What it means
Congress passes laws in broad terms and leaves the detail to regulators. The Federal Reserve Board writes rules that fill in the detail, and publishes them as a lettered series that runs through the alphabet, often called Regulation A, B, C and so on.
The letters are historic labels and do not signal importance. Some well-known examples show the range.
Regulation D has covered reserve requirements for banks, Regulation T governs credit that brokers may extend to buy securities, Regulation CC deals with how quickly banks must make deposited cheques available, and Regulation W limits certain dealings between a bank and its affiliates. Others deal with the Federal Reserve's own lending, payment systems and bank holding companies.
After the financial crisis, the Dodd-Frank Act moved responsibility for several consumer protection rules, such as those on truth in lending and electronic fund transfers, to the Consumer Financial Protection Bureau. Many of the lettered rules still exist, but some are now written and enforced by that agency rather than the Federal Reserve.
Anyone relying on a rule should confirm which body currently issues it. For businesses, these regulations shape practical decisions.
A broker must follow the margin rules when lending to customers, a bank must follow funds availability rules when it handles a cheque, and a company that owns a bank must follow the holding company rules. The cost of complying with them is part of the cost of doing business in financial services.
The rules change through a public process. The Board proposes a change, invites comments, and then publishes a final rule with a date on which it takes effect.
A finance team that is affected should watch for proposals early, because the effective dates can arrive quickly. The rules are normally supported by official interpretations and staff guidance that explain how they apply in practice.
A compliance team should read those alongside the rule itself, because the guidance often answers the practical questions. Penalties for breaking the rules can include fines, orders to correct problems and in serious cases restrictions on business activities.
In practice
Real-world examples.
Example
A brokerage firm sets its margin policy for new clients under the Regulation T limits on borrowing to buy securities. The compliance officer reviews every account to make sure the initial margin is met. When a customer falls short, the firm issues a call and records the date and amount in its compliance log.
Example
A local bank applies the funds availability rule in Regulation CC when a small business deposits a cheque for $12,000. Part of the money is made available the next business day and the rest after a short hold. The bank explains the schedule to the customer in writing.
Example
A company that owns a small bank reviews its transactions with its affiliates under Regulation W. A proposed loan from the bank to the parent's other business is limited by the rules and requires collateral. The finance director revises the plan to fund the business through its own credit line instead. This keeps the bank within the limits and avoids a breach.
Case study
Seen in the real world.
Summit Peak Financial is an illustrative, fictional holding company that owns a small bank and a brokerage. A new compliance manager is asked to prepare a map of which Federal Reserve Regulations apply to each part of the group.
She lists the bank's obligations under rules on deposits and cheque holds, the brokerage's obligations under the margin rules, and the group's obligations under the holding company and affiliate rules. For each, she names an owner, a review date and the evidence that proves compliance.
The map finds that two policies refer to a rule that has moved to another agency, and these are corrected. In this illustrative case, the exercise costs about 60 hours of work, and the lesson is that knowing which rule applies, and who writes it, is the first step in compliance.
Watch out
Common mistakes.
- Assuming the letters show the order of importance, when they are simply labels from the order in which the rules were issued.
- Believing all the lettered rules are still written by the Federal Reserve, when some consumer rules moved to the Consumer Financial Protection Bureau.
- Treating a rule as permanent, when the Board can propose and finalise changes at any time.
Questions
People also ask.
Who writes Federal Reserve Regulations?
The Board of Governors of the Federal Reserve System writes them to carry out laws passed by Congress.
What is Regulation T?
It is the rule that limits credit brokers and dealers can extend to customers for buying securities.
Where can I find the current text?
The rules are published in the federal regulations code and on the Federal Reserve Board's website.
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