§ 371c. — Banking affiliates.
[Laws in effect as of January 24, 2002]
[Document not affected by Public Laws enacted between
January 24, 2002 and December 19, 2002]
[CITE: 12USC371c]
TITLE 12--BANKS AND BANKING
CHAPTER 3--FEDERAL RESERVE SYSTEM
SUBCHAPTER X--POWERS AND DUTIES OF MEMBER BANKS
Sec. 371c. Banking affiliates
(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) of this section 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)(i) any company, including a real estate investment
trust, that is sponsored and advised on a contractual basis by
the member bank or any subsidiary or affiliate of the member
bank; or
(ii) any investment company with respect to which a member
bank or any affiliate thereof is an investment advisor as
defined in section 80a-2(a)(20) of title 15; 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;
(B) a purchase of or an investment in securities issued by
the affiliate;
(C) a purchase of assets, including assets subject to an
agreement to repurchase, 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 issued by the affiliate as
collateral security for a loan or extension of credit to any
person or company; or
(E) the issuance of a guarantee, acceptance, or letter of
credit, including an endorsement or standby letter of credit, on
behalf of an 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.
(c) Collateral for certain transactions with affiliates
(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 shall be secured at the time of the transaction by
collateral having a market value equal to--
(A) 100 per centum of the amount of such loan or extension of
credit, guarantee, acceptance, or letter of credit, 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, or letter of credit 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, or letter of credit 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, or letter of credit if the collateral
is composed of stock, leases, or other real or personal property.
(2) Any such collateral that is subsequently retired or amortized
shall be replaced by additional eligible collateral where needed to keep
the percentage of the collateral value relative to the amount of the
outstanding loan or extension of credit, guarantee, acceptance, or
letter of credit equal to the minimum percentage required at the
inception of the transaction.
(3) 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.
(4) The securities issued by an affiliate of the member bank 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, that
affiliate or any other affiliate of the member bank.
(5) 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 subsection (a)(4) of this
section, shall not be applicable to--
(1) any transaction, subject to the prohibition contained in
subsection (a)(3) of this section, 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, or issuing a
guarantee, acceptance, or letter of credit on behalf of, 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) of
this section, 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) Exceptions for transactions with financial subsidiaries
(A) Exception from limit on covered transactions with any
individual financial subsidiary
Notwithstanding paragraph (2), the restriction contained in
subsection (a)(1)(A) of this section shall not apply with
respect to covered transactions between a bank and any
individual financial subsidiary of the bank.
(B) Exception for earnings retained by financial subsidiaries
Notwithstanding paragraph (2) or subsection (b)(7) of this
section, a bank's investment in a financial subsidiary of the
bank shall not include retained earnings of the financial
subsidiary.
(4) 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) The Board may, at its discretion, by regulation or order exempt
transactions or relationships from the requirements of this section if
it finds such exemptions to be in the public interest and consistent
with the purposes of this section.
(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.
(Dec. 23, 1913, ch. 6, Sec. 23A, as added June 16, 1933, ch. 89,
Sec. 13, 48 Stat. 183; amended Aug. 23, 1935, ch. 614, title III,
Sec. 327, 49 Stat. 717; June 30, 1954, ch. 434, Sec. 1, 68 Stat. 358;
Pub. L. 86-230, Sec. 1(b), Sept. 8, 1959, 73 Stat. 457; Pub. L. 89-485,
Secs. 12(a), 13(h), July 1, 1966, 80 Stat. 241, 243; Pub. L. 97-320,
title IV, Sec. 410(b), Oct. 15, 1982, 96 Stat. 1515; Pub. L. 97-457,
Sec. 22, Jan. 12, 1983, 96 Stat. 2509; Pub. L. 106-102, title I,
Sec. 121(b), Nov. 12, 1999, 113 Stat. 1378.)
References in Text
The effective date of this Act, referred to in subsec. (b)(2)(E),
probably means the effective date as provided by Pub. L. 97-320, which
completely revised this section. Section 410(c) of Pub. L. 97-320 set
out as an Effective Date of 1982 Amendment note below, provided that
this section shall apply to any transaction entered into after Oct. 15,
1982 with certain exceptions.
The Gramm-Leach-Bliley Act, referred to in subsecs. (b)(11) and
(e)(4)(B), is Pub. L. 106-102, Nov. 12, 1999, 113 Stat. 1338. Section
122 of the Act is set out as a note under section 1843 of this title.
For complete classification of this Act to the Code, see Short Title of
1999 Amendment note set out under section 1811 of this title and Tables.
This chapter, referred to in subsec. (e)(4)(B), was in the original
``this Act'', meaning act Dec. 23, 1913, ch. 6, 38 Stat. 251, as
amended, known as the Federal Reserve Act. For complete classification
of this act to the Code, see References in Text note set out under
section 226 of this title and Tables.
Amendments
1999--Subsec. (b)(11). Pub. L. 106-102, Sec. 121(b)(2), added par.
(11).
Subsec. (e). Pub. L. 106-102, Sec. 121(b)(1)(B), added subsec. (e).
Former subsec. (e) redesignated (f).
Subsec. (f). Pub. L. 106-102, Sec. 121(b)(1)(A), (3), redesignated
subsec. (e) as (f) and added par. (3).
1983--Subsec. (d)(1). Pub. L. 97-457, Sec. 22(1), substituted
``subject to the prohibition contained in subsection (a)(3) of this
section'' for ``except for the purchase of a low-quality asset which is
prohibited''.
Subsec. (d)(6). Pub. L. 97-457, Sec. 22(2), inserted ``, subject to
the prohibition contained in subsection (a)(3) of this section,'' after
``market quotation or''.
1982--Pub. L. 97-320 amended section generally by substituting
provisions in lettered subsections relating to restrictions on
transactions with affiliates, collateral for such transactions,
exemptions for certain transactions and rulemaking and additional
exemptions, for prior undesignated paragraphs which read as follows:
``No member bank shall (1) make any loan or any extension of credit
to, or purchase securities under repurchase agreement from, any of its
affiliates, or (2) invest any of its funds in the capital stock, bonds,
debentures, or other such obligations of any such affiliate, or (3)
accept the capital stock, bonds, debentures, or other such obligations
of any such affiliate as collateral security for advances made to any
person, partnership, association, or corporation, if, in the case of any
such affiliate, the aggregate amount of such loans, extensions of
credit, repurchase agreements, investments, and advances against such
collateral security will exceed 10 per centum of the capital stock and
surplus of such member bank, or if, in the case of all such affiliates,
the aggregate amount of such loans, extensions of credits, repurchase
agreements, investments, and advances against such collateral security
will exceed 20 per centum of the capital stock and surplus of such
member bank.
``Within the foregoing limitations, each loan or extension of credit
of any kind or character to an affiliate shall be secured by collateral
in the form of stocks, bonds, debentures, or other such obligations
having a market value at the time of making the loan or extension of
credit of at least 20 per centum more than the amount of the loan or
extension of credit, or of at least 10 per centum more than the amount
of the loan or extension of credit if it is secured by obligations of
any State or of any political subdivision or agency thereof: Provided,
That the provisions of this paragraph shall not apply to loans or
extensions of credit secured by obligations of the United States
Government, the Federal intermediate credit banks, the Federal land
banks, or the Federal Home Loan Banks, or by such notes, drafts, bills
of exchange, or bankers' acceptances as are eligible for rediscount or
for purchase by Federal Reserve Banks. A loan or extension of credit to
a director, officer, clerk, or other employee, or any representative of
any such affiliate, shall be deemed a loan to the affiliate to the
extent that the proceeds of such loan are used for the benefit of or
transferred to the affiliate.
``The provisions of this section shall not apply to any affiliate
(1) engaged solely in holding the bank premises of the member bank with
which it is affiliated; (2) engaged solely in conducting a safe-deposit
business or the business of an agricultural credit corporation or
livestock loan company; (3) in the capital stock of which a national
banking association is authorized to invest pursuant to section 25 of
this Act, as amended [12 U.S.C. 601 et seq.], or a subsidiary of such
affiliate, all the stock of which (except qualifying shares of directors
in an amount not to exceed 10 per centum) is owned by such affiliate;
(4) organized under section 25(a) of this Act, as amended [12 U.S.C. 611
et seq.], of this title, or a subsidiary of such affiliate, all the
stock of which (except qualifying shares of directors in an amount not
to exceed 10 per centum) is owned by such affiliate; (5) engaged solely
in holding obligations of the United States or obligations fully
guaranteed by the United States as to principal and interest, the
Federal intermediate credit banks, the Federal land banks, the Federal
Home Loan Banks; (6) where the affiliate relationship has arisen out of
a bona fide debt contracted prior to the date of the creation of such
relationship; or (7) where the affiliate relationship exists by reason
of the ownership or control of any voting shares thereof by a member
bank as executor, administrator, trustee, receiver, agent, depositary,
or in any other fiduciary capacity, except where such shares are held
for the benefit of all or a majority of the stockholders of such member
bank; but as to any such affiliate, member banks shall continue to be
subject to other provisions of law applicable to loans by such banks and
investments by such banks in stocks, bonds, debentures, or other such
obligations. The provisions of this section shall likewise not apply to
indebtedness of any affiliate for unpaid balances due a bank on assets
purchased from such bank or to loans secured by, or extensions of credit
against, obligations of the United States or obligations fully
guaranteed by the United States as to principal and interest.
``For the purposes of this section, (1) the term `extension of
credit' and `extensions of credit' shall be deemed to include (A) any
purchase of securities, other assets or obligations under repurchase
agreement, and (B) the discount of promissory notes, bills of exchange,
conditional sales contracts, or similar paper, whether with or without
recourse, except that the acquisition of such paper by a member bank
from another bank, without recourse, shall not be deemed to be a
`discount' by such member bank for such other bank; and (2) noninterest-
bearing deposits to the credit of a bank shall not be deemed to be a
loan or advance or extension of credit to the bank of deposit, nor shall
the giving of immediate credit to a bank upon uncollected items received
in the ordinary course of business be deemed to be a loan or advance or
extension of credit to the depositing bank.
``For the purposes of this section, the term `affiliate' shall
include, with respect to any member bank, any bank holding company of
which such member bank is a subsidiary within the meaning of the Bank
Holding Company Act of 1956, as amended [12 U.S.C. 1841 et seq.], and
any other subsidiary of such company.
``The provisions of this section shall not apply to (1) stock,
bonds, debentures, or other obligations of any company of the kinds
described in section 4(c)(1) of the Bank Holding Company Act of 1956, as
amended [12 U.S.C. 1843(c)(1)]; (2) stock, bonds, debentures, or other
obligations accepted as security for debts previously contracted,
provided that such collateral shall not be held for a period of over two
years; (3) shares which are of the kinds and amounts eligible for
investment by national banks under the provisions of section 24 of this
title; (4) any extension of credit by a member bank to a bank holding
company of which such bank is a subsidiary or to another subsidiary of
such bank holding company, if made within one year after July 1, 1966,
and pursuant to a contract lawfully entered into prior to January 1,
1966; or (5) any transaction by a member bank with another bank the
deposits of which are insured by the Federal Deposit Insurance
Corporation, if more than 50 per centum of the voting stock of such
other bank is owned by the member bank or held by trustees for the
benefit of the shareholders of the member bank.''
1966--Pub. L. 89-485 added last three pars. and struck out from
third par. introductory statement that term ``affiliate'' shall include
holding company affiliates as well as other affiliates, respectively.
Such added pars. make ``extension of credit'' cover all purchases under
repurchase agreements and the discount of promissory notes, bills of
exchange, conditional sales contracts, or similar paper, whether with or
without recourse, excluding therefrom such discounts by one bank for
another, if without recourse, exclude from being deemed a loan, advance,
or extension of credit noninterest bearing deposits to the credit of a
bank or the giving of immediate credit to a bank for uncollected items
received in the ordinary course of business, define term ``affiliate''
(superseding one stricken from par. three), and exempt stocks, bonds,
debentures, or other obligations of companies described in section
4(c)(1) of the Bank Holding Company Act of 1956, as amended; or accepted
as security for debts previously contracted, shares of the kind and
amounts eligible for investment by national banks under section 24 of
this title, loans by a bank to its holding company or a fellow
subsidiary if made within one year after July 1, 1966 and pursuant to a
contract lawfully entered before Jan. 1, 1966, and transactions between
a member bank and a majority-owned insured bank.
1959--Pub. L. 86-230 struck out from second and third pars.
references to Home Owners' Loan Corporation after Federal Home Loan
Banks.
1954--Act June 30, 1954, amended third par. substituting ``solely''
for ``on June 16, 1934'' after ``(1) engaged'' and struck out ``or in
maintaining and operating properties acquired for banking purposes prior
to such date'' after ``is affiliated''.
1935--Act Aug. 23, 1935, amended third par.
Effective Date of 1999 Amendment
Amendment by Pub. L. 106-102 effective 120 days after Nov. 12, 1999,
see section 161 of Pub. L. 106-102, set out as a note under section 24
of this title.
Effective Date of 1982 Amendment
Section 410(c) of Pub. L. 97-320 provided that: ``Section 23A of the
Federal Reserve Act, as amended by this section [this section], shall
apply to any transaction entered into after the date of enactment of
this Act [Oct. 15, 1982], except for transactions which are the subject
of a binding written contract or commitment entered into on or before
July 28, 1982, and except that any renewal of a participation in a loan
outstanding on July 28, 1982, to a company that becomes an affiliate as
a result of the enactment of this Act [see section 1 of Pub. L. 97-320,
set out as a Short Title of 1982 Amendments note under section 226 of
this title], or any participation in a loan to such an affiliate
emanating from the renewal of a binding written contract or commitment
outstanding on July 28, 1982, shall not be subject to the collateral
requirements of this Act.''
Section Referred to in Other Sections
This section is referred to in sections 371c-1, 504, 601, 1468,
1815, 1828, 1831o, 1831w, 1841, 1843, 3909 of this title.
