Implications of Final Section 385 Debt/Equity Regulations for Financial Institutions

The new section 385 regulations will affect financial institutions in myriad ways, as described in the accompanying alert memorandum, including:

• FBOs will be subject to the documentation rules in respect of intragroup borrowings by their U.S. subsidiaries. See our alert memorandum dated October 21, 2016 for an expanded discussion of the documentation rules.
• FBOs without a U.S. corporate IHC or BHC will generally be subject to the general and funding rules (which can result in the recharacterization of debt as equity), while FBOs with U.S. corporate IHCs will largely be exempt from these rules.
• Regulatory capital securities are generally exempt from the documentation rule, although there are some uncertainties that need to be clarified.

The new regulations generally will not affect U.S.-headquartered financial institutions since the regulations apply only to domestic corporations borrowing from (foreign or domestic) related parties that are not members of the same U.S. consolidated tax group.