The chairman of our board of directors owns 10% of one business and 12% of another. Would these businesses be eligible for a Paycheck Protection Program (PPP) loan from our bank? We believe this would be permissible under Regulation O, but we are unsure if it would be permissible under the SBA’s recent interim final rule. Would the chairman be considered a “key employee” of the bank if they are not employed by the bank?

No, the chairman of your board would not be considered a “key employee” if they are not employed by your bank, and businesses in which they have an interest would be eligible for a PPP loan from your bank — provided all other eligibility criteria are met.

The SBA’s interim final rule addressing PPP eligibility criteria provides that the SBA’s general prohibitions against loans to lenders’ “associates” (including officers, directors, and key employees, among others) do not apply to “an outside director or holder of a less than 30 percent equity interest in a PPP Lender.” However, this exception does not apply to “officers or key employees” who “may obtain a PPP Loan from a different lender, but not from the PPP Lender with which they are associated.”

The interim final rule does not define the term “key employee,” but the SBA affiliation rules provide that a “key employee” is “an employee who, because of his/her position in the concern, has a critical influence in or substantive control over the operations or management of the concern.” Consequently, if the chairman is not an employee of your bank, they would not be considered a “key employee.”

Additionally, with respect to Regulation O, we note that the Federal Reserve recently adopted an interim final rule revising the regulation to provide that “extensions of credit” do not include PPP loans that are permitted by the SBA and made between February 15 and June 30, 2020 — except with respect to the provisions addressing restrictions on loans to executive officers.

For resources related to our guidance, please see:

SBA Interim Final Rule, Paycheck Protection Program – Additional Eligibility Criteria and Requirements for Certain Pledges of Loans (“[T]he Administrator, in consultation with the Secretary, has determined that SBA regulations (including 13 CFR 120.110 and 120.140) shall not apply to prohibit an otherwise eligible business owned (in whole or part) by an outside director or holder of a less than 30 percent equity interest in a PPP Lender from obtaining a PPP loan from the PPP Lender on whose board the director serves or in which the equity owner holds an interest, provided that the eligible business owned by the director or equity holder follows the same process as any similarly situated customer or account holder of the Lender. Favoritism by the Lender in processing time or prioritization of the director’s or equity holder’s PPP application is prohibited. The Administrator cautions, however, that Lenders should comply with all other applicable state and federal regulations concerning loans to associates of the Lender. . . . The foregoing paragraph does not apply to a director or owner who is also an officer or key employee of the PPP Lender.”)

SBA Interim Final Rule, Paycheck Protection Program – Additional Eligibility Criteria and Requirements for Certain Pledges of Loans (“Officers and key employees of a PPP Lender may obtain a PPP Loan from a different lender, but not from the PPP Lender with which they are associated. SBA also reminds Lenders that the ‘Authorized Lender Official’ for each PPP Loan is subject to the limitations described in the Lender Application Form, which states in relevant part: “Neither the undersigned Authorized Lender Official, nor such individual’s spouse or children, has a financial interest in the Applicant [Borrower].”)

SBA Regulations, 13 CFR 120.140 (“Lenders, Intermediaries, and CDCs (in this section, collectively referred to as ‘Participants’), must act ethically and exhibit good character. Ethical indiscretion of an Associate of a Participant or a member of a CDC will be attributed to the Participant. . . . The following are examples of such unethical behavior. A Participant may not: . . . (b) Have a real or apparent conflict of interest with a small business with which it is dealing (including any of its Associates or an Associate's Close Relatives) or SBA; (c) Own an equity interest in a business that has received or is applying to receive SBA financing (during the term of the loan or within 6 months prior to the loan application); . . . (i) Fail to disclose to SBA all relationships between the small business and its Associates (including Close Relatives of Associates), the Participant, and/or the lenders financing the Project of which it is aware or should be aware. . .”)

SBA Regulations, 13 CFR 120.10 (“Lender or 7(a) Lender is an institution that has executed a participation agreement with SBA under the guaranteed loan program.”)

SBA Regulations, 13 CFR 120.10 (“An Associate of a Lender or CDC is: (i) An officer, director, key employee, or holder of 20 percent or more of the value of the Lender's or CDC's stock or debt instruments, or an Agent (as defined in §103.1 of this chapter) involved in the loan process; or (ii) Any entity in which one or more individuals referred to in paragraphs (1)(i) of this definition or a Close Relative of any such individual owns or controls at least 20 percent.”)

SBA Regulations, 13 CFR 120.10 (“Close Relative is a spouse; a parent; or a child or sibling, or the spouse of any such person.”)

SBA Regulations, 13 CFR 121.103(g) (“Affiliation may arise where former officers, directors, principal stockholders, managing members, or key employees of one concern organize a new concern in the same or related industry or field of operation, and serve as the new concern's officers, directors, principal stockholders, managing members, or key employees, and the one concern is furnishing or will furnish the new concern with contracts, financial or technical assistance, indemnification on bid or performance bonds, and/or other facilities, whether for a fee or otherwise. . . . A ‘key employee’ is an employee who, because of his/her position in the concern, has a critical influence in or substantive control over the operations or management of the concern.”)

OCC Rules, 12 CFR 31.2(a) (“National banks, Federal savings associations, and their insiders shall comply with the provisions contained in 12 CFR part 215 (Regulation O).”)

Regulation O, 12 CFR 215.2(h) (“Insider means an executive officer, director, or principal shareholder, and includes any related interest of such a person.”)

Federal Reserve Interim Final Rule, Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks (“In § 215.3, in paragraph (b)(6) remove the semicolon, the word ‘or’ at the end of the paragraph and add a period in its place, in paragraph (b)(7) remove the period at the end of the paragraph, add a semicolon and the word ‘or’ in its place, and add paragraph (b)(8) to read as follows:

§ 215.3 Extension of credit.

* * * * *

(b) An extension of credit does not include:

* * * * *

(8) Except for purposes of section 215.5 of this part, a loan: (i) In which the participation by the Small Business Administration on a deferred basis is 100 percent pursuant to section 1102(a)(1) of Pub. L. 116-136 (to be codified at 15 U.S.C. 636(a)(2)(F)); (ii) That is made during the period beginning on February 15, 2020, and ending on June 30, 2020; and (iii) That would not be prohibited by paragraph 120.110(o) of Title 13 or rules or interpretations thereof issued by the Small Business Administration.”)

Regulation O, 12 CFR 215.5 (“Additional restrictions on loans to executive officers of member banks.”)