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Publication
Keeping your dawn raid guidance current
Unannounced inspections or ‘dawn raids’ are used by antitrust authorities to obtain evidence when there are suspicions that individuals or businesses have infringed the antitrust rules.
Global | Publication | June 2019
In this latest banking reform updater, we discuss a recent proposal from the United States Board of Governors of the Federal Reserve System (Federal Reserve Board) to clarify the standards for “control” under the U.S. Bank Holding Company Act of 1956 (BHCA).
On May 14, 2019, the Federal Reserve Board published a proposed rule that it feels would simplify and make more transparent the standards under which the Federal Reserve Board determines that a company controls a banking organization or another company. The concept of control is important for determining if an investment is permissible under the federal banking laws. The press release announcing the proposed rule notes that “the proposal would reduce complexity and burden for banking organizations and their investors, and provide clarity so that a wide range of stakeholders can better understand the control rules.”
Under the BHCA, a company is considered to have control of a bank or other company if
A bank holding company is restricted in the types of activities in which it can engage. Activities of bank holding companies are restricted to activities permissible for a bank holding company (generally, banking or activities closely related to banking) or a financial holding company (FHC) (generally, activities financial in nature or incidental to a financial activity), if it qualifies for the latter designation because of capital and management ratings.
The test also is applicable to any companies the BHC might want to acquire because it can only gain control of another company if it can engage in the activities in which a BHC or FHC can engage.
At the other end of the spectrum, there is a presumption that any company that directly or indirectly owns, controls, or has power to vote less than 5 per cent of any class of voting securities of a given bank or company does not have control over that bank or company.
While the first two prongs of control – 25 per cent or more of any class of voting securities and controlling the election of a majority of the directors – are objective determinations of control, ownership of between 5 per cent and 25 per cent of any class of voting securities requires that the Federal Reserve Board review all the facts and circumstances on a case-by-case basis in order to make a control determination.
Over the years, Federal Reserve Board staff have developed some general standards that were used to evaluate such “in-between” transactions, but these standards were not set forth in a formally promulgated regulation. The proposed regulation would do just that, while at the same time, the Federal Reserve Board reserves the right in a particular case to make a control/non-control determination that might deviate from any new regulatory standards.
The proposal adds new sections to the Bank Holding Company Act regulations detailing the standards. Among other proposed revisions, rebuttable presumptions of control would arise at the following ownership or control levels between 5 per cent and 25 per cent of the outstanding securities of any class of voting securities: per cent
Ownership or control by the first company of 5 per cent or more of the outstanding securities of any class of voting securities of the second company and any of the following factors
Ownership or control by the first company of 10 per cent or more of the outstanding securities of any class of voting securities of the second company and any of the following factors
Finally, ownership or control by the first company of 15 per cent or more of the outstanding securities of any class of voting securities of the second company and any of the following factors
Also proposed is a rebuttable presumption of non-control by the first company of the second company if the first company owns less than 10 per cent of the outstanding securities of any class of voting securities of the second company and otherwise does not meet any of the rebuttable presumptions of control discussed above.
The announcement of the proposal contained a chart summarizing the proposal. There also is a memorandum from Federal Reserve Board staff to the Board of Governors explaining the proposal.
Similar changes would be made to the regulations for savings and loan holding companies, which control thrift institutions such as savings banks and savings and loan associations.
Comments to the Federal Reserve Board on the proposed rule are due by July 15, 2019. Over 50 questions are posed in the supplementary material accompanying the text of the proposed regulations for the public to focus on in formulating their comments, although comments are welcome on any part of the proposal.
Publication
Unannounced inspections or ‘dawn raids’ are used by antitrust authorities to obtain evidence when there are suspicions that individuals or businesses have infringed the antitrust rules.
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