[Code of Federal Regulations]
[Title 12, Volume 3]
[Revised as of January 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 12CFR220.111]

[Page 20-21]
 
                       TITLE 12--BANKS AND BANKING
 
                   CHAPTER II--FEDERAL RESERVE SYSTEM
 
PART 220--CREDIT BY BROKERS AND DEALERS (REGULATION T)--Table of Contents
 
Sec. 220.111  Arranging for extensions of credit to be made by a bank.

    (a) The Board has recently had occasion to express opinions 
regarding the requirements which apply when a person subject to this 
part (for convenience, called here simply a broker) arranges for a bank 
to extend credit.
    (b) The matter is treated generally in Sec. 220.7(a) and is also 
subject to the general rule of law that any person who aids or abets a 
violation of law by another is himself guilty of a violation. It may be 
stated as a general principle that any person who arranges for credit to 
be extended by someone else has a responsibility so to conduct his 
activities as not to be a participant in a violation of this part, which 
applies to brokers, or part 221 of this subchapter, which applies to 
banks.
    (c) More specifically, in arranging an extension of credit that may 
be subject to part 221 of this subchapter, a broker must act in good 
faith and, therefore,

[[Page 21]]

must question the accuracy of any non-purpose statement (i.e., a 
statement that the loan is not for the purpose of purchasing or carrying 
registered stocks) given in connection with the loan where the 
circumstances are such that the broker from any source knows or has 
reason to know that the statement is incomplete or otherwise inaccurate 
as to the true purpose of the credit. The requirement of ``good faith'' 
is of vital importance. While the application of the requirement will 
necessarily vary with the facts of the particular case, the broker, like 
the bank for whom the loan is arranged to be made, must be alert to the 
circumstances surrounding the loan. Thus, for example, if a broker or 
dealer is to deliver registered stocks to secure the loan or is to 
receive the proceeds of the loan, the broker arranging the loan and the 
bank making it would be put on notice that the loan would probably be 
subject to part 221 of this subchapter. In any such circumstances they 
could not in good faith accept or rely upon a statement to the contrary 
without obtaining a reliable and satisfactory explanation of the 
situation. The foregoing, of course, applies the principles contained in 
Sec. 221.101 of this subchapter.
    (d) In addition, when a broker is approached by another broker to 
arrange extensions of credit for customers of the approaching broker, 
the broker approached has a responsibility not to arrange any extension 
of credit which the approaching broker could not himself arrange. 
Accordingly, in such cases the statutes and regulations forbid the 
approached broker to arrange extensions of credit on unregistered 
securities for the purpose of purchasing or carrying either registered 
or unregistered securities. The approaching broker would also be 
violating the applicable requirements if he initiated or otherwise 
participated in any such forbidden transactions.
    (e) The expression of views, set forth in this section, to the 
effect that certain specific transactions are forbidden, of course, 
should not in any way be understood to indicate approval of any other 
transactions which are not mentioned.

[18 FR 5505, Sept. 15, 1953]