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    FED Finalizes Regulation to Determine Control of Banking Entity

    January 30, 2020

    FED is adopting a final rule to revise its 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 includes certain targeted adjustments to the historical practice of FED. The final rule will be effective from April 01, 2020. FED also published a chart that shows how different combinations of the factors would or would not result in control. In a statement supporting this rule, the FED Governor Lael Brainard said that the rule substantially increases the transparency and clarity of the control framework.

    FED had proposed this rule in April last year and this final rule is largely consistent with the proposal, though FED has made certain changes to the proposed rule. The rule establishes a comprehensive and public framework to determine when a company controls a bank or a bank controls a company. The framework uses several factors to determine if a company has control over a bank. The key factors include the company's total voting and non-voting equity investment in the bank; director, officer, and employee overlaps between the company and the bank; and the scope of business relationships between the company and the bank. The final rule should help to facilitate permissible investments in banking organizations and by banking organizations. 

     As indicated in the proposal, the final rule contains certain targeted adjustments from the current practice in light of FED's experience administering the statute. These changes are generally technical in nature rather than fundamental changes to FED'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. Under the final rule, a company would be presumed to control another company when:

    • The first company controls 5% 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% or more of the total annual revenues or expenses of the second company
    • The first company controls 10% 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% or more of the total annual revenues or expenses of the second company
    • The first company controls 15% 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% or more of the total annual revenues or expenses of the second company


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    Effective Date: April 01, 2020

    Keywords: Americas, US, Banking, Control of Banking Organization, Regulation Y, Regulation ll, FED

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