Regulation W applies to transactions between a bank and its affiliates, but the definition of “affiliate” requires that the counterparty be a “company.” This raises a fundamental question: what qualifies as a company for Regulation W purposes?
The answer excludes sole proprietorships – a sole proprietorship is not a company for purposes of Regulation W. This means that even if an individual who operates a sole proprietorship also controls a bank, the sole proprietorship itself cannot be an affiliate of the bank under Regulation W.
This distinction is rooted in the definition of “company” under banking law, which generally encompasses corporations, partnerships, limited liability companies, business trusts, and similar organizations, but not unincorporated businesses operated by a single individual in their personal capacity.
However, banks should not treat this as a blanket safe harbor. Transactions with sole proprietors who are insiders may still be subject to other regulatory requirements, including Regulation O governing insider lending, and general safety and soundness standards. Additionally, the attribution rule could apply if loan proceeds to a sole proprietor are transferred to an affiliated entity.
DM Tip: While sole proprietorships fall outside Regulation W’s affiliate framework, ensure your compliance program still captures transactions with sole proprietors who are insiders or who may transfer proceeds to affiliated entities. Cross-reference your Regulation O and Regulation W monitoring systems.