WASHINGTON — In what is emerging as a multipronged effort to reinvigorate the financial sector, the Federal Reserve Board said Monday that it would loosen rules that limit private-equity investments in banking companies.
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Reversing previous policies, the Fed said a private-equity investor could hold a single seat on a bank's board without wielding too much control over the institution.
"Although having a representative on the board of the banking organization enhances the influence of a minority investor, the Board's experience has shown that, in the absence of other indicia of control, it would be difficult for a minority investor with a single board seat to have a controlling influence over the management or policies of the banking organization," the Fed said in its policy statement.
While maintaining its interpretation of the Bank Holding Company Act as barring an investor from holding more than 25% of voting stock without registering as a bank holding company, the Fed said the law "does not impose an express limit" on the ownership of nonvoting shares.
Now, the Fed will allow private equity investors to hold up to a third of a bank's total shares. But in an effort to minimize the holding's influence, the Fed said private equity investors could not hold more than 15% of voting shares. The remaining 18% must be nonvoting.
"In particular, the Board would not expect that a minority investor would have a controlling influence over a banking organization if the investor owns a combination of voting shares and nonvoting shares that, when aggregated, represents less than one-third of the total equity of the organization (and less than one-third of any class of voting securities, assuming conversion of all convertible nonvoting shares held by the investor) and does not allow the investor to own, hold, or vote 15% or more of any class of voting securities of the organization," according to the policy statement. "In these situations, the limitation on voting rights reduces the potential that the investor may exercise influence that is controlling."
Finally, the Fed clarified the type of communications a private-equity firm with a minority stake in a bank could have with the institution's management.
"The board believes that a noncontrolling minority investor, like any other shareholder, generally may communicate with banking organization management about, and advocate with banking organization management for changes in, any of the banking organization's policies and operations," according to the policy statement.
"For example, an investor may, directly or through a representative on a banking organization's board of directors, advocate for changes in the banking organization's dividend policy; discuss strategies for raising additional debt or equity financing; argue that the banking organization should enter into or avoid a new business line or divest a material subsidiary; or attempt to convince banking organization management to merge the banking organization with another firm or sell the banking organization to a potential acquirer."
At issue is the Bank Holding Company Act, which requires any investor with a stake in a bank larger than 24.9% to register as a bank holding company and submit to regulation and examination by the Fed.
In an effort to limit control over banks, the Fed also steps up supervision of investors when their stake in a bank exceeds 9.9% by, for instance, limiting their voting rights and the number of seats they hold on bank boards of directors.
Though it would take an act of Congress to raise the standard for bank holding company registration beyond 24.9%, the Fed's move serves to provide more flexibility for investors with holdings higher than 9.9%.
