[Code of Federal Regulations]
[Title 12, Volume 3]
[Revised as of January 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 12CFR220.118]

[Page 24-25]
 
                       TITLE 12--BANKS AND BANKING
 
                   CHAPTER II--FEDERAL RESERVE SYSTEM
 
PART 220--CREDIT BY BROKERS AND DEALERS (REGULATION T)--Table of Contents
 
Sec. 220.118  Time of payment for mutual fund shares purchased in a special cash account.

    (a) The Board has recently considered the question whether, in 
connection with the purchase of mutual fund shares in a ``special cash 
account'' under the provisions of this part 220, the 7-day period with 
respect to liquidation for nonpayment is that described in 
Sec. 220.4(c)(2) or that described in Sec. 220.4(c)(3).
    (b) Section 220.4(c)(2) provides as follows:

    In case a customer purchases a security (other than an exempted 
security) in the special cash account and does not make full cash 
payment for the security within 7 days after the date on which the 
security is so purchased, the creditor shall, except as provided in 
subparagraphs (3)-(7) of this paragraph, promptly cancel or otherwise 
liquidate the transaction or the unsettled portion thereof.


Section 220.4(c)(3), one of the exceptions referred to, provides in 
relevant part as follows:

    If the security when so purchased is an unissued security, the 
period applicable to the transaction under subparagraph (2) of this 
paragraph shall be 7 days after the date on which the security is made 
available by the issuer for delivery to purchasers.

    (c) In the case presented, the shares of the mutual fund (open-end 
investment company) are technically not issued at the time they are sold 
by the underwriter and distributor. Several days may elapse from the 
date of sale before a certificate can be delivered by the transfer 
agent. The specific inquiry to the Board was, in effect, whether the 7-
day period after which a purchase transaction must be liquidated or 
cancelled for nonpayment should run, in the case of mutual fund shares, 
from the time when a certificate for the purchased shares is available 
for delivery to the purchaser, instead of from the date of the purchase.
    (d) Under the general rule of Sec. 220.4 (c)(2) that is applicable 
to purchases of outstanding securities, the 7-day period runs from the 
date of purchase without regard to the time required for the mechanical 
acts of transfer of ownership and delivery of a certificate. This rule 
is based on the principles governing the use of special cash accounts in 
accordance with which, in the absence of special circumstances, payment 
is to be made promptly upon the purchase of securities.
    (e) The purpose of Sec. 220.4(c)(3) is to recognize the fact that, 
when an issue of securities is to be issued at some fixed future date, a 
security that is a part of such issue can be purchased on a ``when-
issued'' basis and that payment may reasonably be delayed until after 
such date of issue, subject to other basic conditions for transactions 
in a special cash account. Thus, unissued securities should be regarded 
as ``made available for delivery to purchasers'' on the date when they 
are substantially as available as outstanding securities are available 
upon purchase, and this would ordinarily be the designated date of 
issuance or, in the case of a stock dividend, the ``payment date''. In 
any case, the time required for the mechanics of transfer and delivery 
of a certificate is not material under Sec. 220.4(c)(3) any more than it 
is under Sec. 220.4(c)(2).
    (f) Mutual fund shares are essentially available upon purchase to 
the same extent as outstanding securities. The mechanics of their 
issuance and of the delivery of certificates are not significantly 
different from the mechanics of transfer and delivery of certificates 
for shares of outstanding securities, and the issuance of mutual fund 
shares is not a future event in a sense that would warrant the extension 
of the time for payment beyond that afforded in the case of outstanding 
securities. Consequently, the Board has concluded

[[Page 25]]

that a purchase of mutual fund shares is not a purchase of an ``unissued 
security'' to which Sec. 220.4(c)(3) applies, but is a transaction to 
which Sec. 220.4(c)(2) applies.

[27 FR 10885, Nov. 8, 1962]