12 U.S.C. § 371c — Banking affiliates

submitted 113 years ago by ch. 6 to r/title-12-BANKS-AND-BANKING · 2,860 words · no verdicts yet

in plain englishAI-generated · not legal advice

This law limits how much business a member bank can do with its affiliates. Deals with one affiliate can't exceed 10% of the bank's capital and surplus. All affiliates combined can't exceed 20%, and these deals must be safe, sound, and often backed by collateral.

(a) Restrictions on transactions with affiliates. (1) A member bank and its subsidiaries can only do a "covered transaction" (defined below) with an affiliate if two limits are met: (A) deals with that one affiliate can't add up to more than 10% of the bank's capital stock and surplus, and (B) deals with all affiliates put together can't add up to more than 20% of the bank's capital stock and surplus. (2) If a bank does a deal with any person, and the money from that deal ends up helping or going to an affiliate, it still counts as a deal with that affiliate. (3) The bank can't buy a "low-quality asset" (defined below) from an affiliate. The only exception: the bank already did its own credit check and had committed to buy that asset before the affiliate got it. (4) Every covered transaction, and every transaction exempted under subsection (d), must be done on terms that fit safe and sound banking practices. (b) Definitions. (1) "Affiliate" of a member bank means: (A) any company that controls the bank, plus any other company controlled by that same controlling company; (B) a bank that is a subsidiary of the member bank; (C) a company controlled, directly or through a trust, by or for people who control the bank, or a company where a majority of directors overlap with the bank's directors; (D) any investment fund that the bank or an affiliate manages as investment adviser; and (E) any other company the Federal Reserve Board decides has a relationship with the bank close enough that deals with it could hurt the bank. (2) These are NOT affiliates: (A) a non-bank company that is a subsidiary of the bank, unless the Board decided under (1)(E) to include it anyway; (B) a company that only holds the bank's building; (C) a company that only runs a safe deposit business; (D) a company that only holds U.S. government or government-guaranteed obligations; and (E) a company the bank controls only because it took over rights from a real debt owed to it — but only for a limited time (usually two years, extendable by the Board up to three years total). (3)(A) A company or shareholder "controls" another company if: (i) it owns or can vote 25% or more of any class of voting stock; (ii) it controls the election of a majority of directors; or (iii) the Board decides, after notice and a hearing, that it has controlling influence over the company's management. (B) Owning shares only as a trustee for someone else doesn't count as control, except in the trust-control situation described in (1)(C) or when the trustee is itself a business trust. (4) "Subsidiary" means a company controlled by the company being discussed. (5) "Bank" includes state banks, national banks, banking associations, and trust companies. (6) "Company" means a corporation, partnership, business trust, association, or similar organization, and includes a member bank or bank unless specifically excluded. (7) "Covered transaction" with an affiliate means: (A) a loan or credit extension to the affiliate, including buying assets with an agreement to buy them back; (B) buying or investing in securities the affiliate issued; (C) buying assets from the affiliate, except real or personal property the Board specifically exempts; (D) accepting the affiliate's securities or debt as collateral for a loan to any person; (E) issuing a guarantee, acceptance, or letter of credit for the affiliate; (F) borrowing or lending securities with the affiliate in a way that exposes the bank to credit risk from the affiliate; or (G) a derivative deal with the affiliate that exposes the bank to credit risk from the affiliate. (8) "Aggregate amount of covered transactions" means the new transaction added to all the covered transactions already outstanding. (9) "Securities" means stocks, bonds, debentures, notes, and similar obligations. (10) "Low-quality asset" means any asset that is: (A) rated "substandard," "doubtful," or "loss," or listed as "other loans especially mentioned" in the affiliate's most recent bank exam report; (B) not accruing interest; (C) more than 30 days past due on principal or interest; or (D) had its terms renegotiated because the borrower's finances got worse. (11) A company or shareholder is presumed to control another company if it owns or controls 15% or more of that company's equity capital under certain rules on bank holding companies — unless it gives the Board information that rebuts this presumption. (c) Collateral for certain transactions with affiliates. (1) A loan, guarantee, acceptance, letter of credit, or credit exposure (from securities lending or a derivative deal) involving an affiliate must always be backed by collateral worth: (A) 100% of the amount, if the collateral is U.S. government obligations, U.S.-guaranteed obligations, notes and bills eligible for Federal Reserve rediscount, or a segregated deposit account at the bank; (B) 110% of the amount, if the collateral is state or local government obligations; (C) 120% of the amount, if the collateral is other debt instruments, including receivables; or (D) 130% of the amount, if the collateral is stock, leases, or other real or personal property. (2) A low-quality asset can never be used as this collateral. (3) An affiliate's own securities or debt obligations can never be used as collateral for a deal with that affiliate or any other affiliate of the bank. (4) These collateral rules don't apply to an acceptance that is already fully secured by attached shipping documents or other property tied to the deal. (d) Exemptions. Except for the safe-and-sound-practices rule in (a)(4), this section does not apply to: (1) transactions (still subject to the low-quality-asset ban in (a)(3)) with a bank that is 80% or more commonly owned with the member bank, in either direction; (2) ordinary correspondent-banking deposits in an affiliated bank, subject to Board rules; (3) giving an affiliate immediate credit for uncollected items in the normal course of business; (4) a loan, guarantee, or credit exposure to an affiliate that is fully secured by U.S. government obligations, U.S.-guaranteed obligations, or a segregated deposit account; (5) buying securities from certain companies described in a related bank holding company law; (6) buying assets that have a public market price at that price, or (subject to the low-quality-asset ban) buying loans without recourse from affiliated banks; and (7) buying back, from an affiliate, a loan the bank originally made and sold to that affiliate under a repurchase or recourse agreement. (e) Rules for banks with financial subsidiaries. (1) A "financial subsidiary" is a subsidiary of a bank that would count as a financial subsidiary of a national bank under a related statute. (2) For this section, a financial subsidiary is treated as an affiliate of the bank, not as a subsidiary — even though the bank owns it. (3) To stop banks from evading these rules: (A) if an affiliate buys or invests in a financial subsidiary's securities, it counts as if the bank itself did; and (B) if an affiliate extends credit to the financial subsidiary, it counts as if the bank did, when the Board decides that treatment is needed to prevent evasion of this law. (f) Rulemaking and additional exemptions. (1) The Board may issue further regulations, including new definitions, to carry out and enforce this section. (2)(A) The Board may exempt transactions from this section if it finds the exemption is in the public interest, tells the FDIC, and the FDIC does not object in writing within 60 days on the ground that the exemption risks the Deposit Insurance Fund. (B) Similarly, the Comptroller of the Currency (for national banks) or the FDIC/Board (for state banks) may grant exemptions jointly with the Board, following the same public-interest finding and 60-day FDIC no-objection process. (3)(A) Within 18 months of November 12, 1999, the Board had to adopt final rules treating derivative-deal credit exposure and same-day credit extensions between banks and affiliates as covered transactions. (B) The Board could delay when those rules took effect, to give banks time to adjust without undue hardship. (4) The Board may issue rules on how netting agreements affect the size of a covered transaction, including whether they help a transaction count as "fully secured" under (d)(4); any such interpretation for a specific bank must be issued jointly with that bank's federal banking regulator.

the actual law source: uscode.house.gov ↗public domain

(a) Restrictions on transactions with affiliates

(1)

A member bank and its subsidiaries may engage in a covered transaction with an affiliate only if—

(A)

in the case of any affiliate, the aggregate amount of covered transactions of the member bank and its subsidiaries will not exceed 10 per centum of the capital stock and surplus of the member bank; and

(B)

in the case of all affiliates, the aggregate amount of covered transactions of the member bank and its subsidiaries will not exceed 20 per centum of the capital stock and surplus of the member bank.

(2)

For the purpose of this section, any transaction by a member bank with any person shall be deemed to be a transaction with an affiliate to the extent that the proceeds of the transaction are used for the benefit of, or transferred to, that affiliate.

(3)

A member bank and its subsidiaries may not purchase a low-quality asset from an affiliate unless the bank or such subsidiary, pursuant to an independent credit evaluation, committed itself to purchase such asset prior to the time such asset was acquired by the affiliate.

(4)

Any covered transactions and any transactions exempt under subsection (d) between a member bank and an affiliate shall be on terms and conditions that are consistent with safe and sound banking practices.

(b) Definitions

For the purpose of this section—

(1)

the term “affiliate” with respect to a member bank means—

(A)

any company that controls the member bank and any other company that is controlled by the company that controls the member bank;

(B)

a bank subsidiary of the member bank;

(C)

any company—

(i)

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 member bank or any company that controls the member bank; or

(ii)

in which a majority of its directors or trustees constitute a majority of the persons holding any such office with the member bank or any company that controls the member bank;

(D)

any investment fund with respect to which a member bank or affiliate thereof is an investment adviser; and

(E)

any company that the Board determines by regulation or order to have a relationship with the member bank or any subsidiary or affiliate of the member bank, such that covered transactions by the member bank or its subsidiary with that company may be affected by the relationship to the detriment of the member bank or its subsidiary; and

(2)

the following shall not be considered to be an affiliate:

(A)

any company, other than a bank, that is a subsidiary of a member bank, unless a determination is made under paragraph (1)(E) not to exclude such subsidiary company from the definition of affiliate;

(B)

any company engaged solely in holding the premises of the member bank;

(C)

any company engaged solely in conducting a safe deposit business;

(D)

any company engaged solely in holding obligations of the United States or its agencies or obligations fully guaranteed by the United States or its agencies as to principal and interest; and

(E)

any company where control results from the exercise of rights arising out of a bona fide debt previously contracted, but only for the period of time specifically authorized under applicable State or Federal law or regulation or, in the absence of such law or regulation, for a period of two years from the date of the exercise of such rights or the effective date of this Act, whichever date is later, subject, upon application, to authorization by the Board for good cause shown of extensions of time for not more than one year at a time, but such extensions in the aggregate shall not exceed three years;

(3)

(A)

a company or shareholder shall be deemed to have control over another company if—

(i)

such company or shareholder, directly or indirectly, or acting through one or more other persons owns, controls, or has power to vote 25 per centum or more of any class of voting securities of the other company;

(ii)

such company or shareholder controls in any manner the election of a majority of the directors or trustees of the other company; or

(iii)

the Board determines, after notice and opportunity for hearing, that such company or shareholder, directly or indirectly, exercises a controlling influence over the management or policies of the other company; and

(B)

notwithstanding any other provision of this section, no company shall be deemed to own or control another company by virtue of its ownership or control of shares in a fiduciary capacity, except as provided in paragraph (1)(C) of this subsection or if the company owning or controlling such shares is a business trust;

(4)

the term “subsidiary” with respect to a specified company means a company that is controlled by such specified company;

(5)

the term “bank” includes a State bank, national bank, banking association, and trust company;

(6)

the term “company” means a corporation, partnership, business trust, association, or similar organization and, unless specifically excluded, the term “company” includes a “member bank” and a “bank”;

(7)

the term “covered transaction” means with respect to an affiliate of a member bank—

(A)

a loan or extension of credit to the affiliate, including a purchase of assets subject to an agreement to repurchase;

(B)

a purchase of or an investment in securities issued by the affiliate;

(C)

a purchase of assets from the affiliate, except such purchase of real and personal property as may be specifically exempted by the Board by order or regulation;

(D)

the acceptance of securities or other debt obligations issued by the affiliate as collateral security for a loan or extension of credit to any person or company;

(E)

the issuance of a guarantee, acceptance, or letter of credit, including an endorsement or standby letter of credit, on behalf of an affiliate;

(F)

a transaction with an affiliate that involves the borrowing or lending of securities, to the extent that the transaction causes a member bank or a subsidiary to have credit exposure to the affiliate; or

(G)

a derivative transaction, as defined in paragraph (3) of section 84(b) of this title, with an affiliate, to the extent that the transaction causes a member bank or a subsidiary to have credit exposure to the affiliate;

(8)

the term “aggregate amount of covered transactions” means the amount of the covered transactions about to be engaged in added to the current amount of all outstanding covered transactions;

(9)

the term “securities” means stocks, bonds, debentures, notes, or other similar obligations; and

(10)

the term “low-quality asset” means an asset that falls in any one or more of the following categories:

(A)

an asset classified as “substandard”, “doubtful”, or “loss” or treated as “other loans especially mentioned” in the most recent report of examination or inspection of an affiliate prepared by either a Federal or State supervisory agency;

(B)

an asset in a nonaccrual status;

(C)

an asset on which principal or interest payments are more than thirty days past due; or

(D)

an asset whose terms have been renegotiated or compromised due to the deteriorating financial condition of the obligor.

(11)Rebuttable presumption of control of portfolio companies.—

In addition to paragraph (3), a company or shareholder shall be presumed to control any other company if the company or shareholder, directly or indirectly, or acting through 1 or more other persons, owns or controls 15 percent or more of the equity capital of the other company pursuant to subparagraph (H) or (I) of section 1843(k)(4) of this title or rules adopted under section 122 of the Gramm-Leach-Bliley Act, if any, unless the company or shareholder provides information acceptable to the Board to rebut this presumption of control.

(1)

Each loan or extension of credit to, or guarantee, acceptance, or letter of credit issued on behalf of, an affiliate by a member bank or its subsidiary, and any credit exposure of a member bank or a subsidiary to an affiliate resulting from a securities borrowing or lending transaction, or a derivative transaction, shall be secured at all times by collateral having a market value equal to—

(A)

100 per centum of the amount of such loan or extension of credit, guarantee, acceptance, letter of credit, or credit exposure, if the collateral is composed of—

(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;

(iii)

notes, drafts, bills of exchange or bankers’ acceptances that are eligible for rediscount or purchase by a Federal Reserve Bank; or

(iv)

a segregated, earmarked deposit account with the member bank;

(B)

110 per centum of the amount of such loan or extension of credit, guarantee, acceptance, letter of credit, or credit exposure if the collateral is composed of obligations of any State or political subdivision of any State;

(C)

120 per centum of the amount of such loan or extension of credit, guarantee, acceptance, letter of credit, or credit exposure if the collateral is composed of other debt instruments, including receivables; or

(D)

130 per centum of the amount of such loan or extension of credit, guarantee, acceptance, letter of credit, or credit exposure if the collateral is composed of stock, leases, or other real or personal property.

(2)

A low-quality asset shall not be acceptable as collateral for a loan or extension of credit to, or guarantee, acceptance, or letter of credit issued on behalf of, an affiliate, or credit exposure to an affiliate resulting from a securities borrowing or lending transaction, or derivative transaction.

(3)

The securities or other debt obligations issued by an affiliate of the member bank shall not be acceptable as collateral for a loan or extension of credit to, guarantee, acceptance, or letter of credit issued on behalf of, or credit exposure from a securities borrowing or lending transaction, or derivative transaction to, that affiliate or any other affiliate of the member bank.

(4)

The collateral requirements of this paragraph shall not be applicable to an acceptance that is already fully secured either by attached documents or by other property having an ascertainable market value that is involved in the transaction.

(d) Exemptions

The provisions of this section, except paragraph (a)(4),1 shall not be applicable to—

(1)

any transaction, subject to the prohibition contained in subsection (a)(3), with a bank—

(A)

which controls 80 per centum or more of the voting shares of the member bank;

(B)

in which the member bank controls 80 per centum or more of the voting shares; or

(C)

in which 80 per centum or more of the voting shares are controlled by the company that controls 80 per centum or more of the voting shares of the member bank;

(2)

making deposits in an affiliated bank or affiliated foreign bank in the ordinary course of correspondent business, subject to any restrictions that the Board may prescribe by regulation or order;

(3)

giving immediate credit to an affiliate for uncollected items received in the ordinary course of business;

(4)

making a loan or extension of credit to, issuing a guarantee, acceptance, or letter of credit on behalf of, or having credit exposure resulting from a securities borrowing or lending transaction, or derivative transaction to, an affiliate that is fully secured by—

(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; or

(C)

a segregated, earmarked deposit account with the member bank;

(5)

purchasing securities issued by any company of the kinds described in section 1843(c)(1) of this title;

(6)

purchasing assets having a readily identifiable and publicly available market quotation and purchased at that market quotation or, subject to the prohibition contained in subsection (a)(3), purchasing loans on a nonrecourse basis from affiliated banks; and

(7)

purchasing from an affiliate a loan or extension of credit that was originated by the member bank and sold to the affiliate subject to a repurchase agreement or with recourse.

(e) Rules relating to banks with financial subsidiaries

(1) Financial subsidiary defined

For purposes of this section and section 371c–1 of this title, the term “financial subsidiary” means any company that is a subsidiary of a bank that would be a financial subsidiary of a national bank under section 24a of this title.

(2) Financial subsidiary treated as an affiliate

For purposes of applying this section and section 371c–1 of this title, and notwithstanding subsection (b)(2) of this section or section 371c–1(d)(1) of this title, a financial subsidiary of a bank—

(A)

shall be deemed to be an affiliate of the bank; and

(B)

shall not be deemed to be a subsidiary of the bank.

(3) Anti-evasion provision

For purposes of this section and section 371c–1 of this title—

(A)

any purchase of, or investment in, the securities of a financial subsidiary of a bank by an affiliate of the bank shall be considered to be a purchase of or investment in such securities by the bank; and

(B)

any extension of credit by an affiliate of a bank to a financial subsidiary of the bank shall be considered to be an extension of credit by the bank to the financial subsidiary if the Board determines that such treatment is necessary or appropriate to prevent evasions of this chapter and the Gramm-Leach-Bliley Act.

(f) Rulemaking and additional exemptions

(1)

The Board may issue such further regulations and orders, including definitions consistent with this section, as may be necessary to administer and carry out the purposes of this section and to prevent evasions thereof.

(2)

(A)In general.—

The Board may, at its discretion, by regulation exempt transactions or relationships from the requirements of this section if—

(i)

the Board finds the exemption to be in the public interest and consistent with the purposes of this section, and notifies the Federal Deposit Insurance Corporation of such finding; and

(ii)

before the end of the 60-day period beginning on the date on which the Federal Deposit Insurance Corporation receives notice of the finding under clause (i), the Federal Deposit Insurance Corporation does not object, in writing, to the finding, based on a determination that the exemption presents an unacceptable risk to the Deposit Insurance Fund.

(B)Additional exemptions.—

(i)National banks.—

The Comptroller of the Currency may, by order, exempt a transaction of a national bank from the requirements of this section if—

(I)

the Board and the Office of the Comptroller of the Currency jointly find the exemption to be in the public interest and consistent with the purposes of this section and notify the Federal Deposit Insurance Corporation of such finding; and

(II)

before the end of the 60-day period beginning on the date on which the Federal Deposit Insurance Corporation receives notice of the finding under subclause (I), the Federal Deposit Insurance Corporation does not object, in writing, to the finding, based on a determination that the exemption presents an unacceptable risk to the Deposit Insurance Fund.

(ii)State banks.—

The Federal Deposit Insurance Corporation may, by order, exempt a transaction of a State nonmember bank, and the Board may, by order, exempt a transaction of a State member bank, from the requirements of this section if—

(I)

the Board and the Federal Deposit Insurance Corporation jointly find that the exemption is in the public interest and consistent with the purposes of this section; and

(II)

the Federal Deposit Insurance Corporation finds that the exemption does not present an unacceptable risk to the Deposit Insurance Fund.

(3)Rulemaking required concerning derivative transactions and intraday credit.—

(A)In general.—

Not later than 18 months after November 12, 1999, the Board shall adopt final rules under this section to address as covered transactions credit exposure arising out of derivative transactions between member banks and their affiliates and intraday extensions of credit by member banks to their affiliates.

(B)Effective date.—

The effective date of any final rule adopted by the Board pursuant to subparagraph (A) shall be delayed for such period as the Board deems necessary or appropriate to permit banks to conform their activities to the requirements of the final rule without undue hardship.

(4)Amounts of covered transactions.—

The Board may issue such regulations or interpretations as the Board determines are necessary or appropriate with respect to the manner in which a netting agreement may be taken into account in determining the amount of a covered transaction between a member bank or a subsidiary and an affiliate, including the extent to which netting agreements between a member bank or a subsidiary and an affiliate may be taken into account in determining whether a covered transaction is fully secured for purposes of subsection (d)(4). An interpretation under this paragraph with respect to a specific member bank, subsidiary, or affiliate shall be issued jointly with the appropriate Federal banking agency for such member bank, subsidiary, or affiliate.

Source credit: (Dec. 23, 1913, ch. 6, § 23A, as added June 16, 1933, ch. 89, § 13, 48 Stat. 183; amended Aug. 23, 1935, ch. 614, title III, § 327, 49 Stat. 717; June 30, 1954, ch. 434, § 1, 68 Stat. 358; Pub. L. 86–230, § 1(b), Sept. 8, 1959, 73 Stat. 457; Pub. L. 89–485, §§ 12(a), 13(h), July 1, 1966, 80 Stat. 241, 243; Pub. L. 97–320, title IV, § 410(b), Oct. 15, 1982, 96 Stat. 1515; Pub. L. 97–457, § 22, Jan. 12, 1983, 96 Stat. 2509; Pub. L. 106–102, title I, § 121(b), Nov. 12, 1999, 113 Stat. 1378; Pub. L. 111–203, title VI, §§ 608(a), 609(a), July 21, 2010, 124 Stat. 1608, 1611.)

history & why it existsrecord from the source credit

1913Enacted · Act of Dec. 23, 1913, ch. 6 · 48 Stat. 183
1935Amended · Act of Aug. 23, 1935, ch. 614 · 49 Stat. 717
1954Amended · Act of June 30, 1954, ch. 434 · 68 Stat. 358
1959Amended · Pub. L. 86-230 · 73 Stat. 457
1966Amended · Pub. L. 89-485 · 80 Stat. 241, 243
1982Amended · Pub. L. 97-320 · 96 Stat. 1515
1983Amended · Pub. L. 97-457 · 96 Stat. 2509
1999Amended · Pub. L. 106-102 · 113 Stat. 1378
2010Amended · Pub. L. 111-203 · 124 Stat. 1608, 1611

A history note hasn’t been published yet. The record shows enactment by ch. 6 on 1913-12-23.

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