August 3, 2020

Volume X, Number 216

July 31, 2020

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Will Recent Clarification of Control in Regulation Y Translate to Regulation W?

Final amendments to provisions of Regulation Y for determining whether a company exercises a controlling influence on a bank holding company will become effective on April 1, 2020. In a speech, on December 11 at the Brookings Institution, concerning the history of brokered deposits, Federal Deposit Insurance Corporation Chairman Jelena McWilliams compared the lore of brokered deposit rulings with that of Regulation Y control rulings. She quoted Randal K. Quarles, Vice-Chair for Supervision of the Board of Governors of the Federal Reserve System, describing the Federal Reserve’s treatment of control under the Bank Holding Company Act as being understood only by those with “a long apprenticeship in the subtle hermeneutics of Federal Reserve lore, receiving the wisdom of the elders through oral tradition like the Tribes of Orinoco.”

The control translation to be effective on April 1 took only 131 pages of the Federal Register publication to bring that collective wisdom forward, but it is well distilled in a one-page grid summarizing tiered presumptions based on voting control, director position, business relationships, and equity ownership. The purpose of these changes is to provide transparency on the types of relationships that the Board of Governors generally views as supporting a determination that one company controls another company, by distilling the Board of Governors’ experience over the past few decades.

While this clarification on Regulation Y and control of banks and bank holding companies is very much welcome, it would be beneficial if such concepts were also applied to the control provisions of Regulation W to determine whether an affiliate relationship exists due to degrees of control. Regulation W at 12 CFR §223.2 defines affiliates as, among other things, “companies under common control.” “Control” is defined at 12 CFR §223.3 as “ownership, control or power to vote 25% or more of any class of voting securities or the ability to elect a majority of directors of a company.” However, it also limits ownership or control of nonvoting securities to less than 25% of the equity capital of another company, regardless of voting control, unless there is a demonstration to the Board of Governors’ satisfaction that the holder of the nonvoting equity does not control the other company. The tiered presumption of control under Regulation Y, on the other hand, will allow ownership of up to 33 1/3% of total equity, in addition to consideration of business relationships, interlocking officers, voting rights of less than 25%, or common directors. It would be beneficial if the Board of Governors would extend similar control provisions to Regulation W in determining affiliate relationships.

© 2020 Jones Walker LLPNational Law Review, Volume X, Number 44


About this Author

Craig N. Landrum, Jones Walker, Banking Industry Lawyer, Insurance Representation Attorney

Craig Landrum is a partner in the firm's Banking & Financial Services Practice Group and practices from the firm's Jackson office. His practice focuses on bank regulatory law, corporate law, mergers and acquisitions law, and securities law. He also has experience representing insurance companies and agencies with regard to corporate and regulatory matters, including the licensing of bank subsidiaries as general insurance agencies and underwriters.

Mr. Landrum is a graduate of Mississippi State University, where he received a bachelor of...