Ann E. Misback
Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue NW
Washington, DC 20551

Re: Control and Divestiture Proceedings (Federal Reserve Board Docket No. R-1662, RIN 7100-AF 49)

Ladies and Gentlemen:

The Financial Services Forum (the “Forum”) and the Securities Industry and Financial Markets Association (“SIFMA” and, together with the Forum, the “Associations”)1 appreciate the opportunity to submit this letter to the Board of Governors of the Federal Reserve System (the “FRB”) on the notice of proposed rulemaking (the “Proposal”) regarding the definition of control under the Bank Holding Company Act (“BHC Act”) and the Home Owners’ Loan Act (“HOLA”).2

In this letter, we describe how the Proposal can be adjusted to help ensure that U.S. financial markets and banking organizations remain competitive, continue to be well positioned to drive innovation and growth, and are fully able to meet their customers’ capital markets and asset management needs. Without the modifications we suggest, U.S. financial markets risk being left behind at a critical time of change, as the global financial services sector transforms how capital and credit are provided to the real economy. Therefore, the Proposal is highly consequential to all member institutions of the Associations. We have focused this letter on priority issues related to innovation in capital and other financial markets, which we long have believed are important policy concerns.3 We also support the comment letter submitted by the Bank Policy Institute (“BPI”), which discusses a broader range of issues.

Executive Summary

We support the FRB’s goal to provide greater clarity regarding the controlling influence test. Aspects of the Proposal, however, should be modified to avoid unnecessarily impeding growth and innovation.

• The Proposal should be revised to facilitate investments in emerging companies and technologies. First, the FRB should provide additional flexibility for a banking organization to have business relationships with companies, particularly emerging companies, in which the banking organization invests. As proposed, the controlling influence test would make it impractical for banking organizations to partner with fintech firms, unnecessarily restraining innovation in the financial sector. Second, the Proposal should allow investors to utilize typical minority protection rights to ensure the soundness of their investments. Third, the proposed calculation of total equity is inappropriate in a number of respects for investments in emerging companies and other startups. As a general matter, the standards for calculating total equity should be modified to better reflect an investor’s economic stake in a company. In addition, the “functionally equivalent to equity” test should be eliminated because it does not accord with the Proposal’s goal of clarifying the FRB’s framework for evaluating control and, therefore, would inject deleterious uncertainty into transactions. Further, the total equity recalculation requirement similarly would chill investment because investors could be presumed to control based on third-party actions or their own sales of equity and also should be adjusted.
• The Proposal should be revised to facilitate customer-driven capital markets and asset management transactions and businesses. First, the FRB should add a presumption of non-control for financing vehicles whose only function is to hold a specified pool of assets (or assets that meet specified criteria). Treating these entities as subsidiaries would cause unnecessary compliance obligations, given that these entities effectively have no management or policies to control (i.e., there is limited policy benefit in treating them as controlled). Second, the Proposal’s presumption of control for entities subject to consolidation under U.S. generally accepted accounting principles (“GAAP”) should be eliminated because it needlessly would increase the cost of offering various financing products to customers and could forestall innovation; at minimum, variable interest entities (“VIEs”) should be exempted from this presumption. Third, the investment fund presumptions should be revised to avoid impeding the formation of new funds. Specifically, the FRB should revise the presumptions to allow a multi-year seeding period and raise the permitted post-seeding voting equity threshold.

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