Alert June 09, 2009

FRB Issues Letter Approving Extension of Merchant Banking Investment

The Gramm-Leach-Bliley Act of 1999 (“GLBA”) created a special type of bank holding company, a financial holding company (“FHC”), and authorized it for the first time to passively invest in non-financial companies (“merchant banking investments”).  The GLBA generally permitted an FHC to hold a merchant banking investment for up to ten years, subject to FRB approved extensions.  As a result, if an FHC acquired and held a merchant banking investment shortly after and since the passage of the GLBA, at this point the FRB would have to either dispose of the merchant banking investment in the near future or ask for an extension from the FRB.

In an interpretive letter dated May 28, 2009 (the “Letter”), the FRB provided some insight into the factors it would consider when deciding whether an extension was appropriate.  The Letter states that the applicant complied with the information requirements located at 12 CFR 225.272(b)(4).  The FRB also considered the applicant’s average holding period for merchant banking investments, the efforts the applicant has made to dispose of the merchant banking investment at issue, the fact that the applicant has reduced the level of that merchant banking investment to a significant degree, and that the applicant has held the merchant banking investment in conformity with applicable rules, including restrictions on routine management and operation of the company to which the merchant banking investment relates.  On this basis, the FRB agreed to extend the period during which the applicant may hold the merchant banking investment.