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Delayed effective date for revised control framework under BHC Act

Mar 31, 2020

On March 31, the Federal Reserve Board announced that it will delay for six months the effective date (from April 1, 2020 to September 30, 2020) for its revised control framework for determining when a company controls a bank, and vice versa, for purposes of the Bank Holding Company Act (referred to as the “BHC Act”).  The delay is intended to reduce operational burdens on banks, enable them to focus on conducting business during uncertain economic conditions, and provide banks with extra time to consult with FRB staff on the revised framework.

Previously, the Board adopted a final rule on January 30 that revised its regulations related to determining whether a company controls another company for purposes of the BHC Act.  Under the BHC Act, control is defined by a three-pronged test: a company has control over another company if the first company:

(1) directly or indirectly has the power to vote 25 percent or more of any class of voting securities of the other company;

(2) controls in any manner the election of a majority of the directors or trustees of the other company; or

(3) directly or indirectly exercises a “controlling influence” over the management or policies over the other company. 

Although the first two prongs provide straightforward standards, the third prong requires a facts and circumstances determination by the FRB that often included analysis and precedents not available to the public.

The revised control framework codified presumptions of control that the FRB uses in making a control determination with the intent of providing transparency by making public additional information regarding the FRB’s views on controlling influence.  Specifically, the FRB established a series of tiered presumptions of control that are based on the level of voting securities owned by the “controlling” company.  The presumptions use three thresholds for owned voting securities (5%, 10%, and 15%), and the following factors are considered in relation to these thresholds:

(1) director representation;

(2) extent of business relationships;

(3) senior management interlocks;

(4) contractual limits on major operational or policy decisions;

(5) total equity;

(6) ability to solicit proxies on issues; and

(7) existence of any threats by the first company to dispose of the second company’s securities. 

In addition to the tiered-presumption framework, the FRB also noted that it would consider, among other factors, as part of its control determination whether any management agreements exist between the two entities, whether the first company provides investment advice to the second company, and whether accounting consolidation occurs under U.S. GAAP.

Control is a foundational concept under the BHC Act.  An FRB determination that control exists between a company and a bank or bank holding company results in the company becoming subject to the Federal banking agencies’ regulations and supervisory oversight, which includes examinations, regular financial reporting, capital and liquidity requirements, source of strength obligations, activities restrictions, and restrictions on affiliate transactions.  By delaying the effective date, the FRB has granted companies potentially affected by the revised control framework additional time to better understand the impact of the revised framework on existing and future relationships with banks and bank holding companies.

For any questions or additional information, please contact Kevin Tran at (615) 850-8743.

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