Friedman, Billings, Ramsey Group Inc. is taking another step to transform itself from an investment boutique to a diverse company that combines broker-dealer services and investment banking with asset management and now retail banking — and one that is less dependent on an erratic income stream from capital markets.

On Wednesday the Federal Reserve Board approved the Arlington, Va., firm’s application to merge with Money Management Associates, a privately held company in Bethesda, Md., that owns Rushmore Trust & Savings. Money Management will be combined with Rushmore under the name of FBR National Bank, a subsidiary of the FBR Group.

Friedman Billings is the first company with significant merchant banking and investment banking activities to take advantage of the Gramm-Leach-Bliley Act of 1999, which allows financial services companies to become financial holding companies.

In approving the application, the Fed granted Friedman Billings the first exemption from regulations limiting the amount of merchant banking investments allowed financial holding companies.

Under current rules such investments cannot exceed 30% of the holding company’s Tier 1 capital. Friedman Billings will exceed that limit pending a capital rule for merchant banking investments. That rule would instead impose a sliding capital charge based on the percentage of a financial holding company’s assets that are merchant banking investments.

In its approval, the Fed noted that Friedman Billings’ current capital levels would “significantly exceed” the amount required to be considered well-capitalized under the proposed rule.

The $27.2 million transaction might not make it a miniature Merrill Lynch & Co., but it will extend Friedman Billings’ lines of business extensively, said Eric Billings, chairman and co-chief executive officer. The deal gives the company the necessary edge to become an attractive partner to high-net-worth clients, said Mr. Billings, who holds 2.78% of the company’s shares.

The acquisition, which was announced in October 1999, is expected to close this month and will add $920 million of assets under management and $1.6 billion for which Rushmore provides administrative services, to Friedman Billings’ roughly $800 million of assets under management, said Robert S. Smith, its chief operating officer. It will also add 50 people to the company’s staff of 400. Mr. Smith said his company plans to hire another 50 to extend the capital markets business.

In addition to the company’s traditional business lines, asset management has become a major focus of Friedman Billings’ strategy. Last year income from asset management activities rose to 35.5% of its revenues, up 5% from 1999, while investment banking revenues fell to 29.8% from 35.3%.

Mr. Billings said he sees that as a coincidence rather than part of the company’s strategy. After all, he noted, diversifying earnings also stabilizes them. Mr. Smith said acquiring a bank makes sense for other smaller investment banks, considering that most of the big players use retail banks to gather deposits and assets.

Nevertheless, Mr. Billings said, Rushmore has presented a unique opportunity. The thrift has good name recognition in the region, offering a base to expand core earnings, and a large money management arm that allowed the parent company to shift its own asset management business to FBR National. In addition, Rushmore operates in the wealthy area of Montgomery County, within walking distance of the National Institutes of Health.

“NIH along with the other research centers are very important to our expanding biotechnology business,” Mr. Smith said. “So we get a bank with fiduciary power and the ability to make loans, we get the asset management business, and we get the mutual fund business, which is a nice recurring fee stream.”

Mr. Billings said that if the Rushmore acquisition had been rejected by regulators, his company would have given up these strategic plans rather than look for another bank or thrift to buy.

Mr. Billings said he is confident that the newly strengthened Friedman Billings will attract high-net-worth clients by offering expertise in capital underwriting in several industries in combination with quick reflexes of a small firm.

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