90-5

August 10, 1990

Re: Request for Interpretive Opinion – Loans to Executive Officers of Member Banks

Dear M ________:

This responds to your letter of July 10, 1990. In your letter, you generally ask us to rule that Article 2 (commencing at Section 3370), Chapter 18, Division 1 of the Financial Code does not apply in the case of state-licensed nonmember banks. We are unable to grant your request.

Financial Code Section 3372 provides, in pertinent part:

“Sections 215.2, 215.3, 215.4, 215.5, 215.7, and 215.8 of Regulation O in all of their particulars, including footnotes thereto, are hereby referred to, incorporated by reference into this article, and adopted, subject to the following:

(b) The term ‘member bank,’ as used in the referenced sections of Regulation O, shall be construed to have the same meaning as ‘bank,’ as defined in Section 3371.” (Emphasis added.)

The term “bank” is defined in Section 3371 as “[a]ny commercial bank or trust company incorporated under the laws of this state.” (Fin. Code Section 3371(a)(1).)

Consequently, Section 215.5 of Regulation O, as incorporated into Article 2, applies to any state-licensed commercial bank or trust company.

The express language of Sections 3371 and 3372 evidences the unequivocal intent of the Legislature to subject state-licensed banks and trust companies to the insider lending restrictions and prohibitions of Article 2, irrespective of membership in the Federal Reserve System. Any argument that the Legislature intended to prohibit or restrict certain loans to executive officers of member banks only, is, in our view, wholly inconsistent with the plain meaning of Article 2.

Very truly yours,

CONRAD W. HEWITT
Superintendent of Banks

By

WILLIAM G. THOMPSON
Supervising Counsel

WGT:arc

bcc: J. F. Carrig

J. R. Paulus

July 10, 1990

Re: Request for Interpretive Opinion

Dear Mr. Thompson:

This letter is submitted pursuant to Section 5.6 of the Superintendent of Bank’s regulations, Cal. Admin. Code tit. 10, Sec. 5.6 (1979), to request an interpretive opinion from your office on the provisions of the California Financial Code set forth in Chapter 18, Article Two of the Code pertaining to loans made to bank executive officers and directors, Cal. Fin. Code §§ 3370-77 (West l989).

We request confirmation that (1) Section 3372 of the California Financial Code, Cal. Fin. Code Sec. 3372 (West 1989) (“Section 3372”) refers to, incorporates by reference, and adopts footnote five to Section 215.5. of Federal Reserve Board’s Regulation O, 12 CFR Part 215 (“Regulation O”), which provides that the provisions of that Section do not apply to banks which are not members of Federal Reserve System (“nonmember banks”), and that (2) no provision of the California Financial Code, including Section 3372, subjects a California state-chartered nonmember bank to Section 215.5 of Regulation O.

I. Introduction.

A. Statutory Language.

Section 3372 states that “Sections 215.2, 215.3, 215.4, 215.5, 215.7, and 215.8 of Regulation O, in all their particulars, including footnotes thereto, are hereby referred to, incorporated by reference into this article, and adopted . . . . ” Cal. Fin. Code § 3372 (West 1989) (emphasis added). Section 215.5 of Regulation O imposes restrictions on loans made to executive officers by banks which are members of the Federal Reserve System (“member banks”) and expressly provides that it does not apply to nonmember banks. Footnote five to the Section (“Footnote Five”) states that “Sections 215.5, 215.8, and 215.9 of Regulation O implement Section 22(g) of the Federal Reserve Act and do not apply to nonmember banks . . . . ” 12 C.F.R. § 215.5(a), footnote five. Accordingly, a textual reading of Section 3372 establishes that the provision incorporates Footnote Five and that Section 215.5 of Regulation O is not applicable to California state-chartered nonmember banks.

II. Discussion

An interpretation of Section 3372 that is consistent with its express terms is supported by legislative intent behind the provision and the regulations and policies of the Federal Reserve Board (“FRB”) and the Federal Deposit Insurance Corporation (“FDIC”).

A. Legislative History of Section 3372.

Legislative history of Section 3372 and related provisions of the California Financial Code setting forth limits on loans made to executive officers and directors by state-chartered banks indicates that the California State Legislature (“Legislature”) generally intended to conform these provisions to the federal regulatory scheme pertaining to insider lending by banks and specifically intended to incorporate Footnote Five in Section 3372 with the effect of making Section 215.5 of Regulation O inapplicable to California state-chartered nonmember banks.

1. Insertion of the Phrase “Including Footnotes Thereto.”

The Legislature emphasized its desire to implement Section 3372 in a manner consistent with federal regulation of bank loans to insiders and to apply Footnote Five to California’s incorporation of Regulation O by inserting the phrase “including footnotes thereto” in Section 3372.

Footnote Five existed in its present form when the Legislature enacted Section 3372 with the phrase “including footnotes thereto” in 1984. See 44 Fed. Reg. 12,959, 12,964 (1979) (footnote four to 12 C.F.R. § 215.5). While Footnote Five arguably would have applied to California’s adoption of Regulation O without inserting the phrase at issue, the Legislature nevertheless added them, and it chose to leave them in Section 3372 when it amended the very sentence in which they are set forth in 1985. See 1984 Cal. Legis. Serv. ch. 975, § 3 (West); 1985 Cal. Legis. Serv. ch. 956, § 5 (West).

2. Provisions Related to Section 3372.

The Legislature expressed further its intent to conform Section 3372 to federal regulatory policies on bank insider lending by enacting related Sections 3370 and 3373. Section 3370 confirms that the Legislature intended to defer to the FRB’s policies in construing the provisions of Regulation O which apply to California state-chartered banks and to apply the FRB’s interpretations of such provisions as they may change from time to time. Section 3370 states as follows:

It is the intent of the Legislature that the provisions of . . . [Chapter 18, Article Two], insofar as they are contained in Regulation O (12 C.F.R. Part 215) of the FRB, conform, and be interpreted by anyone construing the provisions of this article to so conform, to Regulation 0, to any rule or interpretation promulgated thereunder by the Board of Governors of the Federal Reserve System, and to any interpretation issued by an official or employee of the Federal Reserve System duly authorized to issue the interpretation.

Cal. Fin. Code § 3370 (West 1989).

The Legislature indicated a similar intention to use FRB’s policies as a guide in interpreting the provisions of Regulation O made applicable to California state-chartered banks by adopting Section 3373 of the California Financial Code which authorizes the Superintendent of Banks to promulgate regulations which effect any change made by the FRB to Sections 215.2, 215.3, 215.4, 215.5, 215.7, or 215.8 of Regulation 0. Cal. Fin. Code § 3373(a) (West 1989).

3. Statements By the State Banking Department.

Excerpts from the Superintendent of Bank’s Annual Report for 1984 confirm that the Legislature intended to defer to the federal regulatory scheme designed to govern insider lending by banks in adopting Section 3372 and related provisions pertaining to loans made to bank executive officers and directors. The Report states that the Legislature enacted statutory provisions during 1984 to ” . . . generally conform . . . California law to the recent changes in federal restrictions on insider dealings and disclosures (Regulation O) . . . . ” 1984 Superintendent of Banks Ann. Rep. 12.

B. The Purpose Behind and the FRB’s Policies Pertaining to Regulation O .

In 1979, the FRB amended Regulation O to read substantially as it exists today by adding provisions to implement the then recently-enacted Section 22(h) of the Federal Reserve Act (“FRA”), 12 U.S.C. § 375b. Section 22(h) of the FRA was added by Section 104 of the Financial Institutions Regulatory and Interest Rate Control Act of 1978, Pub. L. No. 95-630, §104, 92 Stat. 3644 (1978) (the “FIRA”) and was made applicable to state nonmember banks by virtue of Section 108 of the FIRA, codified at Section 18(j)(2) of the Federal Deposit Insurance Act, 12 U.S.C. § 1828(j)(2). Prior to the 1979 amendment, Regulation O contained provisions similar to Sections 215.2, 215.8, and 215.9 of the Regulation which implemented Section 12(g) of the FRA, 12 U.S.C. § 375a, a provision applicable solely to federally-insured nonmember banks. See 44 Fed. Reg. 12,959 (1979); 47 Fed. Reg. 47,002 (1982). See generally, Mattingly, Insider Lending Restrictions and Reporting Requirements Under the FIRA, 1984 Ann. Rev. Banking L. 21-87. The 1979 amendment of Regulation O thus created a Regulation O composed of provisions implementing Section 22(h) of the FRA which are applicable only to member banks i.e., Sections 215.5, 215.8, and 215.9 of Regulation O) and provisions implementing Section 12(h) of the FRA which are applicable to FDIC-insured member and nonmember banks (i.e., Sections 215.1, 215.2, 215.3, 215.4, 215.6, 215.7, 215.10, and 215.11).

The FRB added Footnote Five in 1979 to clarify that the 1979 amendment of Regulation O did not subject federally insured nonmember banks to the provisions of the Regulation implementing Section 12(g) of the FRA, such as Section 215.5, which Congress had refrained from imposing on nonmember banks under the FIRA. See 44 Fed. Reg. 12,959, 12,966 (1979). Accordingly, any application of Section 215.5 to a state nonmember bank would be inconsistent with the FRB’s construction of that Section and with federal legislative intent behind the FIRA.

C. The FDIC’s Policies On Regulation O.

The regulations and policies of the FDIC, the primary federal regulator of federally-insured state nonmember banks, lend additional support for concluding that Section 3372 does not impose Section 215.5 of Regulation O on California statechartered nonmember banks The FDIC has long taken the position that certain provisions of Regulation O, such as Section 215.5, do not apply to nonmember banks since such provisions implement Section 22(g) of the FRA which is applicable solely to member banks and do not implement Section 22(h) of the FRA. See 47 Fed. Reg. 47,002 (1982). In 1982, the FDIC clarified further the extent to which Regulation O governs federally-insured nonmember banks by adopting Section 337.3 of its regulations which expressly provides that Section 215.5 of Regulation O is inapplicable to nonmember banks. See 12 C.F.R. 337.3(a); 47 Fed. Reg. 47,002 (1982).

D. Summary.

In adopting the provisions of the California Financial Code governing loans to executive officers and directors, the Legislature was cognizant of the FRB’s and FDIC’s policies pertaining to and the purposes behind Regulation O and apparently chose to fashion those provisions including, Section 3372, in a manner consistent with those policies and purposes. The Legislature’s incorporation of Sections 215.5 and 215.8 of Regulation O in light of Footnote Five does not indicate that the Legislature intended to negate Footnote Five. This incorporation recognized merely that the provisions apply to member banks which are chartered in California and that they would apply to California state-chartered nonmember banks should Congress or the FRB choose to make them applicable to nonmember banks in the future. Any other reading of Section 3372 would be inconsistent with the express terms of the provision and with the federal scheme for regulating insider lending by federally-insured banks.

For the foregoing reasons, we request an interpretive opinion holding that Section 3372 refers to, incorporates by reference, and adopts Footnote five and that neither Section 3372 nor any other provision of the California Financial Code subjects California state-chartered nonmember banks to Section 215.5 of Regulation O.

Please do not hesitate to call me or ________ of this office if you have questions regarding this letter.

Thank you in advance for your prompt attention to this matter.

Sincerely,