Frequently Asked Questions about Regulation Y

Bank Holding Companies and Change in Bank Control

Staff of the Board of Governors of the Federal Reserve System has developed the following frequently asked questions (FAQs) to assist entities in complying with the Board's Regulation Y. Although the FAQs below refer at times to bank holding companies, the FAQs also apply to foreign banking organizations that are subject to the provisions of the Bank Holding Company Act of 1956 (BHC Act) in the same manner as a bank holding company under the International Banking Act of 1978. 12 U.S.C. § 3106. Except as noted below, these FAQs are staff interpretations and have not been approved by the Board of Governors. Staff may supplement or revise these FAQs as necessary or appropriate in the future. Any questions regarding these FAQs, or requests for modification, rescission, or waiver, should be submitted through the Board's Contact Us form.

Subpart A—General Provisions

12 CFR 225.2 (Definitions)

Q1: If a partner of a partnership that is a qualified family partnership (QFP) (as defined in section 2(o)(10) of the BHC Act) assigns the economic interest associated with the partnership interest to a third party who is not a related family member, will the partnership lose its status as a QFP?

Q2: Section 2 of the BHC Act defines "company" generally to include any "corporation, partnership, business trust, association, or similar organization." Under what circumstances would a voting trust, buy-sell agreement, or other similar agreement among shareholders in a bank holding company not constitute a "company" under the BHC Act?

Q3: May a trust that relies on the exception from the definition of "company" in section 2 of the BHC Act include as a beneficiary a new trust that is formed upon termination of the original trust (a "springing trust"), so long as the original trust terminates within the applicable statutory time limit?

Q4: Does a non-business trust that relies on the exception from the definition of "company' in section 2 of the BHC Act need to terminate within the timeframe set out in that section if it was formed in a state that does not observe the rule against perpetuities or otherwise require termination of a trust in such timeframe?

Subpart C—Nonbanking Activities and Acquisitions by Bank Holding Companies

12 CFR 225.22 (Exempt nonbanking activities and acquisitions)

Q1: May a bank holding company acquire an interest in a company that engages in commercial or industrial activities pursuant to section 4(c)(6) of the BHC Act?

Q2: In light of the Board's interpretation of section 4(c)(6) of the BHC Act at section 225.137 of Regulation Y, may bank holding companies jointly invest in a company that engages in the clearing and settlement of securities under section 4(c)(6) of the BHC Act, if the bank holding companies would own in the aggregate more than 50 percent of the stock of the company?

Q3: May a bank holding company effectively dispose of a lease in real property held as an asset acquired in satisfaction of a debt previously contracted in good faith (a "DPC lease") under section 4(c)(2) of the BHC Act by entering into a sublease?

12 CFR 225.28 (List of permissible nonbanking activities)

Q1: May a bank holding company enter into volumetric production payment (VPP) transactions as an activity closely related to banking under section 4(c)(8) of the BHC Act?

Q2: May certain transactions involving the purchase and subsequent sale of a commodity be considered within the scope of permissible lending activities for bank holding companies under section 225.28(b)(1) of Regulation Y?

Q3: May a bank holding company engage in providing flood zone determination services as an activity closely related to banking under section 4(c)(8) of the BHC Act?

Q4: May a bank holding company provide certain services for customers seeking to make exchanges of real property pursuant to section 1031 of the Internal Revenue Code (section 1031) as a permissible nonbanking activity under section 225.28 of Regulation Y?

Subpart D—Control and Divestiture Proceedings

12 CFR 225.31 (Control proceedings)

Q1: Is a contractual provision between a first company and a second company that requires the second company to conform its activities to the activities restrictions under the BHC Act or Home Owners' Loan Act (HOLA) considered a limiting contractual right?

Q2: If a market standard loan covenant in a loan agreement between a first company and a second company meets the definition of a limiting contractual right, is the loan covenant considered a limiting contractual right even though it is located in a loan agreement?

12 CFR 225.32 (Rebuttable presumptions of control of a company)

Q1: What action should a company take if it has investments that predate the effective date of the Board's control rule, have been treated by the company as noncontrolling, and trigger one or more of the presumptions of control in section 225.32 of Regulation Y?

Q2: Are there any circumstances in which Board staff would not recommend that the Board find that an asset management company controls a bank holding company or bank for purposes of the BHC Act, or a savings and loan holding company or savings association for purposes of HOLA, even though the company would be subject to a presumption of control under the Board's regulations?

12 CFR 225.34 (Total equity)

Q1: For purposes of the calculation of total equity in section 225.34 of Regulation Y (12 CFR 225.34), how should the denominator of the total equity formula, "Issuer Shareholders' Equity," be determined?

Subpart E—Change in Bank Control

12 CFR 225.41 (Transactions requiring prior notice)

Q1: When all or substantially all of a state member bank's or bank holding company's shareholders are party to a shareholders' agreement, should the shareholders who are a party to the agreement be viewed as a "group acting in concert"under Regulation Y?

Subpart I—Financial Holding Companies

12 CFR 225.83 (What are the consequences of failing to continue to meet applicable capital and management requirements?)

Q1: May a financial holding company reorganize its activities when it is subject to restrictions on activities under 12 CFR 225.83(d) or an agreement with the Board under section 4(m) of the BHC Act (section 4(m) agreement)?

Subpart J—Merchant Banking Investments

12 CFR 225.171 (What are the limitations on managing or operating a portfolio company held as a merchant banking investment?)

Q1: What covenants would generally be permissible without involving a financial holding company in routinely managing or operating a portfolio company?

Q2: When would the holding period for a merchant banking investment commence if a financial holding company acquired the investment prior to becoming a bank holding company and making a financial holding company election?

Q3: When a financial holding company acquires shares, assets, or ownership interests from another financial holding company, and holds such assets under merchant banking authority, would the applicable holding period for the acquiring financial holding company include the time during which the former owner held the assets?


Subpart A—General Provisions

12 CFR 225.2 (Definitions)

Q1: If a partner of a partnership that is a qualified family partnership (QFP) (as defined in section 2(o)(10) of the BHC Act) assigns the economic interest associated with the partnership interest to a third party who is not a related family member, will the partnership lose its status as a QFP?

A1: Yes. Under section 2(o)(10)(F) of the BHC Act, all partners of a QFP must be (i) individuals related to each other by blood, marriage (including former marriage), or adoption; or (ii) trusts for the primary benefit of individuals described in (i) above. 12 U.S.C. § 1841(o)(10)(F). If a partner of a QFP were to assign the economic interest associated with the partner's partnership interest in the QFP to a third party that is neither a related family member nor a trust for the primary benefit of a related family member, the partnership would no longer be in compliance with the statutory requirements for a QFP even where the associated voting interest is excluded from the assignment.

Source: Letter from Scott G. Alvarez, General Counsel of the Board, to Michael N. Delune, Esq. (May 10, 2010), available here.

Posted: 3/31/2021

 

Q2: Section 2 of the BHC Act defines "company" generally to include any "corporation, partnership, business trust, association, or similar organization." Under what circumstances would a voting trust, buy-sell agreement, or other similar agreement among shareholders in a bank holding company not constitute a "company" under the BHC Act?

A2: A voting trust, buy-sell agreement, or other similar agreement among shareholders in a bank holding company will generally not be a company under section 2 of the BHC Act if the trust or agreement: (i) relates only to the shares of a single bank; (ii) terminates within 25 years; (iii) involves parties who are not participants in any similar voting trust or agreement with respect to any other bank or nonbank business; and (iv) in the case of a voting trust, engages in no other activity except to hold and vote the shares of a single bank.

Source: FRRS 4-185.5.

Posted: 3/31/2021

 

Q3: May a trust that relies on the exception from the definition of "company" in section 2 of the BHC Act include as a beneficiary a new trust that is formed upon termination of the original trust (a "springing trust"), so long as the original trust terminates within the applicable statutory time limit?

A3: Yes. Section 2 of the BHC Act excludes from the definition of "company" a trust that is not a business trust, provided that, by its terms, it terminates (i) within 25 years or (ii) not later than 21 years and 10 months after the death of individuals living on the effective date of the trust (termination requirement). 12 U.S.C. § 1841(b); 12 CFR 225.2(d)(1). A trust that, by its terms, satisfies the termination requirement is excluded from the definition of "company" in the BHC Act, regardless of whether the trust has as its beneficiary a springing trust formed only upon its termination. For purposes of the termination requirement, the "effective date" of a springing trust is the date the springing trust is created (upon termination of the original trust). A springing trust that acquires shares of a bank or bank holding company would be required to comply with any applicable filing obligations related to the acquisition.

Posted: 3/31/2021

 

Q4: Does a non-business trust that relies on the exception from the definition of "company" in section 2 of the BHC Act need to terminate within the timeframe set out in that section if it was formed in a state that does not observe the rule against perpetuities or otherwise require termination of a trust in such timeframe?

A4: Yes. The termination requirement in section 2 of the BHC Act (see Q3 for 12 CFR 225.2) applies regardless of whether the rule against perpetuities or another similar constraint applies under the laws of the state where the trust is formed. Staff understands that it may be difficult to amend the termination provisions of an irrevocable trust (for example, by petitioning the state court to amend or revise the trust). Accordingly, if an irrevocable trust was established with a termination provision that does not meet the termination requirement in section 2 of the BHC Act, but would meet such requirement if measured from the date of the trust's acquisition of shares in a bank or bank holding company (rather than from the effective date of the trust), staff would not recommend that the Board take an enforcement action against the trust for violation of the termination requirement in the trust exclusion from the definition of "company."

Posted: 3/31/2021

 

Subpart C—Nonbanking Activities and Acquisitions by Bank Holding Companies

12 CFR 225.22 (Exempt nonbanking activities and acquisitions)

Q1: May a bank holding company acquire an interest in a company that engages in commercial or industrial activities pursuant to section 4(c)(6) of the BHC Act?

A1: Yes. Section 4(c)(6) of the BHC Act imposes no restrictions on the activities of the company in which the bank holding company invests under such authority. 12 U.S.C. § 1843(c)(6). Section 4(c)(6) permits bank holding companies to make investments in shares of voting securities of a company that, in the aggregate, represent 5 percent or less of the outstanding shares of any class of voting securities of the company, subject to the provisions of section 225.137 of Regulation Y. See 12 CFR 225.22(d)(5). The investment must be noncontrolling within the meaning of the BHC Act and Regulation Y. See 12 CFR part 225, subpart D.

Posted: 3/31/2021

 

Q2: In light of the Board's interpretation of section 4(c)(6) of the BHC Act at section 225.137 of Regulation Y, may bank holding companies jointly invest in a company that engages in the clearing and settlement of securities under section 4(c)(6) of the BHC Act, if the bank holding companies would own in the aggregate more than 50 percent of the stock of the company?

A2: Yes, if each bank holding company: (i) would acquire 5 percent or less of any class of voting securities of the company, and (ii) would make a noncontrolling investment within the meaning of the BHC Act and Regulation Y.

Source: Letter from J. Virgil Mattingly, General Counsel of the Board, to Bradley K. Sabel, Esq. (July 21, 1997), available here.

Posted: 3/31/2021

 

Q3: May a bank holding company effectively dispose of a lease in real property held as an asset acquired in satisfaction of a debt previously contracted in good faith (a "DPC lease") under section 4(c)(2) of the BHC Act by entering into a sublease?

A3: Yes, under certain conditions. A bank holding company effectively disposes of a DPC lease in real property if it enters into a coterminous sublease—that is, a sublease that terminates at the same time as the DPC lease. If a sublease is not coterminous with the DPC lease, the applicable holding period of the lease under section 4(c)(2) of the BHC Act (12 U.S.C. § 1843(c)(2)) and 12 CFR 225.22 is suspended during the term of the non-coterminous sublease and restarts upon termination of the sublease. To constitute an effective disposal, or to suspend the holding period, the sublease or subleases must cover 100 percent of the physical area under the DPC lease.

Posted: 3/31/2021

 

12 CFR 225.28 (List of permissible nonbanking activities)

Q1: May a bank holding company enter into volumetric production payment (VPP) transactions as an activity closely related to banking under section 4(c)(8) of the BHC Act?

A1: VPP transactions entered into for the purpose of providing financing to a third-party customer are considered closely related to banking as extensions of credit and loan servicing under Regulation Y, provided that (i) certain conditions on the activity are satisfied and (ii) certain risk-management policies and procedures are established. See 12 CFR 225.28(b)(1). The letter cited below provides more information on the conditions applicable to VPP transactions, as well as on the required risk-management policies and procedures.

Source: Letter from Scott G. Alvarez, General Counsel of the Board, to Elizabeth T. Davy, Esq. (May 15, 2006), available here.

Posted: 3/31/2021

 

Q2: May certain transactions involving the purchase and subsequent sale of a commodity be considered within the scope of permissible lending activities for bank holding companies under section 225.28(b)(1) of Regulation Y?

A2: Two alternative structures for "commodity purchase and forward sale" (CPFS) transactions are within the scope of permissible lending transactions under 12 CFR 225.28(b)(1).

In the first structure, the bank holding company would purchase a commodity from its customer and simultaneously enter into a forward sale agreement under which the customer would be obligated to repurchase the commodity from the bank holding company at a predetermined price and on a predetermined future date. The second structure is similar to the first structure, except that it would involve a third party, either as the initial seller of the commodity to the bank holding company, or as the ultimate purchaser of the commodity from the bank holding company. During the term of a CPFS transaction, the bank holding company would (i) hold title to the underlying commodity, (ii) mark the commodity to market on a daily basis, and (iii) call for additional margin if the market value of the commodity falls below a specific collateral threshold.

Under either structure, a variety of conditions must be met to ensure that the CPFS transaction does not expose the bank holding company to risks that would be inconsistent with a financing arrangement. For example, the bank holding company must earn a fixed return on a CPFS transaction, just as it would on an ordinary secured loan, and its risk exposure effectively must be limited to counterparty credit risk. All non-price risks and costs of owning the commodity during the term of the CPFS transaction must be borne by the ultimate purchaser. In all cases, although the bank holding company would take title to the underlying commodity at the inception of a CPFS transaction, it would take title in the form of a warehouse receipt only; that is, the commodity would continue to be stored in a licensed warehouse owned and operated by an entity other than the bank holding company. The commodity would not be moved physically as a result of the transaction. Other conditions would apply, as described in the letter cited below.

Source: Letter from Scott G. Alvarez, General Counsel of the Board, to Isaac Lustgarten, Esq. (May 15, 2006), available here.

Posted: 3/31/2021

 

Q3: May a bank holding company engage in providing flood zone determination services as an activity closely related to banking under section 4(c)(8) of the BHC Act?

A3: Yes. Flood zone determination services, including providing initial flood zone determinations to mortgage lenders and providing mortgage lenders with ongoing flood zone tracking services with respect to their mortgage loans, are considered closely related to banking as activities related to extending credit under Regulation Y, provided that certain conditions are satisfied, including limits on the services provided to non-lenders. 12 CFR 225.28(b)(2). For more information on the conditions applicable to flood zone determination services, see the letter cited below.

Source: Letter from Scott G. Alvarez, General Counsel of the Board, to Nancy M. Stiles, P.C. (July 9, 2002), available here.

Posted: 3/31/2021

 

Q4: May a bank holding company provide certain services for customers seeking to make exchanges of real property pursuant to section 1031 of the Internal Revenue Code (section 1031) as a permissible nonbanking activity under section 225.28 of Regulation Y?

A4: In a "forward" section 1031 exchange transaction, the taxpayer first sells his or her existing real property and later purchases a replacement real property of "like kind." In order to complete a forward section 1031 exchange transaction, a taxpayer must satisfy certain conditions in section 1031 (26 U.S.C. § 1031) and the U.S. Treasury regulations that implement section 1031.

A bank holding company subsidiary may provide certain services for customers seeking to make forward section 1031 exchange transactions. These services include: (i) providing its customer with documents related to the exchange in order to ensure that the exchange qualifies as a valid forward section 1031 exchange transaction, which could include taking transitory title to the initial property and the replacement property as they are transferred from seller to buyer; (ii) investing the proceeds of the sale of the initial property on behalf of the customer until the customer acquires the replacement property; and (iii) transferring the necessary funds to the appropriate party to effect the customer's purchase of the replacement property. If the customer does not identify a replacement property, or purchase the replacement property, within the required time periods set forth in section 1031 or U.S. Treasury regulations implementing section 1031, the proceeds of the sale of the initial property would be transferred to the customer. The bank holding company subsidiary would act in a fiduciary capacity in holding, investing, and disbursing the customer's funds. If a non-depository trust company chartered in the same state as the subsidiary would be allowed to engage in this activity, the bank holding company subsidiary would also be allowed to engage in this activity, even if the subsidiary is not a trust company.

Under Regulation Y, these activities are permissible for the bank holding company subsidiary as a combination of permissible real estate settlement services (12 CFR 225.28(b)(2)(viii)); trust company functions (12 CFR 225.28(b)(5); and financial advisory services, including tax planning and tax preparation services(12 CFR 225.28(b)(6)).

The bank holding company subsidiary may not participate in negotiating the terms of the real property sale and purchase transactions that constitute the forward section 1031 exchange transaction and may not assist the customer in locating a buyer of the initial property or a seller of the replacement property.

Source: Letter from Scott G. Alvarez, General Counsel of the Board, to Debra L. Barbin, Esq. (February 9, 2006), available here.

Posted: 3/31/2021

 

Subpart D—Control and Divestiture Proceedings

12 CFR 225.31 (Control proceedings)

Q1: Is a contractual provision between a first company and a second company that requires the second company to conform its activities to the activities restrictions under the BHC Act or Home Owners' Loan Act (HOLA) considered a limiting contractual right?

A1: A contractual provision between a first company and a second company that requires the second company to conform its activities to the activities restrictions under the BHC Act or HOLA generally would be considered a limiting contractual right as such a provision would provide the first company with a right to limit the ability of the second company to engage in some new lines of business. However, a contractual provision that provides a first company with a reasonable and non-punitive mechanism to redeem, reduce, or restructure its investment in the second company if the second company fails to conform its activities to the activities restrictions of the BHC Act or HOLA generally would not be considered a limiting contractual right.

Source: 85 Fed. Reg. 12398, 12417 (March 2, 2020).

Posted: 9/30/2020 (revised 3/31/2021)

 

Q2: If a market standard loan covenant in a loan agreement between a first company and a second company meets the definition of a limiting contractual right, is the loan covenant considered a limiting contractual right even though it is located in a loan agreement?

A2: A contractual provision that meets the definition of a limiting contractual right is a limiting contractual right. The rules governing control and divestiture proceedings, subpart D of Regulation Y as amended by the 2020 amendments (the control rule), do not differentiate between limiting contractual rights based on the circumstances under which the right was created or the nature of the document in which the right resides. 12 CFR 225.31. The influence that a limiting contractual right provides its holder does not vary based on the circumstances of the right's creation or the document in which the right is incorporated. In particular, the control rule does not create any exception from the definition of a limiting contractual right for covenants in a loan agreement. 12 CFR 225.31. Importantly, the control rule's presumption of control related to limiting contractual rights does not apply where the first company controls less than 5 percent of any class of voting securities of the second company. 12 CFR 225.32(d)(5). As a result, loan covenants generally do not raise control concerns by themselves, but instead raise concerns when held by a first company that also controls 5 percent or more of any class of voting securities of a second company.

Source: 85 Fed. Reg. 12398, 12418 (March 2, 2020).

Posted: 9/30/2020 (revised 3/31/2021)

 

12 CFR § 225.32 (Rebuttable presumptions of control of a company)

Q1: What action should a company take if it has investments that predate the effective date of the Board's control rule, have been treated by the company as noncontrolling, and trigger one or more of the presumptions of control in section 225.32 of Regulation Y?

A1: The Board does not expect to revisit structures that have already been reviewed by the Board or a Federal Reserve Bank prior to the effective date of the control rule. For an existing structure that was not previously reviewed by the Board or a Federal Reserve Bank, a company may contact Board staff to discuss the structure and what, if any, alterations should be made to continue to treat the structure as noncontrolling. Board staff would not require alterations to structures that represent a reasonable interpretation of Board precedent at the time the structure was created.

Source: 85 Fed. Reg. 12398, 12420 (March 2, 2020).

Posted: 9/30/2020 (revised 3/31/2021)

 

Q2: Are there any circumstances in which Board staff would not recommend that the Board find that an asset management company controls a bank holding company or bank for purposes of the BHC Act, or a savings and loan holding company or savings association for purposes of HOLA, even though the company would be subject to a presumption of control under the Board's regulations?

A2: In general, in circumstances in which a company is subject to a presumption of control with respect to its investment in and other relationships with a bank holding company, bank, savings and loan holding company, or savings association (a "regulated company"), staff would recommend that the Board find that the investing company controls the regulated company for purposes of the BHC Act or HOLA. However, staff would be prepared to issue written relief indicating it would not recommend that the Board find that an asset management company controls a regulated company, despite being subject to a presumption of control, in the circumstances described below.

This relief would be available to an asset management company that is not itself, and is not affiliated with, a bank holding company or savings and loan holding company, and whose primary business involves sponsoring, managing, or advising investment companies registered under the Investment Company Act of 1940, other pooled investment vehicles, and institutional accounts. To support a staff recommendation that such an asset management company does not control a regulated company, the asset management company must provide commitments and become subject to conditions regarding its investments in and relationships with the regulated company. Board staff expects that such commitments generally would impose stricter limits on the asset management company's relationships with a regulated company than would apply under the regulatory presumptions of control (for example, with respect to limits on director representatives and the solicitation of proxies), but would allow levels of certain relationships to exceed the limits under the regulatory presumptions of control in certain narrow respects (for example, with respect to permissible business relationships).

Prior to submitting a request for such relief, an asset management company may contact Board staff to discuss the nature of its investment activities, the proposed conditions and commitments regarding its existing and future investments in regulated companies, and other information Board staff may expect to review in evaluating the request.

Source: Letter from Mark E. Van Der Weide, General Counsel of the Board, to Anne E. Robinson, Esq. (November 26, 2019), available here.

Posted: 3/31/2021

 

12 CFR § 225.34 (Total equity)

Q1: For purposes of the calculation of total equity in section 225.34 of Regulation Y (12 CFR. § 225.34), how should the denominator of the total equity formula, "Issuer Shareholders' Equity," be determined?

A1: Under Regulation Y, a first company's total equity in a second company is equal to the sum of the first company's Investor Common Equity and, for each class of preferred stock issued by the second company, Investor Preferred Equity, divided by Issuer Shareholders' Equity. 12 CFR 225.31(b)(1). Investor Common Equity is the greater of zero and the share of the second company's common stock controlled by the first company multiplied by the amount of the second company's balance sheet shareholders' equity under U.S. Generally Accepted Accounting Principles (GAAP) that is not allocated to preferred stock. 12 CFR 225.34(b)(2). Investor Preferred Equity is, for each class of preferred stock issued by the second company, the greater of zero and the share of the class of preferred stock controlled by the first company multiplied by the amount of the second company's balance sheet shareholders' equity under U.S. GAAP that is allocated to the class of preferred stock. Issuer Shareholders' Equity should be calculated as the sum of Investor Common Equity and Investor Preferred Equity for each person that controls equity instruments of the second company. Such an approach to the definition of Issuer Shareholders' Equity ensures that the numerator and denominator used to determine a first company's total equity ownership of a second company are both calculated in a consistent manner based on U.S. GAAP. Under this approach, a first company that controls less than one-third of each class of equity securities of a second company should always control less than one-third of the total equity of the second company. If Issuer Shareholders' Equity would be equal to zero, and the first company controls more than one-third of a class of equity securities of the second company, Board staff should be consulted.

Posted: 9/30/2020 (revised 3/31/2021)

 

Subpart E—Change in Bank Control

12 CFR 225.41 (Transactions requiring prior notice)

Q1: When all or substantially all of a state member bank's or bank holding company's shareholders are party to a shareholders' agreement, should the shareholders who are a party to the agreement be viewed as a "group acting in concert" under Regulation Y?

A1: Yes, with limited exceptions. Under Regulation Y, a group is "acting in concert" when there is knowing participation in a joint activity or parallel action toward a common goal of acquiring control of a state member bank or bank holding company, whether or not pursuant to an express agreement. 12 CFR 225.41(b)(2). The regulation includes a presumption that investors in a state member bank or bank holding company that are parties to any agreement, contract, understanding, relationship, or other arrangement, whether written or otherwise, regarding the acquisition, voting, or transfer of control of voting securities of a state member bank or bank holding company, other than through a revocable proxy, are a "group acting in concert." See 12 CFR 225.41(d)(4).

In limited circumstances, Board staff would not recommend that the Board find that the parties to a shareholders' agreement are a group acting in concert for purposes of the Change in Bank Control Act. These circumstances include where the agreement is (i) entered into by all or substantially all of the shareholders of the state member bank or bank holding company (which may include the state member bank or bank holding company as a party to the agreement); (ii) the agreement relates only to the shares, and not to the management or operations of, the state member bank or bank holding company; (iii) the agreement is entered into for a purpose other than to acquire or exercise control of a state member bank or bank holding company, such as (a) preserving the S Corporation status of the state member bank or bank holding company under the Internal Revenue Code, (b) preserving tax benefits of the state member bank or bank holding company, or (c) providing existing shareholders a right of first refusal to acquire shares of the state member bank or bank holding company from other shareholders for a reasonable period of time before the shares are offered to non-shareholders; and (iv) the agreement does not impose other limits on shareholders' ability to acquire, vote, or transfer shares of the state member bank or bank holding company for reasons unrelated to those described above. See also 12 CFR 225.9(b)(1), (8).

In the event a shareholders' agreement entered into by all or substantially all of the shareholders of a state member bank or bank holding company includes provisions other than those described above, you may consult with Federal Reserve staff as to whether the agreement would result in the parties to the agreement being a "group acting in concert" for purposes of the Change in Bank Control Act. You may also consult with Federal Reserve staff as to whether the period during which existing shareholders may exercise a right of first refusal is reasonable under the facts and circumstances.

Posted: 3/31/2021

 

Subpart I—Financial Holding Companies

12 CFR 225.83 (What are the consequences of failing to continue to meet applicable capital and management requirements?)

Q1: May a financial holding company reorganize its activities when it is subject to restrictions on activities under 12 CFR 225.83(d) or an agreement with the Board under section 4(m) of the BHC Act (section 4(m) agreement)?

A1: A financial holding company that is subject to the restrictions on activities under 12 CFR 225.83(d) or a section 4(m) agreement may, without the prior approval of the Board, reorganize its existing activities permissible under section 4(k) of the BHC Act, provided that the financial holding company does not commence any new activities in connection with the reorganization and does not acquire the shares of any non-subsidiary company. The following are examples of reorganizations that may be consummated without the prior approval of the Board under 12 CFR 225.83(d) or a section 4(m) agreement:

  • A financial holding company that is operating under a section 4(m) agreement has a wholly owned asset management subsidiary that is not a subsidiary of a bank. The financial holding company seeks to move this subsidiary to another part of the holding company organization. In connection with the movement of the subsidiary, the financial holding company would not commence any new activities and would not acquire any shares of any unaffiliated company. The reorganization involves only companies that are wholly owned by the financial holding company.
  • Assume the same facts as the previous example, except assume that the financial holding company's subsidiary bank has a wholly owned subsidiary organized under section 25A of the Federal Reserve Act (an "Edge corporation"), and the asset management company is a subsidiary of the Edge corporation. The financial holding company seeks to move the asset management subsidiary to another part of the holding company organization through dividends in kind and contributions of shares, such that the asset management company would no longer be a subsidiary of the bank or of the Edge corporation. (Note that the prior approval of the Board would be required for a state member bank or Edge corporation to declare or pay a noncash dividend.)
  • Assume the same facts as the first example, except assume that the asset management activities are conducted directly by the subsidiary bank of the financial holding company. The bank seeks to move the asset management activities to a newly formed, wholly owned subsidiary in the holding company organization through a purchase-and-assumption agreement. The newly formed subsidiary would not be a subsidiary of the bank.

Source: 12 CFR 225.123(c).

Posted: 3/31/2021

 

Subpart J—Merchant Banking Investments

12 CFR 225.171 (What are the limitations on managing or operating a portfolio company held as a merchant banking investment?)

Q1: What covenants would generally be permissible without involving a financial holding company in routinely managing or operating a portfolio company?

A1: Under section 4(k)(4)(H) of the BHC Act and Regulation Y, a financial holding company may not routinely manage or operate a portfolio company held under merchant banking authority except in special circumstances described in Regulation Y. 12 U.S.C. § 1843(k)(4)(H); 12 CFR 225.171(a), (e). Regulation Y provides a non-exhaustive list of covenants and other provisions by which a financial holding company may restrict activities of a portfolio company that are outside the ordinary course of business of the portfolio company, without such restrictions constituting routine management or operation of a portfolio company. 12 CFR 225.171(d)(2). The letter cited below provides additional examples of covenants that Board staff believes would generally be permissible without involving a financial holding company in routinely managing or operating a portfolio company.

Whether restrictions on the management and operation of a portfolio company rise to the level of routine management or operation will depend on the significance of the restrictions. In this context, significance would be determined by considering the nature of the restriction and the size, capital condition, business, and characteristics of the portfolio company. If an action is one that would be presented to the company's board of directors for approval or consideration under ordinary business practices, Board staff would not recommend that a covenant requiring review and approval of such action by the financial holding company investor be viewed as routine management or operation of the portfolio company. For all other actions, Board staff recognizes that a covenant restricting the activities of a portfolio company may be permissible and would be considered on a case-by-case basis based on the particular facts and circumstances of the case.

Source: Letter from J. Virgil Mattingly, General Counsel of the Board, to Peter T. Grauer (December 21, 2001), available here.

Posted: 3/31/2021

 

Q2: When would the holding period for a merchant banking investment commence if a financial holding company acquired the investment prior to becoming a bank holding company and making a financial holding company election?

A2: Under Regulation Y, a financial holding company may own or control shares, assets, and ownership interests pursuant to its merchant banking investment authority only for a period of time in order to enable the sale or disposition of the investment on a reasonable basis consistent with the financial viability of the financial holding company's merchant banking investment activities. 12 CFR 225.172(a). Generally, this time period is limited to 10 years or, for certain qualifying private equity funds, 15 years. 12 CFR 225.172(b)(1) and 225.173(c)(1). The holding period time limits set out in Regulation Y apply only during the time period in which a company is a bank holding company that has elected financial holding company status.

In the event a company acquires ownership or control of shares, assets, or other ownership interests prior to becoming a bank holding company and electing financial holding company status, the merchant banking investment holding period applies starting on the date that the company became a financial holding company. The acquisition or control of shares, assets, or ownership interests pursuant to the merchant banking authority is only permitted where it is part of a "bona fide" underwriting or merchant or investment banking activity. 12 CFR 225.170(b).

Posted: 3/31/2021

 

Q3: When a financial holding company acquires shares, assets, or ownership interests from another financial holding company, and holds such assets under merchant banking authority, would the applicable holding period for the acquiring financial holding company include the time during which the former owner held the assets?

A3: As a general matter, when a financial holding company acquires shares, assets, or other ownership interests, the applicable holding period would begin on the date of acquisition, and would not include the time during which the investment was held by the former owner, even if the former owner were a financial holding company and the shares were held under merchant banking authority by that owner. However, when a financial holding company acquires shares, assets, or other ownership interests from an affiliated party, as set out in Regulation Y, the acquirer's holding period must include (or "tack" on) a period of time prior to its acquisition. See 12 CFR 225.172(b)(2). When the "tacking" rule applies, a financial holding company must include, as part of its holding period, the time during which (i) the affiliated company held the investment, or (ii) the financial holding company held the investment under another provision of federal banking law that also imposes a limited holding period on the investment. See 12 CFR 225.172(b)(3).

Posted: 3/31/2021

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Last Update: March 31, 2021