Statement of Purpose for an Extension of Credit Secured by Margin Stock
Lenders that extend credit as permitted by the Board's margin requirements are sometimes required to fill out purpose statements to document the purpose of their loans secured by margin stock. The FR T-4 purpose statement is used for extensions of credit by brokers and dealers, the FR G-3 for extensions of credit by other nonbank lenders, and the FR U-1 for extensions of credit by banks. The borrower lists the amount and purpose of the loan, and the lender lists the collateral for the loan.
Purpose: These statements provide a written record of the amount of credit being extended, the purpose for which the money is to be used, and a listing and valuation of collateral. They serve as a compliance tool for the subject lenders and borrowers; as an efficient supervisory instrument for bank examiners (as applicable) to use in verifying compliance; and, if necessary, as an evidentiary or enforcement tool for the Justice Department, the Securities and Exchange Commission, or the self-regulatory agencies charged with ensuring broker-dealer compliance.
The Securities Exchange Act of 1934 ('34 Act) authorizes the Board to regulate securities credit issued by banks, brokers and dealers, and other lenders. Until their recent revision, the securities credit regulations were distinguished by the type of lender to which they were applied, that is, banks, brokers and dealers, and others. Regulation T has governed credit activities of brokers and dealers since 1934. Regulation U, governing banks, was adopted in 1936. The Federal Reserve adopted Regulation G in 1968 as a companion to Regulation U, to stop unregulated lenders from circumventing the margin requirements of Regulations T and U. Effective April 1, 1998, the National Securities Markets Improvement Act of 1996 repealed section 8(a) of the '34 Act, which distinguished between bank and nonbank lenders with respect to broker-dealers. The amendment eliminated the need for separate regulations, and Regulation G was merged into Regulation U.
Banks, brokers and dealers, and nonbank lenders. Reporting is required.
The FR U-1 statement is for recordkeeping requirements that must be met before credit is extended. The lender must retain the records for three years after the credit is extinguished.
Last Update: January 28, 2015