Final rule codifies presumptions used by Fed to determine bank control; some adjustments from past practice included

A final rule that codifies under its Regulations Y and LL certain “tiered” presumptions in determining when a firm has obtained control of a bank, or vice versa – thus subjecting that firm or bank to the agency’s regulatory and supervisory authority – was approved unanimously Thursday by the Federal Reserve Board governors and will take effect April 1.

According to the Fed, the final rule clarifies, rationalizes and memorializes in regulation the board’s control standards under the Bank Holding Company Act (BHCA) and Home Owners’ Loan Act HOLA) by establishing a series of presumptions of control based on particular relationships between one company and another company.

The key factors considered in determining ownership include a company’s total voting and non-voting equity investment in the bank; director, officer, and employee overlaps between the company and the bank; and the scope of business relationships between the company and the bank. The tiered presumptions provided in the final rule are listed in the table below.

Source: Federal Reserve

The Fed notes that the final rule, largely consistent with the proposed rule, retains most presumptions that have been held in the past over bank control and presents these in a comprehensive, public framework. In the past, control reviews were situation-specific and often followed precedents that were not available to firms or the public, it noted.

Some changes from past practice are reflected in the final rule, but the Fed describes these as “generally technical” in nature and not expected to have a major impact on the banking industry. “Importantly, the final rule significantly improves the transparency and predictability around questions of controlling influence,” according to the notice prepared for the Federal Register.

Certain past presumptions are eliminated by omission from the final rule. These “targeted adjustments” are deemed appropriate by the board “based on its experience over the past few decades.”

The final rule’s presumptions of control, consistent with the proposal, are arranged in tiers based on the level of voting securities of the first company in the second company, according to a summary in the final rule. Each of these presumptions applies where the first company has at least a specified level of voting securities in a second company, and another specified relationship with the second company. The presumptions use three thresholds for voting securities: 5%, 10%, and 15%.

Also consistent with the proposal, many of the other control factors referenced in the final rule also vary in magnitude. “For instance, business relationships between two companies can range from minimal to very significant, and more significant business relationships provides a greater means of exercising (and a greater incentive to exercise) a controlling influence than less significant business relationships,” it states. “In recognition of this, the presumptions in the final rule effectively assume that higher levels of business relationships, combined with higher levels of voting securities, increase the likelihood of the ability to exercise a controlling influence.”

In the past, the board has raised controlling influence concerns if a company with control over 10% or more of a class of voting securities of a second company: solicits proxies from shareholders of the second company on any issue; or threatens to dispose of its investment if the second company refuses to take some action desired by the first company. Consistent with the proposal, the final rule does not adopt either factor as a presumption of control.

Control and Divestiture Proceedings (Federal Register notice)