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4000 - Advisory Opinions


Limitations on Affiliate Transactions Within "Large Chain Banking Organization"

FDIC-90-9

February 8, 1990

Gerald J. Gervino, Senior Attorney

You have asked for an opinion as to the ramifications and/or limitations of certain transactions within your chain banking organization. In connection with your request, you have supplied us with an organizational chart which you feel closely resembles a large chain banking firm in * * * . Your primary concern is with respect to Sections 23A and 23B of the Federal Reserve Act, 12 USC 371c and 12 USC 371c-1 (Supp. 1983, 1988) ("Section 23A" and "Section 23B").

We assume that the "large chain banking organization" to which you refer is your banking group. Although the chart you have furnished us lacks sufficient detail to show the complete relationship of all the parties, we will attempt to make some general statements about the transactions which you have hypothesized as they might relate to the entities we will identify from the chart.

You ask for our opinion with respect to the chart and the following transactions on the assumption that all executive officers have less than 5 percent ownership in the company with which they work and no ownership elsewhere in the organization:

1.  An executive officer of Bank G borrowing personally from Bank A.

2.  An executive officer of Bank C borrowing personally from Bank A.

3.  An executive officer of Bank Holding Company B borrowing personally from Bank D1.

4.  An executive officer of Bank Holding Company B borrowing personally from Bank D.

5.  An executive officer of Bank Holding Company B borrowing personally from Bank F.

The above examples would not be covered by Section 23A or Section 23B because an individual cannot be an "affiliate" under those sections. Sections 23A(b)(1) and 23B(d)(1). However, the "attribution rules" of Section 23A(a)(2) and Section 23B(a)(3) might apply under the circumstances set out in the two rules.

Section 23A(a)(2) deems any transaction by a bank with any person 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. For example, if an executive officer were to receive funds to repay a loan from an affiliated bank, the loan to the officer would very likely be deemed a loan to the affiliated bank.

Section 23B(a)(3) deems any transaction by a bank or its subsidiary with any person to be a transaction with an affiliate of the bank if any of the proceeds of the transaction are used for the benefit of, or transferred to, the affiliate.

6.  Company C borrowing from Bank C.

In your chart, Bank C is 88.80 percent owned by Bank Holding Company B, while Company C is 23.6 percent owned by the same bank holding company. Under Section 23A(b)(3)(a), the bank holding company is deemed to control Bank C, while no such irrebuttable presumption exists with respect to Company C because less than 25 percent ownership is shown on the chart. However, Company C may be an affiliate of Bank Holding Company B because it is otherwise controlled by the bank holding company through other common shareholders, special arrangements, or other devices. Section 23A(b)(1) and (3)(A).

Section 23B(d)(1) provides that the term "affiliate" has the same meaning for Section 23B as in Section 23A except that any bank is excluded.

7.  Company C borrowing from Bank D1.

The answer is the same as in question 6. A difference in the analysis is necessary since the common share ownership is no longer in Bank Holding Company B, but in the individual shareholder John Doe, who controls Bank D1, which is 99.65 percent owned by Bank Holding Company A, which in turn is 25.13 percent owned by John Doe with other common shareholders of and including Bank Holding Company B, which is 64.25 percent owned by John Doe. The result in this case turns on the same question of Bank Holding Company B control of Company C which is presented in question 6.

8.  Company D borrowing from Bank Holding Company A.

9.  Company B borrowing from Bank Holding Company B.

Unless the attribution rules described above applies, Section 23A does not directly restrict loans made by a bank holding company. Section 23B(a)(2)(C) and (a)(1) might apply if a transaction involved a related loan or other covered transaction to or with the bank in which the holding company obtained some preference or other restricted benefit.

If you have any further questions, please write or call me at (202) 898-3723.


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