Arkansas
State Bank Department

Sections 23A & 23B Federal Reserve Act

(updated March 3, 2004)

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.  Section 23A applies specifically to member banks; however, Section 18(j) of the Federal Deposit Insurance Act extends the provisions of Section 23A 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

Refer to http://www.federalreserve.gov/boarddocs/SRLETTERS/2003/sr0302.htm

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