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Regulatory Bulletin 2.1-102 Insider Transactions
Table of Contents
1.0 Applicability and scope
The purpose of this bulletin is to clarify the regulatory expectations of the Division of Banks (Division) for state-chartered institutions which must comply with both Massachusetts banking statutes and federal regulations of their primary federal regulator governing extensions of credit to officers, directors or trustees, principal shareholders and their related interests. The bulletin also sets forth the regulatory expectations governing certain contracts or services between state-chartered institutions and insiders. The purpose is intended to limit the potential for unsafe and unsound insider abuses, self-dealing, and actual or perceived conflicts of interests.
State-chartered trust companies, co-operative banks, and savings banks are subject to the provisions of this bulletin. State-chartered credit unions are not subject to Regulation O.
The following words shall, unless the context otherwise requires, have the following meanings:
Director: a director of any co-operative bank, trust company, limited purpose trust company, credit union, or a savings bank in stock form. However, the term does not include an honorary director provided such honorary position meets the requirements of: G.L. c. 170, s. 13; G.L. c. 171, s. 12; or 12 CFR 215.2(d) (1)-(3), as applicable.
Division: the Division of Banks, including the Commissioner of Banks.
FDIC: the Federal Deposit Insurance Corporation.
FRB: the Board of Governors of the Federal Reserve System.
G.L.: Massachusetts General Laws
Insider: as defined by 12 CFR 215.2(h), except that the term shall also mean a trustee. For the purposes of Section III(B) of this bulletin, the term also includes any officer.
NCUA: the National Credit Union Administration.
Officer: any person who is subject to the provisions of G.L. c. 168, s. 18; G.L. c. 168, s. 25; G.L. c. 170, s. 13; G.L. c. 170, s. 19; G.L. c. 171, s. 15; or G.L. c. 172, s. 13.
Person: as defined by 12 CFR 215.2(l).
Principal shareholder: as defined by 12 CFR 215.2(m).
Primary federal regulator: the FDIC, FRB, or the NCUA.
Related interest: as defined by 12 CFR 215.2(n).
State-chartered institution: a co-operative bank, savings bank, trust company, limited purpose trust company, or credit union chartered under the laws of the Commonwealth of Massachusetts.
Trustee: any trustee of a savings bank in mutual form. However, the term does not include a corporator unless such corporator also is a trustee or officer of the savings bank. The term also does not include an honorary trustee provided such honorary position meets the requirements of: G.L. c. 168, s. 14; or 12 CFR 215.2(d) (1)-(3), as applicable.
A. Extensions of Credit to Insiders
- Relationship Between Massachusetts Statutes and Federal Regulations
a. State-Chartered Banks
State-chartered banks shall comply with 12 CFR 215 (FRB) or 12 CFR 337.3 (FDIC) depending on their primary federal regulator in regards to extensions of credit to the bank’s insiders.
b.State-Chartered Credit Unions
All extensions of credit by a credit union to its directors shall be subject to the limitations of G.L. c. 171, s. 20. In addition, a director, including an officer who is also a director, shall formally abstain from reviewing, deliberating on, or approving any loan or extension of credit from which he or she will receive a benefit. Prior Board of Director approval of director and officer loans is necessary when the loan or line of credit, when aggregated with the amount of all other extensions of credit to that person and to all related interests of that person, exceeds the higher of $25,000 or 5 percent of the credit union’s net worth, as defined in NCUA Rules and Regulations Section 702.2(f)(1). State-chartered credit unions shall also conform to 12 CFR 701.21(c)(8) and 12 CFR 701.21(d)(5) as it applies to non-preferential treatment and payment of fees, commissions, gifts and other compensation in connection with extensions of credit.
- State-Chartered Institutions Without a Primary Federal Regulator
In accordance with the regulatory expectations of this bulletin, state-chartered institutions that lack a primary federal regulator should comply with the provisions of 12 CFR 215 to ensure best practices relating to extensions of credit to the state-chartered institution’s insiders.
B. Contracts or Services Between State-Chartered Institutions and Insiders
- Types of Contracts and Services
a. Transactions between a state-chartered institution and an insider for the following goods or services are subject to the requirements of Section III(B) of this bulletin:
i. goods, including but not limited to, insurance, supplies and other goods used in the normal course of transacting and operating a business;
ii. professional or other services, including but not limited to, legal, accounting, management, consulting, facility maintenance and management, brokerage of all kinds (e.g., real estate, securities, or insurance); architectural or general contracting; or
iii. the lease or sale of personal or real property to the institution.
b. Additionally, any transaction described in Section 3(B)(1)(a) in which compensation or a fee is paid to the insider by a customer or third party shall be considered a contract or service subject to the requirements of Section 3(B) of this bulletin.
- Preferential Terms and Conditions
a. State-chartered institutions shall not enter into any contract with, or retain the services of, an insider upon terms and conditions that are preferential to the insider or adverse to such institution.
b. A contract or service is not preferential if it is made on substantially the same terms and conditions as those prevailing for comparable market transactions.
- Abstention and Prior Approval Requirements
a. A director or trustee, including an officer who is also a director or trustee, shall formally abstain from reviewing, deliberating on, or approving any insider contract or service from which he or she will receive a benefit. Such abstention shall be recorded in the minutes.
b. All insider contracts or services shall require the formal prior approval of a majority of the state-chartered institution’s disinterested directors or trustees before officially engaging in the contracts or services, or annually if appropriate. Such action shall be recorded in the minutes.
c. Annual approval is appropriate if the contract or service provided by the insider is continuous in nature and formal prior approval would otherwise be burdensome on an individual transaction basis.
- Record Keeping Requirements
Contracts or services that either individually or in the aggregate are, or are reasonably expected to be, greater than $50,000 in value per annum per insider for institutions with assets under $500 million, and contracts or services greater than $100,000 in value per annum per insider for institutions with assets over $500 million, are subject to the record keeping requirements set forth below.
State-chartered institutions shall maintain complete and accurate internal records and documentation that include, at a minimum:
a. records and data relied upon by directors or trustees in approving each insider transaction;
b. the insider’s name, position or relationship that causes such person to be deemed an insider;
c. the date the transaction was approved by the majority of disinterested directors or trustees;
d. minutes of the Board vote, including a statement articulating the Board’s rationale for approval and statements of any dissenting members; and
e. pertinent contracts, agreements, payment records, or any other relevant documentation.
The records required to be maintained shall be subject to examiner review for compliance with Section 3(B) of this bulletin.
4.0 Historical notes
This bulletin incorporated Opinion #93-O96 and Opinion #97-O53, and rescinded, repealed, and replaced Administrative Bulletin 9-1, which was originally issued on November 10, 1978. It was subsequently reissued in substantially the same form on July 1, 1979 and again in February 1993. On March 29, 2013, this bulletin was updated where necessary and to reflect the consolidation of Regulatory Bulletin 4.1-101 Loans and Fees to Directors and Senior Management Employees, which had applied only to credit unions, into this bulletin. Accordingly, Regulatory Bulletin 4.1-101 was repealed as of the same date. On August 16, 2016, this bulletin was updated to reflect changes resulting from Chapter 482 of the Acts of 2014, the so-called Bank Modernization Act.
G.L. c. 167, s. 2I, clause (6) and s. 6;G.L. c. 167E, s. 4;G.L. c. 167J, s. 10; G.L. c. 171, s. 15; G.L. c. 172, s. 9A; 12 CFR 215; 12 CFR 337.3.