Presenting a live 90-minute webinar with interactive Q&A Bank Affiliate Transactions: Navigating Sections 23A and 23B of the Federal Reserve Act Complying With Regulation W's Complex Restrictions on Business Dealings With Affiliate Institutions WEDNESDAY, MARCH 18, 2015 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Keith R. Fisher , Of Counsel, Ballard Spahr , Washington, D.C. Scot J. Seabaugh, Shareholder, Polsinelli , St. Louis The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Regulation of Bank- Affiliate Transactions Sections 23A and 23B of the Federal Reserve Act And the Federal Reserve’s Regulation W Keith R. Fisher Ballard Spahr LLP, Washington, D.C. Office fisherk@ballardspahr.com 202.661.2284
Why Regulate Affiliate Transactions? • Protect federally insured depository institutions from misuse of their resources in transactions with their affiliates • Curtail the ability of commercial banking organizations to transfer to nonbank within the holding company system the subsidy arising from banks’ access to the Federal safety net - Insured deposits - Payment system - Discount window 5
Statutory Methodology • Section 23A of the Federal Reserve Act (“FRA”), 12 U.S.C. § 371c - Imposes quantitative (and some qualitative) restrictions on transactions with affiliates - Enacted as part of the Banking Act of 1933, along with • the creation of federal deposit insurance and the FDIC • the Glass-Steagall Act separating commercial from investment banking • FRA § 23B, 12 U.S.C. § 371c-1 - Imposes qualitative restrictions on affiliate transactions (market terms) - Enacted as part of the Competitive Equality Banking Act of 1987 6
Interpretive & Exemptive Authority • Initially ( i.e., after enactment of FRA §§ 23A (1933) and 23B (1987), the Board of Governors of the Federal System (the “Board”) exercised interpretive & exemptive authority Pre- Internet: only for the cognoscenti (FRRS and “secret law”) - • After Gramm-Leach-Bliley (1999), the Board decided to codify its supplementary definitions and some of its interpretations of 23A and 23B into Reg. W, 12 C.F.R. pt. 223.1 (promulgated October 2002, effective April 2003) - Board still provided interpretation by letter and commitments • The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) were granted exemptive authority (comparable to the Board’s) by Dodd-Frank § 608 (effective July 21, 2012) 7
Key Concepts • Member Bank Broadened to nonmember banks, 12 U.S.C. § 1828(j) (1966), - thrifts 12 U.S.C. § 1468(a) (1989), and to certain transactions involving U.S. branches and agencies of foreign banks. • Affiliate – broadest definition in banking law • Covered Transactions - Credit and credit support - Asset purchases • Collateral Requirements – varies with nature of collateral • Attribution • Default Limitations - Low quality assets - Safety and soundness 8
Suggested Analytical Approach Whenever a bank contemplates a transaction with another entity ( not a transaction with a natural person), the bank needs to ask: Is the entity an “affiliate”? 1. Is the matter in question a “covered transaction” under § 2. 23A or a “listed transaction” under § 23B? 3. If so, is the transaction exempt (or do we have an argument for seeking an exemption)? 4. If not, is it (A) in compliance with the applicable quantitative restrictions and collateral requirements and (B) on substantially similar terms as those available to third parties? 9
Section 23A Definition of “Affiliate” Controlling, controlled by, or under common control 10
Not a common law but a statutory concept • Affiliation is a statutorily defined index of relatedness that subjects one or both related entities to a particular legal treatment. • There is, however, no single, “one size fits all” definition of that index of relatedness that applies to all statutory schemes. Typically, each different regulatory regime is predicated upon an explicit statutory definition of what the legislature means by “affiliate.” - For general discussion of the concept, and detailed analysis of the different yet contemporaneous Glass-Steagall and Section 23A definitions of “affiliate,” see Keith R. Fisher, Orphan of Invention: Why the Gramm-Leach-Bliley Act Was Unnecessary, 80 O REGON L. R EV . 1301 (2001). 11
Affiliation Bank Holding Company Nonbank Nonbank Bank 1 Bank 2 2nd tier sub Op Sub Financial Sub 3 rd tier sub 12
Examples of 23A Affiliates • Parent BHC • Companies controlled by BHC or under common control - N.B. IDIs are treated as affiliates for some purposes • Companies with interlocking directorates • Financial Subsidiaries • Portfolio Companies (merchant banking authority) ≥15% equity capital, but subject to exceptions - • Partnerships • Subsidiaries of affiliates • Sponsored/advised entities (including investment company for which bank or affiliate acts as investment adviser) • Other companies as prescribed by the Fed 13
Controlled by/under common control • ≥ 25% voting securities (including convertible securities) • General partner of partnership • Manager of LLC • Ability to select a majority of directors • Ability to exercise “controlling influence over management or policies” (after notice and opportunity for a hearing) • Lower thresholds through management interlocks, agreements, restrictions on transfer, voting agreements, and other methods of acting in concert 14
Entities Not Considered Affiliates • Subsidiaries of the bank, except for -- - Financial subsidiaries - Companies controlled directly by an affiliate or a s/h or group of s/hs that control the bank - Depository institutions (except for 23B purposes) - ESOPs, trusts, or similar arrangements that benefit s/hs, partners, members or employees of the bank or its affiliates • “Sister Bank” Exemption • Safe Deposit Companies • Companies engaged solely in holding obligations of, or guaranteed as to principal and interest by, the U.S. Government or its agencies • Bank premises companies • DPC subsidiaries 15
Bank Affiliate Transactions: Scot J. Seabaugh 314.552.6845 Navigating Sections 23A and 23B of sseabaugh@polsinelli.com the Federal Reserve Act March 16, 2015 Polsinelli PC. In California, Polsinelli LLP
Analysis of the Transaction To begin the analysis of a transaction that may be subject to Sections 23A and 23B of the FRA, there are two initial questions to ask: Is the transaction between the bank and an affiliate of the bank? Is the transaction between the bank and its affiliate a covered transaction? If the transaction does not involve an affiliate or a covered transaction as provided in the FRA, then Section 23A does not apply. 17 real challenges. real answers. sm
Analysis of the Transaction – Covered Transaction The definition of covered transaction is found in Section 23A(b)(7) of the FRA (12 U.S.C. §371c). The definition of covered transaction in Reg W (12 C.F.R. §223.3(h)) reflecting the DFA amendments have not yet been enacted. The seven categories of what constitutes a “covered transaction” with an affiliate by a bank are: 18 real challenges. real answers. sm
Analysis of the Transaction - Covered Transaction 1. a loan or extension of credit to the affiliate, including a purchase of assets subject to an agreement to repurchase; 2. a purchase of or an investment in securities issued by the affiliate; 3. a purchase of assets from the affiliate, except such purchase of real or personal property as may be specifically exempted by the Board by order or regulation; 19 real challenges. real answers. sm
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