[Federal Register Volume 62, Number 135 (Tuesday, July 15, 1997)]
[Proposed Rules]
[Pages 37744-37747]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-18526]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 62, No. 135 / Tuesday, July 15, 1997 / 
Proposed Rules  

[[Page 37744]]


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FEDERAL RESERVE SYSTEM

12 CFR Part 250

[Miscellaneous Interpretations; Docket R-0977]


Applicability of Sections 23A and 23B of the Federal Reserve Act 
to Transactions Between a Member Bank and Its Subsidiaries

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of proposed rulemaking.

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SUMMARY: Sections 23A and 23B of the Federal Reserve Act restrict the 
ability of a member bank to fund an affiliate through direct 
investment, loans, or other transactions. The Board is proposing to 
apply sections 23A and 23B to transactions between a member bank and 
any subsidiary that engages in activities that are impermissible for 
the bank itself and that Congress has not previously exempted from 
coverage by section 23A. The proposed treatment is largely consistent 
with the existing treatment of these subsidiaries by the other banking 
agencies, which have applied sections 23A and 23B in some form to 
transactions between a bank and such subsidiaries.

DATES: Comments must be submitted on or before September 3, 1997.

ADDRESSES: Comments, which should refer to Docket No. R-0977, may be 
mailed to Mr. William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, D.C. 20551. Comments addressed to Mr. Wiles also may be 
delivered to the Board's mail room between 8:45 a.m. and 5:15 p.m. and 
to the security control room outside of those hours. Both the mail room 
and the security control room are accessible from the courtyard 
entrance on 20th Street between Constitution Avenue and C Street, N.W. 
Comments may be inspected in Room MP-500 between 9:00 a.m. and 5:00 
p.m. weekdays, except as provided in Sec. 261.8 of the Board's Rules 
Regarding Availability of Information, 12 CFR 261.8.

FOR FURTHER INFORMATION CONTACT: Gregory Baer, Managing Senior Counsel 
(202/452-3236), Pamela G. Nardolilli, Senior Attorney (202/452-3289), 
or Deborah M. Awai, Senior Attorney (202/452-3594), Legal Division or 
Roger T. Cole, Deputy Associate Director (202/452-2618), Banking 
Supervision and Regulation or Molly S. Wassom, Assistant Director, 
Banking Supervision and Regulation (202/452-2305), Board of Governors 
of the Federal Reserve System. For the hearing impaired only, 
Telecommunications Device of the Deaf (TDD), Diane Jenkins (202/452-
3254).

SUPPLEMENTARY INFORMATION:

Background

Restrictions of Sections 23A and 23B

    Sections 23A and 23B of the Federal Reserve Act are designed to 
protect a member bank from loss in transactions with its 
affiliates.1 Although sections 23A and 23B originally 
applied only to member banks, Congress has since applied these sections 
to insured nonmember banks and savings associations in the same manner 
as they apply to member banks.2 Section 23A protects these 
institutions in three major ways. First, the statute limits ``covered 
transactions'' with any single affiliate to no more than 10 percent of 
the bank's capital and surplus, and aggregate transactions with all 
affiliates to no more than 20 percent of capital and 
surplus.3 Covered transactions include extensions of credit, 
investments, and other transactions exposing the member bank to risk. 
Second, all transactions between a member bank and its affiliate must 
be on terms and conditions consistent with safe and sound banking 
practices, and, in particular, a bank may not purchase low-quality 
assets from the bank's affiliate. Finally, the statute requires that 
all credit exposures to an affiliate be secured by a statutorily 
defined amount of collateral.
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    \1\ 12 U.S.C. 371c, 371c-1.
    \2\ 12 U.S.C. 1828(j); 12 U.S.C. 1468.
    \3\ ``Capital and surplus'' has been defined by the Board as 
tier 1 and tier 2 capital plus the balance of an institution's 
allowance for loan and lease losses not included in tier 2 capital. 
12 CFR 250.242.
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    Section 23B of the Federal Reserve Act requires a member bank to 
engage in transactions with its affiliates only on terms and under 
circumstances that are substantially the same or at least as favorable 
as those prevailing at the time for comparable transactions with 
unaffiliated companies.4 Section 23B applies this 
restriction to any covered transaction as defined by section 23A, as 
well as other transactions, such as a sale of securities or other 
assets to an affiliate and the payment of money or the furnishing of 
services to an affiliate.
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    \4\ 12 U.S.C. 371c-1(a)(1). Section 23B also contains other 
provisions that apply in limited cases.
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Coverage of Subsidiaries of Banks

    Section 23A defines an ``affiliate'' of a member bank to include 
any company that controls the member bank and any company that is under 
common control with the member bank.5 (The definition is 
applied to insured nonmember banks and savings associations in the same 
way as member banks.) Section 23A excludes from the definition of 
``affiliate'' any subsidiary of the bank, unless the Board determines 
by regulation or order that the subsidiary should be considered an 
affiliate. The statute also excludes from the definition of 
``affiliate'' companies engaged solely in certain specified activities: 
holding the premises of the member bank, conducting a safe deposit 
business, or holding obligations issued or guaranteed by the United 
States or its agencies.6
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    \5\ 12 U.S.C. 371c(b)(1). The definition also includes other 
entities as an affiliate, including a bank subsidiary of a member 
bank.
    \6\ 12 U.S.C. 371c(b)(2). The statute temporarily excludes 
companies where control of the company results from the exercise of 
rights arising out of a bona fide debt previously contracted. The 
exception generally lasts for two years.
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    When section 23A was originally enacted as part of the Banking Act 
of 1933, a majority-owned subsidiary of a member bank was included as 
an affiliate of the member bank.7 In its 1982 redrafting of 
section 23A, Congress, at the Board's urging, amended the definition of 
``affiliate'' in section 23A to exclude nonbank 
subsidiaries.8 This statutory amendment was consistent with 
the law as it had developed since 1933. The 1933 version of section 23A 
already exempted from the definition of ``affiliate'' Edge Act 
subsidiaries, Agreement corporations, companies holding bank premises, 
companies

[[Page 37745]]

conducting a safe deposit business, and certain other member bank 
subsidiaries that Congress had authorized. In 1970, the Board issued an 
interpretation that also excluded from section 23A any transaction 
between a member bank and its ``operations subsidiary,'' defined as ``a 
separately incorporated department of the bank, performing, at 
locations at which the bank is authorized to engage in business, 
functions that the bank is empowered to perform directly.'' 
9 Thus, in recommending that Congress exempt subsidiaries in 
1982, the Board stated, ``It should be noted that this liberalization 
is much more limited than it might first appear * * *. [M]ember banks 
are generally prohibited from purchasing stock, and of the few types of 
companies whose stock is exempt from this prohibition, several are 
already exempt from the restriction of Section 23A.'' 10
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    \7\ Banking Act of 1933, Pub. L. 73-66, section 13, 48 Stat. 
162, 183 (1933).
    \8\ Banking Affiliates Act of 1982, Pub. L. 97-320, section 410, 
96 Stat. 1469, 1515 (1982) (codified at 12 U.S.C. 371c(b)(2)(A)).
    \9\ 12 CFR 250.240 (1997).
    \10\ A Discussion of Amendments to Section 23A of the Federal 
Reserve Act Proposed by the Board of Governors of the Federal 
Reserve System 15 (September 1981) (hereafter, Board's 23A Proposal) 
(attached as appendix to correspondence from Chairman Paul Volcker 
to the Chairman and Ranking Members of the House and Senate 
Committees on Banking, Housing and Urban Affairs, October 2, 1981).
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    Although Congress generally exempted transactions with a subsidiary 
from section 23A, it expressly granted the Board authority to reimpose 
sections 23A and 23B on any subsidiary that has ``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.'' 11 The Board has had 
few occasions to exercise this authority, as subsidiaries of banks 
generally have continued to be limited in their activities to those on 
which the 1982 amendments were premised.12
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    \11\ 12 U.S.C. 371c(b)(1)(E).
    \12\ In one case, the Board concluded that transactions between 
a bank and a subsidiary that engaged in underwriting life insurance 
abroad should be limited by section 23A. Citibank Overseas 
Investment Corporation, 70 Fed. Res. Bull. 68 (1984). In another 
case, the Board determined that certain investment advisory 
subsidiaries of a national bank should be treated as affiliates of 
the bank. Wells Fargo & Company, 76 Fed. Res. Bull. 465,466 (1990).
    In addition, in 1987, the Board solicited comment on a proposal 
regarding the real estate investment and development activities of 
subsidiaries of banks owned by bank holding companies. 52 FR 42301 
(1987). As part of its rulemaking, the Board sought comment on 
whether to apply sections 23A and 23B to the subsidiaries of banks 
engaged in real estate activities. The Board never issued a final 
rule, as market conditions caused banks to curtail their real estate 
activities and thereby made such action unnecessary.
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Expansion of Subsidiary Activities

    Increasingly, however, operating subsidiaries are being authorized 
to engage in activities impermissible for the bank. The Board recently 
expressed its belief that Congress did not intend, in the National Bank 
Act or elsewhere, to allow national banks to engage through 
subsidiaries in activities prohibited to the national bank 
itself.13 Indeed, as noted above, the 1982 amendments to 
section 23A were based on the assumption that such activities were 
impermissible. However, Congress has allowed state banks and federal 
savings associations to engage through a subsidiary in some activities 
impermissible to the state bank or thrift itself. Thus, the issue of 
how a subsidiary engaged in activities impermissible for its parent 
institution should be treated for purposes of sections 23A and 23B 
arises regardless of the permissibility of those activities for 
national banks.
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    \13\ See, e.g., Comment Letter from Board to Comptroller of the 
Currency on Docket Numbers 97-06 and 97-07, May 5, 1997 (commenting 
on a national bank's proposal to engage in real estate development 
and leasing through a subsidiary).
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    For example, as amended in 1991, section 24 of the Federal Deposit 
Insurance Act (FDI Act), although generally prohibiting insured state 
banks from engaging as principal through a subsidiary in an activity 
that is not permissible for a subsidiary of a national bank, allows a 
state bank to engage in such an activity provided certain conditions 
are met: The activity must be authorized by the bank's state chartering 
authority, the bank must meet relevant capital requirements, and the 
Federal Deposit Insurance Corporation (FDIC) must determine that the 
activity will not pose a significant risk to the deposit insurance 
fund.14 Acting under that authority, the FDIC recently 
allowed by order some state chartered banks to invest in real estate 
through majority-owned subsidiaries as authorized by state law, and has 
issued a proposed rulemaking that would allow such activity by 
regulation when authorized by state law, subject to certain 
restrictions.15
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    \14\ 12 U.S.C. 1831a.
    \15\ 61 FR 43486 (1996).
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    As drafted, the FDIC's proposed rule would require the bank to 
comply with sections 23A and 23B in its transactions with a real estate 
subsidiary to the same extent as if the subsidiary were an affiliate, 
except that a bank's loan to finance the sale of real estate by the 
subsidiary to a third party would not be subject to the limits of 
section 23A provided that it complied with section 23B.16
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    \16\ Id. at 43499. If such credit were extended to a third party 
to purchase property from an affiliate, the credit would be subject 
to the ``attribution rule'' of sections 23A and 23B, whereby any 
transaction where the proceeds are used for the benefit of, or 
transferred to, an affiliate is considered a transaction with the 
affiliate. 12 U.S.C. 371c(a)(2), 371c-1(a)(3).
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    The FDIC also has promulgated a rule establishing parameters 
pursuant to which state nonmember banks may, if authorized by their 
state chartering authority, underwrite and deal in securities. The FDIC 
generally applies the restrictions of section 23A of the Federal 
Reserve Act to extensions of credit to such a subsidiary, but does not 
include investments in the subsidiary toward the 23A limit and does not 
apply the attribution rule of section 23A. However, very few, if any, 
state nonmember banks have established a securities subsidiary pursuant 
to this rule.17
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    \17\ See General Accounting Office, Banks' Securities 
Activities: Oversight Differs Depending on Activity and Regulator 65 
(1995) (sampling found no state nonmember banks engaged in 
underwriting and dealing in bank-ineligible securities). FDIC staff 
is currently aware of only one such subsidiary.
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    With respect to thrifts, section 5(c)(4)(B) of the Home Owners' 
Loan Act (HOLA) allows a savings association to invest up to three 
percent of its assets in the capital stock, obligations, and other 
securities of a ``service corporation.'' 18 Under Office of 
Thrift Supervision (OTS) rules, a service corporation may conduct any 
activity ``reasonably related'' to the activities of financial 
institutions, even if that activity is not permitted to the parent 
savings association.19 Pursuant to OTS rules, extensions of 
credit by a savings association to a majority-owned service corporation 
generally are not subject to funding restrictions akin to sections 23A 
and 23B, although other restrictions are applied by statute and 
regulation.
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    \18\ 12 U.S.C. 1464(c)(4)(B).
    \19\ 12 CFR 559.4. The OTS distinguishes service corporations 
from ``operating subsidiaries,'' which by definition may engage only 
in activities the savings association may conduct directly.
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    Finally, as noted above, the Office of the Comptroller of the 
Currency (OCC) recently amended its rules to allow a national bank to 
engage through an operating subsidiary in activities prohibited to the 
national bank. The OCC rule would subject transactions between national 
banks and such subsidiaries to sections 23A and 23B.20
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    \20\  61 FR 60342 (1996) (codified at 5 CFR 5.34 (f)(3)(ii)).

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[[Page 37746]]

Proposal

Coverage of Transactions Between Member Banks and Their Subsidiaries

    The Board is proposing to designate a subsidiary of a member bank 
as an affiliate of the member bank if the subsidiary engages in 
functions that the member bank is not empowered to perform directly and 
that Congress has not previously exempted from sections 23A and 23B. 
Covered activities could include real estate development and 
underwriting and dealing in bank-ineligible securities. The Board 
believes, and proposes to find under the standard set forth in section 
23A(b)(1)(E), that the relationship of such a subsidiary to its parent 
institution could result in funding of the subsidiary to the detriment 
of the bank.
    Absent application of sections 23A and 23B, a bank would have a 
strong incentive to use its resources to prevent the failure of a 
subsidiary or affiliate. Such efforts could include lending below 
market rates, lending more than is prudent, or purchasing low quality 
assets from the subsidiary or affiliate. Indeed, the risks to an 
insured depository institution from a subsidiary (as well as the 
rewards) appear to be greater than those present when nonbanking 
activities are conducted in a holding company affiliate of the 
institution. Under generally accepted accounting principles and 
regulatory capital rules, losses of the subsidiary would generally be 
consolidated with the parent bank, thereby adversely affecting the 
capital position of the bank from both a market and regulatory 
perspective. Furthermore, because the bank owns and controls the 
management and operation of the subsidiary, its reputational stake is 
greater. Thus, in the Board's view, the incentive of bank management to 
prevent or defer losses through easy credit and other transactions is 
that much stronger.
    The Board is also concerned that imposition of sections 23A and 23B 
on an ad hoc basis by different agencies could result in 
inconsistencies that would create confusion or competitive advantage by 
charter or structure. The Board believes that it was this result that 
Congress sought to avoid by authorizing the Board to write the 
regulations in this area.
    Finally, the Board believes that imposition of sections 23A and 23B 
could help to ensure corporate separateness. The requirement of section 
23B that transactions be on market terms, in particular, could help to 
prevent piercing of the bank's corporate veil. Nonetheless, the Board 
recognizes that in this area, and with respect to other safety and 
soundness concerns, imposition of sections 23A and 23B is not itself 
sufficient. Ensuring that banks observe appropriate principles of 
corporate separateness in dealing with their subsidiaries, and that the 
relationship of a subsidiary to its parent bank does not otherwise 
endanger the bank, will remain the responsibility of the bank's 
appropriate Federal banking agency, as would primary responsibility for 
monitoring compliance with sections 23A and 23B to the extent that they 
were applied.
    The Board is not proposing to alter the statutory exemption from 
sections 23A and 23B for two types of subsidiaries. First, the Board's 
proposal would not affect the statutory exemption for subsidiaries that 
are engaged solely in activities in which the member bank could engage 
directly. Although concerns about imprudent funding by a bank exist 
with respect to these subsidiaries as well, they have traditionally 
been exempt from sections 23A and 23B, and it is these subsidiaries 
that Congress understood it was exempting in the 1982 amendments. More 
practically speaking, covering these subsidiaries could result in the 
activities simply being transferred back to the bank, thereby imposing 
costs with no corresponding benefit. Thus, the Board is not proposing 
to apply sections 23A and 23B to such subsidiaries.
    The proposal also would not cover subsidiaries that Congress 
previously had exempted from sections 23A and 23B when those statutes 
generally applied to subsidiaries. In effect, Congress has determined 
that the benefits of allowing banks to assume financial exposure to 
these types of subsidiaries exceed the potential costs.
    The proposed rule addresses such subsidiaries in two ways. As 
noted, the 1933 version of section 23A exempted subsidiaries engaged in 
certain specified activities from coverage by sections 23A and 23B. One 
group of activities could be performed by either an affiliate or a 
subsidiary; although these activities no longer required an exemption 
if performed in a subsidiary after 1982, section 23A continued to 
exempt them if performed in an affiliate.21 These activities 
include conducting a safe deposit business or holding bank premises. 
Although the proposed rule would now treat a subsidiary conducting such 
activities as an affiliate under sections 23A and 23B, the subsidiary 
would also qualify for the exception that applies when such activities 
are conducted in an affiliate.22 Thus, no language in the 
proposed rule is necessary to exclude this group of companies from 
coverage as subsidiaries by sections 23A and 23B.
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    \21\ There were two other types of companies that could operate 
as either a subsidiary or an affiliate and that were exempt from the 
pre-1982 section 23A: agricultural credit corporations and livestock 
loan companies. However, on the Board's recommendation, Congress 
discontinued the affiliate exemption for these companies. Board's 
23A Proposal at 26.
    \22\ 12 U.S.C. 371c(b)(2)(B-D).
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    The second group of subsidiaries exempt under the 1933 Act were 
Edge Act subsidiaries and Agreement corporations. Because those 
companies were almost always subsidiaries of a bank, Congress did not 
retain a specific exception for them after the 1982 amendments (because 
they, like all other subsidiaries, were already exempt). Similarly, 
when member banks were first authorized to invest directly in the stock 
of foreign banks in 1966, Congress specifically authorized the Board to 
exempt transactions with such foreign bank subsidiaries from section 
23A.23 The Board did so between 1967 and 1982, but 
discontinued the exemption as unnecessary after 1982. Thus, the 
proposed rule needs to contain specific language exempting these 
subsidiaries.
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    \23\ 12 U.S.C. 601 (Third).
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Application of Sections 23A and 23B to Insured Nonmember Banks and 
Savings Associations

    As noted above, if the Board were to apply sections 23A and 23B to 
transactions between a member bank and its subsidiaries, then by 
operation of law such application would also extend to transactions 
between an insured nonmember bank and a subsidiary engaged in 
activities impermissible for its parent, and to transactions between a 
savings association and a subsidiary engaged in activities 
impermissible for its parent. However, especially in the savings 
association context, application of sections 23A and 23B raises certain 
policy issues. For example, in section 5 of the HOLA, Congress has 
expressly permitted a savings association to invest up to 3 percent of 
its assets in a service corporation--an amount greater than section 23A 
would allow.24 The Board believes that if section 23A were 
applied to service corporations, any investment in a subsidiary 
expressly permitted by section 5 of the HOLA therefore should be 
exempt. Furthermore, section 11(a)(1) of the

[[Page 37747]]

HOLA prohibits a savings association from making a loan or extension of 
credit to an affiliate if the affiliate is engaged in impermissible 
bank holding company activities. If the Board were to designate a 
subsidiary as an ``affiliate'' for purposes of sections 23A and 23B, 
then this lending prohibition arguably would be applied to savings 
associations subsidiaries. Subsidiaries of member banks are not subject 
to such a prohibition. Accordingly, the Board seeks comment on whether 
sections 23A and 23B should be applied to transactions between savings 
associations and their subsidiaries and, if so, in what manner.
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    \24\ At least one-half of the investment in excess of one 
percent of a savings association's assets must be primarily used for 
community, inner-city and community development purposes. 12 U.S.C. 
1464(c)(4)(B).
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    Similarly, section 302(b) of the Small Business Investment Act of 
1958 25 allows member banks and non-member insured banks to 
invest up to 5 percent of their capital and surplus in small business 
investment companies. The Board does not propose to include any 
investment by a member or nonmember insured bank in a subsidiary that 
qualifies as a small business investment company towards the 
limitations of section 23A, and seeks comment on whether any additional 
transactions should be covered.
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    \25\ 15 U.S.C. 682(b).
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Transactions Between a Subsidiary and an Affiliate

    Pursuant to sections 23A and 23B, transactions between a subsidiary 
of a bank and an affiliate of the bank are treated as if they are 
transactions between the parent bank and the affiliate. For example, a 
loan by a subsidiary of a bank to an affiliate of the bank is subject 
to the collateral and other qualitative restrictions of sections 23A 
and 23B, and the amount of the loan is counted toward the bank's 
quantitative limits. This treatment is consistent with such 
subsidiaries being considered departments of the bank.
    However, when such subsidiaries engage in activities not permitted 
to the bank, and the bank would be limited by the proposed rule in its 
ability to fund such subsidiaries, this restriction may no longer be 
appropriate. If a subsidiary is no longer treated as a part of the bank 
when it borrows, it could be argued that the subsidiary should not be 
treated as part of the bank when lending to other affiliates. 
Accordingly, the Board seeks comment on whether transactions between a 
bank subsidiary and an affiliate of the bank should be exempt from 
section 23A or 23B when the subsidiary is limited by sections 23A and 
23B in the funding it can receive from its parent bank.

Remaining Issues

    The Board recognizes that application of sections 23A and 23B to 
bank subsidiaries may raise interpretive issues that the current 
application to affiliates has not. For example, under Generally 
Accepted Accounting Principles, retained earnings of a subsidiary are 
considered an investment in the subsidiary by its parent bank and would 
therefore be considered a covered transaction for purposes of sections 
23A and 23B.26 The Board seeks comment on whether additional 
interpretive issues should be addressed in the final rule.
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    \26\ 12 U.S.C. 371c(b)(7)(B).
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Regulatory Flexibility Act Analysis

    This proposal is not expected to have a significant economic impact 
on a substantial number of small business entities within the meaning 
of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) because a 
substantial number of small insured depository institutions do not 
operate subsidiaries that are subject to the regulation. The Board 
recognizes that some small state banks have established subsidiaries 
engaged in real estate activities pursuant to section 24 of the FDI 
Act, and the proposal would apply sections 23A and 23B to transactions 
between the state banks and these subsidiaries. However, in its orders 
approving such subsidiaries, the FDIC generally has required compliance 
with sections 23A and 23B. The Board seeks comment on whether the 
proposal would impose any additional burden on these entities, and what 
relief would be appropriate.

Paperwork Reduction Act

    No collection of information pursuant to section 3504(h) of the 
Paperwork Reduction Act (44 U.S.C. 3501 et seq.) is contained in this 
notice.

List of Subjects in 12 CFR Part 250

    Banks, banking, Federal Reserve System.

    For the reasons set forth in the preamble, the Board proposes to 
amend 12 CFR part 250 as follows:

PART 250--MISCELLANEOUS INTERPRETATIONS

    1. The authority citation for part 250 continues to read as 
follows:

    Authority: 12 U.S.C. 78, 248(i) and 371c(e).

    2. Section 250.243 is added to read as follows:


Sec. 250.243  Applicability of sections 23A and 23B of the Federal 
Reserve Act to transactions between a member bank and its subsidiaries.

    (a) Covered transactions between an insured depository institution 
and its subsidiary--(1) In general. For purposes of sections 23A(b)(1) 
and 23B(d)(1) of the Federal Reserve Act (12 U.S.C. 371c(b)(1) and 
371c-1(d)(1)), ``affiliate'' with respect to a member bank includes any 
subsidiary of the member bank that engages, directly or through a 
subsidiary, in any activity in which its parent bank may not engage 
directly.
    (2) Exception for certain subsidiaries. The following subsidiaries 
shall not be considered an affiliate for purposes of paragraph (a)(1) 
of this section:
    (i) A corporation organized and operating under section 25A of the 
Federal Reserve Act (12 U.S.C. 611-631), and any subsidiary thereof;
    (ii) A corporation operating under section 25 of the Federal 
Reserve Act (12 U.S.C. 601), and any subsidiary thereof; and
    (iii) A foreign bank held under authority of section 25 of the 
Federal Reserve Act (12 U.S.C. 601), and any subsidiary thereof.
    (3) Exception for certain investments. An investment in a small 
business investment company pursuant to section 302(b) of the Small 
Business Investment Act of 1958 (15 U.S.C. 682(b)) shall not be subject 
to the lending limit of section 23A(a)(1)(A) and shall not count 
towards the aggregate lending limit of section 23A(a)(1)(B) (12 U.S.C. 
371c (a)(1)(A) and (a)(1)(B)).
    (b) Covered transactions between a subsidiary of an insured 
depository institution and an affiliate of the institution. For 
purposes of sections 23A(a)(1), 23A(c), and 23B(a)-(c) of the Federal 
Reserve Act (12 U.S.C. 371c(a)(1), 371c(c), and 371c-1(a)-(c)), a 
subsidiary of a member bank shall not include any subsidiary that is 
considered an affiliate for purposes of paragraph (a)(1) of this 
section.

    By order of the Board of Governors of the Federal Reserve 
System, July 3, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-18526 Filed 7-14-97; 8:45 am]
BILLING CODE 6210-01-P