COMPLIANCE WITH REGULATION U: A REFRESHER. by Barry W. Hunter

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1 COMPLIANCE WITH REGULATION U: A REFRESHER by Barry W. Hunter Complying with Regulation U 1 (herein sometimes referred to as the "Regulation") involves more than just including in the loan documents a covenant of the borrower that the proceeds of the loan will not be used to purchase or carry margin stock. A Lender 2, among other things, must be cognizant of outstanding credits to a borrower and the terms and collateral relating thereto, understand how margin stock can be deemed to secure a credit without a specific pledge of such margin stock, and be alert to circumstances that would impact the Lender's ability to accept, in good faith, certifications of the borrower regarding the ultimate use of loan proceeds. Failure to comply with Regulation U can result in the Federal Reserve Board instituting enforcement actions against the Lender including imposing civil money penalties and seeking a cease and desist order. 3 This Article will review the scope and application of the Regulation and highlight some instances in which the applicability of the Regulation might be overlooked in certain loan transactions. 4 Regulation U is the product of the mandate given to the Federal Reserve under the Securities and Exchange Act of 1934 (the "Exchange Act") to regulate and monitor the amount of credit flowing into the securities market. Regulation U has two components: one, a restriction on the amount of credit that can be extended in purchasing or carrying margin stock if that credit is secured directly or indirectly by margin stock; and, two, a requirement that a Lender

2 obtain from its customer an executed Form FR U-1 ("Purpose Statement") whenever a credit in an amount greater than $100,000 is secured directly or indirectly by margin stock. LOAN LIMIT If a Lender extends credit 5 to a borrower for the purpose of purchasing or carrying margin stock, and the credit (herein referred to as a "Purpose Credit") is secured, directly or indirectly, by margin stock, the amount of the Purpose Credit cannot exceed fifty percent (50%) of the current market value of the margin stock. 6 Except for options that qualify as margin stock, puts, calls, and combinations are assigned a zero value. 7 Margin stock is defined to include (i) equity securities registered or having unlisted trading privileges on a national securities exchange, (ii) OTC securities designated as qualified for trading in the National Market System under a designation plan approved by the Securities and Exchange Commission (the "SEC"), (iii) debt securities that are convertible into margin stock, (iv) warrants or rights to subscribe to or purchase margin stock, (v) debt securities that carry a warrant or right to subscribe to or purchase margin stock, and (vi) securities issued by investment companies registered under Section 8 of the Investment Company Act of 1940 unless such investment company is licensed under the Small Business Company Act of 1958, as amended, or has at least ninety-five percent (95%) of its assets continuously invested in exempted securities, or issues face amount certificates (as defined in 15 U.S.C. 80a-2(a)(15)) with respect to such securities, or is a money market fund under SEC Rule 2a-7. 8 Thus, a loan made by a Lender to a borrower for the purpose of purchasing a corporate debt obligation that does not have any conversion features, would not be subject to the credit limitation even if the corporate debt obligation were pledged to secure the repayment of the loan. Similarly, stock which is convertible into margin stock but which itself is 2

3 not registered or granted trading privileges as set forth in clauses (i) or (ii) above is not considered margin stock. 9 If the purpose of a loan is to purchase or carry margin stock, the loan will constitute a Purpose Credit irrespective of whether the purpose to purchase or carry margin stock is immediate, incidental or ultimate. 10 If a borrower could cleanse the taint of a Purpose Credit simply by constructing a financing arrangement involving multiple loans, Regulation U could easily be avoided. For example, if a loan were made to a corporation for the purpose of making a loan to its sole shareholder, who, in turn, used the proceeds to acquire margin stock, the ultimate purpose of the loan is to purchase or carry margin stock and will, accordingly, fall within the definition of a Purpose Credit. However, this author believes that if a loan were made to the corporation for the avowed purpose of repaying a valid indebtedness owed by the corporation to its sole shareholder, who, in turn, used the proceeds to acquire margin stock, the ultimate purpose of the loan is not to purchase or carry margin stock but to discharge a valid obligation. Therefore, even if the Lender obtained a security interest in the margin stock to secure the repayment of the loan to the corporation, the loan would not be subject to the loan limit applicable to Purpose Credits. Another example of the ultimate purpose of the loan subjecting the credit to the Regulation is where the Borrower uses the loan proceeds to acquire the stock (which is not margin stock) of a company which owns margin stock, with the intent to merge the company into the borrower. 11 the reach of Regulation U. 12 Similarly, temporary application of loan proceeds will not avoid If, for example, loan proceeds are used to acquire securities other than margin stock with the intent that, shortly after the transaction has closed, securities would be sold and margin stock acquired, the loan would still be considered a Purpose Credit subject to 3

4 Regulation U. Nevertheless, it is the original purpose of the credit that dictates whether Regulation U applies. 13 Section of the Regulation expressly provides that changes in the collateral securing a loan will not make such loan a Purpose Credit if it were exempt by reason of the original purpose of the loan. It also must be recognized that the reason for the loan is immaterial; if the loan is not for speculative purposes it will still be a Purpose Credit if the specified criteria are met. When applying Regulation U, extensions and renewals of an existing credit will not be treated as a new credit so long as there is no increase in the any credit beyond any interest, service charges, or taxes with respect to the credit. 14 However, if there is any increase in the credit for any other purpose, whether an extension, renewal, or otherwise, the increase in the amount of the credit will be considered a new credit for purposes of Regulation U and tested like any other new loan. 15 Once extended, a credit which satisfies the requirements of the Regulation may be continued by the Lender notwithstanding (i) any drop in the maximum loan value of the margin stock due to market conditions, (ii) any change in the percentage of market value used to calculate the maximum loan value, or (ii) change in the status of the credit by reason collateral securities becoming margin stock. 16 Since a Purpose Credit includes a credit which is for the purpose of "carrying", as opposed to purchasing, margin stock, a borrower could find itself subject to the Regulation in a transaction that might otherwise appear to be exempt. Consider a loan extended by a Lender to a borrower to finance the purchase of inventory for resale and secured by margin stock. Would such a loan be subject to Regulation U if the borrower could have liquidated the margin stock to 4

5 acquire the inventory? That is, will a loan that enables a borrower to continue to hold its margin stock (because the proceeds of the loan are used for a purpose that, without the loan, the borrower would have been required to sell its margin stock to acquire the funds needed for that purpose) be construed as a loan for "carrying" margin stock? Fortunately, the Federal Reserve Board has not interpreted the term "carrying" so broadly. In a staff opinion issued on March 22, 1978, the Federal Reserve Board ruled that where the proceeds of a loan were used to repay indebtedness which itself was not a Purpose Credit, the loan would not be treated as having the purpose of carrying margin stock. 17 This was the case even though the borrower had other outstanding indebtedness which was for the purpose of purchasing margin stock. The ruling, however, was predicated on the fact that the proceeds of the new loan were earmarked for the specific purpose of repaying the nonpurpose credit. Conversely, if the proceeds of a new credit were used for repaying a debt previously incurred to acquire margin stock, the new credit would be a Purpose Credit. Although the Federal Reserve Board has interpreted "carrying" margin stock narrowly to include only the repayment of indebtedness previously incurred to purchase margin stock, Section of the Regulation suggests that the Federal Reserve Board will apply a broader replacement theory when interpreting the scope of the term "purchasing." In this section of the Regulation, the Federal Reserve Board examined an arrangement in which a borrower pledged margin stock to a Bank to secure working capital loans made to the borrower. The margin stock was acquired with the proceeds of the accounts receivable. Based on the fact that the margin stock would exceed the net earnings of the borrower, the Federal Reserve Board concluded that 5

6 loan proceeds were, in effect, used to purchase the margin stock. In analyzing this case, the Federal Reserve Board made the following statement: As pointed out in with respect to a similar program for putting a high proportion of cash income into stock, the borrowing against the margin stock to meet needs for which the cash would otherwise have been required, a contrary conclusion could largely defeat the basic purpose of the margin regulations. 18 In both Sections and of the Regulation, the Federal Reserve Board deemed the loan proceeds to be used to purchase margin stock where the proceeds of the new credit replaced other funds of the borrower which were used to acquire the margin stock. Accordingly, a borrower and a Lender must view the totality of the circumstances in which a loan is made in order to determine whether an underlying arrangement would result in the treatment of a loan as a Purpose Credit even when the avowed purpose is something other than the purchase of margin stock. 19 PURPOSE STATEMENT Once a Lender has determined that a new credit is not for purchasing or carrying of margin stock, it doesn't mean the transaction is exempt from Regulation U. As previously indicated, Regulation U has two requirements and even though a new credit is not subject to the loan limit for Purpose Credits, the Lender may be required to obtain from its customer a completed and executed Purpose Statement. Section 221.3(c) of the Regulation provides that a Lender must require its customer to execute a Purpose Statement if the amount of the loan exceeds $100,000 and the loan is secured, directly or indirectly, by any margin stock. 20 The Purpose Statement must be accepted and executed by the bank officer in good faith. 21 If the loan consists of a revolving credit facility or other extension of credit comprised of multiple draws, 6

7 the Purpose Statement is required to be executed at the commencement of the loan, and, if all of the collateral is not then pledged to the Lender, must be amended for each disbursement which constitutes a Purpose Credit. 22 The amendment consists of the Lender obtaining from the customer a current list of the collateral that supports the credit, which is attached to the originally executed Purpose Statement. 23 When the parties treat the revolving credit facility or multiple draw loan as a single loan, and all of the collateral is pledged when the loan is committed, the Lender can make disbursements which, in the aggregate, do not exceed the maximum loan value of the margin stock determined at the time the Purpose Statement was completed. This is so even if the value of the collateral falls during the term of the credit. 24 Moreover, the Federal Reserve Board will allow such credits to be considered, in part, a single loan, and, in part, a multiple loan, utilizing the value of the collateral pledged at the beginning of the loan irrespective of when it is applied. Since most form documents used by Lenders contain dragnet clauses to cross collateralize all debt owed by a borrower to the Lender, one must be alert to the fact that, in such cases, a Purpose Statement is required for every credit (if the minimum amount is satisfied) extended to the borrower when the collateral subject to the dragnet clause is margin stock. 26 DUE DILIGENCE Compliance with Regulation U involves some due diligence on the part of the loan officer. As stated above, the loan officer must act in good faith in accepting a Purpose Statement. This good faith requirement means the loan officer must use "reasonable diligence to learn the truth" 27 and be "alert to the circumstances surrounding the loan." 28 The Regulation 7

8 further states that there is reason for special vigilance in circumstances where margin stock is substituted for bonds or other securities shortly after the loan is closed. 29 Another situation in which the Lender would be put on notice that a Purpose Credit may be involved, notwithstanding the customer's execution of a Purpose Statement to the contrary, is where the borrower is not a broker or dealer but a broker or dealer is to deliver margin stock to the Lender for the purpose of securing the loan. 30 Similarly, if loan proceeds are to be paid to a broker or dealer, the Lender could not accept the Purpose Statement, in good faith, without obtaining "reliable and satisfactory explanation of the circumstances." 31 If the borrower is not personally known to the Lender, or the loan officer, the Regulation indicates that "special diligence" is required to be exercised by the Lender. 32 Since a loan officer is required to exercise some level of due diligence, whether reasonable, special or otherwise, to satisfy the good faith requirement when accepting a Purpose Statement, the question arises as to whether the loan officer must deal with the borrower in a face to face encounter. At least one Section of the Regulation implies that this would be the case absent other safeguards. In Section of the Regulation, the Federal Reserve Board ruled that a Lender was not required to have a face to face interview with its customer because the Lender developed additional procedures to verify the truth of the information received from the customer in such a manner as to provide the same safeguards that are inherent in face to face interviews. By negative implication, a face to face encounter would be required if other safeguards are not in place. However, the circumstances in which the ruling was made need to be considered and whether a Lender must obtain the Purpose Statement in a face to face interview should be governed by the facts and circumstances of each case. While closing a loan 8

9 with a new borrower on bank loan documents that have not been negotiated might require either a face to face interview with the borrower or other procedural safeguards to satisfy the good faith requirement, it is this author's view that closing a loan with an existing customer of the Lender where the purpose of the loan has been discussed with the loan officer and is specified in the commitment letter and other loan documents should not require a face to face encounter to obtain the Purpose Statement. INDIRECTLY SECURED Although the Federal Reserve Board has narrowly construed the term "carrying" when determining the purpose of a loan, it has broadly construed the term "indirectly" when ascertaining the security for a loan. Section of Regulation U defines "indirectly secured" to include any arrangement with a customer under which (i) the right or ability of the customer to sell, pledge or otherwise dispose of margin stock is "in any way restricted" or (ii) the loan is subject to acceleration as a result of the customer exercising any such right. If, for example, a borrower owns margin stock which it deposits with the Lender (but does not pledge or otherwise grant a security interest therein), such margin stock would be deemed to secure indirectly the loan because it would be more readily available as security to the Lender than to other creditors. 33 If, however, the Lender held the stock only in its capacity as a "custodian, depositary or trustee or under similar circumstances" and did not, in good faith, rely upon the margin stock as collateral, the margin stock would not be deemed to be indirectly securing the loan. 34 Other examples of loans "indirectly" secured by margin stock include: (i) when a borrower retains possession of the margin stock but enters into a negative pledge agreement with the Lender that the borrower will not pledge or encumber the borrower's assets while the loan is outstanding; 35 9

10 and (ii) when a borrower deposits margin stock with a third party who agrees to hold the stock until the loan has been fully repaid. 36 In the first instance, the Federal Reserve Board views the arrangement as providing some protection to the Lender since future relations with the customer are dependent upon the customer keeping his word; and in the second instance, the mere fact that the margin stock is beyond the borrower's control provides some additional protection to the Lender. The Regulation makes it clear that the examples are only illustrative and any arrangement in which margin stock would be more readily available to the Lender than to other creditors would be included. 37 Unless a transaction comes within the purview of one of the exemptions under the financial covenants provision, a loan (of more than $100,000) to a borrower having margin stock as a significant part of its assets would trigger the requirement for obtaining a Purpose Statement if the loan documents contained a covenant of the borrower not to dispose of any of its assets without the prior written consent of the Lender. The Regulation, however, excludes from the concept of "indirectly secured" (i) an arrangement under which, after applying the proceeds of the credit, margin stock would not exceed 25% of the value of the assets subject to the arrangement, (ii) an arrangement under which the Lender could accelerate the maturity of the credit as a result of a default or renegotiation of another credit made by another creditor that is not an affiliate of the Lender, (iii) an arrangement under which the Lender would hold the margin stock only in its capacity as a custodian, depositary, or trustee and had not, in good faith, relied upon the margin stock as collateral, and (iv) an arrangement under which the Lender, in good faith, had not relied upon the margin stock as collateral. 38 The Federal Reserve Board indicated that the purpose of the modifications to the Regulation in 1968 to include the exception 10

11 where the Lender, in good faith, had not relied upon margin stock as collateral was to clarify that a Lender would not be subject to Regulation U simply by including certain routine negative covenants in its loan documents. 39 Indicia that a Lender has not relied on margin stock includes where the loan is not payable on demand or as a result of changes in the market value of the margin stock, but, in fact, is paid on fixed maturity dates typical of loans of similar nature, and where a Lender has current financial information on the borrower that justifies the loan. 40 Whether a credit falls within this exception, however, is a question of fact that is dependent upon the circumstances of each case. SINGLE CREDIT RULE Except for certain syndicated loans, the Regulation provides that all Purpose Credits are considered a single credit. 41 Accordingly, if a Lender extends a Purpose Credit which is secured by margin stock and then extends to the same borrower an unsecured Purpose Credit, the Lender will comply with the Regulation only if the credits are treated as a single secured Purpose Credit that does not exceed the maximum loan value of the margin stock. 42 However, if the Lender extends an unsecured Purpose Credit to a customer and subsequently extends a Purpose Credit secured by margin stock, the credits are combined only for the purpose of the provisions relating to withdrawals and substitutions. 43 Under the rules relating to withdrawals and substitutions, a customer is permitted to withdraw or substitute cash or collateral only if the transaction will not result in a Purpose Credit exceeding the maximum loan value of the margin stock (or increase the excess by which a Purpose Credit exceeds the maximum loan value of the margin stock existing at the time of the transaction). 44 For example, assume a Lender extended to a borrower an unsecured Purpose Credit in the amount of $500,000 and subsequently made a loan to the 11

12 same borrower in the amount of $500,000 to purchase margin stock having a value of $1,200,000 that would secure the second loan. If the Regulation required aggregating the Purpose Credits for all purposes, the second loan could not be made in an amount exceeding $100,000 which, when aggregated with the first loan, equals the maximum loan value of the margin stock. To give effect to the Lender's treatment of the first loan on an unsecured basis, however, the second loan is allowed since the amount of the loan, considered separately, does not exceed the maximum loan value for the margin stock securing it. The withdrawal regulations, however, would prevent any release of collateral because the two loans are aggregated for this particular purpose and the aggregate amount exceeds the loan value of the margin stock (if only the second loan had been made, the Lender could have released margin stock having $200,000 of value since the loan would not, after such release, exceed the maximum loan value of the margin stock). 45 The Single Credit Rule applies only to Purpose Credits. If a Lender extends both a Purpose Credit secured by margin stock and other credit, the credits are treated as separate loans and the collateral securing the Purpose Credit cannot be relied upon by the Lender for the nonpurpose credit. 46 The Lender would be required to base the nonpurpose credit on such other collateral as the Lender would, in good faith, ordinarily require if it had not extended any Purpose Credit. But note, there is a significant limitation on the ability of the Lender to extend both a Purpose Credit and a nonpurpose credit to a customer and have them treated separately: the Regulation provides that if a Lender extends a nonpurpose credit purportedly secured by margin stock and simultaneously extends a Purpose Credit secured by other collateral, the Lender will be required to attribute the margin stock to the Purpose Credit based upon the 12

13 maximum loan value of the margin stock before any excess value can be attributed to the nonpurpose loan. 47 Furthermore, since the Lender would have access to the margin stock it would be indirectly secured as to the Purpose Credit even though the margin stock were specifically pledged to the nonpurpose credit. 48 Although the example used in Section involves the simultaneous extension of credits (i.e. Purpose Credit and nonpurpose credit), the specific requirement in the Regulation for attributing the margin stock to the Purpose Credit before attributing any excess value to the nonpurpose credit is not so limited. LENDER PROTECTION The Regulation affords Lenders some protection against liability when deviating from the rules in two circumstances. First, a Lender does not have to comply with the Regulation if it, in good faith, deems noncompliance necessary for its protection. 49 This exception will be most useful when a Lender is dealing with a borrower in a loan restructuring or similar context. Second, a Lender would not be considered in violation as a result of a mistake made in good faith. 50 This latter exception, however, covers mistakes of fact, not law, so that incorrect interpretations of the Regulation will afford no protection. 51 SUMMARY Lenders must be familiar with the nuances of Regulation U to avoid inadvertent noncompliance. Even in a transaction the Lender knows does not involve a Purpose Credit, the requirement for delivery of a Purpose Statement when a loan exceeds $100,000 and is indirectly secured by margin stock will require the Lender to add some additional documentation to the loan. Moreover, the Lender must be alert to circumstances that might suggest a borrower is providing an inaccurate Purpose Statement, how margin stock can become indirect security for a 13

14 loan, and how margin stock collateral can be reallocated for purposes of Regulation U notwithstanding the loan documentation. The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. 14

15 END NOTES C.F.R. Part While the term "Lender" includes any person subject to Regulation U, this Article focuses on U.S. Banks, as defined in Section 3(a)(6) of the Securities and Exchange Act of 1934, making loans in the U.S., and excludes consideration of savings and loan associations, credit unions, members of a national securities exchange and instrumentalities or agencies of the United States. 3. See Policy Letter of the Federal Reserve Board's Division of Banking Supervision and Regulation, dated March 16, 1993, 7 CCH Fed. Banking L. Rep (2001) pp. 81, , If the Lender has knowledge of a borrower's violation of Regulation X and assists in the transaction by extending credit, the Securities and Exchange Commission can assess civil money penalties and obtain injunctions against the Lender for aiding and abetting. Id. 4. This Article disregards loans which are treated as exempted transactions under Section of the Regulation. 5. Overdrafts are considered extensions of credit. See Staff Opinion dated May 26, 1993, 7 CCH Fed. Banking L. Rep Z (2001) pp. 81, , C.F.R (a) C.F.R (c) C.F.R See Staff Opinions dated February 26, 1982, February 26, 1986, and December 6, 1989, 7 CCH Fed. Banking L. Rep T (2001) pp. 81, , See definition of "Purpose Credit" in 12 C.F.R A loan to a corporation for the purpose of acquiring its stock for immediate retirement is not considered a Purpose Credit. See Staff Opinion dated November 7, 1980, 7 CCH Fed. Banking L. Rep Z, p. 81, "Going private" transactions, however, are not considered as falling within this exemption. See Staff Opinion dated May 27, 1993, 7 CCH Fed. Banking L. Rep Z (2001), pp. 81, , See Staff Opinion dated July 31, 1997, 7 CCH Fed. Banking L. Rep Z (2001) pp. 81, C.F.R (d) C.F.R (a). 15

16 C.F.R (h). If a Lender discovers that a borrower gave a false Purpose Statement but nevertheless renewed the Credit, while the Lender may not be in violation of Regulation U, it could be in violation of Regulation X by aiding and abetting the borrower's violation. See Staff Opinion dated April 9, 1980, 7 CCH Fed. Banking L. Rep CC (2001) pp. 81, , C.F.R (b) C.F.R (a)(2). Although the Lender is permitted to maintain a credit under these circumstances, it would be subject to the withdrawal and substitution provisions of the Regulation. See text accompanying note 35, infra CCH Fed. Banking L. Rep L (2001), p. 81, C.F.R (c). 19. A Lender is not permitted to arrange for the extension of a credit which it could not itself extend under Regulation U. 12 C.F.R (a)(3). 20. All credit to the borrower secured by margin stock must be aggregated to determine if the threshold amount is reached. The Purpose Statement would be required for that credit which, when aggregated with prior credits secured by margin stock, exceeded $100,000. See Staff Opinion dated February 3, 1992, 7 CCH Fed. Banking L. Rep L (2001) pp. 81, C.F.R (c)(1)(i) C.F.R (c)(2) C.F.R (c)(2)(iv). 24. See Staff Opinions dated November 5, 1987 and December 2, 1987, 7 CCH Fed. Banking L. Rep L (2001) p. 81,935. The staff opinions also make it clear that even though a Purpose Statement may need to be amended in certain cases, it is never a requirement to execute a new Purpose Statement. 25. Id. 26. See Staff Opinion dated September 9, 1975, 7 CCH Fed. Banking L. Rep N (2001) p. 81, C.F.R (h) C.F.R (c). 16

17 C.F.R (f) C.F.R (e). 31. Id C.F.R (d) C.F.R See definition of "indirectly secured" in 12 C.F.R and 12 C.F.R (1) C.F.R (f)(2) C.F.R (f)(3). 37. Apparently, a liquidity covenant coupled with an agreement of the Borrower to grant the Lender coequal security with any other creditor would not trigger the indirect security test and the Regulation would not apply, at least not until the direct grant of the security interest. See Staff Opinion dated April 30, 1993, 7 CCH Fed. Banking L. Rep N (2001), p. 81, , See definition of "indirectly secured" in 12 C.F.R However, if the value of the borrower's assets changed to an extent the 25% test under clause (i) were, newly extended credit under a revolving credit facility would be treated as indirectly secured under that test. See Staff Opinion dated November 9, 1983, 7 CCH Fed. Banking L. Rep N (2001) p. 81,945. Also a simple assertion of nonreliance will not suffice for compliance with the exemption set forth in clause (iv) if loan documentation is inconsistent with that assertion. See Staff Opinion dated February 25, 1997, 7 CCH Fed. Banking L. Rep N (2001) pp. 81, , C.F.R (b). 40. Id C.F.R (d)(1) C.F.R (d)(2). If the first credit extended to the borrower were a secured Purpose Credit that was undermargined at the time of the extension of the second secured Purpose Credit, the single credit rule would require combining the loans after they were made. Therefore, the Lender would not have to take into account the deficiency in the collateral for the first credit in making the second loan. However, the loan would be considered a single credit for the withdrawal and substitution provisions immediately upon closing the second loan. See Staff Opinion dated December 14, 1987, 7 CCH Fed. Banking L. Rep. (2001) DD, p. 81,

18 C.F.R (d)(3). For this reason the Federal Reserve Board has taken the position that, assuming the transaction is not entered into for the purpose of evading the Regulation, the sale of a participation interest in a loan made in compliance with the Regulation will not result in a violation irrespective of the participant's other dealings with the borrower. See Staff Opinion dated February 29, 1988, 7 CCH Fed. Banking L. Rep L (2001), pp. 81,936-81, C.F.R (f). 45. Even though a Purpose Credit which is not secured by margin stock is not subject to the loan limit, once secured by margin stock, a Lender cannot evade the withdrawal and substitution provisions of the Regulation by releasing all of the margin stock. See Staff Opinion dated April 8, 1998, 7 CCH Fed. Banking L. Rep HH (2001), p. 81, C.F.R (d)(4) C.F.R Id C.F.R (j) C.F.R (k). 51. See Staff Opinion dated April 24, 1992, 7 CCH Fed. Banking L. Rep Z (2001), pp. 81, , # v1 18