Federal Reserve And Treasury Department Announce Final Rule On Merchant Banking Activities

January 10, 2001

The Board of Governors of the Federal Reserve ystem and the Secretary of the Treasury today approved a joint final rule governing the merchant banking activities of financial holding companies.

The rule, effective February 15, 2001, implements provisions of the Gramm-Leach-Bliley Act. The Board and Secretary believe it permits a "two-way street" between securities firms and banking organizations while, at the same time, giving effect to the statutory limitations and framework adopted by Congress to help maintain the separation of banking and commerce and ensure the safety and soundness of depository institutions.

The final rule incorporates a number of amendments in response to public comments on the interim rule issued March 17, 2000. These changes include:

  • Modifying the provisions defining when a financial holding company routinely manages or operates a portfolio company.
  • Eliminating the dollar-based threshold for the review of a financial holding company's merchant banking activities and adopting a sunset provision for the remaining capital-based investment threshold.
  • Streamlining the rule's reporting and recordkeeping requirements.
  • Broadening the definition of "private equity fund" and clarifying the rule's application to such funds.
  • Modifying when transactions between insured depository institutions and portfolio companies are subject to sections 23A and 23B of the Federal Reserve Act.
  • Revising the restrictions that apply to merchant banking investments held beyond the permissible holding period.
  • Expanding the definition of "securities affiliate" to include a department or division of a bank registered as a municipal securities dealer.

The joint notice is attached (156 KB PDF).

Source: Federal Reserve Board

Contact ALTA at 202-296-3671 or communications@alta.org.

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