[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: 12CFR221.2] [Page 35-37] TITLE 12--BANKS AND BANKING CHAPTER II--FEDERAL RESERVE SYSTEM PART 221--CREDIT BY BANKS AND PERSONS OTHER THAN BROKERS OR DEALERS FOR THE PURPOSE OF PURCHASING OR CARRYING MARGIN STOCK (REGULATION U)--Table of Contents Sec. 221.2 Definitions. The terms used in this part have the meanings given them in section 3(a) of the Act or as defined in this section as follows: Affiliate means: (1) For banks: (i) Any bank holding company of which a bank is a subsidiary within the meaning of the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1841(d)); (ii) Any other subsidiary of such bank holding company; and (iii) Any other corporation, business trust, association, or other similar organization that is an affiliate as defined in section 2(b) of the Banking Act of 1933 (12 U.S.C. 221a(c)); (2) For nonbank lenders, affiliate means any person who, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with the lender. Bank. (1) Bank. Has the meaning given to it in section 3(a)(6) of the Act (15 U.S.C. 78c(a)(6)) and includes: (i) Any subsidiary of a bank; (ii) Any corporation organized under section 25(a) of the Federal Reserve Act (12 U.S.C. 611); and (iii) Any agency or branch of a foreign bank located within the United States. (2) Bank does not include: (i) Any savings and loan association; (ii) Any credit union; (iii) Any lending institution that is an instrumentality or agency of the United States; or (iv) Any member of a national securities exchange. Carrying credit is credit that enables a customer to maintain, reduce, or retire indebtedness originally incurred to purchase a security that is currently a margin stock. Current market value of: (1) A security means: (i) If quotations are available, the closing sale price of the security on the preceding business day, as appearing on any regularly published reporting or quotation service; or [[Page 36]] (ii) If there is no closing sale price, the lender may use any reasonable estimate of the market value of the security as of the close of business on the preceding business day; or (iii) If the credit is used to finance the purchase of the security, the total cost of purchase, which may include any commissions charged. (2) Any other collateral means a value determined by any reasonable method. Customer excludes an exempted borrower and includes any person or persons acting jointly, to or for whom a lender extends or maintains credit. Examining authority means: (1) The national securities exchange or national securities association of which a broker or dealer is a member; or (2) If a member of more than one self-regulatory organization, the organization designated by the Securities and Exchange Commission as the examining authority for the broker or dealer. Exempted borrower means a member of a national securities exchange or a registered broker or dealer, a substantial portion of whose business consists of transactions with persons other than brokers or dealers, and includes a borrower who: (1) Maintains at least 1000 active accounts on an annual basis for persons other than brokers, dealers, and persons associated with a broker or dealer; (2) Earns at least $10 million in gross revenues on an annual basis from transactions with persons other than brokers, dealers, and persons associated with a broker or dealer; or (3) Earns at least 10 percent of its gross revenues on an annual basis from transactions with persons other than brokers, dealers, and persons associated with a broker-dealer. Good faith with respect to: (1) The loan value of collateral means that amount (not exceeding 100 per cent of the current market value of the collateral) which a lender, exercising sound credit judgment, would lend, without regard to the customer's other assets held as collateral in connection with unrelated transactions. (2) Making a determination or accepting a statement concerning a borrower means that the lender or its duly authorized representative is alert to the circumstances surrounding the credit, and if in possession of information that would cause a prudent person not to make the determination or accept the notice or certification without inquiry, investigates and is satisfied that it is correct; In the ordinary course of business means occurring or reasonably expected to occur in carrying out or furthering any business purpose, or in the case of an individual, in the course of any activity for profit or the management or preservation of property. Indirectly secured. (1) Includes any arrangement with the customer under which: (i) The customer's right or ability to sell, pledge, or otherwise dispose of margin stock owned by the customer is in any way restricted while the credit remains outstanding; or (ii) The exercise of such right is or may be cause for accelerating the maturity of the credit. (2) Does not include such an arrangement if: (i) After applying the proceeds of the credit, not more than 25 percent of the value (as determined by any reasonable method) of the assets subject to the arrangement is represented by margin stock; (ii) It is a lending arrangement that permits accelerating the maturity of the credit as a result of a default or renegotiation of another credit to the customer by another lender that is not an affiliate of the lender; (iii) The lender holds the margin stock only in the capacity of custodian, depositary, or trustee, or under similar circumstances, and, in good faith, has not relied upon the margin stock as collateral; or (iv) The lender, in good faith, has not relied upon the margin stock as collateral in extending or maintaining the particular credit. Lender means: (1) Any bank; or (2) Any person subject to the registration requirements of this part. Margin stock means: (1) Any equity security registered or having unlisted trading privileges on a national securities exchange; [[Page 37]] (2) Any OTC security designated as qualified for trading in the National Market System under a designation plan approved by the Securities and Exchange Commission (NMS security); (3) Any debt security convertible into a margin stock or carrying a warrant or right to subscribe to or purchase a margin stock; (4) Any warrant or right to subscribe to or purchase a margin stock; or (5) Any security issued by an investment company registered under section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8), other than: (i) A company licensed under the Small Business Investment Company Act of 1958, as amended (15 U.S.C. 661); or (ii) A company which has at least 95 percent of its assets continuously invested in exempted securities (as defined in 15 U.S.C. 78c(a)(12)); or (iii) A company which issues face-amount certificates as defined in 15 U.S.C. 80a-2(a)(15), but only with respect of such securities; or (iv) A company which is considered a money market fund under SEC Rule 2a-7 (17 CFR 270.2a-7). Maximum loan value is the percentage of current market value assigned by the Board under Sec. 221.7 (the Supplement) to specified types of collateral. The maximum loan value of margin stock is stated as a percentage of its current market value. Puts, calls and combinations thereof that do not qualify as margin stock have no loan value. All other collateral has good faith loan value. Nonbank lender means any person subject to the registration requirements of this part. Purpose credit is any credit for the purpose, whether immediate, incidental, or ultimate, of buying or carrying margin stock.