[Federal Register Volume 61, Number 218 (Friday, November 8, 1996)]
[Rules and Regulations]
[Pages 57769-57770]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28720]



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 Rules and Regulations
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  Federal Register / Vol. 61, No. 218 / Friday, November 8, 1996 / 
Rules and Regulations  

[[Page 57769]]



FEDERAL RESERVE SYSTEM

12 CFR Part 215

[Regulation O; Docket No. R-0939]


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: Final rule.

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SUMMARY: The Board is amending its Regulation O, which limits how much 
and on what terms a bank may lend to its own insiders and insiders of 
its affiliates, in order to permit insiders of a bank and of the bank's 
affiliates to obtain loans under company-wide employee benefit plans. 
This amendment conforms the regulation to the Economic Growth and 
Regulatory Paperwork Reduction Act of 1996, which was recently passed 
by Congress. Currently, participation in such plans is prohibited when 
loans under such plans are on terms not available to the general 
public.
    The Board also is amending Regulation O to simplify the procedure 
for a bank's board of directors to exclude executive officers and 
directors of an affiliate from policymaking functions of the bank, and 
thereby from the restrictions of Regulation O.

EFFECTIVE DATE: November 4, 1996.

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 restricts insider lending 
by banks, and Regulation O implements section 22(h). 12 U.S.C. 375b; 12 
CFR Part 215. Regulation O imposes quantitative limits on loans to 
insiders and requires that such loans not be on ``preferential'' 
terms--that is, on the same terms a person not affiliated with the bank 
would receive. 12 CFR 215.4(a). 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). 
Section 22(h) also restricts lending to insiders of a bank's parent 
bank holding company and any other subsidiary of that bank holding 
company. 12 U.S.C. 22(h)(8).

Widely Available Benefit Plans

    On September 30, 1996, in the Economic Growth and Regulatory 
Paperwork Reduction Act of 1996 (EGRPRA),1 Congress amended the 
preferential lending prohibition of section 22(h)(2) by adding an 
exception for extensions of credit made pursuant to a program that is 
widely available to all employees of the lending bank and does not give 
preference to insiders over other employees. The amendment to section 
22(h) was effective September 30, 1996.
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    \1\  Pub. L. 194-208, section 2211 (1996).
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    Previously, section 22(h)(2) prohibited insiders from participating 
in programs available to all other employees of a lending bank, such as 
a reduction or waiver of closing costs for home mortgage loans, because 
members of the general public were not entitled to obtain credit on the 
same terms. The legislative history of EGRPRA indicates that Congress 
amended section 22(h) because participation by insiders in programs as 
described above would not affect any of the core restrictions on 
insider lending under the statute.2 In other words, participation 
by an insider in a plan that is widely available to employees of a bank 
would not constitute abuse of the insider's position and would not 
substantially contribute to a concentration of credit among insiders.
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    \2\ See S. Rep. No. 104-185, 104th Cong., 1st Sess. 25 (1995).
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    The Board is amending Regulation O to conform to the amendment in 
EGRPRA. Consistent with section 22(h)(8), the amendment also expressly 
includes loans to insiders of an affiliate in the new exception.3
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    \3\  Insiders of affiliates are eligible because they are deemed 
to be insiders of member banks for all purposes under the statute. 
See 12 U.S.C. 375b(8). Thus, an insider of an affiliate would be 
eligible for a benefit or compensation program if the bank made the 
benefit or compensation widely available to employees of that 
affiliate, and did not give preference to insiders over other 
employees of that affiliate.
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Exclusion of Insiders of Affiliates From Policymaking at a Bank

    The Board previously published for public comment a proposal 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.4 Currently, in order 
to be exempt from Regulation O, an executive officer must be excluded 
by resolution of the board of directors of both the lending bank and 
the affiliate for which the executive officer works. 12 CFR 
215.2(e)(2)(i). Because a bank has full control over who participates 
in its policymaking, however, the Board proposed that requiring a board 
resolution of the affiliate in addition to a board resolution of the 
lending bank was superfluous and unduly burdensome. Forty-four public 
comments were received on the proposal, of which 18 generally supported 
the simplification of the resolution requirements, with no comments 
opposed. Accordingly, the Board is deleting this requirement from the 
existing exception for executive officers of affiliates.
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    \4\  61 FR 19683 (May 3, 1996).
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    Four commenters on the proposal also recommended that the 
resolution requirements be further simplified by permitting a bank to 
adopt a resolution listing by name or title only 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. Currently, the regulation requires the 
executive officer to be excluded by name or title from participating in 
such functions. 12 CFR 215.2(e)(2)(i). Because a bank's board of

[[Page 57770]]

directors has formal control over who participates in the bank's 
policymaking, the Board believes that an affirmative resolution of the 
board should accurately identify all persons participating. 
Accordingly, the Board is amending the resolution requirement to 
provide for such a resolution.
    Some commenters also proposed that the board of directors of a bank 
holding company be permitted to adopt a resolution on behalf of its 
subsidiaries. The Board does not consider this procedure to be 
appropriate, however, in view of the formal responsibility of a bank's 
own board of directors to set the bank's policy and the variations that 
exist among bank holding companies in the degree of influence they 
exercise over internal policymaking at their subsidiary banks. Another 
commenter suggested that the requirement for a board of directors 
resolution be dropped entirely. The Board believes that the resolution 
requirement should be retained, in order to ensure that a bank's major 
policymakers are identified at a level within the bank that is 
qualified to address the issue authoritatively.
    Simultaneously with this notice, as a result of a change in the 
exemptive authority of the Board under EGRPRA, the Board also is 
proposing an amendment to Regulation O to permit a bank to exempt 
directors of an affiliate from the restrictions of Regulation O. The 
amended procedures described above concerning the resolution 
requirements to exempt executive officers of an affiliate also are 
included in the proposed amendment to exempt directors of an affiliate. 
Public comment on the amended procedures is requested as part of that 
proposed rulemaking.

Determination of Effective Date

    Because the final rule is a substantive rule that grants an 
exemption or relieves a restriction, and the final rule concerning 
participation by insiders and insiders of affiliates in employee 
benefit plans is intended solely to conform the regulation to section 
22(h), as amended effective September 30, 1996, the Board has 
determined, for good cause, that the final rule will become effective 
immediately upon the date of Board action adopting the amendment. See 5 
U.S.C. 553(d). The final rule imposes no additional reporting, 
disclosure, or other new requirements on insured depository 
institutions. See 12 U.S.C. 4802(b).

Final Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires an 
agency to publish a final regulatory flexibility analysis when the 
agency publishes a final rule. Two of the requirements of a final 
regulatory flexibility analysis (5 U.S.C. 604(b))--a succinct statement 
of the need for, and the objectives of, the rule, and a summary of the 
issues raised by the public comments received, the agency assessment 
thereof, and any changes made in response thereto--are contained in the 
supplementary information above. No significant alternatives to the 
final rule were considered by the agency.
    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 605(b)), the Board certifies that the amendment to Regulation O 
will not have a significant economic impact on a substantial number of 
small entities, and that any impact on those entities should be 
positive. The amendment will reduce the regulatory burden for most 
banks by permitting insiders of banks and insiders of their affiliates 
to participate in lending programs generally available to employees and 
by simplifying the procedures for exempting insiders of affiliates from 
the insider lending restrictions in general.

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 final rule under the authority delegated to the Board by 
the Office of Management and Budget.
    The recordkeeping requirements are authorized by 12 U.S.C. 
375b(10). This information is required to evidence compliance with the 
requirements of section 22(h) of the Federal Reserve Act. The amendment 
is estimated to result in some reduction in the annual burden of 
recordkeeping associated with Regulation O for state member banks.
    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.

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 by revising paragraph (e)(2)(i) to read 
as follows:


Sec. 215.2  Definitions.

* * * * *
    (e) * * *
    (2) * * *
    (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; and
* * * * *
    3. Section 215.4 is amended as follows:
    a. Paragraphs (a) introductory text, (a)(1) and (a)(2) are 
redesignated as paragraphs (a)(1) introductory text, (a)(1)(i) and 
(a)(1)(ii), respectively;
    b. A heading is added to newly designated paragraph (a)(1); and
    c. A new paragraph (a)(2) is added.
    The additions read as follows:


Sec. 215.4  General prohibitions.

    (a) Terms and creditworthiness--(1) In general. * * *
    (2) Exception. Nothing in this paragraph (a) shall prohibit any 
extension of credit made pursuant to a benefit or compensation 
program--
    (i) That is widely available to employees of the member bank and, 
in the case of extensions of credit to an insider of its affiliates, is 
widely available to employees of the affiliates at which that person is 
an insider; and
    (ii) That does not give preference to any insider of the member 
bank over other employees of the member bank and, in the case of 
extensions of credit to an insider of its affiliates, does not give 
preference to any insider of its affiliates over other employees of the 
affiliates at which that person is an insider.
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, November 4, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-28720 Filed 11-7-96; 8:45 am]
BILLING CODE 6210-01-P