Regulation W became effective April 1, 2003. Sections 23A and 23B and Regulation W limit the risks to a bank from transactions between the bank and its affiliates. Sections 23A and 23B apply specifically to member banks; however, Section 18(j) of the Federal Deposit Insurance Act extends the provisions of Sections 23A and 23B to nonmember insured banks. Management is urged to become familiar with the provisions and collateral restrictions of this statute. Certain intercompany transactions may occur which can be construed as unsecured lending by the bank subsidiary to an affiliate and can be cited as a violation during a commercial examination of the bank subsidiary. The following types of transactions are not permitted:
- Parent company’s overdrawn checking account with bank subsidiary
- Payment of organization costs by bank subsidiary
- Overpayment of income taxes to the parent company
- Any payments by the bank subsidiary which represent expenses of the parent company (e.g., franchise taxes)
A bank and its subsidiaries may engage in transactions covered by Section 23B of the Federal Reserve Act only on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to the bank or its subsidiaries, as in transactions with non-affiliates. A bank or its subsidiary cannot purchase as fiduciary any securities or other assets from any affiliate unless the purchase is permitted:
- under the instrument creating the fiduciary relationship
- by court order
- by law of jurisdiction
A bank or its subsidiaries cannot knowingly purchase or acquire any security during existence of an underwriting or selling syndicate, if an affiliate of the bank is a principal underwriter, unless the purchase has been approved before the sale to the public by a majority of outside directors.
It may be a violation of Sections 23A and 23B for a profitable bank subsidiary to transfer an earning asset to a bank holding company resulting in an adverse effect on the bank. Transfer of low-quality loans or other assets from an affiliate to a bank subsidiary is prohibited.
A policy designed to address appropriate intercompany and affiliate transactions should include the following:
- Criteria for identifying the existence of affiliates
- Types and volume of approved transactions
- Collateral and margin requirements
- Supporting documentation requirements
- Organizational approvals
- Methodology for determining and charging fees for services
- Factors for determining when price quotations from third parties are required
- Factors for determining when appraisals or fairness opinions must be obtained
- Audit/Compliance review frequency