Bank holding companies (“BHCs”) have the ability to hold equity stakes in portfolio companies through multiple legal authorities. A common question under Regulation W arises when a BHC owns shares of a portfolio company under both the merchant banking authority of Section 4(k)(4)(H) or (I) of the Bank Holding Company Act and under Section 4(c)(6) of the BHC Act. Does this combination trigger the presumption of affiliation?
The answer is yes – here’s why. Section 223.2(a)(9)(i) of Regulation W creates a presumption of affiliation when certain ownership thresholds are met. The key is that a BHC may not own any shares in reliance on Section 4(c)(6) if it owns or controls, in the aggregate under a combination of authorities, more than 5 percent of any class of voting securities of the company.
In an example provided by the Federal Reserve, a BHC owns 12 percent of equity capital and voting stock under the merchant banking authority plus 4 percent under Section 4(c)(6). Because the aggregate exceeds 5 percent across combined authorities, the presumption of affiliation is triggered.
This has real consequences: if the portfolio company is deemed an affiliate, any transaction between it and the subsidiary bank becomes a covered transaction subject to Regulation W’s full suite of restrictions.
DM Tip: When your BHC acquires portfolio company interests under multiple BHC authorities, aggregate all holdings across all authorities before evaluating whether the Regulation W affiliation presumption is triggered. Reach out for support.