On April 23, 2019, the Board of Governors of the Federal Reserve System (the “Board”) issued proposed rules that, if adopted, would provide much-needed clarity in the determination of “control” of a banking organization. According to the Board’s notice, the proposals would revise the regulations related to “determinations of whether a company has the ability to exercise a controlling influence over another company for purposes of the Bank Holding Company Act or the Home Owners’ Loan Act. The proposal would significantly expand the number of presumptions for use in such determinations.” View a full copy of the proposal and request for comment here.

The proposed rules in essence would codify existing practice and guidance issued by the Board over many years, potentially simplifying the determination of control for purposes of investment in–and acquisitions made by–a banking organization. Additionally, the proposal would establish a tiered framework of presumptions that “generally would be consistent with the Board’s historical practice with respect to the types of relationships that raise, or do not raise, significant controlling influence concerns...” These proposals have the potential to provide greater certainty in the context of capital raise and other transactions, easing regulatory burdens on banks seeking private equity capital investments, as well as making it easier for banks to invest in nonbank subsidiaries.

The Board pointed out in its release that, among other things, “. . . compared to past practice, the proposal would permit an investor to have a greater number of director representatives at the target company without triggering a presumption of control, and would allow investors seeking to terminate an existing control relationship to do so while retaining greater levels of ownership.”

The proposed tiered levels of rebuttable presumptions of control or noncontrol based on voting ownership were summarized by the Board as follows: “The presumptions would be keyed off of three levels of voting ownership: 5 percent, 10 percent, and 15 percent. Five percent is the level of voting ownership at which the statutory presumption of noncontrol ceases to apply. Ten percent is a level of voting ownership used by the Board in other circumstances to identify major investors in banking organizations. Finally, investors at the level of 15 percent or higher are significant investors closer to statutory control at 25 percent than presumed noncontrol at less than 5 percent.” Other relationships are taken into account by the Board under the proposed rules, including director representation, business relationships, senior management interlocks, contractual limitations on operational or policy decisions, total equity, proxy solicitations, and threats to dispose of voting or nonvoting securities.

Comments were requested by the Board and are due within 60 days following publication in the Federal Register. As of the date of this article, publication had not yet been made.