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F ed er a l Reser ve Ba n k o f Dallas DALLAS, TEXAS 75222 C irc u la r No. 76-44 March 25, 1976 American Revolution Bicentennial INTERPRETATION OF REGULATION Y Escrow A rrang em ent Involving Bank Stock Resulting in a Violation of the Bank Holding Company Act TO A L L BANKS, BANK HOLDING COMPANIES, AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE D ISTR IC T: The Board of G overnors of the Federal Reserve System has issued an interpretation of Regulation Y — Bank Holding Companies— finding that the m anner in which a company structured an escrow agreement involving bank stock resulted in a violation of the Bank Holding Company A ct. T h e in te rp re tation is p rin te d on the reverse of this page. If you have any questions reg ard in g this in te rp re tatio n , please contact R ichard H. Peeples of our Regulations D e p a rtm e n ta l (214) 651-6169. Additional copies of the interpretation of Regulation Y w ill be f u r nished upon request to the S ecretary's Office of this Bank. S in ce re ly yo u rs , T . W. Plant F irs t V ic e President 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 S E C T IO N 225.134 — E SC R O W A R R A N G E M E N T S IN V O L V IN G B A N K STO CK R E S U L T IN G IN A V IO L A T IO N O F T H E B A N K H O L D IN G C O M P A N Y A C T . In connection w ith a recent application to be com e a b ank holding com pany, the B oard con sidered a situation in w hich shares of a b an k were acquired and then placed in escrow by the appli cant p rio r to the B oard’s approval o f th e applica tion. T he facts indicated th at the applicant com pany had incurred debt for the purpose of acquiring b an k shares and im m ediately after the purchase the shares w ere transferred to an u n affiliated escrow agent w ith instructions to retain possession o f th e shares pending Board action on the com pany’s application to becom e a bank holding com pany. T he escrow agreem ent provided that, if the application w ere approved by the Board, th e escrow agent was to retu rn the shares to the applicant com pany; and, if the application w ere denied, th e escrow agent was to deliver the shares to the applicant com pany’s shareholders upon their assum ption of debt originally incurred by the applicant in the acquisition o f the bank shares. In addition, the escrow agreem ent provided that, while the shares w ere held in escrow, the ap plicant could not exercise voting o r any oth er ownership rights with respect to those shares. 2-26-76 On the basis of the above facts, the B oard con cluded that the com pany h ad violated the prior approval provisions o f section 3 of the B ank H o ld ing C om pany A ct ( “A ct” ) at the tim e th a t it made the initial acquisition of bank shares and that, fo r purposes o f the A ct, the com pany continued to control those shares in violation o f the A ct. In view o f these findings, individuals and b an k hold ing com panies should n o t enter into escrow a r rangem ents of the type described herein, o r any sim ilar arrangem ent, w ithout securing the p rior approval of the Board, since such action could constitute a violation of th e Act. W hile the above represents the B oard’s conclu sion with respect to the particular escrow arran ge m ent involved in the proposal presented, the B oard does not believe th at the use o f an escrow arrange m ent w ould always result in a violation o f the Act. F o r example, it appears th a t a transaction whereby ban k shares are placed in escrow pending B oard action on an application w ould not involve a violation of the A ct so long as title to such shares rem ains with the seller during the pendency of th e application; there are no other indicia th at the applicant controls the shares held in escrow; and, in the event of a B oard denial o f the applica tion, the escrow agreem ent provides th a t th e shares would be returned to th e seller.
@FedFRASER