The banking agencies have revised their interagency statement regarding enforcement actions for Reg. O violations.
The Office of the Comptroller of the Currency, Federal Reserve Board, and Federal Deposit Insurance Corporation have issued a revised statement to supersede the "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," which was issued on Dec. 27, 2019, and was set to expire on Jan. 1, 2021.
Regulation 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 agencies noted that 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 issued the original statement at the end of 2019 after certain banking firms raised concerns about the application of Reg. O to "fund complexes"—companies that sponsor, manage, or advise investment funds and institutional accounts that invest in voting securities of banking organizations, as well as the company that sponsors, manages, or advises them.
The revised interagency statement explains that the agencies will continue to exercise discretion not to take action against banks, or against certain asset managers that become principal shareholders of banks—principal shareholder fund complexes—with respect to certain extensions of credit by banks to portfolio companies of the principal shareholder fund complex, known as fund complex-controlled portfolio companies, that otherwise would violate Regulation O, 12 CFR 215, provided certain eligibility criteria are satisfied.
The agencies’ no-action relief will apply until Jan. 1, 2022, unless amended, extended, or superseded in writing prior to that time. However, the agencies cautioned that their no-action relief does not cover a fund complex-controlled portfolio company that may be an insider of a bank for a reason other than its status as a related interest of a principal shareholder fund complex, such as by virtue of the portfolio company’s status as a principal shareholder of the bank. In addition, this relief does not preclude a person from seeking rebuttal of the presumption of control pursuant to 12 CFR 215.2(c)(4).
Finally, the agencies added that they will not take action against an insured depository institution for failure to report, for purposes of section 363.2 of the FDIC’s Regulations (12 CFR 363.2), extensions of credit by insured depository institutions to fund complex-controlled portfolio companies that otherwise would violate Regulation O but are covered by this Regulation O no-action position.
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