Regulation O and the Director as Registered Agent

Issue/Inquiry

The Bank, which is chartered in New Jersey, is making a commercial loan to a limited liability company. When it obtained the company’s Certificate of Formation, it noticed that one of its own directors is listed as “Registered Agent.” The director does not have an ownership interest in the company. Would the requirements of Regulation O be applicable to the loan because the director is the registered agent of the company?

Response Summary

Under Regulation O, if a director controls a company, a loan to the company will be subject to the requirements of the regulation. Whether the director has such control is to be determined by whether this individual has the power to exercise a controlling influence over the management or policies of the company. At first glance, a registered agent would not have such control, but the Bank should make a determination of the extent to which the director has a controlling influence over the management or affairs of the limited liability company.

Response Detail

Regulation O governs any extension of credit made by a bank to an executive officer, director, or principal shareholder of the bank, including any company controlled by that person. 12 CFR §215.1(b)(1) & (2). Consequently, the answer to the Bank’s question depends on whether its director controls the limited liability company it is extending credit to.

For the purposes of Regulation O, control of a company 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 percent or more of any class of voting securities of the company
• Controls in any manner the election of a majority of the directors of the company
• Has the power to exercise a controlling influence over the management or policies of the company. 12 CFR §215.2(c)(1).

Simply being an officer or director of a company is not enough to demonstrate that an individual has control of that company. There is a presumption of control, however, if the following is true:

• The individual is an executive officer or director of the company and directly or indirectly owns, controls, or has the power to vote more than 10 percent of any class of voting securities of the company; or
• The individual directly or indirectly owns, controls, or has the power to vote more than 10 percent of any class of voting securities of the company; and no other person owns, controls, or has the power to vote a greater percentage of that class of voting securities. 12 CFR §215.2(c)(2).

In this case, there is no presumption that the director of the Bank controls the limited liability company, since the director is not an executive officer or director of the Bank and does not have an ownership interest in it. Whether the director controls the company is a question of fact which the Bank must determine.

Under New Jersey law, every limited liability company organized under the laws of the state or doing business in the state must have a registered agent. Legal process against the company can be served on the registered agent, and any notice or demand that can be made upon the company can be mailed or otherwise delivered to the registered agent. N.J.S.A. 14A:2C-14, 17.

Being the registered agent of the limited liability company does not in itself grant the director the power to control the company, since such an agent is not involved in the management of the company, but is the recipient of legal process served on the company.

There remains one question for the Bank to determine: Does the director in fact have the power to exercise a controlling influence over the management or policies of the limited liability company?

The Bank will have to determine what influence the director has with the limited liability company. If, on the basis of this determination, the Bank finds that the director has a controlling influence over the company, the loan to the company will be covered by Regulation O. If the director is no more than a registered agent, however, then this individual will not have a controlling influence over the company and the loan will not be subject to the requirements of Regulation O.

In any case, the Bank should document the basis of its determination.

This entry was posted on Monday, June 4th, 2018 at 6:00 am.