Regulation U

What Is Regulation U?

Regulation U is a rule issued by the Federal Reserve Board that governs loans made by banks and other lenders when the loan is secured by margin stock. Margin stock generally refers to publicly traded equity securities and certain other securities that can be pledged as collateral. The rule is codified in the federal regulations under Title 12, and it implements the margin provisions of the Securities Exchange Act of 1934 for these lenders. A separate rule, Regulation T, covers credit extended by broker-dealers.

How It Works

Regulation U sets a maximum loan value for credit secured by margin stock, expressed as a percentage of the stock's market value. That percentage is tied to the initial margin requirement the Federal Reserve sets for brokers. A loan that exceeds the permitted maximum does not comply with the rule.

When a loan secured by margin stock is used to purchase or carry margin stock, the borrower usually signs a purpose statement, typically on a federal form designated FR U-1. This statement tells the lender what the money will be used for, which helps determine whether Regulation U applies and which limits must be observed. Loans that are not secured by margin stock, or whose proceeds are used for other purposes, generally fall outside the rule.

Why It Matters to Investors

Regulation U is designed to limit the use of bank credit to finance stock purchases, which in turn restricts the leverage investors can obtain through certain lenders. An investor who borrows from a bank against shares may find the borrowing amount capped, and the loan may have different terms than a margin loan from a brokerage account, which is governed by Regulation T instead.

The rule also serves broader financial stability goals. By restricting excessive credit flowing into securities markets, it aims to reduce the risk that heavy borrowing to buy stock amplifies market declines and losses at lending institutions. Understanding which rule applies to a given loan helps explain why borrowing terms can differ depending on the lender and the purpose of the funds.