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Federal reserve Bank of Dallas
DALLAS, T E X A S

75222

C ir c u l a r No. 78-21
F e b r u a r y 23, 1978

INTERPRETATION OF REGULATION Y
P re s u m p tio n of C o n tin u ed Control of
T r a n s f e r r e d A ss e ts a n d A ctiv ities

TO ALL MEMBER BANKS,
BANK HOLDING COMPANIES,
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
In F e b r u a r y 1977, the B oard of G o v e rn o rs of the F ederal
R e s e rv e System p u b lis h e d for comment a p r o p o s e d am en d m en t to its R eg u ­
lation Y th a t would h a v e codified c e r ta i n r u l i n g s made by the Board u n d e r
Section 2(g) (3) of th e Bank Holding Company Act, a n d would a lso h a ve
e s ta b lis h e d c e r ta in re g u la to r y p re s u m p tio n s re la tin g to the c o n tin u e d c o n ­
tro l by b a n k hold in g com p a n ies of s h a r e s o r a s s e t s d iv e s te d by such
c o m p a n ies. T h e B oard h a s now d e te rm in e d to w ith d ra w the p r o p o s e d
am end m ent a n d to is s u e instead an in te rp r e ta tio n of Section 2(g) (3) of the
A ct. T h e in te rp r e ta tio n is e n c lo se d .
If you h a v e a n y q u e s tio n s r e g a r d i n g th is i n te r p r e ta t io n , p le a s e
c o n ta ct o u r Holding Company S u p e r v is io n D epartm en t, Ext. 6182.
Additional c o p ie s of th e in te rp r e ta tio n of Regulation Y will be
fu r n i s h e d upon r e q u e s t to th e S e c r e t a r y 's Office of th is B an k , Ext. 6267.
S in c e re ly y o u r s ,
R o b ert H . Boykin
F ir s t Vice P r e s id e n t
E n c lo su re

Banks and others are encouraged to use the following incoming W A T S numbers in contacting this Bank:
1 -8 00 -492 -440 3 (intrastate) and 1-800 -527 -497 0 (interstate). For calls placed locally, please use 651 plus
the extension referred to above.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

BANK HOLDING COMPANIES
INTERPRETATION OF REGULATION Y
SECTION 225.138 — PRESUMPTION
OF CO N TIN U ED CONTROL U N D ER §2(g)(3)
OF TH E BANK HO LD IN G COMPANY ACT
Section 2(g) (3) of the Bank Holding Company
Act (the “Act”) establishes a statutory presump­
tion that where certain specified relationships exist
between a transferor and transferee of shares, the
transferor (if it is a bank holding company, or a
company that would be such but for the transfer)
continues to own or control indirectly the trans­
ferred shares.1 This presumption arises by opera­
tion of law, as of the date of the transfer, without
the need for any order or determination by the
Board. Operation of the presumption may be
terminated only by the issuance of a Board deter­
mination, after opportunity for hearing, “that the
transferor is not in fact capable of controlling the
transferee.”2
The purpose of section 2(g)(3) is to provide the
Board an opportunity to assess the effectiveness of
divestitures in certain situations in which there may
be a risk that the divestiture will not result in the
complete termination of a control relationship. By
presuming control to continue as a matter of law,
section 2(g) (3) operates to allow the effectiveness
of the divestiture to be assessed before the divest­
ing company is permitted to act on the assumption
that the divestiture is complete. Thus, for example,
if a holding company divests its banking interests
under circumstances where the presumption of
continued control arises, the divesting company
must continue to consider itself bound by the Act
until an appropriate order is entered by the Board
dispelling the presumption. Section 2(g) (3) does
not establish a substantive rule that invalidates

transfers to which it applies, and in a great many
cases the Board has acted favorably on applica­
tions to have the presumption dispelled. It merely
provides a procedural opportunity for Board con­
sideration of the effect of such transfers in advance
of their being deemed effective. Whether or not
the statutory presumption arises, the substantive
test for assessing the effectiveness of a divestiture
is the same — that is, the Board must be assured
that all control relationships between the trans­
feror and the transferred property have been
terminated and will not be reestablished.3
In the course of administering section 2(g) (3)
the Board has had several occasions to consider
the scope of that section. In addition, questions
have been raised by and with the Board’s staff as
to coverage of the section. Accordingly, the Board
believes it would be useful to set forth the follow­
ing interpretations of section 2(g) (3):
1.
The terms “transferor” and “transferee,” as
used in section 2(g) (3), include parents and sub­
sidiaries of each. Thus, for example, where a trans­
feree is indebted to a subsidiary of the transferor,1
or where a specified interlocking relationship
exists between the transferor or transferee and a
subsidiary of the other (or between subsidiaries of
each), the presumption arises. Similarly, if a
parent of the transferee is indebted to a parent of
the transferor, the presumption arises. The pre­
sumption of continued control also arises where
an interlock or debt relationship is retained be­
tween the divesting company and the company
being divested, since the divested company will
be or may be viewed as a “subsidiary” of the
transferee or group of transferees.

’The presumption arises where the transferee “is indebted to the transferor, or has one or more officers,
directors, trustees, or beneficiaries in com mon with o r subject to control by the transferor.”
"The Board has delegated to its G eneral Counsel the authority to issue such determinations. 12 C.F.R.
§265.2 (b ) (1 ).
3It should be noted, however, that the Board will require termination of any interlocking management
relationships between the divesting company and the transferee or the divested company as a precondition
of finding that a divestiture is complete. Similarly, the retention of an economic interest in the divested
company that would create an incentive for the divesting company to attempt to influence the management
of the divested company will preclude a finding that the divestiture is complete. (See the Board’s O rder in
the m atter of International Bank, 1977 Federal Reserve Bulletin 1106, 1113).
‘The indebtedness giving rise to the presumption is not limited to debt incurred in connection with the trans­
fer; it includes any debt running to the transferor or its subsidiaries.

2.
The terms “officers,” “directors,” and “trust­ aggregate more than 5 percent of the shares of
ees,” as used in section 2(g) (3), include persons
the company being divested.
performing functions normally associated with
3.
Although section 2(g) (3) refers to transfers
such positions (including general partners in a
of “shares,” it is not, in the Board’s view, limited
partnership and limited partners having a right
to disposition of corporate stock. General or
to participate in the management of the affairs of
limited partnership interests, for example, are in­
the partnership) as well as persons holding such
cluded within the term “shares.” Furthermore, the
positions in an advisory or honorary capacity. The
transfer of all or substantially all of the assets of
presumption arises not only where the transferee
a company, or the transfer of such a significant
or transferred company has an officer, director, or
volume of assets that the transfer may in effect
trustee “in common with” the transferor, but
constitute the disposition of a separate activity of
where the transferee himself holds such a position
the company, is deemed by the Board to involve
with the transferor.3
a transfer of “shares” of that company.
It should be noted that where a transfer takes
the form of a pro-rata distribution, or “spinoff,”
* * * * *
of shares to a company’s shareholders, officers and
directors of the transferor company are likely to
Section 2(g) (3) provides that a Board deter­
receive a portion of such shares. The presumption
mination that a transferor is not in fact capable
of continued control would, of course, attach to
of controlling a transferee shall be made after
any shares transferred to officers and directors of
opportunity for hearing. It has been the Board’s
the divesting company, whether by “spinoff” or
routine practice since 1966 to publish notice in
outright sale. However, the presumption will be of
the Federal Register of applications filed under
legal significance — and will thus require an ap­
section 2(g) (3) and to offer interested parties an
plication under section 2(g) (3) — only where the
opportunity for a hearing. Virtually without ex­
total number of shares subject to the presumption
ception no comments have been submitted on such
exceeds one of the applicable thresholds in the
applications by parties other than the applicant
Act. For example, where officers and directors of
and, with the exception of one case in which the
a one-bank holding company receive in the aggre­
request was later withdrawn, no hearings have
gate 25 percent or more of the stock of a bank
been requested in such cases. Because the Board
subsidiary being divested by the holding company,
believes that the hearing provision in section
the holding company would be presumed to con­
2(g) (3) was intended as a protection for applicants
tinue to control the “divested” bank. In such a
who are seeking to have the presumption over­
case it would be necessary for the divesting com­
come by a Board order, a hearing would not be of
pany to demonstrate that it no longer controls
use where an application is to be granted. In light
either the divested bank or the officer/director
of the experience indicating that the publication
of Federal Register notice of such applications has
transferees. However, if officers and directors were
to receive in the aggregate less than 25 percent of
not served a useful purpose, the Board has decided
the bank’s stock (and no other shares were subject
to alter its procedures in such cases. In the future,
to the presumption), section 2(g) (3) would not
Federal Register notice of section 2(g) (3) applica­
tions will be published only in cases in which the
have the legal effect of presuming continued con­
trol of the bank.6 In the case of a divestiture of
Board’s General Counsel, acting under delegated
nonbank shares, an application under section
authority, has determined not to grant such an
2(g) (3) would be required whenever officers and
application and has referred the matter to the
Board for decision.’
directors of the divesting company received in the
“It has been suggested that the words “in com mon with” in section 2 ( g ) ( 3 ) evidence an intent to make the
presumption applicable only where the transferee is a company having an interlock with the transferor.
Such an interpretation would, in the Board’s view, create an unwarranted gap in the coverage of section
2 ( g ) ( 3 ) . Furtherm ore, because the presumption clearly arises where the transferee is an individual who is
indebted to the transferor such an interpretation would result in an illogical internal inconsistency in the
statute.
“O f course, the fact that section 2 ( g ) ( 3 ) would not operate to presume continued control would not
necessarily mean that control h ad in fact been terminated if control could be exercised through other means.
T t should be noted that in the event a third party should take exception to a Board order under section
2 ( g ) ( 3 ) finding that control has been terminated, any rights such party might have would not be prejudiced
by the order. If such party brought facts to the Board’s attention indicating that control had not been
terminated, the Board would have ample authority to revoke its order and take necessary remedial action.
Orders issued under 2 (g ) (3 ) are published in the Federal Register and in the Federal Reserve
Bulletin.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102