Randy Benjenk is quoted in a Risk article regarding the Federal Reserve's plan to reform bank holding company (BHC) rules. According to Benjenk, the most common case of ambiguity around control determinations is whether investors such as private equity firms “can make a capital infusion into a bank without becoming a BHC or requiring approval from a federal regulator." He says, “This is critically important because a lot of banks capitalize themselves with private equity investments. Private equity investors do not generally want to become BHCs, and they don’t want their funds to be either. So they have to make sure their investment is non-controlling."
The Fed can reach a finding of controlling influence at a relatively low level of ownership, Benjenk adds. “It could even be found technically with no common stock ownership. If an investor has more than a third of the total equity of a company in the form of non-voting preferred stock, for example, that investor is deemed under the Fed’s controlling influence precedent to have control over that company,” Benjenk says. The definition of control in the BHC Act is actually used in a variety of statutes, and even where it isn’t expressly used, the Fed will look to that definition in different contexts.
“Governor Quarles has said that he wants to make the control test simpler, so that it doesn’t require as much analysis to figure out whether one company controls another. But making that multi-factor analysis into a bright-line rule is easier said than done. When the Fed has tried in the past to make changes or clarify the framework, it has not resulted in much added clarity,” warns Benjenk.
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