Transactions With Affiliates

Overview

Sections 23A and 23B of the Federal Reserve Act, codified at 12 USC 371c and 371c-1 respectively, tightly circumscribe transactions between member banks and their affiliates

Section 18(j) of the FDIA makes 23A and B applicable to insured state nonmember banks 12 USC 1828(j)

Section 11(a) of the HOLA makes 23A and B, with a few differences, applicable to savings associations
12 USC 1468(a)

Section 23A limits a member bank's ability to engage in covered transactions with its affiliates

Affiliates of member banks include

A company that controls the bank
Companies that are under common control of the bank's parent company and certain other organizations
A company whose general partners or officers comprise a majority of the general partners or officers of the bank or its parent company
Any company, including a real estate investment trust, that is sponsored and advised on a contractual basis by the member bank or any subsidiary or affiliate of the member bank

Any investment company with respect to which a member bank or any affiliate thereof is an investment advisor as defined in section 80a-2(a)(20) of title 15
Any company that the Board determines by regulation or order to have a relationship with the member bank or any subsidiary or affiliate of the member bank, such that covered transactions by the member bank or its subsidiary with that company may be affected by the relationship to the detriment of the member bank or its subsidiary

A company or shareholder will be deemed to have Control if

Such company or shareholder, directly or indirectly, or acting through one or more other persons owns, controls, or has power to vote 25 per centum or more of any class of voting securities of the other company;

Such company or shareholder controls in any manner the election of a majority of the directors or trustees of the other company; or
The Board determines, after notice and opportunity for hearing, that such company or shareholder, directly or indirectly, exercises a controlling influence over the management or policies of the other company

Attribution Rules

Any transaction by a member bank with any person shall be deemed to be a transaction with an affiliate to the extent that the proceeds of the transaction are used for the benefit of, or transferred to, that affiliate

Financial subsidiaries of banks are deemed to be affiliates rather than subsidiaries of the banks

For purposes of section 23B, affiliate does not include an insured depository institution

The following are not affiliates:

Any company, other than a bank, that is a subsidiary of a member bank, unless a determination is made under paragraph(1)(E) not to exclude such subsidiary company from the definition of affiliate;

Any company engaged solely in holding the premises of the member bank;
Any company engaged solely in conducting a safe deposit business;
Any company engaged solely in holding obligations of the United States or its agencies or obligations fully guaranteed by the United States or its agencies as to principal and interest; and
Any company where control results from the exercise of rights arising out of a bona fide debt previously contracted, but only for the period of time specifically authorized under applicable State or Federal law or regulation or, in the absence of such law or regulation, for a period of two years from the date of the exercise of such rights or the effective date of this Act, whichever date is later, subject, upon application, to authorization by the Board for good cause shown of extensions of time for not more than one year at a time, but such extensions in the aggregate shall not exceed three years.

Covered Transactions include:

A loan or extension of credit to the affiliate;
A purchase of or an investment in securities issued by the affiliate;
A purchase of assets, including assets subject to an agreement to repurchase, from the affiliate, except such purchase of real and personal property as may be specifically exempted by the Board by order or regulation;
The acceptance of securities issued by the affiliate as collateral security for a loan or extension of credit to any person or company; or
The issuance of a guarantee, acceptance, or letter of credit, including an endorsement or standby letter of credit, on behalf of an affiliate

Section 23A Transaction Restrictions

Covered transactions with a single affiliate are limited to 10% of the bank's capital stock and surplus and with all affiliates in the aggregate to 20%

Collateral requirements Each loan or extension of credit to, or guarantee, acceptance, or letter of credit issued on behalf of, an affiliate by a member bank or its subsidiary shall be secured at the time of the transaction by collateral having a market value equal to

100% of the amount of such loan, if the collateral is composed of

Obligations of the United States or its agencies
Obligations fully guaranteed by the United States or its agencies as to principal and interest
Notes, drafts, bills of exchange or bankers' acceptances that are eligible for rediscount or purchase by a Federal Reserve Bank; or
Asegregated, earmarked deposit account with the member bank

110% of the amount of such loan f the collateral is composed of obligations of any State or political subdivision of any State;

120% of the amount of such loan if the collateral is composed of other debt instruments, including receivables; or
130% of the amount of such loan or extension of credit, guarantee, acceptance, or letter of credit if the collateral is composed of stock, leases, or other real or personal property.

Collateral Restrictions

Low-quality assets shall not be acceptable as collateral
Low quality asset means an asset

Classified as substandard, doubtful, or loss or treated as "other loans especially mentioned" in the most recent report of exam
In a non-accrual status;
On which principal or interest payments are more than thirty days past due; or
An asset whose terms have been renegotiated or compromised due to the deteriorating financial condition of the obligor.

Securities issued by an affiliate of the member bank shall not be acceptable as collateral

All covered transactions, even those excluded from other requirements of section 23A must be conducted on a "safe and sound" basis

Exemptions from Section 23A Requirements

The following transactions are exempt from the strictures of Section 23A (except the safety and soundness requirement):

any transaction, subject to the low quality asset prohibition with a bank

Which controls 80 per centum or more of the voting shares of the member bank;
In which the member bank controls 80 per centum or more of the voting shares; or
In which 80 per centum or more of the voting shares are controlled by the company that controls 80 per centum or more of the voting shares of the member bank

Making deposits in an affiliated bank or affiliated foreign bank in the ordinary course of correspondent business, subject to any restrictions that the Board may prescribe by regulation or order;
Giving immediate credit to an affiliate for uncollected items received in the ordinary course of business;

Making a loan or extension of credit to, or issuing a guarantee, acceptance, or letter of credit on behalf of, an affiliate that is fully secured by

Obligations of the United States or its agencies;
Obligations fully guaranteed by the United States or its agencies as to principal and interest; or
Asegregated, earmarked deposit account with the member bank;

Purchasing securities issued by any company of the kinds described in section 1843(c)(1) of this title;
Purchasing assets having a readily identifiable and publicly available market quotation and purchased at that market quotation or, subject to the "low quality asset" prohibition subsection (a)(3) of this section, purchasing loans on a nonrecourse basis from affiliated banks; and
Purchasing from an affiliate a loan or extension of credit that was originated by the member bank and sold to the affiliate subject to a repurchase agreement or with recourse

See also exemptions created by regulatory interpretation at 12 CFR 223.41 and 223.42

Statutory and Regulatory Differences with respect to
Savings Associations

Two major statutory differences in application of 23A to savings associations

No loan or other extension of credit may be made to any affiliate unless that affiliate is engaged only in activities described in 12 USC 1467a(c)(2)(F)(i) [activities which the Board of Governors of the Federal Reserve System, by regulation, has determined to be permissible for bank holding companies under section 4(c) of the Bank Holding Company Act of 1956 [12 U.S.C. 1843(c)], unless the Director, by regulation, prohibits or limits any such activity for savings and loan holding companies; and

No savings association may purchase securities of or make an investment in securities issued by any affiliate other than with respect to shares of a subsidiary

Sister Bank exemption available to savings associations See 12 USC 1468(a)(2)

Savings association owned by bank holding company treated as a bank

See OTS Regulations on this page for regulatory differences between OTS and FRB Reg W

Section 23B Restrictions

Affiliate and subsidiary have the same meanings as in section 23A except that "affiliate does not include an insured depository institution

Covered Transaction has the same meaning as in 23A, with the same exemptions as provided in 23A

Transactions affected include

Any covered transaction with an affiliate

The sale of securities or other assets to an affiliate, including assets subject to an agreement to repurchase
The payment of money or the furnishing of services to an affiliate under contract, lease, or otherwise
Any transaction in which an affiliate acts as an agent or broker or receives a fee for its services to the bank or to any other person

Any transaction or series of transactions with a
third party

If an affiliate has a financial interest in the third party, or
If an affiliate is a participant in such transaction or series of transactions

A member bank and its subsidiaries may engage in any of the transactions described above only

On terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to such bank or its subsidiary, as those prevailing at the time for comparable transactions with or involving other nonaffiliated companies, or
In the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to, or would apply to, nonaffiliated companies

Any transaction by a member bank or its subsidiary with any person shall be deemed to be a transaction with an affiliate of such bank if any of the proceeds of the transaction are used for the benefit of, or transferred to, such affiliate

Prohibited transactions include

Purchasing as fiduciary any securities or other assets from any affiliate unless such purchase is permitted

Under the instrument creating the fiduciary relationship
By court order, or
By law of the jurisdiction governing the fiduciary relationship; and

Whether acting as principal or fiduciary, knowingly purchasing or otherwise acquiring, during the existence of any underwriting or selling syndicate, any security if a principal underwriter of that security is an affiliate of such bank

A member bank or any subsidiary or affiliate of a member bank shall not publish any advertisement or enter into any agreement stating or suggesting that the bank shall in any way be responsible for the obligations of its affiliates

FRB Regulations 12 CFR Part 223
Reg W - Transactions With Affiliates

OCC Regulations

Since all national banks are member banks that are already covered by Reg W, the OCC does not have any specific Transactions with Affiliates regulations

FDIC Regulations

FDIC has no specific regulations enforcing sections 23A and B

OTS Regulations

12 CFR Part 563

Section 563.41 Transactions with Affiliates
Includes a detailed table referencing the differences between Regulation W and the OTS regulations

12 CFR Part 559 - Subordinate Organizations

559.1 What does this part cover?
559.2 Definitions

Subpart A - Regulations Applicable to
Federal Savings Associations

559.3 Subordinate organizations of Federal savings assns
559.4 Preapproved activities for service corporations
559.5 Investing in service corporations

Subpart B - Regulations Applicable to
All Savings Associations

559.10 Maintenance of separate corporate identities
559.11 Notices required
559.12 Issuing securities
559.13 Exercising salvage power

Commentary

Fed Grants Exemption from Section 23A for Securities Lending as Principal 3.19.07

Pepper Hamilton LLP

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