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Proposed Rule2024-18187

Regulations Implementing the Change in Bank Control Act

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Published

August 19, 2024

Issuing agencies

Federal Deposit Insurance Corporation

Abstract

The Federal Deposit Insurance Corporation (FDIC) is proposing to amend its filing requirements and processing procedures for notices filed under the Change in Bank Control Act (CBCA) by removing the exemption from the notice requirement for acquisitions of voting securities of a depository institution holding company with an FDIC- supervised subsidiary institution for which the Board of Governors of the Federal Reserve System (FRB) reviews a notice under the CBCA and by making conforming definitional changes. The FDIC also seeks information and comment regarding its approach to change in control notices under the CBCA with regard to persons who may be directly or indirectly exercising control over an FDIC-supervised institution. The FDIC is committed to developing an interagency approach to change in control notices with the FRB and the Office of the Comptroller of the Currency.

Full Text

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<title>Federal Register, Volume 89 Issue 160 (Monday, August 19, 2024)</title>
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[Federal Register Volume 89, Number 160 (Monday, August 19, 2024)]
[Proposed Rules]
[Pages 67002-67009]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-18187]

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Proposed Rules
Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 89, No. 160 / Monday, August 19, 2024 /
Proposed Rules

[[Page 67002]]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 303

RIN 3064-AG04

Regulations Implementing the Change in Bank Control Act

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is proposing
to amend its filing requirements and processing procedures for notices
filed under the Change in Bank Control Act (CBCA) by removing the
exemption from the notice requirement for acquisitions of voting
securities of a depository institution holding company with an FDIC-
supervised subsidiary institution for which the Board of Governors of
the Federal Reserve System (FRB) reviews a notice under the CBCA and by
making conforming definitional changes. The FDIC also seeks information
and comment regarding its approach to change in control notices under
the CBCA with regard to persons who may be directly or indirectly
exercising control over an FDIC-supervised institution. The FDIC is
committed to developing an interagency approach to change in control
notices with the FRB and the Office of the Comptroller of the Currency.

DATES: Comments must be received by October 18, 2024.

ADDRESSES: You may submit comments, identified by RIN 3064-AG04, by any
of the following methods
<bullet> Agency website: <a href="https://www.fdic.gov/resources/regulations/federal-register-publications/">https://www.fdic.gov/resources/regulations/federal-register-publications/</a>. Follow instructions for
submitting comments on the FDIC's website.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#dd9eb2b0b0b8b3a9ae9dbbb9b4bef3bab2ab">[email&#160;protected]</a>. Include ``Change in Bank Control
Act/RIN 3064-AG04'' in the subject line of the message.
<bullet> Mail: James P. Sheesley, Assistant Executive Secretary,
Attention: Change in Bank Control Act--RIN 3064-AG04, Federal Deposit
Insurance Corporation, 550 17th Street NW, Washington, DC 20429.
<bullet> Hand Delivery: Comments may be hand-delivered to the guard
station at the rear of the 550 17th Street NW, building (located on F
Street NW) on business days between 7:00 a.m. and 5:00 p.m. eastern
time.
<bullet> Public Inspection: Comments received, including any
personal information provided, may be posted without change to <a href="https://www.fdic.gov/resources/regulations/federal-register-publications/">https://www.fdic.gov/resources/regulations/federal-register-publications/</a>.
Commenters should submit only information that the commenter wishes to
make available publicly. The FDIC may review, redact, or refrain from
posting all or any portion of any comment that it may deem to be
inappropriate for publication, such as irrelevant or obscene material.
The FDIC may post only a single representative example of identical or
substantially identical comments, and in such cases will generally
identify the number of identical or substantially identical comments
represented by the posted example. All comments that have been
redacted, as well as those that have not been posted, that contain
comments on the merits of this document will be retained in the public
comment file and will be considered as required under all applicable
laws. All comments may be accessible under the Freedom of Information
Act.

FOR FURTHER INFORMATION CONTACT: Annmarie Boyd, Senior Counsel, 202-
898-3714, <a href="/cdn-cgi/l/email-protection#c1a0a3aeb8a581a7a5a8a2efa6aeb7">[email&#160;protected]</a>; Gregory S. Feder, Counsel, 202-898-8724,
<a href="/cdn-cgi/l/email-protection#fb9c9d9e9f9e89bb9d9f9298d59c948d">[email&#160;protected]</a>; Nicholas A. Simons, Senior Attorney, 202-898-6785,
<a href="/cdn-cgi/l/email-protection#78160b111517160b381e1c111b561f170e">[email&#160;protected]</a>; Legal Division; Derek Sturtevant, Senior Review
Examiner, 202-898-3693, <a href="/cdn-cgi/l/email-protection#acc8dfd8d9ded8c9dacdc2d8eccac8c5cf82cbc3da">[email&#160;protected]</a>; Division of Risk
Management Supervision, 550 17th Street NW, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Policy Objectives

The policy objective of the proposed rule is to ensure appropriate
review of transactions that would result in control over FDIC-
supervised institutions by allowing the FDIC to disapprove of a
proposed acquisition if the proposed transaction would fail to satisfy
any of the statutory factors enumerated in the CBCA.\1\ Under the
FDIC's current regulations, an entity is exempt from a notification
requirement when the FRB reviews a notice under the CBCA. However,
recent developments in equity markets may be contributing to elevated
risk of excessive indirect control or concentration of ownership in
FDIC-supervised institutions. Therefore, the FDIC is proposing to amend
its regulations governing change in control notifications to remove the
current exemption in order to ensure appropriate review of certain
transactions, increasing the likelihood that all the statutory factors
in the CBCA are met, and reducing the likelihood that certain
transactions would result in an adverse effect on the Deposit Insurance
Fund (DIF). The FDIC recognizes the importance of interagency
collaboration and consistency with respect to the review of
transactions under the CBCA and is committed to engaging in dialogue
and coordination with the FRB and Office of the Comptroller of the
Currency to develop an interagency approach to the issues discussed in
this proposal.\2\ The FDIC is also seeking public comment on all
aspects of this proposal, including steps that may be taken on an
interagency basis to coordinate CBCA notice review.
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\1\ 12 U.S.C. 1817(j)(7).
\2\ The FDIC's commitment includes following standard notice and
comment rulemaking practices should an interagency approach be
developed and adopted.
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II. Background

A. The Change in Bank Control Act

The Change in Bank Control Act, section 7(j) of the Federal Deposit
Insurance Act (FDI Act), generally provides that no person,\3\ acting
directly or indirectly, or in concert with other persons, may acquire
control of an insured depository institution (IDI) unless the person
has provided the appropriate Federal banking agency (AFBA) \4\ prior
written notice of the proposed transaction and the AFBA has

[[Page 67003]]

not disapproved the transaction within 60 days, as may be extended.\5\
``Control'' for purposes of the CBCA means ``the power, directly or
indirectly, to direct the management or policies of an insured
depository institution or to vote 25 per centum or more of any class of
voting securities of an insured depository institution.'' \6\ The
proposed acquisition may be completed upon receipt of written notice
that the AFBA does not disapprove of the acquisition or if the AFBA
fails to act on a substantially complete prior notice within the
statutory time period.
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\3\ 12 CFR 303.81(g) defines ``person'' as ``an individual,
corporation, limited liability company (LLC), partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship,
unincorporated organization, voting trust, or any other form of
entity; and includes each party to a voting agreement and any group
of persons acting in concert.''
\4\ 12 U.S.C. 1813(q).
\5\ 12 U.S.C. 1817(j). The AFBA may, in its discretion, extend
an additional 30 days the period during which such a disapproval may
be issued. The period of disapproval may be extended two additional
times for not more than 45 days each time in certain circumstances.
See 12 U.S.C. 1817(j)(1)(A) through (D).
\6\ 12 U.S.C. 1817(j)(8)(B).
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An AFBA may disapprove a proposed acquisition if it is unable to
satisfactorily resolve one or more of the statutory factors enumerated
in the CBCA.\7\ An AFBA may disapprove of a proposed acquisition if the
acquisition would result in a monopoly or may substantially lessen
competition and the anticompetitive effects are not clearly outweighed
by the public interest; the financial condition of any acquiring person
or the future prospects of the institution is such as might jeopardize
the financial stability of the institution or prejudice the interests
of its depositors; the competence, experience, or integrity of any
acquiring person or any proposed management would not be in the best
interests of the depositors or the public; any acquiring person
neglects, fails, or refuses to furnish the AFBA with all required
information; or the AFBA determines that the proposed transaction would
result in an adverse effect on the DIF.
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\7\ 12 U.S.C. 1817(j)(7).
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B. FDIC Rules and Regulation--Part 303

Subpart E of 12 CFR part 303 of the FDIC Rules and Regulations
(subpart E) \8\ implements the CBCA and sets forth the FDIC's filing
requirements and processing procedures for notices filed pursuant to
the CBCA (notices).\9\ Subpart E requires notice to the FDIC before any
person, acting directly or indirectly, alone or in concert with others,
acquires control of a ``covered institution,'' unless the acquisition
is exempt. The FDIC is the AFBA for insured State nonmember banks and
insured State savings associations.\10\ Because the CBCA applies to
direct or indirect acquisitions of control, for purposes of the CBCA,
the FDIC also may review a notice for an acquisition of control of any
company that directly or indirectly controls an insured State nonmember
bank or an insured State savings association.\11\ Subpart E therefore
defines ``covered institution'' to include an insured State nonmember
bank, an insured State savings association, and any company that
controls, directly or indirectly, an insured State nonmember bank or an
insured State savings association and exempts certain holding companies
in situations for which the FDIC does not currently require a
notice.\12\
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\8\ 12 CFR 303.80 through 303.88.
\9\ The FDIC's requirements and procedures are consistent with
those of the other Federal banking agencies. See 12 CFR 5.50 (Office
of the Comptroller of the Currency); 12 CFR 225.41 through 225.44
(FRB).
\10\ 12 U.S.C. 1813(q).
\11\ Industrial loan companies, which in most cases are State
nonmember banks, are not ``banks'' as defined in the Bank Holding
Company Act so their parent companies are not required to become
bank holding companies. 12 U.S.C. 1841(c)(2)(H).
\12\ 12 CFR 303.81(e) (citing 12 CFR 303.84(a)(3) and (8)).
Section 303.84(a)(3) exempts transactions described in sections
2(a)(5), 3(a)(A), or 3(a)(B) of the Bank Holding Company Act (12
U.S.C. 1841(a)(5), 1842(a)(A), and 1842(a)(B)) by a person described
in those provisions because shares held in such capacities do not
confer control upon such holding companies. Section 303.84(a)(8)
exempts acquisitions of voting securities of a depository
institution holding company for which the FRB reviews a notice
pursuant to the CBCA.
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While the CBCA does not describe what constitutes the power to
direct the management or policies of a covered institution, the Federal
banking agencies have determined that a shareholder who owns or
controls a significant block of voting securities generally will have
influence in a banking organization. Thus, the FDIC's regulations
contain a rebuttable presumption that an acquisition of voting
securities of a covered institution constitutes control and triggers
the notice requirement if, immediately after the transaction, the
acquiring person will own, control, or hold the power to vote 10
percent or more of any class of voting securities, and either the
institution has registered securities under section 12 of the
Securities Exchange Act of 1934, or no other person will own, control,
or hold a greater percentage of that class of voting securities after
the transaction.\13\ An acquiring person may rebut this presumption of
control in writing.\14\
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\13\ 12 CFR 303.82(b)(1). See also 12 CFR 5.50(f)(2)(iii) (OCC);
12 CFR 225.41(c)(2) (FRB).
\14\ 12 CFR 303.82(b)(4).
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In practice, for transactions above the regulatory threshold of 10
percent of voting securities but below the 25 percent statutory
threshold for control, an acquiring person generally will file a notice
with the FDIC or rebut the presumption of control. To rebut the
presumption of control, the acquiring person generally will set forth
factors that demonstrate that it will not have the power, directly or
indirectly, to direct the management or policies of the covered
institution. These factors may include, for example, commitments by the
acquiring person not to seek representation on the board of directors
of the covered institution, not to take certain actions to influence
the policies of the institution, or not to acquire further voting
securities above a certain threshold. The documents describing the
actions the acquiring person will or will not take to rebut the
presumption of control may be called ``certifications,'' ``passivity
agreements,'' or ``passivity commitments'' (passivity commitments). The
FDIC generally is a party to such passivity commitments, and these
agreements by their terms constitute a ``written agreement'' entered
into with a Federal banking agency and enforceable under sections 8 and
50 of the FDI Act.\15\ It has long been the policy of the FDIC that any
passivity commitments executed in connection with an acquisition of
voting securities must be tailored to the facts and circumstances of
each situation.\16\
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\15\ 12 U.S.C. 1818 and 1831aa.
\16\ 80 FR 65889, 65894 (Oct. 28, 2015).
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The FDIC has entered into passivity commitments in limited cases
with asset managers investing in publicly traded FDIC-supervised
institutions. The FDIC currently has in force four passivity
commitments with three asset management companies. These commitments
are published on the FDIC's website.\17\
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\17\ <a href="https://www.fdic.gov/regulations/applications/resources/change-in-control.html">https://www.fdic.gov/regulations/applications/resources/change-in-control.html</a>.
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Certain transactions are exempt from the notice requirements of
subpart E pursuant to Sec. 303.84(a). Among the exempt transactions
are the acquisition of voting securities of a depository institution
holding company for which the FRB reviews a notice.\18\ Subpart E
currently codifies the FDIC's policy that it does not require a notice
when the FRB actually reviews a notice to acquire voting securities of
a depository institution holding company under the CBCA.\19\ However,
the exemption does not extend to FRB determinations to accept a
passivity commitment in lieu of a notice. In such cases, the FDIC
evaluates the facts and circumstances to determine whether a notice is
required to be filed with the FDIC for the indirect acquisition of
control of an FDIC-supervised institution.\20\
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\18\ 12 CFR 303.84(a)(8).
\19\ 80 FR 65897.
\20\ Id.

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[[Page 67004]]

In recent years, however, the FDIC typically has not determined
that notices must be filed with the FDIC when the FRB accepts a
passivity commitment in lieu of a notice. For the reasons described
below, developments involving institutional investors and FDIC-
supervised institutions have prompted the FDIC to reconsider its
procedures regarding transactions exempt from notice requirements
pursuant to subpart E, the facts and circumstances under which it will
require a notice, and how to monitor compliance with passivity
commitments entered into to rebut the presumption of control.

C. Growth in Passive Investments and Implications

Passive investment vehicles such as index mutual funds and
exchange-traded funds (ETFs) that aim to replicate the performance of a
third-party index such as the S&P 500 Index (collectively, ``index
funds'') have grown in popularity in recent decades. Index funds do not
hand-pick stocks like actively managed funds do in order to provide a
return greater than the market; rather, index funds seek to match
market returns by investing proportionally across stocks in the desired
index or sector of the national economy. To the extent multiple index
funds have the same company or related companies that sponsor, manage,
or advise them, these companies are called ``fund complexes.'' By the
end of December 2023, according to data released by Morningstar,
passive funds exceeded active funds in total assets under management
for the first time, with approximately $13.3 trillion in total assets
to active funds' $13.2 trillion.\21\ For comparison, when the first ETF
was listed in 1993, passive funds represented less than 1 percent of
total fund assets.\22\ Index funds have grown in popularity due to
lower management fees relative to active funds, the belief that index
funds match or outperform active funds more frequently and
consistently, and the growth of target-date funds in retirement
plans.\23\ Investments in index funds have pulled in more dollars on a
net basis than active funds every year since 2013, and if fund flows
continue to follow current trends, then they will further exceed total
assets in active funds in the future.\24\
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\21\ U.S. Fund Flows December 2023, Morningstar (Jan. 17, 2024),
<a href="https://research.morningstar.com/articles/1202332/us-fund-flows-december-2023">https://research.morningstar.com/articles/1202332/us-fund-flows-december-2023</a> (login required). See also Adam Sabban, It's Official:
Passive Funds Overtake Active Funds, Morningstar (Jan. 17, 2024),
<a href="https://www.morningstar.com/funds/recovery-us-fund-flows-was-weak-2023">https://www.morningstar.com/funds/recovery-us-fund-flows-was-weak-2023</a>.
\22\ Sabban, supra note 19.
\23\ Morningstar, Target-Date Strategy Landscape: 2023 Report
(Mar. 28, 2023), <a href="https://newsroom.morningstar.com/newsroom/news-archive/press-release-details/2023/Morningstars-Target-Date-Strategy-Landscape-Report-Finds-Investors-Stayed-the-Course-Despite-Market-Volatility-in-2022/default.aspx">https://newsroom.morningstar.com/newsroom/news-archive/press-release-details/2023/Morningstars-Target-Date-Strategy-Landscape-Report-Finds-Investors-Stayed-the-Course-Despite-Market-Volatility-in-2022/default.aspx</a>.
\24\ Sabban, supra note 19.
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The exponential growth of index funds necessarily implicates the
statutory and regulatory schemes of the CBCA and other banking laws
that are based on ownership thresholds and control of banking
organizations.\25\ As investments in index funds grow, asset management
companies and other institutional investors engaging in similar
strategies must continue to invest those funds in the universe of
stocks that comprise the index, purchasing ever-greater shares of those
companies and increasing their ownership stakes. The FDIC has observed
that fund complexes have acquired 10 percent or more of the voting
securities at FDIC-supervised institutions or their controlling
affiliates and have continued to increase their ownership percentages
at more institutions. Additionally, the FDIC in recent years has
observed a general pattern of more frequent requests for relief to
rebut the presumptions of control under subpart E.
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\25\ For example, pursuant to section 22(h) of the Federal
Reserve Act, 12 U.S.C. 375b, and Regulation O, 12 CFR part 215 (made
applicable to insured nonmember banks by 12 U.S.C. 1828(j)(2)),
extensions of credit by banks to ``insiders,'' such as principal
shareholders, must comply with certain individual and aggregate
lending limits and other requirements. Over the past several years,
fund complexes have acquired, or have approached acquiring, more
than 10 percent of a class of voting securities of banking
organizations. Upon acquiring more than 10 percent of a class of
voting securities of a banking firm, a fund complex would be
considered a ``principal shareholder'' of the bank for purposes of
Regulation O. Any company in which a principal shareholder fund
complex owns more than 10 percent of a class of voting securities
could, in some instances, be presumed to be a ``related interest''
of the fund complex. In that event, the fund complex, as a principal
shareholder of the bank, and any related interests of the fund
complex would be considered insiders of the bank under Regulation O.
Accordingly, the bank's lending to the principal shareholder fund
complex and its controlled portfolio companies would be subject to
the lending limits and other requirements of Regulation O. Certain
banking firms expressed concerns about the possible unintended
consequences of applying Regulation O to these relationships. In
response, the Federal banking agencies issued a temporary no-action
position in 2019 to provide time for the FRB, in consultation with
the other Federal banking agencies, to consider whether to amend
Regulation O to address concerns about unintended consequences of
the application of Regulation O to companies that sponsor, manage,
or advise investment funds and institutional accounts that invest in
voting securities of banking organizations. FIL-85-2019 (Dec. 27,
2019), <a href="https://www.fdic.gov/news/inactive-financial-institution-letters/2019/fil19085.html">https://www.fdic.gov/news/inactive-financial-institution-letters/2019/fil19085.html</a>. This interagency statement provided that
the Federal banking agencies will exercise discretion to not take
enforcement action against either a fund complex that is a principal
shareholder of a bank, or a bank for which a fund complex is a
principal shareholder, with respect to extensions of credit by the
bank to the related interests of such fund complex that otherwise
would violate Regulation O, provided the fund complexes and banks
satisfy certain conditions that evidence that there is a lack of
control by the fund complex over the bank. This statement was
extended several times, most recently on December 15, 2023, until
January 1, 2025. FIL-63-2023 (Dec. 15, 2023), <a href="https://www.fdic.gov/news/financial-institution-letters/2023/fil23063.html">https://www.fdic.gov/news/financial-institution-letters/2023/fil23063.html</a>.
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These developments have prompted the FDIC to reconsider its
policies under the CBCA and implementing regulations so that the FDIC
may more appropriately assess the effects of any control exerted over
the management and policies of FDIC-supervised institutions. The FDIC
is concerned that fund complexes will continue to increase their
ownership percentage of FDIC-supervised institutions to potentially
significant amounts as investments in their respective index funds
grow. Fund complexes owning such high percentages of voting securities
of FDIC-supervised institutions may create situations where the
investor can have an outsized influence over the management or policies
of an institution.\26\ Such outsized influence may flow naturally from
exercise of their votes as large shareholders over matters such as
mergers, or through other indicia of control, such as engagements with
portfolio companies whereby investors meet with directors or management
to influence the direction of the company.\27\ Fund complexes may seek
board representation or management interlocks depending on the nature
of existing passivity commitments.
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\26\ See John Coates, The Problem of Twelve: When a Few
Financial Institutions Control Everything, 27-28 (2023).
\27\ See id. at 47-48 (describing trends of asset managers
increasing the number of engagements held with portfolio companies
and the companies' responses).
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Additionally, there have been changes to proxy access \28\ and
discretionary broker voting \29\ that have given fund complexes more
potential for control over the companies in which they hold a large
equity stake in voting securities. The potential for fund complexes to
exercise significant influence or control over management, business
strategies, or

[[Page 67005]]

major policy decisions at publicly traded FDIC-supervised institutions
could increase the risk profile at such institutions and lead to
excessive risk-taking to enhance profits, investor returns, or stock
price. Finally, as fund complexes continue to purchase more shares of
banking organizations across the market to match the growth of
investments in index funds, there is the potential to create a
concentration of ownership that may result in such investors having
excessive influence or control over the banking industry as a whole.
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\28\ See Holly J. Gregory, et al., The Latest on Proxy Access,
Harv. L. Sch. F. on Corp. Governance & Fin. Reg. (Feb. 1, 2019)
(detailing the increase in proxy access at S&P 500 companies since
2015).
\29\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, section 957, 124 Stat. 1376, 1906 (2010)
(codified at 15 U.S.C. 78f(b)(10)) (prohibiting broker members from
voting shares on executive compensation, boards of directors, and
other ``significant matter[s]'').
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In light of these changes to the economic landscape and ownership
of FDIC-supervised institutions, the FDIC reviewed its policies under
the CBCA and implementing regulations and believes it is appropriate to
amend its current regulations to allow it to review certain
transactions under the CBCA to address the concerns and potential risks
outlined above. The FDIC also recognizes the interest in and need for
collaboration among the Federal banking agencies on these issues to
ensure consistency in the review of transactions implicating the CBCA.
Accordingly, the FDIC is committed to engaging in dialogue and
coordination with the FRB and the Office of the Comptroller of the
Currency to develop an interagency approach to the issues discussed in
this proposal and seeks public comment regarding further interagency
coordination in this area.

III. Proposed Rule

A. Section 303.81(e)--Definitions

As noted above, the defined term ``covered institution'' excludes a
holding company that is the subject of an exemption described in either
Sec. 303.84(a)(3) or (a)(8).\30\ In accordance with the FDIC's
proposal to remove the exemption at Sec. 303.84(a)(8), as described
below, the FDIC proposes to remove the reference to holding companies
and associated exemptions in the definition of ``covered institution.''
Therefore, as shown in the proposed regulatory text, the definition of
``covered institution'' would eliminate the reference to holding
companies subject to the regulatory exemptions in Sec. 303.84(a)(3) or
(a)(8).
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\30\ 12 CFR 303.81(e).
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As described below, the FDIC proposes to remove the exemption at
Sec. 303.84(a)(8). The FDIC is not proposing to remove the exemption
at Sec. 303.84(a)(3), which refers to transactions that are
statutorily exempt from the CBCA's notice requirements. However,
because the reference to Sec. 303.84(a)(3) in the definition of
``covered institution'' refers to statutorily exempt transactions and
not to holding companies themselves, the FDIC believes it is
appropriate to remove this reference in the definition of covered
institution as well. Some depository institution holding companies may
be considered covered institutions.

B. Section 303.84(a)--Transactions That Do Not Require Notice

Section 303.84(a) currently contains eight transactions that are
exempt from providing prior notice to the FDIC. The FDIC proposes to
remove the exemption at Sec. 303.84(a)(8), acquisitions of depository
institution holding company voting securities for which the Board of
Governors of the Federal Reserve System reviews a notice pursuant to
the CBCA.
The current regulatory exemption only applies when the FRB actually
reviews a notice under the CBCA, as described above.\31\ Under this
proposal, investors that propose to acquire voting securities of a
depository institution holding company in transactions for which the
FRB reviews a notice would no longer automatically be exempt from
providing the FDIC prior notice. A change in control at the holding
company level conveys indirect control over the IDI for which the FDIC
is the AFBA under the CBCA. The proposal to remove the exemption solely
because a notice is being reviewed by the FRB would allow the FDIC to
exercise its authority under the CBCA to require and approve or
disapprove such a notice at the IDI level.
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\31\ Supra, note 18 and accompanying text.
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The FDIC has determined that the original purpose of the current
exemption, which was to avoid duplicate regulatory review of the same
transaction by both the FRB and the FDIC,\32\ is no longer warranted in
light of the widespread impacts resulting from growth in, and changes
to the nature of, passive investment strategies. As described above,
fund complexes' increasingly large ownership of voting securities of
FDIC-supervised institutions or companies that control FDIC-supervised
institutions, and the evolution of the economic landscape over the past
few decades, present new risks. Accordingly, the FDIC has determined
that this proposal is necessary in light of the risks created by
possible outsized control over and concentration of ownership of FDIC-
supervised institutions. The FDIC must have the ability to require a
notice so that, as the AFBA for the underlying IDI, it may
independently review and determine whether the proposed acquisition
satisfies the statutory factors enumerated in the CBCA for the
institutions it supervises.\33\ While an acquisition may be disapproved
if one or more statutory factors in the CBCA are not met, as the
Federal agency that also administers the DIF, the FDIC has a particular
interest in reviewing whether a proposed acquisition could result in an
adverse effect on the DIF.
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\32\ Id.
\33\ 12 U.S.C. 1817(j)(7). The Office of the Comptroller of the
Currency is the AFBA for national banks and the FRB is the AFBA for
State member banks. Each agency would have a similar interest.
---------------------------------------------------------------------------

While this proposal would allow the FDIC to require a notice to the
FDIC when the FRB reviews a notice to acquire voting securities of a
depository institution holding company, the FDIC would consider the
facts and circumstances when deciding whether to exercise this
authority for notices filed with the FRB. The FDIC believes it is
appropriate to review proposed acquisitions under the CBCA more closely
in order to fully address risks regarding outsized influence and
increased concentration of ownership, though the FDIC may not do so for
every proposed acquisition. Rather, the FDIC's proposal would allow it
to consider the full range of options provided for under the CBCA.
Under the FDIC's current regulations, when the FRB accepts a
passivity commitment in lieu of a notice, the FDIC evaluates the facts
and circumstances of the case to determine whether a notice is required
to be filed with the FDIC for the indirect acquisition of control of an
FDIC-supervised institution. Similarly, in cases where the FRB accepts
a notice, the FDIC under the proposed rule will evaluate the facts and
circumstances to determine whether to require a notice to be filed with
the FDIC as well.
The proposed rule would mean that for transactions resulting in the
acquiring person owning, controlling, or holding with power to vote 10
percent or more of any class of voting securities of a depository
institution holding company with an FDIC-supervised subsidiary
institution, the FDIC may exercise one of the following options: (1)
based on the facts and circumstances, require prior written notice to
the FDIC under the CBCA for the indirect acquisition of control of an
FDIC-supervised institution; or (2) allow the acquiring person an
opportunity to

[[Page 67006]]

rebut the presumption of control in writing.\34\
---------------------------------------------------------------------------

\34\ Making passivity commitments is one option the FDIC will
consider on whether the presumption of control has been rebutted.
---------------------------------------------------------------------------

IV. Expected Effects

As previously discussed, the proposed rule would remove an existing
regulatory exemption that only applies when the FRB reviews a notice
under the CBCA. As of the quarter ending March 31, 2024, the FDIC
supervised 2,920 insured depository institutions.\35\ This proposed
rule, if promulgated, would likely increase the number of change-in-
control notices submitted by entities seeking to acquire voting
securities of FDIC-supervised institutions or their parent companies,
and associated costs. Over the first three months of 2024, the FRB
received 13 filings from 11 unique entities to indirectly acquire
voting securities of FDIC-supervised institutions by acquiring voting
securities of the entity that controls an FDIC-supervised
institution.\36\ The FDIC expects to receive 52 notices annually as a
result of the proposed rule and one request to rebut the presumption of
control annually.\37\ The FDIC estimates that each notice would require
30.5 labor hours at an hourly cost of $142.40 \38\ and that each
request to rebut the presumption of control would require 15 labor
hours at an hourly cost of $111.40.\39\ Therefore, the FDIC estimates
that the proposed rule could result in average annual recordkeeping,
reporting, and disclosure compliance costs of up to $227,517.40.\40\
However, the FDIC believes that this estimate likely is conservative
because, as previously stated, the FDIC may not exercise this authority
for every notice filed with the FRB.
---------------------------------------------------------------------------

\35\ FDIC Call Report data, March 31, 2024.
\36\ See 89 FR 471 (Jan. 4, 2024), 89 FR 1575 (Jan. 10, 2024),
89 FR 3403 (Jan. 18, 2024), 89 FR 5235 (Jan. 26, 2024), 89 FR 5544
(Jan. 29, 2024), 89 FR 8681 (Feb. 08, 2024), 89 FR 11276 (Feb. 14,
2024), and 89 FR 18410 (Mar. 13, 2024).
\37\ Thirteen responses in the first three months of 2024 x (12/
3) = 52 estimated change in control notices submitted annually.
\38\ To derive this estimate, the FDIC used data from the Bureau
of Labor Statistics (BLS) Occupational Employment and Wage
Statistics for executives and managers, lawyers, compliance
officers, financial analysts, and clerical categories in the
depository credit intermediation sector as of May 2023. The FDIC
increased these estimates by approximately 1.53 using the March 2023
BLS Employer Costs for Employee Compensation data, and then
multiplied the resulting values by approximately 1.04 to reflect the
change in the BLS Employment Cost Index between March 2023 and March
2024.
\39\ Id.
\40\ 52 x 30.5 x $142.40 + 1 x 15 x $111.40 = $227,517.40.
---------------------------------------------------------------------------

If adopted, the FDIC believes that the proposed rule would
facilitate appropriate review of transactions resulting in control of
FDIC-supervised institutions and, thereby, would reduce the likelihood
of outsized influence or control over FDIC-supervised institutions and
any associated costs. As previously discussed, recent developments in
equity markets in concert with the FDIC's current practice of exempting
entities from a notification requirement when the FRB reviews a notice
under the CBCA may be contributing to elevated risk of excessive or
indirect control or concentration of ownership of FDIC-supervised
institutions. The proposed rule would facilitate the FDIC's review of
certain transactions, thereby increasing the likelihood that all the
statutory factors in the CBCA are met, and reducing the likelihood that
certain transactions would result in an adverse effect on the DIF. The
FDIC does not have the information necessary to quantify such effect.

V. Alternatives Considered

The primary alternative to this proposed rule that the FDIC
considered was maintaining the existing regulatory structure in which
an entity is exempt from submitting a notice to the FDIC when the FRB
actually reviews a notice to acquire voting securities of a depository
institution holding company. The FDIC believes that the proposed rule
is more appropriate because recent developments in the equity markets,
in concert with the FDIC's current policy of not requiring a notice,
may be contributing to an elevated risk of excessive indirect control
of FDIC-supervised institutions. The FDIC also considered the
alternative of compelling an entity to file a notice with the FDIC in
each case where the FRB actually reviews a notice to acquire voting
securities of a depository institution holding company under the CBCA.
However, the FDIC believes that the proposed rule is more appropriate
because it would balance the costs associated with duplicate regulatory
review of the same transaction with the elevated risks associated with
excessive control or concentration of ownership of FDIC-supervised
institutions.

VI. Request for Comments

The FDIC is seeking comment on all aspects of the proposed rule and
existing regulatory framework that applies to the role played by asset
managers and other institutional investors with FDIC-supervised
institutions in the context of the CBCA and passivity agreements. While
the FDIC continues to perform a comprehensive review of its overall
regulatory and supervisory approach to issues that arise under the
CBCA, this proposed rule asks a number of questions and seeks public
comment regarding monitoring of change in control-related issues, the
use of passivity commitments, and specific terms and conditions that
may be appropriate to incorporate into such commitments or non-
objections in the future. In responding to the following questions, the
FDIC asks that commenters please include quantitative as well as
qualitative support for their responses, as applicable. The FDIC will
consider comments submitted anonymously.
Question 1. Should the FDIC require prior written notice at the
bank level when a change of control occurs at the holding company
level? Why or why not?
Question 2. If the FDIC should require prior written notice when a
change of control occurs at the holding company level, what steps
should the FDIC take to avoid duplication of regulatory reviews and
reduce regulatory burden? What would be the negative impacts of
inconsistent approaches across the Federal banking agencies?
Question 3. Should the FDIC and other AFBAs consider an approach
whereby a notice would be required at either the bank level or holding
company based on specific criteria, such as the percentage of assets of
the insured depository institution in relation to the consolidated
assets of the holding company?
Question 4. Does the existing and proposed regulatory and
supervisory framework properly consider all aspects of the role played
by investors with FDIC-supervised institutions in the context of the
CBCA? If not, what areas should be addressed?
Question 5. What, if any, additional requirements or criteria
should be included in the existing regulatory framework to address the
concerns of passive investors exerting control, direct and indirect,
over FDIC-supervised institutions?

[[Page 67007]]

Question 6. What facts and circumstances should the FDIC consider
when determining whether to require a notice to be filed with the FDIC
for an indirect acquisition of control of an FDIC-supervised
institution? What difference should there be in this determination, if
any, when a notice is filed at the FRB versus when the FRB determines
to accept a passivity commitment in lieu of a notice?
Question 7. Through what methods should the FDIC address the
rebuttable presumption of control other than through passivity
commitments? Should the FDIC continue entering into passivity
agreements, or should it consider a different approach such as other
passivity commitment arrangements, no-action letters, or agency
opinions? Please identify the benefits and risks to any proposed
method.
Question 8. What should the FDIC consider when determining whether
a presumption of control has been successfully rebutted?
Question 9. What types of provisions should passivity commitments
include and why?
Question 10. What, if any, provisions should be included in
passivity commitments to ensure compliance with the written agreements?
Question 11. Should the FDIC enter into blanket passivity
agreements with investors that apply to the entire portfolio of the
FDIC-supervised institutions in the fund complex or require separate
agreements for each FDIC-supervised institution? What should the FDIC
consider when making this determination?
Question 12. Are institutional investors, fund complexes asset
managers, or other large, passive shareholders directing the management
or policies of FDIC-supervised institutions as a result of their voting
securities holdings? If so, how? Are there other situations, investors,
or risks that the FDIC should consider?
Question 13. Are investors coordinating voting or otherwise acting
in concert in ways that the FDIC should be monitoring more closely? If
so, please provide any available quantitative and qualitative data.
Question 14. Are there any other considerations for the FDIC in
evaluating its current regulatory framework as it relates to the filing
requirements and processing procedures for notices filed under the
CBCA?
Question 15. Has concentrated ownership of FDIC-supervised
institutions and their affiliates affected banking sector competition?
If so, please identify the impact and how it has impacted the sector.
Question 16. Has there been any impact on corporate governance, or
other safety and soundness considerations, of concentrated ownership of
FDIC-supervised institutions and their affiliates? If so, please
identify the impact and how it has impacted these areas.
Question 17. Are there other areas of impact on FDIC-supervised
institutions and their affiliates as a result of investors owning large
proportions of voting securities of covered institutions that the FDIC
should consider?
Question 18. Should the FDIC limit the voting power of persons who
acquire 10 percent or more of a class of voting securities of an FDIC-
supervised institution or its parent company? If so, how? What are the
benefits and costs of various approaches?
Question 19. How can the FDIC and the other Federal banking
agencies best ensure consistency in the review of notices under the
CBCA? What steps should be taken on an interagency basis to ensure the
appropriate review of transactions involving an indirect acquisition of
control of an institution?
Question 20. Are there any expected effects of the proposed rule
that have not been identified?

VII. Regulatory Analyses

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA) generally requires an agency,
in connection with a proposed rule, to prepare and make available for
public comment an initial regulatory flexibility analysis that
describes the impact of the proposed rule on small entities.\41\
However, an initial regulatory flexibility analysis is not required if
the agency certifies that the proposed rule will not, if promulgated,
have a significant economic impact on a substantial number of small
entities. The Small Business Administration (SBA) has defined ``small
entities'' to include banking organizations with total assets of less
than or equal to $850 million.\42\
---------------------------------------------------------------------------

\41\ 5 U.S.C. 601, et seq.
\42\ The SBA defines a small banking organization as having $850
million or less in assets, where an organization's ``assets are
determined by averaging the assets reported on its four quarterly
financial statements for the preceding year.'' See 13 CFR 121.201
(as amended by 87 FR 69118, effective December 19, 2022). In its
determination, the ``SBA counts the receipts, employees, or other
measure of size of the concern whose size is at issue and all of its
domestic and foreign affiliates.'' See 13 CFR 121.103. Following
these regulations, the FDIC uses an IDI's affiliated and acquired
assets, averaged over the preceding four quarters, to determine
whether the IDI is ``small'' for the purposes of RFA.
---------------------------------------------------------------------------

The proposed rule could impose costs since it would permit the FDIC
to require certain entities that acquire control of FDIC-supervised
institutions to file notices with the FDIC. Moreover, should these
entities rebut the presumption of control, they would likely incur
costs in order to do so. As of March 31, 2024, the FDIC supervises
2,920 institutions, of which 2,198 are small entities for the purposes
of the RFA.\43\ Over the first three months of 2024, 11 different
investors indirectly acquired voting securities of 13 FDIC-supervised
institutions, including eight that are small entities for the purposes
of the RFA,\44\ by acquiring voting securities of the companies that
controlled those institutions.\45\ The FDIC does not have data with
which to determine if the acquirers were small entities for the
purposes of the RFA.
---------------------------------------------------------------------------

\43\ FDIC Call Report data, March 31, 2024.
\44\ Id.
\45\ See supra note 33.
---------------------------------------------------------------------------

The FDIC estimates this proposed rule would affect as many as 44
entities annually.\46\ Acquirers of voting securities of FDIC-
supervised institutions over the first three months of 2024 included
individuals, family trusts, private equity firms, and construction
companies.\47\ Given the wide range of potential acquirers of voting
securities of FDIC-supervised institutions, the FDIC believes it is
unlikely that these 44 entities represent a substantial number of small
entities. In light of the foregoing, the FDIC certifies that the
proposed rule would not have a significant economic impact on a
substantial number of small entities. Accordingly, an initial
regulatory flexibility analysis is not required.
---------------------------------------------------------------------------

\46\ 11 x (12/3) = 44.
\47\ See supra note 33.
---------------------------------------------------------------------------

The FDIC invites comments on all aspects of the supporting
information provided in this RFA section. In particular, would this
proposed rule have any significant effects on small entities that the
FDIC has not identified?

B. Paperwork Reduction Act

Certain provisions of the proposed rule contain ``collections of
information'' within the meaning of the Paperwork Reduction Act (PRA)
of 1995.\48\ In accordance with the requirements of the PRA, the FDIC
may not conduct or sponsor, and the respondent is not required to
respond to, an information collection unless it displays a currently
valid Office of Management and Budget (OMB) control number. The FDIC's
OMB control

[[Page 67008]]

number associated with this proposed rule is 3064-0019 and is titled
``Interagency Notice of Change in Control.''
---------------------------------------------------------------------------

\48\ 44 U.S.C. 3501-3521.
---------------------------------------------------------------------------

As stated above, over the first three months of 2024, the FRB
received 13 filings from 11 unique filers to indirectly acquire voting
securities of an FDIC-supervised institution.\49\ The FDIC estimates 43
annual respondents to the information collection (IC) in this ICR that
corresponds to notices,\50\ and 52 annual responses \51\ for an average
of 1.21 responses per respondent annually.\52\ Subject matter experts
(SMEs) at the FDIC recommend retaining the estimate of 30.5 labor hours
per response for notices. Further, SMEs at the FDIC estimate that the
FDIC will receive one request per year from an acquirer to rebut the
presumption of control, and that an entity would spend, on average, 15
labor hours to prepare and submit such a request at an average hourly
cost of $111.40.\53\ The FDIC estimates that change in control
applicants will incur labor costs at an hourly cost estimate of
$142.40.\54\ Therefore, the FDIC estimates that the annual reporting
burden hours associated with this NPR, if finalized, would be 1,601 as
shown in table 1, and that the annual cost would be $227,517.40.\55\
---------------------------------------------------------------------------

\49\ See supra note 33.
\50\ 11 x (12/3) = 44. SMEs at the FDIC estimate that one
respondent per year would rebut the presumption of change in control
rather than submit a change in control notice. Therefore, the
estimated annual number of respondents to the first information
collection (IC) is 43 (44--1) and the estimated annual number of
respondents to the second IC is 1.
\51\ 13 x (12/3) = 52.
\52\ 52/4335 = 1.21.
\53\ See supra note 35.
\54\ Id.
\55\ 1,586 x $142.40 + 15 x $111.40 = $227,517.40.

Table 1--Summary of Estimated Annual Burden
----------------------------------------------------------------------------------------------------------------
Type of burden Number of Time per
Information collection (IC) (frequency of Number of responses per response Annual burden
(obligation to respond) response) respondents respondent (HH:MM) (hours)
----------------------------------------------------------------------------------------------------------------
1. Applications for Change in Reporting (On 43 1.21 30:30 1,586
Bank Control, 12 CFR 303.80 occasion).
et seq. (Mandatory).
2. Requests to rebut the Reporting (On 1 1 15:00 15
presumption of control 12 CFR occasion).
303.82(b)(4) (Voluntary).
---------------------------------------------------------------
Total Annual Burden ................ .............. .............. .............. 1,601
(Hours):.
----------------------------------------------------------------------------------------------------------------
Source: FDIC.
Note: The estimated annual IC time burden is the product, rounded to the nearest hour, of the estimated annual
number of responses and the estimated time per response for a given IC. The estimated annual number of
responses is the product, rounded to the nearest whole number, of the estimated annual number of respondents
and the estimated annual number of responses per respondent. This methodology ensures the estimated annual
burdens in the table are consistent with the values recorded in OMB's consolidated information system.

Comments are invited on:
(a) Whether the collection of information is necessary for the
proper performance of the FDIC's functions, including whether the
information has practical utility;
(b) The accuracy of the estimate of the burden of the information
collection, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of the information collection on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Comments on the
collection of information should be sent to the address listed in the
ADDRESSES section of this document. Written comments and
recommendations for this information collection also should be sent
within 30 days of publication of this document to <a href="http://www.reginfo.gov/public/do/PRAMain">www.reginfo.gov/public/do/PRAMain</a>. Find this particular information collection by
selecting ``Currently under 30-day Review--Open for Public Comments''
or by using the search function.

C. Riegle Community Development and Regulatory Improvement Act of 1994

Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act of 1994 \56\ (RCDRIA), in determining the
effective date and administrative compliance requirements for new
regulations that impose additional reporting, disclosure, or other
requirements on IDIs, each Federal banking agency must consider,
consistent with principles of safety and soundness and the public
interest, any administrative burdens that such regulations would place
on affected depository institutions, including small depository
institutions, and customers of depository institutions, as well as the
benefits of such regulations. In addition, section 302(b) of the RCDRIA
requires new regulations and amendments to regulations that impose
additional reporting, disclosures, or other new requirements on IDIs
generally to take effect on the first day of a calendar quarter that
begins on or after the date on which the regulations are published in
final form.\57\ The FDIC invites comments that will further inform its
consideration of RCDRIA.
---------------------------------------------------------------------------

\56\ 12 U.S.C. 4802(a).
\57\ 12 U.S.C. 4802(b).
---------------------------------------------------------------------------

D. Plain Language

Section 722 of the Gramm-Leach-Bliley Act \58\ requires the Federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The FDIC has sought to present the
proposed rule in a simple and straightforward manner and invites
comment on the use of plain language. For example:
---------------------------------------------------------------------------

\58\ Public Law 106-102, sec. 722, 113 Stat. 1338, 1471 (1999).
---------------------------------------------------------------------------

<bullet<ls-thn-eq> Are the requirements in the proposed rule
clearly stated? If not, how could the proposed rule be more clearly
stated?
<bullet<ls-thn-eq> Does the proposed rule contain language or
jargon that is not clear? If so, which language requires clarification?
<bullet<ls-thn-eq> Would a different format make the proposed rule
easier to understand? If so, what changes to the format would make the
proposed rule easier to understand?
<bullet<ls-thn-eq> What else could the FDIC do to make the proposed
rule easier to understand?

[[Page 67009]]

E. Providing Accountability Through Transparency Act of 2023

The Providing Accountability Through Transparency Act of 2023 \59\
requires that a notice of proposed rulemaking include the internet
address of a summary of not more than 100 words in length of a proposed
rule, in plain language, that shall be posted on the internet website
under section 206(d) of the E-Government Act of 2002.\60\
---------------------------------------------------------------------------

\59\ 5 U.S.C. 553(b)(4).
\60\ 44 U.S.C. 3501 note.
---------------------------------------------------------------------------

The FDIC is proposing to amend the current regulation by removing
one exempt transaction from Sec. 303.84(a) that currently does not
require prior written notice to the FDIC. Transactions involving the
acquisition of voting securities of a depository institution holding
company for which the FRB reviews a notice would no longer be an exempt
transaction under Sec. 303.84(a). The proposed rule is intended for
the FDIC to strengthen its review and approval process for acquisitions
of voting securities that involve FDIC-supervised institutions. The
proposal and required summary can be found at <a href="https://www.fdic.gov/resources/regulations/federal-register-publications/">https://www.fdic.gov/resources/regulations/federal-register-publications/</a>.

List of Subjects in 12 CFR Part 303

Administrative practice and procedure, Bank deposit insurance,
Banks, Banking, Change in bank control, Filing procedures, Procedure
and rules of practice, Reporting and recordkeeping requirements, and
Savings associations.

Authority and Issuance

For the reasons set forth in the preamble, the Federal Deposit
Insurance Corporation proposes to amend 12 CFR part 303 as follows:

PART 303--FILING PROCEDURES

0
1. The authority citation for part 303 continues to read as follows:

Authority: 12 U.S.C. 378, 1463, 1467a, 1813, 1815, 1817, 1818,
1819(a) (Seventh and Tenth), 1820, 1823, 1828, 1831i, 1831e, 1831o,
1831p-1, 1831w, 1831z, 1835a, 1843(l), 3104, 3105, 3108, 3207, 5412;
15 U.S.C. 1601-1607.

0
2. Amend Sec. 303.81 by revising paragraph (e) to read as follows:

Sec. 303.81 Definitions.

* * * * *
(e) Covered institution means an insured State nonmember bank, an
insured State savings association, and any company that controls,
directly or indirectly, an insured State nonmember bank or an insured
State savings association.
* * * * *

Sec. 303.84 [Amended]

0
3. Amend Sec. 303.84 by removing paragraph (a)(8).

By order of the Board of Directors.

Dated at Washington, DC, on July 30, 2024.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2024-18187 Filed 8-16-24; 8:45 am]
BILLING CODE 6714-01-P

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