Banking Agencies Extend No-Action Treatment on Credit to Certain Investment Funds

The OCC, FRB and FDIC extended temporary no-action positions concerning the application of Regulation O ("Loans to Executive Officers, Directors and Principal Shareholders of Member Banks") on loans to insiders of certain investment funds and FDIC Part 363 ("Annual Independent Audits and Reporting Requirements") on extensions of credit by banks to investment funds and their portfolio companies. 

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). As previously covered, the agencies provided no-action relief from Regulation O. Since then, the position had been extended multiple times, most recently in December 2023.

The Interagency Statement responds to concerns that over the past few years, "companies that sponsor, manage, or advise investment funds and institutional accounts that invest in voting securities of banking firms [including certain funds or 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." This threshold triggers the "insider" and "related interest" provisions of Regulation O which "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 banking agencies said they "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 following: 

As to the fund complex,

• it does not directly or indirectly control 15 percent interest in the bank (although under some conditions, up to 20 percent is acceptable);

• it does not try to have a representative serve as an officer, agent or employee of the bank;

• it does not seek to exercise controlling influence over the bank's management or to control the bank's lending policies; and

• it can demonstrate that the loan was made on the same terms as a loan made to an unrelated party.

As to the bank,

• if it "does not knowingly make an extension of credit to a fund complex-controlled portfolio company, unless the terms of such extension of credit are on substantially 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 stated that this communication "extends the expiration of the no-action position previously provided" until "the sooner of January 1, 2026, 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."