Merchant Banking Rule Finalized

by Mary Beth Guard

Most compliance officers immediately think of privacy when the Gramm-Leach-Bliley Act is mentioned, but in actuality the most significant provisions of GLBA deal with banking powers.

Under GLBA, a bank holding company may elect to become a financial holding company. Under a new rule from the FRB and Treasury that carries out amendments made to the the Bank Holding Company Act by Gramm-Leach-Bliley Act, a bank holding company that has made an effective election to become a financial holding company is allowed to make investments in nonfinancial companies as part of a bona fide securities underwriting or merchant or investment banking activity.

Under the new rules, investments may be made in any type of ownership interest in any type of nonfinancial entity (portfolio company), and may represent any amount of the equity of a portfolio company. Investments made under this new authority are referred to as "merchant banking investments." These merchant banking powers are an important addition to traditional bank activities.

If your bank wants to explore its options under these new powers, you should be aware that there are conditions on three aspects of the activity: l) the length of time that these investments may be held, 2) the ability of the financial holding company to routinely manage or operate the portfolio company, and 3) other aspects of the relationship between the financial holding company and its affiliates on the one hand and the portfolio company on the other hand.

The effective date of the new merchant banking rules was February 15, 2001.

Originally appeared in the Oklahoma Bankers Association Compliance Informer.

First published on BankersOnline.com 6/11/01