BOARD OF' GOVERNORS

OF'THE

FEDERAL RESERVE SYSTEM

WASHINGTON, o. C. 20551

ADDRESS OFFICIAL CORRESPONDENCE

TO THE BOARD

March 5, 2008

Mary Kostopoulos, Esq.

Moses & Singer LLP

405 Lexington Avenue

New York, New York 11238

Dear Ms. Kostopoulos:

Thisis in response to your email inquiry received onFebruary 21,2008, concerning the status

of auction rate preferred securities under Regulation T ("Credit by Brokers and Dealers," 12 CFR

Part 220). Regulation T has been adopted pursuant to the Securities Exchange Act of 1934 (the Act)

and terms used in the regulation have the meanings given them in section 3(a) ofthe Act (15 V.S.c.

78c(a», unless they have been defined by the Board in section 220.2 ofRegulation T.

Under Regulation T, a security can generally be classified as belonging to one of three

categories: margin, nonmargin, or exempted security. U.S. broker-dealers are prohibited from

extending credit against nonmargin securities, unless the loan is a nonpurpose loan, that is, for a

purpose other than buying, carrying, or trading in securities (see section 220.6(e) ofRegulation T).

Broker-dealers may extend purpose credit against margin and exempted securities. Exempted

securities are defined in section 3(a)(12) ofthe Act to include government and municipal securities.

Broker-dealers may extend up to 50 percent loan value against margin equity securities. Brokerdealers may extend "good faith" credit against debt and exempted securities. Margin requirements

are listed in section 220.12 ofRegulation T.

We understand that auction rate securities are securities whose interest or dividend rate is

reset periodically. Auction rate securities may be issued in the form of debt or preferred stock. If

an auction rate security is not an equity security as defined in section 3(a)(l 1) of the Act, it will

satisfy the third clause ofthe definition of margin security in section 220.2 of Regulation T ("any

nonequity security"). We understand your use ofthe phrase "auction rate preferred securities" to

refer to auction rate securities that are equity securities under the Act.

You have asked about the margin status of auction rate preferred securities issued by

municipalities and corporations. Itis our understanding that municipalities accessing the auction rate

market do so with debt offerings and there are no auction rate preferred securities issued by

municipalities. Section 220.12(b) of Regulation T permits "good faith" margining for both

nonequity and exempted securities.
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A corporate auction rate preferred security that meets one of the other clauses of the

definition ofmargin security in Regulation T will be margin eligible. To our knowledge, no auction

rate preferred security is registered, or has unlisted trading privileges on, a national securities

exchange, and no auction rate preferred security is a debt convertible into a margin security. We are

also unaware of any auction rate preferred security issued by an open-end investment company or

unit investment trust registered under section 8 ofthe Investment Company Act of1940 (15 U.S.C.

80a-8). An auction rate preferred security with any of these characteristics would be a margin

security under Regulation T.

There are two additional scenarios under which auction rate preferred securities may be

marginable, although we are unaware ofthe existence ofany securities that meet these criteria. The

first applies to an auction rate preferred security issued in a jurisdiction otherthan the United States.

Such a security may qualify as a margin security ifit meets the Regulation T definition offoreign

margin stock. This requires a determination that the foreign equity security is deemed to have a

"ready market" under SEC Rule 15c3-1 (17 CFR 240.15c3-1) or a "no-action" position issued by

the Securities and Exchange Commission. The second scenario involves a closed-end investment

company whose securities meet the definition of exempted securities mutualfund in Regulation T.

Thisrequires the company to have at least 95 percent ofits assets continuously invested in exempted

securities. Auction rate preferred securities issued by such a closed-end investment company are

entitled to "good faith" margining under section 220.12(b) ofRegulation T.

The foregoing analysis showsthat the margin status ofan auction rate security is not affected

by its auction feature. In summary, based on our understanding ofthese products, an auction rate

preferred security is unlikely to be marginable under Regulation T. Ifthe security meets any ofthe

clauses ofthe Regulation T definition ofmargin security described in the preceding two paragraphs

however, it would be entitled to 50 percent loan value under section 220.12(a) ofthe regulation. If

the security meets the Regulation T definition of exempted securities mutual fund, it would be

eligible for "good faith" credit under section 220.12(b) of the regulation. Otherwise, it will be

classified as a nonmargin, nonexempted security and the customer will be required pursuant to

section 220.12(e) of Regulation T to maintain margin equal to 100 percent ofthe current market

value ofthe security. In other words, the security will have no loan value at a U.S. broker-dealer,

unless used as collateral for nonpurpose credit pursuant to section 220.6(e) ofRegulation T.

We trust that you will find this information helpful. This is a staffopinion only, as the matter

has not been presented to the Board.

Scott Holz

Senior Counsel