Regulation W applies to several transactions involving “securities,” including purchases of or investments in securities issued by an affiliate and acceptance of affiliate securities as collateral. But how does the Federal Reserve define “securities”?
The Federal Reserve generally looks to the federal securities laws for guidance, as confirmed in the 2002 preamble to its Final Rule implementing Regulation W. This means the definition of “security” under Section 2(a)(1) of the Securities Act of 1933 and Section 3(a)(10) of the Securities Exchange Act of 1934 provides the framework.
Under federal securities law, the term “security” is interpreted broadly to include stocks, bonds, debentures, notes, investment contracts, and a wide range of other instruments. The Supreme Court’s Howey test for investment contracts and the Reves “family resemblance” test for notes provide additional guidance for instruments that are not clearly labeled.
This broad interpretation means that banks should not assume an instrument falls outside Regulation W simply because it is not a traditional stock or bond. Partnership interests, LLC membership interests, certain loan participations, and structured products may all qualify as securities depending on their characteristics.
DM Tip: When evaluating whether an instrument issued by an affiliate constitutes a “security” for Regulation W purposes, apply the federal securities law definitions broadly. When in doubt, treat the instrument as a security and comply with Regulation W requirements. Document your analysis, especially for novel or hybrid instruments
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.
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