PRIA, Government Policy, Made Personal

Summary

Banks and their subsidiaries must only do business with related companies (affiliates) on terms that are basically the same as deals they would make with outside, unaffiliated companies. If no similar deals exist, the bank must use honest, fair terms it would offer to an outside company. This rule covers many kinds of deals, like loans or other covered transactions, selling securities or assets (including repurchase agreements), paying money or providing services under contracts or leases, acting through an affiliate as agent or broker for fees, or deals involving a third party when an affiliate has a financial interest or takes part. A deal counts as with an affiliate if any of the money goes to or benefits that affiliate. A bank or its subsidiary cannot, as a trustee or fiduciary, buy securities or assets from an affiliate unless the trust document, a court order, or the governing law allows it. A bank must not buy securities during an underwriting if an affiliate is a principal underwriter, unless a majority of the bank’s directors approve before those securities are first offered to the public. Banks also may not advertise or promise to be responsible for an affiliate’s debts. Key terms: affiliate = related company; bank, subsidiary, person, security, and covered transaction are defined under section 371c. The Federal Reserve Board can make rules and, with notice to the FDIC, may grant limited exemptions unless the FDIC objects in writing within 60 days because of risk to the Deposit Insurance Fund.

Title 12, §371c–1

Banks and Banking, Source: USLM XML via OLRC

(a)(1)A member bank and its subsidiaries may engage in any of the transactions described in paragraph (2) only—

(A)on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to such bank or its subsidiary, as those prevailing at the time for comparable transactions with or involving other nonaffiliated companies, or

(B)in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to, or would apply to, nonaffiliated companies.

(2)Paragraph (1) applies to the following:

(A)Any covered transaction with an affiliate.

(B)The sale of securities or other assets to an affiliate, including assets subject to an agreement to repurchase.

(C)The payment of money or the furnishing of services to an affiliate under contract, lease, or otherwise.

(D)Any transaction in which an affiliate acts as an agent or broker or receives a fee for its services to the bank or to any other person.

(E)Any transaction or series of transactions with a third party—

(i)if an affiliate has a financial interest in the third party, or

(ii)if an affiliate is a participant in such transaction or series of transactions.

(3)For the purpose of this subsection, any transaction by a member bank or its subsidiary with any person shall be deemed to be a transaction with an affiliate of such bank if any of the proceeds of the transaction are used for the benefit of, or transferred to, such affiliate.

(b)(1)A member bank or its subsidiary—

(A)shall not purchase as fiduciary any securities or other assets from any affiliate unless such purchase is permitted—

(i)under the instrument creating the fiduciary relationship,

(ii)by court order, or

(iii)by law of the jurisdiction governing the fiduciary relationship; and

(B)whether acting as principal or fiduciary, shall not knowingly purchase or otherwise acquire, during the existence of any underwriting or selling syndicate, any security if a principal underwriter of that security is an affiliate of such bank.

(2)Subparagraph (B) of paragraph (1) shall not apply if the purchase or acquisition of such securities has been approved, before such securities are initially offered for sale to the public, by a majority of the directors of the bank based on a determination that the purchase is a sound investment for the bank irrespective of the fact that an affiliate of the bank is a principal underwriter of the securities.

(3)For the purpose of this subsection—

(A)the term “security” has the meaning given to such term in section 78c(a)(10) of title 15; and

(B)the term “principal underwriter” means any underwriter who, in connection with a primary distribution of securities—

(i)is in privity of contract with the issuer or an affiliated person of the issuer;

(ii)acting alone or in concert with one or more other persons, initiates or directs the formation of an underwriting syndicate; or

(iii)is allowed a rate of gross commission, spread, or other profit greater than the rate allowed another underwriter participating in the distribution.

(c)A member bank or any subsidiary or affiliate of a member bank shall not publish any advertisement or enter into any agreement stating or suggesting that the bank shall in any way be responsible for the obligations of its affiliates.

(d)For the purpose of this section—

(1)the term “affiliate” has the meaning given to such term in section 371c of this title (but does not include any company described in section 11 So in original. Probably should be “subsection”. (b)(2) of such section or any bank);

(2)the terms “bank”, “subsidiary”, “person”, and “security” (other than security as used in subsection (b)) have the meanings given to such terms in section 371c of this title; and

(3)the term “covered transaction” has the meaning given to such term in section 371c of this title (but does not include any transaction which is exempt from such definition under subsection (d) of such section).

(e)(1)The Board may prescribe regulations to administer and carry out the purposes of this section, including—

(A)regulations to further define terms used in this section; and

(B)subject to paragraph (2), if the Board finds that an exemption or exclusion is in the public interest and is consistent with the purposes of this section, and notifies the Federal Deposit Insurance Corporation of such finding, regulations to—

(i)exempt transactions or relationships from the requirements of this section; and

(ii)exclude any subsidiary of a bank holding company from the definition of affiliate for purposes of this section.

(2)The Board may grant an exemption or exclusion under this subsection only if, during the 60-day period beginning on the date of receipt of notice of the finding from the Board under paragraph (1)(B), the Federal Deposit Insurance Corporation does not object, in writing, to such exemption or exclusion, based on a determination that the exemption presents an unacceptable risk to the Deposit Insurance Fund.

Notes & Related Subsidiaries

Editorial Notes

Amendments

2010—Subsec. (e). Pub. L. 111–203, § 608(b)(1)–(4), designated existing provisions as par. (1) and inserted heading, redesignated former pars. (1) and (2) as subpars. (A) and (B), respectively, of par. (1), redesignated former subpars. (A) and (B) of par. (2) as cls. (i) and (ii), respectively, of par. (1)(B), realigned margins, and struck out concluding provisions which read as follows: “if the Board finds such exemptions or exclusions are in the public interest and are consistent with the purposes of this section.” Subsec. (e)(1)(B). Pub. L. 111–203, § 608(b)(5)(A), inserted “subject to paragraph (2), if the Board finds that an exemption or exclusion is in the public interest and is consistent with the purposes of this section, and notifies the Federal Deposit Insurance Corporation of such finding,” before “

Regulations

” in introductory provisions. Subsec. (e)(1)(B)(ii). Pub. L. 111–203, § 608(b)(5)(B), substituted period for comma at end. Subsec. (e)(2). Pub. L. 111–203, § 608(b)(6), added par. (2). 1999—Subsec. (b)(2). Pub. L. 106–102 amended text of par. (2) generally. Prior to amendment, text read as follows: “Subparagraph (B) of paragraph (1) shall not apply if the purchase or acquisition of such securities has been approved, before such securities are initially offered for sale to the public, by a majority of the directors of the bank who are not officers or employees of the bank or any affiliate thereof.”

Statutory Notes and Related Subsidiaries

Effective Date

of 2010 AmendmentAmendment by Pub. L. 111–203 effective 1 year after the transfer date, see section 608(d) of Pub. L. 111–203, set out as a note under section 371c of this title.

§371c–1 Restrictions on Transactions with Affiliates