Federal Reserve Board Requests Comments on Proposal to Clarify What Constitutes Control Under Bank Holding Company Act and Home Owners’ Loan Act

On April 23, 2019, the Federal Reserve Board announced a Notice of Proposed Rulemaking with Request for Comment, which would revise and enhance provisions in the Bank Holding Company Act and the Home Owners’ Loan Act in connection with determining whether a company has the ability to exercise a controlling influence over another company, a key determinant of whether an investing entity is subject to the Board’s rules.  Most significantly, the proposal would: (i) codify the Board’s historical interpretations of presumptions of control; (ii) introduce a tiered framework that would revise and clarify the existing rebuttable presumptions of control; (iii) add a new rebuttable presumption of noncontrol; and (iv) include various definitions and additional provisions to incorporate the proposed rebuttable presumptions of control and noncontrol.

The proposal relates to the issue of whether an investment, alone or in combination with other relationships, raises controlling influence concerns.  Because one part of the definition of “control” includes a factual determination made by the Board, the proposed revisions are intended to provide bank holding companies, savings and loan companies, depository institutions, investors, and the public with a better understanding of the facts and circumstances that are most relevant to the Board when making a “controlling influence” determination.  Overall, the proposal would codify the Board’s historical considerations and expand existing presumptions that would be indicative of the ability or inability of a company to exercise a controlling influence over another company. Such factors include, among others:

• The size of a company’s voting and total equity investment in another company;
• A company’s rights to director representation and committee representation on the board of directors of another company;
• A company’s use of proxy solicitations with respect to another company;
• Covenants or other agreements that allow a company to influence or restrict management or operational decisions of another company;
• The nature and scope of the business relationships between the companies; and
• The use of management agreements and the standards regarding the divestiture or termination of control in another company.

Regarding the proposed tiered framework, the Bank Holding Company Act currently generally provides that a company that owns, controls, or has the power to vote 25% or more of any class of voting securities of another company controls that other company, while a company that owns, controls, or has the power to vote less than 5% of any class of voting securities of another company is presumed not to have control of that other company.  The Board currently evaluates the full facts and circumstances of the relationship between two companies within the remaining 5% and 25% range when determining control, and it generally may consider factors beyond voting ownership or control percentages when making a controlling influence determination for companies that own, control, or have the power to vote less than 25%.  In codifying certain factors, some of which are listed above, the proposed tiered presumptions of control fill this gap, setting thresholds with related factors to consider for the presumptions at essentially four ranges of voting ownership or control: less than 5%, 5% or more, 10% or more, and 15% or more.  Under this approach, a company may, for example, be presumed to exercise a controlling influence if it has high levels of voting ownership and business relationships of lesser import, or, in the alternative, lower levels of voting ownership and business relationships of more substantial import.  For assistance regarding how the factors apply in each presumption, the Board provided a chart as a guidance document with its press release.

Additionally, the proposed rule adds a new rebuttable presumption of noncontrol if a company controls less than 10% of every class of voting securities of another company and if the company does not trigger any of the above-described proposed presumptions of control.  Finally, the proposal would revise certain definitional terms to incorporate the proposed presumptions.

Because the Home Owners’ Loan Act includes a substantially similar definition of “control” as the Bank Holding Company Act, the proposal would also incorporate the proposed control presumptions and related revisions into the implementing regulation applicable to savings and loan holding companies under the Home Owners’ Loan Act, essentially as done for the implementing regulation applicable to bank holding companies under the Bank Holding Company Act.

In addition to the proposed revisions related to controlling influence issues, the Board reminded that it still may have safety and soundness or other concerns arising out of such relationships, whether they are controlling or noncontrolling, and that the Board retains the right to examine banking entities under its jurisdiction for such concerns.

Comments must be received within 60 days after the date of publication in the Federal Register.