On January 30, the Federal Reserve released a highly anticipated final rule that substantially updates and clarifies the agency's regulatory framework for determining when an investor exercises a controlling influence over a bank or other company under the Bank Holding Company Act and the Home Owners' Loan Act.
The final rule liberalizes in a number of significant ways the control standards that are currently employed by the Board of Governors of the Federal Reserve System (Federal Reserve) and its staff. Its most dramatic impact is to bring clarity and transparency to the standards, considerations and calculation methodologies applied by the Federal Reserve and its staff in making control determinations, especially with regard to the particular combinations of voting and nonvoting equity investments, board and board committee representation, personnel interlocks, business relationships and contractual arrangements that can lead to a determination that a minority investor has control.
The final rule largely tracks the Federal Reserve's April 2019 proposed rule, with key changes, including: (1) taking into account the significance of business relationships between an investor and a company only from the perspective of the company, not the investor; (2) a standardized presumption of control based on an investor's total equity ownership of at least 33.33%; (3) the elimination of one of the investment fund control standards; and (4) modifications to proposed definitions. The final rule becomes effective April 1, 2020.
This alert focuses on the changes made by the final rule to the Federal Reserve's existing, public framework for determining whether a controlling influence exists for purposes of the Bank Holding Company Act (BHCA).1 In this alert, we refer to an investor as a company under the BHCA that acquires the securities of any bank or company.2 Unless otherwise specified, references in this alert to ownership or control of a company also refer to ownership or control of a bank, and references to ownership of securities also include controlling the securities or holding them with power to vote.
1 The BHCA and the Home Owners’ Loan Act (HOLA) have substantially similar definitions of control. As a result, the final rule also amends Regulation LL, which implements HOLA, in an essentially similar manner.
Nevertheless, there are key differences between HOLA and the BHCA: (1) HOLA governs control of savings associations by individuals and companies (the BHCA concerns control of banks by companies); (2) under HOLA, a person controls a company if that person has more than 25% of any class of that company’s voting securities (under the BHCA, more than 24.99%); (3) under HOLA, a person that contributes more than 25% of the capital of a company controls that company; and (4) HOLA does not include the BHCA presumption of non-control for a company with less than a 5% voting interest in another company. Accordingly, the final rule amends Regulation LL so that for purposes of HOLA, contributed capital has the same meaning as total equity as used by the Federal Reserve in control analyses under the BHCA. As a result, the maximum total equity a non-controlling investor may have under Regulation LL and HOLA is 25% or less (compared with less than 33.3% for purposes of Regulation Y and the BHCA).
2 The Federal Reserve’s control framework under the final rule and the BHCA do not apply to, for instance, individuals who make investments, or other persons who do not meet the definitional requirements under the BHCA (e.g., qualified family partnerships).
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