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FDIC Federal Register Citations

Board of Governors of the Federal Reserve System

Robert E. Feldman
Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, D. C. 20429

Re: Proposed Rule on Sections 23A and 23B of the Federal Reserve Act (RIN 3064-AC78) (the "Proposal")

Dear Mr. Feldman:

The Board of Governors of the Federal Reserve System ("Board") appreciates this opportunity to provide comments on the Proposal, which addresses the application of sections 23A and 23B of the Federal Reserve Act (12 U.S.C. §§ 371c, 371 c-1) and the Board's Regulation W (12 CFR part 223) to insured state nonmember banks (" nonmember banks"). In brief, although the Board supports the Proposal to the extent that it clarifies that nonmember banks are subject to Regulation W in the same manner and to the same extent as if they were member banks, the Board has serious concerns about those elements of the Proposal that do not conform to Regulation W or purport to provide the FDIC with exclusive authority that has been statutorily conferred on the Board.

Sections 23A and 23B of the Federal Reserve Act impose restrictions on transactions between a member bank and its affiliates and specifically authorize the Board to issue regulations to administer and grant exemptions from the statutory provisions.1 Regulation W is the Board's rule that implements sections 23A and 23B. Section 18(j)(1) of the Federal Deposit Insurance Act ("FDIA") provides that sections 23A and 23B of the Federal Reserve Act "shall apply with respect to every nonmember insured bank in the same manner and to the same extent as if the nonmember insured bank were a member bank."2 Because nonmember banks are subject to sections 23A and 23B as if they were member banks, nonmember banks also must comply with Regulation W as if they were member banks.

Several elements of the Proposal are inconsistent with the statutory and regulatory framework established by sections 23A and 23B, the FDIA, and Regulation W. The first and most problematic element of the Proposal is the FDIC's claim to have the exclusive authority to grant exemptions from sections 23A and 23B for nonmember banks (including the FDIC's proposed exemption for certain section 24 subsidiaries of nonmember banks) and to make a wide variety of exemptive determinations under Regulation W for nonmember banks.3 The Board also is troubled by the FDIC's claim in the Proposal to have the exclusive authority to administer and interpret sections 23A and 23B for nonmember banks.

The Proposal's preamble offers a number of arguments in support of these positions, none of which seem persuasive (individually or collectively). The FDIC's principal argument is that the Proposal's justification can be found in the FDIA's general grant of authority to the FDIC to issue rules to implement the FDIA.4 As the Proposal acknowledges, however, the FDIC's rulemaking authority under the FDIA does not extend to rulemaking in areas that Congress has "expressly and exclusively" granted to another regulatory agency.5 Sections 23A and 23B both expressly provide the Board (and no other regulatory agency) authority to issue regulations and orders to administer and carry out the purposes of the sections and to provide exemptions from the sections. As such, sections 23A and 23B appear to be the types of statutory provisions over which Congress has "expressly and exclusively" provided another agency with authority to regulate and administer.

In addition, the FDIC's statutory authority under the FDIA to prescribe rules "to carry out the purposes of" the FDIA does not appear to include authority to exempt depository institutions from any requirement of the FDIA, including the requirement in section 18(j)(1) of the FDIA that nonmember banks be subject to sections 23A and 23B in the same manner and to the same extent as member banks. Accordingly, even if (arguendo) the FDIA does confer authority on the FDIC to issue a rule that addresses the application of sections 23A and 23B to nonmember banks, this authority would not justify the FDIC in granting an exemption from sections 23A and 23B to a nonmember bank or in making any exemptive determinations under Regulation W for nonmember banks (beyond those expressly delegated to the FDIC by the Board).

Crucially, the FDIA requires that sections 23A and 23B apply to nonmember, banks "in the same manner and to the same extent" as they apply to member banks. If the FDIC were to interpret a provision of section 23A or 23B in a different manner than the Board, or if the FDIC were to provide an exemption from section 23A, or 23B or a determination under Regulation W that the Board would not have provided, it simply would not be true that nonmember banks were subject to sections 23A and 23B in the same manner and to the same extent as member banks.

The Board also believes that the Proposal is inconsistent with the Congressional intent behind the Federal statutory framework that governs bank transactions with affiliates. The legislative history of the 1989 amendment to the Home Owners' Loan Act that subjected insured savings associations to sections 23A and 23B makes very clear that the FDIC does not have authority to provide exemptions from section 23A or 23B (and that the Board has exclusive authority to provide exemptions from sections 23A and 23B for insured depository institutions). In discussing the authority of the OTS to grant exemptions from section 23A or 23B for insured savings associations, the relevant Conference Report states: "Exemptions from section 23A or 23B may be granted only by the Federal Reserve Board, as is currently the case with respect to all FDIC-insured banks."6

Sound public policy considerations support the Congressional decision to consolidate bank transactions with affiliates regulation in the Board. Sections 23A and 23B occupy a place of central importance in the bank regulatory framework, and a single agency should have ultimate authority to interpret and provide exemptions from the statute in order to ensure uniformity of application. Appointment of a single agency as the administrator of transactions with affiliates regulation for all depository institutions prevents this crucial safety and soundness bulwark from becoming subject to regulatory arbitrage. In addition, the Board, as the consolidated supervisor of bank holding companies, supervises the most significant bank affiliates and, accordingly, is uniquely positioned to be the administrator of sections 23A and 23B.

The Board has a long-standing practice to consult with the primary Federal regulator of a depository institution before granting a section 23A exemption to the institution, and has a long-standing practice of consulting with the FDIC before granting a section 23A exemption to any insured depository institution. The Board also regularly consults with the other Federal banking agencies before issuing rules under, or major interpretations of, section 23A.  This collaborative interagency process has worked well for the past few decades.

In light of these considerations, the Board recommends that the FDIC revise the Proposal by eliminating 12 CFR 324.2(b) and 324.3, the statement in the first sentence of 12 CFR 324.4 that a nonmember bank should read all references in Regulation W to "the Board" to refer only to the "FDIC," and 12 CFR 324.5 and 324.6.

Very truly yours,


Jennifer J. Johnson
Secretary of the Board


1 12 U.S.C. §§ 371c(f), 371c-1(e).
2 12 U.S.C. § 1828(j)(1).
3 These determinations include exempting certain merchant banking portfolio companies from the definition of affiliate (12 CFR 223.2(a)(9)(ii)), supplementing the list of U.S. government obligations (12 CFR 223.3(z)), approving securities affiliates (12 CFR 223.3(gg)), approving intangible assets as eligible collateral (12 CFR 223.14(c)(4)), and exempting certain credit card transactions from the attribution rule (12 CFR 223.1 6(c)(4)).
4
12 U.S.C. § 1819(a)(10).
5 Id.
6 Conf. Rep. No. 101-222, 101st Cong., 1st Sess., p. 408 (Aug. 4, 1989).

Last Updated 05/24/2004 regs@fdic.gov

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