The federal margin rules were initially implemented in the aftermath of the stock market crash of 1929 and the Great Depression. Margin lending refers to borrowing money for the purpose of investing in other securities. The federal margin rules are intended to curb excessive speculative investing using leverage.

The main source of margin regulations in the United States are the Federal Reserve Regulations T, U and X. These regulations are issued by the Federal Reserve Board pursuant to Section 7 of the Securities Exchange Act of 1934. Thus, while the Federal Reserve Board publishes interpretative guidance on the margin regulations, it is the Securities and Exchange Commission (SEC) that has enforcement authority over margin lending.

Regulation T applies to broker-dealers. It regulates the amount of credit that broker-dealers can extend to investors for the purpose of buying securities. Under Regulation T, a broker-dealer may extend credit to an investor through a margin account against collateral that is cash or certain margin-eligible securities. Investors are not permitted to borrow more than 50% of the market price of shares on a margin purchase.

Regulation U applies to banks and non-bank lenders. It establishes limits on extending credit when the loan is secured by margin stock. Under Regulation U, the maximum loan value that can be extended is 50% of the market value of the collateral securing the loan.

Regulation X applies to credit limits to foreign persons or organizations, who are controlled by or acting on behalf of U.S. persons, with respect to buying U.S. Treasuries. It is intended to make sure that foreign persons controlled by a U.S. person are also subject to the restrictions of Regulation T and Regulation U.

Many types of deal documents, such as underwriting agreements and credit agreements, contain company representations regarding the U.S. margin rules. In the “Representations and Warranties of the Company” section of a typical Underwriting Agreement, there is a representation that addresses Regulations T, U and X. Below is an example of how this representation may be drafted.

“Margin Rules. Neither the issuance, sale and delivery of the Shares nor the application of the proceeds thereof by the Company as described in each of the Registration Statement, the Pricing Disclosure Package and the Prospectus will violate Regulation T, U or X of the Board of Governors of the Federal Reserve System or any other regulation of such Board of Governors.”

In the “Representations and Warranties of the Company” section of a typical credit agreement, there is a representation that addresses margin regulations. Below is an example of how this representation may be drafted.