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Need to Know

Bank Ownership Limits Eased

U.S. regulators are becoming more open to the concept of private equity firms investing in banks, as reported by Reuters. Initially regulators were hesitant about the idea because they thought it would mean only quick fixes for banks instead of a commitment to long-term backing.

Previously, the Federal Reserve appeared to permit only two private equity firms to own 24.9 percent each of a bank, with additional investors restricted to owning under 9.9 percent each, said Randal Quarles, a managing director at Carlyle Group. But lately, the Fed has allowed four private equity firms to own 24.9 percent each of a bank, as long as they were not “acting in concert and were four separate shareholders,” Quarles said.

“We have seen it go from private equity is not invited to the party to there is a role for private equity as long as the parties aren’t acting in concert,” said Kevin Stein, a financial institutions investment banker at FBR Capital Markets.

A major hurdle for private equity firms regarding bank investments is that if an investor owns above 24.9 percent of a bank, then the firm must become a bank holding company. That would mean severe restrictions on what other types of activities the firm can engage in.

California’s New Placement Law

Placement agents and some employees of private equity firms who seek investments from California state public pensions must register as lobbyists and follow related regulations, in accordance with a new law that goes into effect on January 1.

In light of the new legislation, said Kirkland & Ellis, private equity firms need to figure out which, if any, of their employees could be considered a placement agent by the state and thus be obliged to register as a lobbyist. Firms should also examine their internal compliance policies and how they compensate those employees to make sure those arrangements are allowed by the state.

A private equity firm employee who seeks investments from a California pension plan would be considered a placement agent required to register as a lobbyist, and thus subject to related regulations, unless he or she also spends one-third or more of a year managing the assets of the firm. “This is a concern for internal marketing and investor relations professionals, but may also be relevant for other employees of a fund sponsor involved in the offer or sale of the securities or services,” according to Kirkland & Ellis.

The law firm also noted that sponsors should keep the new law in mind when hiring a placement agent, especially regarding provisions about whether and how to solicit California state pensions and related compensation, and issues of compliance and disclosures. A placement agent considered to be a lobbyist must comply with certain rules, including a ban on receiving compensation contingent on the state’s decision to invest with a manager.