[Federal Register Volume 61, Number 218 (Friday, November 8, 1996)]
[Proposed Rules]
[Pages 57797-57799]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28719]


=======================================================================
-----------------------------------------------------------------------

FEDERAL RESERVE SYSTEM

12 CFR Part 215

[Regulation O; Docket No. R-0940]


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: Supplemental notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The supplemental notice of proposed rulemaking (supplemental 
proposal) 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 supplemental proposal, the restrictions of 
Regulation O would not apply to extensions of credit by a bank to an 
executive officer or director of the bank's affiliate, provided that 
the executive officer or director was not engaged in major policymaking 
functions of the bank and the affiliate did not account for more than 
10 percent of the consolidated assets of the bank's holding company.
    The supplemental proposal supersedes a similar proposal included in 
a proposed rule published by the Board on May 3, 1996. The supplemental 
proposal results from a recent change in the exemptive authority of the 
Board under the Economic Growth and Regulatory Paperwork Reduction Act 
of 1996. Other provisions of the earlier proposal have been adopted by 
the Board as a final rule.

DATES: Comments must be received on or before December 9, 1996.

ADDRESSES: Comments should refer to Docket No. R-0940 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. on 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:

Introduction

    Section 22(h) of the Federal Reserve Act restricts insider lending 
by banks, and Regulation O implements section 22(h). 12 U.S.C. 375b; 12 
CFR Part 215. 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    On May 3, 1996, the Board proposed amendments to Regulation O to 
conform its exceptions for executive officers and directors of 
affiliates of banks to the requirements of section 22(h), as amended by 
the Riegle Community Development and Regulatory Improvement Act of 1994 
(Riegle Act).\2\ 61 FR 19,683. On September 30, 1996, in the Economic 
Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA),\3\ 
Congress further amended section 22(h)(8)(B) by expanding the number of 
restrictions from which the Board could exempt insiders of affiliates, 
but narrowing the number of insiders of affiliates eligible for such 
exemptions. In view of the changes in the Board's authority and the 
comments received from the public concerning the Board's original 
proposal, the Board is seeking comment on a new proposal to exempt 
certain insiders of affiliates from Regulation O.
---------------------------------------------------------------------------

    \2\ Pub. L. 103-325, section 334 (1994).
    \3\ Pub. L. 104-208, section 2211 (1996).
---------------------------------------------------------------------------

Background

    Section 22(h) restricts lending not only to insiders of the bank 
that is making the loan but also to insiders of the bank's parent bank 
holding company and any other subsidiary of that bank holding 
company.\4\ Prior to FDICIA, the Board's rules exempted from all the 
provisions of Regulation O an executive officer of the bank's 
affiliates (other than the parent bank holding company) who did not 
participate in major policymaking functions at the bank.\5\ 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 lending bank to obtain a 
loan on anything but arm's length terms, in contrast to executive 
officers of the lending bank itself or its parent. Thus, the Board 
considered the benefits, in terms of protecting the safety and 
soundness of bank, of restricting loans to these insiders of affiliates 
to be small. Second, applying these restrictions to executive officers 
of affiliates would have required each bank to maintain an updated list 
of all its affiliates' executive officers and all related interests of 
these 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 not outweighed by 
any substantial benefit.
---------------------------------------------------------------------------

    \4\ As amended by the Federal Deposit Insurance Corporation 
Improvement Act of 1991 (FDICIA), 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).
    \5\ Subsection (h) of section 22 was added in 1978. Financial 
Institutions Regulatory and Interest Rate Control Act of 1978, Pub. 
L. 95-630, Sec. 104. At that time, subsection (h) 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 provided that an ``officer'' of a bank included officers 
of affiliates, but did not similarly address ``executive officers.'' 
The statute's restrictions on lending by a bank to ``executive 
officers'' of the bank therefore did not clearly apply to 
``executive officers'' of affiliates. No such ambiguity existed with 
respect to directors and principal shareholders of affiliates, who 
were explicitly treated like their counterparts at the lending bank. 
In 1980, the Board amended Regulation O to cover insiders of 
affiliates, but included a regulatory exception for executive 
officers of affiliates who did not participate in major policymaking 
functions at the bank.
---------------------------------------------------------------------------

    However, after the FDICIA amendment, the language of the statute no 
longer appeared to allow such an

[[Page 57798]]

exception for executive officers of affiliates. Under the amendment, 
executive officers of affiliates were 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 Act, Congress addressed this issue by amending 
section 22(h)(8) again. Congress authorized the Board to make 
exceptions for executive officers and directors of affiliates, provided 
that the executive officer or director did not have the authority to 
participate, and did not participate in, major policymaking functions 
of the lending bank. The Board's exceptions, however, could not include 
the provisions of section 22(h)(2), which prohibited lending on 
preferential terms.\6\ Although the legislative history of the 
provision indicates that it was intended to allow the Board to maintain 
its existing exception for executive officers, its language did not 
allow the Board to do so.\7\ The Board suggested and supported an 
amendment to section 22(h) to make its language consistent with its 
apparent intent.
---------------------------------------------------------------------------

    \6\ The provision extending the statute to executive officers 
and directors of affiliates was moved to a new paragraph (8)(A), and 
the authority of 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. 12 U.S.C. 375b(8)(B). 
``Paragraph (2)'' is the prohibition against lending on preferential 
terms.
    \7\ The 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, 103d Cong., 2d Sess. at 180 
(1994).
---------------------------------------------------------------------------

    EGRPRA resolved the situation by dropping the requirement in 
section 22(h)(8) that the Board's exceptions not include the 
preferential lending provision. EGRPRA therefore restored the ability 
of the Board prior to FDICIA to exempt executive officers of a bank's 
affiliates from all the provisions of section 22(h), and reconfirmed 
the authority of the Board to make such an exception for directors of a 
bank's affiliates as well.
    Congress further revised section 22(h)(8) in EGRPRA, however, to 
introduce an additional restriction on the Board's authority to make 
exceptions. Under the 1996 amendment, an executive officer or director 
of an affiliate is not eligible for an exception if the assets of the 
affiliate constitute more than 10 percent of the consolidated assets of 
the highest-tier holding company controlling the affiliate and the bank 
making the loan.

Proposal

    Accordingly, the Board is proposing amendments to Regulation O that 
would eliminate its restrictions on a bank's lending to executive 
officers and directors of affiliates who are not involved in major 
policymaking functions of the lending bank, if the assets of the 
affiliate do not exceed 10 percent of the consolidated assets of a 
company that controls the member bank and such subsidiary and is not 
controlled by any other company.\8\ For the same reasons that it 
originally exempted executive officers of affiliates, the Board 
believes that retaining the executive officer exception and expanding 
it to cover directors would relieve regulatory burden on bank holding 
companies without increasing the risk of excessive or preferential 
lending or resultant safety and soundness problems.
---------------------------------------------------------------------------

    \8\ The proposed amendment also would retain the current 
provision in Regulation O that excludes extensions of credit to 
exempt insiders of affiliates from the recordkeeping requirements of 
Sec. 215.8 of Regulation O. 12 CFR 215.8. The Board in its original 
proposal retained the recordkeeping requirement because the lending 
bank was required to identify loans to exempted insiders of 
affiliates and their related interests in order to ensure that such 
loans were not made on preferential terms. Under the proposed 
amendment, however, the Board's exception would include all 
prohibitions under section 22(h), including the prohibition on 
preferential terms, and therefore make recordkeeping for loans to 
exempt borrowers unnecessary.
---------------------------------------------------------------------------

    Simultaneously with this proposal, the Board has published a final 
rule elsewhere in today's Federal Register to simplify the requirements 
for board of directors action to exclude an executive officer of an 
affiliate from participating in major policymaking functions of the 
lending bank. Under the amended procedures, in order to be exempt from 
Regulation O, the board of directors of a bank must adopt a resolution 
listing by name or title the insiders of the bank and its affiliates 
who are authorized to participate in major policymaking functions of 
the bank and generally excluding all other persons from participation, 
and the executive officer must not be included in the resolution and 
must not actually participate in such major policymaking functions. 
Previously, the regulation required the executive officer to be 
excluded from major policymaking functions of the bank by name or title 
in a resolution of the bank and of the affiliated bank or company where 
the individual served as an executive officer. 12 CFR 215.2(e)(2)(i).
    The supplemental proposal reflects this simplified procedure for 
excluding executive officers and extends it to directors. The Board 
adopted the simplified procedures for exempting an executive officer of 
an affiliate from Regulation O because the lending bank and its board 
of directors have full and formal control over who participates in the 
bank's policymaking. For the same reasons, the Board believes that 
simplifying the requirements to exempt a director of an affiliate would 
relieve regulatory burden without increasing the risk of evasion of 
Regulation O.

Regulatory Flexibility Analysis

    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 amendment would reduce the regulatory burden 
for most banks by increasing the number of insiders of affiliates who 
may be excepted from the insider lending restrictions of Regulation O 
and substantially eliminating recordkeeping with respect to such 
individuals. The amendment may increase the regulatory burden for some 
banks by excluding executive officers of larger affiliates who 
previously were eligible to be excepted. 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 
1980 (44 U.S.C. Ch. 35; 5 CFR Part 1320, Appendix A.1), the Board 
reviewed the supplemental notice of proposed rulemaking under the 
authority delegated to the Board by the Office of Management and 
Budget. Comments on the collection of information should be sent to the 
Office of Management and Budget, Paperwork Reduction Project (7100-
0036), Washington, DC 20503,

[[Page 57799]]

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 System 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 System. The recordkeeping and disclosure requirements on 
extensions of credit by the reporting banks 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 System, 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 System'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.

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 amending 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 revisions read as follows:


Sec. 215.2  Definitions.

* * * * *
    (d)(1) * * *
    (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, 215.6, and 215.8, provided that--
    (i) The board of directors of the member bank adopts a resolution 
identifying (by name or by title) all persons authorized to participate 
in major policymaking functions of the member bank, and the director of 
the affiliate is not included in the resolution and does not actually 
participate in such major policymaking functions;
    (ii) The assets of the affiliate do not constitute more than 10 
percent of the consolidated assets of the company that controls the 
member bank and is not controlled by any other company; and
    (iii) The director of the affiliate is not otherwise subject to 
Secs. 215.4, 215.6, and 215.8.
    (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, 215.6, and 215.8, provided that--
    (i) The board of directors of the member bank adopts a resolution 
identifying (by name or by title) all persons authorized to participate 
in major policymaking functions of the member bank, and the executive 
officer of the affiliate is not included in the resolution and does not 
actually participate in such major policymaking functions;
    (ii) The assets of the affiliate do not constitute more than 10 
percent of the consolidated assets of the company that controls the 
member bank and is not controlled by any other company; and
    (iii) The executive officer of the affiliate is not otherwise 
subject to Secs. 215.4, 215.6, and 215.8.
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, November 4, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-28719 Filed 11-7-96; 8:45 am]
BILLING CODE 6210-01-P