If a Bank Director is the trustee of a trust that is 100% owner of a business, would that fall under Reg. O?

3--1062.1

CONTROL OF COMPANY OR BANK--Executor, Trustee, or Beneficiary of Estate or Trust

An extension of credit by a member bank to an estate or trust for which a director of the bank is executor or trustee (but not beneficiary) is not considered made directly to the director under subpart A of Regulation O solely by reason of the director's status as executor of the estate or trustee of the trust. However, if the director was personally liable for the extension of credit or if the proceeds of the extension of credit were transferred to the director or used for the director's personal benefit, the extension of credit would be considered made to the director.

An extension of credit to an estate may be subject to the prohibitions of subpart A of Regulation O if the estate is a "related interest" of the director. The term "estate" is not included in the definition of "company" under subpart A. Estates are generally similar to individuals, which are not considered companies under subpart A. Accordingly, a member bank may extend credit to an estate of which the director is the executor (but not beneficiary) without regard to the prohibitions of subpart A. However, if the estate is long lived or takes on other characteristics of a company, the estate may be considered a company. If the estate controls a company, the director may be held to control the company through the director's control as executor of shares of the company held by the estate. Also, if the estate holds 10 percent or more of the shares of any class of voting shares of the bank, the estate would qualify as a principal shareholder of the bank. In such a case, the director would also be considered a principal shareholder of the bank through his control of the estate.

A trust qualifies as a company under subpart A. Control of a company under Regulation O exists when a person, directly or indirectly, owns or controls 25 percent or more of the voting shares of a company. Also, a person is presumed to control a company when that person owns or controls more than 10 percent but less than 25 percent of the voting shares. Whether a director controls depends on whether the director is in the position to control the requisite share of the trust. Therefore, a sole trustee or a co-trustee would control the trust, and the trust would qualify as a "related interest" of the director. In that situation, any extension of credit to the trust would be subject to the preferential and prior-approval requirement of Regulation O.

If a director is a beneficiary of a trust or estate, an extension of credit to the trust or estate would inure to the benefit of the director. If the director has a 25 percent or more present or contingent interest in the estate or trust, the extension of credit will be considered to have been made to the director. Also, if the director, who is a beneficiary (but not a trustee) of the trust possessed the right to sell or dispose of the trust assets, terminate the trust, or replace the trustee, the director must be considered to control the trust. STAFF OP. of May 23, 1980.

Authority: FRA § 22(g) and (h), 12 USC 375a and 375b; 12 CFR 215.2(a), (b), and (k); 12 CFR 215.3(f) and 215.4(c).

See also 1936 Fed. Res. Bull. 249.

As always, thanks Randy!