SAFEGUARDS AGAINST INSIDER ABUSE.

SEC. 306. SAFEGUARDS AGAINST INSIDER ABUSE. (a) Recodification of Current Law Restricting Extensions of Credit to Insiders.— Section 22(h) of the Federal Reserve Act (12 U.S.C. 375b) is amended to read as follows: “(h) Extensions of Credit to Executive Officers, Directors, and Principal Shareholders of Member Banks.— “(1) In general.— No member bank may extend credit to any of its executive officers, directors, or principal shareholders, or to any related interest of such a person, except to the extent permitted under paragraphs (2), (3), (4), and (6). “(2) Preferential terms prohibited.— A member bank may extend credit to its executive officers, directors, or principal shareholders, or to any related interest of such a person, only if the extension of credit— “(A) is made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions by the bank with persons who are not executive officers, directors, principal shareholders, or employees of the bank; and 105 STAT. 2356 “(B) does not involve more than the normal risk of repayment or present other unfavorable features. “(3) Prior approval required.— A member bank may extend credit to a person described in paragraph (1) in an amount that, when aggregated with the amount of all other outstanding extensions of credit by that bank to each such person and that person’s related interests, would exceed an amount prescribed by regulation of the appropriate Federal banking agency (as defined in section 3 of the Federal Deposit Insurance Act) only if— “(A) the extension of credit has been approved in advance by a majority vote of that bank’s entire board of directors; and “(B) the interested party has abstained from participating, directly or indirectly, in the deliberations or voting on the extension of credit. “(4) Aggregate limit on extensions of credit to any executive officer or principal shareholder.— A member bank may extend credit to any executive officer or principal shareholder, or to any related interest of such a person, only if the extension of credit is in an amount that, when aggregated with the amount of all outstanding extensions of credit by that bank to that person and that person’s related interests, would not exceed the limits on loans to a single borrower established by section 5200 of the Revised Statutes. For purposes of this paragraph, section 5200 of the Revised Statutes snail be deemed to apply to a State member bank as if the State member bank were a national banking association. “(5) [Reserved.] “(6) Overdrafts by executive officers and directors prohibited.— “(A) In general.— If any executive officer or director has an account at the member bank, the bank may not pay on behalf of that person an amount exceeding the funds on deposit in the account. “(B) Exceptions.— Subparagraph (A) does not prohibit a member bank from paying funds in accordance with— “(i) a written preauthorized, interest-bearing extension of credit specifying a method of repayment; and “(ii) a written preauthorized transfer of funds from another account of the executive officer or director at that bank. “(7) [Reserved.] “(8) Executive officer, director, or principal shareholder of certain affiliates treated as executive officer, director, or principal shareholder of member bank.— For purposes of this subsection, any executive officer, director, or principal shareholder (as the case may be) of any bank holding company of which the member bank is a subsidiary, or of any other subsidiary of that company, shall be deemed to be an executive officer, director, or principal shareholder (as the case may be) of the member bank. “(9) Definitions.— For purposes of this subsection: “(A) Company.— “(i) In general.— Except as provided in clause (ii), the term ‘company’ means any corporation, partnership, business or other trust, association, joint venture, 105 STAT. 2357pool syndicate, sole proprietorship, unincorporated organization, or other business entity. “(ii) Exceptions.— The term ‘company’ does not include— “(I) an insured depository institution (as defined in section 3 of the Federal Deposit Insurance Act); or “(II) a corporation the majority of the shares of which are owned by the United States or by any State. “(B) Control.— A person controls a company or bank if that person, directly or indirectly, or acting through or in concert with 1 or more persons— “(i) owns, controls, or has the power to vote 25 percent or more of any class of the company’s voting securities; “(ii) controls in any manner the election of a majority of the company’s directors; or “(iii) has the power to exercise a controlling influence over the company’s management or policies. “(C) Executive officer.— A person is an ‘executive officer’ of a company or bank if that person participates or has authority to participate (other than as a director) in major policymaking functions of the company or bank. “(D) Extension of credit.— A member bank extends credit by making or renewing any loan, granting a line of credit, or entering into any similar transaction as a result of which a person becomes obligated (directly or indirectly, or by any means whatsoever) to pay money or its equivalent to the bank. “(E) [Reserved.] “(F) Principal shareholder.— The term ‘principal share-holder’ means any person that directly or indirectly, or acting through or in concert with one or more persons, owns, controls, or has the power to vote more than 10 percent of any class of voting securities of a member bank or company. For purposes of paragraph (4), if a member bank has its main banking office in a city, town, or village with a population of less than 30,000, the preceding sentence shall apply with ‘18 percent’ substituted for TO percent’. “(G) Related interest.— A ‘related interest’ of a person is— “(i) any company controlled by that person; and “(ii) any political or campaign committee that is controlled by that person or the funds or services of which will benefit that person. “(H) Subsidiary.— The term ‘subsidiary’ has the same meaning as in section 2 of the Bank Holding Company Act of 1956. “(10) Board’s rulemaking authority.— The Board of Governors of the Federal Reserve System may prescribe such regulations, including definitions of terms, as it determines to be necessary to effectuate the purposes and prevent evasions of this subsection.”. (b) Requiring Depository Institutions To Follow Normal Credit Underwriting Procedures When Extending Credit to 105 STAT. 2358 Insiders.— Section 22(h)(2) of the Federal Reserve Act (12 U.S.C. 375b(2)), as amended by subsection (a), is amended— (1) by striking “and” at the end of subparagraph (A); (2) by striking the period at the end of subparagraph (B) and inserting “; and”; and (3) by inserting after subparagraph (B) the following new subparagraph: “(C) the bank follows credit underwriting procedures that are not less stringent than those applicable to comparable transactions by the bank with persons who are not executive officers, directors, principal shareholders, or employees of the bank.”. (c) Applying to Directors the Limit on Loans to One Borrower.— Section 22(h)(4) of the Federal Reserve Act (12 U.S.C. 375b(4)), as amended by subsection (a), is amended— (1) by inserting “, director,” after “Aggregate limit on extensions of credit to any executive officer”; and (2) by inserting “, director,” after “A member bank may extend credit to any executive officer”. (d) Limiting Depository Institution’s Aggregate Extensions of Credit to Insiders.— (1) In general.— Section 22(h)(5) of the Federal Reserve Act (12 U.S.C. 375b(5)), as amended by subsection (a), is amended to read as follows: “(5) Aggregate limit on extensions of credit to all executive officers, directors, and principal shareholders.— “(A) In general.— A member bank may extend credit to any executive officer, director, or principal shareholder, or to any related interest of such a person, if the extension of credit is in an amount that, when aggregated with the amount of all outstanding extensions of credit by that bank to its executive officers, directors, principal shareholders, and those persons’ related interests would not exceed the bank’s unimpaired capital and unimpaired surplus. “(B) More stringent limit authorized.— The Board may, by regulation, prescribe a limit that is more stringent than that contained in subparagraph (A). “(C) Board may make exceptions for certain banks.— The Board may, by regulation, make exceptions to subparagraph (A) for member banks with less than $100,000,000 in deposits if the Board determines that the exceptions are important to avoid constricting the availability of credit in small communities or to attract directors to such banks. In no case may the aggregate amount of all outstanding extensions of credit to a bank’s executive officers, directors, principal shareholders, and those persons’ related interests be more than 2 times the bank’s unimpaired capital and unimpaired surplus.”. (2) Conforming amendment.— Section 22(h)(1) of the Federal Reserve Act (12 U.S.C. 375b(1)), as amended by subsection (a), is amended by inserting “(5),” after “(4),”. (e) Prohibiting Insiders From Accepting Unauthorized Extensions of Credit.— Section 22(h)(7) of the Federal Reserve Act (12 U.S.C. 375b(7)), as amended by subsection (a), is amended to read as follows: “(7) Prohibition on knowingly receiving unauthorized extension of credit.— No executive officer, director, or prin-105 STAT. 2359cipal shareholder shall knowingly receive (or knowingly permit any of that person’s related interests to receive) from a member bank, directly or indirectly, any extension of credit not authorized under this subsection.”. (f) Applying Uniform Rules to All Companies Controlling Depository Institutions.— Section 22(h)(8) of the Federal Reserve Act (12 U.S.C. 375b(8)), as amended by subsection (a), is amended by striking “bank holding”. (g) Applying Safeguards to Insider Transactions With Depository Institution’s Subsidiaries.— Section 22(h)(9)(E) of the Federal Reserve Act (12 U.S.C. 375b(9)(E)), as amended by subsection (a), is amended to read as follows: “(E) Member bank.— The term ‘member bank’ includes any subsidiary of a member bank.”. (h) Applying Uniform Rules to All Principal Shareholders.— Section 22(h)(9)(F) of the Federal Reserve Act (12 U.S.C. 375b(9)(F)), as amended by subsection (a), is amended by striking the last sentence. (i) Limiting Savings Associations’ Extensions of Credit to Executive Officers.— Section 11(b)(1) of the Home Owners’ Loan Act (12 U.S.C. 1468(b)(1)) is amended by striking “Section 22(h)” and inserting “Subsections (g) and (h) of section 22”. (j) Preventing Savings Associations From Making Preferential Extensions of Credit Through Correspondent Institutions.— Section 106(b)(2)(H)(i) of the Bank Holding Company Act Amendments of 1970 (12 U.S.C. 1972(2)(H)(i)) is amended by inserting “, a savings bank, and a savings association (as those terms are defined in section 3 of the Federal Deposit Insurance Act)” after “mutual savings bank”. (k) Limiting State Nonmember Bank’s Extensions of Credit to Executive Officers; Clarifying the Prohibition on Preferential Extensions of Credit to Insiders.— Section 18(j) of the Federal Deposit Insurance Act (12 U.S.C. 1828(j)) is amended to read as follows: “(j) Restrictions on Transactions With Affiliates and Insiders.— “(1) Transactions with affiliates.— “(A) In general.— Sections 23A and 23B of the Federal Reserve Act shall apply with respect to every nonmember insured bank in the same manner and to the same extent as if the nonmember insured bank were a member bank. “(B) Affiliate defined.— For the purpose of subparagraph (A), any company that would be an affiliate (as defined in sections 23A and 23B) of a nonmember insured bank if the nonmember insured bank were a member bank shall be deemed to be an affiliate of that nonmember insured bank. “(2) Extensions of credit to officers, directors, and principal shareholders.— Subsections (g) and (h) of section 22 of the Federal Reserve Act shall apply with respect to every nonmember insured bank in the same manner and to the same extent as if the nonmember insured bank were a member bank. “(3) Avoiding extraterritorial application to foreign banks.— “(A) Transactions with affiliates.— Paragraph (1) shall not apply with respect to a foreign bank solely because the foreign bank has an insured branch. 105 STAT. 2360 “(B) Extensions of credit to officers, directors, and principal shareholders.— Paragraph (2) shall not apply with respect to a foreign bank solely because the foreign bank has an insured branch, but shall apply with respect to the insured branch. “(C) Foreign bank defined.— For purposes of this paragraph, the term ‘foreign bank’ has the same meaning as in section l(b)(7) of the International Banking Act of 1978.”. (l) Effective Date.— The amendments made by this section shall become effective upon the earlier of— (1) the date on which final regulations under subsection (m)(1) become effective; or (2) 150 days after the date of enactment of this Act. (m) Regulations.— (1) In general.— The Board of Governors of the Federal Reserve System shall, not later than 120 days after the date of enactment of this Act, promulgate final regulations to implement the amendments made by this section, other than the amendments made by subsections (i) and (k). (2) Limiting extensions of credit to executive officers.— The Federal Deposit Insurance Corporation and Director of the Office of Thrift Supervision shall each, not later than 120 days after the date of enactment of this Act, promulgate final regulations prescribing the maximum amount that a nonmember insured bank or insured savings association (as the case may be) may lend under section 22(g)(4) of the Federal Reserve Act, as made applicable to those institutions by subsections (k) and (i), respectively. (n) Existing Transactions Not Affected.— The amendments made by this section do not affect the validity of any extension of credit or other transaction lawfully entered into on or before the effective date of those amendments. (o) Reporting of Credit by Executive Officers and Directors.— An executive officer or director of an insured depository institution, a bank holding company, or a savings and loan holding company, the shares of which are not publicly traded, shall report annually to the board of directors of the institution or holding company the outstanding amount of any credit that was extended to such executive officer or director and that is secured by shares of the institution or holding company.