Merchant banking guidance sets framework for sound investment, risk management policies

HEADNOTE

Federal Reserve Board acts to help safeguard institutions from market, liquidity and other potential risks

In a step toward ensuring the prudent use of some of the key powers authorized by the Gramm-Leach-Bliley

Act of 1999, the Board of Governors of the Federal Reserve System recently issued guidance on equity investments and merchant banking activities for financial holding companies and other banking organizations. The guidance, which implements the merchant banking provisions of the act, is designed to protect financial institutions from market, liquidity and other potential risks.

The Gramm-Leach-Bliley Act defines permissible merchant banking activities as "investments in any amount of the shares, assets or ownership of any type of non-financial company." Non-financial companies include companies that engage in activities other than financial activities that a financial holding company may conduct in accordance with the act's amendments to Section 4 of the Bank Holding Company Act and various implementing regulations and interpretations.