Loan which is secured indirectly by stock.

CFR · 2024-01-01 · US · Title 12

(a) A question has been presented to the Board as to whether a loan by a bank to a mutual investment fund is “secured * * * indirectly by margin stock” within the meaning of § 221.(3)(a), so that the loan should be treated as subject to this part. (b) Briefly, the facts are as follows. Fund X, an open-end investment company, entered into a loan agreement with Bank Y, which was (and still is) custodian of the securities which comprise the portfolio of Fund X. The agreement includes the following terms, which are material to the question before the Board: (1) Fund X agrees to have an “asset coverage” (as defined in the agreements) of 400 percent of all its borrowings, including the proposed borrowing, at the time when it takes down any part of the loan. (2) Fund X agrees to maintain an “asset coverage” of at least 300 percent of its borrowings at all times. (3) Fund X agrees not to amend its custody agreement with Bank Y, or to substitute another custodian without Bank Y's consent. (4) Fund X agrees not to mortgage, pledge, or otherwise encumber any of its assets elsewhere than with Bank Y. (c) In § 221.109 the Board stated that because of “the general nature and operations of such a company”, any “loan by a bank to an open-end investment company that customarily purchases margin stock * * * should be presumed to be subject to this part as a loan for the purpose of purchasing or carrying margin stock” (purpose credit). The Board's interpretation went on to say that: “this would

official document · source cfr-2024 · id 12:§ 221.113