Not every transaction between a bank and its affiliate is a covered transaction under Regulation W. A notable exception is that an affiliate’s purchase of stock issued by the bank is not a covered transaction.

This makes sense from a policy perspective. The purpose of Section 23A and Regulation W is to protect the bank from losses arising from affiliate transactions. When an affiliate purchases the bank’s stock, the bank is receiving capital, not extending resources to the affiliate. The transaction strengthens the bank rather than exposing it to credit or counterparty risk from the affiliate.

This means that a holding company can invest additional equity capital in its subsidiary bank without triggering Regulation W’s quantitative limits, collateral requirements, or other restrictions. Similarly, other affiliates may purchase the bank’s stock or subordinated debt that constitutes equity capital without those purchases counting as covered transactions.

However, banks should note that while the affiliate’s purchase of bank stock is not a covered transaction, the reverse may be. If a bank purchases securities issued by an affiliate, that is a covered transaction subject to all Regulation W requirements.

DM Tip: When structuring capital injections from affiliates, confirm that the transaction involves the affiliate purchasing the bank’s stock (not a covered transaction) rather than the bank investing in affiliate securities (which would be a covered transaction). Document the direction of the capital flow clearly.

While a sole proprietorship is not a company under Regulation W, the analysis is different for trusts established for a business purpose. An ESOP, pension plan, or other business trust qualifies as a “company” for purposes of Regulation W.

This means that if a business trust meets the definition of an affiliate under 12 CFR 223.2, perhaps because it is controlled by the bank’s holding company or because it meets another affiliation criterion, transactions between the member bank and that trust are covered transactions subject to all Regulation W requirements.

This distinction matters particularly in the holding company context, where parent companies frequently establish ESOPs, pension trusts, or special-purpose trusts that hold bank stock or other assets. If such a trust is controlled by an entity that also controls the member bank, the trust is an affiliate, and any extension of credit from the bank to the trust, or any asset purchase, triggers Regulation W compliance obligations.

The key takeaway is that legal form matters under Regulation W. The trust structure, which creates a separate legal entity with its own assets and obligations, is sufficient to qualify as a company, unlike a sole proprietorship where no separate entity exists.

DM Tip: Inventory all trusts in your holding company structure, including ESOPs, pension trusts, and special-purpose vehicles. Do any of them qualify as an affiliate? If so, ensure all transactions with affiliated trusts are captured in your Regulation W monitoring system.

The anti-tying provisions of 12 U.S.C. § 1972 are among the most significant restrictions governing how banks market and price their products. Generally, a bank may not condition the availability or pricing of one product on a customer’s purchase of another product. However, the combined-balance discount exception provides meaningful flexibility for banks seeking to reward full-relationship customers.

Safe Harbor for Combined Balances

Under 12 CFR 225.7(b)(2), a bank may condition product availability or pricing on a customer obtaining a “loan, discount, deposit, or trust service.” The Federal Reserve has identified 20 categories of qualifying services, including but not limited to:

• All types of extensions of credit, letters of credit, and financial guarantees
• All forms of deposit accounts, safe deposit box services, and escrow services
• Cash management, payroll, and payment/settlement services
• Fiduciary, custody, and transfer agent services
• Credit card and merchant processing services
• Remote/mobile deposit capture and deposit sweep services

Expanded Definition of “Customer”

For combined-balance discount purposes, “customer” may include not only the natural person but also any members of that person’s “immediate family” (as defined in 12 CFR 225.41(b)(3)) who reside at the same address. This allows household-level product bundling. Additionally, financial products including insurance products may count toward the combined balance.

This exception offers banks significant latitude to design relationship-based pricing programs, but careful documentation is essential to demonstrate compliance.

DM Tip: Review your product bundling and discount programs to ensure they fall within the safe harbor. Document which products count toward combined balances and maintain records showing that household-level aggregation is limited to immediate family members residing at the same address.

Bank holding companies (“BHCs”) have the ability to hold equity stakes in portfolio companies through multiple legal authorities. A common question under Regulation W arises when a BHC owns shares of a portfolio company under both the merchant banking authority of Section 4(k)(4)(H) or (I) of the Bank Holding Company Act and under Section 4(c)(6) of the BHC Act. Does this combination trigger the presumption of affiliation?

The answer is yes – here’s why. Section 223.2(a)(9)(i) of Regulation W creates a presumption of affiliation when certain ownership thresholds are met. The key is that a BHC may not own any shares in reliance on Section 4(c)(6) if it owns or controls, in the aggregate under a combination of authorities, more than 5 percent of any class of voting securities of the company.

In an example provided by the Federal Reserve, a BHC owns 12 percent of equity capital and voting stock under the merchant banking authority plus 4 percent under Section 4(c)(6). Because the aggregate exceeds 5 percent across combined authorities, the presumption of affiliation is triggered.

This has real consequences: if the portfolio company is deemed an affiliate, any transaction between it and the subsidiary bank becomes a covered transaction subject to Regulation W’s full suite of restrictions.

DM Tip: When your BHC acquires portfolio company interests under multiple BHC authorities, aggregate all holdings across all authorities before evaluating whether the Regulation W affiliation presumption is triggered. Reach out for support.

“Closely Related to Banking”

Bank holding companies seeking to diversify revenue streams beyond traditional lending and deposit-taking have a surprisingly broad menu of permissible nonbanking activities available under Regulation Y. The Federal Reserve has approved a range of activities as “closely related to banking” under 12 CFR 225.28, often subject to specific conditions and limitations. In this post, we explore a few very specific permissible nonbanking activities previously approved by the Federal Reserve.

Commodity Transactions

Volumetric Production Payment (VPP) transactions for financing purposes are permissible under 12 CFR 225.28(b)(1) when certain conditions and risk-management requirements are met. Similarly, two “commodity purchase and forward sale” (CPFS) structures have been approved as permissible lending transactions, subject to conditions including: the BHC holds title only via warehouse receipt, the commodity is not physically moved, the BHC earns a fixed return, and risk exposure is limited to counterparty credit risk.

Real Estate and Credit-Related Services

Flood zone determination services are permissible as activities related to extending credit under 12 CFR 225.28(b)(2), though services to non-lenders are subject to limitations. Section 1031 exchange services have been approved as a combination of real estate settlement services, trust company functions, and financial advisory services — but the subsidiary may NOT negotiate property sale or purchase terms or help find buyers or sellers.

Minority Investments Under Section 4(c)(6)

Under section 4(c)(6) of the BHC Act, BHCs may invest in companies engaged in commercial or industrial activities, subject to limitations: up to 5% of any class of voting securities, and the investment must be noncontrolling. Notably, multiple BHCs may jointly invest in a clearing or settlement company even if they collectively own more than 50% of the stock.

DM Tip: Banks exploring revenue-generating nonbanking activities should maintain robust legal review processes and consider consulting with Federal Reserve staff early when structuring novel transactions. Contact your Duane Morris attorney for support and guidance.

The Federal Reserve’s 2020 final rule on Control and Divestiture Proceedings brought significant clarity to one of banking law’s most complex areas. Among its most important provisions is the treatment of “limiting contractual rights” — contractual provisions that can, in combination with other factors, create a presumption of control over another company.

What Constitutes a Limiting Contractual Right?

A contractual provision requiring a second company to conform its activities to BHC Act or Home Owners’ Loan Act (HOLA) restrictions is generally classified as a “limiting contractual right.” This classification applies regardless of the type of agreement in which the provision appears. Critically, a loan covenant that meets this definition is a limiting contractual right — the control rule makes no exception for loan agreements.

The Redemption Exception

However, not every protective provision triggers the classification. A provision that gives a company a reasonable and non-punitive mechanism to redeem, reduce, or restructure its investment if the second company fails to conform to activity restrictions is generally NOT a limiting contractual right. The key qualifiers are “reasonable” and “non-punitive” — draconian penalty provisions would likely not qualify for this exception.

The 5% Threshold

Even where a limiting contractual right exists, the presumption of control does not apply if the first company controls less than 5% of any class of voting securities of the second company. This threshold provides a meaningful safe harbor for passive investors with standard protective covenants.

The 2020 amendments to Regulation Y codified these presumptions of control and non-control, replacing the prior case-by-case approach with more predictable regulatory standards.

DM Tip: Banks with equity investments accompanied by loan covenants should evaluate whether those covenants could be classified as limiting contractual rights, especially when combined with voting securities ownership at or above 5%. Consider restructuring problematic covenants as non-punitive redemption rights where possible.

Under Regulation W, the definition of “affiliate” is critical because it determines which entities trigger the quantitative limits, collateral requirements, and other restrictions of Sections 23A and 23B of the Federal Reserve Act. But not every company with a connection to your bank qualifies as an affiliate.

Consider the following: A company controls a subsidiary of a member bank but does not control the bank itself and does not otherwise meet the definition of ‘affiliate’ in 12 CFR 223.2. Is that company an affiliate of the bank? The answer is NO.

The affiliate definition in Regulation W focuses on control relationships with the member bank, not on control of entities further down the corporate chain. A company must independently meet one of the criteria in Regulation W to be deemed an “affiliate.” Simply controlling a subsidiary of the bank, without more, is insufficient.

This distinction is important because banks must correctly identify their affiliates to comply with the 10 percent single-affiliate limit and 20 percent aggregate limit on covered transactions. Misidentifying non-affiliates as affiliates can unnecessarily restrict business activities, while failing to identify true affiliates can lead to regulatory violations.

DM Tip: Maintain an up-to-date affiliate identification chart that maps all control relationships. When evaluating whether a company is an affiliate, trace the control relationship back to the bank itself, not just to its subsidiaries. Document your analysis for examiner review.

One of the most consequential determinations under the Bank Holding Company Act is whether an arrangement constitutes a “company.” Under section 2(b) of the BHC Act (12 U.S.C. § 1841(b)) and 12 CFR 225.2(d)(1), the term “company” includes any bank, corporation, general or limited partnership, business trust, association, or similar organization. But what about voting trusts, buy-sell agreements, and similar shareholder arrangements?

The Federal Reserve has long-standing guidance on when such arrangements will not be treated as a “company” under the BHC Act, offering an informal safe harbor for common governance structures.

The Four-Part Safe Harbor

Under Federal Reserve guidance, a voting trust, buy-sell agreement, or similar arrangement generally will NOT be considered a “company” if it meets all four conditions:

• It relates only to shares of a single bank.
• It terminates within 25 years (or not later than 21 years and 10 months after the death of living individuals at the trust’s creation).
• The parties are not participants in any similar arrangement regarding another bank or nonbank business.
• In the case of a voting trust, it engages in no activity other than holding and voting shares.

Termination Requirements Override State Law

An important nuance is that state laws on the rule against perpetuities do not override the federal termination requirement. Even if a state permits perpetual trusts, the BHC Act’s 25-year (or lives-in-being-plus-21-years-and-10-months) termination requirement still applies. However, a “springing trust” — one that is formed upon the termination of the original trust — is permissible.

This guidance offers clarity but demands thoughtful drafting. Trusts that satisfy the safe harbor at formation can risk losing it through amendments, activities beyond mere share-holding, or involvement in multi-bank arrangements.

DM Tip: Trusts holding bank shares should verify the trust’s termination provisions comply with BHC Act requirements regardless of state perpetuity rules. Review trust documents, buy-sell agreements, shareholder agreements (or similar) on a regular basis or upon any amendment to confirm continued compliance with the safe harbor.