December 23, 2020

Federal Banking Agencies Extend No-Action Relief on Loans to Insiders

The Federal Reserve Board ("FRB"), the FDIC and the OCC (collectively, the "agencies") extended no-action relief to asset managers and other institutions from Regulation O ("Loans to Executive Officers, Directors and Principal Shareholders of Member Banks"). Additionally, the agencies provided clarification regarding the eligibility criteria for the no-action relief.

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 "Revised 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 agencies clarified that they would not take enforcement action against banks in connection with certain loans if the following conditions are met with respect to the fund complex.

  1. The fund complex has:
    • less than 15 percent interest in the bank, or
    • less than 20 percent interest in the bank and has received from the agencies "applicable agency correspondence" that references such a percentage, if (i) there is no individual fund in the fund complex that has more than 10 percent interest in the bank (for the purpose of this condition, two or more funds sharing the same, or substantially the same, investment objective and asset composition will be considered a single fund) or (ii) non-index funds collectively have not more than 10 percent interest in the bank.
  2. The fund complex does not have or seek to have a representative serve as an officer, agent or employee of the bank.
  3. The fund complex does not exercise or seek to exercise controlling influence over the bank's management or policies.

The relief is also conditional upon the bank demonstrating that an extension of credit was not knowingly made to a fund complex-controlled portfolio company unless it was made on the same terms as "those prevailing for comparable transactions with unaffiliated third parties and do not involve more than normal risk of repayment or present other unfavorable features."

The agencies made clear that the relief does not cover fund complex-controlled portfolio companies that may be insiders of a bank for reasons other than their status as a "related interest" of a principal shareholder fund complex (e.g., where the portfolio company is a principal shareholder of the bank). Additionally, the relief covers extensions of credit only to fund complex-controlled portfolio companies, not to principal shareholder fund complexes.

The new relief rescinds and supersedes the previously issued relief (see previous coverage). The relief, previously set to expire on January 1, 2021, will now expire on January 1, 2022.