Agencies Provide Reg O Relief for Certain Fund-Controlled Companies

Noting the growing risk of “sudden and disruptive unwinding” of lending relationships, the federal banking agencies today issued no-action relief under Regulation O for banks lending to investment fund-controlled companies under specific conditions. Meanwhile, the agencies said they are “actively considering” amendments to Reg O—which sets limits on the credit that can be granted to bank insiders—to resolve problems addressed by the temporary relief.

Specifically, the relief is being provided for “fund complex-controlled portfolio companies”—that is, companies whose voting shares are at least 10% owned by an investment fund and its sponsor—whose fund complex acquires enough shares in a bank to be considered an insider under Reg O. “Banks have indicated that the treatment of fund complex-controlled portfolio companies as ‘related interests’ under Regulation O could require the sudden and disruptive unwinding of substantial preexisting lending relationships and reduce credit availability to a wide swath of financial and non-financial companies,” the agencies said.

Under the relief—which is set to expire Jan. 1, 2021, unless amended or extended—the agencies will not take action against banks extending credit to fund complex-controlled portfolio companies that would otherwise violate Reg O, provided that the fund complex controls less than 15% of the bank’s shares and that it does not have or seek to place representatives in the bank or to exercise influence over the bank. Extensions of credit to these companies must be on “substantially the same terms” as those for comparable unaffiliated parties. The relief applies only to portfolio companies, not the fund complexes.investor