Regulation O and Control of a Company

Issue/Inquiry

A director of the Bank is on the managing board of a company to which the Bank is extending credit. The director has sole discretion to execute documents and borrow money, but has no ownership interest in the company. Does this loan fall under Regulation O?

Response Summary

If the director controls the company, a loan to the company will be covered by Regulation O. Whether the director has such control is a question of fact to be determined by whether the individual has the power to exercise a controlling influence over the management or policies of the company.

Response Detail

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

For the purposes of Regulation O, control of a company means that an individual, 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).

Merely 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, however, that an individual controls a company if the following is true:

• The person 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.
• The person directly or indirectly owns, controls, or has the power to vote more than 10 percent of any class of voting securities of the company.
• 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) & (3).

In this case, there is no presumption that the director of the Bank has a controlling interest in company, since the individual does not have an ownership interest in it. Whether the director controls the company, then, is a question of fact. The director does not own 25 percent or more of the securities issued by the company, but does he control the selection of its directors or exercise a controlling influence over its management or policies? Having the sole discretion to execute documents and borrow money for the company may indicate that such an influence exists.

The Bank will have to determine what the duties and authority of the director are with regards to the company. If, on the basis of this determination, the Bank finds that he has a controlling influence over the company, the loan to the company will be covered by Regulation O. In any case, the Bank should document the basis of its determination.

 

This entry was posted on Monday, August 8th, 2016 at 3:00 pm.