FDIC Proposes Rule Amendments to Expand Its Role in Reviewing Depository Institution Holding Company Acquisitions
On July 30, 2024, the Federal Deposit Insurance Corporation (FDIC) proposed amendments to regulations under the Change in Bank Control Act of 1978 (the CBCA) that would subject certain acquisitions of holding companies of FDIC-supervised institutions to FDIC advance notice requirements.
Currently, an entity is generally required to file a change-in-control notification with the FDIC in advance of a proposed transaction that would result in the entity acquiring control (generally defined as 25% ownership)[1] of an insured state nonmember bank or an insured state savings association (i.e., an FDIC-supervised institution), or a company that directly or indirectly controls such institution, providing the FDIC generally 60 days to disapprove of the proposed transaction if it fails to satisfy any of the enumerated factors under the CBCA. An acquisition of a holding company of an FDIC-supervised institution is generally exempt from the FDIC notice requirement where the Federal Reserve Board (FRB) separately receives and reviews a notice under the CBCA. This exemption does not apply where the FRB accepts a “passivity commitment” from the acquiring entity in lieu of a notice—i.e., an agreement outlining the actions the acquiring entity will or will not take to rebut the regulatory presumption that the acquiring entity would control the acquired entity after the transaction. In such cases, the FDIC evaluates whether a notice to the FDIC is required and, in recent years, has typically not determined to require such notice.
According to the proposing release, as passive investment vehicles, such as index mutual funds and ETFs, have experienced significant growth in recent years, the FDIC has observed increasing ownership stakes taken by passively managed funds under common sponsorship, management or advisement, which the FDIC refers to as “fund complexes,” in FDIC-supervised institutions and their controlling affiliates, pursuant to their index-tracking investment strategies, as well as more frequent requests for relief from the regulatory presumption of control and notice requirement. These developments have prompted the FDIC to reconsider its current filing requirements and processing procedures under the CBCA, as the FDIC is concerned about fund complexes having outsized influence or control over the management or policies of an institution, potentially leading to “excessive risk-taking to enhance profits, investor returns, or stock price” and creating concentration of ownership that may result in “excessive influence or control over the banking industry as a whole.”
In light of these developments, the proposed amendments would remove the current exemption from the FDIC notice requirement for an acquisition of a holding company of an FDIC-supervised institution when the FRB separately receives and reviews a notice under the CBCA. As a result, regardless of whether the FRB receives and reviews a notice in such cases, or accepts a passivity commitment in lieu of notice, the FDIC will separately evaluate whether to require that a notice be filed with the FDIC or, as applicable, allow the acquiring entity the opportunity to rebut the regulatory presumption of control.
If adopted, the proposed amendments could have a material impact on large index fund complexes. For example, a fund complex may need to file a notice with the FDIC, or rebut the presumption of control in writing, in advance of a rebalancing event that could result in a change in control at an applicable institution, which could delay the rebalancing and potentially impact fund performance and tracking error.
Comments on the proposal are due on or before October 18, 2024.
The FDIC’s proposing release is available here and a related press release is available here.
[1] ‘‘Control’’ for purposes of the CBCA means ‘‘the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25 per centum or more of any class of voting securities of an insured depository institution.’’ While the CBCA does not describe what constitutes the power to direct the management or policies of an institution, FDIC regulations contain a rebuttable presumption that an acquisition resulting in the ownership of 10 percent or more of any class of voting securities constitutes control. As a result, in practice, for transactions that result in ownership above the 10 percent regulatory threshold but below the 25 percent statutory threshold for control, the acquiring entity generally will file a notice with the FDIC or rebut the presumption of control.
Vedder Thinking | Articles FDIC Proposes Rule Amendments to Expand Its Role in Reviewing Depository Institution Holding Company Acquisitions
Newsletter/Bulletin
October 10, 2024
On July 30, 2024, the Federal Deposit Insurance Corporation (FDIC) proposed amendments to regulations under the Change in Bank Control Act of 1978 (the CBCA) that would subject certain acquisitions of holding companies of FDIC-supervised institutions to FDIC advance notice requirements.
Currently, an entity is generally required to file a change-in-control notification with the FDIC in advance of a proposed transaction that would result in the entity acquiring control (generally defined as 25% ownership)[1] of an insured state nonmember bank or an insured state savings association (i.e., an FDIC-supervised institution), or a company that directly or indirectly controls such institution, providing the FDIC generally 60 days to disapprove of the proposed transaction if it fails to satisfy any of the enumerated factors under the CBCA. An acquisition of a holding company of an FDIC-supervised institution is generally exempt from the FDIC notice requirement where the Federal Reserve Board (FRB) separately receives and reviews a notice under the CBCA. This exemption does not apply where the FRB accepts a “passivity commitment” from the acquiring entity in lieu of a notice—i.e., an agreement outlining the actions the acquiring entity will or will not take to rebut the regulatory presumption that the acquiring entity would control the acquired entity after the transaction. In such cases, the FDIC evaluates whether a notice to the FDIC is required and, in recent years, has typically not determined to require such notice.
According to the proposing release, as passive investment vehicles, such as index mutual funds and ETFs, have experienced significant growth in recent years, the FDIC has observed increasing ownership stakes taken by passively managed funds under common sponsorship, management or advisement, which the FDIC refers to as “fund complexes,” in FDIC-supervised institutions and their controlling affiliates, pursuant to their index-tracking investment strategies, as well as more frequent requests for relief from the regulatory presumption of control and notice requirement. These developments have prompted the FDIC to reconsider its current filing requirements and processing procedures under the CBCA, as the FDIC is concerned about fund complexes having outsized influence or control over the management or policies of an institution, potentially leading to “excessive risk-taking to enhance profits, investor returns, or stock price” and creating concentration of ownership that may result in “excessive influence or control over the banking industry as a whole.”
In light of these developments, the proposed amendments would remove the current exemption from the FDIC notice requirement for an acquisition of a holding company of an FDIC-supervised institution when the FRB separately receives and reviews a notice under the CBCA. As a result, regardless of whether the FRB receives and reviews a notice in such cases, or accepts a passivity commitment in lieu of notice, the FDIC will separately evaluate whether to require that a notice be filed with the FDIC or, as applicable, allow the acquiring entity the opportunity to rebut the regulatory presumption of control.
If adopted, the proposed amendments could have a material impact on large index fund complexes. For example, a fund complex may need to file a notice with the FDIC, or rebut the presumption of control in writing, in advance of a rebalancing event that could result in a change in control at an applicable institution, which could delay the rebalancing and potentially impact fund performance and tracking error.
Comments on the proposal are due on or before October 18, 2024.
The FDIC’s proposing release is available here and a related press release is available here.
[1] ‘‘Control’’ for purposes of the CBCA means ‘‘the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25 per centum or more of any class of voting securities of an insured depository institution.’’ While the CBCA does not describe what constitutes the power to direct the management or policies of an institution, FDIC regulations contain a rebuttable presumption that an acquisition resulting in the ownership of 10 percent or more of any class of voting securities constitutes control. As a result, in practice, for transactions that result in ownership above the 10 percent regulatory threshold but below the 25 percent statutory threshold for control, the acquiring entity generally will file a notice with the FDIC or rebut the presumption of control.
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