[Code of Federal Regulations]
[Title 12, Volume 3]
[Revised as of January 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 12CFR223.3]

[Page 58-61]
 
                       TITLE 12--BANKS AND BANKING
 
                   CHAPTER II--FEDERAL RESERVE SYSTEM
 
PART 223--TRANSACTIONS BETWEEN MEMBER BANKS AND THEIR AFFILIATES (REGULATION W)--Table of Contents
 
                 Subpart A--Introduction and Definitions
 
Sec. 223.3  What are the meanings of the other terms used in sections 23A and 23B and this part?

    For purposes of this part:
    (a) Aggregate amount of covered transactions means the amount of the 
covered transaction about to be engaged in added to the current amount 
of all outstanding covered transactions.
    (b) Appropriate Federal banking agency with respect to a member bank 
or other depository institution has the same meaning as in section 3 of 
the Federal Deposit Insurance Act (12 U.S.C. 1813).
    (c) ``Bank holding company'' has the same meaning as in 12 CFR 
225.2.
    (d) ``Capital stock and surplus'' means the sum of:
    (1) A member bank's tier 1 and tier 2 capital under the risk-based 
capital guidelines of the appropriate Federal banking agency, based on 
the member bank's most recent consolidated Report of Condition and 
Income filed under 12 U.S.C. 1817(a)(3);
    (2) The balance of a member bank's allowance for loan and lease 
losses not included in its tier 2 capital under the risk-based capital 
guidelines of the appropriate Federal banking agency, based on the 
member bank's most recent consolidated Report of Condition and Income 
filed under 12 U.S.C. 1817(a)(3); and
    (3) The amount of any investment by a member bank in a financial 
subsidiary that counts as a covered transaction and is required to be 
deducted from the member bank's capital for regulatory capital purposes.
    (e) Carrying value with respect to a security means (unless 
otherwise provided) the value of the security on the financial 
statements of the member bank, determined in accordance with GAAP.
    (f) Company means a corporation, partnership, limited liability 
company, business trust, association, or similar organization and, 
unless specifically excluded, includes a member bank and a depository 
institution.
    (g) Control. (1) In general. ``Control'' by a company or shareholder 
over another company means that:
    (i) The company or shareholder, directly or indirectly, or acting 
through one or more other persons, owns, controls, or has power to vote 
25 percent or more of any class of voting securities of the other 
company;
    (ii) The company or shareholder controls in any manner the election 
of a majority of the directors, trustees, or general partners (or 
individuals exercising similar functions) of the other company; or
    (iii) The Board determines, after notice and opportunity for 
hearing, that the company or shareholder, directly or indirectly, 
exercises a controlling influence over the management or policies of the 
other company.
    (2) Ownership or control of shares as fiduciary. Notwithstanding any 
other

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provision of this regulation, no company will be deemed to control 
another company by virtue of its ownership or control of shares in a 
fiduciary capacity, except as provided in paragraph (a)(3) of Sec. 223.2 
or if the company owning or controlling the shares is a business trust.
    (3) Ownership or control of securities by subsidiary. A company 
controls securities, assets, or other ownership interests owned or 
controlled, directly or indirectly, by any subsidiary (including a 
subsidiary depository institution) of the company.
    (4) Ownership or control of convertible instruments. A company or 
shareholder that owns or controls instruments (including options or 
warrants) that are convertible or exercisable, at the option of the 
holder or owner, into securities, controls the securities, unless the 
company or shareholder presents information to the Board that 
demonstrates, to the Board's satisfaction, that the company or 
shareholder should not be deemed to control the securities.
    (5) Ownership or control of nonvoting securities. A company or 
shareholder that owns or controls 25 percent or more of the equity 
capital of another company controls the other company, unless the 
company or shareholder presents information to the Board that 
demonstrates, to the Board's satisfaction, that the company or 
shareholder does not control the other company.
    (h) Covered transaction with respect to an affiliate means:
    (1) An extension of credit to the affiliate;
    (2) A purchase of, or an investment in, a security issued by the 
affiliate;
    (3) A purchase of an asset from the affiliate, including an asset 
subject to recourse or an agreement to repurchase, except such purchases 
of real and personal property as may be specifically exempted by the 
Board by order or regulation;
    (4) The acceptance of a security issued by the affiliate as 
collateral for an extension of credit to any person or company; and
    (5) The issuance of a guarantee, acceptance, or letter of credit, 
including an endorsement or standby letter of credit, on behalf of the 
affiliate, a confirmation of a letter of credit issued by the affiliate, 
and a cross-affiliate netting arrangement.
    (i) Credit transaction with an affiliate means:
    (1) An extension of credit to the affiliate;
    (2) An issuance of a guarantee, acceptance, or letter of credit, 
including an endorsement or standby letter of credit, on behalf of the 
affiliate and a confirmation of a letter of credit issued by the 
affiliate; and
    (3) A cross-affiliate netting arrangement.
    (j) Cross-affiliate netting arrangement means an arrangement among a 
member bank, one or more affiliates of the member bank, and one or more 
nonaffiliates of the member bank in which:
    (1) A nonaffiliate is permitted to deduct any obligations of an 
affiliate of the member bank to the nonaffiliate when settling the 
nonaffiliate's obligations to the member bank; or
    (2) The member bank is permitted or required to add any obligations 
of its affiliate to a nonaffiliate when determining the member bank's 
obligations to the nonaffiliate.
    (k) ``Depository institution'' means, unless otherwise noted, an 
insured depository institution (as defined in section 3 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813)), but does not include any branch 
of a foreign bank. For purposes of this definition, an operating 
subsidiary of a depository institution is treated as part of the 
depository institution.
    (l) ``Derivative transaction'' means any derivative contract listed 
in sections III.E.1.a. through d. of Appendix A to 12 CFR part 225 and 
any similar derivative contract, including a credit derivative contract.
    (m) ``Eligible affiliated mutual fund securities'' has the meaning 
specified in paragraph (c)(2) of Sec. 223.24.
    (n) ``Equity capital'' means:
    (1) With respect to a corporation, preferred stock, common stock, 
capital surplus, retained earnings, and accumulated other comprehensive 
income, less treasury stock, plus any other account that constitutes 
equity of the corporation; and
    (2) With respect to a partnership, limited liability company, or 
other

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company, equity accounts similar to those described in paragraph (n)(1) 
of this section.
    (o) ``Extension of credit'' to an affiliate means the making or 
renewal of a loan, the granting of a line of credit, or the extending of 
credit in any manner whatsoever, including on an intraday basis, to an 
affiliate. An extension of credit to an affiliate includes, without 
limitation:
    (1) An advance to an affiliate by means of an overdraft, cash item, 
or otherwise;
    (2) A sale of Federal funds to an affiliate;
    (3) A lease that is the functional equivalent of an extension of 
credit to an affiliate;
    (4) An acquisition by purchase, discount, exchange, or otherwise of 
a note or other obligation, including commercial paper or other debt 
securities, of an affiliate;
    (5) Any increase in the amount of, extension of the maturity of, or 
adjustment to the interest rate term or other material term of, an 
extension of credit to an affiliate; and
    (6) Any other similar transaction as a result of which an affiliate 
becomes obligated to pay money (or its equivalent).
    (p) ``Financial subsidiary''
    (1) In general. Except as provided in paragraph (p)(2) of this 
section, the term ``financial subsidiary'' means any subsidiary of a 
member bank that:
    (i) Engages, directly or indirectly, in any activity that national 
banks are not permitted to engage in directly or that is conducted under 
terms and conditions that differ from those that govern the conduct of 
such activity by national banks; and
    (ii) Is not a subsidiary that a national bank is specifically 
authorized to own or control by the express terms of a Federal statute 
(other than 12 U.S.C. 24a), and not by implication or interpretation.
    (2) Exceptions. ``Financial subsidiary'' does not include:
    (i) A subsidiary of a member bank that is considered a financial 
subsidiary under paragraph (p)(1) of this section solely because the 
subsidiary engages in the sale of insurance as agent or broker in a 
manner that is not permitted for national banks; and
    (ii) A subsidiary of a State bank (other than a subsidiary described 
in section 46(a) of the Federal Deposit Insurance Act (12 U.S.C. 
1831w(a))) that is considered a financial subsidiary under paragraph 
(p)(1) of this section solely because the subsidiary engages in one or 
more of the following activities:
    (A) An activity that the State bank may engage in directly under 
applicable Federal and State law and that is conducted under the same 
terms and conditions that govern the conduct of the activity by the 
State bank; and
    (B) An activity that the subsidiary was authorized by applicable 
Federal and State law to engage in prior to December 12, 2002, and that 
was lawfully engaged in by the subsidiary on that date.
    (3) Subsidiaries of financial subsidiaries. If a company is a 
financial subsidiary under paragraphs (p)(1) and (p)(2) of this section, 
any subsidiary of such a company is also a financial subsidiary.
    (q) ``Foreign bank'' and an ``agency,'' ``branch,'' or ``commercial 
lending company'' of a foreign bank have the same meanings as in section 
1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).
    (r) ``GAAP'' means U.S. generally accepted accounting principles.
    (s) ``General purpose credit card'' has the meaning specified in 
paragraph (c)(4)(ii) of Sec. 223.16.
    (t) In contemplation. A transaction between a member bank and a 
nonaffiliate is presumed to be ``in contemplation'' of the nonaffiliate 
becoming an affiliate of the member bank if the member bank enters into 
the transaction with the nonaffiliate after the execution of, or 
commencement of negotiations designed to result in, an agreement under 
the terms of which the nonaffiliate would become an affiliate.
    (u) ``Intraday extension of credit'' has the meaning specified in 
paragraph (l)(2) of Sec. 223.42.
    (v) ``Low-quality asset'' means:
    (1) An asset (including a security) classified as ``substandard,'' 
``doubtful,'' or ``loss,'' or treated as ``special

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mention'' or ``other transfer risk problems,'' either in the most recent 
report of examination or inspection of an affiliate prepared by either a 
Federal or State supervisory agency or in any internal classification 
system used by the member bank or the affiliate (including an asset that 
receives a rating that is substantially equivalent to ``classified'' or 
``special mention'' in the internal system of the member bank or 
affiliate);
    (2) An asset in a nonaccrual status;
    (3) An asset on which principal or interest payments are more than 
thirty days past due;
    (4) An asset whose terms have been renegotiated or compromised due 
to the deteriorating financial condition of the obligor; and
    (5) An asset acquired through foreclosure, repossession, or 
otherwise in satisfaction of a debt previously contracted, if the asset 
has not yet been reviewed in an examination or inspection.
    (w) ``Member bank'' means any national bank, State bank, banking 
association, or trust company that is a member of the Federal Reserve 
System. For purposes of this definition, an operating subsidiary of a 
member bank is treated as part of the member bank.
    (x) ``Municipal securities'' has the same meaning as in section 
3(a)(29) of the Securities Exchange Act of 1934 (17 U.S.C. 78c(a)(29)).
    (y) ``Nonaffiliate'' with respect to a member bank means any person 
that is not an affiliate of the member bank.
    (z) ``Obligations of, or fully guaranteed as to principal and 
interest by, the United States or its agencies'' includes those 
obligations listed in 12 CFR 201.108(b) and any additional obligations 
as determined by the Board. The term does not include Federal Housing 
Administration or Veterans Administration loans.
    (aa) ``Operating subsidiary'' with respect to a member bank or other 
depository institution means any subsidiary of the member bank or 
depository institution other than a subsidiary described in paragraphs 
(b)(1)(i) through (v) of Sec. 223.2.
    (bb) ``Person'' means an individual, company, trust, joint venture, 
pool, syndicate, sole proprietorship, unincorporated organization, or 
any other form of entity.
    (cc) ``Principal underwriter'' has the meaning specified in 
paragraph (c)(1) of Sec. 223.53.
    (dd) ``Purchase of an asset'' by a member bank from an affiliate 
means the acquisition by a member bank of an asset from an affiliate in 
exchange for cash or any other consideration, including an assumption of 
liabilities. The merger of an affiliate into a member bank is a purchase 
of assets by the member bank from an affiliate if the member bank 
assumes any liabilities of the affiliate or pays any other form of 
consideration in the transaction.
    (ee) Riskless principal. A company is ``acting exclusively as a 
riskless principal'' if, after receiving an order to buy (or sell) a 
security from a customer, the company purchases (or sells) the security 
in the secondary market for its own account to offset a contemporaneous 
sale to (or purchase from) the customer.
    (ff) ``Securities'' means stocks, bonds, debentures, notes, or 
similar obligations (including commercial paper).
    (gg) ``Securities affiliate'' with respect to a member bank means:
    (1) An affiliate of the member bank that is registered with the 
Securities and Exchange Commission as a broker or dealer; or
    (2) Any other securities broker or dealer affiliate of a member bank 
that is approved by the Board.
    (hh) ``State bank'' has the same meaning as in section 3 of the 
Federal Deposit Insurance Act (12 U.S.C. 1813).
    (ii) ``Subsidiary'' with respect to a specified company means a 
company that is controlled by the specified company.
    (jj) ``Voting securities'' has the same meaning as in 12 CFR 225.2.
    (kk) ``Well capitalized'' has the same meaning as in 12 CFR 225.2 
and, in the case of any holding company that is not a bank holding 
company, ``well capitalized'' means that the holding company has and 
maintains at least the capital levels required for a bank holding 
company to be well capitalized under 12 CFR 225.2.
    (ll) ``Well managed'' has the same meaning as in 12 CFR 225.2.

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