IBA Compliance Connection

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One of our directors is the President and CEO (but not an owner) of company that would like to borrow money from our bank. If the director has “control” of the company for purposes of Regulation O, we believe we will exceed our legal lending limit for this borrower. Are we correct that an individual can have “control” of a company without having an ownership interest in the company?

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Yes, we believe it is possible for a person to have “control” of a company, as defined in Regulation O, without having an ownership interest in the company.

Under Regulation O, a person has control of a company if the person “owns, controls, or has the power to vote 25 percent or more of any class of voting securities of the company.” A person also has control if they “exercise a controlling influence over the management or policies of the company” or control “in any manner the election of a majority of the directors of the company.” Consequently, we do not believe ownership is required for a person to have control of a company under Regulation O.

Whether the CEO in this case exercises a controlling influence over the management or policies of the company depends on the company’s specific circumstances, as an “individual is not considered to have control, including the power to exercise a controlling influence over the management or policies, of a company . . . solely by virtue of the individual’s position as an officer or director of the company.”

For resources related to our guidance, please see:

  • 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.”)
  • Regulation O, 12 CFR 215.2(n) (“Related interest of a person means: (1) A company that is controlled by that person
  • Regulation O, 12 CFR 215.2(c)(1) (“Control of a company or bank means that a person directly or indirectly, or acting through or in concert with one or more persons:

(i) Owns, controls, or has the power to vote 25 percent or more of any class of voting securities of the company or bank;

(ii) Controls in any manner the election of a majority of the directors of the company or bank; or

(iii) Has the power to exercise a controlling influence over the management or policies of the company or bank.”)

  • Regulation O, 12 CFR 215.2(c)(3) (“An individual is not considered to have control, including the power to exercise a controlling influence over the management or policies, of a company or bank solely by virtue of the individual’s position as an officer or director of the company or bank.”)