Regulations
Regulation LL - Frequently Asked Questions
Q: What action should a company take if it has investments that predate the effective date of the Board's control rule, have been treated by the company as noncontrolling, and trigger one or more of the presumptions of control in the control rule?
Posted: 9/30/2020
A: Consistent with the preamble to the control rule, the Board does not expect to revisit structures that have already been reviewed by the Board or a Federal Reserve Bank prior to the effective date of the control rule (85 FR at 12420). For a structure that has not been reviewed by the Board or a Federal Reserve Bank, a company may contact Board staff to discuss the structure and what, if any, alterations should be made to continue to treat the structure as noncontrolling. Board staff would not require alterations to structures that represent a reasonable interpretation of Board precedent at the time the structure was created.
Q: Is a contractual provision between a first company and a second company that requires the second company to conform its activities to the activities restrictions under the Bank Holding Company Act or Home Owners' Loan Act considered a limiting contractual right?
Posted: 9/30/2020
A: Consistent with the preamble to the control rule, a contractual provision between a first company and a second company that requires the second company to conform its activities to the activities restrictions under the Bank Holding Company Act or Home Owners' Loan Act generally would be considered a limiting contractual right as such a provision would provide the first company with a right to limit the ability of the second company to engage in some new lines of business (85 FR at 12417). However, a contractual provision that provides a first company with a reasonable and non-punitive mechanism to redeem, reduce, or restructure its investment in the second company if the second company fails to conform its activities to the activities restrictions of the Bank Holding Company Act or Home Owners' Loan Act generally would not be considered a limiting contractual right.
Q: If a market standard loan covenant in a loan agreement between a first company and a second company meets the definition of a limiting contractual right, is the loan covenant considered a limiting contractual right even though it is located in a loan agreement?
Posted: 9/30/2020
A: Consistent with the preamble to the control rule, a contractual provision that meets the definition of a limiting contractual right is a limiting contractual right (85 FR at 12418). The control rule does not differentiate between limiting contractual rights based on the circumstances under which the right was created or the nature of the document in which the right resides. The influence that a limiting contractual right provides its holder does not vary based on the circumstances of the right's creation or the documentary location of the right. In particular, the control rule does not create any exception from the definition of a limiting contractual right for covenants in a loan agreement. Importantly, the control rule's presumption of control related to limiting contractual rights does not apply where the first company controls less than five percent of any class of voting securities of the second company. As a result, loan covenants generally do not raise control concerns by themselves, but instead raise concerns when held by a first company that also controls a material percentage of the voting securities of a second company.