Pub. 10 2019 Issue 2

www.wvbankers.org 20 West Virginia Banker In or out of Control: Federal Reserve Issues Proposed Regulation on Controlling Influence Test By Sandra M. Murphy and Amy J. Tawney, Bowles Rice LLP F or legal advisors to the banking industry, some of the most challenging provisions of the Bank Holding Com- pany Act (the BHC Act) have been those that address control of a bank. Developed piecemeal over many decades, the control rules have required practitioners to understand and rely on interpretations involving fact specific determina- tions by the Board of Governors of the Federal Reserve Sys- tem (Federal Reserve) that were not always available to the public. After signaling in 2018 that reform was on the way, on April 23, 2019, the Federal Reserve released for public com- ment proposed changes to the control rules. The proposed changes are important because a company that controls a bank is subject to supervision and regulation by the Federal Reserve, as well as certain activities restrictions. Similarly, a company that is controlled by a bank holding company is subject to activity restrictions as a subsidiary of a regulated holding company. There are three tests for “control” under the BHC Act. The first two are straightforward bright-lined tests: (i) owning, controlling or having the power to vote 25% or more of any class of voting securities; and (ii) the ability to control in any manner the election of a majority of the directors of a com- pany. The proposal is meant to clarify the third test: whether a company exercises a “controlling influence” over another company, which is a facts and circumstances determination by the Federal Reserve. The proposal includes a tiered framework designed to incorporate the major factors and thresholds the Federal Reserve has typically viewed as pre- senting a controlling influence. It also includes several other presumptions of control, a new presumption of non-control and additional provisions clarifying how the presumptions apply in particular circumstances. Tiered Presumptions The proposal includes presumptions that are arranged in by tiers based on the level of ownership of the first company in the second company. As the amount of ownership in- creases, the extent of the relationships between the two companies that can exist without a presumption of con- trol decreases. The following chart provided by the Federal  In or out of Control Continued on Page 22