Regulation O and Related Interest in Nonprofit Corporation

 Issue/Inquiry

 One of the Bank’s directors also sits on the board of a nonprofit corporation that is applying for a loan from the Bank. The Bank’s director does not have an ownership interest in the corporation, since it is a nonprofit and the director is a minority voting member on the 12-member board, with no controlling influence over policy or decision-making. Does the director’s position on the board of this organization trigger Regulation O restrictions?

 Response Summary

 The corporation would be considered a related interest of the director only if he/she controls it. Since the corporation is a nonprofit, the director would not have an ownership interest in it. Consequently, a determination would have to be made as to whether the director has the power to exercise a controlling influence. This is a question of fact and will turn on the duties and authority of the director with respect to the corporation.

 Response Detail

 Regulation O governs any extension of credit made by a bank to an executive officer, director, or principal shareholder of the bank, or to a related interest of that person. A “related interest” of a person includes a company controlled by that person. The term “company” includes any corporation. 12 CFR 215.1(b);2(b) & (n)(1).

Consequently, the answer to the Bank’s question turns on whether its director controls the corporation that has applied for credit.

For Regulation O purposes, 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).

In this case, since the corporation is a nonprofit, there are no private owners or any stock issued. Likewise, there can be no presumption that the director has control of the nonprofit corporation, since this is also based upon the ownership of a certain percentage of the voting securities of a company. 12 CFR 215.2(c)(2) & (3).

As such, the question of control is determined by whether the Bank’s director has the power to exercise a controlling influence over the management or policies of the corporation. This is a question of fact. The Bank must determine what the duties and authority of the director are with respect to the corporation.

If the Bank finds that the director does not have a controlling influence over the corporation, the loan to the corporation will not be covered by Regulation O. In any case, the Bank should document the basis of its determination. A summary of the Bank’s findings might appear as follows, if warranted by the facts:

Mr. A is one of 12 members of the Board of Directors of NPC corporation. His vote carries no more weight than that of any other director. He also has no managerial or executive authority in the operation of the corporation. Since NPC corporation is a nonprofit corporation, he does not have an ownership interest in it or the power to control in any manner the election of a majority of its directors. As such, he does not have the power to exercise a controlling influence over the management or policies of the corporation. Therefore, NPC corporation should not be considered a related interest of Mr. A for the purposes of Regulation O.

Thus, as restrictions are only triggered in cases where the director controls the corporation, the director’s position and loans to the corporation do not trigger Regulation O restrictions.

This entry was posted on Monday, June 24th, 2019 at 6:00 am.