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7500 - FRB Regulations


Subpart D—Control and Divestiture Proceedings

§ 225.31  Control proceedings.

(a)  Preliminary determination of control.   (1) The Board may issue a preliminary determination of control under the procedures set forth in this section in any case in which:

(i)  Any of the presumptions of control set forth in paragraph (d) of this section is present; or

(ii)  It otherwise appears that a company has the power to exercise a controlling influence over the management or policies of a bank or other company.

(2)  If the Board makes a preliminary determination of control under this section, the Board shall send notice to the controlling company containing a statement of the facts upon which the preliminary determination is based.

(b)  Response to preliminary determination of control.  Within 30 calendar days of issuance by the Board of a preliminary determination of control or such longer period permitted by the Board, the company against whom the determination has been made shall:

(1)  Submit for the Board's approval a specific plan for the prompt termination of the control relationship;

(2)  File an application under subpart B or C of this regulation to retain the control relationship; or

(3)  Contest the preliminary determination by filing a response, setting forth the facts and circumstances in support of its position that no control exists, and, if desired, requesting a hearing or other proceeding.

(c)  Hearing and final determination.  (1) The Board shall order a formal hearing or other appropriate proceeding upon the request of a company that contests a preliminary determination that the company has the power to exercise a controlling influence over the management or policies of a bank or other company, if the Board finds that material facts are in dispute. The Board may also in its discretion order a formal hearing or other proceeding with respect to a preliminary determination that the company controls voting securities of the bank or other company under the presumptions in paragraph (d)(1) of this section.

(2)  At a hearing or other proceeding, any applicable presumptions established by paragraph (d) of this section shall be considered in accordance with the Federal Rules of Evidence and the Board's Rules of Practice for Formal Hearings (12 CFR Part 263).

(3)  After considering the submissions of the company and other evidence, including the record of any hearing or other proceeding, the Board shall issue a final order determining whether the company controls voting securities, or has the power to exercise a controlling influence over the management or policies, of the bank or other company. If a control relationship is found, the Board may direct the company to terminate the control relationship or to file an application for the Board's approval to retain the control relationship under subpart B or C of this regulation.

(d)  Rebuttable presumptions of control.  The following rebuttable presumptions shall be used in any proceeding under this section:

(1)  Control of voting securities.--(i) Securities convertible into voting securities.  A company that owns, controls, or holds securities that are immediately convertible, at the option of the holder or owner, into voting securities of a bank or other company, controls the voting securities.

(ii)  Option or restriction on voting securities.  A company that enters into an agreement or understanding under which the rights of a holder of voting securities of a bank or other company are restricted in any manner controls the securities. This presumption does not apply where the agreement or understanding:

(A)  Is a mutual agreement among shareholders granting to each other a right of first refusal with respect to their shares;

(B)  Is incident to a bona fide loan transaction; or

(C)  Relates to restrictions on transferability and continues only for the time necessary to obtain approval from the appropriate Federal supervisory authority with respect to acquisition by the company of the securities.

(2)  Control over company.--(i) Management agreement.  A company that enters into any agreement or understanding with a bank or other company (other than an investment advisory agreement), such as a management contract, under which the first company or any of its subsidiaries directs or exercises significant influence over the general management or overall operations of the bank or other company controls the bank or other company.

(ii)  Shares controlled by company and associated individuals.  A company that, together with its management officials or controlling shareholders (including members of the immediate families of either), owns, controls, or holds with power to vote 25 percent or more of the outstanding shares of any class of voting securities of a bank or other company controls the bank or other company, if the first company owns, controls, or holds with power to vote more than 5 percent of the outstanding shares of any class of voting securities of the bank or other company.

(iii)  Common management officials.  A company that has one or more management officials in common with a bank or other company controls the bank or other company, if the first company owns, controls or holds with power to vote more than 5 percent of the outstanding shares of any class of voting securities of the bank or other company, and no other person controls as much as 5 percent of the outstanding shares of any class of voting securities of the bank or other company.

(iv)  Shares held as fiduciary. The presumptions in paragraphs (d)(2)(ii) and (iii) of this section do not apply if the securities are held by the company in a fiduciary capacity without sole discretionary authority to exercise the voting rights.

(e)  Presumption of non-control--(1)  In any proceeding under this section, there is a presumption that any company that directly or indirectly owns, controls, or has power to vote less than 5 percent of the outstanding shares of any class of voting securities of a bank or other company does not have control over that bank or other company.

(2)  In any proceeding under this section, or judicial proceeding under the BHC Act, other than a proceeding in which the Board has made a preliminary determination that a company has the power to exercise a controlling influence over the management or policies of the bank or other company, a company may not be held to have had control over the bank or other company at any given time, unless that company, at the time in question, directly or indirectly owned, controlled, or had power to vote 5 percent or more of the outstanding shares of any class of voting securities of the bank or other company, or had already been found to have control on the basis of the existence of a controlling influence relationship.

[Codified to 12 C.F.R. § 225.31]

[Section 225.31 amended at 58 Fed. Reg. 474, January 6, 1993, effective February 4, 1993; 62 Fed. Reg. 9338, February 28, 1997, effective April 21, 1997]

[Subpart effective September 30, 2020]

§ 225.31  Control proceedings.

(a)  Preliminary determination of control.

(1)  The Board in its sole discretion may issue a preliminary determination of control under the procedures set forth in this section in any case in which the Board determines, based on consideration of the facts and circumstances presented, that a first company has the power to exercise a controlling influence over the management or policies of a second company.

(2)  If the Board makes a preliminary determination of control under this section, the Board shall send notice to the first company containing a statement of the facts upon which the preliminary determination is based.

(b)  Response to preliminary determination of control.

(1)  Within 30 calendar days after issuance by the Board of a preliminary determination of control or such longer period permitted by the Board in its discretion, the first company against whom the preliminary determination has been made shall:

(i)  Consent to the preliminary determination of control and either:

(A)  Submit for the Board's approval a specific plan for the prompt termination of the control relationship; or

(B)  File an application or notice under this part, as applicable; or

(ii)  Contest the preliminary determination by filing a response, setting forth the facts and circumstances in support of its position that no control exists, and, if desired, requesting a hearing or other proceeding.

(2)  If the first company fails to respond to the preliminary determination of control within 30 days or such longer period permitted by the Board in its discretion, the first company will be deemed to have waived its right to present additional information to the Board or to request a hearing or other proceeding regarding the preliminary determination of control.

(c)  Hearing and final determination.

(1)  The Board shall order a hearing or other appropriate proceeding upon the petition of a first company that contests a preliminary determination of control if the Board finds that material facts are in dispute. The Board may, in its discretion, order a hearing or other appropriate proceeding without a petition for such a proceeding by the first company.

(2)  At a hearing or other proceeding, any applicable presumptions established under this subpart shall be considered in accordance with the Federal Rules of Evidence and the Board's Rules of Practice for Formal Hearings (12 CFR part 263).

(3)  After considering the submissions of the first company and other evidence, including the record of any hearing or other proceeding, the Board will issue a final order determining whether the first company has the power to exercise a controlling influence over the management or policies of the second company. If a controlling influence is found, the Board may direct the first company to terminate the control relationship or to file an application or notice for the Board's approval to retain the control relationship.

(d)  Submission of evidence.

(1)  In connection with contesting a preliminary determination of control under paragraph (b)(1)(ii) of this section, a first company may submit to the Board evidence or any other relevant information related to its control of a second company.

(2)  Evidence or other relevant information submitted to the Board pursuant to paragraph (d)(1) of this section must be in writing and may include a description of all current and proposed relationships between the first company and the second company, including relationships of the type that are identified under any of the rebuttable presumptions in §§ 225.32 and 225.33 of this part, copies of any formal agreements related to such relationships, and a discussion regarding why the Board should not determine the first company to control the second company.

(e)  Definitions. For purposes of this subpart:

(1)  Board of directors means the board of directors of a company or a set of individuals exercising similar functions at a company.

(2)  Director representative means any individual that represents the interests of a first company through service on the board of directors of a second company. For purposes of this paragraph (e)(2), examples of persons who are directors of a second company and generally would be considered director representatives of a first company include:

(i)  A current officer, employee, or director of the first company;

(ii)  An individual who was an officer, employee, or director of the first company within the prior two years; and

(iii)  An individual who was nominated or proposed to be a director of the second company by the first company.

(iv)  A director representative does not include a nonvoting observer.

(3)  First company means the company whose potential control of a second company is the subject of determination by the Board under this subpart.

(4)  Investment adviser means a company that:

(i)  Is registered as an investment adviser with the Securities and Exchange Commission under the Investment Advisers Act of 1940 (15 U.S.C. 80b--1 et seq.);

(ii)  Is registered as a commodity trading advisor with the Commodity Futures Trading Commission under the Commodity Exchange Act (7 U.S.C. 1 et seq.);

(iii)  Is a foreign equivalent of an investment adviser or commodity trading advisor, as described in paragraph (e)(4)(i) or (ii) of this section; or

(iv)  Engages in any of the activities set forth in § 225.28(b)(6)(i) through (iv) of this part.

(5)  Limiting contractual right means a contractual right of the first company that would allow the first company to restrict significantly, directly or indirectly, the discretion of the second company, including its senior management officials and directors, over operational and policy decisions of the second company.

(i)  Examples of limiting contractual rights may include, but are not limited to, a right that allows the first company to restrict or to exert significant influence over decisions related to:

(A)  Activities in which the second company may engage, including a prohibition on entering into new lines of business, making substantial changes to or discontinuing existing lines of business, or entering into a contractual arrangement with a third party that imposes significant financial obligations on the second company;

(B)  How the second company directs the proceeds of the first company's investment;

(C)  Hiring, firing, or compensating one or more senior management officials of the second company, or modifying the second company's policies or budget concerning the salary, compensation, employment, or benefits plan for its employees;

(D)  The second company's ability to merge or consolidate, or its ability to acquire, sell, lease, transfer, spin-off, recapitalize, liquidate, dissolve, or dispose of subsidiaries or assets;

(E)  The second company's ability to make investments or expenditures;

(F)  The second company achieving or maintaining a financial target or limit, including, for example, a debt-to-equity ratio, a fixed charges ratio, a net worth requirement, a liquidity target, a working capital target, or a classified assets or nonperforming loans limit;

(G)  The second company's payment of dividends on any class of securities, redemption of senior instruments, or voluntary prepayment of indebtedness;

(H)  The second company's ability to authorize or issue additional junior equity or debt securities, or amend the terms of any equity or debt securities issued by the second company;

(I)  The second company's ability to engage in a public offering or to list or de-list securities on an exchange, other than a right that allows the securities of the first company to have the same status as other securities of the same class;

(J)  The second company's ability to amend its articles of incorporation or by-laws, other than in a way that is solely defensive for the first company;

(K)  The removal or selection of any independent accountant, auditor, investment adviser, or investment banker employed by the second company; or

(L)  The second company's ability to significantly alter accounting methods and policies, or its regulatory, tax, or liability status (e.g., converting from a stock corporation to a limited liability company); and

(ii)  A limiting contractual right does not include a contractual right that would not allow the first company to significantly restrict, directly or indirectly, the discretion of the second company over operational and policy decisions of the second company. Examples of contractual rights that are not limiting contractual rights may include:

(A)  A right that allows the first company to restrict or to exert significant influence over decisions relating to the second company's ability to issue securities senior to securities owned by the first company;

(B)  A requirement that the first company receive financial reports or other information of the type ordinarily available to common stockholders;

(C)  A requirement that the second company maintain its corporate existence;

(D)  A requirement that the second company consult with the first company on a reasonable periodic basis;

(E)  A requirement that the second company provide notices of the occurrence of material events affecting the second company;

(F)  A requirement that the second company comply with applicable statutory and regulatory requirements;

(G)  A market standard requirement that the first company receive similar contractual rights as those held by other investors in the second company;

(H)  A requirement that the first company be able to purchase additional securities issued by the second company in order to maintain the first company's percentage ownership in the second company;

(I)  A requirement that the second company ensure that any security holder who intends to sell its securities of the second company provide other security holders of the second company or the second company itself the opportunity to purchase the securities before the securities can be sold to a third party; or

(J)  A requirement that the second company take reasonable steps to ensure the preservation of tax status or tax benefits, such as status of the second company as a Subchapter S corporation or the protection of the value of net operating loss carry-forwards.

(6)  Second company means the company whose potential control by a first company is the subject of determination by the Board under this subpart.

(7)  Senior management official means any person who participates or has the authority to participate (other than in the capacity as a director) in major policymaking functions of a company.

(f)  Reservation of authority. Nothing in this subpart shall limit the authority of the Board to take any supervisory or enforcement action otherwise permitted by law, including an action to address unsafe or unsound practices or conditions, or violations of law.

[Codified to 12 C.F.R. § 225.31]

[Section 225.31 amended at 58 Fed. Reg. 474, January 6, 1993, effective February 4, 1993; 62 Fed. Reg. 9338, February 28, 1997; 85 Fed. Reg. 22939, April 23, 2020, effective September 30, 2020]

[Subpart Reserved March 5, 2005 through September 29, 2020]

225.32 [Reserved]

[Subpart Effective September 30, 2020]

§ 225.32  Rebuttable presumptions of control of a company.

(a)  General.

(1)  In any proceeding under § 225.31(b) or (c) of this part, a first company is presumed to control a second company in the situations described in paragraphs (b) through (i) of this section. The Board also may find that a first company controls a second company based on other facts and circumstances.

(2)  For purposes of the presumptions in this section, any company that is a subsidiary of the first company and also a subsidiary of the second company is considered to be a subsidiary of the first company and not a subsidiary of the second company.

(b)  Management contract or similar agreement. The first company enters into any agreement, understanding, or management contract (other than to serve as investment adviser) with the second company, under which the first company directs or exercises significant influence or discretion over the general management, overall operations, or core business or policy decisions of the second company. Examples of such agreements include where the first company is a managing member, trustee, or general partner of the second company, or exercises similar powers and functions.

(c)  Total equity. The first company controls one third or more of the total equity of the second company.

(d)  Ownership or control of 5 percent or more of voting securities. The first company controls 5 percent or more of the outstanding securities of any class of voting securities of the second company, and:

(1)(i)  Director representatives of the first company or any of its subsidiaries comprise 25 percent or more of the board of directors of the second company or any of its subsidiaries; or

(ii)  Director representatives of the first company or any of its subsidiaries are able to make or block the making of major operational or policy decisions of the second company or any of its subsidiaries;

(2)  Two or more employees or directors of the first company or any of its subsidiaries serve as senior management officials of the second company or any of its subsidiaries;

(3)  An employee or director of the first company or any of its subsidiaries serves as the chief executive officer, or serves in a similar capacity, of the second company or any of its subsidiaries;

(4)  The first company or any of its subsidiaries enters into transactions or has business relationships with the second company or any of its subsidiaries that generate in the aggregate 10 percent or more of the total annual revenues or expenses of the second company, each on a consolidated basis; or

(5)  The first company or any of its subsidiaries has any limiting contractual right with respect to the second company or any of its subsidiaries, unless such limiting contractual right is part of an agreement to merge with or make a controlling investment in the second company that is reasonably expected to close within one year and such limiting contractual right is designed to ensure that the second company continues to operate in the ordinary course until the merger or investment is consummated or such limiting contractual right requires the second company to take an action necessary for the merger or investment to be consummated.

(e)  Ownership or control of 10 percent or more of voting securities. The first company controls 10 percent or more of the outstanding securities of any class of voting securities of the second company, and:

(1)  The first company or any of its subsidiaries propose a number of director representatives to the board of directors of the second company or any of its subsidiaries in opposition to nominees proposed by the management or board of directors of the second company or any of its subsidiaries that, together with any director representatives of the first company or any of its subsidiaries on the board of directors of the second company or any of its subsidiaries, would comprise 25 percent or more of the board of directors of the second company or any of its subsidiaries;

(2)  Director representatives of the first company and its subsidiaries comprise more than 25 percent of any committee of the board of directors of the second company or any of its subsidiaries that can take action that binds the second company or any of its subsidiaries; or

(3)  The first company or any of its subsidiaries enters into transactions or has business relationships with the second company or any of its subsidiaries that:

(i)  Are not on market terms; or

(ii)  Generate in the aggregate 5 percent or more of the total annual revenues or expenses of the second company, each on a consolidated basis.

(f)  Ownership or control of 15 percent or more of voting securities. The first company controls 15 percent or more of the outstanding securities of any class of voting securities of the second company, and:

(1)  A director representative of the first company or of any of its subsidiaries serves as the chair of the board of directors of the second company or any of its subsidiaries;

(2)  One or more employees or directors of the first company or any of its subsidiaries serves as a senior management official of the second company or any of its subsidiaries; or

(3)  The first company or any of its subsidiaries enters into transactions or has business relationships with the second company or any of its subsidiaries that generate in the aggregate 2 percent or more of the total annual revenues or expenses of the second company, each on a consolidated basis.

(g)  Accounting consolidation. The first company consolidates the second company on its financial statements prepared under U.S. generally accepted accounting principles.

(h)  Control of an investment fund.

(1)  The first company serves as an investment adviser to the second company, the second company is an investment fund, and the first company, directly or indirectly, or acting through one or more other persons:

(i)  Controls 5 percent or more of the outstanding securities of any class of voting securities of the second company; or

(ii)  Controls 25 percent or more of the total equity of the second company.

(2)  The presumption of control in paragraph (h)(1) of this section does not apply if the first company organized and sponsored the second company within the preceding 12 months.

(i)  Divestiture of control.

(1)  The first company controlled the second company under § 225.2(e)(1)(i) or (ii) of this part at any time during the prior two years and the first company controls 15 percent or more of the outstanding securities of any class of voting securities of the second company.

(2)  Notwithstanding paragraph (i)(1) of this section, a first company will not be presumed to control a second company under this paragraph if 50 percent or more of the outstanding securities of each class of voting securities of the second company is controlled by a person that is not a senior management official or director of the first company, or by a company that is not an affiliate of the first company.

(j)  Securities held in a fiduciary capacity. For purposes of the presumptions of control in this section, the first company does not control securities of the second company that the first company holds in a fiduciary capacity, except that if the second company is a depository institution or a depository institution holding company, this paragraph (j) only applies to securities held in a fiduciary capacity without sole discretionary authority to exercise the voting rights of the securities.

[Codified to 12 CFR 225.32]

[Section 225.32 added at 85 Fed. Reg. 22939, April 23, 2020, effective September 30, 2020]

§ 225.33  Rebuttable presumption of noncontrol of a company.

(a)  In any proceeding under § 225.31(b) or (c) of this part, a first company is presumed not to control a second company if:

(1)  The first company controls less than 10 percent of the outstanding securities of each class of voting securities of the second company; and

(2)  The first company is not presumed to control the second company under § 225.32 of this part.

(b)  In any proceeding under this subpart, or judicial proceeding under the Bank Holding Company Act, other than a proceeding in which the Board has made a preliminary determination that a first company has the power to exercise a controlling influence over the management or policies of a second company, a first company may not be held to have had control over a second company at any given time, unless the first company, at the time in question, controlled 5 percent or more of the outstanding securities of any class of voting securities of the second company, or had already been found to have control on the basis of the existence of a controlling influence relationship.

[Codified to 12 CFR 225.33]

[Section 225.33 added at 85 Fed. Reg. 22939, April 23, 2020, effective September 30, 2020]

[Subpart effective September. 30, 2020]

§ 225.34  Total equity.

(a)  General. For purposes of this subpart, the total equity controlled by a first company in a second company that is organized as a stock corporation and prepares financial statements pursuant to U.S. generally accepted accounting principles will be calculated as described in paragraph (b) of this section. With respect to a second company that is not organized as a stock corporation or that does not prepare financial statements pursuant to U.S. generally accepted accounting principles, the first company's total equity in the second company will be calculated so as to be reasonably consistent with the methodology described in paragraph (b) of this section, while taking into account the legal form of the second company and the accounting system used by the second company to prepare financial statements.

(b)  Calculation of total equity--(1)  Total equity. The first company's total equity in the second company, expressed as a percentage, is equal to:

(i)  The sum of Investor Common Equity and, for each class of preferred stock issued by the second company, Investor Preferred Equity, divided by

(ii)  Issuer Shareholders' Equity.

(2)  Investor Common Equity equals the greater of:

(i)  Zero, and

(ii)  The quotient of the number of shares of common stock of the second company that are controlled by the first company divided by the total number of shares of common stock of the second company that are issued and outstanding, multiplied by the amount of shareholders' equity of the second company not allocated to preferred stock under U.S. generally accepted accounting principles.
  1If the second company has multiple classes of common stock outstanding and different classes of common stock have different economic interests in the second company on a per share basis, the number of shares of common stock must be adjusted for purposes of this calculation so that each share of common stock has the same economic interest in the second company.}

(3)  Investor Preferred Equity equals, for each class of preferred stock issued by the second company, the greater of:

(i)  Zero, and

(ii)  The quotient of the number of shares of the class of preferred stock of the second company that are controlled by the first company divided by the total number of shares of the class of preferred stock that are issued and outstanding, multiplied by the amount of shareholders' equity of the second company allocated to the class of preferred stock under U.S. generally accepted accounting principles.
  2If there are different classes of preferred stock with equal seniority (i.e., pari passu classes of preferred stock), the pari passu shares are treated as a single class. If pari passu classes of preferred stock have different economic interests in the second company on a per share basis, the number of shares of preferred stock must be adjusted for purposes of this calculation so that each pari passu share of preferred stock has the same economic interest in the second company. }

(c)  Consideration of debt instruments and other interests in total equity.

(1)  For purposes of the total equity calculation in paragraph (b) of this section, a debt instrument or other interest issued by the second company that is controlled by the first company may be treated as an equity instrument if that debt instrument or other interest is functionally equivalent to equity.

(2)  For purposes of paragraph (b)(1) of this section, the principal amount of all debt instruments and the market value of all other interests that are functionally equivalent to equity that are controlled by the first company are added to the sum under paragraph (b)(1)(i) of this section, and the principal amount of all debt instruments and the market value of all other interests that are functionally equivalent to equity that are outstanding are added to Issuer Shareholders' Equity.

(3)  For purposes of paragraph (c)(1) of this section, a debt instrument issued by the second company may be considered functionally equivalent to equity if it has equity-like characteristics, such as:

(i)  Extremely long-dated maturity;

(ii)
  aSo in original; there are two subsection (c)(3)(ii). See 85 FR 12425. }

aSubordination to other debt instruments issued by the second company;

(ii)aQualification as regulatory capital under any regulatory capital rules applicable to the second company;

(iii)  Qualification as equity under applicable tax law;

(iv)  Qualification as equity under U.S. generally accepted accounting principles or other applicable accounting standards;

(v)  Inadequacy of the equity capital underlying the debt at the time of the issuance of the debt; or

(vi)  Issuance not on market terms.

(4)  For purposes of paragraph (c)(1) of this section, an interest that is not a debt instrument issued by the second company may be considered functionally equivalent to equity if it has equity-like characteristics, such as entitling its owner to a share of the profits of the second company.

(d)  Exclusion of certain equity instruments from total equity.

(1)  For purposes of the total equity calculation in paragraph (b) of this section, an equity instrument issued by the second company that is controlled by the first company may be treated as not an equity instrument if the equity instrument is functionally equivalent to debt.

(2)  For purposes of paragraph (d)(1) of this section, an equity instrument issued by the second company may be considered functionally equivalent to debt if it has debt-like characteristics, such as protections generally provided to creditors, a limited term, a fixed rate of return or a variable rate of return linked to a reference interest rate, classification as debt for tax purposes, or classification as debt for accounting purposes.

(e)  Frequency of total equity calculation. The total equity of a first company in a second company is calculated each time the first company acquires control over equity instruments of the second company, including any debt instruments or other interests that are functionally equivalent to equity in accordance with paragraph (c) of this section.

[Codified to 12 CFR 225.34]

[Section 225.34 added at 85 Fed. Reg. 22939, April 23, 2020, effective September 30, 2020]


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