Sec. 35.2. Limitations on investments in and loans to affiliates.

2,302 words·~10 min read·/il/chapter-205/act-5/35-2

A research copy — for the controlling text, always check the official state or federal source. Not legal advice.

(a)Restrictions on transactions with affiliates.

(1)A state bank and its subsidiaries may engage in a covered transaction with an

affiliate, as expressly provided in this Section 35.2, only if:

(A)in the case of any one affiliate, the aggregate amount of covered transactions

of the state bank and its subsidiaries will not exceed 10% of the unimpaired capital and unimpaired surplus of the state bank; and

(B)in the case of all affiliates, the aggregate amount of covered transactions of

the state bank and its subsidiaries will not exceed 20% of the unimpaired capital and unimpaired surplus of the state bank.

(2)For the purpose of this Section, any transactions by a state bank with any person

shall be deemed to be a transaction with an affiliate to the extent that the proceeds of the transaction are used for the benefit of, or transferred to, that affiliate.

(3)A state bank and its subsidiaries may not purchase a low-quality asset from an

affiliate unless the bank or such subsidiary, pursuant to an independent credit evaluation, committed itself to purchase such asset prior to the time such asset was acquired by the affiliate.

(4)Any covered transactions and any transactions exempt under subsection

(d)between a

state bank and an affiliate shall be on terms and conditions that are consistent with safe and sound banking practices.

(b)Definitions. For the purpose of this Section, the following rules and definitions apply:

(1)"Affiliate" with respect to a state bank means

(A)any company that controls the state bank and any other company that is

controlled by the company that controls the state bank;

(B)a bank subsidiary of the state bank;

(C)any company

(i)controlled directly or indirectly, by a trust or otherwise, by or for the

benefit of shareholders who beneficially or otherwise control, directly or indirectly, by trust or otherwise, the state bank or any company that controls the state bank; or

(ii)a majority of the directors or trustees of which constitute a majority of

the persons holding any such office with the state bank or any company that controls the state bank;

(i)any company, including a real estate investment trust, that is sponsored and

advised on a contractual basis by the state bank or any subsidiary or affiliate of the state bank; or

(ii)any investment company with respect to which a state bank or any affiliate

thereof is an investment advisor. An investment advisor is defined as "any person (other than a bona fide officer, director, trustee, member of an advisory board, or employee of such company, as such) who pursuant to contract with such company regularly furnishes advice to such company, with respect to the desirability or investing in, purchasing, or selling securities or other property shall be purchased or sold by such company, and any other who pursuant to contract with a person as described above regularly performs substantially all of the duties undertaken by such person described above; but does not include a person whose advice is furnished solely through uniform publications to subscribers thereto or a person who furnishes only statistical and other factual information, advice regarding economic factors and trends, or advice as to occasional transactions in specific securities, but without generally furnishing advice or making recommendations regarding the purchase or sale of securities, or a company furnishing such services at cost to one or more investment companies, insurance companies or other financial institutions, or any person the character and amount of whose compensation for such services must be approved by a court.

(E)any company the Commissioner determines as having a relationship with the state

bank or any subsidiary or affiliate of the state bank, such that covered transactions by the state bank or its subsidiary with the company may be affected by the relationship to the detriment of the state bank or its subsidiary.

(2)None of the following are considered to be an affiliate:

(A)any company, other than a bank, that is a subsidiary of a state bank, unless a

determination is made under subparagraph

(E)of paragraph

(1)not to exclude such subsidiary company from the definition of affiliate;

(B)any company engaged solely in holding the premises of the state bank;

(C)any company engaged solely in conducting a safe deposit business;

(D)any company engaged solely in holding obligations of the United States or its

agencies or obligations fully guaranteed by the United States or its agencies as to principal and interest; and

(E)any company where control results from the exercise of rights arising out of a

bona fide debt previously contracted, but only for the period of time specifically authorized under applicable State and federal law or regulations or, in the absence of such law or regulation, for a period of 2 years from the date of the exercise of such rights or the effective date of this Act, whichever date is later, subject, upon application, to authorization by the Commissioner for good cause shown of extensions of time for not more than one year at a time, with such extensions not to exceed an aggregate of 3 years.

(A)A company or shareholder has control over another company if

(i)such company or shareholder, directly or indirectly, or acting through one

or more other persons, owns, controls, or has power to vote 25% or more of any class of voting securities of the other company;

(ii)such company or shareholder controls in any manner the election of a

majority of the directors or trustees of the other company; or

(iii)the Commissioner determines, after notice and opportunity for hearing,

that such company or shareholder, directly or indirectly, exercises a controlling influence over the management or policies of the other company.

(B)Notwithstanding any other provisions of this Section, no company shall be deemed

to own or control another company by virtue of its ownership or control of shares in a fiduciary capacity, except as provided in subparagraph

(C)of paragraph

(1)or because of its ownership or control of such shares in a business trust.

(4)"Subsidiary" with respect to a specified company means a company that is controlled

by such specified company.

(5)"Bank" means any bank now or hereafter organized under the laws of any State or

territory of the United States including the District of Columbia, any national bank, and any trust company.

(6)"Company" means a corporation, partnership, business trust, association, or similar

organization and, unless specifically excluded, includes a "state bank" and a "bank".

(7)"Covered transaction" means, with respect to an affiliate of a state bank,

(A)a loan or extension of credit to the affiliate;

(B)a purchase of or an investment in securities issued by the affiliate;

(C)a purchase of assets, including assets subject to an agreement to repurchase,

from the affiliate, except such purchases of real and personal property as may be specifically exempted by the Commissioner;

(D)the acceptance of securities issued by the affiliate as collateral security for

a loan or extension of credit to any person or company; or

(E)the issuance of a guarantee, acceptance, or letter of credit, including an

endorsement or standby letter of credit, on behalf of an affiliate.

(8)"Aggregate amount of covered transactions" means the amount of covered transactions

about to be engaged in added to the current amount of all outstanding covered transactions.

(9)"Securities" means stocks, bonds, debentures, notes or other similar obligations.

(10)"Low-quality asset" means an asset that falls into any one or more of the following

categories:

(A)an asset classified as "substandard", "doubtful", or "loss" or treated as "other

loans especially mentioned" in the most recent report of examination of an affiliate;

(B)an asset in a nonaccrual status;

(C)an asset on which principal or interest payments are more than 30 days past due;

(D)an asset whose terms have been renegotiated or compromised due to the

deteriorating financial condition of the obligor.

(c)Collateral for certain transactions with affiliates.

(1)Each loan or extension of credit to, or guarantee, acceptance or letter of credit

issued on behalf of, an affiliate by a state bank or its subsidiary shall be secured at the time of the transaction by collateral having a market value equal to

(A)100% of the amount of such loan or extension of credit, guarantee, acceptance,

or letter of credit, if the collateral is composed of

(i)obligations of the United States or its agencies;

(ii)obligations fully guaranteed by the United States or its agencies as to

principal and interest;

(iii)notes, drafts, bills of exchange or bankers' acceptances that are eligible

for rediscount or purchase by a Federal Reserve Bank; or

(iv)a segregated, earmarked deposit account with the state bank;

(B)110% of the amount of such loan or extension of credit, guarantee, acceptance or

letter of credit if the collateral is composed of obligations of any state or political subdivision of any State;

or letter of credit if the collateral is composed of other debt instruments, including receivables; and

(D)130% of the amount of such loan or extension of credit, guarantee, acceptance or

letter of credit if the collateral is composed of stock, leases, or other real or personal property.

(2)Any such collateral that is subsequently retired or amortized shall be replaced by

additional eligible collateral where needed to keep the percentage of the collateral value relative to the amount of the outstanding loan or extension of credit, guarantee, acceptance, or letter of credit equal to the minimum percentage required at the inception of the transaction.

(3)A low-quality asset shall not be acceptable as collateral for a loan or extension of

credit to, or guarantee, acceptance, or letter of credit issued on behalf of, an affiliate.

(4)The securities issued by an affiliate of the state bank shall not be acceptable as

collateral for a loan or extension of credit to, or guarantee, acceptance or letter of credit issued on behalf of, that affiliate or any other affiliate of the state bank.

(5)The collateral requirements of this paragraph do not apply to an acceptance that is

already fully secured either by attached documents or by other property having an ascertainable market value that is involved in the transaction.

(d)Exemptions. The provisions of this Section, except paragraph

(4)of subsection (a), shall not be applicable to the following as to which there shall be no limitation:

(1)any transaction, subject to the prohibition contained in paragraph

(3)of subsection

(a), with a bank

(A)which controls 80% or more of the voting shares of the state bank;

(B)in which the state bank controls 80% or more of the voting shares; or

(C)in which 80% or more of the voting shares are controlled by the company that

controls 80% or more of the voting shares of the state bank;

(2)making deposits in an affiliated bank or affiliated foreign bank in the ordinary

course of correspondent business, subject to any restrictions that the Commissioner may prescribe;

(3)giving immediate credit to an affiliate for uncollected items received in the

ordinary course of business;

(4)making a loan or extension of credit to, or issuing a guarantee, acceptance, or

letter of credit on behalf of, an affiliate that is fully secured by

(A)obligations of the United States or its agencies;

(B)obligations fully guaranteed by the United States or its agencies as to

principal and interest; or

(C)a segregated, earmarked deposit account with the state bank;

(5)purchasing securities issued by any company of the kinds described as follows:

Shares of any company engaged or to be engaged solely in one or more of the following

activities: holding or operating properties used wholly or substantially by any banking subsidiary of such bank holding company in the operations of such banking subsidiary or acquired for such future use; or conducting a safe deposit business; or furnishing services to or performing services for such bank holding company or its banking subsidiaries; or liquidating assets acquired from such bank holding company or its banking subsidiaries or acquired from any other source prior to May 9, 1956, or the date on which such company became a bank holding company, whichever is later;

(6)purchasing assets having a readily identifiable and publicly available market

quotation and purchased at the market quotation or, subject to the prohibition contained in paragraph

(3)of subsection (a), purchasing loans on a nonrecourse basis from affiliated banks; and

(7)purchasing from an affiliate a loan or extension of credit that was originated by

the state bank and sold to the affiliate subject to a repurchase agreement or with recourse.

(e)Notwithstanding the provisions of this Section, a state bank and its subsidiaries in compliance with the provisions of Regulation W [12 C.F.R. Part 223] promulgated by the Board of Governors of the Federal Reserve, as amended from time to time, shall be deemed to be in compliance with this Section.

This Section shall apply to any transaction entered into after January 1, 1984, except for transactions which are the subject of a binding written contract or commitment entered into on or before July 28, 1982, and except that any renewal of a participation in a loan outstanding on July 28, 1982, to a company that becomes an affiliate as a result of the enactment of this Act, or any participation in a loan to such an affiliate emanating from the renewal of a binding written contract or commitment outstanding on July 28, 1982, shall not be subject to the collateral requirements of this Act.