Regulation 23A and 23B: Limiting Transactions with Affiliates
Regulation 23A
Regulation 23A, implemented under the Federal Reserve Act, aims to minimize risks associated with transactions between member banks and their affiliates (12 CFR 223). It applies to member banks and, through Section 18(j) of the Federal Deposit Insurance Act, to nonmember insured banks (FDIC Act). The regulation imposes quantitative limits on specific transactions, such as loans, asset purchases, and other dealings.
Prohibited Transactions under Regulation 23A
Certain transactions are explicitly prohibited under Regulation 23A, including:
Key Facts
- Regulation 23A applies specifically to member banks, but Section 18(j) of the Federal Deposit Insurance Act extends the provisions of Section 23A to nonmember insured banks.
- The purpose of Regulation 23A is to limit the risks to a bank from transactions with its affiliates.
- It sets quantitative limits on loans, purchases of assets, and certain other transactions between a member bank and its affiliates.
- Certain transactions are not permitted under Regulation 23A, such as a parent company’s overdrawn checking account with a bank subsidiary, payment of organization costs by a bank subsidiary, overpayment of income taxes to the parent company, and any payments by the bank subsidiary that represent expenses of the parent company.
Regulation 23B:
- Regulation 23B applies to both member banks and their subsidiaries.
- The purpose of Regulation 23B is to ensure that transactions between a bank and its subsidiaries are conducted on terms and under circumstances that are substantially the same, or at least as favorable, as transactions with non-affiliates.
- It covers various types of transactions, including the sale of securities or other assets to an affiliate, payment of money or furnishing of services to an affiliate, and transactions in which an affiliate acts as an agent or broker or receives a fee for its services.
- Regulation 23B prohibits a bank or its subsidiaries from purchasing securities or other assets from any affiliate as a fiduciary, unless permitted by the instrument creating the fiduciary relationship, court order, or law of the jurisdiction governing the fiduciary relationship.
- It also prohibits the purchase or acquisition of securities during the existence of an underwriting or selling syndicate if a principal underwriter of that security is an affiliate of the bank, unless approved by a majority of outside directors before the sale to the public.
- Overdrawn checking accounts of parent companies with bank subsidiaries
- Payment of organization costs by bank subsidiaries
- Overpayment of income taxes to parent companies
- Payments representing parent company expenses by bank subsidiaries
Regulation 23B
Regulation 23B, also part of the Federal Reserve Act, applies to both member banks and their subsidiaries (12 CFR 223). It ensures that transactions between banks and affiliates are conducted on terms comparable to those with non-affiliates.
Covered Transactions under Regulation 23B
Regulation 23B encompasses various transactions, such as:
- Sale of securities or assets to affiliates
- Payment of money or provision of services to affiliates
- Transactions involving affiliates as agents, brokers, or fee recipients
Prohibited Transactions under Regulation 23B
Regulation 23B prohibits banks or subsidiaries from engaging in certain transactions, including:
- Purchasing securities or assets from affiliates as fiduciaries (unless permitted by specific exceptions)
- Purchasing or acquiring securities during underwriting or selling syndicates where an affiliate is a principal underwriter (unless approved by outside directors)
Conclusion
Regulations 23A and 23B play a crucial role in safeguarding the stability of the financial system by limiting the risks associated with transactions between banks and their affiliates. These regulations ensure that transactions are conducted on fair and equitable terms, protecting the interests of both banks and their customers.
References
- 12 CFR 223
- Sections 23A & 23B Federal Reserve Act
- Section 23B. Restrictions on Transactions with Affiliates
FAQs
What is Regulation 23A?
Regulation 23A limits the risks to a bank from transactions with its affiliates, including quantitative limits on certain transactions.
What is Regulation 23B?
Regulation 23B ensures that transactions between a bank and its subsidiaries are conducted on terms and under circumstances that are substantially the same as transactions with non-affiliates.
What types of transactions are covered by Regulation 23A?
Regulation 23A covers transactions such as loans, purchases of assets, and certain other transactions between a member bank and its affiliates.
What types of transactions are covered by Regulation 23B?
Regulation 23B covers various types of transactions, including the sale of securities or other assets to an affiliate, payment of money or furnishing of services to an affiliate, and transactions in which an affiliate acts as an agent or broker or receives a fee for its services.
What are some prohibited transactions under Regulation 23A?
Prohibited transactions under Regulation 23A include a parent company’s overdrawn checking account with a bank subsidiary, payment of organization costs by a bank subsidiary, overpayment of income taxes to the parent company, and any payments by the bank subsidiary that represent expenses of the parent company.
What are some prohibited transactions under Regulation 23B?
Prohibited transactions under Regulation 23B include a bank or its subsidiaries purchasing securities or other assets from any affiliate as a fiduciary (unless permitted by specific exceptions) and purchasing or acquiring securities during the existence of an underwriting or selling syndicate if a principal underwriter of that security is an affiliate of the bank (unless approved by outside directors).
Who is subject to Regulation 23A?
Regulation 23A applies to member banks and, through Section 18(j) of the Federal Deposit Insurance Act, to nonmember insured banks.
Who is subject to Regulation 23B?
Regulation 23B applies to both member banks and their subsidiaries.