The Fiduciary Exemption: Holding Shares With Sole Voting Discretion

Under Regulation W’s control analysis, owning shares typically implies the potential for control over the issuing company. But what if a company holds shares in a fiduciary capacity? Can it qualify for the exception from the definition of “control” even if it has sole voting discretion over those shares?

The answer is yes. Unlike the analogous provision in Section 4(f)(2) of the Bank Holding Company Act, which excludes fiduciaries with sole discretionary voting power, Regulation W’s fiduciary exemption does not impose such a limitation. A company may qualify for the fiduciary exception from control even if it exercises sole voting discretion over the shares held in trust.

This is an important distinction for bank trust departments that hold significant blocks of stock in fiduciary accounts. Under the BHC Act, sole voting discretion would negate the fiduciary exception and potentially create a control relationship. Under Regulation W, however, the trust department’s holdings in fiduciary accounts do not create an affiliate relationship solely because the bank has voting discretion.

The rationale reflects the different purposes of the two statutes. The BHC Act’s control provisions focus on preventing unauthorized concentrations of banking power, while Regulation W focuses on protecting banks from affiliate transaction risks. Fiduciary holdings with voting discretion do not create the same risk of self-dealing that Regulation W targets.

DM Tip: If your bank’s trust department holds significant equity positions with sole voting discretion, document that these holdings are in a fiduciary capacity to support the Regulation W control exemption. Be aware that the same analysis may differ under the BHC Act, so consult both frameworks.