Legal Opinion Regulation U

(1) The borrower may deposit margin shares in the custody of the Bank. While such an agreement cannot put the bank in the position of a secured creditor in the event of bankruptcy or even conflicting claims, it is likely to effectively strengthen the bank`s position. The definition of “directly secured” in section 221.2, according to which a loan is not indirectly secured if the lender “holds the margin portfolio solely as a depositary, custodian or trustee or in similar circumstances and has not relied in good faith on the margin stock as collateral” does not exempt such a deposit from the effects of the settlement, unless: It is clear that the bank is not dependent on the margins deposited with it. This description should not be construed as an exhaustive presentation of the Regulations. Rather, a general overview of the requirements of the Regulation should be provided. The full regulations are available on the Government Printing Office website. (d) Accordingly, Bank Y`s loan to Fund X was and is an “assigned loan”. However, a loan from a bank is not subject to this part, unless it is a dedicated loan; and it is “directly or indirectly guaranteed by margin shares”. In this case, the loan is not “directly secured by shares in the usual sense”, since Fund X`s portfolio is not pledged to guarantee Bank Y`s loan. But the word “indirect” must refer to a form of security other than the “direct” security right resulting from the “transaction that gives use of movable or particular property, or against a third party” on the basis of an obligation specified in the Restatement of the Law of Security of the American Law Institute, page 1, is described. Otherwise, the word “indirect” would be superfluous and a regulation, such as a statute, should, as far as possible, be interpreted in such a way as to give meaning to each word.

Regulation U imposes certain requirements on lenders who are not securities dealers and dealers who make loans secured by margin shares. Margin stocks include all securities registered on a national stock exchange, such as the New York Stock Exchange or the American Stock Exchange. all OTC securities traded on the domestic market of the Nasdaq stock exchange; any debt security convertible into a margin portfolio; and most mutual funds. The regulations apply to businesses that are not brokers or dealers, including commercial banks, savings and loan associations, federal savings unions, credit unions, production credit associations, insurance companies, and corporations that have employee stock option plans. Regulation T applies to dealers within the meaning of the Exchange Act and members of a national stock exchange, as well as certain related persons. Regulation U applies to banks and non-bank lenders that, in the ordinary course of business, make loans of $200,000 or more, directly or indirectly secured by margin shares, or at any time during a calendar quarter, issue $500,000 or more of those outstanding loans. Rule X applies to borrowers. It was added to the margin rules after some borrowers attempted to use a violation of the margin rules applicable to lenders as a defense against loan disbursement. (d) In the opinion of the Governing Council, a loan of the type described would be contrary to this Part if it exceeded the maximum value of the guarantee. The Regulations apply to all loans secured by margin holdings for the purpose of acquiring or maintaining margin portfolios (section 221.3(a)). While the proposed loan is supposed to be for the cost of living, given the loan`s ratio to employee stock ownership plan, it seems pretty clear that its real purpose would be to allow the borrower to purchase AT&T stock, which are margin holdings. At the end of the 24-month period, the borrower would purchase a certain number of shares of those shares and incur a debt to the lending bank approximately equal to the amount he would pay for those shares.

In these circumstances, the Bank`s loan must be regarded as a loan “for the purchase” of the shares and is therefore subject to the restrictions set out in this Part. This conclusion follows from the provisions of this Part and it may also be noted that a contrary conclusion could largely nullify the fundamental objective of the margin regime. (h) In the second case, entity C, an operating company with significant assets or cash flows, seeks to acquire entity D, which is significantly larger than entity C. Company C creates a shell company which, together with Company C, makes a takeover bid for the shares of Company D, which are margin interests. In order to fund the takeover bid, the shell company would receive a bank loan that complies with the margin credit restrictions of this Part and the C company would issue debt securities that would not be directly secured by margin shares. The Board of Directors believes that these notes should not be considered to be indirectly secured by Company D`s margin portfolio because Company C has significant assets or cash flows as an operating entity, regardless of Company D`s margin portfolio. A presumption would not be appropriate, as the purchasers of the bonds may rely on assets other than the margins held by D Company to repay the loan. (a) The National Securities Markets Improvement Act of 1996 (Pub. L. 104-290, 110 Stat. 3416) limits the Board`s margin power by repealing Section 8(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Section 7 of the Exchange Act (15 U.S.C.