As discussed in this Orrick alert, federal bank regulators recently issued guidance to financial institutions concerning leveraged lending practices (the “Lending Guidance”). In most respects the Lending Guidance was anticipated, but it contains a surprising statement about the anti-tying provisions of the Bank Holding Company Act, which we hope signals a long-awaited change of view at the Federal Reserve.

The Lending Guidance states that “[t]he intent behind Section 106(b) [of the Bank Holding Company Act Amendments of 1970] is to prevent financial institutions from using their market power over certain products to obtain an unfair competitive advantage in other products.”1 The reference to “market power” was also included in the draft Lending Guidance released in March 2012 and it may be significant, because the Federal Reserve has previously declined to interpret that market power is a necessary element of an illegal tying arrangement under Section 106. In its 2003 proposed interpretation of Section 106 of the Bank Holding Company Act (the “Proposed Interpretation”),2 the Federal Reserve specifically determined, based on its review of the legislative history of the section, that economic power and anticompetitive effects are not necessary elements of a Section 106 claim.3

The Federal Reserve’s position in the Proposed Interpretation generated significant commentary. Even the Department of Justice, having power to enforce federal antitrust laws generally, submitted a comment letter stating that “[t]ying arrangements are per se illegal under the federal antitrust laws only if the seller has sufficient market power to make anticompetitive effects highly likely.”4 Comments expressing similar concerns were submitted by the Office of the Comptroller of the Currency, financial industry groups, banks, law firms, and three U.S. Senators (John Sununu, Elizabeth Dole, and Mike Crapo). Notwithstanding this commentary, however, the Federal Reserve did not revise or finalize the Proposed Interpretation. In fact, the Committee on Banking Law of the New York City Bar reminded the Federal Reserve more than two years later of the "urgent need to finish the process of issuing a final interpretation of Section 106," and in a manner that "brings Section 106 into line with the general federal antitrust laws."5

The statement in the Lending Guidance that the intent of Section 106 requires an abuse of market power for impermissible tying is at the end of the Lending Guidance,6 and it would be easy to miss. Given the extensive discussion in response to the Proposed Interpretation, however, and the fact that the reference to market power was also in the draft of the Lending Guidance published more than a year ago, there is some basis for hope that including the reference to market power was thoughtfully considered, and that the Federal Reserve may be revisiting its earlier stance.