loss, excessive cost, undue risk, or other economic detriment to the bank. The regulation would also make clear that the FDIC will take appropriate supervisory action against a bank whose insider transactions are found to be unsafe or unsound. Depending on the nature of the transaction and the circumstances involved, such supervisory action may range from informal efforts to obtain voluntary correction to, in an appropriate case, institution of formal proceedings under Section 8 of the Federal Deposit Insurance Act. Technical compliance with the regulation's review, approval, and recordkeeping requirements would not be considered justification for an insider transaction which is an unsafe or unsound banking practice.

Thus, in order to dispel any confusion that may exist with respect to the current regulation, the proposed amendments would make it clear that the FDIC will not tolerate any insider transaction that affords preferential treatment to an insider or a person related to an insider and results in, or is likely to result in, economic detriment to the bank. Insured State nonmember banks can and should expect such transactions, should they occur, to be the subject of examiner comment and FDIC supervisory action.

With reference to the factors enumerated in subsection (g) of the current regulation which the FDIC will consider in determining the presence of unsafe or unsound banking practices involving insider transactions, two of those factors have been deleted in the proposed amendments in favor of a revised single standard. It should be emphasized, however, that the revised single standard is not intended to be narrower in scope than the three factors enumerated in present subsection (g). It should also be emphasized that any insider transaction that meets the stated criteria will be considered an unsafe or unsound banking practice, regardless of the dollar amount of the transaction. The inclusion in the regulation of a schedule of minimum dollar amounts which "trigger" the regulation's review, approval, and recordkeeping requirements in no way limits the FDIC's ability to take supervisory action against a bank that enters into an insider transaction which is an unsafe or unsound banking practice, even if the dollar amount of the transaction falls below the applicable "triggering amount."

3. A new provision would be added relating specifically to correspondent accounts. It would require each insider to report in writing to the bank's board of directors all loans or other extensions of credit that are both (a) made by a financial institution with which the bank maintains a correspondent account, and (b) made for the purpose of enabling the insider, the insider's spouse, or any relative of the insider who lives in the insider's home to purchase, carry, or own a beneficial interest in securities issued by the bank, its holding company, or any other insured bank or holding company of an insured bank. The report would state the terms and conditions of the loan, including certain specified information, and would be kept with the bank's insider transaction records.

The bank's board of directors would be required to review at least annually, all of the bank's correspondent accounts with other financial institutions. The purpose of the review would be to ensure that such accounts are fair to and in the best interests of the bank. In making the review, the board would be required to consider all relevant facts, including the bank stock loans reported by insiders.

In addition to this specific provision, any deposit placed by a bank in another financial institution to compensate that institution for making a loan to an insider of the bank would be considered an "insider transaction" under amended paragraph (a)(8)(iii) and would therefore be subject to the regulation's review, approval and recordkeeping requirements.

4. The definition of "person related to an insider" would be expanded to include certain relatives of an insider not covered by the present regulation (e.g., brothers, sisters, spouse's parents).

5. The definition of "business transactions" would be substantially revised. Instead of listing certain examples of such transactions, as the present regulation does, the revised regulation would simply define "business transaction" to mean "any arrangement, activity, or transaction," except those specifically excluded. The "exceptions" relating to trust activities and activities undertaken in the capacity of securities transfer agent or municipal securities dealer would be deleted. In addition, the exception for "credit card transactions" would be restricted to those which are "pursuant to standard credit provisions applied and enforced equally as to all credit card customers of the bank," and the exception for "deposit account activities" would be restricted to those "involving the bank as depository (other than payment by the bank of interest on time deposits of $100,000 or more).'

6. The definition of "series of related business transactions," currently in a footnote, would be placed in the main text.

7. In the definition of "insider transaction," the phrase "inures to the tangible economic benefit of" would be changed to "results in economic benefit to." It is believed that the new language would be more easily understood.

8. The bank's board of directors would be required to review and approve an insider transaction prior to consummation of the transaction, unless prior review and approval are clearly impractical, in which case review and approval would be required to occur no later than the next regularly scheduled board meeting following consummation of the transaction. In those cases in which approval is given following consummation of the transaction, the board's minutes would be required to include a statement of the reasons why the board found prior review and approval to be clearly impractical.

9. The following additional amendments to the regulation's review and approval requirements are proposed: (a) The phrase "[an insider transaction] involving assets or services having a fair market value amounting to more than" would be replaced by the phrase "[an insider transaction that] involves an amount greater than," along with a clarifying footnote; (b) the minutes of the meeting at which approval is given would be required to expressly indicate that the board recognized the transaction to be an insider transaction; and (c) review and approval of a "series of related business transactions" would be required to occur at least annually.

10. The regulation's recordkeeping provisions would be amended in the following respects: (a) Each file containing documents or information relating to an insider transaction would have to be conspicuously marked as such and would have to be cross-referenced to the minutes of the meeting at which the board approved the transaction; and (b) each such file would be required to include sufficient information and documentation to enable the board to make an informed decision as to approval or disapproval, including such information and documentation as the bank would require of a noninsider in a comparable transaction.

11. The existing provision relating to the discovery by the bank of an insider relationship after entering into a transaction requiring review and approval would be deleted.

Accordingly, the Board of Directors of the Federal Deposit Insurance Corporation hereby proposes to amend 12 CFR Part 337 by revising § 337.3 to read as follows:

(a) Definitions

SECTION 337.3 INSIDER TRANSACTIONS

(1) Bank.-The term "bank" means an insured State nonmember commercial or mutual savings bank and any majority-owned subsidiary of such bank.

(2) Person. The term “person” means a corporation, partnership, association, or other business entity; a trust; or a 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 person, whether through the ownership of voting securities, by proxy to vote such securities, by contract, or otherwise.

(4) Insider.-The term "insider" means: (i) Any director or trustee of a bank; (ii) Any officer or employee of a bank who participates or has authority to participate in major policymaking functions of the bank; (iii) Any person who has direct or indirect control over the voting rights of ten percent or more of the shares of any class of voting stock of a bank; or (iv) Any person who otherwise controls a bank. (5) Person related to an insider.-The term "person related to an insider" means: (i) A corporation, partnership, association, other business entity, or trust which controls, is controlled by, or is under common control with an insider; and (ii) A natural person who is (A) an insider's spouse (except where legally separated); (B) a parent or stepparent of an insider's spouse; (C) an insider's parent, stepparent, child, stepchild, brother, stepbrother, half-brother, sister, stepsister, or half-sister; or (D) any other relative of an insider who lives in the insider's home.

(6) Business transaction.-The term "business transaction" means any arrangement, activity, or transaction, except: charitable transactions; deposit account activities involving the bank as depository (other than payment by the bank of interest on time deposits of $100,000 or more); safekeeping transactions; and credit card transactions pursuant to standard credit provisions applied and enforced equally as to all credit card customers of the bank.

(7) Series of related business transactions.-The phrase "series of related business transactions" includes business transactions which are in substance part of an integrated business arrangement or relationship, such as borrowings under a single line of credit, law firm billings, or recurring transactions of a similar nature within a holding company system.

(8) Insider transaction.-The term "insider transaction" means any business transaction or series of related business transactions between a bank and: (i) an insider of the bank; (ii) a person related to an insider of the bank; (iii) any other person where the transaction results in economic benefit to an insider of the bank or a person related to an insider of the bank; or (iv) any other person where the transaction is engaged in or made in contemplation of such person becoming an insider of the bank.

(9) Preferential.-An insider transaction is "preferential" if, in light of all the circumstances, an insider or person related to an insider obtains a benefit or advantage which would not be afforded in a comparable arm's length transaction to a noninsider of comparable creditworthiness or otherwise similarly situated.

(b) Unsafe or unsound banking practices involving insider transactions; supervisory action

(1) An insider transaction is an unsafe or unsound banking practice if the transaction is preferential and results in, or is likely to result in, loan loss, excessive cost, undue risk, or other economic detriment to the bank.

(2) The Corporation will take appropriate supervisory action against a bank, its officers, or its directors or trustees when the Corporation determines that an insider transaction, alone or when aggregated with other insider transactions, is an unsafe or unsound banking practice. Such supervisory action may consist of informal efforts to obtain voluntary correction of the unsafe or unsound banking practice or, in an appropriate case, may involve institution of formal proceedings under Section 8 of the Federal Deposit Insurance Act. Compliance with the review, approval, and recordkeeping requirements of this section will not relieve the officers, directors, or trustees of a bank of their duties to conduct the bank's operations in a safe and sound manner, and will not be considered justification for an insider transaction which is found to be an unsafe or unsound banking practice.

(c) Review and approval of certain insider transactions

(1) A bank's board of directors or board of trustees shall specifically review and approve each insider transaction that, either alone or when aggregated in accordance with paragraph (d) of this section, involves an amount1 greater than: (i) $20,000, if the bank has not more than $100,000,000 in total assets; (ii) $50,000, if the bank has more than $100,000,000 but not more than $500,000,000 in total assets; or (iii) $100,000, if the bank has more than $500,000,000 in total assets.

Such review and approval shall occur prior to consummation of the transaction, unless prior review and approval are clearly impractical, in which case review and approval shall occur no later than the next regularly scheduled meeting of the bank's board of directors or board of trustees following consummation of the transaction.

(2) 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 or board of trustees has reviewed and approved the entire series of related transactions and the terms and conditions under which such transactions may take place. Any series of related business transactions shall be reviewed and approved at least annually.

(3) The minutes of the meeting at which approval is given shall (i) indicate the nature of the transaction and the parties thereto, (ii) expressly indicate that the board recognized the transaction to be an insider transaction, that review was undertaken, and that the transaction was approved or disapproved, and (iii) state the names of each director or trustee who voted to approve or disapprove the transaction or abstained from voting. In the case of negative votes, a brief statement of each dissenting director's or trustee's reason for voting to disapprove the proposed insider transaction shall be included in the minutes if its inclusion is requested by the dissenting director or trustee. In those cases in which approval is given following consummation of the transaction, the minutes shall also include a statement of the reasons why the board found prior review and approval to be clearly impractical.

(d) Aggregation of insider transactions

For purposes of subsection (c) of this section, any loan or extension of credit involving an insider shall be aggregated with the outstanding balances of all other

'If the transaction involves a disbursement of funds or an obligation to disburse funds by the bank, then the "amount" referred to in the text is the amount disbursed or the maximum amount which the bank is obligated to disburse. If the transaction involves payment by the bank of interest on time deposits of $100,000 or more, then the "amount" referred to in the text is the principal amount of the time deposit.

loans or extensions of credit involving that insider. 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 results in economic benefit to that insider or a person related to that insider.

(e) Records and information pertaining to insider transactions

(1) Each bank shall maintain a record of, and information pertaining to, insider transactions requiring review and approval under this section. To facilitate examiner review, such records and information shall (i) be readily accessible to examiners, (ii) be kept in a manner and form that will enable examiners to readily identify all insider transactions which require review and approval under this section, and (iii) be cross-referenced to the minutes of the board of directors' or board of trustees' meeting at which the insider transaction was approved. Each file containing documents or other information relating to an insider transaction shall be clearly and conspicuously marked as such.

(2) The records and information relating to insider transactions shall describe fully and accurately all insider transactions requiring review and approval under this section, and shall include all documents and other material relied upon by the board in approving each such transaction, including the name of the insider, the insider's position or relationship that causes him 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. The file relating to each such transaction shall include sufficient information and documentation to enable the board to make an informed decision as to approval or disapproval, including such information and documentation as the bank would require of a noninsider in a comparable transaction.

(f) Disclosure of proposed insider transactions

Any insider having knowledge of an insider transaction or a proposed insider transaction involving that insider or a person related to that insider shall give timely notice of such transaction to the bank's board of directors or board of trustees.

(g) Correspondent accounts2

(1) A bank's board of directors or board of trustees shall periodically review (at least annually) all of the bank's correspondent accounts with other financial institutions to ensure that such accounts are fair to and in the best interests of the bank. In making the review, the board shall consider all relevant facts and circumstances, including the loans and other extensions of credit reported under paragraph (2) of this subsection (g). The board's minutes shall recite the details and findings of the review.

(2) Each insider shall report in writing to the board of directors or board of trustees of the bank all loans or other extensions of credit that are both (A) made by a financial institution with which the bank maintains a correspondent account and (B) made for the purpose of enabling the insider, the insider's spouse, or any relative of the insider who lives in the insider's home to purchase, carry, or own a beneficia! interest in securities issued by the bank, its holding company, or any other insured bank or holding company of an insured bank. The report shall be kept with the records maintained by the bank with respect to insider transactions and shall state the terms and conditions of each loan or extension of credit, including the following information: (i) a brief description of the loan or other extension of credit; (ii) the parties thereto or affected thereby; (iii) the identity and relation to the bank of the insider involved; and (iv) the principal terms and conditions of the loan or other extension of credit (in the case of a loan, these would include the principal amount; term or maturity; interest rate; description and valuation of collateral pledged; purpose of loan; repayment schedule; and source of repayment).

(Sec. 2[8], Pub. L. 797, 64 Stat. 879, as amended, Pub. L. 89-695, 80 Stat. 1046 (12 U.S.C. 1818); sec 2[9], Pub. L. 797, 64 Stat. 881-82 (12 U.S.C. 1819)). By order of the Board of Directors dated January 25, 1978.

FEDERAL DEPOSIT INSURANCE CORPORATION

ALAN R. MILLER,
Executive Secretary.

2 Compliance with the provisions of this subsection (g), or of section 337.3 generally, should not be construed to affect in any manner the liability of any person under 18 U.S.C. § 656 for willful misapplication of bank funds.

3 As used in this sentence, the term "insured bank" includes any national bank, State member bank, or insured State nonmember bank.

The CHAIRMAN. Thank you, Mr. LeMaistre. Mr. Heimann.

STATEMENT OF JOHN HEIMANN, COMPTROLLER OF THE CURRENCY

I appreciate the opportunity to comment on the results of the recently concluded Special Survey of certain banking transactions, a joint effort of this Committee and the three federal bank regulatory agencies. We share your concern about insider abuse, and view these hearings to be part of a constructive and continuous process whereby Congress and the banking agencies refine our tools for dealing with insider misconduct. We discuss in our statement the current approach of the Comptroller's Office to this problem. In addition, I shall suggest further steps which the agencies and the Congress should take immediately to deal with the improper and reprehensible acts of some insiders.

I must emphasize in the strongest possible terms my view that preferential treatment of bank insiders is unethical. It is just plain wrong and should not be tolerated. This belief flows from several considerations.

Banks and bankers occupy a unique place in our society and the economy. Bankers are, in effect, custodians of the economic resources of millions of citizens. Moreover, maintenance of a stable and secure payments mechanism, and therefore the health of our economy, is directly dependent upon the confidence of those citizens in the banking system. This special role of trust necessarily requires the highest standards of conduct and imposes upon bankers legal and ethical obligations that are perhaps more stringent than those imposed on individuals in other industries.

In addition, as a bank supervisor, I am concerned that when an insider exacts terms and conditions not available to members of the public at large who are otherwise similarly situated, the bank itself is adversely affected. This is true whether the transaction reflects a conscious intent to use improperly the assets of the bank or is only the result of poor judgment.

Further, we should all recognize that preferential treatment of bank insiders is unfair to the public at large which cannot obtain such favorable terms.

However interpreted, the results of the survey are disappointing. They do reflect a level of preferential treatment of bank insiders. At the same time I must emphasize that the great majority of banks take their public trust seriously and are operated in a fashion to justify that trust. For this reason, it is important not to overstate our concerns. Even so, the results of the survey reflect the need for a reevaluation of public policy with respect to insider abuse.

This need has been recognized at the Comptroller's Office, and improved policies and procedures are in place. Certainly, these hearings are part of such a reevaluation. It is my hope that a consensus as to how to deal most effectively with these questions can be reached.

Before outlining steps which can and should be taken immediately, certain points should be kept in mind.

First of all, it is important to note that the problem is a general one not limited to overdrafts, bank stock loans or extensions of credit on preferential terms. Historically, the Comptroller's Office has detected and dealt sternly with abusive insider transactions. Formal and informal enforcement actions, as well as criminal referrals, have addressed excessive directors' and management fees and salaries, preferential treatment in the purchase, sale and leasing of assets, excessive overdrafts, payment of questionable personal expenses by the bank, diversion of bank assets for personal use, poor quality and unsupported loans, and other questionable transactions which result in a personal advantage for an insider. To the maximum extent possible, we should seek to develop a comprehensive rather than a piecemeal approach.

Second, we should recognize that there are genuine differences of opinion as to just what constitutes abusive and unsound conduct and precisely what should be done about it. It is essential to the success of these deliberations that we clarify rather than obscure these differences and that Congress and the public focus upon the gray areas where reasonable people may differ as to what is appropriate policy. In saying this, we should also underscore that there are areas in which abuses are clear-cut and there certainly is no disagreement.

Because of lack of agreement as to precisely what is and is not appropriate, the agencies and Congress have not always communicated clearly to either bankers or bank examiners what is expected of them. Indeed, only recently, in S. 71, has