[Federal Register Volume 85, Number 41 (Monday, March 2, 2020)]
[Rules and Regulations]
[Pages 12398-12430]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03398]
[[Page 12397]]
Vol. 85
Monday,
No. 41
March 2, 2020
Part II
Federal Reserve System
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12 CFR Parts 225 and 238
Control and Divestiture Proceedings; Final Rule
Federal Register / Vol. 85 , No. 41 / Monday, March 2, 2020 / Rules
and Regulations
[[Page 12398]]
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FEDERAL RESERVE SYSTEM
12 CFR Parts 225 and 238
[Regulations Y and LL; Docket No. R-1662]
RIN 7100-AF 49
Control and Divestiture Proceedings
AGENCY: Board of Governors of the Federal Reserve System (Board).
ACTION: Final rule.
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SUMMARY: The Board is adopting a final rule to revise the Board's
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 final rule expands the number of presumptions for use in such
determinations. By codifying the presumptions in the Board's Regulation
Y and Regulation LL, the Board's rules will provide substantial
additional transparency on the types of relationships that the Board
generally views as supporting a determination that one company controls
another company. The final rule is largely consistent with the proposal
and includes certain targeted adjustments to the Board's historical
practice, as described in detail in the SUPPLEMENTARY INFORMATION.
DATES: The final rule is effective on April 1, 2020.
FOR FURTHER INFORMATION CONTACT: Laurie Schaffer, Deputy General
Counsel, (202) 452-2272, Alison Thro, Deputy Associate General Counsel,
(202) 452-3236, Mark Buresh, Senior Counsel, (202) 452-5270, Greg
Frischmann, Senior Counsel, (202) 452-2803, or Brian Phillips, Senior
Attorney, (202) 452-3321, Legal Division; Melissa Clark, Lead Financial
Institution Policy Analyst, (202) 452-2277, or Sheryl Hudson, Lead
Financial Institution Policy Analyst, (202) 912-7839, Division of
Supervision and Regulation, Board of Governors of the Federal Reserve
System, 20th Street and Constitution Avenue NW, Washington, DC 20551.
For users of Telecommunication Device for Deaf (TDD) only, call (202)
263-4869.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background and Summary of the Proposal
A. Description of ``Control'' Under the Bank Holding Company Act
B. Summary of the Board's Historical Interpretation of
``Control'' Under the Bank Holding Company Act
C. Summary of the Proposal
D. Summary of Comments Received on the Proposal
II. Final Rule--Presumptions of Control and Noncontrol
A. Control Hearings and the Role of Presumptions of Control and
Noncontrol
B. Description of the Tiered Presumptions
C. Description of Additional Presumptions and Exclusions
III. Final Rule--Control-Related Definitions
A. First Company and Second Company
B. Voting Securities and Nonvoting Securities
C. Control of Securities
D. Calculation of Total Equity Percentage
E. Limiting Contractual Rights
F. Director Representatives
G. Investment Advisers
IV. Application to Savings and Loan Holding Companies
A. Control Under HOLA Compared to the BHC Act
B. Revisions to Regulation LL
V. Additional Implementation Matters
VI. Administrative Law Matters
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Plain Language
I. Background and Summary of the Proposal
In May 2019, the Board issued a proposal seeking comment on
revisions to its rules regarding the definition of control in the Bank
Holding Company Act (``BHC Act''),\1\ and the Home Owners' Loan Act
(``HOLA'').\2\ The proposal was published in the Federal Register on
May 14, 2019, and the period for public comment ended on July 15,
2019.\3\ The proposal was intended to provide bank holding companies,
savings and loan holding companies, depository institutions, investors,
and the public with a better understanding of the facts and
circumstances that the Board considers most relevant when assessing
control and thereby increase transparency around the Board's views on
control under the BHC Act and HOLA.
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\1\ 12 U.S.C. 1841 et seq.
\2\ 12 U.S.C. 1461 et seq.
\3\ 84 FR 21634 (May 14, 2019).
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Under the BHC Act, control is defined by a three-pronged test: A
company has control over another company if the first company (i)
directly or indirectly or acting through one or more other persons
owns, controls, or has power to vote 25 percent or more of any class of
voting securities of the other company; (ii) controls in any manner the
election of a majority of the directors or trustees of the other
company; or (iii) directly or indirectly exercises a controlling
influence over the management or policies of the other company.\4\ HOLA
includes a substantially similar definition of control.\5\ While the
first two prongs of the definition of control are easily understood
bright-line standards, the third prong of the definition of control
requires a facts and circumstances determination by the Board. As a
result, it is often difficult for an investor that does not meet either
of the first two prongs of the definition of control to determine
whether it will be considered controlling or noncontrolling by the
Board under the third prong.
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\4\ 12 U.S.C. 1841(a)(2); 12 CFR 225.2(e).
\5\ See 12 U.S.C. 1467a(a)(2); 12 CFR 238.2(e).
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In practice, large minority investors often seek to protect or
enhance their investments through multiple forms of engagement with the
target company that provide the investor with an opportunity to monitor
and influence the target company. This situation in particular
frequently has raised questions regarding whether the investor will be
able to exercise a controlling influence over the management or
policies of the target company when the investment and all other
aspects of the relationship are considered in the aggregate. These
issues arise for both companies seeking to invest in banking
organizations and banking organizations seeking to make investments in
other companies.
Under the statutory framework, the determination of whether a
company has the ability to exercise a controlling influence over
another company is a factual determination. The Board's experience has
shown that the variety of equity investments, negotiated investment
terms, and business and other arrangements between companies makes it
difficult to prescribe a set of rigid rules that determine whether one
company exercises a controlling influence over another company in all
situations. As a result, Board determinations regarding the presence or
absence of a controlling influence have taken into account the specific
facts and circumstances of each case.\6\ Nonetheless, the Board has
developed over time a number of factors and thresholds that the Board
believes generally are indicative of the ability or inability of a
company to exercise a controlling influence over another company.
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\6\ See 12 CFR 225.143; Policy Statement on equity investments
in banks and bank holding companies (September 22, 2008),
www.federalreserve.gov/newsevents/press/bcreg/20080922c.htm.
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The Board believes that the final rule, which is largely consistent
with the proposal, will increase the transparency and consistency of
the Board's control framework. As a result, the final rule should help
to facilitate permissible investments in banking organizations and by
banking organizations.
[[Page 12399]]
The final rule includes certain targeted adjustments relative to
historical practice that the Board believes are appropriate based on
its experience over the past few decades. The specific provisions of
the final rule, including the targeted adjustments, are described in
detail in this preamble.
A. Description of ``Control'' Under the Bank Holding Company Act
Control is a foundational concept under the BHC Act and related
statutes.\7\ Most notably, control is used to determine the scope of
application of the BHC Act because a company is defined to be a bank
holding company if the company directly or indirectly controls a bank
or bank holding company.\8\ Accordingly, a company that controls a bank
or bank holding company is subject to the Board's regulations and
supervisory oversight, which includes examinations,\9\ regular
financial reporting,\10\ capital and liquidity requirements,\11\ source
of strength obligations,\12\ activities restrictions,\13\ and
restrictions on affiliate transactions.\14\
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\7\ The following discussion is limited to the BHC Act because
much of the Board's experience with control has arisen in the
context of the BHC Act, rather than HOLA. The final rule generally
applies the same standards in the context of the BHC Act and HOLA,
though the final rule is different in each context where appropriate
to recognize the limited differences between the BHC Act and HOLA
with respect to the definition of control.
\8\ 12 U.S.C. 1841(a)(1).
\9\ 12 U.S.C. 1844(c); 12 CFR 225.5(c).
\10\ 12 U.S.C. 1844(c); 12 CFR 225.5(b).
\11\ See, e.g., 12 CFR part 217; 12 CFR 225 app. C; 12 CFR part
249.
\12\ 12 U.S.C. 1831o-1.
\13\ 12 U.S.C. 1843; 12 CFR 225 subpart C.
\14\ 12 U.S.C. 371c and 371c-1; 12 CFR part 223.
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In assessing control, the Board historically has focused on two key
purposes of the BHC Act to guide its understanding of the meaning of
control and controlling influence. First, the BHC Act was intended to
ensure that companies that acquire control of banks have the financial
strength and managerial ability to exercise control in a safe and sound
manner. Second, the BHC Act was intended to separate banking from
commerce by preventing companies with commercial interests from
exercising control over banking organizations and by restricting the
nonbanking activities of banking organizations.\15\
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\15\ Bank Holding Company Act Amendments: Hearing on H.R. 6778
Before H. Comm. on Banking & Currency, 91st Cong. 85 (1969).
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Congress enacted the BHC Act in 1956. In the original BHC Act,
Congress defined ``bank holding company'' to mean any company that (1)
``directly or indirectly owns, controls, or holds with power to vote,
25 per centum or more of the voting shares of each of two or more banks
or of a company which is or becomes a bank holding company by virtue of
this Act, or (2) which controls in any manner the election of a
majority of the directors of each of two or more banks.'' \16\
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\16\ Bank Holding Company Act of 1956, Public law 84-511, 70
Stat. 133 (May 9, 1956). The original BHC Act also defined ``bank
holding company'' to include a company that holds 25 percent or more
of the voting securities of two or more banks or bank holding
companies, if such securities are held by trustees for the benefit
of the shareholders or members of the company. This prong of control
was repealed in 1966. See An Act to Amend the Bank Holding Company
Act of 1956, Public Law 89-485, 80 Stat. 236 (July 1, 1966).
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In 1970, Congress made significant amendments to the BHC Act,
including revisions to the definition of control. Specifically,
Congress added to the existing two prongs of the definition of control
a new third prong. This third prong provided that a company has control
over a bank or other company if the ``Board determines after notice and
opportunity for hearing, that the company directly or indirectly
exercises a controlling influence over the management or policies of
the bank or company.'' \17\ Congress added the controlling influence
prong to address concerns that a company could structure an investment
in a bank below the two bright-line thresholds of control while still
having the ``power directly or indirectly to direct or cause the
direction of the management or policies of any bank.'' \18\
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\17\ An Act to Amend the Bank Holding Company Act of 1956,
Public Law 91-607, 84 Stat. 1760, 1761 (December 31, 1970). HOLA,
originally enacted in 1933, contains substantially similar language
for its definition of control. As a corollary to the third prong in
the BHC Act, HOLA's definition of control of a savings association
or other company includes ``if the Board determines after reasonable
notice and opportunity for hearing, that such person directly or
indirectly exercises a controlling influence over the management or
policies of such association or other company.'' 12 U.S.C.
1467a(a)(2)(D).
\18\ Bank Holding Company Act Amendments: Hearing on H.R. 6778
Before H. Comm. on Banking & Currency, 91st Cong. 87 (1969).
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B. Summary of the Board's Historical Interpretation of ``Control''
Under the Bank Holding Company Act
Since the 1970 amendments to the BHC Act, the Board has had
numerous occasions to interpret and apply the controlling influence
prong of the BHC Act. The Board historically has interpreted
controlling influence not to require that an investor is able to
exercise complete domination or absolute control over all aspects of
the management and policies of a company. Instead, the Board has found
that a controlling influence is possible at lower levels of influence,
including where a company is not able to determine the outcome of a
significant matter under consideration.\19\ In other words, control
requires only ``the mere potential for manipulation of a bank.'' \20\
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\19\ Patagonia Corp., 63 Federal Reserve Bulletin 288 (1977)
(citing Detroit Edison Co. v. SEC, 119 F.2d 738, 739 (6th Cir. 1941)
(interpreting ``controlling influence'' in the Public Utility
Holding Company Act, which has a nearly identical definition of
control as in the BHC Act, to not ``necessarily [require] those
exercising a controlling influence [to] be able to carry their
point.'' Rather a controlling influence can be effective ``without
accomplishing the purpose fully'')).
\20\ Interamericas Investments, Ltd. v. Bd. of Governors of the
Fed. Reserve Sys., 111 F.3d 376, 383 (5th Cir. 1997).
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In assessing the controlling influence prong, the Board has
considered a number of factors, including the size of a company's
voting and total equity investment in the other company; the presence
of countervailing shareholders of the other company; a company's
representation on the board of directors or board committees of the
other company; covenants or other agreements that allow a company to
influence or restrict the management decisions of the other company;
and the nature and scope of the business relationships between the
companies.\21\ The Board's regulations include procedures for
determining controlling influence, as well as certain standards for
identifying controlling influence. The Board also has issued guidance
documents related to control on several occasions. For example, the
Board issued a limited set of regulatory presumptions of control for
use in control proceedings in 1971 and updated these presumptions in
1984.\22\ In addition, the Board issued policy statements regarding the
controlling influence prong of the BHC Act in 1982 and 2008.\23\
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\21\ A relationship between two companies may raise supervisory
or other concerns whether or not the relationship raises controlling
influence concerns.
\22\ 36 FR 18945 (Sept. 24, 1971); 49 FR 794, 817, 828-29 (Jan.
5, 1984).
\23\ See 68 Federal Reserve Bulletin 413 (July 1982) (codified
at 12 CFR 225.143); Policy Statement on equity investments in banks
and bank holding companies (September 22, 2008). The Board has
issued two additional policy statements that are also relevant to
the meaning of control and controlling influence: ``Statement of
policy concerning divestitures by bank holding companies'' (12 CFR
225.138) and ``Presumption of continued control under section
2(g)(3) of the Bank Holding Company Act'' (12 CFR 225.139). These
policy statements remain in effect to the extent not superseded by
the final rule.
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C. Summary of the Proposal
The proposal established tiered presumptions of control in the
Board's regulations. The proposal also provided several additional
presumptions of control and noncontrol, along with
[[Page 12400]]
various ancillary provisions such as definitions of terms used in the
proposed presumptions.
As noted, the BHC Act and HOLA provide that control due to
controlling influence arises once the Board determines, based on the
facts presented and after notice and opportunity for a hearing, that a
company controls another company. The proposal established presumptions
intended to assist the Board in conducting such a hearing or other
proceeding and to provide additional information to the public
regarding the circumstances in which the Board believes that
controlling influence is likely to exist.\24\
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\24\ Under the final rule, the Board retains the ability to find
a controlling influence based on the facts and circumstances
presented by a particular case. However, the Board generally does
not expect to find that a company controls another company unless
the first company triggers a regulatory presumption of control with
respect to the second company.
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The proposal--like this final rule--related solely to the issue of
whether an investment, alone or in combination with other
relationships, raises control concerns. The Board may have safety and
soundness or other concerns arising out of either controlling or
noncontrolling relationships of a banking organization. Thus, that an
investment is not presumed to be controlling does not mean that the
investment and all other aspects of a relationship are necessarily
consistent with safe and sound banking practices or other expectations
or requirements of the Board.\25\ The Board retains the right to review
investments involving banking organizations under its jurisdiction for
potential safety and soundness or other concerns.
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\25\ For example, contractual covenants and business
relationships between a banking organization and a company may raise
safety and soundness or other concerns whether or not the
relationship raises control concerns. In particular, a contractual
provision may not allow a company to restrict substantially the
discretion of a banking organization, but may impose financial
obligations on the banking organization that are inconsistent with
safe and sound operation of the banking organization.
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D. Summary of Comments Received on the Proposal
General Comments
Many commenters were supportive of the Board's overall efforts to
bring increased transparency, clarity, and consistency to the Board's
views regarding controlling influence. Some commenters noted that the
additional clarity provided by the proposal would improve the speed
with which banking institutions can raise capital.
Certain commenters argued that the Board's presumptions of control
presumed control at levels too low to be supported by the underlying
statutes.\26\ Several of these commenters contended that Congress
intended the controlling influence prong of the BHC Act to cover only
situations with higher levels of influence than the Board has
traditionally considered controlling, which some commenters referred to
as situations of ``actual control.'' Many commenters who supported
higher thresholds for the presumptions of control argued that unduly
low thresholds would inhibit investments into and by banking
organizations and, in particular, would inhibit investments by banking
organizations into start-up technology companies. These commenters
generally argued that there was no public benefit to limiting such
investments and that there could be a negative impact on the economy.
At least one commenter also suggested that a higher threshold for
control would be appropriate in order to mitigate the extraterritorial
application of the BHC Act on the foreign operations of foreign firms.
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\26\ Specific suggestions from commenters are described in the
appropriate sections of this preamble on specific presumptions.
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In support of a higher threshold for control, several commenters
suggested that the Board look to its treatment of merchant banking
investments, as well as the definition of banking entity under the
Volcker Rule. These commenters argued that the Board had established
looser definitions of control in these areas that should be applied to
control more generally. Other commenters argued that the Board should
separate control in general under the BHC Act from the definition of
banking entity under the Volcker Rule. In addition, certain commenters
provided suggestions for revising the Board's rules related to merchant
banking to separate merchant banking from questions of control.
A few commenters objected to the proposal on the basis that the
Board's current standards and processes around controlling influence
have functioned well. Such commenters asserted that the proposal may
have various negative effects by weakening the existing framework.
Several commenters objected to the elements of the proposal that they
viewed as raising the threshold for control for several reasons,
including concern that the proposal could lead to greater concentration
in the banking industry or to greater concentration in the shareholder
base of the banking industry. At least one commenter expressed concern
that the proposal might allow companies to have greater influence over
banking organizations without being subject to the bank regulatory
framework and noted that retaining discretion to review each case on
the facts and circumstances presented was necessary to address the wide
variety of potential relationships among companies. At least one
commenter stated that the Board should consider the economic and
competitive impact of these types of increased consolidation and should
update its analysis of competitive issues more generally. At least one
commenter also stated that the Board should carefully consider the
impact of the control proposal on smaller banking organizations and the
ability of banking organizations to sponsor and advise investment
funds.
The Board believes that the proposal reflected an appropriate
interpretation of the controlling influence prong of the BHC Act and
generally conformed to historical Board practice implementing and
interpreting the statute. The Board's historical practice is consistent
with the underlying statutes, the legislative history, and relevant
case law. The Board has made several changes in the final rule compared
to the proposal, as described in more detail in the applicable sections
of this preamble, but the Board is issuing the final rule in a form
substantially consistent with the proposal. As indicated in the
proposal, the final rule contains certain targeted adjustments from
current practice in light of the Board's experience administering the
statute. These changes are generally technical in nature rather than
fundamental changes to the Board's substantive standards for
controlling influence. As the final rule is generally consistent with
current practice, significant changes in outcomes are not anticipated
and, therefore, no major impact on the banking industry is expected.
Importantly, the final rule significantly improves the transparency and
predictability around questions of controlling influence.
Some commenters expressed concern that certain of the presumptions
could have extraterritorial reach by attributing control over companies
outside the United States, especially by foreign banking organization.
Commenters recommended that the Board clarify that lawful home country
activities and relationships currently in existence should not be upset
by the proposal. A few commenters argued for different control
standards for qualifying foreign banking organizations, or for foreign
companies more generally. At least one commenter argued that the
Board's rules should take foreign control standards
[[Page 12401]]
into account when considering relationships involving foreign entities
or that the Board should revise its control standards to not apply to
relationships that are wholly outside the United States.
The statutory framework for control does not contemplate different
definitions of control for companies in different jurisdictions. For
this reason, neither the proposal nor the Board's historical practice
contains such distinctions. The final rule is consistent with the
proposal in this regard. As noted, the final rule is generally
consistent with the Board's current practice and, as a result, the
final rule is not expected to result in substantially different
outcomes for questions of controlling influence involving foreign
companies.
Comments on Scope of Application
Some commenters suggested that the final rule should make it clear
that an investment that does not trigger a presumption of control and
is less than 5 percent of any class of voting securities should be
considered passive for purposes of section 4(c)(6) of the BHC Act. The
final rule is intended to apply to questions of control under the BHC
Act and HOLA. As a result, the control framework in the final rule
applies for purposes of section 4(c)(6) and, in particular, the Board's
interpretation of section 4(c)(6) located in section 225.137 of the
Board's Regulation Y.\27\
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\27\ 12 CFR 225.137.
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Comments on Interaction With Other Regulations
Several commenters suggested that the Board apply the proposed
control standards to control under the Change in Bank Control Act
(``CIBCA'').\28\ Several commenters also recommended that the Board
apply the proposed control standards to the Board's Regulation O and
Regulation W.\29\ Commenters suggested that applying the control
standards in the proposal to these other contexts would improve the
simplicity and efficiency of the Board's regulations by establishing a
uniform, trans-regulatory concept of control. Some commenters noted
that, in certain cases, this could result in a more permissive control
standard than currently applies under CIBCA, Regulation O, and
Regulation W.
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\28\ 12 U.S.C. 1817(j).
\29\ 12 CFR part 215; 12 CFR part 223.
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A few commenters also argued that the threshold for filing a notice
under CIBCA was too low and that the Board should streamline the CIBCA
notice process--in coordination with the FDIC and OCC--to reduce the
burden of CIBCA filings. These commenters asserted that the existing
CIBCA regulations restricted investment into banking organizations and
therefore recommended that the Board revise its regulations to reduce
the number of filings and the information required in a filing.
Specific recommendations for reduced burden included creating a process
for investors to rebut the 10 percent presumption of control under the
CIBCA regulations, reducing the required content of a CIBCA notice, and
increasing reliance on public information such as public filings with
the Securities and Exchange Commission (``SEC''). At least one
commenter stated that the Board should reduce the scope of CIBCA filing
requirements to remove or limit, for example, CIBCA filing requirements
for investments in predominantly non-financial grandfathered savings
and loan holding companies.
Other commenters argued against applying the proposed control
framework to contexts other than control under the BHC Act and HOLA.
These commenters noted that the control concept under the BHC Act and
HOLA serves a different purpose than under CIBCA, Regulation O, and
Regulation W. For example, control under CIBCA requires filing a one-
time notice, while control under the BHC Act results in a permanent
regulatory status that comes with activity restrictions, prudential
regulation, approval requirements for major transactions, periodic
examinations, and reporting requirements. Some commenters also
encouraged the Board to provide additional clarity about the operation
of the presumptions of control under the regulations implementing
CIBCA.
The final rule applies to questions of control under the BHC Act
and HOLA; it does not extend to CIBCA, Regulation O, and Regulation W.
The Board may in the future consider conforming revisions to other
elements of its regulatory framework, including CIBCA, Regulation O,
and Regulation W. While common control standards across the Board's
regulatory framework may provide efficiency benefits, each of the
regulations identified by commenters arises out of different provisions
of law and is intended to address different concerns in specific
contexts.
Some commenters suggested that the Board provide additional
guidance for investments in non-corporate entities, such as
partnerships and limited liability companies. In certain sections, the
proposal provided for the special characteristics of non-corporate
entities. The final rule retains these provisions but does not contain
further information regarding the treatment of non-corporate entities
because of the wide variety of forms such entities can take. The Board
generally expects to apply equivalent control standards to all types of
legal entities while taking into account the unique features of
different entity types.
II. Final Rule--Presumptions of Control and Noncontrol
A. Control Hearings and the Role of Presumptions of Control and
Noncontrol
The BHC Act provides that control due to controlling influence
arises following a Board determination that a company controls another
company. The presumptions of control in the final rule are intended to
assist the Board in the context of such a determination and to provide
additional public information regarding the Board's views on
controlling influence.
Under the final rule, the Board, in its discretion, may issue a
preliminary determination of control if it appears that a company has
the power to exercise a controlling influence over a bank or other
company. A company that receives a preliminary determination of control
must respond within 30 days with (i) a plan to terminate the control
relationship; (ii) an application for the Board's approval of the
control relationship; or (iii) a response contesting the preliminary
determination, setting forth supporting facts and circumstances, and,
if desired, requesting a hearing or other proceeding. If a company
contests a preliminary determination of control and requests a hearing
or other proceeding, then the Board shall order a hearing or other
appropriate proceeding if material facts are in dispute. The
presumptions in the final rule would apply at such a hearing or other
proceeding in accordance with the Federal Rules of Evidence and the
Board's Rules of Practice for Formal Hearings. After considering all
relevant facts and circumstances, including information gathered during
any hearing or other proceeding, the Board would issue a final order
stating its determination on controlling influence. Under the final
rule, as under the proposal, the procedures differ from the existing
procedures in the Board's regulations in only two modest ways. First,
the final rule clarifies that failure to respond to a preliminary
determination of control from the Board would constitute waiver of the
right to present additional information to the Board and waiver of the
opportunity to
[[Page 12402]]
request a hearing or other proceeding. Second, the final rule contains
an express requirement to submit additional information in writing in
response to a preliminary determination of control.
Some commenters recommended that the Board grant additional time to
respond to preliminary determinations of control. The final rule
maintains the existing 30-day timeframe because 30 days should
generally be sufficient time to respond to a preliminary determination
of control. Thirty days is consistent with, or, in some cases, longer
than, the procedural timeframes provided by the Board for similar
administrative processes.\30\ In addition, the final rule provides that
the Board may allow for additional time in its discretion, so firms
that need additional time may request additional time. The procedures
for control proceedings in the final rule are consistent with the
proposal.
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\30\ See, e.g., 12 CFR part 263.
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B. Description of the Tiered Presumptions
As discussed, a core consideration for control established by
Congress in the BHC Act is the percentage of voting securities that one
company controls of a second company. Under the statute, a company that
controls 25 percent or more of any class of voting securities of a
second company controls the second company.\31\ Similarly, under the
statute, a company that controls less than 5 percent of any class of
voting securities of a company is presumed not to control the second
company.\32\ This statutory framework leaves a space between 5 percent
and 25 percent of a class of voting securities where a company does not
have clear statutory control and is not presumed not to control. For
companies within this range of voting securities of 5 percent to less
than 25 percent voting, the Board considers the full facts and
circumstances of the relationship between the two companies when
determining whether the first company controls the second company,
consistent with the controlling influence prong of the BHC Act.\33\
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\31\ 12 U.S.C. 1841(a)(2)(A).
\32\ 12 U.S.C. 1841(a)(3).
\33\ 12 U.S.C. 1841(a)(2)(C).
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The framework established by Congress implies that a company with a
level of voting securities at the higher end of the range--closer to 25
percent--is more likely to control the second company, while a company
at the lower end of the range--closer to 5 percent--is less likely to
control the second company. The Board's experience supports these
implications. As a result, where a company's voting securities
percentage falls within this range is one of the most salient
considerations for determining whether the first company controls the
second company.
The final rule, like the proposed rule, establishes a series of
tiered presumptions of control. These presumptions are arranged in
tiers based on the level of voting securities of the first company in
the second company. Each of these presumptions applies where the first
company has at least a specified level of voting securities in a second
company, and another specified relationship with the second company.
The presumptions use three thresholds for voting securities: 5 percent,
10 percent, and 15 percent.
Consistent with the proposal, many of the other control factors
referenced in the final rule also vary in magnitude. For instance,
business relationships between two companies can range from minimal to
very significant, and more significant business relationships provide a
greater means of exercising (and a greater incentive to exercise) a
controlling influence than less significant business relationships. In
recognition of this, the presumptions in the final rule effectively
assume that higher levels of business relationships, combined with
higher levels of voting securities, increase the likelihood of the
ability to exercise a controlling influence.
Director Representation
The Board has long considered a company's level of representation
on the board of directors of a second company as an important factor
for controlling influence. The importance of director representation to
controlling influence is supported by the second prong of the
definition of control in the BHC Act, which provides that control over
the election of a majority of the board of directors of a company
constitutes control of the company. Traditionally, the board of
directors of a company is the body that makes strategic decisions and
establishes major policies for the company. One of the most important
issues that holders of voting securities can vote on is the selection
of the members of the board of directors of a company.
For a company that controls 5 percent or more of any class of
voting securities of a second company, the proposal presumed control if
the first company controlled a quarter or more of the board of
directors of the second company. This presumption reflected the view
that the combination of a material level of voting power combined with
control over a quarter or more of the board of directors is generally
enough to constitute a controlling influence. This element of the
proposal reflected a modest liberalization of practice. Under the
Board's precedents, a noncontrolling company that controlled more than
10 percent of a class of voting securities of another company often was
limited to one or two director representatives at the second company
(regardless of the size of the board of directors at the second
company).\34\
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\34\ Policy Statement on equity investments in banks and bank
holding companies (September 22, 2008).
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In addition, the proposal presumed that a company that controls 5
percent or more of any class of voting securities of a second company
controls the second company if the first company has director
representatives that are able to make or block the making of major
operational or policy decisions of the second company. This presumption
was intended to address supermajority voting requirements, individual
veto rights, or any similar unusual provision that would allow a
minority of the board of directors of the second company to control
effectively major operational or policy decisions of the second
company.
Commenters generally supported the proposal to allow a company to
have up to a quarter of the representatives on the board of directors
of another company without triggering a presumption of control.
Commenters generally also confirmed that they preferred the proposal to
a standard where companies with higher levels of voting securities must
have reduced levels of director representation to avoid triggering a
presumption of control. The final rule is consistent with the proposal
with respect to the total share of director representatives that a
company may have on the board of directors of another company before
triggering a presumption of control.
In addition to the share of director representatives that one
company has on the board of directors of a second company, the proposed
presumptions considered particular director representatives to have
outsized ability to affect the decisions of the second company. For
instance, the chair of the board of directors of a company is generally
recognized as a leader of the company and its board of directors, and
the chair may have additional powers, such as the ability to set the
agenda for meetings of the board of directors. Similarly, certain
committees of the board of directors may have the power to take actions
that bind the company without the need for approval by the
[[Page 12403]]
full board of directors. In these circumstances, such a committee is
nearly equivalent to the full board of directors with respect to those
decisions that it is empowered to make unilaterally.
To recognize the enhanced power wielded by directors in the
positions described in the paragraph above, the proposal included a
presumption of control if a company controls 15 percent or more of any
class of voting securities of a second company and if any director
representative of the first company also serves as the chair of the
board of directors of the second company. In addition, the proposal
included a presumption of control if a company controls 10 percent or
more of any class of voting securities of a second company and the
director representatives of the first company occupy more than a
quarter of the positions on any board committee of the second company
that has the power to bind the company without the need for additional
action by the full board of directors.
With respect to the presumption of control for a director
representative serving as chair of the board, commenters suggested that
different standards should apply depending on whether the company was
publically traded, on the basis that public companies are subject to
heightened governance standards compared to private companies.
Commenters also suggested that the Board take the presence of
independent directors into account because independent directors could
limit the influence of the chair of the board.
With respect to the presumption of control for director
representatives serving on certain committees, commenters generally
supported the distinction drawn in the proposal between committees with
power to act independently and committees with only advisory powers.
Some commenters suggested that the presumption of control should apply
only if the director representatives occupied 50 percent or more of an
independent committee. At least one commenter suggested clearly
excluding advisory committees from the committee presumption.
The final rule is consistent with the proposal with respect to the
presumptions of control for director representatives serving as chair
of the board or serving on certain committees. Distinguishing between
public and private companies, or between companies that have a high
versus low proportion of independent directors, would add substantial
complexity to the framework. In addition, incorporating such
distinctions may increase uncertainty with respect to control because
the proportion of independent directors or the public status of a
company may change without action by an investor. Moreover, as noted
above, the presumption of control related to director representatives
occupying more than 25 percent of a committee that has the power to
take action to bind the company is premised on the concern that such a
committee is nearly equivalent to the full board of directors with
respect to those items that the committee can act on unilaterally. As a
result, the final rule retains the 25 percent committee standard
contained in the proposal to correspond to the 25 percent entire-board
standard for director representatives. With respect to the questions on
advisory committees, the standard under the final rule is whether a
committee has the ability to take action that binds the company or its
subsidiaries. If an advisory committee does not have that ability, it
is not a committee covered by the presumption.
The proposal also included a presumption regarding the solicitation
of proxies for the election of directors, consistent with Board
precedent. Under the proposal, the Board would have presumed control if
a company that controls 10 percent or more of any class of voting
securities of a second company solicits proxies to appoint a number of
directors that equals or exceeds a quarter of the total directors on
the board of directors of the second company. This 25 percent standard
aligned the presumption for proxy solicitations to elect directors with
the proposed presumption for having director representatives.
The Board did not receive comments specifically on the presumption
of control related to the solicitation of proxies to elect directors.
The final rule is consistent with the proposal with respect to this
presumption of control, though the final rule has been revised slightly
to describe the standard more clearly.
Business Relationships
The Board has long believed that a company's business relationships
with another company provide a mechanism through which the first
company could exercise a controlling influence over the second company.
For example, a business relationship between an investor and another
company that accounts for a substantial portion of the revenues or
expenses of the investor may create a financial incentive for the
investor to attempt to influence the second company. Similarly, a
business relationship between an investor and another company that
accounts for a substantial portion of the revenues or expenses of the
second company may create a powerful lever of influence for the
investor over the second company.
Under the proposal, the Board presumed control in the following
circumstances:
i. If a company controls 5 percent or more of any class of voting
securities of a second company and has business relationships with the
second company that generate in the aggregate 10 percent or more of the
total annual revenues or expenses of the first company or the second
company;
ii. If a company controls 10 percent or more of any class of voting
securities of a second company and has business relationships with the
second company that generate in the aggregate 5 percent or more of the
total annual revenues or expenses of the first company or the second
company; or
iii. If a company controls 15 percent or more of any class of
voting securities of a second company and has business relationships
with the second company that generate in the aggregate 2 percent or
more of the total annual revenues or expenses of the first company or
the second company.
In addition, the Board has long believed that if a company is able
to enter into a business relationship with a second company on terms
that are not market terms, it is likely that the first company has a
significant level of influence over the second company. Thus, under the
proposal, the Board presumed control if a company controls 10 percent
or more of any class of voting securities of a second company and has
business relationships with the second company that are not on market
terms.
Many commenters suggested that the Board's proposed presumptions
related to business relationships used revenue and expense thresholds
that were too low. These commenters suggested that, as a consequence,
the presumptions would capture business relationships that generally
would be too small to provide a controlling influence and that the rule
could therefore unnecessarily inhibit beneficial business
relationships. Similarly, some commenters argued that the business
relationship presumptions had the effect of conflating influence over a
business relationship with influence over the management and policies
of a company. A few commenters suggested that the thresholds
established in the proposal for business relationships would create
particular issues for banking organizations seeking to make minority
investments in smaller companies, such
[[Page 12404]]
as recently formed financial technology firms.
Various commenters recommended different thresholds for the control
presumptions based on business relationships. For example, some
commenters recommended that the Board revise the business relationship
presumptions such that an investor with less than 15 percent of any
class of voting securities in a second company would not be presumed to
have control regardless of the size of business relationships between
the companies. Similarly, a few commenters recommended that the
business relationship thresholds for a presumption of control be raised
substantially at different levels of voting securities. For example, at
least one commenter stated that the presumptions of control should be
set at 50 percent of revenues and expenses for an investor with between
5 and 10 percent of voting securities, at 33 percent of revenues and
expenses for an investor between 10 and 15 percent of voting
securities, and at 25 percent of revenues and expenses for an investor
between 15 and 25 percent of voting securities. Some commenters also
suggested applying higher thresholds in certain circumstances, such as
if there were a larger shareholder or a party with a larger business
relationship.
A few commenters suggested that the Board abandon quantitative
metrics for business relationships and instead presume control only if
a company threatens to terminate or alter business relationships with
another company for the purpose of exercising a controlling influence
over the second company's management or policies.
As noted, the Board historically has viewed business relationships
as an important mechanism through which one company can exercise
control over the management or policies of another company. The Board's
longstanding view has required business relationships to be
quantitatively limited and qualitatively immaterial to avoid raising
control concerns. Consistent with this principle, the proposal provided
several presumptions based on voting securities and business
relationships. The Board views the thresholds at which the proposed
business relationship presumptions of control were set to be reasonable
and generally consistent with its past practice. The final rule,
therefore, retains the threshold levels that were included in the
proposal. Further, the final rule includes the presumption related to
business relationships that are not on market terms without change from
the proposal, for the reasons described above.
Some commenters argued that the Board should modify the business
relationships thresholds to focus only on the revenues (not expenses)
of the two companies. These commenters contended that a business
relationship that is a substantial expense to one party generally does
not provide that party with any additional ability to exercise control
over the counterparty. While commenters acknowledged uncommon
exceptions to this general standard--such as a relationship that cannot
be easily replaced--commenters asked that the rule not consider
expenses or only consider expenses under circumstances likely to be
relevant to control. A number of commenters further argued that the
presumptions should only take into account the scale of business
relationships from the perspective of the second company and not the
first company. Specifically, these commenters contended that the fact
that a relationship was significant to a first company did not mean
that it was significant to a second company and only relationships that
were significant from the perspective of the second company would
provide the first company with an ability to exert influence over the
second company.
In response to these comments, the final rule differs from the
proposal in that the final presumptions of control related to business
relationships only include thresholds based on the revenues and
expenses of the second company. As commenters noted, the significance
of business relationships from the perspective of a first company is
not necessarily indicative of the first company's ability to control a
second company, even though it may provide an incentive for the first
company to attempt to exercise control over the second company. A
business relationship that is significant to a second company as a
source of revenue or expense, however, may be leveraged by the first
company to exercise influence over the second company.\35\
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\35\ Though the final rule is expected to cover most controlling
influence concerns arising out of business relationships, the Board
may raise controlling influence concerns under specific facts and
circumstances consistent with historical precedent, such as
relationships with special qualitative significance (for example,
relationships that are difficult to replace and are necessary for
core functions). In addition, the revised business relationship
presumptions of control do not in any way limit the ability of the
Board to take action to address business relationships that raise
safety and soundness or other concerns.
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As a result, under the final rule, a company would be presumed to
control another company when:
i. The first company controls 5 percent or more of any class of
voting securities of the second company and has business relationships
with the second company that generate in the aggregate 10 percent or
more of the total annual revenues or expenses of the second company;
ii. The first company controls 10 percent or more of any class of
voting securities of the second company and has business relationships
with the second company that generate in the aggregate 5 percent or
more of the total annual revenues or expenses of the second company; or
iii. The first company controls 15 percent or more of any class of
voting securities of the second company and has business relationships
with the second company that generate in the aggregate 2 percent or
more of the total annual revenues or expenses of the second company.
Some commenters sought clarification of concepts used in the
business relationship presumptions, such as total annual revenues and
total annual expenses, and encouraged the Board to rely on well-
understood and widely available definitions of these concepts.
Commenters suggested that the Board provide clear standards for
measurement and attribution of revenues and expenses, and that the
Board clarify what accounting standards could be relied upon for such
measurements. Some commenters argued for a longer period of time over
which to measure the companies' business relationships, such as two
years or three years. A number of commenters argued that the thresholds
for business relationships should only apply with respect to a company
and its consolidated subsidiaries and should not include business
relationships from unconsolidated subsidiaries.
A few commenters argued for an exception to the business
relationship presumptions for a company that could not calculate both
sides of the business relationship but had a good faith basis for
believing that the relationships were within the limits of the
presumptions. At least one commenter recommended that business
relationships be measured based only on the financial statements of a
company at the time of an investment in order to make it easier to
comply with the business relationship thresholds.
Consistent with the proposal, the business relationship
presumptions in the final rule include thresholds based on total
consolidated annual revenues and expenses. Revenues and expenses are
meant to be understood as these terms are commonly understood in the
context of U.S. generally accepted
[[Page 12405]]
accounting principles (``GAAP'').\36\ Principles of consolidation are
also meant to be applied as generally implemented in the context of
GAAP. Thus, the general expectation is that a company's consolidated
income statement for the preceding fiscal year should contain the
necessary information to determine revenues and expenses for purposes
of the presumptions. Further, the final rule maintains annual
measurement of revenues and expenses for purposes of the presumptions
as annual financials provide an existing and widely relied upon means
to understand the significance of business relationships.
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\36\ For purposes of the final rule, revenue is understood to
mean gross income, not income net of expenses. If a company does not
prepare financial statements according to GAAP, the Board expects to
rely on the non-GAAP financial statements of the company, while
taking differences in accounting standards into account as
appropriate.
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Many commenters sought specific exclusions from the business
relationship presumptions. At least one commenter recommended that the
final rule exclude certain types of business relationships, such as
arm's-length lending and deposit relationships, or non-exclusive
business relationships where alternative service providers are
available. Some commenters sought clarification regarding specific
contexts, such as whether management fees paid by limited partners to
general partners should be included as business relationships.
Similarly, commenters argued that readily marketable debt securities of
a company owned by another company should not be included in business
relationships if the terms were not negotiated by the two companies.
At least one commenter argued that the presumptions should not take
into account business relationships between an investment fund and any
company in which the fund makes an investment, to the extent such
relationships are at arm's length and non-exclusive. Some commenters
suggested that the business relationship presumption should take
account of the special circumstances of start-up companies by measuring
revenues over a longer period or not considering business relationships
during the first several years of a company's existence. Several
commenters argued that business relationships involving referrals
should not be included for revenue purposes because the amount of
referral fees can be volatile.
The final rule contains no specific exclusions from the
presumptions for particular types of business relationships. The final
rule establishes clear and generally applicable standards that rely on
well-understood accounting principles that aim to capture the economic
significance of business relationships between two companies. The
introduction of exclusions for particular types of relationships or
counterparties would add substantial complexity to the rule.
Some commenters argued that there should be a temporary transition
or grace period, during which business relationships could exceed
applicable thresholds without triggering a presumption of control. As
discussed, the business relationship presumptions in the final rule are
based on annual consolidated revenues and expenses. The use of annual
measurement allows for some, but not excessive, day-to-day volatility
in business relationships that should be sufficient for companies to
manage. As a result, the final rule includes no additional transition
or grace period.
In addition, consistent with the proposal, the final rule does not
include a presumption of control based on threats to alter or terminate
business relationships. Although such actions may be relevant to
determinations of control, adding such a presumption would increase the
complexity of the final rule.
Senior Management Interlocks
The officers of a company wield significant power over the company
because they implement the major policies set by the board of
directors, make all the ancillary policy decisions necessary for
implementation, and operate the company on a day-to-day basis. In
addition, officers often make influential recommendations to the board
of directors regarding major policy decisions. As a result of this
substantial degree of influence, the Board historically has viewed
situations where an agent of a significant investor company serves as a
management official of another company as providing a significant
avenue for the first company to exercise a controlling influence over
the second company.
The proposal included a presumption of control where a company that
controls 5 percent or more of any class of voting securities of a
second company has more than one senior management interlock with the
second company. In addition, the proposal included a presumption of
control where a company that controls 15 percent or more of any class
of voting securities of a second company has any senior management
interlock with the second company. In order to trigger either of these
presumptions, the individual must serve as an employee or director at
the first company and as a senior management official at the second
company. The proposal defined a senior management official of a company
as any person who participates or has the authority to participate
(other than in the capacity as a director) in major policymaking
functions of the company.
In addition, the proposal included a presumption of control where a
company that controls 5 percent or more of any class of voting
securities of a second company has an employee or director who serves
as the chief executive officer (or an equivalent role) of the second
company. The chief executive officer of a company is generally the most
powerful senior management official of the company.
Some commenters criticized the proposed presumption based on senior
management interlocks on the basis that the scope of individuals
treated as senior management officials was unclear. These commenters
generally encouraged the Board to limit the scope of covered senior
management officials to a clearly identifiable group, rather than using
the qualitative standard included in the proposal. A few commenters
also argued that larger companies should be permitted to have more
senior management interlocks.
The final rule includes the proposed presumptions of control for
senior management interlocks without revision. The Board has long
recognized the potential for senior management interlocks to be a
conduit by which one company can influence another company, and the
final rule is consistent with this understanding. Consistent with the
proposal, the presumptions related to senior management interlocks in
the final rule include targeted adjustments to historical practice to
refine the scope of relevant interlocks to focus on senior officers
and, in particular, the chief executive officer. The focus on senior
management officials leans against the types of interlocks most likely
to raise controlling influence concerns, but also permits an investor
to have multiple junior employee interlocks that would not increase the
investor's ability to influence operations and policies at the investee
company.
Also consistent with the proposal, the final rule defines ``senior
management official'' to be any person with authority to participate
(other than as a director) in major policy making functions of a
company. This definition is based on the function that a person serves
rather than a person's official title. The Board recognizes that this
definition is not
[[Page 12406]]
precise and will consider providing additional clarity around this
definition after acquiring more experience with the senior management
interlocks presumptions.
Contractual Limits on Major Operational or Policy Decisions
A company that controls a material amount of voting securities of a
second company also may have contractual arrangements with the second
company, such as investment agreements, debt relationships, service
agreements, or agreements related to other business relationships.
Often, these contractual rights do not raise controlling influence
concerns because the rights, for example, are limited in scope or
reinforce the protections provided to the investor under the law.
However, the Board has viewed many other contractual provisions as
raising controlling influence concerns when the agreement has the
effect of substantially enhancing one company's influence over the
discretion of another company.\37\
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\37\ Contractual covenants also may raise safety and soundness
concerns, such as a covenant that impairs the ability of a banking
organization to raise additional capital, or a covenant that imposes
substantial financial obligations on a banking organization. Safety
and soundness concerns may arise in the absence of, or in addition
to, controlling influence concerns.
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Contractual rights often raise controlling influence concerns when
they provide an investor with the ability to direct or block major
operational or policy decisions of another company, whether such
decisions are made by management or by the board of directors of the
other company. The ability of an investor effectively to veto an
important business decision of a company generally provides the
investor with the ability to exercise a significant influence over a
major operational or policy decision of the company.
The Board also has long recognized that contracts governing
business relationships, including many loan agreements, contain
restrictive covenants and that the existence of these covenants has not
been sufficient, in itself, to constitute a controlling influence.
Thus, the Board generally has not viewed restrictive covenants in the
context of loan transactions or commercial services to raise
controlling influence concerns. However, when a company has both
control over a material percentage of the voting securities of another
company and covenants that significantly restrict the discretion of the
second company, the covenants have raised controlling influence
concerns. These concerns have been raised whether the covenants arise
directly from the terms of the equity investment or from separate
agreements between the companies.
Under the proposal, a company generally was presumed to control a
second company if the first company (i) owns 5 percent or more of any
class of voting securities of the second company; and (ii) has any
contractual right that significantly restricts the discretion of the
second company over major operational or policy decisions.\38\ A
company with less than 5 percent of each class of voting securities of
a second company would not have triggered this presumption of control
even if the first company had covenants that significantly restricted
the discretion of the second company over major operational and policy
decisions. Thus, the proposal both recognized the potentially
significant influence that covenants can provide and recognized the
normal use of restrictive covenants in loan agreements and other
market-terms business relationships.
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\38\ The proposal provided an exclusion for limiting contractual
rights in the context of a pending merger that are designed to
ensure that the target company operates in the ordinary course while
the merger is pending. The final rule includes this exclusion
consistent with the proposal.
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The presumption of control under the proposal introduced a new
defined term, ``limiting contractual right,'' defined as a contractual
right that allows a company to restrict significantly the discretion of
a second company, including its senior management officials and
directors, over major operational or policy decisions. The proposal
also included a nonexclusive list of examples of contractual rights
that are generally considered to be limiting contractual rights, as
well as a nonexclusive list of examples of contractual rights that are
generally not considered to be limiting contractual rights.
Commenters argued that the Board should either raise the voting
securities threshold at which the presumption of control based on
limiting contractual rights would apply or remove the presumption
entirely. At least one commenter argued that the presumption related to
limiting contractual rights should not apply to an investor that
controls less than 10 percent of each class of voting securities. In
addition, commenters raised concerns with some of the specific rights
listed in the proposal as examples of limiting contractual rights.
These comments are discussed later in this preamble in the section
related to the definition of limiting contractual rights.
Consistent with the proposal, under the final rule, a company is
presumed to control another company if the first company controls 5
percent or more of any class of voting securities of the second company
and the first company has a limiting contractual right with respect to
the second company. As discussed, limiting contractual rights can allow
a company to exercise significant influence over another company, such
as by providing the first company with an effective veto over decisions
of the second company, overriding the discretion of the board of
directors of the second company or the choices of its shareholders.
However, limiting contractual rights are often important provisions in
commercial agreements, including many loan agreements, and the Board
has long recognized the importance of such contractual provisions in
the context of commercial relationships. Thus, consistent with the
proposal, under the final rule, a company must also control a material
percentage of the voting securities of another company--specifically,
at least 5 percent of any class of voting securities--in order to be
presumed to control the other company due to a limiting contractual
right. In other words, the final rule reflects that the Board's concern
with limiting contractual rights generally arises from the combination
of a limiting contractual right and control over a material share of
voting securities.\39\ This approach is intended to balance the normal
use of restrictive covenants in standard lending and other commercial
relationships, while also recognizing the power of limiting contractual
rights to enhance the influence of a company that is a material equity
investor in another company.
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\39\ This is different from management agreements, which raise
control concerns regardless of the share of voting securities
controlled.
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Total Equity
The Board has long subscribed to the view that the overall size of
an equity investment, including both voting and nonvoting equity, is an
important indicator of the degree of influence an investor may have. A
company is likely to pay heed to its large shareholders in order to
maintain stability in its capital base, enhance its ability to raise
additional equity capital in the future, and to prevent the negative
market signal that may be created by the sale of a large block of
equity by an unhappy shareholder. All of these concerns are present
independent of the ability of an investor to exercise the voting powers
of
[[Page 12407]]
equity to attempt to influence the investee company. Further, an
investor with a large equity investment also has a powerful incentive
to wield influence over the company in which it has invested due to the
investor's substantial economic interest in the investee company.
However, the Board also has recognized that nonvoting equity does not
provide the same ability to exercise a controlling influence as voting
equity.
Accordingly, under the proposal, a company was presumed to control
another company if the first company controls less than 15 percent of
the voting securities of the second company but one-third or more of
the total equity of the second company. In addition, a company was
presumed to control another company if the first company controls 15
percent or more of the voting securities of the second company and 25
percent or more of the second company's total equity. This element of
the proposal was consistent with the total equity standard described in
the Board's 2008 Policy Statement.
Some commenters argued that total equity on its own does not
provide a company with a substantial ability to exercise a controlling
influence and therefore recommended that the Board increase the amount
of total equity the first company could control in the second company
before triggering a presumption of control. A few commenters suggested
that the Board permit all investors to own up to one-third of the total
equity of a company (regardless of voting equity position) without
triggering a presumption of control. Other commenters advocated for
alternative tiered presumptions related to total equity, such as
presumptions of control where a company (i) has 15 percent or more of
the voting securities of the second company and one-third or more of
the total equity; (ii) has between 10 percent and 15 percent voting and
more than 40 percent total equity; and (iii) has under 10 percent
voting and more than 50 percent total equity. Some commenters suggested
that the Board have an exception to the total equity presumption if
another shareholder has a significant block of voting securities in the
second company that could prevent the first company from using total
equity to exercise a controlling influence over the second company.
In the final rule, the Board is simplifying its total equity
presumption so that a company will be presumed to control a second
company when the first company controls one-third or more of the total
equity of the second company. The threshold of one-third or more of
total equity would apply without regard to the first company's voting
securities percentage. In addition to simplifying, this adjustment to
the proposal reflects that nonvoting equity, while a significant
mechanism through which control may be exercised, should not be capped
at the same 25 percent voting securities level that the statute
identifies as control.
Commenters also raised a variety of issues around the Board's
proposed methodology for calculating a company's total equity position
in another company. These comments are discussed below in section
III.D. of the preamble.
Proxies on Issues
The Board historically has raised controlling influence concerns if
a company with control over 10 percent or more of a class of voting
securities of a second company solicits proxies from the shareholders
of the second company on any issue. The Board did not propose a
presumption of control for a company that controls 10 percent or more
of a class of voting securities of a second company and solicits
proxies from the shareholders of the second company on any issue. Many
commenters supported the Board's decision to not include a presumption
of control based on soliciting proxies on issues presented to the
shareholders.
Consistent with the proposal, the Board is not adopting a general
presumption of control for a company that solicits proxies from the
shareholders of another company.\40\ Accordingly, under the final rule,
a noncontrolling investor generally may act as a shareholder and engage
with the target company and other shareholders on issues through proxy
solicitations.
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\40\ The final rule includes a presumption of control related to
soliciting proxies for the election of directors, which is discussed
in the section of this preamble related to the presumptions of
control based on director representation.
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Threats To Dispose of Securities
Historically, the Board has viewed threats to dispose of large
blocks of voting or nonvoting securities in an effort to try to affect
the policy and management decisions of another company as presenting
potential controlling influence concerns. As a result, the Board
traditionally has raised controlling influence concerns if a company
with control over 10 percent or more of a class of voting securities of
a second company threatens to dispose of its investment if the second
company refuses to take some action desired by the first company.
However, the Board also has recognized that an investor that is unhappy
or disagrees with the business decisions of the company in which it has
invested should be able to exit its investment and that the possibility
of investor exit imposes important discipline on management. The Board
did not propose a presumption of control based on threats to dispose of
securities.
Many commenters expressed support for the Board's decision to not
include a presumption of control based on attempts to exercise control
by threatening to dispose of securities.
Consistent with the proposal, the Board is not adopting a
presumption of control based on one company attempting to exercise
control over another company by threatening to dispose of its
securities in the second company. By not adopting a presumption, the
Board recognizes that investors generally should be able to exit
investments without raising control concerns.
C. Description of Additional Presumptions and Exclusions
In addition to the tiered presumption framework described
previously, the proposal included several additional presumptions of
control. Several of these presumptions clarified presumptions already
in Regulation Y and Regulation LL, and others of these presumptions
related to standards that the Board historically has used to make
control decisions but has not before included in regulation. This
section of the preamble discusses these additional presumptions and how
they are reflected in the final rule.
Management Agreements
The Board has long believed that management agreements under which
a company can direct or exercise significant influence over the
management or operations of another company raise significant
controlling influence concerns.\41\ The proposal expanded slightly the
existing regulatory presumption to expressly identify additional types
of agreements or understandings that allow a company to direct or
exercise significant influence over the core business or policy
decisions of another company. The proposal also clarified that a
management agreement includes an agreement where a company is a
managing member, trustee, or general partner of another company, or
exercises similar functions.
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\41\ See 12 CFR 225.31(d)(2)(i); 12 CFR 238.21(d)(2)(i)
(citations are to the Code of Federal Regulations prior to the
amendments made by this final rule).
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[[Page 12408]]
The Board did not receive comment specifically on the presumption
of control arising from a management agreement. Accordingly, the Board
is finalizing the presumption as proposed, including with the
clarifications that expressly include agreements where a company is a
managing member, trustee, or general partner of another company.
Investment Advice and Investment Funds
The proposal included a presumption of control where a company
serves as investment adviser to an investment fund and controls 5
percent or more of any class of voting securities of the fund or 25
percent or more of the total equity of the fund. For purposes of this
presumption, the proposal defined ``investment adviser'' to include any
person registered as an investment adviser under the Investment
Advisers Act of 1940 (``Advisers Act''), any person registered as a
commodity trading adviser under the Commodity Exchange Act, or a
foreign equivalent of such a registered adviser.\42\ Similarly,
``investment fund'' included a wide range of investment vehicles,
including investment companies registered under the Investment Company
Act of 1940, investment companies that are exempt from registration
under the Investment Company Act, and foreign equivalents of either
registered investment companies or exempt investment companies.\43\
Other investment vehicles, such as commodity funds and real estate
investment trusts, generally also were included as investment funds.
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\42\ 15 U.S.C. 80b-1 et seq.; 7 U.S.C. 1 et seq.
\43\ 15 U.S.C. 80a et seq.
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However, the proposed presumption of control would not have applied
if the investment adviser organized and sponsored the investment fund
within the preceding twelve months. This provision allowed the
investment adviser to avoid triggering the presumption of control over
the investment fund during the initial seeding period of the fund.\44\
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\44\ The proposed presumption of control for service as an
investment adviser to an investment fund was intended to be
consistent with the Board's precedents regarding when an investment
adviser controls an advised investment fund under the BHC.
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In addition, the proposal provided a limited exception from the
presumptions of control where the investment fund was an investment
company registered with the SEC under the Investment Company Act of
1940 and certain other criteria were satisfied.\45\ In order to qualify
for this exception:
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\45\ 15 U.S.C. 80a et seq.
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The only permitted business relationships between the
investment adviser and the investment company were investment advisory,
custodian, transfer agent, registrar, administrative, distributor, and
securities brokerage services provided by the investment adviser to the
investment company;
Representatives of the investment adviser must occupy 25
percent or less of the board of directors or trustees of the investment
company; and
The investment adviser must control less than 5 percent of
each class of voting securities of the investment company and less than
25 percent of the total equity of the investment company.
Corresponding to the seeding period in the investment adviser
presumption, the last criteria in the registered investment company
exception did not apply if the investment adviser had organized and
sponsored the investment company within the preceding twelve months.
This provision allowed the investment adviser to control greater
percentages of securities of the investment company during the initial
seeding period of the investment company.\46\
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\46\ See, e.g., Mellon Bank Corporation, 79 Federal Reserve
Bulletin 626 (1993); The Chase Manhattan Corporation, 81 Federal
Reserve Bulletin 883 (1995); Commerzbank AG, 83 Federal Reserve
Bulletin 678 (1997).
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Commenters argued that the proposals with respect to investment
funds and registered investment companies were inconsistent with prior
Board precedent, most notably a single case where the Board allowed a
bank holding company to retain up to 25 percent of the voting
securities of an investment company under certain conditions.\47\ Many
commenters argued that the rule should follow this precedent and allow
investment advisers to control up to 25 percent of the voting
securities of an advised investment fund without triggering a
presumption of control, rather than 5 percent as proposed.
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\47\ See Letter to H. Rodgin Cohen, Esq., dated June 24, 1999,
https://www.federalreserve.gov/boarddocs/legalint/BHC_ChangeInControl/1999/19990624/.
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Many commenters also suggested a one-year seeding period was too
short and should be extended to three years to be consistent with the
Volcker Rule. In addition, commenters suggested that the seeding
periods should be available to authorized participants, not just
organizers and sponsors. Some commenters advocated for an approach
where no seeding period was specified in the rule and instead the
seeding period would be a reasonable period determined by fund
managers.
A few commenters recommended that the investment company exception
apply to foreign equivalents of U.S. registered investment companies
and certain other types of investment funds, such as exempt investment
companies and business development companies. Some commenters also
requested that registered investment companies be excluded from the
presumptions of control without having to satisfy any conditions.
Several commenters further argued that the Board should apply the
standards of the SEC for independent directors rather than the Board's
standards for director representatives for purposes of determining how
many director representatives a company has on the board of directors
of a registered investment company. At least one commenter suggested
that the Board exclude any ordinary-course business relationships
between investment companies and their advisers from consideration in
the context of control.
The final rule retains the presumption of control for investment
advisers of investment funds as proposed. The exception for registered
investment companies is not included in the final rule. Both the
control presumption and the exception were designed to align with Board
precedent regarding control over investment funds and thus were
intended to be complementary in scope. The registered investment
company exception had minimal incremental information value beyond the
general investment fund presumption, and the details of the exception
raised many questions regarding how it would function. Thus, it has
been removed from the final rule to simplify the rule.
The final rule retains the threshold of 5 percent of a class of
voting securities for purposes of the investment adviser presumption of
control. The single precedent identified by commenters that permitted
ownership of up to 25 percent of the voting securities of a fund was an
unusual case based in part on statutory provisions that are no longer
in effect. In addition, in that precedent, the Board relied on
additional constraints to mitigate control concerns and these
additional constraints were not included in the proposal. The threshold
of 5 percent of any class of voting securities is consistent with the
preponderance of Board precedent in this area.
The final rule retains the one-year seeding period, consistent with
the proposal. The one-year seeding period is consistent with the bulk
of Board precedent related to organizing and sponsoring investment
funds and
[[Page 12409]]
provides a reasonable amount of time for the seeding of most investment
funds. The one-year seeding period is only available to the company
that organizes and sponsors an investment fund and not to other early
investors in an investment fund, because only the sponsor/organizer
necessarily controls all the equity securities of the company when the
fund is formed.\48\
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\48\ The one-year seeding period in the final rule does not
alter the rules applicable to hedge fund and private equity fund
investments under the Volcker Rule, including the rules addressing
permissible seeding periods for such funds.
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At least one commenter recommended that the Board confirm the
ongoing applicability of control letters from the General Counsel of
the Board to mutual fund families, and investments made in accordance
with those letters. The application of the final rule to existing
structures is discussed in more detail elsewhere in this preamble. The
Board does not intend to revisit existing structures that were
previously reviewed by the Federal Reserve System and have not changed
materially.
Accounting Consolidation
Under the proposal, the Board presumed that a company that
consolidates a second company under GAAP controls the second company.
The presumption was based on an understanding that GAAP generally calls
for consolidation under circumstances where the consolidating entity
has a controlling financial interest over the consolidated entity.
Consolidation is typically required under GAAP due to ownership of a
majority of the voting securities of a company, which would
significantly exceed the voting security threshold for control under
the BHC Act and HOLA. In addition, GAAP requires consolidation of
companies under the variable interest entity standard (i) where a
company has significant economic exposure to a variable interest entity
and has the power to direct the activities of the entity that most
significantly impact the entity's economic performance or (ii) where a
company controls a variable interest entity by contract.\49\
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\49\ See, e.g., ASC 810-10.
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Many commenters urged the Board to abandon the proposed presumption
of control where a first company consolidates a second company for
purposes of GAAP. Commenters also urged the Board not to expand the
proposed consolidation presumption based on GAAP to consolidation under
other accounting standards. These commenters argued that the standards
for consolidation for variable interest entities did not conform to the
Board's standards for controlling influence. Commenters also stated
that presuming that consolidated variable interest entities are
controlled could have unintended consequences for foreign banking
organizations subject to the Board's U.S. intermediate holding company
requirements.\50\ In addition, commenters expressed concern that the
accounting consolidation rules were promulgated by a different
authority with different purposes and that the consolidation standards
were subject to change outside of the control of the Board. Some
commenters requested exclusions for variable interest entities in
certain contexts, such as an exclusion for asset-backed commercial
paper conduits or particular types of ownership or management
relationships between a company and a variable interest entity.
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\50\ See 12 CFR 252.153.
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The final rule establishes a presumption of control when one
company consolidates a second company for purposes of GAAP. This
presumption is consistent with the proposal. A company that
consolidates another company due to control over a majority of the
voting securities of the second company should control the second
company under the voting securities control prong of the BHC Act and
HOLA. A company that consolidates another company under the variable
interest entity standard must have substantial ability to direct the
activities of the second company (in addition to having a potentially
significant economic exposure). A company that is consolidated under
the variable interest entity standard often would be controlled under
one of the other presumptions of control in the final rule such as the
management agreement presumption. The inclusion of the GAAP
consolidation presumption should reduce burden and uncertainty by
allowing companies to identify presumptive control relationships based
on existing accounting standards.
The presumption of control where one company consolidates a second
company for purposes of GAAP covers, by its terms, only those companies
that prepare financial statements under GAAP. The Board notes, however,
that the Board is likely to have control concerns where a company
consolidates another company on its financial statements under another
accounting standard, particularly if the other accounting standard has
consolidation standards that are similar to the consolidation standards
under GAAP.
Regarding the interaction of the final rule and the intermediate
holding company requirements of the Board's Regulation YY, a foreign
banking organization that is required to form a U.S. intermediate
holding company must hold all ownership interests in U.S. subsidiaries
through its U.S. intermediate holding company.\51\ In general,
ownership interest under the intermediate holding company requirements
does not include contractual relationships, including contractual
relationships that result in consolidation of a company under the
variable interest entity standard. Thus, for example, where a U.S.
branch of a foreign bank has a contract with an asset-backed commercial
paper conduit that causes the conduit to be consolidated by the branch
under the variable interest entity standard, the contract is not an
ownership interest and therefore may remain between the branch and the
conduit.
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\51\ 12 CFR 252.153.
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The proposal sought comment on whether the Board should presume
that a company controls a second company if the first company applies
the equity method of accounting with respect to its investment in the
second company. Many commenters opposed the introduction of this
presumption. These commenters argued that the standards for the equity
method of accounting were different than control under the BHC Act and
HOLA and that the practical effect of such a presumption would be to
presume control over a company due to control over 20 percent of a
company's voting securities, substantially below the statutory
threshold of 25 percent. Similar to comments regarding accounting
consolidation, commenters also objected to the Board's control-based
reliance on accounting standards designed for different purposes.
The final rule does not include a presumption of control when one
company applies the equity method of accounting with respect to its
investment in a second company. Although equity method accounting
treatment indicates a substantial relationship between two companies,
unlike consolidation, equity method accounting is not as closely linked
to the Board's views on what constitutes a controlling influence.
Divestiture
The proposal substantially revised the Board's standards regarding
divestiture of control. The Board historically has taken the position
that a company that has controlled another company may be
[[Page 12410]]
able to exert a controlling influence over that company even after a
substantial divestiture.\52\ As a result, the Board typically has
applied a stricter standard for terminating control than for
establishing new noncontrolling investments.\53\
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\52\ See, e.g., ``Statement of policy concerning divestitures by
bank holding companies'' (divestiture policy statement). 12 CFR
225.138. The divestiture policy statement indicates that divestiture
is a special consideration for purposes of control and that the
Board's normal rules and presumptions regarding control may not
always be appropriate in the context of divestiture. See also Am.
Gas & Elec. Co. v. SEC, 134 F.2d 633, 643 (D.C. Cir. 1943) (holding
that ``controls and influences exercised for so long and so
extensively [under the Public Utilities Holding Company Act] are not
severed instantaneously, sharply and completely, especially when
powers of voting, consultation and influence such as have been
retained remain'').
\53\ See, e.g., 12 CFR 225.139 (``2(g)(3) policy statement'').
The 2(g)(3) policy statement describes the implementation of section
2(g)(3) of the BHC Act (Congress removed section 2(g)(3) from the
BHC Act in 1996). Section 2(g)(3) created a rebuttable presumption
that a transferor continued to control securities of a company
transferred to a transferee if the transferee was indebted to the
transferor or if there were certain director or officer interlocks
between the transferor and transferee. The 2(g)(3) policy statement
remains relevant because it reflects the Board's longstanding
position that terminating control requires reducing relationships to
lower levels than would be consistent with a new noncontrolling
relationship.
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The proposal provided that a company that previously controlled a
second company during the preceding two years would be presumed to
continue to control the second company if the first company owned 15
percent or more of any class of voting securities of the second
company. The divestiture presumption did not apply if a majority of
each class of voting securities of the second company would be
controlled by a single unaffiliated individual or company after the
divestiture by the first company. Further, the divestiture presumption
generally did not apply in cases where a company sold a subsidiary to a
third company and received stock of the third company as consideration
for the sale.\54\
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\54\ See, e.g., Letter to Mark Menting, Esq., dated February 14,
2012, https://www.federalreserve.gov/bankinforeg/LegalInterpretations/bhc_changeincontrol20120214.pdf.
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Many commenters supported the proposed divestiture presumption.
Other commenters argued that the threshold for the divestiture
presumption should be raised higher than 15 percent or that the
divestiture presumption should be entirely removed from the rule. At
least one commenter requested clarification as to the conditions
required for the exception to the divestiture presumption to apply,
specifically whether the other shareholder must control a majority of
every class of voting securities of the second company, or only a
majority of the securities of the class of voting securities that the
divesting shareholder is selling. In addition, commenters asked the
Board to clarify how the divestiture presumption interacts with the
seeding period in the investment fund context.
The final rule includes the divestiture presumption substantially
as proposed. As noted, the possibility of continued control in the
context of a partial divestiture has been identified as a concern in
Board precedent and case law. The final rule balances these concerns
with the goal of providing greater transparency and certainty to the
Board's consideration of controlling influence issues.
The final rule does not provide an exception to the presumption to
facilitate the organization and sponsorship of investment funds. Such
an exception is not necessary because an investment adviser must have
less than 5 percent of each class of voting securities of an investment
fund after the initial one-year seeding period in order to not trigger
the investment fund presumption of control, and the divestiture
presumption only applies where a company retains at least 15 percent of
any class of voting securities.
Regarding the commenter requests for clarification of the exception
to the divestiture presumption, the Board clarifies that the exception
only applies when an unaffiliated person controls 50 percent or more of
the outstanding securities of each class of voting securities of the
company being divested.
Presumption of Control for the Combined Ownership of a Company and Its
Senior Management Officials and Directors
The proposal included a presumption that a company controls a
second company when (i) the first company controls at least 5 percent
of any class of voting securities of the second company and (ii) the
senior management officials and directors of the first company,
together with their immediate family members and the first company, own
25 percent or more of a class of voting securities of the second
company (5-25 presumption). The proposed presumption reflected the
Board's historical position that it is often appropriate to attribute
securities held by management officials of a company to the company
itself for purposes of measuring control by a company under the BHC
Act. The management officials of a company are well positioned to
coordinate their actions with each other and the company to act as a
single voting bloc to advance the interests of the company.
The proposal differed from current practice, however, by providing
an exception to this general presumption. Specifically, the presumption
did not apply if (i) the first company controls less than 15 percent of
each class of voting securities of the second company and (ii) the
senior management officials and directors of the first company,
together with their immediate family members, control 50 percent or
more of each class of voting securities of the second company.
The proposed exclusion to the presumption reflected the Board's
traditional understanding that, when individuals control an outright
majority of a class of voting securities of a second company, it is
likely the individuals who are truly exercising control over the second
company, rather than any company that employs the individuals. Under
these circumstances, the first company is generally not a significant
conduit for control over the second company.\55\
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\55\ See Vickars-Henry Corp. v. Fed. Reserve Sys., 629 F.2d 629
(9th Cir. 1980).
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At least one commenter requested that the Board clarify how the
rule attributing ownership of securities held by senior management
officials, directors, or controlling shareholders of a company to that
company (proposed 12 CFR 225.9(c), 238.10(c)) would operate in
conjunction with the 5-25 presumption (proposed 12 CFR 225.32(d)(6),
238.22(d)(6)).
The final rule does not include the 5-25 presumption of control of
a company. Instead, this presumption of control of a company has been
integrated into the standard for control by a company over voting
securities. Specifically, the final rule provides that a company that
controls 5 percent or more of any class of voting securities of another
company also controls any securities issued by the second company that
are controlled by the senior management officials, directors, or
controlling shareholders of the first company, or immediate family
members of such individuals. In addition, the final rule incorporates
into this standard for control over securities the exclusion contained
in the proposed 5-25 presumption, as described further in section III.C
of this preamble.
Closely Held Companies and Widely Held Companies
In developing the proposal, the Board considered whether there
should be different presumptions for (i) companies
[[Page 12411]]
that are widely held relative to companies that are closely held or
(ii) companies that are majority owned by a third party. The Board
considered these factors because it could be reasonable to assume that
a major investor in a company that is otherwise widely held has
outsized influence compared to a context where the major investor is
one of several major investors in a closely held company. Similarly, in
many cases, it could be reasonable to assume that a major investor has
reduced influence over a company where another investor has an outright
majority of the voting securities of the company. The proposal,
however, did not include different presumptions for widely held
companies versus closely held companies or for companies under the
majority control of a third party because such distinctions increased
the complexity of the proposal and could have made the presumptions
more difficult to apply in practice.
Some commenters argued that the presence of a larger, third-party
shareholder should create a presumption of non-control for any company
with a lesser interest. Commenters provided several different proposals
for how this might be implemented, ranging from an exemption from the
presumptions of control where a third party controls a majority of the
securities of a company to an exemption from the presumptions of
control where a third party controls a sufficiently large plurality of
the securities of a company. Some commenters suggested that the
presence of a larger, third-party shareholder should raise the level of
other relationships, particularly business relationships, that two
companies could have before triggering a presumption of control.
Commenters also argued that a majority shareholder should give rise to
a presumption of noncontrol for all other shareholders.
Other commenters supported the Board's proposal not to create
different presumptions depending on the shareholder composition of the
second company because of the complexity this would add to the rule.
The presumptions in the final rule do not differentiate between
closely held and widely held companies and generally do not turn on the
presence of a majority third-party shareholder. Although a company's
influence over another company may vary based on the shareholder
structure of the second company, adding exceptions to certain
presumptions of control because the second company is closely held or
majority-controlled by a third party would significantly increase the
complexity of the rule. Moreover, the Board notes that the statutory
framework contemplates that multiple companies could control a single
company even if there is one company that has predominant, or even
majority, control over the voting securities of the company. Finally,
having control determinations turn on the shareholder structure of the
target company may create practical difficulties for investors. For
example, a first company could establish a relationship that does not
trigger a presumption of control over a second company, but the second
company could subsequently become more widely held, leading the first
company to trigger a presumption of control without any action of its
own.
Fiduciary Exception
Under the proposal, the presumptions of control did not apply to
the extent that a company controls voting or nonvoting securities of a
second company in a fiduciary capacity without sole discretionary
authority to exercise the voting rights. This exception for holding
securities in a fiduciary capacity is currently in the control
provisions of Regulation Y and was retained in full.\56\
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\56\ See 12 CFR 225.31(d)(2)(iv); see also 12 U.S.C.
1841(a)(5)(A).
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Many commenters argued that the Board's proposed exclusion for
securities held in a fiduciary capacity was overly restrictive because
it included a requirement that the fiduciary not have sole
discretionary voting authority over the securities. Commenters noted
that, although not having sole discretionary voting authority was
required for the fiduciary exemption in section 3 of the BHC Act,
section 4 of the BHC Act excluded securities held in a fiduciary
capacity without this additional requirement.
Commenters also sought clarification of when a company would be
considered to have sole discretionary authority to exercise voting
rights. At least one commenter asked that the Board provide that an
investment adviser lacks sole discretionary voting authority where an
investment fund has the right to revoke the adviser's voting authority.
In response to the issues raised by commenters, the fiduciary
exception in the final rule only requires that the securities of a
depository institution or a depository institution holding company be
held without sole discretionary voting authority. Accordingly, the
final rule's fiduciary exception would parallel the different fiduciary
exceptions in section 3 and section 4 of the BHC Act. The same
exception would apply for purposes of Regulation LL, to provide
parallel treatment under the BHC Act and HOLA. The final rule also
includes additional clarifying edits to the fiduciary exception.
The final rule does not provide broader clarity around the scope of
the fiduciary exception. The Board notes, however, that the fiduciary
exception in the final rule is intended to align with the Board's
traditional understanding of the scope of the fiduciary exceptions in
the BHC Act and Regulation Y. The primary example of the role covered
by the fiduciary exception is that of the trust department of a
depository institution that is authorized to engage in fiduciary
activities. Companies may contact the Board or its staff to seek
clarification as to whether any particular holding of securities would
qualify for the fiduciary exception.
Rebuttable Presumption of Noncontrol
Under the proposal, a company was presumed not to control a second
company if the first company (i) controls less than 10 percent of every
class of voting securities of the second company and (ii) is not
presumed to control the second company under any of the proposed
presumptions of control. This provision of the proposal modestly
expanded the statutory and pre-existing regulatory rebuttable
presumption of noncontrol that applies where a first company controls
less than 5 percent of any class of voting securities of a second
company.\57\
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\57\ 12 U.S.C. 1841(a)(3), 12 CFR 225.31(e), and 238.21(e).
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Many commenters supported the proposed presumption of noncontrol,
arguing that controlling influence would be especially unusual for
companies with less than 10 percent of each class of voting securities
of another company. Some commenters argued that the Board should expand
the presumption of noncontrol further to cover any company that did not
trigger a presumption of control. At least one commenter argued that a
presumption of noncontrol should at least apply to foreign entities
that do not trigger a presumption of control in order to mitigate
extraterritorial application of the BHC Act. Commenters also raised
concerns with the proposed exclusion from the presumption of noncontrol
for any company that triggered a presumption of control, at least as
applied to companies with less than 5 percent of any class of voting
securities of another company.
[[Page 12412]]
The final rule adopts the rebuttable presumption of noncontrol as
proposed.\58\ Thus, a company is presumed not to control a second
company if the first company (i) controls less than 10 percent of every
class of voting securities of the second company and (ii) is not
presumed to control the second company under any of the presumptions of
control. This approach and calibration of the noncontrol presumption
reflects the Board's experience that a company with less than 10
percent of any class of voting securities of another company is
unlikely to have a controlling influence over the second company,
absent the indicia of control specified in the control presumptions.
The additional changes supported by some commenters would increase the
scope of the presumption of noncontrol significantly, well beyond both
the presumption of noncontrol in the BHC Act and the Board's
experience.
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\58\ As under the proposal, the filing requirements applicable
to bank holding companies and savings and loan holding companies for
investments in 5 percent or more of any class of voting securities
of a company are not impacted as a result of the presumption of
noncontrol.
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III. Final Rule--Control-Related Definitions
The proposal proposed to amend Regulation Y and Regulation LL to
update and clarify the definitions of various control-related terms.
This section discusses in detail how the final rule addresses each of
these definitions.
Some commenters indicated that the Board should define additional
terms to provide further clarity regarding the application of the
presumptions of control. For example, a commenter suggested that the
Board clarify how the presumptions of control would apply to an
agreement among shareholders that is designed to preserve a company's
tax status under the Internal Revenue Code. In addition, a commenter
stated that the Board should clarify whether a testamentary trust
qualified as a ``company'' under the proposal.
The final rule does not introduce new defined terms compared to the
proposal, though certain changes have been made to the proposed defined
terms as described in detail in this section. Consistent with the
proposal, the final rule includes defined terms to the extent
appropriate to clarify the application of the rule, while avoiding
over-prescription that could limit the Board's ability to respond
appropriately to unusual facts and circumstances or to prevent evasion
of the framework. Specifically with respect to agreements to preserve
tax status under the Internal Revenue Code, the final rule, consistent
with the proposal, clarifies that covenants to take reasonable steps to
maintain a specific tax status generally are not limiting contractual
rights and that agreements among shareholders to preserve a certain tax
status generally do not constitute restrictions on securities that
provide control over the covered securities. On the status of
testamentary trusts as companies under the BHC Act, neither the
proposal nor the final rule alters the Board's standards related to
testamentary trusts.
A. First Company and Second Company
The core of the proposal was the addition of a series of
presumptions of control that apply in the context of the Board making a
determination that one company has the ability to exercise a
controlling influence over another company. To clarify the application
of these presumptions, the proposal provided definitions of ``first
company'' and ``second company.''
The proposal defined ``first company'' as the company whose control
over a second company was the subject of a determination of control by
the Board. The proposal defined ``second company'' as the company the
control of which by a first company was the subject of a determination
of control by the Board. For many of the proposed presumptions, the
first company was presumed to control the second company if the first
company, together with its subsidiaries, had particular relationships
with the second company, together with its subsidiaries.
In addition, the proposal provided that, for purposes of the
proposed presumptions, any company that was both a subsidiary of the
first company and the second company should be treated as a subsidiary
of the first company but not as a subsidiary of the second company.
This provision prevented the second company's relationships with a
joint venture subsidiary with the first company from being considered
relationships with the first company for purposes of the presumptions
of control.
Some commenters contended that it would be more appropriate to
consider only relationships between top-tier parent companies.
Relatedly, a few commenters stated that first company and second
company should not be defined to include their subsidiaries. With
respect to joint ventures, some commenters argued that the language of
the proposal was difficult to apply and that it would be better not to
consider any relationships with joint ventures when reviewing for
control between joint venture partners.
The final rule adopts the definitions of first company and second
company as proposed.\59\ For purposes of controlling influence, the
Board historically has considered the relationships between one company
and its subsidiaries, on the one hand, and another company and its
subsidiaries, on the other hand. Grouping a parent company with its
subsidiaries reflects an understanding that a subsidiary generally will
comply with directions from its parent company. Considering only direct
relationships between two companies would ignore this dynamic and thus
the economic realities of corporate structures. For example, an
investing company may own securities in a top-tier bank holding company
while having substantial business relationships with the bank holding
company's subsidiary bank. Considering the investing company's
relationships with the bank holding company alone and with the bank
alone would exclude important aspects of the combined relationship
between the investing company, on the one hand, and the bank holding
company and the bank, on the other hand.
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\59\ First company and second company could take a variety of
legal entity forms, including a stock corporation, limited liability
company, partnership, business trust, or foreign equivalents of such
legal entities. See 12 U.S.C. 1467a(a)(1)(C) and 1841(b).
---------------------------------------------------------------------------
Regarding joint ventures, the Board historically has recognized
that relationships with joint ventures can be significant for purposes
of controlling influence analysis because such relationships can
represent a significant connection between the joint venture partners.
For this reason, the final rule does not completely exclude
relationships with joint ventures. Instead, consistent with the
proposal, the final rule provides that a company that is a subsidiary
of both the first company and the second company is treated as a
subsidiary of the first company and not of the second company for
purposes of applying the presumptions of control. The Board believes
that this is a reasonable standard for recognizing the potential
importance of joint ventures without overstating such importance.
B. Voting Securities and Nonvoting Securities
The BHC Act defines control to include the ownership, control, or
power to vote 25 percent or more of any class of voting securities of a
company.\60\ In addition, several of the proposed presumptions required
identifying the percentage of a class of
[[Page 12413]]
voting securities controlled by a company in another company.
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\60\ 12 U.S.C. 1841(a)(2)(A).
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Regulation Y and Regulation LL previously included definitions of
``voting securities'' and ``nonvoting shares.'' \61\ The proposal
changed the defined term ``nonvoting shares'' to ``nonvoting
securities'' and added to the definition of ``nonvoting securities''
equity instruments issued by companies other than stock corporations,
such as limited liability companies and partnerships. In addition, the
proposal revised the definition of ``nonvoting securities'' to clarify
that common stock can be nonvoting securities.\62\
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\61\ 12 CFR 225.2(q).
\62\ For safety and soundness reasons, the Board generally
believes that voting common stockholders' equity should be the
dominant form of equity for a banking organization. See, e.g., 78 FR
62018, 62044 (Oct. 11, 2013).
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Regulation Y and Regulation LL also provide a nonexclusive list of
examples of the types of voting rights that the Board has considered to
be within the scope of the defensive voting rights that nonvoting
securities may contain.\63\ The proposal revised the definition of
nonvoting securities to expressly permit certain additional defensive
voting rights that are commonly found in investment funds that are
organized as limited liability companies and limited partnerships.
Specifically, the proposal provided that defensive voting rights that
do not cause a security to be a voting security include the right to
vote to remove a general partner or managing member for cause, the
right to vote to replace a general partner or managing member that has
been removed for cause or has become incapacitated, and the right to
vote to dissolve the company or to continue operations following the
removal of a general partner or managing member. Some commenters asked
that the Board provide that certain securities--including limited
partnership interests, REIT investment units, and trust beneficiary
rights--are nonvoting securities.
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\63\ 12 CFR 225.2(q)(2)(i); 12 CFR 238.2(r)(2)(i).
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The final rule is largely consistent with the proposal on the
definitions of voting securities and nonvoting securities. To prevent
evasion, the final rule does not categorically exclude any specific
types of securities issued by certain legal entities from the
definition of voting securities. Although there is substantial
variability in the terms and structures of securities in the financial
markets, the definitions of voting securities and nonvoting securities
in the final rule have been drafted broadly to apply effectively to all
forms of legal entities.
C. Control of Securities
The proposed rule reflected the Board's current practice for
determining whether a company's securities are owned, controlled, or
held with power to vote by an investor and provided rules for
determining the percentage of a class of a company's voting securities
attributed to a person.
Ownership, Control, and Holding With Power To Vote
The proposal provided rules for determining whether a person
``controls'' a security.\64\ Specifically, the proposal provided that a
person controls a security if the person owns the security or has the
power to sell, transfer, pledge, or otherwise dispose of the security.
In addition, a person controls a security if the person had the power
to vote the security, other than due to holding a short-term, revocable
proxy. This proposed definition of control over securities is
consistent with Board precedent and with the language of the BHC
Act.\65\
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\64\ These proposed standards effectively replaced the
presumptions for control over voting securities currently in 12 CFR
225.31(d)(1). In this discussion, ``person'' has the meaning
provided in 12 CFR 225.2(l) and 12 CFR 238.2(j).
\65\ See, e.g., 12 U.S.C. 1841(a)(2)-(3) and 1842(a).
---------------------------------------------------------------------------
Some commenters suggested that power to dispose of securities in
certain circumstances should not provide control over the securities,
such as securities held in a fiduciary capacity or as collateral that
may be rehypothecated. A few commenters argued that securities held in
a small business investment company or in a merchant banking portfolio
company should not be considered controlled. Commenters also argued
that securities held in an underwriting, dealing, or market making
capacity should not be considered controlled for purposes of the
presumptions of control.
The final rule makes minor revisions to the proposal's provisions
on control over securities. The final rule is consistent with Board
precedent and the statutory framework. However, the Board does
recognize that securities held by an underwriter for a very limited
period of time for purposes of conducting a bona fide underwriting
generally do not raise control concerns. An underwriter generally would
hold the securities only for a few days and only for the purpose of
prompt resale to the market.\66\
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\66\ For example, the Board's capital rule provides a 5-day
holding period for underwriting securities. 12 CFR 217.2.
---------------------------------------------------------------------------
The Board does not believe that the final control rule should make
exceptions for small business investment company investments, merchant
banking portfolio company investments, or any specific investment
types. The Board's general regulatory framework addresses the
permissibility of these investments, and there are no compelling
reasons to treat these investments differently than other investments
under the Board's control framework. For example, if a financial
holding company owns 100 percent of the securities of a merchant
banking portfolio company, the financial holding company controls the
portfolio company for purposes of the BHC Act under the first prong of
the definition of control. The financial holding company is able to
have this ownership interest under its merchant banking authority, but
must treat the portfolio company as a controlled subsidiary under
Regulation Y.\67\
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\67\ 12 CFR part 225, subpart J.
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Options, Warrants, and Convertible Instruments
The proposal provided standards for deeming a person to control a
security through control of an option or warrant to acquire the
security or through control of a convertible instrument that may be
converted into, or exchanged for, the security. Under the proposal's
``look-through'' approach, a person would control all securities that
the person could control upon exercise of any options or warrants. In
addition, a person would control all securities that the person could
control as a result of the conversion or exchange of a convertible
instrument controlled by the person. This approach was consistent with
the Board's longstanding precedent of generally considering a person to
control any securities (i) that the person has a contractual right to
acquire now or in the future; or (ii) that the person would
automatically acquire upon occurrence of a future event.\68\
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\68\ See, e.g., 2008 Policy Statement.
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In addition, the proposal provided that a person controls the
maximum number of securities that could be obtained under the terms of
the option, warrant, or convertible instrument. Thus, for example, if
the number of securities that could be acquired upon exercise of an
option varied based on some metric, such as the market price or book
value of the securities, the person with the option was considered to
control the highest percentage of the class of securities that could
possibly be acquired under the terms of the option.
Moreover, for purposes of calculating a person's percentage of a
class of voting securities or total equity, the proposal generally
deemed a person to control
[[Page 12414]]
the percentage resulting from the exercise of the person's options,
warrants, or conversion features, assuming that no other parties
exercised their options, warrants, or conversion features. However, if,
for example, a person is only able to exercise an option when all
outstanding options in a class are simultaneously exercised by all
holders, the percentage controlled by the person should reflect the
exercise of all the outstanding options in the class, not just those
options held by the person.
The proposal included several limited exceptions to this general
look-through approach. Consistent with the 2008 Policy Statement, the
proposal incorporated a limited exception for financial instruments
that may convert into voting securities but by their terms may not
become voting securities in the hands of the current holder or any
affiliate of the current holder and may only convert to voting
securities upon transfer to (i) the issuer or an affiliate of the
transferor, (ii) in a widespread public distribution, (iii) in
transfers where no transferee or group of associated transferees would
receive 2 percent or more of any class of voting securities of the
issuer, or (iv) to a transferee that controls 50 percent or more of
every class of voting securities before the transfer.
The proposal also exempted from the general look-through approach a
purchase agreement to acquire securities that had not yet closed. This
exemption allowed parties to enter into securities purchase agreements
pending regulatory approval, due diligence, and satisfaction of other
conditions to closing.
In addition, the proposal exempted from the general look-through
approach any options, warrants, or convertible instruments that
permitted an investor to acquire additional voting securities only to
maintain the investor's percentage of voting securities in the event
the issuing company increased the number of its outstanding voting
securities.
Many commenters suggested that the Board should apply the look-
through approach only to narrow classes of options, warrants, and
convertible instruments, or that the Board should not look through
options, warrants, or convertible instruments at all. Some commenters
suggested that the Board only look through options or convertible
instruments if they could be freely exercised within 60 days, are in
the money, or are not subject to a remote contingency trigger or
condition outside of the holder's control. Some commenters argued that
the look-through approach should not apply to options if the investor
does not have control over the exercise of the option. A few commenters
asked the Board to clarify the application of the standards from the
2008 Policy Statement under the proposal. A few commenters suggested
that the Board clarify that nonvoting securities will remain nonvoting
even if they have the right to elect directors after six quarterly
dividend payments are missed, consistent with Board precedent.
The final rule is generally consistent with the proposal with
respect to these provisions. However, the final rule includes an
additional exception to the look-through approach that preferred
securities that have no voting rights unless the issuer fails to pay
dividends for six or more quarters are only considered to be voting
securities if a sufficient number of dividends are missed and the
voting rights are active. As noted by commenters, this additional
narrow exception to the look-through approach is consistent with Board
precedent and helps to address a fairly common feature of preferred
securities. Securities with springing voting rights that do not fit
into this exception generally will be considered to be voting
securities under the look-through approach.
The final rule does not include any of the other limitations on the
look-through approach supported by commenters. The look-through
approach appropriately recognizes that options, warrants, and
convertible instruments provide the holder of such instruments with the
ability to control the underlying securities by exercising the option,
warrant, or convertible instrument, or transferring the option,
warrant, or convertible instrument. In addition, many of the suggested
limitations on the look-through approach are not practicable. For
example, looking through in-the-money options while not looking through
out-of-the-money options could result in unpredictable moves from non-
control to control of a bank without the ability of the investor to
apply or receive prior approval under section 3 of the BHC Act.
Moreover, excluding from the look-through approach options, warrants,
and convertible instruments with remote contingency triggers would
require the Board to adopt an impracticable measure of remoteness. The
Board notes that the final rule's exception to the look-through
approach based on transfer restrictions has been slightly revised to
conform more precisely to the 2008 Policy Statement.
Control Over Securities Through Restrictions on Rights
Consistent with current regulations, the proposal provided that a
person controls securities if the person is a party to an agreement or
understanding under which the rights of the owner or holder of
securities are restricted in any manner, unless the restriction falls
under one of the exceptions specified in the rule.\69\
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\69\ This standard could result in multiple persons being
considered to have control over the same securities. This remains
possible under the final rule.
---------------------------------------------------------------------------
The proposal provided six exceptions to this general rule, each
designed to accommodate certain common restrictions on securities that
do not provide the type of control over securities relevant to this
rulemaking. The first exception was for rights of first refusal, rights
of last refusal, tag-along rights, drag-along rights, or similar rights
that are on market terms and that do not impose significant
restrictions on the transfer of the securities. Second, the proposal
provided an exception for arrangements that restrict the rights of an
owner or holder of securities when the restrictions are incidental to a
bona fide loan transaction. Third, the proposal provided that an
arrangement that restricts the ability of a shareholder to transfer
securities pending the consummation of an acquisition of the securities
does not provide the restricting party control over the securities of
the restricted party. Fourth, the proposal generally provided that an
arrangement that requires a current shareholder of a company to vote in
favor of a proposed acquisition of the company would not result in the
proposed acquirer controlling the securities of the current
shareholder. Fifth, the proposal exempted arrangements among the
shareholders of a company designed to preserve the tax status or tax
benefits of a company, such as qualifying as a Subchapter S Corporation
\70\ or to preserve tax assets (such as net operating losses) against
impairment.\71\ Sixth, the proposal provided that a short-term
revocable proxy would not provide the holder of the proxy with control
over the securities governed by the proxy.\72\
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\70\ See 26 U.S.C. 1361.
\71\ See 26 U.S.C. 382. In order to qualify for this exemption,
the arrangement was required to not impose restrictions on
securities beyond those reasonably necessary to achieve the goal of
preserving tax status, tax benefits, or tax assets. Agreements of
this type may raise significant safety and soundness concerns under
certain circumstances, independent of whether control concerns are
raised.
\72\ The proposed treatment of short-term revocable proxies was
consistent with the Board's current regulations regarding notices
under the Change in Bank Control Act. See 12 CFR 225.41(d)(4); 12
CFR 225.42(a)(5).
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[[Page 12415]]
The Board received very few comments on this framework and is
adopting the framework as proposed.
Control of Securities Through Associated Individuals and Subsidiaries
The proposal provided that a company that owns, controls, or holds
with power to vote 5 percent or more of any class of voting securities
of a second company controls any securities issued by the second
company that are owned, controlled, or held with power to vote by the
senior management officials, directors, or controlling shareholders of
the first company, or by the immediate family members of such
individuals.\73\ In addition, the proposal provided that a person
controls all voting securities controlled by any subsidiaries of the
person, and that a person generally does not control any voting
securities controlled by any non-subsidiary of the person.
---------------------------------------------------------------------------
\73\ See 12 CFR 225.31(d)(2)(ii).
---------------------------------------------------------------------------
At least one commenter argued that the Board should not consider
securities held in separate accounts by an insurance company to be
controlled by the insurance company, or that the Board should clarify
how separate accounts may be structured so that securities in such
accounts are not treated as controlled by the insurance company. One
commenter requested clarification regarding the attribution of voting
securities held in a voting trust.
The final rule defines control over securities through associated
individuals and subsidiaries in a manner substantially consistent with
the proposal. The final rule has been revised, however, to integrate
the standards for control over voting securities through associated
individuals with the proposed 5-25 presumption. Specifically, the
proposed 5-25 presumption substantially overlapped with the provision
providing that a company should be attributed the securities of its
senior management officials, directors, and controlling shareholders,
as well as immediate family members of such individuals. As a result,
as discussed above, the proposed 5-25 presumption is not necessary and
is not included in the final rule. However, the Board is revising the
provisions related to control over voting securities through associated
individuals to incorporate the exception to the proposed 5-25
presumption when the company controls less than 15 percent of each
class of voting securities of the other company and a majority of each
class of voting securities of the other company are controlled by the
first company's senior management officials, directors, and controlling
shareholders, as well as immediate family members of such individuals.
The final rule does not include the express statement from the
proposal that a company does not control securities that are controlled
by a non-subsidiary of the company. Although the Board continues to
believe that a company generally should not be deemed to control
securities held by a non-subsidiary of the company, the Board has
removed this provision from the final rule so as not to create an
expectation that a company would never be deemed to control securities
held by a non-subsidiary. For example, a company generally would be
deemed to control securities held by a non-subsidiary if the company
had an option to acquire those securities.
Reservation of Authority
The proposal included a reservation of authority to allow the Board
to determine that securities that would otherwise be considered
controlled by a person under the proposal are not controlled by the
person. Similarly, the proposed reservation of authority allowed the
Board to determine that securities that are not considered controlled
by a person under the proposal are controlled by the person. The Board
received no comments specifically on this reservation of authority
provision and the final rule includes the reservation of authority
consistent with the proposal. The reservation of authority is meant to
allow the Board to deal with rare circumstances that do not align with
the intent of the rule.
Percentage of a Class of Voting Securities
The proposal provided a rule for calculating the percentage of a
class of voting securities controlled by a person. The proposed rule
considered both the number of securities and the voting power of those
securities. Specifically, the percentage of a class of voting
securities controlled by a person was the greater of (i) the number of
voting securities of the class controlled by the person divided by the
number of issued and outstanding voting securities of the class
(expressed as a percentage) and (ii) the number of votes that the
person could cast divided by the total number of votes that may be cast
under the terms of all the voting securities of the class that are
issued and outstanding (expressed as a percentage).
Commenters argued that the Board should not include two voting
ownership tests and should only calculate voting ownership based on
voting power not on number of voting securities owned.
The final rule is generally consistent with the proposal.
Considering both voting power and number of voting securities is
consistent with the text of the BHC Act, the legislative history, and
Board precedents. This method of calculation also prevents evasion
through the use of securities with different voting power.
D. Calculation of Total Equity Percentage
The proposal provided a methodology for calculating a company's
total equity percentage in a second company that was a stock
corporation that prepared financial statements according to GAAP. The
first step to calculate a company's total equity in a second company
was to determine the percentage of each class of voting and nonvoting
common or preferred stock issued by the second company that the first
company controlled.\74\ The second step was to multiply the percentage
of each class of stock controlled by the first company by the value of
shareholders' equity allocated to the class of stock under GAAP, with
retained earnings allocated to common stock. The third and final step
was to divide the first company's dollars of shareholders' equity by
the total shareholders' equity of the second company, as determined
under GAAP.
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\74\ For this purpose, all classes of common stock--whether
voting or nonvoting--were treated as a single class. If certain
classes of common stock had different economic interests per share
in the issuing company, the number of shares of common stock was
adjusted to equalize the economic interest per share.
---------------------------------------------------------------------------
The proposal also provided adjustments to this general standard for
more complex structures. For example, a first company was considered to
control all equity securities controlled by its subsidiaries. The
proposal also provided that a first company controls a pro rata share
of equity securities controlled by a non-subsidiary of the first
company.
Under the proposal, the total equity calculation methodology
applied by its terms only to stock corporations that prepare financials
under GAAP. However, the proposed rule indicated that the Board
generally would apply the methodology in other circumstances as well,
to the extent appropriate.
The proposal also included several anti-evasion provisions.
Specifically, where a company controlled debt of a second company that
was functionally
[[Page 12416]]
equivalent to equity of the second company, the debt was counted as
equity for purposes of the total equity calculation. The proposal
provided a nonexclusive list of factors that the Board would examine in
deciding whether to treat debt instruments as functionally equivalent
to equity. These factors included treatment of the debt as equity under
accounting, regulatory, or tax standards; subordination of the debt; or
long maturity of the debt. Similarly, the proposal provided that other
interests in a company beyond debt that were functionally equivalent to
equity may be treated as equity.
In addition to a methodology for calculating total equity, the
proposal provided a standard for the frequency of measurement of total
equity. Under the proposal, an investing company was required to
calculate its total equity in a second company each time the investing
company acquired control over additional equity interests of the second
company or divested control of equity interests of the second company.
Many commenters criticized the proposed total equity calculation
methodology. In particular, commenters argued that it would lead to a
first company being presumed to control a second company where the
second company had negative retained earnings and the first company
controlled preferred securities of the second company that included a
liquidation preference. Several commenters recommended that retained
earnings from start-up companies be excluded from the total equity
calculation to avoid this problem. Some commenters alternatively
recommended that the final rule include an exception for start-up
companies where the total equity presumption would not apply for the
first several years of a company's existence.
Certain commenters suggested that the Board calculate total equity
using a common stock equivalent method as an alternative to the
proposed methodology. Some commenters argued that the Board should
establish more flexible rules for investments by and in investment
funds.
Many commenters recommended that the Board not include debt
instruments or other interests in the total equity calculation under
the proposal's functional equivalence standard. Commenters argued that
the standard was vague and could inhibit the use of certain common
types of debt and other economic interests. At least one commenter
suggested that the Board also provide that equity may be treated as
functionally equivalent to debt under appropriate circumstances and
thus excluded from total equity.
Various commenters urged the Board to eliminate or restrict the
scope of the provisions of the total equity methodology that required a
company to include a pro rata share of equity securities held by a non-
subsidiary.
One commenter suggested that the Board revise the frequency of
recalculation of total equity to require recalculation only if a
company acquires control over additional voting equity, or only if a
company controls five percent or more of a class of voting securities.
Some commenters recommended that the final rule require recalculation
of total equity only when a company acquires equity, never in the case
of divestiture of equity.
The final rule's methodology for determining a company's total
equity percentage in another company is largely consistent with the
proposal. The Board believes that the GAAP-based core methodology of
the final rule is effective, fit for purpose, well-understood, and easy
to apply. The final rule includes a technical correction to the formula
for total equity so that pari passu classes of preferred stock (i.e.,
classes of preferred securities of the same seniority in liquidation)
are treated as a single class.
The final rule includes without change the provision whereby debt
or other interests may be treated as equity if the interests are
functionally equivalent to equity. The Board expects to reclassify debt
as equity under the rule only under unusual circumstances to prevent
evasion of the rule. The list of debt features that support a
reclassification as equity should not be understood to indicate that a
debt instrument having any one of such features automatically would be
treated as equity.
In response to concerns raised by commenters, the final rule
provides flexibility for excluding nominally equity instruments from
total equity if the equity instruments are determined to be
functionally equivalent to debt. The final rule also includes a non-
exclusive list of characteristics that could indicate that an equity
instrument may be functionally equivalent to debt, such as protections
generally provided to creditors, a limited term, a fixed rate of return
or a variable rate of return linked to a reference interest rate,
classification as debt for tax purposes, or classification as debt for
accounting purposes.\75\ This provision is intended to provide
flexibility for unusual structures and is expected to be used rarely.
Companies should consult with the Board or its staff in order to
determine whether equity instruments would be excluded from total
equity.
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\75\ See, e.g., ASC 480-10.
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The final rule does not include the proposed provision that
required a company to include a pro rata share of equity securities
held by a non-subsidiary Accordingly, a company must include in the
total equity calculation only equity securities it controls directly or
indirectly through its subsidiaries.
Also in response to concerns raised by commenters, the final rule
requires calculation of total equity only when a first company acquires
control over additional equity of a second company. The first company
is not required to recalculate its total equity when it sells or
otherwise disposes of equity of the second company. This change will
prevent a divestiture from causing an increase in total equity due to
balance sheet changes at the second company.
E. Limiting Contractual Rights
Under the proposal, a company was presumed to control a second
company if the first company had a contractual right that significantly
restricts, or allows the first company to significantly restrict, the
discretion of the second company over major operational or policy
decisions.\76\ Such contractual provisions was defined as a limiting
contractual right.
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\76\ For purposes of this restriction, a contractual arrangement
between the first company and a subsidiary of the second company, or
between a subsidiary of the first company and the second company,
could constitute a limiting contractual right of the first company
over the second company.
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The proposal provided examples of provisions that generally were
considered limiting contractual rights and examples of provisions that
generally were not considered limiting contractual rights. The examples
included in the proposal were not intended to be a complete list of
provisions that would or would not be considered limiting contractual
rights. Rather, the provisions were meant as non-exclusive examples to
provide transparency. The examples of limiting contractual rights
listed in the proposal were:
Restrictions on activities in which a company may engage,
including a prohibition on (i) entering into new lines of business,
(ii) making substantial changes to or discontinuing existing lines of
business, (iii) entering into a contractual arrangement with a third
party that imposes significant financial obligations on the company, or
(iv) materially altering the policies or procedures of the company;
[[Page 12417]]
Requirements that a company direct the proceeds of the
investment to effect any action, including to redeem the company's
outstanding voting securities;
Restrictions on hiring, firing, or compensating senior
management officials of a company, or restrictions on significantly
modifying a company's policies concerning the salary, compensation,
employment, or benefits plan for employees of the company;
Restrictions on a company's ability to merge or
consolidate, or its ability to acquire, sell, lease, transfer, spin-
off, recapitalize, liquidate, dissolve, or dispose of subsidiaries or
major assets;
Restrictions on a company's ability to make significant
investments or expenditures;
Requirements that a company achieve or maintain certain
fundamental financial targets, such as a debt-to-equity ratio, a net
worth requirement, a liquidity target, or a working capital
requirement;
Requirements that a company not exceed a specified
percentage of classified assets or non-performing loans;
Restrictions on a company's ability to pay or not pay
dividends, change its dividend payment rate on any class of securities,
redeem senior instruments, or make voluntary prepayment of
indebtedness;
Restrictions on a company's ability to authorize or issue
additional junior equity or debt securities, or amend the terms of any
equity or debt securities issued by the company;
Restrictions on a company's ability to engage in a public
offering or to list or de-list securities on an exchange;
Restrictions on a company's ability to amend its articles
of incorporation or by-laws, other than limited restrictions that are
solely defensive for the investor;
Restrictions on the removal or selection of any
independent accountant, auditor, or investment banker; or
Restrictions on a company's ability to alter significantly
accounting methods and policies, or its regulatory, tax, or corporate
status, such as converting from a stock corporation to a limited
liability company.
The proposal's examples of contractual provisions that generally
would not be limiting contractual rights were:
A restriction on a company's ability to issue securities
senior to the securities owned by the investor;
A requirement that a company provide the investor with
financial reports of the type ordinarily available to common
stockholders;
A requirement that a company maintain its corporate
existence;
A requirement that a company consult with the investor on
a reasonable periodic basis;
A requirement that a company comply with applicable
statutory and regulatory requirements;
A requirement that a company provide the investor with
notice of the occurrence of material events affecting the company or
its significant assets;
A market standard ``most-favored nation'' requirement that
the investor receive similar contractual rights as those held by other
investors in a company; or
Drag-along rights, tag-along rights, rights of first or
last refusal, or stock transfer restrictions related to preservation of
tax benefits of a company, such as S-corporation status and tax carry
forwards, or other similar rights.
Commenters suggested that the scope of the definition of limiting
contractual rights might be inconsistent with past precedent. Many
commenters argued that the list of limiting contractual rights was
overly broad and encompassed many standard investor protection rights.
In addition, many commenters argued that the open-ended definition of
limiting contractual right to include any right that restricts or
allows one company to exert significant influence over another was
overly vague.
In addition, commenters objected to including within the scope of
limiting contractual rights various of the examples provided, including
limits on: The second company's ability to enter into new lines of
business; how the second company directs the proceeds of investments;
the second company's ability to incur additional debt or raise
additional equity; requirements that the second company maintain a
particular financial ratio; the second company's ability to amend the
terms of its debt or equity securities; the second company's ability to
engage in a public offering, or to list or de-list securities on an
exchange; the second company's ability to merge or consolidate with
another company; the second company's ability to dispose of material
subsidiaries or assets; and the second company's ability to alter its
accounting methods or policies or its regulatory, tax, or liability
status.
The final rule's definition of a limiting contractual right is
generally consistent with the proposal. Limiting contractual rights are
important indicia of controlling influence. In particular, limiting
contractual rights provide a means for a company to cause or prevent
otherwise permissible actions by another company, independent of the
first company's exercise of its voting rights as a shareholder in the
second company. Using such contractual rights, a company that has
relatively low voting power may effectively control another company's
decisions over important actions, or at least have influence over such
decisions well beyond what the first company's voting power would
provide.\77\
---------------------------------------------------------------------------
\77\ Such limiting contractual rights also may raise safety and
soundness concerns by restricting the ability of a company to take
appropriate actions to address supervisory issues.
---------------------------------------------------------------------------
The variety of forms that limiting contractual rights may take
makes the functional definition included in the final rule preferable
to a prescriptive definition. The final rule, consistent with the
proposal, includes lists of contractual rights that generally would or
would not be considered limiting contractual rights in order to provide
additional clarity around the specific application of the definition.
The lists of contractual rights reflect a distillation of the Board's
past practice and current understanding of the types of contractual
restrictions that likely would or would not raise controlling influence
concerns. The lists of contractual rights have not been changed from
the proposal, though the introductory text of each list has been
revised to make it clear that the listed provisions are examples of
what generally would or would not be considered a limiting contractual
right. Whether or not a particular contractual right is a limiting
contractual right depends on whether the contractual right meets the
functional regulatory definition of a limiting contractual right.
Commenters argued that a restriction on new lines of business
should not be considered a limiting contractual right because such a
restriction would help a bank holding company comply with the activity
limitations in the BHC Act. Similarly, commenters argued that covenants
to comply with the activities restrictions under the BHC Act or HOLA
should not be treated as limiting contractual rights. Under the final
rule, a contractual prohibition on engaging in particular activities is
generally a limiting contractual right. However, the Board notes that a
contractual provision that provides a reasonable and non-punitive
mechanism for an investing company to reduce its investment to comply
with the activities restrictions of the BHC Act or HOLA generally would
not be a limiting contractual right.
One commenter asked the Board to clarify whether a contractual
right restricting ``materially altering policies
[[Page 12418]]
or procedures'' would qualify as a limiting contractual right. A
restriction of this type generally would be considered a limiting
contractual right. It is similar to the example of a limiting
contractual right provided in the final rule related to amendments to
the articles or bylaws of a company.
Commenters suggested that the right to information available to
shareholders should be expanded to include access to information that
is necessary or appropriate to allow the first company to monitor its
investment and to monitor regulatory, legal, or other requirements or
standards, including the presumptions of control in the final rule. In
the Board's view, an investor's right to access information regarding
the relationship between the investor and the investee company, such as
the information necessary to determine the application of the
presumptions of control, generally would not be considered a limiting
contractual right. In addition, the final rule has been revised to
clarify that a contractual right to information ordinarily available to
common shareholders, whether or not the information is financial in
nature, is generally not a limiting contractual right.
Commenters also argued that the presumption of control based on
limiting contractual rights should be revised so that the presumption
does not apply if the first company cannot exercise the right
unilaterally or if the first company is not the largest single decider
of the exercise of the right. One commenter sought clarification as to
whether, and in what circumstances, voting rights exercised by a group
of investors (such as a voting right that can only be exercised by
certain preferred shareholders) would be treated as a limiting
contractual right. To avoid undue complexity, the final rule does not
specifically address contractual provisions that incorporate elements
of voting by requiring agreement of a certain percentage of certain
parties. Companies with questions on a particular limiting contractual
right may contact the Board or its staff to address the specific
situation.
In addition, commenters expressed concern that the proposal would
treat standard loan or bond covenants as limiting contractual rights.
Commenters argued that treating loan covenants as limiting contractual
rights would make it impossible for a bank to make a loan to another
company if its affiliate had also made an equity investment in that
company. Some commenters argued that standard loan covenants should not
trigger a presumption of control when they are on market terms, there
are multiple lenders, and the first company has less than 15 percent
voting power in the second company. The final rule does not include any
revisions in response to these comments. In the Board's view, a
contractual provision that significantly restricts a company's
discretion over operational and policy decisions ought to be treated as
a limiting contractual right in the final rule. Whether or not the
limiting contractual right is embedded in a market-standard loan
agreement does not affect the influence the limiting contractual right
provides the holder of the right. The Board generally has controlling
influence concerns when a company, directly or indirectly, both
controls a material amount of voting securities of another company and
has the ability to significantly restrict the discretion of the other
company over operational or policy decisions by contract.
F. Director Representatives
As discussed, the Board has long taken the position that director
representatives of a company serving on the board of directors of a
second company are an avenue through which the first company may
exercise a controlling influence over the second company. To provide
more clarity on when the Board deems an individual to be a director
representative of a company, the proposal defined director
representative to be any director who (i) is a current director,
employee, or agent of the company; (ii) was a director, employee, or
agent of the company within the preceding two years; or (iii) is an
immediate family member of an individual who is a current director,
employee, or agent of the company, or was a director, employee, or
agent of the company within the preceding two years. In addition, the
proposal provided that a director is a director representative of a
first company if the director was proposed to serve as a director by
the first company, whether by exercise of a contractual right or
otherwise. The proposal also specified that a nonvoting observer is not
a director representative.
Some commenters suggested that the definition of a director
representative was too broad and could include directors over which the
first company did not have substantial influence. In particular, some
commenters contended that director representatives should not include
individuals elected to the board of directors of a mutual fund by a
first company if the director representatives are independent of the
first company.
A few commenters expressed concern that the proposed definition
might mean that the Board would attribute a director to a company if
the company merely suggested the name of the director to a nominating
committee. Some commenters also expressed concern about the ambiguity
of treating ``agents'' of a company as director representatives and
requested that the Board define the term agent in this context.
Several commenters argued that the definition of director
representative should include only former directors of the first
company and should not include former employees. Similarly, some
commenters suggested that a company should only be attributed a former
officer, director, or employee if the individual became a director of
the second company while still an officer, director, or employee of the
first company.
Some commenters argued that the inclusion of immediate family
members of directors, employees, and agents of the first company was
too broad and would create compliance difficulties, especially with
respect to employees of large companies. These commenters argued that
the immediate family member prong ought to be removed from the
definition of director representative.
In response to the comments received, the Board is substantially
amending the definition of a director representative to be more
functional and more narrow. Specifically, under the final rule,
``director representative'' is defined as an individual that represents
the interests of a first company through service on the board of
directors of a second company. The final rule then provides a non-
exclusive list of examples of persons who generally would be considered
to be director representatives for purposes of the final rule: (i)
Individuals who are officers, employees, or directors of the first
company, (ii) individuals who were officers, employees, or directors of
the first company within the preceding two years, and (iii) individuals
who were nominated or proposed by the first company to be directors of
the second company. Companies may contact the Board or its staff for
guidance in determining whether or not a particular individual would be
considered to be a director representative for purposes of the final
rule.
G. Investment Advisers
The proposal defined investment adviser for purposes of the
proposed presumptions to mean a company that is registered as an
investment adviser with the SEC under the Investment Advisers Act,\78\
a company registered
[[Page 12419]]
with the Commodity Futures Trading Commission (``CFTC'') as a commodity
trading adviser under the Commodity Exchange Act,\79\ a company that is
a foreign equivalent of an investment adviser or commodity trading
adviser registered with the SEC or CFTC, respectively, or a company
that engages in any of the activities set forth in section
225.28(b)(6)(i) through (iv) of the Board's Regulation Y.
---------------------------------------------------------------------------
\78\ 15 U.S.C. 80b-1 et seq.
\79\ 7 U.S.C. 1 et seq.
---------------------------------------------------------------------------
The Board did not receive comments specifically on the definition
of investment adviser, although the Board did receive comments on the
presumption of control based on investment advisory relationships. The
comments on the presumption of control based on investment advisory
relationships are discussed earlier in this preamble. The final rule
adopts the definition of investment adviser as proposed.
IV. Application to Savings and Loan Holding Companies
As noted, the proposal applied equally to bank holding companies
and savings and loan holding companies to the maximum extent permitted
by law. HOLA defines control in a substantially similar manner as the
BHC Act.\80\ The Board previously recognized that the statutory control
framework under the BHC Act and HOLA are nearly identical and
determined to apply matching procedures for reviewing controlling
influence cases involving savings and loan holding companies under
Regulation LL as apply to bank holding companies under Regulation
Y.\81\ Consistent with this principle, the proposal incorporated the
proposed control presumptions and related revisions into the Board's
Regulation LL for savings and loan holding companies in essentially the
same manner as into the Board's Regulation Y for bank holding
companies. The Board is also amending portions of subpart A of
Regulation LL to incorporate current Sec. 238.9 into Sec. 238.8. This
does not any change requirements under these sections, but is merely a
technical edit to make room for the new section Sec. 238.9 adopted by
this final rule.
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\80\ Compare 12 U.S.C. 1467a(a)(2) (HOLA) with 12 U.S.C.
1841(a)(2) (BHC Act).
\81\ 76 FR 56508, 56509 (Sept. 13, 2011).
---------------------------------------------------------------------------
A. Control Under HOLA Compared to the BHC Act
Although controlling influence is defined similarly under HOLA and
the BHC Act, there are several differences between the definitions of
``control'' in each statute. Under HOLA, the definition of control
applies to both individuals and companies controlling other companies,
while control is limited to companies controlling other companies under
the BHC Act.\82\ Under HOLA, a person controls a company if the person
has more than 25 percent of any class of voting securities of the
company, rather than 25 percent or more of any class of voting
securities under the BHC Act.\83\ Unlike the BHC Act, HOLA specifies
that a general partner of a partnership controls the partnership, a
trustee of a trust controls the trust, and a person that has
contributed more than 25 percent of the capital of a company controls
the company.\84\ Further, HOLA does not include the BHC Act's
presumption of noncontrol for a company with a less than 5 percent
voting interest in another company.\85\
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\82\ 12 U.S.C. 1467a(a)(2).
\83\ 12 U.S.C. 1467a(2)(A)-(B) and 1841(a)(2)(A).
\84\ 12 U.S.C. 1467a(2)(B)-(C).
\85\ 12 U.S.C. 1841(a)(3).
---------------------------------------------------------------------------
At least one commenter stated that the Board should confirm past
decisions of the Office of Thrift Supervision indicating that
contributed capital for purposes of HOLA was the same as total equity,
or that the Board should otherwise clarify its interpretation of
contributed capital for purposes of HOLA. One commenter suggested that
the Board should seek additional public comment on its interpretation
of contributed capital.
In response to comments received on the proposal, the final rule
has been revised to reflect that contributed capital for purposes of
HOLA generally has the same meaning as total equity as used by the
Board in the context of control under the BHC Act. As a result, the
final rule differs from the proposal in several respects. Specifically,
the final rule omits the concept of total equity from subpart C of
Regulation LL because subpart C relates to questions of controlling
influence and contributed capital is a separate part of the statutory
definition of control under HOLA. The rules for calculating total
equity under subpart D of Regulation Y reflect how the Board generally
expects to measure contributed capital for purposes of HOLA and
Regulation LL.
B. Revisions to Regulation LL
Under the proposal, the Board included in Regulation LL the same
presumptions and related amendments made to Regulation Y, with limited
changes to reflect the relevant differences between control under the
BHC Act and HOLA. The proposed defined terms were located in Sec.
238.2 of Regulation LL. The proposed provisions relating to the
calculation of the percentage of a class of securities controlled by a
person were located in Sec. 238.9 of Regulation LL. The proposed
provisions related to control proceedings, including the proposed
presumptions of control and noncontrol, were located in subpart C of
Regulation LL.
The Board did not receive any comments specifically on how the rule
amended Regulation LL, other than the contributed capital issue
described previously. Accordingly, other than the provisions related to
total equity and the placement of proposed Sec. 238.10 in Sec. 238.9
instead, the final rule creates an essentially consistent control
framework between Regulation Y and Regulation LL.
V. Additional Implementation Matters
Use of Passivity Commitments
Some commenters suggested that the Board abandon its use of
passivity commitments and clarify that such commitments are not needed
going forward. Other commenters requested that the Board clarify
whether it intends to continue to seek either the general passivity
commitments or any of the specialized types of similar commitments. A
few commenters also requested that the Board provide a process under
which companies that have provided passivity commitments may obtain
relief from the commitments to align to the control framework. Some
commenters suggested that investors that had previously submitted
passivity commitments to the Board should be allowed to increase their
relationships with the target company without seeking relief from
commitments so long as the increased relationships would not trigger a
presumption of control under the final rule.
The Board does not intend to obtain the standard-form passivity
commitments going forward in the ordinary course. The Board will
continue to obtain control-related commitments in specific contexts,
such as commitments from employee stock ownership plans and mutual fund
complexes, and in special situations.
In the wake of the final rule, companies that have provided the
standard form of passivity commitments to the Board may contact the
Board or the appropriate Federal Reserve Bank to seek relief from these
commitments. Absent unusual circumstances, the
[[Page 12420]]
Board expects to be receptive to such requests for relief.\86\
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\86\ Companies that have provided commitments in connection with
TARP securities may also seek relief.
---------------------------------------------------------------------------
Application of the Final Rule
Several commenters suggested that the Board's new control framework
should only apply prospectively. Similarly, some commenters suggested
that the Board grandfather all existing investments or more narrowly
grandfather existing investments that had been reviewed by the Board or
its staff. Some commenters advocated for a three-year phase-in period
for foreign banking organizations so that these firms could make
adjustments to their business practices to account for the final rule.
The final rule provides additional information regarding the
Board's views on questions of controlling influence, but it is
generally consistent with the Board's current practice. As it is not a
fundamental change to current practice, the final rule does not
grandfather existing structures and does not provide a transition
period to allow firms to conform existing investments. The Board does
not expect to revisit structures that have already been reviewed by the
Federal Reserve System unless such structures are materially altered
from the facts and circumstances of the original review. To the extent
that a company previously considered an existing relationship between
two companies to not constitute control, the relationship was not
reviewed by the Federal Reserve System, and the relationship would be
presumed to be a controlling relationship under the final rule, the
company may contact the Board or its staff to discuss potential
actions.
VI. Administrative Law Matters
A. Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (44 U.S.C. 3501-3521) (PRA), the Board may not conduct or
sponsor, and a respondent is not required to respond to, an information
collection unless it displays a currently valid Office of Management
and Budget (OMB) control number. The Board reviewed the final rule and
determined that it does not create any new or revise any existing
collection of information under section 3504(h) of title 44.
B. Regulatory Flexibility Act
An initial regulatory flexibility analysis (IRFA) was included in
the proposal in accordance with section 603(a) of the Regulatory
Flexibility Act (RFA), 5 U.S.C. 601 et seq. (RFA). In the IRFA, the
Board requested comment on the effect of the proposed rule on small
entities and on any significant alternatives that would reduce the
regulatory burden on small entities. The Board did not receive any
comments on the IRFA. The RFA requires an agency to prepare a final
regulatory flexibility analysis unless the agency certifies that the
rule will not, if promulgated, have a significant economic impact on a
substantial number of small entities. Based on its analysis, and for
the reasons stated below, the Board certifies that the rule will not
have a significant economic impact on a substantial number of small
entities.\87\
---------------------------------------------------------------------------
\87\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------
Under regulations issued by the Small Business Administration, a
small entity includes a bank, bank holding company, or savings and loan
holding company with assets of $600 million or less and trust companies
with total assets of $41.5 million or less (small banking
organization).\88\ As of June 30, 2019, there were approximately 2,976
small bank holding companies, 133 small savings and loan holding
companies, and 537 small SMBs. The final rule may also have
implications for additional entities that have material relationships
with banking organizations; however, the scope of potentially affected
entities and thus the extent to which affected entities are small
entities under the regulations of the Small Business Administration, is
not known.
---------------------------------------------------------------------------
\88\ See 13 CFR 121.201. Effective August 19, 2019, the SBA
revised the size standards for banking organizations to $600 million
in assets from $550 million in assets. 84 FR 34261 (July 18, 2019).
---------------------------------------------------------------------------
As discussed in the SUPPLEMENTARY INFORMATION section, the final
rule establishes a more detailed framework for the Board to determine
whether a company has control over another company for purposes of the
BHC Act and HOLA. The final rule consists of a series of rebuttable
presumptions of control, a rebuttable presumption of noncontrol, and
various ancillary items such as definitions of terms used in the
presumptions. The presumptions of control generally would be consistent
with the Board's current practice with respect to controlling
influence, with certain targeted adjustments.
A main impact of the final rule will be to enhance transparency to
the public on the Board's views on controlling influence. The final
rule most directly affects bank holding companies and savings and loan
holding companies, though it also could impact state member banks and
other companies with relationships with depository institutions and
depository institution holding companies. However, the final rule
generally will not impact banking organizations in the ordinary course;
there are no regular compliance, recordkeeping, or reporting
requirements associated with the final rule. Rather, the impact of the
final rule will generally be in the context of certain types of
significant transactions that companies may decide to engage in. In
addition, any material impact would be concentrated in companies
engaged in the particular types of investments where controlling
influence is a concern for the parties involved, which is a narrow
subset of all transactions banking organizations may be party to. For
the reasons discussed above, the Board anticipates that any economic
impact of the final rule, including on small banking organizations,
will be a reduction of burden associated with structuring transactions
to address control issues. Therefore, the Board does not expect the
rule to have a significant economic impact on a substantial number of
small entities.
C. Plain Language
Section 722 of the Gramm-Leach-Bliley Act \89\ requires the Federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The Board have sought to present the
final rule in a simple and straightforward manner, did not receive any
comments on the use of plain language.
---------------------------------------------------------------------------
\89\ Public Law 106-102, section 722, 113 Stat. 1338, 1471
(1999).
---------------------------------------------------------------------------
List of Subjects
12 CFR Part 225
Administrative practice and procedure, Banks, Banking, Capital
planning, Holding companies, Reporting and recordkeeping requirements,
Securities, Stress testing.
12 CFR Part 238
Administrative practice and procedure, Banks, Banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Holding companies, Securities.
Authority and Issuance
For the reasons stated in the preamble, the Board of Governors of
the Federal Reserve System amends 12 CFR chapter II as follows:
[[Page 12421]]
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
0
1. The authority citation for part 225 continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-
1, 1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3906,
3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.
Subpart A--General Provisions
0
2. In Sec. 225.2:
0
a. Remove the words ``bank or other company'' and add in their place
``company'' wherever they occur in paragraphs (e) introductory text and
(e)(1);
0
b. Revise paragraphs (e)(2) and (q)(2); and
0
c. Add paragraph (u).
The revisions and addition read as follows:
Sec. 225.2 Definitions.
* * * * *
(e) * * *
(2) A company is deemed to control voting securities or assets
owned, controlled, or held, directly or indirectly:
(i) By the company, or by any subsidiary of the company;
(ii) That the company has power to vote or to dispose of;
(iii) In a fiduciary capacity for the benefit of the company or any
of its subsidiaries;
(iv) In a fiduciary capacity (including by pension and profit-
sharing trusts) for the benefit of the shareholders, members, or
employees (or individuals serving in similar capacities) of the company
or any of its subsidiaries; or
(v) According to the standards under Sec. 225.9 of this part.
* * * * *
(q) * * *
(2) Nonvoting securities. Common shares, preferred shares, limited
partnership interests, limited liability company interests, or similar
interests are not voting securities if:
(i) Any voting rights associated with the securities are limited
solely to the type customarily provided by statute with regard to
matters that would significantly and adversely affect the rights or
preference of the security, such as the issuance of additional amounts
or classes of senior securities, the modification of the terms of the
security, the dissolution of the issuing company, or the payment of
dividends by the issuing company when preferred dividends are in
arrears;
(ii) The securities represent an essentially passive investment or
financing device and do not otherwise provide the holder with control
over the issuing company; and
(iii) The securities do not entitle the holder, by statute,
charter, or in any manner, to select or to vote for the selection of
directors, trustees, or partners (or persons exercising similar
functions) of the issuing company; except that limited partnership
interests or membership interests in limited liability companies are
not voting securities due to voting rights that are limited solely to
voting for the removal of a general partner or managing member (or
persons exercising similar functions at the company) for cause, to
replace a general partner or managing member (or persons exercising
similar functions at the company) due to incapacitation or following
the removal of such person, or to continue or dissolve the company
after removal of the general partner or managing member (or persons
exercising similar functions at the company).
* * * * *
(u) Voting percentage. For purposes of this part, the percentage of
a class of a company's voting securities controlled by a person is the
greater of:
(1) The quotient, expressed as a percentage, of the number of
shares of the class of voting securities controlled by the person,
divided by the number of shares of the class of voting securities that
are issued and outstanding, both as adjusted by Sec. 225.9 of this
part; and
(2) The quotient, expressed as a percentage, of the number of votes
that may be cast by the person on the voting securities controlled by
the person, divided by the total votes that are legally entitled to be
cast by the issued and outstanding shares of the class of voting
securities, both as adjusted by Sec. 225.9 of this part.
0
3. Section 225.9 is added to read as follows:
Sec. 225.9 Control over securities.
(a) Contingent rights, convertible securities, options, and
warrants. (1) A person that controls a security, option, warrant, or
other financial instrument that is convertible into, exercisable for,
exchangeable for, or otherwise may become a security controls each
security that could be acquired as a result of such conversion,
exercise, exchange, or similar occurrence.
(2) If a financial instrument of the type described in paragraph
(a)(1) of this section is convertible into, exercisable for,
exchangeable for, or otherwise may become a number of securities that
varies according to a formula, rate, or other variable metric, the
number of securities controlled under paragraph (a)(1) of this section
is the maximum number of securities that the financial instrument could
be converted into, be exercised for, be exchanged for, or otherwise
become under the formula, rate, or other variable metric.
(3) Notwithstanding paragraph (a)(1) of this section, a person does
not control voting securities due to controlling a financial instrument
if the financial instrument:
(i) By its terms is not convertible into, is not exercisable for,
is not exchangeable for, and may not otherwise become voting securities
in the hands of the person or an affiliate of the person; and
(ii) By its terms is only convertible into, exercisable for,
exchangeable for, or may otherwise become voting securities in the
hands of a transferee after a transfer:
(A) In a widespread public distribution;
(B) To the issuing company;
(C) In transfers in which no transferee (or group of associated
transferees) would receive 2 percent or more of the outstanding
securities of any class of voting securities of the issuing company; or
(D) To a transferee that would control more than 50 percent of
every class of voting securities of the issuing company without any
transfer from the person.
(4) Notwithstanding paragraph (a)(1) of this section, a person that
has agreed to acquire securities or other financial instruments
pursuant to a securities purchase agreement does not control such
securities or financial instruments until the person acquires the
securities or financial instruments.
(5) Notwithstanding paragraph (a)(1) of this section, a right that
provides a person the ability to acquire securities in future issuances
or to convert nonvoting securities into voting securities does not
cause the person to control the securities that could be acquired under
the right, so long as the right does not allow the person to acquire a
higher percentage of the class of securities than the person controlled
immediately prior to the future acquisition.
(6) Notwithstanding paragraph (a)(1) of this section, a preferred
security that would be a nonvoting security but for a right to vote on
directors that activates only after six or more quarters of unpaid
dividends is not considered to be a voting security until the security
holder is entitled to exercise the voting right.
(7) For purposes of determining the percentage of a class of voting
securities or the total equity percentage of a company controlled by a
person that
[[Page 12422]]
controls a financial instrument of the type described in paragraph
(a)(1) of this section:
(i) The securities controlled by the person under paragraphs (a)(1)
through (6) of this section are deemed to be issued and outstanding;
and
(ii) Any securities controlled by anyone other than the person
under paragraph (a)(1) through (6) of this section are not deemed to be
issued and outstanding, unless by the terms of the financial
instruments the securities controlled by the other persons must be
issued and outstanding in order for the securities of the person to be
issued and outstanding.
(b) Restriction on securities. A person that enters into an
agreement or understanding with a second person under which the rights
of the second person are restricted in any manner with respect to
securities that are controlled by the second person, controls the
securities of the second person, unless the restriction is:
(1) A requirement that the second person offer the securities for
sale to the first person for a reasonable period of time prior to
transferring the securities to a third party;
(2) A requirement that, if the second person agrees to sell the
securities, the second person provide the first person with the
opportunity to participate in the sale of the securities by the second
person;
(3) A requirement under which the second person agrees to sell its
securities to a third party if a majority of security holders agrees to
sell their securities to the third party;
(4) Incident to a bona fide loan transaction in which the
securities serve as collateral;
(5) A short-term and revocable proxy;
(6) A restriction on transferability that continues only for a
reasonable amount of time necessary to complete an acquisition by the
first person of the securities from the second person, including the
time necessary to obtain required approval from an appropriate
government authority with respect to the acquisition;
(7) A requirement that the second person vote the securities in
favor of a specific acquisition of control of the issuing company, or
against competing transactions, if the restriction continues only for a
reasonable amount of time necessary to complete the transaction,
including the time necessary to obtain required approval from an
appropriate government authority with respect to an acquisition or
merger; or
(8) An agreement among security holders of the issuing company
intended to preserve the tax status or tax benefits of the company,
such as qualification of the issuing company as a Subchapter S
corporation, as defined in 26 U.S.C. 1361(a)(1) or any successor
statute, or prevention of events that could impair deferred tax assets,
such as net operating loss carryforwards, as described in 26 U.S.C. 382
or any successor statute.
(c) Securities held by senior management officials or controlling
equity holders of a company. A company that controls 5 percent or more
of any class of voting securities of another company controls all
securities issued by the second company that are controlled by senior
management officials, directors, or controlling shareholders of the
first company, or by immediate family members of such persons, unless
the first company controls less than 15 percent of each class of voting
securities of the second company and the senior management officials,
directors, and controlling shareholders of the first company, and
immediate family members of such persons, control 50 percent or more of
each class of voting securities of the second company.
(d) Reservation of authority. Notwithstanding paragraphs (a)
through (c) of this section, the Board may determine that securities
are or are not controlled by a company based on the facts and
circumstances presented.
0
4. Subpart D is revised to read as follows:
Subpart D--Control and Divestiture Proceedings
Sec.
225.31 Control proceedings.
225.32 Rebuttable presumptions of control of a company.
225.33 Rebuttable presumption of noncontrol of a company.
225.34 Total equity.
Subpart D--Control and Divestiture Proceedings
Sec. 225.31 Control proceedings.
(a) Preliminary determination of control. (1) The Board in its sole
discretion may issue a preliminary determination of control under the
procedures set forth in this section in any case in which the Board
determines, based on consideration of the facts and circumstances
presented, that a first company has the power to exercise a controlling
influence over the management or policies of a second company.
(2) If the Board makes a preliminary determination of control under
this section, the Board shall send notice to the first company
containing a statement of the facts upon which the preliminary
determination is based.
(b) Response to preliminary determination of control. (1) Within 30
calendar days after issuance by the Board of a preliminary
determination of control or such longer period permitted by the Board
in its discretion, the first company against whom the preliminary
determination has been made shall:
(i) Consent to the preliminary determination of control and either:
(A) Submit for the Board's approval a specific plan for the prompt
termination of the control relationship; or
(B) File an application or notice under this part, as applicable;
or
(ii) Contest the preliminary determination by filing a response,
setting forth the facts and circumstances in support of its position
that no control exists, and, if desired, requesting a hearing or other
proceeding.
(2) If the first company fails to respond to the preliminary
determination of control within 30 days or such longer period permitted
by the Board in its discretion, the first company will be deemed to
have waived its right to present additional information to the Board or
to request a hearing or other proceeding regarding the preliminary
determination of control.
(c) Hearing and final determination. (1) The Board shall order a
hearing or other appropriate proceeding upon the petition of a first
company that contests a preliminary determination of control if the
Board finds that material facts are in dispute. The Board may, in its
discretion, order a hearing or other appropriate proceeding without a
petition for such a proceeding by the first company.
(2) At a hearing or other proceeding, any applicable presumptions
established under this subpart shall be considered in accordance with
the Federal Rules of Evidence and the Board's Rules of Practice for
Formal Hearings (12 CFR part 263).
(3) After considering the submissions of the first company and
other evidence, including the record of any hearing or other
proceeding, the Board will issue a final order determining whether the
first company has the power to exercise a controlling influence over
the management or policies of the second company. If a controlling
influence is found, the Board may direct the first company to terminate
the control relationship or to file an application or notice for the
Board's approval to retain the control relationship.
(d) Submission of evidence. (1) In connection with contesting a
preliminary determination of control
[[Page 12423]]
under paragraph (b)(1)(ii) of this section, a first company may submit
to the Board evidence or any other relevant information related to its
control of a second company.
(2) Evidence or other relevant information submitted to the Board
pursuant to paragraph (d)(1) of this section must be in writing and may
include a description of all current and proposed relationships between
the first company and the second company, including relationships of
the type that are identified under any of the rebuttable presumptions
in Sec. Sec. 225.32 and 225.33 of this part, copies of any formal
agreements related to such relationships, and a discussion regarding
why the Board should not determine the first company to control the
second company.
(e) Definitions. For purposes of this subpart:
(1) Board of directors means the board of directors of a company or
a set of individuals exercising similar functions at a company.
(2) Director representative means any individual that represents
the interests of a first company through service on the board of
directors of a second company. For purposes of this paragraph (e)(2),
examples of persons who are directors of a second company and generally
would be considered director representatives of a first company
include:
(i) A current officer, employee, or director of the first company;
(ii) An individual who was an officer, employee, or director of the
first company within the prior two years; and
(iii) An individual who was nominated or proposed to be a director
of the second company by the first company.
(iv) A director representative does not include a nonvoting
observer.
(3) First company means the company whose potential control of a
second company is the subject of determination by the Board under this
subpart.
(4) Investment adviser means a company that:
(i) Is registered as an investment adviser with the Securities and
Exchange Commission under the Investment Advisers Act of 1940 (15
U.S.C. 80b-1 et seq.);
(ii) Is registered as a commodity trading advisor with the
Commodity Futures Trading Commission under the Commodity Exchange Act
(7 U.S.C. 1 et seq.);
(iii) Is a foreign equivalent of an investment adviser or commodity
trading advisor, as described in paragraph (e)(4)(i) or (ii) of this
section; or
(iv) Engages in any of the activities set forth in Sec.
225.28(b)(6)(i) through (iv) of this part.
(5) Limiting contractual right means a contractual right of the
first company that would allow the first company to restrict
significantly, directly or indirectly, the discretion of the second
company, including its senior management officials and directors, over
operational and policy decisions of the second company.
(i) Examples of limiting contractual rights may include, but are
not limited to, a right that allows the first company to restrict or to
exert significant influence over decisions related to:
(A) Activities in which the second company may engage, including a
prohibition on entering into new lines of business, making substantial
changes to or discontinuing existing lines of business, or entering
into a contractual arrangement with a third party that imposes
significant financial obligations on the second company;
(B) How the second company directs the proceeds of the first
company's investment;
(C) Hiring, firing, or compensating one or more senior management
officials of the second company, or modifying the second company's
policies or budget concerning the salary, compensation, employment, or
benefits plan for its employees;
(D) The second company's ability to merge or consolidate, or its
ability to acquire, sell, lease, transfer, spin-off, recapitalize,
liquidate, dissolve, or dispose of subsidiaries or assets;
(E) The second company's ability to make investments or
expenditures;
(F) The second company achieving or maintaining a financial target
or limit, including, for example, a debt-to-equity ratio, a fixed
charges ratio, a net worth requirement, a liquidity target, a working
capital target, or a classified assets or nonperforming loans limit;
(G) The second company's payment of dividends on any class of
securities, redemption of senior instruments, or voluntary prepayment
of indebtedness;
(H) The second company's ability to authorize or issue additional
junior equity or debt securities, or amend the terms of any equity or
debt securities issued by the second company;
(I) The second company's ability to engage in a public offering or
to list or de-list securities on an exchange, other than a right that
allows the securities of the first company to have the same status as
other securities of the same class;
(J) The second company's ability to amend its articles of
incorporation or by-laws, other than in a way that is solely defensive
for the first company;
(K) The removal or selection of any independent accountant,
auditor, investment adviser, or investment banker employed by the
second company; or
(L) The second company's ability to significantly alter accounting
methods and policies, or its regulatory, tax, or liability status
(e.g., converting from a stock corporation to a limited liability
company); and
(ii) A limiting contractual right does not include a contractual
right that would not allow the first company to significantly restrict,
directly or indirectly, the discretion of the second company over
operational and policy decisions of the second company. Examples of
contractual rights that are not limiting contractual rights may
include:
(A) A right that allows the first company to restrict or to exert
significant influence over decisions relating to the second company's
ability to issue securities senior to securities owned by the first
company;
(B) A requirement that the first company receive financial reports
or other information of the type ordinarily available to common
stockholders;
(C) A requirement that the second company maintain its corporate
existence;
(D) A requirement that the second company consult with the first
company on a reasonable periodic basis;
(E) A requirement that the second company provide notices of the
occurrence of material events affecting the second company;
(F) A requirement that the second company comply with applicable
statutory and regulatory requirements;
(G) A market standard requirement that the first company receive
similar contractual rights as those held by other investors in the
second company;
(H) A requirement that the first company be able to purchase
additional securities issued by the second company in order to maintain
the first company's percentage ownership in the second company;
(I) A requirement that the second company ensure that any security
holder who intends to sell its securities of the second company provide
other security holders of the second company or the second company
itself the opportunity to purchase the securities before the securities
can be sold to a third party; or
(J) A requirement that the second company take reasonable steps to
ensure
[[Page 12424]]
the preservation of tax status or tax benefits, such as status of the
second company as a Subchapter S corporation or the protection of the
value of net operating loss carry-forwards.
(6) Second company means the company whose potential control by a
first company is the subject of determination by the Board under this
subpart.
(7) Senior management official means any person who participates or
has the authority to participate (other than in the capacity as a
director) in major policymaking functions of a company.
(f) Reservation of authority. Nothing in this subpart shall limit
the authority of the Board to take any supervisory or enforcement
action otherwise permitted by law, including an action to address
unsafe or unsound practices or conditions, or violations of law.
Sec. 225.32 Rebuttable presumptions of control of a company.
(a) General. (1) In any proceeding under Sec. 225.31(b) or (c) of
this part, a first company is presumed to control a second company in
the situations described in paragraphs (b) through (i) of this section.
The Board also may find that a first company controls a second company
based on other facts and circumstances.
(2) For purposes of the presumptions in this section, any company
that is a subsidiary of the first company and also a subsidiary of the
second company is considered to be a subsidiary of the first company
and not a subsidiary of the second company.
(b) Management contract or similar agreement. The first company
enters into any agreement, understanding, or management contract (other
than to serve as investment adviser) with the second company, under
which the first company directs or exercises significant influence or
discretion over the general management, overall operations, or core
business or policy decisions of the second company. Examples of such
agreements include where the first company is a managing member,
trustee, or general partner of the second company, or exercises similar
powers and functions.
(c) Total equity. The first company controls one third or more of
the total equity of the second company.
(d) Ownership or control of 5 percent or more of voting securities.
The first company controls 5 percent or more of the outstanding
securities of any class of voting securities of the second company,
and:
(1)(i) Director representatives of the first company or any of its
subsidiaries comprise 25 percent or more of the board of directors of
the second company or any of its subsidiaries; or
(ii) Director representatives of the first company or any of its
subsidiaries are able to make or block the making of major operational
or policy decisions of the second company or any of its subsidiaries;
(2) Two or more employees or directors of the first company or any
of its subsidiaries serve as senior management officials of the second
company or any of its subsidiaries;
(3) An employee or director of the first company or any of its
subsidiaries serves as the chief executive officer, or serves in a
similar capacity, of the second company or any of its subsidiaries;
(4) The first company or any of its subsidiaries enters into
transactions or has business relationships with the second company or
any of its subsidiaries that generate in the aggregate 10 percent or
more of the total annual revenues or expenses of the second company,
each on a consolidated basis; or
(5) The first company or any of its subsidiaries has any limiting
contractual right with respect to the second company or any of its
subsidiaries, unless such limiting contractual right is part of an
agreement to merge with or make a controlling investment in the second
company that is reasonably expected to close within one year and such
limiting contractual right is designed to ensure that the second
company continues to operate in the ordinary course until the merger or
investment is consummated or such limiting contractual right requires
the second company to take an action necessary for the merger or
investment to be consummated.
(e) Ownership or control of 10 percent or more of voting
securities. The first company controls 10 percent or more of the
outstanding securities of any class of voting securities of the second
company, and:
(1) The first company or any of its subsidiaries propose a number
of director representatives to the board of directors of the second
company or any of its subsidiaries in opposition to nominees proposed
by the management or board of directors of the second company or any of
its subsidiaries that, together with any director representatives of
the first company or any of its subsidiaries on the board of directors
of the second company or any of its subsidiaries, would comprise 25
percent or more of the board of directors of the second company or any
of its subsidiaries;
(2) Director representatives of the first company and its
subsidiaries comprise more than 25 percent of any committee of the
board of directors of the second company or any of its subsidiaries
that can take action that binds the second company or any of its
subsidiaries; or
(3) The first company or any of its subsidiaries enters into
transactions or has business relationships with the second company or
any of its subsidiaries that:
(i) Are not on market terms; or
(ii) Generate in the aggregate 5 percent or more of the total
annual revenues or expenses of the second company, each on a
consolidated basis.
(f) Ownership or control of 15 percent or more of voting
securities. The first company controls 15 percent or more of the
outstanding securities of any class of voting securities of the second
company, and:
(1) A director representative of the first company or of any of its
subsidiaries serves as the chair of the board of directors of the
second company or any of its subsidiaries;
(2) One or more employees or directors of the first company or any
of its subsidiaries serves as a senior management official of the
second company or any of its subsidiaries; or
(3) The first company or any of its subsidiaries enters into
transactions or has business relationships with the second company or
any of its subsidiaries that generate in the aggregate 2 percent or
more of the total annual revenues or expenses of the second company,
each on a consolidated basis.
(g) Accounting consolidation. The first company consolidates the
second company on its financial statements prepared under U.S.
generally accepted accounting principles.
(h) Control of an investment fund. (1) The first company serves as
an investment adviser to the second company, the second company is an
investment fund, and the first company, directly or indirectly, or
acting through one or more other persons:
(i) Controls 5 percent or more of the outstanding securities of any
class of voting securities of the second company; or
(ii) Controls 25 percent or more of the total equity of the second
company.
(2) The presumption of control in paragraph (h)(1) of this section
does not apply if the first company organized and sponsored the second
company within the preceding 12 months.
(i) Divestiture of control. (1) The first company controlled the
second company under Sec. 225.2(e)(1)(i) or (ii) of this part at any
time during the prior
[[Page 12425]]
two years and the first company controls 15 percent or more of the
outstanding securities of any class of voting securities of the second
company.
(2) Notwithstanding paragraph (i)(1) of this section, a first
company will not be presumed to control a second company under this
paragraph if 50 percent or more of the outstanding securities of each
class of voting securities of the second company is controlled by a
person that is not a senior management official or director of the
first company, or by a company that is not an affiliate of the first
company.
(j) Securities held in a fiduciary capacity. For purposes of the
presumptions of control in this section, the first company does not
control securities of the second company that the first company holds
in a fiduciary capacity, except that if the second company is a
depository institution or a depository institution holding company,
this paragraph (j) only applies to securities held in a fiduciary
capacity without sole discretionary authority to exercise the voting
rights of the securities.
Sec. 225.33 Rebuttable presumption of noncontrol of a company.
(a) In any proceeding under Sec. 225.31(b) or (c) of this part, a
first company is presumed not to control a second company if:
(1) The first company controls less than 10 percent of the
outstanding securities of each class of voting securities of the second
company; and
(2) The first company is not presumed to control the second company
under Sec. 225.32 of this part.
(b) In any proceeding under this subpart, or judicial proceeding
under the Bank Holding Company Act, other than a proceeding in which
the Board has made a preliminary determination that a first company has
the power to exercise a controlling influence over the management or
policies of a second company, a first company may not be held to have
had control over a second company at any given time, unless the first
company, at the time in question, controlled 5 percent or more of the
outstanding securities of any class of voting securities of the second
company, or had already been found to have control on the basis of the
existence of a controlling influence relationship.
Sec. 225.34 Total equity.
(a) General. For purposes of this subpart, the total equity
controlled by a first company in a second company that is organized as
a stock corporation and prepares financial statements pursuant to U.S.
generally accepted accounting principles will be calculated as
described in paragraph (b) of this section. With respect to a second
company that is not organized as a stock corporation or that does not
prepare financial statements pursuant to U.S. generally accepted
accounting principles, the first company's total equity in the second
company will be calculated so as to be reasonably consistent with the
methodology described in paragraph (b) of this section, while taking
into account the legal form of the second company and the accounting
system used by the second company to prepare financial statements.
(b) Calculation of total equity--(1) Total equity. The first
company's total equity in the second company, expressed as a
percentage, is equal to:
(i) The sum of Investor Common Equity and, for each class of
preferred stock issued by the second company, Investor Preferred
Equity, divided by
(ii) Issuer Shareholders' Equity.
(2) Investor Common Equity equals the greater of:
(i) Zero, and
(ii) The quotient of the number of shares of common stock of the
second company that are controlled by the first company divided by the
total number of shares of common stock of the second company that are
issued and outstanding, multiplied by the amount of shareholders'
equity of the second company not allocated to preferred stock under
U.S. generally accepted accounting principles.\1\
---------------------------------------------------------------------------
\1\ If the second company has multiple classes of common stock
outstanding and different classes of common stock have different
economic interests in the second company on a per share basis, the
number of shares of common stock must be adjusted for purposes of
this calculation so that each share of common stock has the same
economic interest in the second company.
---------------------------------------------------------------------------
(3) Investor Preferred Equity equals, for each class of preferred
stock issued by the second company, the greater of:
(i) Zero, and
(ii) The quotient of the number of shares of the class of preferred
stock of the second company that are controlled by the first company
divided by the total number of shares of the class of preferred stock
that are issued and outstanding, multiplied by the amount of
shareholders' equity of the second company allocated to the class of
preferred stock under U.S. generally accepted accounting principles.\2\
---------------------------------------------------------------------------
\2\ If there are different classes of preferred stock with equal
seniority (i.e., pari passu classes of preferred stock), the pari
passu shares are treated as a single class. If pari passu classes of
preferred stock have different economic interests in the second
company on a per share basis, the number of shares of preferred
stock must be adjusted for purposes of this calculation so that each
pari passu share of preferred stock has the same economic interest
in the second company.
---------------------------------------------------------------------------
(c) Consideration of debt instruments and other interests in total
equity. (1) For purposes of the total equity calculation in paragraph
(b) of this section, a debt instrument or other interest issued by the
second company that is controlled by the first company may be treated
as an equity instrument if that debt instrument or other interest is
functionally equivalent to equity.
(2) For purposes of paragraph (b)(1) of this section, the principal
amount of all debt instruments and the market value of all other
interests that are functionally equivalent to equity that are
controlled by the first company are added to the sum under paragraph
(b)(1)(i) of this section, and the principal amount of all debt
instruments and the market value of all other interests that are
functionally equivalent to equity that are outstanding are added to
Issuer Shareholders' Equity.
(3) For purposes of paragraph (c)(1) of this section, a debt
instrument issued by the second company may be considered functionally
equivalent to equity if it has equity-like characteristics, such as:
(i) Extremely long-dated maturity;
(ii) Subordination to other debt instruments issued by the second
company;
(ii) Qualification as regulatory capital under any regulatory
capital rules applicable to the second company;
(iii) Qualification as equity under applicable tax law;
(iv) Qualification as equity under U.S. generally accepted
accounting principles or other applicable accounting standards;
(v) Inadequacy of the equity capital underlying the debt at the
time of the issuance of the debt; or
(vi) Issuance not on market terms.
(4) For purposes of paragraph (c)(1) of this section, an interest
that is not a debt instrument issued by the second company may be
considered functionally equivalent to equity if it has equity-like
characteristics, such as entitling its owner to a share of the profits
of the second company.
(d) Exclusion of certain equity instruments from total equity. (1)
For purposes of the total equity calculation in paragraph (b) of this
section, an equity instrument issued by the second company that is
controlled by the first company may be treated as not an equity
instrument if the equity instrument is functionally equivalent to debt.
[[Page 12426]]
(2) For purposes of paragraph (d)(1) of this section, an equity
instrument issued by the second company may be considered functionally
equivalent to debt if it has debt-like characteristics, such as
protections generally provided to creditors, a limited term, a fixed
rate of return or a variable rate of return linked to a reference
interest rate, classification as debt for tax purposes, or
classification as debt for accounting purposes.
(e) Frequency of total equity calculation. The total equity of a
first company in a second company is calculated each time the first
company acquires control over equity instruments of the second company,
including any debt instruments or other interests that are functionally
equivalent to equity in accordance with paragraph (c) of this section.
PART 238--SAVINGS AND LOAN HOLDING COMPANIES (REGULATION LL)
0
5. The authority citation for part 238 continues to read as follows:
Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462, 1462a, 1463,
1464, 1467, 1467a, 1468, 1813, 1817, 1829e, 1831i, 1972; 15 U.S.C.
78l.
Subpart A--General Provisions
0
6. Amend Sec. 238.2 by revising paragraphs (e), (r)(2), and (tt) to
read as follows:
Sec. 238.2 Definitions.
* * * * *
(e) A person shall be deemed to have control of:
(1) A savings association if the person directly or indirectly or
acting in concert with one or more other persons, or through one or
more subsidiaries, owns, controls, or holds with power to vote, or
holds proxies representing, more than 25 percent of the voting shares
of such savings association, or controls in any manner the election of
a majority of the directors of such association;
(2) Any other company if the person directly or indirectly or
acting in concert with one or more other persons, or through one or
more subsidiaries, owns, controls, or holds with power to vote, or
holds proxies representing, more than 25 percent of the voting shares
or rights of such other company, or controls in any manner the election
or appointment of a majority of the directors or trustees of such other
company, or is a general partner in or has contributed more than 25
percent of the capital of such other company;
(3) A trust if the person is a trustee thereof;
(4) A company if the Board determines, after reasonable notice and
opportunity for hearing, that such person directly or indirectly
exercises a controlling influence over the management or policies of
such association or other company; or
(5) Voting securities or assets owned, controlled, or held,
directly or indirectly:
(i) By the company, or by any subsidiary of the company;
(ii) That the company has power to vote or to dispose of;
(iii) In a fiduciary capacity for the benefit of the company or any
of its subsidiaries;
(iv) In a fiduciary capacity (including by pension and profit-
sharing trusts) for the benefit of the shareholders, members, or
employees (or individuals serving in similar capacities) of the company
or any of its subsidiaries; or
(v) According to the standards under Sec. 238.9 of this part.
* * * * *
(r) * * *
(2) Nonvoting securities. Common shares, preferred shares, limited
partnership interests, limited liability company interests, or similar
interests are not voting securities if:
(i) Any voting rights associated with the securities are limited
solely to the type customarily provided by statute with regard to
matters that would significantly and adversely affect the rights or
preference of the security, such as the issuance of additional amounts
or classes of senior securities, the modification of the terms of the
security, the dissolution of the issuing company, or the payment of
dividends by the issuing company when preferred dividends are in
arrears;
(ii) The securities represent an essentially passive investment or
financing device and do not otherwise provide the holder with control
over the issuing company; and
(iii) The securities do not entitle the holder, by statute,
charter, or in any manner, to select or to vote for the selection of
directors, trustees, or partners (or persons exercising similar
functions) of the issuing company; except that limited partnership
interests or membership interests in limited liability companies are
not voting securities due to voting rights that are limited solely to
voting for the removal of a general partner or managing member (or
persons exercising similar functions at the company) for cause, to
replace a general partner or managing member (or persons exercising
similar functions at the company) due to incapacitation or following
the removal of such person, or to continue or dissolve the company
after removal of the general partner or managing member (or persons
exercising similar functions at the company).
* * * * *
(tt) Voting percentage. For purposes of this part, the percentage
of a class of a company's voting securities controlled by a person is
the greater of:
(1) The quotient, expressed as a percentage, of the number of
shares of the class of voting securities controlled by the person,
divided by the number of shares of the class of voting securities that
are issued and outstanding, both as adjusted by Sec. 238.9 of this
part; and
(2) The quotient, expressed as a percentage, of the number of votes
that may be cast by the person on the voting securities controlled by
the person, divided by the total votes that are legally entitled to be
cast by the issued and outstanding shares of the class of voting
securities, both as adjusted by Sec. 238.9 of this part.
0
7. Section 238.8 is amended by revising the section heading and adding
paragraphs (b) and (c) to read as follows:
Sec. 238.8 Safe and sound operations, and Small Bank Holding Company
Policy Statement.
* * * * *
(b) The Board's Small Bank Holding Company Policy Statement (12 CFR
part 225, appendix C) (Policy Statement) applies to savings and loan
holding companies as if they were bank holding companies. To qualify or
rely on the Policy Statement, savings and loan holding companies must
meet all qualifying requirements in the Policy Statement as if they
were a bank holding company. For purposes of applying the Policy
Statement, the term ``nonbank subsidiary'' as used in the Policy
Statement refers to a subsidiary of a savings and loan holding company
other than a savings association or a subsidiary of a savings
association.
(c) The Board may exclude any savings and loan holding company,
regardless of asset size, from the Policy Statement under paragraph (b)
of this section if the Board determines that such action is warranted
for supervisory purposes.
0
8. Section 238.9 is revised to read as follows:
Sec. 238.9 Control over securities.
(a) Contingent rights, convertible securities, options, and
warrants. (1) A person that controls a security, option, warrant, or
other financial instrument that is convertible into, exercisable for,
exchangeable for, or otherwise may
[[Page 12427]]
become a security controls each security that could be acquired as a
result of such conversion, exercise, exchange, or similar occurrence.
(2) If a financial instrument of the type described in paragraph
(a)(1) of this section is convertible into, exercisable for,
exchangeable for, or otherwise may become a number of securities that
varies according to a formula, rate, or other variable metric, the
number of securities controlled under paragraph (a)(1) of this section
is the maximum number of securities that the financial instrument could
be converted into, be exercised for, be exchanged for, or otherwise
become under the formula, rate, or other variable metric.
(3) Notwithstanding paragraph (a)(1) of this section, a person does
not control voting securities due to controlling a financial instrument
if the financial instrument:
(i) By its terms is not convertible into, is not exercisable for,
is not exchangeable for, and may not otherwise become voting securities
in the hands of the person or an affiliate of the person; and
(ii) By its terms is only convertible into, exercisable for,
exchangeable for, or may otherwise become voting securities in the
hands of a transferee after a transfer:
(A) In a widespread public distribution;
(B) To the issuing company;
(C) In transfers in which no transferee (or group of associated
transferees) would receive 2 percent or more of the outstanding
securities of any class of voting securities of the issuing company; or
(D) To a transferee that would control more than 50 percent of
every class of voting securities of the issuing company without any
transfer from the person.
(4) Notwithstanding paragraph (a)(1) of this section, a person that
has agreed to acquire securities or other financial instruments
pursuant to a securities purchase agreement does not control such
securities or financial instruments until the person acquires the
securities or financial instruments.
(5) Notwithstanding paragraph (a)(1) of this section, a right that
provides a person the ability to acquire securities in future issuances
or to convert nonvoting securities into voting securities does not
cause the person to control the securities that could be acquired under
the right, so long as the right does not allow the person to acquire a
higher percentage of the class of securities than the person controlled
immediately prior to the future acquisition.
(6) Notwithstanding paragraph (a)(1) of this section, a preferred
security that would be a nonvoting security but for a right to vote on
directors that activates only after six or more quarters of unpaid
dividends is not considered to be a voting security until the security
holder is entitled to exercise the voting right.
(7) For purposes of determining the percentage of a class of voting
securities of a company controlled by a person that controls a
financial instrument of the type described in paragraph (a)(1) of this
section:
(i) The securities controlled by the person under paragraphs (a)(1)
through (6) of this section are deemed to be issued and outstanding;
and
(ii) Any securities controlled by anyone other than the person
under paragraphs (a)(1) through (6) of this section are not deemed to
be issued and outstanding, unless by the terms of the financial
instruments the securities controlled by the other persons must be
issued and outstanding in order for the securities of the person to be
issued and outstanding.
(b) Restriction on securities. A person that enters into an
agreement or understanding with a second person under which the rights
of the second person are restricted in any manner with respect to
securities that are controlled by the second person, controls the
securities of the second person, unless the restriction is:
(1) A requirement that the second person offer the securities for
sale to the first person for a reasonable period of time prior to
transferring the securities to a third party;
(2) A requirement that, if the second person agrees to sell the
securities, the second person provide the first person with the
opportunity to participate in the sale of the securities by the second
person;
(3) A requirement under which the second person agrees to sell its
securities to a third party if a majority of security holders agrees to
sell their securities to the third party;
(4) Incident to a bona fide loan transaction in which the
securities serve as collateral;
(5) A short-term and revocable proxy;
(6) A restriction on transferability that continues only for a
reasonable amount of time necessary to complete an acquisition by the
first person of the securities from the second person, including the
time necessary to obtain required approval from an appropriate
government authority with respect to the acquisition;
(7) A requirement that the second person vote the securities in
favor of a specific acquisition of control of the issuing company, or
against competing transactions, if the restriction continues only for a
reasonable amount of time necessary to complete the transaction,
including the time necessary to obtain required approval from an
appropriate government authority with respect to an acquisition or
merger; or
(8) An agreement among security holders of the issuing company
intended to preserve the tax status or tax benefits of the company,
such as qualification of the issuing company as a Subchapter S
corporation, as defined in 26 U.S.C. 1361(a)(1) or any successor
statute, or prevention of events that could impair deferred tax assets,
such as net operating loss carryforwards, as described in 26 U.S.C. 382
or any successor statute.
(c) Securities held by senior management officials or controlling
equity holders of a company. A company that controls 5 percent or more
of any class of voting securities of another company controls all
securities issued by the second company that are controlled by senior
management officials, directors, or controlling shareholders of the
first company, or by immediate family members of such persons, unless
the first company controls less than 15 percent of each class of voting
securities of the second company and the senior management officials,
directors, and controlling shareholders of the first company, and
immediate family members of such persons, control 50 percent or more of
each class of voting securities of the second company.
(d) Reservation of authority. Notwithstanding paragraphs (a)
through (c) of this section, the Board may determine that securities
are or are not controlled by a company based on the facts and
circumstances presented.
0
9. Subpart C is revised to read as follows:
Subpart C--Control Proceedings
Sec.
238.21 Control proceedings.
238.22 Rebuttable presumptions of control of a company.
238.23 Rebuttable presumption of noncontrol of a company.
Subpart C--Control Proceedings
Sec. 238.21 Control proceedings.
(a) Preliminary determination of control. (1) The Board in its sole
discretion may issue a preliminary determination of control under the
procedures set forth in this section in any case in which the Board
determines, based on consideration of the facts and circumstances
presented, that a first company has the power to exercise a
[[Page 12428]]
controlling influence over the management or policies of a second
company.
(2) If the Board makes a preliminary determination of control under
this section, the Board shall send notice to the first company
containing a statement of the facts upon which the preliminary
determination is based.
(b) Response to preliminary determination of control. (1) Within 30
calendar days after issuance by the Board of a preliminary
determination of control or such longer period permitted by the Board
in its discretion, the first company against whom the preliminary
determination has been made shall:
(i) Consent to the preliminary determination of control and either:
(A) Submit for the Board's approval a specific plan for the prompt
termination of the control relationship; or
(B) File an application or notice under this part, as applicable;
or
(ii) Contest the preliminary determination by filing a response,
setting forth the facts and circumstances in support of its position
that no control exists, and, if desired, requesting a hearing or other
proceeding.
(2) If the first company fails to respond to the preliminary
determination of control within 30 days or such longer period permitted
by the Board in its discretion, the first company will be deemed to
have waived its right to present additional information to the Board or
to request a hearing or other proceeding regarding the preliminary
determination of control.
(c) Hearing and final determination. (1) The Board shall order a
hearing or other appropriate proceeding upon the petition of a first
company that contests a preliminary determination of control if the
Board finds that material facts are in dispute. The Board may, in its
discretion, order a hearing or other appropriate proceeding without a
petition for such a proceeding by the first company.
(2) At a hearing or other proceeding, any applicable presumptions
established under this subpart shall be considered in accordance with
the Federal Rules of Evidence and the Board's Rules of Practice for
Formal Hearings (12 CFR part 263).
(3) After considering the submissions of the first company and
other evidence, including the record of any hearing or other
proceeding, the Board will issue a final order determining whether the
first company has the power to exercise a controlling influence over
the management or policies of the second company. If a controlling
influence is found, the Board may direct the first company to terminate
the control relationship or to file an application or notice for the
Board's approval to retain the control relationship.
(d) Submission of evidence. (1) In connection with contesting a
preliminary determination of control under paragraph (b)(1)(ii) of this
section, a first company may submit to the Board evidence or any other
relevant information related to its control of a second company.
(2) Evidence or other relevant information submitted to the Board
pursuant to paragraph (d)(1) of this section must be in writing and may
include a description of all current and proposed relationships between
the first company and the second company, including relationships of
the type that are identified under any of the rebuttable presumptions
in Sec. Sec. 238.22 and 238.23 of this part, copies of any formal
agreements related to such relationships, and a discussion regarding
why the Board should not determine the first company to control the
second company.
(e) Definitions. For purposes of this subpart:
(1) Board of directors means the board of directors of a company or
a set of individuals exercising similar functions at a company.
(2) Director representative means any individual that represents
the interests of a first company through service on the board of
directors of a second company. For purposes of this paragraph (e)(2),
examples of persons who are directors of a second company and generally
would be considered director representatives of a first company
include:
(i) A current officer, employee, or director of the first company;
(ii) An individual who was an officer, employee, or director of the
first company within the prior two years; and
(iii) An individual who was nominated or proposed to be a director
of the second company by the first company.
(iv) A director representative does not include a nonvoting
observer.
(3) First company means the company whose potential control of a
second company is the subject of determination by the Board under this
subpart.
(4) Investment adviser means a company that:
(i) Is registered as an investment adviser with the Securities and
Exchange Commission under the Investment Advisers Act of 1940 (15
U.S.C. 80b-1 et seq.);
(ii) Is registered as a commodity trading advisor with the
Commodity Futures Trading Commission under the Commodity Exchange Act
(7 U.S.C. 1 et seq.);
(iii) Is a foreign equivalent of an investment adviser or commodity
trading advisor, as described in paragraph (e)(4)(i) or (ii) of this
section; or
(iv) Engages in any of the activities set forth in 12 CFR
225.28(b)(6)(i) through (iv).
(5) Limiting contractual right means a contractual right of the
first company that would allow the first company to restrict
significantly, directly or indirectly, the discretion of the second
company, including its senior management officials and directors, over
operational and policy decisions of the second company.
(i) Examples of limiting contractual rights may include, but are
not limited to, a right that allows the first company to restrict or to
exert significant influence over decisions related to:
(A) Activities in which the second company may engage, including a
prohibition on entering into new lines of business, making substantial
changes to or discontinuing existing lines of business, or entering
into a contractual arrangement with a third party that imposes
significant financial obligations on the second company;
(B) How the second company directs the proceeds of the first
company's investment;
(C) Hiring, firing, or compensating one or more senior management
officials of the second company, or modifying the second company's
policies or budget concerning the salary, compensation, employment, or
benefits plan for its employees;
(D) The second company's ability to merge or consolidate, or its
ability to acquire, sell, lease, transfer, spin-off, recapitalize,
liquidate, dissolve, or dispose of subsidiaries or assets;
(E) The second company's ability to make investments or
expenditures;
(F) The second company achieving or maintaining a financial target
or limit, including, for example, a debt-to-equity ratio, a fixed
charges ratio, a net worth requirement, a liquidity target, a working
capital target, or a classified assets or nonperforming loans limit;
(G) The second company's payment of dividends on any class of
securities, redemption of senior instruments, or voluntary prepayment
of indebtedness;
(H) The second company's ability to authorize or issue additional
junior equity or debt securities, or amend the terms of any equity or
debt securities issued by the second company;
(I) The second company's ability to engage in a public offering or
to list or
[[Page 12429]]
de-list securities on an exchange, other than a right that allows the
securities of the first company to have the same status as other
securities of the same class;
(J) The second company's ability to amend its articles of
incorporation or by-laws, other than in a way that is solely defensive
for the first company;
(K) The removal or selection of any independent accountant,
auditor, investment adviser, or investment banker employed by the
second company; or
(L) The second company's ability to significantly alter accounting
methods and policies, or its regulatory, tax, or liability status
(e.g., converting from a stock corporation to a limited liability
company); and
(ii) A limiting contractual right does not include a contractual
right that would not allow the first company to significantly restrict,
directly or indirectly, the discretion of the second company over
operational and policy decisions of the second company. Examples of
contractual rights that are not limiting contractual rights may
include:
(A) A right that allows the first company to restrict or to exert
significant influence over decisions relating to the second company's
ability to issue securities senior to securities owned by the first
company;
(B) A requirement that the first company receive financial reports
or other information of the type ordinarily available to common
stockholders;
(C) A requirement that the second company maintain its corporate
existence;
(D) A requirement that the second company consult with the first
company on a reasonable periodic basis;
(E) A requirement that the second company provide notices of the
occurrence of material events affecting the second company;
(F) A requirement that the second company comply with applicable
statutory and regulatory requirements;
(G) A market standard requirement that the first company receive
similar contractual rights as those held by other investors in the
second company;
(H) A requirement that the first company be able to purchase
additional securities issued by the second company in order to maintain
the first company's percentage ownership in the second company;
(I) A requirement that the second company ensure that any security
holder who intends to sell its securities of the second company provide
other security holders of the second company or the second company
itself the opportunity to purchase the securities before the securities
can be sold to a third party; or
(J) A requirement that the second company take reasonable steps to
ensure the preservation of tax status or tax benefits, such as status
of the second company as a Subchapter S corporation or the protection
of the value of net operating loss carry-forwards.
(6) Second company means the company whose potential control by a
first company is the subject of determination by the Board under this
subpart.
(7) Senior management official means any person who participates or
has the authority to participate (other than in the capacity as a
director) in major policymaking functions of a company.
(f) Reservation of authority. Nothing in this subpart shall limit
the authority of the Board to take any supervisory or enforcement
action otherwise permitted by law, including an action to address
unsafe or unsound practices or conditions, or violations of law.
Sec. 238.22 Rebuttable presumptions of control of a company.
(a) General. (1) In any proceeding under Sec. 238.21(b) or (c) of
this part, a first company is presumed to control a second company in
the situations described in paragraphs (b) through (h) of this section.
The Board also may find that a first company controls a second company
based on other facts and circumstances.
(2) For purposes of the presumptions in this section, any company
that is a subsidiary of the first company and also a subsidiary of the
second company is considered to be a subsidiary of the first company
and not a subsidiary of the second company.
(b) Management contract or similar agreement. The first company
enters into any agreement, understanding, or management contract (other
than to serve as investment adviser) with the second company, under
which the first company directs or exercises significant influence or
discretion over the general management, overall operations, or core
business or policy decisions of the second company. Examples of such
agreements include where the first company is a managing member,
trustee, or general partner of the second company, or exercises similar
powers and functions.
(c) Ownership or control of 5 percent or more of voting securities.
The first company controls 5 percent or more of the outstanding
securities of any class of voting securities of the second company,
and:
(1)(i) Director representatives of the first company or any of its
subsidiaries comprise 25 percent or more of the board of directors of
the second company or any of its subsidiaries; or
(ii) Director representatives of the first company or any of its
subsidiaries are able to make or block the making of major operational
or policy decisions of the second company or any of its subsidiaries;
(2) Two or more employees or directors of the first company or any
of its subsidiaries serve as senior management officials of the second
company or any of its subsidiaries;
(3) An employee or director of the first company or any of its
subsidiaries serves as the chief executive officer, or serves in a
similar capacity, of the second company or any of its subsidiaries;
(4) The first company or any of its subsidiaries enters into
transactions or has business relationships with the second company or
any of its subsidiaries that generate in the aggregate 10 percent or
more of the total annual revenues or expenses of the second company,
each on a consolidated basis; or
(5) The first company or any of its subsidiaries has any limiting
contractual right with respect to the second company or any of its
subsidiaries, unless such limiting contractual right is part of an
agreement to merge with or make a controlling investment in the second
company that is reasonably expected to close within one year and such
limiting contractual right is designed to ensure that the second
company continues to operate in the ordinary course until the merger or
investment is consummated or such limiting contractual right requires
the second company to take an action necessary for the merger or
investment to be consummated.
(d) Ownership or control of 10 percent or more of voting
securities. The first company controls 10 percent or more of the
outstanding securities of any class of voting securities of the second
company, and:
(1) The first company or any of its subsidiaries propose a number
of director representatives to the board of directors of the second
company or any of its subsidiaries in opposition to nominees proposed
by the management or board of directors of the second company or any of
its subsidiaries that, together with any director representatives of
the first company or any of its subsidiaries on the board of directors
of the second company or any of its subsidiaries, would comprise 25
percent or more of the board of directors
[[Page 12430]]
of the second company or any of its subsidiaries;
(2) Director representatives of the first company and its
subsidiaries comprise more than 25 percent of any committee of the
board of directors of the second company or any of its subsidiaries
that can take action that binds the second company or any of its
subsidiaries; or
(3) The first company or any of its subsidiaries enters into
transactions or has business relationships with the second company or
any of its subsidiaries that:
(i) Are not on market terms; or
(ii) Generate in the aggregate 5 percent or more of the total
annual revenues or expenses of the second company, each on a
consolidated basis.
(e) Ownership or control of 15 percent or more of voting
securities. The first company controls 15 percent or more of the
outstanding securities of any class of voting securities of the second
company, and:
(1) A director representative of the first company or of any of its
subsidiaries serves as the chair of the board of directors of the
second company or any of its subsidiaries;
(2) One or more employees or directors of the first company or any
of its subsidiaries serves as a senior management official of the
second company or any of its subsidiaries; or
(3) The first company or any of its subsidiaries enters into
transactions or has business relationships with the second company or
any of its subsidiaries that generate in the aggregate 2 percent or
more of the total annual revenues or expenses of the second company,
each on a consolidated basis.
(f) Accounting consolidation. The first company consolidates the
second company on its financial statements prepared under U.S.
generally accepted accounting principles.
(g) Control of an investment fund. (1) The first company serves as
an investment adviser to the second company, the second company is an
investment fund, and the first company, directly or indirectly, or
acting through one or more other persons, controls 5 percent or more of
the outstanding securities of any class of voting securities of the
second company.
(2) The presumption of control in paragraph (g)(1) of this section
does not apply if the first company organized and sponsored the second
company within the preceding 12 months.
(h) Divestiture of control. (1) The first company controlled the
second company under Sec. 238.2(e)(1) or (2) of this part at any time
during the prior two years and the first company controls 15 percent or
more of the outstanding securities of any class of voting securities of
the second company.
(2) Notwithstanding paragraph (h)(1) of this section, a first
company will not be presumed to control a second company under this
paragraph if 50 percent or more of the outstanding securities of each
class of voting securities of the second company is controlled by a
person that is not a senior management official or director of the
first company, or by a company that is not an affiliate of the first
company.
(i) Securities held in a fiduciary capacity. For purposes of the
presumptions of control in this section, the first company does not
control securities of the second company that the first company holds
in a fiduciary capacity, except that if the second company is a
depository institution or a depository institution holding company,
this paragraph (i) only applies to securities held in a fiduciary
capacity without sole discretionary authority to exercise the voting
rights of the securities.
Sec. 238.23 Rebuttable presumption of noncontrol of a company.
(a) In any proceeding under Sec. 238.21(b) or (c) of this part, a
first company is presumed not to control a second company if:
(1) The first company controls less than 10 percent of the
outstanding securities of each class of voting securities of the second
company; and
(2) The first company is not presumed to control the second company
under Sec. 238.22 of this part.
(b) In any proceeding under this subpart, or judicial proceeding
under the Home Owners' Loan Act, other than a proceeding in which the
Board has made a preliminary determination that a first company has the
power to exercise a controlling influence over the management or
policies of a second company, a first company may not be held to have
had control over a second company at any given time, unless the first
company, at the time in question, controlled 5 percent or more of the
outstanding securities of any class of voting securities of the second
company, or had already been found to have control on the basis of the
existence of a controlling influence relationship.
By order of the Board of Governors of the Federal Reserve
System, February 14, 2020.
Ann Misback,
Secretary of the Board.
[FR Doc. 2020-03398 Filed 2-27-20; 8:45 am]
BILLING CODE 6210-01-P