Chamber Comment Letter on FDIC Proposal to Amend Regulations Under the Change in Bank Control Act

Dear Mr. Sheesley:

The U.S. Chamber of Commerce ("Chamber") submits these comments in response to the proposed rulemaking issued by the Federal Deposit Insurance Corporation ("FDIC") that would expand the FDIC's Change in Bank Control Act ("CBCA") approval authority regarding changes to direct or indirect control of an FDIC-supervised institution ("Proposal").[1] The Chamber is concerned with several aspects of the Proposal that would impact passive investments in bank holding companies.[2] The FDIC's approach is further troubling given the separate actions taken outside of the public purview that have already changed policy by unraveling passivity commitments with asset managers.

In April 2024, the Chamber submitted comments to Director McKernan on a reported proposal that would develop a plan to regularly examine large asset managers which hold a 10% or greater stake in FDIC-regulated banks.[3] In that letter, the Chamber called on the FDIC to employ care in considering changes to its processes, recognizing that modifications to any of the array of interagency rulemakings, statements, agreements, and other guidance could have unintended consequences for both asset managers and investors. We further urged the FDIC to closely coordinate with other regulators - including the Federal Reserve Board (FRB), Office of the Comptroller of the Currency (OCC) and Securities and Exchange Commission (SEC) - as the underlying subject matter involved some issues that are beyond the scope of the FDIC's statutory remit.

Regrettably, the FDIC has moved forward with a Proposal to re-write its approval authority over acquisitions of a bank holding company of an FDIC-supervised bank based on a novel interpretation of its own authority, and without conducting the necessary analysis or interagency coordination the Chamber previously recommended. The Proposal also fails to substantiate with clear arguments and data why the proposed amendments to the FDIC's CBCA procedures are necessary, and as a result appears arbitrary and capricious. Further, the Proposal is based upon questionable assertions of the FDIC's statutory authority.

It is essential that capital markets remain competitive and capital flows freely. Asset managers play an important role in supporting the efficient flow of investment capital into publicly traded banking organizations. Yet, the FDIC's proposed interference into purchases of banking shares will create significant consequences for banks, asset managers, and investors. A restriction of capital inflow to banks would be particularly harmful to smaller and mid-size banks.[4] Although it is unclear whether the FDIC seeks to delay transactions or require asset managers to set limits on equity investments in banks, neither aim is in the interest of banks that rely on stable, long-term investment capital. Investors would also be worse off as funds attempt to navigate unnecessary obstacles to acquiring the securities they need to pursue their stated investment strategy.

We encourage the FDIC to withhold further consideration of the Proposal until it has more fully examined its limits under CBCA and has publicly released for additional review and comment any data and other supporting evidence that reasonably demonstrates that the rule amendments are both necessary and rationally connected to the issue the FDIC is purporting to address.

Overview and General Concerns with the Proposal

Asset managers structure their investment portfolios to align with the goals of their investors, which in many cases today include strategies that attempt to mirror the composition and returns of major stock indices. To effectively execute these strategies for their investors, asset managers often must acquire shares of publicly traded bank holding companies. Although asset managers must necessarily include bank shares in their portfolios, they neither seek nor in practice exercise a controlling influence over the banks in which they invest.

In recognition of the natural tension between the need for asset managers to hold bank shares and the understanding that asset managers do not intend to exercise "control" over these banks for regulatory purposes, the FDIC, FRB, and OCC maintain longstanding rules and guidance governing the passivity commitments into which they enter with asset managers. These commitments allow those asset managers who have entered into an agreement with the appropriate federal banking agency ("AFBA")to invest in a bank up to a certain threshold without being deemed to "control" that bank.[5] Asset managers are currently required to self-certify that they comply with their passivity commitments and, to date, the FDIC has not indicated that any party to a passivity commitment has failed to adhere to its terms.

The FDIC now seeks to disrupt this longstanding and effective practice through a novel interpretation of its own authority. The CBCA specifically requires that entities provide advance notice to "the appropriate federal banking agency" prior to an acquisition of voting securities that would constitute "control" of an insured depository institution. In the case of bank holding companies, that regulator is the FRB. Under current FDIC regulations, there are eight exemptions available to entities for providing advance notice to a regulator. One of these exemptions stipulates that an entity need not notify the FDIC of its acquisition of voting securities in an FDIC-supervised institution if the FRB has already reviewed the transaction pursuant to its role as "the appropriate federal banking agency" under the CBCA.

The FDIC has raised concern in the Proposal that fund complexes that own a high percentage of voting securities in FDIC-supervised institutions may have outsized influence over the management or policies of an institution. Although it presents no data to support its view, the FDIC seeks to address this speculative concern by proposing to remove the exemption from FDIC review for an entity that has already undergone a review with the FRB. Investors that propose to acquire voting securities of a depository institution holding company in transactions for which the Federal Reserve reviews a notice would no longer automatically be exempt from providing the FDIC prior notice and would instead be subject to a duplicative, costly, and time-consuming review by the FDIC.

By removing the exemption, the FDIC aims to act in excess of its statutory authority under the CBCA to require and subsequently approve or disapprove a notice of purchase of a banking institution's voting securities after the FRB has approved the transaction. By proposing a novel statutory interpretation to grant itself the authority to second guess the FRB's work, the FDIC is also making an implicit assertion that the FRB is failing at its job of reviewing transactions that are relevant under the CBCA. In fact, the CBCA does not provide the FDIC this additional authority and, even if it did, the Administrative Procedure Act requires the FDIC to establish that the FRB is failing at its job to substantiate the purpose and benefits of this amendment. There does not appear to be any current evidence to support that assertion. However, if the FDIC believes the FRB's process has shortcomings, the appropriate next step is to work with the FRB to investigate any perceived gaps, and/or work with Congress to amend its statutory authority, not by proposing amendments that both reinterpret the scope of the CBCA and encroach upon the FRB's responsibility to review CBCA notices.

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[1] Federal Deposit Insurance Corporation, Regulations Implementing the Change in Bank Control Act, available at https://www.govinfo.gov/content/pkg/FR-2024-08-19/pdf/2024-18187.pdf.

[2] For simplicity, this letter refers to bank and savings and loan holding companies as "bank holding companies" and their FDIC-insured subsidiaries as "banks."

[3] U.S. Chamber of Commerce, Letter to FDIC Director Jonathan McKernan, April 22, 2024, available at https://www.uschamber.com/finance/letter-to-fdic-on-monitoring-of-investment-funds-passivity-agreements.

[4] For example, small or family-owned banks could be affected if estate planning leads to filings under the CBCA. See e.g. S&P Global at https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/fdic-proposal-on-change-in-control-notices-has-potential-ripple-effects-on-m-a-83040607.

[5] These comments depend on the specific facts and circumstances of the acquisition, but commonly include commitment to refrain from making shareholder proposals, nominating directors or threatening to sell securities to induce a specific board action.

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