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FED ER AL RESERVE BANK OF NEW YORK Circular No. 82791 February IS, 1978 J BANK HOLDING COMPANIES — Interpretation of Regulation Y Regarding Transferred Shares or Other Assets — Resumption of Processing Applications to Underwrite and Deal in Government and Municipal Securities To A ll Bank Holding Companies, and Others Coyicerned, in the Second Federal Reserve District: The Board of Governors of the Federal Reserve System has issued an interpretation of its Regulation Y, “Bank Holding Companies,” to clarify Section 2(g) (3) of the Bank Holding Com pany Act relating to the presumption of continued control by bank holding companies over certain transferred shares or other assets. At the same time, the Board of Governors has withdrawn a pro posed amendment to Regulation Y regarding this matter. (The text of the proposed amendment was provided in this Bank’s Circular No. 8057, dated February 18, 1977.) Following is the text of a statement issued by the Board of Governors announcing the inter pretation of Regulation Y : The Board of Governors of the Federal Reserve System today [January 26, 1978] issued an interpre tation of a section of the Bank Holding Company Act concerning transferred shares or other assets. The Bank Holding Company Act provides that if a bank holding company transfers shares that it owns to a company or other transferee that is (a) indebted to the bank holding company, or (b) has an officer or director interlock with the bank holding company, control of the shares is presumed not to have changed un less the Board determines otherwise. The Board has in ^effect interpreted this section of the Act—2 ( g ) ( 3 ) —in decisions on specific cases. The interpretation issued today: 1. Codifies these past rulings by the Board to the effect that (a) the presumption of continued control arises where the shares or other assets are transferred to a person who is an officer or director of the com pany making the transfer and (b) the terms “transferor” and “transferee” include parent or subsidiary companies of each (including a transferred company itself). 2. Interprets Section 2 (g )(3 ) as being applicable where (a) all or substantially all of the assets of a company or subsidiary are being transferred, or (b) the asset being transferred is of such significant size or value as to constitute the transfer of an “activity” of a bank holding company; also, that transfers of part nership interests are covered. 3. Interprets the terms “officer” and “director” as including not only persons with such titles but also those with comparable functions, and those holding such offices in honorary or advisory capacities. 4. Provides that in the interests of expediting proceedings under this provision of the Bank Holding Company Act no future Federal Register notice will be published upon receipt of an application under this section, but that no application under Section 2 (g )(3 ) will be denied by the Board without affording the ap plicant company an opportunity for a hearing. The Board will continue to publish final decisions under this section in the Federal Register. The Board withdrew a proposed rulemaking under Section 2 (g )(3 ) published in February 1977. Enclosed is a copy of the interpretation. Questions thereon may be directed to our Domestic Banking Applications Department (Tel. No. 212-791-5861). ( over ) In another matter relating to Regulation Y, the Board of Governors has announced its decision not to adopt a proposed amendment that would add the activity of underwriting and dealing in Government and municipal securities to the list of activities that have been determined by the Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Board has also announced, however, that it is lifting the suspension of proc essing applications to engage in that activity. The text of the Board’s statement is printed below. The Board of Governors of the Federal Reserve System announced today [January 26, 1978] it will re sume the processing of applications from Bank Holding Companies to underwrite and deal in Federal Gov ernment and municipal securities. Applications will be processed, however, on a case-by-case basis and no regulatory action will be taken by the Board to add this activity to its Regulation Y as closely related to banking and permissible for bank holding companies. On October 19, 1976, the Board announced that it had deferred action on a rulemaking proposal to make underwriting and dealing in government securities a permissible activity for bank holding companies. It sus pended further consideration of applications to engage in this activity to allow time for the newly created Municipal Securities Rulemaking Board to take possible action in this field. A proposal to add this activity to its Regulation Y as permissible for bank holding companies was issued by the Board on April 2, 1974. That proposal has been withdrawn by the Board by the action announced today. Copies of the Board’s order in this matter are available from our Domestic Banking Applica tions Department upon request. P aul A. V olcker, President. Board of Governors of the Federal Reserve System BANK HOLDING COMPANIES IN TER PR ETA TIO N OF REGULATION Y [Reg. Y ; Docket No. R-0083] PART 225—BANK HOLDING COMPANIES A G E N C Y: Board of Governors of the Federal Reserve System A C T IO N : Interpretation S U M M A R Y : In February 1977, the Board published for comment a proposed amendment to its Regulation Y that would have codified certain rulings made by the Board under sec tion 2 (g )(3 ) of the Bank Holding Company Act (the “Act” ), and would also have estab lished certain regulatory presumptions relating to the continued control by bank holding com panies of shares or assets divested by such com panies. The Board has now determined to with draw the proposed amendment and to issue in stead an interpretation of section 2 (g )(3 ) of the Act. E F F E C T IV E D A T E : January 25, 1978 FOR F U R T H E R IN F O R M A T IO N CON TA C T: Robert E. Mannion, Associate General Counsel, Board of Governors of the Federal Reserve System, Washington, D. C. 20551 (202-452-3274) SU PPLEM EN TARY IN F O R M A T IO N : Pursuant to its authority under sections 2 (g )(3 ) and 5(b) of the Bank Holding Com pany Act, the Board has issued the following interpretation of section 2 (g )(3 ) of the Act: § 225.138—Presumption of Continued Control Under § 2 (g) (3) of the Bank Holding Company Act Section 2(g) (3) of the Bank Holding Com pany Act (the “Act” ) establishes a statutory presumption that where certain specified rela tionships exist between a transferor and trans feree 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 transferred shares.1 This presumption arises by operation 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 termin ated only by the issuance of a Board determinaIT h e presumption 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." [Enc. Cir. No. 8279] tion, 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 effec tiveness 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 dives titure 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 inter ests under circumstances where the presump tion 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. Sec tion 2 (g )(3 ) does not establish a substantive rule that invalidates transfers to which it ap plies, and in a great many cases the Board has acted favorably on applications to have the pre sumption dispelled. It merely provides a pro cedural opportunity 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 divesti ture is the same—that is, the Board must be assured that all control relationships between the transferor 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 addi tion, 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) : 1. The terms “transferor” and “transferee,” as used in section 2 (g )( 3 ), include parents and subsidiaries of each. Thus, for example, where a transferee is indebted to a subsidiary of the z i tie Hoard has delegated to its Ueneral Counsel the authority to issue such determinations. 12 C.F.R. § 265.2(b)(1). 3 It should be noted, however, that the Board will require termination of any interlocking management relationships be tween the divesting comnany and the transferee or the divested company as a precondition of finding that a divestiture is com plete. Similarly, the retention of an economic interest in the divested company that would create an incentive for the divest ing company to attempt to influence the management of the di vested company will preclude a finding that the divestiture is complete. (See the Board’s Order in the matter of I n t e r n a t i o n a l B a n k , 1 9 7 7 Federal Reserve B U L L E T IN 1106, 1113). P R IN T E D IN N E W YORK ( over) transferor,4 or where a specified interlocking have the legal effect of presuming continued control of the bank.6 In the case of a divestiture relationship exists between the transferor or transferee and a subsidiary of the other (or be of nonbank shares, an application under sec tion 2 (g )(3 ) would be required whenever of tween subsidiaries of each), the presumption ficers and directors of the divesting company arises. Similarly, if a parent of the transferee received in the aggregate more than 5 per cent is indebted to a parent of the transferor, the of the shares of the company being divested. presumption arises. The presumption of con tinued control also arises where an interlock 3. Although section 2 (g )(3 ) refers to trans or debt relationship is retained between the fers of “shares” it is not, in the Board’s view, divesting company and the company being di limited to disposition of corporate stock. Gen vested, since the divested company will be or eral or limited partnership interests, for exam may be viewed as a “subsidiary” of the trans ple, are included within the term “shares.” F ur feree or group of transferees. thermore, the transfer of all or substantially 2. The terms “officers,” “directors,” and all of the assets of a company, or the transfer of such a significant volume of assets that the “trustees,” as used in section 2 (g )( 3 ), include transfer may in effect constitute the disposition persons performing functions normally associ of a separate activity of the company, is deemed ated with such positions (including general by the Board to involve a transfer of “shares” partners in a partnership and limited partners of that company. having a right to participate in the management * * >k of the affairs of the partnership) as well as Section 2 (g )(3 ) provides that a Board de persons holding such positions in an advisory termination that a transferor is not in fact ca or honorary capacity. The presumption arises pable of controlling a transferee shall be made not only where the transferee or transferred after opportunity for hearing. It has been the company has an officer, director or trustee “in Board’s routine practice since 1966 to publish common with” the transferor, but where the notice in the Federal Register of applications transferee himself holds such a position with filed under section 2 (g) (3) and to offer inter the transferor.5 ested parties an opportunity for a hearing. Vir It should be noted that where a transfer takes tually without exception no comments have the form of a pro-rata distribution, or “spinoff,” been submitted on such applications by parties of shares to a company’s shareholders, officers other than the applicant and, with the excep and directors of the transferor company are tion of one case in which the request was later likely to receive a portion of such shares. The withdrawn, no hearings have been requested presumption of continued control would, of in such cases. Because the Board believes that course, attach to any shares transferred to of the hearing provision in section 2 (g )(3 ) was ficers and directors of the divesting company, intended as a protection for applicants who are whether by “spinoff” or outright sale. How seeking to have the presumption overcome by a ever, the presumption will be of legal signifi Board order, a hearing would not be of use cance—and will thus require an application where an application is to be granted. In light under section 2 ( g ) ( 3 ) —only where the total of the experience indicating that the publication number of shares subject to the presumption of Federal Register notice of such applications exceeds one of the applicable thresholds in the has not served a useful purpose, the Board has Act. For example, where officers and directors decided to alter its procedures in such cases. of a one-bank holding company receive in the In the future, Federal Register notice of section aggregate 25 per cent or more of the stock of 2 (g )(3 ) applications will be published only in a bank subsidiary being divested by the holding cases in which the Board’s General Counsel, company, the holding company would be pre acting under delegated authority, has deter sumed to continue to control the “divested” mined not to grant such an application and has bank. In such a case it would be necessary for referred the matter to the Board for decision.7 the divesting company to demonstrate that it By order of the Board of Governors, effec no longer controls either the divested bank or tive January 25, 1978. the officer/director transferees. However, if arises where the transferee is an individual who is indebted to officers and directors were to receive in the the transferor such an interpretation would result in an illogical aggregate less than 25 per cent of the bank’s internal inconsistency in the statute. 6 Of course, the fact that section 2 (g )(3 ) would not operate stock (and no other shares were subject to to presume continued control would not necessarily mean that the presumption), section 2 (g )(3 ) would not control had in fact been terminated if control could be exercised 4 The indebtedness giving rise to the presumption is not limited to debt incurred in connection with the transfer; it in cludes any debt running to the transferor or its subsidiaries. 5 I t has been suggested that the words “in common with” in section 2 (g )(3 ) evidence an intent to make the presumption applicable only where the transferee is a c o m p a n y 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 ). Furthermore, because the presumption clearly through ether means. 7 It 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 Beard’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 section 2 (g )(3 ) are nublished in the F e d e r a l R e g i s t e r and in the Federal Reserve B u l l e t i n .
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