The Board of Governors of the Federal Reserve System (the “Fed”), the Office of the Comptroller of the Currency (the “OCC”), and the Federal Deposit Insurance Corporation (the “FDIC”) each have regulations implementing the Change in Bank Control Act (12 U.S.C. 1817(j)) (“CIBCA”), which essentially requires a person, or group of persons, to file a notice with the banking agency and receive its clearance before acquiring “control” of a bank or bank holding company.

For bank holding companies (“BHCs”), the Fed is the federal banking agency with which the notice is filed, and for stand-alone banks the notice is filed with the bank’s primary federal regulator (FDIC, Fed, or OCC). There may also be separate approvals or notices required under applicable state law for state banks and their BHCs. Because most banks in the US have a BHC, most CIBCA filings are made with the Fed.

The purpose of this alert is to give some practical examples of situations that may create inadvertent violations of CIBCA, as well as actions BHCs and shareholders can take to avoid or remedy violations. We will focus on the Fed’s rather complicated system for determining whether a person is in control of a BHC under the CIBCA.

In our experience, many shareholders¹ are inadvertently violating these rules due to their complexity. Such violations may be discovered if the Fed raises the issue (e.g., when it reviews the Form Y-6 that the BHC files annually) or if the BHC makes a filing with the Fed and the inadvertent violation is discovered (e.g., filing an application in connection with an acquisition).

The technical legal exposure from such violations is severe. Moreover, violations may be deemed to exist when the BHC or bank are in less than a well-capitalized position, thereby requiring much more than an after-the-fact filing.

A Brief Note on the Bank Holding Company Act

Entities² are at risk of being subject to the Bank Holding Company Act of 1956, as amended (the “BHC Act”), if the entity is deemed to be in control of a bank or BHC. In such case, the entity must obtain prior approval to become a BHC under the BHC Act. Individuals are not bank holding companies and are not subject to the BHC Act.

Among other requirements, BHCs are required by law to serve as a source of financial and managerial strength for their subsidiary banks; thus, most shareholders prefer to structure their investments to avoid becoming BHCs themselves. In general, if an entity owns or controls more than 25% of the voting common stock of a bank or BHC, that entity is required to obtain prior approval to be a BHC itself, although the Fed can find control in ownership levels as low as a 5% voting interest if other factors are present. On January 30, 2020, the Fed adopted a final rule for Control and Divestiture Proceedings (“Final Rule”) to clarify the Fed’s considerations when determining whether a company has the ability to exercise “control” or a “controlling influence” under the BHC Act and the Home Owners’ Loan Act. The Final Rule became effective on April 1, 2020.

This alert will focus on the CIBCA, but if you have questions regarding the Final Rule or other Fed requirements under the BHC Act, we would be happy to discuss those matters. 

Read the complete Client Alert here.