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F ederal reserve Ba n k DALLAS. TEXAS of D allas 7S222 C ircu lar No. 79-53 March 21, 1979 PROPOSED ADDENDA TO REGULATION O TO ALL MEMBER BANKS, BANK HOLDING COMPANIES, AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: The Board of Governors of the Federal Reserve System, on March 8, 1979, issued proposed addenda to Regulation O to implement T itle V III (C orre spondent Accounts) and T itle IX (Disclosure of Material Facts) of the Financial Institutions Regulatory and Interest Rate Control Act of 1978. Printed on the following pages is a copy of the Board's press release and enclosed is a copy of the Federal Register document. Interested persons are invited to submit comments regarding the proposed regulations. Comments should be in w ritin g and should refer to F .R .B . Docket No. R-0210. They should be sent to the S ecretary, Board of Governors of the Federal Reserve System, Washington, D .C . 20551, and must be received by A p ril 20, 1979. Any questions on the proposed regulations should be directed to Uzziah Anderson or William C . Reddick, J r . in our Bank Supervision and Regulations Department, Ext. 6274. Sincerely yours, Robert H . Boykin First Vice President Enclosure Banks and others are encouraged to use the following incoming WATS numbers in contacting this Bank: 1-800-492-4403 (intrastate) and 1-800-527-4970 (interstate). For calls placed locally, please use 651 plus the extension referred to above. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) FEDERAL y «v J press RESERVE release f*4 L R £ ^ V For immediate release March 8, 1979 The Federal Reserve Board and the Federal Deposit Insurance Corporation today published fo r comment proposed regulations to implement T itle s V I I I and IX o f FIRA. The Federal Reserve Board's proposed regulation applies to a l l member banks, including national banks. T it le V I I I p roh ibits banks that maintain correspondent account relationships from extending cred it on p re fe re n tia l terns to each other's executive o ffic e r s , d ire c to rs and p rin c ip a l shareholders. The le g is la tio n a lso prohibits banks from opening a correspondent account relationship when one o f the banks has outstanding a p referen tial extension o f credit to an executive o f f i c e r , d irecto r or p rin cip al shareholder o f the other bank. The proposed regu lation defines a correspondent account as an account that is maintained by a bank with another bank for the deposit or placement o f funds. Comment is s p e c ific a lly requested on th is d efin ition . T it le V I I I establish es certain reporting and public disclosure procedures for insured banks and fo r th e ir executive o ffic e rs and principal stockholders o f record, but not fo r directors. Each executive o ffic e r and p rin c ip a l stockholder o f an insured bank would report annually to the bank's board o f directors on the maximum ( amount o f indebtedness of the o ff ic e r or stockholder and each o f his or her related interests to depository banks, the amount o f such indebtedness outstanding on December 31, the range o f interest rates on the loans and the terms and conditions. A depository bank is a bank that maintains a correspondent account fo r the insured bank. -2 Each insured bank would be required to forward an annual report to the appropriate Federal banking agency li s t i n g the name o f each executive o ffic e r or p rin c ip a l stockholder who f i l e s a report of indebtedness and the aggregate amount o f indebtedness o f these persons and th e ir related interests to the insured bank's depository banks. In implementing T it le IX, the proposed regu lation would require each insured bank to f i l e with the apprpriate Federal banking agency an annual report lis t in g the names o f it s executive o ffic e r s and p rin cip al stockholders and the aggregate amount o f indebtedness from the insured bank to these persons and th e ir related in te re sts. Both o f the reports f ile d with the bank agency would be made a v a ila b le to the public on request. As proposed, the f i r s t reports would cover the period from March 10, 1979,to December 31, 1980. However, comment is s p e c ific a lly requested on whether the reporting period fo r 1979 should sta rt on July 1. As proposed, o ffic e r s and stockholders would f i l e reports with the boards o f d irecto rs on January 10, 1980, and the insured banks would f i l e th eir reports with the appropriate agency by January 31, 1980. The agencies' proposed regulations are attached. * * * * * * 13035 E x trac t from Federal Register V O L . 44, NO. 48 F rid a y , M arch 9, 1979 p p . 13035 - 13038 [6210-01-M] FEDERAL RESERVE SYSTEM [12 CFR Pari 215] LOANS TO EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS FEDERAL DEPOSIT INSURANCE CORPORATION [12 CFR Parts 304, 349] [Docket No. R-02101 FORMS, INSTRUCTIONS, AND REPORTS LOANS BY CORRESPONDENT BANKS A G E N C IE S : Board of Governors of the Federal Reserve System, Comp troller of the Currency, and Federal Deposit Insurance Corporation. A C T IO N : Proposed regulations. S U M M A R Y : The agencies listed above are considering methods and proce dures to implement Title V III (Corre spondent Accounts) and Title I X (D is closure of M aterial Facts) o f the Fi nancial Institutions Regulatory and Interest Rate Control Act of 1978, Pub. L. 95-630 ( “F IR A ”). Titles V III and I X o f F IR A take effect on M arch 10 1979. Title V I I I prohibits banks that maintain a correspondent account re lationship with each other from ex tending credit on preferential terms to each other’s executive officers, direc tors or principal shareholders. It also prohibits the opening of a correspon dent account relationship between banks where there is a preferential ex tension of credit from one bank to an executive officer, director or principal shareholder of the other bank. In ad dition, Titles V III and I X require in sured banks and the executive officers and principal stockholders of record of insured banks to file certain reports. D A T E : Comments must be received by April 20,1979. A D D R E S S : Interested persons are in vited to submit comments regarding the proposed regulations. National banks should address their comments to the Secretary, Board of Governors of the Federal Reserve System, W ash ington, D.C. 20551, with a copy to John E. Shockey, Chief Counsel, Office of the Comptroller o f the Cur rency, 490 L ’Enfant Plaza East, S.W., Washington, D.C. 20219. State banks that are members of the Federal R e serve System should send their com ments to the Secretary, Board of G ov ernors of the Federal Reserve System, Washington, D.C. 20551. Insured banks that are not members of the Federal Reserve System should ad dress their comments to the Office of the Executive Secretary, Federal D e posit Insurance Corporation, 550 17th Street, N.W ., Washington, D.C. 20429. A ll other interested persons should ad dress their comments to the Board of Governors of the Federal Reserve System, with a copy to any other ap propriate agency. A ll material submit ted should refer to F.R.B. Docket No. R-0210. A ll comments received will be made available for public inspection. FOR FURTHER CONTACT: IN F O R M A T IO N Board of Governors of the Federal Reserve System: Bronwen Mason, Senior Attorney, Legal Division (202/452-3564), or Michael Bleier, Senior Attorney, Legal Division (202/452-3721); Federal Deposit In surance Corporation: Alan J. Kaplan, Senior Attorney, Legal Divi sion (202/389-4433); Comptroller of the Currency: W illiam H. Rivoir, A t torney, Enforcement and Compli ance Division (202/447-1989). S U P P L E M E N T A R Y IN F O R M A T IO N : a. Title V I I I —Effective M arch 10, 1979, Title V III of F IR A , which amends section 106 of the Bank Hold ing Company Act Amendments of 1970, prohibits banks that maintain a correspondent account relationship with each other from extending credit to each other’s executive officers, di rectors or principal shareholders unless the extension of credit is (1) made on substantially the same terms as those prevailing at the time for comparable transactions with other persons and (2) does not involve more than the normal risk of repayment or present other unfavorable features. The agencies propose to interpret the term “other persons” to mean other persons not associated with, or em ployed by, the bank. Title V III also prohibits the opening of a correspondent account relation ship between banks where there is a preferential extension o f credit from one o f the banks to an executive offi cer, director, or principal shareholder of the other bank. Persons covered by these prohibi tions include any individual or compa ny that directly or indirectly owns or controls more than ten percent of any class of voting shares o f a bank. In the proposed rule, a principal shareholder includes a person who controls a prin cipal shareholder, such as a person th at controls a bank holding company. In addition, shares owned by an indi- 13036 vidu&l’s Immediate family, as defined In the Federal Reserve Board’s Regu lation O, are deemed to be owned by the individual. T h e proposed rule defines a corre spondent account as an account that is maintained by a bank with another bank for the deposit or placement of funds. T h e agencies are considering exclusions from the definition of cor respondent account such as time de posit accounts at prevailing interest rates and accounts maintained solely fo r the purpose o f effecting federal funds transactions or loan participa tions. T h e agencies request comment on this definition as well as sugges tions for other possible inclusions or exclusions. Such suggestions should be justified in light of the purposes of the Act. In addition to its prohibitions, Title V III imposes reporting requirements upon executive officers and principal stockholders of record. The proposed regulations define principal stock holder of record as a person that, di rectly or indirectly, owns, controls, or has the power to vote more than ten percent of any class of voting securi ties of an insured bank. F or the purposes of these require ments, the term insured bank includes a branch of a foreign bank, the depos its of which are insured by the F D IC . I f a foreign bank maintains a non-in sured branch or an agency or a com mercial lending company in the United States, the branch, agency or company would qualify as a bank for purposes o f the prohibitions o f Title V III, but would not be subject to Title V I I I ’s reporting requirements. Executive officers and principal stockholders of record of insured hanks are required to provide the board of directors o f their bank with a report regarding any extension of credit made to them and to each of their related interests by each o f their bank’s depository banks during a cal endar year. A depository bank is de fined as a bank that maintains a corre spondent account for another bank. A related interest is a company con trolled by, or a political or campaign committee that benefits or is con trolled by,~an executive officer or prin cipal stockholder o f record. These re porting requirements do not apply to directors, unless the£ are executive of ficers or principal stockholders of record. F or the purposes of the report ing requirements, a depository bank does not include a bank that main tains a correspondent account(s) that does not exceed $100,000 in the aggre gate at any time during the reporting year. T h e agencies are considering a lower triggering amount for smaller banks. In particular, the agencies are considering a cut-off based upon i per centage o f the depositing bank’s total deposits. Executive officers and principal stockholders must include in the report filed with the bank’s board of directors (1) the “maximum amount of indebtedness” of the executive officer or principal stockholder and of each of that person’s related interests to each depository bank; (2) the amount o f in debtedness outstanding ten days before the report is filed of the execu tive officer or principal stockholder and of each of that person’s related in terests to each depository bank; (3 ) the range of interest rates on the in debtedness; and (4 ) the terms and con ditions of the indebtedness. Separate amounts are to be reported for the ex ecutive officer or principal stockholder and for each of that person’s related interests. T h e agencies propose to define the term “maximum amount of indebted ness” as the highest amount that was owed during the year. As an alterna tive, the agencies are considering de fining “maximum amount of indebted ness” as the sum of all extensions of credit. W h ile the alternative method of calculation appears less burden some, it yields a higher figure that may not accurately reflect the extent of correspondent borrowing by a bank’s executive officers and principal stockholders. Comment is specifically requested on the cost and burden to insured banks that would be imposed by adopting either alternative. Com ment is also requested on w hether the “highest amount” should mean ( I ) the highest average daily, weekly, or monthly balance during the calendar year, (2 ) the highest end-of-the-month balance during the calendar year, or (3 ) the highest amount calculated on some other basis. Title V i n requires each insured bank to compile the reports submitted to it by its executive officers and prin cipal stockholders of record and to furnish such compilation annually to the appropriate bank supervisory agency. T h e format fo r the compila tion will be published at a later date. The reports submitted by such persons to the board of directors of the in sured bank must be maintained at the bank fo r five years and should not be forwarded to the appropriate Federal banking agency unless requested. The appropriate agency may require the reports to be retained by the bank for an additional period o f time. Finally, Title V I I I requires each in sured bank to file an annual report with the appropriate Federal banking agency. In the report, the bank must list by name each executive officer and principal stockholder o f record that files a report with the bank’s board of directors concerning indebt edness from depository banks. T h e in sured b u ik also reports the “aggregate amount of all extensions o f credit” made to such persons by depository banks. This single figure'is calculated by totaling the “maximum amounts of indebtedness” reported by the execu tive officers and principal stockholders of record. This report will be part of the report filed by the insured bank under Title IX and will be made avail able to the public upon request. b. Title I X —Title IX , which amends section 7 o f the Federal Deposit Insur ance Act, requires each insured bank to file a report annually with its ap propriate Federal banking agency. In that report, the insured bank lists each of its executive officers and prin cipal stockholders of record and the aggregate amount o f extensions of credit by the bank to such persons and their related interests. T h e agencies propose to define "aggregate amount” as the total o f the highest amounts of indebtedness owed to the insured bank by each o f the bank’s executive offi cers and principal stockholders of record and each o f that person’s relat ed interests. As an alternative, the agencies are considering defining "a g gregate amount” as the sum of all ex tensions of credit made during the re porting year. These reports will be made available to the public at the bank and at the appropriate Federal banking agency upon request. T h e proposed regulations incorpo rate the definitions in the Federal Re serve B oard’s Regulation O for the terms “executive officer,” “extension of credit,” “immediate family,” and "control of a bank or company.” It should be noted that under Regula tion O, a person is not considered to control a company or a bank solely be cause o f that person’s position as a di rector or executive officer of the bank or company. T h e prohibitions against preferen tial lending in Title V I I I are prospec tive only. Preferential loans that are outstanding as of M arch 10, 1979, are not specifically addressed in the stat ute or the proposed regulations. How ever, banks should eliminate the pref erential terms on such loans as soon as practicable. I f such preferential terms are not eliminated, they may be sub ject to criticism by the agencies. This policy applies particularly to demand loans that are within the power of the bank to call and renegotiate at any time. It is emphasized that, although these are proposals and not final regu lations, the actual statute takes effect on M arch 10, 1979, and all banks are expected to comply with the law be ginning on that date. Until final action is taken on the proposals, however, banks should refer to the definitions of terms contained in the proposed regulations (in particular, the defini- 13037 tiorr o f "correspondent account” ) for guidance in complying with the prohi bitions o f Title v m . T h e agencies are considering wheth er it is necessary to provide forms on which the statements and reports re quired under Titles V III and I X must be filed. Any such forms, and accom panying instructions, would be pub lished at a later date. The first reports under Titles V III and I X are due to be filed by executive officers and princi pal stockholders of record of insured banks by January 10, 1980, and by in sured banks by January 31, 1980.'The period covered by such reports will be from M arch 10, 1979 (the effective date of F IR A ) through December 31, 1979. However, the agencies may con sider limiting the first reporting period to July 1, 1979 to December 31, 1979, in order to provide for the order ly implementation of the Act’s report ing requirements. Also, comment is re quested on whether the January 31 filing date for insured banks should be extended to a later date. Accordingly, the Board of Governors of the Federal Reserve System hereby proposes to amend the title to the Board’s Regulation O (12 C F R Part 215) to read "P a rt 215—Loans to Ex ecutive Officers, Directors, and Princi pal Shareholders,’’ to add a new para graph (b ) to section 215.9 of Regula tion O, to include sections 215.1 through 215.10 o f Regulation O in Subpart A titled “Loans by Member Banks,” and to add a new Subpart B to Regulation O, to read as set forth below, and the Board of Directors of the Federal Deposit Insurance Corpo ration hereby proposes to amend 12 C F R by adding thereto a new Part 349 and a new section 304.4 to read as set forth below. by name o f each principal stockholder procedures to implement the reporting and public disclosure requirements of o f record o f the member bank; and (2) The aggregate amount of all exTitle V m of F IR A with respect to member banks and executive officers tensions o f credit made by the and principal stockholders of record of member bank to its executive officers member banks. and principal stockholders o f record ang their related interests. F o r the § 215.21 Definitions. purposes of this paragraph, "aggre gate amount of all extensions of credit” means the sum o f the highest amounts of indebtedness owed to the member bank during the year by each executive officer or principal stock holder of record and each of the re porting person’s related interests. Principal stockholder of record has the meaning given in section 215.21(h) of Subpart B below. • * * * * 2. Sections 215.1 through 215.10 are designated as new Subpart A, which is titled: Subpart A — Loans by Member Banks 3. A new Subpart B is added to Part 215 to read as follows: Subpart B— Loons by Correspondent Banks Sec. 215.20 Authority, purpose, and scope. 215.21 Definitions. 215.22 Prohibited transactions. 215.23 Reports by executive officers and principal stockholders of record. 215.24 Reports by member banks. 215.25 Civil penalties. A u t h o r i t y : Title V III of the Financial In stitutions Regulatory and Interest Rate Control Act of 1978, Pub. L. 95-630; Secs. l l ( i ) and 22(h)(7) of the Federal Reserve Act (12 U.S.C. 248(1) and 375b(7) and 12 U.S.C. 1817(k)(l)). Subpart B— Loans by Correspondent Bank § 215.20 Authority, purpose, and scope. (a ) Authority. This Subpart is issued F ederal R eser ve S y s t e m pursuant to Title V III of the Financial 1. The Title to Part 215 is revised, Institutions Regulatory and Interest Rate Control Act of 1978 (" F I R A ” ) and paragraph (b ) is added to §215.9 (P.L. 95-630), and under authority of as follows: sections l l ( i ) and 22(h)(7) o f the Fed PART 215—IOANS TO EXECUTIVE OFFICERS, eral Reserve Act (12 U.S.C. 248(i) and DIRECTORS, AND PRINCIPAL SHAREHOLD 375b(7)) and 12 U.S.C. 1817(k)(l). Title ERS V III amends section 106(b) of the Bank Holding Company Act Amend Subpart A — Loans by Member Banks ments of 1970 (12 U.S.C. 1972). (b ) Purpose and Scope. T h e purpose * * • * * of this Subpart is to implement the provisions o f Title V III o f F IR A . It § 215.9 Reports by member banks. prohibits (1 ) preferential lending by a bank to executive officers, directors • • • * * and principal shareholders o f another (b ) On or before January 31 of each bank when there is a correspondent year, each member bank shall file with account relationship between the the appropriate Federal Reserve Bank banks, and (2 ) the opening of a corre or the Comptroller of the Currency, as spondent account relationship be the case may be, a report that shall in tween banks when there is a preferen clude the following information with tial extension of credit by one o f the respect to the preceding calendar year: banks to an executive officer, director (1 ) A list by name of each executive or principal shareholder of the other officer of the member bank and a list bank. This Subpart also establishes F or the purposes of this Subpart, the following definitions apply: (a ) “Bank” has the meaning given in 12 U.S.C. 1841(c). The term includes a branch of a foreign bank, or a com mercial lending company that is con trolled by a foreign bank, or by a com pany that controls a foreign bank, where the branch or agency is main tained in a State of the United States or in the District of Columbia or the commercial lending company is orga nized under State law .1 (12 U.S.C. 3106(d)). (b ) "Com pany” means any person, estate, trust, partnership, corporation, association, or similar organization. The term does not include any corpo ration the majority of the shares of which are owned by the United States or by any State.2 (c ) “Control of a company or bank,” “executive officer,” "extension of credit,” and "immediate family” shall have the meanings provided in Sub part A. (d ) “Correspondent account” is an account that is maintained by a bank with another bank for the deposit or placement of funds. (e ) “Depository bank” means a bank that maintains a correspondent account(s) for a member bank in an amount aggregating more than $100,000 at any time during the re porting year. ( f ) “Person” means an individual or a company. (g ) “Principal shareholder” means any person that directly or indirectly, or acting through or in concert with one or more persons, owns, controls, or has the power to vote more than 10 percent of any class of voting securi ties of a bank or company. The term includes a person that controls a prin cipal shareholder (.e.g., a person that controls a bank holding company). Shares owned or controlled by a member of an individual’s immediate family are considered to be owned or controlled by the individual. (h ) “Principal stockholder of record” means a person who directly or indi•Under this definition, a foreign bank’s branch in a State would be a bank but, unless the branch’s deposits were insured by the FDIC, the branch would not be an “in sured bank’’ and would not, therefore, be subject to the reporting requirements of sections 215.23 and 215.24, below. ’ The definition of a company in this Sub part differs from that contained in Subpart A. The definition in Subpart A excludes in sured banks and includes sole proprietor ships. 13038 rectly owns, controls, or has the power to vote more than 10 percent of any class of voting securities of an insured bank. The term includes a person that controls a principal stockholder of record. (1) "Related interest” means any company controlled by a person and any political or campaign committee, the funds or services of which will benefit a person or that is controlled t^y a person.’ § 215.22 Prohibited transactions. (a )(1 ) N o bank that maintains a cor respondent account for another bank shall make an extension of credit to an executive officer, director, or principal shareholder of such other bank unless the extension o f credit is not preferen tial. (2 ) N o bank shall open a correspon dent account at another bank that has outstanding an extension of credit to an executive officer, director, or prin cipal shareholder of the bank desiring to open the account unless the exten sion of credit is not preferential. (3 ) N o bank that maintains a corre spondent account at another bank shall make an extension o f credit to an executive officer, director or principal shareholder of such other bank unless the extension of credit is not preferen tial. (4 ) N o bank that has outstanding an extension of credit to an executive of ficer, director, or principal sharehold er of another bank shall open a corre spondent account at the other bank unless the extension of credit is not preferential. (b ) For the purposes of this section, an extension of credit is not preferen tial if (1 ) it is made on substantially the same terms, including interest rates and collateral, as those prevail ing at the time for comparable trans actions with other persons that are not covered by this Subpart and who are not employed by the bank, and (2 ) it does not involve more than the normal risk of repayment or present other unfavorable features. (b ) T h e report required by this sec tion shall include the following infor mation: (1 ) T h e “maximum amount o f in debtedness” of the executive officer or principal stockholder of record and of each of that person’s related interests to each depository bank; (2 ) T h e amount of indebtedness of the executive officer or principal stockholder of record and of each of that person’s related interests out standing as of December 31 of the cal endar year for which the report is made to each depository bank; (3 ) T h e range of interest rates charged on the indebtedness reported in paragraphs ( b X l ) and (b )(2 ) of this section; and (4 ) A general description of the terms and conditions of the indebted ness reported in paragraphs (b )(1 ) and (b )(2 ) of this section. (c ) For the purposes of this Subpart, "maximum amount o f indebtedness” shall mean the highest amount owed during the calendar year for which the report is made. (d ) The report required by this sec tion must be filed by a person who was an executive officer or a principal stockholder of record of a member bank at any time during the reporting year and who received an extension of credit during that year from a deposi tory bank of the member bank. § 215.24 Reports by member banks. (a ) On or before January 31 of each year, each member bank shall compile the reports filed under section 215.23(a) above, and shall forward a compilation of such reports to the Comptroller o f the Currency, in the case of a national bank, or the appro priate Federal Reserve Bank, in the case of a State member bank. The re ports required by section 215.23(a) above, shall be retained at the member bank for a period of five years. The appropriate Federal banking agency may require these reports to be re tained by the bank for an additional period of time. (b ) Each member bank shall include in the report required under section § 215.23 Reports by executive officers and 215.9(b) of Subpart A the following in formation: principal stockholders o f record. ( 1 ) A list by name of each person (a ) I f during any calendar year an who files a report under section executive officer or principal stock 215.23(a) above; and holder of record of a member bank • (2) the aggregate amount, or sum, of had outstanding an extension o f credit all the maximum amounts of indebted from a depository bank(s) of the ness reported under section member bank, the executive officer or 215.23(b)(1) above. stockholder shall, on or before Janu ary 10 of the following year, make a § 215.25 Civil penalties. written report to the board of direc As specified in subsection tors of the member bank.4 106(b)(2)(F) of the Bank Holding ’ The definition of related interest In this Subpart differs from that in. Subpart A. The definition in Subpart A excludes insured banks. 4 Persons reporting under this section are not required to include information on ex- tensions of credit that are fully described in a report by a person they control or a person that controls them, provided they identify their relationships with such other person. Company Act Amendments of 1970 (12 U.S.C. 1972(b)(2)(F)), any bank, or any officer, director, employee, agent, or other person participating in the con* duct of the affairs of the bank, that violates any provision of this Subpart shall forfeit and pay a civil penalty of not more than $1,000 per day for each day during which the violation contin ues. By Order of the Board of Governors of the Federal Reserve System March 6,1979. F ed eral D e p o s it I n s u r a n c e C o r p o r a t io n T h e o d o r e E. A l l i s o n , Secretary o f the Board.