On July 30, 2024, the Federal Deposit Insurance Corporation (FDIC) issued a notice of proposed rulemaking (NPR)[1] that would expand the FDIC’s role under the Change in Bank Control Act of 1978 (CBCA).[2] The NPR seeks, in part, to address the FDIC’s concerns about the increasing stakes in insured depository institutions (IDIs) and their holding companies (IDI Holding Companies) held by large fund complexes and other asset managers. The NPR was adopted by a 3-to-2 vote, with Vice-Chair Travis Hill and Director McKernan dissenting.
Background
The CBCA generally requires 60 days’ prior written notice to the “appropriate Federal banking agency”[3] before a person may acquire control of an IDI or IDI Holding Company. The prior notice requirement provides the banking agency the opportunity to evaluate and disapprove a proposed acquisition, or approve with conditions, such as passivity commitments. “Control” for CBCA purposes means the “power, directly or indirectly, to direct the management or policies of an [IDI] or to vote 25 percentum or more of any class of voting securities of an [IDI].” “Control” is presumed to occur under certain conditions with the acquisition, directly or indirectly, of 10% of any class of voting securities of an IDI or IDI Holding Company.[4] The presumption is rebuttable.
The CBCA does not apply to acquisitions of IDI or IDI Holding Company voting securities subject to approval under section 3 of the Bank Holding Company Act;[5] the Bank Merger Act;[6] or section 10 of the Home Owners’ Loan Act.[7] Such transactions, including outright acquisitions of an IDI or of substantially all of its assets, are subject to prior approval (rather than prior notice) by the appropriate Federal banking agency. This leaves the CBCA with a limited, but nonetheless significant, role, consisting generally of requiring CBCA notices for transactions involving the direct or indirect acquisition of at least 10% but less than 25% of a class of IDI or IDI Holding Company voting securities.[8]
According to the NPR, the proposal was prompted largely by the increased concentration of holdings of IDI and IDI Holding Company voting securities by large asset managers for the accounts of the funds and accounts they manage or advise, including passive index funds sponsored, managed, or advised by such asset managers.[9] The FDIC notes that passive index funds present issues of particular concern, as asset managers are required by such funds’ governing documents to hold specific percentages of securities in a fund’s underlying index, which can include IDI and IDI Holding Company voting securities.
To address CBCA control issues in these circumstances, the FRB has entered into passivity commitments with certain large asset managers.[10] Under these passivity commitments, asset managers have undertaken, among other measures, not to acquire in the aggregate, directly or through funds they manage or advise, 15% or more of IDI Holding Company or IDI voting securities and not to have more than one director interlock or any officer or employee interlock. The asset managers subscribing to these commitments have been permitted to acquire up to 15% of any class of voting securities of a bank holding company, savings and loan holding company, or state member bank without filing a CBCA notice with the FRB that would otherwise be required. The FDIC has also entered into passivity commitments with asset managers, which would permit an asset manager to acquire up to 15% of any class of voting securities of a state nonmember or an insured state savings association, or an IDI Holding Company thereof, without filing with the FDIC a CBCA notice that would otherwise be required.[11]
Proposed Regulatory Change
As discussed above, CBCA notices are filed with the appropriate Federal banking agency, which varies depending on the financial institution subject to a change of control. The FDIC is the appropriate Federal banking agency for a CBCA filing by a nonmember bank or insured state savings association.[12] However, as a general rule, an IDI Holding Company parent of either such institution is required to file a CBCA notice with the FRB.[13] Under current FDIC regulations, such an IDI Holding Company is exempt from filing a CBCA notice with the FDIC as long as a CBCA notice is filed and reviewed by the FRB.[14]
The NPR would remove this exemption for an IDI Holding Company parent of a state nonmember bank or an insured state savings association. As a result, such an IDI Holding Company would be required to file a CBCA notice with both the FRB and FDIC.[15] In these circumstances, the FDIC would exercise its own judgment, independent of the FRB, as to whether to require a CBCA notice and ultimately whether to object to the transaction or approve it, possibly subject to conditions, such as its own set of passivity commitments.
In the NPR, the FDIC acknowledges that its proposal could result in duplication of review of a transaction by the FDIC and the FRB. However, as the primary Federal regulator of nonmember banks and insured state savings associations, and in light of its concerns regarding the concentration of IDI and IDI Holding Company ownership with a limited number of large asset managers, the FDIC, as the manager of the Deposit Insurance Fund, believes it should be authorized to take responsibility for conducting its own reviews of certain transactions under the CBCA.
As explained above, under the FDIC’s existing rule, an IDI Holding company of a nonmember bank or an insured state savings association is not required to file a CBCA notice with the FDIC if a notice is filed and reviewed by the FRB. However, an IDI Holding Company may not file a CBCA notice with the FRB if the transaction is within the parameters of agreed upon passivity commitments with the FRB. In such a situation, the FDIC’s existing regulation can be construed as not exempting an FDIC CBCA filing.
In his press release accompanying the NPR, FDIC Chairman Gruenberg explains that in these circumstances, the FDIC has reserved but not exercised the right to require a notice involving an indirect change of control of a nonmember bank or insured state saving association.[16] It remains to be seen whether, consistent with the policy underlying the NPR, the FDIC would seek to require a notice in these circumstances. In any event, Chairman Gruenberg confirms that the FDIC intends “to strengthen its passivity commitments with investors, by ending reliance on self-certification by investors and ensuring that the FDIC has the ability to obtain the information for examination staff to analyze the ongoing interaction between an investor and the institution.”
Interagency Collaboration
While staking out its own role, the FDIC recognizes in the NPR “the importance of interagency collaboration and consistency with respect to the review of transactions under the CBCA” and states its commitment “to engaging in dialogue and coordination with the FRB and OCC to develop an interagency approach to the issues discussed in this proposal.”
Potential Consequences for Asset Managers
This change may well have implications for fund complexes, particularly those that include large passive index funds. Requiring these fund complexes to file CBCA notices could materially impact the performance of passive index funds by, for example, delaying the ability of such funds to execute transactions implementing an index rebalance event that would result in the fund complex owning 10% or more of an IDI or IDI Holding Company. A delay in implementation of an index rebalance could materially impact the price at which the fund is able to transact in the relevant securities, potentially affecting fund performance. Such delays and pricing issues may also result in significant tracking errors between a fund and its underlying index, resulting in harm to existing shareholders who seek exposure to the underlying index.
Comments on the proposed rule must be received by October 18, 2024.
[1] 89 FR 67002 (Aug. 19, 2024). A prior version of the NPR was proposed and withdrawn at the Board’s April 25, 2024, meeting.
[2] 12 U.S.C. § 1817(j).
[3] Under the CBCA, the “appropriate Federal banking agency” is the Board of Governors of the Federal Reserve System (FRB) for banks that are members of the Federal Reserve System and bank holding companies, the Office of the Comptroller of the Currency (OCC) for national banks, and the FDIC for nonmember banks and insured state savings associations. 12 U.S.C. § 1817(j); 12 U.S.C. § 1813(q).
[4] 12 C.F.R. § 303.82(b).
[5] 12 U.S.C. § 1842.
[6] 12 U.S.C. § 1828(c).
[7] 12 U.S.C. §1467a.
[8] The CBCA’s prior notice requirements are also triggered by acquisitions of control of IDIs by natural persons.
[9] An asset manager is deemed to hold IDI shares, directly or indirectly, held by the funds or accounts it manages or advises if the asset manager has sole discretionary authority to vote the shares and retain such authority for more than two years. 12 C.F.R. § 225.12(a).
[10] BlackRock letter - December 3, 2020; bhcchangeincontrol20191126a.pdf; Letter to Jeffrey Hare.
[11] See, e.g., Change In Control.
[12] See note 3 supra.
[13] 12 U.S.C. § 1813(q)(3). There is an exception to this general rule. A CBCA notice for a parent company of an FDIC-insured industrial loan company is required to be filed with the FDIC. See 12 C.F.R. Part 354 and proposed clarifying and other changes.
[14] 12 C.F.R. § 303.81(e).
[15] The FDIC is not the “appropriate Federal banking agency” under the statute in these circumstances. 12 U.S.C. § 1813(q). This raises the question of whether the NPR, if adopted, will be subject to judicial challenge.
[16] See Statement by Martin J. Gruenberg Chairman, FDIC Notice of Proposed Rulemaking Amending Regulations Implementing the Change in Bank Control Act.
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