SR 21-20:

Status of Certain Investment Funds and their Portfolio Investments for Purposes of Regulation O and Reporting Requirements under Part 363 of FDIC Regulations

BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, D.C. 20551

DIVISION OF
SUPERVISION AND REGULATION

SR 21-20
December 17, 2021

TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE BANK

SUBJECT:

Status of Certain Investment Funds and their Portfolio Investments for Purposes of Regulation O and Reporting Requirements under Part 363 of FDIC Regulations

Applicability:  This guidance applies to banks that are members of the Federal Reserve System and principal shareholders of such banks.

The Federal Reserve Board (Board), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (together, “federal banking agencies”) are issuing the attached interagency statement (Statement) to explain that the federal banking agencies will continue to exercise discretion to not take enforcement action against either an asset manager that is a principal shareholder of a bank, or a bank for which an asset manager is a principal shareholder, with respect to extensions of credit by the bank to the related interests of such asset manager that otherwise would violate Regulation O.

Regulation O places quantitative limits and qualitative restrictions on extensions of credit by banks to their executive officers, directors, and principal shareholders, and to the related interests of such persons.1 The popularity of mutual funds, exchange-traded funds, and similar index-based investment products has resulted in several large asset management companies becoming principal shareholders of a number of banks. As a principal shareholder, an asset manager can trigger a Regulation O presumption of control, resulting in companies in the asset manager’s portfolios becoming related interests subject to limits and restrictions under Regulation O. Market participants have expressed concern about possible unintended consequences of the application of Regulation O to these relationships.

The federal banking agencies are extending this no-action position while the Board, in consultation with the other federal banking agencies, continues to consider whether to amend Regulation O to address this issue. As detailed in the Statement, the federal banking agencies will exercise discretion in not bringing an enforcement action against asset managers and banks for extensions of credit to related interests that would otherwise violate Regulation O, provided the asset managers and banks satisfy certain conditions that evidence that there is a lack of control by the asset manager over the bank. In addition, the federal banking agencies would not take action against banks for failure to report, for purposes of section 363.2 of the FDIC’s regulations,2 extensions of credit that would otherwise violate Regulation O but are covered by the Statement.

Unless amended, extended, or superseded in writing, the Statement will cease to be effective on the sooner of January 1, 2023, or the effective date of a final Federal Reserve 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.

Reserve Banks should distribute this SR letter to supervised institutions in their districts and to appropriate supervisory staff.  Questions regarding this SR letter may be sent via the Board’s public website.3

signed by
Michael S. Gibson
Director
Division of
Supervision and Regulation

Supersedes:
  • SR 20-31, “Status of Certain Investment Funds and Their Portfolio Investments for Purposes of Regulation O and Reporting Requirements under Part 363 of FDIC Regulations”

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Last Update: December 17, 2021