State Street-BBH Investor Services: What Explains the Regulatory Approval Delay?
In September 2021 State Street Corporation announced that it had reached an agreement to acquire the Investor Services business of Brown Brothers Harriman. The parties stated that they were targeting year-end 2021 as the closing date for the $3.5 billion transaction.
This target date quickly came and went without the transaction closing, but this was not all that surprising and did not generate much comment. After all, less than three months from signing to closing was on the optimistic side for this sort of transaction, even before taking into account the fact that the U.S. federal banking regulators were, to varying degrees, beginning to take a more skeptical view of bank mergers.
The more significant development came in April 2022, when alongside its Q1 earnings announcement State Street disclosed that the parties had encountered difficulty securing unspecified U.S. federal bank regulatory approvals and so were attempting to restructure the transaction.
Yesterday, alongside its Q2 earnings announcement, State Street provided an update on where the restructuring stands:1
We've been engaged in discussions with US banking regulators and have developed with BBH proposed modifications to our proposed acquisition of the BBH Investor Services business, including changes to the operating model and legal entity structure and changes to regulatory approvals required to consummate the transaction, intended to facilitate resolution of the regulatory review process and a path to consummating the transaction.
State Street is seeking amendments to the transaction terms, including the purchase price, as part of such a modified transaction, which such amendments will be subject to review and approval by both BBH and our Board of Directors.
There can be no assurance that a mutually acceptable modified transaction will be entered into or as to the timing or outcome of any regulatory approvals and other closing conditions for that modified transaction.
Absent further agreement of the parties, after September 6, 2022 either party can terminate the transaction without penalty.
Unlike most large U.S. bank M&A transactions, because of the nature of the transaction and the fact that BBH is not a public company, there is not a merger proxy filed with the SEC. As a result, we know comparatively less about the specific regulatory approvals the parties were required to obtain to consummate this deal.
Notwithstanding that, there are enough scraps of public information that have been released by the U.S. banking regulators that it is possible to make an educated guess as to what has been happening behind the scenes. And as with many notable U.S. bank regulatory developments this year, the FDIC appears to be at the center of the action.
Timeline of Events
September 7, 2021: State Street and BBH announce that they have reached an agreement for State Street to purchase BBH’s Investor Services business. The parties state that they are “targeting year-end 2021” as the closing date for the transaction.
September 27, 2021: State Street Bank and Trust Company (SSBT), State Street’s Massachusetts state member bank subsidiary, files a merger application with the FDIC.2 The information made available publicly by the FDIC does not specify why this filing was made, but a public report of applications received around this time by the Massachusetts Division of Banks supplies the explanation. The report states that SSBT applied with the Division of Banks to “assume certain deposit liabilities from, and acquire certain related assets of” BBH. Such an assumption of deposit liabilities means that, in addition to whatever is required by state law, prior federal bank regulatory approval is required under the federal Bank Merger Act. And because BBH is an uninsured institution, the federal regulator responsible for reviewing the application is the FDIC, even though the Federal Reserve Board, not the FDIC, is SSBT’s primary federal regulator.3
October 2021: SSBT files an application with the Federal Reserve Board to “open a branch office located at 185 Hudson Street, Suite 1150, Jersey City, New Jersey.”4 The Federal Reserve Board publication in which this filing was reported does not say that this filing was related to the acquisition, but the address above corresponds to BBH’s Jersey City office location.
November 24, 2021: The Federal Reserve Board approves5 a prior notice by SSBT and State Street International Holdings (SSIH) to make an investment under Regulation K, the Board’s regulation governing certain overseas investments.6 The Board’s publication noting the approval of this application does not identify the nature of the investment.
December 1, 2021: State Street Bank and Trust Company National Association (SSBTCNA) files an application with the OCC seeking approval to merge with Brown Brothers Harriman Institutional Trust Company of New York, LLC.
December 22, 2021: The Federal Reserve Board approves another prior notice by SSBT and SSIH to make an investment under Regulation K. As with the prior notice approved in November, the Board’s publication does not identify the nature of the investment.
January 28, 2022: The Federal Reserve Board approves SSBT’s application to establish a branch in Jersey City. On the same day, the OCC approves SSBTCNA’s application under the Bank Merger Act.
February 1, 2022: SSBT withdraws its merger application with the FDIC.7
April 14, 2022: State Street reports Q1 2022 earnings. In prepared remarks on the earnings call, State Street management discloses that “the regulatory review process for the proposed acquisition of the BBH Investor Services business has progressed more slowly than we anticipated. While many required approvals have been obtained, some required regulatory approvals, most notably approval to the relevant federal banking agencies, remain outstanding. We are evaluating potential modifications of the transaction that are intended to facilitate resolution of the bank regulatory review. We are working towards concluding regulatory reviews during the third quarter.”
April 27, 2022: State Street files its Q1 2022 10-Q. The 10-Q includes a substantially similar description of the regulatory approval process to that offered a few weeks earlier on the Q1 earnings call, again attributing the reason for the delay to difficulty obtaining unspecified federal bank regulatory approvals.
July 15, 2022: State Street reports Q2 2022 earnings and provides the disclosure in the block quote in the introduction this post. State Street says that the parties now “are aiming to close the transaction at the end of the fourth quarter of 2022.” It also cautions, however, that “there exists significant timing uncertainty and risk that closing will extend beyond that timeline.” In the Q&A portion of the earnings call, State Street reiterates that it remains committed to the combination on a strategic basis, and notes that discussions with BBH remain amicable, with both sides “committed to making this happen.” Management generally declines to get into the weeds on the details of the revised transaction structure, noting that the parties remain in discussions.
The FDIC Again at the Center of Things
Based on the public record as set out above, the OCC and Federal Reserve Board approved each filing made with them by State Street in relation to the transaction as it was originally structured. In contrast, the only application filed by State Street with the FDIC in relation to the transaction as originally structured was withdrawn in early February. No further applications from State Street have been publicly recorded by any federal banking regulator since the FDIC application was withdrawn in February.
These facts, combined with State Street’s public statements in April that federal bank regulatory approval remained outstanding and that a restructuring of the transaction was in progress, appear consistent with the FDIC having taken issue with something having to do with State Street’s application.
If the above is correct, presumably the parties’ proposed restructuring is intended either to satisfy some objection from the FDIC or to eliminate the need for FDIC approval altogether.8 If so, I believe this would be at least the second time this year that the FDIC’s unwillingness to approve a merger application has caused a large bank to withdraw its application and attempt to restructure a transaction.9
Caveats
I believe the explanation laid out above is the most reasonable hypothesis about what is going on behind the scenes, but this is a pretty unusual situation in that there are more federal and state banking regulators required here than is typical.10 So there are at least three caveats that must be acknowledged.
Massachusetts. The Massachusetts Division of Banks releases a monthly report of its decisions on applications along with a list of applications that remain pending. As of June 2022, the latest report which is available, SSBT’s application was still listed as pending. It is possible, then, that Massachusetts also has objections to some aspect of the transaction. On the other hand, State Street’s April statements and SEC filings specifically identified the federal bank regulatory application process as the reason for the delay, so it is unlikely that Massachusetts on its own is standing in the way of the transaction.
Non-Public Applications. As noted above, the public record indicates that the OCC and Federal Reserve Board approved all of the respective applications they have received to date in relation to the transaction. But it is not necessarily the case that every application or notice required by U.S. banking law would be publicly recorded by the federal banking agencies. As a result, an objection to the original deal structure from the OCC or, much more relevant here, the Federal Reserve Board cannot be ruled out, particularly if there were supervisory issues with either State Street or the BBH entities originally within the scope of the transaction. An objection to the original structure on these grounds would be surprising, however, given what we know about what the Board was willing to approve in relation to the transaction as originally structured.11
Board or OCC Objection to Revised Deal. Even if the original objection came from the FDIC, and even if the Board and OCC were initially okay with the transaction, things may have changed since earlier this year, especially if the parties’ attempted restructuring will require the Board or OCC to take a novel position on the applicability or inapplicability of certain statutes or regulations within their purview. If this is so, and if the transaction ultimately does fail for regulatory reasons, then the FDIC will not deserve all the blame. Or all the credit, depending on your perspective.
I have broken up a very long bullet point into separate sentences for flow, but otherwise this is verbatim.
I cannot figure out a way to link to it directly, but this information is available by searching for State Street in the FDIC’s application search tool.
See 12 USC 1828(c)(1) (requiring FDIC approval before an insured depository institution may, among other things, assume liability to pay any deposits of any noninsured bank or institution). Federal Reserve Board approval would have been required under the Bank Merger Act if SSBT was merging with, or acquiring assets or liabilities of, another insured depository institution. See 12 USC 1828(c)(2).
This filing was made with the Federal Reserve Board (and, although not noted here, also with Massachusetts) because as noted above SSBT is a state member bank.
Due to the technicalities of Regulation K the Board describes this, both here and in the December action described later in this post, as a non-objection rather than an approval. I refer to it throughout this post as an approval for ease of reference.
As explained at the outset of this post, there has not been a comprehensive public disclosure of either the regulatory approvals originally needed to consummate the transaction or the BBH entities originally in scope for the transaction. A ruling on the transaction from the European Commission’s competition regulator, however, states that State Street would be acquiring “shares in, or assets from, certain of [BBH’s] European and Asian subsidiaries.”
Depending on the State Street entity making the acquisition of these European and Asian subsidiaries, Regulation K may therefore have been implicated, hence my decision to include these approvals on the timeline. See footnote 11 below for further discussion on the extent to which these Regulation K approvals may be relevant to State Street and BBH, even if the approvals were not themselves related to the acquisition.
See footnote 2.
Holding all else equal, one way to eliminate the need for FDIC approval would be to structure the transaction such that SSBT is no longer assuming any deposits of an uninsured institution. Easier said than done, but if this approach is under consideration it could explain (at least in part) why State Street is seeking to re-price the deal.
In April, New York Community Bancorp and Flagstar Bancorp announced that their pending transaction would be restructured such that FDIC approval would no longer be required. The parties did not say explicitly that the FDIC had been unwilling to approve the application and the FDIC for its part declined to comment.
The typical large U.S. bank M&A deal is a whole bank acquisition, which usually involves from a federal perspective (1) a Federal Reserve Board approval of the holding company merger and (2) depending on the charter held by the acquiring subsidiary bank, approvals from that subsidiary bank’s federal regulator - either the Board, the OCC or the FDIC. So typically you at most need to go to only two of the three federal regulators.
Based on the public record, State Street-BBH Investor Services as originally structured was unusual because, among other things, multiple of State Street’s subsidiary banks were involved in the acquisition, meaning that at the federal level approvals of some kind were required from all three federal regulators: the Board, the OCC and the FDIC.
Incidentally, one other example of a pending transaction requiring approval from all three federal banking regulators is U.S. Bancorp-MUFG Union Bank. Based on the description found at that link, the required FDIC approval there is a bit different from what was required in State Street-BBH Investor Services, in that the assumption of liabilities in question will involve an affiliate of the target assuming deposits from the target, rather than the acquirer assuming liabilities from the target, as was the case in State Street’s deal as originally conceived.
At a minimum, the Board approved the branch application. It is not clear whether the Regulation K filings approved by the Board were related to the BBH transaction. I would guess that at least one of them was not, given that in early September 2021, before the BBH transaction was announced, SSBT and SSIH filed an apparently unrelated application “to invest in certain subsidiaries of SSIH in support of their proposal to reposition an existing affiliate entity, State Street Corporate Services Mumbai Private Limited, as a new indirect subsidiary of SSIH to rationalize the provision of shared services within the State Street group.”
But even if each of the November and December approvals was unrelated to the BBH transaction, this does not make them irrelevant to the argument being made here. At the least, the approvals offer evidence that State Street’s supervisory status is not such that the Board is categorically opposed to approving applications from State Street. Of course, the Board is sometimes willing to approve internal reorganizations even if it would be unwilling to approve expansionary activity by the same organization, so without knowing more about the Regulation K investments in question it would be wrong to extrapolate too much from this.