Fed Proposes Revisions to Control Regulations for First Time in Decades

On April 23, the Board of Governors of the Federal Reserve System (Federal Reserve Board) invited public comment on a notice of proposed rulemaking that would revise its regulations related to determinations of whether a company controls another company for purposes of the Bank Holding Company Act or the Home Owners’ Loan Act. Although the Federal Reserve Board previously has issued policy statements (including one as recently as 2008), the Federal Reserve Board has not materially modified its regulatory presumptions related to control since the 1980s, and the need to provide greater transparency regarding these standards has been a topic of recent speeches by Federal Reserve Board leadership, including those of Vice Chairman for Supervision Randal K. Quarles. According to the Federal Reserve Board, the proposal is intended to increase transparency and provide greater clarity regarding what the Federal Reserve Board considers to be a “controlling influence,” thereby supporting consistent decision-making and reducing regulatory burdens for investors and other interested parties. The Federal Reserve Board acknowledges that these investors often structure their investments to avoid acquisitions of control, which triggers the restrictions and obligations imposed upon bank holding companies and savings and loan holding companies.

Notably, the proposal includes a tiered framework that would incorporate the major factors and thresholds that the Federal Reserve Board typically views as presenting controlling influence concerns. The proposed framework would be structured so that, as an investor’s ownership percentage in the target company increases, the additional relationships and other factors through which the investor could exercise control generally must decrease in order to avoid triggering the application of a presumption of control. In particular, the proposal creates a tiered structure for these presumptions, based on the level of voting ownership at three different levels: 5%, 10% and 15%, and describes several factors that the Federal Reserve Board will use to determine if a company has control over another company. The key factors include the first company's total voting and non-voting equity investment in the second company; director, officer, and employee overlaps between the first company and the second company; and the scope of business relationships between the first company and the second company. The proposal describes what combination of those factors would and would not trigger a presumption of control (the Federal Reserve provided a chart showing how different combinations of the factors would or would not result in a presumption of control under the proposal). The proposal also includes an explicit presumption of noncontrol, which would apply if the first company controls less than 10% of every class of voting securities of the second company and if the first company is not presumed to control the second company under any of the proposed presumptions of control. In addition, the proposal streamlines the process for divestiture of control.

Upon initial review, the proposal generally appears to lighten the Federal Reserve Board’s approach with respect to director interlocks and business relationships. However, the proposal does not address business relationships in connection with investments comprising less than 5% of a class of voting securities. Importantly, the proposal could benefit banks and fintech companies alike at a time when more and more banks are considering investments in fintech firms. In the proposal, the Federal Reserve Board noted that the additional transparency provided by the proposal “should have an incremental increase in the ability of a banking organization to make investments in other companies — including fintech companies — by generally reducing the risk of unexpected control concerns.” This additional transparency could also make investments in banks and bank holding companies more appealing to private equity funds.

Comments will be accepted for 60 days after publication in the Federal Register. For additional information, please contact a member of Goodwin’s Banking group, part of its Financial Industry practice, and look for a more detailed client alert in the coming days.

About Goodwin:

Goodwin’s financial services practice is one of the most highly regarded and largest financial services practices in the United States. Our clients include most of the largest global banks on Wall Street and throughout the world, including full-service and specialty banks; bank and financial holding companies; credit card, mortgage and other lenders, servicers and insurers; companies offering mutual, hedge and private equity fund products; investment advisers; broker-dealers; institutional investors; and providers of technology and other consumer financial services. We represent many of the most prominent financial institutions worldwide in connection with complex Fintech investments and other strategic initiatives. Our global team has led some of the largest bank consortium deals to date across a wide variety of sub-verticals, including blockchain, trading platforms, technology infrastructure, communications platforms and utilities. Our global multidisciplinary team is cohesively integrated to provide strategic advice and deal execution on behalf of the most impactful participants at the intersection of financial services and technology, from early state startup companies (through their entire life cycle) and bulge bracket enterprises.