Federal Reserve Board: China Can Own Up to 10% of Morgan Stanley

The Federal Reserve Board on Tuesday cleared the way for China Investment Corp. (CIC) to acquire up to 10% of the voting shares of Morgan Stanley (MS). The move required approval under the Bank Holding Company Act of 1956, which restricts foreign government ownership of U.S. financial institutions.

CIC, a Chinese sovereign wealth fund which invests the government's foreign-exchange reserves, already owns 2.49% of Morgan Stanley's voting common stock through subsidiaries with U.S. bank branches. The fund first invested in the Morgan Stanley in December 2007 through a subsidiary, which bought preferred shares and obtained an agreement enabling in to buy voting common stock through August 2010.

Back in 2007, the Bank Holding Company Act of 1956 didn't require approval for the transaction because Morgan Stanley wasn't yet a bank holding company and CIC also didn't yet own any Chinese banks with U.S. branches. Under provisions of the act, bank holding companies must obtain prior Federal Reserve Board approval to directly or indirectly acquire 5% of more of the voting shares of a U.S. bank or bank holding company.

But the situation has changed. Aside from CIC's accumulation of Morgan Stanley's voting common stock through its banking subsidiaries, Morgan Stanley also became a bank holding company in September 2008 as a result of the financial crisis that rocked the U.S. So now the companies are subject to the Bank Holding Company Act.

CIC Seeks No Controlling Influence

For years, many have argued that foreign ownership of U.S. financial institutions shouldn't be allowed. In this case, federal regulators concluded that Morgan Stanley wouldn't be influenced by CIC after the fund agreed to several "passivity commitments."

The order approving the ownership arrangement reads: "CIC has committed not to exercise or attempt to exercise a controlling influence over the management or policies of Morgan Stanley; not to seek or accept more than one representative on the board of directors of Morgan Stanley; and not to have any other director, officer, employee, or agent interlocks with Morgan Stanley. The Passivity Commitments also include certain restrictions on the business relationships between CIC and Morgan Stanley."

CIC has three months to exercise its rights to purchase the additional voting shares of Morgan Stanley stock.