Insider Activities

Introduction

This "Insider Activities" booklet is one of several booklets in the Comptroller’s Handbook that will be published under the theme of corporate governance. This booklet provides guidance on how banks may legally and prudently engage in transactions with insiders and implement risk management processes that provide for the appropriate control and monitoring of insider activities. This booklet also provides guidance on how examiners will review and assess insider activities during the supervisory process.

A bank should engage in safe and sound business and personal transactions with its insiders, consistent with law and regulation. Transactions between a bank and its insiders can address legitimate banking needs and serve the interests of both parties. The challenge is to separate legitimate insider financial relationships from those that are, or could become, abusive, imprudent, or preferential. Studies of bank failures have found that insider abuse, including excessive or poor quality loans made, and unjustified fees paid, to directors and officers, is often a contributing factor to the failure. Because of the significant risks that insider activities can pose, activities are subject to strict laws and ethical guidelines.

While most risks can be measured and quantified, insider abuse can damage a bank’s reputation beyond the dollar amount of any credit loss. Improper insider activities can undermine public confidence in the institution. Market perception of the integrity of a bank’s insiders is fundamental to the bank’s financial health and ongoing viability. To maintain this public confidence, a bank must have a reputation for honesty and integrity in all of its activities, especially in its transactions with insiders.

The bank’s corporate governance processes should comprehensively address insider activities. The board of directors must assume leadership by adopting and administering strong written insider policies that closely govern the relationship between the bank and all insiders. The board must also ensure that a process is implemented to monitor and validate compliance with these policies. As used in this booklet, the definition of "insider" is broader than the regulatory definition of a bank insider. Unless otherwise noted, the word "insider" in this booklet is intended to mean an institution-affiliated party, such as an officer, director, employee, controlling shareholder, and all "related interests" of these persons. Regulation O (12 CFR 215), which imposes limits on a bank’s loans to insiders, defines the word "insider" more narrowly.

When the word "management" is used in this booklet, it refers to persons who are appointed by the board of directors and charged with the daily responsibilities of operating the bank. When the term "the board and management" is used in this booklet, it refers collectively to the members of the board of directors and management.

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