Are Accounts Established for a Director’s Grandchildren Subject to Regulation O?

Issue/Inquiry

The Bank has several accounts in the names of the grandchildren of one of its directors, with the spouse of the director named as the secondary accountholder. Such are overdraft accounts with a $500 maximum allowed per account, for a total of six accounts with an aggregate credit balance of $3,000. Are these accounts considered loans to an insider or related interest? Should the Bank be tracking the accounts for Regulation O purposes?

Response Summary

The overdraft accounts for the grandchildren would not be covered by Regulation O, and thus, there would be no need to track them, as the spouse of the director is not an insider and there is no obvious beneficial interest to the director from the accounts.

Response Detail

Under Regulation O, if an insider is secondarily liable on an account, it would be considered an extension of credit subject to the requirements of the regulation, since the insider would be obligated to pay money to the Bank under certain circumstances. 12 CFR §215.3(a)(7).

An “insider,” for Regulation O purposes, is an executive officer, director, or principal shareholder of a financial institution or any related interest of such a person. A “related interest” is a company or political campaign controlled by that person. 12 CFR §215.2(h), (n). The spouse of an insider, therefore, would not be considered an insider.

Under the “beneficial interest” rule prescribed by section 215.3(f) of Regulation O, however, an extension of credit to someone other than the insider can still be considered as being to the insider, if it appears that the purpose was to “mask” the intended beneficiary:

“An extension of credit is considered made to an insider to the extent that the proceeds are transferred to the insider or are used for the tangible economic benefit of the insider.”

The question, then, is whether the director obtained a “tangible economic benefit” as a result of the overdraft accounts established by the director’s spouse for the benefit of their grandchildren. Barring any facts indicating that the director has use of the accounts or is receiving account proceeds, it would seem that the benefit to the director is the satisfaction of knowing that the grandchildren have the accounts. This would be an intangible benefit, however, and thus outside the beneficial interest rule of Regulation O.

This entry was posted on Monday, June 27th, 2016 at 3:00 pm.