As one regulator put it, “The rules and regulations regarding bank control take 10 minutes to read and a lifetime to understand.” We’ve spent the past 26 years working with all types of financial institutions, banking regulators and studying the regulations themselves, and we feel like we’re well on our way to making sense of bank control regulations. There’s nothing we’d like more than to help our clients gain the same understanding.

Our particular focus of this paper is to discuss circumstances in which an individual’s investment in a bank or bank holding company (BHC) triggers a control analysis under the Change in Bank Control Act. The term “individual” here includes natural persons, companies and partnerships. In contrast, investments in a bank or BHC by a banking or non-banking organization may trigger a control analysis under the Bank Holding Company Act, rather than the Change in Bank Control Act.

“The rules and regulations regarding bank control take 10 minutes to read and a lifetime to understand.”


When is a Change in Control Filing Required?
As per the Change in Bank Control Act, prior approval from the Federal Reserve is required when an individual, alone or acting together with others, acquires “control” of a state member bank, BHC or savings and loan holding company.

The standards of what constitutes “control” under U.S. banking laws are complex, and the complexity of a control determination is compounded by the fact that there are several, often overlapping, definitions and guidelines relating to control, depending on the nature of the transaction.

In general, control is when an individual or group (acting in concert) owns, controls or holds with power to vote (as in a trustee) 25% or more of any class of a banking entity’s voting securities, or when an individual or group owns, controls, or holds with power to vote 10% or more of any class of voting securities, if no other person holds a greater percentage of any class of voting securities.


Who is Impacted?
Over the last several months, we at DD&F have observed an uptick in the instances where bank or BHC shareholders, particularly those involved in a control group (family members or persons acting in concert) – including trusts within control groups – found themselves needing to file a Notice of Change in Control with their regulators, be it the Federal Reserve, FDIC, OCC or their respective State Bank Department. The Federal Reserve, which has authority over BHC’s and member banks, has more stringent control rules than other regulatory agencies, particularly when it comes to family control groups.

The general definitions of control, defined above, serve as guidelines for when ownership interest changes trigger a filing requirement, but the instances may not be necessarily obvious to shareholders. The implication of legal terminology is very important. For instance, in a situation where a group of related individuals (“immediate family” as defined by the regulation) together controls 10% or more of the stock of an institution (with no other individual shareholder controlling a larger percentage), this requires a Change in Control filing. It is important to know how “immediate family” is defined and who is considered part of a control group. Perhaps your company’s stock ownership was shifted around back in 2011, ahead of estate planning tax changes, without anyone realizing there may have been a need to obtain prior regulatory approval for a change in control.

Another common occurrence we see is when an existing control group adds a family member, (as a result of stock ownership, whether by purchase or gift) who was not previously approved as part of the control group. Each time a family member of an approved control group member gains control of bank or BHC stock, even if it’s just by one share, that new stockholder must be approved as part of the control group.

Another example is when an individual, previously approved to own less than 25% of a bank or BHC’s stock, acquires additional stock causing their ownership interest to exceed 25%. This bump in ownership interest to 25% or greater requires a filing.

With regard to BHC or Fed-member bank stock, another issue we’ve frequently observed is when an individual places his/her stock into a trust and unknowingly violates Federal Reserve guidelines. One possible issue with a trust holding the stock is this: if the trust controls 5% or more of a bank or BHC, the Federal Reserve only allows 25% or less of the aggregate assets held by that trust to be impermissible assets for a bank or BHC. For example, if a trust holds $400,000 worth of BHC stock, which represents 5% ownership of the BHC, and the trust’s only other asset is a personal residence valued at $600,000 (which represents 60% of the trust’s total assets), the residence, considered an impermissible asset, is over the 25% limit. In such a case there would essentially be three options:

1) The trust has to be approved as a BHC (most owners don’t want this)

2) The real estate would have to be divested out of the trust

3) A separate, qualified trust would need to be established  to hold the BHC stock.

DD&F can help you walk through your options in this or any of the other control scenarios that come into play.


When are the Filings Required?
These are just a few of the countless scenarios that could trigger a change in control. When it comes to control of an institution, there are many factors to consider, both in the relationship of individuals who own the stock and who/what holds the stock. While prior approval is required before a change in control occurs – typically 60 days advance notice – it is important to understand that if a change in control has already occurred, an after-the-fact notice is still required to be filed with one or more of the institution’s regulators seeking retroactive approval.


How do I know where I stand?
Changes in control can be complicated to navigate, and the signs along the path may be confusing to understand, so if you’re in any doubt as to whether a filing is required or simply have general questions about the issue, please do not hesitate to give us a call for guidance.