FEDERAL RESERVE BANKO F NEW Y O R K

Circular No. 8 8 9 6 August 12, 1980

A M E N D M E N T T O R E G U L A T IO N T

E x te n s io n o f C r ed it on M u tu a l F u n d S h a r e s

To A ll Persons Extending Securities Credit in the Second Federal Reserve District:

T h e B oard o f G overn ors o f th e F e d e r a l R e serv e S y s te m h as issu ed th e fo llo w in g s ta te m e n t a n n o u n c in g an a m e n d m e n t to its R e g u la tio n T, “C red it by B ro k ers an d D e a le r s ”:

The Federal Reserve Board announced approval of an amendment to Regulation T— Credit by Brokers and Dealers—to permit brokers and dealers to lend on mutual fund shares. The Board acted after consideration of comment received on a proposed amendment issued in 1979.

The amendment is effective November 3.

Under the amendment brokers and dealers can extend and maintain credit only on fully paid for mutual fund shares. A broker-dealer would be prohibited under provisions of the Securities Exchange Act and existing rules of the SEC from giving credit on the initial purchase of mutual fund shares.

E n c lo se d is a cop y o f th e a m e n d m e n t. Q u estio n s on th is m a tte r m ay be d ir e c te d to ou r R e g u la tio n s D iv is io n (T el. N o. 2 1 2 -7 9 1 -5 9 1 4 ).

Anthony M. S olomon,President.

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

B o a r d o f G o v e r n o r s o f th e F e d e r a l R e s e r v e S y s te m

C R E D I T B Y B R O K E R S A N D D E A L E R S

AMENDMENT TO REGULATION T(effective N oveviber 3, 1980)

A G E N C Y : Board of Governors of the Federal Reserve System.

A C T IO N : Final Rule.

S U M M A R Y : This amendment will permit brokers and dealers to extend credit on fully paid for mutual fund shares deposited in a general account. The present rule permits broker-dealers to extend and maintain credit only on securities registered on a national securities exchange, or included on the Board’s List of OTC Margin Stock and on certain non- convertible debt securities which are traded in the over-the-counter market.

The Board intends the rule to reduce significantly the inequity which exists between broker-dealers and banks, which are currently permitted to extend credit on mutual fund shares under Regulation U, and lenders registered with the Board under Regulation G, who have the same authority. The amendment was published for comment on August 9, 1979 (44 F.R. 47776).

E F F E C T I V E D A T E : November 3. 1980.

F O R F U R T H E R IN F O R M A T IO N C O N T A C T : Patsy Abelle, Senior Attorney, or Michael J. Schoenfeld, Senior Securities Regulations Analyst, Securities Regulation Section, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System, Washington, D.C. 20551 (202-452-2781).

S U P P L E M E N T A R Y IN F O R M A T IO N : All of the comments received on the Board’s proposal to permit brokers and dealers to extend and maintain credit on mutual fund shares were favorable. The rule has been adopted as proposed.

One commenter recommended that the composition of a fund’s underlying portfolio be the basis for determining the margin requirement. This suggestion has not been adopted because the Board believes such a basis would be unworkable in view of the varying composition of some mutual fund portfolios.

One commenter requested that unit investment trusts be given good faith loan value since they invest almost exclusively in tax- exempt bonds. This issue was addressed previously by the Board in 1972 (12 CFR 220.125) when it was decided that shares in registered open-end investment companies are not themselves exempt securities, even if the portfolio consists entirely of exempt securities.

Another commenter felt that money market funds which permit investors to write drafts against them should be excluded since a broker- dealer would never know that money had been borrowed against the shares in this fashion. The Board understands that would not happen. Once the shares are pledged, it is understood the broker would request the fund to issue a certificate in “street name”. Thus if a draft were subsequently drawn, it would not be honored by the fund since the shares technically would no longer be in the investor’s name. Therefore, the Board believes that there is no problem in this regard.

It was also suggested that variable annuity contracts which meet the definition of a mutual fund be excluded, presumably because they are essentially retirement vehicles. Since this could be said for a number of securities, the Board believes there is no reason to make such a distinction.

Accordingly, pursuant to sections 7 and 23 of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78g and w), the Board revises section 220.2(f) of Regulation T (12 CFR 2 2 0 .2 (f)) to read as follows:

SECTION 220.2-DEFINITIONS * * *

(f) The term “margin security” means any registered security, OTC margin stock, OTC margin bond, or any security issued by an open-end investment company or unit investment trust registered under section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8).

For this Regulation to be complete, retain:

1) Regulation T, as amended effective June 1, 1977, printed in the pamphlet “Securities Credit Transactions.”

2) The Supplement to Regulation T, effective January 1, 1977.3) Amendments effective June 15, 1978. July 12, 1978, October 30, 1978, June 2, 1980, and

August 11, 1980.4) This slip sheet.

[Enc. Cir. No. 8396] PRINTED IN NEW YORKDigitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis