outubro 29 2024

Federal Reserve Requires Banking Organizations to Verify and Reconcile Organization Structure Charts

Share

The Board of Governors of the Federal Reserve System (“Federal Reserve”) is implementing new reporting requirements that will affect most bank holding companies and foreign banking organizations (“banking organizations”).

As part of their annual regulatory filing, banking organizations will be required to verify and reconcile the organization structure chart on file with the Federal Reserve against the organization’s actual structure. The verification and reconciliation process will be conducted electronically, even if a banking organization submits its reports in hard copy format.

Banking organizations may need to expend significant effort to review or update historical information for the first reconciliation in early 2025. They will have 120 days at most to complete the process, which may prove difficult for banking organizations with distributed management structures or a significant number of subsidiaries that are not wholly owned.

In this Legal Update, we discuss the new verification and reconciliation requirements and their potential implications for banking organizations.

Background

Top-tier bank holding companies and non-qualifying foreign banking organizations generally must make an annual information filing with the Federal Reserve—the FR Y-6. Qualifying foreign banking organizations make a similar annual filing—the FR Y-7.

The FR Y-6 and Y-7 require banking organizations to include an organization chart that identifies the organization and its interests in defined types of legal entities. Reportable interests include most companies that were reported on the Report of Changes in Organizational Structure (FR Y-10), as well as some non-controlling investments that are in excess of 5% (e.g., investments under an authority other than Section 4(c)(6)).

The organization structure chart may take the form of a diagram or list of entities as long as it includes the relevant biographical and relationship information.

Organization Chart Changes

In 2022, the Federal Reserve proposed revisions to how the organization chart was reported on the FR Y-6 and Y-7. It stated that banking organizations would no longer be required to submit a hard copy of their organization chart. Instead, they would need to use an electronic system to securely access their organization chart and reconcile their structure data. The proposal was finalized later in 2022, with an effective date of December 31, 2024.

In July 2024, the Federal Reserve announced that it would make a new electronic system available to banking organizations to facilitate the verification and reconciliation process. The use of the new system, known as “Structure Central,” is mandatory for all banking organizations, even if they submit a paper filing for other parts of the FR Y-6 or Y-7 filing.

Commenters noted at the time of the proposal that the meaning of the new reconciliation and verification requirements was unclear.1 Without providing much detail, the Federal Reserve stated that the purpose of the new requirement was to confirm the accuracy of the information in its database. Further, if a banking organization identified a discrepancy in the reconciliation process, it would need to update the Federal Reserve’s database.

The new verification and reconciliation process applies to all legal entities reported on an FR Y-6 or Y-7, except for entities or relationships that are excluded from the scope of the FR Y-10 (i.e., non-controlling investments that are in excess of 5%).2 Non-controlling investments that are in excess of 5% will still need to be reported in the annual filing but will not be subject to the electronic verification and reconciliation processes.

For each entity in a banking organization’s structure, the banking organization will need to verify the following items:

  • Full legal name
  • Legal Entity Identifier (if it has one)
  • Physical address
  • Country of incorporation
  • Intercompany ownership and control relationships (including an interest held through more than one direct holder)
  • Percentage and nature of ownership (e.g., limited partner) of voting securities and non-voting equity

If any entity’s information is no longer accurate, the banking organization will need to file an FR Y-10 to update the Federal Reserve’s database.

Takeaways

The Federal Reserve’s database contains information on 61,000 entities that are connected by 279,000 relationships. Banking organizations will have approximately 90 to 120 days at the beginning of 2025 to reconcile their information in the Federal Reserve’s database. This will be a significant undertaking that could result in thousands of updates and corrections through FR Y-10 filings. Additionally, the rigid nature of the reporting fields likely will highlight issues with the legal authority, primary activity, or nature of relationship for various legal entities. Banking organizations should consider involving counsel in the reconciliation process to ensure that these authority and activity issues are promptly and accurately resolved.

Additionally, it is unclear how certain relationships or changes to relationships should be reported. For example, a banking organization’s interest in an entity may fluctuate throughout the year due to share redemptions, compensation grants, or other changes to the equity ownership of the entity. These almost continuous ownership changes might be impractical to address through multiple FR Y-10 filings and, instead, would be picked up on the annual FR Y-6 or Y-7 filing. However, under the new verification requirement, the banking organization may need to file an FR Y-10 for the last fluctuation in ownership percentage during a reporting year or renegotiate its reporting arrangements with staff. These questions will need to be addressed by the Federal Reserve before or during the short reconciliation window in early 2025.

 


(Originally published in International Financial Law Review.) 

1 See Federal Reserve, Supporting Statement for Structure Reporting and Recordkeeping Requirements (Nov. 29, 2022) (pages 9-12 of the file that downloads from https://www.reginfo.gov/public/do/DownloadDocument?objectID=126864401).

2 Some entities or relationships that may be reported on an FR Y-10 are explicitly excluded from the FR Y-6 or Y-7. These can include administered and advised mutual funds, subsidiaries of insurers, certain special purpose vehicles for leasing transactions, and entities held solely pursuant to the debt previously contracted authority.

Stay Up To Date With Our Insights

See how we use a multidisciplinary, integrated approach to meet our clients' needs.
Subscribe