This week’s study question from the Solomon Online Exam Simulator question database is now available.
Question (Relevant to the Series 6, Series 7, Series 24, Series 26, Series 62, and Series 82):
Which of the following best describes Regulation U?
Answers:
A. Places credit restrictions on broker-dealers by establishing initial margin requirements and prescribing how a margin transaction must be maintained
B. Empowers the Federal Reserve to regulate credit associated with respect to the purchase of securities, also known as margin
C. Requires broker-dealers to be registered
D. Imposes credit restrictions on non-broker-dealer lenders that may finance margin transactions such as banks
Correct Answer: D.
Rationale: Section 7 of the Exchange Act of 1934 empowers the Federal Reserve to regulate credit associated with respect to the purchase of securities, also known as margin. Its intent is to manage the amount of speculative activity that can be applied to securities transactions and to manage the supply of money in the credit markets.
The Federal Reserve responded to its new powers by enacting Regulation T, which places credit restrictions on broker-dealers by establishing initial margin requirements and prescribing how a margin transaction must be maintained. Initial margin requirements are currently set at 50%. Regulation T was soon followed in 1936 by Regulation U, which imposes credit restrictions on other lenders that would finance margin transactions, such as banks. Regulation U forbids banks from extending more credit than the “maximum loan value” for margin securities, which it identifies as 50% of the stock’s current market value.
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