PART 223—TRANSACTIONS BETWEEN MEMBER BANKS AND THEIR AFFILIATES (REGULATION W) Authority: 12 U.S.C. 371c(b)(1)(E), (b)(2)(A), and (f), 371c-1(e), 1828(j), 1468(a), and section 312(b)(2)(A) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5412). Source: 67 FR 76604, Dec. 12, 2002, unless otherwise noted. Subpart A—Introduction and Definitions § 223.1 Authority, purpose, and scope. (a) Authority. (b) Purpose. (c) Scope. [67 FR 76604, Dec. 12, 2002, as amended at 76 FR 56531, Sept. 13, 2011] § 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. (2) Companies under common control by a parent company. (3) Companies under other common control. (4) Companies with interlocking directorates. (5) Sponsored and advised companies. (6) Investment companies. (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. (8) Financial subsidiaries. (9) Companies held under merchant banking or insurance company investment authority In general. (ii) General exemption. (iii) Specific exemptions. (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. (v) Definition. holding company (10) Partnerships associated with the member bank or an affiliate. (11) Subsidiaries of affiliates. (12) Other companies. (b) “ Affiliate not (1) Subsidiaries. (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. (3) Safe deposit. (4) Government securities. (5) Companies held DPC. (c) For purposes of subpart F (implementing section 23B), “affiliate” with respect to a member bank also does not § 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 (b) Appropriate Federal banking agency (c) “ Bank holding company (d) Capital stock and surplus (1) A member bank's tier 1 and tier 2 capital under the capital rule 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 or adjusted allowance for credit losses, as applicable, not included in its tier 2 capital under the capital rule 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. (4) Notwithstanding paragraphs (d)(1) through (3) of this section, for a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), capital stock and surplus equals tier 1 capital (as defined in § 217.12 of this chapter and calculated in accordance with § 217.12(b) of this chapter) plus allowances for loan and lease losses or adjusted allowance for credit losses, as applicable. (e) Carrying value (f) Company (g) Control In general. Control (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. (3) Ownership or control of securities by subsidiary. (4) Ownership or control of convertible instruments. (5) Ownership or control of nonvoting securities. (h) Covered transaction (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 (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 (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 (l) “ Derivative transaction (m) “ Eligible affiliated mutual fund securities (n) “ Equity capital (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 (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. financial subsidiary (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 (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 (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. (q) “ Foreign bank agency, branch, commercial lending company (r) “ GAAP (s) “ General purpose credit card (t) In contemplation. in contemplation (u) “ Intraday extension of credit (v) “ Low-quality asset (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 (x) “ Municipal securities (y) “ Nonaffiliate (z) “ Obligations of, or fully guaranteed as to principal and interest by, the United States or its agencies (aa) “ Operating subsidiary (bb) “ Person (cc) “ Principal underwriter (dd) “ Purchase of an asset (ee) Riskless principal. acting exclusively as a riskless principal (ff) “ Securities (gg) “ Securities affiliate (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 (ii) “ Subsidiary (jj) “ Voting securities (kk) “ Well capitalized well capitalized (ll) “ Well managed [67 FR 76604, Dec. 12, 2002, as amended at 84 FR 4244, Feb. 14, 2019; 84 FR 61798, Nov. 13, 2019] 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? 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. § 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. § 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. § 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. (b) Amount of collateral required The rule. (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. (c) Ineligible collateral. (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 Perfection. (2) Priority. (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. (e) Replacement requirement for retired or amortized collateral. (f) Inapplicability of the collateral requirements to certain transactions. (1) Acceptances. (2) The unused portion of certain extensions of credit. (3) Purchases of affiliate debt securities in the secondary market. § 223.15 May a member bank purchase a low-quality asset from an affiliate? (a) In general. (b) Exemption for renewals of loan participations involving problem loans. (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. § 223.16 What transactions by a member bank with any person are treated as transactions with an affiliate? (a) In general. (b) Certain agency transactions. (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. (1) Certain riskless principal transactions. (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. (3) Preexisting lines of credit. (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 In general. (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. (ii) Definition. General purpose credit card (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. (iv) Example of calculating compliance with the 25 percent test. Subpart C—Valuation and Timing Principles Under Section 23A § 223.21 What valuation and timing principles apply to credit transactions? (a) Valuation Initial valuation. (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. (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. (4) Examples. (i) Term loan. (ii) Revolving credit. (iii) Guarantee. (iv) Acquisition of a loan to an affiliate. (b) Timing In general. (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 In general. (ii) Credit transactions by a member bank with a nonaffiliate in contemplation of the nonaffiliate becoming an affiliate of the member bank. (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 or 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. § 223.22 What valuation and timing principles apply to asset purchases? (a) Valuation In general. (2) Exceptions Purchase of an extension of credit to an affiliate. (ii) Purchase of a security issued by an affiliate. (iii) Transfer of a subsidiary. (iv) Purchase of a line of credit. (b) Timing In general. (2) Asset purchases by a member bank from a nonaffiliate in contemplation of the nonaffiliate becoming an affiliate of the member bank. (c) Examples. (1) Cash purchase of assets. (2) Purchase of assets through an assumption of liabilities. § 223.23 What valuation and timing principles apply to purchases of and investments in securities issued by an affiliate? (a) Valuation In general. (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. (i) Purchase of the debt securities of an affiliate. (ii) Purchase of the shares of an affiliate. (iii) Contribution of the shares of an affiliate. (b) Timing In general. (2) A member bank's purchase of or investment in a security issued by a nonaffiliate that becomes an affiliate of the member bank. § 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. (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. (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 The exclusion. (2) Definition. Eligible affiliated mutual fund securities et seq. (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 not 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. 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? (a) Certain acquisitions by a member bank of securities issued by an affiliate are treated as a purchase of assets from an affiliate. (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 Initial valuation. (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. (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. (d) Exemption for step transactions. (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 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. § 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. (b) Valuation of purchases of or investments in the securities of a financial subsidiary General rule. (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. (3) Examples of the valuation of purchases of and investments in the securities of a financial subsidiary. (i) Initial valuation. Direct acquisition by a member bank. (B) Contribution of a financial subsidiary to a member bank. (ii) Carrying value not adjusted for earnings and losses of the financial subsidiary. (c) Treatment of an affiliate's investments in, and extensions of credit to, a financial subsidiary of a member bank Investments. (2) Extensions of credit that are treated as regulatory capital of the financial subsidiary. (3) Other extensions of credit. § 223.33 What rules apply to derivative transactions? (a) Market terms requirement. (b) Policies and procedures. (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. (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. Subpart E—Exemptions 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. (b) Transactions between a member bank and a depository institution owned by the same holding company. (c) Certain loan purchases from an affiliated depository institution. (d) Internal corporate reorganization transactions. (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. § 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. (b) Giving credit for uncollected items. (c) Transactions secured by cash or U.S. government securities In general. (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. (d) Purchasing securities of a servicing affiliate. (e) Purchasing certain liquid assets. (f) Purchasing certain marketable securities. (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 (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. (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. (i) Asset purchases by a newly formed member bank. (j) Transactions approved under the Bank Merger Act. (k) Purchasing an extension of credit from an affiliate. (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 (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 In general. (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 (m) Riskless principal transactions. (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. (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 (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. (ii) U.S. tri-party repurchase agreement market (o) Purchases of certain asset-backed commercial paper. (1) Purchases the asset-backed commercial paper on or after September 19, 2008; (2) Pledges the asset-backed commercial paper to a Federal Reserve Bank to secure financing from the asset-backed commercial paper lending facility (AMLF) established by the Board on September 19, 2008; and (3) 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. [67 FR 76604, Dec. 12, 2002, as amended at 73 FR 54308, Sept. 19, 2008; 73 FR 55709, Sept. 26, 2008; 74 FR 6226, 6227, Feb. 6, 2009] § 223.43 What are the standards under which the Board may grant additional exemptions from the requirements of section 23A? (a) The standards. (b) Procedure. (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. Subpart F—General 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. § 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; (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. § 223.53 What asset purchases are prohibited by section 23B? (a) Fiduciary purchases of assets from an affiliate. (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. (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. (1) “Principal underwriter” (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” § 223.54 What advertisements and statements are prohibited by section 23B? (a) In general. (b) Guarantees, acceptances, letters of credit, and cross-affiliate netting arrangements subject to section 23A. (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. § 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) Purchases of certain asset-backed commercial paper. (1) Purchases the asset-backed commercial paper on or after September 19, 2008; (2) Pledges the asset-backed commercial paper to a Federal Reserve Bank to secure financing from the asset-backed commercial paper lending facility (AMLF) established by the Board on September 19, 2008; and (3) 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] [Reg. W, 74 FR 6228, Feb. 6, 2009] 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? (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. (b) Affiliate defined. (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); (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. capital stock and surplus 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? (a) In general. (b) Examples The (d)(6) exemption. (2) T he sister-bank exemption. Subpart I—Savings Associations—Transactions with Affiliates § 223.72 Transactions with affiliates. (a) Scope. (2) For the purposes of this subpart, “savings association” is defined at section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813), and also includes any savings bank or any cooperative bank that is a savings association under 12 U.S.C. 1467a(l). A non-affiliate subsidiary of a savings association is treated as part of the savings association. For purposes of this subpart, a “non-affiliate subsidiary” is a subsidiary of a savings association other than a subsidiary described at 12 CFR 223.2(b)(1)(i), and (b)(1)(iii) through (v). (b) Sections 23A and 23B of the FRA. Provision of Regulation W Application (1) 12 CFR 223.2(a)(8)—“Affiliate” includes a financial subsidiary Does not apply. Savings association subsidiaries do not meet the statutory definition of financial subsidiary. (2) 12 CFR 223.2(a)(12)—Determination that “affiliate” includes other types of companies Read to include the following statement: “Affiliate also includes any company that the Board determines, by order or regulation, to present a risk to the safety and soundness of the savings association.” (3) 12 CFR 223.2(b)(1)(ii)—“Affiliate” includes a subsidiary that is a financial subsidiary Does not apply. Savings association subsidiaries do not meet the statutory definition of financial subsidiary. (4) 12 CFR 223.3(d)—Definition of “capital stock and surplus.” “Capital stock and surplus” for a savings association has the same meaning as under the regulatory capital requirements applicable to that savings association. (5) 12 CFR 223.3(h)(1)—Section 23A covered transactions include an extension of credit to the affiliate Read to incorporate paragraph (c)(1) of this section, which prohibits loans or extensions of credit to an affiliate, unless the affiliate is engaged only in the activities described at 12 U.S.C. 1467a(c)(2)(F)(i), as defined in Regulation LL at 12 CFR 238.54. (6) 12 CFR 223.3(h)(2)—Section 23A covered transactions include a purchase of or investment in securities issued by an affiliate Read to incorporate paragraph (c)(2) of this section, which prohibits purchases and investments in securities issued by an affiliate, other than with respect to shares of a subsidiary. (7) 12 CFR 223.3(k)—Definition of “depository institution.” Read to include the following statement: “For the purposes of this definition, a non-affiliate subsidiary of a savings association is treated as part of the depository institution.” (8) 12 CFR 223.3(p)—Definition of “financial subsidiary.” Does not apply. Savings association subsidiaries do not meet the statutory definition of financial subsidiary. (9) 12 CFR 223.3(w)—Definition of “member bank.” Read to include the following statement: “Member bank also includes a savings association. For purposes of this definition, a non-affiliate subsidiary of a savings association is treated as part of the savings association.” (10) 12 CFR 223.3(aa)—Definition of “operating subsidiary.” Does not apply. (11) 12 CFR 223.31—Application of section 23A to an acquisition of an affiliate that becomes an operating subsidiary Read to refer to “a non-affiliate subsidiary” instead of “operating subsidiary.” (12) 12 CFR 223.32—Rules that apply to financial subsidiaries of a bank Does not apply. Savings association subsidiaries do not meet the statutory definition of financial subsidiary. (13) 12 CFR 223.42(f)(2)—Exemption for purchasing certain marketable securities Read to refer to “Thrift Financial Report” instead of “Call Report.” References to “state member bank” are unchanged. (14) 12 CFR 223.42(g)(2)—Exemption for purchasing municipal securities Read to refer to “Thrift Financial Report” instead of “Call Report.” References to “state member bank” are unchanged. (15) 12 CFR 223.61—Application of sections 23A and 23B to U.S. branches and agencies of foreign banks Does not apply to savings associations or their subsidiaries. (c) Additional prohibitions and restrictions. (1) Loans and extensions of credit. (ii) If the Board determines that a particular transaction is, in substance, a loan or extension of credit to an affiliate that is engaged in activities other than those described at 12 U.S.C. 1467a(c)(2)(F)(i), as defined in § 238.54 of Regulation LL (12 CFR 238.54), or the Board has other supervisory concerns concerning the transaction, the Board may inform the savings association that the transaction is prohibited under this paragraph (c)(1), and require the savings association to divest the loan, unwind the transaction, or take other appropriate action. (2) Purchases or investments in securities. [76 FR 56531, Sept. 13, 2011]