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IN THE UNITED STATES COURT OF FEDERAL CLAIMS __________ Nos. 01-256 T and 01-257 T (Judge Charles Lettow) MARRIOTT INTERNATIONAL RESORTS, L.P., MARRIOTT INTERNATIONAL JBS CORPORATION, TAX MATTERS PARTNER, Plaintiff v. THE UNITED STATES, Defendant. ______________________ SUPPLEMENTAL BRIEF OF THE UNITED STATES IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT AND IN OPPOSITION TO PLAINTIFF'S CROSS-MOTION FOR PARTIAL SUMMARY JUDGMENT ______________________ Defendant filed a motion for summary judgment on the question whether an obligation to close a short sale constitutes a liability for partnership basis purposes pursuant to § 752.1 Plaintiff filed an opposition to defendant's motion for summary judgment and a cross-motion for partial summary judgment. Defendant filed a brief in reply to plaintiff's opposition and in opposition to plaintiff's cross-motion for partial summary judgment. Oral argument on the parties' motions was held on May19, 2008. The Court subsequently requested that the parties file supplemental briefs on whether Regulation T as it stood in 1994 has implications for the
Except as otherwise noted, all sections cited herein refer to the Internal Revenue Code of 1986, 26 U.S.C., in effect during the periods in issue. -1-
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applicability of Section 752 to the transfer of the obligation to close the short sales pertinent to these cases. Introduction The United States asserts that under § 752, Marriott International Resorts, L.P. (MIR), must include in its partnership basis the short sale obligations it "assumed" from Marriott Ownership Resorts, Inc. (MORI), because the short sale obligations to replace the borrowed Treasury Notes are legal liabilities secured by the proceeds from the Treasury short sales, and the proceeds from the short sales quantify the amount of liability for purposes of § 752, irrespective of the term of the underlying securities. Regulation T Governs Short Sales Transactions Short sales are subject to extensive federal regulation. Levitin v. Paine Webber, Inc., 159 F.3d 698, 705 (1998). The Securities and Exchange Act of 1934 (the "Act") provides the general authority for the imposition of rules with respect to the extensions of credit by brokers and dealers to customers for the purchase or carrying of securities. 15 U.S.C. § 78g(a). The Act directs the Board of Governors of the Federal Reserve System to prescribe rules and regulations with respect to the amount of credit that may be initially extended and maintained by a broker or dealer on any security. Ibid. The Act gives the Federal Reserve Board authority to regulate short sales and the withdrawal by a customer of funds or securities. Ibid. Subsequently, Regulation T was issued by the Federal Reserve. The purpose of Regulation T is to "regulate extensions of credit by and to brokers and dealers; it also covers related transactions within the Board's authority under the Act. It imposes, among other obligations, initial margin
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requirements and payment rules on securities transactions." 12 C.F.R. § 220.1(a)(1994).2 Regulation T governs all short sales executed by United States broker-dealers. 12 C.F.R. §§ 220.1(a), 220.18(c) and (d). Under Regulation T, a creditor is any broker or dealer, and a customer is any person to or for whom a creditor extends, arranges, or maintains any credit. 12 C.F.R. §§ 220.2(b) and (c). Thus, Credit Suisse First Boston (CSFB) is a creditor and MORI is a customer for purposes of Regulation T. As a creditor, CSFB was required to maintain a record for MORI's account showing the full details of all transactions.3 12 C.F.R. § 220.3(a). MORI's short sale transactions were required to be maintained in a margin account.4 12 C.F.R. §§ 220.1(b)(1), 220.4(a), and 220.5(b). MORI was required to post initial margin for the short sales of Treasury Notes equal to 100 percent of the market value of the Notes--the short sale proceeds--plus any additional margin that may have been required by CSFB.5 12 C.F.R. §§ 220.5(b) and 220.18(d).6 Only items in MORI's margin account in which the short sales were conducted could be
The 1994 version of Regulation T is contained in the appendix hereto and all references herein are to the 1994 version unless otherwise noted. Thus, CSFB was required to document all account transactions including any withdrawal of funds or securities from MORI's account, 12 C.F.R. § 220.4(e), or a transfer of the account to another customer, 12 C.F.R. § 220.5(f)(2). The term short sale means any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller. 17 C.F.R. § 240.3b-3. The amount of the initial posted collateral is determined by the market value of the shorted securities, so any subsequent change in the value of the securities is irrelevant. Under Regulation T, a United States Treasury Note is considered an "exempt" security because it is a government security. 12 C.F.R. § 220.2(r); 15 U.S.C. § 78c(a)(12) and (42). By contrast, a "nonexempt" security requires a higher initial posted margin--equal to 150 percent of the market value of the security. 12 C.F.R. § 220.18(c). -36 5 4 3
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considered by CSFB to determine whether MORI had posted the required margin collateral. 12 C.F.R. § 220.3(b). Moreover, MORI was prohibited from withdrawing any funds or securities from its CSFB margin account if doing so would create or increase any margin deficiency. 12 C.F.R. § 220.4(e)(1)(ii). The practical effect of Regulation T on short sales was explained by the court in Levitin v. Paine Webber, Inc., 159 F.3d 698, 705 (1998): a broker who lends a customer stock for a short sale does not typically pay the proceeds of the sale to the customer to be spent when and how she wants, waiting for the customer to cover when and if it suits her. If a broker did that, the price might increase and the customer become insolvent or disappear, leaving the broker out the entire value of the stock-the price at the time of short sale plus its increase. Brokers therefore demand collateral, usually by taking an amount from the customer's account equal to the security required. The proceeds from the sale will, of course, usually be available as security, but if those proceeds and the balance in the customer's account are not sufficient to satisfy the security requirement, the customer will have to post additional collateral. The amount of security required is not entirely a matter for negotiation between broker and customer. The collateral posted must satisfy federal margin requirements associated with short trades. The Application of Regulation T to MORI's transactions In this case, MORI's short sales of Treasury Notes were executed through MORI's CSFB margin account. Pursuant to the requirements of Regulation T, MORI was required to post margin collateral at least equal to the market value of MORI's liability to CSBF to replace the borrowed Treasury Notes. Accordingly, CSFB held the proceeds from the short sales as margin collateral for MORI's binding, legal, obligation to replace the Treasury Notes.7 Similarly, after
There is no evidence that MORI substituted other collateral for the short sale proceeds to satisfy the margin requirements of Regulation T and it would be immaterial in any event. -4-
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MIR "assumed" the obligation to close the short sales, MIR could not have withdrawn the short sale proceeds which had been posted as initial margin collateral.8 Under Regulation T, a short sale is a secured transaction between a creditor and customer-debtor. Marriott's argument that a short sale obligation is a contingent liability is impossible to square with Regulation T's requirement that the full market value of the short sale liability be posted as collateral for the binding obligation to replace the shorted securities. The only way to characterize as "contingent" the absolute obligation to close a short sale would be to ignore Regulation T's long-standing requirements for the posting of margin collateral on short sales and the restrictions on the withdrawal of the collateral. Marriott's argument that a short sale is contingent because the precise amount of the eventual gain or loss on the short sale transaction is not known until the short sale is closed is irrelevant for the partnership basis calculation.9 Section 722 provides that the basis of an interest in a partnership acquired by the contribution of property to the partnership is the adjusted basis of the property to the contributing partner at the time of the contribution. Thus, whether there is a liability under § 752 which affects the partner's basis must be determined at the time the partner acquires its partnership interest by contributing property. Accordingly, the calculation of
For the purposes of the pending summary judgment motions only, the United States assumes that there was a "contribution" of the short sale proceeds to MIR and an "assumption" of the short sale obligations by MIR. It is an open question, however, whether the "contribution" and "assumption" actually occurred in manner that satisfies the transfer requirements of Regulation T. See 12 C.F.R. §§ 220.4(e), 220.5(f)(2); Def. Ex. 13 (short sale transactions in MORI's name after the purported contribution to MIR). Arguably, MORI did not "contribute" the short sale proceeds to MIR in the first place, so MIR could not have "assumed" the short sale obligations nor could MIR have closed the short sales. It is defendant's understanding that Marriott does not contest that it had a binding contractual obligation to return the borrowed Treasury Notes to CSFB, nor could it. -59
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MORI's partnership basis in MIR is determined at the time MORI acquired its partnership interest in MIR. Thus, MORI's basis in MIR must be determined at the time MORI "contributed" the short sale proceeds to MIR and MIR "assumed" the obligation to replace the borrowed Treasury Notes. Under Regulation T, when MORI entered the first part of the short sale transaction (selling the borrowed Treasury Notes), the amount of MORI's secured short sale liability to CSFB was equal to the amount of the short sales proceeds (the then-market value of the Notes sold). Regulation T required MORI to post that amount in the CSFB margin account to secure the liability to close the short sales and restricted the withdrawal of that amount. Therefore, for purposes of § 752, the liability to close the short sales was certain and quantified at that point and must be taken into account in calculating MORI's basis in MIR.10 In essence, Marriott argues that anticipated subsequent events may be taken into account in determining MORI's basis at the time it acquired its interest in MIR. There is no statutory provision, however, that allows a partner to calculate its initial basis in a partnership by anticipating subsequent events that might change the value of property contributed by a partner to a partnership. If a partner contributes a piece of machinery in exchange for a partnership interest, his partnership basis is based on his adjusted basis in the machinery. If the machinery becomes obsolete and worthless after the contribution, the partner's initial partnership basis is not changed by the subsequent change in the value of the machinery. It must follow then, that the partner cannot anticipate the possibility that the machinery may someday become worthless
This is consistent with the holding in Rev. Rul. 95-45, 1995-1 C.B. 53, that an obligation to replace shorted securities constitutes a liability under § 752, and the amount of the liability is the amount of the proceeds from the initial short sale transaction. -6-
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in calculating his initial basis in the partnership when he contributed the machinery to the partnership. Likewise, Marriott cannot use the possibility of a subsequent change in the value of the short sale obligation to effectuate an anticipatory adjustment to MORI's basis calculation by means of ignoring the short sale liability when MORI acquired its interest in MIR. MORI's obligation to close the short sales was a binding, legal obligation which was certain and quantified at the time of the contribution to MIR by the amount required by Regulation T to secure the obligation. Because MORI claims to have "contributed" the short sale proceeds to MIR in exchange for its partnership interest (so that its basis in MIR was equal to the short sale proceeds), the amount of the corresponding short sale liability must follow the "contribution." A short sale transaction is essentially identical to a conventional purchasemoney financing which clearly must be accounted for as a § 752 liability. Marriott's claim that the obligation to close the short sales is a contingent liability is controverted by Regulation T, which imposes a binding liability on a customer/debtor engaging in a short sale, which is quantified for § 752 purposes by the amount of the short sale proceeds. Accordingly, Marriott's claim that the short sale obligation can be disregarded a as liability under § 752 for partnership tax basis is groundless.
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CONCLUSION Based on the foregoing, defendant respectfully requests that its motion for summary judgment be granted. Respectfully submitted, s/G. Robson Stewart G. ROBSON STEWART U.S. Department of Justice - Tax Division Court of Federal Claims Section Post Office Box 26 Ben Franklin Station Washington, DC 20044 tel: (202) 307-6493 fax: (202) 514-9440 JOHN A. DICICCO Deputy Assistant Attorney General DAVID GUSTAFSON Chief, Court of Federal Claims Section s/David Gustafson Of Counsel Dated: June 6, 2008
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APPENDIX
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'12
C.F.R. Secs. 220 1 - 220.18 (1994)
SUBCHAPTER
-
A_BOARD OF GOVERNORS OF THE
RESERVE SYSTEM
220.11? ErceptioE caalr accoun6
FEDERAL
PART 220-CREDIT BY BROKERS
lo
90.dav rule
ln
spclrl
AND
Sec
DEATERS (REGUIATION
D
220.U8 Tlme of FymsEt for mutual tuDd sbs,res purchased lD a gpclcl cash ac-
22O.1 Auchortty, purpose, and scope 22O.2 DeflDlttous2m.3 GeDerBl Provlslons
2m.ll9 Apguc&blUty oI mafilo
2a).4 MarylD accouni.
ments ro creau! 6xteDd6d to corporailoE ln conoeclloD wlltr r.tlremeDt of stocE. 2m l2O LoaD vslue ot securliles used io
rsquir_
220.5 MartlE rccouDt excepllons aDd spcial provlalona 220.5 Spclal memorendufi accouo! 220.? Arbllrage account
ms.k rcoulred deposli 220.12I Appllcsbtlirv of martlD requlromsDt to jolnl s,ccoullc biwcn iwo
20.8
Cash BccouDt
?20.9 NoDsecu-rliles
credlt aDd
Zn
220
emplove
W "D.ep ta tbe monev pul und cell lloDs as exrcnsion8 of credlE
erlEE noEconverilble bonds ErEms as "arraDEilng" for cledlt.
crealllor3.
op-
stock ownershiP lccounE 220,10 OmDlbus accouDr
123 Purtiel delaved l$uo conlract cov-
2A).ll
2r0.I2 Markt tuDcilo!3 accouD!.
Brokor-dealer creclll 4ccouDi
2D,12{ IrsstallmeDl sele of !.x-8be]tr pro220
220.13 Arrsngdna fo! loBls by oibers.
2r.t4
cla.oDce of secu.itles oplloDs aDd futuro3. 220.15 BorroslBg bY credlcors 220,16 BorfowlDs eDd IndlBB s6curltl3 U0.1? BaqutremDls fot ihe ]lst of
for6l8id ms!81! 8!OCka. 220.18 SuPplemDt: MrrglD rqulremsotr
INAERPBE-IATONA
I25 Ext4Ddl0g, InslDtslnlDg of BrreDSlng credlE oD mulual fuDd sbares havrDa
portfollo oI exempild socurl!1e3. 126 Pul eDd c8ll op[loD8.
220 220
lZ7
IE&
mary1;abl6 C/TC stocLs end ths
lisl oI
?2O
12a TrellmDi of slmultrEouc long aBd shor! poslDioDs ln lho same msriln eccoun! wbeD pu! or call oplloDs or com' blDalloDs lbereof oD such siock tro also
lDsurstrce promlum fuDdlag proEr'ems
crdlt lD coEEectloE witb the sale or
LDdepeDdenl broker/doaler8 arrang'
2?0-101
Tlsnsactloos of cusbmera wbo are
brokora or dalera.
220.1('2 [Rserved]
22O
I29 Appllcabilitv of same'Osv
tut,loD rul6
Lo
outatendlEg lD
Ehe
eccouDl
sccouDts subJoc!
Lo
suDstlsclloD irens_
SEC
220.1G Borrowlng o( socurlll3
?20.10,1 (Re8ervodl
220
130 Escrow rcotpls
zn
8{).
for oPclon
220.105 Nlnty-aluy
rule lE 8pcld castr oc-
2m
220.106 Desl8lslion of Nelc York Stock Ex_ chaDg for purposes of spoclall6l tBns220
I3l !o broker-dealr scllvltles untler
Rule l4.tA
1? aDd 23
ADpLicerloD of tbo anEngrDS secrloo
lfi
rog
TlsEsacllonB
ln undermarSlled
ac_
curlilos ExcbaDae Ac! of 1934.
U.S c. ?8c, ?tu:. t8b,
220.18
AulsoRrTY Secs.3, ?,8. souRcE: ResrlatioD
U0 100 Il]tematloDel BaDk Secuillles
220
of ibe SeaB smended (15 ?8q aDd ?8w)-
ArranEemen! for crciut bv brokeE or deelerg 22O llo AsslstsDce by Federal c.ealtt uDlon
sppear uE 48 FR less othrwlse Dold,
EDtroRIAr,
T, l!22OI
23165,
tbrouah May 24, 198:|, 'rn-
to ils member3. 22O-111 ArranglDa for ExiensioDs of crcdl! to b6 made by B bank 2m,112 Alrang:lDg loBD lo purchB3e opeD-enal !EvescmsEi compsDy sDdleE 220.113 N0css6lty for plompt f,eymeDl 4Dq illlvery tE sDeclal casb rccouara220.115
220
refeFod to lD tbls psrt is nled ar r Flt o( the ortslDal documeD!. Copies ere Eveileble upoD request Eo lhe Boutd ol Govemors o( ths FBdral Rserve System or anv Federal
Resepe Bebk (21 see rhe Lisr of c!.R secLloDs Arfecled ln bb FlDding Aifu sectloD of tllls volume ror FR cltslioos io Dert 220 olc MBrglb Stocks cbenges
Nor!8: (I) A copv of each form
220.1I4 TraEs3ctlons iB res[ricled accounts uDder amsndd Flrbalrawat rulesarnatlrneDt,
Short ssles mBds prlor to rlcDt
116 SlmultaBeous loDg eDd shor! poal-
thersto,
but covoreal
tekeD
suNquent
1220.1 Authonty' purPoee'
(a) Autholitv
arLd, purpose.
a.Ed ccope.
tlon ln aem merglD rccount
shor! posltlo!
1s
fll:i.
wharo
T (thls part) ls lssued by the Board of
F,e8!l&ttoD
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s2?c.2
Governors of the Federal R8ervg Sy8Esm (the Bo&rd) purau4lE Lo the Securlrles ExchElge Act of 1934 (the Act) (15 U.S.C, ?Ea ea seq.). Its prlncip,I Purpose ts !o re$ a.te exienalona of credlL by and !o brokers and dealers: it &lso cover rels,iod trs,Dsa,ctionE wtthlD the Board'8 &uLhority under the Act Ib lm8atloDs, inltlal
PaYmeDt acbloDs.
12 CFR Ch.
ll (l-l-94 Edltlon)
(d) Debit bolonce meo'DB the cssh amouut owed io the cretlltor ln a marglr1 a.ccount alter deblting &mount8
fie|Ll , PalmetTt .D trdrlsactiolT
iransforred. to the special mehora,ndurn account.
undel whlch a
a'!d
credltor will dellver to, or &caepb from, ihe customer, or the custome!'g ageqt, a security &g8,lnst full payment of the
aSree
that the
add
Bpecifically permitted
count,
coult Bb&lI be recorded ln a ma'rEirn
a creditor. Any tra,nsactioE nol in a speclal ec-
a'c-
max81n accou:nE,
t
n
foF
S
its own Prooecuon.
hi6 Part heve the
220.2 DefisltloDs.
(^) Credil bdiozce meaaa the cesb a[lount due tbe cuslomer iD a marg]n
ferreat
iu Eectton 3(a) of n bhls aectlon'
or put.
s,ccouDt a,fber deblting amouuts lr&o8-
to
bhe spcls,l memors-ndum a'c-
coun!,
tb\ Creclitor me&rls any broker or deal_ (a.s defined in gecLions 3(a)(4) aDd 3(aX5) of lhe Ac!). any member of a Da'
(h) Exo,mining authorit! mea'D'st (l) Ttre natloDal securities excb&lge o! other self-reglla,tory orga.trization of wllich a crgdltor is s' member: or
the Regional aDd Exclr&nge
er
a,ny such solf_
th crodltor.
Cornmlsslon (SEC) where the credltor has lts priucipol place of buainess; or (3) IJ & member of more thao one BeIfregru.Iaiory olgalizahion, the orga z&tlou destgls'ted by the SEC as the x-
the tradel (2) AnY PartDer iD a, firm who would be coDaldered a cuatomer of ibe firm
abseDt
aod
the paxtnership
relstionshlp;
the Boa.rd: or (2) A foretS! security that ls a debt socurlby convertlble into a marS'iD 8e-
(3) 'lLor Any Dartlclpate8 aad whtch would
jolD! veniure lD whlch e crodbe
cun!y,
lssued
coneidored a cuebomer of the credltor the crediior were not & pa,rticlparl.t-
if
6
6l
Foteign sefliritu meaD8 & secuflt'y
Unlted St&tes.
l!
a,
iurisdlcilod other than
bhe
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Fdetol Resrve Syslm
5 Z2{t.2
(k) Good loith lawin me&Ds the alnouDi of ma.r8lD whlch a creclltor. exercisiug sound credlt jud8irneut' would cru|rom4r'lly requlr for a speclfled se_ cudty posltlon and wblch la
esleD-
(l)
security Do! tr4ded oD a uatlons] sctlrltles exchaDge whlch meets all of the followlng requiremenis:
OTC margin boad meeDs: (1) A debt
ljEhed wtthouI regard to tbe customer's oiher asaeta or gecurlttes posltioEs held ln qoDtrectlon with unrelated traDaactioDg.
(I) At tbe time of the oriS{n8'l issue, a prtDclpal &rnount of Dol IeEa tbaD S25.000,0o0 of th lssue wss outstq.trcllng; (li) Tte lssue wa.s reSlshered under
reDt markt p.lce of the underlyltrR secu-rlty ts not more iban oDe standard xerclEe iDterval below (with respect to d call optlod) or above (wlth respct to a put optlon) the exerclse prlce of the
(l) In or at the mofle! means the cur-
sectlod 5 of the Securltles Act of lgiIl (15 U.S.C. ??e) and the lasuer elther flIes periodic reports pulsuant to sec_ tIoE 13(a) or 15(d) of ihe Act or is an lnsurance comp4ny which meets a'II of
optlon.
(m) Ifl the r^ofleV fileaaa tho culreni msrket prlce of tbe undealytng secu_ rlDy rr Dot below (witb respcL !o a' call optloEr or above (wilh respect Lo a put
the conditlons spectfied in section 12(cX2XG) of the Act; aDd (llt) At the tlme of the exten8iou of credtt, the creditor has a leasontble basis for believing tha! lhe isauer is
oor in defAult on interes! or prinaipal
optlon) lhe exercise price of the optlon (\) Moryin c@ll meats a dernencl bY a credltor to B cuslomer for a deposlb of eddltlonsl c&sh or securttles to ellmidBto oa reduce a ma.rgin deflcieDcy requlred under thl9 Part.
as
o.rnount by wblch the required margin exceeda tbe equlty ltr the margin aacou-ot,
(o) Margin
clelTaelLc! rneens tne
(D) Maryin erceJs-meaDE tbe &moult by whlch the equllv ld the margln ac-
conDt exc6ed.s
W}IeD the m&lT1n elcesa
the rcquired
ls
marSJn.
by securltles, bbe currenL v&lue of the
securltloB Ia subject to the perceDta.Ses set forth td 0220-18 (tbe Supplement). (q) Malgia sectaflty meang: (l) Any regilstered gecuritY;
represeDEeq
payments; or (2) A private mortgage pass-throlrgh securlty (not guaranteed by en agetrcy of the U.S. governmetrt) meetlng &ll of bhe followint requlrements: (l) Ad a8Sre8iate prlqclpal amount of not less than $25,000,000 (whtch mav be isEued 1n serles) waa i$3ued pursuant to a, registr&tlob statement flled with lhe SEC utrder section 5 of the Securities Act of 1933; (ti) CuFent reports relathg to the lsEue have been flled wlth the sEC; and (ltt) At the tlme of the credlt exttr-
quallfied for tradll8i lE tbe Nalional Ma.rket System under a. desiglatiotr
(2) Any OTC mr.rglD stock; (3) A-Dy OTc ma,rSln bond; (4) Ary OTC securlty desigxrated as
ston, the creditor has 4 reaaonable basls for belle\rldg thet mortgage lnter_ est, prlDcips.l payments and other dl6tributlons are belng peaaed througlr as requlred and that the servicitrR aSent ts meeblnE .lts maierlal obllg&tlons uDder
plan epproved by the SecuritieB 4nd
ExchaDge CollrnissloD (NMS securlty);
the terms of the offerlng; or (3) A moflgoge reloted. secuit! a.s deflned ir sectlon 3(a)(41) of the Act; or (4) A debt security lssued or gullren_ teed as a generel obllgation by bhe aoverrunent of a foreiSn courtry, lts prov-
(5) ADy securtty lssued by elther aD open-ld luveatmeEt compaDy or unli investmont tru8t Fblch 18 registered under sectloE 8 of tbe Lnvestment Comp&Ey Act of 1940 (15 U.S.C. 80a A) (6) Arly forelg'n marg{! stock.
4Dy Eeoudty other than an exempted securtty (as deflDed io sectloE 3(eX12) of the
lnces. states,
Datlonal entlty,
extenslon of credlt oDe of the followlDg lB ra,ted lD one of th two lrighest ret-
or cltie6. or a sopratf at the blme of ihe
latltrg olgaDizatlon:
in8: categortes by 4 natioDally recogDlzed statistlcEl (l) T'tte lssue,
(11)
(t)
NoTlezenpted. securitg
meals
ltly), or
T'tIe lssuer or gla,rantor (lmpllc-
Act).
Rservo gyatern.
(a\ Nonnefiber D@r!,t mea.Da a ba,nk that 18 nol & member of lh Federal
(ltt) Other outstardlDg ursecured lodg-term debt secudlles igsued or ruara4teed by tho government or eDtlty; or
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5220.3
12 CFR Ch. ll
(l-l-94
Edhlon)
De-
EoncoEvertlble debb security th-et curity th&t: (l) IE reeil8iered otr a meets 9ll of the follow-inc requlre- tlolal gecuritles exchange; or
menta:
(5) A forelg! Securlty that ta a
(t) Ab the tlme of origlDel l8aue,
a
(a.) Registered secutitS/ mes,na aDy 6e-
prlnclps,l &moult of at lea,st $(n,(Xn,(n0 wg.s outat,ndlngi
(tt) At the time of the exteDsioD of credlt, the crditor has a reasotrtble bssts for bellevlngi theL the isauer i8 uot lD defs,ult on lnterest or priDcilte.l
paJrments; aDd
a Drblotra.I securiiles exchange. (y) Slrort c4ll or short put meaDa a, c6,11 optlo[ or a put optloE bha.b i8 l8sued, endorced, or gua,rarteed lD o! for atr accolLEt.
(2) Has uDli6'.ed tradltrg prlvileges oD
tomer to sell the underlylng security,
(l) A short call
obllgate8 the cusde-
foreig! curreacy, or certlficate of
(2)
credib. tho issue is rated iD ode of tbe two htghest rabing categories by a, n-atloDally recogrrized stetistical rating orge,ulza,tlon, except thai an issue th&t ha,s not been rabed as of ihe effective d&to of thls pro!'lslon shall be coDslalered a,\ OTC matgin bond. if a sub8e-
(iii) At the tlme of
bhe exteDsion of
po8lt at the exercise price upon receipt of a,D exercise notice at any tlme plior to the expiretion date of bhe option.
quent unsecureal iasue of at least $100.000,000 oi the same issuer is rebed in one of the two hLghest ra,ting ca,tegories by a [a,tlonally recogEized stg,tistical ra,iiDCi organizotioo. (\) OTc margin sroc/. mes.ns anv eq-
tomer to pLrrcha,se ihe \rnderlylng securtty, foreign culroncy, or ceriificeie of deposit at the exerclBe prlce upon receipt of e,n exercise notice !t any time prior to lhe expira.tion dale of the op-
A short put
obliga,tes
the
cus-
securltles exchan8;e tha,t the Boald ha,s debermined ha6 the degree of ns,biona,l breadth of market, bhe avallability of informablon respecting the security ald ibs la6uer, and Lhe chara,cier a.Dd permanettce of the lssuer to wa.fralrlt being treabed like e,n equlty secutity troded on a nations,l securibies ex_ chenge. An OTC stock is not coDaidered
uity scurtty not iraded on a
Datioaa'l
iDveslor lnterest, the depth
and
cised the option the cash difference between the exercise price s,nd the current assigDed value of the index as established by the option contract. (z\ Specialist joint account means an account which. by written agreement, provides for lhe comrlingliDg of the securtby positions of bhe p&rticipant6 a,nd e, Eherlng of profits and losses from the 0,ccoudb oD aome predetermined ratio.
tion. (3) A short ca.li or a short put cn stock index options obligabes bhe customer to pay the holder of aA rn the mone! lorlg put or call who has exer-
curity lhs,t wiII
to be a,n O?C ttuLrgin stock ulless it appears on the Board's periodlca,lly pubIlshed Iisi of OTC margiq stocks. (1) A put (v) OTerlling option c&11 opbioD writoption purchased or a 'neo,Da. ten a8&iost a long positiou in aD u-nder_ lylng security iD bhe speclelist record in S 220.12(b); or (2) A call optioE purchased or a Put option writLen agailst a shori po6itioD
olse of an option. (48 FR 23165. May 24. Aui
S
(aa,\ Underlling secztitg means the sebe delivered upon exer-
1983; 48 FR 3495. Aug 2, 1983. s.s amended a! 49 FR 35?58, Sept. 12, 1984; 52
FR 32N2, A.vg n,198?; 53 FR
30831,
16, 19Aj 55 FR, 11159,
Mar
2?, I99Ol
in an underlying security in the
spe-
cialish recold in 5220.12(b). (w) Purpose cTedit means credit for the purpose of: (1) Buying, carrying, or tra.din8 in securitiesi or
(2) Buying or carrying any part of an investment contract security which shall be deemed crealiL for Lhe purTose of buying or ca,frying the eDiire secu-
(b) Separation ol accotnts. Except as provided for in the margin a,ccount a,nal bhe specia,I memorandu.rrr accounb, the requ.irements of an account ma,y not be met by considering items jn any other a,ccount. If withdrawals of ca,sh or securities are permitted under Nhe regulabion. wriiien el1bries shall be made
220.3 Gncral provisions. (a\ Recortk. The creditor shall meintain a record for each accoun! showiDg bhe full details of all transactions.
n [y,
when cash or securiiies are used for purposes of meeting requiremenis in another a"ccounl
A-4
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Federol Reserv S]yslem
s
2rc''i
ps.rt may be m,lnt&lned regaadleBe of: prlce6;
(c) MaintenolEe o/ crediC. Except as Droblbttd by thls part, any c.odlt iultlally extended lu compli8uce witlr tbls
(l) Reducttons ln the cuatomer'8 equlty rEulllDg ftom cbr.ugeo ln ma.rket
lDg to be mEr8ln or exempted; or (3r A-oy chaDge ln the marl o requiremenls paescrlbed under this part. (d) Guarattee of aacounts. No glarantee of a cuaiomer's a,ccouDt sha.ll be
(2) Any securlty lD &D &ccoult
cea-s-
tts acqul8itio! Bhell be tres.ted a.o lf the Eecudty Is s. marlln secuilty. (g, VaLuing Jecuritis. Ttre curreni markei value of 4 secu.lty Bhall be setermlned ss follows: (1) TlEoughoub the da,y of the purchase or s4le of a secudty, tb6 credttor sb8,ll use the securlty's total cost of purchase or the Det proceeala of tt sa,le includlng any conunissions cbarged. (2) At any other tlme, the credltoa shall use the clostdg sale prlce of Lhe
glven any effect for pulposes of this pari. (e) Receipt ol fuflds or seczrilies. (t) A creditor, &ctln8 ln good faith, may accePt as imlnedia,te PaJrment: payable oD presenttloni or tached.
(t) Caab or any check, tbaft, or order
a.t-
If there Do closing price. the cleditor rnay use eny reasona,ble egcimate of the markei value of Ehe security as of ihe close of buslness on lhe preceding buslis
ness clay,
ss shown by any reg-Jls.rly published
reportlnB or quotation service.
securlty on che precedinE: buslness day,
(ii) Any securliy with sight drall
(2) A creditor may treai a security. check or c'xafi aa received upon writteE notiflcotlon flom enother creditor ihat [he speclfled securlty. check, or drafE
has been seEt.
nls[ake rnade in good f3,ith in executing a transactron or c&lcdatin8: ihe amount of margln, the credltor sha,ll not be deemed ln violation of this Da,rt if. promDtly after the discovry of lhe
mistake, the creatitor bakes appropriaie corrective a,ction,
\h) Innocent fiistakes. If zrly faiture to comply wibh this part results from a
when securltlea ha.ve Eot been received
(3) UDon notificBtion tha,t a check. draft, or order haa been ausbonored or
wlihin a reasonable time, the creditor shall t,ke the actioD required by bhis part whe[ payment or securjties are
not receiveal on time. (4) A crediior may accept.
to the issuer to dellver bhe reaulbinc slock to Ehe crectitor. prior to acceD!ance. lhe credlror must verify thar;he
rICles are to b deposited. (f) E change of securitres. (1) To enable
ln lieu of secuflties. a. properly executed exerclse noflce for a st,ock optton issued by the cuslomer'js employer ald lnstruc[rons
compahy that, issues or sells vadable annurEy con[racis or engages in a gen_ eral securitieg business as a broker or dealer shall be subject to this part oDly
insurance componres,
(i)
Variqble an LuitV coltra.cts issued. bu
Any
iosuranc-e
subject to pert
for trensactions rn conlection with those a,ciivities. Extensions of credit a.ssOciated with colventiOnal Iendins practices of lnsurance companies ar;
20'7
of this chapler.
lssue. will deltver the securitles promptly
and the customer must des_ ignate the accounb iltto whjch the secua customer to participote in an offer to
t{8 FR 23165, May 2t, 1989. as s.mendd FR {8805, Dec 22. l9?l
$
ai
Oz
excnatge securjties whrch is maoe Go all holders of an issue of securities. a, crediior may submit anv Becurities held in e un;, crlthout rega,rd to Lhe lons of ihis parc, provideat iion received rs deposiied iDt,o the accounr r2) [f a nonmargin. nonexempted se_ Curlt,y js acquired in exchange for a ma.r81D security. iLs retent,ion, with_ clrawal, or sale wtthin 60 d&ys followjhs
recorded tn bhe ma.rgjn account
EO:
220.4 Ma-rgin sccou-nt. (a) Margin tronsachons. (l) Au transactiotrs not specifice.lly a"uthorized for inclusion in another account shall be
(2) A credltor may esiablish sepa.rare
person
margi! e,ccounts for ihe seme
(i) Clear iransactions for other creditors where the r"lansactions rr9 inlroduced lo the clearing credi[or by sepa,
ra,te Credr LOrS: or
credl lors iI lhe :ransaclions fected by sepa,rs.Ee .redirors: 9r
(ii) Cleer iransac!lons ahrough oEner are ef-
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Case 1:01-cv-00256-CFL
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Page 6 of 16
s 220.4
12 CFR
ch. ll (l-l-9'l Edltlon)
Ap(lll) Provlded one or more accountg cunstaDcea wa,rrant such actioD.upon or s' thlrd Dlicotlotrs Ehe.ll be tiled s,nd ectsd or the credltor o"'.i'-lrll i""ty tone"t-"or, advlser baa invest- P or to the end of tbe ? dr"y Prlod the expiratlolt of a,Dy aubaequnt exteDmeDt allaoretlo!. by (b) F,equired t atgin. The requlred sloD, However, appltcattons llled acflrms hs,vt!8 Do direct electroDjc e&ch position l! securliles marsln for cess to tbe orgadzatlon or a,sgocl&t1on ts sel forth tD 5220.18 i,be SupplemeDl) po8taod ts subiect to bhe exceDtloDs e'nd ma,y be accepted es timely flld lf sDeclal provlslon6 conteiugd ln {220.5 marked by mld-uight of the Iast day of
{
(i4ar81u Accouat Exceptlons a'Dd Spe-
the ? day perlod or &ny subsequent
ex_
clal Provl8ioDs).
comblDed
tlonal mArgin ia requlred by bho creditor. For bho purpo6e of computhg equlty tD an account, securlty po8ltioDB are esta,bllshed or ellmineted atrd 3,
to deterlnltre whether
lbe
addt-
iii
teBsion. (4) Satislactiotu restriction. Any !ran6action, posltioD, or deposit tb&b is used to satlsfy one reqrdremoBt u!de! this palt shaJl be u.D&v4llable to 88,ll8fy aov other requlrment.
credit or debtt created oD the trsde dete of 4 security treDsa,ctloa. AdditloEal ma,rgltr is tequlred otr aay day wheD the dey's transactlola create or lncrase a ma,rSln deflcieDcv ln th ec_ count &Dd shall be for ihe &mou.ql oI the ma,rtld deflcloncy go crea,td or lncraaed. To bhe extent th&t debll8 iD a
If aDY i4I witbln ! shs'Il blme, o meet urlttes the msxgi! call or to elintnate any
ls not
ion
maJSjB deflclelcy exlsting oD tbe day
such llquidatioD ls requlrd, whlcbever is less. lf the margi1n deftclency crea.ted or incrased is $500 or le8a' tro acllou Deed be ta,keD by the creditor' G\ withdrduals ol cosh ot sec'tlities
(1) cash or securttles may be withdrawD from &D account, oacept if: (l) AdditioDal ca.ah or Eecurltles are requlrd to be deposlled lnto the ac_ couDt fo! 4 trsnsactioE on bhe sam or
a,
comDutiDg
u5611 59
6veu to such 89ciflcally tdeDtlfled forelgio marS{D securities for pur' DoBes of compuling equjty in lhe marlln accou-nL elther iD UDlted Stateg doua,rs or in any other spciflc foreig:o
a deflctency
a-Dd
no credil
prerdous t!ay; or
obher transa,ctions, deposlbs, aEd wtthalrawals oD lhe sg,me dr,y, would create or ltrcreese s, ma.rJn deflcieucy. (2) Margin excess ma,y be vrlthdr&wn
(tl) The
wtthdrev.'4l, togebher with
to the 8pcia'l iBg a gingle entry bo that acoouri wbich q-tll represetrt 8, dbit to the
or rnay be
memoraDdum accoult (5220.6) by maktra,ns.ferred
exempted
o thoreof'
call
shaU
ms.rgiD accou.Dt and a oredlt to the speci&I memoraldurn &ccount. (3) If a creditor doe6 not recelve & dlstrlbutlon of cash or Becuritlea wblch ls
days a,fter
bhe malsln deflcleucy w&s cres'ted or
lncreaaed.
for ooe or more lirnlted period8 upon crealitor to s, aelftloD or nabioDal seu-DLesB ihe orgatrlza.tloE or asaociatlon belteves ths,i the cred.ltor is not actlDg h good fallh or
(il) The
?
day Pertod may be extDded
payable wlth respct to any Beourlty lD e mar:iu eccount oD the day it iE peyable eDd rdthdrewal would not be per_ mitted under this par&er8'ph, a wlthctrs,wal tla,oaaction shall be doemed to
h&ve occu$ed on bhe als,y the dlstribu-
tioD ls paya,ble.
tbat the crealitor has noi sufflciently deiermlned that excepilonal clr10
(D Interest, sen)ice charges, elc. (l) Wtthout regard to the other provlslons of thls sectlon, the creclltor' lD 113
usual practice, mEy deblt th followlDg
Items to a margln accouDb
lf thy
ero
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Federol Reserye Syslm
coDsldereal ln celculeilng ttre b&lauce of such rccount:
g220s
(l) Interest cbsrgieal oD creaut maintslned ln the ms,rTln eccounu (tl) Promiums on aecutltles bomowed ln cotrlecblon w_tth thort 84lea or to ef_ fect deltvry; (ltl) Dtvtdends, ltrterest, or other dlstrlbutlons due otr borrowed securlttes: (lv) CorrtmunlcdtloD or thlpptnSi cbsrges wlth le6ltect to transactlons lE
lhe m&rlD 4ccounb; dnd (v) Any orher servlce cbarges which tbe credltor may lmpo8e.
put or short csll oa Bn exempted debt scuJ'lty, certlnclte of dpo8lt. stock inder, or forl8! curreEcy (lf the o9tion tE braded oE & gecurltles exchange), shell be lhe s.mount or posltloDs ln lleu of mar8lu 8et forth ln
S220.18
tie.'. Tte requlred m&r81u for ea.ch traDsactlon lrlvollalng eny sborl put or short cell on an equlty Becurlty shrll be tho Lmount Beb forth in 5220,18 (tho
Supplement).
\3) Covaa or positioT6 in lieu ol tttorgin. No ma,r8:in ls requlred for &n opilon wr:lttetr oE eD equlty securliy poaltlon wheD the accouDt holds eny of bhe fol-
(the SupplemeDl). (2\ MoTgin for opiions on equitV securi-
.I creditor rney permlt lnleleal, dlvtdends, or otber dlstrtbutlons credIted to e m4r8du accou-ot lo be \rithdlewn fcom the sccounl if:
(2)
(t) T'be withdr&wa.l doea not cleate or iocreeso & mar8itn deficlency iD the accounti or
iowlng:
scurtlles wltbdrawn does Dot exceed I0 percon! of ibe curtent markeE value or the securlLy w.Ilh respect to which tbcy
wer dlslrlbuted.
FTt rr159, Mar. gl.
(il) The cuFent market va,lue of
enY
(t) The underlylng securlly ln bhe in the underlying securlty in ihe case
csse of & shori call, or 4 short poaltlon
of a thort put;
t48 FR 23165, May 2{, t98ll, a tmeDded
1Sl
at
55
!220.5 Margt! sccou.ut elcPtioua
rp.cld prvisloDt. (&) Unisjred sedrti,ie-s. (l) Tbe re_ quired m&r8_1n on a nt loEg or net
short cornrnlbmont ln &n u.nlaaued scurtty tB ths mar81tr th&t would be re-
t-Dd
(1i ) Securltte8 lmmedlately convertible irbo or exch-ongeAble for the underlylng security witbout the pa.yment of mouey ln ibe case of a short call, lf tbe rlght to convert or exchaDge does not explre otr or before the expira,llon date of the shofL call: (lll) An escrow agreemedt for the un-
derlylng securlty or forelE! exhaq8e (lD tbe case of & sholt call) or ca.sh (lD
tbe case of e short put):
qul.ed tf the Eecudty were an lasued m&r8ln security, pl\r6 any uDreallzed
losg on the corrunltmeDt or legs ely uEreallzed g&lu. (2) Margln ls not requlred on & net ghort commltment lE uulS8ued securtbleo when the account coDtsins the reIa,bed lssued secudtle8, nor for ary net short or uet IoEg po8itlon ln unisaued
call, and if the amount (tf &ny), by which the exerclse prlce of tbe lo!8 c&ll exceeds lhe exerclse prlce of ihe short ca.ll l3 deposlted ln the Account:
sheres of tho slune underlying securlty lf ihe lona put doe8 not erplre before
(1v) A long cell on the sJne uunber of sharea of bhe same underlJdng securtty if the long cell does not expire before tbe exphation dAte of the short
(v) A long pub on the
s,me Dr.r:nber
of
(b) Shoit J@lej-
exempieal securlt(e8.
the expl!&tlotr det of the short put, lf the amount (tf &ny). by whlcb tbe xerclse prlce of the shorl pul exceeda tho exerclse prlce of th lonf put
&nd
lE depostted
@,ta of d4)oslt, stock izdices, or secr.ntlet erchonge tra.d.ed options otl Ioreign
Durpose of comDuttng the equlty 4Dd tbo roqulred ma.r8ln. (c) Opaloru-
Atnendes.
Tt rqulred ms.r3lE for oach tre.nSa4tlon ltrvolvlEg. dtry ahort
I1
lylng 8curlty, ltr the case of a short ceU. tf tbe ws,rra.Dt aloes noi erplre on or before the explr&tlo! d&te of the short call, and lf the amounb (tf any), by ''ghlcb ibe exerclse prlc6 of the wart'atrt exceda the xercls prlce of the ahort call la alepoalteal lu the &ccount A wa.rra,nh used ln lieu of lhe reaulrd
(vl) A ws.msnt to purchase the
h
the account;
u-Eder-
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s 220.6
l2 cFR Ch. ll (l-l-94 Edmon)
coD-
marSi! undor this pro\48loD thall trlbute no qulty to lhe accouE!'
&ccouBb
(l) Trcnsler of a4counl-t. (1) A marSdn that is tranSferrod from oDe creditor to a,nolher rnay bg treeted a5 lf It h4d beeD m4tnt&tned by the traDafere flom the d.te of lt8 orlSln, tf the
traDaferee 4ccept6,
slgiled stetemelt of the trs,Bsferor (or.
ln good feltb'
a
(c)(2) of tblE sectioD a5 the emount to bo added to lbe rqulred marln lu respect of shorl, sales lhall be lncreased by auy unreatizod losa on the po8ltlon. (lt) wlen d EecurltY held tD tbe &ccount seryeB ln lleu of bhe requlred marSl! for & short ce,ll, hhe securlty shaJl be valued at no gre&ter tban lbe exerciae Pdoes of tho short csll.
if lbal is Dot practlcable, of the cu8-
tomer), ths,t atry maJS{tr c&ll isaued ulder this part ha.s beeD 8atl8fled (2) A mar8ltr accoult that is tr&naferred from one cuatomer to 4uotber as Da:tt of a trs,usa,ctlon, nob uDdertg,ken -to avoid the requiremots of tbls part,
(5) .Stroddter. Wlen both & short put and 4 Ehort call are l! a, mar81n 8,ccoult oD the s&me trumber of thares of
the ssrne utrderlylDB secuflty' tbe requlred ma,rSlD shall be tbe ma,rtlD on ;ither the sbort put or lhe short call whlchever i8 greater, plua any uEreellzed loas o! the other optloll(6\ E chsiue desigflatioL T'be cuEtomsr ms,y dosl8-lole at tho tlme the
wblch secudty posltlo! held iD the &ccoult la to aervo Itr tleu of bhe requlred marg{!l, if such optlon order
18 eDtered
rnav be t res.ted a.s if it h&d beeD firainbi;od for bhe tralsferee from lhe d&te of lts ort8dn, lf bhe oredltor accepts rd good falth a,Dd ksepE wlth bhe tranEferee account & sl8led statemeut of ihe
tra,Bsferor de8crlblDg tbe
cumBtaDces for the tra,Dafer.
cir-
(c, Credit ilefuomifloteil in foteign c'urralcU. A creditor may exteEd credib denomlnated
curd by forelgn mar8l! securitle6 de-
ltr a
forl8in cturency
ae-
nomlnated or traded
18! currency
eervlce l8 offercd by tho credlbor;'or ilre cuatomer may have a ataDdlng aSxeomeEt wlth tbe credltor sB to the metbod to be used for determlDlDg on alry 8'lven alay whtch securtty po6ltlon wlll bo used ln lieu of the marS:ln to support a,n optloD lronsactloD. only Eecrulty held 1D the accoult wblclr 8erve8 ln lleu of ttre requtred marS:tD for a sbort put or e short calt thall be uDavelleblo to aupport ADy otber optton lradaacllon in the a,ccou-Dt. (d) Accourlts ol parttuers. If a' partDer of bhe creditor has a, ma,rgln I'ccoult wttb the oredltor, the creautor shall ausregaxd the pa,rtner's flua,Dclal relatioDs wlth the flrm (as shown ltr tbe Dalider'8 caplta,l a,nd ortllDaxy alrawidg accounts) ltr calculathg the marS:h or equlty of the partnr's ma.rt'lD accou[h.
fled on the credltor'8 books aDd reaord8 a.s aecurlng tbe foret8! curreDcy debit.
[48 FR 8165. May 24. IgGt, ss amoDdd
r9901
S
ln the 8s"me forald speclfically ldsntl_
ai
FR 26155. JuDo 26 1985; 55 FR tllsg' Mer'
fl'
50
220,6 Speclsl m6EorallaluE accouut.
(a) A specta,l memor&udum a,ocount (SMA) may be malntalDed lD coDjuBction wtth a ma.r8d! eccou-ut. A siDgle entry amount msy be u.6od to rpresent
both a credlt
bo bhe SMA a'Dd &
the mar8ln accoult. A traDsfer bebweeD the two a,ccouDts ma,Y be ef-
dblt to
fectd by an itrcrea.8e or reducblon ln the eotry. E bon computlagi the equity ttr a maJSln account. the 8ltrgle entry amouDt shatl be consldered aa a deblt In tbe marEtln a.ccou.ab. A p&yment to the cu8lomer or or1 the cu8tomer's be-
half or s. trs,Dsfer to ady of the
reduces the Bingle eobry smou-trt.
cus-
Il G\ Contibut on to ioint m&rg{E s,ccoult ls the accoult of
oetuture.
o'
tomer'e other accounts from the SMA
(b) Tto SMA m8,Y ootrtaln tho follow(1) DlvideDd aDd inter8t pevmentsi (2) Casb nob requlred by tb18 ps,rt, iD-
iolnt voDture lD whlch ihe credilor parilctpotes, any lDtereat of the credilor io rbe jolDt account tD exce88 of the i!tere8t whlch tbe creditor would hr,ve on bhe basls of tts rtgbt to thare iD the proflts ths.ll be tle&bed &a an eitenslo! of credit to the joint accoult a,nd shau
be maJglDd es such.
a
irg
oDtrleE:
cludlng
ca.gh dsposlted to meet o ma,lntetraDce ma,rglD c8.ll o! to met any re-
quiremeDt of e self-regd8,tory orga,Dlzatloq bhe.t is not lmposed by tNB palu
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Federol Relerve Sldem
(3) Ptocoods of & s8le of eecurltlea or cash qo longer requird oD s.Dy erptrd or llquldated securl ty poattlo! that
tb.tE parb; aDd
s2a).0
moDey) la h6ld
l! or purcheaed for lhe a4counb on the ss.me day, and the oP
tloa DrolIdum ls held tn tbe &ccounl
unbtl c6sh psyment for bhe underlj'lng
or convectlblo srcrulty l8 reclved; or (lt) I.E tho cslre of e ptrt opilon, the
m&y b wlthdr4wn undet !220.(e) of
the rnerSlD &ccouDt under 9220.4(eX2) of
(4) Mardn exce68 tre.Dafeded ftom
thl8 p&rt.
!
3q'.7 Arblbego scaou.nt. In sn 4abttrae 4ccouDl a credltor mey effect a,Dd flnaDce for auy cuaFor the purpo8e of thls Ecllon.
tefin "bona lide Lrbllfeie"
meaDa:
credltor obt4lDa c5h ln atr &mouDl equal to the exerclse prlce or hold! ln the r.ccount eny of th6 followlng lnEtrurnenta \ilth a current market velue &t leost equs.l io the exerclse prlce and w-lth one year or leas to maturlty: securltles lssued or Iu4ranieed by the Unlted States or lta aSencles, Degotl4ble bAnk certtnc4ie8 of deposrt, or bankera
&ccept&!ce8 ls8ued by banklng lnEtltulloDa ln tlte Unltd Sts,t6s aEd payable
tD the Unlted Staies.
tomer bond lide &rbtbrage iraDaactloDE.
bbe
prscticable for the pu!pooe of t,ktlg adv&D088e of s difforeEce ln prlcea la the bwo rn8rket, or
Ba,nre
(&) A purchaae or sale of & Ecurtty l! ono market tofether wlth eD offsottlba sele or purchsse of the s&me Eecurlty ln 4 d.lffereat m&rket s.t aa Des,rly the
ilme
a.s
of the cs,sh or underlylng securlty po8l-
({) UBe aa eBcrow q,greement ln lleu
(b) A purchase of & gecurlty which 16. wlthout restrlcttoD other tbeE the paymeDt of money, exch4rsieBblc or converglbl wlthln 90 c&lenda.r dsys of the purche.s lolo e, scond aecurlty lo_ gether wlth a.n offseLttng ssle of tbe gecond scurlty ab or 4bout Bhe 8.me tlme, for th prrpose of t4kttrg adeaDtaaie of a coDcurrenb dl6D6.rtty ta the prlcea of bhe two secu-rltleB.
! 22OJ Carh ecconnl
creautor
tlon lf: (l) In ihe care of a call or e put. ihe
th&b the requlred Becuritles or ca.8h are
la advtged by the
customer
beld by a be.Dk aBd the crealltor lndependently vertfles that an appropriaue escfow 4greemeni wtll be deuvered by the beDk prompbly; or
(ll) I! the case of a caII Isaued, endored, or Bua.rs,Dteed oD the sa.me day lhe underlJdEg securtty ls purchsaed ln
(&) Permissible trdnsoations. In o c68h s CreClltor, ma,y: (1) Buy for oa 6ell to &ny curlomer any Ecurlby tf: (l) Ttere are sulncletrt tuDd6 ln bhe &ccou-Bta; or (1t) the crdrtor accPba ln Siood falth the cuatomer'8 aSTeemetrt th&t the cuatomer
4CCOUDt,
tbe accouut e.Dd Lhe underlylng securlLy ls to be dellvered to a b4nk, the credltor verlfleE that an a,pproprla,te e6crow eSfeemeEt wlll be dellvered by
tbe bs.!k promptly.
tiot or liquida.tion-(1) FrA
d.ato:
(b) Time periods lot pq,ltnent; ca,ncella-
ment. A credltor shall obtatn
cash pa!-
pa.Jrmenl for customer purchsaes-
full
caah
wlll promptly m4ke tull caah pa,Jrmeat for th scurity befor selltag tt a.Dd dos Dot contemplat 8Utng tt piior to
rna.klng auch paJrment;
(2) Buy from or aell for &ny oustomer &Dy Eecudty tf: (l) The securlty ls held
(l) Wtthln seved buslnes6 days of the
pu-rchaad;
(A) A-dy noDexempted security
wa,a
ln th aoooutrt; or (ll) the cFalltor 4cceDt ln good faith the customer'a Et,tmont thet the Ecurtty l8 owued by th6 cu8tomor or th6 cuatpmr's
Dlllctpal, s.nd that tC wl.tl be Dromptly doDo8ltd ltr the &ccou.nt:
(3) I!su6, ldorse. or glrrs,Dtee oD tlon for a,try culiomer lf:
(B) A-ny u-nt$ued securlty ws.s m&de a,valls,ble by the issuer for dellvery to purchaaera;
(C)
w8a
oF
deamed e,Ed & Dew refundlog securlty of the 8{.me lssuer haa been purchased by
(D) A securtLy owrred by the customer [as ms,bured or hs.B been re-
Ary "when dlstributed" securiby dlsirlbuted u.uder s, Erublisbed plan;
(l) In tbe ces of e crll optloE. cho uDdorlylDg securlty (or a 8curlty tmmodlatoly coDvrtlbl lEio tho uDderlJrttra scu.tty.
wtthout th6 ls,yrnnt of
1a
tho cultomer. provlded: (-l) Tb cuatomor purche.sed tlre nw 8cudty IIo more th&tr 35 c&lenda.r ds,y8 prlor to th de,t of m&turlty or rodemptlod of the old securlty:
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Case 1:01-cv-00256-CFL
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Page 10 of 16
9220.9 the
12 CfR Ch.
ll (l-'l'94 Edttlon)
c
the
rl!y: or titi) crant a welver from the
90 daY
(48
FF' lusg.
FR
23165,
Mar''t
Msv 2{, 1983 4s amend6d at
rS01
55
622o.o Nonsecurities credlt and er|r' " lioYee stock owoFhip accou-nt' (a) ID d oonsecuritles cretllt a'ccou_Dt
a oretubor may:
(1) Effect and ca'rry transactiolB ln
conrmodlties; --(2)
Effect an'l c8'rrJr bra'Dsa'ctlons ln
taln Eecured or credlb' subject
pa'raers'pb (b) of
t to em-
wltbout of this
14
A-10
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Fdorql Resorve sysfem
s
2m.12
Tte 8t&tmenl shall corrlorm to the rqulremoDta e8tsbllsbod by the Bos.rd. To a4cept th cu6tomer'8 atstmeut in good f8lth, the credlior 8ha,ll be &w&re of the clrcu[ratBnceB surroundlug th exteEslon of credlt dnd Eh4ll be 8atlsfled ttrel the BtetemeDt i8 trutbJul.
t48 FR 2t165. May 2{,
FB. 2d155, Ju-Eo 26,
los.D iO tncreeae the emouDt of deallDg
(B) Wtll qot use tbe proceeds of the
iD acullties for the accouDi of the credllor, tt8 fum or corporatlon or &D elllllated corDorabloE.
Cio4 mesDs
(b) For purposes of poraSTa,Dhs (f,) (3) srld (4) of thts aecalo[ ollllioted corpordmoB stock of whlch i8 ow!6d dlrectly partEors and employees of th flrm, or by the corporallon or holder8 of the controlllng 6tock aDd emgloyeea of the beeu 4pproved by the credltor'8 oxarn!
rS5l
l*},
3s amDded
at
50
e corporatlotr ell the com-
or lDdlrectly by the ftrm or
corporatloB a,nd
gooera,I
t 220.10 OE-uibut accou.nL (s) ln 4! omdbua g@cou4t, 4
may ffect 4Dd fha[oe trcnE4ctloua for a, broker or deala Pho ts r8l8tered
crdltor
tbe afnlt&tioD
baa
wilb tbe SEC u-nder action
Act a.!d who notlce thal:
(1)
dealor;4r1d
15
81ve8 the credltor
wrtitD
of lhe
A]l Eecurtttes will be for the accoult of cuatomer6 of bhe broker or
(2) AAy thorb 84IeB effecld sUl be short Bsles msde oD beba.lf of the cualomera of tbe broker or dealer other
lh6,n Dartnera.
flDa.nce ibe tra,nsa,ctloDs of rnr.fket par-
21b.f2 Markot fuDc'tloD! accou-ut. (a.) Requirenerlts. In e ntaxkei f\rnctloD! &ccou-Et, & credltor moy effect or
tlclDs.nts (n &ccord4nce wtth the fol-
(b) The wrtttetr Dotlce roquired bY arv SEC rule oE the hypothec4ttoo of cu.stomers' securttles by brokers or dealp4raSTaph (&) Ehell coafofm to
lowlEg provlBlona. A aepefate recoral sheU be kept for th6 trqd-sactloEa sDclfled for esch c4tcgory descrtbed lo paraSr&ph8 (b) tbrough (e) of thl6 8ectlou. Aly posltlou lD a sps.rat record sball uot be usod to meet the requlremeaLg of eny other catgory.
efs.
! 22O.1r BrokFdea.lsr
(s.) Prmissible tratr-tdttions. Ia 4 broker-dealer credlt 4ccorEt. a credltor nay: (1) Purchaa any gecuriiy from or aell any securlly to Alother credltor under a. good fallb aireemeEi to promptly deof tho purchase prlce.
cdlt .ccourl
(b) Spect4l4ts--'(1) Applrcabitttv, A crdllor ftay clear or flnance specialiBt trs,DaaottoDa for s,!y speclallst, or 4uy
EDecl&list ioint &ccouDt, in Fhlch all D,rttctpent8, or a,ll p&rtlclpants otbr than the credltor, r.re reSl8tered aa sp-
ciallsts oD a Datlo!&l securltlss
xcbr,nge thab requlrea regda,r reports oD
llvor th6 securlty
a.giatnst
full payment
(2) Effect or flne,nce tralsa4tloEs of &ny of lta ou.nent lf the credltor ls e. cleallqg 6,Dd servlcltrg broker or deg.ler owned jolDlly or lBdlvidually by other credltora. (3) Extend &nd malEt,in crdii to an]r
Irs.rtDer
the use of spectaltst cledlc from tbe reglEtred sDecia,llsts. (2\ Pennitted offset poitlons. A 8pclal-
t8t lE
SbEre-for-share b8sl8,
coDtrlbutlou to, or purcbasing Btock of, the credltor, s.ffllls,ted corporatlo! or another credltor.
for ihe
or stockholder of tbe crdltor Durpoae of m&klDg a c4pltel wlth the ap-
Droval of the &Dprcprl&t exrminlEa authorliy:
Eeod! of any
(4) Extend a,nd mdlta'lD,
(t) Credtt to meet the emergency credllor: or (ll) gubordinrbed crdlt to another gredltor for c&ptt l purDose8, tf the
otbor credltor: (A) IE aD a,ffUla,tod corpoFadoll; or
15
po8ltloD ID the securlties undorlJdDs' the optloEs td whtch the Bl'ctalist mAkes a ma,rket, s.ud a, speciaJlsL lrl securlbiea otber lhEn optloEs m&y purchsse or wrlte optioDa overlldng the scurlties ln rrblch ibe Epecla,llst m6,kes e, mr,rket, if the Eccount bolds the followlDg pern tted offset po8ltlons: (i) A short optloE poaltlon whlch ls "tu or at tbe money" atrd lE not offset by a, lonS or sbort optlotr posltlon for
opbloEs may ests,bllsh, oD a a loDg or short
4n equa,l or gTe&ler trumber of shars of the seme u-nderlylug securlty whtch ts "lD the money";
(u) A lona optloD po8ltto! whlch ls "ln or at bbe mouey" s,nd ts not offsei by & long or ahort optloD post ol for
Case 1:01-cv-00256-CFL
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Filed 06/06/2008
Page 12 of 16
s 220.
r3
l2 cFR Ch. ll (l - l-94 Edlflon)
Iowlng: business day, the creditor tha'll
or 8Tater number of shares of the same underlying seculity wblch is "iD the mouey'r: (iti) A short optioD posltioo againsL whlch an exerciso notice was tendered; (iv) A long optiol positlo! which was
a,n equs,l
liquldate posltlons itr the speclellsl's
accou[t.
exercised:
does not qualify as a specialist or permitted offsei posi tion.
speclelist makes a market; or (vi) A Dgt short posrtion i! a security (oiher than aE opbion) iD which the speoialist makes a market. (3\ Required, narg,a. The required m4r81n for a speclalist's transactions shall be: (i) Good fs.itl merg:in for any long or short posliion ilr a security iD which ihe specialist makes a, markeU (ii) Good faith margin for any wholly-owned margin securiby or exempted security; (iii) Ttre margin prescribed by $220.18 (the Supplement) when a security purchased or sold short in the account
(v) A net long position in a secu.rity (other than aD opiion) in which the
G\ Withdr@uals. Withalr&wals may be permitted to the exteDb tha,t the equity exceeds ihe margin requirement s specifled i! p&ragraph (b)(3) of this section.
creditor may effect or finance for aDy dealer or SToup of dealers Lransaciions
(c) thd,erwritings and drstributions. L
for the purpose of facilitating the underwriting or dlstribution of all or a part of an issue of securities with a good lalth margin(d\ OTC Marketnnkers and Third. Marketnakers, (l) A creditor may clear or finance with a good faith ma.rgrn,
marketma,king tralsacbions for aD OTC ma.rketmaker or a third marketmaker
who:
(i) Is in compliance with any applicable SEC rule, includiqg minimrun net
recognized inler-dealer quotation sys-
capltal rules; (ii) Regularly submits bona /ide competitive bid and offer quotations to a
(4, Ad.dtt@nal nargin: restricliotu on "free-fidnq.' (i) Except as required by pexagraph (b)(5) of tttis section, the creditor shall issue a margin ca,Il on any day wheD addilional margin is required as a result of specialist transactions. T'he credrtor may s,llow the spcla,list a, maxlmwn of 7 business
days to satisfy a margln call.
ma.r8-iD
tem: . (iii) Is ready, willing, and able to effect tra,nss,ctions in reasonable
iDve!tory turnover.
amounbs wiLh other brokers and dealero at the quoted Prices; and (iv) Has a reasone,ble avrage rate of
isfy the call). the credrtor shs,ll be prohibited for a 15 caleDda,r day period from exteDdiDg aDy further credlt to lhe speciall8t to finaDce transactions
iD DoDapecialty aeouritiea.
(ir) If a specialist lall8 to satisfy a call witLin the poriod spocified in lhis paxagraph (and lhe crediior is required bo liquidate securitioa to 8at-
(2) If bhe credlb extended to a malketmaker ceases to be for the purpose of markeimaking, or lhe dealer cea.ses to be a marktmaker for an issue of Eeculities for which credit was
extended, the credib shall be subject to
tbe maxgin specified in
Sul)plemenl). (e) Odd.-lot d.ealers.
S220.18 (the
clear and finance odd-lot transactioDs
A creditor
may
(ili) lfhe reEtriction on "free-riditrg"
(A) Any specisJlst on a na,tio[a] secu-
for aly credltor who is re8:iatered as an odd-lot dealer oll a, natlonal securitles exchange wlth a good feith maxgl!.
L r9$l
g
U8 FR 23165, May 24, 1983; {8 FR 26590, JuDe
tlon of a perrnltted olfset posiblon. (5) Delicit saotus. On &ny day when a 8pclallst'8 Eeparate record wou.ld liquldete to a, deftott, tho oieautor ahall lot exlend any further spci&llsb credit lD the a,cooult aDd sh6,ll lasue a, max8{n ca,ll a,t lea,et ss large aa the defictt. ff ibo csJl lE rlot mel by Doon of lhe fol16
rltle8 excbauge that has aD SEc-a,pprovod lule oD "free-r.ldlng" by specla,lt8ts; or (B) the a,cqulsition or liquida-
220,13 Arranging for los!.s by otheta,
extenaloD or mainton&nce of credlt to
A creditor may not
&rrs,nge
for the
or for
a,ny cuatomer by aDy pmoD upon berms and condltiols other thaD thoao upoo wbjch tho croalltor ma.y Itsell exteDd or malut&lD credll under tbe provl8lona of tht8 ps.rt, excepL bhat thls llmitatlon shall Dot a.pply to credit arra.Dged for o oustomo! whlch does
Case 1:01-cv-00256-CFL
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Page 13 of 16
FedoEt RetorYe sysiem
52at.t6 modlty Fubures TledlEA ComrnlsatoD;
a.Dd
Dot vlolste ps..ts 30? a.nd 22I of this cbcDFr and rcEult8 Eolely ftom:
vided by the crdltor to the cuatomer. to, un|derFrltltrgs, ptivet placomoDts. e.nd &dslce 8.nd other serelcs lD coDtrectlon wlth exchaDge offera, metSra, or a,cqulSltlons, excepl for u.udeF rttiDSs
(a) Invedtmodb banldu8i a6r'elces, pro-
tlcludlDS, but uot Urultsd
Ity Futures Ttadl[g
FR, {6110,
Comm.tE8lou.
e.s s,meDded
an equlty securlty wltb lnBta.llment or other defgrred paymeDt provlaloDs: (b) The s&le8 of noErna.rg.iu aecudtjes (iacludlD8: securitles pith lDst,lrrnetrE or olhel deferred paJrment provisions) if the sale la exemptd from the registraltiotr requlremeDts Of tbe Securitles Act of l93l] urder seciloB 4(2) of section 4(6) of the Act;
thet l[volve the publtc dlstrlbutton of
t{8 FR 23165, Mey 2{, l98ll.
Sept. 10, lSOll
ar
b6
I
Zl0.l5 BorlwiDg
(a) Eestrictions 04 borroulng. L credl_ ror may not borroqr in tbe orallnary course of busitress as a broker or dea,lei of,the Federal Reserve System; ot (zr !rom any norunember bank that has flled with the Boerd an agreemenc as pfesclibed in ps,ragraph (b) of this section, which agreement ls sttU iD et, fect; or (3) From another creditor tf the loaD
by cFedit rs.
usiDg as collateral any reg.l8tered n gr-lgx_empt ed securi ty. exceDt : (rt !-rom or lhJough a member bank
(d, Credit exleDded by a foreiST prsoD to purchaJe foreig! scurities.
t5O
ulder
[4ce-s.mount certlficete s.s permi ited
15
(c) A subEequent loa,D or Adva.Dce oE & U.S.C. E0s.-28(d); or
FR
FR
10C14. 11160.
Mrr
Mar. 19, 1985. ss omended ec
27, 15,91
55
1220.1,{ Clee.ra.uc of scu-rities, oF tioD!, a.Dd futures.
The provlslons of this pa,rt sball Dot apply to the extensiou or maintEance of eny credit that is Dot for more tbs.n one d4y lf tt is tDcide!!&l to lhe clearance of transactiolrs itr securides all_
through a.Dy clearing agedcy Feg-istered witb the SEC. (bt Deposit ol sec-unties Dith a cleaino dge\c!. T\.e pro\risions of thls par; shall lot epply to the deposit of secu-ri_
(a., Cred.it
fot
clearo,nce
oI
sec-urities.
(i) Its principa.l place of business is in a terrltory or insular possession of the UEited States: or
rectly between members of e Ba,tioDal securltlea exchaqge or a.66ocla,tio! or
wrlEten consent of the Board
S
(3) Any Donmember bank may termi_ nate lts agreemellt if ii obta,ins the 220..16 Borrowi_ug e-Dd liea.
leudi!(
sscurr-
secu_ rlry (lncluding options on aay secuJicy. cer [ca(e of deposr!, secuflties index or foreigin currency); or (ii) GualarSaaa performaDce of con_ Elacts for the purcbase or sale of a corrfiodity for future delivery q1 ,,
or, or clears lra,nsacLiona iD,
a,Dy
clons on such contracis:
wl
tzt rh
cy is reFisrered
Exchanie Com-
Without regard to Lhe other Drovrof this part, a creditor mai bor_ row or lend securiEtes for the purpose 01 maklng delivery of Lhe securiLies in the case of shoat sales, failure to re_ celve securities required to be delivered, or other similar si[uaLions Each borrowing shalt be of one or more cf
sions
:,::l
!B_ asenay ror a Ded by the Com-
UDited States or tiable bank certifi
L'I
securiLies issued
o
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Case 1:01-cv-00256-CFL
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s
220.t7
l2
CFR Ch.
ll (l-l-94 Edlfion)
b&nkr8 sccept&lces lssued by banklng
h8tltutloDs tn th UDtted Stetes &nd Irayable lD the UDlted States, or irrevoca,ble lolters of cre(Ut laaued by a, ba.Dk lnsured by the Fedolal Depostt Iraura,lce Corporatlon or & IorelS! ba,!k that has filed ar agreemetrt with the Boa,rd oD Form F.R. T-2. Such deposlt m&de s'ith tbe letrder of the securttles Sball hs,ve a,t a.ll tlmea a value a,t lea.st equal to t00 percetrt of bhe ms,rket va,lue of the socurlcles borrowed, computed as of the close of lbe precedlng
busiDegB day.
(8) T'here aro 1,200 or more holderB of record, ss deflned iD SEC Rule lzgt-l (U CFR 240.1295-1), of iho Etock \rho are trot offlcem, dlrector"s or beDofloial owDers of 10 Pelcent or more of bhe stock. or the averaSe dally trad.log vol-
122 (a,) Requirements
anal tb liet
the liat of
the
ume of sucb Etock &s determlued by the Board, is a,t leart 500 shaxe6; and (9) The lssuer or a pretleceaaor lD iDterest has been ln exlstence for at leasb three years. (b) Requirenents lor contiTueal iflclu' sion on the list ol narcifldble OTC stocks Excepb as proYided lD para,STapb (f) of thlB 6ectioD, OTC max8:in stock Bball
Iist ol narginable OTC stocks. Except as provlded ln ps.ragraph (O of thls sectton. OTC mardE 6tock Bhall meet the followlDg roqulremnts: (I) Four o! more de&lels sta,nd williog to. and do lD fo,ct, mak e ms,rkeb ln
Bucb Etock
oouDta;
(2)
Ior inclution on
meet tho followilg requiremetrts: (1) Tlbree or more dealem staDd wlllidg to, aqd do lE fact, m&ke a tnarket
ln sucb stock and regularlY
&ccounta;
botra flde btds aDd offeN to an automated quotations system for bheir own
submlt
such atocks, as detrmlned by the
Board, ls a.b laest $2 Per ahare; (3) The stock is registered a,s specl-
(2) The rnlnimum average bid price of
ald regularly Bubmlt boda ftd blds Bnd offeFB to an autom&ted quotetloD8 Ey8tem for their own acauch 8tock, as deterrnlDed bY bhe Board. i8 at least $5 Pr thare. (3) Ttle stock l8 rSletered uDder sectloD t2 of the Act, i6 issued by s,D insuraurce compaby subjecE to secllon 12(s)(2)(G) of th Act, i8 ieaued bv a closed-end lnvestment management
comps,ny subjct to reglsirs,tlon purau-
The mlnimum avera'ge bld price of
fied Ia paragra,ph (e)(3) of bhls secttoD; (4) Daily quotattonB for both btd aDd asked prlce8 for ihe slock are conclnuously e.v&llable !o cbo genera,l publlc: (5) The l8suer has at lea.Bt sl milltoD of capltal, sufplus. &Dd uldli'ided prof1la: (6) l'here are 300,000 or more shs.rea of
such stock outsta,ndhg
in s.ddltlon io rectora. or bneflcla.l owBers of more
shares held beleflolally by offlcers, diths,n 10 percent of the Etock; 8.!d (?) Thero coltinue bo bo 800 or more
aDt to secblon I of the LDve8tmeDt ComllaDy Act of 1940 (I5 U.S.C.8,Oa-)' ls &n American DeDogltory Roceipt
(ADR,) of a forelSin la8uer whose aecurl-
tles are regilsterod under sectloD 12 ot the Act, or ts a stock ol an issuer required to file report8 undor aection
15(d)
a.aked prlaes for the Elock are coEtl[uou8ly avall&ble to th general public;
(4) Datly quotatlons for both bld and
of tbe Act;
holders of record, 6a defined i.D SEC Rule I2R5 1 (I? CI'R, 2{0 1295-l), of th stock who are noi offlcera, directora' or betreflcia,I owners of 10 percelt or more of the sbock, or ibe average dailv trad' lng volume of
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