Insider Activities

12 CFR 215 — Regulation O

Regulation O, the Federal Reserve Board’s regulation that implements many of the laws pertaining to bank insider transactions, including 12 USC 375a and 375b, is the most comprehensive banking regulation relating to extensions of credit to insiders. It limits the amount and type of credit that may be extended, and includes reporting and record keeping requirements. The term "insider" has a special definition for purposes of Regulation O. For purposes of most of subpart A of Regulation O, the term "insider" includes a "principal shareholder," an "executive officer," a "director," and the "related interests" of any of these persons. A "related interest" of a person includes (1) a company that is controlled by that person, or (2) a political or campaign committee that is controlled by that person or the funds or services of which will benefit that person. All of these terms are further defined by 12 CFR 215.2. These definitions, however, do not apply to

all

provisions of Regulation O, so banks must be careful in determining the persons or entities subject to a particular Regulation O provision. The term "extension of credit" is also specifically and broadly defined by Regulation O and includes loan renewals. See 12 CFR 215.3 and appendix B of this booklet. Regulation O’s six main provisions include:

A prohibition on loans to insiders unless a loan (1) is non-preferential and (2) does not present a higher-than-normal risk of repayment or other unfavorable features.^[4]
A requirement that prior board approval is obtained for loans to insiders greater than a certain amount.
A limit on lending to individual insiders and to insiders in aggregate.
Restrictions on loans to executive officers in other ways.
A requirement that insiders report and disclose certain financial information.
A requirement that certain insiders report and disclose indebtedness to correspondent banks.

Most violations of 12 USC 375a, 375b, or 1972(2) will also be violations of Regulation O. When determining compliance with the quantitative limits of Regulation O, examiners and bankers must make sure they use the definition of unimpaired capital and unimpaired surplus in Regulation O^[5]

OCC Interpretive Letter 1024. A loan to an insider that has become troubled may not be renewed unless the lending bank obtains additional protection to safeguard it and offset the unfavorable features the loan would otherwise present. Depending on the facts, a bank could require additional collateral, a guarantee, or other credit enhancement.

Regulation O defines unimpaired capital and unimpaired surplus as the sum of Tier 1 and Tier 2 capital included in the bank’s risk-based capital, based on the bank’s most recent call report, and the balance of the bank’s allowance for loan and lease losses not included in Tier 2 capital for risk-based capital purposes, based on the bank’s most recent call report. 12 CFR 215.2(i)

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