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4000 - Advisory Opinions
Regulation O Violation Relating to Loans to a
Principal Shareholder
FDIC-79-13
November 15, 1979
Pamela E. F. LeCren, Attorney
The following opinion is in response to the October 10, 1979 letter
written by the law firm of *** counsel for *** which was forwarded to
the Legal Division for response. The letter requests an opinion on
whether or not a person is a "principal shareholder" within the
meaning of the term as defined by Federal Reserve Board Regulation O
(12 C.F.R. Part 215) 1
if (1) the person owns approximately one percent of the stock in a
nonmember insured bank, (2) his/her stock is held by a voting trust,
which controls 54.2 percent of the total outstanding stock of the bank,
(3) the stock held by the voting trust is voted in accordance with the
majority vote of five trustees, and (4) the person in question is one
of the five trustees. This question is raised as the June 14, 1979
examination report of *** cited the bank for a violation of section
215.4(c) of Regulation O. The bank is said to have violated the
regulation in that it made an extension of credit after March 10, 1979
to *** a principal shareholder of the bank, which caused the bank to
have outstanding extensions of credit to *** in excess of the lending
limitation proscribed by Regulation O.
The Legal Division recently formulated an opinion regarding members
of voting trusts for the purposes of Regulation
0. 2
In brief, the opinion states that the members of a voting trust who
hold more than ten percent of the stock of a bank may or may not be
principal shareholders under Regulation O. Despite the fact that
members of a voting trust normally divest themselves of the power to
vote their bank stock when it is placed in the voting trust, a member
of the trust will be considered to be a principal shareholder if the
member is in a position to control the selection of the trustees or the
manner in which the trustees vote. As neither is the case with regard
to *** we will not consider him to be a principal shareholder of *** on
the basis of his membership in a voting trust that controls over ten
percent of the stock of the bank.
*** is, however, a trustee of the voting trust. It is our opinion
(also stated in the October 17, 1979 letter) that the trustees of a
voting trust are principal shareholders under the definition
of the term found in Regulation O. The five trustees of the subject
trust have the power, acting in concert, to vote more than ten percent
of the stock of ***. That the stock is voted at all necessarily
requires that at least three of the trustees act together in
directing
{{4-28-89 p.4031}}the vote. Even though the identity of
the three persons may change from time to time, that fact does not
negate there being an identifiable group (the five trustees) who
control how the stock is voted.
To say that no one of the trustees is a principal shareholder
because he/she cannot vote the stock alone would result in the anomaly
of 54.2 percent of the stock of the bank being voted as a block
pursuant to an agreement without any individual or group of individuals
being identified as controlling that stock. Furthermore, such a
position is contrary to the statutory purpose of protecting banks from
the abuses associated with persons who have the power to vote
significant portions of the stock of the bank. We could say that the
five trustees as a body are one principal shareholder but to
do so would limit each trustee in his/her borrowing from *** to two
percent of the bank's capital and unimpaired surplus. By treating each
trustee as a principal shareholder in his/her own right, each trustee
is permitted to borrow up to the full ten percent ceiling.
In summary, it is our opinion that *** was incorrectly identified as
a principal shareholder of *** due to his membership in the voting
trust. He is, however, a principal shareholder under section 215.2(j)
of the regulation. As a loan was made to *** after March 10, 1979 (the
effective date of the regulation), which resulted in the bank exceeding
the applicable loan ceiling (section 215.4(c)), there has been a
violation of Regulation O. Section 215.6, which provides a two-year
period to reduce nonconforming loans, is not applicable here as the
loan in question was made after March 10, 1979. The bank is
therefore required to reduce the loan immediately. In practical terms,
this may mean selling the loan.
1 Section 215.2(j) defines "principal shareholder" to be
an individual or a company that directly or indirectly, or acting
through or in concert with one or more persons, owns, controls, or has
the power to vote more than 10 percent of any class of voting
securities of an insured nonmember bank or company. Go Back to Text
2 See letter dated October 17, 1979 to *** Executive Vice
President, ***. Go Back to Text
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