Agencies outline ‘no action’ against lending to Reg O insiders under certain conditions

Federal banking agencies will exercise discretion to not take enforcement action against banks or asset managers lending to investment fund-controlled companies under certain conditions, the federal banking agencies said Friday.

In issuing its “no action” statement, the Federal Deposit Insurance Corp. (FDIC), Federal Reserve and Office of the Comptroller of the Currency (OCC) said the statement applies to “fund complex-controlled portfolio companies” – those whose voting shares equal at least 10% owned by an investment fund and its sponsor – whose fund complex acquires enough shares in a bank to be considered an insider under Regulation O.

The agencies also indicated that amendments to Reg O are being considered by the Fed to address the issue of “control” by institutions.

“Banks have indicated that the treatment of fund complex-controlled portfolio companies as ‘related interests’ under Regulation O could require the sudden and disruptive unwinding of substantial pre-existing lending relationships and reduce credit availability to a wide swath of financial and non-financial companies,” the agencies said in the statement.

The statement notes that the agencies will exercise discretion in not bringing enforcement actions against asset managers and institutions for extensions of credit that would otherwise violate Reg O, provided the asset managers and institutions satisfy certain conditions designed to ensure that there is a lack of control by the asset manager over the institution. In addition, the agencies said they would not take action against institutions for failure to report extensions of credit that would otherwise violate Regulation O but are covered by the no-action position.

According to the agencies’ statement, Reg O places quantitative limits and qualitative restrictions on extensions of credit by depository institutions to executive officers, directors, principal shareholders, and “related interests of such persons.” “The popularity of mutual funds, exchange-traded funds, and similar index-based investment products has resulted in several large asset management companies becoming principal shareholders of a number of institutions, and has triggered the Regulation O presumption of control of a related interest over an increasing number of companies in the asset managers’ portfolios,” the agencies said.

Status of Certain Investment Funds and Their Portfolio Investments for Purposes of Regulation O and Reporting Requirements under Part 363 of FDIC Regulations