September 24, 1992
TO: UNIT INVESTMENT TRUST COMMITTEE NO. 54-92
SEC RULES COMMITTEE NO. 72-92
CLOSED-END FUND COMMITTEE NO. 21-92
RE: INSTITUTE PROPOSES CHANGES TO MARGIN TREATMENT OF INVESTMENT
COMPANY SHARES
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The Institute has submitted a rulemaking petition
to the Federal Reserve Board proposing that the Board amend
Regulation T to eliminate certain inequities that currently exist
in the treatment of extensions of credit by brokers or dealers
with respect to securities issued by investment companies. Such
securities are treated as "margin equity securities" under
Regulation T, which means that a broker or dealer may extend
credit to a customer holding those securities equal to 50 percent
of the value of the securities or the percentage set by the
regulatory authority where the trade occurs, whichever is
greater. In contrast, in the case of "exempted securities" (as
defined in the Securities Exchange Act of 1934), a broker or
dealer may extend credit in an amount equal to the "good faith"
loan value of the securities (which is likely to be more than 50
percent). Thus, under Regulation T, an investor who owns
exempted securities may borrow the good faith loan value of those
securities from a broker or dealer, but an investor who owns a
proportionate interest in a pool of those same securities through
ownership of shares of an investment company, can borrow only 50
percent of the market value of those shares.
Moreover, under Regulations U and G (governing extensions
of credit by banks and other lenders), the maximum loan value of
investment company securities is their good faith loan value,
provided that the investment company has at least 95% of its
assets continuously invested in exempted securities. Thus,
brokers and dealers extending credit to customers with respect to
investment company securities are at a competitive disadvantage
compared to banks and other persons in terms of the amount of
credit they can extend.
The Institute’s proposal would eliminate the above
discrepancies by amending Regulation T to provide that brokers
and dealers may extend to customers holding investment company
securities in a margin account the good faith loan value of those
securities, provided that the investment company has at least 95%
of its assets continuously invested in exempted securities.
Copies of the rulemaking petition and supporting memorandum
that the Institute filed with the Federal Reserve Board are
attached. We will keep you informed of developments.
Frances M. Stadler
Assistant Counsel
Attachments