Clarifying the Control Paradigm: The FRB's Proposed Control Rule and Its Implications for Banks, Fintechs, Corporate Boards, and the Financial Industry

On April 23rd, the Federal Reserve Board proposed a new, comprehensive framework for determining control under the Bank Holding Company (BHC) Act. If adopted, these rules would provide unprecedented transparency to standards that for decades have been opaque and difficult to navigate. The resulting clarity would help companies, including funds and fintechs, better understand the implications of bank-related partnerships and deals—with wide-ranging consequences for the M&A landscape. By making investments in banks easier, the rules could initiate a new age of shareholder activism and proxy contests.

Debevoise & Plimpton and RMA recently presented a webinar that provided an overview of the proposal and discussed in particular the potential implications for banks, fintechs, potential investors, and corporate boards. 

The BHC Act prohibits bank holding companies (BHCs) from owning voting shares of companies other than those that are engaged in banking and other activities that are financial in nature, unless an exception applies. Entities controlled by, or controlling, BHCs/SLHCs are subject to banking rules, the Volcker Rule, Regulation W, and consolidated compliance oversight.

Today, control is determined by a three-pronged test:

  1. Owning, controlling, or holding with the power to vote 25% or more of the outstanding shares of any class of voting securities, directly or indirectly, or acting through one or more other persons.
  2. Controlling the election of a majority of the company’s directors (or equivalent position).
  3. Or having the power to exercise, directly or indirectly, a controlling influence over the management or policies of the company.

The FRB proposal to revise the existing framework, if adopted, would:

  • Establish a new, comprehensive framework to govern control under the BHC Act and the Home Owners’ Loan Act (HOLA).
  • Bring additional clarity to companies (including fintechs) considering transactions with banks or BHCs.
  • Codify a set of standards currently based on a patchwork of FRB policy statements, orders on specific applications, and informal and non-public guidance.

As written, the current proposal provides some benefits to banks investing in fintechs, but perhaps more benefits to fintechs investing in banks. The key feature is a matrix of tiered control presumptions to govern the FRB’s control determinations. It includes an investor’s ownership of voting securities on one axis and other indicia of controlling influence factors on the other. Each step-up in the voting equity tier reduces the permissibility of other controlling influences.

The proposal also loosens the FRB’s tear-down standards, making it easier for a controlling company to divest such control. The proposal adds clarity regarding the nature and scope of intercompany business relationships that would affect the control analysis. This detail, and the numerical thresholds, would reduce the mystery around controlling interests.

There has long been speculation that a revised control framework could initiate significant deal activity by and among banks, BHCs, fintechs, and various types of funds. With the increased transparency the proposal offers, minority stakes in particular could become more attractive to many investors, and this could be a two-way market: banks taking minority stakes in fintech companies, and nonbank investors, including fintech companies, taking minority stakes in banks.

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