A “no action” position regarding application of Regulation O was extended for at least another year by the federal banking agencies Thursday, the agencies said in a joint statement.
According to the Federal Reserve, Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC), their interagency statement extends the expiration of the no-action position previously provided about a year ago (Dec. 17). That statement followed others that started in 2019 and revised in 2020.
Regulation O prohibits a bank from extending credit to an insider that is not made on substantially the same terms as, or is made without following credit underwriting procedures that are at least as stringent as, comparable transactions with persons that are non-insiders and not employees of the bank.
In 2019, the agencies issued the no-action position to provide time for the Fed, consulting with the FDIC and OCC, to consider whether to amend Regulation O to address concerns about unintended consequences of the application of the rule to companies that sponsor, manage, or advise investment funds and institutional accounts that invest in voting securities of banking organizations, they said in their Thursday statement.
The following year, the agencies revised that statement to extend the expiration of the no-action position and clarified the eligibility criteria for such relief. The revised statement was also extended on Dec. 1, 2021, until Jan. 1, 2023.
“This Statement extends the expiration of the no-action position previously provided until the sooner of Jan. 1, 2024, or the effective date of a final FRB rule having a revision to Regulation O that addresses the treatment of extensions of credit by a bank to fund complex-controlled portfolio companies that are insiders of the bank,” the agencies wrote in their joint statement Thursday.
“Certain banking firms have raised concerns about the application of Regulation O to companies that sponsor, manage, or advise investment funds and institutional accounts that invest in voting securities of banking firms (such investment vehicles, collectively ‘funds,’ and, together with the company that sponsors, manages, or advises them, ‘fund complexes’),” the agencies said in their statement.
The agencies added that 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.”
As a result, the agencies indicated, continue to actively consider whether to amend Regulation O to address the treatment of extensions of credit to fund complex- controlled portfolio companies under Regulation O. “In the interim, the federal banking agencies believe it is appropriate to articulate supervisory expectations with respect to the application of Regulation O in this specific context in order to provide banks flexibility to lend to certain fund complex-controlled portfolio companies,” the agencies wrote.