Ownership restrictions and implications
Controlling interest
Describe the legal and regulatory limitations regarding the types of entities and individuals that may own a controlling interest in a bank (or non-bank). What constitutes ‘control’ for this purpose?
Both individuals and entities may own a controlling interest in a bank. An individual or group of individuals seeking to acquire a bank will need to comply with the requirements of the Change in Bank Control Act (CIBCA). Under the CIBCA, approval may be required before acquiring 10 per cent or more of the voting stock of a bank or company that controls a bank.
In general, a company that controls a bank or a bank holding company (BHC) will be regulated by the Federal Reserve Board (FRB). For this purpose, control means having the power to vote 25 per cent or more of any class of voting securities, controlling the election of a majority of the directors or trustees, or exercising a ‘controlling influence’ over the management or policies of the bank or holding company.
The FRB recently finalised regulations putting in place a tiered framework for determining controlling influence, under which the FRB presumes that a company exercises a controlling influence over a bank if the company owns or controls a specified percentage of the bank’s voting securities and other indicia of control are present. Voting securities are defined as securities that entitle the holder to vote for or select directors, trustees or partners or entitle the holder to vote on or to direct the conduct of the operations or significant policies of the issuer. There are four tiers of the control analysis based on the ownership of voting securities of the bank or company: <5 per cent; 5 per cent to <10 per cent; 10 per cent to <15 per cent; and 15 per cent to < 25 per cent. Each higher ownership tier is accompanied by greater restrictions on various control factors.
Foreign ownership
Are there any restrictions on foreign ownership of banks (or non-banks)?
Foreign banking organisations (FBOs) are generally subject to the same limitations and processes as US owners of banks pursuant to the general principle of ‘national treatment’. The federal banking laws do not prohibit foreign ownership or control of US depository institutions, and the laws of states also permit foreign ownership of banks or thrifts chartered by the state. There are certain restrictions on citizenship, however, of directors of national banks and some state-chartered banks. An acquisition of a US bank or thrift by a foreign acquirer could be subject to national security review by the Committee on Foreign Investment in the United States if the transaction could result in foreign control of any ‘critical infrastructure’. The FRB requires certain FBOs with a large US presence to form a US intermediate holding company to hold US subsidiaries, including bank subsidiaries.
Implications and responsibilities
What are the legal and regulatory implications for entities that control banks?
A company that controls a bank, and its affiliates, are subject to banking laws, regulations, guidance and limitations on activities and operations. In particular, a bank holding company (BHC) may not engage in any activity not explicitly authorised under the BHC Act, which generally requires that companies that control banks limit their activities to financial activities. Notable supervisory and regulatory implications include that the BHC will be subject to examinations, reporting requirements and capital requirements. The BHC would be subject to periodic on- and off-site examinations to assess the risk management and financial condition of the BHC and its subsidiaries. The BHC must submit periodic reports to the FRB, including financial statements for the BHC and its subsidiaries, and reports on company ownership and organisational structure. The BHC also must comply with minimum capital requirements and overall capital adequacy standards.
An entity that is deemed to control a bank will also be subject to restrictions under sections 23A and 23B of the Federal Reserve Act. Those provisions impose qualitative and quantitative conditions and restrictions on transactions between a bank and its affiliates and require that transactions between a bank and its affiliates be on ‘market terms’.
What are the legal and regulatory duties and responsibilities of an entity or individual that controls a bank?
The Dodd–Frank Act imposes a source-of-financial-strength requirement for any company that directly or indirectly controls an insured depository institution. This requirement mandates that the controlling company of a bank must be able to provide financial and managerial assistance to the bank in the event of its financial distress. Under this doctrine, any company that controls a bank, regardless of whether it is a BHC under the BHC Act, must serve as a source of strength. Individuals, however, are not subject to the requirement.
What are the implications for a controlling entity or individual in the event that a bank becomes insolvent?
If a bank becomes insolvent, it may be placed into receivership with the Federal Deposit Insurance Corporation (FDIC) as receiver. The FDIC will then have broad authority to resolve the bank. The FDIC may conduct investigations and bring suits against former directors or officers.
Changes in control
Required approvals
Describe the regulatory approvals needed to acquire control of a bank (or non-bank). How is ‘control’ defined for this purpose?
Transactions to acquire control of a bank are governed by the Change in Bank Control Act (CIBCA), the Bank Holding Company Act (BHC Act), the Home Owners’ Loan Act (HOLA) and the Bank Merger Act. The meaning of control for this purpose is discussed above.
The CIBCA seeks to ensure that acquisitions of banks by individuals do not cause competitive or safety and soundness concerns. It mandates that any individual or company acquiring control of a bank must provide prior notice to the appropriate federal banking agency of the target bank. It requires regulators to approve or disapprove an acquisition within a specified time period. If the time period has expired without agency disapproval, the transaction can go forward. The CIBCA does not apply to transactions that require approval separately under the BHC Act, HOLA or the Bank Merger Act.
Under the BHC Act, if a company seeks to acquire control of a bank or bank holding company (BHC), it will require prior approval by the Federal Reserve Board (FRB). FRB approval is also required under HOLA for acquisition of control of a savings association.
The Bank Merger Act requires that mergers between depository institutions receive prior approval of the primary federal regulatory of the resulting institution.
Foreign acquirers
Are the regulatory authorities receptive to foreign acquirers? How is the regulatory process different for a foreign acquirer?
Under the International Banking Act, a foreign bank with a US commercial banking presence, and any of its parent companies, is subject to many of the same laws that regulate the activities of US BHCs.
Beginning in July 2016, the FRB required certain foreign banks to hold US-based subsidiaries, including depository institutions subsidiaries and broker-dealer subsidiaries, in an intermediate holding company (IHC) to act as the parent company of all of the foreign banking organisation’s (FBO) US subsidiaries. The rule applied to FBOs with $50 billion or more in US non-branch assets and was an effort to consolidate supervision. The FRB could then treat the IHC as a domestic BHC and require it to comply with capital, stress testing, liquidity, risk management and other regulatory requirements.
Under what circ*mstances can a foreign bank (or non-bank) establish an office and engage in business? For example, can it establish a branch or must it form or acquire a locally chartered bank?
An FBO generally will be treated as a BHC under the BHC Act. FBOs that wish to establish a US banking presence or otherwise take part in deposit-taking activities in the United States may not do so through a branch office insured by the FDIC, but instead must establish or acquire an insured US bank subsidiary. All foreign banks must limit their US activities to those not requiring FDIC insurance. Foreign reserve services and privileges are open to foreign bank branches, but they are also subject to all supervision and enforcement requirements of US banking agencies.
State law determines whether a foreign bank with a branch in a state may establish additional branches in that state. For this reason, a foreign bank that is establishing additional branches may prefer a federal license in many states.
Factors considered by authorities
What factors are considered by the relevant regulatory authorities in an acquisition of control of a bank (or non-bank)?
In reviewing an application for control of a bank, the BHC Act and the Bank Merger Act require federal regulators to consider various enumerated factors with respect to both the applicant and the bank. These factors include the effect on competition, the financial and managerial resources and future prospects of the two entities, the competence, experience and integrity of the officers, directors and principal shareholders, the convenience and needs of the communities to be served, and any impact the transaction will have on the banking or financial system.
Similarly, under the CIBCA, a notice of change in control can be disapproved if the proposed acquisition of control would result in a monopoly, might substantially lessen competition, if the financial condition of any acquiring person or the future prospects of the bank might jeopardise the financial stability of the bank, or the competence, experience or integrity of any acquiring person or the proposed management personnel indicates that it would not be in the interest of depositors or the public to permit that person to control the bank, or if the proposed acquisition would result in an adverse effect on the Federal Deposit Insurance Fund.
Filing requirements
Describe the required filings for an acquisition of control of a bank.
The filings that are required for the acquisition of control of a bank depend on what type of transaction is contemplated and what statute and regulations govern the transaction. Examples of filings include a Bank Merger Act Application, a Notice of Change in Bank Control, an Application to Become a Bank Holding Company and/or Acquire an Additional Bank or Bank Holding Company, and an Application for a Foreign Organization to Acquire a US Bank or Bank Holding Company. All of these filings require a detailed description of the transaction and detailed financial and management information of the applicant and potential subsidiary or target company.
Time frame for approval
What is the typical time frame for regulatory approval for both a domestic and a foreign acquirer?
In the first half of 2020, the average number of days for the FRB to approve an M&A proposal was 62 days. However, the FRB may receive adverse public comments with respect to an M&A proposal, which would likely increase the length of time it takes to approve the merger, as the FRB will allow the applicant the opportunity to respond to the comment, and then the FRB will evaluate both the comment and the applicant’s response. In the first half of 2020, no proposals subject to adverse public comments were approved. In 2019, the average processing time for proposals with adverse public comments was 143 days versus an average of 56 days for proposals not receiving adverse public comments.
Law stated date
Correct on
Give the date on which the information above is accurate.
March 2021.
