The Federal Reserve Posts "Capital Welcome!" Sign and Opens the Gate a Little Wider for Noncontrolling Investments in Banks by Private Equity Firms and Others


Among the flurry of proposals and pronouncements by the banking and securities regulators intended to calm the troubled financial market waters and restore credibility and liquidity was the long-rumored, but modest relaxation by the Federal Reserve of its policy on equity and non-equity investments in banks that will not subject the investor to supervision, regulation and examination as a bank holding company. Whether and when the new Federal Reserve policy, which is likely to be followed by the other regulatory agencies, may result in significant new private equity investment in bank capital remains to be seen.

Since the 1980s the Federal Reserve has allowed combinations of voting equity and total capital investments between 10% and 15% and up to 24.9%[1], subject to restrictions on having a director on the board and otherwise avoiding several identified indices of control that may allow the investor to otherwise exercise a controlling influence over the management or policies of a banking organization (e.g. having executive management positions; seeking to influence lending practices, growth decisions or dividends; and opposing management?s director nominee slate). Private equity investors who take more than 9.9% voting interest will generally need to receive nonobjections from the applicable bank regulatory agency by providing so-called ?passivity commitments? or entering into a Rebuttal of Control Agreement.

This BankingLaw@manatt newsletter summarizes the basic issues and rules, identifies what has changed and what has not changed; and then offers some background history and perspective and comments on the potential impact of the new Federal Reserve policy statement.

See full newsletter for more.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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