Earlier this week, the Federal Reserve Board (“FRB”) issued a “Policy Statement on Equity Investments in Bank and Bank Holding Companies” which explains the FRB’s policies regarding the extent to which companies may invest capital into banks and bank holding companies (“banking organization”) without becoming subject to regulation as bank holding companies.
By statute, any company will become a bank holding company, subject to regulation by the FRB and the activities restrictions of the Bank Holding Company Act, if it acquires 25% or more of the voting stock of a banking organization, controls the election of a majority of the board of directors of the banking organization or is found to exercise a “controlling influence” over the management or policies of the banking organization. An issue that often arises with investments of less than 25% of the voting stock (a “minority investment”) is whether such an investment, when combined with other circumstances, such as an additional nonvoting equity investments, gives the investor a controlling influence that would trigger bank holding company status.
In 1982, the FRB issued its Policy Statement on “Nonvoting Equity Investment in Bank Holding Companies” to provide guidance, in a different context, on the FRB’s considerations in reviewing whether a minority investment would result in the exercise by the investor of a controlling influence over the management or policies of a banking organization. Based on a review of its experience since then, the FRB’s new policy statement has modified its previous guidance while continuing to stress that the determination in each case will depend on all the facts and circumstances involved with the minority investor’s relationship with the banking organization.
In the new policy statement, the FRB has indicated that it could be consistent with a noncontrol position for a minority investor to have a board seat, and up to two board representatives could be permissible where the investor’s aggregate director representation is proportionate to its total interest in the banking organization, does not exceed 25% of the voting board members and another shareholder of the banking organization is a controlling bank holding company. The FRB also has indicated that an investment in voting and nonvoting securities constituting up to one-third of the total equity of a banking organization could be consistent with a noncontrol position so long as the investor does not own, control or vote 15% or more of any class of the voting securities of the banking organization. Further, the FRB’s guidance sets forth general principles on the extent to which minority investors may advocate their views to management without exercising a “controlling influence” and explains the FRB’s determination that certain business relationships between the minority investor and the banking organization may be permissible where quantitatively limited and qualitatively nonmaterial.
The significance of the FRB’s new policy statement is that it may make minority investments in banking organizations more attractive to companies that want to avoid being regulated as bank holding companies due to, for example, the applicable activities restrictions. The FRB indicated that it will also use the principles set forth in the new guidance to analyze control issues arising from investments by bank holding companies in nonbanking companies.
Savings associations and saving and loan holding companies are not subject to the FRB’s guidance but instead to the control regulations of the Office of Thrift Supervision (the “OTS”). However, the FRB’s new guidelines may constitute persuasive authority that can be used in dealing with the OTS with respect to its regulations in particular situations.