4000 - Advisory Opinions
Applicability of Regulation O to Loans to Related Interest of Bank Insider
January 14, 1980
Pamela E. F. LeCren, Attorney
Your letter to Ronald Goldstein, FDIC Philadelphia Regional Counsel, requesting an opinion regarding the status of a certain loan under Federal Reserve Board Regulation O (12 C.F.R. Part 215) has been forwarded to the Legal Division in Washington, D.C. for reply. According to your letter, the professional association of *** has applied to the *** *** for a loan in the amount of $225,000. You seek an opinion as to whether or not the loan, if made, would be considered a loan to a related interest of one of the bank's principal shareholders or directors and thus be subject to the restrictions of Federal Reserve Board Regulation O (12 C.F.R. Part 215).
In general, Regulation O limits the loans a bank may make to its principal shareholders and their related interests to 10 percent of its capital and unimpaired surplus. Loans to directors and their related interests are not subject to the loan ceiling. The loans to principal shareholders, their related interests, directors, and their related interests may not be preferential and must be approved in advance by a majority of the entire board of directors of the bank. Section 215.2(j) defines principal shareholder to be, among other things, a person who directly or indirectly, acting through or in concert with one or more persons, owns, controls, or has the power to vote more than 10 percent of the stock of a bank. A related interest is defined in Section 215.2(k) as, among other things, a company controlled by a person. The term company is defined in section 215.2(a) so as to include professional associations.
The relevant facts as presented in your letter are as follows. Two of the five members of the professional association seeking the loan, *** respectively own 4.0 percent and 6.7 percent of the stock of ***. The professional association itself owns 6.9 percent of the stock of the bank (5.0 percent in an employee pension plan and 1.9 percent in a profit sharing plan). All five members of the association are trustees of the pension plan and the profit sharing plan. Both *** are directors of ***.
It is our opinion based on the above facts that the three remaining members of the professional association are not principal shareholders. Assuming that the stock held in the pension and profit sharing plans is voted by the majority vote of the five trustees, *** as trustees acting in concert with the other trustees have the power to vote 6.9 percent of the stock of the bank. That figure added with their individual holdings causes *** to own, control or have the power to vote 10.9 percent of the stock of the bank and *** 13.6 percent of the stock of the bank. Each is therefore a principal shareholder (in addition to being a director) of ***.
As the professional association is a company as that term is defined in section 215.2(a), if either doctor has control of the association it is his related interest and loans to it are subject to Regulation O. Control of a company is defined in section 215.2(b) with reference to (1) owning, controlling, or having the power to vote 25 percent of the stock of a company, (2) controlling the election of a majority of the directors of a company, or (3) having the power to exercise a controlling influence over the management or policies of a company. If one of the above is present with regard to either doctor, he is conclusively presumed to control the association. Either will be rebuttably presumed to control the association if (1) he is a director or executive officer of the association and owns more than 10 percent of its stock, or (2) he owns more than 10 percent of the stock of the association and no other member owns a greater percentage. We are unable at this time to determine whether or not either doctor controls the professional association as that term is defined in the regulation as we have insufficient information. We can say that if (1) the association is a non-stock association, (2) neither doctor is a director or executive officer of the association, and (3) all the members have an equal vote as to the business of the association, then the association is not controlled by either doctor. The association would therefore not be a related interest of either doctor and loans to the association would not be subject to the restrictions of Regulation O.