[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: 12CFR220.117]

[Page 22-24]
 
                       TITLE 12--BANKS AND BANKING
 
                   CHAPTER II--FEDERAL RESERVE SYSTEM
 
PART 220--CREDIT BY BROKERS AND DEALERS (REGULATION T)--Table of Contents
 
Sec. 220.117  Exception to 90-day rule in special cash account.

    (a) The Board of Governors has recently interpreted certain of the 
provisions of Sec. 220.4(c)(8), with respect to the withdrawal of 
proceeds of a sale of stock in a ``special cash account'' when the stock 
has been sold out of the account prior to payment for its purchase.
    (b) The specific factual situation presented may be summarized as 
follows:


[[Page 23]]


    Customer purchased stock in a special cash account with a member 
firm on Day 1. On Day 3 customer sold the same stock at a profit. On Day 
8 customer delivered his check for the cost of the purchase to the 
creditor (member firm). On Day 9 the creditor mailed to the customer a 
check for the proceeds of the sale.

    (c) Section 220.4(c)(8) prohibits a creditor, as a general rule, 
from effecting a purchase of a security in a customer's special cash 
account if any security has been purchased in that account during the 
preceding 90 days and has then been sold in the account or delivered out 
to any broker or dealer without having been previously paid for in full 
by the customer. One exception to this general rule reads as follows:

    * * * The creditor may disregard for the purposes of this 
subparagraph (Sec. 220.4(c) (8)) a sale without prior payment provided 
full cash payment is received within the period described by 
subparagraph (2) of this paragraph (seven days after the date of 
purchase) and the customer has not withdrawn the proceeds of sale on or 
before the day on which such payment (and also final payment of any 
check received in that connection) is received. * * *

    (d) Final payment of customer's check: (1) The first question is: 
When is the creditor to be regarded as having received ``final payment 
of any check received'' in connection with the purchase?
    (2) The clear purpose of Sec. 220.4(c) (8) is to prevent the use of 
the proceeds of sale of a stock by a customer to pay for its purchase--
i.e., to prevent him from trading on the creditor's funds by being able 
to deposit the sale proceeds prior to presentment of his own check to 
the drawee bank. Thus, when a customer undertakes to pay for a purchase 
by check, that check does not constitute payment for the purchase, 
within the language and intent of the above-quoted exception in 
Sec. 220.4(c)(8), until it has been honored by the drawee bank, 
indicating the sufficiency of his account to pay the check.
    (3) The phrase ``final payment of any check'' is interpreted as 
above notwithstanding Sec. 220.6(f), which provides that:

    For the purposes of this part (Regulation T), a creditor may, at his 
option (1) treat the receipt in good faith of any check or draft drawn 
on a bank which in the ordinary course of business is payable on 
presentation, * * * as receipt of payment of the amount of such check, 
draft or order; * * *


This is a general provision substantially the same as language found in 
section 4(f) of Regulation T as originally promulgated in 1934. The 
language of the subject exception to the 90-day rule of 
Sec. 220.4(c)(8), i.e., the exception based expressly on final ``payment 
of any check,'' was added to the regulation in 1949 by an amendment 
directed at a specific type of situation. Because the exception is a 
special, more recent provision, and because Sec. 220.6(f), if 
controlling, would permit the exception to undermine, to some extent, 
the effectiveness of the 90-day rule, sound principles of construction 
require that the phrase ``final payment of any check'' be given its 
literal and intended effect.
    (4) There is no fixed period of time from the moment of receipt by 
the payee, or of deposit, within which it is certain that any check will 
be paid by the drawee bank. Therefore, in the rare case where the 
operation of the subject exception to Sec. 220.4(c)(8) is necessary to 
avoid application of the 90-day rule, a creditor should ascertain (from 
his bank of deposit or otherwise) the fact of payment of a customer's 
check given for the purchase. Having so determined the day of final 
payment, the creditor can permit withdrawal on any subsequent day.
    (e) Mailing as ``withdrawal'': (1) Also presented is the question 
whether the mailing to the customer of the creditor's check for the sale 
proceeds constitutes a withdrawal of such proceeds by the customer at 
the time of mailing so that, if the check for the sale proceeds is 
mailed on or before the day on which the customer's check for the 
purchase is finally paid, the 90-day rule applies. It may be that a 
check mailed one day will not ordinarily be received by the customer 
until the next. The Board is of the view, however, that when the check 
for sale proceeds is issued and released into the mails, the proceeds 
are to be regarded as withdrawn by the customer; a more liberal 
interpretation would open a way for circumvention. Accordingly, the 
creditor's check should not be mailed nor

[[Page 24]]

the sale proceeds otherwise released to the customer ``on or before the 
day'' on which payment for the purchase, including final payment of any 
check given for such payment, is received by the creditor, as determined 
in accordance with the principles stated herein.
    (2) Applying the above principles to the schedule of transactions 
described in the second paragraph of this interpretation, the mailing of 
the creditor's check on ``Day 9'' would be consistent with the subject 
exception to Sec. 220.4(c)(8), as interpreted herein, only if the 
customer's check was paid by the drawee bank on ``Day 8''.

[27 FR 3511, Apr. 12, 1962]