Memorandum
Federal Reserve Recommends Legislative Repeal of MerchantBanking Authority and Exemptions for ILCs and GrandfatheredThrifts
September 9, 2016

The Federal Reserve has issued a set of sweeping and surprising recommendations to Congress that, ifenacted, would dramatically limit the authority of banking institutions subject to the Bank Holding Company
Act of 1956 (the “BHC Act”) to engage in certain non-banking activities and investments. The Federal
Reserve also proposed eliminating the current exemptions for owners of industrial loan companies and“grandfathered” thrifts. The recommendations were contained in a report issued yesterday by the FederalReserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency toCongress and the Financial Stability Oversight Council.
Although the prospects for legislative passage are low, at least in the near term, the recommendations (andrelated commentary) constitute a significant public statement of the Federal Reserve’s views on longstanding
statutory authorities that it has administered.

Federal Reserve Recommends Full-Scale Repeal of Four Key Exemptions
The Federal Reserve recommended that Congress:• repeal the “merchant banking” authority under Section 4(k)(4)(H) of the BHC Act, which financial
holding companies have relied upon since 1999 to acquire shares of companies engaged in all sorts of
non-financial activities (subject to restrictions on “routine management” and holding period limitations)and which would complete the process begun by the Volcker Rule of barring banking organizations fromthe private equity business;• repeal the “grandfather” authority under Section 4(o) of the BHC Act, which has permitted Goldman
Sachs and Morgan Stanley to engage in a broad range of physical commodities activities, including thestorage, transportation and extraction of commodities;
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Memorandum – September 9, 20162

• repeal the exemption that permits corporate owners of industrial loan companies (“ILCs” or “industrialbanks”) to operate outside the regulatory and supervisory framework applicable to other corporate
owners of insured depository institutions (because an ILC is not technically a “bank” for purposes of theBHC Act, a company that controls an industrial bank is not currently regulated as a bank holding
company and is not subject to consolidated capital requirements or activities restrictions); and• repeal the exemption for grandfathered unitary savings and loan holding companies from the BHC Act’s
activities restrictions that apply to all other savings and loan holding companies.
The report did not recommend any proposed effective date or transition period, nor did it offer any
grandfathering exceptions for current activities or investments.
If adopted, the recommendations would have far-reaching legal and economic implications for manybanking organizations and certain of their shareholders, and effectively require the sale, spin-out orrestructuring of affected business units and operations.

For more information regarding the report, which is available here, please contact any member of the Firm’s
Financial Institutions Group, including those listed below.
Lee A. Meyerson+1-212-455-3675
lmeyerson@stblaw.com
Keith A. Noreika+1-202-636-5864
keith.noreika@stblaw.com
Mark Chorazak+1-212-455-7613
mchorazak@stblaw.com
Spencer A. Sloan+1-212-455-7821
spencer.sloan@stblaw.com

The contents of this publication are for informational purposes only. Neither this publication nor the lawyers who authoredit are rendering legal or other professional advice or opinions on specific facts or matters, nor does the distribution of thispublication to any person constitute the establishment of an attorney-client relationship. Simpson Thacher & Bartlett LLP
assumes no liability in connection with the use of this publication. Please contact your relationship partner if we can be ofassistance regarding these important developments. The names and office locations of all of our partners, as well as ourrecent memoranda, can be obtained from our website, www.simpsonthacher.com.

Simpson Thacher & Bartlett LLP

Memorandum – July 12, 2016

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