Regulation O is a Federal Reserve rule placing limits and stipulations on the credit extensions a member bank can offer to its executive officers, principal shareholders, and directors. It aims to prevent these bank insiders from benefiting from favorable credit terms.
Key Takeaways:
- Regulation O governs the credit extensions offered to bank insiders.
- Banks must report any such extensions in their quarterly reports.
- Bank insiders include directors, trustees, executive officers, and principal shareholders.
- Restrictions ensure insiders don’t get better terms than non-insiders.
Understanding Regulation O
Regulation O regulates the credit extensions member banks can offer to individuals classified as “insiders.” While insiders can take loans from their associated banks, federal law regulates how the insider is treated as a customer. This includes mandatory reporting of such extensions in the bank’s quarterly reports.
Bank insiders can be directors or trustees, executive officers (e.g., president or treasurer), or principal shareholders (those owning more than 10% of the publicly-traded shares). The restrictions aim to ensure insiders aren’t given better terms than non-insiders. An exception exists for universally applicable compensation packages. For instance:
If a bank waives certain mortgage application fees for all employees, including tellers, the same can be applied to the bank president, an insider.
Implementing and Expanding Regulation O
Regulation O details reporting requirements from the Financial Institutions Regulatory and Interest Rate Control Act of 1978 and the Depository Institutions Act of 1982. Despite its strict guidelines, banks might find exceptions or workarounds that comply with the regulation. To mitigate such loopholes, the Dodd-Frank Act expanded the definition of credit extensions to broaden Regulation O’s reach. Reg O applies to national banks, state banks, savings associations, and insured branches of foreign banking organizations.
Special Considerations for Regulation O
Recent increases in investments through mutual funds, exchange-traded funds (ETFs), and other index-based products have made Regulation O increasingly relevant. As asset management firms become principal shareholders through fund complexes, those holding 10% or more of a class of voting securities of a banking organization are deemed “principal shareholders.”
What Is the Purpose of Regulation O?
Regulation O seeks to ensure that bank insiders do not receive more favorable credit terms than non-insiders or other bank clients.
Who Is Considered an Insider Under Regulation O?
An insider includes principal shareholders, executive officers, directors, or any related interest of these individuals.
Which Extensions of Credit Does Regulation O Cover?
Regulation O covers any indebtedness on which an insider may be liable, such as insider loans. This includes credit extended by a member bank to an executive officer, director, or principal shareholder, among others.
Does Regulation O Apply to Family Members?
Shares owned or controlled by immediate family members are attributed to the insider. Immediate family members include a spouse, and minor or adult children living with the insider.
The Bottom Line
Regulation O ensures that insiders aren’t given unfair advantages in credit terms at the expense of other customers. It outlaws any act of giving preferential treatment, like lower interest rates, reduced fees, flexible repayment terms, or lenient credit checks, to insiders.
Related Terms: credit, insider, trustee, quarterly reports, shares, mortgage.
References
- Office of the Comptroller of the Currency. “Comptroller’s Handbook: Insider Activities”.
