What Is Regulation O?

What Is Regulation O?

Let me tell you about Regulation O—it's a Federal Reserve regulation that sets limits and conditions on the credit extensions a member bank can provide to its executive officers, principal shareholders, and directors.

This regulation exists to stop bank directors, trustees, executive officers, or principal shareholders from getting favorable credit deals that others wouldn't receive.

Key Takeaways

Regulation O directly controls the credit extensions member banks offer to their 'insiders.' It mandates that banks include any such extensions in their quarterly reports. Under this rule, insiders are defined as directors or trustees, executive officers, or principal shareholders. The restrictions ensure insiders don't get more generous credit terms than regular customers.

Understanding Regulation O

Regulation O oversees the credit that member banks extend to those considered 'insiders.' You should know that while insiders aren't forbidden from borrowing from their associated bank, federal law strictly governs how the bank treats them as borrowers. Beyond restrictions, banks have to report these extensions quarterly.

The regulation clearly defines insiders, categorizing them into tiers with varying rules. These include directors or trustees, executive officers like presidents or treasurers, and principal shareholders who own or control over 10% of the bank's publicly traded shares.

In general, these restrictions make sure insiders don't receive better credit terms than non-insiders. The bank can't offer credit it wouldn't give to outsiders or exceed legal lending limits. There's an exception for employee compensation packages that apply to everyone, including non-insiders.

For instance, if a bank waives mortgage fees for regular employees like tellers, it can do the same for an insider like the bank president.

Implementation and Expansion

Regulation O outlines reporting requirements from laws like the Financial Institutions Regulatory and Interest Rate Control Act of 1978 and the Depository Institutions Act of 1982.

Banks often find ways around these rules to give insiders preferential treatment without breaking them. The Dodd-Frank Act expanded the definition of 'credit extension' to broaden Regulation O's reach.

Keep in mind that Regulation O applies to national banks, state banks, savings associations, and insured branches of foreign banks.

Special Considerations for Regulation O

With the rise in mutual funds, ETFs, and index-based investments, more companies are scrutinizing Regulation O. Large asset managers become principal shareholders through 'fund complexes' that invest in funds.

If a complex acquires 10% of a banking organization's voting securities, it's deemed a principal shareholder.

What Is the Purpose of Regulation O?

The purpose of Regulation O is to stop bank insiders from getting better loan or credit terms than non-insiders or other customers.

Who Is Considered an Insider Under Regulation O?

An insider is a principal shareholder, executive officer, director, or any related interest of these persons.

Which Extensions of Credit Does Regulation O Cover?

It covers insider loans and any indebtedness where an insider is liable as a guarantor. This includes credit from a member bank to its executive officers, directors, or principal shareholders; to a bank holding company if the bank is a subsidiary; or to other subsidiaries of that holding company.

Does Regulation O Apply to Family Members?

Yes, shares owned or controlled by immediate family members—like a spouse or children living with the insider—are attributed to the insider.

The Bottom Line

Regulation O stops lenders from giving unfair or favorable terms to bank insiders at others' expense. It's possible for banks to try providing lower rates, reduced fees, flexible terms, or lax checks to their own, but Regulation O prohibits that.