[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: 12CFR223.31]

[Page 69-71]
 
                       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 D--Other Requirements Under Section 23A
 
Sec. 223.31  How does section 23A apply to a member bank's acquisition of an affiliate that becomes an operating subsidiary of the member bank after the 
          acquisition?


    (a) Certain acquisitions by a member bank of securities issued by an 
affiliate are treated as a purchase of assets from an affiliate. A 
member bank's acquisition of a security issued by a company that was an 
affiliate of the member

[[Page 70]]

bank before the acquisition is treated as a purchase of assets from an 
affiliate, if:
    (1) As a result of the transaction, the company becomes an operating 
subsidiary of the member bank; and
    (2) The company has liabilities, or the member bank gives cash or 
any other consideration in exchange for the security.
    (b) Valuation. (1) Initial valuation. A transaction described in 
paragraph (a) of this section must be valued initially at the greater 
of:
    (i) The sum of:
    (A) The total amount of consideration given by the member bank in 
exchange for the security; and
    (B) The total liabilities of the company whose security has been 
acquired by the member bank, as of the time of the acquisition; or
    (ii) The total value of all covered transactions (as computed under 
this part) acquired by the member bank as a result of the security 
acquisition.
    (2) Ongoing valuation. The value of a transaction described in 
paragraph (a) of this section may be reduced after the initial transfer 
to reflect:
    (i) Amortization or depreciation of the assets of the transferred 
company, to the extent that such reductions are consistent with GAAP; 
and
    (ii) Sales of the assets of the transferred company.
    (c) Valuation example. The parent holding company of a member bank 
contributes between 25 and 100 percent of the voting shares of a 
mortgage company to the member bank. The parent holding company retains 
no shares of the mortgage company. The member bank gives no 
consideration in exchange for the transferred shares. The mortgage 
company has total assets of $300,000 and total liabilities of $100,000. 
The mortgage company's assets do not include any loans to an affiliate 
of the member bank or any other asset that would represent a separate 
covered transaction for the member bank upon consummation of the share 
transfer. As a result of the transaction, the mortgage company becomes 
an operating subsidiary of the member bank. The transaction is treated 
as a purchase of the assets of the mortgage company by the member bank 
from an affiliate under paragraph (a) of this section. The member bank 
initially must value the transaction at $100,000, the total amount of 
the liabilities of the mortgage company. Going forward, if the member 
bank pays off the liabilities, the member bank must continue to value 
the covered transaction at $100,000. If the member bank, however, sells 
$15,000 of the transferred assets of the mortgage company or if $15,000 
of the transferred assets amortize, the member bank may value the 
covered transaction at $85,000.
    (d) Exemption for step transactions. A transaction described in 
paragraph (a) of this section is exempt from the requirements of this 
regulation (other than the safety and soundness requirement of 
Sec. 223.13 and the market terms requirement of Sec. 223.51) if:
    (1) The member bank acquires the securities issued by the 
transferred company within one business day (or such longer period, up 
to three months, as may be permitted by the member bank's appropriate 
Federal banking agency) after the company becomes an affiliate of the 
member bank;
    (2) The member bank acquires all the securities of the transferred 
company that were transferred in connection with the transaction that 
made the company an affiliate of the member bank;
    (3) The business and financial condition (including the asset 
quality and liabilities) of the transferred company does not materially 
change from the time the company becomes an affiliate of the member bank 
and the time the member bank acquires the securities issued by the 
company; and
    (4) At or before the time that the transferred company becomes an 
affiliate of the member bank, the member bank notifies its appropriate 
Federal banking agency and the Board of the member bank's intent to 
acquire the company.
    (e) Example of step transaction. A bank holding company acquires 100 
percent of the shares of an unaffiliated leasing company. At that time, 
the subsidiary member bank of the holding company notifies its 
appropriate Federal banking agency and the Board of its intent to 
acquire the leasing company from its holding company. On the day after

[[Page 71]]

consummation of the acquisition, the holding company transfers all of 
the shares of the leasing company to the member bank. No material change 
in the business or financial condition of the leasing company occurs 
between the time of the holding company's acquisition and the member 
bank's acquisition. The leasing company has liabilities. The leasing 
company becomes an operating subsidiary of the member bank at the time 
of the transfer. This transfer by the holding company to the member 
bank, although deemed an asset purchase by the member bank from an 
affiliate under paragraph (a) of this section, would qualify for the 
exemption in paragraph (d) of this section.