View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

F e d e r a l Re s e r v e Ba n k



Circular No. 80-38
March 3, 1980

(Bank Holding Companies and Change in Bank Control)
Presumption o f Continued Control o f
Transferred A ssets and A ctivities


The Board o f Governors of the Federal Reserve System has
revised its interpretation issued in January 1978 concerning Section
2(g)(3) o f the Bank Holding Company A ct. The revised interpretation,
e ffe c tiv e February 7, 1980, is enclosed.
An excerpt o f the Board's Order, as published in the Federal
R eg ister, is printed on the reverse o f this circular.
The excerpt
sum m arizes the revised interpretation and presents supplementary
information relating to it.
Any questions concerning the enclosed material should be
directed to the A ttorney's Section o f our Holding Company Supervision
Department, Ext. 6182. Additional copies o f the interpretation will be
furnished upon request to the Secretary's O ffice o f this Bank, Ext. 6267.
Sincerely yours,
Robert H. Boykin
First Vice President


Banks and others are encouraged to use the following incoming W A T S numbers in contacting this Bank:
1-800-442-7140 (intrastate) and 1-800-527-9200 (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 (

Federal Register
Vol. 45, No. 27
T h ursday , F eb ru ary 7, 1980

12 CFR Part 225

[Reg. Y, Docket No. R-0273]

Indebtedness That Does Not Give Rise
to Presumption of Continued Control
Under Section 2(gX3) of the Bank
Holding Company Act
AGENCY: Board of Governors of the

Federal Reserve System.
a c t io n : Revison o f interpretation.
SUMMARY: The Board is revising an

interpretation issued in January 1978 (12
CFR 225.139), in order to amplify its
view s regarding the nature o f
indebtedness that gives rise to the
presumption of continued control
established by section 2(g)(3) of the
Bank Holding Company Act. Under the
revised interpretation, the statutory
presumption d oes not apply in a case
where the transferee o f property is
indebted to the transferor if the
indebtedness involves certain routine
business credit of limited amounts or
certain loans for personal or household
purposes. This action is being taken
because questions have arisen in the
administration of the A ct since the
Board issued its 1978 interpretation. The
action is intended to relieve a regulatory
burden and facilitate transfers of
divested assets by obviating the need
for an administrative proceeding in
cases falling within the interpretation.
EFFECTIVE DATE: February 7,1980.


Robert E. Mannion, Deputy General
Counsel (202/452-3274) or Bronwen
Mason, Senior Attorney (202/452-3584),
Board of Governors of the Federal
Reserve System, W ashington, D.C.
s u p pl e m e n t a r y in fo r m a t io n : Section
2(g)(3) of the Bank Holding Company
A ct (the "Act") establishes a
presumption that, among other
situations, where a transferee of shares
is indebted to the transferor on the date
of transfer, the transferor is presumed to
continue to own or control indirectly the
transferred shares. The presumption
arises by operation of law , and may be
terminated only by issuance of a Board
determination, “that the transferor is not
in fact capable of controlling the
transferee.” Therefore, the transfer w ill
not be regarded as an effective
divestiture of control of the shares
unless the parties involved are able to
satisfy the Board that the transferor/
creditor cannot use the indebtedness to
retain control of the shares in the hands
of the transferee/debtor.
In its January 25,1978, interpretation
of section 2(g)(3) (12 CFR 225.139) the
Board stated that indebtedness giving
rise to the presumption of continued
control is not limited to debt incurred in
connection with the transfer, but
includes any debt outstanding at the
time of transfer from the transferee
(including an individual) to the
transferor and its subsidiaries. In the
course of administering section 2(g)(3),
questions have arisen concerning the
operation of the presumption in cases
where the transferee is a business with
a small amount of routine commercial
borrowing or an individual who has
personal borrowing, such as a credit
card balance, a home mortgage loan or
an automobile loan outstanding to the
transferor or a lending subsidiary. W hile
the presumption might literally apply to
transfers of property in these situations,
the Board's interpretation of section
2(g)(3) of the A ct is that the presumption
should not apply in these situations. The
revised interpretation reflects that
A s a result of this interpretation, a
transferor w hose situation falls within
the interpretation w ill be relieved of the
burden of an administrative proceeding
to seek a favorable determination.
Hence, the Board's action should
facilitate divestitures. Of course, w hile a
statutory presumption may not apply in
these situations, the Board would not be
precluded from examining a particular
transfer and finding that die divestiture
w as ineffective based on the fac4s of
record; however, unless the Board made

such a finding, the parties could treat
the divestiture as effective.
In taking this action, the Board has
not follow ed its expanded rulemaking
procedures (44 FR 3957) nor the
procedures of 5 U.S.C. 553(b) regarding
notice, public participation, and
deferred effective date because: (1) the
action relaxes a requirement, and (2)
rulemaking procedures do not apply to
interpretive rules.
B oard o f G overnors o f die F ed eral R eserve
System , Janu ary 31,1980.

Theodore E. Allison,

S c e a yoft eB a d
h or.
[PR Doc. 80-3936 Filed Z - t - M i 8:45 am]




Section 2(g)(3) of the Bank Holding Company Act
(the “Act”) establishes a statutory presumption 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 con­
trol indirectly the transferred shares.1 This presump­
tion arises by operation of law, as of the date of the
transfer, without the need for any order or determina­
tion 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
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 com­
plete termination of a control relationship. By
presuming control to continue as a matter of law, sec­
tion 2(g)(3) operates to allow the effectiveness of the
divestiture to be assessed before the divesting com­
pany 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 ap­
propriate 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 applications to have the presump­
tion dispelled. It merely provides a procedural oppor­
tunity for Board consideration 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
transferor and the transferred property have been ter­
minated 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 following interpretations of
section 2(g)(3):
The terms “transferor” and “transferee,” as
used in section 2(g)(3), include parents and sub­
sidiaries of each. Thus, for example, where a
transferee is indebted to a subsidiary of the
transferor, or where a specified interlocking relation­
ship 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 presumption of con­
tinued control also arises where an interlock or debt
relationship is retained between the divesting com­
pany and the company being divested, since the
divested company will be or may be viewed as a “sub­
sidiary” of the transferee or group of transferees.

'T h e presum ption arises where the transferee “ is indebted to the transferor, or has one or more officers, directors, trustees,
or beneficiaries in common with or subject to control by the transferor.”
T ’he Board has delegated to its General Counsel the authority to issue such determinations. 12 C .F .R . §265.2(b)(l).
sI t should be noted, however, th at the Board will require term ination of any interlocking m anagem ent 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 th at would create an incentive for the
divesting company to attem pt to influence the m anagement of the divested company will preclude a finding th at the
divestiture is complete. (See the B oard's Order in the m atter of International Bank, 1977 Federal Reserve Bulletin 1106,1113).

2. The terms “officers,” “directors,” and “trust­
ees,” as used in section 2(g)(3), include persons per­
forming functions normally associated with such posi­
tions (including general partners in a partnership and
limited partners having a right to participate in the
management of the affairs of the partnership) as well
as persons holding such positions in an advisory or
honorary capacity. The presumption arises not only
where the transferee or transferred company has an
officer, director, or trustee “in common with” the
transferor, but where the transferee himself holds
such a position with the transferor.4
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 receive a portion
of such shares. The presumption of continued control
would, of course, attach to any shares transferred to
officers and directors of the divesting company,
whether by “spinoff” or outright sale. However, the
presumption will be of legal significance—and will
thus require an application under section 2(g)(3)—on­
ly where the total number of shares subject to the
presumption exceeds one of the applicable thresholds
in the Act. For example, where officers and directors
of a one-bank holding company receive in the ag­
gregate 25 percent or more of the stock of a bank sub­
sidiary being divested by the holding company, the
holding company would be presumed to continue to
control the “divested” bank. In such a case it would
be necessary for the divesting company to
demonstrate that it no longer controls either the
divested bank or the officer/director transferees.
However, if officers and directors were to receive in
the aggregate less than 25 percent of the bank’s stock
(and no other shares were subject to the
presumption), section 2(g)(3) would not have the legal
effect of presuming continued control of the bank.5 In
the case of a divestiture of nonbank shares, an ap­
plication under section 2(g)(3) would be required
whenever officers and directors of the divesting com­
pany received in the aggregate more than 5 percent of
the shares of the company being divested.
3. Although section 2(g)(3) refers to transfers of
“shares,” it is not, in the Board’s view, limited to

disposition of corporate stock. General or limited
partnership interests, for example, are included
within the term “shares.” Furthermore, the transfer
of all or substantially all of the assets of a company, or
the transfer of such a significant volume of assets that
the transfer may in effect constitute the disposition of
a separate activity of the company, is deemed by the
Board to involve a transfer of “shares” of that
The term “indebtedness” giving rise to the
presumption of continued control under section
2(g)(3) of the Act is not limited to debt incurred in
connection with the transfer; it includes any debt
outstanding at the time of transfer from the transferee
to the transferor of its subsidiaries. However, the
Board believes that not every kind of indebtedness
was within the comtemplation of the Congress when
section 2(g)(3) was adopted. Routine business credit
of limited amounts and loans for personal or
household purposes are generally not the kinds of in­
debtedness that, standing alone, support a presump­
tion that the creditor is able to control the debtor. Ac­
cordingly, the Board does not regard the presumption
of section 2(g)(3) as applicable to the following
categories of credit, provided the extensions of credit
are not secured by the transferred property and are
made in the ordinary course of business of the
transferor (or its subsidiary) that is regularly engaged
in the business of extending credit: (i) consumer credit
extended for personal or household use to an in­
dividual transferee; (ii) student loans made for the
education of the individual transferee or a spouse or
child of the transferee; (iii) a home mortgage loan
made to an individual transferee for the purchase of a
residence for the individual’s personal use and
secured by the residence; and (iv) loans made to com­
panies (as defined in section 2(b) of the Act) in an ag­
gregate amount not exceeding ten per cent of the total
purchase price (or if not sold, the fair market value) of
the transferred property. The amounts and terms of
the preceding categories of credit should not differ
substantially from similar credit extended in com­
parable circumstances to others who are not
transferees. It should be understood that, while the
statutory presumption in situations involving these
categories of credit may not apply, the Board is not

4It has been suggested th at the words “ in common w ith” in section 2(gl(3l 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
B oard’s view, create an unw arranted gap in the coverage of section 2(g)(3). Furtherm ore, because the presum ption 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.
5Of course, the fact th at section 2(g)(3) would not operate to presume continued control would not necessarily mean th at
control had in fact been term inated if control could be exercised through other means.

precluded in any case from examining the facts of a
particular transfer and finding that the divestiture of
control was ineffective based on the facts of record.
★ ★ ★ ★

Section 2(g)(3) provides that a Board determination
that a transferor is not in fact capable of controlling a
transferee shall be made after opportunity for hear­
ing. It has been the Board’s routine practice since
1966 to publish notice in the Federal R egister of ap­
plications filed under section 2(g)(3) and to offer in­
terested parties an opportunity for hearing. Virtually
without exception no comments have been submitted
on such applications by parties other than the appli­
cant and, with the exception of one case in which the

request was later withdrawn, no hearings have been
requested in such cases. Because the Board believes
that the hearing provision in section 2(g)(3) was in­
tended as a protection for applicants who are seeking
to have the presumption overcome by a Board order,
a hearing could not be of use where an application is
to be granted. In light of the experience indicating
that the publication of Federal R egister notice of
such applications has not served a useful purpose, the
Board has decided to alter its procedures in such
cases. In the future, Federal R egister notice of sec­
tion 2(g)(3) applications will be published only in
cases in which the Board’s General Counsel, acting
under delegated authority, has determined not to
grant such an application and has referred the matter
to the Board for decision.6

6I t should be noted th at in the event a third party should take exception to a Board order under section 2(g)(3) finding that
control has been term inated, any rights such party might have would not be prejudiced by the order. If such party brought
facts to the B oard’s attention indicating that control had not been term inated, 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.

For initial transfers of funds requests from member banks within the Dallas metropolitan service area:




For initial transfers of funds requests from member banks outside of the Dallas metropolitan service
Call Toll-free*
800 442-7276 (Texas banks only)
Forrequests for adjustments or corrections involving initial transfers of funds requests:
Call Collect ««
214 651-6130
If the toll-free WATS number is not accessible within a reasonable time or,
If there is difficulty in reaching us concerning corrections or adjustments:
Call Collect «*


In the unlikely event that you experience any unnecessary delay in contacting our Transfers of Funds
area using the above numbers, it would be appreciated if you would:

Call Collect **



It is suggested that this card be kept near the telephone in the appropriate using areas. Of course, the
telephone numbers listed above are dedicated exclusively to transfers of funds. However, you are re­
minded that the toll-free number for other categories of inquiries to this Bank may be placed TOLL-FREE*
to the main Bank number 800-442-7140 (Texas banks only).
‘ For out of Texas banks, Call TOLL-FREE to the main Bank number 800-527-9200.
“ Member banks located within the Dallas metropolitan service area should not call these numbers
collect since they are considered local calls.