Pub. 6 2015 Issue 2

www.wvbankers.org 12 West Virginia Banker Related Interests Under Regulation O: It’s All About Control By Sandra Murphy, Amy Tawney and Daniel Cohn, Bowles Rice LLP R egulation O governs a bank’s transactions with its directors, executive officers, and their “related interests.” Although the regulation’s application to a loan made directly to a bank insider is generally clear, its application to an insider’s “relat- ed interests” often involves complex and highly technical legal analysis. An understanding of certain key definitions is important in order to apply Regulation O correctly. First, Regulation O applies to loans to “insiders.” Insiders include directors, executive offi- cers, principal shareholders, and the “related interests” of each of them. In turn, a “related interest” means any company that is controlled by a director, executive officer, or principal share- holder. And “company” includes partnerships, limited liability companies, trusts, corporations, and any other entities. General- ly, Regulation O applies to loans to directors, executive officers, principal shareholders, and any entity controlled by such a per- son. This is where banks often encounter problems. There are three, separate tests for determining whether a person controls a company. If control is established through any one test, then the person controls the company -- which means that the company is a related interest -- which means that Regulation O applies to the bank’s loan to that company. The three tests are: • Voting. The person owns, controls, or has the power to vote 25% or more of any class of voting securities of the company. • Election. The person controls in any manner the election of a majority of the directors of the company. • Controlling Influence. The person has the power to exercise a controlling influence over the management or policies of the company. There are certain presumptions of control under Regulation O. Control is presumed where a person is a director or executive officer and has the power to vote more than 10% of any class of