December 20, 2022
TO: Banking Organizations and Non-Bank Regulated Entities
RE: Request for Public Comments Regarding the Presumption of Control of a New York-Chartered or Licensed Depository or Non-Depository Institution
Several investment management companies have sought guidance from the New York State Department of Financial Services (the “Department”) on the presumption of control that applies to certain stock-form financial institutions regulated under the New York Banking Law (the “Banking Law”).
In general, any person seeking to acquire control of a New York-chartered bank, trust company, stock-form savings bank, or stock-form savings and loan association (each a “Banking Organization”) or a New York-licensed transmitter of money, casher of checks, licensed lender, sales finance company, insurance premium finance agency, budget planner, mortgage banker, mortgage broker, mortgage servicer; or student loan servicer (each a “Non-Bank Regulated Entity” and, together with Banking Organizations, “Regulated Entities”) must obtain the prior approval of the Superintendent of Financial Services (the “Superintendent”). Failure to obtain such approval prior to acquiring control of a Regulated Entity constitutes a violation of the Banking Law.
The Banking Law generally provides that a person is presumed to control a Regulated Entity if such person holds a certain percentage of the voting stock of that institution (a “Presumption of Control”). Except for New York-licensed transmitters of money, a Presumption of Control with respect to a Regulated Entity is triggered when a person acquires, directly or indirectly, ten percent or more of that Regulated Entity’s voting stock. For licensed transmitters of money, the Presumption of Control is triggered when a person acquires 25% or more of a licensed money transmitter’s voting stock.
For example, Banking Law Section 143-b defines the term “control” as the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a New York-chartered bank, trust company, stock-form savings bank, or stock-form savings and loan association, whether through the ownership of voting stock of such entity, the ownership of voting stock of any company which possesses such power or otherwise. Banking Law Section 143-b establishes a Presumption of Control when a company, directly or indirectly >“owns, controls or holds with the power to vote” ten percent or more of the voting stock of a Banking Organization or of an entity which owns, controls or holds with power to vote ten percent or more of the voting stock of a Banking Organization. Under this provision, the Superintendent may, upon application by either the Banking Organization or a company subject to the Presumption of Control, exercise the discretion to issue a determination of non-control based on the facts and circumstances presented.
For Non-Bank Regulated Entities, the applicable control provisions are as follows: (1) licensed lenders – Banking Law Section 345; (2) cashers of checks – Banking Law Section 370-a; (3) sales finance companies – Banking Law Section 492-a; (4) insurance premium finance agencies – Banking Law Section 555-a; (5) budget planners – Banking Law Section 583-a; (6) mortgage bankers, mortgage brokers or mortgage servicers – Banking Law Section 594-b; (7) licensed transmitters of money – Banking Law Section 652-a; and (8) student loan servicers – Banking Law Section 715 (collectively, with Banking Law Section 143-b, the “Control Provisions”). Although there is some variation in the specific factors indicating control across the range of Regulated Entities, each noted control provision defines a Presumption of Control and provides the Superintendent with the discretion to override this presumption.
Exercise of Control
The securities portfolio of a number of investment managers and their subsidiaries and affiliates (collectively, “Investment Managers”), including the funds, other pooled investment vehicles, and institutional accounts—such as traditional mutual funds and exchange-traded funds, as well as private equity funds—sponsored, managed or advised by the Investment Manager (collectively, “Managed Funds”), contain the voting stock of various Regulated Entities. Certain Investment Managers, on behalf of themselves, their subsidiaries and affiliates, and their Managed Funds, have asserted that they hold voting stock of these Regulated Entities solely as passive investors and that they have no intent or desire to exercise control over any Regulated Entity. These Investment Managers argue that they should not be deemed to control a Regulated Entity held in this capacity even if the Investment Manager, including its subsidiaries, affiliates, and Managed Funds, acquire and hold, whether directly or indirectly, whether individually or in aggregate, an amount of voting stock of a Regulated Entity that would trigger the relevant Presumption of Control. Therefore, these Investment Managers have sought guidance on obtaining a determination of “non-control” from the Superintendent.
This concern extends to all positions over which an Investment Manager exercises voting discretion, including those in individual accounts and in Managed Funds. In the case of an Investment Manager’s individual accounts, the account holders are the owners of the securities in the accounts. In the case of Managed Funds, the underlying investors are the indirect beneficial owners of the securities in such Managed Funds. In each case, however, Investment Managers who have investment discretion over securities held, either in individual accounts or Managed Funds, generally have the responsibility for voting those securities that have voting rights.
Accordingly, certain Investment Managers have sought to establish a process for demonstrating that their acquisition and holding of power to vote the voting stock of a Regulated Entity is, in fact, passive. These Investment Managers have proffered a number of passivity commitments in order to facilitate the Superintendent’s potential determination of non-control, even in those cases where the Investment Manager acquires the power to vote the voting stock of a Regulated Entity in an amount that triggers the Presumption of Control and in cases where the Investment Manager’s holdings also include a substantial amount of non-voting equity and/or debt issued by a Regulated Entity.
Further, Investment Managers often offer funds with holdings designed specifically tied to the composition of various publicly available indices (“Index Funds”). In this regard, Index Funds seek to track the performance of a specified reference index and are generally presumed not to be actively managed by an Investment Manager. Therefore, some Investment Managers have argued that holding voting stock of a Regulated Entity via an Index Fund should indicate that they are merely passive investors in the Regulated Entity.
Aggregation of Positions
In addition to Managed Funds actively managed by an Investment Manager, Investment Managers may offer funds or other investment vehicles sponsored by the Investment Manger but advised and managed by an independent and unaffiliated third-party investment manager (“External Manager”) with sole or partial investment discretion—including voting rights over the stock held by the funds advised and managed by such External Manager (“Externally Managed Funds”). In these instances, since the investment decisions and the voting rights related to the positions held are within the discretionary control of the External Manager, some Investment Managers have suggested that positions held in such Externally Managed Funds should be excluded from the calculation of an Investment Manager or its Managed Funds’ ownership of voting stock of a Regulated Entity.
(B) Sample Passivity Commitments:
The following is a sample of passivity commitments that may be considered in evaluating a request for a determination of non-control by an Investment Manager and its Managed Funds when their ownership of voting stock of a Regulated Entity triggers a Presumption of Control.
The Investment Manager and each of its Managed Funds commit that:
- They will not, whether directly or indirectly, or whether individually or in the aggregate, acquire [x] percent of the voting stock of a Regulated Entity that is in excess of the amount that would trigger a Presumption of Control without the prior approval of the Department and shall grant the management of any such Regulated Entity a proxy for all voting stock of the Regulated Entity in excess of the amount that would trigger a Presumption of Control (“Excess Stock”), directing that such Excess Stock be voted in proportion to all other such stock voted by all other holders thereof or, in the event that such mirror voting is not possible, to not vote such Excess Stock.
- Neither the Investment Manager nor its Managed Funds shall:
- Take any action to control any Regulated Entity within the meaning of the applicable control provision in the Banking Law;
- Unless agreed to by the Department and permitted by applicable law, condition its acquisition of the voting stock of a Regulated Entity on obtaining representation on the board of directors of a Regulated Entity, or seek to designate an officer, director, or employee of the Investment Manager or its Managed Funds to the board of directors of a Regulated Entity, or accept representation of more than one director on the board of directors or similar management body of such a Regulated Entity, nor allow any director appointed or controlled by the Investment Manager, including its subsidiaries or affiliates, or its Managed Funds to serve:
- As chairman of any such board or of any committee thereof, or
- As a member of any board committee if such director occupies more than twenty-five per cent of the seats on such committee, or
- As a member of any board committee that has the authority or practical ability to unilaterally make (or block the making of) policy or other decisions that bind the board or management of a Regulated Entity or any of its subsidiaries;
- Have or seek to have any officer, employee, or other representative of the Investment Manager or any Managed Fund serve as an officer, agent or employee of such a Regulated Entity;
- Propose a director or slate of directors in opposition to any nominee or slate of nominees proposed by the management or board of directors of such a Regulated Entity;
- Exercise or attempt to exercise a controlling influence over the management or policies of such a Regulated Entity;
- Attempt to influence the dividend policies; loan, credit, or investment decisions or policies; pricing of services; personnel decisions; operations activities (including the location of any offices or branches or their hours of operation, etc.); or any similar activities or decisions of such a Regulated Entity;
- Enter into any agreement with such a Regulated Entity that substantially limits such Regulated Entity’s discretion over major policies and decisions including, but not limited to, policies or decisions about employing and compensating executive officers; engaging in new business lines; raising additional debt or equity capital; merging or consolidating with another firm; or acquiring, selling, leasing, transferring or disposing of material assets, subsidiaries or other entities;
- Pledge any acquired voting stock of a Regulated Entity to serve as collateral for a loan with any financial institution or other transaction, nor engage with a Regulated Entity other than in those banking or other financial service transactions that are normal and customary for an investor;
- Solicit or participate in soliciting proxies with respect to any matter presented to the shareholders of a Regulated Entity; or
- Dispose or threaten to dispose (explicitly or implicitly) of debt or equity interests in such a Regulated Entity or in any manner as a condition to or inducement of specific action or non-action by such a Regulated Entity.
- Neither the Investment Manager nor any of its Managed Funds will dispose of the voting stock of a Regulated Entity:
provided that notwithstanding subsections 3(a) through (c) hereof, such Investment Manager or the Managed Funds may dispose of their stocks in a Regulated Entity in the following circumstances:
- in a cross trade between two of the Managed Funds in compliance with the rules governing such cross trades under the Investment Company Act of 1940, as amended;
- in a sale by the Investment Manager or its Managed Funds to the Regulated Entity;
- in a tender or exchange offer for voting stock of the Regulated Entity; or
- in a widespread public distribution effected on a stock exchange or otherwise (which may include a sale to one or more broker-dealers acting as market makers or otherwise intending to resell the shares sold to it or them in accordance with its or their normal business practices).
- To any person if Investment Manager or the Managed Fund knows that such person seeks to change the control of a Regulated Entity in any manner; or
- To any person who the Investment Manager or the Managed Fund knows:
- has made a filing with the United States Securities and Exchange Commission or other federal agency with respect to its ownership of more than five percent of the voting stock of such a Regulated Entity, or
- Would be required to do so as a result of the purchase from the Investment Manager or its Managed Funds; or
- In an amount of more than five percent of the voting stock of a Regulated Entity in any single transaction;
- Unless agreed to by the Department, neither the Investment Manager nor its Managed Funds shall enter any banking or non-banking transactions with the Regulated Entity or any of its subsidiaries, except that the Investment Manager and the Managed Funds may, on substantially the same terms as those prevailing for comparable persons unaffiliated with the Regulated Entity:
- Establish and maintain deposit accounts with the Regulated Entity that is a depository institution, provided that the aggregate balance in all deposit accounts does not exceed [a specified percentage of the assets] of such Regulated Entity; or
- Borrow from such Regulated Entity provided that the aggregate amounts so borrowed not exceed [a specified percentage of the assets] of such Regulated Entity.
With the exception of a New York-licensed transmitter of money, neither the Investment Manager nor any single of its Managed Funds will individually own, control, or hold with the power to vote more than [y] percent of the voting stock of a Regulated Entity, and in the case of a licensed money transmitter, no more than twenty-five percent of the voting stock of such money transmitter.
(C) Request for Comments:
The Department is seeking comments with respect to the questions noted below. All comments should be submitted no later than March 3, 2023, to [email protected].
Q1. What is the maximum percentage of voting stock of a Regulated Entity with respect to which an Investment Manager and its Managed Funds, subject to the appropriate commitments, should have the right to vote, whether directly or indirectly, or whether individually or in aggregate, as referenced under Passivity Commitment 1?
Q2. What is the maximum percentage of voting stock of a Regulated Entity with respect to which an individual Investment Manager or any of its Managed Funds, subject to the appropriate commitments, should have the right to vote, as described above in Passivity Commitment 5?
Q3. What is the maximum percentage of a Regulated Entity’s securities, including all voting and non-voting securities, that an Investment Manager and its Managed Funds should, subject to the appropriate commitments, be permitted to hold and remain eligible for a determination of non-control? Is there a percentage ownership level above which a determination of non-control would be inappropriate?
Q4. Should the percentage of voting stock an Investment Manager and its Managed Funds, be permitted to hold while remaining eligible for a non-control determination differ if the Investment Manager has investment discretion over a substantial amount of non-voting equity or debt securities issued by the Regulated Entity? If yes, please provide an assessment of what a level of holdings would constitute a “substantial amount” for these purposes.
Q5. In considering a potential non-control determination, how should the Department assess Investment Managers’ holdings of the voting stock of a Regulated Entity through, or for the benefit of, one or more Index Funds? In other words, should there be a presumption of passivity if voting stocks are held through, or for the benefit of, one or more Index Funds?
Q6. Should, and under what circumstances, the voting stock of a Regulated Entity held by funds that are sponsored by the Investment Manager but held in an Externally Managed Fund be excluded when calculating the percentage of voting stock controlled by the Investment Manager and its Managed Funds?
Q7. What criteria should be used for determining the independence of an External Manager? For example, would it be sufficient for the Investment Manager to represent and commit as follows:
- Each Externally Managed Fund shall be managed and controlled by an independent and unaffiliated third-party manager who shall have been appointed by an independent governing board of such Externally Managed Fund;
- The Investment Manager shall exercise no control over the investment or proxy voting decisions made by the external manager with respect to the Externally Managed Fund;
- The governing board of the Externally Managed Fund shall delegate authority to the external manager to vote proxies for the voting stock held in the portfolios of the Externally Managed Fund by such external manager;
- There shall be no coordination over the voting of the voting stock of a Regulated Entity either among the Investment Manager and its Managed Funds on one hand, and the external manger and Externally Managed Funds on the other, or among various external managers, over how to vote such stock;
- Neither the Investment Manager nor its Managed Funds shall provide to the external manager or the Externally Managed Funds any information not publicly available about (i) the holding of the voting stock of a Regulated Entity by either the Investment Manager or its Managed Funds or (ii) the manner in which the Investment Manager intends to vote such stock; nor shall any external manager or Externally-Managed Fund provide to the Investment Manager or the Managed Funds any information not publicly available about (x) the holding of voting stock of a Regulated Entity by the external manager or the Externally Managed Fund; or (y) the manner in which the external manager intends to vote such stock.
Q8. What types of restrictions should be imposed on the contractual arrangements and banking relationships between a Regulated Entity, the Investment Manager and its Managed Funds to mitigate the risk of undue influence or control over the management or operations of a Regulated Entity and otherwise to avoid conflicts of interest?
Q9. What risks are entailed in the acquisition of a meaningful percentage of the voting securities of a Regulated Entity, particularly a Banking Organization (i.e., in excess of the relevant Presumption of Control threshold), by multiple Investment Managers and their Managed Funds? How might a high level of ownership by the investment management industry affect the direction, policies, and strategies of a Regulated Entity?
Q10. What risks are entailed in an abrupt disposition of the stock of a Regulated Entity? How might an abrupt disposition of stock of a Regulated Entity affect such entity?
Q11. Are there alternative structures available that would allow Investment Managers to meet their investment mandates without acquiring the amount of voting stock which would trigger the Presumption of Control for a Regulated Entity? For example, could certain types of derivatives effectively substitute for the acquisition of voting stock of a Regulated Entity? What would be the cost of using derivatives or other alternatives to capture the performance of the voting stock of a Regulated Entity? Would these alternatives otherwise avoid the concerns that accompany control of a Regulated Entity by an Investment Manager and its Managed Funds?
Q12. To the extent not already covered, do the passivity commitments listed in section B above provide sufficient safeguards to assure that neither an Investment Manager nor its Managed Funds would exercise control over a Regulated Entity, assuming they made such passivity commitments prior to acquiring some amount of voting stock in excess of the relevant Presumption of Control for such a Regulated Entity? Should there be any modifications of those listed in Section B and not already discussed?
Q13. In its 2003 order promulgating the rule covering proxy voting by registered investment advisers, the SEC stated:
“Investment advisers registered with [the SEC] have discretionary authority to manage $19 trillion of assets on behalf of their clients, including large holdings in equity securities. In most cases, clients give these advisers authority to vote proxies relating to equity securities. This enormous voting power gives advisers significant ability collectively, and in many cases individually, to affect the outcome of shareholder votes and influence the governance of corporations. Advisers are thus in a position to significantly affect the future of corporations and, as a result, the future value of corporate securities held by their clients.”
In light of this “enormous voting power,” are there additional conditions or safeguards that the Superintendent should impose before issuing a determination of non-control when an Investment Manager or its Managed Funds own, control or hold with the power to vote ten percent or more of the voting stock of a Regulated Entity?
All comments should be submitted no later than March 31, 2023, to [email protected].
 68 Fed. Reg. 6585, 6586 (February 7, 2003), which promulgated Investment Advisers Act Rule 206(4)-6 concerning Proxy Voting.
 Percentage to be determined after the Department receives and reviews responses to this Request for Public Comments,
 Percentage to be determined after the Department receives and reviews responses to this Request for Public Comments.
 68 Fed. Reg. 6585 at 6586.