On December 27, 2019, the Federal Reserve, Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation published a statement clarifying the application of Regulation O to certain investment funds. Regulation O (12 CFR 215) imposes restrictions on extensions of credit by banks and savings associations to executive officers, directors, and principal shareholders (and related interests of such persons) (“insiders”), including placing individual and aggregate lending limits, and requiring prior board approval (by a majority of disinterested directors) for large extensions of credits to insiders.

In the statement, the agencies noted that 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 organizations. Such fund complexes are not, and are not affiliated with, a bank holding company or savings and loan holding company. Over the past few years, fund complexes have acquired or have approached acquiring more than 10 percent of a class of voting securities of a wide range of public companies, including banks and non-bank companies. Upon acquiring more than 10 percent of a class of voting securities of a banking organization, a fund complex would be a “principal shareholder” of the bank for purposes of Regulation O (a “principal shareholder fund complex”). Likewise, under Regulation O, any company in which a principal shareholder fund complex owns 10 percent or more of a class of voting securities could in some instances be presumed to be a “related interest” of the fund complex (“fund complex-controlled portfolio company”). In that event, the principal shareholder fund complex and its controlled portfolio companies would be considered insiders of the bank under Regulation O. Accordingly, the bank’s lending to the principal shareholder fund complex and its fund-complex controlled portfolio companies would be subject to the strict lending limits and other restrictions and standards of Regulation O.

Banks have indicated 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 Federal Reserve, in consultation with the OCC and the FDIC, is actively considering 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 provided 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, subject to eligibility criteria. Therefore, while the Federal banking agencies consider whether to amend Regulation O to address these issues, the federal banking agencies would not take action against banks or principal shareholder fund complexes with respect to extensions of credit by the banks to fund complex-controlled portfolio companies that otherwise would violate Regulation O, provided the fund complexes and banks satisfy the criteria mentioned in the statement.