The Federal Reserve Board ("FRB"), the FDIC and the OCC provided no-action relief to asset managers and other institutions from Regulation O ("Loans to Executive Officers, Directors and Principal Shareholders of Member Banks") until January 1, 2021. Regulation O establishes quantitative limits and qualitative restrictions on extensions of credit by depository institutions to "insiders" (i.e., executive officers, directors, and principal shareholders and affiliates).

In their "Statement Regarding Status of Certain Investment Funds and Their Portfolio Investments for Purposes of Regulation O and Reporting Requirements under Part 363 of FDIC Regulations," the banking agencies announced that they would not take enforcement action against banks in connection with certain loans where the fund complex:

  • has less than 15 percent interest in the bank;
  • does not try to have a representative serve as an officer, agent or employee of the bank;
  • does not seek to exercise controlling influence over the bank's management or to control the bank's lending policies; and
  • can demonstrate that the loan was made on the same terms as a loan made to an unrelated party.

In the interim, the FRB, FDIC and OCC stated that they will assess whether they should amend the treatment of extensions of credit by banks to portfolio companies that are part of a fund complex that owns more than 10 percent of the bank. The agencies expressed concern that, as fund complexes become owners of 10 percent or more of the voting securities of banks, the effect of Regulation O will be to prohibit loans by the 10 percent-owned bank to a large number of other entities in which the fund complex has a 10 percent ownership interest. As a result, the agencies are concerned that Regulation O might financially impact the bank by forcing it to discontinue a large number of preexisting lending relationships and reduce credit availability to a significant swath of financial and nonfinancial companies.


Scott Cammarn

The banking agencies took this somewhat unusual step of issuing the Statement following concerns having been raised by several banking organizations. Since 2013, the Federal Reserve has issued a series of exemption letters to various fund families, including the Vanguard Group, Wellington Asset Management, and the T. Rowe Price Group, permitting these fund families through their commonly advised funds to collectively hold 10% or more in any one bank or bank holding company without filing for prior approval under the Change in Bank Control Act. However, the initial approval letters did not address the other regulatory implications that would arise if the fund families crossed the 10% threshold - in particular, certain lending limits under Section 22(h) of the Federal Reserve Act (12 USC 375b) and Regulation O (12 CFR Part 215). Under those provisions, a fund family that exceeds 10% in any bank or bank holding company would be deemed a "principal shareholder" of the bank or bank holding company, and any portfolio company in which the fund family owns 10% or more would become a "related interest" of that "principal shareholder." As a result, in order to comply with these provisions, the bank would have to determine the identity of all of the fund family's 10% portfolio companies and then restrict its lending to those portfolio companies in order to comply with certain individual and aggregate limits and prior approval requirements under the Federal Reserve Act and Regulation O (12 CFR Part 215). This Statement is intended to prevent banks from having to gather such information and then curtail lending to portfolio companies merely because the fund family owning the portfolio company had crossed the 10% threshold.

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