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12 CFR Ch. II (1–1–14 Edition) § 221.109

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12 CFR Ch. II (1–1–14 Edition) § 221.109 § 221.109 12 CFR Ch. II (1–1–14 Edition) margin stock, the loan would be sub- a case of this kind, the loan would be ject to this part in exactly the same subject to this part, for the following way, for example, as a loan subject to reasons: this part that became under-margined (i) The Board has long held, in the because of a decline in the current closely related purpose area, that the market value of the loan collateral or original purpose of a loan should not be because of a decrease by the Board in determined upon a narrow analysis of the maximum loan value of the loan the technical circumstances under collateral. which a loan is made. Instead, the fun- damental purpose of the loan is consid- § 221.109 Loan to open-end investment ered to be controlling. Indeed, ‘‘the company. fact that a loan made on the borrower’s In response to a question regarding a signature only, for example, becomes possible loan by a bank to an open-end secured by registered stock shortly investment company that customarily after the disbursement of the loan’’ af- purchases stocks registered on a na- fords reasonable grounds for ques- tional securities exchange, the Board tioning whether the bank was entitled stated that in view of the general na- to rely upon the borrower’s statement ture and operations of such a company, as to the purpose of the loan. 1953 Fed. any loan by a bank to such a company Res. Bull. 951 (See, § 221.106). should be presumed to be subject to (ii) Where security is involved, stand- this part as a loan for the purpose of ards of interpretation should be equal- purchasing or carrying margin stock. ly searching. If, for example, the origi- This would not be altered by the fact nal agreement between borrower and that the open-end company had used, lender contemplated that the loan or proposed to use, its own funds or should be secured by margin stock, and proceeds of the loan to redeem some of such stock is in fact delivered to the its own shares, since mere application bank when available, the transaction of the proceeds of a loan to some other must be regarded as fundamentally a use cannot prevent the ultimate pur- secured loan. This view is strengthened pose of a loan from being to purchase by the fact that this part applies to a or carry registered stocks. loan ‘‘secured directly or indirectly by margin stock.’’ § 221.110 Questions arising under this (2) Loan to acquire controlling shares. part. (i) The second question is whether this (a) This part governs ‘‘any purpose part governs a margin stock-secured credit’’ extended by a lender ‘‘secured loan made for the business purpose of directly or indirectly by margin stock’’ purchasing a controlling interest in a and defines ‘‘purpose credit’’ as ‘‘any corporation, or whether such a loan credit for the purpose, whether imme- would be exempt on the ground that diate, incidental, or ultimate, of buy- this part is directed solely toward pur- ing or carrying margin stock, ‘‘ with chases of stock for speculative or in- certain exceptions, and provides that vestment purposes. The Board an- the maximum loan value of such mar- swered that a margin stock-secured gin stock shall be a fixed percentage loan for the purpose of purchasing or ‘‘of its current market value.’’ carrying margin stock is subject to (b) The Board of Governors has had this part, regardless of the reason for occasion to consider the application of which the purchase is made. the language in paragraph (a) of this (ii) The answer is required, in the section to the two following questions: Board’s view, since the language of this (1) Loan secured by stock. First, is a part is explicitly inclusive, covering loan to purchase or carry margin stock ‘‘any purpose credit, secured directly subject to this part where made in un- or indirectly by margin stock.’’ More- secured form, if margin stock is subse- over, the withdrawal in 1945 of the quently deposited as security with the original section 2(e) of this part, which lender, and surrounding circumstances exempted ‘‘any loan for the purpose of indicate that the parties originally purchasing a stock from or through a contemplated that the loan should be person who is not a member of a na- so secured? The Board answered that in tional securities exchange . .’’ plainly 44 VerDate Mar<15>2010 20:08 Apr 17, 2014 Jkt 232037 PO 00000 Frm 00054 Fmt 8010 Sfmt 8010 Q:\12\12V3.TXT ofr150 PsN: PC150.
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