On Thursday, January 30, 2020, the Board of Governors of the Federal Reserve System (Federal Reserve) finalized revisions to its rules (Rule) related to control determinations for investments in banks, savings associations and their holding companies (collectively a “bank” or “banks”) by entities, other than individuals.1 In the explanation accompanying the Rule, the Federal Reserve states that, at some future date, it “may” consider making conforming changes to questions related to control in its rules governing Change in Bank Control Act notices, insider lending and affiliate transactions.
The Rule was finalized substantially as initially proposed in spring 2019, and it clarifies the Federal Reserve’s existing rules and interpretations related to control determinations, which were ambiguous and not always transparent. In addition, the Rule relaxes some previous presumptions of control, and it eliminates the practice of passivity agreements, except that the Federal Reserve will continue to obtain control-related commitments in specific circumstances, such as employee stock ownership plans, mutual fund complexes and special situations. Investors that have entered into such agreements with the Federal Reserve are invited to seek relief from those agreements.
Many investors in banks structure their investments to avoid a control determination, and the accompanying supervision and regulation by the Federal Reserve. The Rule provides a clearer path for investors to make non-controlling investments in banks by establishing a more comprehensive and public framework to determine what constitutes control. The Rule eliminates some, but not all, of the uncertainty related to such investments and helps to ensure that presumptions of control are applied by the Federal Reserve in a clearer and more transparent manner. Additionally, the Rule adopted control-related presumptions relating to divestiture of investments.
The Rule is effective as of April 1, 2020.
1 The Rule also applies to investments by bank holding companies in nonbank entities and may have implications for investments by depository institutions in nonbanks because of cross-references in the Federal Deposit Insurance Act.