Section 23A of the Federal Reserve Act and its implementing regulation, Regulation W, impose restrictions on banks concerning “covered transactions” with their affiliates. With the increasing intertwining of banking institutions and private investment funds, understanding the implications of Regulation W is more critical than ever. In this Legal Update, we explain the scope of Regulation W, its requirements, and how it affects subscription credit facilities, including guidance from the Federal Reserve Board, and suggestions for how banks can comply with Section 23A when providing covered credit facilities.

Background

Given the abundance of private investment funds, it is increasingly common for banks to invest in or advise investors in these funds and also lend to these funds. However, Section 23A of the Federal Reserve Act (12 USC 371c) restricts “covered transactions” among banks and their affiliates. These restrictions aim to safeguard the bank’s safety and soundness—and by extension, the government’s exposure through mechanisms like the discount window and deposit insurance—by regulating transactions with affiliates.¹ To determine whether Section 23A’s restrictions apply to a given transaction requires a two-prong assessment to determine whether the transaction (i) involves a bank and an “affiliate” of the bank and (ii) qualifies as a “covered transaction” under Regulation W.

What to Know About Regulation W

What is an “Affiliate” Under Section 23A?

Section 23A defines “affiliate” broadly as any entity that controls, is controlled by, or is under common control with another entity (in this case, a bank), including:

• Any company in which a majority of its directors, trustees, or general partners (or individuals exercising similar functions) constitute a majority of those persons holding similar roles in the bank or its controlling entity.
• Any company, including a real estate investment trust, receiving sponsorship and advisory services on a contractual basis from the bank or an affiliate.
• Any investment fund for which the bank or an affiliate acts as an investment adviser.