On September 22, the Board of Governors of the Federal Reserve System (FRB) released a policy statement on equity investments in banks and bank holding companies (Policy Statement) that addresses when such investments may amount to a “controlling influence” over a bank or bank holding company (BHC). The Policy Statement expands the indicia of control an investing company may have without being considered to have a controlling influence and therefore subjecting itself to treatment as a BHC. Traditionally, companies have sought to avoid bank holding company status and the attendant regulation, examination, and capital requirements imposed by the FRB under the Bank Holding Company Act of 1956, as amended (BHCA).

The BHCA sets forth the tests by which control determinations are made with respect to banks and bank holding companies (banking organizations). Specifically, the BHCA provides that a company has control over a banking organization if (i) the company directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25% or more of any class of voting securities of the banking organization; (ii) the company controls in any manner the election of a majority of the directors or trustees of the banking organization; or (iii) the FRB determines, after notice and opportunity for hearing, that the company directly or indirectly exercises a controlling influence over the management or policies of the banking organization.

The FRB had not previously provided significant guidance with respect to the third prong of the control test: namely, the facts and circumstances that amount to a determination that an investor has a “controlling influence” over a banking organization. The Policy Statement, however, discusses certain “controlling influence” factors, including board representation, total equity investments, consultations with management and permissible covenants that a banking organization may provide to an investor, and provides new guidance as to actions that are permissible without amounting to a “controlling influence” for purposes of the BHCA.

http://www.federalreserve.gov/newsevents/press/bcreg/20080922c.htm