The Federal Reserve Board (“Board”) on Monday announced the approval of a Policy Statement on equity investments in banks and bank holding companies (to be published at 12 C.F.R. § 225.144). The policy statement provides additional guidance on the Board's position on non-controlling equity investments in banks and bank holding companies (each a “Banking Organization”). In general, the Board’s new policy allows an investor to maintain a greater interest and/or involvement in a Banking Organization, without the investor, itself, becoming subject to the Bank Holding Company Act (“BHCA”). 1
We expect that these changes will make investments in Banking Organizations more attractive to investors, including private equity funds and hedge funds.
Why is being deemed non-controlling important?
Under U.S. banking law, an entity that is deemed to control a Banking Organization must register as a holding company with the Board. Becoming a holding company subjects the entity to regulatory supervision, capital requirements, “source of strength” obligations, and potentially significant activity and investment restrictions.
How does the Board’s new Policy Statement change the level of investment and/or involvement permissible for a non-controlling investor?
Under the BHCA, any entity that, directly or indirectly, acquires 25% or more of any class of a Banking Organization's voting stock (or instruments convertible into such voting stock) will be deemed to control the Banking Organization. However, under the Board’s regulations, an entity possessing as little as 10% of any class of a Banking Organization’s voting stock or 25% of its total equity (even if it does not hold any voting rights) may also be deemed a controlling shareholder, depending on its overall relationship with the Banking Organization. The new Policy Statement indicates increased flexibility in several areas that will allow non-controlling investors to maintain increased total equity stakes and greater relationships without being deemed to be in control of a Banking Organization. The chart below provides a brief summary of the changes. It is important to note, however, that the new Policy Statement does not change the effect of the BHCA on entities that acquire 25% or more of any class of a Banking Organization’s voting stock or are otherwise deemed to control the Banking Organization.