September 13, 2019

Fed Control Rules:  Moving from Lore to Law?

On April 23, 2019, the Board of Governors of the Federal Reserve System (the “FRB”) released a proposed rule on control and divestiture proceedings (the “Proposed Rule”) to revise its regulations related to determining when a company has the ability to exercise a controlling influence over another company for purposes of the Bank Holding Company Act (“BHCA”) and the Home Owners’ Loan Act (“HOLA”), which are implemented by Regulations Y and LL, respectively. The Proposed Rule seeks to simplify and provide transparency for the FRB’s control standards under the BHCA and HOLA by proposing a new, comprehensive framework for determining control and controlling influence.

As both Federal Reserve Chair Powell and Vice Chair for Supervision Quarles have indicated, “the framework for determining what constitutes control has developed over many years through an accumulation of complex precedents that can be difficult for the public to understand and apply with confidence”, and it “has become one of the more ad hoc and complicated areas of the FRB’s regulatory administration.” Therefore, the goal for the Proposed Rule is to codify and enhance long-standing, but unwritten FRB precedent for determining control.

Under the control framework, if a company controls a depository institution, it is generally a bank holding company or savings and loan holding company and is, therefore, subject to FRB supervision and regulation, which imposes significant recordkeeping and reporting requirements, as well as significant activities limitations.

Currently, the FRB’s regulations provide standards for control only under specific, limited circumstances, which is why a substantial number of control determinations have historically been made by the FRB on a case-by-case basis. This is precisely the reason for issuing the Proposed Rule – to provide a comprehensive set of guidelines for making such control determinations.

The first two prongs of control in the BHCA (and HOLA) are relatively straightforward, with generally bright-line rules. However, the third prong of control relating to whether a company has the ability to exercise a controlling influence over another company is a highly fact-specific inquiry where the FRB examines a number of factors, or indicia of control. There has not been a significant pronouncement from the FRB describing those common features of proposed investments that will generally implicate control or controlling influence since the issuance of the FRB’s policy statement on equity investments in banks and bank holding companies in September 2008.