decision, and any statement filed by directors who voted not to approve the transaction setting forth their reasons for such a vote. In this regard, it should be noted that the regulation does not require the maintenance of a separate set of files for insider transactions. The thrust of these record keeping requirements is to insure that insider transactions are clearly identifiable, that files pertaining to such transactions are readily accessible to examiner personnel (through indexing or some other system), and that the files contain appropriate documentation. KNOWLEDGE OF INSIDER TRANSACTIONS In order to facilitate compliance with its approval and review requirements, the regulation requires an insider having knowledge of a proposed insider transaction with which he or she is involved to give timely notice of such transaction to the bank's board of directors. Also, when the bank itself becomes aware of the existence of a completed insider transaction which has not been reviewed and approved in compliance with the regulation, the bank will be required to report such transaction promptly in writing to the FDIC Regional Director with jurisdiction over the bank. SUPERVISORY GUIDELINES Finally, the regulation makes it clear that formal compliance with its review and approval requirements neither relieves the bank of its obligation to conduct its operations in a safe and sound manner nor prevents the Corporation from taking whatever supervisory action it deems necessary and appropriate with respect to any insider transaction or group of insider transactions, including the institution of formal proceedings under section 8 of the Federal Deposit Insurance Act. In addition, the regulation sets forth the factors which will be considered by the Corporation's Board of Directors in determining whether such transaction or transactions indicate the presence of unsafe or unsound banking practices. These factors include: whether, because of preferential terms and conditions, such insider transactions are likely to result in significant loan losses, excessive costs, or other significant economic detriment which would not occur in a comparable arm's length transaction with a person of comparable creditworthiness or otherwise similarly situated; whether transactions with an insider and all persons related to that insider are excessive in amount, either in relation to the bank's capital and reserves or in relation to the total of all transactions of the same type; or whether from the nature and extent of the bank's insider transactions it appears that certain insiders are abusing their positions with the bank. 2. The new § 337.3 reads as follows: (a) Definitions. SECTION 337.3 INSIDER TRANSACTIONS (1) Bank.-The term "bank" means an insured State nonmember bank, other than a mutual savings bank as defined in section 3(f) of the Federal Deposit Insurance Act (12 U.S.C. 1813(f)), and any majority-owned subsidiary of such bank. (2) Person. The term "person" means a corporation, partnership, association, or other business entity; any trust; or any natural person. (3) Control. The term "control" (including the terms "controlling," controlled by," and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of management and policies of a bank, whether through the ownership of voting securities, by contract, or otherwise. (4) Insider.—The term "insider" means any officer or employee who participates or has authority to participate in major policy-making functions of a bank, any director of a bank, or any other person who has direct or indirect control over the voting rights of ten percent of the shares of any class of voting stock of a bank or otherwise controls the management or policies of a bank. (5) Person related to an insider. The term "person related to an insider" means any person controlling, controlled by or under common control with an insider, and also, in the case of a natural person, means: (a) an insider's spouse; (b) an insider's parent or stepparent, or child or stepchild; or (c) any other relative who lives in an insider's home. (6) Insider transaction.--The term "insider transaction" means any business transaction or series of related business transactions between a bank and: (a) an insider of the bank; (b) a person related to an insider of the bank; (c) any other person where the transaction is made in contemplation of such person becoming an insider of the bank; or (d) any other person where the transaction inures to the tangible economic benefit of an insider or a person related to an insider. (7) Business transaction.-The term "business transaction" includes, but is not limited to, the following types of transactions: (a) loans or other extensions of credit; (b) purchases of assets or services from the bank; (d) use of the bank's facilities, its real or personal property, or its personnel; (f) payment by the bank of commissions and fees, including brokerage commissions and management, consultant, architectural and legal fees; and (g) payment by the bank of interest on time deposits which are in amounts of $100,000 or more. For the purpose of this regulation, the term does not include deposit account activities other than those specified above in subsection (a) (7) (g), safekeeping transactions, credit card transactions, trust activities, and activities undertaken in the capacity of securities transfer agent or municipal securities dealer. (b) Approval and Disclosure of Insider Transactions. An insider transaction, either alone or when aggregated in accordance with subsection (c), involving assets or services having a fair market value amounting to more than: (1) $20,000 if the bank has not more than $100,000,000 in total assets; (2) $50,000 if the bank has more than $100,000,000 and not more than $500,000,000 in total assets; or (3) $100,000 if the bank has more than $500,000,000 in total assets shall be specifically reviewed and approved by the bank's board of directors, provided, however, that, when an insider transaction is part of a series of related business transactions involving the same insider, approval of each separate transaction is not required so long as the bank's board of directors has reviewed and approved the entire series of related transactions and the terms and conditions under which such transactions may take place.2 The minutes of the meeting at which approval is given shall indicate the nature of the transaction or transactions, the parties to the transaction or transactions, that such review was undertaken and approval given, and the names of individual directors who voted to approve or disapprove the transaction or transactions. In the case of negative votes, a brief statement of each dissenting director's reason for voting to disapprove the proposed insider transaction or transactions shall be included in the minutes if its inclusion is requested by the dissenting director. (c) AGGREGATION OF LOANS OR OTHER EXTENSIONS OF CREDIT WHICH ARE INSIDER TRANSACTIONS Any loan or extension of credit involving an insider shall be aggregated with the outstanding balances of all other loans or extensions of credit involving that insider. For purposes of this regulation, a loan or extension of credit involves a specific insider when the loan or extension of credit is made to that insider, to a person related to that insider, or to any other person where the loan or extension of credit inures to the tangible economic benefit of that insider or a person related to that insider. (D) BANK FILES MAINTAINED FOR INSIDER TRANSACTIONS Each bank shall maintain a record of insider transactions requiring review and approval under subsection (b) in a manner and form that will enable examiner personnel to identify such insider transactions. Files pertaining to such insider 1 The phrase "series of related business transactions" includes transactions which are in substance part of an integrated business arrangement or relationship such as borrowings on a line of credit, law firm billings, or recurring transactions of a similar nature within a holding company system. 2 Although not specifically required by the proposed regulation, prior review and approval is desirable and should occur except under circumstances in which such review and approval is clearly impractical. Where prior review and approval by the board of directors is clearly impractical, subsequent action should occur as soon as possible. transactions shall be readily accessible to examiners and shall contain all documents and other material relied upon by the board in approving each transaction, including the name of the insider, the insider's position or relationship that causes such person to be considered an insider, the date on which the transaction was approved by the board, the type of insider transaction and the relevant terms of the transaction, any other pertinent facts which serve to explain or support the basis for the board's decision, and any statements submitted for the minutes or the file by directors who voted not to approve the transaction setting forth their reasons for such vote. (E) DISCOVERY OF INSIDER RELATIONSHIP When a bank becomes aware of the existence of an insider relationship after entering into a transaction for which approval would have been required under subsection (b), the bank shall promptly report such transaction in writing to the Regional Director of the Corporation in charge of the Region in which the bank is headquartered. (F) KNOWLEDGE OF PROPOSED INSIDER TRANSACTION Any insider, having knowledge of an insider tranaction between the bank and: (1) that insider; (2) a person related to that insider; or (3) any other person where the transaction inures to the tangible economic benefit of that insider or person related to that insider shall give timely notice of such transaction to the bank's board of directors. (G) SUPERVISORY ACTION IN REGARD TO CERTAIN INSIDER TRANSACTIONS Notwithstanding compliance with the review and approval requirements of subsection (b), the Corporation will take appropriate supervisory action against the bank, its officers or its directors when the Corporation determines that an insider transaction, alone or when aggregated with other insider transactions, is indicative of unsafe or unsound practices. Such superviory action may involve institution of formal proceedings under section 8 of the Federal Deposit Insurance Act. Among the factors which the Corporation will consider in determining the presence of unsafe or unsound banking practices involving insider transactions are: (1) whether, because of preferential terms and conditions, such insider transactions are likely to result in significant loan losses, excessive costs, or other significant economic detriment which would not occur in a comparable arm's length transaction with a person of comparable creditworthiness or otherwise similarly situated; (2) whether transactions with an insider and all persons related to that insider are excessive in amount, either in relation to the bank's capital and reserves or in relation to the total of all transactions of the same type; or (3) whether, from the nature and extent of the bank's insider transactions, it appears that certain insiders are abusing their positions with the bank. 3. This § 337.3 shall become effective on May 1, 1976. By Order of the Board of Directors, February 25, 1976. ALAN R. MILLER, APPENDIX C-1-FEDERAL DEPOSIT INSURANCE CORPORATION Federal Deposit Insurance Act-Section 8(b) (Cease and Desist Actions) Attached is a case-by-case summary of 39 Cease and Desist actions issued by the Corporation since January 1971. It should be noted that several such actions are now in various stages of processing. In addition to the listing, it should also be noted a number of other Cease and Desist actions have been authorized by the Corportion's Board of Directors which were never stipulated to by banks or adopted in final form by our Board because of favorable interim affirmative actions on the part of either the banks or management-shareholders. In effect, the threat of a Cease and Desist action has caused many favorable affirmative action programs on the part of banks which negated the need for finalizing the authorized Cease and Desist actions. Also attached is a summary of each of the three formal written agreements between banks and the Corporation which were ratified by our Board of Directors. In the case of formal written agreements, noncompliance thereof can be enforced by a subsequent Cease and Desist action. Section 8(m) of the Federal Deposit Insurance Act provides the State supervisory authorities with the opportunity to initiate independent corrective action after the Corporation has served notice of intent to take formal action. While in most cases the State supervisory authorities choose to join the Corporation in any such action, some State banking laws do provide for independent cease and desist actions which have been utilized in a number of instances-either prior to notice of intent on the part of the Corporation or subsequent thereto. A compilation of these State supervisory authority cease and desist actions is not maintained by the FDIC, but the corrective orders are analyzed and checked for compliance on a case-by-case basis at each examination of the involved banks. SUMMARY Bank No. 1.-Deposits-$64,556,000. Cease and Desist order entered on 6-17-71. Bank ordered to cease and desist from unsafe and unsound practices and take affirmative action with respect to reduction in volume of municipal bonds, other assets realignment to improve liquidity, curtailment of direct and indirect loans to insiders, acceptable management, and injection of new capital funds. Order terminated 12-10-71 following the sale of controlling interest by the unsatisfactory management, sale of new capital funds, substantial compliance with the Cease and Desist order, and the designation of new management. Bank No. 2.-Deposits-$46,107,000. Cease and Desist order entered on 7-12-71. Bank ordered to cease and desist from unsafe and unsound practices and take affirmative action with respect to elimination of transactions with self-serving ownership. Order terminated 1-12-73 following change of stock control and a revamping of the board of directors. Bank No. 3.-Deposits-$7,328,000. Cease and Desist order entered on 7-12-71. Bank ordered to cease and desist from unsafe and unsound practices and take affirmative action with respect to elimination of transactions with self-serving ownership. Order terminated 5-1-72 following the sale of controlling interest by the unsatisfactory management and restoration of the capital accounts to an acceptable level. Bank No. 4.-Deposits-$1,025,000. Cease and Desist order entered on 7-12-71. Bank ordered to cease and desist from unsafe and unsound practices and take affirmative action with respect to elimination of transactions with self-serving ownership. Order terminated 4-17-72 following the sale of controlling interest by the unsatisfactory management and restoration of the capital accounts to an acceptable level. Bank No. 5.-Deposits-$20,238,000. Cease and Desist order entered on 7-12-71. Bank ordered to cease and desist unsafe and unsound practices and take affirmative action with respect to elimination of transactions with self-serving ownership. Order terminated 12-10-71 following the sale of controlling interest by the unsatisfactory management and restoration of the capital to an acceptable level. Bank No. 6.-Deposits-$5,096,000. Cease and Desist order entered on 7-12-71. Bank ordered to cease and desist from unsafe and unsound practices and take affirmative action with respect to correction of violations of laws and regulations, correction of operating deficits, and restoration of the capital accounts to an acceptable level. Order terminated 7-8-74 following substantial compliance with corrective orders, favorable trends, improved prospects and augmented capital. Bank No. 7.-Deposits-$4,649,000. Cease and Desist order entered on 11-19-71. Bank ordered to cease and desist from unsafe and unsound practices and take affirmative action with respect to elimination of transactions with a self-serving ownership and management. Order terminated 5-2-74 following change of control, management and asset. improvement. Bank No. 8.-Deposits-$6,513,000. Cease and Desist order entered on 1-6-72. Bank ordered to cease and desist from unsafe and unsound practices and take affirmative action with respect to providing its shareholders with adequate information pertaining to the conditions and activities of the bank in full compliance with various requirements of Sections 12, 13 and 14 of the Securities Exchange Act of 1934 and Section 335 of the Federal Deposit Insurance Corporation's Rules and Regulations. Substantial compliance with the order was accomplished in 1972 although the order remains outstanding. Bank No. 9.-Deposits-$5,128,000 Cease and Desist order entered on 2-15-72. Bank ordered to cease and desist from unsafe and unsound practices and take affirmative action with respect to misuse of credit facilities by controlling stockholders. Order terminated 5-29-74 when compliance with all conditions was accomplished. Bank No. 10.-Deposits-$18,866,000 Cease and Desist order entered on 3-31-72. Bank ordered to cease and desist from unsafe and unsound practices and take affirmative action with respect to hazardous lending policies and inadequate capital caused by incompetent active management and a complacent directorate. Order terminated 8-28-73 when substantial compliance with almost all conditions had been accomplished. Bank No. 11.-Deposits-$1,795,000 Cease and Desist order entered on 5-5-72. Bank ordered to cease and desist from unsafe and unsound practices and take affirmative action with respect to sharply declining asset condition and capital inadequacy resulting from two successive inept management/ownership groups. Order terminated 6-25-73 following change of management/ownership, improved asset condition and substantial compliance with other parts of the order. Bank No. 12.-Deposits-$3,614,000 Cease and Desist order entered on 5-5-72. Bank ordered to cease and desist from unsafe and unsound practices and take affirmative action with respect to an excessive volume of high-risk loans, sizeable loan losses, and inadequate capital which resulted from policies of a liberal, self-serving and domineering controlling owner and weak, ineffective management. Only partial compliance has been accomplished-new management-and order remains outstanding. Bank No. 13.-Deposits-$59,975,000 Cease and Desist order entered on 8-18-72. Bank ordered to cease and desist from unsafe and unsound practices and take affirmative action with respect to failure to correct repeated and flagrant violations of applicable laws and regulations. Order terminated 5-14-73 upon compliance with requirements contained therein. Bank No. 14.-Deposits-$3,742,000 Cease and Desist order entered on 11-21-72. Bank ordered to cease and desist from unsafe and unsound practices and take affirmative action with respect to excessive risk in the loan account, inadequate capital, willful and continued violations of applicable statutes, and generally unsatisfactory operations resulting from liberal lending policies of self-serving controlling interests. Order terminated 6-19-74 following compliance with the corrective requirements. Bank No. 15.-Deposits-$4,703,000 Cease and Desist order entered on 11-21-72. Bank ordered to cease and desist from unsafe and unsound practices and take affirmative action with respect to excessive exposure in the loan account, increasing loan losses, an inadequate and diminishing level of capital, and unsatisfactory operations under the selfserving domination of the controlling interests. Order terminated 2-8-74 after substantial improvements in the bank's assetcapital condition and operations within the constraints of the Cease and Desist order. Bank No. 16.-Deposits-$1,953,000 Cease and Desist order entered on 12-4-72. Bank ordered to cease and desist from unsafe and unsound practices and take affirmative action with respect to excessive risk in the loan account, increasing losses and a shrinking level of capital which resulted from liberal lending policies fostered by the bank's management/ownership. |