[Code of Federal Regulations]
[Title 12, Volume 3]
[Revised as of January 1, 2005]
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, must question the accuracy of any non-purpose 
statement (i.e., a statement that the loan is not for the purpose of

[[Page 21]]

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]