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Fed issues final rule clarifying standards for bank investors

WASHINGTON — The Federal Reserve voted Thursday to finalize a new bank control framework for determining the circumstances in which one company controls another.

In an April proposal, the Fed sought to standardize how those owning less than a quarter of a bank can determine if they hold a "controlling" stake, and therefore must register as a bank holding company.

The Fed historically has determined what constitutes control in part on a case-by-case basis, but that makes it challenging for investors and banks to know which circumstances trigger holding company requirements and other provisions of the Bank Holding Company Act.

“The complexity and relative lack of transparency of the board’s case-by-case approach to control can impose a substantial compliance and uncertainty burden on the public, especially banking organizations and investors,” Fed Vice Chair for Supervision Randal Quarles said in a statement, adding that the final rule will boost the predictability and transparency of the framework.

Broadly speaking, the final rule is the same as the proposal that the agency issued last year. That proposal stipulated four tiers based on the amount of voting shares in a given stake. The four tiers are: less than 5%, 5-9.99%, 10-14.99% and 15-24.99%. That standard codifies existing practice, the Fed said at the time. In each tier, control would be presumed under a different set of conditions, such as the size of a company’s total equity investment and the makeup of the board of directors.

“The rule clearly lays out the key factors and thresholds that the board will take into account and the combination of factors that would and would not trigger control,” Fed Chairman Jerome Powell said in a statement.

The final rule does incorporate some technical adjustments. The tiered framework in the final rule has simplified presumptions of control based on total equity ownership compared to the proposal, and has a simplified control framework for savings and loan holding companies.

The final rule also clarifies how to determine if business relationships between an investor and the company trigger control requirements.

The Fed also took the recommendation from commenters to narrow the definition of a director representative to make it less prescriptive, as well as the recommendation to amend the total equity provisions in the proposal so that an investor only has to measure its total equity position when they make an investment in another company.

The Fed board unanimously approved the revamped bank control framework at a meeting Thursday.

“Although not directly affected by the final rule, it will be important to monitor the ownership structures of banking organizations in light of this control framework and industry trends, so the board can identify and address any financial stability, competition and other issues that arise in the future,” Fed Gov. Lael Brainard said in a statement.

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