Key takeaways

• On September 23, 2016, the Federal Reserve issued a proposed rule that would adopt additional limits to the physical commodity activities of financial holding companies and bank holding companies. Although focused on physical commodities, the NPR could foreshadow additional restrictions on merchant banking activities more broadly.
• The NPR includes five main elements: (1) capital requirements for physical commodity assets and merchant banking investments in portfolio companies that engage in physical commodity activities; (2) tightening of the 5% of tier 1 capital limit that applies to physical commodity activities conducted pursuant to complementary activity authority under section 4(k)(1)(B) of the Bank Holding Company Act; (3) rescission of the orders authorizing energy management and tolling activities as complementary activities; (4) removal of copper from the list of precious metals that bank holding companies may own and store under section 4(c)(8) of the Bank Holding Company Act; and (5) an increase of supervisory and public reporting regarding physical commodity activities, including merchant banking investments in companies engaged in physical commodity activities. 
• This client update provides an overview of the NPR, describes its elements in more detail and then discusses what it may mean for merchant banking. In addition, the appendix to the client update illustrates, in redline form, the revisions to regulatory text that the NPR contemplates.