Full text of Federal Reserve Bank of New York Circulars : 8753. Regulation Y

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FED ER A L RESERVE BANK
O F NEW YORK

Circular No. 8753
February 8, 1980

REGULATION Y
Revised Interpretation Relating to Transferred Shares or Other Assets

To All Bank Holding Companies, and Others Concerned,
in the Second Federal Reserve District:

The Board of Governors of the Federal Reserve System has issued a revised interpretation of its
Regulation Y, “ Bank Holding Companies and Change in Bank C ontrol,’’ to further clarify its views regard­
ing Section 2(g)(3) of the Bank Holding Company Act. That section relates to the presumption of continued
control by bank holding companies over certain transferred shares or other assets. The revised interpreta­
tion amplifies the interpretation issued by the Board of Governors in January 1978 and enclosed with this
Bank’s Circular No. 8279.
In its January 1978 interpretation, 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. The revised interpretation indicates that the presumption does not apply
in a case where the transferee is indebted to the transferor or its subsidiaries and the indebtedness involves
certain routine business credit of limited amounts or certain loans for personal or household purposes. For
example, the presumption would not apply in a situation 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 of the transferor.
A copy of the revised interpretation is enclosed. Questions regarding the interpretation may be directed
to our Domestic Banking Applications Department (Tel. No. 212-791-5861).




T hom as m . T im l e n ,
First Vice President.

Board of Governors of the Federal Reserve System

BANK HOLDING COM PANIES A N D CHANGE IN BANK CONTROL
R EV ISED IN T E R P R E T A T IO N O F R E G U L A T IO N Y

[Reg. Y; Docket No. R-0273]
A G E N C Y : Board of Governors o f the Federal
Reserve System.
A C T IO N : Revision of Interpretation.
S U M M A R Y : The Board is revising an interpreta­
tion issued in January 1978 (12 CFR 225.139), in
order to amplify its views regarding the nature of
indebtedness that gives rise to the presum ption of
continued control established by §2(g)(3) o f the
Bank Holding Com pany Act. Under the revised in­
terpretation, the statutory presum ption does not
apply in a case where the transferee o f property is
indebted to the transferor if the indebtedness in­
volves certain routine business credit o f limited
am ounts or certain loans for personal or household
purposes. This action is being taken because ques­
tions have arisen in the adm inistration o f the Act
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 adm inistrative proceeding in cases
falling within the interpretation.
E F F E C TIV E D A T E : Upon publication in the
Federal Register [on or about February 7, 1980].
FOR F U R T H E R IN F O R M A T IO N C O N T A C T :
Robert E. M annion, Deputy General Counsel (202/
452-3274) or Bronwen M ason, Senior Attorney
(202/452-3564), Board of Governors o f the Federal
Reserve System, W ashington, D .C. 20551.
S U P P L E M E N T A R Y IN F O R M A T IO N : Section
2(g)(3) o f the Bank Holding Com pany Act (the
“ A ct” ) establishes a presum ption that, among
other situations, where a transferee o f 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
presum ption arises by operation of law, and may be
term inated only by issuance o f a Board determ ina­
tion “ that the transferor is not in fact capable of
controlling the transferee.” Therefore, the transfer

[Enc. Cir. No. 8753)




will not be regarded as an effective divestiture of
control of the shares unless the parties involved are
able to satisfy the Board that the tranferor/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 presum ption of con­
tinued control is not limited to debt incurred in
connection with the transfer, but includes any debt
outstanding at the time of transfer from the trans­
feree (including an individual) to the transferor and
its subsidiaries. In the course o f administering sec­
tion 2(g)(3), questions have arisen concerning the
operation of the presumption in cases where the
transferee is a business with a small am ount of
routine commercial borrowing or an individual who
has personal borrowing, such as a credit card
balance, a home mortgage loan or an autom obile
loan outstanding to the transferor or a lending sub­
sidiary. While the presumption might literally apply
to transfers of property in these situations, the
B oard’s interpretation o f section 2(g)(3) o f the Act
is that the presumption should not apply in these
situations. The revised interpretation reflects that
position.
As a result o f this interpretation, a transferor
whose situation falls within the interpretation will
be relieved o f the burden of an administrative pro­
ceeding to seek a favorable determ ination. Hence,
the B oard’s action should facilitate divestitures. Of
course, while a statutory presumption may not ap­
ply in these situations, the Board would not be
precluded from examining a particular transfer and
finding that the divestiture was ineffective based on
the facts 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 followed
its expanded rulemaking procedures (44 F.R. 3957)
nor the procedures of 5 U .S.C . 553(b) regarding
notice, public participation, and deferred effective

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date because: ( 1 ) the action relaxes a requirem ent,
and (2 ) rulemaking procedures do not apply to in­
terpretive rules.

To implement this action under the Board’s
authority in sections 2(g)(3) and 5(b) of the Bank
Holding Company Act (12 U.S.C. 1841(g)(3),
1844(b)), 12 CFR 225.139 (“ Presumption of con­
tinued control under section 2(g)(3) of the Bank
Holding Company Act”) is revised as follows:
1. Footnote 4 is deleted, and footnotes 5, 6, and 7
are renumbered 4, 5, and 6, respectively.
2. A new paragraph (c)(4) is added to read as
follows:
(4)
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 or its subsidiaries.
However, the Board believes that not every kind of
indebtedness was within the contemplation 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 indebtedness that, stand­
ing alone, support a presumption that the creditor is
able to control the debtor. Accordingly, 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 or­
dinary course of business of the tranferor (or its
subsidiary) that is regularly engaged in the business
of extending credit: (i) consumer credit extended for
personal or household use to an individual trans­
feree; (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 companies (as
defined in section 2(b) of the Act) in an aggregate
amount not exceeding ten per cent of the total pur­
chase 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 trans­
ferees. It should be understood that, while the
statutory presumption in situations involving these
categories of credit may not apply, the Board is not
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.
Board of Governors of the Federal Reserve
System, January 31, 1980.