WASHINGTON — Bankers applauded Wednesday as federal regulators issued a merchant banking rule that removes a short-lived $6 billion cap on investments and makes other pro-industry changes.

“We think the rule moves in the right direction, and we are pleased with that,” said Thomas Block, the co-director of government relations for J.P. Morgan Chase & Co. “The thing that concerned us was that over a period of time, we would clearly hit the $6 billion cap.” An interim rule released in March by the Federal Reserve Board and the Treasury Department attracted widespread criticism from lawmakers and financial services executives, who said the cap was too restrictive and contradicted the Gramm-Leach-Bliley Act of 1999’s intent to promote investment banking by financial holding companies.

The final rule kept a provision that limits merchant banking to 30% of a company’s Tier 1 capital, but even that threshold will be eliminated once banking regulators finalize capital requirements for these investments.

“The big question has always been the capital rule,” Mr. Block said. “This is the first 50 yards of a 100-yard dash. The capital rule is the last 50 yards, and we haven’t seen it yet.”

The Fed governors met behind closed doors Wednesday to discuss the capital proposal, but the agency refused to confirm whether they decided to release it for public comment. The central bank has said it plans to back off of an earlier, controversial proposal that financial holding companies hold 50 cents in capital for every $1 of equity investments.

Instead, the Fed is expected to propose a sliding scale that links a company’s requirements to the amount of its equity investments. The new proposal would have a 25% maximum capital charge for those banking companies with the most investments, industry sources said.

Fed officials were vague about the timing of the capital standards. When Edward W. Kelley Jr., one of the central bank’s governors, asked whether it would be finalized “in the next few months,” Scott Alvarez, the Fed’s associate general counsel, hesitated and then said it is expected “in the near term.”

Industry observers said that the changes to the interim rule would help ease the concerns of several larger banks that the investment caps would inhibit growth.

“For the larger banks, the key worry was the aggregate limit,” said Robert J. Kabel, a partner at the law firm of Manatt, Phelps & Phillips here who represents the banks most involved in merchant banking. “It is very helpful that the Fed said that once the new capital rule is in place, the aggregate limit will be sunseted. That gives the big banks more certainty. This just says that once the capital rule is in place, and you abide by it, you can do merchant banking as much as you want.”

Industry representatives said several other changes from the interim rule could make a significant difference, including the easing of restrictions on how long companies may hold equity investments and the clarification of when and how a company may intervene in troubled investments.

“I keep coming back to the word flexibility,” said Beth L. Climo, executive director for the American Bankers Association Securities Association. “What we sought in these areas was more of a supervisory approach, rather than a harder regulatory approach. In this final rule, they have provided greater flexibility in a number of areas.”

Under the rule, financial holding companies may hold their investments for 10 years, but the Fed and Treasury simplified the way institutions may seek extensions. Among other changes, holding companies must provide notice to the central bank at least 90 days before the deadline. The interim rule had required an application a year before.

Observers said that change will keep companies from simply dumping their investments when the deadline approached.

“The way it had been proposed before would have resulted in a fire sale of investments not meeting expectations,” said Richard M. Whiting, executive director of the Financial Services Roundtable. “This gives a lot more flexibility and discretion to investment bankers.”

The rule also bars institutions from becoming involved with the day-to-day management of companies in which they have invested, but clarified cases in which exceptions would be permitted. It also lets companies challenge any ruling which says it was too involved in management.


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