Circular
Interim Rule on Merchant Banking Activities Under the Financial Modernization Act (Gramm-Leach-Bliley Act)
April 13, 2000
Circular No. 11243

Supplemental Proposal on Consolidated Capital Guidelines Under the Merchant Banking Authority of the Bank Holding Company Act

To the Chief Executive Officers of all Bank Holding Companies in the Second Federal Reserve District:

The following is from a joint statement by the Board of Governors of the Federal Reserve System and the U.S. Department of the Treasury:

The Federal Reserve Board and the Secretary of the Treasury have jointly announced their approval of an interim rule governing the merchant banking activities of financial holding companies.

The interim rule implements the merchant banking provisions of the Financial Modernization Act. The interim rule includes provisions on record keeping and reporting; risk management practices; holding periods for merchant banking investments; corporate separateness and limits on involvement in management; and limits on exposure of financial holding companies to merchant banking investments. The interim rule became effective on March 17, 2000.

The Board also announced that it is seeking public comment on a proposed rule, developed in consultation with the Secretary of the Treasury, that would govern the regulatory capital treatment for equity investments in nonfinancial companies held by bank holding companies. The proposed rule would generally impose a 50 percent capital requirement on merchant banking investments and certain similar investments.

Comments will be accepted on the interim rule and the capital proposal until May 22, 2000. The interim rule and the capital proposal will be revised as appropriate after the comments are reviewed.

A copy of Part II of the Federal Register of March 28 is available (pdf - 283kb), containing the official notices on the interim rule and the proposal (the notice on the proposal begins on page 16480). Comments should be sent directly to the Federal Reserve Board, as specified in the notices. Questions on this matter may be directed, at this Bank, to Darryll E. Hendricks, Senior Vice President.