                                               savings account relationship, regard-
                                                                     choose from a menu of alternatives
                                                                     when electing to prohibit solicitations,                  less of whether the consumer opted out
                                                                     such as by electing to prohibit solicita-                 in connection with the checking ac-
                                                                     tions from certain types of affiliates                    count.
                                                                     covered by the opt-out notice but not                       (b) Duration of opt-out. The election
                                                                     other types of affiliates covered by the                  of a consumer to opt out must be effec-
                                                                     notice, electing to prohibit solicita-                    tive for a period of at least five years
                                                                     tions based on certain types of eligi-                    (the ‘‘opt-out period’’) beginning when
                                                                     bility information but not other types                    the consumer’s opt-out election is re-
                                                                     of eligibility information, or electing                   ceived and implemented, unless the
                                                                     to prohibit solicitations by certain                      consumer subsequently revokes the
                                                                     methods of delivery but not other                         opt-out in writing or, if the consumer
                                                                     methods of delivery. However, one of                      agrees, electronically. An opt-out pe-
                                                                     the alternatives must allow the con-                      riod of more than five years may be es-
                                                                     sumer to prohibit all solicitations from                  tablished, including an opt-out period
                                                                     all of the affiliates that are covered by                 that does not expire unless revoked by
                                                                     the notice.                                               the consumer.
                                                                       (5) Special rule for a notice following                   (c) Time of opt-out. A consumer may
                                                                     termination of all continuing relation-                   opt out at any time.
                                                                     ships—(i) In general. A consumer must
                                                                     be given a new opt-out notice if, after
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                                                                     all continuing relationships with you
                                                                     or your affiliate(s) are terminated, the

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                                                                     Federal Reserve System                                                                              § 222.23

                                                                     § 222.23 Contents of opt-out notice;                      credit card companies and the XYZ in-
                                                                           consolidated and equivalent no-                     surance companies’’;
                                                                           tices.                                                (iii) A general description of the
                                                                        (a) Contents of opt-out notice—(1) In                  types of eligibility information that
                                                                     general. A notice must be clear, con-                     may be used to make solicitations to
                                                                     spicuous, and concise, and must accu-                     the consumer;
                                                                     rately disclose:                                            (iv) That the consumer may elect to
                                                                        (i) The name of the affiliate(s) pro-                  limit the use of eligibility information
                                                                     viding the notice. If the notice is pro-                  to make solicitations to the consumer;
                                                                     vided jointly by multiple affiliates and                    (v) That the consumer’s election will
                                                                     each affiliate shares a common name,                      apply for the specified period of time
                                                                     such as ‘‘ABC,’’ then the notice may                      stated in the notice and, if applicable,
                                                                     indicate that it is being provided by                     that the consumer will be allowed to
                                                                     multiple companies with the ABC                           renew the election once that period ex-
                                                                     name or multiple companies in the                         pires;
                                                                     ABC group or family of companies, for                       (vi) If the notice is provided to con-
                                                                     example, by stating that the notice is
                                                                                                                               sumers who may have previously opted
                                                                     provided by ‘‘all of the ABC compa-
                                                                                                                               out, such as if a notice is provided to
                                                                     nies,’’ ‘‘the ABC banking, credit card,
                                                                                                                               consumers annually, that the con-
                                                                     insurance, and securities companies,’’
                                                                                                                               sumer who has chosen to limit solicita-
                                                                     or by listing the name of each affiliate
                                                                                                                               tions does not need to act again until
                                                                     providing the notice. But if the affili-
                                                                                                                               the consumer receives a renewal no-
                                                                     ates providing the joint notice do not
                                                                                                                               tice; and
                                                                     all share a common name, then the no-
                                                                     tice must either separately identify                        (vii) A reasonable and simple method
                                                                     each affiliate by name or identify each                   for the consumer to opt out.
                                                                     of the common names used by those af-                       (2) Joint relationships. (i) If two or
                                                                     filiates, for example, by stating that                    more consumers jointly obtain a prod-
                                                                     the notice is provided by ‘‘all of the                    uct or service, a single opt-out notice
                                                                     ABC and XYZ companies’’ or by ‘‘the                       may be provided to the joint con-
                                                                     ABC banking and credit card compa-                        sumers. Any of the joint consumers
                                                                     nies and the XYZ insurance compa-                         may exercise the right to opt out.
                                                                     nies’’;                                                     (ii) The opt-out notice must explain
                                                                        (ii) A list of the affiliates or types of              how an opt-out direction by a joint
                                                                     affiliates whose use of eligibility infor-                consumer will be treated. An opt-out
                                                                     mation is covered by the notice, which                    direction by a joint consumer may be
                                                                     may include companies that become af-                     treated as applying to all of the associ-
                                                                     filiates after the notice is provided to                  ated joint consumers, or each joint
                                                                     the consumer. If each affiliate covered                   consumer may be permitted to opt out
                                                                     by the notice shares a common name,                       separately. If each joint consumer is
                                                                     such as ‘‘ABC,’’ then the notice may                      permitted to opt out separately, one of
                                                                     indicate that it applies to multiple                      the joint consumers must be permitted
                                                                     companies with the ABC name or mul-                       to opt out on behalf of all of the joint
                                                                     tiple companies in the ABC group or                       consumers and the joint consumers
                                                                     family of companies, for example, by                      must be permitted to exercise their
                                                                     stating that the notice is provided by                    separate rights to opt out in a single
                                                                     ‘‘all of the ABC companies,’’ ‘‘the ABC                   response.
                                                                     banking, credit card, insurance, and se-                    (iii) It is impermissible to require all
                                                                     curities companies,’’ or by listing the                   joint consumers to opt out before im-
                                                                     name of each affiliate providing the no-                  plementing any opt-out direction.
                                                                     tice. But if the affiliates covered by the                  (3) Alternative contents. If the con-
                                                                     notice do not all share a common                          sumer is afforded a broader right to opt
                                                                     name, then the notice must either sep-                    out of receiving marketing than is re-
                                                                     arately identify each covered affiliate                   quired by this subpart, the require-
                                                                     by name or identify each of the com-                      ments of this section may be satisfied
                                                                     mon names used by those affiliates, for                   by providing the consumer with a
                                                                     example, by stating that the notice ap-                   clear, conspicuous, and concise notice
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                                                                     plies to ‘‘all of the ABC and XYZ com-                    that accurately discloses the con-
                                                                     panies’’ or to ‘‘the ABC banking and                      sumer’s opt-out rights.

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                                                                     § 222.24                                                               12 CFR Ch. II (1–1–09 Edition)

                                                                        (4) Model notices. Model notices are                   to the consumer at the time of an elec-
                                                                     provided in appendix C of this part.                      tronic transaction, such as a trans-
                                                                        (b) Coordinated and consolidated no-                   action conducted on an Internet Web
                                                                     tices. A notice required by this subpart                  site. The consumer is required to de-
                                                                     may be coordinated and consolidated                       cide, as a necessary part of proceeding
                                                                     with any other notice or disclosure re-                   with the transaction, whether to opt
                                                                     quired to be issued under any other                       out before completing the transaction.
                                                                     provision of law by the entity pro-                       There is a simple process that the con-
                                                                     viding the notice, including but not                      sumer may use to opt out at that time
                                                                     limited to the notice described in sec-                   using the same mechanism through
                                                                     tion 603(d)(2)(A)(iii) of the Act and the                 which the transaction is conducted.
                                                                     Gramm-Leach-Bliley Act privacy no-                          (4) At the time of an in-person trans-
                                                                     tice.                                                     action. The opt-out notice is provided
                                                                        (c) Equivalent notices. A notice or                    to the consumer in writing at the time
                                                                     other disclosure that is equivalent to                    of an in-person transaction. The con-
                                                                     the notice required by this subpart,                      sumer is required to decide, as a nec-
                                                                     and that is provided to a consumer to-                    essary part of proceeding with the
                                                                     gether with disclosures required by any                   transaction, whether to opt out before
                                                                     other provision of law, satisfies the re-                 completing the transaction, and is not
                                                                     quirements of this section.                               permitted to complete the transaction
                                                                                                                               without making a choice. There is a
                                                                     § 222.24 Reasonable opportunity to opt
                                                                           out.                                                simple process that the consumer may
                                                                                                                               use during the course of the in-person
                                                                        (a) In general. You must not use eligi-                transaction to opt out, such as com-
                                                                     bility information about a consumer                       pleting a form that requires consumers
                                                                     that you receive from an affiliate to                     to write a ‘‘yes’’ or ‘‘no’’ to indicate
                                                                     make a solicitation to the consumer                       their opt-out preference or that re-
                                                                     about your products or services, unless                   quires the consumer to check one of
                                                                     the consumer is provided a reasonable                     two blank check boxes—one that al-
                                                                     opportunity to opt out, as required by                    lows consumers to indicate that they
                                                                     § 222.21(a)(1)(ii) of this part.                          want to opt out and one that allows
                                                                        (b) Examples of a reasonable oppor-                    consumers to indicate that they do not
                                                                     tunity to opt out. The consumer is given                  want to opt out.
                                                                     a reasonable opportunity to opt out if:
                                                                                                                                 (5) By including in a privacy notice.
                                                                        (1) By mail. The opt-out notice is
                                                                                                                               The opt-out notice is included in a
                                                                     mailed to the consumer. The consumer
                                                                                                                               Gramm-Leach-Bliley Act privacy no-
                                                                     is given 30 days from the date the no-
                                                                                                                               tice. The consumer is allowed to exer-
                                                                     tice is mailed to elect to opt out by
                                                                     any reasonable means.                                     cise the opt-out within a reasonable pe-
                                                                        (2) By electronic means. (i) The opt-out               riod of time and in the same manner as
                                                                     notice is provided electronically to the                  the opt-out under that privacy notice.
                                                                     consumer, such as by posting the no-
                                                                                                                               § 222.25 Reasonable and simple meth-
                                                                     tice at an Internet Web site at which                         ods of opting out.
                                                                     the consumer has obtained a product or
                                                                     service. The consumer acknowledges                          (a) In general. You must not use eligi-
                                                                     receipt of the electronic notice. The                     bility information about a consumer
                                                                     consumer is given 30 days after the                       that you receive from an affiliate to
                                                                     date the consumer acknowledges re-                        make a solicitation to the consumer
                                                                     ceipt to elect to opt out by any reason-                  about your products or services, unless
                                                                     able means.                                               the consumer is provided a reasonable
                                                                        (ii) The opt-out notice is provided to                 and simple method to opt out, as re-
                                                                     the consumer by e-mail where the con-                     quired by § 222.21(a)(1)(ii) of this part.
                                                                     sumer has agreed to receive disclosures                     (b) Examples—(1) Reasonable and sim-
                                                                     by e-mail from the person sending the                     ple opt-out methods. Reasonable and
                                                                     notice. The consumer is given 30 days                     simple methods for exercising the opt-
                                                                     after the e-mail is sent to elect to opt                  out right include—
                                                                     out by any reasonable means.                                (i) Designating a check-off box in a
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                                                                        (3) At the time of an electronic trans-                prominent position on the opt-out
                                                                     action. The opt-out notice is provided                    form;

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                                                                     Federal Reserve System                                                                              § 222.27

                                                                       (ii) Including a reply form and a self-                 sonably be expected to receive actual
                                                                     addressed envelope together with the                      notice if the affiliate providing the no-
                                                                     opt-out notice;                                           tice:
                                                                       (iii) Providing an electronic means to                    (1) Hand-delivers a printed copy of
                                                                     opt out, such as a form that can be                       the notice to the consumer;
                                                                     electronically mailed or processed at                       (2) Mails a printed copy of the notice
                                                                     an Internet Web site, if the consumer                     to the last known mailing address of
                                                                     agrees to the electronic delivery of in-                  the consumer;
                                                                     formation;                                                  (3) Provides a notice by e-mail to a
                                                                       (iv) Providing a toll-free telephone                    consumer who has agreed to receive
                                                                     number that consumers may call to opt                     electronic disclosures by e-mail from
                                                                     out; or
                                                                                                                               the affiliate providing the notice; or
                                                                       (v) Allowing consumers to exercise
                                                                     all of their opt-out rights described in                    (4) Posts the notice on the Internet
                                                                     a consolidated opt-out notice that in-                    Web site at which the consumer ob-
                                                                     cludes the privacy opt-out under the                      tained a product or service electroni-
                                                                     Gramm-Leach-Bliley Act, 15 U.S.C. 6801                    cally and requires the consumer to ac-
                                                                     et seq., the affiliate sharing opt-out                    knowledge receipt of the notice.
                                                                     under the Act, and the affiliate mar-                       (c) Examples of no reasonable expecta-
                                                                     keting opt-out under the Act, by a sin-                   tion of actual notice. A consumer may
                                                                     gle method, such as by calling a single                   not reasonably be expected to receive
                                                                     toll-free telephone number.                               actual notice if the affiliate providing
                                                                       (2) Opt-out methods that are not rea-                   the notice:
                                                                     sonable and simple. Reasonable and sim-                     (1) Only posts the notice on a sign in
                                                                     ple methods for exercising an opt-out                     a branch or office or generally pub-
                                                                     right do not include—                                     lishes the notice in a newspaper;
                                                                       (i) Requiring the consumer to write                       (2) Sends the notice via e-mail to a
                                                                     his or her own letter;                                    consumer who has not agreed to re-
                                                                       (ii) Requiring the consumer to call or                  ceive electronic disclosures by e-mail
                                                                     write to obtain a form for opting out,                    from the affiliate providing the notice;
                                                                     rather than including the form with                       or
                                                                     the opt-out notice;                                         (3) Posts the notice on an Internet
                                                                       (iii) Requiring the consumer who re-                    Web site without requiring the con-
                                                                     ceives the opt-out notice in electronic                   sumer to acknowledge receipt of the
                                                                     form only, such as through posting at                     notice.
                                                                     an Internet Web site, to opt out solely
                                                                     by paper mail or by visiting a different                  § 222.27    Renewal of opt-out.
                                                                     Web site without providing a link to
                                                                     that site.                                                   (a) Renewal notice and opt-out require-
                                                                       (c) Specific opt-out means. Each con-                   ment—(1) In general. After the opt-out
                                                                     sumer may be required to opt out                          period expires, you may not make so-
                                                                     through a specific means, as long as                      licitations based on eligibility informa-
                                                                     that means is reasonable and simple                       tion you receive from an affiliate to a
                                                                     for that consumer.                                        consumer who previously opted out,
                                                                                                                               unless:
                                                                     § 222.26 Delivery of opt-out notices.                        (i) The consumer has been given a re-
                                                                        (a) In general. The opt-out notice                     newal notice that complies with the re-
                                                                     must be provided so that each con-                        quirements of this section and §§ 222.24
                                                                     sumer can reasonably be expected to                       through 222.26 of this part, and a rea-
                                                                     receive actual notice. For opt-out no-                    sonable opportunity and a reasonable
                                                                     tices provided electronically, the no-                    and simple method to renew the opt-
                                                                     tice may be provided in compliance                        out, and the consumer does not renew
                                                                     with either the electronic disclosure                     the opt-out; or
                                                                     provisions in this subpart or the provi-                     (ii) An exception in § 222.21(c) of this
                                                                     sions in section 101 of the Electronic                    part applies.
                                                                     Signatures in Global and National                            (2) Renewal period. Each opt-out re-
                                                                     Commerce Act, 15 U.S.C. 7001 et seq.                      newal must be effective for a period of
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                                                                        (b) Examples of reasonable expectation                 at least five years as provided in
                                                                     of actual notice. A consumer may rea-                     § 222.22(b) of this part.

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                                                                     § 222.27                                                               12 CFR Ch. II (1–1–09 Edition)

                                                                        (3) Affiliates who may provide the no-                 notice do not all share a common
                                                                     tice. The notice required by this para-                   name, then the notice must either sep-
                                                                     graph must be provided:                                   arately identify each covered affiliate
                                                                        (i) By the affiliate that provided the                 by name or identify each of the com-
                                                                     previous opt-out notice, or its suc-                      mon names used by those affiliates, for
                                                                     cessor; or                                                example, by stating that the notice ap-
                                                                        (ii) As part of a joint renewal notice                 plies to ‘‘all of the ABC and XYZ com-
                                                                     from two or more members of an affili-                    panies’’ or to ‘‘the ABC banking and
                                                                     ated group of companies, or their suc-                    credit card companies and the XYZ in-
                                                                     cessors, that jointly provided the pre-                   surance companies’’;
                                                                     vious opt-out notice.                                       (3) A general description of the types
                                                                        (b) Contents of renewal notice. The re-                of eligibility information that may be
                                                                     newal notice must be clear, con-                          used to make solicitations to the con-
                                                                     spicuous, and concise, and must accu-                     sumer;
                                                                     rately disclose:
                                                                                                                                 (4) That the consumer previously
                                                                        (1) The name of the affiliate(s) pro-
                                                                                                                               elected to limit the use of certain in-
                                                                     viding the notice. If the notice is pro-
                                                                                                                               formation to make solicitations to the
                                                                     vided jointly by multiple affiliates and
                                                                                                                               consumer;
                                                                     each affiliate shares a common name,
                                                                     such as ‘‘ABC,’’ then the notice may                        (5) That the consumer’s election has
                                                                     indicate that it is being provided by                     expired or is about to expire;
                                                                     multiple companies with the ABC                             (6) That the consumer may elect to
                                                                     name or multiple companies in the                         renew the consumer’s previous elec-
                                                                     ABC group or family of companies, for                     tion;
                                                                     example, by stating that the notice is                      (7) If applicable, that the consumer’s
                                                                     provided by ‘‘all of the ABC compa-                       election to renew will apply for the
                                                                     nies,’’ ‘‘the ABC banking, credit card,                   specified period of time stated in the
                                                                     insurance, and securities companies,’’                    notice and that the consumer will be
                                                                     or by listing the name of each affiliate                  allowed to renew the election once that
                                                                     providing the notice. But if the affili-                  period expires; and
                                                                     ates providing the joint notice do not                      (8) A reasonable and simple method
                                                                     all share a common name, then the no-                     for the consumer to opt out.
                                                                     tice must either separately identify                        (c) Timing of the renewal notice.—(1) In
                                                                     each affiliate by name or identify each                   general. A renewal notice may be pro-
                                                                     of the common names used by those af-                     vided to the consumer either—
                                                                     filiates, for example, by stating that                      (i) A reasonable period of time before
                                                                     the notice is provided by ‘‘all of the                    the expiration of the opt-out period; or
                                                                     ABC and XYZ companies’’ or by ‘‘the                         (ii) Any time after the expiration of
                                                                     ABC banking and credit card compa-                        the opt-out period but before solicita-
                                                                     nies and the XYZ insurance compa-
                                                                                                                               tions that would have been prohibited
                                                                     nies’’;
                                                                                                                               by the expired opt-out are made to the
                                                                        (2) A list of the affiliates or types of
                                                                                                                               consumer.
                                                                     affiliates whose use of eligibility infor-
                                                                     mation is covered by the notice, which                      (2) Combination with annual privacy
                                                                     may include companies that become af-                     notice. If you provide an annual privacy
                                                                     filiates after the notice is provided to                  notice under the Gramm-Leach-Bliley
                                                                     the consumer. If each affiliate covered                   Act, 15 U.S.C. 6801 et seq., providing a
                                                                     by the notice shares a common name,                       renewal notice with the last annual
                                                                     such as ‘‘ABC,’’ then the notice may                      privacy notice provided to the con-
                                                                     indicate that it applies to multiple                      sumer before expiration of the opt-out
                                                                     companies with the ABC name or mul-                       period is a reasonable period of time
                                                                     tiple companies in the ABC group or                       before expiration of the opt-out in all
                                                                     family of companies, for example, by                      cases.
                                                                     stating that the notice is provided by                      (d) No effect on opt-out period. An opt-
                                                                     ‘‘all of the ABC companies,’’ ‘‘the ABC                   out period may not be shortened by
                                                                     banking, credit card, insurance, and se-                  sending a renewal notice to the con-
                                                                     curities companies,’’ or by listing the                   sumer before expiration of the opt-out
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                                                                     name of each affiliate providing the no-                  period, even if the consumer does not
                                                                     tice. But if the affiliates covered by the                renew the opt out.

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                                                                     Federal Reserve System                                                                              § 222.30

                                                                     § 222.28 Effective     date,   compliance                   (2) Definitions. (i) Credit has the same
                                                                          date, and prospective application.                   meaning as in section 702 of the Equal
                                                                        (a) Effective date. This subpart is ef-                Credit Opportunity Act, 15 U.S.C. 1691a.
                                                                     fective January 1, 2008.                                    (ii) Creditor has the same meaning as
                                                                        (b) Mandatory compliance date. Com-                    in section 702 of the Equal Credit Op-
                                                                     pliance with this subpart is required                     portunity Act, 15 U.S.C. 1691a.
                                                                     not later than October 1, 2008.                             (iii) Eligibility, or continued eligibility,
                                                                        (c) Prospective application. The provi-                for credit means the consumer’s quali-
                                                                     sions of this subpart shall not prohibit                  fication or fitness to receive, or con-
                                                                     you from using eligibility information                    tinue to receive, credit, including the
                                                                     that you receive from an affiliate to                     terms on which credit is offered. The
                                                                     make solicitations to a consumer if                       term does not include:
                                                                     you receive such information prior to                       (A) Any determination of the con-
                                                                     October 1, 2008. For purposes of this
                                                                                                                               sumer’s qualification or fitness for em-
                                                                     section, you are deemed to receive eli-
                                                                                                                               ployment, insurance (other than a
                                                                     gibility information when such infor-
                                                                                                                               credit insurance product), or other
                                                                     mation is placed into a common data-
                                                                     base and is accessible by you.                            non-credit products or services;
                                                                                                                                 (B) Authorizing, processing, or docu-
                                                                                                                               menting a payment or transaction on
                                                                       Subpart D—Medical Information                           behalf of the consumer in a manner
                                                                                                                               that does not involve a determination
                                                                       SOURCE: 70 FR 70679, Nov. 22, 2005, unless              of the consumer’s eligibility, or contin-
                                                                     otherwise noted.
                                                                                                                               ued eligibility, for credit; or
                                                                     § 222.30 Obtaining or using medical in-                     (C) Maintaining or servicing the con-
                                                                           formation in connection with a de-                  sumer’s account in a manner that does
                                                                           termination of eligibility for credit.              not involve a determination of the con-
                                                                        (a) Scope. This section applies to                     sumer’s eligibility, or continued eligi-
                                                                        (1) Any of the following that partici-                 bility, for credit.
                                                                     pates as a creditor in a transaction—                       (c) Rule of construction for obtaining
                                                                        (i) A bank that is a member of the                     and using unsolicited medical informa-
                                                                     Federal Reserve System (other than                        tion—(1) In general. A creditor does not
                                                                     national banks) and its subsidiaries;                     obtain medical information in viola-
                                                                        (ii) A branch or Agency of a foreign                   tion of the prohibition if it receives
                                                                     bank (other than Federal branches,                        medical information pertaining to a
                                                                     Federal Agencies, and insured State                       consumer in connection with any de-
                                                                     branches of foreign banks) and its sub-                   termination of the consumer’s eligi-
                                                                     sidiaries;                                                bility, or continued eligibility, for
                                                                        (iii) A commercial lending company                     credit without specifically requesting
                                                                     owned or controlled by foreign banks;                     medical information.
                                                                        (iv) An organization operating under                     (2) Use of unsolicited medical informa-
                                                                     section 25 or 25A of the Federal Reserve
                                                                                                                               tion. A creditor that receives unsolic-
                                                                     Act (12 U.S.C. 601 et seq., and 611 et seq.);
                                                                                                                               ited medical information in the man-
                                                                        (v) A bank holding company and an
                                                                                                                               ner described in paragraph (c)(1) of this
                                                                     affiliate of such holding company
                                                                                                                               section may use that information in
                                                                     (other than depository institutions and
                                                                                                                               connection with any determination of
                                                                     consumer reporting agencies); or
                                                                        (2) Any other person that partici-                     the consumer’s eligibility, or contin-
                                                                     pates as a creditor in a transaction in-                  ued eligibility, for credit to the extent
                                                                     volving a person described in paragraph                   the creditor can rely on at least one of
                                                                     (a)(1) of this section.                                   the exceptions in § 222.30(d) or (e).
                                                                        (b) General prohibition on obtaining or                  (3) Examples. A creditor does not ob-
                                                                     using medical information. (1) In general.                tain medical information in violation
                                                                     A creditor may not obtain or use med-                     of the prohibition if, for example:
                                                                     ical information pertaining to a con-                       (i) In response to a general question
                                                                     sumer in connection with any deter-                       regarding a consumer’s debts or ex-
                                                                     mination of the consumer’s eligibility,                   penses, the creditor receives informa-
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                                                                     or continued eligibility, for credit, ex-                 tion that the consumer owes a debt to
                                                                     cept as provided in this section.                         a hospital.

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                                                                     § 222.30                                                               12 CFR Ch. II (1–1–09 Edition)

                                                                       (ii) In a conversation with the credi-                  benefits related to health or a medical
                                                                     tor’s loan officer, the consumer in-                      condition that is relied on as a source
                                                                     forms the creditor that the consumer                      of repayment; or
                                                                     has a particular medical condition.                         (D) The identity of creditors to whom
                                                                       (iii) In connection with a consumer’s                   outstanding medical debts are owed in
                                                                     application for an extension of credit,                   connection with an application for
                                                                     the creditor requests a consumer re-                      credit, including but not limited to, a
                                                                     port from a consumer reporting agency                     transaction involving the consolidation
                                                                     and receives medical information in                       of medical debts.
                                                                     the consumer report furnished by the                        (ii) Examples of uses of medical infor-
                                                                     agency even though the creditor did                       mation consistent with the exception. (A)
                                                                     not specifically request medical infor-                   A consumer includes on an application
                                                                     mation from the consumer reporting                        for credit information about two $20,000
                                                                     agency.                                                   debts. One debt is to a hospital; the
                                                                       (d) Financial information exception for                 other debt is to a retailer. The creditor
                                                                     obtaining and using medical informa-                      contacts the hospital and the retailer
                                                                     tion—(1) In general. A creditor may ob-                   to verify the amount and payment sta-
                                                                     tain and use medical information per-                     tus of the debts. The creditor learns
                                                                     taining to a consumer in connection                       that both debts are more than 90 days
                                                                     with any determination of the con-                        past due. Any two debts of this size
                                                                     sumer’s eligibility, or continued eligi-                  that are more than 90 days past due
                                                                     bility, for credit so long as:                            would disqualify the consumer under
                                                                       (i) The information is the type of in-                  the creditor’s established underwriting
                                                                     formation routinely used in making                        criteria. The creditor denies the appli-
                                                                     credit eligibility determinations, such                   cation on the basis that the consumer
                                                                     as information relating to debts, ex-                     has a poor repayment history on out-
                                                                     penses, income, benefits, assets, collat-                 standing debts. The creditor has used
                                                                     eral, or the purpose of the loan, includ-                 medical information in a manner and
                                                                     ing the use of proceeds;                                  to an extent no less favorable than it
                                                                       (ii) The creditor uses the medical in-                  would use comparable non-medical in-
                                                                     formation in a manner and to an ex-                       formation.
                                                                     tent that is no less favorable than it                      (B) A consumer indicates on an appli-
                                                                     would use comparable information that                     cation for a $200,000 mortgage loan that
                                                                     is not medical information in a credit                    she receives $15,000 in long-term dis-
                                                                     transaction; and                                          ability income each year from her
                                                                       (iii) The creditor does not take the                    former employer and has no other in-
                                                                     consumer’s physical, mental, or behav-                    come. Annual income of $15,000, regard-
                                                                     ioral health, condition or history, type                  less of source, would not be sufficient
                                                                     of treatment, or prognosis into account                   to support the requested amount of
                                                                     as part of any such determination.                        credit. The creditor denies the applica-
                                                                       (2) Examples. (i) Examples of the types                 tion on the basis that the projected
                                                                     of information routinely used in making                   debt-to-income ratio of the consumer
                                                                     credit eligibility determinations. Para-                  does not meet the creditor’s under-
                                                                     graph (d)(1)(i) of this section permits a                 writing criteria. The creditor has used
                                                                     creditor, for example, to obtain and use                  medical information in a manner and
                                                                     information about:                                        to an extent that is no less favorable
                                                                       (A) The dollar amount, repayment                        than it would use comparable non-med-
                                                                     terms, repayment history, and similar                     ical information.
                                                                     information regarding medical debts to                      (C) A consumer includes on an appli-
                                                                     calculate, measure, or verify the repay-                  cation for a $10,000 home equity loan
                                                                     ment ability of the consumer, the use                     that he has a $50,000 debt to a medical
                                                                     of proceeds, or the terms for granting                    facility that specializes in treating a
                                                                     credit;                                                   potentially terminal disease. The cred-
                                                                       (B) The value, condition, and lien                      itor contacts the medical facility to
                                                                     status of a medical device that may                       verify the debt and obtain the repay-
                                                                     serve as collateral to secure a loan;                     ment history and current status of the
                                                                       (C) The dollar amount and continued                     loan. The creditor learns that the debt
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                                                                     eligibility for disability income, work-                  is current. The applicant meets the in-
                                                                     ers’ compensation income, or other                        come and other requirements of the

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                                                                     Federal Reserve System                                                                              § 222.30

                                                                     creditor’s underwriting guidelines. The                   equity loan and the creditor typically
                                                                     creditor grants the application. The                      does not require consumers to obtain a
                                                                     creditor has used medical information                     debt cancellation contract, debt sus-
                                                                     in accordance with the exception.                         pension agreement, or credit insurance
                                                                       (iii) Examples of uses of medical infor-                product in connection with such loans.
                                                                     mation inconsistent with the exception.                   However, based on the consumer’s ap-
                                                                     (A) A consumer applies for $25,000 of                     parent medical condition, the loan offi-
                                                                     credit and includes on the application                    cer recommends to the credit com-
                                                                     information about a $50,000 debt to a                     mittee that credit be extended to the
                                                                     hospital. The creditor contacts the hos-                  consumer only if the consumer obtains
                                                                     pital to verify the amount and pay-                       a debt cancellation contract, debt sus-
                                                                     ment status of the debt, and learns                       pension agreement, or credit insurance
                                                                     that the debt is current and that the                     product from a nonaffiliated third
                                                                     consumer has no delinquencies in her                      party. The credit committee agrees
                                                                     repayment history. If the existing debt                   with the loan officer’s recommenda-
                                                                     were instead owed to a retail depart-                     tion. The loan officer informs the con-
                                                                     ment store, the creditor would approve                    sumer that the consumer must obtain
                                                                     the application and extend credit based                   a debt cancellation contract, debt sus-
                                                                     on the amount and repayment history                       pension agreement, or credit insurance
                                                                     of the outstanding debt. The creditor,                    product from a nonaffiliated third
                                                                     however, denies the application be-                       party to qualify for the loan. The con-
                                                                     cause the consumer is indebted to a                       sumer obtains one of these products
                                                                     hospital. The creditor has used medical                   and the creditor approves the loan. The
                                                                     information, here the identity of the                     creditor has used medical information
                                                                     medical creditor, in a manner and to                      in a manner inconsistent with the ex-
                                                                     an extent that is less favorable than it                  ception by taking into account the
                                                                     would use comparable non-medical in-                      consumer’s physical, mental, or behav-
                                                                     formation.                                                ioral health, condition, or history, type
                                                                       (B) A consumer meets with a loan of-                    of treatment, or prognosis in setting
                                                                     ficer of a creditor to apply for a mort-                  conditions on the consumer’s eligi-
                                                                     gage loan. While filling out the loan                     bility for credit.
                                                                     application, the consumer informs the                       (e) Specific exceptions for obtaining and
                                                                     loan officer orally that she has a poten-                 using medical information—(1) In general.
                                                                     tially terminal disease. The consumer                     A creditor may obtain and use medical
                                                                     meets the creditor’s established re-                      information pertaining to a consumer
                                                                     quirements for the requested mortgage                     in connection with any determination
                                                                     loan. The loan officer recommends to                      of the consumer’s eligibility, or contin-
                                                                     the credit committee that the con-                        ued eligibility, for credit—
                                                                     sumer be denied credit because the                          (i) To determine whether the use of a
                                                                     consumer has that disease. The credit                     power of attorney or legal representa-
                                                                     committee follows the loan officer’s                      tive that is triggered by a medical con-
                                                                     recommendation and denies the appli-                      dition or event is necessary and appro-
                                                                     cation because the consumer has a po-                     priate or whether the consumer has the
                                                                     tentially terminal disease. The cred-                     legal capacity to contract when a per-
                                                                     itor has used medical information in a                    son seeks to exercise a power of attor-
                                                                     manner inconsistent with the excep-                       ney or act as legal representative for a
                                                                     tion by taking into account the con-                      consumer based on an asserted medical
                                                                     sumer’s physical, mental, or behavioral                   condition or event;
                                                                     health, condition, or history, type of                      (ii) To comply with applicable re-
                                                                     treatment, or prognosis as part of a de-                  quirements of local, state, or Federal
                                                                     termination of eligibility or continued                   laws;
                                                                     eligibility for credit.                                     (iii) To determine, at the consumer’s
                                                                       (C) A consumer who has an apparent                      request, whether the consumer quali-
                                                                     medical condition, such as a consumer                     fies for a legally permissible special
                                                                     who uses a wheelchair or an oxygen                        credit program or credit-related assist-
                                                                     tank, meets with a loan officer to                        ance program that is—
                                                                     apply for a home equity loan. The con-                      (A) Designed to meet the special
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                                                                     sumer meets the creditor’s established                    needs of consumers with medical condi-
                                                                     requirements for the requested home                       tions; and

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                                                                     § 222.30                                                               12 CFR Ch. II (1–1–09 Edition)

                                                                       (B) Established and administered                        use that information to verify the con-
                                                                     pursuant to a written plan that—                          sumer’s eligibility for the program, and
                                                                       (1) Identifies the class of persons that                forward that information to the orga-
                                                                     the program is designed to benefit; and                   nization. A consumer who is a veteran
                                                                       (2) Sets forth the procedures and                       applies to a creditor for a home pur-
                                                                     standards for extending credit or pro-                    chase mortgage loan. The creditor in-
                                                                     viding other credit-related assistance                    forms the consumer about the credit
                                                                     under the program;                                        assistance program for disabled vet-
                                                                       (iv) To the extent necessary for pur-                   erans and the consumer seeks to qual-
                                                                     poses of fraud prevention or detection;                   ify for the program. Assuming that the
                                                                       (v) In the case of credit for the pur-                  program complies with all applicable
                                                                     pose of financing medical products or                     law, including applicable fair lending
                                                                     services, to determine and verify the                     laws, the creditor may obtain and use
                                                                     medical purpose of a loan and the use                     medical information about the medical
                                                                     of proceeds;                                              condition and disability, if any, of the
                                                                       (vi) Consistent with safe and sound                     consumer to determine whether the
                                                                     practices, if the consumer or the con-                    consumer qualifies for the credit as-
                                                                     sumer’s legal representative specifi-                     sistance program.
                                                                     cally requests that the creditor use                         (3) Examples of verifying the medical
                                                                     medical information in determining                        purpose of the loan or the use of proceeds.
                                                                     the consumer’s eligibility, or contin-                    (i) If a consumer applies for $10,000 of
                                                                     ued eligibility, for credit, to accommo-                  credit for the purpose of financing vi-
                                                                     date the consumer’s particular cir-                       sion correction surgery, the creditor
                                                                     cumstances, and such request is docu-                     may verify with the surgeon that the
                                                                     mented by the creditor;                                   procedure will be performed. If the sur-
                                                                       (vii) Consistent with safe and sound                    geon reports that surgery will not be
                                                                     practices, to determine whether the                       performed on the consumer, the cred-
                                                                     provisions of a forbearance practice or                   itor may use that medical information
                                                                     program that is triggered by a medical                    to deny the consumer’s application for
                                                                     condition or event apply to a con-                        credit, because the loan would not be
                                                                     sumer;                                                    used for the stated purpose.
                                                                       (viii) To determine the consumer’s                         (ii) If a consumer applies for $10,000 of
                                                                     eligibility for, the triggering of, or the                credit for the purpose of financing cos-
                                                                     reactivation of a debt cancellation con-                  metic surgery, the creditor may con-
                                                                     tract or debt suspension agreement if a                   firm the cost of the procedure with the
                                                                     medical condition or event is a trig-                     surgeon. If the surgeon reports that the
                                                                     gering event for the provision of bene-                   cost of the procedure is $5,000, the cred-
                                                                     fits under the contract or agreement;                     itor may use that medical information
                                                                     or                                                        to offer the consumer only $5,000 of
                                                                       (ix) To determine the consumer’s eli-                   credit.
                                                                     gibility for, the triggering of, or the re-                  (iii) A creditor has an established
                                                                     activation of a credit insurance prod-                    medical loan program for financing
                                                                     uct if a medical condition or event is a                  particular elective surgical procedures.
                                                                     triggering event for the provision of                     The creditor receives a loan applica-
                                                                     benefits under the product.                               tion from a consumer requesting $10,000
                                                                       (2) Example of determining eligibility for              of credit under the established loan
                                                                     a special credit program or credit assist-                program for an elective surgical proce-
                                                                     ance program. A not-for-profit organiza-                  dure. The consumer indicates on the
                                                                     tion establishes a credit assistance pro-                 application that the purpose of the
                                                                     gram pursuant to a written plan that is                   loan is to finance an elective surgical
                                                                     designed to assist disabled veterans in                   procedure not eligible for funding
                                                                     purchasing homes by subsidizing the                       under the guidelines of the established
                                                                     down payment for the home purchase                        loan program. The creditor may deny
                                                                     mortgage loans of qualifying veterans.                    the consumer’s application because the
                                                                     The organization works through mort-                      purpose of the loan is not for a par-
                                                                     gage lenders and requires mortgage                        ticular procedure funded by the estab-
                                                                     lenders to obtain medical information                     lished loan program.
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                                                                     about the disability of any consumer                         (4) Examples of obtaining and using
                                                                     that seeks to qualify for the program,                    medical information at the request of the

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                                                                     Federal Reserve System                                                                              § 222.30

                                                                     consumer. (i) If a consumer applies for a                 sumer’s eligibility, or continued eligi-
                                                                     loan and specifically requests that the                   bility, for credit and provides the cred-
                                                                     creditor consider the consumer’s med-                     itor with medical information for that
                                                                     ical disability at the relevant time as                   purpose, and the creditor determines
                                                                     an explanation for adverse payment                        that it needs additional information re-
                                                                     history information in his credit re-                     garding the consumer’s circumstances,
                                                                     port, the creditor may consider such                      the creditor may request, obtain, and
                                                                     medical information in evaluating the                     use additional medical information
                                                                     consumer’s willingness and ability to                     about the consumer as necessary to
                                                                     repay the requested loan to accommo-                      verify the information provided by the
                                                                     date the consumer’s particular cir-                       consumer or to determine whether to
                                                                     cumstances, consistent with safe and                      make an accommodation for the con-
                                                                     sound practices. The creditor may also                    sumer. The consumer may decline to
                                                                     decline to consider such medical infor-                   provide additional information, with-
                                                                     mation to accommodate the consumer,                       draw the request for an accommoda-
                                                                     but may evaluate the consumer’s appli-                    tion, and have the application consid-
                                                                     cation in accordance with its otherwise                   ered under the creditor’s otherwise ap-
                                                                     applicable underwriting criteria. The                     plicable underwriting criteria.
                                                                     creditor may not deny the consumer’s
                                                                                                                                 (v) If a consumer completes and signs
                                                                     application or otherwise treat the con-
                                                                                                                               a credit application that is not for
                                                                     sumer less favorably because the con-
                                                                                                                               medical purpose credit and the applica-
                                                                     sumer specifically requested a medical
                                                                                                                               tion contains boilerplate language that
                                                                     accommodation, if the creditor would
                                                                                                                               routinely requests medical information
                                                                     have extended the credit or treated the
                                                                                                                               from the consumer or that indicates
                                                                     consumer more favorably under the
                                                                                                                               that by applying for credit the con-
                                                                     creditor’s otherwise applicable under-
                                                                     writing criteria.                                         sumer authorizes or consents to the
                                                                       (ii) If a consumer applies for a loan                   creditor obtaining and using medical
                                                                     by telephone and explains that his in-                    information in connection with a de-
                                                                     come has been and will continue to be                     termination of the consumer’s eligi-
                                                                     interrupted on account of a medical                       bility, or continued eligibility, for
                                                                     condition and that he expects to repay                    credit, the consumer has not specifi-
                                                                     the loan by liquidating assets, the                       cally requested that the creditor ob-
                                                                     creditor may, but is not required to,                     tain and use medical information to
                                                                     evaluate the application using the sale                   accommodate the consumer’s par-
                                                                     of assets as the primary source of re-                    ticular circumstances.
                                                                     payment, consistent with safe and                           (5) Example of a forbearance practice or
                                                                     sound practices, provided that the                        program. After an appropriate safety
                                                                     creditor documents the consumer’s re-                     and soundness review, a creditor insti-
                                                                     quest by recording the oral conversa-                     tutes a program that allows consumers
                                                                     tion or making a notation of the re-                      who are or will be hospitalized to defer
                                                                     quest in the consumer’s file.                             payments as needed for up to three
                                                                       (iii) If a consumer applies for a loan                  months, without penalty, if the credit
                                                                     and the application form provides a                       account has been open for more than
                                                                     space where the consumer may provide                      one year and has not previously been in
                                                                     any other information or special cir-                     default, and the consumer provides
                                                                     cumstances, whether medical or non-                       confirming documentation at an appro-
                                                                     medical, that the consumer would like                     priate time. A consumer is hospitalized
                                                                     the creditor to consider in evaluating                    and does not pay her bill for a par-
                                                                     the consumer’s application, the cred-                     ticular month. This consumer has had
                                                                     itor may use medical information pro-                     a credit account with the creditor for
                                                                     vided by the consumer in that space on                    more than one year and has not pre-
                                                                     that application to accommodate the                       viously been in default. The creditor
                                                                     consumer’s application for credit, con-                   attempts to contact the consumer and
                                                                     sistent with safe and sound practices,                    speaks with the consumer’s adult child,
                                                                     or may disregard that information.                        who is not the consumer’s legal rep-
                                                                       (iv) If a consumer specifically re-                     resentative. The adult child informs
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                                                                     quests that the creditor use medical in-                  the creditor that the consumer is hos-
                                                                     formation in determining the con-                         pitalized and is unable to pay the bill

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                                                                     § 222.31                                                               12 CFR Ch. II (1–1–09 Edition)

                                                                     at that time. The creditor defers pay-                      (b) In general. The exclusions from
                                                                     ments for up to three months, without                     the term ‘‘consumer report’’ in section
                                                                     penalty, for the hospitalized consumer                    603(d)(2) of the Act that allow the shar-
                                                                     and sends the consumer a letter con-                      ing of information with affiliates do
                                                                     firming this practice and the date on                     not apply to a person described in para-
                                                                     which the next payment will be due.                       graph (a) of this section if that person
                                                                     The creditor has obtained and used                        communicates to an affiliate:
                                                                     medical information to determine                            (1) Medical information;
                                                                     whether the provisions of a medically-                      (2) An individualized list or descrip-
                                                                     triggered forbearance practice or pro-                    tion based on the payment trans-
                                                                     gram apply to a consumer.                                 actions of the consumer for medical
                                                                                                                               products or services; or
                                                                     § 222.31 Limits on redisclosure of in-                      (3) An aggregate list of identified
                                                                         formation.                                            consumers based on payment trans-
                                                                       (a) Scope. This section applies to                      actions for medical products or serv-
                                                                     banks that are members of the Federal                     ices.
                                                                     Reserve System (other than national                         (c) Exceptions. A person described in
                                                                     banks) and their respective operating                     paragraph (a) of this section may rely
                                                                     subsidiaries, branches and agencies of                    on the exclusions from the term ‘‘con-
                                                                     foreign banks (other than Federal                         sumer report’’ in section 603(d)(2) of the
                                                                     branches, Federal Agencies, and in-                       Act to communicate the information in
                                                                     sured State branches of foreign banks),                   paragraph (b) of this section to an affil-
                                                                     commercial lending companies owned                        iate:
                                                                     or controlled by foreign banks, organi-                     (1) In connection with the business of
                                                                     zations operating under section 25 or                     insurance or annuities (including the
                                                                     25A of the Federal Reserve Act (12                        activities described in section 18B of
                                                                     U.S.C. 601 et seq., and 611 et seq.), and                 the model Privacy of Consumer Finan-
                                                                     bank holding companies and affiliates                     cial and Health Information Regula-
                                                                     of such holding companies (other than                     tion issued by the National Association
                                                                     depository institutions and consumer                      of Insurance Commissioners, as in ef-
                                                                     reporting agencies).                                      fect on January 1, 2003);
                                                                       (b) Limits on redisclosure. If a person                   (2) For any purpose permitted with-
                                                                     described in paragraph (a) of this sec-                   out authorization under the regula-
                                                                                                                               tions promulgated by the Department
                                                                     tion receives medical information
                                                                                                                               of Health and Human Services pursu-
                                                                     about a consumer from a consumer re-
                                                                                                                               ant to the Health Insurance Port-
                                                                     porting agency or its affiliate, the per-
                                                                                                                               ability and Accountability Act of 1996
                                                                     son must not disclose that information
                                                                                                                               (HIPAA);
                                                                     to any other person, except as nec-
                                                                                                                                 (3) For any purpose referred to in sec-
                                                                     essary to carry out the purpose for
                                                                                                                               tion 1179 of HIPAA;
                                                                     which the information was initially
                                                                                                                                 (4) For any purpose described in sec-
                                                                     disclosed, or as otherwise permitted by
                                                                                                                               tion 502(e) of the Gramm-Leach-Bliley
                                                                     statute, regulation, or order.
                                                                                                                               Act;
                                                                     § 222.32 Sharing medical information                        (5) In connection with a determina-
                                                                         with affiliates.                                      tion of the consumer’s eligibility, or
                                                                                                                               continued eligibility, for credit con-
                                                                       (a) Scope. This section applies to                      sistent with § 222.30 of this part; or
                                                                     banks that are members of the Federal                       (6) As otherwise permitted by order
                                                                     Reserve System (other than national                       of the Board.
                                                                     banks) and their respective operating
                                                                     subsidiaries, branches and agencies of
                                                                     foreign banks (other than Federal
                                                                                                                                      Subparts E–H [Reserved]
                                                                     branches, Federal Agencies, and in-
                                                                     sured State branches of foreign banks),                   Subpart I—Duties of Users of Con-
                                                                     commercial lending companies owned                           sumer     Reports   Regarding
                                                                     or controlled by foreign banks, organi-                      Identity Theft
                                                                     zations operating under section 25 or
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                                                                     25A of the Federal Reserve Act (12                          SOURCE: 69 FR 77618, Dec. 28, 2004, unless
                                                                     U.S.C. 601 et seq., and 611 et seq.).                     otherwise noted.

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                                                                     Federal Reserve System                                                                              § 222.83

                                                                     § 222.80–222.81         [Reserved]                        sumer reporting agency with the con-
                                                                                                                               sumer.
                                                                     § 222.82 Duties of users regarding ad-                      (d) Consumer’s address.—(1) Require-
                                                                           dress discrepancies.                                ment to furnish consumer’s address to a
                                                                        (a) Scope. This section applies to a                   consumer reporting agency. A user must
                                                                     user of consumer reports (user) that re-                  develop and implement reasonable poli-
                                                                     ceives a notice of address discrepancy                    cies and procedures for furnishing an
                                                                     from a consumer reporting agency, and                     address for the consumer that the user
                                                                     that is a member bank of the Federal                      has reasonably confirmed is accurate
                                                                     Reserve System (other than a national                     to the consumer reporting agency from
                                                                     bank) and its respective operating sub-                   whom it received the notice of address
                                                                     sidiaries, a branch or agency of a for-                   discrepancy when the user:
                                                                     eign bank (other than a Federal                             (i) Can form a reasonable belief that
                                                                     branch, Federal agency, or insured                        the consumer report relates to the con-
                                                                     State branch of a foreign bank), com-                     sumer about whom the user requested
                                                                     mercial lending company owned or                          the report;
                                                                     controlled by a foreign bank, and an                        (ii) Establishes a continuing relation-
                                                                     organization operating under section 25                   ship with the consumer; and
                                                                     or 25A of the Federal Reserve Act (12                       (iii) Regularly and in the ordinary
                                                                     U.S.C. 601 et seq., and 611 et seq.).                     course of business furnishes informa-
                                                                        (b) Definition. For purposes of this                   tion to the consumer reporting agency
                                                                     section, a notice of address discrepancy                  from which the notice of address dis-
                                                                     means a notice sent to a user by a con-                   crepancy relating to the consumer was
                                                                     sumer reporting agency pursuant to 15                     obtained.
                                                                     U.S.C. 1681c(h)(1), that informs the user                   (2) Examples of confirmation methods.
                                                                     of a substantial difference between the                   The user may reasonably confirm an
                                                                     address for the consumer that the user                    address is accurate by:
                                                                     provided to request the consumer re-                        (i) Verifying the address with the
                                                                     port and the address(es) in the agency’s                  consumer about whom it has requested
                                                                     file for the consumer.                                    the report;
                                                                        (c) Reasonable belief—(1) Requirement                    (ii) Reviewing its own records to
                                                                     to form a reasonable belief. A user must                  verify the address of the consumer;
                                                                     develop and implement reasonable poli-                      (iii) Verifying the address through
                                                                     cies and procedures designed to enable                    third-party sources; or
                                                                     the user to form a reasonable belief                        (iv) Using other reasonable means.
                                                                     that a consumer report relates to the                       (3) Timing. The policies and proce-
                                                                     consumer about whom it has requested                      dures developed in accordance with
                                                                     the report, when the user receives a no-                  paragraph (d)(1) of this section must
                                                                     tice of address discrepancy.                              provide that the user will furnish the
                                                                        (2) Examples of reasonable policies and                consumer’s address that the user has
                                                                     procedures. (i) Comparing the informa-                    reasonably confirmed is accurate to
                                                                     tion in the consumer report provided                      the consumer reporting agency as part
                                                                     by the consumer reporting agency with                     of the information it regularly fur-
                                                                     information the user:                                     nishes for the reporting period in which
                                                                        (A) Obtains and uses to verify the                     it establishes a relationship with the
                                                                     consumer’s identity in accordance with                    consumer.
                                                                     the requirements of the Customer In-                      [Reg. V, 72 FR 63756, Nov. 9, 2007]
                                                                     formation Program (CIP) rules imple-
                                                                     menting 31 U.S.C. 5318(l) (31 CFR                         § 222.83 Disposal of consumer informa-
                                                                     103.121);                                                      tion.
                                                                        (B) Maintains in its own records,                         (a) Definitions as used in this section.
                                                                     such as applications, change of address                   (1) You means member banks of the
                                                                     notifications, other customer account                     Federal Reserve System (other than
                                                                     records, or retained CIP documenta-                       national banks) and their respective
                                                                     tion; or                                                  operating subsidiaries, branches and
                                                                        (C) Obtains from third-party sources;                  agencies of foreign banks (other than
                                                                     or                                                        Federal branches, Federal agencies and
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                                                                        (ii) Verifying the information in the                  insured State branches of foreign
                                                                     consumer report provided by the con-                      banks), commercial lending companies

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                                                                     § 222.90                                                               12 CFR Ch. II (1–1–09 Edition)

                                                                     owned or controlled by foreign banks,                       (ii) A deposit account.
                                                                     and organizations operating under sec-                      (2) The term board of directors in-
                                                                     tion 25 or 25A of the Federal Reserve                     cludes:
                                                                     Act (12 U.S.C. 601 et seq., 611 et seq.).                   (i) In the case of a branch or agency
                                                                       (b) In general. You must properly dis-                  of a foreign bank, the managing offi-
                                                                     pose of any consumer information that                     cial in charge of the branch or agency;
                                                                     you maintain or otherwise possess in                      and
                                                                     accordance     with     the    Interagency                  (ii) In the case of any other creditor
                                                                     Guidelines Establishing Information                       that does not have a board of directors,
                                                                     Security Standards, as required under                     a designated employee at the level of
                                                                     sections 208.3(d) (Regulation H), 211.5(l)                senior management.
                                                                     and 211.24(i) (Regulation K) of this                        (3) Covered account means:
                                                                     chapter, to the extent that you are                         (i) An account that a financial insti-
                                                                     covered by the scope of the Guidelines.                   tution or creditor offers or maintains,
                                                                       (c) Rule of construction. Nothing in                    primarily for personal, family, or
                                                                     this section shall be construed to:                       household purposes, that involves or is
                                                                       (1) Require you to maintain or de-
                                                                                                                               designed to permit multiple payments
                                                                     stroy any record pertaining to a con-
                                                                                                                               or transactions, such as a credit card
                                                                     sumer that is not imposed under any
                                                                                                                               account, mortgage loan, automobile
                                                                     other law; or
                                                                                                                               loan, margin account, cell phone ac-
                                                                       (2) Alter or affect any requirement
                                                                                                                               count, utility account, checking ac-
                                                                     imposed under any other provision of
                                                                                                                               count, or savings account; and
                                                                     law to maintain or destroy such a
                                                                                                                                 (ii) Any other account that the finan-
                                                                     record.
                                                                                                                               cial institution or creditor offers or
                                                                                                                               maintains for which there is a reason-
                                                                     Subpart J—Identity Theft Red Flags                        ably foreseeable risk to customers or
                                                                                                                               to the safety and soundness of the fi-
                                                                      SOURCE: Reg. V, 72 FR 63758, Nov. 9, 2007,               nancial institution or creditor from
                                                                     unless otherwise noted.                                   identity theft, including financial,
                                                                                                                               operational, compliance, reputation, or
                                                                     § 222.90 Duties regarding the detec-
                                                                           tion, prevention, and mitigation of                 litigation risks.
                                                                           identity theft.                                       (4) Credit has the same meaning as in
                                                                                                                               15 U.S.C. 1681a(r)(5).
                                                                        (a) Scope. This section applies to fi-
                                                                                                                                 (5) Creditor has the same meaning as
                                                                     nancial institutions and creditors that
                                                                                                                               in 15 U.S.C. 1681a(r)(5), and includes
                                                                     are member banks of the Federal Re-
                                                                                                                               lenders such as banks, finance compa-
                                                                     serve System (other than national
                                                                                                                               nies, automobile dealers, mortgage
                                                                     banks) and their respective operating
                                                                                                                               brokers, utility companies, and tele-
                                                                     subsidiaries, branches and agencies of
                                                                                                                               communications companies.
                                                                     foreign banks (other than Federal
                                                                     branches, Federal agencies, and insured                     (6) Customer means a person that has
                                                                     State branches of foreign banks), com-                    a covered account with a financial in-
                                                                     mercial lending companies owned or                        stitution or creditor.
                                                                     controlled by foreign banks, and orga-                      (7) Financial institution has the same
                                                                     nizations operating under section 25 or                   meaning as in 15 U.S.C. 1681a(t).
                                                                     25A of the Federal Reserve Act (12                          (8) Identity theft has the same mean-
                                                                     U.S.C. 601 et seq., and 611 et seq.).                     ing as in 16 CFR 603.2(a).
                                                                        (b) Definitions. For purposes of this                    (9) Red Flag means a pattern, prac-
                                                                     section and appendix J, the following                     tice, or specific activity that indicates
                                                                     definitions apply:                                        the possible existence of identity theft.
                                                                        (1) Account means a continuing rela-                     (10) Service provider means a person
                                                                     tionship established by a person with a                   that provides a service directly to the
                                                                     financial institution or creditor to ob-                  financial institution or creditor.
                                                                     tain a product or service for personal,                     (c) Periodic Identification of Covered
                                                                     family, household or business purposes.                   Accounts. Each financial institution or
                                                                     Account includes:                                         creditor must periodically determine
                                                                        (i) An extension of credit, such as the                whether it offers or maintains covered
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                                                                     purchase of property or services involv-                  accounts. As a part of this determina-
                                                                     ing a deferred payment; and                               tion, a financial institution or creditor

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                                                                     Federal Reserve System                                                                              § 222.91

                                                                     must conduct a risk assessment to de-                       (2) Involve the board of directors, an
                                                                     termine whether it offers or maintains                    appropriate committee thereof, or a
                                                                     covered accounts described in para-                       designated employee at the level of
                                                                     graph (b)(3)(ii) of this section, taking                  senior management in the oversight,
                                                                     into consideration:                                       development, implementation and ad-
                                                                       (1) The methods it provides to open                     ministration of the Program;
                                                                     its accounts;                                               (3) Train staff, as necessary, to effec-
                                                                       (2) The methods it provides to access                   tively implement the Program; and
                                                                     its accounts; and                                           (4) Exercise appropriate and effective
                                                                       (3) Its previous experiences with iden-                 oversight of service provider arrange-
                                                                     tity theft.                                               ments.
                                                                       (d) Establishment of an Identity Theft                    (f) Guidelines. Each financial institu-
                                                                     Prevention Program—(1) Program require-                   tion or creditor that is required to im-
                                                                     ment. Each financial institution or                       plement a Program must consider the
                                                                     creditor that offers or maintains one or                  guidelines in appendix J of this part
                                                                     more covered accounts must develop                        and include in its Program those guide-
                                                                     and implement a written Identity                          lines that are appropriate.
                                                                     Theft Prevention Program (Program)
                                                                     that is designed to detect, prevent, and                  § 222.91 Duties of card issuers regard-
                                                                     mitigate identity theft in connection                          ing changes of address.
                                                                     with the opening of a covered account                        (a) Scope. This section applies to a
                                                                     or any existing covered account. The                      person described in § 222.90(a) that
                                                                     Program must be appropriate to the                        issues a debit or credit card (card
                                                                     size and complexity of the financial in-                  issuer).
                                                                     stitution or creditor and the nature                         (b) Definitions. For purposes of this
                                                                     and scope of its activities.                              section:
                                                                       (2) Elements of the Program. The Pro-                      (1) Cardholder means a consumer who
                                                                     gram must include reasonable policies                     has been issued a credit or debit card.
                                                                     and procedures to:                                           (2) Clear and conspicuous means rea-
                                                                       (i) Identify relevant Red Flags for the                 sonably understandable and designed
                                                                     covered accounts that the financial in-                   to call attention to the nature and sig-
                                                                     stitution or creditor offers or main-                     nificance of the information presented.
                                                                     tains, and incorporate those Red Flags                       (c) Address validation requirements. A
                                                                     into its Program;                                         card issuer must establish and imple-
                                                                       (ii) Detect Red Flags that have been                    ment reasonable policies and proce-
                                                                     incorporated into the Program of the                      dures to assess the validity of a change
                                                                     financial institution or creditor;                        of address if it receives notification of
                                                                       (iii) Respond appropriately to any                      a change of address for a consumer’s
                                                                     Red Flags that are detected pursuant                      debit or credit card account and, with-
                                                                     to paragraph (d)(2)(ii) of this section to                in a short period of time afterwards
                                                                     prevent and mitigate identity theft;                      (during at least the first 30 days after
                                                                     and                                                       it receives such notification), the card
                                                                       (iv) Ensure the Program (including                      issuer receives a request for an addi-
                                                                     the Red Flags determined to be rel-                       tional or replacement card for the
                                                                     evant) is updated periodically, to re-                    same account. Under these cir-
                                                                     flect changes in risks to customers and                   cumstances, the card issuer may not
                                                                     to the safety and soundness of the fi-                    issue an additional or replacement
                                                                     nancial institution or creditor from                      card, until, in accordance with its rea-
                                                                     identity theft.                                           sonable policies and procedures and for
                                                                       (e) Administration of the Program.                      the purpose of assessing the validity of
                                                                     Each financial institution or creditor                    the change of address, the card issuer:
                                                                     that is required to implement a Pro-                         (1)(i) Notifies the cardholder of the
                                                                     gram must provide for the continued                       request:
                                                                     administration of the Program and                            (A) At the cardholder’s former ad-
                                                                     must:                                                     dress; or
                                                                       (1) Obtain approval of the initial                         (B) By any other means of commu-
                                                                     written Program from either its board                     nication that the card issuer and the
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                                                                     of directors or an appropriate com-                       cardholder have previously agreed to
                                                                     mittee of the board of directors;                         use; and

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                                                                     Pt. 222, App. B                                                        12 CFR Ch. II (1–1–09 Edition)

                                                                        (ii) Provides to the cardholder a rea-                   3. Specifying the particular type of ac-
                                                                     sonable means of promptly reporting                       count on which information may be fur-
                                                                     incorrect address changes; or                             nished, such as ‘‘credit card account’’
                                                                                                                                 4. Rearranging in Model Notice B–1 the
                                                                        (2) Otherwise assesses the validity of                 phrases ‘‘information about your account’’
                                                                     the change of address in accordance                       and ‘‘to credit bureaus’’ such that it would
                                                                     with the policies and procedures the                      read ‘‘We may report to credit bureaus infor-
                                                                     card issuer has established pursuant to                   mation about your account.’’
                                                                     § 222.90 of this part.                                                    Model Notice B–1
                                                                        (d) Alternative timing of address valida-
                                                                     tion. A card issuer may satisfy the re-                     We may report information about your ac-
                                                                                                                               count to credit bureaus. Late payments,
                                                                     quirements of paragraph (c) of this sec-                  missed payments, or other defaults on your
                                                                     tion if it validates an address pursuant                  account may be reflected in your credit re-
                                                                     to the methods in paragraph (c)(1) or                     port.
                                                                     (c)(2) of this section when it receives an
                                                                                                                                               Model Notice B–2
                                                                     address change notification, before it
                                                                     receives a request for an additional or                     We have told a credit bureau about a late
                                                                     replacement card.                                         payment, missed payment or other default
                                                                                                                               on your account. This information may be
                                                                        (e) Form of notice. Any written or
                                                                                                                               reflected in your credit report.
                                                                     electronic notice that the card issuer
                                                                     provides under this paragraph must be                     [69 FR 33285, June 15, 2004]
                                                                     clear and conspicuous and provided
                                                                                                                               APPENDIX C TO PART 222—MODEL FORMS
                                                                     separately from its regular correspond-
                                                                                                                                       FOR OPT-OUT NOTICES
                                                                     ence with the cardholder.
                                                                                                                                  a. Although use of the model forms is not
                                                                       APPENDIX A TO PART 222 [RESERVED]                       required, use of the model forms in this ap-
                                                                                                                               pendix (as applicable) complies with the re-
                                                                     APPENDIX B TO PART 222—MODEL NO-                          quirement in section 624 of the Act for clear,
                                                                        TICES OF FURNISHING NEGATIVE IN-                       conspicuous, and concise notices.
                                                                          FORMATION                                               b. Certain changes may be made to the lan-
                                                                                                                               guage or format of the model forms without
                                                                        a. Although use of the model notices is not            losing the protection from liability afforded
                                                                     required, a financial institution that is sub-            by use of the model forms. These changes
                                                                     ject to section 623(a)(7) of the FCRA shall be            may not be so extensive as to affect the sub-
                                                                     deemed to be in compliance with the notice                stance, clarity, or meaningful sequence of
                                                                     requirement in section 623(a)(7) of the FCRA              the language in the model forms. Persons
                                                                     if the institution properly uses the model no-            making such extensive revisions will lose the
                                                                     tices in this appendix (as applicable).                   safe harbor that this appendix provides. Ac-
                                                                        b. A financial institution may use Model               ceptable changes include, for example:
                                                                     Notice B–1 if the institution provides the no-               1. Rearranging the order of the references
                                                                     tice prior to furnishing negative information             to ‘‘your income,’’ ‘‘your account history,’’
                                                                                                                               and ‘‘your credit score.’’
                                                                     to a nationwide consumer reporting agency.
                                                                                                                                  2. Substituting other types of information
                                                                        c. A financial institution may use Model               for ‘‘income,’’ ‘‘account history,’’ or ‘‘credit
                                                                     Notice B–2 if the institution provides the no-            score’’ for accuracy, such as ‘‘payment his-
                                                                     tice after furnishing negative information to             tory,’’ ‘‘credit history,’’ ‘‘payoff status,’’ or
                                                                     a nationwide consumer reporting agency.                   ‘‘claims history.’’
                                                                        d. Financial institutions may make certain                3. Substituting a clearer and more accu-
                                                                     changes to the language or format of the                  rate description of the affiliates providing or
                                                                     model notices without losing the safe harbor              covered by the notice for phrases such as
                                                                     from liability provided by the model notices.             ‘‘the [ABC] group of companies,’’ including
                                                                     The changes to the model notices may not be               without limitation a statement that the en-
                                                                     so extensive as to affect the substance, clar-            tity providing the notice recently purchased
                                                                     ity, or meaningful sequence of the language               the consumer’s account.
                                                                     in the model notices. Financial institutions                 4. Substituting other types of affiliates
                                                                     making such extensive revisions will lose the             covered by the notice for ‘‘credit card,’’ ‘‘in-
                                                                     safe harbor from liability that this appendix             surance,’’ or ‘‘securities’’ affiliates.
                                                                     provides. Acceptable changes include, for ex-                5. Omitting items that are not accurate or
                                                                     ample,                                                    applicable. For example, if a person does not
                                                                        1. Rearranging the order of the references             limit the duration of the opt-out period, the
                                                                     to ‘‘late payment(s),’’ or ‘‘missed pay-                  notice may omit information about the re-
                                                                     ment(s)’’                                                 newal notice.
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                                                                        2. Pluralizing the terms ‘‘credit bureau,’’               6. Adding a statement informing con-
                                                                     ‘‘credit report,’’ and ‘‘account’’                        sumers how much time they have to opt out

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                                                                     Federal Reserve System                                                                     Pt. 222, App. C
                                                                     before shared eligibility information may be              [Company address]
                                                                     used to make solicitations to them.                         lDo not allow your affiliates to use my
                                                                       7. Adding a statement that the consumer                 personal information to market to me.
                                                                     may exercise the right to opt out at any
                                                                     time.                                                     C–2—Model Form for Initial Opt-out Notice
                                                                       8. Adding the following statement, if accu-               (Joint Notice)—[Your Choice To Limit Mar-
                                                                     rate: ‘‘If you previously opted out, you do                 keting]/[Marketing Opt-out]
                                                                     not need to do so again.’’
                                                                       9. Providing a place on the form for the                  • The [ABC group of companies] is pro-
                                                                     consumer to fill in identifying information,              viding this notice.
                                                                     such as his or her name and address                         • [Optional: Federal law gives you the
                                                                                                                               right to limit some but not all marketing
                                                                     C–1 Model Form for Initial Opt-out Notice
                                                                                                                               from the [ABC] companies. Federal law also
                                                                       (Single-Affiliate Notice)
                                                                                                                               requires us to give you this notice to tell you
                                                                     C–2 Model Form for Initial Opt-out Notice                 about your choice to limit marketing from
                                                                       (Joint Notice)                                          the [ABC] companies.]
                                                                     C–3 Model Form for Renewal Notice (Sin-                     • You may limit the [ABC] companies,
                                                                       gle-Affiliate Notice)                                   such as the [ABC credit card, insurance, and
                                                                     C–4 Model Form for Renewal Notice (Joint                  securities] affiliates, from marketing their
                                                                       Notice)                                                 products or services to you based on your
                                                                     C–5 Model Form for Voluntary ‘‘No Mar-                    personal information that they receive from
                                                                       keting’’ Notice                                         other [ABC] companies. This information in-
                                                                     C–1—Model Form for Initial Opt-out Notice                 cludes your [income], your [account history],
                                                                       (Single-Affiliate Notice)—[Your Choice To               and your [credit score].
                                                                       Limit Marketing]/[Marketing Opt-out]                      • Your choice to limit marketing offers
                                                                                                                               from the [ABC] companies will apply [until
                                                                        • [Name of Affiliate] is providing this no-            you tell us to change your choice]/[for x
                                                                     tice.                                                     years from when you tell us your choice]/[for
                                                                        • [Optional: Federal law gives you the                 at least 5 years from when you tell us your
                                                                     right to limit some but not all marketing                 choice]. [Include if the opt-out period ex-
                                                                     from our affiliates. Federal law also requires            pires.] Once that period expires, you will re-
                                                                     us to give you this notice to tell you about              ceive a renewal notice that will allow you to
                                                                     your choice to limit marketing from our af-               continue to limit marketing offers from the
                                                                     filiates.]                                                [ABC] companies for [another x years]/[at
                                                                        • You may limit our affiliates in the [ABC]            least another 5 years].
                                                                     group of companies, such as our [credit card,               • [Include, if applicable, in a subsequent
                                                                     insurance, and securities] affiliates, from               notice, including an annual notice, for con-
                                                                     marketing their products or services to you               sumers who may have previously opted out.]
                                                                     based on your personal information that we                If you have already made a choice to limit
                                                                     collect and share with them. This informa-                marketing offers from the [ABC] companies,
                                                                     tion includes your [income], your [account                you do not need to act again until you re-
                                                                     history with us], and your [credit score].                ceive the renewal notice.
                                                                        • Your choice to limit marketing offers                  To limit marketing offers, contact us [in-
                                                                     from our affiliates will apply [until you tell            clude all that apply]:
                                                                     us to change your choice]/[for x years from                 • By telephone: 1–877–###–####
                                                                     when you tell us your choice]/[for at least 5               • On the Web: www.---.com
                                                                     years from when you tell us your choice].                   • By mail: Check the box and complete the
                                                                     [Include if the opt-out period expires.] Once             form below, and send the form to:
                                                                     that period expires, you will receive a re-
                                                                     newal notice that will allow you to continue              [Company name]
                                                                     to limit marketing offers from our affiliates             [Company address]
                                                                     for [another x years]/[at least another 5                   lDo not allow any company [in the ABC
                                                                     years].                                                   group of companies] to use my personal in-
                                                                        • [Include, if applicable, in a subsequent             formation to market to me.
                                                                     notice, including an annual notice, for con-
                                                                     sumers who may have previously opted out.]                C–3—Model Form for Renewal Notice (Single-
                                                                     If you have already made a choice to limit                  Affiliate Notice)—[Renewing Your Choice To
                                                                     marketing offers from our affiliates, you do                Limit Marketing]/[Renewing Your Marketing
                                                                     not need to act again until you receive the                 Opt-Out]
                                                                     renewal notice.                                              • [Name of Affiliate] is providing this no-
                                                                        To limit marketing offers, contact us [in-             tice.
                                                                     clude all that apply]:                                       • [Optional: Federal law gives you the
                                                                        • By telephone: 1–877–###–####                         right to limit some but not all marketing
                                                                        • On the Web: www.---.com                              from our affiliates. Federal law also requires
                                                                        • By mail: Check the box and complete the              us to give you this notice to tell you about
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                                                                     form below, and send the form to:                         your choice to limit marketing from our af-
                                                                     [Company name]                                            filiates.]

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                                                                     Pt. 222, App. J                                                        12 CFR Ch. II (1–1–09 Edition)
                                                                       • You previously chose to limit our affili-               To stop all marketing, contact us [include
                                                                     ates in the [ABC] group of companies, such                all that apply]:
                                                                     as our [credit card, insurance, and securities]             • By telephone: 1–877–###–####
                                                                     affiliates, from marketing their products or                • On the Web: www.---.com
                                                                     services to you based on your personal infor-               • By mail: Check the box and complete the
                                                                     mation that we share with them. This infor-               form below, and send the form to:
                                                                     mation includes your [income], your [ac-                  [Company name]
                                                                     count history with us], and your [credit                  [Company address]
                                                                     score].                                                   lDo not market to me.
                                                                       • Your choice has expired or is about to ex-
                                                                     pire.                                                     [72 FR 62962, Nov. 7, 2007]
                                                                       To renew your choice to limit marketing
                                                                     for [x] more years, contact us [include all                      APPENDICES D–I TO PART 222
                                                                     that apply]:                                                            [RESERVED]
                                                                       • By telephone: 1–877–###–####
                                                                       • On the Web: www.---.com                               APPENDIX J TO PART 222—INTERAGENCY
                                                                       • By mail: Check the box and complete the                  GUIDELINES ON IDENTITY THEFT DE-
                                                                     form below, and send the form to:                            TECTION, PREVENTION, AND MITIGA-
                                                                     [Company name]                                                TION
                                                                     [Company address]
                                                                                                                                 Section 222.90 of this part requires each fi-
                                                                     lRenew my choice to limit marketing for                   nancial institution and creditor that offers
                                                                       [x] more years.                                         or maintains one or more covered accounts,
                                                                                                                               as defined in § 222.90(b)(3) of this part, to de-
                                                                     C–4—Model Form for Renewal Notice (Joint No-              velop and provide for the continued adminis-
                                                                       tice)—[Renewing Your Choice To Limit Mar-               tration of a written Program to detect, pre-
                                                                       keting]/[Renewing Your Marketing Opt-Out]               vent, and mitigate identity theft in connec-
                                                                       • The [ABC group of companies] is pro-                  tion with the opening of a covered account
                                                                     viding this notice.                                       or any existing covered account. These
                                                                       • [Optional: Federal law gives you the                  guidelines are intended to assist financial in-
                                                                     right to limit some but not all marketing                 stitutions and creditors in the formulation
                                                                     from the [ABC] companies. Federal law also                and maintenance of a Program that satisfies
                                                                     requires us to give you this notice to tell you           the requirements of § 222.90 of this part.
                                                                     about your choice to limit marketing from
                                                                     the [ABC] companies.]                                                      I. The Program
                                                                       • You previously chose to limit the [ABC]                 In designing its Program, a financial insti-
                                                                     companies, such as the [ABC credit card, in-              tution or creditor may incorporate, as appro-
                                                                     surance, and securities] affiliates, from mar-            priate, its existing policies, procedures, and
                                                                     keting their products or services to you                  other arrangements that control reasonably
                                                                     based on your personal information that                   foreseeable risks to customers or to the safe-
                                                                     they receive from other ABC companies.                    ty and soundness of the financial institution
                                                                     This information includes your [income],                  or creditor from identity theft.
                                                                     your [account history], and your [credit
                                                                     score].                                                         II. Identifying Relevant Red Flags
                                                                       • Your choice has expired or is about to ex-              (a) Risk Factors. A financial institution or
                                                                     pire.                                                     creditor should consider the following fac-
                                                                       To renew your choice to limit marketing                 tors in identifying relevant Red Flags for
                                                                     for [x] more years, contact us [include all               covered accounts, as appropriate:
                                                                     that apply]:                                                (1) The types of covered accounts it offers
                                                                       • By telephone: 1–877–###–####                          or maintains;
                                                                       • On the Web: www.---.com                                 (2) The methods it provides to open its cov-
                                                                       • By mail: Check the box and complete the               ered accounts;
                                                                     form below, and send the form to:                           (3) The methods it provides to access its
                                                                     [Company name]                                            covered accounts; and
                                                                     [Company address]                                           (4) Its previous experiences with identity
                                                                                                                               theft.
                                                                     lRenew my choice to limit marketing for                     (b) Sources of Red Flags. Financial institu-
                                                                       [x] more years.                                         tions and creditors should incorporate rel-
                                                                     C–5—Model Form for Voluntary ‘‘No Mar-                    evant Red Flags from sources such as:
                                                                       keting’’ Notice—Your Choice To Stop Mar-                  (1) Incidents of identity theft that the fi-
                                                                       keting                                                  nancial institution or creditor has experi-
                                                                                                                               enced;
                                                                       • [Name of Affiliate] is providing this no-               (2) Methods of identity theft that the fi-
                                                                     tice.                                                     nancial institution or creditor has identified
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                                                                       • You may choose to stop all marketing                  that reflect changes in identity theft risks;
                                                                     from us and our affiliates.                               and

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                                                                     Federal Reserve System                                                                     Pt. 222, App. J
                                                                       (3) Applicable supervisory guidance.                      (c) Changing any passwords, security
                                                                       (c) Categories of Red Flags. The Program                codes, or other security devices that permit
                                                                     should include relevant Red Flags from the                access to a covered account;
                                                                     following categories, as appropriate. Exam-                 (d) Reopening a covered account with a
                                                                     ples of Red Flags from each of these cat-                 new account number;
                                                                     egories are appended as Supplement A to                     (e) Not opening a new covered account;
                                                                     this appendix J.                                            (f) Closing an existing covered account;
                                                                       (1) Alerts, notifications, or other warnings              (g) Not attempting to collect on a covered
                                                                     received from consumer reporting agencies                 account or not selling a covered account to
                                                                     or service providers, such as fraud detection             a debt collector;
                                                                     services;                                                   (h) Notifying law enforcement; or
                                                                       (2) The presentation of suspicious docu-                  (i) Determining that no response is war-
                                                                     ments;                                                    ranted under the particular circumstances.
                                                                       (3) The presentation of suspicious personal
                                                                     identifying information, such as a suspicious                         V. Updating the Program
                                                                     address change;                                             Financial institutions and creditors should
                                                                       (4) The unusual use of, or other suspicious             update the Program (including the Red Flags
                                                                     activity related to, a covered account; and               determined to be relevant) periodically, to
                                                                       (5) Notice from customers, victims of iden-             reflect changes in risks to customers or to
                                                                     tity theft, law enforcement authorities, or               the safety and soundness of the financial in-
                                                                     other persons regarding possible identity                 stitution or creditor from identity theft,
                                                                     theft in connection with covered accounts                 based on factors such as:
                                                                     held by the financial institution or creditor.              (a) The experiences of the financial institu-
                                                                                                                               tion or creditor with identity theft;
                                                                                  III. Detecting Red Flags
                                                                                                                                 (b) Changes in methods of identity theft;
                                                                       The Program’s policies and procedures                     (c) Changes in methods to detect, prevent,
                                                                     should address the detection of Red Flags in              and mitigate identity theft;
                                                                     connection with the opening of covered ac-                  (d) Changes in the types of accounts that
                                                                     counts and existing covered accounts, such                the financial institution or creditor offers or
                                                                     as by:                                                    maintains; and
                                                                       (a) Obtaining identifying information                     (e) Changes in the business arrangements
                                                                     about, and verifying the identity of, a person            of the financial institution or creditor, in-
                                                                     opening a covered account, for example,                   cluding mergers, acquisitions, alliances,
                                                                     using the policies and procedures regarding               joint ventures, and service provider arrange-
                                                                     identification and verification set forth in              ments.
                                                                     the Customer Identification Program rules
                                                                     implementing 31 U.S.C. 5318(l) (31 CFR                    VI. Methods for Administering the Program
                                                                     103.121); and                                               (a) Oversight of Program. Oversight by the
                                                                       (b) Authenticating customers, monitoring                board of directors, an appropriate committee
                                                                     transactions, and verifying the validity of               of the board, or a designated employee at the
                                                                     change of address requests, in the case of ex-            level of senior management should include:
                                                                     isting covered accounts.                                    (1) Assigning specific responsibility for the
                                                                                                                               Program’s implementation;
                                                                     IV. Preventing and Mitigating Identity Theft
                                                                                                                                 (2) Reviewing reports prepared by staff re-
                                                                       The Program’s policies and procedures                   garding compliance by the financial institu-
                                                                     should provide for appropriate responses to               tion or creditor with § 222.90 of this part; and
                                                                     the Red Flags the financial institution or                  (3) Approving material changes to the Pro-
                                                                     creditor has detected that are commensurate               gram as necessary to address changing iden-
                                                                     with the degree of risk posed. In determining             tity theft risks.
                                                                     an appropriate response, a financial institu-               (b) Reports. (1) In general. Staff of the finan-
                                                                     tion or creditor should consider aggravating              cial institution or creditor responsible for
                                                                     factors that may heighten the risk of iden-               development, implementation, and adminis-
                                                                     tity theft, such as a data security incident              tration of its Program should report to the
                                                                     that results in unauthorized access to a cus-             board of directors, an appropriate committee
                                                                     tomer’s account records held by the financial             of the board, or a designated employee at the
                                                                     institution, creditor, or third party, or no-             level of senior management, at least annu-
                                                                     tice that a customer has provided informa-                ally, on compliance by the financial institu-
                                                                     tion related to a covered account held by the             tion or creditor with § 222.90 of this part.
                                                                     financial institution or creditor to someone                (2) Contents of report. The report should ad-
                                                                     fraudulently claiming to represent the finan-             dress material matters related to the Pro-
                                                                     cial institution or creditor or to a fraudulent           gram and evaluate issues such as: the effec-
                                                                     website. Appropriate responses may include                tiveness of the policies and procedures of the
                                                                     the following:                                            financial institution or creditor in address-
                                                                       (a) Monitoring a covered account for evi-               ing the risk of identity theft in connection
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                                                                     dence of identity theft;                                  with the opening of covered accounts and
                                                                       (b) Contacting the customer;                            with respect to existing covered accounts;

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                                                                     Pt. 222, App. J                                                        12 CFR Ch. II (1–1–09 Edition)
                                                                     service provider arrangements; significant                   3. A consumer reporting agency provides a
                                                                     incidents involving identity theft and man-               notice of address discrepancy, as defined in
                                                                     agement’s response; and recommendations                   § 222.82(b) of this part.
                                                                     for material changes to the Program.                         4. A consumer report indicates a pattern of
                                                                       (c) Oversight of service provider arrange-              activity that is inconsistent with the history
                                                                     ments. Whenever a financial institution or                and usual pattern of activity of an applicant
                                                                     creditor engages a service provider to per-               or customer, such as:
                                                                     form an activity in connection with one or                   a. A recent and significant increase in the
                                                                     more covered accounts the financial institu-              volume of inquiries;
                                                                     tion or creditor should take steps to ensure                 b. An unusual number of recently estab-
                                                                     that the activity of the service provider is              lished credit relationships;
                                                                     conducted in accordance with reasonable                      c. A material change in the use of credit,
                                                                     policies and procedures designed to detect,               especially with respect to recently estab-
                                                                     prevent, and mitigate the risk of identity                lished credit relationships; or
                                                                     theft. For example, a financial institution or               d. An account that was closed for cause or
                                                                     creditor could require the service provider               identified for abuse of account privileges by
                                                                     by contract to have policies and procedures               a financial institution or creditor.
                                                                     to detect relevant Red Flags that may arise
                                                                     in the performance of the service provider’s                            Suspicious Documents
                                                                     activities, and either report the Red Flags to
                                                                     the financial institution or creditor, or to                5. Documents provided for identification
                                                                     take appropriate steps to prevent or miti-                appear to have been altered or forged.
                                                                     gate identity theft.                                        6. The photograph or physical description
                                                                                                                               on the identification is not consistent with
                                                                      VII. Other Applicable Legal Requirements                 the appearance of the applicant or customer
                                                                                                                               presenting the identification.
                                                                       Financial institutions and creditors should
                                                                     be mindful of other related legal require-                  7. Other information on the identification
                                                                     ments that may be applicable, such as:                    is not consistent with information provided
                                                                       (a) For financial institutions and creditors            by the person opening a new covered account
                                                                     that are subject to 31 U.S.C. 5318(g), filing a           or customer presenting the identification.
                                                                     Suspicious Activity Report in accordance                    8. Other information on the identification
                                                                     with applicable law and regulation;                       is not consistent with readily accessible in-
                                                                       (b) Implementing any requirements under                 formation that is on file with the financial
                                                                     15 U.S.C. 1681c–1(h) regarding the cir-                   institution or creditor, such as a signature
                                                                     cumstances under which credit may be ex-                  card or a recent check.
                                                                     tended when the financial institution or                    9. An application appears to have been al-
                                                                     creditor detects a fraud or active duty alert;            tered or forged, or gives the appearance of
                                                                       (c) Implementing any requirements for fur-              having been destroyed and reassembled.
                                                                     nishers of information to consumer reporting
                                                                     agencies under 15 U.S.C. 1681s–2, for example,              Suspicious Personal Identifying Information
                                                                     to correct or update inaccurate or incom-                   10. Personal identifying information pro-
                                                                     plete information, and to not report informa-             vided is inconsistent when compared against
                                                                     tion that the furnisher has reasonable cause              external information sources used by the fi-
                                                                     to believe is inaccurate; and                             nancial institution or creditor. For example:
                                                                       (d) Complying with the prohibitions in 15                 a. The address does not match any address
                                                                     U.S.C. 1681m on the sale, transfer, and place-            in the consumer report; or
                                                                     ment for collection of certain debts resulting              b. The Social Security Number (SSN) has
                                                                     from identity theft.                                      not been issued, or is listed on the Social Se-
                                                                                                                               curity Administration’s Death Master File.
                                                                                 Supplement A to Appendix J
                                                                                                                                 11. Personal identifying information pro-
                                                                       In addition to incorporating Red Flags                  vided by the customer is not consistent with
                                                                     from the sources recommended in section                   other personal identifying information pro-
                                                                     II.b. of the Guidelines in appendix J of this             vided by the customer. For example, there is
                                                                     part, each financial institution or creditor              a lack of correlation between the SSN range
                                                                     may consider incorporating into its Pro-                  and date of birth.
                                                                     gram, whether singly or in combination, Red                 12. Personal identifying information pro-
                                                                     Flags from the following illustrative exam-               vided is associated with known fraudulent
                                                                     ples in connection with covered accounts:                 activity as indicated by internal or third-
                                                                                                                               party sources used by the financial institu-
                                                                         Alerts, Notifications or Warnings from a              tion or creditor. For example:
                                                                               Consumer Reporting Agency                         a. The address on an application is the
                                                                       1. A fraud or active duty alert is included             same as the address provided on a fraudulent
                                                                     with a consumer report.                                   application; or
                                                                       2. A consumer reporting agency provides a                 b. The phone number on an application is
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                                                                     notice of credit freeze in response to a re-              the same as the number provided on a fraud-
                                                                     quest for a consumer report.                              ulent application.

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                                                                     Federal Reserve System                                                                              Pt. 223
                                                                       13. Personal identifying information pro-                 e. A material change in telephone call pat-
                                                                     vided is of a type commonly associated with               terns in connection with a cellular phone ac-
                                                                     fraudulent activity as indicated by internal              count.
                                                                     or third-party sources used by the financial                22. A covered account that has been inac-
                                                                     institution or creditor. For example:                     tive for a reasonably lengthy period of time
                                                                       a. The address on an application is ficti-              is used (taking into consideration the type of
                                                                     tious, a mail drop, or a prison; or                       account, the expected pattern of usage and
                                                                       b. The phone number is invalid, or is asso-             other relevant factors).
                                                                     ciated with a pager or answering service.                   23. Mail sent to the customer is returned
                                                                       14. The SSN provided is the same as that                repeatedly as undeliverable although trans-
                                                                     submitted by other persons opening an ac-                 actions continue to be conducted in connec-
                                                                     count or other customers.                                 tion with the customer’s covered account.
                                                                       15. The address or telephone number pro-                  24. The financial institution or creditor is
                                                                     vided is the same as or similar to the ac-                notified that the customer is not receiving
                                                                     count number or telephone number sub-                     paper account statements.
                                                                     mitted by an unusually large number of                      25. The financial institution or creditor is
                                                                     other persons opening accounts or other cus-              notified of unauthorized charges or trans-
                                                                     tomers.                                                   actions in connection with a customer’s cov-
                                                                       16. The person opening the covered account              ered account.
                                                                     or the customer fails to provide all required
                                                                     personal identifying information on an appli-             Notice from Customers, Victims of         Identity
                                                                     cation or in response to notification that the             Theft, Law Enforcement Authorities,      or Other
                                                                     application is incomplete.                                 Persons Regarding Possible Identity      Theft in
                                                                       17. Personal identifying information pro-                Connection with Covered Accounts         Held by
                                                                     vided is not consistent with personal identi-              the Financial Institution or Creditor
                                                                     fying information that is on file with the fi-
                                                                     nancial institution or creditor.                            26. The financial institution or creditor is
                                                                       18. For financial institutions and creditors            notified by a customer, a victim of identity
                                                                     that use challenge questions, the person                  theft, a law enforcement authority, or any
                                                                     opening the covered account or the customer               other person that it has opened a fraudulent
                                                                     cannot provide authenticating information                 account for a person engaged in identity
                                                                     beyond that which generally would be avail-               theft.
                                                                     able from a wallet or consumer report.                    [Reg. V, 72 FR 63758, Nov. 9, 2007]
                                                                      Unusual Use of, or Suspicious Activity Related
                                                                                to, the Covered Account                        PART 223—TRANSACTIONS BE-
                                                                       19. Shortly following the notice of a change              TWEEN MEMBER BANKS AND
                                                                     of address for a covered account, the institu-              THEIR AFFILIATES (REGULATION
                                                                     tion or creditor receives a request for a new,              W)
                                                                     additional, or replacement card or a cell
                                                                     phone, or for the addition of authorized users
                                                                     on the account.                                             Subpart A—Introduction and Definitions
                                                                       20. A new revolving credit account is used
                                                                                                                               Sec.
                                                                     in a manner commonly associated with
                                                                                                                               223.1 Authority, purpose, and scope.
                                                                     known patterns of fraud patterns. For exam-
                                                                     ple:                                                      223.2 What is an ‘‘affiliate’’ for purposes of
                                                                       a. The majority of available credit is used                 sections 23A and 23B and this part?
                                                                     for cash advances or merchandise that is eas-             223.3 What are the meanings of the other
                                                                     ily convertible to cash (e.g., electronics                    terms used in sections 23A and 23B and
                                                                     equipment or jewelry); or                                     this part?
                                                                       b. The customer fails to make the first
                                                                     payment or makes an initial payment but no                 Subpart B—General Provisions of Section
                                                                     subsequent payments.                                                       23A
                                                                       21. A covered account is used in a manner
                                                                     that is not consistent with established pat-              223.11 What is the maximum amount of cov-
                                                                     terns of activity on the account. There is, for               ered transactions that a member bank
                                                                     example:                                                      may enter into with any single affiliate?
                                                                       a. Nonpayment when there is no history of               223.12 What is the maximum amount of cov-
                                                                     late or missed payments;                                      ered transactions that a member bank
                                                                       b. A material increase in the use of avail-                 may enter into with all affiliates?
                                                                     able credit;                                              223.13 What safety and soundness require-
                                                                       c. A material change in purchasing or                       ment applies to covered transactions?
                                                                     spending patterns;                                        223.14 What are the collateral requirements
                                                                       d. A material change in electronic fund                     for a credit transaction with an affiliate?
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                                                                     transfer patterns in connection with a de-                223.15 May a member bank purchase a low-
                                                                     posit account; or                                             quality asset from an affiliate?

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                                                                     § 223.1                                                                12 CFR Ch. II (1–1–09 Edition)
                                                                     223.16 What transactions by a member bank                 223.56 What transactions are exempt from
                                                                         with any person are treated as trans-                     the market-terms requirement of section
                                                                         actions with an affiliate?                                23B?

                                                                           Subpart C—Valuation and Timing                      Subpart G—Application of Sections 23A
                                                                             Principles Under Section 23A                         and 23B to U.S. Branches and Agen-
                                                                                                                                  cies of Foreign Banks
                                                                     223.21 What valuation and timing principles
                                                                         apply to credit transactions?                         223.61 How do sections 23A and 23B apply to
                                                                     223.22 What valuation and timing principles                   U.S. branches and agencies of foreign
                                                                         apply to asset purchases?                                 banks?
                                                                     223.23 What valuation and timing principles
                                                                         apply to purchases of and investments in               Subpart H—Miscellaneous Interpretations
                                                                         securities issued by an affiliate?                    223.71 How do sections 23A and 23B apply to
                                                                     223.24 What valuation principles apply to                     transactions in which a member bank
                                                                         extensions of credit secured by affiliate                 purchases from one affiliate an asset re-
                                                                         securities?                                               lating to another affiliate?

                                                                        Subpart D—Other Requirements Under                       AUTHORITY: 12 U.S.C. 371c(b)(1)(E), (b)(2)(A),
                                                                                                                               and (f), 371c–1(e), 1828(j), and 1468(a).
                                                                                   Section 23A
                                                                                                                                 SOURCE: 67 FR 76604, Dec. 12, 2002, unless
                                                                     223.31 How does section 23A apply to a mem-               otherwise noted.
                                                                         ber bank’s acquisition of an affiliate that
                                                                         becomes an operating subsidiary of the
                                                                         member bank after the acquisition?
                                                                                                                                   Subpart A—Introduction and
                                                                     223.32 What rules apply to financial subsidi-                          Definitions
                                                                         aries of a member bank?
                                                                     223.33 What rules apply to derivative trans-
                                                                                                                               § 223.1     Authority, purpose, and scope.
                                                                         actions?                                                (a) Authority. The Board of Governors
                                                                                                                               of the Federal Reserve System (Board)
                                                                     Subpart E—Exemptions from the Provisions                  has issued this part (Regulation W)
                                                                                 of Section 23A                                under the authority of sections 23A(f)
                                                                                                                               and 23B(e) of the Federal Reserve Act
                                                                     223.41 What covered transactions are ex-
                                                                         empt from the quantitative limits and
                                                                                                                               (12 U.S.C. 371c(f), 371c–1(e)).
                                                                         collateral requirements?                                (b) Purpose. Sections 23A and 23B of
                                                                     223.42 What covered transactions are ex-                  the Federal Reserve Act (12 U.S.C. 371c,
                                                                         empt from the quantitative limits, col-               371c–1) establish certain quantitative
                                                                         lateral requirements, and low-quality                 limits and other prudential require-
                                                                         asset prohibition?                                    ments for loans, purchases of assets,
                                                                     223.43 What are the standards under which                 and certain other transactions between
                                                                         the Board may grant additional exemp-                 a member bank and its affiliates. This
                                                                         tions from the requirements of section                regulation implements sections 23A
                                                                         23A?                                                  and 23B by defining terms used in the
                                                                                                                               statute, explaining the statute’s re-
                                                                      Subpart F—General Provisions of Section                  quirements, and exempting certain
                                                                                      23B                                      transactions.
                                                                     223.51 What is the market terms require-                    (c) Scope. Sections 23A and 23B and
                                                                         ment of section 23B?                                  this regulation apply by their terms to
                                                                     223.52 What transactions with affiliates or               ‘‘member banks’’—that is, any national
                                                                         others must comply with section 23B’s                 bank, State bank, trust company, or
                                                                         market terms requirement?                             other institution that is a member of
                                                                     223.53 What asset purchases are prohibited                the Federal Reserve System. In addi-
                                                                         by section 23B?                                       tion, the Federal Deposit Insurance
                                                                     223.54 What advertisements and statements                 Act (12 U.S.C. 1828(j)) applies sections
                                                                         are prohibited by section 23B?                        23A and 23B to insured State non-
                                                                     223.55 What are the standards under which                 member banks in the same manner and
                                                                         the Board may grant exemptions from                   to the same extent as if they were
                                                                         the requirements of section 23B?                      member banks. The Home Owners’
                                                                                                                               Loan Act (12 U.S.C. 1468(a)) also applies
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                                                                                                                               sections 23A and 23B to insured savings
                                                                                                                               associations in the same manner and to

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                                                                     Federal Reserve System                                                                              § 223.2

                                                                     the same extent as if they were mem-                        (7) Depository institution subsidiaries.
                                                                     ber banks (and imposes two additional                     A depository institution that is a sub-
                                                                     restrictions).                                            sidiary of the member bank;
                                                                                                                                 (8) Financial subsidiaries. A financial
                                                                     § 223.2 What is an ‘‘affiliate’’ for pur-                 subsidiary of the member bank;
                                                                         poses of sections 23A and 23B and                       (9) Companies held under merchant
                                                                         this part?
                                                                                                                               banking or insurance company investment
                                                                       (a) For purposes of this part and ex-                   authority—(i) In general. Any company
                                                                     cept as provided in paragraphs (b) and                    in which a holding company of the
                                                                     (c) of this section, ‘‘affiliate’’ with re-               member bank owns or controls, di-
                                                                     spect to a member bank means:                             rectly or indirectly, or acting through
                                                                       (1) Parent companies. Any company                       one or more other persons, 15 percent
                                                                     that controls the member bank;                            or more of the equity capital pursuant
                                                                       (2) Companies under common control by                   to section 4(k)(4)(H) or (I) of the Bank
                                                                     a parent company. Any company, in-                        Holding Company Act (12 U.S.C.
                                                                     cluding any subsidiary of the member                      1843(k)(4)(H) or (I)).
                                                                     bank, that is controlled by a company                       (ii) General exemption. A company will
                                                                     that controls the member bank;                            not be an affiliate under paragraph
                                                                       (3) Companies under other common con-                   (a)(9)(i) of this section if the holding
                                                                     trol. Any company, including any sub-                     company presents information to the
                                                                     sidiary of the member bank, that is                       Board that demonstrates, to the
                                                                     controlled, directly or indirectly, by                    Board’s satisfaction, that the holding
                                                                     trust or otherwise, by or for the benefit                 company does not control the com-
                                                                     of shareholders who beneficially or oth-                  pany.
                                                                     erwise control, directly or indirectly,                     (iii) Specific exemptions. A company
                                                                     by trust or otherwise, the member                         also will not be an affiliate under para-
                                                                     bank or any company that controls the                     graph (a)(9)(i) of this section if:
                                                                     member bank;                                                (A) No director, officer, or employee
                                                                       (4) Companies with interlocking direc-                  of the holding company serves as a di-
                                                                                                                               rector, trustee, or general partner (or
                                                                     torates. Any company in which a major-
                                                                                                                               individual exercising similar functions)
                                                                     ity of its directors, trustees, or general
                                                                                                                               of the company;
                                                                     partners (or individuals exercising
                                                                     similar functions) constitute a major-                      (B) A person that is not affiliated or
                                                                                                                               associated with the holding company
                                                                     ity of the persons holding any such of-
                                                                                                                               owns or controls a greater percentage
                                                                     fice with the member bank or any com-
                                                                                                                               of the equity capital of the company
                                                                     pany that controls the member bank;
                                                                                                                               than is owned or controlled by the
                                                                       (5) Sponsored and advised companies.                    holding company, and no more than
                                                                     Any company, including a real estate                      one officer or employee of the holding
                                                                     investment trust, that is sponsored and                   company serves as a director or trustee
                                                                     advised on a contractual basis by the                     (or individual exercising similar func-
                                                                     member bank or an affiliate of the                        tions) of the company; or
                                                                     member bank;                                                (C) A person that is not affiliated or
                                                                       (6) Investment companies. (i) Any in-                   associated with the holding company
                                                                     vestment company for which the mem-                       owns or controls more than 50 percent
                                                                     ber bank or any affiliate of the member                   of the voting shares of the company,
                                                                     bank serves as an investment adviser,                     and officers and employees of the hold-
                                                                     as defined in section 2(a)(20) of the In-                 ing company do not constitute a ma-
                                                                     vestment Company Act of 1940 (15                          jority of the directors or trustees (or
                                                                     U.S.C. 80a–2(a)(20)); and                                 individuals exercising similar func-
                                                                       (ii) Any other investment fund for                      tions) of the company.
                                                                     which the member bank or any affil-                         (iv) Application of rule to private equity
                                                                     iate of the member bank serves as an                      funds. A holding company will not be
                                                                     investment advisor, if the member                         deemed to own or control the equity
                                                                     bank and its affiliates own or control                    capital of a company for purposes of
                                                                     in the aggregate more than 5 percent of                   paragraph (a)(9)(i) of this section solely
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                                                                     any class of voting securities or of the                  by virtue of an investment made by the
                                                                     equity capital of the fund;                               holding company in a private equity

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                                                                     § 223.3                                                                12 CFR Ch. II (1–1–09 Edition)

                                                                     fund (as defined in the merchant bank-                    ists for the benefit of the shareholders,
                                                                     ing subpart of the Board’s Regulation                     partners, members, or employees of the
                                                                     Y (12 CFR 225.173(a))) that owns or con-                  member bank or any of its affiliates; or
                                                                     trols the equity capital of the company                     (v) Any other company determined to
                                                                     unless the holding company controls                       be an affiliate under paragraph (a)(12)
                                                                     the private equity fund under 12 CFR                      of this section;
                                                                     225.173(d)(4).                                              (2) Bank premises. Any company en-
                                                                       (v) Definition. For purposes of this                    gaged solely in holding the premises of
                                                                     paragraph (a)(9), ‘‘holding company’’                     the member bank;
                                                                     with respect to a member bank means                         (3) Safe deposit. Any company en-
                                                                     a company that controls the member                        gaged solely in conducting a safe de-
                                                                     bank, or a company that is controlled                     posit business;
                                                                     by shareholders that control the mem-                       (4) Government securities. Any com-
                                                                     ber bank, and all subsidiaries of the                     pany engaged solely in holding obliga-
                                                                     company (including any depository in-                     tions of the United States or its agen-
                                                                     stitution that is a subsidiary of the                     cies or obligations fully guaranteed by
                                                                     company).                                                 the United States or its agencies as to
                                                                       (10) Partnerships associated with the                   principal and interest; and
                                                                     member bank or an affiliate. Any part-
                                                                                                                                 (5) Companies held DPC. Any company
                                                                     nership for which the member bank or
                                                                                                                               where control results from the exercise
                                                                     any affiliate of the member bank
                                                                                                                               of rights arising out of a bona fide debt
                                                                     serves as a general partner or for which
                                                                                                                               previously contracted. This exclusion
                                                                     the member bank or any affiliate of the
                                                                                                                               from the definition of ‘‘affiliate’’ ap-
                                                                     member bank causes any director, offi-
                                                                                                                               plies only for the period of time specifi-
                                                                     cer, or employee of the member bank
                                                                                                                               cally authorized under applicable State
                                                                     or affiliate to serve as a general part-
                                                                                                                               or Federal law or regulation or, in the
                                                                     ner;
                                                                                                                               absence of such law or regulation, for a
                                                                       (11) Subsidiaries of affiliates. Any sub-
                                                                                                                               period of two years from the date of
                                                                     sidiary of a company described in para-
                                                                                                                               the exercise of such rights. The Board
                                                                     graphs (a)(1) through (10) of this sec-
                                                                                                                               may authorize, upon application and
                                                                     tion; and
                                                                                                                               for good cause shown, extensions of
                                                                       (12) Other companies. Any company
                                                                                                                               time for not more than one year at a
                                                                     that the Board determines by regula-
                                                                                                                               time, but such extensions in the aggre-
                                                                     tion or order, or that the appropriate
                                                                                                                               gate will not exceed three years.
                                                                     Federal banking agency for the mem-
                                                                     ber bank determines by order, to have                       (c) For purposes of subpart F (imple-
                                                                     a relationship with the member bank,                      menting section 23B), ‘‘affiliate’’ with
                                                                     or any affiliate of the member bank,                      respect to a member bank also does not
                                                                     such that covered transactions by the                     include any depository institution.
                                                                     member bank with that company may                         § 223.3 What are the meanings of the
                                                                     be affected by the relationship to the                        other terms used in sections 23A
                                                                     detriment of the member bank.                                 and 23B and this part?
                                                                       (b) ‘‘Affiliate’’ with respect to a mem-
                                                                     ber bank does not include:                                  For purposes of this part:
                                                                       (1) Subsidiaries. Any company that is                     (a) Aggregate amount of covered trans-
                                                                     a subsidiary of the member bank, un-                      actions means the amount of the cov-
                                                                     less the company is:                                      ered transaction about to be engaged in
                                                                       (i) A depository institution;                           added to the current amount of all out-
                                                                       (ii) A financial subsidiary;                            standing covered transactions.
                                                                       (iii) Directly controlled by:                             (b) Appropriate Federal banking agency
                                                                       (A) One or more affiliates (other than                  with respect to a member bank or
                                                                     depository institution affiliates) of the                 other depository institution has the
                                                                     member bank; or                                           same meaning as in section 3 of the
                                                                       (B) A shareholder that controls the                     Federal Deposit Insurance Act (12
                                                                     member bank or a group of share-                          U.S.C. 1813).
                                                                     holders that together control the mem-                      (c) ‘‘Bank holding company’’ has the
                                                                     ber bank;                                                 same meaning as in 12 CFR 225.2.
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                                                                       (iv) An employee stock option plan,                       (d) ‘‘Capital stock and surplus’’ means
                                                                     trust, or similar organization that ex-                   the sum of:

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                                                                     Federal Reserve System                                                                              § 223.3

                                                                       (1) A member bank’s tier 1 and tier 2                   company by virtue of its ownership or
                                                                     capital under the risk-based capital                      control of shares in a fiduciary capac-
                                                                     guidelines of the appropriate Federal                     ity, except as provided in paragraph
                                                                     banking agency, based on the member                       (a)(3) of § 223.2 or if the company own-
                                                                     bank’s most recent consolidated Re-                       ing or controlling the shares is a busi-
                                                                     port of Condition and Income filed                        ness trust.
                                                                     under 12 U.S.C. 1817(a)(3);                                 (3) Ownership or control of securities by
                                                                       (2) The balance of a member bank’s                      subsidiary. A company controls securi-
                                                                     allowance for loan and lease losses not                   ties, assets, or other ownership inter-
                                                                     included in its tier 2 capital under the                  ests owned or controlled, directly or in-
                                                                     risk-based capital guidelines of the ap-                  directly, by any subsidiary (including a
                                                                     propriate Federal banking agency,                         subsidiary depository institution) of
                                                                     based on the member bank’s most re-                       the company.
                                                                     cent consolidated Report of Condition                       (4) Ownership or control of convertible
                                                                     and Income filed under 12 U.S.C.                          instruments. A company or shareholder
                                                                     1817(a)(3); and                                           that owns or controls instruments (in-
                                                                       (3) The amount of any investment by                     cluding options or warrants) that are
                                                                     a member bank in a financial sub-                         convertible or exercisable, at the op-
                                                                     sidiary that counts as a covered trans-                   tion of the holder or owner, into securi-
                                                                     action and is required to be deducted                     ties, controls the securities, unless the
                                                                     from the member bank’s capital for                        company or shareholder presents infor-
                                                                     regulatory capital purposes.                              mation to the Board that dem-
                                                                       (e) Carrying value with respect to a                    onstrates, to the Board’s satisfaction,
                                                                     security means (unless otherwise pro-                     that the company or shareholder
                                                                     vided) the value of the security on the                   should not be deemed to control the se-
                                                                     financial statements of the member                        curities.
                                                                     bank, determined in accordance with
                                                                                                                                 (5) Ownership or control of nonvoting
                                                                     GAAP.
                                                                                                                               securities. A company or shareholder
                                                                       (f) Company means a corporation,
                                                                                                                               that owns or controls 25 percent or
                                                                     partnership, limited liability company,
                                                                                                                               more of the equity capital of another
                                                                     business trust, association, or similar
                                                                                                                               company controls the other company,
                                                                     organization and, unless specifically
                                                                                                                               unless the company or shareholder pre-
                                                                     excluded, includes a member bank and
                                                                                                                               sents information to the Board that
                                                                     a depository institution.
                                                                                                                               demonstrates, to the Board’s satisfac-
                                                                       (g) Control—(1) In general. ‘‘Control’’
                                                                                                                               tion, that the company or shareholder
                                                                     by a company or shareholder over an-
                                                                                                                               does not control the other company.
                                                                     other company means that:
                                                                                                                                 (h) Covered transaction with respect to
                                                                       (i) The company or shareholder, di-
                                                                                                                               an affiliate means:
                                                                     rectly or indirectly, or acting through
                                                                     one or more other persons, owns, con-                       (1) An extension of credit to the affil-
                                                                     trols, or has power to vote 25 percent or                 iate;
                                                                     more of any class of voting securities                      (2) A purchase of, or an investment
                                                                     of the other company;                                     in, a security issued by the affiliate;
                                                                       (ii) The company or shareholder con-                      (3) A purchase of an asset from the
                                                                     trols in any manner the election of a                     affiliate, including an asset subject to
                                                                     majority of the directors, trustees, or                   recourse or an agreement to repur-
                                                                     general partners (or individuals exer-                    chase, except such purchases of real
                                                                     cising similar functions) of the other                    and personal property as may be spe-
                                                                     company; or                                               cifically exempted by the Board by
                                                                       (iii) The Board determines, after no-                   order or regulation;
                                                                     tice and opportunity for hearing, that                      (4) The acceptance of a security
                                                                     the company or shareholder, directly                      issued by the affiliate as collateral for
                                                                     or indirectly, exercises a controlling                    an extension of credit to any person or
                                                                     influence over the management or poli-                    company; and
                                                                     cies of the other company.                                  (5) The issuance of a guarantee, ac-
                                                                       (2) Ownership or control of shares as fi-               ceptance, or letter of credit, including
                                                                     duciary. Notwithstanding any other                        an endorsement or standby letter of
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                                                                     provision of this regulation, no com-                     credit, on behalf of the affiliate, a con-
                                                                     pany will be deemed to control another                    firmation of a letter of credit issued by

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                                                                     § 223.3                                                                12 CFR Ch. II (1–1–09 Edition)

                                                                     the affiliate, and a cross-affiliate net-                 those described in paragraph (n)(1) of
                                                                     ting arrangement.                                         this section.
                                                                       (i) Credit transaction with an affiliate                  (o) ‘‘Extension of credit’’ to an affiliate
                                                                     means:                                                    means the making or renewal of a loan,
                                                                       (1) An extension of credit to the affil-                the granting of a line of credit, or the
                                                                     iate;                                                     extending of credit in any manner
                                                                       (2) An issuance of a guarantee, ac-                     whatsoever, including on an intraday
                                                                     ceptance, or letter of credit, including                  basis, to an affiliate. An extension of
                                                                     an endorsement or standby letter of                       credit to an affiliate includes, without
                                                                     credit, on behalf of the affiliate and a                  limitation:
                                                                     confirmation of a letter of credit issued                   (1) An advance to an affiliate by
                                                                     by the affiliate; and                                     means of an overdraft, cash item, or
                                                                       (3) A cross-affiliate netting arrange-                  otherwise;
                                                                     ment.                                                       (2) A sale of Federal funds to an affil-
                                                                       (j) Cross-affiliate netting arrangement                 iate;
                                                                     means an arrangement among a mem-                           (3) A lease that is the functional
                                                                     ber bank, one or more affiliates of the                   equivalent of an extension of credit to
                                                                     member bank, and one or more non-                         an affiliate;
                                                                     affiliates of the member bank in which:                     (4) An acquisition by purchase, dis-
                                                                       (1) A nonaffiliate is permitted to de-                  count, exchange, or otherwise of a note
                                                                     duct any obligations of an affiliate of                   or other obligation, including commer-
                                                                     the member bank to the nonaffiliate                       cial paper or other debt securities, of
                                                                     when settling the nonaffiliate’s obliga-                  an affiliate;
                                                                     tions to the member bank; or                                (5) Any increase in the amount of, ex-
                                                                       (2) The member bank is permitted or                     tension of the maturity of, or adjust-
                                                                     required to add any obligations of its                    ment to the interest rate term or other
                                                                     affiliate to a nonaffiliate when deter-                   material term of, an extension of credit
                                                                     mining the member bank’s obligations                      to an affiliate; and
                                                                     to the nonaffiliate.                                        (6) Any other similar transaction as a
                                                                       (k) ‘‘Depository institution’’ means,                   result of which an affiliate becomes ob-
                                                                     unless otherwise noted, an insured de-                    ligated to pay money (or its equiva-
                                                                     pository institution (as defined in sec-                  lent).
                                                                     tion 3 of the Federal Deposit Insurance                     (p) ‘‘Financial subsidiary’’
                                                                     Act (12 U.S.C. 1813)), but does not in-                     (1) In general. Except as provided in
                                                                     clude any branch of a foreign bank. For                   paragraph (p)(2) of this section, the
                                                                     purposes of this definition, an oper-                     term ‘‘financial subsidiary’’ means any
                                                                     ating subsidiary of a depository insti-                   subsidiary of a member bank that:
                                                                     tution is treated as part of the deposi-                    (i) Engages, directly or indirectly, in
                                                                     tory institution.                                         any activity that national banks are
                                                                       (l) ‘‘Derivative transaction’’ means any                not permitted to engage in directly or
                                                                     derivative contract listed in sections                    that is conducted under terms and con-
                                                                     III.E.1.a. through d. of appendix A to 12                 ditions that differ from those that gov-
                                                                     CFR part 225 and any similar deriva-                      ern the conduct of such activity by na-
                                                                     tive contract, including a credit deriv-                  tional banks; and
                                                                     ative contract.                                             (ii) Is not a subsidiary that a na-
                                                                       (m) ‘‘Eligible affiliated mutual fund se-               tional bank is specifically authorized
                                                                     curities’’ has the meaning specified in                   to own or control by the express terms
                                                                     paragraph (c)(2) of § 223.24.                             of a Federal statute (other than 12
                                                                       (n) ‘‘Equity capital’’ means:                           U.S.C. 24a), and not by implication or
                                                                       (1) With respect to a corporation, pre-                 interpretation.
                                                                     ferred stock, common stock, capital                         (2) Exceptions. ‘‘Financial subsidiary’’
                                                                     surplus, retained earnings, and accu-                     does not include:
                                                                     mulated other comprehensive income,                         (i) A subsidiary of a member bank
                                                                     less treasury stock, plus any other ac-                   that is considered a financial sub-
                                                                     count that constitutes equity of the                      sidiary under paragraph (p)(1) of this
                                                                     corporation; and                                          section solely because the subsidiary
                                                                       (2) With respect to a partnership,                      engages in the sale of insurance as
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                                                                     limited liability company, or other                       agent or broker in a manner that is not
                                                                     company, equity accounts similar to                       permitted for national banks; and

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                                                                     Federal Reserve System                                                                              § 223.3

                                                                        (ii) A subsidiary of a State bank                      filiate prepared by either a Federal or
                                                                     (other than a subsidiary described in                     State supervisory agency or in any in-
                                                                     section 46(a) of the Federal Deposit In-                  ternal classification system used by
                                                                     surance Act (12 U.S.C. 1831w(a))) that is                 the member bank or the affiliate (in-
                                                                     considered a financial subsidiary under                   cluding an asset that receives a rating
                                                                     paragraph (p)(1) of this section solely                   that is substantially equivalent to
                                                                     because the subsidiary engages in one                     ‘‘classified’’ or ‘‘special mention’’ in
                                                                     or more of the following activities:                      the internal system of the member
                                                                        (A) An activity that the State bank                    bank or affiliate);
                                                                     may engage in directly under applica-                        (2) An asset in a nonaccrual status;
                                                                     ble Federal and State law and that is                        (3) An asset on which principal or in-
                                                                     conducted under the same terms and
                                                                                                                               terest payments are more than thirty
                                                                     conditions that govern the conduct of
                                                                                                                               days past due;
                                                                     the activity by the State bank; and
                                                                        (B) An activity that the subsidiary                       (4) An asset whose terms have been
                                                                     was authorized by applicable Federal                      renegotiated or compromised due to
                                                                     and State law to engage in prior to De-                   the deteriorating financial condition of
                                                                     cember 12, 2002, and that was lawfully                    the obligor; and
                                                                     engaged in by the subsidiary on that                         (5) An asset acquired through fore-
                                                                     date.                                                     closure, repossession, or otherwise in
                                                                        (3) Subsidiaries of financial subsidi-                 satisfaction of a debt previously con-
                                                                     aries. If a company is a financial sub-                   tracted, if the asset has not yet been
                                                                     sidiary under paragraphs (p)(1) and                       reviewed in an examination or inspec-
                                                                     (p)(2) of this section, any subsidiary of                 tion.
                                                                     such a company is also a financial sub-                      (w) ‘‘Member bank’’ means any na-
                                                                     sidiary.                                                  tional bank, State bank, banking asso-
                                                                        (q) ‘‘Foreign bank’’ and an ‘‘agency,’’                ciation, or trust company that is a
                                                                     ‘‘branch,’’ or ‘‘commercial lending com-                  member of the Federal Reserve Sys-
                                                                     pany’’ of a foreign bank have the same                    tem. For purposes of this definition, an
                                                                     meanings as in section 1(b) of the                        operating subsidiary of a member bank
                                                                     International Banking Act of 1978 (12                     is treated as part of the member bank.
                                                                     U.S.C. 3101).                                                (x) ‘‘Municipal securities’’ has the
                                                                        (r) ‘‘GAAP’’ means U.S. generally ac-                  same meaning as in section 3(a)(29) of
                                                                     cepted accounting principles.                             the Securities Exchange Act of 1934 (17
                                                                        (s) ‘‘General purpose credit card’’ has                U.S.C. 78c(a)(29)).
                                                                     the meaning specified in paragraph                           (y) ‘‘Nonaffiliate’’ with respect to a
                                                                     (c)(4)(ii) of § 223.16.                                   member bank means any person that is
                                                                        (t) In contemplation. A transaction be-                not an affiliate of the member bank.
                                                                     tween a member bank and a nonaffil-                          (z) ‘‘Obligations of, or fully guaranteed
                                                                     iate is presumed to be ‘‘in contempla-
                                                                                                                               as to principal and interest by, the United
                                                                     tion’’ of the nonaffiliate becoming an
                                                                                                                               States or its agencies’’ includes those ob-
                                                                     affiliate of the member bank if the
                                                                                                                               ligations listed in 12 CFR 201.108(b) and
                                                                     member bank enters into the trans-
                                                                                                                               any additional obligations as deter-
                                                                     action with the nonaffiliate after the
                                                                                                                               mined by the Board. The term does not
                                                                     execution of, or commencement of ne-
                                                                     gotiations designed to result in, an                      include Federal Housing Administra-
                                                                     agreement under the terms of which                        tion or Veterans Administration loans.
                                                                     the nonaffiliate would become an affil-                      (aa) ‘‘Operating subsidiary’’ with re-
                                                                     iate.                                                     spect to a member bank or other depos-
                                                                        (u) ‘‘Intraday extension of credit’’ has               itory institution means any subsidiary
                                                                     the meaning specified in paragraph                        of the member bank or depository in-
                                                                     (l)(2) of § 223.42.                                       stitution other than a subsidiary de-
                                                                        (v) ‘‘Low-quality asset’’ means:                       scribed in paragraphs (b)(1)(i) through
                                                                        (1) An asset (including a security)                    (v) of § 223.2.
                                                                     classified as ‘‘substandard,’’ ‘‘doubt-                      (bb) ‘‘Person’’ means an individual,
                                                                     ful,’’ or ‘‘loss,’’ or treated as ‘‘special               company, trust, joint venture, pool,
                                                                     mention’’ or ‘‘other transfer risk prob-                  syndicate, sole proprietorship, unincor-
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                                                                     lems,’’ either in the most recent report                  porated organization, or any other
                                                                     of examination or inspection of an af-                    form of entity.

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                                                                     § 223.11                                                               12 CFR Ch. II (1–1–09 Edition)

                                                                        (cc) ‘‘Principal underwriter’’ has the                  Subpart B—General Provisions of
                                                                     meaning specified in paragraph (c)(1) of                            Section 23A
                                                                     § 223.53.
                                                                        (dd) ‘‘Purchase of an asset’’ by a mem-                § 223.11 What is the maximum amount
                                                                     ber bank from an affiliate means the                          of covered transactions that a mem-
                                                                     acquisition by a member bank of an                            ber bank may enter into with any
                                                                     asset from an affiliate in exchange for                       single affiliate?
                                                                     cash or any other consideration, in-                        A member bank may not engage in a
                                                                     cluding an assumption of liabilities.                     covered transaction with an affiliate
                                                                     The merger of an affiliate into a mem-                    (other than a financial subsidiary of
                                                                     ber bank is a purchase of assets by the                   the member bank) if the aggregate
                                                                     member bank from an affiliate if the                      amount of the member bank’s covered
                                                                     member bank assumes any liabilities                       transactions with such affiliate would
                                                                     of the affiliate or pays any other form                   exceed 10 percent of the capital stock
                                                                     of consideration in the transaction.                      and surplus of the member bank.
                                                                        (ee) Riskless principal. A company is
                                                                                                                               § 223.12 What is the maximum amount
                                                                     ‘‘acting exclusively as a riskless prin-                      of covered transactions that a mem-
                                                                     cipal’’ if, after receiving an order to                       ber bank may enter into with all af-
                                                                     buy (or sell) a security from a cus-                          filiates?
                                                                     tomer, the company purchases (or
                                                                                                                                  A member bank may not engage in a
                                                                     sells) the security in the secondary                      covered transaction with any affiliate
                                                                     market for its own account to offset a                    if the aggregate amount of the member
                                                                     contemporaneous sale to (or purchase                      bank’s covered transactions with all af-
                                                                     from) the customer.                                       filiates would exceed 20 percent of the
                                                                        (ff) ‘‘Securities’’ means stocks, bonds,               capital stock and surplus of the mem-
                                                                     debentures, notes, or similar obliga-                     ber bank.
                                                                     tions (including commercial paper).
                                                                        (gg) ‘‘Securities affiliate’’ with respect             § 223.13 What safety and soundness re-
                                                                     to a member bank means:                                       quirement applies to covered trans-
                                                                        (1) An affiliate of the member bank                        actions?
                                                                     that is registered with the Securities                      A member bank may not engage in
                                                                     and Exchange Commission as a broker                       any covered transaction, including any
                                                                     or dealer; or                                             transaction exempt under this regula-
                                                                        (2) Any other securities broker or                     tion, unless the transaction is on terms
                                                                     dealer affiliate of a member bank that                    and conditions that are consistent with
                                                                     is approved by the Board.                                 safe and sound banking practices.
                                                                        (hh) ‘‘State bank’’ has the same mean-
                                                                                                                               § 223.14 What are the collateral re-
                                                                     ing as in section 3 of the Federal De-                        quirements for a credit transaction
                                                                     posit Insurance Act (12 U.S.C. 1813).                         with an affiliate?
                                                                        (ii) ‘‘Subsidiary’’ with respect to a
                                                                     specified company means a company                           (a) Collateral required for extensions of
                                                                                                                               credit and certain other covered trans-
                                                                     that is controlled by the specified com-
                                                                                                                               actions. A member bank must ensure
                                                                     pany.
                                                                                                                               that each of its credit transactions
                                                                        (jj) ‘‘Voting securities’’ has the same                with an affiliate is secured by the
                                                                     meaning as in 12 CFR 225.2.                               amount of collateral required by para-
                                                                        (kk) ‘‘Well capitalized’’ has the same                 graph (b) of this section at the time of
                                                                     meaning as in 12 CFR 225.2 and, in the                    the transaction.
                                                                     case of any holding company that is                         (b) Amount of collateral required—(1)
                                                                     not a bank holding company, ‘‘well cap-                   The rule. A credit transaction described
                                                                     italized’’ means that the holding com-                    in paragraph (a) of this section must be
                                                                     pany has and maintains at least the                       secured by collateral having a market
                                                                     capital levels required for a bank hold-                  value equal to at least:
                                                                     ing company to be well capitalized                          (i) 100 percent of the amount of the
                                                                     under 12 CFR 225.2.                                       transaction, if the collateral is:
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                                                                        (ll) ‘‘Well managed’’ has the same                       (A) Obligations of the United States
                                                                     meaning as in 12 CFR 225.2.                               or its agencies;

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                                                                     Federal Reserve System                                                                              § 223.14

                                                                       (B) Obligations fully guaranteed by                     of default resulting from bankruptcy,
                                                                     the United States or its agencies as to                   insolvency, liquidation, or similar cir-
                                                                     principal and interest;                                   cumstances.
                                                                       (C) Notes, drafts, bills of exchange, or                  (2) Priority. A member bank either
                                                                     bankers’ acceptances that are eligible                    must obtain a first priority security in-
                                                                     for rediscount or purchase by a Federal                   terest in collateral required by this
                                                                     Reserve Bank; or                                          section or must deduct from the value
                                                                       (D) A segregated, earmarked deposit                     of collateral obtained by the member
                                                                     account with the member bank that is                      bank the lesser of:
                                                                     for the sole purpose of securing credit                     (i) The amount of any security inter-
                                                                     transactions between the member bank                      est in the collateral that is senior to
                                                                     and its affiliates and is identified as                   that of the member bank; or
                                                                     such;                                                       (ii) The amount of any credit secured
                                                                       (ii) 110 percent of the amount of the                   by the collateral that is senior to that
                                                                     transaction, if the collateral is obliga-                 of the member bank.
                                                                     tions of any State or political subdivi-                    (3) Example. A member bank makes a
                                                                     sion of any State;                                        $2,000 loan to an affiliate. The affiliate
                                                                       (iii) 120 percent of the amount of the                  grants the member bank a second pri-
                                                                     transaction, if the collateral is other                   ority security interest in a piece of real
                                                                     debt instruments, including loans and                     estate valued at $3,000. Another insti-
                                                                     other receivables; or                                     tution that previously lent $1,000 to the
                                                                       (iv) 130 percent of the amount of the                   affiliate has a first priority security in-
                                                                     transaction, if the collateral is stock,                  terest in the entire parcel of real es-
                                                                     leases, or other real or personal prop-                   tate. This transaction is not in compli-
                                                                     erty.                                                     ance with the collateral requirements
                                                                       (2) Example. A member bank makes a                      of this section. Due to the existence of
                                                                     $1,000 loan to an affiliate. The affiliate                the prior third-party lien on the real
                                                                     posts as collateral for the loan $500 in                  estate, the effective value of the real
                                                                     U.S. Treasury securities, $480 in cor-                    estate collateral for the member bank
                                                                     porate debt securities, and $130 in real                  for purposes of this section is only
                                                                     estate. The loan satisfies the collateral                 $2,000—$600 less than the amount of
                                                                     requirements of this section because                      real estate collateral required by this
                                                                     $500 of the loan is 100 percent secured                   section for the transaction ($2,000 × 130
                                                                     by obligations of the United States,                      percent = $2,600).
                                                                     $400 of the loan is 120 percent secured                     (e) Replacement requirement for retired
                                                                     by debt instruments, and $100 of the                      or amortized collateral. A member bank
                                                                     loan is 130 percent secured by real es-                   must ensure that any required collat-
                                                                     tate.                                                     eral that subsequently is retired or am-
                                                                       (c) Ineligible collateral. The following                ortized is replaced with additional eli-
                                                                     items are not eligible collateral for                     gible collateral as needed to keep the
                                                                     purposes of this section:                                 percentage of the collateral value rel-
                                                                       (1) Low-quality assets;                                 ative to the amount of the outstanding
                                                                       (2) Securities issued by any affiliate;                 credit transaction equal to the min-
                                                                       (3) Equity securities issued by the                     imum percentage required at the incep-
                                                                     member bank, and debt securities                          tion of the transaction.
                                                                     issued by the member bank that rep-                         (f) Inapplicability of the collateral re-
                                                                     resent regulatory capital of the mem-                     quirements to certain transactions. The
                                                                     ber bank;                                                 collateral requirements of this section
                                                                       (4) Intangible assets (including serv-                  do not apply to the following trans-
                                                                     icing assets), unless specifically ap-                    actions.
                                                                     proved by the Board; and                                    (1) Acceptances. An acceptance that
                                                                       (5) Guarantees, letters of credit, and                  already is fully secured either by at-
                                                                     other similar instruments.                                tached documents or by other property
                                                                       (d) Perfection and priority requirements                that is involved in the transaction and
                                                                     for collateral—(1) Perfection. A member                   has an ascertainable market value.
                                                                     bank must maintain a security interest                      (2) The unused portion of certain exten-
                                                                     in collateral required by this section                    sions of credit. The unused portion of an
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                                                                     that is perfected and enforceable under                   extension of credit to an affiliate as
                                                                     applicable law, including in the event                    long as the member bank does not have

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                                                                     § 223.15                                                               12 CFR Ch. II (1–1–09 Edition)

                                                                     any legal obligation to advance addi-                     mination set forth in paragraph (b)(2)
                                                                     tional funds under the extension of                       of this section;
                                                                     credit until the affiliate provides the                     (B) Each renewal or extension of ad-
                                                                     amount of collateral required by para-                    ditional credit described in this para-
                                                                     graph (b) of this section with respect to                 graph (b) meets the standards; and
                                                                     the entire used portion (including the                      (C) The board of directors of the
                                                                     amount of the requested advance) of                       member bank periodically reviews re-
                                                                     the extension of credit.                                  newals and extensions of additional
                                                                       (3) Purchases of affiliate debt securities              credit described in this paragraph (b)
                                                                     in the secondary market. The purchase of                  to ensure that they meet the standards
                                                                     a debt security issued by an affiliate as                 and periodically reviews the standards
                                                                     long as the member bank purchases the                     to ensure that they continue to meet
                                                                     debt security from a nonaffiliate in a                    the criterion set forth in paragraph
                                                                     bona fide secondary market trans-                         (b)(2) of this section;
                                                                     action.                                                     (3) The participating member bank’s
                                                                                                                               share of the renewal or extension of ad-
                                                                     § 223.15 May a member bank purchase                       ditional credit does not exceed its pro-
                                                                         a low-quality asset from an affil-                    portional share of the original trans-
                                                                         iate?
                                                                                                                               action by more than 5 percent, unless
                                                                        (a) In general. A member bank may                      the member bank obtains the prior
                                                                     not purchase a low-quality asset from                     written approval of its appropriate
                                                                     an affiliate unless, pursuant to an inde-                 Federal banking agency; and
                                                                     pendent credit evaluation, the member                       (4) The participating member bank
                                                                     bank had committed itself to purchase                     provides its appropriate Federal bank-
                                                                     the asset before the time the asset was                   ing agency with written notice of the
                                                                     acquired by the affiliate.                                renewal or extension of additional
                                                                        (b) Exemption for renewals of loan par-                credit not later than 20 days after con-
                                                                     ticipations involving problem loans. The                  summation.
                                                                     prohibition contained in paragraph (a)
                                                                     of this section does not apply to the re-                 § 223.16 What transactions by a mem-
                                                                     newal of, or extension of additional                          ber bank with any person are treat-
                                                                     credit with respect to, a member                              ed as transactions with an affiliate?
                                                                     bank’s participation in a loan to a non-                    (a) In general. A member bank must
                                                                     affiliate that was originated by an af-                   treat any of its transactions with any
                                                                     filiate if:                                               person as a transaction with an affil-
                                                                        (1) The loan was not a low-quality                     iate to the extent that the proceeds of
                                                                     asset at the time the member bank                         the transaction are used for the benefit
                                                                     purchased its participation;                              of, or transferred to, an affiliate.
                                                                        (2) The renewal or extension of addi-                    (b) Certain agency transactions. (1) Ex-
                                                                     tional credit is approved, as necessary                   cept to the extent described in para-
                                                                     to protect the participating member                       graph (b)(2) of this section, an exten-
                                                                     bank’s investment by enhancing the ul-                    sion of credit by a member bank to a
                                                                     timate collection of the original in-                     nonaffiliate is not treated as an exten-
                                                                     debtedness, by the board of directors of                  sion of credit to an affiliate under
                                                                     the participating member bank or, if                      paragraph (a) of this section if:
                                                                     the originating affiliate is a depository                   (i) The proceeds of the extension of
                                                                     institution, by:                                          credit are used to purchase an asset
                                                                        (i) An executive committee of the                      through an affiliate of the member
                                                                     board of directors of the participating                   bank, and the affiliate is acting exclu-
                                                                     member bank; or                                           sively as an agent or broker in the
                                                                        (ii) One or more senior management                     transaction; and
                                                                     officials of the participating member                       (ii) The asset purchased by the non-
                                                                     bank, if:                                                 affiliate is not issued, underwritten, or
                                                                        (A) The board of directors of the                      sold as principal by any affiliate of the
                                                                     member bank approves standards for                        member bank.
                                                                     the member bank’s renewals or exten-                        (2) The interpretation set forth in
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                                                                     sions of additional credit described in                   paragraph (b)(1) of this section does not
                                                                     this paragraph (b), based on the deter-                   apply to the extent of any agency fee,

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                                                                     Federal Reserve System                                                                              § 223.16

                                                                     brokerage commission, or other com-                         (ii) The extension of credit is made
                                                                     pensation received by an affiliate from                   pursuant to, and consistent with any
                                                                     the proceeds of the extension of credit.                  conditions imposed in, a preexisting
                                                                     The receipt of such compensation may                      line of credit that was not established
                                                                     qualify, however, for the exemption                       in contemplation of the purchase of se-
                                                                     contained in paragraph (c)(2) of this                     curities from or through an affiliate of
                                                                     section.                                                  the member bank.
                                                                        (c) Exemptions. Notwithstanding para-                    (4) General purpose credit card trans-
                                                                     graph (a) of this section, the following                  actions.
                                                                     transactions are not subject to the                         (i) In general. An extension of credit
                                                                     quantitative limits of §§ 223.11 and                      by a member bank to a nonaffiliate, if:
                                                                     223.12 or the collateral requirements of                    (A) The proceeds of the extension of
                                                                     § 223.14. The transactions are, however,                  credit are used by the nonaffiliate to
                                                                     subject to the safety and soundness re-                   purchase a product or service from an
                                                                     quirement of § 223.13 and the market                      affiliate of the member bank; and
                                                                     terms requirement and other provi-                          (B) The extension of credit is made
                                                                     sions of subpart F (implementing sec-                     pursuant to, and consistent with any
                                                                     tion 23B).                                                conditions imposed in, a general pur-
                                                                        (1) Certain riskless principal trans-                  pose credit card issued by the member
                                                                     actions. An extension of credit by a                      bank to the nonaffiliate.
                                                                     member bank to a nonaffiliate, if:                          (ii) Definition. ‘‘General purpose credit
                                                                        (i) The proceeds of the extension of                   card’’ means a credit card issued by a
                                                                     credit are used to purchase a security                    member bank that is widely accepted
                                                                     through a securities affiliate of the                     by merchants that are not affiliates of
                                                                     member bank, and the securities affil-                    the member bank for the purchase of
                                                                     iate is acting exclusively as a riskless                  products or services, if:
                                                                     principal in the transaction;                               (A) Less than 25 percent of the total
                                                                        (ii) The security purchased by the                     value of products and services pur-
                                                                     nonaffiliate is not issued, under-                        chased with the card by all cardholders
                                                                     written, or sold as principal (other                      are purchases of products and services
                                                                     than as riskless principal) by any affil-                 from one or more affiliates of the mem-
                                                                     iate of the member bank; and                              ber bank;
                                                                        (iii) Any riskless principal mark-up                     (B) All affiliates of the member bank
                                                                     or other compensation received by the                     would be permissible for a financial
                                                                     securities affiliate from the proceeds of                 holding company (as defined in 12
                                                                     the extension of credit meets the mar-                    U.S.C. 1841) under section 4 of the Bank
                                                                     ket terms standard set forth in para-                     Holding Company Act (12 U.S.C. 1843),
                                                                     graph (c)(2) of this section.                             and the member bank has no reason to
                                                                        (2) Brokerage commissions, agency fees,                believe that 25 percent or more of the
                                                                     and riskless principal mark-ups. An af-                   total value of products and services
                                                                     filiate’s retention of a portion of the                   purchased with the card by all card-
                                                                     proceeds of an extension of credit de-                    holders are or would be purchases of
                                                                     scribed in paragraph (b) or (c)(1) of this                products and services from one or more
                                                                     section as a brokerage commission,                        affiliates of the member bank; or
                                                                     agency fee, or riskless principal mark-                     (C) The member bank presents infor-
                                                                     up, if that commission, fee, or mark-up                   mation to the Board that dem-
                                                                     is substantially the same as, or lower                    onstrates, to the Board’s satisfaction,
                                                                     than, those prevailing at the same time                   that less than 25 percent of the total
                                                                     for comparable transactions with or in-                   value of products and services pur-
                                                                     volving other nonaffiliates, in accord-                   chased with the card by all cardholders
                                                                     ance with the market terms require-                       are and would be purchases of products
                                                                     ment of § 223.51.                                         and services from one or more affili-
                                                                        (3) Preexisting lines of credit. An exten-             ates of the member bank.
                                                                     sion of credit by a member bank to a                        (iii) Calculating compliance. To deter-
                                                                     nonaffiliate, if:                                         mine whether a credit card qualifies as
                                                                        (i) The proceeds of the extension of                   a general purpose credit card under the
                                                                     credit are used to purchase a security                    standard set forth in paragraph
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                                                                     from or through a securities affiliate of                 (c)(4)(ii)(A) of this section, a member
                                                                     the member bank; and                                      bank must compute compliance on a

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                                                                     § 223.21                                                               12 CFR Ch. II (1–1–09 Edition)

                                                                     monthly basis, based on cardholder                          (ii) The amount owed by the affiliate
                                                                     purchases that were financed by the                       to the member bank under the trans-
                                                                     credit card during the preceding 12 cal-                  action; or
                                                                     endar months. If a credit card has                          (iii) The sum of:
                                                                     qualified as a general purpose credit                       (A) The amount provided to, or on be-
                                                                     card for 3 consecutive months but then                    half of, the affiliate in the transaction;
                                                                     ceases to qualify in the following                        and
                                                                     month, the member bank may continue                         (B) Any additional amount that the
                                                                     to treat the credit card as a general                     member bank could be required to pro-
                                                                     purpose credit card for such month and                    vide to, or on behalf of, the affiliate
                                                                     three additional months (or such                          under the terms of the transaction.
                                                                     longer period as may be permitted by                        (2) Initial valuation of certain acquisi-
                                                                     the Board).                                               tions of a credit transaction. If a member
                                                                       (iv) Example of calculating compliance                  bank acquires from a nonaffiliate a
                                                                     with the 25 percent test. A member bank                   credit transaction with an affiliate, the
                                                                     seeks to qualify a credit card as a gen-                  covered transaction initially must be
                                                                     eral purpose credit card under para-                      valued at the sum of:
                                                                     graph (c)(4)(ii)(A) of this section. The                    (i) The total amount of consideration
                                                                     member bank assesses its compliance                       given (including liabilities assumed) by
                                                                     under paragraph (c)(4)(iii) of this sec-                  the member bank in exchange for the
                                                                     tion on the 15th day of every month                       credit transaction; and
                                                                     (for the preceding 12 calendar months).                     (ii) Any additional amount that the
                                                                     The credit card qualifies as a general                    member bank could be required to pro-
                                                                     purpose credit card for at least three                    vide to, or on behalf of, the affiliate
                                                                     consecutive months. On June 15, 2005,                     under the terms of the transaction.
                                                                     however, the member bank determines                         (3) Debt securities. The valuation prin-
                                                                     that, for the 12-calendar-month period                    ciples of paragraphs (a)(1) and (2) of
                                                                     from June 1, 2004, through May 31, 2005,                  this section do not apply to a member
                                                                     27 percent of the total value of prod-                    bank’s purchase of or investment in a
                                                                     ucts and services purchased with the                      debt security issued by an affiliate,
                                                                     card by all cardholders were purchases                    which is governed by § 223.23.
                                                                     of products and services from an affil-                     (4) Examples. The following are exam-