On March 31, 2023, substantial revisions will take effect to the Federal Reserve Board’s Form FR Y-10 (Report of Changes in Organizational Structure).1 Most notably, these revisions incorporate into the FR Y-10 a significant part of the Federal Reserve’s approaches for determining whether one company has control over another for purposes of the US Bank Holding Company Act of 1956 (“BHCA”) and the Home Owners’ Loan Act (“HOLA”), as amended. Banking organizations should revise their periodic and annual reporting procedures for this new definition of control and consider if they need to reevaluate existing investments.2
In this Legal Update, we provide background on the FR Y-10 and discuss the ramifications of the change to the definition of “control.”
The FR Y-10 is a long-standing report that the Federal Reserve uses to monitor changes in organizational structure or the regulated investments or activities of certain banking organizations. Banking organizations subject to the FR Y-10 include bank holding companies (“BHCs”), foreign banking organizations (“FBOs”), savings and loan holding companies (“SLHCs”) (including grandfathered unitary SLHCs), and national and state member banks that are not controlled by a BHC or FBO.
Banking organizations are required to report changes in organizational structure using the FR Y-10. These changes include:
- The acquisition, disposition, or change of interests in BHCs, FBOs, SLHCs, banks, savings associations, and other nonbanking companies.
- Changes in the activities of a previously reported BHC, FBO, SLHC, bank, savings association, or other nonbanking company.
- Changes in other previously reported information.
- Changes to certain types of offices of a banking organization.
The FR Y-10 generally must be filed within 30 days of a change.
For many larger banking organizations, one of the most important parts of the FR Y-10 is the requirement to report information on nonbanking companies, which can number in the thousands. Historically, an interest in a nonbanking company generally was reportable on the FR Y-10 if the banking organization (“Company A”) acquired or retained control of the nonbanking company (“Company B”). For these purposes, the instructions to the FR Y-10 stated that a Company A would control a Company B if any of the following circumstances occurred:
- Company A controlled 25 percent or more of any class of voting securities of Company B;
- Company A elected a majority of Company B’s board of directors, trustees, general partners, or others with similar management responsibilities under the company’s organizing documents;
- Company A was a general partner, managing member, or trustee of Company B; or
- In certain situations where Company A acquired all or substantially all of Company B’s assets.
Further, the instructions to the FR Y-10 contained rebuttable presumptions of control if any of the following situations occurred:
- Company A entered into a management agreement with Company B under which Company A exercised significant influence over Company B’s general management or overall operations;
- Company A controlled more than 5 percent of a class of voting securities of Company B, one or more individuals served as director or officer of both Company B and Company A, and no person unaffiliated with Company A controlled 5 percent or more of Company B;
- Company A controlled more than 5 percent of a class of voting securities of Company B and together with directors or officers of Company A controlled more than 25 percent of a class of voting securities of Company B;
- Company A controlled 10 percent or more of a class of voting securities of Company B, and an individual served as both a director or officer of Company B and a director or officer of Company A; or
- Staff at the Federal Reserve or the appropriate Federal Reserve Bank informed the banking organization that, for purposes of the FR Y-6, Y-7, and Y-10, Company A was deemed to control Company B.
Notably absent from this definition was any reference to the controlling influence test under the BHCA and the Federal Reserve’s Regulation Y. When the Federal Reserve approved a final rule in 2020 to revise and codify its approach for determining whether one company has control over another for purposes of the BHCA and HOLA, as amended (“2020 Control Rule”), it indicated that it would consider making conforming revisions to other elements of its regulatory framework but was not doing so at that time.3
The 2022 revisions to the FR Y-10 conform the definition of control in the instructions to the FR Y-10 to a significant part of the approach the Federal Reserve took in the 2020 Control Rule. It does so by replacing the prior definition and rebuttable presumptions with the following definition:
- Company A controls 25 percent or more of any class of voting securities of Company B;4
- Company A elects a majority of Company B’s board of directors, trustees, general partners, or others with similar management responsibilities under the company’s organizing documents;
- Company A is a general partner, managing member, or trustee of Company B; or
- In certain situations where Company A acquires all or substantially all of Company B’s assets.
In addition, Company A generally is deemed to control Company B if Company A is presumed to control Company B under any of the presumptions of control in the 2020 Control Rule or if staff at the Federal Reserve or the appropriate Federal Reserve Bank has informed the banking organization that, for purposes of the FR Y-6, Y-7, and Y-10, Company A is deemed to control Company B.
For existing relationships, banking organizations must file any FR Y-10s that are necessary to account for the revised definition within 30 days of the effective date (i.e., by the end of April 2023). However, the 2022 revisions contain a grandfathering provision through which a BHC or a SLHC is not required to treat a company as controlled if either:
- The relationship between Company A and Company B was reviewed by Federal Reserve System staff prior to September 30, 2020, and was not determined to constitute control; or
- The relationship between Company A and Company B was reasonably determined not to constitute control by Company A at the time the relationship was established.
The grandfathering provision is not available if the relationship between Company A and Company B changed or changes materially from the date of prior review.
The 2022 revisions to the FR Y-10 also make other conforming changes, such as specifying that a banking organization may be required to report a variable interest entity if it controls the entity, for example, if the entity is consolidated with the banking organization for accounting purposes. The 2022 revisions also state that banking organizations may contact Federal Reserve staff if there are questions about whether one company controls another.
Like the 2020 Control Rule, the FR Y-10, with the 2022 revisions, contains a somewhat ambiguous grandfathering provision. Based on this provision, it is unclear how a BHC/SLHC would demonstrate that it had a relationship reviewed by the Federal Reserve prior to September 30, 2020, let alone produce documentation showing that the BHC/SLHC “reasonably determined” that control did not exist at the time the relationship was established. Further, by its terms, the grandfathering does not appear to be available to non-BHC intermediate holding companies and arguably could even be read to be unavailable to FBOs.
Similarly, the grandfathering provision applies only to the acquisition of control, meaning that a banking organization may need to terminate reporting of an interest in a nonbanking company because of the changes to the FR Y-10. For example, in the past, a banking organization may have reported an interest in a nonbanking company because the banking organization controlled more than 5 percent of the voting interests and had one director interlock and no other person had a significant interest. This interest would no longer be reportable and the banking organization may need to file a final FR Y-10 to terminate reporting of this entity.
The revisions to the definition of “control” in the FR Y-10 will flow through to the Federal Reserve’s FR Y-6 (Annual Report of Holding Companies) and FR Y-7 (Annual Report of Foreign Banking Organizations). These forms require banking organizations to submit organizational structure charts of the companies that they control as part of their annual report to the regulator. Therefore, banking organizations should consider how the revised definition of control will change the companies that are reported on the annual organizational structure chart that is filed with the FR Y-6/Y-7.5 This could be a significant undertaking in its own right, particularly for FBOs.
The revisions to the FR Y-10 incorporate the presumptions of control from the 2020 Control Rule but do not explicitly incorporate the provisions regarding control over securities.6 This is significant because the provisions regarding control over securities are the way that the Federal Reserve aggregates voting securities held by a banking organization and its senior management officials or controlling equity holders. Without an explicit incorporation of these provisions, it is possible that a banking organization could control a nonbanking company under the 2020 Control Rule but not for purposes of the FR Y-10, defeating the purpose of the 2022 revisions.
Finally, the revisions to the FR Y-10 do not appear to change the definition of control for reporting of certain interests under Regulation K. This continues the Federal Reserve’s opaque treatment of cross-border investments by banking organizations, which hopefully will be resolved in the long-awaited revisions to Regulation K.
1 87 Fed. Reg. 73,304 (Nov. 29, 2022), https://www.federalregister.gov/documents/2022/11/29/2022-26035/agency-information-collection-activities-announcement-of-board-approval-under-delegated-authority. The Federal Reserve made other changes to the FR Y-10 that take effect on December 31, 2022, but these are technical in nature and should not have the potentially wide-ranging effect of the changes discussed in this Legal Update.
3 See our Legal Update on the 2020 control rulemaking: https://www.mayerbrown.com/en/perspectives-events/publications/2020/02/us-federal-reserve-board-approves-final-rule-significantly-revising-control-rules.
4 The revisions also note that a banking organization that is a SLHC will control Company B if it holds more than 25 percent of the equity of Company B, reflecting a difference between the BHCA and HOLA. See 12 U.S.C. § 1467a(a)(2).
5 The Federal Reserve intends to transition from requiring a hardcopy organizational structure chart in the annual report to an electronic structure tracking system, but this will not occur until the 2025 filing cycle at the earliest.