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7500 - FRB Regulations
{{12-31-07 p.7785}}
PART 223TRANSACTIONS BETWEEN MEMBER BANKS AND THEIR AFFILIATES
(REGULATION W)
Subpart A INTRODUCTION AND DEFINITIONS
Sec. 223.1
Authority, purpose and scope
223.2
What is an ``affiliate'' for purposes of sections 23A and 23B and
this part?
223.3
What are the meanings of the other terms used in sections 23A and 23B
and this part?
Subpart B General Provisions of Section 23A
223.11
What is the maximum amount of covered transactions that a member bank
may enter into with any single affiliate?
223.12
What is the maximum amount of covered transactions that a member bank
may enter into with all affiliates?
223.13
What safety and soundness requirement applies to covered transactions?
223.14
What are the collateral requirements for a credit transaction with an
affiliate?
223.15
May a member bank purchase a low-quality asset from an affiliate?
223.16
What transactions by a member bank with any person are treated as
transactions with an affiliate?
%
Subpart C Valuation and Timing Principles Under Section 23A
223.21
What valuation and timing principles apply to credit transactions?
223.22
What valuation and timing principles apply to asset purchases?
223.23
What valuation and timing principles apply to purchases of and
investments in securities issued by an affiliate?
223.24
What valuation principles apply to extensions of credit secured by
affiliate securities?
Subpart D Other Requirements Under Section 23A
223.31
How does section 23A apply to a member bank's acquisition of an
affiliate that becomes an operating subsidiary of the member bank after
the acquisition?
223.32
What rules apply to financial subsidiaries of a member bank?
223.33
What rules apply to derivative transactions?
Subpart E Exemptions from the Provisions of Section 23A
223.41
What covered transactions are exempt from the quantitative limits and
collateral requirements?
223.42
What covered transactions are exempt from the quantitative limits,
collateral requirements, and low-quality asset prohibition?
223.43
What are the standards under which the Board may grant additional
exemptions from the requirements of section 23A?
Subpart F General Provisions of Section 23B
223.51
What is the market terms requirement of section 23B?
223.52
What transactions with affiliates or others must comply with section
23B's market terms requirement?
223.53
What asset purchases are prohibited by section 23B?
{{12-31-07 p.7786}}
223.54
What advertisements and statements are prohibited by section 23B?
223.55
What are the standards under which the Board may grant exemptions from
the requirements of section 23B?
Subpart G Application of Sections 23A and 23B to U.S.
Branches and Agencies of Foreign Banks
223.61
How do sections 23A and 23B apply to U.S. branches and agencies of
foreign banks?
Subpart H Miscellaneous Interpretations
223.71
How do sections 23A and 23B apply to transactions in which a member
bank purchases from one affiliate an asset relating to another
affiliate?
AUTHORITY: 12 U.S.C. 371c(b)(1)(E), (b)(2)(A), and (f), 371c-1(e),
1828(j), and 1468(a).
SOURCE: The provisions of this Part 223 appear at 67 Fed. Reg.
76604, December 12, 2002, effective April 1, 2003.
Subpart A Introduction and Definitions
§ 223.1 Authority, purpose, and scope.
(a) Authority. The Board of Governors of the Federal
Reserve System (Board) has issued this part (Regulation W) under the
authority of sections 23A(f) and 23B(e) of the Federal Reserve Act
(12 U.S.C. 371c(f),
371c-1(e)).
(b) Purpose. Sections 23A and 23B of the Federal Reserve
Act (12 U.S.C. 371c, 371c-1) establish certain quantitative limits and
other prudential requirements for loans, purchases of assets, and
certain other transactions between a member bank and its affiliates.
This regulation implements sections 23A and 23B by defining terms used
in the statute, explaining the statute's requirements, and exempting
certain transactions.
(c) Scope. Sections 23A and 23B and this regulation
apply by their terms to "member banks"--that is, any national
bank, State bank, trust company, or other institution that is a member
of the Federal Reserve System. In addition, the Federal Deposit
Insurance Act (12 U.S.C.
1828(j)) applies sections 23A and 23B to insured State
non-member banks in the same manner and to the same extent as if they
were member banks. The Home Owners' Loan Act
(12 U.S.C. 1468(a)) also
applies sections 23A and 23B to insured savings associations in the
same manner and to the same extent as if they were member banks (and
imposes two additional restrictions).
[Codified to 12 C.F.R. §223.1]
§ 223.2 What is an "affiliate" for purposes of sections
23A and 23B and this part?
(a) For purposes of this part and except as provided in paragraphs
(b) and (c) of this section, "affiliate" with respect to a member
bank means:
(1) Parent companies. Any company that controls the
member bank;
(2) Companies under common control by a parent company.
Any company, including any subsidiary of the member bank, that is
controlled by a company that controls the member bank;
(3) Companies under other common control. Any company,
including any subsidiary of the member bank, that is controlled,
directly or indirectly, by trust or otherwise, by or for the benefit of
shareholders who beneficially or otherwise control, directly or
indirectly, by trust or otherwise, the member bank or any company that
controls the member bank;
(4) Companies with interlocking directorates. Any
company in which a majority of its directors, trustees, or general
partners (or individuals exercising similar functions)
{{12-31-07 p.7787}}constitute a majority of
the persons holding any such office with the member bank or any company
that controls the member bank;
(5) Sponsored and advised companies. Any company,
including a real estate investment trust, that is sponsored and advised
on a contractual basis by the member bank or an affiliate of the member
bank;
(6) Investment companies. (i) Any investment company
for which the member bank or any affiliate of the member bank serves as
an investment adviser, as defined in section 2(a)(20) of the Investment
Company Act of 1940 (15 U.S.C.
80a-2(a)(20)); and
(ii) Any other investment fund for which the member bank or any
affiliate of the member bank serves as an investment advisor, if the
member bank and its affiliates own or control in the aggregate more
than 5 percent of any class of voting securities or of the equity
capital of the fund;
(7) Depository institution subsidiaries. A depository
institution that is a subsidiary of the member bank;
(8) Financial subsidiaries. A financial subsidiary of
the member bank;
(9) Companies held under merchant banking or insurance
company investment authority--(i) In general. Any
company in which a holding company of the member bank owns or controls,
directly or indirectly, or acting through one or more other persons, 15
percent or more of the equity capital pursuant to section 4(k)(4)(H) or
(I) of the Bank Holding Company Act (12
U.S.C. 1843(k)(4)(H) or (I)).
(ii) General exemption. A company will not be an
affiliate under paragraph (a)(9)(i) of this section if the holding
company presents information to the Board that demonstrates, to the
Board's satisfaction, that the holding company does not control the
company.
(iii) Specific exemptions. A company also will not be
an affiliate under paragraph (a)(9)(i) of this section if:
(A) No director, officer, or employee of the holding company
serves as a director, trustee, or general partner (or individual
exercising similar functions) of the company;
(B) A person that is not affiliated or associated with the
holding company owns or controls a greater percentage of the equity
capital of the company than is owned or controlled by the holding
company, and no more than one officer or employee of the holding
company serves as a director or trustee (or individual exercising
similar functions) of the company; or
(C) A person that is not affiliated or associated with the
holding company owns or controls more than 50 percent of the voting
shares of the company, and officers and employees of the holding
company do not constitute a majority of the directors or trustees (or
individuals exercising similar functions) of the company.
(iv) Application of rule to private equity funds. A
holding company will not be deemed to own or control the equity capital
of a company for purposes of paragraph (a)(9)(i) of this section solely
by virtue of an investment made by the holding company in a private
equity fund (as defined in the merchant banking subpart of the Board's
Regulation Y (12 CFR
225.173(a))) that owns or controls the equity capital of the
company unless the holding company controls the private equity fund
under 12 CFR 225.173(d)(4).
(v) Definition. For purposes of this paragraph (a)(9),
"holding company" with respect to a member bank means
a company that controls the member bank, or a company that is
controlled by shareholders that control the member bank, and all
subsidiaries of the company (including any depository institution that
is a subsidiary of the company).
(10) Partnerships associated with the member bank or an
affiliate. Any partnership for which the member bank or any
affiliate of the member bank serves as a general partner or for which
the member bank or any affiliate of the member bank causes any
director, officer, or employee of the member bank or affiliate to serve
as a general partner;
(11) Subsidiaries of affiliates. Any subsidiary of a
company described in paragraphs (a)(1) through (10) of this section;
and
(12) Other companies. Any company that the Board
determines by regulation or order, or that the appropriate Federal
banking agency for the member bank determines by order, to have a
relationship with the member bank, or any affiliate of the member bank,
such that covered transactions by the member bank with that company may
be affected by the relationship to the detriment of the member
bank.
{{12-31-07 p.7788}}
(b) "Affiliate" with respect to a member bank does
not include:
(1) Subsidiaries. Any company that is a subsidiary of
the member bank, unless the company is:
(i) A depository institution;
(ii) A financial subsidiary;
(iii) Directly controlled by:
(A) One or more affiliates (other than depository institution
affiliates) of the member bank; or
(B) A shareholder that controls the member bank or a group of
shareholders that together control the member bank;
(iv) An employee stock option plan, trust, or similar
organization that exists for the benefit of the shareholders, partners,
members, or employees of the member bank or any of its affiliates; or
(v) Any other company determined to be an affiliate under
paragraph (a)(12) of this section;
(2) Bank premises. Any company engaged solely in
holding the premises of the member bank;
(3) Safe deposit. Any company engaged solely in
conducting a safe deposit business;
(4) Government securities. Any company engaged solely
in holding obligations of the Unites States or its agencies or
obligations fully guaranteed by the United States or its agencies as to
principal and interest; and
(5) Companies held DPC. Any company where control
results form the exercise of rights arising out of a bona fide debt
previously contracted. This exclusion from the definition of
"affiliate" applies 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. The Board may authorize, upon
application and for good cause shown, extensions of time for not more
than one year at a time, but such extensions in the aggregate will not
exceed three years.
(c) For purposes of subpart F (implementing section 23B),
"affiliate" with respect to a member bank also does
not include any depository institution.
[Codified to 12 C.F.R. §223.2]
§ 223.3 What are the meanings of the other terms used in
sections 23A and 23B and this part?
For purposes of this part:
(a) Aggregate amount of covered transactions means the
amount of the covered transaction about to be engaged in added to the
current amount of all outstanding covered transactions.
(b) Appropriate Federal banking agency with respect to a
member bank or other depository institution has the same meaning as in
section 3 of the Federal Deposit Insurance Act
(12 U.S.C. 1813).
(c) "Bank holding company" has the same meaning as
in 12 CFR 225.2.
(d) "Capital stock and surplus" means the sum of:
(1) A member bank's tier 1 and tier 2 capital under the
risk-based capital guidelines of the appropriate Federal banking
agency, based on the member bank's most recent consolidated Report of
Condition and Income filed under 12
U.S.C. 1817(a)(3);
(2) The balance of a member bank's allowance for loan and lease
losses not included in its tier 2 capital under the risk-based capital
guidelines of the appropriate Federal banking agency, based on the
member bank's most recent consolidated Report of Condition and Income
filed under 12 U.S.C. 1817(a)(3); and
(3) The amount of any investment by a member bank in a financial
subsidiary that counts as a covered transaction and is required to be
deducted from the member bank's capital for regulatory capital
purposes.
{{12-31-07 p.7789}}
(e) Carrying value with respect to a security means
(unless otherwise provided) the value of the security on the financial
statements of the member bank, determined in accordance with GAAP.
(f) Company means a corporation, partnership, limited
liability company, business trust, association, or similar organization
and, unless specifically excluded, includes a member bank and a
depository institution.
(g) Control. (1) In general. "Control"
by a company or shareholder over another company means that:
(i) The company or shareholder, directly or indirectly, or acting
through one or more other persons, owns, controls, or has power to vote
25 percent or more of any class of voting securities of the other
company;
(ii) The company or shareholder controls in any manner the
election of a majority of the directors, trustees, or general partners
(or individuals exercising similar functions) of the other company; or
(iii) The Board determines, after notice and opportunity for
hearing, that the company or shareholder, directly or indirectly,
exercises a controlling influence over the management or policies of
the other company.
(2) Ownership or control of shares as fiduciary.
Notwithstanding any other provision of this regulation, no company
will be deemed to control another company by virtue of its ownership or
control of shares in a fiduciary capacity, except as provided in
paragraph (a)(3) of § 223.2 or if the company owning or controlling
the shares is a business trust.
(3) Ownership or control of securities by subsidiary.
A company controls securities, assets, or other ownership
interests owned or controlled, directly or indirectly, by any
subsidiary (including a subsidiary depository institution) of the
company.
(4) Ownership or control of convertible instruments. A
company or shareholder that owns or controls instruments (including
options or warrants) that are convertible or exercisable, at the option
of the holder or owner, into securities, controls the securities,
unless the company or shareholder presents information to the Board
that demonstrates, to the Board's satisfaction, that the company or
shareholder should not be deemed to control the securities.
(5) Ownership or control of nonvoting securities. A
company or shareholder that owns or controls 25 percent or more of the
equity capital of another company controls the other company, unless
the company or shareholder presents information to the Board that
demonstrates, to the Board's satisfaction, that the company or
shareholder does not control the other company.
(h) Covered transaction with respect to an affiliate
means:
(1) An extension of credit to the affiliate;
(2) A purchase of, or an investment in, a security issued by the
affiliate;
(3) A purchase of an asset from the affiliate, including an asset
subject to recourse or an agreement to repurchase, except such
purchases of real and personal property as may be specifically exempted
by the Board by order or regulation;
(4) The acceptance of a security issued by the affiliate as
collateral for an extension of credit to any person or company; and
(5) The issuance of a guarantee, acceptance, or letter of credit,
including an endorsement or standby letter of credit, on behalf of the
affiliate, a confirmation of a letter of credit issued by the
affiliate, and a cross-affiliate netting arrangement.
(i) Credit transaction with an affiliate means:
(1) An extension of credit to the affiliate;
(2) An issuance of a guarantee, acceptance, or letter of credit,
including an endorsement or standby letter of credit, on behalf of the
affiliate and a confirmation of a letter of credit issued by the
affiliate; and
(3) A cross-affiliate netting arrangement.
(j) Cross-affiliate netting arrangement means an
arrangement among a member bank, one or more affiliates of the member
bank, and one or more nonaffiliates of the member bank in
which;
{{12-31-07 p.7790}}
(1) A nonaffiliate is permitted to deduct any obligations of an
affiliate of the member bank to the nonaffiliate when settling the
nonaffiliate's obligations to the member bank; or
(2) The member bank is permitted or required to add any
obligations of its affiliate to a nonaffiliate when determining the
member bank's obligations to the nonaffiliate.
(k) "Depository institution" means, unless
otherwise noted, an insured depository institution (as defined in
section 3 of the Federal Deposit Insurance Act
(12 U.S.C. 1813)), but does not
include any branch of a foreign bank. For purposes of this definition,
an operating subsidiary of a depository institution is treated as part
of the depository institution.
(l) "Derivative transaction" means any
derivative contract listed in sections III.E.1.a. through d. of
Appendix A to 12 CFR part
225 and any similar derivative contract, including a credit
derivative contract.
(m) "Eligible affiliated mutual fund securities"
has the meaning specified in paragraph (c)(2) of § 223.24.
(n) "Equity capital" means:
(1) With respect to a corporation, preferred stock, common stock,
capital surplus, retained earnings, and accumulated other comprehensive
income, less treasury stock, plus any other account that constitutes
equity of the corporation; and
(2) With respect to a partnership, limited liability company, or
other company, equity accounts similar to those described in paragraph
(n)(1) of this section.
(o) "Extension of credit" to an affiliate means
the making or renewal of a loan, the granting of a line of credit, or
the extending of credit in any manner whatsoever, including on an
intraday basis, to an affiliate. An extension of credit to an affiliate
includes, without limitation:
(1) An advance to an affiliate by means of an overdraft, cash
item, or otherwise;
(2) A sale of Federal funds to an affiliate;
(3) A lease that is the functional equivalent of an extension of
credit to an affiliate;
(4) An acquisition by purchase, discount, exchange, or otherwise
of a note or other obligation, including commercial paper or other debt
securities, of an affiliate;
(5) Any increase in the amount of, extension of the maturity of,
or adjustment to the interest rate term or other material term of, an
extension of credit to an affiliate; and
(6) Any other similar transaction as a result of which an
affiliate becomes obligated to pay money (or its equivalent).
(p) "Financial subsidiary"
(1) In general. Except as provided in paragraph (p)(2)
of this section, the term "financial subsidiary" means
any subsidiary of a member bank that:
(i) Engages, directly or indirectly, in any activity that
national banks are not permitted to engage in directly or that is
conducted under terms and conditions that differ from those that govern
the conduct of such activity by national banks; and
(ii) Is not a subsidiary that a national bank is specifically
authorized to own or control by the express terms of a Federal statute
(other than 12 U.S.C. 24a), and not by implication or interpretation.
(2) Exceptions. "Financial subsidiary" does not
include:
(i) A subsidiary of a member bank that is considered a financial
subsidiary under paragraph (p)(1) of this section solely because the
subsidiary engages in the sale of insurance as agent or broker in a
manner that is not permitted for national banks; and
(ii) A subsidiary of a State bank (other than a subsidiary
described in section 46(a) of the Federal Deposit Insurance Act
(12 U.S.C. 1831w(a))) that is
considered a financial subsidiary under paragraph (p)(1) of this
section solely because the subsidiary engages in one or more of the
following activities:
(A) An activity that the State bank may engage in directly under
applicable Federal and State law and that is conducted under the same
terms and conditions that govern the conduct of the activity by the
State bank; and
{{12-31-07 p.7791}}
(B) An activity that the subsidiary was authorized by applicable
Federal and State law to engage in prior to December 12, 2002, and that
was lawfully engaged in by the subsidiary on that date.
(3) Subsidiaries of financial subsidiaries. If a
company is a financial subsidiary under paragraphs (p)(1) and (p)(2) of
this section, any subsidiary of such a company is also a financial
subsidiary.
(q) "Foreign bank" and an "agency,"
"branch," or "commercial lending company"
of a foreign bank have the same meanings as in section 1(b) of the
International Banking Act of 1978 (12
U.S.C. 3101).
(r) "GAAP" means U.S. generally accepted
accounting principles.
(s) "General purpose credit card" has the meaning
specified in paragraph (c)(4)(ii) of § 223.16.
(t) In contemplation. A transaction between a member
bank and a nonaffiliate is presumed to be "in
contemplation" of the nonaffiliate becoming an affiliate of the
member bank if the member bank enters into the transaction with the
nonaffiliate after the execution of, or commencement of negotiations
designed to result in, an agreement under the terms of which the
nonaffiliate would become an affiliate.
(u) "Intraday extension of credit" has the meaning
specified in paragraph (1)(2) of § 223.42.
(v) "Low-quality asset" means:
(1) An asset (including a security) classified as
"substandard," "doubtful," or "loss," or treated as
"special mention" or "other transfer risk problems," either
in the most recent report of examination or inspection of an affiliate
prepared by either a Federal or State supervisory agency or in any
internal classification system used by the member bank or the affiliate
(including an asset that receives a rating that is substantially
equivalent to "classified" or "special mention" in the
internal system of the member bank or affiliate);
(2) An asset in a nonaccrual status;
(3) An asset on which principal or interest payments are more
than thirty days past due;
(4) An asset whose terms have been renegotiated or compromised
due to the deteriorating financial condition of the obligor; and
(5) An asset acquired through foreclosure, repossession, or
otherwise in satisfaction of a debt previously contracted, if the asset
has not yet been reviewed in an examination or inspection.
(w) "Member bank" means any national bank, State
bank, banking association, or trust company that is a member of the
Federal Reserve System. For purposes of this definition, an operating
subsidiary of a member bank is treated as part of the member bank.
(x) "Municipal securities" has the same meaning as
in section 3(a)(29) of the Securities Exchange Act of 1934 (17 U.S.C.
78c(a)(29)).
(y) "Nonaffiliate" with respect to a member bank
means any person that is not an affiliate of the member bank.
(z) "Obligations of, or fully guaranteed as to principal
and interest by, the United States or its agencies" includes
those obligations listed in 12 CFR 201.108(b) and any additional
obligations as determined by the Board. The term does not include
Federal Housing Administration or Veterans Administration loans.
(aa) "Operating subsidiary" with respect to a
member bank or other depository institution means any subsidiary of the
member bank or depository institution other than a subsidiary described
in paragraphs (b)(1)(i) through (v) of § 223.2.
(bb) "Person" means an individual, company, trust,
joint venture, pool, syndicate, sole proprietorship, unincorporated
organization, or any other form of entity.
(cc) "Principal underwriter" has the meaning
specified in paragraph (c)(1) of § 223.53.
(dd) "Purchase of an asset" by a member bank from
an affiliate means the acquisition by a member bank of an asset from an
affiliate in exchange for cash or any other consideration, including an
assumption of liabilities. The merger of an affiliate into a member
bank is a purchase of assets by the member bank from an affiliate if
the member
{{12-31-07 p.7792}}bank assumes any liabilities of
the affiliate or pays any other form of consideration in the
transaction.
(ee) Riskless principal. A company is "acting
exclusively as a riskless principal" if, after receiving an
order to buy (or sell) a security from a customer, the company
purchases (or sells) the security in the secondary market for its own
account to offset a contemporaneous sale to (or purchase from) the
customer.
(ff) "Securities" means stocks, bonds, debentures,
notes, or similar obligations (including commercial paper).
(gg) "Securities affiliate" with respect to a
member bank means:
(1) An affiliate of the member bank that is registered with the
Securities and Exchange Commission as a broker or dealer; or
(2) Any other securities broker or dealer affiliate of a member
bank that is approved by the Board.
(hh) "State bank" has the same meaning as in
section 3 of the Federal Deposit Insurance Act
(12 U.S.C. 1813).
(ii) "Subsidiary" with respect to a specified
company means a company that is controlled by the specified company.
(jj) "Voting securities" has the same meaning as
in 12 CFR 225.2.
(kk) "Well capitalized" has the same meaning as in
12 CFR 225.2 and, in the case of any holding company that is not a bank
holding company, "well capitalized" means that the
holding company has and maintains at least the capital levels required
for a bank holding company to be well capitalized under 12 CFR 225.2.
(ll) "Well managed" has the same meaning as in 12
CFR 225.2.
[Codified to 12 C.F.R. §223.3]
Subpart BGeneral Provisions of
Section 23A
§ 223.11 What is the maximum amount of covered transactions
that a member bank may enter into with any single affiliate?
A member bank may not engage in a covered transaction with an
affiliate (other than a financial subsidiary of the member bank) if the
aggregate amount of the member bank's covered transactions with such
affiliate would exceed 10 percent of the capital stock and surplus of
the member bank.
[Codified to 12 C.F.R. §223.11]
§ 223.12 What is the maximum amount of covered transactions
that a member bank may enter into with all affiliates?
A member bank may not engage in a covered transaction with any
affiliate if the aggregate amount of the member bank's covered
transactions with all affiliates would exceed 20 percent of the capital
stock and surplus of the member bank.
[Codified to 12 C.F.R. §223.12]
§ 223.13 What safety and soundness requirement applies to
covered transactions?
A member bank may not engage in any covered transaction, including
any transaction exempt under this regulation, unless the transaction is
on terms and conditions that are consistent with safe and sound banking
practices.
[Codified to 12 C.F.R. §223.13]
§ 223.14 What are the collateral requirements for a credit
transaction with an affiliate?
(a) Collateral required for extensions of credit and certain
other covered transactions. A member bank must ensure that each of
its credit transactions with an affiliate is secured by
{{12-31-07 p.7793}}the amount of collateral
required by paragraph (b) of this section at the time of the
transaction.
(b) Amount of collateral required. (1) The rule.
A credit transaction described in paragraph (a) of this section
must be secured by collateral having a market value equal to at least:
(i) 100 percent of the amount of the transaction, if the
collateral is:
(A) Obligations of the United States or its agencies;
(B) Obligations fully guaranteed by the United States or its
agencies as to principal and interest;
(C) Notes, drafts, bills of exchange, or bankers' acceptances
that are eligible for rediscount or purchase by a Federal Reserve Bank;
or
(D) A segregated, earmarked deposit account with the member bank
that is for the sole purpose of securing credit transactions between
the member bank and its affiliates and is identified as such;
(ii) 110 percent of the amount of the transaction, if the
collateral is obligations of any State or political subdivision of any
State;
(iii) 120 percent of the amount of the transaction, if the
collateral is other debt instruments, including loans and other
receivables; or
(iv) 130 percent of the amount of the transaction, if the
collateral is stock, leases, or other real or personal property.
(2) Example. A member bank makes a $1,000 loan to an
affiliate. The affiliate posts as collateral for the loan $500 in U.S.
Treasury securities, $480 in corporate debt securities, and $130 in
real estate. The loan satisfies the collateral requirements of this
section because $500 of the loan is 100 percent secured by obligations
of the United States, $400 of the loan is 120 percent secured by debt
instruments, and $100 of the loan is 130 percent secured by real
estate.
(c) Ineligible collateral. The following items are not
eligible collateral for purposes of this section:
(1) Low-quality assets;
(2) Securities issued by any affiliate;
(3) Equity securities issued by the member bank, and debt
securities issued by the member bank that represent regulatory capital
of the member bank;
(4) Intangible assets (including servicing assets), unless
specifically approved by the Board; and
(5) Guarantees, letters of credit, and other similar instruments.
(d) Perfection and priority requirements for collateral.
(1) Perfection. A member bank must maintain a security
interest in collateral required by this section that is perfected and
enforceable under applicable law, including in the event of default
resulting from bankruptcy, insolvency, liquidation, or similar
circumstances.
(2) Priority. A member bank either must obtain a first
priority security interest in collateral required by this section or
must deduct from the value of collateral obtained by the member bank
the lesser of:
(i) The amount of any security interest in the collateral that is
senior to that of the member bank; or
(ii) The amount of any credit secured by the collateral that is
senior to that of the member bank.
(3) Example. A member bank makes a $2,000 loan to an
affiliate. The affiliate grants the member bank a second priority
security interest in a piece of real estate valued at $3,000. Another
institution that previously lent $1,000 to the affiliate has a first
priority security interest in the entire parcel of real estate. This
transaction is not in compliance with the collateral requirements of
this section. Due to the existence of the prior third-party lien on the
real estate, the effective value of the real estate collateral for the
member bank for purposes of this section is only $2,000--$600 less than
the amount of real estate collateral required by this section for the
transaction ($2,000 × 130 percent = $2,600).
{{12-31-07 p.7794}}
(e) Replacement requirement for retired or amortized
collateral. A member bank must ensure that any required collateral
that subsequently is retired or amortized is replaced with additional
eligible collateral as needed to keep the percentage of the collateral
value relative to the amount of the outstanding credit transaction
equal to the minimum percentage required at the inception of the
transaction.
(f) Inapplicability of the collateral requirements to certain
transactions. The collateral requirements of this section do not
apply to the following transactions.
(1) Acceptances. An acceptance that already is fully
secured either by attached documents or by other property that is
involved in the transaction and has an ascertainable market value.
(2) The unused portion of certain extensions of credit.
The unused portion of an extension of credit to an affiliate as
long as the member bank does not have any legal obligation to advance
additional funds under the extension of credit until the affiliate
provides the amount of collateral required by paragraph (b) of this
section with respect to the entire used portion (including the amount
of the requested advance) of the extension of credit.
(3) Purchases of affiliate debt securities in the secondary
market. The purchase of a debt security issued by an affiliate as
long as the member bank purchases the debt security from a nonaffiliate
in a bona fide secondary market transaction.
[Codified to 12 C.F.R. §223.14]
§ 223.15 May a member bank purchase a low-quality asset from an
affiliate?
(a) In general. A member bank may not purchase a
low-quality asset from an affiliate unless, pursuant to an independent
credit evaluation, the member bank had committed itself to purchase the
asset before the time the asset was acquired by the affiliate.
(b) Exemption for renewals of loan participations involving
problem loans. The prohibition contained in paragraph (a) of this
section does not apply to the renewal of, or extension of additional
credit with respect to, a member bank's participation in a loan to a
nonaffiliate that was originated by an affiliate if:
(1) The loan was not a low-quality asset at the time the member
bank purchased its participation:
(2) The renewal or extension of additional credit is approved, as
necessary to protect the participating member bank's investment by
enhancing the ultimate collection of the original indebtedness, by the
board of directors of the participating member bank or, if the
originating affiliate is a depository institution, by:
(i) An executive committee of the board of directors of the
participating member bank; or
(ii) One or more senior management officials of the participating
member bank, if:
(A) The board of directors of the member bank approves standards
for the member bank's renewals or extensions of additional credit
described in this paragraph (b), based on the determination set forth
in paragraph (b)(2) of this section;
(B) Each renewal or extension of additional credit described in
this paragraph (b) meets the standards; and
(C) The board of directors of the member bank periodically
reviews renewals and extensions of additional credit described in this
paragraph (b) to ensure that they meet the standards and periodically
reviews the standards to ensure that they continue to meet the
criterion set forth in paragraph (b)(2) of this section;
(3) The participating member bank's share of the renewal or
extension of additional credit does not exceed its proportional share
of the original transaction by more than 5 percent, unless the member
bank obtains the prior written approval of its appropriate Federal
banking agency; and
(4) The participating member bank provides its appropriate
Federal banking agency with written notice of the renewal or extension
of additional credit not later than 20 days after consummation.
[Codified to 12 C.F.R. §223.15]
{{12-31-07 p.7795}}
§ 223.16 What transactions by a member bank with any person are
treated as transactions with an affiliate?
(a) In general. A member bank must treat any of its
transactions with any person as a transaction with an affiliate to the
extent that the proceeds of the transaction are used for the benefit
of, or transferred to, an affiliate.
(b) Certain agency transactions. (1) Except to the
extent described in paragraph (b)(2) of this section, an extension of
credit by a member bank to a nonaffiliate is not treated as an
extension of credit to an affiliate under paragraph (a) of this section
if:
(i) The proceeds of the extension of credit are used to purchase
an asset through an affiliate of the member bank, and the affiliate is
acting exclusively as an agent or broker in the transaction; and
(ii) The asset purchased by the nonaffiliate is not issued,
underwritten, or sold as principal by any affiliate of the member bank.
(2) The interpretation set forth in paragraph (b)(1) of this
section does not apply to the extent of any agency fee, brokerage
commission, or other compensation received by an affiliate from the
proceeds of the extension of credit. The receipt of such compensation
may qualify, however, for the exemption contained in paragraph (c)(2)
of this section.
(c) Exemptions. Notwithstanding paragraph (a) of this
section, the following transactions are not subject to the quantitative
limits of §§ 223.11 and 223.12 or the collateral requirements of
§ 223.14. The transactions are, however, subject to the safety and
soundness requirement of § 223.13 and the market terms requirement
and other provisions of subpart F (implementing section 23B).
(1) Certain riskless principal transactions. An
extension of credit by a member bank to a nonaffiliate, if:
(i) The proceeds of the extension of credit are used to purchase
a security through a securities affiliate of the member bank, and the
securities affiliate is acting exclusively as a riskless principal in
the transaction;
(ii) The security purchased by the nonaffiliate is not issued,
underwritten, or sold as principal (other than as riskless principal)
by any affiliate of the member bank; and
(iii) Any riskless principal mark-up or other compensation
received by the securities affiliate from the proceeds of the extension
of credit meets the market terms standard set forth in paragraph (c)(2)
of this section.
(2) Brokerage commissions, agency fees, and riskless
principal mark-ups. An affiliate's retention of a portion of the
proceeds of an extension of credit described in paragraph (b) or (c)(1)
of this section as a brokerage commission, agency fee, or riskless
principal mark-up, if that commission, fee, or mark-up is substantially
the same as, or lower than, those prevailing at the same time for
comparable transactions with or involving other nonaffiliates, in
accordance with the market terms requirement of § 223.51.
(3) Preexisting lines of credit. An extension of
credit by a member bank to a nonaffiliate, if:
(i) The proceeds of the extension of credit are used to purchase
a security from or through a securities affiliate of the member bank;
and
(ii) The extension of credit is made pursuant to, and consistent
with any conditions imposed in, a preexisting line of credit that was
not established in contemplation of the purchase of securities from or
through an affiliate of the member bank.
(4) General purpose credit card transactions.
(i) In general. An extension of credit by a member
bank to a nonaffiliate, if:
(A) The proceeds of the extension of credit are used by the
nonaffiliate to purchase a product or service from an affiliate of the
member bank; and
(B) The extension of credit is made pursuant to, and consistent
with any conditions imposed in, a general purpose credit card issued by
the member bank to the nonaffiliate.
{{12-31-07 p.7796}}
(ii) Definition. "General purpose credit card"
means a credit card issued by a member bank that is widely accepted by
merchants that are not affiliates of the member bank for the purchase
of products or services, if:
(A) Less than 25 percent of the total value of products and
services purchased with the card by all cardholders are purchases of
products and services from one or more affiliates of the member bank;
(B) All affiliates of the member bank would be permissible for a
financial holding company (as defined in
12 U.S.C. 1841) under section 4
of the Bank Holding Company Act (12
U.S.C. 1843), and the member bank has no reason to believe that
25 percent or more of the total value of products and services
purchased with the card by all cardholders are or would be purchases of
products and services from one or more affiliates of the member bank;
or
(C) The member bank presents information to the Board that
demonstrates, to the Board's satisfaction, that less than 25 percent
of the total value of products and services purchased with the card by
all cardholders are and would be purchases of products and services
from one or more affiliates of the member bank.
(iii) Calculating compliance. To determine whether a
credit card qualifies as a general purpose credit card under the
standard set forth in paragraph (c)(4)(ii)(A) of this section, a member
bank must compute compliance on a monthly basis, based on cardholder
purchases that were financed by the credit card during the preceding 12
calendar months. If a credit card has qualified as a general purpose
credit card for 3 consecutive months but then ceases to quality in the
following month, the member bank may continue to treat the credit card
as a general purpose credit card for such month and three additional
months (or such longer period as may be permitted by the Board).
(iv) Example of calculating compliance with the 25 percent
test. A member bank seeks to qualify a credit card as a general
purpose credit card under paragraph (c)(4)(ii)(A) of this section. The
member bank assesses its compliance under paragraph (c)(4)(iii) of this
section on the 15th day of every month (for the preceding 12 calendar
months). The credit card qualifies as a general purpose credit card for
at least three consecutive months. On June 15, 2005, however, the
member bank determines that, for the 12-calendar-month period from June
1, 2004, through May 31, 2005, 27 percent of the total value of
products and services purchased with the card by all cardholders were
purchases of products and services from an affiliate of the member
bank. Unless the credit card returns to compliance with the 25 percent
limit by the 12-calendar-month period ending August 31, 2005, the card
will cease to qualify as a general purpose credit card as of September
1, 2005. Any outstanding extensions of credit under the credit card
that were used to purchase products or services form an affiliate of
the member bank would become covered transactions at such time.
[Codified to 12 C.F.R. §223.16]
Subpart CValuation and Timing Principles Under
Section 23A
§ 223.21 What valuation and timing principles apply to credit
transactions?
(a) Valuation. (1) Initial valuation. Except
as provided in paragraph (a)(2) or (3) of this section, a credit
transaction with an affiliate initially must be valued at the greater
of:
(i) The principal amount of the transaction;
(ii) The amount owed by the affiliate to the member bank under
the transaction; or
(iii) The sum of;
(A) The amount provided to, or on behalf of, the affiliate in the
transaction; and
(B) Any additional amount that the member bank could be required
to provide to, or on behalf of, the affiliate under the terms of the
transaction.
(2) Initial valuation of certain acquisitions of a credit
transaction. If a member bank acquires from a nonaffiliate a
credit transaction with an affiliate, the covered transaction initially
must be valued at the sum of:
{{12-31-07 p.7797}}
(i) The total amount of consideration given (including
liabilities assumed) by the member bank in exchange for the credit
transaction; and
(ii) Any additional amount that the member bank could be required
to provide to, or on behalf of, the affiliate under the terms of the
transaction.
(3) Debt securities. The valuation principles of
paragraphs (a)(1) and (2) of this section do not apply to a member
bank's purchase of or investment in a debt security issued by an
affiliate, which is governed by § 223.23.
(4) Examples. The following are examples of how to
value a member bank's credit transactions with an affiliate.
(i) Term loan. A member bank makes a loan to an
affiliate that has a principal amount of $100. The affiliate pays $2 in
up-front fees to the member bank, and the affiliate receives net loan
proceeds of $98. The member bank must initially value the covered
transaction at $100.
(ii) Revolving credit. A member bank establishes a
$300 revolving credit facility for an affiliate. The affiliate has
drawn down $100 under the facility. The member bank must value the
covered transaction at $300 throughout the life of the facility.
(iii) Guarantee. A member bank has issued a guarantee
to a nonaffiliate on behalf of an affiliate under which the member bank
would be obligated to pay the nonaffiliate $500 if the affiliate
defaults on an issuance of debt securities. The member bank must value
the guarantee at $500 throughout the life of the guarantee.
(iv) Acquisition of a loan to an affiliate. A member
bank purchases from a nonaffiliate a fixed-rate loan to an affiliate.
The loan has an outstanding principal amount of $100 but, due to
movements in the general level of interest rates since the time of the
loan's origination, the member bank is able to purchase the loan for
$90. The member bank initially must value the credit transaction at $90
(and must ensure that the credit transaction complies with the
collateral requirements of § 223.14 at the time of its acquisition of
the loan).
(b) Timing. (1) In general. A member bank
engages in a credit transaction with an affiliate at the time during
the day that:
(i) The member bank becomes legally obligated to make an
extension of credit to, issue a guarantee, acceptance, or letter of
credit on behalf of, or confirm a letter of credit issued by, an
affiliate;
(ii) The member bank enters into a cross-affiliate netting
arrangement; or
(iii) The member bank acquires an extension of credit to, or
guarantee, acceptance, or letter of credit issued on behalf of, an
affiliate.
(2) Credit transactions by a member bank with a
nonaffiliate that becomes an affiliate of the member bank.
(i) In general. A credit transaction with a
nonaffiliate becomes a covered transaction at the time that the
nonaffiliate becomes an affiliate of the member bank. The member bank
must treat the amount of any such credit transaction as part of the
aggregate amount of the member bank's covered transactions for
purposes of determining compliance with the quantitative limits of
§§ 223.11 and 223.12 in connection with any future covered
transactions. Except as described in paragraph (b)(2)(ii) of this
section, the member bank is not required to reduce the amount of its
covered transactions with any affiliate because the nonaffiliate has
become an affiliate. If the nonaffiliate becomes an affiliate less than
one year after the member bank enters into the credit transaction with
the nonaffiliate, the member bank also must ensure that the credit
transaction complies with the collateral requirements of § 223.14
promptly after the nonaffiliate becomes an affiliate.
(ii) Credit transactions by a member bank with a
nonaffiliate in contemplation of the nonaffiliate becoming an affiliate
of the member bank. Notwithstanding the provisions of paragraph
(b)(2)(i) of this section, if a member bank engages in a credit
transaction with a nonaffiliate in contemplation of the nonaffiliate
becoming an affiliate of the member bank, the member bank must ensure
that:
{{12-31-07 p.7798}}
(A) The aggregate amount of the member bank's covered
transactions (including any such credit transaction with the
nonaffiliate) would not exceed the quantitative limits of § 223.11 of
223.12 at the time the nonaffiliate becomes an affiliate; and
(B) The credit transaction complies with the collateral
requirements of § 223.14 at the time the nonaffiliate becomes an
affiliate.
(iii) Example. A member bank with capital stock and
surplus of $1,000 and no outstanding covered transactions makes a $120
unsecured loan to a nonaffiliate. The member bank does not make the
loan in contemplation of the nonaffiliate becoming an affiliate. Nine
months later, the member bank's holding company purchases all the
stock of the nonaffiliate, thereby making the nonaffiliate an affiliate
of the member bank. The member bank is not in violation of the
quantitative limits of § 223.11 or 223.12 at the time of the stock
acquisition. The member bank is, however, prohibited from engaging in
any additional covered transactions with the new affiliate at least
until such time as the value of the loan transaction falls below 10
percent of the member bank's capital stock and surplus. In addition,
the member bank must bring the loan into compliance with the collateral
requirements of § 223.14 promptly after the stock acquisition.
[Codified to 12 C.F.R. §223.21]
§ 223.22 What valuation and timing principles apply to asset
purchases?
(a) Valuation. (1) In general. Except as
provided in paragraph (a)(2) of this section, a purchase of an asset by
a member bank from an affiliate must be valued initially at the total
amount of consideration given (including liabilities assumed) by the
member bank in exchange for the asset. The value of the covered
transaction after the purchase may be reduced to reflect amortization
or depreciation of the asset, to the extent that such reductions are
consistent with GAAP.
(2) Exceptions. (i) Purchase of an extension of
credit to an affiliate. A purchase from an affiliate of an
extension of credit to an affiliate must be valued in accordance with
§ 223.21, unless the note or obligation evidencing the extension of
credit is a security issued by an affiliate (in which case the
transaction must be valued in accordance with § 223.23).
(ii) Purchase of a security issued by an affiliate. A
purchase from an affiliate of a security issued by an affiliate must be
valued in accordance with § 223.23.
(iii) Transfer of a subsidiary. A transfer to a member
bank of securities issued by an affiliate that is treated as a purchase
of assets from an affiliate under § 223.31 must be valued in
accordance with paragraph (b) of § 223.31.
(iv) Purchase of a line of credit. A purchase from an
affiliate of a line of credit, revolving credit facility, or other
similar credit arrangement for a nonaffiliate must be valued initially
at the total amount of consideration given by the member bank in
exchange for the asset plus any additional amount that the member bank
could be required to provide to the borrower under the terms of the
credit arrangement.
(b) Timing. (1) In general. A purchase of an
asset from an affiliate remains a covered transaction for a member bank
for as long as the member bank holds the asset.
(2) Asset purchases by a member bank from a nonaffiliate in
contemplation of the nonaffiliate becoming an affiliate of the member
bank. If a member bank purchases an asset from a nonaffiliate in
contemplation of the nonaffiliate becoming an affiliate of the member
bank, the asset purchase becomes a covered transaction at the time that
the nonaffiliate becomes an affiliate of the member bank. In addition,
the member bank must ensure that the aggregate amount of the member
bank's covered transactions (including any such transaction with the
nonaffiliate) would not exceed the quantitative limits of § 223.11 or
223.12 at the time the nonaffiliate becomes an affiliate.
(c) Examples. The following are examples of how to value
a member bank's purchase of an asset from an affiliate.
(1) Cash purchase of assets. A member bank purchases a
pool of loans from an affiliate for $10 million. The member bank
initially must value the covered transaction at
{{12-31-07 p.7799}}$10 million. Going forward, if
the borrowers repay $6 million of the principal amount of the loans,
the member bank may value the covered transaction at $4 million.
(2) Purchase of assets through an assumption of
liabilities. An affiliate of a member bank contributes real
property with a fair market value of $200,000 to the member bank. The
member bank pays the affiliate no cash for the property, but assumes a
$50,000 mortgage on the property. The member bank has engaged in a
covered transaction with the affiliate and initially must value the
transaction at $50,000. Going forward, if the member bank retains the
real property but pays off the mortgage, the member bank must continue
to value the covered transaction at $50,000. If the member bank,
however, sells the real property, the transaction ceases to be a
covered transaction at the time of the sale (regardless of the status
of the mortgage).
[Codified to 12 C.F.R. §223.22]
§ 223.23 What valuation and timing principles apply to
purchases of and investments in securities issued by an affiliate?
(a) Valuation. (1) In general. Except as
provided in paragraph (b) of § 223.32 with respect to financial
subsidiaries, a member bank's purchase of or investment in a security
issued by an affiliate must be valued at the greater of:
(i) The total amount of consideration given (including
liabilities assumed) by the member bank in exchange for the security,
reduced to reflect amortization of the security to the extent
consistent with GAAP; or
(ii) The carrying value of the security.
(2) Examples. The following are examples of how to
value a member bank's purchase of or investment in securities issued
by an affiliate (other than a financial subsidiary of the member bank).
(i) Purchase of the debt securities of an affiliate.
The parent holding company of a member bank owns 100 percent of
the shares of a mortgage company. The member bank purchases debt
securities issued by the mortgage company for $600. The initial
carrying value of the securities is $600. The member bank initially
must value the investment at $600.
(ii) Purchase of the shares of an affiliate. The
parent holding company of a member bank owns 51 percent of the shares
of a mortgage company. The member bank purchases an additional 30
percent of the shares of the mortgage company from a third party for
$100. The initial carrying value of the shares is $100. The member bank
initially must value the investment at $100. Going forward, if the
member bank's carrying value of the shares declines to $40, the member
bank must continue to value the investment at $100.
(iii) Contribution of the shares of an affiliate. The
parent holding company of a member bank owns 100 percent of the shares
of a mortgage company and contributes 30 percent of the shares to the
member bank. The member bank gives no consideration in exchange for the
shares. If the initial carrying value of the shares is $300, then the
member bank initially must value the investment at $300. Going forward,
if the member bank's carrying value of the shares increases to $500,
the member bank must value the investment at $500.
(b) Timing. (1) In general. A purchase of or
investment in a security issued by an affiliate remains a covered
transaction for a member bank for as long as the member bank holds the
security.
(2) A member bank's purchase of or investment in a
security issued by a nonaffiliate that becomes an affiliate of the
member bank. A member bank's purchase of or investment in a
security issued by a nonaffiliate that becomes an affiliate of the
member bank must be treated according to the same transition rules that
apply to credit transactions described in paragraph (b)(2) of
§ 223.21.
[Codified to 12 C.F.R. §223.23]
{{12-31-07 p.7800}}
§ 223.24 What valuation principles apply to extensions of
credit secured by affiliate securities?
(a) Valuation of extensions of credit secured exclusively by
affiliate securities. An extension of credit by a member bank to a
nonaffiliate secured exclusively by securities issued by an affiliate
of the member bank must be valued at the lesser of:
(1) The total value of the extension of credit; or
(2) The fair market value of the securities issued by an
affiliate that are pledged as collateral, if the member bank verifies
that such securities meet the market quotation standard contained in
paragraph (e) of § 223.42 or the standards set forth in paragraphs
(f)(1) and (5) of § 223.42.
(b) Valuation of extensions of credit secured by affiliate
securities and other collateral. An extension of credit by a
member bank to a nonaffiliate secured in part by securities issued by
an affiliate of the member bank and in part by nonaffiliate collateral
must be valued at the lesser of:
(1) The total value of the extension of credit less the fair
market value of the nonaffiliate collateral; or
(2) The fair market value of the securities issued by an
affiliate that are pledged as collateral, if the member bank verifies
that such securities meet the market quotation standard contained in
paragraph (e) of § 223.42 or the standards set forth in paragraphs
(f)(1) and (5) of § 223.42.
(c) Exclusion of eligible affiliated mutual fund securities.
(1) The exclusion. Eligible affiliated mutual fund
securities are not considered to be securities issued by an affiliate,
and are instead considered to be nonaffiliate collateral, for purposes
of paragraphs (a) and (b) of this section, unless the member bank knows
or has reason to know that the proceeds of the extension of credit will
be used to purchase the eligible affiliated mutual fund securities
collateral or will otherwise be used for the benefit of or transferred
to an affiliate of the member bank.
(2) Definition. "Eligible affiliated mutual fund
securities" with respect to a member bank are securities issued
by an affiliate of the member bank that is an open-end investment
company registered with the Securities and Exchange Commission under
the Investment Company Act of 1940 (15 U.S.C. 80a--1 et
seq.), if:
(i) The securities issued by the investment company:
(A) Meet the market quotation standard contained in paragraph (e)
of § 223.42;
(B) Meet the standards set forth in paragraphs (f)(1) and (5) of
§ 223.42; or
(C) Have closing prices that are made public through a mutual
fund "supermarket" website maintained by an unaffiliated
securities broker-dealer or mutual fund distributor; and
(ii) The member bank and its affiliates do no own or control in
the aggregate more than 5 percent of any class of voting securities or
of the equity capital of the investment company (excluding securities
held by the member bank or an affiliate in good faith in a fiduciary
capacity, unless the member bank or affiliate holds the securities for
the benefit of the member bank or affiliate, or the shareholders,
employees, or subsidiaries of the member bank or affiliate).
(3) Example. A member bank proposes to lend $100 to a
nonaffiliate secured exclusively by eligible affiliated mutual fund
securities. The member bank knows that the nonaffiliate intends to use
all the loan proceeds to purchase the eligible affiliated mutual fund
securities that would serve as collateral for the loan. Under the
attribution rule in § 223.16, the member bank must treat the loan to
the nonaffiliate as a loan to an affiliate, and, because securities
issued by an affiliate are ineligible collateral under § 223.14, the
loan would not be in compliance with § 223.14.
[Codified to 12 C.F.R. §223.24]
{{12-31-07 p.7801}}
Subpart DOther Requirements Under
Section 23A
§ 223.31 How does section 23A apply to a member bank's
acquisition of an affiliate that becomes an operating subsidiary of the
member bank after the acquisition?
(a) Certain acquisitions by a member bank of securities
issued by an affiliate are treated as a purchase of assets from an
affiliate. A member bank's acquisition of a security issued by a
company that was an affiliate of the member bank before the acquisition
is treated as a purchase of assets from an affiliate, if:
(1) As a result of the transaction, the company becomes an
operating subsidiary of the member bank; and
(2) The company has liabilities, or the member bank gives cash or
any other consideration in exchange for the security.
(b) Valuation. (1) Initial valuation. A
transaction described in paragraph (a) of this section must be valued
initially at the greater of:
(i) The sum of:
(A) The total amount of consideration given by the member bank in
exchange for the security; and
(B) The total liabilities of the company whose security has been
acquired by the member bank, as of the time of the acquisition; or
(ii) The total value of all covered transactions (as computed
under this part) acquired by the member bank as a result of the
security acquisition.
(2) Ongoing valuation. The value of a transaction
described paragraph (a) of this section may be reduced after the
initial transfer to reflect:
(i) Amortization or depreciation of the assets of the transferred
company, to the extent that such reductions are consistent with GAAP;
and
(ii) Sales of the assets of the transferred company.
(c) Valuation example. The parent holding company of a
member bank contributes between 25 and 100 percent of the voting shares
of a mortgage company to the member bank. The parent holding company
retains no shares of the mortgage company. The member bank gives no
consideration in exchange for the transferred shares. The mortgage
company has total assets of $300,000 and total liabilities of $100,000.
The mortgage company's assets do not include any loans to an affiliate
of the member bank or any other asset that would represent a separate
covered transaction for the member bank upon consummation of the share
transfer. As a result of the transaction, the mortgage company becomes
an operating subsidiary of the member bank. The transaction is treated
as a purchase of the assets of the mortgage company by the member bank
from an affiliate under paragraph (a) of this section. The member bank
initially must value the transaction at $100,000, the total amount of
the liabilities of the mortgage company. Going forward, if the member
bank pays off the liabilities, the member bank must continue to value
the covered transaction at $100,000. If the member bank, however, sells
$15,000 of the transferred assets of the mortgage company or if $15,000
of the transferred assets amortize, the member bank may value the
covered transaction at $85,000.
(d) Exemption for step transactions. A transaction
described in paragraph (a) of this section is exempt from the
requirements of this regulation (other than the safety and soundness
requirement of § 223.13 and the market terms requirement of
§ 223.51) if:
(1) The member bank acquires the securities issued by the
transferred company within one business day (or such longer period, up
to three months, as may be permitted by the member bank's appropriate
Federal banking agency) after the company becomes an affiliate of the
member bank;
(2) The member bank acquires all the securities of the
transferred company that were transferred in connection with the
transaction that made the company an affiliate of the member bank;
(3) The business and financial condition (including the asset
quality and liabilities) of the transferred company does not materially
change from the time the company becomes an
{{12-31-07 p.7802}}affiliate of the member bank
and the time the member bank acquires the securities issued by the
company; and
(4) At or before the time that the transferred company becomes an
affiliate of the member bank, the member bank notifies its appropriate
Federal banking agency and the Board of the member bank's intent to
acquire the company.
(e) Example of step transaction. A bank holding company
acquires 100 percent of the shares of an unaffiliated leasing company.
At that time, the subsidiary member bank of the holding company
notifies its appropriate Federal banking agency and the Board of its
intent to acquire the leasing company from its holding company. On the
day after consummation of the acquisition, the holding company
transfers all of the shares of the leasing company to the member bank.
No material change in the business or financial condition of the
leasing company occurs between the time of the holding company's
acquisition and the member bank's acquisition. The leasing company has
liabilities. The leasing company becomes an operating subsidiary of the
member bank at the time of the transfer. This transfer by the holding
company to the member bank, although deemed an asset purchase by the
member bank from an affiliate under paragraph (a) of this section,
would qualify for the exemption in paragraph (d) of this section.
[Codified to 12 C.F.R. §223.31]
§ 223.32 What rules apply to financial subsidiaries of a member
bank?
(a) Exemption from the 10 percent limit for covered
transactions between a member bank and a single financial subsidiary.
The 10 percent quantitative limit contained in § 223.11 does not
apply with respect to covered transactions between a member bank and a
financial subsidiary of the member bank. The 20 percent quantitative
limit contained in § 223.12 does apply to such transactions.
(b) Valuation of purchases of or investments in the
securities of a financial subsidiary. (1) General rule.
A member bank's purchase of or investment in a security issued by
a financial subsidiary of the member bank must be valued at the greater
of:
(i) The total amount of consideration given (including
liabilities assumed) by the member bank in exchange for the security,
reduced to reflect amortization of the security to the extent
consistent with GAAP; and
(ii) The carrying value of the security (adjusted so as not to
reflect the member bank's pro rata portion of any earnings retained or
losses incurred by the financial subsidiary after the member bank's
acquisition of the security).
(2) Carrying value of an investment in a consolidated
financial subsidiary. If a financial subsidiary is consolidated
with its parent member bank under GAAP, the carrying value of the
member bank's investment in securities issued by the financial
subsidiary shall be equal to the carrying value of the securities on
parent-only financial statements of the member bank, determined in
accordance with GAAP (adjusted so as not to reflect the member bank's
pro rata portion of any earnings retained or losses incurred by the
financial subsidiary after the member bank's acquisition of the
securities).
(3) Examples of the valuation of purchases of and
investments in the securities of a financial subsidiary. The
following are examples of how a member bank must value its purchase of
or investment in securities issued by a financial subsidiary of the
member bank. Each example involves a securities underwriter that
becomes a financial subsidiary of the member bank after the transaction
described below.
(i) Initial valuation. (A) Direct acquisition by
a member bank. A member bank pays $500 to acquire 100 percent of
the shares of a securities underwriter. The initial carrying value of
the shares on the member bank's parent-only GAAP financial statements
is $500. The member bank initially must value the investment at $500.
(B) Contribution of a financial subsidiary to a member
bank. The parent holding company of a member bank acquires 100
percent of the shares of a securities underwriter in a transaction
valued at $500, and immediately contributes the shares to the member
bank. The member bank gives no consideration in exchange for the
shares. The member
{{12-31-07 p.7803}}bank initially must value the
investment at the carrying value of the shares on the member bank's
parent-only GAAP financial statements. Under GAAP, the member bank's
initial carrying value of the shares would be $500.
(ii) Carrying value not adjusted for earnings and losses of
the financial subsidiary. A member bank and its parent holding
company engage in the transaction described in paragraph (b)(3)(i)(B)
of this section, and the member bank initially values the investment at
$500. In the following year, the securities underwriter earns $25 in
profit, which is added to its retained earnings. The member bank's
carrying value of the shares of the underwriter is not adjusted for
purposes of this part, and the member bank must continue to value the
investment at $500. If, however, the member bank contributes $100 of
additional capital to the securities underwriter, the member bank must
value the aggregate investment at $600.
(c) Treatment of an affiliate's investments in, and
extensions of credit to, a financial subsidiary of a member bank.
(1) Investments. Any purchase of, or investment in, the
securities of a financial subsidiary of a member bank by an affiliate
of the member bank is treated as a purchase of or investment in such
securities by the member bank.
(2) Extensions of credit that are treated as regulatory
capital of the financial subsidiary. Any extension of credit to a
financial subsidiary of a member bank by an affiliate of the member
bank is treated as an extension of credit by the member bank to the
financial subsidiary if the extension of credit is treated as capital
of the financial subsidiary under any Federal or State law, regulation,
or interpretation applicable to the subsidiary.
(3) Other extensions of credit. Any other extension of
credit to a financial subsidiary of a member bank by an affiliate of
the member bank will be treated as an extension of credit by the member
bank to the financial subsidiary, if the Board determines, by
regulation or order, that such treatment is necessary or appropriate to
prevent evasions of the Federal Reserve Act or the Gramm-Leach-Bliley
Act.
[Codified to 12 C.F.R. §223.32]
§ 223.33 What rules apply to derivative transactions?
(a) Market terms requirement. Derivative transactions
between a member bank and its affiliates (other than depository
institutions) are subject to the market terms requirement of
§ 233.51.
(b) Policies and procedures. A member bank must
establish and maintain policies and procedures reasonably designed to
manage the credit exposure arising from its derivative transactions
with affiliates in a safe and sound manner. The policies and procedures
must at a minimum provide for:
(1) Monitoring and controlling the credit exposure arising at any
one time from the member bank's derivative transactions with each
affiliate and all affiliates in the aggregate (through, among other
things, imposing appropriate credit limits, mark-to-market
requirements, and collateral requirements); and
(2) Ensuring that the member bank's derivative transactions with
affiliates comply with the market terms requirement of § 223.51.
(c) Credit derivatives. A credit derivative between a
member bank and a nonaffiliate in which the member bank provides credit
protection to the nonaffiliate with respect to an obligation of an
affiliate of the member bank is a guarantee by a member bank on behalf
of an affiliate for purposes of this regulation. Such derivatives would
include:
(1) An agreement under which the member bank, in exchange for a
fee, agrees to compensate the nonaffiliate for any default of the
underlying obligation of the affiliate; and
(2) An agreement under which the member bank, in exchange for
payments based on the total return of the underlying obligation of the
affiliate, agrees to pay the nonaffiliate a spread over funding costs
plus any depreciation in the value of the underlying obligation of the
affiliate.
[Codified to 12 C.F.R. §223.33]
{{12-31-07 p.7804}}
Subpart EExemptions from the Provisions of
Section 23A
§ 223.41 What covered transactions are exempt from the
quantitative limits and collateral requirements?
The following transactions are not subject to the quantitative
limits of §§ 223.11 and 223.12 or the collateral requirements of
§ 223.14. The transactions are, however, subject to the safety and
soundness requirement of § 223.13 and the prohibition on the purchase
of a low-quality asset of § 223.15.
(a) Parent institution/subsidiary institution transactions.
Transactions with a depository institution if the member bank
controls 80 percent or more of the voting securities of the depository
institution or the depository institution controls 80 percent or more
of the voting securities of the member bank.
(b) Transactions between a member bank and a depository
institution owned by the same holding company. Transactions with a
depository institution if the same company controls 80 percent or more
of the voting securities of the member bank and the depository
institution.
(c) Certain loan purchases from an affiliated depository
institution. Purchasing a loan on a nonrecourse basis from an
affiliated depository institution.
(d) Internal corporate reorganization transactions.
Purchasing assets from an affiliate (including in connection with
a transfer of securities issued by an affiliate to a member bank
described in paragraph (a) of § 223.31), if:
(1) The asset purchase is part of an internal corporate
reorganization of a holding company and involves the transfer of all or
substantially all of the shares or assets of an affiliate or of a
division or department of an affiliate;
(2) The member bank provides its appropriate Federal banking
agency and the Board with written notice of the transaction before
consummation, including a description of the primary business
activities of the affiliate and an indication of the proposed date of
the asset purchase;
(3) The member bank's top-tier holding company commits to its
appropriate Federal banking agency and the Board before consummation
either:
(i) To make quarterly cash contributions to the member bank, for
a two-year period following the member bank's purchase, equal to the
book value plus any write-downs taken by the member bank, of any
transferred assets that have become low-quality assets during the
quarter; or
(ii) To repurchase, on a quarterly basis for a two-year period
following the member bank's purchase, at a price equal to the book
value plus any write-downs taken by the member bank, any transferred
assets that have become low-quality assets during the quarter;
(4) The member bank's top-tier holding company complies with the
commitment made under paragraph (d)(3) of this section;
(5) A majority of the member bank's directors reviews and
approves the transaction before consummation;
(6) The value of the covered transaction (as computed under this
part), when aggregated with the value of any other covered transactions
(as computed under this part) engaged in by the member bank under this
exemption during the preceding 12 calendar months, represents less than
10 percent of the member bank's capital stock and surplus (or such
higher amount, up to 25 percent of the member bank's capital stock and
surplus, as may be permitted by the member bank's appropriate Federal
banking agency after conducting a review of the member bank's
financial condition and the quality of the assets transferred to the
member bank); and
(7) The holding company and all its subsidiary member banks and
other subsidiary depository institutions are well capitalized and well
managed and would remain well capitalized upon consummation of the
transaction.
[Codified to 12 C.F.R. §223.41]
{{12-31-07 p.7805}}
§ 223.42 What covered transactions are exempt from the
quantitative limits, collateral requirements, and low-quality asset
prohibition?
The following transactions are not subject to the quantitative
limits of §§ 223.11 and 223.12, the collateral requirements of
§ 223.14, or the prohibition on the purchase of a low-quality asset
of § 223.15. The transactions are, however, subject to the safety and
soundness requirement of § 223.13.
(a) Making correspondent banking deposits. Making a
deposit in an affiliated depository institution (as defined in section
3 of the Federal Deposit Insurance Act
(12 U.S.C. 1813)) or affiliated
foreign bank that represents an ongoing, working balance maintained in
the ordinary course of correspondent business.
(b) Giving credit for uncollected items. Giving
immediate credit to an affiliate for uncollected items received in the
ordinary course of business.
(c) Transactions secured by cash or U.S. government
securities.
(1) In general. Engaging in a credit transaction with
an affiliate to the extent that the transaction is and remains secured
by:
(i) Obligations of the United States or its agencies;
(ii) Obligations fully guaranteed by the United States or its
agencies as to principal and interest; or
(iii) A segregated, earmarked deposit account with the member
bank that is for the sole purpose of securing credit transactions
between the member bank and its affiliates and is identified as such.
(2) Example. A member bank makes a $100 non-amortizing
term loan to an affiliate secured by U.S. Treasury securities with a
market value of $50 and real estate with a market value of $75. The
value of the covered transaction is $50. If the market value of the
U.S. Treasury securities falls to $45 during the life of the loan, the
value of the covered transaction would increase to $55.
(d) Purchasing securities of a servicing affiliate.
Purchasing a security issued by any company engaged solely in providing
services described in section 4(c)(1) of the Bank Holding Company Act
(12 U.S.C. 1843(c)(1)).
(e) Purchasing certain liquid assets. Purchasing an
asset having a readily identifiable and publicly available market
quotation and purchased at or below the asset's current market
quotation. An asset has a readily identifiable and publicly available
market quotation if the asset's price is quoted routinely in a widely
disseminated publication that is readily available to the general
public.
(f) Purchasing certain marketable securities. Purchasing
a security from a securities affiliate, if:
(1) The security has a "ready market," as defined in 17 CFR
240.15c3--1(c)(11)(i);
(2) The security is eligible for a State member bank to purchase
directly, subject to the same terms and conditions that govern the
investment activities of a State member bank, and the member bank
records the transaction as a purchase of a security for purposes of its
Call Report, consistent with the requirements for a State member bank;
(3) The security is not a low-quality asset;
(4) The member bank does not purchase the security during an
underwriting, or within 30 days of an underwriting, if an affiliate is
an underwriter of the security, unless the security is purchased as
part of an issue of obligations of, or obligations fully guaranteed as
to principal and interest by, the United States or its agencies;
(5) The security's price is quoted routinely on an unaffiliated
electronic service that provides indicative data from real-time
financial networks, provided that:
(i) The price paid by the member bank is at or below the current
market quotation for the security; and
(ii) The size of the transaction executed by the member bank does
not cast material doubt on the appropriateness of relying on the
current market quotation for the security; and
{{12-31-07 p.7806}}
(6) The member bank maintains, for a period of two years, records
and supporting information that are sufficient to enable the
appropriate Federal banking agency to ensure the member bank's
compliance with the terms of this exemption.
(g) Purchasing municipal securities. Purchasing a
municipal security from a securities affiliate if:
(1) The security is rated by a nationally recognized statistical
rating organization or is part of an issue of securities that does not
exceed $25 million;
(2) The security is eligible for purchase by a State member bank,
subject to the same terms and conditions that govern the investment
activities of a State member bank, and the member bank records the
transaction as a purchase of a security for purposes of its Call
Report, consistent with the requirements for a State member bank; and
(3)(i) The security's price is quoted routinely on an
unaffiliated electronic service that provides indicative data from
real-time financial networks, provided that:
(A) The price paid by the member bank is at or below the current
market quotation for the security; and
(B) The size of the transaction executed by the member bank does
not cast material doubt on the appropriateness of relying on the
current market quotation for the security; or
(ii) The price paid for the security can be verified by reference
to two or more actual, current price quotes from unaffiliated
broker-dealers on the exact security to be purchased or a security
comparable to the security to be purchased, where:
(A) The price quotes obtained from the unaffiliated
broker-dealers are based on a transaction similar in size to the
transaction that is actually executed; and
(B) The price paid is no higher than the average of the price
quotes; or
(iii) the price paid for the security can be verified by
reference to the written summary provided by the syndicate manager to
syndicate members that discloses the aggregate par values and prices of
all bonds sold from the syndicate account, if the member bank:
(A) Purchases the municipal security during the underwriting
period at a price that is at or below that indicated in the summary;
and
(B) Obtains a copy of the summary from its securities affiliate
and retains the summary for three years.
(h) Purchasing an extension of credit subject to a repurchase
agreement. Purchasing from an affiliate an extension of credit
that was originated by the member bank and sold to the affiliate
subject to a repurchase agreement or with recourse.
(i) Asset purchases by a newly formed member bank. The
purchase of an asset from an affiliate by a newly formed member bank,
if the appropriate Federal banking agency for the member bank has
approved the asset purchase in writing in connection with its review of
the formation of the member bank.
(j) Transactions approved under the Bank Merger Act. Any
merger or consolidation between a member bank and an affiliated
depository institution or U.S. branch or agency of a foreign bank, or
any acquisition of assets or assumption of deposit liabilities by a
member bank from an affiliated depository institution or U.S. branch or
agency of a foreign bank, if the transaction has been approved by the
responsible Federal banking agency pursuant to the Bank Merger Act
(12 U.S.C. 1828(c)).
(k) Purchasing an extension of credit from an affiliate.
Purchasing from an affiliate, on a nonrecourse basis, an extension
of credit, if:
(1) The extension of credit was originated by the affiliate;
(2) The member bank makes an independent evaluation of the
creditworthiness of the borrower before the affiliate makes or commits
to make the extension of credit;
(3) The member bank commits to purchase the extension of credit
before the affiliate makes or commits to make the extension of credit;
(4) The member bank does not make a blanket advance commitment to
purchase extensions of credit from the affiliate; and
{{10-31-08 p.7807}}
(5) The dollar amount of the extension of credit, when aggregated
with the dollar amount of all other extensions of credit purchased from
the affiliate during the preceding 12 calendar months by the member
bank and its depository institution affiliates, does not represent more
than 50 percent (or such lower percent as is imposed by the member
bank's appropriate Federal banking agency) of the dollar amount of
extensions of credit originated by the affiliate during the preceding
12 calendar months.
(l) Intraday extensions of credit.
(1) In general. An intraday extension of credit to an
affiliate, if the member bank:
(i) Has established and maintains policies and procedures
reasonably designed to manage the credit exposure arising from the
member bank's intraday extensions of credit to affiliates in a safe
and sound manner, including policies and procedures for:
(A) Monitoring and controlling the credit exposure arising at any
one time from the member bank's intraday extensions of credit to each
affiliate and all affiliates in the aggregate; and
(B) Ensuring that any intraday extension of credit by the member
bank to an affiliate complies with the market terms requirement of
§ 223.51;
(ii) Has no reason to believe that the affiliate will have
difficulty repaying the extension of credit in accordance with its
terms; and
(iii) Ceases to treat any such extension of credit (regardless of
jurisdiction) as an intraday extension of credit at the end of the
member bank's business day in the United States.
(2) Definition. Intraday extension of credit by a
member bank to an affiliate means an extension of credit by a member
bank to an affiliate that the member bank expects to be repaid, sold,
or terminated, or to qualify for a complete exemption under this
regulation, by the end of its business day in the United States.
(m) Riskless principal transactions. Purchasing a
security from a securities affiliate of the member bank if:
(1) The member bank or the securities affiliate is acting
exclusively as a riskless principal in the transaction; and
(2) The security purchased is not issued, underwritten, or sold
as principal (other than as riskless principal) by any affiliate of the
member bank.
(n) Securities financing transactions. (1) From
September 15, 2008, until January 30, 2009 (unless further extended by
the Board), securities financing transactions with an affiliate, if:
(i) The security or other asset financed by the member bank in
the transaction is of a type that the affiliate financed in the U.S.
tri-party repurchase agreement market at any time during the week of
September 8--12, 2008;
(ii) The transaction is marked to market daily and subject to
daily margin-maintenance requirements, and the member bank is at least
as over-collateralized in the transaction as the affiliate's clearing
bank was over-collateralized in comparable transactions with the
affiliate in the U.S. tri-party repurchase agreement market on
September 12, 2008;
(iii) The aggregate risk profile of the securities financing
transactions under this exemption is no greater than the aggregate risk
profile of the securities financing transactions of the affiliate in
the U.S. tri-party repurchase agreement market on September 12, 2008;
(iv) The member bank's top-tier holding company guarantees the
obligations of the affiliate under the securities financing
transactions (or provides other security to the bank that is acceptable
to the Board); and
(v) The member bank has not been specifically informed by the
Board, after consultation with the member bank's appropriate Federal
banking agency, that the member bank may not use this exemption.
(2) For purposes of this exemption:
(i) Securities financing transaction means:
(A) A purchase by a member bank from an affiliate of a security
or other asset, subject to an agreement by the affiliate to repurchase
the asset from the member bank;
(B) A borrowing of a security by a member bank from an affiliate
on a collateralized basis; or
(C) A secured extension of credit by a member bank to an
affiliate.
{{10-31-08 p.7808}}
(ii) U.S. tri-party repurchase agreement market means
the U.S. market for securities financing transactions in which the
counterparties use custodial arrangements provided by JPMorgan Chase
Bank or Bank of New York or another financial institution approved by
the Board.
(o) Purchase of certain asset-backed commercial paper.
Purchases of asset-backed commercial paper from an affiliated
SEC-registered open-end investment company that holds itself out as a
money market mutual fund under SEC Rule 2a--7 (17 CFR 270.2a--7), if
the member bank:
(1) Purchases the asset-backed commercial paper between September
19, 2008, and January 30, 2009 (unless extended by the Board), pursuant
to the asset-backed commercial paper lending facility established by
the Board on September 19, 2008; and
(2) Has not been specifically informed by the Board, after
consultation with the member bank's appropriate Federal banking
agency, that the member bank may not use this exemption.
[Codified to 12 C.F.R. §223.42]
[Section 223.42 amended at 73 Fed. Reg. 54308, September 19, 2008,
effective September 14, 2008; 73 Fed. Reg. 55709, September 26, 2008,
effective September 19, 2008]
§ 223.43 What are the standards under which the Board may grant
additional exemptions from the requirements of section 23A?
(a) The standards. The Board may, at its discretion, by
regulation or order, exempt transactions or relationships from the
requirements of section 23A and subparts B, C, and D of this part if it
finds such exemptions to be in the public interest and consistent with
the purposes of section 23A.
(b) Procedure. A member bank may request an exemption
from the requirements of section 23A and subparts B, C, and D of this
part by submitting a written request to the General Counsel of the
Board. Such a request must:
(1) Describe in detail the transaction or relationship for which
the member bank seeks exemption;
(2) Explain why the Board should exempt the transaction or
relationship; and
(3) Explain how the exemption would be in the public interest and
consistent with the purposes of section 23A.
[Codified to 12 C.F.R. §223.43]
Subpart FGeneral Provisions of
Section 23B
§ 223.51 What is the market terms requirement of section 23B?
A member bank may not engage in a transaction described in
§ 223.52 unless the transaction is:
(a) On terms and under circumstances, including credit standards,
that are substantially the same, or at least as favorable to the member
bank, as those prevailing at the time for comparable transactions with
or involving nonaffiliates; or
(b) 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, nonaffiliates.
[Codified to 12 C.F.R. §223.51]
§ 223.52 What transactions with affiliates or others must
comply with section 23B's market terms requirement?
(a) The market terms requirement of § 223.51 applies to the
following transactions:
(1) Any covered transaction with an affiliate, unless the
transaction is exempt under paragraphs (a) through (c) of § 223.41 or
paragraphs (a) through (e) or (h) through (j) of § 223.42;
(2) The sale of a security or other asset to an affiliate,
including an asset subject to an agreement to repurchase;
(3) The payment of money or the furnishing of a service to an
affiliate under contract, lease, or otherwise;
{{10-31-08 p.7809}}
(4) Any transaction in which an affiliate acts as an agent or
broker or receives a fee for its services to the member bank or to any
other person; and
(5) Any transaction or series of transactions with a
nonaffiliate, if an affiliate:
(i) Has a financial interest in the nonaffiliate; or
(ii) Is a participant in the transaction or series of
transactions.
(b) For the purpose of this section, any transaction by a member
bank with any person will be deemed to be a transaction with an
affiliate of the member bank if any of the proceeds of the transaction
are used for the benefit of, or transferred to, the affiliate.
[Codified to 12 C.F.R. §223.52]
§ 223.53 What asset purchases are prohibited by section 23B?
(a) Fiduciary purchases of assets from an affiliate. A
member bank may not purchase as fiduciary any security or other asset
from any affiliate unless the purchase is permitted:
(1) Under the instrument creating the fiduciary relationship;
(2) By court order; or
(3) By law of the jurisdiction governing the fiduciary
relationship.
(b) Purchase of a security underwritten by an affiliate.
(1) A member bank, whether acting as principal or fiduciary, may
not knowingly purchase or otherwise acquire, during the existence of
any underwriting or selling syndicate, any security if a principal
underwriter of that security is an affiliate of the member bank.
(2) Paragraph (b)(1) of this section does not apply if the
purchase or acquisition of the security has been approved, before the
security is initially offered for sale to the public, by a majority of
the directors of the member bank based on a determination that the
purchase is a sound investment for the member bank, or for the person
on whose behalf the member bank is acting as fiduciary, as the case may
be, irrespective of the fact that an affiliate of the member bank is a
principal underwriter of the security.
(3) The approval requirement of paragraph (b)(2) of this section
may be met if:
(i) A majority of the directors of the member bank approves
standards for the member bank's acquisitions of securities described
in paragraph (b)(1) of this section, based on the determination set
forth in paragraph (b)(2) of this section;
(ii) Each acquisition described in paragraph (b)(1) of this
section meets the standards; and
(iii) A majority of the directors of the member bank periodically
reviews acquisitions described in paragraph (b)(1) of this section to
ensure that they meet the standards and periodically reviews the
standards to ensure that they continue to meet the criterion set forth
in paragraph (b)(2) of this section.
(4) A U.S. branch, agency, or commercial lending company of a
foreign bank may comply with paragraphs (b)(2) and (b)(3) of this
section by obtaining the approvals and reviews required by paragraphs
(b)(2) and (b)(3) from either:
(i) A majority of the directors of the foreign bank; or
(ii) A majority of the senior executive officers of the foreign
bank.
(c) Special definitions. For purposes of this section:
(1) "Principal underwriter" means any
underwriter who, in connection with a primary distribution of
securities:
(i) Is in privity of contract with the issuer or an affiliated
person of the issuer;
(ii) Acting alone or in concert with one or more other persons,
initiates or directs the formation of an underwriting syndicate; or
(iii) Is allowed a rate of gross commission, spread, or other
profit greater than the rate allowed another underwriter participating
in the distribution.
(2) "Security" has the same meaning as in
section 3(a)(10) of the Securities Exchange Act of 1934
(15 U.S.C. 78c(a)(10)).
[Codified to 12 C.F.R. §223.53]
§ 223.54 What advertisements and statements are prohibited by
section 23B?
(a) In general. A member bank and its affiliates may not
publish any advertisement or enter into any agreement stating or
suggesting that the member bank will in any way be responsible for the
obligations of its affiliates.
{{10-31-08 p.7810}}
(b) Guarantees, acceptances, letters of credit, and
cross-affiliate netting arrangements subject to section 23A.
Paragraph (a) of this section does not prohibit a member bank
from:
(1) Issuing a guarantee, acceptance, or letter of credit on
behalf of an affiliate, confirming a letter of credit issued by an
affiliate, or entering into a cross-affiliate netting arrangement, to
the extent such transaction satisfies the quantitative limits of
§§ 223.11 and 223.12 and the collateral requirements of § 223.14,
and is otherwise permitted under this regulation; or
(2) Making reference to such a guarantee, acceptance, letter of
credit, or cross-affiliate netting arrangement if otherwise required by
law.
[Codified to 12 C.F.R. §223.54]
§ 223.55 What are the standards under which the Board may grant
exemptions from the requirements of section 23B?
The Board may prescribe regulations to exempt transactions or
relationships from the requirements of section 23B and subpart F of
this part if it finds such exemptions to be in the public interest and
consistent with the purposes of section 23B.
§ 223.56 What transactions are exempt from the market-terms
requirement of section 23B?
The following transactions are exempt from the market-terms
requirement of § 223.51.
(a) Purchase of certain asset-backed commercial paper.
Purchases of asset-backed commercial paper from an affiliated
SEC-registered open-end investment company that holds itself out as a
money market mutual fund under SEC Rule 2a--7 (17 CFR 270.2a--7), if
the member bank:
(1) Purchases the asset-backed commercial paper between September
19, 2008, and January 30, 2009 (unless extended by the Board), pursuant
to the asset-backed commercial paper lending facility established by
the Board on September 19, 2008; and
(2) Has not been specifically informed by the Board, after
consultation with the member bank's appropriate Federal banking
agency, that the member bank may not use this exemption.
(b) [Reserved]
[Codified at 12 C.F.R. § 223.56]
[Section 223.56 added at 73 Fed. Reg. 55709, September 26, 2008,
effective September 19, 2008]
Subpart GApplication of Sections 23A and 23B to U.S. Branches
and Agencies of Foreign Banks
§ 223.61 How do sections 23A and 23B apply to U.S. branches and
agencies of foreign banks?
(a) Applicability of sections 23A and 23B to foreign banks
engaged in underwriting insurance, underwriting or dealing in
securities, merchant banking, or insurance company investment in the
United States. Except as provided in this subpart, sections 23A
and 23B of the Federal Reserve Act and the provisions of this
regulation apply to each U.S. branch, agency, or commercial lending
company of a foreign bank in the same manner and to the same extent as
if the branch, agency, or commercial lending company were a member
bank.
(b) Affiliate defined. For purposes of this subpart, any
company that would be an affiliate of a U.S. branch, agency, or
commercial lending company of a foreign bank if such branch, agency, or
commercial lending company were a member bank is an affiliate of the
branch, agency, or commercial lending company if the company also is:
(1) Directly engaged in the United States in any of the following
activities:
(i) Insurance underwriting pursuant to section 4(k)(4)(B) of the
Bank Holding Company Act (12 U.S.C.
1843(k)(4)(B));
(ii) Securities underwriting, dealing, or market making pursuant
to section 4(k)(4)(E) of the Bank Holding Company Act (12 U.S.C.
1843(k)(4)(E));
(iii) Merchant banking activities pursuant to section 4(k)(4)(H)
of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H)) (but only to
the extent that the proceeds of the transaction are used for the
purpose of funding the affiliate's merchant banking
activities);
{{10-31-08 p.7811}}
(iv) Insurance company investment activities pursuant to section
4(k)(4)(I) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(I));
or
(v) Any other activity designated by the Board;
(2) A portfolio company (as defined in the merchant banking
subpart of Regulation Y (12 CFR
225.177(c))) controlled by the foreign bank or an affiliate of
the foreign bank or a company that would be an affiliate of the branch,
agency, or commercial lending company of the foreign bank under
paragraph (a)(9) of § 223.2 if such branch, agency, or commercial
lending company were a member bank; or
(3) A subsidiary of an affiliate described in paragraph (b)(1) or
(2) of this section.
(c) Capital stock and surplus. For purposes of this
subpart, the "capital stock and surplus" of a U.S.
branch, agency, or commercial lending company of a foreign bank will be
determined by reference to the capital of the foreign bank as
calculated under its home country capital standards.
[Codified to 12 C.F.R. §223.61]
Subpart HMiscellaneous Interpretations
§ 223.71 How do sections 23A and 23B apply to transactions in
which a member bank purchases from one affiliate an asset relating to
another affiliate?
(a) In general. In some situations in which a member
bank purchases an asset from an affiliate, the asset purchase qualifies
for an exemption under this regulation, but the member bank's
resulting ownership of the purchased asset also represents a covered
transaction (which may or may not qualify for an exemption under this
part). In these situations, the transaction engaged in by the member
bank would qualify as two different types of covered transaction.
Although an asset purchase exemption may suffice to exempt the member
bank's asset purchase from the first affiliate, the asset purchase
exemption does not exempt the member bank's resulting covered
transaction with the second affiliate. The exemptions subject to this
interpretation include §§ 223.31(e), 223.41(a) through (d), and
223.42(e), (f), (i), (j), (k), and (m).
(b) Examples. (1) The (d)(6) exemption. A
member bank purchases from Affiliate A securities issued by Affiliate B
in a purchase that qualifies for the (d)(6) exemption in section 23A.
The member bank's asset purchase from Affiliate A would be an exempt
covered transaction under § 223.42(e); but the member bank also would
have acquired an investment in securities issued by Affiliate B, which
would be a covered transaction between the member bank and Affiliate B
under § 223.3(h)(2) that does not qualify for the (d)(6) exemption.
The (d)(6) exemption, by its terms, only exempts asset purchases by a
member bank from an affiliate; hence, the (d)(6) exemption cannot
exempt a member bank's investment in securities issued by an affiliate
(even if the securities would qualify for the (d)(6) exemption).
(2) The sister-bank exemption. A member bank purchases
from Sister-Bank Affiliate A loan to Affiliate B in a purchase that
qualifies for the sister-bank exemption in section 23A. The member
bank's asset purchase from Sister-Bank Affiliate A would be an exempt
covered transaction under § 223.41(b); but the member bank also would
have acquired an extension of credit to Affiliate B, which would be a
covered transaction between the member bank and Affiliate B under
§ 223.3(h)(1) that does not qualify for the sister-bank exemption.
The sister-bank exemption, by its terms, only exempts transactions by a
member bank with a sister-bank affiliate; hence, the sister-bank
exemption cannot exempt a member bank's extension of credit to an
affiliate that is not a sister bank (even if the extension of credit
was purchased from a sister bank).
[Codified to 12 C.F.R. §223.71]
[The page following this is 7841.]
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