REFRESHER ON REGULATION O
A Presentation To
The Bank Compliance Association of CT
September 29, 2010
Arthur T. Corey
860-331-2624
acorey@haslaw.com
David J. Wiese
860-331-2714
dwiese@haslaw.com
General Overview
• Regulation O is a Federal Regulation Promulgated
by the Board of Governors of the Federal Reserve
(the "Fed")
• Generally Governs "Extensions of Credit" by a
"Member Bank" (and Its Subsidiaries) to an
"Executive Officer", "Director" or "Principal
Shareholder" of
 That "Member Bank"
 The "Affiliates" of That Member Bank
• Also Governs Extensions of Credit to the "Related
Interests" of All Such Executive Officers, Directors
and Principal Shareholders
1
General Overview (cont.)
• The Member-Bank "Affiliates" Include
 Holding Company of That Member Bank
 Other Subsidiaries of That Holding Company
• But "Affiliates" Do Not Include Subsidiaries of
Member-Bank
• Special Rules Allow Bank to Exclude Directors and
Executive Officers of Certain Affiliates From the
Coverage of Some Parts of Reg O if Certain
Conditions are Satisfied
2
General Overview (cont.)
• Reg O is Not "Directly" Applicable to So-Called
"Non-Member Banks"
• Instead, Non-Member Banks are Subject to FDIC
Regulation Part 337.3
 Imposes Parts of Reg O "As Though They Were
Member Banks"
 Imposes Separate Requirements on Loans to
Executive Officers
 Technical Drafting Glitches
• Practical Interplay is That Non-Member Banks Are
"Generally" Subject to the Functional Equivalent of
Reg O
3
Other Related Provisions
• Connecticut Banking Law Contains Its Own Insider
Loan Provisions
 C.G.S. § 36a-263
• Applicable Only to State-Chartered Banks
• Functional Impact is to Require State Chartered
Banks to Comply with Federal Insider Loan Laws
 As a Matter of State Law
 Enforceable by the Commissioner
 Some Technical Glitches Exist
 Schedule IOM Requirements Repealed in 2008
4
Other Related Provisions (cont.)
• Bank Holding Company Act Amendments of 1970
Prohibit Certain Preferential Lending Arrangements
Relative to "Correspondent Banks"
 12 USC 1972(2)
• In 2006, Fed Repealed Subpart B of Reg O Which
Had Imposed Disclosure and Reporting
Responsibilities on Member-Banks With Respect to
Correspondent Bank Relationships
• In Same Year, FDIC Repealed Section 349 (Which
Contained Similar Correspondent Bank Provisions
for Non-Member Banks)
• But Substantive Statutory Prohibitions on
Preferential Lending Relationships Remain Intact
5
Some Key Definitions
"Director" Means Any Director of the Bank or Other
Covered Entity
 Whether or Not Receiving Compensation
 Sometimes Called "Trustees"
 Corporators of Mutual Savings Banks Not Covered
(Unless Also a Director)
 Advisory Director Not a "Director" If
• Not Elected By Shareholders
• Not Authorized to Vote On Board Matters
• Solely Provides General Policy Advice
6
Some Key Definitions (cont.)
"Executive Officer" Means a Person Who Participates or Has
the Authority to Participate (Other Than As a Director) in
Major Policy-Making Functions of the Company or Bank
 The Following Are Automatically Presumed to Be
"Executive Officers"
• Chairman of the Board
• President
• Vice President(s)
• Comptroller
• Secretary
• Treasurer
 Unless the Officer is Excluded By Board Resolution or
Bylaws From Participating in Major Policy-Making
Functions
• And Does Not Actually Participate
7
Key Definitions (cont.)
"Extension of Credit" Means the Making or Renewal of
Any Loan, the Granting of a Line of Credit, and the
Extending of Credit in Any Manner
 Includes Many Transactions (Examples)
• Overdraft Advances
• Letters of Credit
• Guaranty Obligation
• Advances of Unearned Salary
• Any Transaction Where a "Person Becomes
Obligated to Pay Money (or Its Equivalent) to
the Member-Bank"
8
Key Definitions (cont.)
• Extensions of Credit Do Not Include (Examples)
 Advances Against Accrued Salary
 Endorsements or Guarantees for the Protection of
the Bank With Respect to Loans Previously
Acquired by Bank in Good Faith
 Indebtedness of $5000 or Less Arising by Reason
of an Interest-Bearing Overdraft Protection Plan
That Specifies a Method of Payment
 Certain Inadvertent Overdrafts
• Aggregate Amount of $1000 or Less
• Not Overdrawn For More Than 5 Business
Days
• Customary Fees Charged
9
Key Definitions (cont.)
• Extension of Credit May Also Be "Deemed" to Be
Made" to an Insider
To the Extent That the Proceeds of the Extension Are
Used for the Tangible Economic Benefit of, or Are
Transferred to, the Insider (Even Though the Insider May
Not Be Obligated on the Debt)
• However, Not Deemed to Be Made to the Insider If
the Credit is Extended





Without Preferential Terms
Without Preferential Underwriting
Without Abnormal Risk of Repayment
Without Abnormal Features
And the Proceeds Are Used in Bona Fide Transaction to
Acquire Property, Goods or Services From the Insider
10
Key Definitions (cont.)
"Principal Shareholder" Generally Means Any Person
That Directly or Indirectly Owns, Controls, or Has the
Power to Vote More Than 10% of Any Class of Voting
Securities of the Bank or Company
 Does Not Include An Insured Bank or a Holding
Company That Owns the Member-Bank as
Subsidiary
• Special Definition For Public Disclosures
 Generally, Shares Owned or Controlled By a
Member of an Individual’s "Immediate Family" Are
Presumed to Be Owned By the Individual
 "Immediate Family" Means the Spouse, All Minor
Children, and Any Other Children Residing in the
Individual’s Home
11
Key Definitions (cont.)
"Related Interest" of a Person Means:
 A Company That is "Controlled" By That Person
 A Political or Campaign Committee That is
Controlled By That Person (or the Funds or
Services of Which Will Benefit That Person)
12
Key Definitions (cont.)
"Control" of a Company or Bank Generally Means
That a Person, Directly or Indirectly, or Acting
Through or in Concert With One or More Persons
 Owns, Controls or Has the Power to Vote 25% or
More of Any Class of Voting Securities
 Controls the Election of a Majority of the Directors
 Has the Power to "Exercise a Controlling Influence
Over Management or Policies"
• Very Technical Definition With Other Inclusions and
Exclusions (Definition Needs to Be Reviewed in Its
Entirety When Coverage Questions Arise)
13
Prohibition on Knowing Violations
“No Executive Officer, Director, or Principal
Shareholder of Member Bank or Any of Its Affiliates
Shall Knowingly Receive (or Knowingly Permit Any of
That Person’s Related Interests to Receive) From a
Member Bank, Directly or Indirectly, Any Extension of
Credit Not Authorized Under This Part.”
14
Prohibition on Preferential Terms
• Covers All Extensions of Credit By a Member-Bank
(or Its Subsidiaries) to the Directors, Executive
Officers or Principal Shareholders of the Bank or Its
Affiliates (and Their Respective Related Interests)
• Must Be Made on Substantially the Same Terms
(Including Interest Rates and Collateral) as Those
Prevailing at the Time For Comparable Transactions
With Non-Insiders Who Are Not Employed By the
Bank or Its Subsidiaries
15
Prohibition on Preferential Terms (cont.)
• This Prohibition Also Applies to Loan
Administration and Collection Functions
• Waivers, Modifications, Forbearance, Forgiveness
and Other Relationship Management Decisions
Must Not Be Preferential in Nature
16
Prohibition on Preferential Underwriting; Abnormal
Risk of Repayment; and Other Unfavorable
Features
• All Extensions of Credit by Member-Bank (or Its
Subsidiaries) to the Directors, Executive Officers or
Principal Shareholders of the Bank or Its Affiliates
(or to their respective Related Interests) must
 Be Made Following Credit Underwriting Procedures
That Are No Less Stringent Than Those Prevailing
at the Time For Comparable Transactions With
Other Non-Insiders Who Are Not Employed By That
Bank or Its Subsidiaries
 Not Involve "More Than the Normal Risk of
Repayment"
 Or Present "Other Unfavorable Features"
17
Prohibition on Preferential Underwriting;
Abnormal Risk of Repayment; and Other
Unfavorable Features (cont.)
• This Requirement Also Carries Over to Loan
Administration and Collection Functions
• Waivers, Modifications, Forbearance, Forgiveness
and Other Underwriting Management Decisions
Must Not Be Preferential in Nature (or Involve
Abnormal Risk of Repayment or Other Unfavorable
Features)
18
Employee Benefit Or Compensation
Programs
• Regulation O Provides An Exception to the
Prohibitions on Preferential Terms and Preferential
Underwriting, Abnormal Risk of Repayment and
Unfavorable Features in Cases Involving Extensions
of Credit Made Pursuant to An Employee Benefit or
Compensation Program
• For Purposes of Making Comparability
Determinations, the Bank May Look to Loans Made
Pursuant to These Types of Programs, Provided: (i)
the Benefit or Compensation Program is Widely
Available to Employees of the Bank; and (ii) the
Program Does Not Give Preference to the Insider
Over the Applicable Employees
19
Prior Approval
• For Certain Extensions, Regulation O Requires Prior
Approval By the Entire Board of Directors
(Excluding Interested Directors)
• For Any Extension of Credit to An Insider If the
Extension of Credit, When Aggregated With All
Other Extensions of Credit to That Person and All
Related Interests of That Person, Equals or Exceeds
a Particular Dollar Threshold
• Threshold Calculated By Reference to a Specified
Formula (Which For Most Banks is $500,000)
20
Prior Approval (cont.)
• Prior Approval is Not Required For Each Individual
Advance Made Pursuant to a Line Of Credit That
Was Properly Approved Within 14 Months of the
Advance
• An Extension of Credit is "Considered to Have Been
Made At the Time the Bank Enters Into a Binding
Commitment to Make the Extension of Credit." As a
Result, Prior Approval Must Be Obtained Before
Such a Binding Commitment is Undertaken
21
Prior Approval (cont.)
• "Interested Party" Must Abstain From Participating
Directly or Indirectly in the Voting
• This Includes "Participation in the Discussions or
Any Attempt to Influence the Voting"
• The Phrase "Interested Party" Can Include
Interested Directors or Interested Executive Officers
(e.g., If Such Officers Might Otherwise Participate in
Discussions at Board Meetings)
22
Prior Approval (cont.)
• Note, However, That Individual Directors and
Executive Officers May, in Some Cases, Have a
Separate Legal Duty to Disclose Facts That Are
Material to the Transaction
• Those Duties May Arise Under State Law, Including,
For Example, Laws Related to the Duty of Loyalty
(Requiring Candor and Honesty in Personal
Dealings With the Corporation) and Laws Related to
"Conflicting Interests"
23
Individual Lending Limits
• A Member-Bank May Not Extend Credit to Any Insider
of That Bank or An Insider of An Affiliate in An Amount
That, When Aggregated With the Amount of All Other
Extensions of Credit to That Person and All Related
Interests of That Person, Exceeds a Specified Lending
Limit
• Limit is Generally Equal to 15 Percent of Unimpaired
Capital and Unimpaired Surplus in the Case of Loans
That Are Not "Fully Secured"
• Plus An Additional 10 Percent of Unimpaired Capital
and Unimpaired Surplus in the Case of Loans That Are
"Fully Secured"
24
Individual Lending Limits (cont.)
• "Fully Secured" Means Secured By Readily
Marketable Collateral Having a Market Value, As
Determined By Reliable and Continuously Available
Price Quotations, At Least Equal to the Amount of
the Loan
• Exceptions to This Limit Are Permitted For Certain
Types of Obligations (Those Exceptions Are
Provided in 12 U.S.C. § 84)
25
Aggregate Lending Limits
• The Aggregate Amount of All Extensions of Credit
By a Member-Bank (and Its Subsidiaries) to All the
Insiders of the Bank and Its Affiliates (and Their
Related Interests) May Not Exceed 100 Percent of
the Bank's Unimpaired Capital and Unimpaired
Surplus
• Banks With Deposits of Less Than $100 million May
Establish Higher Aggregate Limit (Up to Double the
Normal Limit) If Certain Stringent Conditions Are
Satisfied
• Additional Exceptions Available For
 Certain Highly Collateralized Obligations
 Recourse Obligations Related to Consumer
Installment Paper Meeting Certain Conditions
26
Overdrafts
• Regulation O Contains Special Restrictions Concerning
Overdrafts Involving Executive Officers and Directors of
the Bank and Its Affiliates
• Payments on Overdrafts By a Director or Executive
Officer Are Permitted Only If the Payment of Funds Are
Made Pursuant to:
 (i) A Written, Preauthorized, Interest-Bearing Extension
of Credit Plan That Specifies a Method of
Repayment (an "Overdraft Protection Plan"); or
 (ii) A Written, Preauthorized Transfer of Funds From
Another Account of the Account Holder at the
Applicable Bank ("Preauthorized Overdraft
Transfer")
27
Overdrafts (cont.)
• The Special Restrictions Do Not Apply to Payments
of Inadvertent Overdrafts of $1000 or Less
 If The Account is Not Overdrawn For More Than
Five (5) Business Days, and
 As Long As the Executive Officer or Director is
Charged the Same Fee As is Charged For Any
Other Customer in Similar Circumstances
("Inadvertent Overdrafts")
28
Overdrafts (cont.)
• The Special Restrictions Only Apply to Directors and
Executive Officers
• Principal Shareholders and Related Interests Are Not
Subject to These Special Restrictions
• However, to the Extent That the Payment of An
Overdraft Otherwise Constitutes An Extension of
Credit, Then the Extension of Credit Would Otherwise
Be Subject to the Other General Compliance
Requirements (e.g., No Preferential Terms, No
Preferential Underwriting, Prior Approval, Etc.)
29
Overdrafts (cont.)
• These General Restrictions Apply to All Extensions
of Credit to Directors, Executive Officers, Principal
Shareholders and the Related Interests of These
Persons
• But Note, While The Definition of Extension of
Credit Includes An "Advance By Means of An
Overdraft", It Excludes Overdraft Indebtedness of
$5000 or Less Pursuant to An "Overdraft Protection
Plan" and "Inadvertent Overdrafts"
30
Executive Officers - Limitations On
Types And Amounts Of Loans
• There Are Special Rules on the Types and Amounts
of Extensions of Credit That May Be Made to
Executive Officers of Member-Banks
 Special Rules Do Not Apply to EO’s of Affiliates
• These Are in Addition to the More General Rules
(e.g., Prohibition on Preferential Terms, Prohibition
on Preferential Underwriting, Individual Lending
Limits, Aggregate Lending Limits, Etc.)
• With the Exception of Certain Partnership Interests,
These Special Rules Do Not Apply to the Related
Interests of Executive Officers
31
Executive Officers - Limitation On
Types And Amounts Of Loans (cont.)
• In Particular, Extensions of Credit to Executive
Officers Are Generally Limited to the Following
Types and, Where Applicable, Amounts
 Extensions of Credit For the Education of the
Executive Officer's Children; and
 Extensions of Credit to Finance or Refinance the
Purchase, Construction, Maintenance or
Improvement of a Residence of the Executive
Officer, Subject to Certain Conditions
32
Executive Officers - Limitation On Types
And Amounts Of Loans (cont.)
• Those Conditions Are:
 Such Extension is Secured By a First Lien on That
Residence, and the Residence is Owned (or
Expected to Be Owned After the Extension of
Credit) By the Executive Officer; and
 In the Case of a Refinancing, the Principal
Borrowed is Limited to Only the Amount Used to
Repay the Original Extension of Credit, Plus the
Closing Costs of the Refinancing, Plus Any
Additional Amount Used For Permitted Purposes
(e.g., Construction, Maintenance, or Improvement of
That Residence)
33
Executive Officers - Limitation On
Types And Amounts Of Loans (cont.)
• The Following Secured Extensions of Credit Are Also
Permitted For Executive Officers:
 Extensions of Credit Secured By a Perfected Security Interest in
Bonds, Notes, Certificates or Indebtedness, or Treasury Bills of
the United States or in Other Such Obligations Fully Guaranteed
As to Principal and Interest By the United States.
 Extensions of Credit Secured By Unconditional Takeout
Commitments or Guarantees of Any Department, Agency,
Bureau, Board, Commission or Establishment of the United
States or Any Corporation Wholly-Owned Directly or Indirectly
By the United States.
 Extensions of Credit Secured By a Perfected Security Interest in
a Segregated Deposit Account Maintained at the Bank.
34
Executive Officers - Limitation On
Types And Amounts Of Loans (cont.)
• Executive Officers Are Also Permitted to Have Certain
Additional Extensions of Credit For Other Purposes
("Other Purpose Loans")
• More Specifically, Extensions of Credit Are Permitted
For Any Other Purpose or Category Not Specified
Above, As Long As the Aggregate Amount of Other
Purpose Loans to the Executive Officer Do Not
Exceed At Any One Time An Amount Calculated
Pursuant to a Prescribed Formula (Which For Most
Banks is $100,000)
35
Executive Officers - Acceleration
Feature In Loan Documents
• Any Extension of Credit Made to An Executive Officer
Must Be Made Subject to the Following Written
Acceleration Feature
• The Extension of Credit Can, At the Option of the
Bank, Become Due and Payable At Any Time That the
Executive Officer is Indebted to Any Other Bank or
Banks in Connection With Other Purpose Loans in An
Amount Which Exceeds a Specified Formula Amount
(Which For Most Banks is $100,000)
36
Executive Officers - Acceleration Feature
In Loan Documents (cont.)
• Addendum to Promissory Notes
• Relationship to Other Sections (What Do You Do
With Acceleration Feature)?
 Elimination of Reporting Requirements in 2006
• TILA Implications
37
Executive Officers - Submission Of
Financial Statements
• Any Extension of Credit to An Executive Officer Must
Be Preceded By the Submission, By Such Executive
Officer, of a "Detailed Current Financial Statement"
• It is OK to Implement Special Protocols to Protect
Privacy of Executive Officer. But Be Careful Not to
Violate Prohibition Against Preferential Underwriting
38
Executive Officers - Reports To Board
• An Executive Officer is Required to Report to the
Board of Directors Any Extension of Credit to the
Executive Officer By His/Her Employer-Bank
• That Report Must Be Submitted "Promptly"
39
Executive Officers -Special Rule For
Partnerships
• A Dollar Limit is Imposed on Extensions of Credit to a
Partnership in Which One or More of the Bank's
Executive Officers Are Partners and, Either
Individually or Together, Hold a Majority Interest
• When An Extension of Credit is Granted to Such a
Partnership, the Bank Must Attribute the Total Amount
of the Indebtedness to Each Individual Executive
Officer, and Such An Extension of Credit May Only Be
Made If the Extension Would Otherwise Comply With
the Aggregate Limit For "Other Purpose Loans" to
That Executive Officer (Which For Most Banks is
$100,000)
40
Records – General
• Regulation O Requires Banks to "Maintain Records
Necessary For Compliance With This Part".
• Some Sections of Regulation O Have Specific
Recordkeeping Requirements. Others Do Not.
• As a General Rule, Under Regulation O, Any
Recordkeeping Method Adopted By a Bank Must: (1)
Identify, Through An Annual Survey, All Insiders of the
Bank; and (2) Maintain Records of All Extensions of
Credit to Insiders of the Bank.
• The Records Must Include the Amount and Terms of
Each Extension of Credit.
41
Annual Survey And Other Controls
• Practical Considerations
 Insider Education
 Related Interests
 Extensions of Credit "Deeming" Rules
 Annually?
 New Hires, Promotions and Retirements
 New Board Members
 New Shareholdings
 Data Bases & Flagging Relationships
42
Disclosures to Public
• Applies to Executive Officers and Principal
Shareholders of Member-Bank (Including Bank
Subsidiary)
 Includes Their Related Interests
 Excludes Directors
• Requires Disclosure of Certain Insider Borrowing
Relationships
43
Disclosures to Public (cont.)
• If Requested By Member of Public, Bank Must
Disclose Certain Information Related to
 Its Executive Officers (and EO’s of Subsidiaries)
 Its Principal Shareholders
 Their Related Interests
 But Not Directors or Their Related Interests
• Special Definition of "Principal Shareholder"
44
Disclosures to Public (cont.)
• Must Disclose Names of Executive Officers,
Principal Shareholders to Whom (or to Whose
Related Interests) the Bank Had Outside Aggregate
Indebtedness Exceeding Certain Formula
Thresholds (Which For Most Banks is $500,000)
• Must Keep Records of Public Requests and
Disposition Thereof
 For Two Years
45
Other Reporting Requirements
(Debt Secured By Bank Stock)
• Applies to Stock Banks That Are Not Publicly
Traded
• Applies to Each Executive Officer And Director
• Must Report Annually to the Board of Directors the
Outstanding Amount of Extensions of Credit
Secured By Bank Stock
46
Correspondent Bank Relationships –
Prohibition On Preferential Relationships
• The Bank Holding Company Act Amendments of
1970 Prohibit
 Preferential Lending By a Bank to the Executive
Officers, Directors and Principal Shareholders of
Another Bank When There is a Correspondent
Account Relationship Between the Banks, and
 The Opening of a Correspondent Account
Relationship Between 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
47
• Regulatory Disclosure and Reporting Requirements
Repealed (But Statute Remains Intact)
• Practical Compliance Concerns
 Still Need to Educate Insiders (e.g., Periodic
Reminders As to Which Banks Are "Correspondent
Banks")
 When You Establish New Correspondent
Relationships, You Need to Survey Insiders to
Identify Preferential Issues
 What About the Insiders of the Other Bank?
48
Concluding Remarks
Questions & Answers
49