- in United States
- with readers working within the Business & Consumer Services and Retail & Leisure industries
- within Law Department Performance topic(s)
“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.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.
[View Source]