The proposal would establish stricter oversight of certain transactions and responds to concerns that large asset managers may be exerting influence on FDIC-supervised institutions.
On July 30, 2024, the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) approved a Notice of Proposed Rulemaking to amend the agency’s regulations under the Change in Bank Control Act1 (the Proposal)2. The Proposal would require advance notice to the FDIC for acquisitions of 10% or more of the voting securities of a holding company with an FDIC-supervised subsidiary, and would allow the FDIC to reject such acquisitions if one or more statutory factors are not met.3
The Proposal reflects the FDIC’s increasing concern over indirect control or concentration of ownership by large asset managers and other institutional investors that sponsor, manage, or advise multiple index funds whose underlying securities are stocks of FDIC-supervised institutions. Although these investments by institutional investors are intended to be passive, the FDIC has observed that such investors “have acquired 10 percent or more of the voting securities at FDIC-supervised institutions or their controlling affiliates and have continued to increase their ownership percentages at more institutions.” The Proposal cautions that without regulatory changes, these investors could exercise enough influence over publicly traded FDIC-supervised institutions to “increase the risk profile at such institutions” and raise safety and soundness concerns.
The Change in Bank Control Act (the Act)
Under the Act, a person4 (acting directly or indirectly, or in concert with other persons) that seeks to acquire control of an insured depository institution must provide at least 60 days prior written notice to the appropriate federal banking agency. The appropriate federal banking agency — the FDIC for state-chartered FDIC-insured nonmember banks and state-chartered FDIC-insured thrifts — may disapprove the acquisition of control if certain factors are not met.5
Under current FDIC regulations, change in control transactions are generally exempt from the prior written notice requirement when the Board of Governors of the Federal Reserve System (FRB) must approve an application for the acquisition of control of the holding company of an FDIC-supervised institution.
Current FDIC regulations also provide that when the FRB accepts a passivity commitment instead of an application from an investor taking a large stake in an FDIC-supervised institution (but agreeing, for example, not play an active role in bank management or to acquire further voting securities above a certain threshold), the FDIC evaluates the facts and circumstances of the case and determines whether a written notice must be filed with the FDIC. In practice, however, the FDIC has waived the notice requirement as well when the FRB accepts a passivity commitment.6
The Proposal
The Proposal, if finalized, would:
- remove the existing exemption for transactions reviewed by the FRB (according to the FDIC, the exemption is “no longer warranted” given the emerging risks related to the growth in passive investment strategies”);
- override the practice of not requiring written notice to the FDIC when the FRB has accepted a passivity commitment instead of a notice; and
- request further public comment on the FDIC’s overall approach to changes in control affecting FDIC-supervised institutions.
According to the FDIC, these changes are necessary to “address the concerns and potential risks” that institutional investors pose to FDIC-supervised institutions.
Support and Concerns
The Proposal passed in a 3-2 vote, proposed by Consumer Financial Protection Bureau Director Rohit Chopra, and supported by FDIC Chairman Martin Gruenberg and Acting Comptroller of the Currency Michael Hsu (FDIC members Travis Hill and Jonathan McKernan opposed). Chairman Gruenberg called the Proposal “a meaningful shift in the FDIC’s approach to proposed acquisitions under [the Act].” He asserted that “it is important that the FDIC, as the primary federal regulator of state non-member banks, closely review who is exercising direct or indirect control over its supervised institutions.”
FDIC Director Jonathan McKernan noted that “it is important that the FDIC have insight into the control chain of an FDIC-supervised bank,” but opposed the Proposal due to lack of interagency coordination on the issue across the three federal bank regulators.
To that end, the FDIC stated in the Proposal that it “recognizes the importance of interagency collaboration and consistency” on matters related to the review of change in control transactions under the Act, and “is committed to engaging in dialogue and coordination with the FRB and Office of the Comptroller of the Currency to develop an interagency approach to the issues discussed in this proposal.”
Next Steps
The FDIC included a set of 20 questions for public consideration on all aspects of the Proposal, including the role of asset managers obtaining large stakes in banks and the risks associated with concentrated ownership. Responses or comments on the Proposal must be submitted within 60 days after publication in the Federal Register. Whether the Proposal can be finalized without interagency support remains to be seen.
Global Outlook
The FDIC’s Proposal is broadly comparable to trigger thresholds applied in the controller regime for banking groups in other global jurisdictions, including the UK and EU where a 10% approval threshold is applied to controllers looking to acquire shares or voting power in deposit taking institutions.
