G. Robert Harrison, Jr.
Vice President
The Bank of Bentonville
P.O. Box 1229
Bentonville, Arkansas 72712

Dear Mr. Harrison:

This is in response to your letter regarding the ability under section 23A of the Federal Reserve Act, 12 U.S.C. § 371c, of The Bank of Bentonville, Bentonville, Arkansas ("Bank"), to purchase the accounts receivable from unaffiliated companies if those accounts receivable include credit extended to Wal-Mart Stores Inc., an affiliate of Bank for purposes of section 23A.

The Board previously has concluded that the purchase of a note of an affiliate is the equivalent to a loan or extension of credit to the affiliate under section 23A. 37 Federal Reserve Bulletin 960 (1951). The Board determined that ordinarily the purchase of negotiable paper in the open market does not amount to a loan or extension of credit to the original borrower. However, one of the purposes of section 23A was to limit loans or extensions of credit to affiliates of banks, and the Board reasoned that this purpose could be easily defeated by an affiliate arranging for credit from a third party with a side agreement, written or oral, that the member bank would purchase the affiliate's note. Because of the ease with which the statute could be evaded and the difficulty of distinguishing the cases, the Board determined that purchases by banks of notes of their affiliates should be treated as loans or extensions of credit to affiliated organizations.

This interpretation was issued prior to the 1982 amendments to section 23A. Staff believes, however, that the interpretation is still applicable because section 23A now provides that any transaction by the bank with any person shall be deemed to be a transaction with an affiliate to the extent the proceeds of the transaction are used for the benefit of or transferred to that affiliate. 12 U.S.C. § 371(a)(2). Accordingly, Bank's proposed purchase of an affiliate's receivables would be a loan or extension of credit to the affiliate, and the transaction must meet the quantitative and collateral requirements of the section 23A.

If you have any further questions, please contact Ms. Pamela G. Nardolilli of my staff at 202/452-3289.

Sincerely,

(signed) J. Virgil Mattingly

J. Virgil Mattingly

cc:     Joan P. Cronin,
         Federal Reserve Bank of St. Louis