Federal Reserve Board Modifies Long-Standing Minority Investment Guidance with Goal of Encouraging Private Equity Investments
By V. Gerard Comizio, John L. Douglas and Lawrence D. Kaplan
In response to the ongoing credit (or capital) banking crisis, the Board of Governors of the Federal Reserve System (Federal Reserve Board) issued a new policy statement on September 22, 2008 (Policy Statement), concerning minority equity investments in banks and bank holding companies (collectively, Banking Organizations). The Policy Statement, which modifies long-standing, but antiquated limitations on entities making such minority investments in Banking Organizations (each an Investor), is intended to facilitate noncontrolling capital infusions into Banking Organizations under the Federal Reserve Boards jurisdiction by private pools of capital such as private equity funds. As discussed in greater detail below, the Federal Reserve will now permit an Investor to have board seats, committee assignments, the ability to own up to one-third of a Banking Organizations total equity (conditioned upon no more than fifteen percent (15%) is in any class of voting securities), as well as to advocate for various policy changes and management initiatives. The Federal Reserve also clarifies that certain types of covenants do not result in an Investor having a controlling influence over a Banking Organization.