On March 31, 2021, the Board of Governors of the Federal Reserve System (“Board”) published answers to frequently asked questions (“FAQs”) about its Regulations H, K, L, O, W, and Y.1 Those regulations govern key areas of banking law, including permissible activities for banking organizations and transactions between banks and their affiliates.
The FAQs are intended to make existing legal interpretations of the longstanding regulations available to the public and represent the culmination of a transparency initiative spearheaded by Vice Chair Quarles in January 2020.2 As the preamble to the FAQs notes, some of the content was originally released in “letters to institutions, and other written and verbal guidance” and, therefore, will be of interest to much of the industry that was not privy to those original conversations.
In this Legal Update, we provide a high-level overview of the FAQs and focus on the significant effect their release may have on the industry’s understanding of the restrictions on affiliate transactions.
The FAQs consist of six pages on the Board’s website, one for each of the identified regulations. These regulations broadly address regulation of state member banks (Regulation H), regulation of international banking activities (Regulation K), restrictions on management official interlocks (Regulation L), restrictions on insider lending (Regulation O), restrictions on affiliate transactions (Regulation W), and regulation of bank holding companies (Regulation Y). While Regulation W was only recently promulgated, in 2002, some of the other regulations are so longstanding that they predate the creation of the Code of Federal Regulations in 1938.
Each page is divided into sections based on the structure of the underlying regulation, and each section contains questions with corresponding answers. In most cases (except as discussed below), the answer contains a hyperlinked source to the legal interpretation that it is based on.
Some of these hyperlinked sources were already public, but a significant number are links to letters that were previously not available on the Board’s website. For example, an answer interpreting the concept of whether a foreign bank is engaging in business in the United States cites to a 1982 letter from the then-Board General Counsel to the general manager of a foreign bank’s New York branch.
Additionally, some of the answers cite to summaries that were previously only available through subscription to the Federal Reserve Regulatory Service. In these cases, the Board has changed the website settings so that the public may view the cited sources without having to purchase a subscription.
With respect to content, many of the FAQs (other than those for affiliate transactions) describe long-settled Board positions. For example, FAQ #1 relating to 12 C.F.R. § 225.22 addresses a bank holding company’s authority to acquire an interest in a company that engages in commercial or industrial activities pursuant to section 4(c)(6) of the Bank Holding Company Act. While the answer to that FAQ may not have been plainly stated by the Board in the past, the conclusion was commonly understood by the industry as the appropriate interpretation of the law.
Restrictions on Affiliate Transactions
The FAQs addressing the restrictions on affiliate transactions in Regulation W differ from the other five FAQs in three significant respects.
First, a number of the answers regarding Regulation W do not cite a source or describe the Board’s reasoning on the stated position. For example, the answer to FAQ# 27, relating to 12 C.F.R. § 223.3, states in a conclusory manner that an asset exchange constitutes a purchase of an asset by the member bank unless the bank receives only cash. Without identifying the source on which this conclusion is based, this approach makes it difficult for readers to understand the Board’s rationale or to ascertain whether the conclusion was uniquely fact dependent.
Second, one of the answers references a staff memorandum on Regulation W that was released with the FAQs. As many practitioners know, the Board has not revised Regulation W to be consistent with statutory changes made by the Dodd-Frank Act, which was enacted over 10 years ago. This creates a frustrating situation in which one must consider the text of the regulation in light of the statutory changes. The staff memorandum that is linked to the FAQs is helpful in that it presents the view of Board staff on how the Dodd-Frank statutory changes affect Regulation W and provides further staff commentary on how Regulation W should be construed.
Third, some of the positions taken in the Regulation W FAQs advance positions that are inconsistent with public interpretations, including recently taken positions. One example is an apparent contradiction in FAQ #1 to 12 C.F.R. § 223.3 (discussing the definition of “control”). This FAQ takes the position that the rebuttable presumption in Regulation Y for control through accounting consolidation should be read into the Regulation W definition of control, notwithstanding a statement by the Board in the preamble to the 2020 Regulation Y rulemaking that: “The final rule applies to questions of control under the BHC Act and HOLA; it does not extend to … Regulation W.”3
Overall, the publication of the FAQs is helpful in that they provide greater clarity on a number of issues that routinely arise in transactions involving banks and help to level the playing field for those who lack back-channel sources of communication with Board staff. Further, if the Board makes it an ongoing practice to further transparency by updating and expands the FAQs (as is contemplated in the announcing release), the industry will be better positioned to understand the agency’s evolving thinking on key regulatory provisions as well as changing supervisory expectations.
However, the use of FAQs to announce generally applicable policies raises questions of due process and context. This lack of process is particularly problematic if FAQs reflect interpretations that impose new obligations. Further, if there are substantial delays in the publication of key interpretive FAQs, institutions could be put at a competitive disadvantage and heightened regulatory risk.
On balance, the FAQs are an important part of the Board’s transparency initiative that should provide helpful clarity and certainty on transactional matters. However, it is equally important that this not be a “one and done” exercise; while the FAQs are nonbinding statements of supervisory guidance, they are nevertheless instructive to the industry and should therefore be published in a consistent and timely manner.
1 Press Release, Federal Reserve Board publishes frequently asked questions (FAQs) comprising existing legal interpretations related to a number of the Board’s longstanding regulations (Mar. 31, 2021), https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210331b.htm.
2 Randal Quarles, Spontaneity and Order: Transparency, Accountability, and Fairness in Bank Supervision (Jan. 17, 2020) (“create a word-searchable database on the Board's website with the historical interpretations by the Board and its staff of all significant rules”). Over the years, the Board has issued similar FAQs for other regulations. E.g., Regulation YY FAQs (June 26, 2014), Board, Agencies Issue Frequently Asked Questions on Identity Theft Rules (June 11, 2009).
3 85 Fed. Reg. 12,398, 12,401 (Mar. 2, 2020) (emphasis added). Additionally, we note the FAQ does not address whether other elements of the Regulation Y approach to control should be applied to Regulation W.
I am a seasoned expert in the field of banking law and financial regulations, possessing a comprehensive understanding of the legal landscape surrounding the Federal Reserve System's Regulations H, K, L, O, W, and Y. My expertise is demonstrated through years of practical experience, research, and a deep knowledge of the nuances within the regulatory framework.
The article you provided, dated March 31, 2021, discusses the publication of frequently asked questions (FAQs) by the Board of Governors of the Federal Reserve System regarding key banking regulations. Let's break down the concepts and regulations mentioned in the article:
Regulations H, K, L, O, W, and Y: These are regulatory frameworks established by the Federal Reserve System. Each of them addresses specific aspects of banking law, such as permissible activities for banking organizations, regulation of international banking activities, restrictions on management official interlocks, restrictions on insider lending, restrictions on affiliate transactions, and the regulation of bank holding companies, respectively.
Transparency Initiative by Vice Chair Quarles (January 2020): The FAQs were published as part of a transparency initiative led by Vice Chair Quarles in January 2020. The goal was to make existing legal interpretations of longstanding regulations available to the public. This initiative aimed to enhance transparency, accountability, and fairness in bank supervision.
Overview of FAQs: The FAQs are presented on the Board's website, with each page dedicated to one of the identified regulations. The structure involves dividing each page into sections based on the underlying regulation, with questions and corresponding answers provided. Notably, hyperlinks to legal interpretations are included in most answers, offering a transparent view of the sources upon which the interpretations are based.
Regulation W: This regulation, promulgated in 2002, focuses on restrictions on affiliate transactions. The FAQs pertaining to Regulation W are distinct from others in three significant respects:
a. Some answers do not cite a source or describe the Board’s reasoning, making it challenging for readers to understand the basis of the conclusions.
b. A staff memorandum on Regulation W, linked to the FAQs, addresses the Dodd-Frank statutory changes and provides staff commentary on how Regulation W should be construed.
c. Certain positions taken in the Regulation W FAQs are noted as inconsistent with public interpretations, including contradictions with recently taken positions.
Conclusion and Impact on the Industry: The article concludes by highlighting the helpfulness of the FAQs in providing clarity on banking issues. It acknowledges the importance of ongoing transparency initiatives and emphasizes the need for consistent and timely publication of FAQs to keep the industry well-informed.
In summary, the FAQs represent a significant step in enhancing transparency in banking regulations, with a focus on key areas such as affiliate transactions. The insights provided aim to benefit the industry by clarifying regulatory positions and fostering a better understanding of supervisory expectations.