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Federal R eserve Bank O F DALLAS R O B E R T D. M C T E E R , J R . P R E S ID E N T A N D C H IE F E X E C U T IV E O F F IC E R May 16, 1996 DALLAS, TEXAS 75265-5906 Notice 96-47 TO: The Chief Executive Officer of each member bank and others concerned in the Eleventh Federal Reserve District SUBJECT Request for Public Comment on Proposed Amendments to Regulation O DETAILS The Board of Governors of the Federal Reserve System has requested comment on proposed amendments to Regulation O (Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks). The proposed amendments would implement authority granted the Board by the Riegle Community Development and Regulatory Improvement Act of 1994. Under the proposed rule, the aggregate and individual lending limits, overdraft restriction, and prior approval requirements of Regulation O would not apply to extensions of credit by a bank to executive officers and directors of the bank’ affiliates, provided that those s executive officers and directors were not engaged in major policymaking functions of the lending bank. Of the restrictions in Regulation O, only the prohibition on preferential lending would apply to extensions of credit to such persons. The Board must receive comments by June 17, 1996. Please address com ments to William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, D.C. 20551. All comments should refer to Docket No. R-0924. ATTACHMENT A copy of the Board’ notice as it appears on pages 19863-65, Vol. 61, No. s 87, of the Federal Register dated May 3, 1996, is attached. For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas: Dallas Office (800) 333 -4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) MORE INFORMATION For more information, please contact Jane Anne Schmoker at (214) 922-5101. For additional copies of this Bank’ notice, please contact the Public Affairs Department s at (214) 922-5254. Sincerely yours, Federal Register / Vol. 61, No. 87 / Friday, May 3, 1996 / Proposed Rules FEDERAL RESERVE SYSTEM 12 CFR Part 215 [Regulation O; Docket No. R -0924] Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks; Loans to Holding Companies and Affiliates Division, Board of Governors of the Federal Reserve System. For the hearing impaired only, Telecommunications Device for the Deaf (TDD), Dorothea Thompson (202/452-3544). SUPPLEMENTARY INFORMATION: Background Section 22(h) of the Federal Reserve Act, 12 U.S.C. 375b, restricts insider AGENCY: Board of Governors of the lending by banks, and Regulation O Federal Reserve System. implements section 22(h). Regulation O ACTION: Proposed rule. limits total loans to any one insider and aggregate loans to all insiders to a SUMMARY: The proposed rule would percentage of the bank’s capital and amend the Board’s Regulation O, which requires that such loans be on nonlimits how m uch and on what terms a preferential terms—that is, on the same bank may lend to its own insiders and terms a person not affiliated w ith the insiders of its affiliates. Under the bank would receive.1 12 CFR 215.4 (a), proposed rule, four of the five (c) and (d). For this purpose, an restrictions of Regulation O would not “insider” means an executive officer, • apply to extensions of credit by a bank director, or principal shareholder, and to executive officers and directors of the loans to an insider include loans to any bank’s affiliates, provided that those “related interest” of the insider, executive officers and directors were not including any company controlled by engaged in major policymaking the insider. 12 CFR 215.2(h). Regulation functions of the lending bank. Of the O requires that banks maintain records restrictions in Regulation O, only the to document compliance with all these prohibition on preferential lending restrictions. 12 CFR 215.8. would apply to extensions of credit to Section 22(h) restricts lending not such persons. only to insiders of the bank making the The Board was granted authority to loan but also to insiders of the bank’s create such an exception for directors of parent bank holding company and any affiliates for the first time by the Riegle other subsidiary of that bank holding Community Development and company. As amended by the Federal Regulatory Improvement Act of 1994; Deposit Insurance Corporation Regulation O already contains a blanket Improvement Act of 1991 (FDICIA),2 regulatory exception for executive section 22(h)(8) provides that “any officers of affiliates not involved in executive officer, director, or principal policymaking at the lending bank, shareholder (as the case may be) of any which as a result of the statute must be company of which the member bank is scaled back to no longer include the a subsidiary, or of any other subsidiary prohibition on preferential lending. of that company, shall be deemed to be an executive officer, director, or DATES: Comments m ust be received on or before June 17, 1996. principal shareholder (as the case may be) of the member bank.” 12 U.S.C. ADDRESSES: Comments should refer to 375b(8)(A). Docket No. R-0924 and be mailed to At the time that the FDICIA William W. Wiles, Secretary, Board of amendment became effective, the Governors of the Federal Reserve Board’s rules did not place any System, Washington, DC 20551. They restrictions on loans to an executive may also be delivered to the guard station in the Eccles Building Courtyard officer of a bank’s affiliates (other than the parent bank holding company) on 20th Street, NW., (between unless the executive officer was Constitution Avenue and C Street) involved in major policymaking between 8:45 a.m. and 5:15 p.m. functions at the bank.3 12 CFR 215.2(d) weekdays. Except as provided in the Board’s rules regarding the availability 1Regulation O also requires prior approval of the of information (12 CFR 261.8), bank’s board of directors for certain loans to comments will be available for insiders and prohibits overdrafts by executive officers and directors. inspection and copying by members of 2 Pub. L. 102-242, section 306 (1991). the public in the Freedom of 3 Subsection (h) of section 22 was added in 1978. Information Office, Room M P-500 of the Financial Institutions Regulatory and Interest Rate Martin Building, between 9:00 a.m. and Control Act of 1978, Pub. L. 95-630, section 104. 5:00 p.m. weekdays. However, the statute was ambiguous about whether FOR FURTHER INFORMATION CONTACT: Gregory Baer, Managing Senior Counsel (202/452-3236), or Gordon Miller, Attorney (202/452-2534), Legal an executive officer of a bank’s affiliate was required to be treated like an executive officer of the bank itself. (The statute imposed restrictions on lending by banks to “executive officers” of the bank. The statute provided that an “officer” of a 19863 (1992). The Board considered this treatment appropriate for two reasons. First, such persons generally were not considered to be in a position to exert sufficient leverage on the bank to obtain a loan on anything but arm ’s lengths terms, in contrast to executive officers of the bank or its parent. Thus, in terms of protecting the safety and soundness of banks, the Board considered the benefits of restricting loans to these affiliate insiders to be small. Second, applying these restrictions to affiliate insiders would have required each bank to maintain an updated list of all its affiliates’ executive officers and all related interests of those executive officers, and to check all loans against this list. Particularly for a bank in a large bank holding company structure, this effort would have constituted a significant burden—and one not outweighed by any substantial benefit. However, after the FDICIA amendm ent to section 22(h)(8), the language of the statute no longer appeared to allow such an exception for executive officers of affiliates, who are explicitly treated like executive officers of the bank itself. Still, nothing in the legislative history of FDICIA indicated that Congress intended to invalidate the Board’s regulatory exception and extend coverage to all executive officers of affiliates. In the Riegle Community Development and Regulatory Improvement Act of 1994, Congress addressed this issue by amending section 22(h)(8) yet again. Congress allowed the Board to make exceptions to the statutory restrictions on lending to affiliate insiders embodied in paragraph (8). The extension of the statute to affiliate insiders was moved to a new paragraph (8)(A), and authority for the Board to make exceptions was placed in a new paragraph (8)(B), which reads as follows: The Board may, by regulation, make exceptions to subparagraph (A), except as that subparagraph makes applicable paragraph (2), for an executive officer or director of a subsidiary of a company that controls the member bank, if that executive officer or director does not have authority to participate, and does not participate, in major policymaking functions of the member bank. Section 22(h)(2)—the “paragraph (2)” to w hich the Board may not make bank included officers of affiliates—but did not so provide with respect to "executive officers.” ) No such ambiguity arose with respect to directors and principal shareholders of affiliates, who were explicitly treated like their banking counterparts. In 1980, the Board am ended Regulation O to cover insiders of affiliates, but included a regulatory exception for executive officers of affiliates not involved in major policymaking functions at the bank. 19864 Federal Register / Vol. 61, No. 87 / Friday, May 3, 1996 / Proposed Rules exceptions—is the prohibition against lending on preferential terms. The 1994 am endm ent to section 22(h) allows the Board to exempt executive officers and directors of affiliates (other than the bank holding company) from insider lending restrictions, provided they are not involved in major policymaking functions at the lending bank. The legislative history of the provision indicates that it was intended to allow the Board to extend its existing exception for executive officers to directors as w ell.4 However, the 1994 amendment clearly does not allow the Board to exempt either executive officers or directors from the restriction on preferential lending in section 22(h)(2). Thus, the apparent effect of the 1994 amendments regulation is (1) to reaffirm the Board’s regulation insofar as it exempts executive officers of affiliates who are not involved in policymaking functions at the bank from the aggregate and individual lending limits, overdraft restriction, and prior approval requirements of Regulation O; (2) to invalidate the Board’s regulation insofar as it exempts such executive officers from the prohibition on preferential lending; and (3) to grant the Board authority to extend the remaining parts of its executive officer exemption to directors as well. There is some reason to believe that this effect on the Board’s regulation was unintended, and that Congress intended for the Board’s across-the-board exemption for executive officers of affiliates to continue. The Riegle-Neal conference report stated, “It is not the intent of the Conferees to affect the exemptions that the Federal Reserve Board has already extended to executive officers, but rather to allow the Board the authority to provide appropriate treatment for directors.” House Report 103-652 at 180 (1994). However, where, as here, the provisions of a statute are unambiguous, legislative history may not be used to alter that plain meaning. The Board has, however, suggested and supported an amendment to section 22(h) to make its language consistent w ith its apparent intent. Paperwork Reduction Act In accordance w ith section 3506 of the Paperwork Reduction Act of 1995 (44 U.S.C. Ch. 35; 5 CFR part 1320, A ppendix A .l), the Board reviewed the proposed rule under the authority delegated to the Board by the Office of Management and Budget. Comments on the collections of information should be sent to the Office of Management and Budget, Paperwork Reduction Project (7100-0036), Washington, DC 20503, w ith copies of such comments to be sent to Mary M. MqjLaughlin, 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. Elimination of Unnecessary Board of This information is required to evidence Directors Approval compliance w ith the requirements of In order to qualify for the regulatory Section 22(h) of the Federal Reserve exception for executive officers of Act. The respondents and recordkeepers affiliates, an executive officer currently are for-profit financial institutions, m ust be excluded from major including small businesses. Records policymaking functions of the lending m ust be retained for two years. bank by resolutions of the board of The Federal Reserve may not conduct directors of both the lending bank and or sponsor, and an organization is not the affiliate for which the executive required to respond to, this information officer works. Because a bank has full collection unless it displays a currently control over who participates in its valid OMB control number. The OMB policymaking, the Board believes that control num ber is 7100-0036. Exception for Certain Executive Officers requiring a board resolution of the The proposed amendments are and Directors of Affiliates affiliate in addition to the resolution of expected to provide for some reduction the bank is superfluous and unduly in the recordkeeping and disclosure Accordingly, the Board is proposing practices of state member banks, and amendments to Regulation O that would burdensome. Accordingly, the Board is w ould not affect the banks’ reporting eliminate its restrictions—other than the proposing to delete this requirement requirements to the Federal Reserve. restriction on preferential lending—on a from the existing exception for executive officers and not to include it The recordkeeping and disclosure bank’s lending to executive officers and in the new exception for directors. requirements on extensions of credit by directors of affiliates who are not the reporting bank to insiders of the involved in major policymaking Regulatory Flexibility Act bank and its affiliates are contained in functions of the lending bank. The The Board has concluded after the information collection for the Board believes that extending the reviewing the proposed regulation that, Consolidated Reports of Condition and exemption to directors would relieve if adopted, it would not impose a Income (FFIEC 031-034; OMB No. regulatory burden on bank holding significant economic hardship on small 7100-0036). companies without increasing the risk Because the records would be of insider lending or resultant safety and institutions. The proposal does not necessitate the development of maintained at state member banks and soundness problems. Reimposing the sophisticated recordkeeping or reporting the notices are not provided to the preferential lending restriction on systems by small institutions; nor will Federal Reserve, no issue of executive officers (and m aintaining the small institutions need to seek out the confidentiality under the Freedom of restriction on directors) might negate expertise of specialized accountants, Information Act arises. some of this relief; although banks lawyers, or managers in order to comply Comments are invited on: (a) whether would no longer be required to the proposed revision to the collection w ith the regulation. The proposal is document that loans to executive designed to reduce the burden of of information is necessary for the officers and directors of affiliates fall * Regulation O consistent w ith the proper performance of the Federal w ithin the lending limits of Regulation Reserve’s functions; including whether requirements of the underlying statute. O, they might be required to maintain The Board therefore certifies pursuant to the information has practical utility; (b) similar documentation to demonstrate ways to enhance the quality, utility, and section 605b of the Regulatory that the loans were not on preferential clarity of the information to be terms. However, the Board believes that Flexibility Act (5 U.S.C. 605b) that the collected; and (c) ways to minimize the the plain language of the statute requires proposal, if adopted, will not have a burden of information collection on significantly adverse economic impact coverage of preferential lending. on a substantial number of small entities respondents, including through the use of automated collection techniques or 4House Report 1 03 -6 5 2 ,103d Cong., 2d Sess. 180 w ithin the meaning of the Regulatory (1994). other forms t>f information technology. Flexibility Act (5 U.S.C. 601 et seq.). Federal Register / Vol. 61, No. 87 / Friday, May 3, 1996 / Proposed Rules List of Subjects in 12 CFR Part 215 Credit, Federal Reserve System, Penalties, Reporting and recordkeeping requirements. For the reasons set forth in the preamble, and pursuant to the Board’s authority under section 22(h) of the Federal Reserve Act (12 U.S.C._375b), the Board is proposing to amend 12 CFR Part 215, subpart A, as follows: PART 215—LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND PRINCIPAL SHAREHOLDERS OF MEMBER BANKS (REGULATION O) 1. The authority citation for part 215 continues to read as follows: Authority: 12 U.S.C. 248(i), 375a(10), 375b (9) and (10), 1817(k)(3) and 1972(2)(G)(ii); Pub. L. 102-242,105 Stat. 2236. 2. Section 215.2 is am ended 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)(l)(i) through (d)(l)(iii), respectively; b. A new paragraph (d)(2) is added; and c. Paragraph (e)(2) is revised. The addition and revision read as follows: § 2 1 5.2.2 * * Definitions. * * * (d)(1) Director of a company or bank * * * * * * * * (2) Exception. Extensions of credit to a director of an affiliate of a member bank (other than a company that controls the bank) shall not be subject to §§215.4 (b) through (d) and 215.6, provided that— (1) The director of the affiliate is excluded (by name or by title) from participation in major policymaking functions of the member bank by resolution of the bank’s boards of directors, and does not actually participate in such major policymaking functions; and (ii) The director is not otherwise subject to §§ 215.4 (b) through (d) and 215.6. (e) * * * (2) Extensions of credit to an executive officer of an affiliate of a member bank (other than a company that controls the bank) shall not be subject to §§ 215.4 (b) through (d) and 215.6, provided that— (i) The executive officer of the affiliate is excluded (by name or by title) from participation in major policymaking functions of the member bank by resolution of the bank’s boards of directors, and does not actually participate in such major policymaking functions; and (ii) The executive officer is not otherwise subject to §§ 215.4 (b) through (d) and 215.6. * * * * * By order of the Board of Governors of the Federal Reserve System, April 25,1996. Jennifer J. Johnson, Deputy Secretary of the Board. (FR Doc. 96-10733 Filed 5-2-96; 8:45 am] BILUNG CODE 6210-01-P 19865
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