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FEDERAL RESERVE BANK
OF NEW YORK
4
r Circular No. 8 6 9 1 1
L
November 27, 1979
J
REGULATION 0
Amendments Implementing the Reporting Requirements of the Financial Institutions
Regulatory and Interest Rate Control Act of 1978
To All Member Banks, and Others Concerned,
in the Second Federal Reserve District:
The Board of Governors of the Federal Reserve System has amended, effective December 31,
1979, its Regulation O, “ Loans to Executive Officers, Directors, and Principal Shareholders of
Member Banks,” in order to implement the reporting requirements of Titles V III and IX of the
Financial Institutions Regulatory and Interest Rate Control Act of 1978 (F I R A ). The following
statement was issued by the Board of Governors in this regard:
The Board’s revised Regulation, which is effective December 31, applies to both State chartered member
banks and national banks. The Office of the Comptroller of the Currency concurred in the amendments to Regu
lation O announced today. The revisions of the Regulation were adopted by the Board after consideration of
comment received following publication of proposed amendments in March.
Title V III of FIR A prohibits banks that maintain correspondent account relationships with other banks from
extending credit on preferential terms to one another’s executive officers, directors and principal shareholders, or
from establishing a correspondent relationship where one of the banks involved has outstanding preferential credits
to an executive officer, director or principal shareholder of the other bank.
As one basis for enforcing its requirements, Title V III of FIR A establishes reporting requirements applying
to executive officers and principal shareholders of insured banks, and a related report by the bank.
Title IX requires public disclosure, in annual reports by insured banks, of principal shareholders and execu
tive officers who are in debt to the bank or its correspondent banks, and the aggregate amount of such indebtedness
during the year.
To implement Title V III, the revised Regulation requires:
1. That each executive officer and principal shareholder of an insured bank should report annually, to the
bank’s board of directors, their own indebtedness, and that of their “ related interests” to each of the insured
bank’s correspondent banks, the amount of debt outstanding 10 days before the report is filed, the range of in
terest rates on such loans and other terms and conditions of the loans. A related interest is a company controlled
by, and political or campaign committees controlled by or benefiting, bank officials and shareholders. For the pur
poses of reporting requirements, Regulation O, as amended, defines a correspondent bank as a bank that main
tains an account at an insured bank that exceeds an average daily balance of $100,000, or half of one percent of
the insured bank’s total deposits.
2. That each insured bank forward an annual publicly available report to the appropriate banking agency
listing the name of each executive officer or principal shareholder who files a report of indebtedness with the
bank’s board of directors, and the aggregate amount of indebtedness of these persons and their related interests
to the insured bank’s correspondent banks.
To implement Title IX , the revised Regulation requires:
That each insured bank file with its appropriate regulator an annual report, available to the public upon
request, listing the names of the bank’s principal shareholders as of December 31, a list of executive officers and
principal shareholders of the bank who were indebted, or whose related interests were indebted to the bank
during the year, and the aggregate amount of such debt to the bank.
The first such annual report will cover the period from July 1, 1979 to December 31, 1979.
( over)
Executive officers and principal shareholders filing reports of indebtedness under Title V III will file before
January 31, 1980, and the insured banks will file reports with their appropriate regulators, based on these
reports, by March 31.
Enclosed— for member banks in this District— is a copy of the complete text of the amended
regulation, together with the text of the notice submitted to the Federal Register announcing the
changes. These materials will be published in the Federal R egister; copies will also be furnished
upon request directed to the Circulars Division of this Bank.
The revised regulation is in the process o f being printed in pamphlet form by the Board of
Governors and will be sent to you as soon as it is available. Any questions regarding the regulation
should be directed to our Consumer Affairs and Bank Regulations Department (Tel. No. 212-7915914).
T
M. T i m l e n ,
First Vice President.
homas
BOARD OF GOVERNORS
of the
FEDERAL RESERVE SYSTEM
LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND
PRINCIPAL SHAREHOLDERS OF MEMBER BANKS
REGULATION O
(12 C F R 215)
(in process of being printed; revised
regulation effective December 31, 1979)
Any inquiry relating to this regulation should be addressed to the Federal
Reserve Bank of the Federal Reserve district in which the inquiry arises.
[Enc. Cir. No. 8691]
PART 215— LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND
PRINCIPAL SHAREHOLDERS OF MEMBER BANKS
Subpart A— Loans by Member Banks to Their
Executive Officers, Directors, and Principal Shareholders
Sec.
215.1
215.2
215.3
215.4
215.5
Authority, purpose, and scope
Definitions
Extension of credit
General prohibitions
Additional restrictions on loans to executive
officers of member banks
215.6 Extensions of credit outstanding on March 10,
1979
215.7 Records of member banks
215.8 Reports by executive officers
215.9 Report on credit to executive officers
215.10 Annual report on aggregate credit to executive
officers and principal shareholders
215.11 Civil penalties
Subpart B— Reports on Indebtedness of Executive Officers and
Principal Shareholders to Correspondent Banks
Sec.
215.20 Authority, purpose, and scope
215'. 21 Definitions
215.22 Reports by executive officers and principal
shareholders
215.23 Report by member bank
Subpart A— Loans by Member Banks to their Executive Officers,
Directors, and Principal Shareholders
SECTION 215.1— Authority, purpose, and scope
(a) Authority. This Subpart is issued pursuant to sections
11(i), 22(g) and 22(h) of the Federal Reserve Act (12 U.S.C. §§ 248(i),
375a, 375b(7)) and 12 U.S.C. § 1817(k)(3).
(b) Purpose and scope. This Subpart governs any extension
of credit by a member bank, to an executive officer, director, or prin
cipal shareholder of (1) the member bank, (2) a bank holding company
of which the member bank is a subsidiary, and (3) any other subsidiary
of that bank holding company. It also applies to any extension of credit
by a member bank to (1) a company controlled by such a person and (2)
a political or campaign committee that benefits or is controlled by
such a person. This Subpart also implements the reporting requirements
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of 12 U.S.C. § 375a concerning extensions of credit by a member bank
to its executive officers and of 12 U.S.C. § 1817(k) concerning exten
sions of credit by a member bank to its executive officers and principal
shareholders.
SECTION 215.2— Definitions
For the purpose of this Subpart, the following definitions
apply unless otherwise specified:
*
*
*
SECTION 215.9— Report on credit.to executive officers
*
*
*
*
*
SECTION 215.10— Annual report on aggregate credit to executive
officers and principal shareholders
(a)
Definitions.
following definitions apply:
For the purposes of this section, the
(1) "Aggregate amount of all extensions of credit"
means the sum of the highest amount of credit outstanding during the
calendar year (or, as an alternative, the highest end of the month credit
outstanding during the c
year) from the member bank to:
(i) each
of its executive officers,— ui) each of its principal shareholders,
and (iii) each of the related interests of these persons.
(2) "Principal shareholder of a member bank" means any
person—
(other than an insured bank, or a foreign bank as defined in
12 U.S.C. § 3101(7)) that, directly or indirectly, owns, controls, or
has power to vote more than 10 per cent of any class of voting securi
ties of the member bank. The term includes a person that controls a
principal shareholder (e.£., a person that controls a bank holding com
pany) . Shares of a bank (including a foreign bank), bank holding com
pany, or other company owned or controlled by a member of an individual's
immediate family are presumed to be owned or controlled by the indi
vidual for the purposes of determining principal shareholder status.
2/
For purposes of this section and Subpart B, executive officers
of a member bank do not include an executive officer of a bank holding
company of which the member bank is a subsidiary or of any other sub
sidiary of that bank holding company unless, of course, the executive
officer is also an executive officer rf the member bank.
8/
The term "stockholder of record" appearing in 12 U.S.C. §§ 1817(k)(l)
and 1972(2)(G) is synonymous with the term person.
-3-
(3)
"Related interest" means any company controlled
by a person and any political or campaign committee, the funds or ser
vices of which will benefit a person or that is controlled by a person.
For the purposes of this section and Subpart B, a related interest does
not include a bank or a foreign bank (as defined in 12 U.S.C. § 3101(7)).
(b) Contents of Report. On or before March 31 of each year,
each member bank shall file with the appropriate Federal Reserve Bank
in the case of State member banks, or the Comptroller of the Currency
in the case of national banks or banks located in the District of Colum
bia, a report that shall include the following information with respect
to the preceding calendar year:
(1) a list by name of each person who was a principal
shareholder of the member bank on December 31;
(2) a list by name of each executive officer or
principal shareholder of the member bank during the year to whom, or
to whose related interests, the member bank had outstanding an exten
sion of credit during the year; and
(3) the aggregate amount of all extensions of credit
from the member bank to its executive officers and principal shareholders
and their related interests.
(c) Availability of Report. The Board or the Comptroller,
as the case may be, and the member bank shall make a copy of the report
required by this section available to the public upon request.
SECTION 215.11— Civil penalties
As specified in section 29 of the Federal Reserve Act
(12 U.S.C. 504), any member bank, or any officer, director, employee,
agent, or other person participating in the conduct of the affairs of
the bank, that violates any provision of this Subpart (other than sec
tion 215.10) is subject to a civil penalty of not more than $1,000 per
day for each day during which the violation continues.
Subpart B— Reports on Indebtedness of Executive Officers
and Principal Shareholders to Correspondent Banks
SECTION 215.20— Authority, purpose, and scope
(a)
Authority. This Subpart is issued pursuant to section
ll(i) of the Federal Reserve Act (12 U.S.C. § 248 (i)) and 12 U.S.C.
§§ 1817(k) (3) and 1972 (2) (F) (vi).
-4 -
(b)
Purpose and scope. This Subpart implements the reporting
requirements of Title VIII of the Financial Institutions Regulatory
and Interest Rate Control Act of 1978 ("FIRA") (P.L. 95-630), 12 U.S.C.
§ 1972(2)(G). Title VIII prohibits (1) preferential lending by a bank
to executive officers, directors, and principal shareholders of another
bank when there is a correspondent account relationship between the
banks, and (2) the opening of a correspondent account relationship be
tween banks when there is a preferential extension of credit by one
of the banks to an executive officer, director, or principal shareholder
of the other bank.
SECTION 215.21— Definitions
For the purposes of this Subpart, the following definitions
apply unless otherwise specified:
(a)
"Bank" has the meaning given in 12 U.S.C. § 1841(c),
and includes a branch or agency of a foreign bank, or a commercial lend
ing company controlled by a foreign bank or by a company that controls
a foreign bank, where the branch or agency is maintained in a State
of the United States or in the District of Columbia or the commercial
lending company is organized under State law.
|b) "Company," "control of a company or bank," "executive
officer,"— "extension of credit," "immediate family," and "person"
have the meanings provided in Subpart A.
(c) "Correspondent account" is an account that is maintained
by a bank with another bank for the deposit or placement of funds.
A correspondent account does not include:
(1)
time deposits at prevailing market rates, and
(2) an account maintained in the ordinary course of
business solely for the purpose of effecting federal funds transactions
at prevailing market rates or making Eurodollar placements at prevailing
market rates.
(d) "Correspondent bank" means a bank that maintains one
or more correspondent accounts for a member bank during a calendar year
that in the aggregate exceed an average daily balance during that year
of $100,000 or 0.5 per cent of such member bank's total deposits (as
reported in its first consolidated report of condition during that
calendar year) , whichever amount is smaller.
(e) "Principal shareholder" and "related interest" have the
meanings provided in section 215.10 of Subpart A.
9/
See note 7 above.
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SECTION 215.22— Report by executive officers and principal shareholders
(a) Annual Report. If during any calendar year an executive
officer or principal shareholder of a member bank or a related interest
of such a person has outstanding an extension of credit from a correspon^
dent bank of the member bank, the executive officer or principal share
holder shall, on or before January 31 of the following year, make a
written report to the board of directors of the member bank.— •
(b) Contents of Report. The report required by this section
shall include the following information:
(1)
the maximum amount of indebtedness of the execut
officer or principal shareholder and of each of that person's related
interests to each of the member bank's correspondent banks during the
calendar year;
(2)
the amount of indebtedness of the executive offi
or principal shareholder and of each of that person's related interests
outstanding to each of the member bank's correspondent banks as of.ten
business days before the report required by this section is filed;—
and
(3)
a description of the terms and conditions (inclu
the range of interest rates, the original amount and date, maturity
date, payment terms, security, if any, and any other unusual terms or
conditions) of each extension of credit included in the indebtedness
reported under paragraph (b)(1) of this section.
(c)
Definitions.
(1)
does not include:
For the purposes of this section:
"Indebtedness" means an extension of credit, but
(i) commercial paper, bonds, and debentures issued
in the ordinary course of business; and
(ii) consumer credit (as defined in 12 C.F.R.
§ 226.2(p)) in an aggregate amount of $5,000 or less from each of the
member bank's correspondent banks, provided the indebtedness is incurred
under terms that are not more favorable than those offered to the gen
eral public.
10/ Persons reporting under this section are not required to include
information on extensions 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.
11/ If the amount of indebtedness outstanding to a correspondent bank
ten days before the filing of the report is not available or cannot
be readily ascertained, an estimate of the amount of indebtedness may
be filed with the report, provided that the report is supplemented within
the next 30 days with the actual amount of indebtedness.
-6 -
(2)
"Maximum amount of indebtedness" means, at the
option of the reporting person, either (i) the highest outstanding
indebtedness during the calendar year for which the report is made,
or (ii) the highest end of the month indebtedness outstanding during
the calendar year for which the report is made.
(d) Retention of reports at member banks. The reports
required by this section shall be retained at the member bank for a
period of three years. The Reserve Bank or the Comptroller, as the
case may be, may require these reports to be retained by the bank for
an additional period of time. The reports filed under this section
are not required by this regulation to be made available to the public
and shall not be filed with the Reserve Bank or the Comptroller unless
specifically requested.
(e) Member bank's responsibility. Each member bank shall
advise each of its executive officers and each of its principal share
holders (to the extent known by the bank) of the reports required by
this section and make available to each of these persons a list of the
names and addresses of the member bank's correspondent banks.
SECTION 215.23— Report by member banks
(a) On or before March 31 of each year, each member bank
shall compile the reports filed under section 215.22 of this Subpart
and shall forward the compilation to the Comptroller of the Currency
in the case of a national bank or a bank located in the District of
Columbia, or the appropriate Federal Reserve Bank in the case of a State
member bank. This compilation shall contain only the information re
quired in paragraph (b) of this section.
(b) Each member bank shall include in the report required
under section 215.10 of Subpart A to be filed by March 31 of each year,
the following information:
(1)
a list by name of each executive officer or princip
shareholder that files a report with the member bank's board of directors
under section 215.22 of this Subpart; and
10/ Persons reporting under this section are not required to include
information on extensions 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.
11/
If the amount of indebtedness outstanding to a correspondent bank
ten days before the filing of the report is not available or cannot
be readily ascertained, an estimate of the amount of indebtedness may
be filed with the report, provided that the report is supplemented within
the next 30 days with the actual amount of indebtedness.
-7 -
(2)
the aggregate amount (or sum) of the maximum amo
of indebtedness reported to the board of directors of the member bank
under section 215.22(b)(1) by the member bank's executive officers and
principal shareholders and their related interests.
By Order of the Board of Governors of the Federal Reserve
System, November 19, 1979.
Theodore E. Allison
Secretary of the Board
TITLE 12— BANKS AND BANKING
CHAPTER II— FEDERAL RESERVE SYSTEM
SUBCHAPTER A— BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[12 CFR Part 215]
LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND
PRINCIPAL SHAREHOLDERS OF MEMBER BANKS
(Docket No. R-0210)
AGENCIES: Board of Governors of the Federal Reserve System and
Comptroller of the Currency.
ACTION:
Final Rule.
SUMMARY: This final regulation is issued to implement the reporting
requirements of Titles VIII and IX of the Financial Institutions Reg
ulatory and Interest Rate Control Act of 1978 ("FIRA") (P.L. 95-630),
12 U.S.C. §§ 1817(k) (1) and 1972(2) (G) . Title VIII requires executive
officers and principal shareholders of federally insured banks to file
an annual report with the boards of directors of their banks concerning
the officers' or shareholders' indebtedness to correspondent banks (_i.e.,
a bank that maintains a correspondent account for the insured bank).
Title IX requires each federally insured bank to file annually a pub
licly available report with the appropriate Federal banking agency list
ing the bank's principal shareholders, all of the bank's officers or
principal shareholders who are indebted, or whose related interests
are indebted, to the bank or its correspondent banks during the year,
and the aggregate amount of indebtedness of these persons and their
related interests to the bank and to the bank's correspondent banks.
EFFECTIVE DATE:
December 31, 1979.
FOR FURTHER INFORMATION CONTACT: James V. Mattingly, Jr., Assistant
General Counsel, (202/452-3430), Bronwen Mason, Senior Attorney,
(202/452-3564), Board of Governors of the Federal Reserve System, Wash
ington, D.C. 20551; Larry Raz or Sharon Miyasato, Attorneys, (202/4471880), Office of the Comptroller of the Currency, 490 L ’Enfant Plaza,
East, S.W., Washington, D.C. 20219.
SUPPLEMENTARY INFORMATION: On March 6, 1979, the Federal banking
agencies published for comment proposed regulations to implement Titles
VIII and IX of FIRA. The agencies received 106 letters of comment.
Upon review of the comments received and after a reevaluation of the
regulations published for comment, the agencies have made certain changes
[Enc. Cir. No. 8691]
-2 -
in the proposed regulations. Those changes (as reflected in the final
regulations), an explanation of the provisions of the final regulations,
and a discussion of the comments received are set forth below.
A.
REQUIREMENTS OF TITLES VIII AND IX
1.
Prohibited transactions. Effective March 10, 1979,
Title VIII of FIRA, which amended section 106 of the Bank Holding
Company Act Amendments of 1970 (12 U.S.C. § 1972), prohibits banks that
maintain a correspondent account relationship with each other from ex
tending credit to each other's executive officers, directors, or prin
cipal shareholders unless the extension of credit is (1) made on sub
stantially 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. Title
VIII also prohibits the opening of a correspondent account relationship
between banks where there is a preferential extension of credit from
one of the banks to an executive officer, director, or principal share
holder of the other bank.
A principal shareholder of a bank is a person that directly
or indirectly owns, controls, or has the power to vote more than 10
per cent of any class of voting securities of the bank. Shares of a
bank or bank holding company owned or controlled by a member of an in
dividual's immediate family are considered to be controlled by the in
dividual for the purposes of determining principal shareholder status.
Title VIII defines an executive officer as the term is defined in sec
tion 22(g) of the Federal Reserve Act. The Board has defined the term
as used in that statute as a person who participates or has authority
to participate (other than in the capacity of a director) in major
policymaking functions of the bank. The agencies have applied this
definition, which is found in section ,215.2(d) of Subpart A of the Board's
Regulation 0, to Titles VIII and IX.While the proposed regulations included a subsection that
restated the prohibitions of Title VIII, this restatement elicited little
comment and has been eliminated from the final regulation. The final
regulation, including the definitions contained therein, relate to the
reporting requirements imposed by Titles VIII and IX of FIRA on member
banks and their executive officers and principal shareholders. However,
the final rule contains a definition of "correspondent account," which
1/ Unlike the definition in Subpart A, an executive officer of a member
bank, for the purposes of Titles VIII and IX and this Subpart, does
not include an executive officer of a bank holding company of which
the member bank is a subsidiary or of any other subsidiary of that bank
holding company unless that person is also an executive officer of the
member bank. Similarly, a director of a member bank does not include
a director of a bank holding company of which the member bank is a sub
sidiary or of any other subsidiary of that bank holding company unless
that person is also a director of the member bank.
-3 -
the agencies believe should be used by banks in complying with the
prohibitions of Title VIII. In complying with these prohibitions, banks
should also use the definition of executive officer in section 215.2(d)
of the Board's Regulation 0 and the definition of control in section
215.2(b) of Regulation 0.
2.
Title VIII Reports by Executive Officers and Principal
Shareholders. In addition to its prohibitions, Title VIII contains
two reporting requirements. The first report is required from executive
officers and principal "stockholders of record" of federally insured
banks.—
Title VIII does not require this report to be made available
to the public. As discussed in the next section, the second report
is required from the insured bank itself and, under the statute, must
be made available to the public. The Title VTII reports are not re
quired from, and do not cover indebtedness of, bank directors unless
the director is also a principal stockholder or an executive officer.
As discussed below, the agencies have defined principal "stockholder
of record" to mean a principal shareholder (i _ . e ., a person that, di
rectly or indirectly, owns, controls, or has the power to vote more
than 10 per cent of any class of voting securities of the bank).
Under Title VIII, each executive officer or principal shareholder
of an insured State bank is required to report to the board of directors
of that bank annually the following items:—
a.
the "maximum amount of indebtedness" of the
executive officer or principal shareholder
and of each of that person's related inter
ests U . e . , controlled companies or political
or campaign committees) to each bank that
maintains a correspondent account ("correspon
dent bank") for the reporting person's bank;
b.
the amount of indebtedness outstanding as
of a date 10 days before the report is filed
of the executive officer or principal share
holder and of each of that person's related
interests to each correspondent bank; and
While the prohibitions of Title VIII apply to all banks, the
reporting requirements of Title VIII are limited to federally insured
banks. As used in Titles VIII and IX, insured bank means a national
bank, a State member bank, and a federally insured nonmember State bank.
3/ Under Title VIII, the executive officer or principal shareholder
must file a report if the person is indebted during the year to a cor
respondent bank. If the officer or shareholder is not indebted to a
correspondent bank, the officer or shareholder is not required to file
a report. However, where the officer or shareholder is not indebted
to a correspondent bank but a related interest(s) (controlled company
or political or campaign committee) of the officer or shareholder is
so indebted, the regulation requires the officer or shareholder to file
a report concerning the indebtedness of the person's related interest(s).
2/
-4 -
c.
the terms and conditions (including the range
of interest rates) for each extension of
credit included in the figure reported.as
the ’’maximum amount of indebtedness."—
In answer to numerous comments reflecting concern over personal
privacy, the agencies wish to stress that the bank is not required by
Title VIII or IX or by these regulations to make these reports available
to the public. The reports submitted by executive officers and prin
cipal shareholders to the board of directors of the insured bank must
be maintained at the bank for three years and should not be forwarded
to the appropriate Federal banking agency unless the agency so requests.
The appropriate agency may require the reports to be retained by the
bank for an additional period of time. The reports are, of course,
subject to inspection by examiners of the appropriate Federal banking
agency.
3.
Title VIII Report By Insured Banks. Title VIII requires
each insured bank to compile the reports submitted to it by its execu
tive officers and principal shareholders and to furnish such compilation
annually to the appropriate banking agency. The regulation specifies
that this compilation requirement shall be satisfied through the sub
mission of the information in the public report required to be filed
by insured banks under Title VIII.
Title VIII requires each insured bank to file with the appropriate
banking agency an annual report listing:
1.
the name of each executive officer or principal share
holder who files a report of indebtedness with the bank’s
board of directors; and
2.
the "aggregate amount of all extensions of credit" made
to these persons and their related interests by each
correspondent bank of the insured bank.
The agencies have defined "aggregate amount of all extensions of credit"
as a single figure that represents the sum of the "maximum amounts of
indebtedness" reported to the insured bank’s board of directors by the
bank's executive officers and principal shareholders. This report will
be made a part of the report filed by the insured bank under Title IX.
The Title IX report must be made available to the public by the appro
priate Federal banking agency and by the bank itself.
4/ The regulation does not require a report on the terms and conditions
of indebtedness outstanding 10 days before the report is filed.
-5 -
4.
Title IX Report By Insured Banks. Title IX requires
each insured bank to file with the appropriate Federal banking agency
an annual report listing:
1.
the name of each of its principal shareholders as of
December 31 of the reporting year;
2.
the name of each executive officer or principal
shareholder during the year who was indebted, or whose
related interest was indebted, to the bank during the
yearand
3.
the "aggregate amount of all extensions of credit" by
the insured bank during the year to these persons and
their related interests.
As discussed in section B5 below, the agencies have defined "the aggregate
amount of all extensions of credit" as the sum of the highest amount
of credit extended by the member bank during the year to each of its
executive officers and principal shareholders and to each of their re
lated interests. The Title IX reports must be made available to the
public by the insured bank and by the appropriate banking agency.
B*
DISCUSSION OF ISSUES
The bulk of the comments the agencies received on the proposed
regulation focused on particular situations in which the reporting re
quirements were not appropriate, would be costly, would impose substan
tial burden on reporting persons, or would be difficult, if not impos
sible, to compile. A discussion of the major issues raised by the comments
and the steps taken by the agencies to address the issues follows.
1.
Correspondent Account. While the prohibitions and
reporting requirements of Title VIII are based on the existence of a
correspondent account relationship, the statute does not define the
term correspondent account. The proposed regulation defined the term
correspondent account as an account maintained by one bank with another
for the deposit or placement of funds. The notice accompanying the
proposed regulation asked for comment on this definition as well as
on whether time deposits and accounts maintained for federal funds trans
actions should be excluded from the definition of correspondent account.
Most of the commenters were generally satisfied with the definition,
provided that the suggested exclusions for time deposits and federal
funds were adopted.
5/ In the regulation issued for comment, the agencies proposed that
this list include each executive officer or principal shareholder of
the member bank, whether or not the person was indebteded to the member
bank. The agencies have modified this section to require a list of
only those executive officers or principal shareholders who were indebted,
or whose related interests were indebted, as more accurately reflecting
the legislative intent of the statute as well as its structure.
-6-
In the final regulation, the agencies have excluded time
deposits and accounts maintained solely for federal funds or Eurodollar
transactions at prevailing market rates from the definition of correspon
dent account. These types of transactions are not generally considered
as establishing correspondent accounts. The agencies believe these
exclusions are appropriate and consistent with the Congressional intent
behind the statute, which appears to have been focused on non-interest
bearing or demand accounts. Since the excluded transactions are gen
erally made only at prevailing market rates (and the exclusion is so
limited in the regulation), the possibility of abuse of these types
of accounts for the benefit of persons associated with the bank is
remote.
While a number of commenters proposed additional exclusions
from the definition of correspondent account (such as accounts main
tained for credit card facilities or travellers checks, accounts opened
in a fiduciary capacity, accounts maintained to clear checks or for
securities transactions, accounts used for correspondent business for
small banks, or accounts maintained for brief periods of time), the
agencies do not believe that these exclusions are warranted. The legis
lative history of the statute indicates that the reason for its enact
ment was the difficulty experienced in determining whether an account
(such as one used to clear checks) was being used for legitimate pur
poses or, in whole or in part, to secure benefits for bank insiders.
The preferential lending prohibitions of Title VIII were designed to
eliminate the necessity to prove that the account was not maintained
for a legitimate purpose by prohibiting all preferential credit exten
sions by a correspondent bank, whether or not the correspondent account
was maintained for a legitimate purpose.
2.
Correspondent Bank. The regulation published for comment
proposed to limit the reporting requirements of Title VIII to those
correspondent banks that maintained correspondent accounts for the member
bank of $100,000 or more during the reporting year. In other words,
executive officers and principal shareholders of a member bank would
report their indebtedness to the member bank's correspondent banks only
where the correspondent account relationship aggregated $100,000 or
more during the year. A cut-off figure was believed appropriate to
eliminate reporting of indebtedness from banks maintaining correspon
dent accounts of an insignificant size, where there was believed to
be little if any potential for insider abuse. Banks that hold insig
nificant accounts for another bank are not generally regarded as having
a correspondent account relationship with that bank.
Most of the commenters favored a cut-off figure for the
correspondent accounts based on an average daily balance during the
year, since a correspondent account could exceed $100,000 for only a
few days during the year and thus might not accurately reflect the ex
tent of the correspondent relationship between the banks. While the
agencies believe that a dollar cut-off for correspondent banks is ap
propriate, the agencies believe that an average daily balance of
—
— ——
—
—
—
M—
7-
$100,000 during the year may be too high in the case of smaller banks.
Accordingly, the agencies have decided not to require a member bank’s
executive officers or principal shareholders to report on their indebted
ness to banks that maintain correspondent accounts for the member bank
that do not exceed an average daily balance of $100,000 or 0.5 per cent
of the member bank’s total deposits (as reported in the member bank's
first consolidated report of condition during the reporting year), which
ever amount is smaller.
3.
"Stockholder of Record". The prohibitions of Title VIII
apply to any person (company or individual) that owns, controls, or
has power to vote more than 10 per cent of a bank's voting shares.
The reporting requirements of Titles VIII and IX, however, apply to
each "stockholder of record" who "directly or indirectly" owns, con
trols, or has the power to vote more than 10 per cent of a bank's voting
shares. The term "stockholder of record" is not defined in the Act.
The proposed regulation defined "stockholder of record" in
conformity with the prohibitions of Title VIII as any person who di
rectly or indirectly owns, controls, or has the power to vote the bank's
shares. This definition would include the actual owner of the shares,
whether or not that person'g .name appears on the bank's stock register
as the owner of the shares.— The Board received no adverse comment
on this aspect of the definition of principal stockholder. This in
terpretation is consistent with the legislative history of Titles VIII
and IX, which shows a clear Congressional intent to cover the actual
major shareholders of the bank rather than-iust those persons whose
names appear on the bank's stock register.— If Title VIII's reporting
requirement were confined solely to stockholders whose names appear
on the bank's stock register, the reporting requirements of the statute
would not conform to the prohibitions of the statute and would be almost,
if not completely, meaningless. Accordingly, the agencies have adopted
in the final rule the definition of "stockholder or record" as proposed.
6/ The definition would also include those persons who control the
member bank's parent bank holding company. A person (individual or
company) that controls a member bank's parent bank holding company would
"indirectly" control the member bank. Control of a company is defined,
as in Title I of FIRA and Subpart A of Regulation 0, as generally 25
per cent of the company's outstanding voting shares, control of the
election of a majority of the company's board of directors, or the power
to exercise a controlling influence over the management or policies
of the company.
V
See H. Rep. No. 95-1383, 95th Cong., 2d Sess. 6, 16 (1978); remarks
of Congressman St Germain, 124 Congressional Record H11724 (Oct. 5,
1978).
I mlI il
lnl II II
j iT11
-8-
4.
Banks as Principal Shareholders. Under Titles VIII and
IX, a bank that controls another bank could be viewed as a principal
shareholder and subject to the reporting requirements of Titles VIII
and IX. This situation would arise mainly in the case of foreign banks,
since U.S. banks are generally prohibited from holding shares of another
bank. The final regulation excludes banks (including insured banks
and foreign banks) from the definition of principal shareholder for
the purposes of the reporting requirements of Titles VIII and IX. Of
course, individuals and non-bank companies controlling banks that con
trol other banks are principal shareholders covered by the reporting
requirements of Titles VIII and IX.
The agencies do not believe that normal and routine inter
bank transactions were the type of transactions for which the reporting
requirements were designed or which they can adequately accommodate.
Several commenters indicated that, because of the volume of routine
inter-bank transactions, the bank principal shareholders would find
the report extremely burdensome and costly, if not impossible, to com
pile. Inclusion of inter-bank transactions would also inflate the ag
gregate figure reported by the bank and would be misleading. The ex
clusion of bank principal shareholders from the reporting requirements
of Titles VIII and IX is consistent with the lending restrictions of
section 22(h) of the Federal Reserve Act (Title I of FIRA, 12 U.S.C.
375b), which excludes insured banks as principal shareholders, the exemp
tion from the affiliate lending restrictions of section 23A of the Fed
eral Reserve Act (12 U.S.C. § 371c) for loans by a member bank to an
insured bank, where the member bank owns 50 per cent of the insured
bank's voting shares, and the intent by Congress not to disrupt trans
actions between a bank and its correspondents.—
5.
Amount of Indebtedness to be Reported. Under Title VIII,
the executive officers and principal stockholders of an insured bank
must report to the board of directors of their bank the "maximum amount
of indebtedness" of the officer or stockholder and each of that person's
related interests to each of the insured bank's correspondent banks.
The proposed regulation defined "maximum amount" as the highest indebted
ness outstanding during the year. The final regulation retains this
definition of maximum amount, but allows the reporting person the option
of reporting instead the highest end of the month indebtedness outstand
ing during the year. A number of commenters favored the highest end
of the month balance because smaller banks do not maintain records that
indicate daily borrower indebtedness. This option would allow the re
porting person to check only the monthly loan statements from lending
banks, thereby reducing the time and burden of the reporting requirement
to the reporting person as well as the correspondent banks.
8/ Since foreign banks and their U.S. bank subsidiaries deal with
many of the same correspondent banks, the inclusion of the foreign bank
as a principal shareholder would restrict (and in some cases prohibit)
normal transactions between the foreign bank and its own correspondent
banks. Such a result does not appear to have been intended by Congress.
9In the notice to the regulation proposed for comment, the
Board asked for comment on whether "maximum amount" should be defined
as the simple sum of all extensions made during the year and whether
this alternative definition would be less burdensome for the reporting
person. The commenters universally recommended against this approach
on the basis that the sum approach would yield a highly inflated and
misrepresentative figure. The commenters also did not believe that
the sum approach would reduce the reporting burden to any significant
extent. Accordingly, the agencies have determined not to adopt the
sum approach.
As indicated above, under Title VIII the insured bank reports
to the appropriate Federal banking agency, "the aggregate amount of
all extensions of credit" to its executive officers and principal share
holders and their related interests from correspondent banks. The
agencies have defined the "aggregate amount" as the sum of the maximum
amounts of indebtedness reported to the bank’s board of directors by
its executive officers and principal shareholders. In other words,
the banks are only required to total the figures reported to them by
their officers and shareholders and submit this total (a single figure)
to the appropriate agency.
Under Title IX, the insured bank reports to the appropriate
agency the "aggregate amount of all extensions of credit" the insured
bank makes to its executive officers and principal shareholders and
their related interests. Consistent with the definition in Title VIII,
the agencies have defined "aggregate amount" in Title IX as the sum
of the highest amounts of credit outstanding during the year(or as 'an
alternative the highest end of the month credit outstanding during the
year) from the member bank to each of its executive officers and prin
cipal shareholders and to each of the related interests of such persons
The sum of the highest amounts (rather than the sum of all) credit ex
tended would be reported. This approach would, as in the Title VIII
report, more accurately reflect the extent to which the bank is extend
ing credit to its insiders. The commenters favored this definition
of "aggregate amount" because it would be more representative of the
extent of lending by a bank to its officers and shareholders.
6.
Banks as Related Interests. Under Title IX, each member
bank must report the aggregate amount of credit extended to its prin
cipal shareholders (which by definition would include the bank's parent
bank holding company) and the related interests of the principal share
holders, which would include all the other subsidiaries (including
banks) of the parent bank holding company. In the case of multi-bank
holding companies, the volume of indebtedness between bank subsidiaries
could be substantial. The commenters indicated that the practical dif
ficulties and the burden and cost of calculating and keeping track of
these inter-bank transactions would be immense. Several of the com
menters indicated they did not believe it possible to comply because
of the number of their subsidiaries and the extent of their operations.
Moreover, this inter-bank indebtedness would tremendously inflate the
aggregate amount of debt reported and render the figure all but meaning
less.
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This same problem exists in Title VIII but is greatly
magnified. Under Title VIII, a principal shareholder of an insured
bank must report on indebtedness to the shareholder and to each of the
shareholder's related interests from each of the insured bank's cor
respondent banks. Since a bank holding company qualifies as a principal
shareholder, a bank holding company must report not only on its indebted
ness to each of the correspondent banks of each of its subsidiary banks,
but also on the indebtedness of each of the holding company's related
interests (including each of its subsidiary banks) to each of the cor
respondent banks of each of the holding company's subsidiary banks.
In the case of a multi-bank holding company system, the number and com
plexity of the reports and the corresponding recordkeeping burden is
immense.—
To comply with the reporting requirements, the holding com
pany must maintain records on the transactions between each of its
subsidiary banks and all the correspondents of all of its other sub
sidiary banks. Considering the volume of interbank transactions between
correspondents and the number of correspondent banks involved, the
recordkeeping burden would be substantial, would exceed any benefit
derived from the report, and would tend to disrupt normal banking re
lationships.
In light of the undue burden that would result in these cases
and in accordance with the intent of Congress in Titles VIII and IX
not to disrupt routine transactions between banks, the agencies have
determined to exclude banks (including foreign banks) from the defi
nition of "related interest" in the final regulation. The exclusion
of insured banks is entirely consistent with the statutory definition
of "company" in section 22(h) of the Federal Reserve Act (Title I of
FIRA). In that Title, Congress expressly excluded insured banks from
the definition of company so as not to interfere with, and in recognition
of the tremendous volume of, inter-bank transactions. Since the Title
IX report was intended by Congress as a report for Title I indebtedness
(that is indebtedness of a bank's own insiders to the bank), the agen
cies believe the exclusion of insured bank from the definition of com
pany is appropriate and consistent with the Congressional intent under
lying Title IX. The information on inter-bank transactions among bank
holding company subsidiary banks is available to the agencies through
reports and examinations of bank holding companies.
9/ This is particularly true since in many cases affiliate banks have
correspondent account relationships with many of the same banks. The
statute was clearly not intended to prohibit or require reports on ex
tensions of credit to a bank from its correspondent banks. Inclusion
of banks as related interests would have this effect in many cases.
-1 1 -
The exclusion of banks from the definition of related interest
for the Title VIII report is also consistent with the Congressional
intent underlying Title VTII. In that Title, Congress intended to pro
hibit the misuse of a bank's correspondent account for the benefit of
insiders through preferential extensions of credit. There was no intent
to restrict, or require reports on, routine inter-bank transactions
or credit .extensions by a correspondent bank to the depositing bank
itself.—
See H. Rep. No. 1383, 95th Cong., 2d Sess., 8, 13 (1978).
This Congressional intent is also evidenced in the incorporation in
Title VIII of the definition of "extension of credit" in section 23A
of the Federal Reserve Act, which definition excludes certain routine
inter-bank transactions.
7.
Types of Indebtedness Reported. Under Title VIII,
executive officers or principal shareholders must report on their in
debtedness and their related interests' indebtedness to correspondent
banks. The proposed regulation incorporated the definition of "exten
sion of credit" contained in Subpart A of the Board's Regulation 0.
Under that definition, a purchase by a correspondent bank of commercial
paper, publicly traded bonds or debentures issued by a principal share
holder of a bank (or a related interest of the principal shareholder)
for which the correspondent bank maintained a correspondent account
would constitute an extension of credit and would be reportable. A
number of commenters indicated that the burden imposed on the reporting
person to maintain records on purchases of commercial paper of the re
porting person or of a related interest would be considerable. Indeed,
if the paper is in bearer form, the reporting person may not know which,
if any, correspondent banks may have purchased the paper.
The final regulation defines the term "indebtedness" as an
extension of credit as defined in Subpart A of Regulation 0, but ex
cludes commercial paper, bonds, and debentures issued in the ordinary
course of business. The agencies believe that Congress did not intend
to require reports on these types of transactions as there appears
little if any potential for the type of correspondent account abuse
that the reporting requirements of Title VIII were intended to reveal.
Accordingly, the agencies have determined that it would be appropriate
and consistent with the Act not to include such items as indebtedness.
The agencies have also excluded from the term indebtedness
consumer credit aggregating $5,000 or less from each correspondent bank,
provided the indebtedness is incurred under terms that are not more
favorable than those offered to the general public. This exclusion
merely carries forwarded the exclusion of $5,000 in open end credit
from the definition of "extension of credit" in Subpart A of Regula
tion 0.
10/ The focus of Congressional attention in this area was on individuals
who had used their bank positions for their personal benefit. There
is little, if any, evidence that Congress intended to cover bank holding
companies as insiders or bank subsidiaries as related interests for
the purposes of these reports.
-1 2 -
8•
Description of the Terms and Conditions of Indebtedness.
In addition to reporting information on the amount of indebtedness to
correspondent banks, the principal shareholder or executive officer
is required by Title VIII to report information on the terms and con
ditions (including the range of interests rates) of such indebtedness.
The final regulation requires the reporting person to submit information
on the terms and conditions (including the range of interest rates,
the original amount, date, maturity, payment terms, security, if any,
and any other unusual term or condition) on each extension of credit
that is included in the maximum amount of indebtedness reported. The
terms and conditions must be reported for extensions of credit to the
reporting person as well as the related interests of the reporting per
son. The reporting person is not required to provide this information
for the indebtedness reported 10 days before the report is filed.
9.
Time for Filing Reports. The proposed regulation
required executive officers and principal shareholders to file reports
of indebtedness with their bank's board of directors by January 10 of
each year. The insured bank was required to report to the appropriate
bank agency by January 31. A large number of commenters indicated that
the January 10 date is too close to the end of the year when numerous
other reports must be filed. A number of banks also suggested a later
date for the bank's January 31 reporting date.
In view of these comments, the final regulation provides that
executive officers and principal shareholders must report to their bank
on or before January 31 of each year, rather than by January 10. The
bank must report to the appropriate agency by March 31 of each year,
rather than January 31.
Under Title VIII, executive officers and principal shareholders
must still report on their indebtedness to correspondent banks outstanding
10 days before the date the report is filed with their bank’s board
of directors. A number of commenters indicated that the 10 day period
did not provide enough time to compile the amount of indebtedness out
standing to correspondent banks 10 days before the date the report is
filed. The 10-day time limit is a requirement of the statute. However,
in view of the fact that the reporting person may not be able to de
termine this amount in the short time period provided, the agencies
have provided in the final regulation that the officer or shareholder
may estimate the amount of indebtedness outstanding 10 days before the
report is filed provided the correct amount is filed within the next
30 days.
In the notice accompanying the proposed regulation, the
agencies indicated that they would consider limiting the time period
for which the reports must be filed in the first year to the period
from July 1 through December 31, 1979. The agencies believe this is
0
-1 3 -
necessary in order to provide for the orderly implementation of the
statute's reporting requirements. The agencies do not believe that
any further extension of the period is necessary since the reporting
persons and banks were allowed sufficient time between the publication
of the proposed regulation and the beginning of the reporting period
to make adequate preparations for the reporting requirements.
10.
Forms. The agencies are preparing forms for the public
reports required to be filed by insured banks under Titles VIII and
IX. The first of these reports is not due to be filed until March 31,
1980. A suggested format for the reports to be made by executive of
ficers and principal shareholders to their bank's board of directors
is also being prepared. This form is not a mandatory agency form, but
will be provided as a guide to assist executive officers and principal
shareholders in complying with their reporting requirements under Title
VIII. These forms will be made available to member banks in the near
future for distribution to their executive officers and principal share
holders.
11• Responsibility of Insured Banks to Inform Officers and
Shareholders of Requirements of Title VIII. The agencies have also
required that each, insured bank advise its executive officers and prin
cipal shareholders (to the extent known by the bank) of the reports
required by Title VIII and to make available to these persons a list
of the insured bank's correspondent banks. This requirement is nec
essary to ensure that all persons required to file the Title VIII re
ports with their bank's board of directors are aware of the requirements
of the statute and are provided with the names of correspondent banks
necessary to comply with the statute.
The expanded procedures set forth in the Board's policy
statement of January 15, 1979 (44 F.R. 3957) , were not strictly followed
in developing this regulation, since the proposal was initiated before
the policy statement was adopted. The regulation imposes no report
burdens or record keeping costs that are not required by the statute.
In the development of this final regulation, the Board has complied
with the spirit and intent of its policy statement by making every
effort to reduce unnecessary regulatory burdens with due regard for
the purposes of the statute.
Accordingly, the Board of Governors of the Federal Reserve
System hereby amends the Board's Regulation 0 (12 CFR Part 215) to read
as set forth below:
@FedFRASER