May 23, 1980

John P. Amershadian, Esq.

Hodgson, Russ, Andrews, Woods & Goodyear

1800 One M&T Plaza

Buffalo, New York 14203

Dear Mr. Amershadian

This is in response to your letters of July 26, 1979 and 

February 12, 1980, requesting advice as to whether an extension of 

credit by a member bank to an estate or trust is subject to the prior 

approval and preferential lending restrictions of Regulation O (to 

be codified at 12 C.F.R. Part 215), where a director of the member 

bank serves as an executor or trustee for the estate or trust or is 

a beneficiary of the estate or trust.

Under Regulation O, a member bank may not extend credit 

to a director of the bank, or to a related interest of the director, 

on preferential terms. If the extension of credit, when aggregated with 

all other extensions of credit by the bank to the director and to the 

related interests of the director, would exceed $25,000, the extension 

of credit must be approved in advance by a majority of the entire board 

of directors of the bank.1 Section 215.2(k) of Regulation O defines 

related interest as any company that is controlled by a person or a 

political or campaign committee that is controlled by, or the funds 

or services of which will benefit, a person. Company means "any 

corporation, partnership, trust (business or otherwise), association, 

joint venture, pool syndicate, sole proprietorship, unincorporated 

organization, or any other form of business entity not specifically 

listed herein." See section 215.2(a) of Regulation O.

An extension of credit by a member bank to an estate or trust 

for which a director of the member bank is executor or trustee (but 

is 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. This is consistent 

with the Board's longstanding ruling that a loan to a company

1/ The aggregate lending limit of section 215.4(c) of Regulation O 

does not apply to a member bank's extensions of credit to its directors 

or to their related interests. The overdraft prohibition of section 

215.4(d) of regulation O does not apply directly to related interests.
in which an executive officer of the bank is interested will not 

be considered made to the officer provided the loan is made in good 

faith and the proceeds of the loan are used for company purposes. 22 

Federal Reserve Bulletin 249 (1936). Of course, if the director was 

personally liable for the extension of credit or if the proceeds of 

the extension of credit are transferred to the director or used for the 

director's personal benefit, the extension of credit would, under 

section 215.3(f) of Regulation O, be considered made to the director.

The extension of credit referred to in your letter may, however, 

be subject to the provisions of Regulation O if the estate or trust 

qualifies as a “related interest" of the director. The term "estate" is 

not among. the entities listed in the definition of "company" under 

Subpart A of Regulation O, and the characteristics of an estate in most 

instances resemble more closely an individual than a company. 2/ 

Since an individual does not qualify as a company under Subpart A 

of Regulation O and therefore is not a related interest, it follows logically 

that an estate would not qualify as a related interest under subpart A of 

Regulation O. Accordingly, in the Legal Division's view, a member 

bank may extend credit to an estate of which one of its directors is the 

executor (but not a beneficiary) without regard to the restrictions 

of Subpart A of Regulation O. 3/

If, however, a member bank proposes to extend credit to a 

company which is controlled by the estate, the director might be 

considered to control the company through the director's control 

of the shares of the company held by the estate. In addition, if the estate 

itself controls more than 10 percent of any class of voting shares of 

the member bank, the estate would qualify as a principal shareholder 

of the bank since an individual as well as a company may qualify 

as a principal shareholder under Regulation O. If, in such a case, the 

executor or co-executor controls the estate and thereby the voting of 

the bank shares held by the estate, the executor or co-executor would 

also be considered a principal shareholder of the bank.

2/ Where the estate is long lived or takes on other characteristics of 

a company, the estate might qualify as a "company" under Regulation O.

3/ Under subpart B of Regulation O, relating to correspondent bank 

lending, the term "company" includes an estate. See 12 U.S.C. § 1971(a). 

However, since directors are not required to report under subpart 

B of Regulation O and since the prohibitions of 12 U.S.C. § 1972(2) against 

preferential lending based on a correspondent account do not apply directly 

to related interests, the difference in the definition of company 

between Subparts A and B of regulation O is not relevant in the context 

of your questions.
Under section 215.2(k) of Regulation O and section 22(h)(6)(B) 

of the Federal Reserve Act (to be codified at 12 U.S.C. § 375b(6)(B)), 

A trust would apparently qualify as a company and, therefore, as a 

related interest. If a trust were controlled by a director of a member 

bank as trustee for the trust, any extension of credit by the member bank 

to the trust would be subject to the preferential and prior approval 

requirements of Regulation O since the trust would be a related 

interest of the director-trustee. control of a company (including 

a trust) is defined in section 215.2(b) of Regulation O and exists 

generally wheret a person, directly or indirectly, or acting through or 

in concert with others, owns, controls or holds with power to vote 

25 percent or more of the voting securities of the company Where 

the company does not have voting shares, a person will be considered 

to control the company if the person owns or controls a 25 per cent or 

more interest in the company. Regulation O also presumes control in 

Certain cases where less than 25 percent but more than 10 per cent 

ownership or control exists. See section 215.2(b)(2) of Regulation O. 

Control of a trust by a bank director-trustee would, therefore, depend 

upon whether the director is in a position to control the requisite 

share of the trust. In our view, a sole trustee or a co-trustee would 

control the trust and the trust would qualify as a related interest 

of toe director under Regulation O.

The final question posed in your letter is whether 

an extension of credit by a member bank to an estate or trust of 

which a director of the member bank is a beneficiary (but not a 

trustee or executor) is covered by Regulation O. Under section 215.3(f) 

of Regulation O, an extension of credit may be considered made to the 

director-beneficiary to the extent "the proceeds of the extension of 

credit are used for the tangible economic benefit of, or are transferred," to 

the director. An extension of credit by a member bank to an estate or 

trust of whicht a member bank director is a beneficiary would, in 

our view, inure to the benefit of the director as a beneficiary of the 

trust or estate. Whether or not the extension of credit to the estate or 

trust would be considered made to the director-beneficiary under section 

215.3(f) would depend upon the size of the director-beneficiary’s 

interest in the estate or trust. In our view, and consistent with 

the definition of control in the statute,4/ an extension of credit by a 

member bank to the estate or trust would be considered made to the 

director-beneficiary if the director-beneficiary has a 25 percent or 

more present or contingent interest in the estate or trust. This position 

is consistent with a 1974 Board staff interpretation that a loan by a member

4/ As indicated, under Regulation O, control is defined as ownership or 

control of a 25 percent or more interest in a company.
bank to a trust in which an executive officer of the bank was a beneficiary 

would be considered a loan to the executive officer under notion 22(g) 

of the Federal Reserve Act and then existing Regulation O. The staff 

reasoned that a personal interest in the income or assets of the trust, 

even a future interest, inevitably creates the danger of a conflict of 

interest between the officer's duty to the bank and his/her personal 

enrichment.

Of course, if a director of a member bank who is a beneficiary 

of a trust (but not a trustee) possessed the right to sell or dispose of 

the trust assets, exercise dominion or control over or use the trust assets, 

terminate the trust or replace the trustee, the director-beneficiary 

may also be considered to control the trust. In such a case, the 

trust would be covered under Regulation O as a related interest 

of the director-beneficiary.

If you have any further questions concerning this matter, 

please feel free to contact me or Mr. Mattingly of my office (202/452-3430).

Sincerely,

signed:

Neal L. Petersen

General Counsel
Hodgson, Russ. Andrews, Woods & GOODYEAR

ATTORNEYS AT LAW

1800 One M & T Plaza

BUFFALO, N. Y. 14203

718-856-4000

6010 One Financial Plaza

Ft. Lauderdale, Fla 33384

305-764-2440

February 12, 1980

Neal L. Peterson, Esq.

General Counsel

Board of Governors of the

Federal Reserve System

Washington, D. C. 20551

re: Regulation O

Dear Mr. Peterson:

On July 26, 1979 we wrote a letter to you, a copy 

of which is enclosed, requesting certain advice concerning 

the interpretation of Regulation O. To date, we have not received 

a response. We would greatly appreciate your reviewing 

this matter and contacting the undersigned. Thank you.

Very truly yours,

HODGSON, RUSS, ANDREWS, WOODS & GOODYEAR

by

John P. Amershadian

JPA: wms

copies to: Mr. Edward L. Schaefer

George W. Myers, Jr., Esq.