[Federal Register Volume 61, Number 87 (Friday, May 3, 1996)]
[Proposed Rules]
[Pages 19862-19865]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10733]



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[[Page 19863]]

FEDERAL RESERVE SYSTEM

12 CFR Part 215

[Regulation O; Docket No. R-0924]


Loans to Executive Officers, Directors, and Principal 
Shareholders of Member Banks; Loans to Holding Companies and Affiliates

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

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SUMMARY: The proposed rule would amend the Board's Regulation O, which 
limits how much and on what terms a bank may lend to its own insiders 
and insiders of its affiliates. Under the proposed rule, four of the 
five restrictions of Regulation O would not apply to extensions of 
credit by a bank to executive officers and directors of the bank's 
affiliates, provided that those executive officers and directors were 
not engaged in major policymaking functions of the lending bank. Of the 
restrictions in Regulation O, only the prohibition on preferential 
lending would apply to extensions of credit to such persons.
    The Board was granted authority to create such an exception for 
directors of affiliates for the first time by the Riegle Community 
Development and Regulatory Improvement Act of 1994; Regulation O 
already contains a blanket regulatory exception for executive officers 
of affiliates not involved in policymaking at the lending bank, which 
as a result of the statute must be scaled back to no longer include the 
prohibition on preferential lending.

DATES: Comments must be received on or before June 17, 1996.

ADDRESSES: Comments should refer to Docket No. R-0924 and be mailed to 
William W. Wiles, Secretary, Board of Governors of the Federal Reserve 
System, Washington, DC 20551. They may also be delivered to the guard 
station in the Eccles Building Courtyard on 20th Street, NW., (between 
Constitution Avenue and C Street) between 8:45 a.m. and 5:15 p.m. 
weekdays. Except as provided in the Board's rules regarding the 
availability of information (12 CFR 261.8), comments will be available 
for inspection and copying by members of the public in the Freedom of 
Information Office, Room MP-500 of the Martin Building, between 9:00 
a.m. and 5:00 p.m. weekdays.

FOR FURTHER INFORMATION CONTACT: Gregory Baer, Managing Senior Counsel 
(202/452-3236), or Gordon Miller, Attorney (202/452-2534), Legal 
Division, Board of Governors of the Federal Reserve System. For the 
hearing impaired only, Telecommunications Device for the Deaf (TDD), 
Dorothea Thompson (202/452-3544).

SUPPLEMENTARY INFORMATION:

Background

    Section 22(h) of the Federal Reserve Act, 12 U.S.C. 375b, restricts 
insider lending by banks, and Regulation O implements section 22(h). 
Regulation O limits total loans to any one insider and aggregate loans 
to all insiders to a percentage of the bank's capital and requires that 
such loans be on non-preferential terms--that is, on the same terms a 
person not affiliated with the bank would receive.1 12 CFR 215.4 
(a), (c) and (d). For this purpose, an ``insider'' means an executive 
officer, director, or principal shareholder, and loans to an insider 
include loans to any ``related interest'' of the insider, including any 
company controlled by the insider. 12 CFR 215.2(h). Regulation O 
requires that banks maintain records to document compliance with all 
these restrictions. 12 CFR 215.8.
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    \1\ Regulation O also requires prior approval of the bank's 
board of directors for certain loans to insiders and prohibits 
overdrafts by executive officers and directors.
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    Section 22(h) restricts lending not only to insiders of the bank 
making the loan but also to insiders of the bank's parent bank holding 
company and any other subsidiary of that bank holding company. As 
amended by the Federal Deposit Insurance Corporation Improvement Act of 
1991 (FDICIA),2 section 22(h)(8) provides that ``any executive 
officer, director, or principal shareholder (as the case may be) of any 
company of which the member bank is a subsidiary, or of any other 
subsidiary of that company, shall be deemed to be an executive officer, 
director, or principal shareholder (as the case may be) of the member 
bank.'' 12 U.S.C. 375b(8)(A).
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    \2\  Pub. L. 102-242, section 306 (1991).
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    At the time that the FDICIA amendment became effective, the Board's 
rules did not place any restrictions on loans to an executive officer 
of a bank's affiliates (other than the parent bank holding company) 
unless the executive officer was involved in major policymaking 
functions at the bank.3 12 CFR 215.2(d) (1992). The Board 
considered this treatment appropriate for two reasons. First, such 
persons generally were not considered to be in a position to exert 
sufficient leverage on the bank to obtain a loan on anything but arm's 
lengths terms, in contrast to executive officers of the bank or its 
parent. Thus, in terms of protecting the safety and soundness of banks, 
the Board considered the benefits of restricting loans to these 
affiliate insiders to be small. Second, applying these restrictions to 
affiliate insiders would have required each bank to maintain an updated 
list of all its affiliates' executive officers and all related 
interests of those executive officers, and to check all loans against 
this list. Particularly for a bank in a large bank holding company 
structure, this effort would have constituted a significant burden--and 
one not outweighed by any substantial benefit.
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    \3\ Subsection (h) of section 22 was added in 1978. Financial 
Institutions Regulatory and Interest Rate Control Act of 1978, Pub. 
L. 95-630, section 104. However, the statute was ambiguous about 
whether an executive officer of a bank's affiliate was required to 
be treated like an executive officer of the bank itself. (The 
statute imposed restrictions on lending by banks to ``executive 
officers'' of the bank. The statute provided that an ``officer'' of 
a bank included officers of affiliates--but did not so provide with 
respect to ``executive officers.'') No such ambiguity arose with 
respect to directors and principal shareholders of affiliates, who 
were explicitly treated like their banking counterparts. In 1980, 
the Board amended Regulation O to cover insiders of affiliates, but 
included a regulatory exception for executive officers of affiliates 
not involved in major policymaking functions at the bank.
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    However, after the FDICIA amendment to section 22(h)(8), the 
language of the statute no longer appeared to allow such an exception 
for executive officers of affiliates, who are explicitly treated like 
executive officers of the bank itself. Still, nothing in the 
legislative history of FDICIA indicated that Congress intended to 
invalidate the Board's regulatory exception and extend coverage to all 
executive officers of affiliates.
    In the Riegle Community Development and Regulatory Improvement Act 
of 1994, Congress addressed this issue by amending section 22(h)(8) yet 
again. Congress allowed the Board to make exceptions to the statutory 
restrictions on lending to affiliate insiders embodied in paragraph 
(8). The extension of the statute to affiliate insiders was moved to a 
new paragraph (8)(A), and authority for the Board to make exceptions 
was placed in a new paragraph (8)(B), which reads as follows:

    The Board may, by regulation, make exceptions to subparagraph 
(A), except as that subparagraph makes applicable paragraph (2), for 
an executive officer or director of a subsidiary of a company that 
controls the member bank, if that executive officer or director does 
not have authority to participate, and does not participate, in 
major policymaking functions of the member bank.

Section 22(h)(2)--the ``paragraph (2)'' to which the Board may not make

[[Page 19864]]

exceptions--is the prohibition against lending on preferential terms.
    The 1994 amendment to section 22(h) allows the Board to exempt 
executive officers and directors of affiliates (other than the bank 
holding company) from insider lending restrictions, provided they are 
not involved in major policymaking functions at the lending bank. The 
legislative history of the provision indicates that it was intended to 
allow the Board to extend its existing exception for executive officers 
to directors as well.4 However, the 1994 amendment clearly does 
not allow the Board to exempt either executive officers or directors 
from the restriction on preferential lending in section 22(h)(2).
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    \4\ House Report 103-652, 103d Cong., 2d Sess. 180 (1994).
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    Thus, the apparent effect of the 1994 amendments regulation is (1) 
to reaffirm the Board's regulation insofar as it exempts executive 
officers of affiliates who are not involved in policymaking functions 
at the bank from the aggregate and individual lending limits, overdraft 
restriction, and prior approval requirements of Regulation O; (2) to 
invalidate the Board's regulation insofar as it exempts such executive 
officers from the prohibition on preferential lending; and (3) to grant 
the Board authority to extend the remaining parts of its executive 
officer exemption to directors as well.

Exception for Certain Executive Officers and Directors of 
Affiliates

    Accordingly, the Board is proposing amendments to Regulation O that 
would eliminate its restrictions--other than the restriction on 
preferential lending--on a bank's lending to executive officers and 
directors of affiliates who are not involved in major policymaking 
functions of the lending bank. The Board believes that extending the 
exemption to directors would relieve regulatory burden on bank holding 
companies without increasing the risk of insider lending or resultant 
safety and soundness problems. Reimposing the preferential lending 
restriction on executive officers (and maintaining the restriction on 
directors) might negate some of this relief; although banks would no 
longer be required to document that loans to executive officers and 
directors of affiliates fall within the lending limits of Regulation O, 
they might be required to maintain similar documentation to demonstrate 
that the loans were not on preferential terms. However, the Board 
believes that the plain language of the statute requires coverage of 
preferential lending.
    There is some reason to believe that this effect on the Board's 
regulation was unintended, and that Congress intended for the Board's 
across-the-board exemption for executive officers of affiliates to 
continue. The Riegle-Neal conference report stated, ``It is not the 
intent of the Conferees to affect the exemptions that the Federal 
Reserve Board has already extended to executive officers, but rather to 
allow the Board the authority to provide appropriate treatment for 
directors.'' House Report 103-652 at 180 (1994). However, where, as 
here, the provisions of a statute are unambiguous, legislative history 
may not be used to alter that plain meaning. The Board has, however, 
suggested and supported an amendment to section 22(h) to make its 
language consistent with its apparent intent.

Elimination of Unnecessary Board of Directors Approval

    In order to qualify for the regulatory exception for executive 
officers of affiliates, an executive officer currently must be excluded 
from major policymaking functions of the lending bank by resolutions of 
the board of directors of both the lending bank and the affiliate for 
which the executive officer works. Because a bank has full control over 
who participates in its policymaking, the Board believes that requiring 
a board resolution of the affiliate in addition to the resolution of 
the bank is superfluous and unduly burdensome. Accordingly, the Board 
is proposing to delete this requirement from the existing exception for 
executive officers and not to include it in the new exception for 
directors.

Regulatory Flexibility Act

    The Board has concluded after reviewing the proposed regulation 
that, if adopted, it would not impose a significant economic hardship 
on small institutions. The proposal does not necessitate the 
development of sophisticated recordkeeping or reporting systems by 
small institutions; nor will small institutions need to seek out the 
expertise of specialized accountants, lawyers, or managers in order to 
comply with the regulation. The proposal is designed to reduce the 
burden of Regulation O consistent with the requirements of the 
underlying statute. The Board therefore certifies pursuant to section 
605b of the Regulatory Flexibility Act (5 U.S.C. 605b) that the 
proposal, if adopted, will not have a significantly adverse economic 
impact on a substantial number of small entities within the meaning of 
the Regulatory Flexibility Act (5 U.S.C. 601 et seq.).

Paperwork Reduction Act

    In accordance with section 3506 of the Paperwork Reduction Act of 
1995 (44 U.S.C. Ch. 35; 5 CFR part 1320, Appendix A.1), the Board 
reviewed the proposed rule under the authority delegated to the Board 
by the Office of Management and Budget. Comments on the collections of 
information should be sent to the Office of Management and Budget, 
Paperwork Reduction Project (7100-0036), Washington, DC 20503, with 
copies of such comments to be sent to Mary M. McLaughlin, Federal 
Reserve Board Clearance Officer, Division of Research and Statistics, 
Mail Stop 97, Board of Governors of the Federal Reserve System, 
Washington, DC 20551.
    The collection of information requirements in this proposed 
regulation are found in 12 CFR part 215. This information is required 
to evidence compliance with the requirements of Section 22(h) of the 
Federal Reserve Act. The respondents and recordkeepers are for-profit 
financial institutions, including small businesses. Records must be 
retained for two years.
    The Federal Reserve may not conduct or sponsor, and an organization 
is not required to respond to, this information collection unless it 
displays a currently valid OMB control number. The OMB control number 
is 7100-0036.
    The proposed amendments are expected to provide for some reduction 
in the recordkeeping and disclosure practices of state member banks, 
and would not affect the banks' reporting requirements to the Federal 
Reserve. The recordkeeping and disclosure requirements on extensions of 
credit by the reporting bank to insiders of the bank and its affiliates 
are contained in the information collection for the Consolidated 
Reports of Condition and Income (FFIEC 031-034; OMB No. 7100-0036).
    Because the records would be maintained at state member banks and 
the notices are not provided to the Federal Reserve, no issue of 
confidentiality under the Freedom of Information Act arises.
    Comments are invited on: (a) whether the proposed revision to the 
collection of information is necessary for the proper performance of 
the Federal Reserve's functions; including whether the information has 
practical utility; (b) ways to enhance the quality, utility, and 
clarity of the information to be collected; and (c) ways to minimize 
the burden of information collection on respondents, including through 
the use of automated collection techniques or other forms of 
information technology.

[[Page 19865]]

List of Subjects in 12 CFR Part 215

    Credit, Federal Reserve System, Penalties, Reporting and 
recordkeeping requirements.

    For the reasons set forth in the preamble, and pursuant to the 
Board's authority under section 22(h) of the Federal Reserve Act (12 
U.S.C. 375b), the Board is proposing to amend 12 CFR Part 215, subpart 
A, as follows:

PART 215--LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND PRINCIPAL 
SHAREHOLDERS OF MEMBER BANKS (REGULATION O)

    1. The authority citation for part 215 continues to read as 
follows:

    Authority: 12 U.S.C. 248(i), 375a(10), 375b (9) and (10), 
1817(k)(3) and 1972(2)(G)(ii); Pub. L. 102-242, 105 Stat. 2236.

    2. Section 215.2 is amended as follows:
    a. Paragraph (d) introductory text and paragraphs (d)(1) through 
(d)(3) are redesignated as paragraph (d)(1) introductory text and 
paragraphs (d)(1)(i) through (d)(1)(iii), respectively;
    b. A new paragraph (d)(2) is added; and
    c. Paragraph (e)(2) is revised.
    The addition and revision read as follows:


Sec. 215.2.2  Definitions.

* * * * *
    (d)(1) Director of a company or bank * * *
* * * * *
    (2) Exception. Extensions of credit to a director of an affiliate 
of a member bank (other than a company that controls the bank) shall 
not be subject to Secs. 215.4 (b) through (d) and 215.6, provided 
that--
    (i) The director of the affiliate is excluded (by name or by title) 
from participation in major policymaking functions of the member bank 
by resolution of the bank's boards of directors, and does not actually 
participate in such major policymaking functions; and
    (ii) The director is not otherwise subject to Secs. 215.4 (b) 
through (d) and 215.6.
    (e) * * *
    (2) Extensions of credit to an executive officer of an affiliate of 
a member bank (other than a company that controls the bank) shall not 
be subject to Secs. 215.4 (b) through (d) and 215.6, provided that--
    (i) The executive officer of the affiliate is excluded (by name or 
by title) from participation in major policymaking functions of the 
member bank by resolution of the bank's boards of directors, and does 
not actually participate in such major policymaking functions; and
    (ii) The executive officer is not otherwise subject to Secs. 215.4 
(b) through (d) and 215.6.
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, April 25, 1996.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 96-10733 Filed 5-2-96; 8:45 am]
BILLING CODE 6210-01-P