FRB Proposes Regulation O Fix for Fund Complexes

The Federal Reserve Board (FRB) has issued a notice of proposed rulemaking to amend Regulation O, which governs lending by member banks to their insiders. The proposal directly addresses a long-standing issue where large, passive investment fund complexes, through their diversified holdings, become unintentional "principal shareholders" (owning 10% or more) of banks. Under the current rule, this status can severely restrict the bank from lending to any other portfolio company held by the same fund complex, creating significant business challenges. The FRB's proposal would create a permanent exception for "qualified fund complexes" that satisfy four key passivity conditions, replacing a series of temporary no-action relief letters in place since 2019. The change is critical for both the asset management and banking industries, as it would provide a clear regulatory framework and remove legal uncertainty. Counsel should monitor the comment period, which ends October 5, 2026, as loss of qualified status under the proposed rule would carry significant consequences.