So-called sovereign funds have been much in the news lately, as various pools of capital controlled by sovereign governments act as private equity investors in U.S. businesses.  There will be much political and stock market discussion about the announced 4.9% equity investment of the Abu Dhabi Investment Authority in Citigroup, the holding company for Citibank.  Less discussed is the regulatory issue raised by the prospect of a foreign government controlling a U.S. bank—specifically, whether a foreign government is a “company” for purposes of the Bank Holding Company Act.  The Federal Reserve has answered this question differently over the last three decades, prompted no doubt by political issues or systemic concerns about the financial markets. 

Some History:

1. The French government was not required to apply when a French bank owned by the French government acquired control of a U.S. bank.
   
   
2. An Italian government-owned bank was told by the Fed that the Fed’s prior position  regarding a French bank could change if it did not withdraw its white-knight proposal to acquire a major New York bank.
   
   
3. Mexican banks were informally advised they could face government ownership and divestiture rules when the government of Mexico nationalized banks and thus indirectly acquired control of U.S. banks owned by those Mexican banks.
   
   
4. The Fed discouraged applications that might disclose a Hong Kong bank was controlled by Mainland Chinese interests, presumably government controlled.
   
   
5. The Fed has taken the position that the Bank Holding Company Act does not apply to Indian tribes (as sovereign governments)  because the definition of company in the Bank Holding Company Act does not reference any type of sovereign government Consequently, Congress did not intend it to apply to Indian tribe ownership of banks.

The impact of a foreign government being subject to the Bank Holding Company Act would be dramatic.  Of equal import to the prospects of a foreign government being subject to supervision and examination by the U.S. banking agencies and the worldwide and U.S. capital requirements are the competitive restrictions that could require a foreign government to cease conducting non-banking commercial activities outside as well as inside the U.S.  The Gramm-Leach-Bliley Act now allows financial holding companies to engage in banking, insurance and securities activities worldwide.  However, U.S. banking organizations cannot own a non-financial business such as an auto company, oil company or shipping concerns.Foreign “company” investors in U.S. banks are subject to the same rules.

The real importance of the Abu Dhabi 4.9% investment amount, plus the clarification that it would not come with board representation, is to stay within an express presumption in the Bank Holding Company Act that less than 5% ownership by itself is not control of a U.S. bank.

Attorney Contacts
Mick Grasmick, 310.312.4369
Harold P. Reichwald, 310.312.4148

Contact Mick Grasmick or Hal Reichwald with any questions on this topic. More information on foreign investments in U.S. banks is available in the White Papers posted on the Manatt web site at www.manatt.com.

For additional information on this issue, contact:

 Mick Grasmick Mr. Grasmick's practice focuses on mergers and acquisitions, non-banking activities, formation of new banks, interstate and other expansion by banks, bank holding companies and other financial institutions and the requirements and restrictions on expansion of state and federal bank regulatory agencies; bank supervision and examination, and general banking corporate matters and regulatory and legislative developments.

 Harold P. Reichwald Mr. Reichwald is a highly experienced banking and finance attorney whose career encompasses domestic and international matters for banks and specialty finance institutions.