[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: 12CFR220.123]

[Page 29-30]
 
                       TITLE 12--BANKS AND BANKING
 
                   CHAPTER II--FEDERAL RESERVE SYSTEM
 
PART 220--CREDIT BY BROKERS AND DEALERS (REGULATION T)--Table of Contents
 
Sec. 220.123  Partial delayed issue contracts covering nonconvertible bonds.

    (a) During recent years, it has become customary for portions of new 
issues of nonconvertible bonds and preferred stocks to be sold subject 
to partial delayed issue contracts, which have customarily been referred 
to in the industry as ``delayed delivery'' contracts, and the Board of 
Governors has been asked for its views as to whether such transactions 
involve any violations of the Board's margin regulations.
    (b) The practice of issuing a portion of a debt (or equivalent) 
security issue at a date subsequent to the main underwriting has arisen 
where market conditions made it difficult or impossible, in a number of 
instances, to place an entire issue simultaneously. In instances of this 
kind, institutional investors (e.g., insurance companies or pension 
funds) whose cash flow is such that they expect to have funds available 
some months in the future, have been willing to subscribe to a portion, 
to be issued to them at a future date. The issuer has been willing to 
agree to issue the securities in two or more stages because it did not 
immediately need the proceeds to be realized from the deferred portion, 
because it could not raise funds on better terms, or because it 
preferred to have a certain portion of the issue taken down by an 
investor of this type.
    (c) In the case of such a delayed issue contract, the underwriter is 
authorized to solicit from institutional customers offers to purchase 
from the issuer, pursuant to contracts of the kind described above, and 
the agreement becomes binding at the underwriters' closing, subject to 
specified conditions. When securities are issued pursuant to the 
agreement, the purchase price includes accrued interest or dividends, 
and until they are issued to it, the purchaser does not, in the case of 
bonds, have rights under the trust indenture, or, in the case of 
preferred stocks, voting rights.
    (d) Securities sold pursuant to such arrangements are high quality 
debt issues (or their equivalent). The purchasers buy with a view to 
investment and do not resell or otherwise dispose of the contract prior 
to its completion. Delayed issue arrangements are not acceptable to 
issuers unless a substantial portion of an issue, not less than 10 
percent, is involved.
    (e) Sections 3(a) (13) and (14) of the Securities Exchange Act of 
1934 provide that an agreement to purchase is equivalent to a purchase, 
and an agreement to sell to a sale. The Board has hitherto expressed the 
view that credit is extended at the time when there is a firm agreement 
to extend such credit (1968 Federal Reserve Bulletin 328; 12 CFR 
207.101; para. 6800 Published Interpretations of the Board of 
Governors). Accordingly, in instances of the kind described above, the 
issuer may be regarded as extending credit to the institutional 
purchaser at the time of the underwriters' closing, when the obligations 
of both become fixed.
    (f) Section 220.7(a) of the Board's Regulation T (12 CFR 220.7(a)), 
with an exception not applicable here, forbids a creditor subject to 
that regulation to arrange for credit on terms on which the creditor 
could not itself extend the credit. Sections 220.4(c) (1) and (2) (12 
CFR 220.4(c) (1) and (2)) provide that a creditor may not sell 
securities to a customer except in good faith reliance upon an agreement 
that the customer will promptly, and in no event in more than 7 full 
business days, make full cash payment for the securities. Since the 
underwriters in question are creditors subject to the regulation, unless 
some specific exception applies, they are forbidden to arrange for the 
credit described above. This result follows because payment is not made 
until more than 7 full business days have passed from the time the 
credit is extended.
    (g) However, Sec. 220.4(c)(3) provides that:

    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.


[[Page 30]]


    (h) In interpreting Sec. 220.4(c)(3), the Board has stated that the 
purpose of the provision:

    * * * is to recognize the fact that, when an issue of securities is 
to be issued at some future fixed date, a security that is 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. (1962 
Federal Reserve Bulletin 1427; 12 CFR 220.118; para. 5996, Published 
Interpretations of the Board of Governors.)


In that situation, the Board distinguished the case of mutual fund 
shares, which technically are not issued until the certificate can be 
delivered by the transfer agent. The Board held that mutual fund shares 
must be regarded as issued at the time of purchase because they 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 the sense that would warrant the extension of the time 
for payment beyond that afforded in the case of outstanding securities. 
(ibid.)


The issuance of debt securities subject to delayed issue contracts, by 
contrast with that of mutual fund shares, which are in a status of 
continual underwriting, is a specific single event taking place at a 
future date fixed by the issuer with a view to its need for funds and 
the availability of those funds under current market conditions.
    (i) For the reasons stated above the Board concluded that the 
nonconvertible debt and preferred stock subject to delayed issue 
contracts of the kind described above should not be regarded as having 
been issued until delivered, pursuant to the agreement, to the 
institutional purchaser. This interpretation does not apply, of course, 
to fact situations different from that described in this section.

[36 FR 2777, Feb. 10, 1971]