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.

“Closely Related to Banking”

Bank holding companies seeking to diversify revenue streams beyond traditional lending and deposit-taking have a surprisingly broad menu of permissible nonbanking activities available under Regulation Y. The Federal Reserve has approved a range of activities as “closely related to banking” under 12 CFR 225.28, often subject to specific conditions and limitations. In this post, we explore a few very specific permissible nonbanking activities previously approved by the Federal Reserve.

Commodity Transactions

Volumetric Production Payment (VPP) transactions for financing purposes are permissible under 12 CFR 225.28(b)(1) when certain conditions and risk-management requirements are met. Similarly, two “commodity purchase and forward sale” (CPFS) structures have been approved as permissible lending transactions, subject to conditions including: the BHC holds title only via warehouse receipt, the commodity is not physically moved, the BHC earns a fixed return, and risk exposure is limited to counterparty credit risk.

Real Estate and Credit-Related Services

Flood zone determination services are permissible as activities related to extending credit under 12 CFR 225.28(b)(2), though services to non-lenders are subject to limitations. Section 1031 exchange services have been approved as a combination of real estate settlement services, trust company functions, and financial advisory services — but the subsidiary may NOT negotiate property sale or purchase terms or help find buyers or sellers.

Minority Investments Under Section 4(c)(6)

Under section 4(c)(6) of the BHC Act, BHCs may invest in companies engaged in commercial or industrial activities, subject to limitations: up to 5% of any class of voting securities, and the investment must be noncontrolling. Notably, multiple BHCs may jointly invest in a clearing or settlement company even if they collectively own more than 50% of the stock.

DM Tip: Banks exploring revenue-generating nonbanking activities should maintain robust legal review processes and consider consulting with Federal Reserve staff early when structuring novel transactions. Contact your Duane Morris attorney for support and guidance.

The Federal Reserve’s 2020 final rule on Control and Divestiture Proceedings brought significant clarity to one of banking law’s most complex areas. Among its most important provisions is the treatment of “limiting contractual rights” — contractual provisions that can, in combination with other factors, create a presumption of control over another company.

What Constitutes a Limiting Contractual Right?

A contractual provision requiring a second company to conform its activities to BHC Act or Home Owners’ Loan Act (HOLA) restrictions is generally classified as a “limiting contractual right.” This classification applies regardless of the type of agreement in which the provision appears. Critically, a loan covenant that meets this definition is a limiting contractual right — the control rule makes no exception for loan agreements.

The Redemption Exception

However, not every protective provision triggers the classification. A provision that gives a company a reasonable and non-punitive mechanism to redeem, reduce, or restructure its investment if the second company fails to conform to activity restrictions is generally NOT a limiting contractual right. The key qualifiers are “reasonable” and “non-punitive” — draconian penalty provisions would likely not qualify for this exception.

The 5% Threshold

Even where a limiting contractual right exists, the presumption of control does not apply if the first company controls less than 5% of any class of voting securities of the second company. This threshold provides a meaningful safe harbor for passive investors with standard protective covenants.

The 2020 amendments to Regulation Y codified these presumptions of control and non-control, replacing the prior case-by-case approach with more predictable regulatory standards.

DM Tip: Banks with equity investments accompanied by loan covenants should evaluate whether those covenants could be classified as limiting contractual rights, especially when combined with voting securities ownership at or above 5%. Consider restructuring problematic covenants as non-punitive redemption rights where possible.

Under Regulation W, the definition of “affiliate” is critical because it determines which entities trigger the quantitative limits, collateral requirements, and other restrictions of Sections 23A and 23B of the Federal Reserve Act. But not every company with a connection to your bank qualifies as an affiliate.

Consider the following: A company controls a subsidiary of a member bank but does not control the bank itself and does not otherwise meet the definition of ‘affiliate’ in 12 CFR 223.2. Is that company an affiliate of the bank? The answer is NO.

The affiliate definition in Regulation W focuses on control relationships with the member bank, not on control of entities further down the corporate chain. A company must independently meet one of the criteria in Regulation W to be deemed an “affiliate.” Simply controlling a subsidiary of the bank, without more, is insufficient.

This distinction is important because banks must correctly identify their affiliates to comply with the 10 percent single-affiliate limit and 20 percent aggregate limit on covered transactions. Misidentifying non-affiliates as affiliates can unnecessarily restrict business activities, while failing to identify true affiliates can lead to regulatory violations.

DM Tip: Maintain an up-to-date affiliate identification chart that maps all control relationships. When evaluating whether a company is an affiliate, trace the control relationship back to the bank itself, not just to its subsidiaries. Document your analysis for examiner review.

One of the most consequential determinations under the Bank Holding Company Act is whether an arrangement constitutes a “company.” Under section 2(b) of the BHC Act (12 U.S.C. § 1841(b)) and 12 CFR 225.2(d)(1), the term “company” includes any bank, corporation, general or limited partnership, business trust, association, or similar organization. But what about voting trusts, buy-sell agreements, and similar shareholder arrangements?

The Federal Reserve has long-standing guidance on when such arrangements will not be treated as a “company” under the BHC Act, offering an informal safe harbor for common governance structures.

The Four-Part Safe Harbor

Under Federal Reserve guidance, a voting trust, buy-sell agreement, or similar arrangement generally will NOT be considered a “company” if it meets all four conditions:

• It relates only to shares of a single bank.
• It terminates within 25 years (or not later than 21 years and 10 months after the death of living individuals at the trust’s creation).
• The parties are not participants in any similar arrangement regarding another bank or nonbank business.
• In the case of a voting trust, it engages in no activity other than holding and voting shares.

Termination Requirements Override State Law

An important nuance is that state laws on the rule against perpetuities do not override the federal termination requirement. Even if a state permits perpetual trusts, the BHC Act’s 25-year (or lives-in-being-plus-21-years-and-10-months) termination requirement still applies. However, a “springing trust” — one that is formed upon the termination of the original trust — is permissible.

This guidance offers clarity but demands thoughtful drafting. Trusts that satisfy the safe harbor at formation can risk losing it through amendments, activities beyond mere share-holding, or involvement in multi-bank arrangements.

DM Tip: Trusts holding bank shares should verify the trust’s termination provisions comply with BHC Act requirements regardless of state perpetuity rules. Review trust documents, buy-sell agreements, shareholder agreements (or similar) on a regular basis or upon any amendment to confirm continued compliance with the safe harbor.

CIBCA Framework

The Change in Bank Control Act (“CIBCA”) framework imposes filing requirements on persons or groups seeking to acquire control of a banking organization. One of the most significant — and often overlooked — aspects of this framework is the concept of persons “acting in concert,” which can transform individual shareholders into a regulated group with collective filing obligations.

The Shareholders’ Agreement Presumption

Under 12 CFR 225.41(d)(4), shareholders who are parties to a shareholders’ agreement are generally presumed to be a “group acting in concert.” This presumption can be rebutted in very limited circumstances where the following is true:

• All or substantially all shareholders are parties to the agreement.
• The agreement relates only to shares, not to management or operations.
• It is entered for purposes such as preserving S Corporation status, preserving tax benefits, or providing a right of first refusal.
• No other limitations exist on shareholders’ ability to acquire, vote, or transfer shares. See also 12 CFR 225.9(b).

Trustee Relationships

A person with an unrestricted right to remove and replace a trustee is presumed to act in concert with the trust and its trustee. However, a limited right — such as removal only for cause or fraud — generally would NOT create this presumption.

Adding New Group Members

When a new person seeks to join an existing group acting in concert, the new acquirer must file a CIBCA notice with the Federals Reserve. The notice should identify the new acquirer, the group name (e.g., “XYZ Family Group”), and state that the acquirer is joining an existing (and previously approved) control group. This filing requirement applies even when the new member is acquiring a de minimis interest.

DM Tip

Shareholders party to a shareholder agreement should review it periodically to confirm whether they could trigger “acting in concert” presumptions and ensure all filing obligations are met when group membership changes. Maintain an up-to-date roster of group members and file promptly upon any additions.

In bank holding company land, few structures offer the flexibility of a Qualified Family Partnership (QFP). Defined under section 2(o)(10) of the Bank Holding Company Act, a QFP allows family members to hold bank shares collectively without triggering BHC Act registration requirements. But such convenience comes with strict guardrails that require careful attention.

Under section 2(o)(10)(F), every partner of a QFP must be either” (i) an individual related to other partners by blood, marriage (including former marriage), or adoption, or (ii) a trust established for the primary benefit of such related individuals. This requirement is not merely aspirational — it is a strict condition for maintaining QFP status.

The Pitfall: Assigning Economic Interests

As clarified in a May 10, 2010 letter from Scott G. Alvarez, then General Counsel of the Federal Reserve, if any partner assigns even the economic interest in a partnership to a third party who does not qualify as a related family member, the partnership loses its QFP status entirely. Critically, this holds true even when the associated voting interest is expressly excluded from the assignment.

This interpretation underscores that the Federal Reserve looks at the totality of the partnership composition, not merely the allocation of voting power. The rationale is clear: the QFP exemption exists to accommodate bona fide family arrangements, and permitting economic interests to flow to unrelated parties undermines that foundational purpose.

Key Definition

A qualified family partnership (“QFP”) is defined in section 2(o)(10) of the BHC Act as a partnership whose partners consist entirely of individuals related by blood, marriage, or adoption, or trusts for their primary benefit.

Banks and their advisors must exercise vigilance in estate planning, partnership restructuring, and any transaction that could alter the composition of QFP interests. Even well-intentioned transfers — such as those made for liquidity or tax planning purposes — can have disqualifying consequences.

DM Tip: Before transferring a partnership interest, confirm whether the transferee qualifies as a related family member or eligible trust to preserve QFP status. Consider implementing a pre-transfer compliance checklist that verifies eligibility of each proposed transferee against section 2(o)(10)(F) requirements.

On Friday, March 7, 2025, the Office of the Comptroller of the Currency (“OCC”) issued Interpretive Letter 1183, OCC Letter Addressing Certain Crypto-Asset Activities, reiterating the OCC’s prior guidance regarding the activities in which national banks may engage related to crypto-assets, including crypto-asset custody, certain stablecoin activities, and participation in independent node verification networks such as distributed ledgers. Each of these activities were previously addressed and permitted pursuant to OCC Interpretive Letters 1170, 1172, and 1174, respectively. Interpretive Letter 1183 also rescinds Interpretive Letter 1179, which required national banks to receive a “supervisory nonobjection and demonstrate that they have adequate controls in place before they can engage in these cryptocurrency activities.”

Additionally, “consistent with Interpretive Letter 1183,” the OCC’s news release notes that the OCC withdrew its participation in the joint statement on crypto-asset risks to banking organizations and the joint statement on liquidity risks to banking organizations resulting from crypto-asset market vulnerabilities.

Taken together, Interpretive Letter 1183, the recission of Interpretive Letter 1179, and the withdrawal from the two joint statements on specific risks to banking organizations related to crypto-asset activities result in a much friendlier approach to these activities by national banks. This release also potentially signals a forthcoming expansion of the market for banks to engage in such activities.

But for now, national banks are able to engage in crypto-asset activities such as: (1) “holding” digital currencies on behalf of customers by taking custody of the unique cryptographic keys associated with such digital currencies (Interpretive Letter 1170); (2) holding deposits from stablecoin issuers, including deposits that constitute reserves for a stablecoin associated with hosted wallets, including any activities incidental to receiving deposits from stablecoin issuers (Interpretive Letter 1172); (3) validating, storing, and recording payments transactions by serving as a node on an independent node verification network (Interpretive Letter 1174); and (4) using independent node verification networks and related stablecoins to carry out other permissible payment activities (Interpretive Letter 1174).

Each of these Interpretive Letters, as is consistent with OCC precedent, acknowledge that these activities are natural outgrowths of a national bank’s traditional role as a financial intermediary and that any such crypto-asset activities should be “developed and implemented consistently with sound risk management practices and should align with banks’ overall business plans and strategies.” The OCC further expects national banks to “conduct a legal analysis to ensure the activities will be conducted consistent with all applicable laws, including applicable anti-money laundering laws and regulations and consumer protection laws and regulations.”

Finally, we think it is important to recognize that each of Interpretive Letters 1170, 1172, and 1174 were drafted under the guidance of (and executed by) Jonathan V. Gould, then Senior Deputy Comptroller and Chief Counsel, but recently nominated by the Trump administration to be next Comptroller of the Currency. We expect more on the crypto-related activities of national banks from the OCC in the future, especially if Mr. Gould is approved as Comptroller in this administration that wants the US to be the “Bitcoin Superpower.”