[Federal Register Volume 62, Number 54 (Thursday, March 20, 1997)]
[Rules and Regulations]
[Pages 13294-13298]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-7011]


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

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: Final rule.

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

SUMMARY: The Board is amending its Regulation O, which implements 
section 22(h) of the Federal Reserve Act and limits how much and on 
what terms a bank may lend to its own insiders and insiders of its 
affiliates. Under the final rule, Regulation O will not apply to 
extensions of credit by a bank to an executive officer or director of 
an affiliate, provided that the executive officer or director is not 
engaged in major policymaking functions of the bank and the affiliate 
does not account for more than 10 percent of the consolidated assets of 
the bank's parent holding company. Extensions of credit to executive 
officers of an affiliate that accounts for more than 10 percent of the 
consolidated assets of the bank's parent holding company are covered by 
Regulation O as a result of the Economic Growth and Regulatory 
Paperwork Reduction Act of 1996.

EFFECTIVE DATE: April 1, 1997.

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,

[[Page 13295]]

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 banks 
to maintain records to document compliance with all its 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 
certain overdrafts by executive officers and directors. 12 CFR 
215.4(b) and (e).
---------------------------------------------------------------------------

    The Board in 1980 generally exempted executive officers of 
affiliates from the restrictions of Regulation O so long as they did 
not participate in major policymaking functions of a bank. The Board 
did not exempt directors of affiliates because it lacked authority to 
do so. On May 3, 1996, the Board proposed amendments to Regulation O to 
conform its exemptions 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), which had modified the authority of the Board to maintain 
such exemptions.2 61 FR 19683. On September 30, 1996, in the 
Economic Growth and Regulatory Paperwork Reduction Act of 1996 
(EGRPRA),3 Congress amended section 22(h) to modify further the 
Board's exemptive authority over affiliate insiders. 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 on November 
8, 1996, sought comment on a new proposal to exempt certain insiders of 
affiliates from Regulation O. 61 FR 57797.
---------------------------------------------------------------------------

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

    After considering the comments received on the notice, the Board 
has decided not to apply Regulation O to extensions of credit by a bank 
to an executive officer or director of a bank affiliate, provided that: 
(1) the executive officer or director is not engaged in major 
policymaking functions of the bank; and (2) the affiliate does not 
account for more than 10 percent of the consolidated assets of the 
bank's parent holding company. All commenters supported the Board's new 
proposal, except one commenter who complained that executive officers 
of certain larger affiliates of a bank who previously could be exempted 
from Regulation O no longer would be eligible to be exempted.

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 a bank's loans to an executive officer of 
any of its affiliates (other than the parent bank holding company), 
provided that the executive officer 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 arms-length terms, in contrast to executive officers of the lending 
bank itself or its parent. Thus, the Board considered the benefits of 
restricting loans to these affiliate insiders, in terms of protecting 
the safety and soundness of bank, 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 those executive officers, and to 
check all loans against the list. Particularly for a bank in a multi-
subsidiary bank holding company, 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, section 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 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. The Riegle Act 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 Act, however, did not authorize the Board to 
include any exception from section 22(h)(2), which prohibits 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
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    The Board suggested and supported an amendment to section 22(h) to 
make its language consistent with its apparent intent, and 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 granted the Board the authority to 
make the same 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 exemptive authority. 
Under section 22(h), as amended, the Board may not grant an exception 
to an executive officer or director of an affiliate that constitutes 
more than 10 percent of the consolidated assets of the highest-tier 
holding company controlling the affiliate and the bank making the loan.

[[Page 13296]]

    Accordingly, the Board proposed an amendment to Regulation O that 
would eliminate its restrictions on a bank's lending to executive 
officers and directors of an affiliate who are not involved in major 
policymaking functions of the lending bank, if the assets of the 
affiliate did not exceed 10 percent of the consolidated assets of a 
company that controlled the member bank and such subsidiary and was not 
controlled by any other company.8 As the Board stated in its 
proposal, the Board believes, for the same reasons that it originally 
exempted executive officers of affiliates, that retaining the executive 
officer exemption 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. 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 exemption would encompass all prohibitions under section 
22(h), including the prohibition on preferential terms, and 
therefore make recordkeeping for loans to exempt borrowers 
unnecessary.
---------------------------------------------------------------------------

    The proposal also reflected a simplified procedure for excluding 
executive officers of affiliates that was adopted by the Board in a 
final rule effective the same date as the supplemental notice, and 
extended the procedure to directors. 61 FR 57769. The procedure allows 
the board of directors of a bank to exclude affiliate insiders without 
requiring any action by the affiliate board of directors. The Board 
adopted the simplified procedures 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 stated in 
the proposal that it believed that simplifying the requirements to 
exempt a director of an affiliate would relieve regulatory burden 
without increasing the risk of evasion of Regulation O.
    The Board received 44 comments on its original rulemaking proposal. 
Forty-one commenters supported the Board's proposed amendments, 
including 17 commenters who supported the Board's amendments without 
qualification.9 Several commenters asked the Board to expand its 
proposed amendments to provide additional relief from Regulation O. 
These proposals included extending the exception to include 
Secs. 215.8, 215.10, and 215.11 of Regulation O, which impose various 
recordkeeping and disclosure requirements, and making the amendments 
effective retroactively to the effective date of the Riegle Act.10
---------------------------------------------------------------------------

    \9\ Eleven commenters generally supported the amendments as 
originally proposed but complained that banks would continue to bear 
a significant recordkeeping burden to ensure that loans to affiliate 
insiders were not made on preferential terms. The three commenters 
who opposed the original proposal also objected on the basis of the 
recordkeeping burden. As discussed above, the recordkeeping 
requirement for loans to exempted insiders of affiliates has been 
eliminated.
    \10\ One commenter also suggested that the requirement for a 
board of directors resolution to exempt insiders of a bank's 
affiliates be dropped entirely. This comment was addressed in the 
Board's notice of final rulemaking dated November 8, 1996. 61 FR 
57770.
---------------------------------------------------------------------------

    The Board received 21 comments on its supplemental rulemaking, 
including comments from three banks, nine bank holding companies, six 
Federal Reserve Banks, and three trade associations. Twenty commenters 
supported the Board's revised amendments, including 14 commenters who 
supported the revised amendments without qualification. The other 
commenters in favor sought clarification concerning the measurement of 
consolidated assets, suggested further changes to Regulation O 
concerning persons to be treated as executive officers subject to its 
lending restrictions and the manner of exempting them, proposed 
technical changes in the text of the amendment, or requested the Board 
to seek further amendments of section 22(h) by Congress. One commenter 
opposed the revised amendments because executive officers of certain 
larger affiliates of a lending bank who previously could be exempted 
from section 22(h) and Regulation O no longer can be exempted under 
EGRPRA.
    The Board has carefully considered the comments received, and has 
decided to adopt the amendment substantially as proposed.
    With respect to the comments received on the original rulemaking, 
the Board believes that no action is required to make the exceptions 
effective with respect to Sec. 215.10, concerning the reporting of 
loans to executive officers of member banks in a bank's quarterly 
report of condition pursuant to 12 U.S.C. 1817(a)(3), and Sec. 215.11, 
concerning public disclosure of extensions of credit to executive 
officers and principal shareholders of member banks pursuant to 12 
U.S.C. 1817(k). Sections 215.10 and 215.11 do not apply to executive 
officers of affiliates in any case. Accordingly, no action is necessary 
to exclude executive officers of affiliates who are covered by the 
exceptions. The Board also has determined that a retroactive effective 
date for this amendment is not appropriate.11
---------------------------------------------------------------------------

    \11\Executive officers of affiliates of a lending bank that 
account for more than 10 percent of the consolidated assets of the 
lending bank's top-tier bank holding company previously could be 
exempted from section 22(h) and Regulation O, but they no longer can 
be exempted under EGRPRA, effective September 30, 1996. The statute 
makes no provision for the grandfathering of nonconforming loans 
that were outstanding when the law became effective. The Board's 
practice concerning loans that are outstanding at the time a 
borrower becomes an insider has been not to require that such loans 
be brought into conformity until such loans are renewed, revised, or 
extended, which events are deemed to be a new extension of credit 
subsequent to the date the borrower became an insider. The dollar 
amount of nonconforming loans, however, is counted toward the 
individual insider and aggregate insider lending limits whenever any 
additional extensions of credit subject to these limits are 
considered. See 12 CFR 215.4(c) and (d).
---------------------------------------------------------------------------

    With respect to the comments received on the supplemental 
rulemaking, one commenter noted that EGRPRA did not address when or how 
often the assets of affiliates and the consolidated assets of the top-
tier bank holding company should be measured in order to determine 
whether insiders of certain larger affiliates are ineligible to be 
exempted from the lending restrictions of Regulation O. The Board has 
decided that assets should be measured once per year, based on the 
average assets reported by the top-tier holding company and its banking 
and nonbanking subsidiaries during the four preceding calendar quarters 
or as determined in the examination process. This method of measurement 
should minimize fluctuations in asset size (as may occur, for example, 
as a result of seasonal loan demand) and simplify the collection of 
relevant data.12
---------------------------------------------------------------------------

    \12\When calculating the assets of any affiliate, all inter-
affiliate liabilities should be excluded, in the same manner as such 
liabilities are excluded when calculating the consolidated assets of 
the top-tier bank holding company.
---------------------------------------------------------------------------

    Two commenters sought further simplification of the procedure to 
exclude insiders of an affiliate of a bank from the insider lending 
restrictions. The Board has amended the definitions of ``director'' and 
``executive officer'' in Regulation O to clarify that insiders of an 
affiliate may be excluded by any form of resolution of the board of 
directors or bylaw of a bank that identifies the persons who are 
excluded.13 Even under the amended

[[Page 13297]]

procedures, however, a bank may not rely solely on its resolution or 
bylaw to identify all individuals subject to Regulation O, as some 
affiliate officers and directors who are excluded from policymaking at 
the bank by a bylaw or resolution may nevertheless remain subject to 
Regulation O because their employer controls the bank or controls more 
than 10 percent of the consolidated assets of the top-tier bank holding 
company. 12 CFR 215.2(d)(2)(ii) and (iii) and 215.2(e)(2)(ii) and 
(iii).14
---------------------------------------------------------------------------

    \13\ See 12 CFR 215.2(d) and (e). A bank may exclude an insider 
of an affiliate by using an affirmative resolution or bylaw that 
lists, by name or by title, persons authorized to participate in 
major policymaking functions of the bank and does not include the 
affiliate insider. A resolution or bylaw that stated, ``A, B, and C 
are the only persons authorized to participate as executive officers 
in major policymaking functions of the bank'' would be sufficient to 
exclude all other persons. A bank also may exclude an insider of an 
affiliate by using a negative resolution or bylaw that lists, by 
name or by title, persons not authorized to participate in such 
functions, and includes the affiliate insider. A resolution or bylaw 
that stated, ``No executive officer of X Bank or Y Company is 
authorized to participate in major policymaking functions of this 
bank unless that individual is directly employed by this bank as an 
executive officer,'' would be sufficient to exclude all executive 
officers of the identified affiliates. The identical procedures also 
may be used to exclude officers of a company or bank from being 
classified as executive officers of the company or bank. See 12 CFR 
215.2(e)(1) and (3).
    \14\ Another commenter proposed that the Board permit a bank or 
company to identify its executive officers solely by reference to 
all members of a particular senior management committee of the bank 
or company, in order to avoid all presumptions that may arise from a 
person's title. The comment did not indicate, however, and the Board 
is not aware that such a procedure for identifying persons with 
major policymaking functions is so widespread or standardized that 
it would serve as a reliable substitute in general, at this time, 
for the traditional identification of persons with major 
policymaking functions by title. Accordingly, the Board has 
determined not to adopt this proposal at this time. This procedure 
may be suitable, however, in the particular circumstances of a given 
bank or company, and would be permissible under the terms of 
Sec. 215.2(e)(2) as amended.
---------------------------------------------------------------------------

    Technical changes to the text of the amendment have been made to 
conform the amendment to other provisions of Regulation O and clarify 
the application of the percentage of assets test. A technical change 
also has been made to Sec. 215.4(a)(2) to clarify the scope of the 
exception contained therein to the provisions of Sec. 215.4(a)(1). This 
exception was added as part of the final rule effective November 8, 
1996, implementing certain provisions of EGRPRA. 61 FR 52769.

Determination of Effective Date

    Because the final rule adjusts a requirement on insured depository 
institutions, the final rule will become effective April 1, 1997, the 
first day of the calendar quarter after the date of the final rule's 
publication. 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 adverse economic impact on a substantial 
number of small entities. The amendment will 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.
    One aspect of the amendment may increase the regulatory burden on 
multi-subsidiary bank holding companies. Because EGRPRA no longer 
authorizes the Board to exempt extensions of credit to executive 
officers of affiliates holding more than 10 percent of the consolidated 
assets of the bank holding company, the Board's existing exemption, 
which covers such persons, is being amended to do so no longer. 
Although this action will increase the recordkeeping burden on some 
multi-subsidiary bank holding companies, the increase in burden is 
required by statute and outside the Board's discretion, will generally 
not be significant, and will not be focused on small entities, which 
are less likely to have multiple subsidiaries.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 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 Board may not conduct or sponsor, and an organization is 
not required to respond to, the information collection required in the 
final rule unless the Board displays a currently valid OMB control 
number. The Board's OMB control number is 7100-0036.
    This collection of information is authorized by section 22(h)(10) 
of the Federal Reserve Act (12 U.S.C. 375b(10)), and is mandatory under 
Regulation O. This information is used 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. These parties must retain 
records concerning their insider lending for two years, and certain 
information in these records must be disclosed to the public upon 
request. Because these records are maintained at state member banks, no 
issue of confidentiality under the Freedom of Information Act arises 
concerning this disclosure to the public.
    The amendment is estimated to result in a 10 percent reduction in 
the annual hour burden of recordkeeping and disclosure associated with 
Regulation O for state member banks. The revisions affecting this 
burden are detailed in Section 215.2 of the final rule. The amendment 
will reduce the burden for most banks by increasing the number of 
insiders of affiliates who may be excepted from the insider lending 
restrictions of Regulation O. The burden may increase, however, for 
some multi-subsidiary bank holding companies. Comments on the burden 
are discussed in the Background section of this notice. The Board 
estimates there will be no cost burden in addition to the annual hour 
burden.
    Some of the information collected by banks on extensions of credit 
to insiders of the bank and its affiliates is reported in the 
Consolidated Reports of Condition and Income (Call Report; FFIEC 031-
034; OMB No. 7100-0036). Regulation O information is reported in the 
Call Report on Schedule RC-M, Memoranda, and Special Report on Loans to 
Executive Officers, and is available to the public upon request.
    The Board has a continuing interest in the public's opinion of its 
information collection activities. At any time, comments regarding the 
burden estimate, or any other aspect of this information collection 
requirement, including suggestions for reducing the burden, may be sent 
to: Secretary, Board of Governors of the Federal Reserve System, 20th 
and C Streets, N.W., Washington, DC 20551; and to the Office of 
Management and Budget, Paperwork Reduction Project (7100-0036), 
Washington, DC 20503.

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 amends 12 CFR part 215, subpart A, as follows:

[[Page 13298]]

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. New paragraphs (d)(2) and (d)(3) are added;
    c. Paragraph (e)(2) is revised; and
    d. A new paragraph (e)(3) is added.
    The additions and revisions read as follows:


Sec. 215.2  Definitions.

* * * * *
    (d)(1) * * *
    (2) Extensions of credit to a director of an affiliate of a bank 
are not subject to Secs. 215.4, 215.6, and 215.8 if--
    (i) The director of the affiliate is excluded, by resolution of the 
board of directors or by the bylaws of the bank, from participation in 
major policymaking functions of the bank, and the director does not 
actually participate in such functions;
    (ii) The affiliate does not control the bank;
    (iii) As determined annually, the assets of the affiliate do not 
constitute more than 10 percent of the consolidated assets of the 
company that--
    (A) Controls the bank; and
    (B) Is not controlled by any other company; and
    (iv) The director of the affiliate is not otherwise subject to 
Secs. 215.4, 215.6, and 215.8.
    (3) For purposes of paragraph (d)(2)(i) of this section, a 
resolution of the board of directors or a corporate bylaw may--
    (i) Include the director (by name or by title) in a list of persons 
excluded from participation in such functions; or
    (ii) Not include the director in a list of persons authorized (by 
name or by title) to participate in such functions.
    (e)(1) * * *
    (2) Extensions of credit to an executive officer of an affiliate of 
a bank are not subject to Secs. 215.4, 215.6, and 215.8 if--
    (i) The executive officer is excluded, by resolution of the board 
of directors or by the bylaws of the bank, from participation in major 
policymaking functions of the bank, and the executive officer does not 
actually participate in such functions;
    (ii) The affiliate does not control the bank;
    (iii) As determined annually, the assets of the affiliate do not 
constitute more than 10 percent of the consolidated assets of the 
company that--
    (A) Controls the bank; and
    (B) Is not controlled by any other company; and
    (iv) The executive officer of the affiliate is not otherwise 
subject to Secs. 215.4, 215.6, and 215.8.
    (3) For purposes of paragraphs (e)(1) and (e)(2)(i) of this 
section, a resolution of the board of directors or a corporate bylaw 
may--
    (i) Include the executive officer (by name or by title) in a list 
of persons excluded from participation in such functions; or
    (ii) Not include the executive officer in a list of persons 
authorized (by name or by title) to participate in such functions.
* * * * *
    3. Section 215.4 is amended by revising paragraph (a)(2) 
introductory text to read as follows:


Sec. 215.4  General prohibitions.

    (a) * * *
    (2) Exception. Nothing in this paragraph (a) or paragraph 
(e)(2)(ii) of this section shall prohibit any extension of credit made 
pursuant to a benefit or compensation program--
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, March 14, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-7011 Filed 3-19-97; 8:45 am]
BILLING CODE 6210-01-P