Section 23A is the primary statute governing transactions between a bank and its affiliates. It (i) defines affiliates of a bank; (ii) specifies "covered transactions"; (iii) sets the quantitative limits on a bank's covered; and (iv) sets forth collateral requirements for certain bank-affiliate transactions. Section 23B requires that certain transactions, including all covered transactions, be on market terms and conditions, and specifies how this requirement must be met. Collectively, Sections 23A and 23B and Regulation W are designed to limit the risks to a bank from transactions between the bank and its affiliates.
The Federal Reserve Board’s Regulation W (“Transactions between Member Banks and Their Affiliates”) generally establishes restrictions on transactions between a bank and its broker-dealer affiliate(s). Subject to certain conditions, Regulation W prohibits a bank from initiating certain transactions (extensions of credit, derivatives transactions, investments in securities, asset purchases, issuances of guarantees, etc.) with an “affiliate” (defined broadly to include any company that a bank directly or indirectly controls or that is sponsored and advised by a bank) if after the transaction the aggregate amount of the bank’s covered transactions with that particular affiliate, or with all affiliates, would exceed certain thresholds with respect to the bank’s capital stock and surplus. Moreover, Regulation W requires that all transactions between banks and their affiliates must be on market terms and on an arms-length basis.