On January 30, the Federal Reserve released a highly anticipated final rule that substantially updates and clarifies the agency's regulatory framework for determining when an investor exercises a controlling influence over a bank or other company under the Bank Holding Company Act and the Home Owners' Loan Act.

The final rule liberalizes in a number of significant ways the control standards that are currently employed by the Board of Governors of the Federal Reserve System (Federal Reserve) and its staff. Its most dramatic impact is to bring clarity and transparency to the standards, considerations and calculation methodologies applied by the Federal Reserve and its staff in making control determinations, especially with regard to the particular combinations of voting and nonvoting equity investments, board and board committee representation, personnel interlocks, business relationships and contractual arrangements that can lead to a determination that a minority investor has control.

The final rule largely tracks the Federal Reserve's April 2019 proposed rule, with key changes, including: (1) taking into account the significance of business relationships between an investor and a company only from the perspective of the company, not the investor; (2) a standardized presumption of control based on an investor's total equity ownership of at least 33.33%; (3) the elimination of one of the investment fund control standards; and (4) modifications to proposed definitions. The final rule becomes effective April 1, 2020.

This alert focuses on the changes made by the final rule to the Federal Reserve's existing, public framework for determining whether a controlling influence exists for purposes of the Bank Holding Company Act (BHCA). In this alert, we refer to an investor as a company under the BHCA that acquires the securities of any bank or company. Unless otherwise specified, references in this alert to ownership or control of a company also refer to ownership or control of a bank, and references to ownership of securities also include controlling the securities or holding them with power to vote.