On October 12, the Board of Governors of the Federal Reserve System (the Federal Reserve) issued an order to a financial holding company (FHC) determining that the FHC’s acquisition, management and operation of defined benefit pension plans in the United Kingdom established and maintained by unaffiliated third-parties was permissible (with certain restrictions) under Section 4(k) of the Bank Holding Company Act of 1956, as amended, because such activity is “financial in nature.”

The activity proposed by the FHC was broader than pension plan activities currently permitted to FHCs and involved the acquisition of pension plans that were “hard-frozen” (e.g., no additional beneficiaries could be added to the plan and existing beneficiaries could not accrue additional benefits under the plan) and were and fully funded by the selling sponsor based upon the plan’s assets and projected liabilities (using appropriate actuarial assumptions).

In reaching its determination, the Federal Reserve found that the proposed activity, at its core, involves “the types of investment advisory and investment management skills that are routinely exercised by banking organizations and the types of operational and investment risks that banking organizations routinely incur and manage.” In furtherance of its determination, the Federal Reserve also noted that the FHC could perform such activities with respect to the pension funds because it would assume “essentially the same financial obligations and risks through the acquisition of a third-party U.K. pension plan as an insurance company performs and assumes in connection with the issuance of fixed annuities,” thus making such activities financial in nature.

Notably, in order to find that the activity was permissible, the Federal Reserve was required to notify the Secretary of the US Treasury. The Secretary concurred with the Federal Reserve’s determination and analysis of the activity.