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4000 - Advisory Opinions

Application of Exemptions Contained in § 23A(d) of the Federal Reserve Act to Bank and Its Commonly Controlled Affiliate Bank Where Control is Held by Company Not Regulated Under Bank Holding Company Act


February 18, 1992

Gerald J. Gervino

Senior Attorney

You have requested an interpretation of Section 23A (d) of the Federal Reserve Act, 12 U.S.C. § 371c(d) (1988) ("§ 23A(d)'') as it applies to a bank and its commonly controlled affiliate bank, where the common control is held by a company that is not regulated under the Bank Holding Company Act, 12 U.S.C. § 1841-1850 ("holding company Act'') by the Board of Governors of the Federal Reserve System. The exemptions contained in § 23A(a)(d)(1) and (6) are in question here.

Except for the prohibitions against the purchase of low quality assets or unsafe and unsound banking practices, § 23A(d)(1)(C) provides an exemption for any transaction with a bank in which 80 per centum or more of the voting shares are controlled by the "company" that controls 80% or more of the voting shares of the bank ("sister bank exemption").

This provision is obviously different in its structure from the definition of affiliate contained in § 23A(b)(1)(C)(i) ("common shareholder definition'' or "definition''). This includes (overlooking redundancies) any "company" that is controlled by "shareholders" who control the bank. Aside from the percentages of control necessary for inclusion, the common shareholder definition thus covers relationships similar to that covered by the sister bank exemption. The notable difference is that the common nexus required in the common shareholder definition is "shareholder", while the common bond in the exemption is "company". All exempt sister bank relationships were brought under § 23A coverage by the common shareholder definition.

The difference between the terms "company" and "shareholder" has its practical meaning in this context when "shareholder" is used to subject chain banks to § 23A coverage because of common shareholdings, while no exemption is provided for chain banks under the sister bank exemption because of the absence of a controlling "company" as defined in § 23A(b)(6). Thus chain banks are considered "affiliates'' under § 23A, but are not eligible for exemption under the sister bank exemption. The informal reason advanced for this difference was the fact that the "company" was regulated by the Board of Governors of the Federal Reserve System under the holding company Act, while chain banks were not owned by a regulated entity and thus not comparable to bank holding company affiliated banks.

Because of this difference in regulation, we would consider the unregulated bank holding companies outside the definition of "companies" for purposes of the sister bank exemption. Like the chain banking affiliations, transactions within the affiliated group would not be entitled to the sister bank exemption.

The question has also been raised as to the applicability of the second part of § 23A(d)(6) to the affiliated group here under discussion. This provision exempts the purchase of loans on a nonrecourse basis from affiliated "banks". Since the term "company" does not come into play, the above technical analysis does not apply to § 23A(d)(6). In a reversal of the above situation, § 23A(d)(6) is available to chain banking organizations. We believe the § 23A(d)(6) exemption is available, as well, to bank subsidiaries of an unregulated holding company organization.

If you have any further questions or would like further explanation of our letter, please write or call me at (202) 898-3723.

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