(a) May a financial holding company routinely manage or operate a portfolio
company? Except as permitted in paragraph (e) of this section,
a financial holding company may not routinely manage or operate any
portfolio company.
(b) When does a financial holding company routinely manage or operate
a company?
(1) Examples
of routine management or operation.
(i) Executive officer interlocks at the portfolio
company. A financial holding company routinely manages or operates
a portfolio company if any director, officer, or employee of the financial
holding company serves as or has the responsibilities of an executive
officer of the portfolio company.
(ii) Interlocks
by executive officers of the financial holding company.
(A) Prohibition. A financial holding company
routinely manages or operates a portfolio company if any executive
officer of the financial holding company serves as or has the responsibilities
of an officer or employee of the portfolio company.
(B) Definition. For purposes of paragraph (b)(1)(ii)(A) of this section, the term
“financial holding company” includes the financial holding company
and only the following subsidiaries of the financial holding company:
(1) a securities broker or dealer
registered under the Securities Exchange Act of 1934;
(2) a depository institution;
(3) an affiliate
that engages in merchant banking activities under this subpart or
insurance company investment activities under section 4(k)(4)(I) of
the Bank Holding Company Act (12 USC 1843(k)(4)(I));
(4) a small-business investment company
(as defined in section 302(b) of the Small Business Investment Act
of 1958 (15 USC 682(b)) controlled by the financial holding company
or by any depository institution controlled by the financial holding
company; and
(5) any other affiliate that engages in significant equity investment
activities that are subject to a special capital charge under the
capital adequacy rules or guidelines of the Board.
(iii) Covenants regarding ordinary course of business. A financial holding company routinely manages or operates a portfolio
company if any covenant or other contractual arrangement exists between
the financial holding company and the portfolio company that would
restrict the portfolio company’s ability to make routine business
decisions, such as entering into transactions in the ordinary course
of business or hiring officers or employees other than executive officers.
(2) Presumptions of routine management or operation. A financial holding company is presumed to routinely manage or operate
a portfolio company if—
(i) any director, officer, or employee
of the financial holding company serves as or has the responsibilities
of an officer (other than an executive officer) or employee of the
portfolio company; or
(ii) any officer or employee of the portfolio company is supervised
by any director, officer, or employee of the financial holding company
(other than in that individual’s capacity as a director of the portfolio
company).
4-058.21
(c) How may a financial holding company rebut a
presumption that it is routinely managing or operating a portfolio
company? A financial holding company may rebut a presumption
that it is routinely managing or operating a portfolio company under
paragraph (b)(2) of this section by presenting information to the
Board demonstrating to the Board’s satisfaction that the financial
holding company is not routinely managing or operating the portfolio company.
(d) What arrangements
do not involve routinely managing or operating a portfolio company?
(1) Director representation at portfolio companies. A financial
holding company may select any or all of the directors of a portfolio
company or have one or more of its directors, officers, or employees
serve as directors of a portfolio company if—
(i) the portfolio
company employs officers and employees responsible for routinely managing
and operating the company; and
(ii) the financial holding company does
not routinely manage or operate the portfolio company, except as permitted
in paragraph (e) of this section.
(2) Covenants
or other provisions regarding extraordinary events. A financial
holding company may, by virtue of covenants or other written agreements
with a portfolio company, restrict the ability of the portfolio company,
or require the portfolio company to consult with or obtain the approval
of the financial holding company, to take actions outside of the ordinary
course of the business of the portfolio company. Examples of the types
of actions that may be subject to these types of covenants or agreements
include, but are not limited to, the following:
(i) the
acquisition of significant assets or control of another company by
the portfolio company or any of its subsidiaries;
(ii) removal or selection of an independent
accountant or auditor or investment banker by the portfolio company;
(iii) significant
changes to the business plan or accounting methods or policies of
the portfolio company;
(iv) removal or replacement of any or all of the executive officers
of the portfolio company;
(v) the redemption, authorization or
issuance of any equity or debt securities (including options, warrants,
or convertible shares) of the portfolio company or any borrowing by
the portfolio company outside of the ordinary course of business;
(vi) the amendment
of the articles of incorporation or bylaws (or similar governing documents)
of the portfolio company; and
(vii) the sale, merger, consolidation,
spin-off, recapitalization, liquidation, dissolution or sale of substantially
all of the assets of the portfolio company or any of its significant
subsidiaries.
(3) Providing advisory and underwriting
services to, and having consultations with, a portfolio company. A financial holding company may—
(i) provide financial, investment,
and management consulting advice to a portfolio company in a manner
consistent with and subject to any restrictions on such activities
contained in section 225.28(b)(6) or 225.86(b)(1) of this part (12
CFR 225.28(b)(6) and 225.86(b)(1));
(ii) provide assistance to a portfolio
company in connection with the underwriting or private placement of
its securities, including acting as the underwriter or placement agent
for such securities; and
(iii) meet with the officers or employees
of a portfolio company to monitor or provide advice with respect to
the portfolio company’s performance or activities.
4-058.22
(e) When may a financial
holding company routinely manage or operate a portfolio company?
(1) Special circumstances required. A financial holding company
may routinely manage or operate a portfolio company only when intervention
by the financial holding company is necessary or required to obtain
a reasonable return on the financial holding company’s investment
in the portfolio company upon resale or other disposition of the investment,
such as to avoid or address a significant operating loss or in connection
with a loss of senior management at the portfolio company.
(2) Duration limited. A financial holding company may routinely
manage or operate a portfolio company only for the period of time as may
be necessary to address the cause of the financial holding company’s
involvement, to obtain suitable alternative management arrangements,
to dispose of the investment, or to otherwise obtain a reasonable
return upon the resale or disposition of the investment.
(3) Notice required for extended involvement. A financial holding
company may not routinely manage or operate a portfolio company for
a period greater than nine months without prior written notice to
the Board.
(4) Documentation required. A financial holding
company must maintain and make available to the Board upon request
a written record describing its involvement in routinely managing
or operating a portfolio company.
4-058.23
(f) May a depository institution or its subsidiary
routinely manage or operate a portfolio company?
(1) In general. A depository institution and a subsidiary of a depository institution
may not routinely manage or operate a portfolio company in which an
affiliated company owns or controls an interest under this subpart.
(2) Definition applying provisions governing routine
management or operation. For purposes of this section other than
paragraph (e) and for purposes of section 225.173(d), a financial
holding company includes a depository institution controlled by the
financial holding company and a subsidiary of such a depository institution.
(3) Exception for certain subsidiaries of depository
institutions. For purposes of paragraph (e) of this section,
a financial holding company includes a financial subsidiary held in
accordance with section 5136A of the Revised Statutes (12 USC 24a)
or section 46 of the Federal Deposit Insurance Act (12 USC 1831w),
and a subsidiary that is a small business investment company and that
is held in accordance with the Small Business Investment Act (15 USC
661 et seq.), and such a subsidiary may, in accordance with the limitations
set forth in this section, routinely manage or operate a portfolio
company in which an affiliated company owns or controls an interest
under this subpart.
