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Difficulty: EasyFederal Reserve Board (FRB) and Margin Regulation

Under the Securities Exchange Act of 1934, the Federal Reserve Board (FRB) is empowered to oversee margin rules in the securities industry. Which of the following statements correctly describes the scope of the Federal Reserve Board's Regulation T?

  1. It governs the extension of credit by broker-dealers to customers for purchasing securities and sets initial margin deposit requirements.Answer
  2. B
    It allows newly issued shares from an initial public offering (IPO) to be purchased on margin immediately upon distribution.
  3. C
    It serves as a Congressional fiscal policy tool that adjusts federal taxation rates on margin interest expenses.
  4. D
    It designates FINRA as a federal government agency with authority to prosecute criminal violations of margin lending laws.

Answer

Regulation T governs credit extended by broker-dealers to customers and sets initial margin deposit requirements.
The correct response accurately states that Federal Reserve Board Regulation T regulates credit extended by broker-dealers to retail customers and establishes initial margin requirements.

Step-by-Step Solution

1
Identify the primary governing mandate of Federal Reserve Board Regulation T.
Regulation T establishes rules for credit extended by registered broker-dealers to public customers.
The Federal Reserve Board was given statutory authority under the Securities Exchange Act of 1934 to regulate margin borrowing to prevent excessive speculation.
2
Differentiate Regulation T from other banking regulations and fiscal policy mechanisms.
Regulation T sets the initial equity deposit requirement (currently 50%) and specifies which securities are eligible for margin treatment.
Under these provisions, unseasoned new issues cannot be purchased on margin for 30 days, bank lending is covered separately under Regulation U, and fiscal tools are controlled by Congress.

Key Concept

Scope of Federal Reserve Board Regulation T
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Topics

Federal Reserve Board (FRB) and Margin Regulation

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