New Federal Reserve Rule Proposal Could Pave the Way for Increased Shareholder Activism at Banking Organizations

Harvard Law School Forum on Corporate Governance and Financial Regulation
Steve Wolosky, Andrew Freedman and Ron Berenblat

In April 2019, the Federal Reserve Board (the “FRB”) invited public comment on a proposal to revise the FRB’s rules for determining whether an entity controls a bank or bank holding company (“banking organization”) for purposes of the Bank Holding Company Act of 1956, as amended.  The proposal is intended to clarify, in particular, how the FRB decides whether an entity exercises a “controlling influence” over a banking organization.  If an entity has a controlling influence and, thus, control over a banking organization, the entity generally becomes subject to regulation as a bank holding company.  The FRB’s current framework for making control determinations is complex and often difficult to apply with certainty.  As a result of the uncertainty surrounding whether an investment in and/or engagement with a banking organization would constitute control under the FRB’s current framework and the consequences of becoming subject to the burdens imposed by bank holding company regulation, our shareholder activist clients have generally shied away from campaigns at banking organizations.  As discussed in this Client Alert, we believe the proposal’s simplification of the control framework and establishment of a broad set of rules that specifically cover highly relevant areas for shareholder activists, such as ownership thresholds, board representation and election contests, would introduce an important level of predictability to the control analysis that could pave the way for increased shareholder activism at banking organizations

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