We do not believe that your bank violated Regulation O in this situation unless your bank advanced funds to cover the director’s overdraft before the 9:00 a.m. deadline.

Regulation O prohibits banks from paying overdrafts of an executive officer or director unless the payment is made in accordance with: “(i) A written, preauthorized, interest-bearing extension of credit plan that specifies a method of repayment; or (ii) A written, preauthorized transfer of funds from another account of the account holder at the bank.” While there is an exception to this prohibition, that exception does not apply to overdrafts greater than $1,000.

A 1996 Federal Reserve Board legal interpretation dealt with a situation where a bank initially settled checks presented during the day while making the final decision to pay or return checks by 2:00 p.m. on the banking day following receipt of the check. If a director’s checking account would be overdrawn by payment of a presented check, the bank informed the director and provided an opportunity for them to deposit funds in the checking account to cover the overdraft before the bank’s 2:00 p.m. deadline.

The Federal Reserve concluded that because the bank did not irreversibly advance its own funds to cover a director’s overdraft before the bank’s 2:00 p.m. deadline, this procedure did not “give rise to an overdraft in the director’s account for purposes of Regulation O.” Similarly, if your bank did not advance funds to cover the overdraft before its 9:00 a.m. deadline, we do not believe your practice would give rise to an overdraft subject to Regulation O.

For resources related to our guidance, please see:

• Regulation O, 12 CFR 215.4(e)(1) (“No member bank may pay an overdraft of an executive officer or director of the bank or executive officer or director of its affiliates on an account at the bank, unless the payment of funds is made in accordance with:

(i) A written, preauthorized, interest-bearing extension of credit plan that specifies a method of repayment; or

(ii) A written, preauthorized transfer of funds from another account of the account holder at the bank.”)

• Regulation O, 12 CFR 215.4(e)(2) (“The prohibition in paragraph (e)(1) of this section does not apply to payment of inadvertent overdrafts on an account in an aggregate amount of $1,000 or less, provided:

(i) The account is not overdrawn for more than 5 business days; and

(ii) The member bank charges the executive officer or director the same fee charged any other customer of the bank in similar circumstances.”)

• Regulation O, 12 CFR 215.2(k) (“Pay an overdraft on an account means to pay an amount upon the order of an account holder in excess of funds on deposit in the account.”)

• Federal Reserve Board, Application of overdraft provision of Regulation O to bank’s check processing procedures (December 6, 1996) (“As indicated in your letter and telephone conversation, the bank initially settles for all checks that are presented to it by other banks during a given banking day, while reserving the right to return the checks before midnight of the following banking day (the ‘Midnight Deadline’). The bank makes a final decision to pay or return a presented check by 2:00 p.m. on the banking day following receipt of the check. If a director’s checking account would be overdrawn by payment of a presented check, the director is informed of the situation and given an opportunity to deposit sufficient funds in the checking account to cover the overdraft before the bank’s 2:00 p.m. deadline. . . . Since the bank may return a check that is drawn against a director’s account at any time before the Midnight Deadline, and the bank does not in fact decide to return a check before the bank’s 2:00 p.m. deadline, it does not appear that the bank irreversibly advances its own funds to cover a director’s overdraft before the bank’s 2:00 p.m. deadline. Accordingly, it does not appear that a director would incur an obligation to pay any money to the bank on account of an overdraft in his checking account before the bank’s 2:00 p.m. deadline. The bank’s procedure of initially settling for all checks on the day the checks are presented, while reserving the right to return the checks by the Midnight Deadline, does not appear, therefore, to give rise to an overdraft in the director’s account for purposes of Regulation O before the bank’s 2:00 p.m. deadline.”)