Opinion ID: 782377
Heading Depth: 2
Heading Rank: 2

Heading: Control Under Regulation O

Text: 22 The Board correctly found that De La Fuente controlled all of the loan recipients, and that the loans therefore violated the provisions of Regulation O, 12 C.F.R. § 215.1-.13. Regulation O restricts the ability of member banks in the Federal Reserve system (as well as nonmember, FDIC-insured banks such as FIB, see 12 U.S.C. § 1828(j)(2)) to extend credit to their insider[s]. 12 C.F.R. § 215.4(a). The regulation defines insider, in turn, as an executive officer, director, or principal shareholder, and includes any related interest of such a person, id. § 215.2(h); a [r]elated interest is defined to include [a] company that is controlled by that person, id. § 215.2(n)(1). Under the regulation, a person controls a company, when inter alia he or she owns 25% or more of the shares of a company, id. § 215.2(c)(1)(i), or [h]as the power to exercise a controlling influence over the management or policies of the company, id. § 215.2(c)(1)(iii). The regulation also creates certain rebuttable presumptions of control for persons who own more than 10% of the stock in a company. Id. § 215.2(c)(2). 23 The Board found that De La Fuente controlled FPTC by owning, controlling, or having the power to vote 25% or more of its shares, under § 215.2(c)(1)(i). With respect to the other loans (except the loan to C.T. Produce), the ALJ found that the borrowing entities were actual[ly] control[led] by De La Fuente, which the Board determined constituted a finding of exercising a controlling influence under § 215.2(c)(1)(iii). 24 De La Fuente argues that because the regulation contains rebuttable presumptions of control in § 215.2(c)(2) for persons who own more than 10% of a company's shares, it creates a safe harbor insulating people who do not fall within the rebuttable presumption (i.e., De La Fuente) from a finding of control under § 215.2(c)(1)(iii). We disagree. Subsection 215.2(c)(1) establishes the test for control. 2 The following subsection, § 215.2(c)(2), sets forth a list of circumstances from which control is to be presumed. 3 Control may be established if a proper finding under the first subsection is made, or if one of the requirements of the second subsection is met and the presumption of control is not rebutted. De La Fuente would have us disregard the test in the first subsection because he was not presumed to have control under the second subsection. This is illogical. To read the regulation in this manner would render portions of the regulation surplusage, and would defeat the plain purpose of the regulatory scheme. 25 De La Fuente cites two twenty-odd-year-old unpublished Federal Reserve Board interpretive letters in support of his position that the presumptions in § 215.2(c)(2) create a safe harbor. See 1979 WL 44400, at  (The rebuttable presumptions in [§ 215.2(c)(2) 4 ] are intended to be dispositive of the issue of control of a company by an individual who is an executive officer or director of that company.); 1980 WL 121899, at  (stating that when the 10% share ownership condition is met, these presumptions [in § 215.2(c)(2)] are intended to be dispositive of the issue of control of a company by an individual who is an executive officer or director of that company). 26 In response, the FDIC cites an interpretive letter from the Office of the Comptroller of the Currency (OCC), which explains that the rebuttable presumptions of § 215.2(c)(2) are only implicated when an agency relies for its determination of control on the person's stock ownership, but that a finding of control under § 215.2(c)(1)(iii) is not dependent upon share ownership. 1991 WL 338390 (If share ownership were a prerequisite for a finding of control in all circumstances, the regulation could be easily evaded, especially... [by] limiting share ownership to passive investors within the family. Such a formalistic approach ignores the fact that Regulation O clearly contemplates situations in which control may be established by indirect means.). 27 We are not sure whether any deference is due to the FRB's determination that § 215.2(c)(2) creates a safe harbor, especially given the contrary interpretation of the regulation by the OCC. Even if we were to give some deference to the FRB's letters, however, we would have to reject its position as clearly erroneous and inconsistent with the plain language of the regulation. See Singh-Bhathal v. INS, 170 F.3d 943, 945 (9th Cir.1999). 5 We therefore agree with the Board that its interpretation of § 215.2(c) is the reasonable one, and conclude that it correctly found that all twelve loans violated Regulation O.