On May 8, 2014, the Board of Governors of the Federal Reserve Board (the “FRB”) issued a notice of proposed rulemaking (the “Proposed Rule”) implementing the financial institutions concentration limit provision in new Section 14 of the Bank Holding Company Act of 1956 (the “BHCA”), which was added to that statute by Section 622 of the Dodd-Frank Act. Section 622 generally prohibits financial companies from consummating business combinations if, after giving effect to the consummation, the total consolidated liabilities of the resulting financial company would exceed 10 percent of the aggregate consolidated liabilities of all financial companies in the United States at the end of the calendar year preceding the transaction. The term “financial company” is defined to include: U.S. insured depository institutions; bank holding companies; savings and loan holding companies; other companies that control insured depository institutions; foreign financial companies that have a U.S. branch or agency or control an insured depository institution in the United States; and non-bank companies designated by the Financial Stability Oversight Council (the “FSOC”) under Section 113 of the Dodd-Frank Act to be regulated by the FRB because of their systemic importance. Of note, this definiton means that most non-depository financial services companies are not included in the the aggregate consolidated liabilities of all financial companies in the United States and that, for example, some insurance companies are defined as financial services companies (and included in the the aggregate consolidated liabilities of all financial companies in the United States), although most are not.

The FRB estimates the aggregate consolidated liabilities of all financial companies in the United States for this purpose – defined in the Proposed Rule as “financial sector liabilities” – to be approximately $18 trillion as of year-end 2013 – with the consequence that total consolidated liabilities of a resulting financial company after consummation of an acquisition covered by the Proposed Rule could not exceed approximately $1.8 trillion. Consolidated liabilities for foreign financial companies are defined as the liabilities of their combined U.S. operations, not of their worldwide operations. Consolidated liabilities of U.S. financial companies are effectively defined as the consolidated liabilities of their worldwide operations.

Section 622’s concentration limit, as it would be implemented by the Proposed Rule, would expand existing limitations on acquisitions by the largest U.S. bank holding companies. Because the consolidated liabilities of foreign financial companies are determined with reference only to the liabilities of their combined U.S. operations, Section 622 and the Proposed Rule are not likely to act as a constraint on their potential acquisitions in the United States, at least in the normal case where the resulting company is a foreign financial company.

Comments on the Proposed Rule must be submitted by July 8, 2014.

The full and original memo was published by Sullivan & Cromwell LLP on May 28, 2014, and is available here.