Related Organizations

Transactions with Affiliates

Sections 23A and 23B of the Federal Reserve Act (12 USC 371c and 371c-1), and their implementing regulation, Regulation W (12 CFR 223), restrict a bank’s transactions with its affiliates in order to safeguard the interests of banks and prevent abuses by banks’ affiliates.^[10]

Sections 23A and Regulation W define "affiliate" to include:

Any company that controls the bank, and any other company that is controlled by the company that controls the bank. ^[11]
An insured depository institution subsidiary of the bank.
Any company that is controlled directly or indirectly by a trust or otherwise, by or for the benefit of shareholders who beneficially or otherwise control, directly or indirectly, by trust or otherwise, the bank or any company that controls the bank.
Any company a majority of whose directors, trustees, or general partners constitute a majority of the persons holding these offices with the bank or any company that controls the bank.
Any company, including a real estate investment trust, which is sponsored and advised on a contractual basis by the bank or any subsidiary or affiliate of the bank.
Any investment company for which a bank or any subsidiary or affiliate thereof serves as an investment adviser.
Any other investment fund for which the bank or any subsidiary or affiliate serves as an investment adviser, if the bank and its subsidiaries and affiliates together own or control more than 5 percent of any class of voting securities or of the equity capital of the fund.
A financial subsidiary of the bank.^[12]
Any company in which the bank’s holding company owns or controls, directly, indirectly, or acting through one or more other persons, 15 percent or more of the equity capital pursuant to the merchant banking or insurance investment authority of the GLBA, subject to certain exceptions.
Any partnership for which the bank or any subsidiary or affiliate of the bank serves as a general partner or for which the bank or any subsidiary or affiliate of the bank causes any director, official, or employee of the bank or its subsidiary or affiliate to serve as a general partner.
Any company that the FRB (by regulation or order) or OCC (by order) deems to be an "affiliate."

Under section 23B, the term "affiliate" has the same meaning as it does in section 23A, except that it excludes insured depository institutions.

Transactions between a bank and the following companies are exempt from the restrictions on transactions with affiliates:

An uninsured depository institution subsidiary of the bank.^[13]
Most subsidiaries of the bank that are not insured depository institutions. Subsidiaries that are treated as affiliates include financial subsidiaries and subsidiaries (including uninsured depository institutions) that are also controlled by one or more affiliates of the bank that are not insured depository institutions. (In addition, as noted above, the OCC and the FRB can determine that an otherwise exempt subsidiary should be treated as an affiliate).
Any company engaged solely in holding bank premises.
Any company engaged solely in conducting a safe deposit business.
Any company engaged solely in holding obligations of the United States, its agencies, or any obligations fully guaranteed by the United States or its agencies.
Subject to certain limitations and conditions, any company acquired in collecting debt previously contracted.

From a practical standpoint, examples of the most prevalent types of affiliates for purposes of applying the affiliate transaction rules are the bank’s parent company, nonbank subsidiaries of the bank’s holding company, and entities that are controlled by a person who is also a controlling owner of the bank, including chain banks.

10.

Users of this booklet should not rely on this synopsis as a complete discussion of Regulation W, and are urged to closely review the regulation for a full understanding of its requirements and restrictions.

11.

Generally, "control" for purposes of sections 23A and 23B means the power to vote 25 percent or more of any class of voting securities or to control in any manner the election of directors or trustees of the company. This control threshold is lower than the one in the definition of control in section 221a. Certain other relationships may constitute control, as well.

12.

However, organizations that are considered financial subsidiaries solely because they engage in the sale of insurance as agent or broker in a manner that is not permitted for national banks are not considered to be "financial subsidiaries" for purposes of Regulation W.

13.

When the subsidiary bank is uninsured, it is not treated as an affiliate of the parent bank for purposes of either section 23A or section 23B, but instead is treated as an exempt operating subsidiary from the perspective of the parent bank. Note, however, that from the perspective of the uninsured subsidiary bank, its parent bank is treated as an affiliate, and thus the restrictions of sections 23A and 23B apply to transactions with the parent bank, unless an exemption, such as the sister-bank exemption, is available.

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