[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