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4000 - Advisory Opinions


Principal Shareholder Status Under Regulation O

FDIC-79-10

October 29, 1979

Pamela E. F. LeCren, Attorney

The following is in response to your request for an opinion regarding the interpretation of the term "principal shareholder" under Federal Reserve Board Regulation O (12 C.F.R. Part 215) implementing section 22(h) of the Federal Reserve Act.1 Section 215.2(j) of Regulation O defines a "principal shareholder" as an individual or a company that directly or indirectly, acting through or in concert with one or more persons, owns, controls, or has the power to vote more than 10 per cent of the stock of a bank. In addition, the definition attributes shares owned or controlled by members of an individual's immediate family to that individual. Your request sets out a number of hypotheticals regarding stock held in trust and asks (1) whether or not the trustees and beneficiaries are principal shareholders under Regulation O, and (2) how the attribution rule applies under the circumstances.

Initially let us point out that in our opinion use of the phrase "owns, controls, or has the power to vote" demonstrates an intent to reach all those persons who control 10 per cent or more of the stock of a bank whatever form that control may take. The attribution rule basically presumes that immediate family members who own or control stock are subject to direct or indirect control by other family members and thus may be influenced in the voting of their stock. We do not find it necessary that an individual actually utilize stock control in order to gain personal advantage before considering that individual to be a principal shareholder. All that is necessary is the ability to do so.

1. Stock Held by a Trustee.

We agree that a trustee who has the sole authority to vote stock held in a trust is a principal shareholder under Regulation O if the trust holds 10 per cent or more of the stock of a bank.

2. Attribution of Trustee's Interest in Stock.

In our opinion, shares controlled by a trustee by virtue of sole authority to vote stock should be attributed to the trustee's immediate family members in accordance with the rule on attribution found in the regulation.2 We do not feel that the fiduciary obligation a trustee owes to the beneficiary of a trust precludes the trustee from abusing control of the stock. The trustee is still perceived to wield that control despite the trust relationship and may influence bank personnel. In addition, it is totally conceivable that the trustee could vote the stock in a manner consistent with (1) the safe and sound operation of the bank, and (2) the fiduciary obligation owed the beneficiary and still vote the stock in his/her own self-interest. If the family relationship which is the basis for the attribution rule is present, there is no reason not to attribute the shares controlled by the trustee to the immediate family members.

3. Aggregation of Trustee's Interest in Separate Trusts.

It is our opinion that all stock controlled by a trustee (albeit held in different trusts for different beneficiaries) should be aggregated in determining whether or not the trustee is a 10 per cent shareholder. Once again the separate and distinct fiduciary obligations owed to different beneficiaries do not preclude considering the stock to be controlled by the trustee within the meaning of Regulation O.

4. Trust Beneficiaries.

In our opinion a beneficiary of a trust that holds more than 10 per cent of the stock of a bank is a principal shareholder if the beneficiary can direct the voting of the stock, terminate the trust, remove the trustee or otherwise control the voting of the stock. The beneficiary is not a principal shareholder (i.e., "owner" within the meaning of Regulation O) if he/she merely reaps the economic benefit of stock ownership.3

5. Custodian Under the Uniform Gift to Minors Act.

As the custodian of stock held in accordance with the Uniform Gift to Minors Act has sole voting authority over the stock, the custodian would be considered a principal shareholder if more than 10 per cent of the stock of a bank was so held.

6. Attribution Within Context of Uniform Gift to Minors Act.

For the same reasons cited in the discussion found in paragraph No. 2, we feel that the stock controlled by a custodian of a UGMA trust is to be attributed to immediate family members.

7. Interest of Minor Under UGMA Trust.

The minor will not be considered to own or control the stock held (as he/she has no authority to direct how the stock is voted) unless the minor is able to exercise control indirectly through some other means.

8. Aggregation of Stock Controlled by UGMA Custodian.

All stock controlled by the custodian of several UGMA trusts should be aggregated in determining whether or not the custodian is a principal shareholder.

1 Section 22(h) was added to the Federal Reserve Act by section 104 of Title I of the Financial Institutions Regulatory and Interest Rate Control Act of 1978 (12 U.S.C. 375(b)). Go back to Text

2 In any event, attribution would only occur when the immediate family member owned or controlled stock in the bank. If, for example, the trustee's spouse owned no stock whatsoever, attribution would not take place. Go back to Text

3 In our opinion the "owner" of stock for the purposes of Regulation O is someone whose "ownership" is characterized by the incidents of ownership that signify control, i.e., right to sell or dispose, right to exercise dominion, right to use. Go back to Text


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