| Board of Governors of the
Federal Reserve System Robert E. Feldman
Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, D. C. 20429
Re: Proposed Rule on Sections 23A and 23B of the Federal Reserve Act
(RIN 3064-AC78) (the "Proposal")
Dear Mr. Feldman:
The Board of Governors of the Federal Reserve System ("Board")
appreciates this opportunity to provide comments on the Proposal, which
addresses the application of sections 23A and 23B of the Federal Reserve
Act (12 U.S.C. §§ 371c, 371 c-1) and the Board's Regulation W (12 CFR
part 223) to insured state nonmember banks (" nonmember banks"). In
brief, although the Board supports the Proposal to the extent that it
clarifies that nonmember banks are subject to Regulation W in the same
manner and to the same extent as if they were member banks, the Board
has serious concerns about those elements of the Proposal that do not
conform to Regulation W or purport to provide the FDIC with exclusive
authority that has been statutorily conferred on the Board.
Sections 23A and 23B of the Federal Reserve Act impose restrictions
on transactions between a member bank and its affiliates and
specifically authorize the Board to issue regulations to administer and
grant exemptions from the statutory provisions.1 Regulation W
is the Board's rule that implements sections 23A and 23B. Section
18(j)(1) of the Federal Deposit Insurance Act ("FDIA") provides that
sections 23A and 23B of the Federal Reserve Act "shall apply with
respect to every nonmember insured bank in the same manner and to the
same extent as if the nonmember insured bank were a member bank."2
Because nonmember banks are subject to sections 23A and 23B as if they
were member banks, nonmember banks also must comply with Regulation W as
if they were member banks.
Several elements of the Proposal are inconsistent with the statutory
and regulatory framework established by sections 23A and 23B, the FDIA,
and Regulation W. The first and most problematic element of the Proposal
is the FDIC's claim to have the exclusive authority to grant exemptions
from sections 23A and 23B for nonmember banks (including the FDIC's
proposed exemption for certain section 24 subsidiaries of nonmember
banks) and to make a wide variety of exemptive determinations under
Regulation W for nonmember banks.3 The Board also is troubled
by the FDIC's claim in the Proposal to have the exclusive authority to
administer and interpret sections 23A and 23B for nonmember banks.
The Proposal's preamble offers a number of arguments in support of
these positions, none of which seem persuasive (individually or
collectively). The FDIC's principal argument is that the Proposal's
justification can be found in the FDIA's general grant of authority to
the FDIC to issue rules to implement the FDIA.4 As the
Proposal acknowledges, however, the FDIC's rulemaking authority under
the FDIA does not extend to rulemaking in areas that Congress has
"expressly and exclusively" granted to another regulatory agency.5
Sections 23A and 23B both expressly provide the Board (and no other
regulatory agency) authority to issue regulations and orders to
administer and carry out the purposes of the sections and to provide
exemptions from the sections. As such, sections 23A and 23B appear to be
the types of statutory provisions over which Congress has "expressly and
exclusively" provided another agency with authority to regulate and
administer.
In addition, the FDIC's statutory authority under the FDIA to
prescribe rules "to carry out the purposes of" the FDIA does not appear
to include authority to exempt depository institutions from any
requirement of the FDIA, including the requirement in section 18(j)(1)
of the FDIA that nonmember banks be subject to sections 23A and 23B in
the same manner and to the same extent as member banks. Accordingly,
even if (arguendo) the FDIA does confer authority on the FDIC to issue a
rule that addresses the application of sections 23A and 23B to nonmember
banks, this authority would not justify the FDIC in granting an
exemption from sections 23A and 23B to a nonmember bank or in making any
exemptive determinations under Regulation W for nonmember banks (beyond
those expressly delegated to the FDIC by the Board).
Crucially, the FDIA requires that sections 23A and 23B apply to
nonmember, banks "in the same manner and to the same extent" as they
apply to member banks. If the FDIC were to interpret a provision of
section 23A or 23B in a different manner than the Board, or if the FDIC
were to provide an exemption from section 23A, or 23B or a determination
under Regulation W that the Board would not have provided, it simply
would not be true that nonmember banks were subject to sections 23A and
23B in the same manner and to the same extent as member banks.
The Board also believes that the Proposal is inconsistent with the
Congressional intent behind the Federal statutory framework that governs
bank transactions with affiliates. The legislative history of the 1989
amendment to the Home Owners' Loan Act that subjected insured savings
associations to sections 23A and 23B makes very clear that the FDIC does
not have authority to provide exemptions from section 23A or 23B (and
that the Board has exclusive authority to provide exemptions from
sections 23A and 23B for insured depository institutions). In
discussing the authority of the OTS to grant exemptions from section 23A
or 23B for insured savings associations, the relevant Conference Report
states: "Exemptions from section 23A or 23B may be granted only by the
Federal Reserve Board, as is currently the case with respect to all
FDIC-insured banks."6
Sound public policy considerations support the Congressional decision
to consolidate bank transactions with affiliates regulation in the
Board. Sections 23A and 23B occupy a place of central importance in the
bank regulatory framework, and a single agency should have ultimate authority to
interpret and provide exemptions from the statute in order to ensure
uniformity of application. Appointment of a single agency as the
administrator of transactions with affiliates regulation for all
depository institutions prevents this crucial safety and soundness
bulwark from becoming subject to regulatory arbitrage. In addition, the
Board, as the consolidated supervisor of bank holding companies,
supervises the most significant bank affiliates and, accordingly, is
uniquely positioned to be the administrator of sections 23A and 23B.
The Board has a long-standing practice to consult with the primary
Federal regulator of a depository institution before granting a section
23A exemption to the institution, and has a long-standing practice of
consulting with the FDIC before granting a section 23A exemption to any
insured depository institution. The Board also regularly consults with
the other Federal banking agencies before issuing rules under, or major
interpretations of, section 23A. This collaborative interagency process
has worked well for the past few decades.
In light of these considerations, the Board recommends that the FDIC
revise the Proposal by eliminating 12 CFR 324.2(b) and 324.3, the
statement in the first sentence of 12 CFR 324.4 that a nonmember bank
should read all references in Regulation W to "the Board" to refer only to the "FDIC," and 12
CFR 324.5 and 324.6.
Very truly yours,
Jennifer J. Johnson
Secretary of the Board
1 12 U.S.C. §§ 371c(f), 371c-1(e).
2 12 U.S.C. § 1828(j)(1).
3 These determinations include exempting certain merchant
banking portfolio companies from the definition of affiliate (12 CFR
223.2(a)(9)(ii)), supplementing the list of U.S. government obligations
(12 CFR 223.3(z)), approving securities affiliates (12 CFR 223.3(gg)),
approving intangible assets as eligible collateral (12 CFR
223.14(c)(4)), and exempting certain credit card transactions from the
attribution rule (12 CFR 223.1 6(c)(4)).
4 12 U.S.C. § 1819(a)(10).
5 Id.
6 Conf. Rep. No. 101-222, 101st Cong., 1st Sess., p. 408 (Aug. 4, 1989).
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