June 26, 2017

Top State Regulator Issues Reminder to Obtain Prior Approval of Acquisitions or Changes in Control

4 min

Anytime there's a potential transaction involving a consumer financial services company, it's a good idea to perform regulatory due diligence and to evaluate potentially relevant state regulatory licenses, including those covering banking, money transmission, mortgage brokering, lending, insurance, and other regulated activities. What licenses and registrations does the institution have (and need)? What licenses and registrations does the organization not have? What are the obligations that come with being licensed? Does the purchasing party or investor need to be disclosed to the regulator in advance? Does the regulator have to approve the acquisition or change in control? It tends to be easy enough to confirm these kinds of things, even while diligence is still ongoing. So what to make of it, then, when a top state regulator issues a press release and guidance on obtaining prior regulatory review and approval that could have easily been understood by licensees and potential buyers as an obligation?

That was the case when the New York State Financial Services Superintendent Maria T. Vullo announced that the New York State Department of Financial Services (DFS) has issued interpretative guidance in response to a request by the New York Bankers Association regarding the New York Banking Law requirement of the Superintendent's prior approval for an acquisition or change of control of a banking institution. The guidance was issued on May 22, 2017.

According to a DFS press release, the interpretative guidance has been issued because of a concern that some investors have been developing nontransparent methods of acquiring and controlling banking institutions without obtaining prior regulatory review and approval by DFS. "DFS is reminding state-chartered banks that all proposed changes of control in any banking institution must be submitted to the Department for prior approval under our mandate to safeguard the institutions we supervise and regulate, and to protect the public they serve," said Financial Services Superintendent Maria T. Vullo.

As described in the DFS guidance, "control" is achieved through having the power, whether directly or indirectly, to direct or cause the direction of the management and policies of a banking institution through the ownership of voting stocks or otherwise. Control is presumed to exist if an entity or individual or any combination thereof, directly or indirectly, owns, controls, or holds the power to vote 10% or more of voting stocks. Control is also achieved when individuals and/or entities work together or act in concert, whether expressly or otherwise, to acquire control of a banking institution, but with each individual and/or entity staying below the threshold required for seeking the prior review and approval of the DFS.

The upshot is that Superintendent Vullo's statement and the interpretative guidance of the DFS are intended to ensure that the DFS has an opportunity to fully review any change of control before it occurs, irrespective of the methods or techniques used for the acquisition of control, and that the Superintendent's prior approval is required before any change of control may occur. This guidance specifically relates to Sections 143-b and 141(2) of the New York Banking Law. The guidance doesn't directly address nonbank changes of control in other markets regulated by the DFS. But the focus on change of control notice, advance approval, and transparency suggests that it's a priority for the DFS. On top of that, many state lender, mortgage, money transmission, insurance, debt adjusting, and debt collection laws have similar change in control provisions, thought the specifics vary state-by state.

A copy of the interpretative guidance can be found here.

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Jonathan L. Pompan, Partner and co-chair of the Consumer Financial Services Group, advises on consumer financial services matters and represents clients in investigations and enforcement actions brought by the CFPB, FTC, state attorneys general, and regulatory agencies. He is a frequent author and speaker on state law licensing and compliance topics, and recently spoke at the 2017 Annual Meeting and Regulators Training Symposium of the National Association of Consumer Credit Administrators (NACCA).