State Street and Brown Brothers Harriman agreed Wednesday to terminate the $3.5 billion proposed acquisition that would have folded the private bank’s investor services unit into the Boston-based custody bank.

“The regulatory path forward would involve further delays, and all necessary approvals have not been resolved,” State Street wrote in a release Wednesday. 

State Street did not detail Wednesday which regulator(s) refused to sign off on the deal or why, but Brown Brothers noted the remaining hurdle in its own statement.

“It is disappointing that State Street’s inability to secure regulatory approval precluded the compelling vision that they brought to us,” Bill Tyree, managing partner at Brown Brothers, said Wednesday, adding that the private bank has “no other plan” to sell its investor services business or pursue another transaction.

Doubt plagued the tie-up’s fate for several months but appeared to ramp up by October. State Street CEO Ron O’Hanley, on a third-quarter earnings call that month, characterized the acquisition as “increasingly uncertain.”

"We believe there's still the possibility that we can structure the transaction in a way that will work for both shareholders and to achieve strategic objectives, but … the likelihood of that happening is going down," O'Hanley said.

State Street in July said it was looking to amend the transaction’s terms — including the purchase price or the combined entity’s structure or operating model.

"The price was expensive then and likely became more expensive in a tightening economy," Thomas Hayes, managing member at equity manager Great Hill Capital, told Reuters on Wednesday. "Shareholders are relieved they don't have to pay peak prices for an asset that will take a long time to be accretive.”

Proposed modifications made the deal “increasingly complex” and added risk that would limit the tie-up’s anticipated benefits, State Street said Wednesday.

“The decision not to proceed with this transaction was not taken lightly and is in no way a reflection of the quality of the BBH franchise,” O’Hanley said Wednesday. “We remain confident in the organic growth trajectory of our business.”

State Street and Brown Brothers initially set an aggressive timeline for the deal, which they first expected to close by the end of 2021 — just three months after it was proposed. 

Timing was not on their side, though. President Joe Biden issued an executive order demanding “more robust scrutiny” of bank mergers in July 2021, two months before State Street and Brown Brothers proposed their deal.

Since then, regulators have generally taken more time to review mergers and acquisitions. 

The Federal Reserve last month signed off on a $2.6 billion merger between New York Community Bank and Flagstar — 19 months after it was proposed. The banks extended the merger’s timeline twice and shifted the surviving entity to a national bank charter from a state one to get approval.

Not every combination has fared so well. New Jersey-based OceanFirst Financial and Maryland-based Partners Bancorp agreed to terminate their planned $186 million merger last month — once the timeline stretched past a year — citing regulatory delays.

“Everything has just dramatically slowed down,” Patrick Barrett, OceanFirst’s CFO, told American Banker. “The environment for M&A is just more challenging.”

Neither State Street nor Brown Brothers will incur a penalty over the deal’s termination.

Brown Brothers’ $5.4 trillion in assets under custody would have brought State Street — with $35.7 trillion in assets under custody — within striking distance of market leader BNY Mellon, which counted $42 trillion as of September, according to the Boston Globe.

The tie-up also would have broadened State Street’s reach in some international markets — Japan, particularly — and given the bank access to Brown Brothers’ data-integration software, for which State Street was developing a competing model when the deal was struck, American Banker reported.

“We validated over the past year that there is a unique place for BBH in the asset servicing industry,” Seán Páircéir, Brown Brothers’ partner responsible for investor services, said Wednesday in the bank’s statement. “Our position as a specialized player and premium service provider remains a valued, differentiated choice among the world’s most sophisticated and discerning institutional investors.”