[Federal Register Volume 85, Number 40 (Friday, February 28, 2020)]
[Proposed Rules]
[Pages 12120-12206]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-02707]



[[Page 12119]]

Vol. 85

Friday,

No. 40

February 28, 2020

Part III





Department of the Treasury





-----------------------------------------------------------------------





Office of the Comptroller of the Currency





Federal Reserve System





-----------------------------------------------------------------------

Federal Deposit Insurance Corporation

Commodity Futures Trading Commission

Securities and Exchange Commission





-----------------------------------------------------------------------





12 CFR Parts 44, 248, and 351

17 CFR Parts 75 and 255





Prohibitions and Restrictions on Proprietary Trading and Certain 
Interests in, and Relationships With, Hedge Funds and Private Equity 
Funds; Proposed Rules

  Federal Register / Vol. 85 , No. 40 / Friday, February 28, 2020 / 
Proposed Rules  

[[Page 12120]]


-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 44

[Docket No. OCC-2020-0002]
RIN 1557-AE67

FEDERAL RESERVE SYSTEM

12 CFR Part 248

[Docket No. R-1694]
RIN 7100-AF70

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 351

RIN 3064-AF17

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 75

RIN 3038-AE93

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 255

[Release No. BHCA-8; File No. S7-02-20]
RIN 3235-AM70


Prohibitions and Restrictions on Proprietary Trading and Certain 
Interests in, and Relationships With, Hedge Funds and Private Equity 
Funds

AGENCY: Office of the Comptroller of the Currency, Treasury (OCC); 
Board of Governors of the Federal Reserve System (Board); Federal 
Deposit Insurance Corporation (FDIC); Securities and Exchange 
Commission (SEC); and Commodity Futures Trading Commission (CFTC).

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The OCC, Board, FDIC, SEC, and CFTC (together, the agencies) 
are inviting comment on a proposal that would amend the regulations 
implementing section 13 of the Bank Holding Company Act (BHC Act). 
Section 13 contains certain restrictions on the ability of a banking 
entity or nonbank financial company supervised by the Board to engage 
in proprietary trading and have certain interests in, or relationships 
with, a hedge fund or private equity fund. The proposed amendments are 
intended to continue the agencies' efforts to improve and streamline 
the regulations implementing section 13 of the BHC Act by modifying and 
clarifying requirements related to the covered fund provisions.

DATES: Comments must be received on or before April 1, 2020.

ADDRESSES: Interested parties are encouraged to submit written comments 
jointly to all of the agencies. Commenters are encouraged to use the 
title ``Proposed Revisions to Restrictions on Proprietary Trading and 
Certain Interests in, and Relationships with, Hedge Funds and Private 
Equity Funds'' to facilitate the organization and distribution of 
comments among the agencies. Commenters are also encouraged to identify 
the number of the specific question for comment to which they are 
responding. Comments should be directed to:
    OCC: You may submit comments to the OCC by any of the methods set 
forth below. Commenters are encouraged to submit comments through the 
Federal eRulemaking Portal or email, if possible. Please use the title 
``Proposed Revisions to Prohibitions and Restrictions on Proprietary 
Trading and Certain Interests in, and Relationships with, Hedge Funds 
and Private Equity Funds'' to facilitate the organization and 
distribution of the comments. You may submit comments by any of the 
following methods:
    Federal eRulemaking Portal--``Regulations.gov Classic or 
Regulations.gov Beta'':
    Regulations.gov Classic: Go to https://www.regulations.gov/. Enter 
``Docket ID OCC-2020-0002'' in the Search Box and click ``Search.'' 
Click on ``Comment Now'' to submit public comments. For help with 
submitting effective comments please click on ``View Commenter's 
Checklist.'' Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov, including instructions for 
submitting public comments.
    Regulations.gov Beta: Go to https://beta.regulations.gov/ or click 
``Visit New Regulations.gov Site'' from the Regulations.gov Classic 
homepage. Enter ``Docket ID OCC-2020-0002'' in the Search Box and click 
``Search.'' Public comments can be submitted via the ``Comment'' box 
below the displayed document information or by clicking on the document 
title and then clicking the ``Comment'' box on the top-left side of the 
screen. For help with submitting effective comments please click on 
``Commenter's Checklist.'' For assistance with the Regulations.gov Beta 
site, please call (877) 378-5457 (toll free) or (703) 454-9859 Monday-
Friday, 9 a.m.-5 p.m. ET or email regulations@erulemakinghelpdesk.com.
     Email: regs.comments@occ.treas.gov.
     Mail: Chief Counsel's Office, Office of the Comptroller of 
the Currency, 400 7th Street SW, Suite 3E-218, Washington, DC 20219.
     Hand Delivery/Courier: 400 7th Street SW, Suite 3E-218, 
Washington, DC 20219.
     Fax: (571) 465-4326.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC 2020-0002'' in your comment. In general, the OCC will 
enter all comments received into the docket and publish the comments on 
the Regulations.gov website without change, including any business or 
personal information that you provide such as name and address 
information, email addresses, or phone numbers. Comments received, 
including attachments and other supporting materials, are part of the 
public record and subject to public disclosure. Do not include any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this rulemaking action by any of the following methods:
     Viewing Comments Electronically--Regulations.gov Classic 
or Regulations.gov Beta:
    Regulations.gov Classic: Go to https://www.regulations.gov/. Enter 
``Docket ID OCC-2020-0002'' in the Search box and click ``Search.'' 
Click on ``Open Docket Folder'' on the right side of the screen. 
Comments and supporting materials can be viewed and filtered by 
clicking on ``View all documents and comments in this docket'' and then 
using the filtering tools on the left side of the screen. Click on the 
``Help'' tab on the Regulations.gov home page to get information on 
using Regulations.gov. The docket may be viewed after the close of the 
comment period in the same manner as during the comment period.
    Regulations.gov Beta: Go to https://beta.regulations.gov/ or click 
``Visit New Regulations.gov Site'' from the Regulations.gov Classic 
homepage. Enter ``Docket ID OCC-2020-0002'' in the Search Box and click 
``Search.'' Click on the ``Comments'' tab. Comments can be viewed and 
filtered by clicking on the ``Sort By'' drop-down on the right side of 
the screen or the ``Refine Results'' options on the left side of the 
screen. Supporting materials can be viewed by clicking on the 
``Documents'' tab and filtered by clicking on the ``Sort By'' drop-down 
on the right side of the screen or the ``Refine Results'' options on 
the left side

[[Page 12121]]

of the screen. For assistance with the Regulations.gov Beta site, 
please call (877) 378-5457 (toll free) or (703) 454-9859 Monday-Friday, 
9 a.m.-5 p.m. ET or email regulations@erulemakinghelpdesk.com.
    The docket may be viewed after the close of the comment period in 
the same manner as during the comment period.
     Viewing Comments Personally: You may personally inspect 
comments at the OCC, 400 7th Street SW, Washington, DC 20219. For 
security reasons, the OCC requires that visitors make an appointment to 
inspect comments. You may do so by calling (202) 649-6700 or, for 
persons who are deaf or hearing impaired, TTY, (202) 649-5597. Upon 
arrival, visitors will be required to present valid government-issued 
photo identification and submit to security screening in order to 
inspect comments.
    Board: You may submit comments, identified by Docket No. R-1694; 
RIN 7100-AF70, by any of the following methods:
     Agency Website: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Email: regs.comments@federalreserve.gov. Include docket 
and RIN numbers in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Ann E. Misback, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW, 
Washington, DC 20551.
    All public comments will be made available on the Board's website 
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons or to remove 
personally identifiable information at the commenter's request. 
Accordingly, comments will not be edited to remove any identifying or 
contact information. Public comments may also be viewed electronically 
or in paper form in Room 146, 1709 New York Avenue NW, Washington, DC 
20006, between 9:00 a.m. and 5:00 p.m. on weekdays.
    FDIC: You may submit comments, identified by RIN 3064-AF17 by any 
of the following methods:
     Agency Website: https://www.FDIC.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comments on 
the Agency website.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th 
Street NW, Washington, DC 20429.
     Hand Delivered/Courier: Comments may be hand-delivered to 
the guard station at the rear of the 550 17th Street, NW, building 
(located on F Street) on business days between 7:00 a.m. and 5:00 p.m.
     Email: comments@FDIC.gov. Include the 3064-AF17 on the 
subject line of the message.
     Public Inspection: All comments received must include the 
agency name and RIN 3064-AF17 for this rulemaking. All comments 
received will be posted without change to http://www.fdic.gov/regulations/laws/federal/, including any personal information provided. 
Paper copies of public comments may be ordered from the FDIC Public 
Information Center, 3501 North Fairfax Drive, Room E-1002, Arlington, 
VA 22226 or by telephone at (877) 275-3342 or (703) 562-2200.
    CFTC: You may submit comments, identified by RIN 3038-AE93 and 
``Proposed Revisions to Prohibitions and Restrictions on Proprietary 
Trading and certain Interests in, and Relationships with, Hedge Funds 
and Private Equity Funds,'' by any of the following methods:
     Agency Website: https://comments.cftc.gov. Follow the 
instructions on the website for submitting comments.
     Mail: Send to Christopher Kirkpatrick, Secretary, 
Commodity Futures Trading Commission, 1155 21st Street NW, Washington, 
DC 20581.
     Hand Delivery/Courier: Same as Mail above.
    Please submit your comments using only one method. All comments 
must be submitted in English, or if not, accompanied by an English 
translation. Comments will be posted as received to www.cftc.gov and 
the information you submit will be publicly available. If, however, you 
submit information that ordinarily is exempt from disclosure under the 
Freedom of Information Act, you may submit a petition for confidential 
treatment of the exempt information according to the procedures set 
forth in CFTC Regulation 145.9.1. The CFTC reserves the right, but 
shall have no obligation, to review, pre-screen, filter, redact, refuse 
or remove any or all of your submission from www.cftc.gov that it may 
deem to be inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the Freedom of Information Act.
    SEC: You may submit comments by the following methods:

Electronic Comments

     Use the SEC's internet comment form (http://www.sec.gov/rules/proposed.shtml); or
    Send an email to rule-comments@sec.gov. Please include File Number 
S7-02-20 on the subject line.

Paper Comments

     Send paper comments in triplicate to Vanessa A. 
Countryman, Secretary, Securities and Exchange Commission, 100 F Street 
NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-02-20. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The SEC will post all comments on the SEC's website (http://www.sec.gov/rules/proposed.shtml). Comments are also available for 
website viewing and printing in the SEC's Public Reference Room, 100 F 
Street NE, Washington, DC 20549, on official business days between the 
hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted 
without change. Persons submitting comments are cautioned that the SEC 
does not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly.
    Studies, memoranda, or other substantive items may be added by the 
SEC or SEC staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any materials will 
be made available on the SEC's website. To ensure direct electronic 
receipt of such notifications, sign up through the ``Stay Connected'' 
option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: 
    OCC: Roman Goldstein, Risk Specialist, Treasury and Market Risk 
Policy, (202) 649-6360; Tabitha Edgens, Counsel; Mark O'Horo, Senior 
Attorney, Chief Counsel's Office, (202) 649-5490; for persons who are 
deaf or hearing impaired, TTY, (202) 649-5597, Office of the 
Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219.
    Board: Flora Ahn, Special Counsel, (202) 452-2317, Gregory 
Frischmann, Senior Counsel, (202) 452-2803, Kirin Walsh, Attorney, 
(202) 452-3058, or Sarah Podrygula, Attorney, (202) 912-4658, Legal 
Division, Elizabeth

[[Page 12122]]

MacDonald, Manager, (202) 475-6316, Cecily Boggs, Senior Financial 
Institution Policy Analyst, (202) 530-6209, Jinai Holmes, Lead 
Financial Institution Policy Analyst, (202) 452-2834, Division of 
Supervision and Regulation; Board of Governors of the Federal Reserve 
System, 20th and C Streets NW, Washington, DC 20551.
    FDIC: Bobby R. Bean, Associate Director, bbean@fdic.gov, Andrew D. 
Carayiannis, Senior Policy Analyst, acarayiannis@fdic.gov, or Brian 
Cox, Senior Policy Analyst, brcox@fdic.gov, Capital Markets Branch, 
(202) 898-6888; Michael B. Phillips, Counsel, mphillips@fdic.gov, or 
Benjamin J. Klein, Counsel, bklein@fdic.gov, Legal Division, Federal 
Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 
20429.
    CFTC: Cantrell Dumas, Special Counsel, (202) 418-5043, 
cdumas@cftc.gov; Jeffrey Hasterok, Data and Risk Analyst, (646) 746-
9736, jhasterok@cftc.gov, Division of Swap Dealer and Intermediary 
Oversight; Mark Fajfar, Assistant General Counsel, (202) 418-6636, 
mfajfar@cftc.gov, Office of the General Counsel; Stephen Kane, Research 
Economist, (202) 418-5911, skane@cftc.gov, Office of the Chief 
Economist; Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581.
    SEC: Matthew Cook, Senior Counsel, Benjamin Tecmire, Senior 
Counsel, and Jennifer Songer, Branch Chief at (202) 551-6787 or 
IArules@sec.gov, Division of Investment Management, U.S. Securities and 
Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
II. Overview of Proposal
III. Discussion of the Proposal
    A. Qualifying Foreign Excluded Funds
    B. Modifications to Existing Covered Fund Exclusions
    1. Foreign Public Funds
    2. Loan Securitizations
    3. Public Welfare and Small Business Funds
    C. Proposed Additional Covered Fund Exclusions
    1. Credit Funds
    2. Venture Capital Funds
    3. Family Wealth Management Vehicles
    4. Customer Facilitation
    D. Limitations on Relationships With a Covered Fund
    E. Ownership Interest
    F. Parallel Investments
    G. Technical Amendments
IV. Administrative Law Matters
    A. Solicitation of Comments on Use of Plain Language
    B. Paperwork Reduction Act Analysis Request for Comment on 
Proposed Information Collection
    C. Initial Regulatory Flexibility Act Analysis
    D. Riegle Community Development and Regulatory Improvement Act
    E. OCC Unfunded Mandates Reform Act
    F. SEC Economic Analysis
    G. SEC Small Business Regulatory Enforcement Fairness Act

I. Background

    Section 13 of the Bank Holding Company Act of 1956 (BHC Act),\1\ 
also known as the Volcker Rule, generally prohibits any banking entity 
from engaging in proprietary trading or from acquiring or retaining an 
ownership interest in, sponsoring, or having certain relationships with 
a hedge fund or private equity fund (covered fund).\2\ The statute 
expressly exempts from these prohibitions various activities, including 
among other things:
---------------------------------------------------------------------------

    \1\ 12 U.S.C. 1851.
    \2\ Id.
---------------------------------------------------------------------------

     Underwriting and market making-related activities;
     Risk-mitigating hedging activities;
     Activities on behalf of customers;
     Activities for the general account of insurance companies; 
and
     Trading and covered fund activities and investments by 
non-U.S. banking entities solely outside the United States.\3\
---------------------------------------------------------------------------

    \3\ 12 U.S.C. 1851(d)(1).
---------------------------------------------------------------------------

    In addition, section 13 of the BHC Act contains an exemption that 
permits banking entities to organize and offer, including sponsor, 
covered funds, subject to certain restrictions, including that banking 
entities do not rescue investors in those funds from loss, and are not 
themselves exposed to significant losses due to investments in or other 
relationships with these funds.\4\
---------------------------------------------------------------------------

    \4\ 12 U.S.C. 1851(d)(1)(G). Other restrictions and requirements 
include: (1) The banking entity provides bona fide trust, fiduciary, 
or investment advisory services; (2) the fund is organized and 
offered only to customers in connection with the provision of such 
services; (3) the banking entity does not have an ownership interest 
in the fund, except for a de minimis investment; (4) the banking 
entity complies with certain marketing restrictions related to the 
fund; (5) no director or employee of the banking entity has an 
ownership interest in the fund, with certain exceptions; and (6) the 
banking entity discloses to investors that it does not guarantee the 
performance of the fund. Id.
---------------------------------------------------------------------------

    Authority under section 13 of the BHC Act for developing and 
adopting regulations to implement the prohibitions, restrictions, and 
exemptions of section 13 is shared among the Board, the FDIC, the OCC, 
the SEC, and the CFTC (individually, an agency, and collectively, the 
agencies).\5\ The agencies originally issued a final rule implementing 
section 13 in December 2013 (the 2013 rule), and those provisions 
became effective on April 1, 2014.\6\
---------------------------------------------------------------------------

    \5\ 12 U.S.C. 1851(b)(2).
    \6\ Prohibitions and Restrictions on Proprietary Trading and 
Certain Interests in, and Relationships with, Hedge Funds and 
Private Equity Funds; Final Rule, 79 FR 5535 (Jan. 31, 2014).
---------------------------------------------------------------------------

    The agencies published a notice of proposed rulemaking in July 2018 
(the 2018 proposed rule or 2018 proposal) that proposed several 
amendments to the 2013 rule.\7\ These proposed revisions sought to 
provide greater clarity and certainty about what activities are 
prohibited under the 2013 rule--in particular, under the prohibition on 
proprietary trading--and to better tailor the compliance requirements 
based on the risk of a banking entity's activities. The agencies issued 
a final rule implementing the amendments in November 2019 (the 2019 
amendments), and those provisions became effective in January 2020.\8\
---------------------------------------------------------------------------

    \7\ Proposed Revisions to Prohibitions and Restrictions on 
Proprietary Trading and Certain Interests in, and Relationships 
With, Hedge Funds and Private Equity Funds, 83 FR 33432 (July 17, 
2018).
    \8\ Prohibitions and Restrictions on Proprietary Trading and 
Certain Interests in, and Relationships With, Hedge Funds and 
Private Equity Funds, 84 FR 61974 (Nov. 14, 2019). The agencies 
refer to the regulations implementing section 13 of the BHC Act that 
are effective as of February 28, 2020 as the ``implementing 
regulations.''
---------------------------------------------------------------------------

    As part of the 2018 proposal, the agencies suggested targeted 
changes to the provisions of the 2013 rule relating to acquiring or 
retaining an ownership interest in, sponsoring, or having certain 
relationships with a fund and sought comments on other aspects of the 
covered fund provisions beyond those changes for which specific rule 
text was proposed.\9\ The 2019 amendments finalized those changes to 
the covered fund provisions for which specific rule text was proposed 
in the 2018 proposal. The agencies indicated they would continue to 
consider other aspects of the covered fund provisions and intended to 
issue a separate proposed rulemaking that specifically addresses those 
areas.\10\
---------------------------------------------------------------------------

    \9\ 83 FR 33471-87.
    \10\ 84 FR 62016.
---------------------------------------------------------------------------

    The staffs of the agencies also have addressed several questions 
concerning the regulations implementing section 13 through a series of 
staff Frequently Asked Questions (FAQs).\11\ In the 2018

[[Page 12123]]

proposal, the agencies requested comment on the effectiveness of the 
guidance provided in certain of these FAQs.\12\ The agencies discussed 
comments received in the preamble to the 2019 amendments.\13\ The 
proposed rule would not modify or revoke any previously issued staff 
FAQs, unless otherwise specified.
---------------------------------------------------------------------------

    \11\ See https://www.occ.treas.gov/topics/capitalmarkets/financial-markets/trading-volckerrule/volcker-rule-implementation-faqs.html (OCC); https://www.federalreserve.gov/bankinforeg/volcker-rule/faq.htm (Board); https://www.fdic.gov/regulations/reform/volcker/faq.html (FDIC); https://www.sec.gov/divisions/marketreg/faq-volcker-rule-section13.htm (SEC); https://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_28_VolckerRule/index.htm 
(CFTC).
    \12\ 83 FR 33444-33446.
    \13\ 84 FR 61978-61980.
---------------------------------------------------------------------------

High-Level Summary of Comments on 2018 Proposal 14
---------------------------------------------------------------------------

    \14\ This summary is not meant to be a comprehensive assessment 
of the comments received on the 2018 proposal and only reviews 
certain major areas of interest. Comments are discussed in greater 
detail throughout this SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------

    The agencies invited comment on all aspects of the 2018 proposal 
and received over 75 unique comments and approximately 3,700 comments 
from individuals using a version of a short form letter to express 
opposition to the 2018 proposed rule.\15\ The preamble to the 2019 
amendments reviewed comments relating to the proprietary trading 
provisions of the 2018 proposal and the covered fund provisions that 
were adopted as part of the 2019 amendments. The agencies generally 
deferred public consideration of comments received on other aspects of 
the covered fund provisions to a future proposed rulemaking.
---------------------------------------------------------------------------

    \15\ 84 FR 61976.
---------------------------------------------------------------------------

    Various industry groups suggested maintaining the 2013 rule's base 
definition of covered fund, citing costs associated with complying with 
a new definition, while others supported an alternative definition. A 
number of industry groups and banks, and several Members of Congress, 
urged the agencies to amend the definition of covered fund to exclude 
certain funds, including the following: (1) Family wealth investment 
vehicles; (2) funds that extend credit to customers; (3) long-term 
investment funds that do not engage in any short-term proprietary 
trading; (4) venture capital funds; and (5) customer facilitation 
funds. Various public interest commenters objected to any additional 
exclusions, citing insufficient notice in the 2018 proposal and the 
potential for evasion of the 2013 rule.
    Commenters also proposed modifying the 2013 rule's existing 
exclusions from the definition of covered fund. Numerous industry 
groups suggested revising the exclusion for foreign public funds to 
focus on the characteristics of the fund and foreign regulations, 
rather than imposing specific conduct requirements that are difficult 
to monitor and verify. Several industry groups made various suggestions 
for simplifying the loan securitization exemption, including expanding 
the securities an issuer is permitted to hold and permitting an issuer 
to hold up to a certain percent of assets in non-loan assets.
    Finally, several bank and industry group commenters supported 
making the exemptions under section 23A of the Federal Reserve Act and 
the Board's Regulation W available under section 13(f) of the BHC Act. 
Several such commenters also supported exempting certain payment, 
clearing, and settlement services from the restrictions. A foreign bank 
industry group also recommended limiting the application of section 
13(f) to the U.S. operations of foreign firms.

II. Overview of Proposal

    The agencies are issuing a notice of proposed rulemaking that 
proposes specific changes to the restrictions on covered fund 
investments and activities and other issues related to the treatment of 
investment funds in the implementing regulations (the proposal or the 
proposed rule). The proposed rule is intended to improve and streamline 
the covered fund provisions and provide clarity to banking entities so 
that they can offer financial services and engage in other permissible 
activities in a manner that is consistent with the requirements of 
section 13 of the BHC Act.
    To better limit the extraterritorial impact of the implementing 
regulations, the proposal would exempt the activities of certain funds 
that are organized outside of the United States and offered to foreign 
investors (qualifying foreign excluded funds) from the restrictions of 
the implementing regulations. In certain circumstances, some foreign 
funds that are not ``covered funds'' may be subject to the implementing 
regulations as ``banking entities,'' if they are controlled by a 
foreign banking entity, and thus could be subject to more onerous 
compliance obligations than are imposed on similarly-situated covered 
funds, even though the foreign funds have limited nexus to the United 
States. This provision would codify an existing policy statement by the 
Federal banking agencies that addresses the potential attribution to a 
foreign banking entity of the activities and investments of qualifying 
foreign excluded funds.
    The proposal also would make modifications to several existing 
exclusions from the covered fund provisions, to provide clarity and 
simplify compliance with the requirements of the implementing 
regulations. First, the proposal would revise certain restrictions in 
the foreign public funds exclusion to more closely align the provision 
with the exclusion for similarly-situated U.S. registered investment 
companies. Second, the proposed rule would permit loan securitizations 
excluded from the rule to hold a small amount of non-loan assets, 
consistent with past industry practice, and codify existing staff-level 
guidance regarding this exclusion. In addition, the proposed rule would 
revise the exclusion for small business investment companies to account 
for the life cycle of those companies and would request comment on 
whether to clarify the scope of the exclusion for public welfare 
investments, including as it relates to rural business investment 
companies and qualified opportunity zone funds. Finally, the proposed 
rule would address concerns about certain components of the preamble to 
the 2013 rule related to calculating a banking entity's ownership 
interests in covered funds.
    The agencies recognized in the preamble to the 2013 rule that the 
definition of ``covered fund'' was expansive \16\ and, based on their 
experience implementing the rule, the agencies are now proposing 
several new exclusions from the covered fund provisions to address the 
potential over-breadth of the covered fund definition and related 
requirements. For example, the agencies recognize that the exclusions 
in the implementing regulations have inhibited banking entities' 
relationships with credit funds, and the proposed rule would create a 
new exclusion for such funds. Under the proposal, banking entities 
would be able to invest in and have certain relationships with credit 
funds that extend the type of credit that a banking entity may provide 
directly, subject to certain safeguards. Relatedly, the proposed rule 
would establish an exclusion from the definition of covered fund for 
venture capital funds. This provision would help ensure that banking 
entities can fully engage in this important type of development and 
investment activity, which may facilitate capital formation and provide 
important financing for small businesses, particularly in areas where 
such financing may not be readily available.
---------------------------------------------------------------------------

    \16\ See 79 FR 5677.
---------------------------------------------------------------------------

    The proposal also would include two new exclusions that would allow 
banking entities to provide certain traditional financial services via 
a fund structure, subject to certain safeguards.

[[Page 12124]]

First, the proposed rule would exclude from the definition of covered 
fund an entity created and used to facilitate a customer's exposures to 
a transaction, investment strategy, or other service. Second, the 
proposal would exclude from the covered fund definition wealth 
management vehicles that manage the investment portfolio of a family, 
and certain other persons, allowing a banking entity to provide 
integrated private wealth management services.
    In addition, the proposed rule would permit a banking entity to 
engage in a limited set of covered transactions with a covered fund the 
banking entity sponsors or advises or with which the banking entity has 
certain other relationships. The implementing regulations generally 
prohibit all covered transactions between a covered fund and its 
banking entity sponsor or investment adviser. The agencies recognize 
that the existing restrictions have prevented banking entities from 
providing certain traditional banking services to covered funds, such 
as standard payment, clearing, and settlement services to related 
covered funds.
    Lastly, the proposal would clarify certain aspects of the 
definition of ownership interest. Currently, due to the broad 
definition of ownership interest, some loans by banking entities to 
covered funds could be deemed to be ownership interests. The proposal 
would provide a safe harbor for bona fide senior loans or senior debt 
instruments to make clear that an ``ownership interest'' in a fund does 
not include such credit interests in the fund. In addition, the 
proposal would provide clarity about the types of credit rights that 
would be considered within the scope of the definition of ownership 
interest. Finally, the proposed rule would simplify compliance efforts 
by tailoring the calculation of a banking entity's compliance with the 
implementing regulations' aggregate fund limit and covered fund 
deduction, and provide clarity to banking entities regarding their 
permissible investments made alongside covered funds.\17\
---------------------------------------------------------------------------

    \17\ Separately, the agencies are proposing various technical 
edits to the implementing regulations. See infra III.G (Technical 
Amendments).
---------------------------------------------------------------------------

    The agencies request comment regarding all aspects of the proposed 
rule. Specific requests for comment are included in the following 
sections. Comments on the proposal must be submitted to the agencies on 
or before April 1, 2020.

III. Discussion of the Proposal

A. Qualifying Foreign Excluded Funds

    Since the adoption of the 2013 rule, a number of foreign banking 
entities, foreign government officials, and other market participants 
have expressed concern regarding instances in which certain funds 
offered and sold outside of the United States are excluded from the 
covered fund definition but still could be considered banking entities 
in certain circumstances (foreign excluded funds).\18\ This situation 
may occur if a foreign banking entity controls the foreign fund. A 
foreign banking entity could be considered to control the fund based on 
common corporate governance structures abroad such as where the fund's 
sponsor selects the majority of the fund's directors or trustees, or 
otherwise controls the fund for purposes of section 13 of the BHC Act 
by contract or through a controlled corporate director. As a result, 
such a fund would be subject to the requirements of section 13 and the 
implementing regulations, including restrictions on proprietary 
trading, restrictions on investing in or sponsoring covered funds, and 
compliance obligations.
---------------------------------------------------------------------------

    \18\ The 2013 rule generally excludes covered funds from the 
definition of ``banking entity.'' 2013 rule Sec.  _.2(c)(2)(i). 
However, because foreign excluded funds are not covered funds, they 
can become banking entities through affiliation with other banking 
entities.
---------------------------------------------------------------------------

    The Federal banking agencies released a policy statement on July 
21, 2017 (the 2017 policy statement) to address concerns about the 
possible unintended consequences and extraterritorial impact of section 
13 and the 2013 rule for foreign excluded funds.\19\ The 2017 policy 
statement noted that the staffs of the agencies were considering 
alternative ways in which the 2013 rule could be amended, or other 
appropriate action could be taken, to address any unintended 
consequences of section 13 and the 2013 rule for foreign excluded 
funds.
---------------------------------------------------------------------------

    \19\ Statement regarding Treatment of Certain Foreign Funds 
under the Rules Implementing Section 13 of the Bank Holding Company 
Act (July 21, 2017), available at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20170721a1.pdf.
---------------------------------------------------------------------------

    For purposes of the 2017 policy statement, a ``qualifying foreign 
excluded fund'' meant, with respect to a foreign banking entity, an 
entity that:
    (1) Is organized or established outside the United States and the 
ownership interests of which are offered and sold solely outside the 
United States;
    (2) Would be a covered fund were the entity organized or 
established in the United States, or is, or holds itself out as being, 
an entity or arrangement that raises money from investors primarily for 
the purpose of investing in financial instruments for resale or other 
disposition or otherwise trading in financial instruments;
    (3) Would not otherwise be a banking entity except by virtue of the 
foreign banking entity's acquisition or retention of an ownership 
interest in, or sponsorship of, the entity;
    (4) Is established and operated as part of a bona fide asset 
management business; and
    (5) Is not operated in a manner that enables the foreign banking 
entity to evade the requirements of section 13 or implementing 
regulations.
    To provide additional time to consider this issue, the 2017 policy 
statement provided that the Federal banking agencies would not propose 
to take action during the one-year period ending July 21, 2018, against 
a foreign banking entity \20\ based on attribution of the activities 
and investments of a qualifying foreign excluded fund to a foreign 
banking entity, or against a qualifying foreign excluded fund as a 
banking entity. To be eligible for this relief, the foreign banking 
entity's acquisition or retention of any ownership interest in, or 
sponsorship of, the qualifying foreign excluded fund must have met the 
requirements for permitted covered fund activities and investments 
solely outside the United States, as provided in section 13(d)(1)(I) of 
the BHC Act and Sec.  _.13(b) of the 2013 rule, as if the qualifying 
foreign excluded fund were a covered fund. The agencies extended this 
relief for an additional period of one year (until July 21, 2019) in 
the 2018 proposal.\21\ On July 17, 2019, the Federal banking agencies 
released a policy statement (the 2019 policy statement) that further 
extended this period to July 21, 2021.\22\ This additional time 
facilitates the agencies proposing the specific changes in the proposal 
to address this issue and will allow the public to submit comments in 
response to the proposal.\23\
---------------------------------------------------------------------------

    \20\ ``Foreign banking entity'' was defined for purposes of the 
2017 policy statement to mean a banking entity that is not, and is 
not controlled directly or indirectly by, a banking entity that is 
located in or organized under the laws of the United States or any 
State.
    \21\ 83 FR 33444.
    \22\ Statement regarding Treatment of Certain Foreign Funds 
under the Rules Implementing Section 13 of the Bank Holding Company 
Act (July 17, 2019), available at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20190717a1.pdf.
    \23\ The agencies did not propose any specific amendments to the 
2013 rule in the 2018 proposal on this issue and instead requested 
comment on foreign excluded funds, the policy statements, and 
related issues. See, e.g., 83 FR 33442-46.

---------------------------------------------------------------------------

[[Page 12125]]

    In response to questions in the 2018 proposal, several commenters 
urged the agencies to exclude controlled foreign funds offered solely 
outside the United States.\24\ Many suggested that the agencies 
accomplish this by excluding these funds from the definition of banking 
entity.\25\ Some commenters provided alternative proposals, including 
establishing a rebuttable presumption of compliance and making 
permanent the relief provided in the 2017 policy statement.\26\ Several 
commenters suggested permitting foreign banking entities to opt to be 
treated as a covered fund, instead of a banking entity, and providing 
additional relief from the limitations on relationships with a covered 
fund, under section _.14.\27\ One commenter suggested exempting from 
the definition of ``banking entity'' foreign excluded funds controlled 
by a non-U.S. banking entity as part of the non-U.S. banking entity's 
asset management activities or in connection with consumer derivative 
activities not marketed to U.S. residents.\28\ One commenter opposed 
any type of exclusion for foreign excluded funds and argued that the 
2013 rule as it stands is adequate in relation to the nexus between 
U.S. and foreign activities.\29\
---------------------------------------------------------------------------

    \24\ See, e.g., Institute of International Bankers (IIB); 
American Investment Council (AIC); American Bankers Association 
(ABA); Financial Services Agency/Bank of Japan (FSA/BOJ); Canadian 
Bankers Association (CBA); Federated Investors (FI); BVI; European 
Banking Federation (EBF); Japanese Bankers Association (JBA); and 
Credit Suisse (CS).
    \25\ Id.
    \26\ See, e.g., EBF and IIB.
    \27\ See, e.g., EBF; CS; IIB; and CBA.
    \28\ BVI.
    \29\ Data Boiler.
---------------------------------------------------------------------------

    To provide greater clarity and certainty to banking entities and 
qualifying foreign excluded funds, the agencies are proposing, pursuant 
to their authority under section 13(d)(1)(J) of the BHC Act, to exempt 
the activities of qualifying foreign excluded funds. Specifically, the 
agencies are proposing to exempt from the proprietary trading 
prohibition and covered fund restrictions the purchase or sale of a 
financial instrument by a qualifying foreign excluded fund and the 
acquisition or retention of any ownership interest in, or the 
sponsorship of, a covered fund by a qualifying foreign excluded fund, 
if any acquisition or retention of an ownership interest in, or 
sponsorship of, the qualifying foreign excluded fund by the foreign 
banking entity meets the requirements for permitted covered fund 
activities and investments solely outside the United States, as 
provided in section _.13(b) of the rule. Under the proposal, a 
qualifying foreign excluded fund has the same meaning as in the 2017 
and 2019 policy statements as described above.
    Section 13(d)(1)(H) and (I) of the BHC Act permit foreign banking 
entities to conduct certain trading and investing activities outside 
the United States, notwithstanding the restrictions under section 13(a) 
of the BHC Act. As indicated in the preamble to the 2013 rule, the 
purpose of these statutory provisions is to limit the extraterritorial 
application of section 13 as it applies to foreign banking 
entities.\30\
---------------------------------------------------------------------------

    \30\ 79 FR 5655 n. 1518 (identifying statement of Sen. Merkley 
regarding how section 13(d)(1)(H) ``recognize[s] rules of 
international comity by permitting foreign banks, regulated and 
backed by foreign taxpayers, in the course of operating outside of 
the United States to engage in activities permitted under relevant 
foreign law''). The agencies believe that the same rationale applies 
to section 13(d)(1)(I).
---------------------------------------------------------------------------

    In addition, section 13(d)(1)(J) of the BHC Act gives the agencies 
rulemaking authority to exempt activities from the prohibitions of 
section 13, provided the agencies determine that the activity in 
question would promote and protect the safety and soundness of the 
banking entity and the financial stability of the United States.\31\ 
The agencies believe that the proposal described above would be 
consistent with the purposes of section 13(d)(1)(H) and (I) of the BHC 
Act and could promote and protect the safety and soundness of banking 
entities and U.S. financial stability.
---------------------------------------------------------------------------

    \31\ 12 U.S.C. 1851(d)(1)(J).
---------------------------------------------------------------------------

    Exempting the activities of qualifying foreign excluded funds in 
the circumstances described above would provide clarity and certainty 
to, and likely promote and protect the safety and soundness of, such 
banking entities. This relief would be limited to the asset management 
activities of these foreign funds, which are organized outside of the 
United States and operate pursuant to the local laws of foreign 
jurisdictions. Thus, if the activities of these foreign funds were 
subjected to the restrictions applicable to banking entities, 
generally, their asset management activities may be significantly 
disrupted, and the foreign banking entities may be at a competitive 
disadvantage to other foreign bank and non-bank market participants 
conducting asset management business outside of the United States. 
Exempting the activities of these foreign funds would also allow their 
foreign banking entity sponsors to continue to conduct their asset 
management business outside the United States as long as the foreign 
banking entity's acquisition of an ownership interest in or sponsorship 
of the fund meets the requirements in section _.13(b). Thus, the 
proposed exemption may have the effect of promoting the safety and 
soundness of these foreign funds and their sponsors, while at the same 
time limiting the extraterritorial impact of the implementing 
regulations, consistent with the purposes of section 13(d)(1)(H) and 
(I) of the BHC Act.
    The proposed exemption would also promote and protect U.S. 
financial stability. While qualifying foreign excluded funds have very 
limited nexus to the U.S. financial system, they are permitted to 
invest in U.S. companies. Therefore, to the extent that these funds 
have any direct impact on U.S. financial stability, it would be to 
promote U.S. financial stability by providing additional capital and 
liquidity to U.S. capital markets. Because the proposed exemption would 
require that the foreign banking entity's acquisition of an ownership 
interest in or sponsorship of the fund meets the requirements in 
section _.13(b), the exemption would ensure that the risks of the 
investments made by these foreign funds would be booked to foreign 
entities in foreign jurisdictions, thus promoting and protecting U.S. 
financial stability. Additionally, subjecting such funds to the 
requirements of section 13 of the BHC Act imposed on banking entities 
could precipitate disruptions in foreign capital markets, which could 
generate spillover effects in the U.S. financial system.
    Question 1. Should the agencies make any other amendments to 
Sec. Sec.  _.6 and _.13 or include any additional parameters on the 
proposed exemption? Why or why not?
    Question 2. Would the proposed amendments to Sec. Sec.  _.6 and 
_.13 address the concerns raised regarding unintended consequences and 
extraterritorial impact? Why or why not? If the amendments would not 
address these concerns, what other amendments should be made?
    Question 3. Is the proposed approach to addressing foreign excluded 
funds effective? Why or why not? If not, what alternative approach 
would better address these types of entities?
    Question 4. Would the use of the term ``covered fund'' in Sec.  
_.13(b)(1) or in proposed Sec.  _.13(d)(2), together with the 
definition of ``covered fund'' in Sec.  _.10(b)(1), create any 
unintended consequences for foreign banking entities seeking to rely on 
the exemption for activities permitted by section 13(d)(1)(I) of the 
BHC Act? Why or why not? If so, what other alternatives should be 
considered to make the

[[Page 12126]]

exemption for activities permitted by section 13(d)(1)(I) of the BHC 
Act clear or more workable?
    Question 5. What impacts would the proposed amendments to 
Sec. Sec.  _.6 and _.13 have on the safety and soundness of banking 
entities, and on the financial stability of the United States? Would 
the activities permitted under the proposed amendments to Sec. Sec.  
_.6 and _.13 of the regulations promote and protect safety and 
soundness and U.S. financial stability? Please explain.

B. Modifications to Existing Covered Fund Exclusions

1. Foreign Public Funds
    In addition to the foreign excluded fund issues discussed above 
with respect to the banking entity definition, there are other foreign 
fund issues that arise under the covered fund definition. In order to 
provide consistent treatment between U.S. registered investment 
companies and their foreign equivalents, the implementing regulations 
exclude foreign public funds from the definition of covered fund. A 
foreign public fund is generally defined under the implementing 
regulations as any issuer that is organized or established outside of 
the United States and the ownership interests of which are (1) 
authorized to be offered and sold to retail investors in the issuer's 
home jurisdiction and (2) sold predominantly through one or more public 
offerings outside of the United States.\32\ The agencies stated in the 
preamble to the 2013 rule that they generally expect that an offering 
is made predominantly outside of the United States if 85 percent or 
more of the fund's interests are sold to investors that are not 
residents of the United States.\33\ The 2013 rule defines ``public 
offering'' for purposes of this exclusion to mean a ``distribution,'' 
as defined in Sec.  _.4(a)(3) of subpart B, of securities in any 
jurisdiction outside the United States to investors, including retail 
investors, provided that the distribution complies with all applicable 
requirements in the jurisdiction in which such distribution is being 
made; the distribution does not restrict availability to investors 
having a minimum level of net worth or net investment assets; and the 
issuer has filed or submitted, with the appropriate regulatory 
authority in such jurisdiction, offering disclosure documents that are 
publicly available.\34\
---------------------------------------------------------------------------

    \32\ See 2013 rule Sec.  _.10(c)(1); see also 79 FR 5678 (``For 
purposes of this exclusion, the [a]gencies note that the reference 
to retail investors, while not defined, should be construed to refer 
to members of the general public who do not possess the level of 
sophistication and investment experience typically found among 
institutional investors, professional investors or high net worth 
investors who may be permitted to invest in complex investments or 
private placements in various jurisdictions. Retail investors would 
therefore be expected to be entitled to the full protection of 
securities laws in the home jurisdiction of the fund, and the 
[a]gencies would expect a fund authorized to sell ownership 
interests to such retail investors to be of a type that is more 
similar to a U.S. registered investment company rather than to a 
U.S. covered fund.'').
    \33\ 79 FR 5678.
    \34\ 2013 rule Sec.  _.10(c)(1)(iii).
---------------------------------------------------------------------------

    The 2013 rule places an additional condition on a U.S. banking 
entity's ability to rely on the foreign public fund exclusion with 
respect to any foreign fund it sponsors.\35\ The foreign public fund 
exclusion is only available to a U.S. banking entity with respect to a 
foreign fund sponsored by the U.S. banking entity if, in addition to 
the requirements discussed above, the fund's ownership interests are 
sold predominantly to persons other than the sponsoring banking entity, 
the issuer (or affiliates of the sponsoring banking entity or issuer), 
and employees and directors of such entities.\36\ The agencies stated 
in the preamble to the 2013 rule that, consistent with the agencies' 
view concerning whether a foreign public fund has been sold 
predominantly outside of the United States, the agencies generally 
expect that a foreign public fund would satisfy this additional 
condition if 85 percent or more of the fund's interests are sold to 
persons other than the sponsoring U.S. banking entity and the specified 
persons connected to that banking entity.\37\
---------------------------------------------------------------------------

    \35\ Although the discussion of this condition generally refers 
to U.S. banking entities for ease of reading, the condition also 
applies to foreign subsidiaries of a U.S. banking entity. See 2013 
rule Sec.  _.10(c)(1)(ii) (applying this limitation ``[w]ith respect 
to a banking entity that is, or is controlled directly or indirectly 
by a banking entity that is, located in or organized under the laws 
of the United States or of any State and any issuer for which such 
banking entity acts as sponsor'').
    \36\ See 2013 rule Sec.  _.10(c)(1)(ii).
    \37\ 79 FR 5678.
---------------------------------------------------------------------------

    In adopting the foreign public fund exclusion, the agencies' view 
was that it was appropriate to exclude these funds from the ``covered 
fund'' definition because they are sufficiently similar to U.S. 
registered investment companies.\38\ The agencies also expressed the 
view that the additional condition applicable to U.S. banking entities 
with respect to foreign funds that they sponsor was designed to treat 
foreign public funds consistently with similar U.S. funds and to limit 
the extraterritorial application of section 13 of the BHC Act, 
including by permitting U.S. banking entities and their foreign 
affiliates to carry on traditional asset management businesses outside 
of the United States, while also seeking to limit the possibility for 
evasion through foreign public funds.\39\
---------------------------------------------------------------------------

    \38\ Id.
    \39\ Id.
---------------------------------------------------------------------------

    Based on experience implementing the 2013 rule, as well as 
discussions with and comments received from regulated entities, it 
appears that some of the conditions of the foreign public fund 
exclusion may not be necessary to ensure consistent treatment of 
foreign public funds and registered investment companies. Moreover, 
some conditions may make it difficult for a non-U.S. fund to qualify 
for the exclusion or for a banking entity to validate whether a non-
U.S. fund qualifies for the exclusion, resulting in certain non-U.S. 
funds that are similar to U.S. registered investment companies being 
treated as covered funds. For example, the requirement that the fund be 
authorized to be offered and sold to retail investors in the fund's 
home jurisdiction (the home jurisdiction requirement) disqualifies 
certain funds that are organized in one jurisdiction but only 
authorized to be sold to retail investors in another jurisdiction.\40\ 
It appears that, for a variety of reasons, it is not uncommon for 
foreign retail funds to be organized in one jurisdiction and sold in 
another jurisdiction.\41\
---------------------------------------------------------------------------

    \40\ See, e.g., IIB; Bank Policy Institute (BPI); EBF; and JBA.
    \41\ For example, commenters have noted that retail funds are 
sometimes organized in the Cayman Islands for tax considerations but 
only offered for sale in Japan. See, e.g., BPI.
---------------------------------------------------------------------------

    Additionally, the requirement that a fund be sold ``predominantly'' 
through one or more public offerings may cause certain compliance and 
monitoring difficulties.\42\ This is because banking entities may have 
limited visibility into the distribution history of a third-party 
sponsored fund, or, in the case of a fund sponsored by the banking 
entity, the fund's interests may be sold through third-party 
distributors, and the precise pattern of distribution may be affected 
by market forces and changes in investor demand.\43\ Also, the 
limitation on ownership of interests in a U.S. banking entity-sponsored 
foreign public fund by certain employees (including their immediate 
family members) of the sponsoring banking entity or fund may be 
difficult for banking entities to monitor for similar reasons, and 
imposes a requirement on foreign public funds that may not apply to 
similarly situated U.S. registered investment companies.\44\ Finally, 
commenters have expressed concerns with the expectation stated in the 
preamble to the 2013 rule that for a U.S. banking entity-sponsored

[[Page 12127]]

foreign fund to satisfy the condition that it be ``predominantly'' sold 
to persons other than the sponsoring U.S. banking entity and certain 
persons connected to that banking entity, 85 percent of the ownership 
interests in the fund should be sold to such persons.\45\
---------------------------------------------------------------------------

    \42\ See, e.g., BPI.
    \43\ Id.
    \44\ See, e.g., IIB.
    \45\ See, e.g., Investment Company Institute.
---------------------------------------------------------------------------

    To address the concerns noted above related to the home 
jurisdiction requirement and the requirement that ownership interests 
be sold predominantly through public offerings, the agencies are 
proposing to replace those two requirements with a requirement that the 
fund is authorized to offer and sell ownership interests, and such 
interests are offered and sold, through one or more public offerings. 
The agencies are also proposing to modify the definition of ``public 
offering'' from the implementing regulations to add a new requirement 
that the distribution is subject to substantive disclosure and retail 
investor protection laws or regulations, to help ensure that funds 
qualifying for this exclusion are sufficiently similar to U.S. 
registered investment companies. Additionally, the proposal would only 
apply the condition that the distribution comply with all applicable 
requirements in the jurisdiction where it is made to instances in which 
the banking entity acts as the investment manager, investment adviser, 
commodity trading advisor, commodity pool operator, or sponsor. This 
change is intended to address the potential difficulty that a banking 
entity investing in a third-party sponsored fund may have in 
determining whether the distribution of such fund complied with all the 
requirements in the jurisdiction where it was made.
    The changes discussed above would seek to ensure that the exclusion 
remains limited to funds that are authorized to be sold to retail 
investors, but it would no longer require the fund to be authorized to 
be sold to retail investors in the jurisdiction where it is organized. 
Additionally, while the fund would still be required to be offered and 
sold through one or more public offerings (which would require, among 
other things, that the distribution be made in a jurisdiction outside 
the United States that subjects the foreign public fund to substantive 
disclosure and retail investor protection laws or regulations), the 
proposal would eliminate the requirement that it be sold 
``predominantly'' through one or more public offerings. This change 
would eliminate the difficulty that banking entities have described in 
tracking the specific distribution patterns of ownership interests in 
such funds, and it would more closely align the treatment of foreign 
public funds with that of U.S. registered investment companies, which 
have no such requirement. The agencies believe the revised requirement 
would help ensure that the foreign public fund is sufficiently similar 
to a U.S. registered investment company.
    To simplify the requirements of the exclusion and address concerns 
described by banking entities with the difficulty in tracking the sale 
of ownership interests to employees and their immediate family members, 
the proposal would eliminate the limitation on selling ownership 
interests of the issuer to employees (other than senior executive 
officers) of the sponsoring banking entity or the issuer (or affiliates 
of the banking entity or issuer). This change would also help to align 
the treatment of foreign public funds with that of U.S. registered 
investment companies, as the exclusion for U.S. registered investment 
companies has no such limitation. The proposal would continue to limit 
the sale of ownership interests to directors or senior executive 
officers of the sponsoring banking entity or the fund (or their 
affiliates), as the agencies believe that such a requirement would be 
simpler for a banking entity to track. As discussed in the preamble to 
the 2013 rule, this requirement is intended to prevent evasion of 
section 13 of the BHC Act.\46\
---------------------------------------------------------------------------

    \46\ 79 FR 5678-79.
---------------------------------------------------------------------------

    As reflected in the detailed questions that follow, the agencies 
request comment on all aspects of the proposed modifications to the 
foreign public fund exclusion, including whether the exclusion is 
effective in identifying foreign funds that may be sufficiently similar 
to U.S. registered investment companies and permitting U.S. banking 
entities and their foreign affiliates to carry on traditional asset 
management businesses outside of the United States, without creating 
opportunities for evasion of the requirements of section 13 of the BHC 
Act.
    Question 6. Are foreign funds that satisfy the proposed conditions 
in the foreign public fund exclusion sufficiently similar to U.S. 
registered investment companies such that it is appropriate to exclude 
these funds from the covered fund definition? Why or why not? If these 
foreign funds are not sufficiently similar to U.S. registered 
investment companies, how should the agencies modify the exclusion's 
conditions to permit only funds that are sufficiently similar to U.S. 
registered investment companies to rely on it? Are there foreign funds 
that cannot satisfy the exclusion's proposed conditions but that are 
nonetheless sufficiently similar to U.S. registered investment 
companies such that it would be appropriate to exclude those foreign 
funds from the covered fund definition? If so, how should the agencies 
modify the exclusion's conditions to permit those funds to rely on it?
    Question 7. How effectively does the proposed replacement of the 
home jurisdiction requirement and the requirement that ownership 
interests be sold predominantly through public offerings with a 
requirement that the fund is authorized to offer and sell ownership 
interests, and such interests are offered and sold, through one or more 
public offerings address the concerns discussed above related to the 
compliance with these requirements? If such concerns are not addressed, 
how should the agencies further modify these requirements?
    Question 8. Is the additional condition added to the ``public 
offering'' definition requiring the distribution be subject to 
substantive disclosure and retail investor protection laws or 
regulations sufficiently clear and effective? If not, how should the 
agencies modify or clarify this requirement? Should the agencies 
further specify features of ``substantive disclosure and retail 
investor protection laws or regulations?'' Would it be clearer if the 
agencies identified particular types of laws or regulations that would 
meet this condition (e.g., requirements for periodic filings with, and 
periodic examinations by, the appropriate regulatory authority; 
requirements for periodic reports to be distributed to retail 
investors; or a prohibition against fraud)?
    Question 9. In what ways, if any, is it difficult for a banking 
entity to determine whether a fund satisfies the implementing 
regulations' condition of the ``public offering'' definition requiring 
that the distribution comply with all applicable requirements in the 
jurisdiction in which the distribution is made? Should the agencies 
eliminate this requirement with respect to funds for which the banking 
entity does not serve as the investment manager, investment adviser, 
commodity trading advisor, commodity pool operator, or sponsor, as 
proposed, or should this requirement be otherwise modified? Would 
eliminating or modifying this requirement create an opportunity for 
evasion of the requirements of section 13? If so, how should the 
agencies address this concern?
    Question 10. As discussed above, the agencies propose to modify the

[[Page 12128]]

additional conditions on U.S. banking entity-sponsored foreign funds, 
which are intended in part to limit the possibility for evasion of 
section 13. In what ways, if any, would the proposed modifications, 
including the elimination of the limitations on certain employees 
owning interests in the fund, create an opportunity for evasion? How 
should the agencies modify these additional requirements to limit the 
possibility for evasion? Is the limitation on directors and senior 
executive officers owning interests in the fund necessary or 
appropriate to prevent evasion of section 13? Why or why not? Should 
the agencies eliminate or modify this limitation? How difficult is it 
for banking entities to monitor and track this limitation? Commenters 
should address whether banking entities already track this information.
    Question 11. Is the proposed requirement that the fund's ownership 
interests are sold predominantly to persons other than the sponsoring 
banking entity or the issuer (or affiliates of the sponsoring banking 
entity or issuer), and directors and senior executive officers of such 
entities, necessary to prevent evasion of the requirements of section 
13? If the requirement is not necessary to prevent evasion, how should 
the agencies eliminate or further modify this requirement? Should the 
agencies consider this condition satisfied if 75 percent (or some other 
percentage) of the ownership interests are sold to persons other than 
the sponsoring banking entity, the issuer (or affiliates of the 
sponsoring banking entity or issuer), and directors and senior 
executive officers of such entities? Why or why not?
    Question 12. Do the proposed changes to the foreign public fund 
exclusion, in the aggregate, increase opportunities for evasion of the 
requirements of section 13? If so, how should the agencies address 
these concerns? Should the agencies include a specific reservation of 
authority to prevent evasion through the foreign public fund exclusion, 
or are the anti-evasion provisions in Sec.  __.21 of the implementing 
regulations sufficient to address these concerns? \47\
---------------------------------------------------------------------------

    \47\ Section _.21 of the implementing regulations provides in 
part that whenever an agency finds reasonable cause to believe any 
banking entity has engaged in an activity or made an investment in 
violation of section 13 of the BHC Act or the implementing 
regulations, or engaged in any activity or made any investment that 
functions as an evasion of the requirements of section 13 of the BHC 
Act or the implementing regulations, the agency may take any action 
permitted by law to enforce compliance with section 13 of the BHC 
Act and the 2013 rule, including directing the banking entity to 
restrict, limit, or terminate any or all activities under the 2013 
rule and dispose of any investment.
---------------------------------------------------------------------------

2. Loan Securitizations
    Section 13 of the BHC Act provides that ``[n]othing in this section 
shall be construed to limit or restrict the ability of a banking entity 
. . . to sell or securitize loans in a manner otherwise permitted by 
law.'' \48\ To effectuate this statutory requirement, the 2013 rule 
excludes from the definition of covered fund loan securitizations that 
issue asset-backed securities and hold only loans, certain rights and 
assets, and a small set of other financial instruments (permissible 
assets).\49\ The staffs of the agencies in June 2014 issued an FAQ 
explaining that assets other than permitted securities can be servicing 
assets for purposes of the loan securitization exclusion.\50\
---------------------------------------------------------------------------

    \48\ 12 U.S.C. 1851(g)(2).
    \49\ See 2013 rule Sec.  ____.10(c)(8). Loan is further defined 
as any loan, lease, extension of credit, or secured or unsecured 
receivable that is not a security or derivative. Implementing 
regulations Sec.  __.2(t).
    \50\ Loan Securitization Servicing FAQ. See supra n. 11 and 
accompanying text. See also, infra, Leases and Servicing Assets for 
a discussion of the FAQ.
---------------------------------------------------------------------------

    Since the adoption of the 2013 rule, several banking entities and 
other participants in the loan securitization industry have commented 
that the limited set of permissible assets has inappropriately 
restricted their ability to use the loan securitization exclusion. The 
agencies asked several questions regarding the efficacy and scope of 
the exclusion and the Loan Securitization Servicing FAQ in the 2018 
proposal.\51\ Comments were focused on permitting small amounts of non-
loan assets and clarifying the treatment of leases and related assets. 
The agencies are proposing to codify the Loan Securitization Servicing 
FAQ and permit loan securitizations to hold a small amount of non-loan 
assets. The agencies also request comment on whether other revisions 
are necessary or appropriate to effectuate section 13 of the BHC Act, 
as described in greater detail below.
---------------------------------------------------------------------------

    \51\ 83 FR 33480-81.
---------------------------------------------------------------------------

Leases and Servicing Assets
    The 2013 rule defines ``loan'' to include leases and permits loan 
securitizations to hold rights or other assets (servicing assets) that 
arise from the structure of the loan securitization or from the loans 
supporting a loan securitization.\52\ Rights or other servicing assets 
are assets designed to facilitate the servicing of the assets 
underlying a loan securitization or the distribution of proceeds from 
those assets to holders of the asset-backed securities.\53\ In response 
to confusion regarding the scope of these two provisions, the staffs of 
the agencies released the Loan Securitization Servicing FAQ. Under this 
FAQ, a servicing asset may or may not be a security, but if the 
servicing asset is a security, it must be a permitted security under 
the rule.
---------------------------------------------------------------------------

    \52\ 2013 rule Sec. Sec.  ____.2(s); ____.10(c)(8)(i)(D), (v).
    \53\ See, e.g., FASB Statement No. 156: Accounting for Servicing 
of Financial Assets, ] 61 (FAS 156).
---------------------------------------------------------------------------

    Several commenters on the 2018 proposal supported codifying this 
FAQ, with one commenter encouraging the agencies to include specific 
examples of servicing assets.\54\ However, one commenter suggested that 
the Loan Securitization Servicing FAQ was sufficient and that the 
regulation need not be modified.\55\ Another commenter suggested that 
the exclusion be expanded to cover leases and related assets, including 
operating or capital leases.\56\
---------------------------------------------------------------------------

    \54\ Structured Finance Industry Group (SFIG) and JBA.
    \55\ Data Boiler.
    \56\ SFIG.
---------------------------------------------------------------------------

    The agencies propose codifying the Loan Securitization Servicing 
FAQ to clarify the scope of the servicing asset provision.\57\ However, 
the agencies are not proposing to separately list leases within the 
loan securitization exclusion because leases are included in the 
definition of loan and thus are permitted assets for loan 
securitizations under the current exclusion.\58\
---------------------------------------------------------------------------

    \57\ The proposal also clarifies that special units of 
beneficial interest and collateral certificates meeting the 
requirements of paragraph (c)(8)(v) of the exclusion that are 
securities need not meet the requirements of paragraph (c)(8)(iii) 
of the exclusion.
    \58\ See implementing regulations Sec.  _.2(t).
---------------------------------------------------------------------------

    Question 13. Does the proposed modification of the loan 
securitization exclusion sufficiently permit securitization of leases, 
servicing assets, and related assets, including leases that are 
security interests? Why or why not?
Limited Holdings of Non-Loan Assets
    In the preamble to the 2013 rule, the agencies declined to permit 
loan securitizations to hold a certain amount of non-loan assets.\59\ 
The agencies supported a narrow scope of permissible assets by noting 
that ``the purpose underlying section 13 is not to expand the scope of 
assets in an excluded loan securitization beyond loans as defined in 
the final rule and the other assets that the agencies are specifically 
permitting in a loan securitization.'' \60\
---------------------------------------------------------------------------

    \59\ 79 FR 5687-88.
    \60\ 79 FR 5687.
---------------------------------------------------------------------------

    Several commenters on the 2018 proposal disagreed with the 
agencies'

[[Page 12129]]

views and supported expanding the range of permissible assets in an 
excluded loan securitization.\61\ Many commenters recommended allowing 
loan securitizations to hold up to five or ten percent of non-loan 
assets. Commenters suggested that a limited bucket of non-loan assets 
would be consistent with exclusions under the Investment Company Act, 
such as section 3(c)(5)(C) and rule 3a-7.\62\ Commenters argued that 
banking entities would use such authority to incorporate into 
securitizations corporate bonds, interests in letters of credit, cash 
and short-term highly liquid investments, derivatives, and senior 
secured bonds that do not significantly change the nature and risk 
profile of the securitization.\63\ One commenter suggested permitting 
additional non-loan assets so long as the securitization is ``primarily 
backed by qualifying assets that are not impermissible securities or 
derivatives.'' \64\
---------------------------------------------------------------------------

    \61\ E.g., Investment Adviser Association (IAA); Loan 
Syndications and Trading Association (LSTA); ABA; SFIG; Goldman 
Sachs (GS); BPI; JBA; and Securities Industry and Financial Markets 
Association (SIFMA).
    \62\ BPI.
    \63\ LSTA and JBA.
    \64\ SFIG.
---------------------------------------------------------------------------

    One commenter suggested that permitting loan securitizations to 
hold a small number of non-loan assets, typically fixed income 
securities, would decrease compliance burdens associated with analyzing 
fund assets and increase fund managers' flexibility in responding to 
market conditions and customer preferences.\65\ One commenter also 
claimed that permitting non-loan holdings below a certain threshold 
would conform the rule with industry practice without requiring a 
wholesale redefinition of covered funds.\66\ In addition, some 
commenters maintained that such an approach was consistent with the 
rule of construction because inclusion of small amounts of non-
permissible assets was standard practice, particularly for 
international securitizations, and permitted by law.\67\ In contrast, 
another commenter objected to allowing a limited amount of non-loan 
investments and suggested that permitting such investments would be 
contrary to the general purpose of section 13 of the BHC Act, which the 
commenter claimed was to divest banking entities of risky assets.\68\
---------------------------------------------------------------------------

    \65\ SFIG.
    \66\ LSTA.
    \67\ LSTA and SIFMA. Some of these commenters subsequently 
indicated that the loan securitization industry has evolved since 
the issuance of the 2013 rule and loan securitization issuers no 
longer include non-loan assets and might not include non-loan assets 
in a securitization even if the scope of non-loan assets permitted 
to be held was expanded.
    \68\ Data Boiler.
---------------------------------------------------------------------------

    After considering the comments received on the 2018 proposal, the 
agencies are proposing to allow a loan securitization vehicle to hold 
up to five percent of assets in non-loan assets. Authorizing loan 
securitizations to hold small amounts of non-loan assets could, 
consistent with section 13 of the BHC Act, permit loan securitizations 
to respond to market demand and reduce compliance costs associated with 
the securitization process without significantly increasing risk to 
banking entities and the financial system. The proposed limit on the 
amount of non-loan assets also would assuage potential concerns that 
allowing certain non-loan assets will lead to evasion, indirect 
proprietary trading, and other impermissible activities or excessive 
risk to the banking entity. Moreover, loan securitizations provide an 
important avenue for banking entities to fund lending programs, and 
allowing loan securitizations to hold a small amount of non-loan assets 
in response to customer and market demand may increase a banking 
entity's capacity to provide financing and lending.
    Question 14. Should the loan securitization exclusion permit loan 
securitization issuers to hold a certain percentage of non-loan assets? 
Why or why not? If so, should the maximum percentage of permissible 
non-loan assets be five or ten percent, or some other amount? 
Regardless of the non-loan asset limit, what should be the method of 
calculating compliance with the limit (e.g., market value, par value, 
principal balance, or some other measure)? Would permitting loan 
securitization issuers to hold a certain percentage of non-loan assets 
further the statutory rule of construction in section 13(g)(2) of the 
BHC Act? If so, explain how.
    Question 15. In what ways, if any, should the agencies limit the 
type of permissible non-loan assets to certain asset classes or 
structures (e.g., only debt securities or any permissible asset, such 
as a derivative)? Would the inclusion of certain financial 
instruments--such as derivatives and collateralized debt obligations--
raise safety and soundness concerns? If so, should qualifying loan 
securitizations be permitted to hold such instruments and, if so, what 
restrictions should be placed on the holding of such instruments? What, 
if any, other restrictions should the agencies impose on non-loan 
assets to reduce the potential for evasion of the rule?
Cash Equivalents
    The loan securitization exclusion permits issuers to hold certain 
types of contractual rights or assets directly arising from the loans 
supporting the asset-backed securities that a loan securitization 
relying on the exclusion may hold, including cash equivalents. In 
response to questions about the scope of the cash equivalent provision, 
the Loan Securitization Servicing FAQ stated that ``cash equivalents'' 
means high quality, highly liquid investments whose maturity 
corresponds to the securitization's expected or potential need for 
funds and whose currency corresponds to either the underlying loans or 
the asset-backed securities.\69\ To promote transparency and clarity, 
the proposal would codify this additional language in the Loan 
Securitization Servicing FAQ regarding the meaning of ``cash 
equivalents.'' \70\ The agencies are not requiring ``cash equivalents'' 
to be ``short term,'' because the agencies recognize that a loan 
securitization may need greater flexibility to match the maturity of 
high quality, highly liquid investments to its expected or potential 
need for funds.
---------------------------------------------------------------------------

    \69\ See supra, n. 11.
    \70\ Proposed rule Sec.  _.10(c)(8)(iii)(A).
---------------------------------------------------------------------------

    Question 16. Should the agencies codify the cash equivalents 
language in the Loan Securitization Servicing FAQ? Why or why not?
3. Public Welfare and Small Business Funds
i. Public Welfare Funds
    Section 13(d)(1)(E) of the BHC Act permits, among other things, a 
banking entity to make and retain investments that are designed 
primarily to promote the public welfare of the type permitted under 12 
U.S.C. 24(Eleventh).\71\ Consistent with the statute, the 2013 rule 
excludes from the definition of ``covered fund'' issuers that make 
investments that are designed primarily to promote the public welfare, 
of the type permitted under paragraph 11 of section 5136 of the Revised 
Statutes of the United States (12 U.S.C. 24).\72\ The agencies noted in 
the preamble to the 2013 rule that excluding issuers in the business of 
making public welfare investments would give effect to the statutory 
exemption for these investments. The agencies further stated their 
belief that permitting a banking entity to sponsor and invest in 
entities that are in the business of making public welfare investments 
would result in banking entities being able to provide

[[Page 12130]]

valuable expertise and services to these entities and to provide 
funding and assistance to small businesses and low- and moderate-income 
communities. The agencies also stated their belief that excluding 
issuers that are in the business of making public welfare investments 
would allow banking entities to continue to provide capital to 
community-improving projects and, in some instances, promote capital 
formation.\73\
---------------------------------------------------------------------------

    \71\ See 12 U.S.C. 1851(d)(1)(E).
    \72\ 2013 rule Sec.  _.10(c)(11)(ii).
    \73\ See 79 FR 5698.
---------------------------------------------------------------------------

    In response to the 2018 proposal, the agencies received one comment 
stating that the 2013 rule's exclusion for funds that are designed 
primarily to promote the public welfare does not account for community 
development investments that are made through investment vehicles. The 
commenter recommended expressly excluding all investments that qualify 
for Community Reinvestment Act (CRA) credit, including direct and 
indirect investments in a community development fund, small business 
investment company (SBIC), or similar fund.\74\
---------------------------------------------------------------------------

    \74\ See ABA.
---------------------------------------------------------------------------

    The OCC's regulations implementing 12 U.S.C. 24(Eleventh) provide 
that investments that receive consideration as qualified investments 
under the regulations implementing the CRA (CRA-qualified investments) 
would also meet the public welfare investment requirements.\75\ The 
2013 rule did not expressly incorporate these implementing regulations 
into the exclusion for public welfare investments. The agencies are 
requesting comment on whether any change should be made to clarify that 
all permissible public welfare investments, under any agency's 
regulation, are excluded from the covered fund restrictions.\76\ For 
example, the agencies understand that there may be uncertainty 
regarding how the exclusion for public welfare investments applies to 
community development investments that are made through fund 
structures--for example, an investment fund that invests exclusively in 
SBICs, that is designed to receive consideration as a CRA-qualified 
investment, and that would be considered a public welfare investment 
under applicable regulations.
---------------------------------------------------------------------------

    \75\ See 12 CFR 24.3 (stating that, for national banks, an 
investment that would receive consideration under 12 CFR 25.23 as a 
``qualified investment'' is a public welfare investment); 12 CFR 
25.23 (describing the investment test under the regulations 
implementing the CRA for national banks).
    \76\ A banking entity must have independent authority to make a 
public welfare investment. For example, a banking entity that is a 
state member bank may make a public welfare investment to the extent 
permissible under 12 U.S.C. 338a and 12 CFR 208.22.
---------------------------------------------------------------------------

    In particular, the agencies request comment on the following:
    Question 17. Is the scope of the current public welfare investment 
fund exclusion properly calibrated? Why or why not? Under what 
circumstances, if any, have banking entities experienced compliance 
challenges under the covered fund provisions in Subpart C regarding 
investments in community development, public welfare, or similar funds 
that are designed to receive consideration as CRA-qualified 
investments?
    Question 18. Have banking entities avoided making investments that 
are designed to receive consideration as CRA-qualified investments 
because they believed that the investment may not satisfy the public 
welfare investment fund exclusion? If so, what factors have caused 
uncertainty as to whether an issuer qualifies for the exclusion for 
public welfare investment funds?
    Question 19. In what ways would it promote transparency, clarity, 
and consistency with other Federal banking regulations if the agencies 
explicitly exclude from the definition of covered fund any issuer that 
invests exclusively or substantially in investments that are designed 
to receive consideration as CRA-qualified investments? What policy 
considerations weigh for or against such an exclusion? What conditions 
should apply to such an exclusion?
    Question 20. Should the agencies establish a separate exclusion for 
CRA-qualified investments or incorporate such an exclusion into the 
exclusion for public welfare investments?
    Question 21. Rural Business Investment Companies (RBICs)--as 
defined under 203(l) and 203(m) of the Investment Advisers Act of 1940 
(``Advisers Act'')--are companies licensed under the Rural Business 
Investment Program (RBIP), a program created as a joint initiative 
between the U.S. Department of Agriculture and the Small Business 
Administration. The RBIP was designed to promote economic development 
and job creation in rural communities by investing in companies 
involved in the production, processing and supply of food and 
agriculture-related products. Under the implementing regulations, are 
many RBICs excluded from the definition of covered fund because of the 
public welfare exclusion or because of another provision? \77\ Should 
the agencies provide an express exclusion from the definition of 
covered fund for RBICs, similar to the exclusion for SBICs? Are RBICs 
substantially similar to SBICs and public welfare companies that 
banking entities are permitted to make and retain investments in under 
section 13(d)(1)(E) of the BHC Act? Would excluding RBICs in the same 
manner that SBICs and public welfare companies are excluded from the 
definition of covered fund provide certainty regarding the covered fund 
status of RBICs or serve similar interests, as identified by commenters 
in response to the 2018 proposal?
---------------------------------------------------------------------------

    \77\ Following enactment of the RBIC Advisers Relief Act of 
2018, Pub. L. 115-417 (2019), advisers to solely RBICs and advisers 
to solely SBICs are exempt from investment adviser registration 
pursuant to Advisers Act, section 203(b)(8) and 203(b)(7), 
respectively. The venture capital fund adviser exemption deems RBICs 
and SBICs to be venture capital funds for purposes of the 
registration exemption. 15 U.S.C. 80b-3(l). Accordingly, the 
agencies' proposed exclusion for certain venture capital funds 
discussed below, see infra section III.C.2, which would require that 
a fund be a ``venture capital fund'' as defined in the SEC 
regulations implementing the registration exemption, could apply to 
RBICs and SBICs to the extent that they satisfy the other elements 
of the proposed exclusion.
---------------------------------------------------------------------------

    Question 22. The Tax Cuts and Jobs Act established the 
``opportunity zone'' program to provide tax incentives for long-term 
investing in designated economically distressed communities. The 
program allows taxpayers to defer and reduce taxes on capital gains by 
reinvesting gains in ``qualified opportunity funds'' (QOFs) that are 
required to have at least 90 percent of their assets in designated low-
income zones. Do commenters believe that many or all QOFs are excluded 
from the definition of covered fund under the implementing regulations 
under the public welfare exclusion or another exclusion or exemption? 
Should the agencies provide an express exclusion from the definition of 
covered fund for QOFs? Are QOFs substantially similar to SBICs and 
public welfare companies that banking entities are permitted to make 
and retain investments in under section 13(d)(1)(E) of the BHC Act? 
Would excluding QOFs in the same manner that SBICs and public welfare 
companies are excluded from the definition of covered fund provide 
certainty regarding the covered fund status of QOFs or serve similar 
interests, as identified by commenters in response to the 2018 
proposal?
ii. Small Business Investment Companies
    Consistent with section 13 of the BHC Act,\78\ the 2013 rule 
excludes from the definition of covered fund SBICs and issuers that 
have received notice from the Small Business Administration to

[[Page 12131]]

proceed to qualify for a license as a SBIC, which notice or license has 
not been revoked.\79\ The agencies explained in the preamble to the 
2013 rule that excluding SBICs from the definition of ``covered fund'' 
would give appropriate effect to the statutory exemption for 
investments in SBICs in a way that facilitates national community and 
economic development objectives.\80\
---------------------------------------------------------------------------

    \78\ See 12 U.S.C. 1851(d)(1)(E) (permitting investments in 
SBICs).
    \79\ See 2013 rule Sec.  _.10(c)(11).
    \80\ See 79 FR 5698.
---------------------------------------------------------------------------

    In response to the 2018 proposal,\81\ the agencies received three 
comments recommending revising the 2013 rule's exclusion for SBICs to 
clarify that SBICs that surrender their SBIC licenses when winding down 
may continue to qualify for the exclusion for SBICs.\82\ Two of these 
commenters stated that SBICs often surrender their licenses during 
wind-down, which is when the fund focuses on returning capital to 
partners.\83\ One commenter asserted that, during the wind-down phase 
of an SBIC's lifecycle, an SBIC license is neither necessary nor a 
prudent use of partnership funds.\84\ One commenter noted that banking 
entities that are investors in SBICs generally do not control whether 
an SBIC surrenders its license. This could raise questions as to 
whether an issuer that a banking entity invested in when the issuer was 
an SBIC could become a covered fund for reasons outside the banking 
entity's control.\85\ In contrast, another commenter suggested concerns 
about the SBIC exclusion generally.\86\
---------------------------------------------------------------------------

    \81\ 89 FR 33432.
    \82\ See Small Business Investors Alliance (SBIA); Capital One 
et al.; and BB&T Corporation (BB&T).
    \83\ See SBIA and BB&T.
    \84\ See BB&T.
    \85\ See SBIA.
    \86\ Data Boiler.
---------------------------------------------------------------------------

    The agencies propose to revise the exclusion for SBICs to clarify 
how the exclusion would apply to SBICs that surrender their licenses 
during wind-down phases. The proposed rule would specify that the 
exclusion for SBICs applies to an issuer that was an SBIC that has 
voluntarily surrendered its license to operate as a small business 
investment company in accordance with 13 CFR 107.1900 and does not make 
new investments (other than investments in cash equivalents) after such 
voluntary surrender.\87\
---------------------------------------------------------------------------

    \87\ For purposes of this exclusion, ``cash equivalents'' would 
mean high quality, highly liquid investments whose maturity 
corresponds to the issuer's expected or potential need for funds and 
whose currency corresponds to the issuer's assets.
---------------------------------------------------------------------------

    The agencies believe that continuing to apply the SBIC exclusion to 
an issuer that has surrendered its SBIC license is appropriate because, 
absent these revisions, banking entities may become discouraged from 
investing in SBICs due to concern that an SBIC may become a covered 
fund during its wind-down phase. As indicated by the statutory 
exemption for investments in SBICs, section 13 of the BHC Act was not 
intended to discourage investments in SBICs.\88\
---------------------------------------------------------------------------

    \88\ See 12 U.S.C. 1851(d)(1)(E).
---------------------------------------------------------------------------

    The proposed rule includes conditions designed to ensure that the 
revised exclusion is not abused. In particular, the requirement that an 
issuer that has voluntarily surrendered its license does not make new 
investments (other than investments in cash equivalents) after 
surrendering its license is intended to ensure that the exclusion would 
only apply to funds that are actually winding down and not funds that 
are making new investments (whether wholly new or as follow-on 
investments to existing investments) or that are engaged in speculative 
activities. In addition, the exclusion would only apply to an issuer 
that surrenders its SBIC license in accordance with 13 CFR 107.1900. 
The agencies note that surrendering a license under 13 CFR 107.1900 
requires the prior written approval of the Small Business 
Administration. Furthermore, because the exclusion would only apply to 
an issuer that voluntarily surrenders its SBIC license, the exclusion 
would not extend to an issuer if its SBIC license has been revoked.
    The agencies request comment on the proposed revisions to the 
exclusion for SBICs. Specifically, the agencies request comment on the 
following.
    Question 23. Should the agencies revise the SBIC exclusion as 
proposed? Why or why not? Would the proposed revisions to the SBIC 
exclusion appropriately address issuers that surrender their SBIC 
licenses? If not, what changes should be made to the proposal?
    Question 24. Should the proposed exclusion for issuers that 
surrender their SBIC licenses include a requirement that the issuer 
operate pursuant to a written plan to dissolve within a set period of 
time, such as five years? Why or why not? If so, what is the 
appropriate time period?
    Question 25. What additional restrictions, if any, should apply to 
the proposed exclusion for issuers that surrender their SBIC licenses?
    Question 26. What specific activities or investments, if any, 
should an issuer that surrenders its SBIC license be expressly 
permitted to engage in during wind-down phases, such as follow-on 
investments in existing portfolio companies and why? What conditions 
should apply to such activities or investments?

C. Proposed Additional Covered Fund Exclusions

1. Credit Funds
    The agencies are proposing to create a new exclusion from the 
definition of ``covered fund'' under Sec.  _.10(b) for credit funds 
that make loans, invest in debt, or otherwise extend the type of credit 
that banking entities may provide directly under applicable banking 
law. In the preamble to the 2013 rule, the agencies declined to 
establish an exclusion from the definition of covered fund for credit 
funds.\89\ The agencies cited concerns about whether such funds could 
be distinguished from private equity funds and hedge funds and the 
possible evasion of the requirements of section 13 of the BHC Act 
through the availability of such an exclusion. In addition, the 
agencies suggested that some credit funds would be able to operate 
using other exclusions from the definition of covered fund in the 2013 
rule, such as the exclusion for joint ventures or the exclusion for 
loan securitizations.\90\
---------------------------------------------------------------------------

    \89\ 79 FR 5705. The agencies did not request comments 
specifically on credit funds in the associated 2011 proposed rule. 
See 76 FR 68896-900.
    \90\ Id.
---------------------------------------------------------------------------

    In the 2018 proposal, the agencies issued a broad request for 
comment on whether to provide new exclusions from the definition of 
covered fund to more effectively tailor the 2013 rule.\91\ Several 
commenters urged the agencies to establish an exclusion for funds that 
extend credit to customers in a manner similar to what banking entities 
are otherwise authorized to provide directly because the credit funds 
were not able to take advantage of the alternative exclusions noted by 
the agencies in the 2013 rule's preamble.\92\ Commenters also offered 
specific suggestions relating to the scope, requirements of, and 
restrictions on such an exclusion.
---------------------------------------------------------------------------

    \91\ 83 FR 33471-72. The agencies did not request comments 
specifically on credit funds in the 2018 proposal.
    \92\ E.g., SIFMA; GS; ABA; Financial Services Forum (FSF); and 
CS.
---------------------------------------------------------------------------

    The agencies understand that many credit funds have not been able 
to utilize the joint venture and loan securitization exclusions \93\ 
and are

[[Page 12132]]

proposing an exclusion for credit funds. A credit fund, for the 
purposes of the proposed exclusion, is an issuer whose assets consist 
solely of:
---------------------------------------------------------------------------

    \93\ For example, one industry group commenter claimed that ``no 
credit funds have been able to qualify for the exclusion for joint 
ventures, and very few have been able to qualify for the exclusion 
for loan securitization vehicles, because these exclusions simply 
were not tailored for credit funds. In particular, credit funds are 
generally unable to satisfy the conditions of the loan 
securitization exclusion because credit funds do not typically issue 
asset-backed securities, credit funds are managed and to meet the 
needs of clients, credit funds typically invest in debt securities 
and warrants.'' SIFMA.
---------------------------------------------------------------------------

     Loans;
     Debt instruments;
     Related rights and other assets that are related or 
incidental to acquiring, holding, servicing, or selling loans, or debt 
instruments; and
     Certain interest rate or foreign exchange derivatives.\94\
---------------------------------------------------------------------------

    \94\ Proposed rule Sec.  _.10(c)(15)(i).
---------------------------------------------------------------------------

    To ease compliance burdens, several provisions of the proposed 
exclusion are similar to and modeled on conditions in the loan 
securitization exclusion. For example, any related rights or other 
assets held that are securities must be cash equivalents, securities 
received in lieu of debts previously contracted with respect to loans 
held or, unique to the proposed credit funds exclusion, certain equity 
securities (or rights to acquire equity securities) received on 
customary terms in connection with the credit fund's loans or debt 
instruments.\95\ Relatedly, any derivatives held by the credit fund 
must relate to loans, permissible debt instruments, or other rights or 
assets held and reduce the interest rate and/or foreign exchange risks 
related to these holdings.\96\ The proposed exclusion also would be 
broader than the loan securitization exclusion, by providing that a 
credit fund would be able to transact in certain debt instruments.\97\
---------------------------------------------------------------------------

    \95\ Proposed rule Sec.  _.10(c)(15)(i)(C).
    \96\ Proposed rule Sec.  _.10(c)(15)(i)(D).
    \97\ Proposed rule Sec.  _.10(c)(15)(i)(B).
---------------------------------------------------------------------------

    As noted above, the proposed exclusion would permit the credit fund 
to receive and hold a limited amount of equity securities (or rights to 
acquire equity securities) that are received on customary terms in 
connection with the credit fund's loans or debt instruments.\98\ The 
agencies understand that some banking entities are permitted to take as 
consideration for a loan to a borrower a warrant or option issued by 
the borrower--which allows the creditor to share in the profits, 
income, or earnings of the borrower--as an alternative or replacement 
to interest on an extension of credit.\99\ To ensure that an extension 
of credit may be subject to similar conditions, regardless of form, the 
agencies believe that excluded credit funds should be able to hold 
certain equity instruments, subject to appropriate conditions. The 
agencies are inviting comment on the nature and scope of such 
conditions. Although the agencies are not proposing a specific 
quantitative limit on equity securities (or rights to acquire equity 
securities) in the proposed rule, the agencies expect that such a limit 
may be appropriate, and are considering imposing such a limit in a 
final rule. The agencies are thus soliciting comment, below, about the 
terms of any quantitative limit on equity securities (or rights to 
acquire equity securities), and the method for calculating such a 
limit.
---------------------------------------------------------------------------

    \98\ Proposed rule Sec.  _.10(c)(15)(i)(C)(1)(iii).
    \99\ See 12 CFR 7.1006. See also SIFMA.
---------------------------------------------------------------------------

    The exclusion also would be subject to certain additional 
restrictions to ensure that the issuer is actually engaged in providing 
credit and credit intermediation and is not operated for the purpose of 
evading the provisions of section 13 of the BHC Act.\100\ Under the 
proposal, a credit fund would not be a covered fund, provided that:
---------------------------------------------------------------------------

    \100\ Proposed rule Sec.  _.10(c)(15)(iv)-(vi).
---------------------------------------------------------------------------

     The fund does not engage in activities that would 
constitute proprietary trading, as defined in Sec.  _.3(b)(1)(i) of the 
rule, as if the fund were a banking entity; \101\ and
---------------------------------------------------------------------------

    \101\ Proposed rule Sec.  _.10(c)(15)(ii)(A). For the avoidance 
of doubt, a credit fund would not be able to elect a different 
definition of proprietary trading or trading account.
---------------------------------------------------------------------------

     The fund does not issue asset-backed securities.\102\
---------------------------------------------------------------------------

    \102\ Proposed rule Sec.  _.10(c)(15)(ii)(B).
---------------------------------------------------------------------------

    In addition, a banking entity would not be able to rely on the 
credit fund exclusion unless certain conditions were met. If a banking 
entity sponsors or serves as an investment adviser or commodity trading 
advisor to a credit fund, the banking entity would be required to 
provide disclosures specified in section __.11(a)(8), and ensure that 
the activities of the credit fund are consistent with safety and 
soundness standards that are substantially similar to those that would 
apply if the banking entity engaged in the activities directly.\103\ 
Likewise, a banking entity would not be permitted to rely on the credit 
fund exclusion if it guarantees the performance of the fund,\104\ or if 
the fund holds any debt securities, equity, or rights to receive equity 
that the banking entity would not be permitted to acquire and hold 
directly.\105\ Furthermore, a banking entity's investment in and 
relationship with a credit fund would be required to comply with the 
limitations in section __.14 (except the banking entity would be 
permitted to acquire and retain any ownership interest in the credit 
fund), and the limitations in section __.15 regarding material 
conflicts of interest, high-risk investments, and safety and soundness 
and financial stability, in each case as though the credit fund were a 
covered fund.\106\ A banking entity's investment in and relationship 
with a credit fund also would be required to comply with applicable 
safety and soundness standards.\107\ Finally, a banking entity that 
invests in or has a relationship with a credit fund would continue to 
be subject to capital charges and other requirements under applicable 
banking law.\108\
---------------------------------------------------------------------------

    \103\ Proposed rule Sec.  _.10(c)(15)(iii).
    \104\ Proposed rule Sec.  _.10(c)(15)(iv).
    \105\ Id.
    \106\ Proposed rule Sec.  _.10(c)(15)(v)(A).
    \107\ Proposed rule Sec.  _.10(c)(15)(v)(B).
    \108\ For example, a banking entity's investment in or 
relationship with a credit fund could be subject to the regulatory 
capital adjustments and deductions relating to investments in 
financial subsidiaries or in the capital of unconsolidated financial 
institutions, if applicable. See 12 CFR 217.22.
---------------------------------------------------------------------------

    The agencies believe that the proposed credit fund exclusion would 
(1) address the application of the covered fund provisions to credit-
related activities in which banking entities are permitted to engage 
directly and (2) be consistent with and effectuate Congress's intent 
that section 13 of the BHC Act not limit or restrict banking entities' 
ability to sell loans.\109\ The agencies also believe the proposed 
credit fund exclusion may effectively address concerns the agencies 
expressed in the preamble to the 2013 rule about the administrability 
and evasion of section 13 of the BHC Act. Banking entities already have 
experience using and complying with the loan securitization exclusion. 
Establishing an exclusion for credit funds based on the framework 
provided by the loan securitization exclusion would allow banking 
entities to provide traditional extensions of credit regardless of the 
specific form, whether directly via a loan made by a banking entity, or 
indirectly through an investment in or relationship with a credit fund 
that transacts primarily in loans and certain debt instruments.
---------------------------------------------------------------------------

    \109\ 12 U.S.C. 1851(g)(2).
---------------------------------------------------------------------------

    The proposed credit fund exclusion limits the universe of potential 
funds that could rely on the exclusion by clearly specifying the types 
of activities those funds may engage in. Excluded credit funds could 
transact in or hold only loans, permissible debt instruments, and 
certain related rights or assets. These financial products, and the 
regulations delimiting the use thereof, are well-known and should not 
raise administrability and evasion concerns. Similarly, the requirement

[[Page 12133]]

that the credit fund not engage in activities that would constitute 
proprietary trading under section 13 of the BHC Act and implementing 
regulations should help to ensure that credit extensions that are 
bought and sold are held for the purpose of facilitating the extension 
of credit and not for the purpose of evading the requirements of 
section 13. Finally, the restrictions on guarantees and other 
limitations should eliminate the ability and incentive for either the 
banking entity sponsoring a credit fund or any affiliate to provide 
additional support beyond the ownership interest retained by the 
sponsor. Thus, the agencies expect that, together, the proposed 
criteria for the credit fund exclusion would prevent a banking entity 
having any incentive to bail out such funds in periods of financial 
stress or otherwise expose the banking entity to the types of risks 
that the covered fund provisions of section 13 were intended to 
address.
    The agencies request comment on all aspects of the proposed credit 
fund exclusion.
    Question 27. Is the proposed rule's approach to a credit fund 
exclusion appropriate and effective? Why or why not? Do the conditions 
imposed on the proposed exclusion effectively address the concerns 
about administrability and evasion that the agencies expressed in the 
preamble to the 2013 rule?
    Question 28. What types of loans and permissible debt instruments 
or some subset of those assets, if any, should a credit fund be able to 
hold? Are the definitions used in the proposed exclusion appropriate 
and clear?
    Question 29. The agencies believe it could be appropriate to permit 
credit funds to hold a small amount of non-loan and non-debt assets, 
such as warrants or other equity-like interests directly related to the 
other permitted assets, subject to appropriate conditions. Should 
credit funds be able to hold small amounts of equity securities (or 
rights to acquire equity securities) received on customary terms in 
connection with the credit fund's loans or debt instruments? If so, 
what should be the quantitative limit on permissible non-loan and non-
debt assets? Should the limit be five or ten percent of assets, or some 
other amount? How should such quantitative limit be calculated? Does 
the holding of a certain amount of equity securities (or rights to 
acquire equity securities) raise concerns that banking entities may use 
credit funds to evade the limitations and prohibitions in section 13 of 
the BHC Act? Why or why not? For example, under the proposal, could the 
holdings of an excluded fund be predominantly equity securities (or 
rights to acquire equity securities) received on customary terms in 
connection with the credit fund's loans or debt instruments? If so, 
how?
    Question 30. The proposed credit fund exclusion would permit 
excluded credit funds to hold related rights and other assets that are 
related or incidental to acquiring, holding, servicing, or selling 
loans or debt instruments, provided that each right or asset that is a 
security meets certain requirements. Should credit funds be allowed to 
hold such related rights and other assets? Are these assets necessary 
for the proper functioning of a credit fund? Are the requirements 
regarding rights or assets that are securities applicable to the 
holdings of credit funds or otherwise appropriate?
    Question 31. Is the list of permitted securities appropriately 
scoped, overbroad, or under-inclusive? Why or why not? Should the list 
of permitted securities be modified? If so, how and why?
    Question 32. The proposal provides that any interest rate or 
foreign exchange derivatives held by the credit fund adhere to certain 
requirements. Should credit funds be allowed to hold these, or any 
other type of derivatives? Are the requirements that the written terms 
of the derivatives directly relate to assets held and that the 
derivatives reduce the interest rate and/or foreign exchange risks 
related to the assets held applicable to the holdings of credit funds 
generally? Are such requirements otherwise appropriate? Why or why not?
    Question 33. Which safety and soundness standards, if any, should 
be referenced in the credit fund exclusion? Should the agencies 
reference the safety and soundness standards codified in the banking 
agencies' regulations, e.g., 12 CFR part 30, 12 CFR part 364, or other 
safety and soundness standards? Safety and soundness standards can vary 
depending on the type of banking entity. Is there a universally 
applicable standard that would be more appropriate, such as standards 
applicable to insured depository institutions?
    Question 34. Is the application of sections _.14 and _.15 to the 
proposed credit fund exclusion appropriate? Why or why not? Should a 
banking entity that sponsors or serves as an investment adviser to a 
credit fund be required to comply with the limitations imposed by both 
sections _.14(a) and (b)? Why or why not?
    Question 35. Is it appropriate to require a banking entity that 
sponsors or serves as an investment adviser or commodity trading 
advisor to a credit fund, to comply with the disclosure requirements of 
Sec.  _.11(a)(8), as if the credit fund were a covered fund? Why or why 
not?
    Question 36. Is the definition of proprietary trading in the credit 
fund exclusion appropriately scoped, overbroad, or under-inclusive? Why 
or why not? If the definition is not appropriately scoped, is there an 
alternative definition of proprietary trading? Should credit funds 
sponsored by, or that have as an investment adviser, a banking entity 
be able or be required to use the associated banking entity's 
definition of proprietary trading, for the purposes of this exclusion? 
Why or why not? Would such an approach impose undue compliance burdens? 
If so, what are such burdens?
    Question 37. Should the agencies establish additional provisions to 
prevent evasion of section 13 of the BHC Act? Why or why not? If so, 
what requirements would be appropriate and properly balance providing 
firms with flexibility to facilitate extensions of credit and ensuring 
compliance with section 13 of the BHC Act? For example, should the 
agencies impose quantitative limitations, additional capital charges, 
control restrictions, or other requirements on use of the credit fund 
exclusion?
    Question 38. The proposed exclusion for credit funds is similar to 
the current exclusion for loan securitizations. Should the agencies 
combine the proposed credit fund exclusion with the current loan 
securitization exclusion? If so, how? What would be the benefits and 
drawbacks of combining the exclusions or maintaining separate 
exclusions for each type of activity? If the two exclusions remain 
separate, should the proposed credit fund exclusion contain a 
requirement that a credit fund not issue asset-backed securities? Why 
or why not?
2. Venture Capital Funds
    Under the implementing regulations, venture capital funds that 
invest in small businesses and start-up businesses that would be 
investment companies but for the exclusion contained in section 3(c)(1) 
or 3(c)(7) of the Investment Company Act are covered funds unless they 
otherwise qualify for an exclusion. The agencies are proposing to add 
an exclusion from the definition of ``covered fund'' under Sec.  
_.10(b) of the rule that would allow banking entities to acquire or 
retain an ownership interest in, or sponsor, certain venture capital 
funds to the extent the banking entity is permitted to engage in such 
activities under otherwise applicable law. The exclusion

[[Page 12134]]

would be available with respect to ``qualifying venture capital 
funds,'' which the proposal defines as an issuer that meets the 
definition in 17 CFR 275.203(l)-1 and that meets several additional 
criteria specified below.
    Contemporaneous with the passage of the Dodd-Frank Act, multiple 
Members of Congress made statements indicating that section 13 of the 
BHC Act should not restrict the activities of venture capital 
funds.\110\ Several of these Members of Congress noted that properly 
conducted venture capital funds do not present the same concerns at 
which section 13 of the BHC Act was directed and can promote the public 
interest and job creation.\111\ In addition, in accordance with section 
13(b)(1) of the BHC Act, the Financial Stability Oversight Council 
(FSOC) released a report providing recommendations concerning 
implementation of section 13.\112\ The FSOC Report noted that several 
commenters recommended excluding venture capital funds from the 
definition of ``hedge fund'' and ``private equity fund'' because the 
nature of venture capital funds is fundamentally different from such 
other funds and because they promote innovation.\113\ The FSOC Report 
stated that the treatment of venture capital funds was a significant 
issue and noted that the SEC had recently proposed rules distinguishing 
the characteristics and activities of venture capital funds from other 
private funds.\114\ The FSOC Report recommended that the agencies 
carefully evaluate the range of funds and other legal vehicles that 
rely on the exclusions contained in section 3(c)(1) or 3(c)(7) and 
consider whether it would be appropriate for the regulations 
implementing section 13 to adopt a narrower definition in some 
cases.\115\
---------------------------------------------------------------------------

    \110\ See 156 Cong. Rec. E1295 (daily ed. July 13, 2010) 
(statement of Rep. Eshoo) (``the purpose of the Volcker Rule is to 
eliminate risk-taking activities by banks and their affiliates while 
at the same time preserving safe, sound investment activities that 
serve the public interest . . . Venture capital funds do not pose 
the same risk to the health of the financial system. They promote 
the public interest by funding growing companies critical to 
spurring innovation, job creation, and economic competitiveness. I 
expect the regulators to use the broad authority in the Volcker Rule 
wisely and clarify that funds . . . such as venture capital funds, 
are not captured under the Volcker Rule and fall outside the 
definition of `private equity.' ''); 156 Cong. Rec. S5904 (daily ed. 
July 15, 2010) (statement of Sen. Boxer) (recognizing ``the crucial 
and unique role that venture capital plays in spurring innovation, 
creating jobs and growing companies'' and that ``the intent of the 
rule is not to harm venture capital investment.''); 156 Cong. Rec. 
S5905 (daily ed. July 15, 2010) (statement of Sen. Dodd) (confirming 
``the purpose of the Volcker rule is to eliminate excessive risk 
taking activities by banks and their affiliates while at the same 
time preserving safe, sound investment activities that serve the 
public interest'' and stating ``properly conducted venture capital 
investment will not cause the harms at which the Volcker rule is 
directed. In the event that properly conducted venture capital 
investment is excessively restricted by the provisions of section 
619, I would expect the appropriate Federal regulators to exempt it 
using their authority under section 619[d][1](J) . . .''); 156 Cong. 
Rec. S6242 (daily ed. July 26, 2010) (statement of Sen. Scott Brown) 
(``One other area of remaining uncertainty that has been left to the 
regulators is the treatment of bank investments in venture capital 
funds. Regulators should carefully consider whether banks that focus 
overwhelmingly on lending to and investing in start-up technology 
companies should be captured by one-size-fits-all restrictions under 
the Volcker rule. I believe they should not be. Venture capital 
investments help entrepreneurs get the financing they need to create 
new jobs. Unfairly restricting this type of capital formation is the 
last thing we should be doing in this economy.'').
    \111\ See 156 Cong. Rec. E1295 (daily ed. July 13, 2010) 
(statement of Rep. Eshoo); 156 Cong. Rec. S5904 (daily ed. July 15, 
2010) (statement of Sen. Boxer); 156 Cong. Rec. S5905 (daily ed. 
July 15, 2010) (statement of Sen. Dodd); 156 Cong. Rec. S6242 (daily 
ed. July 26, 2010) (statement of Sen. Scott Brown).
    \112\ See Financial Stability Oversight Counsel, Study and 
Recommendations on Prohibitions on Proprietary Trading and Certain 
Relationships with Hedge Funds and Private Equity Funds (Jan. 18, 
2011), available at https://www.treasury.gov/initiatives/Documents/Volcker%20sec%20%20619%20study%20final%201%2018%2011%20rg.pdf. (FSOC 
Report).
    \113\ See id.
    \114\ See id.
    \115\ See id.
---------------------------------------------------------------------------

    In the 2011 proposed rule, the agencies requested comment on 
whether to exclude venture capital funds from the definition of 
``covered fund.'' \116\ The agencies received several comments 
supporting such an exclusion and two comments opposing such an 
exclusion,\117\ but declined to explicitly exclude venture capital 
funds from the definition of ``covered fund'' in the 2013 rule.\118\ 
The agencies indicated at the time that they did not believe the 
statutory language of section 13 supported providing an exclusion for 
venture capital funds.\119\ The agencies explained that this view was 
based on an understanding that Congress treated venture capital funds 
as a subset of private equity funds in other contexts and that Congress 
did not adopt an express exclusion for venture capital funds in section 
13 of the BHC Act.\120\ Specifically, the agencies cited to 
Congressional reports related to section 402 of the Dodd-Frank Act that 
characterized venture capital funds as ``a subset of private investment 
funds specializing in long-term equity investment in small or start-up 
businesses.'' \121\ The agencies further stated that it appeared that 
the activities and risk profiles for banking entities regarding 
sponsorship of, and investment in, private equity and venture capital 
funds were not readily distinguishable.\122\
---------------------------------------------------------------------------

    \116\ See 76 FR 68915.
    \117\ See 79 FR 5703-04.
    \118\ See id.
    \119\ See id.
    \120\ See id.
    \121\ Id. (quoting S. Rep. No. 111-176 (2010)). See also H. Rep. 
No. 111-517 (2010) (indicating that venture capital funds are 
subsets of ``private funds''). However, the agencies did not address 
the difference in terminology that Congress used in section 402 of 
the Dodd-Frank Act (``private funds'') and section 619 (``hedge 
funds'' and ``private equity funds''). Nor did the agencies address 
the different statutory definitions of these terms. Section 402 
defines ``private fund'' as ``an issuer that would be an investment 
company, as defined in section 3 of the Investment Company Act of 
1940 (15 U.S.C. 80a-3), but for section 3(c)(1) or 3(c)(7) of that 
Act.'' Section 619 defines ``hedge fund or private equity fund'' as 
``an issuer that would be an investment company, as defined in 
section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3), 
but for section 3(c)(1) or 3(c)(7) of that Act, or such similar 
funds as the [agencies] may, by rule . . . determine.'' (emphasis 
added).
    \122\ See 79 FR 5704. The agencies do not believe the fact that 
Congress expressly distinguished these funds from other types of 
private funds in other provisions of the Dodd-Frank Act is 
dispositive. In this context, we do not believe that the differences 
in how the terms private equity fund and venture capital fund are 
used in the Dodd-Frank Act prohibit this proposal. The agencies 
believe it is reasonable under the authority given to the agencies 
under the statute to exclude these funds from the definition of 
``covered fund.''
---------------------------------------------------------------------------

    In 2017, the U.S. Department of the Treasury issued a report 
stating that the definition of ``covered fund'' is overly broad and 
that the covered fund provisions are not well-tailored to the 
objectives of section 13 of the BHC Act.\123\ The report stated that 
changes to the covered fund provisions would ``greatly assist in the 
formation of venture and other capital that is critical to fund 
economic growth opportunities.'' \124\ In the 2018 proposal, the 
agencies requested comment on whether to exclude from the definition of 
``covered fund'' issuers that do not meet the definition of ``hedge 
fund'' or ``private equity fund'' in the SEC's Form PF.\125\ The 
agencies noted that a venture capital fund, as defined in rule 203(l)-1 
under the Advisers Act, is not a ``private equity fund'' or ``hedge 
fund,'' as those terms are defined in Form PF and requested comment on 
whether to include venture capital funds within the definition of 
``covered fund'' if the agencies adopted a definition of covered fund 
based on the definitions in Form PF.\126\
---------------------------------------------------------------------------

    \123\ See U.S. Department of the Treasury, A Financial System 
That Creates Economic Opportunities: Banks and Credit Unions at 77 
(June 2017).
    \124\ See id.
    \125\ See 83 FR 33478.
    \126\ See id.
---------------------------------------------------------------------------

    In response to the 2018 proposal, the agencies received several 
comments

[[Page 12135]]

supporting excluding venture capital funds from the definition of 
covered fund.\127\ Commenters stated that the legislative record does 
not indicate that Congress intended to restrict the activities of 
venture capital funds and that Members of Congress supported excluding 
venture capital funds from the definition of covered fund.\128\ 
Commenters further stated that venture capital funds engage in long-
term investments that promote growth, capital formation, and 
competitiveness.\129\ Some commenters specifically recommended using 
the definition of ``venture capital fund'' in rule 203(l)-1 under the 
Advisers Act to determine the scope of a venture capital fund 
exclusion.\130\ One commenter argued that venture capital funds should 
be treated the same as private equity funds.\131\ Two commenters 
opposed excluding venture capital funds from the definition of covered 
fund.\132\ In addition, several commenters opposed redefining ``covered 
fund'' using the definitions of ``hedge fund'' and ``private equity 
fund'' in Form PF.\133\ Two commenters supported using the definitions 
in Form PF as a basis for excluding certain issuers from the definition 
of covered fund.\134\ In addition, the agencies received several 
comments stating the rule should allow banking entities to invest in 
funds that engage only in long-term activities, including venture 
capital investments, that would be permissible for the banking entity 
to engage in directly.\135\
---------------------------------------------------------------------------

    \127\ See ABA; BPI; IIB; SIFMA; Crapo et al.; Hultgren; 
Hensarling et al; National Venture Capital Association (NVCA); and 
Center for American Entrepreneurship (CAE).
    \128\ See ABA; BPI; Representative Hultgren; NVCA; and Center 
for Capital Markets Competitiveness (CCMC).
    \129\ See ABA; BPI; Representative Hultgren; NVCA; 
Representatives Hensarling et al.; and CAE.
    \130\ See Representative Hultgren and NVCA.
    \131\ See AIC.
    \132\ See Occupy the SEC and Data Boiler.
    \133\ See, e.g., Americans for Financial Reform; AIC; and SIFMA.
    \134\ See Association for Corporate Growth and FI.
    \135\ See e.g., ABA; NVCA; AIC; CCMC; and Committee on Capital 
Markets Regulation.
---------------------------------------------------------------------------

    As discussed in detail below, the agencies are proposing to exclude 
from the definition of ``covered fund'' qualifying venture capital 
funds. The proposal would define a qualifying venture capital fund as 
an issuer that:
     Is a venture capital fund as defined in 17 CFR 275.203(l)-
1; and
     Does not engage in any activity that would constitute 
proprietary trading, under Sec.  _.3(b)(1)(i), as if it were a banking 
entity.
    With respect to any banking entity that acts as a sponsor, 
investment adviser, or commodity trading advisor to the issuer, the 
banking entity would be required to:
     Provide in writing to any prospective and actual investor 
the disclosures required under Sec.  _.11(a)(8), as if the issuer were 
a covered fund; and
     Ensure that the activities of the issuer are consistent 
with safety and soundness standards that are substantially similar to 
those that would apply if the banking entity engaged in the activities 
directly.
    In addition, a banking entity that relies on this exclusion would 
not, directly or indirectly, be permitted to guarantee, assume, or 
otherwise insure the obligations or performance of the issuer. Finally, 
the proposed exclusion would require a banking entity's ownership 
interest in or relationship with a qualifying venture capital fund to:
     Comply with the limitations imposed in Sec.  _.14 (except 
the banking entity may acquire and retain any ownership interest in the 
issuer) and Sec.  _.15 of the implementing regulations, as if the 
issuer were a covered fund; and
     Be conducted in compliance with, and subject to, 
applicable banking laws and regulations, including applicable safety 
and soundness standards.
    These requirements are intended to ensure that banking entity 
investments in qualifying venture capital funds are consistent with the 
purposes of section 13 of the BHC Act. First, a qualifying venture 
capital fund must be a venture capital fund as defined in 17 CFR 
275.203(l)-1. The SEC has defined ``venture capital fund'' as any 
private fund \136\ that:
---------------------------------------------------------------------------

    \136\ For purposes of 17 CFR 275.203(l)-1, ``private fund'' is 
defined as ``an issuer that would be an investment company, as 
defined in section 3 of the Investment Company Act of 1940, but for 
section 3(c)(1) or 3(c)(7) of that Act.'' 15 U.S.C. 80b-2(a)(29).
---------------------------------------------------------------------------

     Represents to investors and potential investors that it 
pursues a venture capital strategy;
     Immediately after the acquisition of any asset, other than 
qualifying investments or short-term holdings, holds no more than 20 
percent of the amount of the fund's aggregate capital contributions and 
uncalled committed capital in assets (other than short-term holdings) 
that are not qualifying investments, valued at cost or fair value, 
consistently applied by the fund;
     Does not borrow, issue debt obligations, provide 
guarantees or otherwise incur leverage, in excess of 15 percent of the 
private fund's aggregate capital contributions and uncalled committed 
capital, and any such borrowing, indebtedness, guarantee or leverage is 
for a non-renewable term of no longer than 120 calendar days, except 
that any guarantee by the private fund of a qualifying portfolio 
company's obligations up to the amount of the value of the private 
fund's investment in the qualifying portfolio company is not subject to 
the 120 calendar day limit;
     Only issues securities the terms of which do not provide a 
holder with any right, except in extraordinary circumstances, to 
withdraw, redeem or require the repurchase of such securities but may 
entitle holders to receive distributions made to all holders pro rata; 
and
     Is not registered under section 8 of the Investment 
Company Act of 1940 . . . , and has not elected to be treated as a 
business development company pursuant to section 54 of that Act . . . 
.\137\
---------------------------------------------------------------------------

    \137\ 17 CFR 275.203(l)-1(a).
---------------------------------------------------------------------------

    ``Qualifying investment'' is defined in the SEC's regulation to be: 
(1) An equity security issued by a qualifying portfolio company that 
has been acquired directly by the private fund from the qualifying 
portfolio company; (2) any equity security issued by a qualifying 
portfolio company in exchange for an equity security issued by the 
qualifying portfolio company described in (1); or (3) any equity 
security issued by a company of which a qualifying portfolio company is 
a majority-owned subsidiary, as defined in section 2(a)(24) of the 
Investment Company Act, or a predecessor, and is acquired by the 
private fund in exchange for an equity security described in (1) or 
(2).\138\
---------------------------------------------------------------------------

    \138\ 17 CFR 275.203(l)-1(c)(3).
---------------------------------------------------------------------------

    ``Qualifying portfolio company,'' in turn, is defined in the SEC's 
regulation to be a company that: (1) At the time of any investment by 
the private fund, is not reporting or foreign traded and does not 
control, is not controlled by or under common control with another 
company, directly or indirectly, that is reporting or foreign traded; 
(2) does not borrow or issue debt obligations in connection with the 
private fund's investment in such company and distribute to the private 
fund the proceeds of such borrowing or issuance in exchange for the 
private fund's investment; and (3) is not an investment company, a 
private fund, an issuer that would be an investment company but for the 
exemption provided by 17 CFR 270.3a-7, or a commodity pool.\139\ The 
SEC explained that the definitions of ``qualifying investment'' and 
``qualifying portfolio company'' reflect the typical characteristics of 
investments made by venture capital funds and that these

[[Page 12136]]

definitions work together to cabin the definition of venture capital 
fund to only the funds that Congress understood to be venture capital 
funds during the passage of the Dodd-Frank Act.\140\
---------------------------------------------------------------------------

    \139\ 17 CFR 275.203(l)-1(c)(4).
    \140\ See Exemptions for Advisers to Venture Capital Funds, 
Private Fund Advisers With Less Than $150 Million in Assets Under 
Management, and Foreign Private Advisers, 76 FR 39646, 39657 (Jul. 
6, 2011).
---------------------------------------------------------------------------

    In the preamble to the regulations adopting this definition of 
venture capital fund, the SEC explained that the definition's criteria 
distinguish venture capital funds from other types of funds, including 
private equity funds and hedge funds. For example, the SEC explained 
that it understood the criteria for ``qualifying portfolio companies'' 
to be characteristic of issuers of portfolio securities held by venture 
capital funds and, taken together, would operate to exclude most 
private equity funds and hedge funds from the venture capital fund 
definition.\141\ The SEC also explained that the criteria for 
``qualifying investments'' under the SEC's regulation would help to 
differentiate venture capital funds from other types of private funds, 
such as leveraged buyout funds.\142\ Moreover, the SEC explained that 
these criteria reflect the Congressional understanding that venture 
capital funds are less connected with the public markets and therefore 
may have less potential for systemic risk.\143\ The SEC further 
explained that its regulation's restriction on the amount of borrowing, 
debt obligations, guarantees or other incurrence of leverage was 
appropriate to differentiate venture capital funds from other types of 
private funds that may engage in trading strategies that use financial 
leverage and may contribute to systemic risk.\144\
---------------------------------------------------------------------------

    \141\ 76 FR 39656.
    \142\ See, e.g., 76 FR 39653 (explaining that a limitation on 
secondary market purchases of a qualifying portfolio company's 
shares would recognize ``the critical role this condition played in 
differentiating venture capital funds from other types of private 
funds'').
    \143\ 76 FR 39648 (``[T]he proposed definition of venture 
capital fund was designed to . . . address concerns expressed by 
Congress regarding the potential for systemic risk.''); 76 FR 39656 
(``Congressional testimony asserted that these funds may be less 
connected with the public markets and may involve less potential for 
systemic risk. This appears to be a key consideration by Congress 
that led to the enactment of the venture capital exemption. As we 
discussed in the Proposing Release, the rule we proposed sought to 
incorporate this Congressional understanding of the nature of 
investments of a venture capital fund, and these principles guided 
our consideration of the proposed venture capital fund 
definition.'').
    \144\ 76 FR 39662. See also 76 FR 39657 (``We proposed these 
elements of the qualifying portfolio company definition because of 
the focus on leverage in the Dodd-Frank Act as a potential 
contributor to systemic risk as discussed by the Senate Committee 
report, and the testimony before Congress that stressed the lack of 
leverage in venture capital investing.'').
---------------------------------------------------------------------------

    The agencies believe the SEC's rationale for adopting this 
definition of venture capital fund could also support using this 
definition as the foundation for an exclusion from the definition of 
``covered fund.'' First, this definition helps to distinguish the 
investment activities of venture capital funds from those of hedge 
funds and private equity funds, which was one of the agencies' primary 
concerns in declining to adopt an exclusion for venture capital funds 
in the 2013 rule. Second, this definition includes criteria reflecting 
the characteristics of venture capital funds that the agencies believe 
may pose less potential risk to a banking entity sponsoring or 
investing in venture capital funds and to the financial system--
specifically, the smaller role of leverage financing and a lesser 
degree of interconnectedness with public markets.\145\ These 
characteristics would help to address the concern expressed in the 
preamble to the 2013 rule that the activities and risk profiles for 
banking entities regarding sponsorship of, and investment in, venture 
capital fund activities are not readily distinguishable from those 
funds that section 13 of the BHC Act was intended to capture.
---------------------------------------------------------------------------

    \145\ See supra notes 106 and 107.
---------------------------------------------------------------------------

    While the SEC's regulatory definition in 17 CFR 275.203(l)-1 would 
form the base of the proposed exclusion for qualifying venture capital 
funds, the proposed exclusion includes additional criteria that would 
help promote the specific purposes of section 13 of the BHC Act. In 
particular, a qualifying venture capital fund would not be permitted to 
engage in any activity that would constitute proprietary trading under 
Sec.  _.3(b)(1)(i) as if the fund were a banking entity. This 
requirement would promote one of the purposes of the covered fund 
provisions in section 13 of the BHC Act, which was to prevent banking 
entities from circumventing the proprietary trading prohibition through 
fund investments.\146\ Under this requirement, a qualifying venture 
capital fund could not engage in any activities that are principally 
for the purpose of short-term resale, benefitting from actual or 
expected short-term price movements, realizing short-term arbitrage 
profits, or hedging one or more of the positions resulting from such 
purchases or sales.
---------------------------------------------------------------------------

    \146\ See, e.g., Treasury Report at 77 and FSOC Report at 6.
---------------------------------------------------------------------------

    The agencies are considering an additional restriction for which 
they are seeking specific comment. Under this additional restriction, 
and notwithstanding 17 CFR 275.203(l)-1(a)(2), the venture capital fund 
exclusion would be limited to funds that do not invest in companies 
that, at the time of the investment, have more than a limited dollar 
amount of total annual revenue, calculated as of the last day of the 
calendar year. The agencies are considering what specific threshold 
would be appropriate. For example, the agencies are considering whether 
a limit of $50 million in annual revenue would be appropriate, or 
whether a higher or lower limit would help to appropriately 
differentiate venture capital funds from the types of funds that 
section 13 of the BHC Act was intended to address.
    A banking entity that serves as a sponsor, investment adviser, or 
commodity trading advisor to a qualifying venture capital fund would be 
required to provide the disclosures required under Sec.  _.11 (a)(8) to 
prospective and actual investors in the fund. In addition, any banking 
entity that relies on the exclusion would not be permitted to, directly 
or indirectly, guarantee, assume or otherwise insure the obligations or 
performance of the qualifying venture capital fund. These requirements 
would promote yet another goal of section 13 of the BHC Act, which was 
to prevent banking entities from bailing out funds that they sponsor or 
advise.\147\
---------------------------------------------------------------------------

    \147\ See Treasury Report at 77 and FSOC Report at 6.
---------------------------------------------------------------------------

    A banking entity that serves as a sponsor, investment adviser, or 
commodity trading advisor to a qualifying venture capital fund also 
must ensure the fund's activities are consistent with safety and 
soundness standards that are substantially similar to those that would 
apply if the banking entity engaged in the activities directly. 
Therefore, a banking entity could not rely on this exclusion to sponsor 
an investment fund that exposes the banking entity to the type of high-
risk trading and investment activities that the covered fund provisions 
of section 13 of the BHC Act were intended to restrict. Further, a 
banking entity's investment in or relationship with a qualifying 
venture capital fund would be subject to Sec.  _14 (except the banking 
entity may acquire and retain any ownership interest in the fund in 
accordance with the terms of the exclusion) and Sec.  _.15 of the 
implementing regulations, as if the fund were a covered fund. These 
limitations would help to ensure that the risk a banking entity takes 
on as a result of its investment in or relationship with a qualifying 
venture capital fund remains appropriately limited. Like the

[[Page 12137]]

restrictions on guarantees described above, applying the requirements 
in Sec.  _.14 would restrict a banking entity that sponsors or advises 
the fund from providing additional support or bailing out the fund. 
Applying the requirements in Sec.  _.15 would ensure that the fund does 
not expose the banking entity to high-risk assets or high-risk trading 
strategies. In particular, to the extent a fund would expose a banking 
entity to a high-risk asset or high-risk trading strategy (or otherwise 
engage in proprietary trading), the fund would not be a qualifying 
venture capital fund. Therefore, prior to making an investment in a 
qualifying venture capital fund, a banking entity would need to ensure 
that the fund's investment mandate and strategy would satisfy the 
requirements of Sec.  _.15. In addition, a banking entity would need to 
monitor the activities of a qualifying venture capital fund to ensure 
it satisfies these requirements on an ongoing basis.
    The agencies believe that qualifying venture capital funds meeting 
each of these requirements would not raise the type of concerns that 
were the target of section 13 of the BHC Act. The proposed exclusion, 
including incorporation of the SEC's regulatory venture capital fund 
definition in 17 CFR 275.203(l)-1, should also address the concerns the 
agencies expressed in the preamble to the 2013 rule that the activities 
and risk profiles for banking entities regarding sponsorship of, and 
investment in, venture capital funds are not readily distinguishable 
from those of funds that section 13 of the BHC Act was intended to 
capture. Accordingly, the agencies believe the foregoing requirements 
could give effect to the language and purpose of section 13 of the BHC 
Act without allowing banking entities to evade the requirements of 
section 13. The agencies further believe that permitting banking 
entities to invest in and have certain relationships with qualifying 
venture capital funds would be consistent with statements by Members of 
Congress that were made contemporaneously with passage of the Dodd-
Frank Act.\148\
---------------------------------------------------------------------------

    \148\ See supra note 110.
---------------------------------------------------------------------------

    The agencies believe that properly-conducted activities involving 
these types of venture capital funds could promote and protect the 
safety and soundness of banking entities and the financial stability of 
the United States. Qualifying venture capital funds could allow banking 
entities to diversify their permissible investment activities, and like 
other exclusions provided in the 2013 rule, allow banking entities to 
share the costs and risks of their permissible investment activities 
with third-party investors.\149\ Investments in qualifying venture 
capital funds could allow banking entities to allocate available 
resources to a more diverse array of long-term investments in a broader 
range of geographic areas, industries and sectors than the banking 
entity may be able to access directly.
---------------------------------------------------------------------------

    \149\ 79 FR 5681.
---------------------------------------------------------------------------

    Banking entity investments in qualifying venture capital funds may 
benefit the broader financial system by improving the flow of financing 
to small businesses and start-ups and thus may promote and protect the 
financial stability of the United States. Permitting these types of 
investments would be consistent with the Treasury Department's June 
2017 report, which said such fund investments ``can greatly assist in 
the formation of venture and other capital that is critical to fund 
economic growth opportunities.'' \150\ Similarly, the agencies 
recognized the economic benefits of allowing banking entities to make 
venture capital-style investments in the preamble to the 2013 rule, 
despite not adopting an exclusion for such funds.\151\ Further, it is 
possible that permitting banking entities to extend financing to 
businesses through qualifying venture capital funds would allow banking 
entities to compete more effectively with non-banking entities that are 
not subject to the same prudential regulation or supervision as banking 
entities subject to section 13 of the BHC Act. In this respect, the 
proposal could allow a larger volume of permissible banking and 
financial activities to occur in the regulated banking system.
---------------------------------------------------------------------------

    \150\ Treasury Report at 77.
    \151\ 79 FR 5704 (``While the final rule does not provide a 
separate exclusion for venture capital funds from the definition of 
covered fund, the [a]gencies recognize that certain venture capital 
investments by banking entities provide capital and funding to 
nascent or early-stage companies and small businesses and also may 
provide these companies expertise and services. Other provisions of 
the final rule or the statute may facilitate, or at least not 
impede, other forms of investing that may provide the same or 
similar benefits.'') (emphasis added).
---------------------------------------------------------------------------

    In addition, it is widely noted that the availability of venture 
and other financing from funds is not uniform throughout the United 
States. In particular, it is noted that such funding is generally 
available on a competitive basis for companies with a significant 
presence in certain geographic regions (e.g., the New York metropolitan 
area, the Boston metropolitan area and ``Silicon Valley'' and 
surrounding areas).\152\ In this respect, the proposal could allow 
banking entities with a presence in and knowledge of the areas where 
venture capital and other types of financing are less readily available 
to businesses to provide this type of financing in those areas.
---------------------------------------------------------------------------

    \152\ See, e.g., Richard Florida, Venture Capital Remains Highly 
Concentrated in Just a Few Cities, CityLab (Oct. 3, 2017), available 
at https://www.citylab.com/life/2017/10/venture-capital-concentration/539775/; PricewaterhouseCoopers & CB Insights, 
MoneyTree Report (Q3 2019), available at: https://www.pwc.com/us/en/moneytree-report/assets/moneytree-report-q3-2019.pdf.
---------------------------------------------------------------------------

    For all of these reasons, the agencies believe the proposal could 
promote the benefits of long-term investment that the agencies and 
Members of Congress have previously recognized, while also addressing 
the concerns that were the target of the funds prohibition in section 
13 of the BHC Act. The agencies are seeking comment on whether to 
exclude other types of funds that, like qualifying venture capital 
funds, provide important capital to businesses through long-term 
investments and do not engage in proprietary trading and other 
activities that section 13 of the BHC Act was intended to prohibit.
    The agencies are requesting comment on the proposal to exclude 
qualifying venture capital funds from the covered fund definition, in 
particular:
    Question 39. Is the proposed exclusion for qualifying venture 
capital funds appropriate? Why or why not?
    Question 40. Does the proposed exclusion for qualifying venture 
capital funds include the appropriate vehicles? Why or why not? If not, 
how should the agencies expand or narrow the vehicles for which banking 
entities would be permitted to make use of the exclusion? What 
modifications to the proposed exclusion would be appropriate and why?
    Question 41. Are the proposed conditions on the proposed exclusion 
for qualifying venture capital funds appropriate? Why or why not? If 
not appropriate, how should the agencies modify the conditions, and 
why?
    Question 42. Would permitting banking entities to invest in or 
sponsor a qualifying venture capital fund promote and protect the 
safety and soundness of banking entities and the financial stability of 
the United States? What data is available to support an argument that 
venture capital funds would or would not promote and protect the safety 
and soundness of banking entities and the financial stability of the 
United States?
    Question 43. Are the requirements for a qualifying venture capital 
fund sufficient to distinguish these types of funds from covered funds? 
Are there any additional standards or requirements that should apply to 
a

[[Page 12138]]

qualifying venture capital fund? If so, what are they and why should 
they apply?
    Question 44. Should the additional proposed revenue requirement be 
added to the venture capital fund exclusion to help ensure that the 
investments made by excluded venture capital funds are truly made in 
small and early-stage companies? Why or why not? If the additional 
restriction is added, is $50 million an appropriate annual revenue 
limit? If not, what would be an appropriate revenue limit? Is there a 
metric other than annual gross revenue, such as amount of time in 
operation, that would serve as a better indicator of whether an 
investment in a company should allow a venture capital fund to qualify 
for the exclusion?
    Question 45. Should the proposed venture capital fund exclusion 
require that 100 percent of the fund's holdings, other than short-term 
holdings, be in qualifying investments instead of the 80 percent that 
is required under 17 CFR 275.203(l)-1(a)(2)? Why or why not?
    Question 46. Are there provisions or conditions of the definition 
under rule 203(l)-1 under the Advisers Act that are inappropriate for 
purposes of determining an exclusion from the ``covered fund'' 
definition in Sec.  _.10? If so, please explain why the purposes of an 
exclusion from the ``covered fund'' definition should lead the agencies 
to exclude a provision or condition, such as paragraph (a)(2), of the 
definition under rule 203(l)-1 under the Advisers Act.
    Question 47. How would a banking entity ensure the activities of a 
qualifying venture capital fund are consistent with the safety and 
soundness standards that apply to the banking entity? Are the standards 
and requirements for a banking entity that acts as a sponsor, 
investment adviser, or commodity trading advisor to a qualifying 
venture capital fund appropriate to apply to a qualifying venture 
capital fund? Are there any additional standards or requirements that 
should apply to a banking entity that acts as a sponsor, investment 
adviser, or commodity trading advisor to a qualifying venture capital 
fund? If so, what are they, and why should they apply?
    Question 48. A banking entity that sponsors or advises a qualifying 
venture capital fund would be required to comply with the limitations 
imposed by Sec. Sec.  _.14 (except the banking entity may acquire and 
retain any ownership interest in the issuer) and _.15 of the 2013 rule, 
as if the qualifying venture capital fund were a covered fund. Is the 
application of these sections to the proposed venture capital fund 
exclusion appropriate? Why or why not?
    Question 49. Is it sufficiently clear what kind of assets or 
investments would result in a conflict of interest or an exposure to a 
high-risk asset or high-risk trading strategy in the context of a 
qualifying venture capital fund? Should the agencies provide additional 
parameters regarding the types of assets and strategies that could 
result in such exposure in this context?
    Question 50. Should the agencies exclude from the definition of 
covered fund, or otherwise permit the activities of, certain long-term 
investment funds that would not be qualifying venture capital funds? 
For example, should the agencies provide an exclusion for issuers (1) 
that make long-term investments that a banking entity could make 
directly, (2) that hold themselves out as entities or arrangements that 
make investments that they intend to hold for a set minimum time 
period, such as two years, (3) whose relevant offering and governing 
documents reflect a long-term investment strategy, and (4) that meet 
all other requirements of the proposed qualifying venture capital fund 
exclusion (other than that the issuers would be venture capital funds 
as defined in 17 CFR 275.203(l)-1)? Would the rationale for excluding 
qualifying venture capital funds also extend to such long-term 
investment funds? Why or why not? If the agencies were to adopt an 
exclusion for long-term investment funds, should the agencies impose 
safeguards on such an exclusion? If so, what safeguards should the 
agencies impose, and why? Would such an exclusion promote and protect 
the safety and soundness of the banking entity and the financial 
stability of the United States? If so, how?
    Question 51. Is there evidence that the covered fund provisions 
have caused banking entities to make more standalone direct balance 
sheet investments? If so, have these investments increased or decreased 
risk to banking entities?
    Question 52. Is there evidence that the covered fund provisions 
have negatively impacted the provision of financing? If so, is this 
impact non-uniform? For example, are effects more acute in certain 
geographic areas or in certain industries? To the extent negative 
effects are asymmetric by geography or otherwise, would the proposal 
effectively address these asymmetries? Is there evidence that the 
covered fund provisions have caused end-users to seek financing from 
non-banking entities? If so, would the proposed exclusion for 
qualifying venture capital funds help to address these impacts?
3. Family Wealth Management Vehicles
    The agencies are proposing to exclude from the definition of 
``covered fund'' under Sec.  _.10(b) of the rule any entity that acts 
as a ``family wealth management vehicle.'' The proposed family wealth 
management vehicle exclusion would be available to an entity that: (1) 
If organized as a trust, the grantor(s) of the entity are all family 
customers and, (2) if not organized as a trust, a majority of the 
voting interests in the entity are owned (directly or indirectly) by 
family customers; and the entity is owned only by family customers and 
up to 3 closely related persons of the family customers.\153\ In 
response to the 2018 proposal, commenters raised concerns that family 
wealth management vehicles were not specifically excluded from the 
covered fund definition following the adoption of the 2013 rule or in 
the 2018 proposed rule.\154\ Commenters stated that family wealth 
management vehicles are typically designed to facilitate family wealth 
management, estate planning, and other similar objectives and may take 
a variety of legal forms, including trusts, limited liability 
companies, limited partnerships, and other pooled investment 
vehicles.\155\ Commenters further stated that absent an exclusion from 
the covered fund definition, family wealth management vehicles could be 
restricted from obtaining various types of ordinary course banking and 
asset management services from a banking entity simply because they 
would receive those services through a family wealth management 
vehicle.\156\ Commenters provided examples of these services, including 
investment advice, brokerage execution, financing, and clearance and 
settlement services.\157\ A commenter also stated that family wealth 
management vehicles structured as trusts for the benefit of family 
members also often appoint banking entities, acting in a fiduciary 
capacity, as trustees for the trusts.\158\
---------------------------------------------------------------------------

    \153\ Under Sec.  _.10(c)(17)(iii)(A) of the proposed rule, 
``closely related person'' would mean ``a natural person (including 
the estate and estate planning vehicles of such person) who has a 
longstanding business or personal relationship with any family 
customer.''
    \154\ See e.g., ABA; BPI; IAA; and SIFMA. These commenters 
stated that many family wealth management vehicles rely on the 
exclusions provided by sections 3(c)(1) or 3(c)(7) of the Investment 
Company Act and would therefore be covered funds unless they satisfy 
the conditions for one of the 2013 rule's exclusions from the 
covered fund definition.
    \155\ See e.g., IAA and SIFMA.
    \156\ See e.g., BPI; IAA; and SIFMA.
    \157\ See e.g., BPI and SIFMA.
    \158\ See SIFMA.

---------------------------------------------------------------------------

[[Page 12139]]

    In the 2018 proposal, the agencies requested comment regarding 
whether the agencies should address the application of Super 23A in the 
context of family wealth management vehicles. One commenter responded 
that the agencies should incorporate the exemptions under Section 23A 
and Regulation W into the definition of ``covered transaction.'' \159\ 
However, commenters also stated that incorporating the exemptions under 
Section 23A and Regulation W would still not permit banking entities to 
engage in the full range of transactions and services sought by family 
wealth management vehicles, including ordinary extensions of credit, 
and therefore the regulations would continue to unnecessarily impede 
traditional banking and asset management services.\160\ Commenters 
further stated that incorporation of the exemptions would not eliminate 
the uncertainty and the associated burden for banking entities 
resulting from an analysis of the status of a family wealth management 
vehicle as a covered fund. The proposal is intended to allow banking 
entities to provide the full range of traditional customer-facing 
banking and asset management services to family wealth management 
vehicles and recognizes that a specific exclusion for family wealth 
management vehicles--rather than merely addressing the application of 
Super 23A--is necessary to address the issues related family wealth 
management vehicles more completely and effectively.
---------------------------------------------------------------------------

    \159\ See id.
    \160\ See e.g., BPI and SIFMA.
---------------------------------------------------------------------------

    Similar to the customer facilitation vehicles discussed below, the 
agencies believe that the proposed exclusion for family wealth 
management vehicles would appropriately allow banking entities to 
structure services or transactions for customers, or to otherwise 
provide traditional customer-facing banking and asset management 
services, through a vehicle, even though such a vehicle may rely on 
section 3(c)(1) or 3(c)(7) of the Investment Company Act or would 
otherwise be a covered fund under the implementing regulations. The 
agencies have previously indicated their intent to avoid unintended 
results that might follow from a definition of ``covered fund'' that is 
inappropriately imprecise,\161\ and believe that these commenters have 
identified such unintended results. The agencies believe that an 
exclusion for family wealth management vehicles would effectively 
tailor the definition of covered fund by permitting banking entities to 
continue to provide traditional banking and asset management services 
that do not involve the types of risks section 13 was designed to 
address. As the agencies noted in the preamble to the 2013 rule, 
section 13 and the implementing regulations were designed to permit 
banking entities to continue to provide client-oriented financial 
services, including asset management services.\162\ In addition, the 
agencies believe that an exclusion for family wealth management 
vehicles is consistent with section 13(d)(1)(D), which permits banking 
entities to engage in transactions on behalf of customers, when those 
transactions would otherwise be prohibited under section 13. The 
proposed exclusion would similarly allow banking entities to provide 
traditional services to customers through vehicles used to manage the 
wealth and other assets of those customers and their families.
---------------------------------------------------------------------------

    \161\ See 83 FR 33471; 79 FR 5670-71.
    \162\ See 79 FR 5541 (describing the 2013 rule as ``permitting 
banking entities to continue to provide, and to manage and limit the 
risks associated with providing, client-oriented financial services 
that are critical to capital generation for businesses of all sizes, 
households and individuals, and that facilitate liquid markets. 
These client-oriented financial services, which include 
underwriting, market making, and asset management services, are 
important to the U.S. financial markets and the participants in 
those markets.'').
---------------------------------------------------------------------------

    Under the proposed exclusion, a family wealth management vehicle 
would include any entity that is not, and does not hold itself out as 
being, an entity or arrangement that raises money from investors 
primarily for the purpose of investing in securities for resale or 
other disposition or otherwise trading in securities, provided that: 
(1) If the entity is a trust, the grantor(s) of the entity are all 
family customers and, (2) if the entity is not a trust, a majority of 
the voting interests are owned (directly or indirectly) by family 
customers and the entity is owned only by family customers and up to 3 
closely related persons of the family customers. Under the proposed 
exclusion, a family customer would mean a family client, as defined in 
Rule 202(a)(11)(G)-1(d)(4) of the Advisers Act (17 CFR 
275.202(a)(11)(G)-1(d)(4)); or any natural person who is a father-in-
law, mother-in-law, brother-in-law, sister-in-law, son-in-law or 
daughter-in-law of a family client, spouse or spousal equivalent of any 
of the foregoing.\163\
---------------------------------------------------------------------------

    \163\ All terms defined in Rule 202(a)(11)(G)-1 of the Advisers 
Act (17 CFR 275.202(a)(11)(G)-1) have the same meaning in the 
proposed family wealth management exclusion.
---------------------------------------------------------------------------

    In addition, a banking entity would rely on the proposed exclusion 
only if the banking entity (or an affiliate): (1) Provides bona fide 
trust, fiduciary, investment advisory, or commodity trading advisory 
services to the entity; (2) does not, directly or indirectly, 
guarantee, assume, or otherwise insure the obligations or performance 
of such entity; (3) complies with the disclosure obligations under 
Sec.  _.11(a)(8), as if such entity were a covered fund; \164\ (4) does 
not acquire or retain, as principal, an ownership interest in the 
entity, other than up to 0.5 percent of the entity's outstanding 
ownership interests that may be held by the banking entity and its 
affiliates for the purpose of and to the extent necessary for 
establishing corporate separateness or addressing bankruptcy, 
insolvency, or similar concerns; (5) complies with the requirements of 
Sec. Sec.  _.14(b) and _.15, as if such issuer were a covered fund; and 
(6) complies with the requirements of 12 CFR 223.15(a), as if such 
banking entity and its affiliates were a member bank and the issuer 
were an affiliate thereof. The agencies believe that, collectively, the 
conditions on the proposed exclusion should help to ensure that family 
wealth management vehicles are used for customer oriented financial 
services provided on arms-length, market terms, and to prevent evasion 
of the requirements of section 13 of the BHC Act and the implementing 
regulations. In addition, these proposed conditions are based on 
existing conditions in other provisions of the implementing 
regulations,\165\ which the

[[Page 12140]]

agencies believe should facilitate banking entities' compliance.
---------------------------------------------------------------------------

    \164\ The obligations under Sec.  _.11(a)(8) of the proposed 
rule would apply in connection with the exemption for organizing and 
offering covered funds, which would typically require the 
preparation and distribution of offering documents. The agencies 
understand that offering documents may not be necessary in 
connection with most family wealth management vehicles given the 
vehicles' purpose and the requirement that interests in such 
vehicles be limited to family customers and up to 3 closely related 
persons of the family customers. Accordingly, the agencies believe 
that for purposes of the proposed exclusion, a banking entity could 
satisfy these written disclosure obligations in a number of ways, 
such as including them in the family wealth management vehicle's 
governing documents, in account opening materials or in 
supplementary materials. The condition reflects the agencies' 
interest in providing family customers with the substance of the 
disclosures, rather than a concern with the document in which they 
are provided. Similarly, the agencies expect the specific wording of 
the disclosures in Sec.  _.11(a)(8) of the proposed rule may need to 
be modified to accurately reflect the specific circumstances of the 
family wealth management vehicle.
    \165\ See implementing regulations Sec.  _.11(a)(5) (imposing, 
as a condition of the exemption for organizing and offering a 
covered fund, that a banking entity and its affiliates do not, 
directly or indirectly, guarantee, assume, or otherwise insure the 
obligations or performance of the covered fund or of any covered 
fund in which such covered fund invests); Sec.  _.11(a)(8) 
(imposing, as a condition of the exemption for organizing and 
offering a covered fund, that the banking entity provide certain 
disclosures to any prospective and actual investor in the covered 
fund); Sec.  _.10(c)(2)(ii) (allowing, as a condition of the 
exclusion from the covered fund definition for wholly-owned 
subsidiaries, for the holding of up to 0.5 percent of outstanding 
ownership interests by a third party for limited purposes); and 
Sec.  _.14(b) (subjecting certain transactions with covered funds to 
section 23B of the Federal Reserve Act).
---------------------------------------------------------------------------

    The agencies are not proposing to apply Super 23A to family wealth 
management vehicles because, as discussed above, the agencies 
understand that the application of Super 23A to family wealth 
management vehicles would prohibit banking entities from providing the 
full range of banking and asset management services to customers using 
these vehicles. However, the agencies are proposing to apply the 
prohibition on purchases of low-quality assets under the Board's 
regulations implementing section 23A of the Federal Reserve Act (12 CFR 
223.15(a)) to help ensure that the exclusion for family wealth 
management vehicles does not allow banking entities to ``bail out'' the 
vehicle.
    The agencies believe that the proposed definition of a family 
wealth management vehicle appropriately distinguishes it from the type 
of entity that section 13 of the BHC Act intended to capture. The 
proposed definition would require that a family wealth management 
vehicle not raise money from investors primarily for the purpose of 
investing in securities for resale or other disposition or otherwise 
trading in securities. This aspect of the definition would help to 
differentiate family wealth management vehicles from covered funds, 
which raise money from investors for this purpose. Defining ``family 
customer'' by building off of the definition of ``family client'' from 
rule 202(a)(11)(G)-1(d)(4) of Advisers Act (family office rule) may 
facilitate compliance by using a definition known in the financial 
services industry. At the same time, the agencies recognize that the 
purpose of the family wealth management exclusion differs from the 
purpose of the family office rule, and should be designed to capture 
the types of persons and entities to which banking entities have 
traditionally provided banking and asset management services, as these 
services do not expose banking entities to the types of risks that 
section 13 was intended to restrict and would facilitate banking 
entities' customer-facing financial services. Accordingly, the agencies 
believe it appropriate to include as ``family customers'' certain in-
laws of the family clients as well as a limited number of persons 
closely related to the family customers.
    Question 53. Should the agencies exclude family wealth management 
vehicles from the definition of ``covered fund'' as proposed? Does the 
agencies' proposed definition of ``family wealth management vehicle'' 
include the appropriate vehicles? What, if any, modifications to the 
scope, definitions or conditions prescribed in the proposed exclusion 
should be made? Should the agencies provide any additional guidance or 
requirements regarding the conditions? For example, should the agencies 
provide additional guidance or requirements regarding the timing of the 
disclosures required by Sec.  _.11(a)(8)?
    Question 54. Would an exclusion for family wealth management 
vehicles create any opportunities for evasion, for example, by allowing 
a banking entity to structure investment vehicles to evade the 
restrictions of section 13 on covered fund activities? Why or why not? 
If so, how could such concerns be addressed? Please explain.
    Question 55. Are there alternative approaches the agencies should 
take to enable banking entities to provide family wealth management 
vehicles with banking and asset management services?
    Question 56. The proposed exclusion would require the banking 
entity and its affiliates to comply with the requirements of 12 CFR 
223.15(a), as if such banking entity and its affiliates were a member 
bank and the issuer were an affiliate thereof. Should the agencies 
adopt this proposed requirement? Why or why not? Would this proposed 
requirement address the agencies' concerns about banking entities or 
their affiliates bailing out a family wealth management vehicle? Why or 
why not?
    Question 57. The proposed exclusion permits ownership of the family 
wealth management vehicle by 3 closely related persons of the family 
customer owners. Should the exclusion permit closely related persons to 
invest in family wealth management vehicles? What, if any, 
modifications should the agencies make to the proposed definition of 
``closely related person''? Why or why not? For example, should the 
definition of ``closely related person'' include individuals with 
longstanding personal relationships with family customers, but exclude 
individuals with only longstanding business relationships with family 
customers, or vice versa? Should the number of closely related persons 
permitted to invest in the family wealth management vehicle be 
increased, decreased, or remain at 3 such persons? Should, for example, 
the agencies consider raising the number of closely related persons to 
10 to parallel the number of permitted unaffiliated co-venturers 
permitted under the Sec.  _.10(c) exclusion for joint ventures? Why or 
why not? What if any other or additional qualitative or quantitative 
limits on the ownership interest of closely related persons in family 
wealth management vehicles? Would the inclusion of closely related 
persons that are not family customers in the family wealth management 
vehicle exclusion raise concerns about these vehicles being used to 
evade the prohibitions in section 13 of the BHC Act? Why or why not? 
Commenters should offer specific examples detailing when it would be 
appropriate for a family wealth management vehicle to include persons 
that are not family customers.
    Question 58. The proposed family wealth management vehicle 
exclusion would permit a banking entity or its affiliates to hold up to 
0.5 percent of the issuer's outstanding ownership interests only to the 
extent necessary for establishing corporate separateness or addressing 
bankruptcy, insolvency, or similar concerns. Instead of permitting such 
an ownership interest to be held by a banking entity or its affiliates, 
should the agencies permit such an ownership interest to be held by a 
third party that is unaffiliated with either the banking entity or the 
family customer? Why or why not?
    Question 59. The proposed family wealth management vehicle 
exclusion would require the banking entity and its affiliates to comply 
with the requirements of Sec.  _.14(b) and Sec.  _.15, as if the family 
wealth management vehicle were a covered fund. Should the exclusion 
require also that the banking entity and its affiliates comply with the 
requirements of all of Sec.  _.14? Why or why not?
4. Customer Facilitation
    The agencies are proposing to exclude from the definition of 
``covered fund'' under Sec.  _.10(b) of the rule any issuer that acts 
as a ``customer facilitation vehicle.'' The proposed customer 
facilitation vehicle exclusion would be available for any issuer that 
is formed by or at the request of a customer of the banking entity for 
the purpose of providing such customer (which may include one or more 
affiliates of such customer) with exposure to a transaction, investment 
strategy, or other service provided by the banking entity. In response 
to the 2018 proposal, a number of commenters indicated that

[[Page 12141]]

the 2013 rule has restricted their ability to provide banking and asset 
management services to customers and requested an exclusion for 
vehicles or structures created to accommodate customer exposure to 
securities, transactions, or other services that banking entities can 
provide directly to the customers.\166\ Commenters provided examples of 
services or transactions that customers (or a group of affiliated 
customers) might prefer to receive from a banking entity through a 
vehicle formed to facilitate those services or transactions rather than 
directly. For example, a customer might wish to purchase structured 
notes issued by a vehicle rather than a banking entity for certain 
legal, counterparty risk management, or accounting reasons specific to 
the customer.\167\ Similarly, a customer might seek financing or 
exposure to a particular, customer-specified investment through a 
special purpose vehicle to structure the transaction for the customer's 
business needs or objectives.\168\ Another commenter stated that many 
clients, in particular non-U.S. clients, prefer to face an entity 
structure rather than a banking entity to facilitate their trading and 
lending transactions for a variety of legal, counterparty risk 
management and accounting reasons.\169\
---------------------------------------------------------------------------

    \166\ See SIFMA; FSF; and ABA.
    \167\ See SIFMA and FSF.
    \168\ See ABA.
    \169\ See BPI.
---------------------------------------------------------------------------

    The agencies believe that the proposed exclusion for customer 
facilitation vehicles would appropriately allow banking entities to 
structure these types of services or transactions for customers, or to 
otherwise provide traditional customer-facing banking and asset 
management services, through a vehicle, even though such a vehicle may 
rely on section 3(c)(1) or 3(c)(7) of the Investment Company Act or 
would otherwise be a covered fund under the implementing regulations. 
While neither section 13 nor the implementing regulations would 
restrict a banking entity from providing these services to a customer 
directly, commenters have indicated that the broad definition of 
``covered fund'' in the 2013 rule has prevented or otherwise impeded 
banking entities from providing such services to a customer through 
vehicles owned or formed by that customer. The agencies have previously 
indicated their intent to avoid unintended results that might follow 
from a definition of ``covered fund'' that is inappropriately 
imprecise,\170\ and believe that these commenters have identified such 
unintended results. In particular, the agencies do not believe that 
section 13 was intended to interfere unnecessarily with the ability of 
banking entities to provide services to their customers simply because 
the customer may prefer to receive those services through a vehicle or 
through a transaction with a vehicle instead of directly with the 
banking entity. As the agencies noted in the preamble of the 2013 rule, 
section 13 and the implementing regulations were designed to permit 
banking entities to continue to provide client-oriented financial 
services, which the agencies believe would include asset management 
services provided through customer facilitation vehicles.\171\
---------------------------------------------------------------------------

    \170\ See 83 FR 33471; 79 FR 5670-71.
    \171\ See 79 FR 5541 (describing the 2013 rule as ``permitting 
banking entities to continue to provide, and to manage and limit the 
risks associated with providing, client-oriented financial services 
that are critical to capital generation for businesses of all sizes, 
households and individuals, and that facilitate liquid markets. 
These client-oriented financial services, which include 
underwriting, market making, and asset management services, are 
important to the U.S. financial markets and the participants in 
those markets.'').
---------------------------------------------------------------------------

    The agencies have previously indicated that section 13 permits the 
agencies to tailor the scope of the definition of covered fund to funds 
that engage in the investment activities contemplated by section 13 (as 
opposed, for example, to vehicles that merely serve to facilitate 
corporate structures).\172\ In addition, the agencies believe that an 
exclusion for customer facilitation vehicles is consistent with section 
13(d)(1)(D), which permits banking entities to engage in transactions 
on behalf of customers, when those transactions would otherwise be 
prohibited under section 13. The agencies have elsewhere tailored the 
2013 rule to allow banking entities to meet their customers' 
needs.\173\ The proposed exclusion would similarly allow banking 
entities to provide customer-oriented financial services through a 
vehicle when that vehicle's purpose is to facilitate a customer's 
exposure to those services.\174\ The agencies believe that these 
vehicles do not expose banking entities to the types of risks that 
section 13 was intended to restrict and would facilitate banking 
entities' customer-facing financial services.
---------------------------------------------------------------------------

    \172\ See 83 FR 33471 (citing 79 FR 5666).
    \173\ For example, the agencies in 2019 amended the exemption 
for risk-mitigating hedging activities to allow banking entities to 
acquire or retain an ownership interest in a covered fund as a risk-
mitigating hedge when acting as an intermediary on behalf of a 
customer that is not itself a banking entity to facilitate the 
exposure by the customer to the profits and losses of the covered 
fund. See 2019 amendments Sec.  _.13(a)(1)(ii). See also 2019 
amendments Sec.  _.3(d)(11) (excluding from the definition of 
``proprietary trading'' the entering into of customer-driven swaps 
or customer-driven security-based swaps and matched swaps or 
security-based swaps under certain conditions).
    \174\ The proposed exclusion would not require that the customer 
relationship be pre-existing. That is, the proposed exclusion could 
be available for an issuer that is formed for the purpose of 
facilitating the exposure of a customer of the banking entity where 
the customer relationship begins only in connection with the 
formation of that issuer. The agencies took a similar approach to 
this question in describing the exemption for activities related to 
organizing and offering a covered fund under Sec.  _.11(a) of the 
2013 rule. See 79 FR 5716. The agencies indicated that section 
13(d)(1)(G), under which the exemption under Sec.  _.11(a) was 
adopted, did not explicitly require that the customer relationship 
be pre-existing. Similarly, section 13(d)(1)(D) does not explicitly 
require a pre-existing customer relationship.
---------------------------------------------------------------------------

    The proposed exclusion would require that the vehicle be formed by 
or at the request of the customer. This requirement is intended to help 
ensure that customer facilitation vehicles are formed to provide 
customer-oriented financial services, and to differentiate customer 
facilitation vehicles from covered funds that are organized and offered 
by the banking entity. This condition would not preclude a banking 
entity from marketing its services through the use of customer 
facilitation vehicles or discussing with its customers prior to 
formation of the customer facilitation vehicle the potential benefits 
of structuring such services through a vehicle.
    A banking entity would be able to rely on the customer facilitation 
vehicle exclusion only under certain conditions, including that all of 
the ownership interests of the issuer are owned by the customer (which 
may include one or more of the customer's affiliates) for whom the 
issuer was created, other than a de minimis interest that may be held 
by the banking entity or its affiliates for specified purposes (as 
described below). The agencies believe that this condition would be 
appropriate to prevent banking entities from using the proposed 
exclusion for customer facilitation vehicles to evade the restrictions 
of section 13. A banking entity and its affiliates would have to 
maintain documentation outlining how the banking entity intends to 
facilitate the customer's exposure to such transaction, investment 
strategy, or service. The agencies believe that this condition would 
support their ability to examine for, and make assessments regarding, 
compliance with the proposed exclusion.
    Additional conditions for the customer facilitation vehicle 
exclusion would include that the banking entity and its affiliates: (1) 
Do not, directly or indirectly, guarantee, assume, or otherwise insure 
the obligations or

[[Page 12142]]

performance of such issuer; (2) comply with the disclosure obligations 
under Sec.  _.11(a)(8), as if such issuer were a covered fund; \175\ 
(3) do not acquire or retain, as principal, an ownership interest in 
the issuer, other than up to 0.5 percent of the issuer's outstanding 
ownership interests that may be held by the banking entity and its 
affiliates for the purpose of and to the extent necessary for 
establishing corporate separateness or addressing bankruptcy, 
insolvency, or similar concerns; (4) comply with the requirements of 
Sec.  _.14(b) and Sec.  _.15, as if such issuer were a covered fund; 
and (5) comply with the requirements of 12 CFR 223.15(a), as if such 
banking entity and its affiliates were a member bank and the issuer 
were an affiliate thereof.
---------------------------------------------------------------------------

    \175\ The obligations under Sec.  _.11(a)(8) apply in connection 
with the exemption for organizing and offering covered funds, which 
would typically require the preparation and distribution of offering 
documents. The agencies understand that offering documents may not 
be necessary in connection with most customer facilitation vehicles 
given the vehicles' purpose and the requirement that interests in 
such vehicles will be limited to a banking entity's customer or 
group of affiliated customers. Accordingly, the agencies believe 
that for purposes of the proposed exclusion, a banking entity could 
satisfy these written disclosure obligations in a number of ways, 
such as including them in the customer facilitation vehicle's 
governing documents, in account opening materials, or in 
supplementary materials. The condition reflects the agencies' 
interest in providing customers with the substance of the 
disclosures, rather than a concern with the document in which they 
are provided. Similarly, the agencies expect that the specific 
wording of the disclosures under Sec.  _.11(a)(8) may need to be 
modified to reflect accurately the specific circumstances of the 
customer facilitation vehicle.
---------------------------------------------------------------------------

    The agencies believe that, collectively, the conditions on the 
proposed exclusion should help to ensure that customer facilitation 
vehicles would be used for customer-oriented financial services 
provided on arms-length, market terms, and should help to prevent 
evasion of the requirements of section 13 and the implementing 
regulations. The agencies also believe that the conditions would be 
consistent with the purposes of section 13. In addition, these proposed 
conditions are based on existing conditions in other provisions of the 
implementing regulations,\176\ which the agencies believe should 
facilitate banking entities' compliance.
---------------------------------------------------------------------------

    \176\ See implementing regulations Sec.  _.11(a)(5) (imposing, 
as a condition of the exemption for organizing and offering a 
covered fund, that a banking entity and its affiliates do not, 
directly or indirectly, guarantee, assume, or otherwise insure the 
obligations or performance of the covered fund or of any covered 
fund in which such covered fund invests); Sec.  _.11(a)(8) 
(imposing, as a condition of the exemption for organizing and 
offering a covered fund, that the banking entity provide certain 
disclosures to any prospective and actual investor in the covered 
fund); Sec.  _.10(c)(2)(ii) (allowing, as a condition of the 
exclusion from the covered fund definition for wholly-owned 
subsidiaries, for the holding of up to 0.5 percent of outstanding 
ownership interests by a third party for limited purposes); and 
Sec.  _.14(b) (subjecting certain transactions with covered funds to 
section 23B of the Federal Reserve Act).
---------------------------------------------------------------------------

    The agencies are not proposing to apply Super 23A to customer 
facilitation vehicles because the agencies understand that the 
application of Super 23A to customer facilitation vehicles would 
prohibit banking entities from providing the full range of banking and 
asset management services to customers using these vehicles. However, 
the agencies are proposing to apply the prohibition on purchases of 
low-quality assets under the Board's regulations implementing section 
23A of the Federal Reserve Act (12 CFR 223.15(a)) to help ensure that 
the exclusion for customer facilitation vehicles does not allow banking 
entities to ``bail out'' the vehicle.
    Question 60. Is the proposed exclusion for customer facilitation 
vehicles appropriate? Why or why not?
    Question 61. Does the proposed exclusion for customer facilitation 
vehicles include the appropriate vehicles? Why or why not? If not, how 
should the agencies expand or narrow the vehicles for which banking 
entities would be permitted to make use of the exclusion? What 
modifications to the proposed exclusion would be appropriate and why?
    Question 62. Are the proposed conditions on the proposed exclusion 
for customer facilitation vehicles appropriate? Why or why not? If not 
appropriate, how should the agencies modify the conditions, and why?
    Question 63. Should the agencies require, as a condition for 
satisfying the proposed exclusion, that the customer facilitation 
vehicle be formed at the request of the customer? Why or why not?
    Question 64. Should the agencies specify to which types of 
transaction, investment strategy, or other service such a customer 
facilitation vehicle could be formed to facilitate exposure? Why or why 
not?
    Question 65. The proposed exclusion would permit a banking entity 
or its affiliates to hold up to 0.5 percent of the issuer's outstanding 
ownership interests only to the extent necessary for establishing 
corporate separateness or addressing bankruptcy, insolvency, or similar 
concerns. Instead of permitting such an ownership interest to be held 
by a banking entity or its affiliates, should the agencies permit such 
an ownership interest to be held by a third party that is unaffiliated 
with either the banking entity or the customer? Why or why not?
    Question 66. The proposed exclusion would require the banking 
entity and its affiliates to comply with the requirements of Sec.  
_.14(b) and Sec.  _.15, as if the customer facilitation vehicle were a 
covered fund. Should the exclusion require also that the banking entity 
and its affiliates comply with the requirements of all of Sec.  _.14? 
Why or why not?
    Question 67. The proposed exclusion would require the banking 
entity and its affiliates to comply with the requirements of 12 CFR 
223.15(a), as if such banking entity and its affiliates were a member 
bank and the issuer were an affiliate thereof. Should the agencies 
adopt this proposed requirement? Why or why not? Would this proposed 
requirement address the agencies' concerns about banking entities or 
their affiliates bailing out a customer facilitation vehicle? Why or 
why not?
    Question 68. Would the proposed exclusion for customer facilitation 
vehicles create any opportunities for evasion, for example, by allowing 
a banking entity to structure such vehicles in a manner to evade the 
restrictions of section 13 on covered fund activities? Why or why not? 
If so, what conditions could be imposed to address such concerns? For 
example, should the agencies impose a restriction that a customer 
facilitation vehicle only be able to serve customers who initiate or 
request a given transaction, investment strategy, or other service? Do 
the conditions that would be imposed on the proposed exclusion address 
those concerns? Please explain.
    Question 69. Should the agencies take a different approach to 
enable banking entities to provide customers with exposure to a 
transaction, investment strategy, or other service provided by the 
banking entity? For example, would modifications to Sec.  _.14 of the 
implementing regulations, whether as proposed below or otherwise, allow 
banking entities to provide customers with this exposure? Please 
explain.
    Question 70. For banking entities with significant trading assets 
and liabilities that sponsor funds relying on the proposed exclusion 
for customer facilitation vehicles, would it be appropriate to require 
additional documentation requirements pursuant to Sec.  _.20(e)(2) 
consistent with other sponsored funds relying on certain exclusions 
from the definition of covered fund? Why or why not? Similarly, should 
the documentation requirements of Sec.  _.20(e)(2) also be applied to 
sponsored funds relying on

[[Page 12143]]

the other new proposed exclusions for credit funds, venture capital 
funds, and family wealth management vehicles? Why or why not?

D. Limitations on Relationships With a Covered Fund

    The agencies are proposing to modify the regulations implementing 
section 13(f)(1) of the BHC Act to permit banking entities to engage in 
a limited set of covered transactions with covered funds for which the 
banking entity directly or indirectly serves as investment manager, 
investment adviser, or sponsor, or that the banking entity organizes 
and offers pursuant to section 13(d)(1)(G) of the BHC Act (such funds, 
related covered funds). Specifically, as described below, the proposal 
would allow a banking entity to enter into covered transactions with a 
related covered fund that would be permissible without limit for a 
state member bank to enter into with an affiliate under section 23A of 
the Federal Reserve Act. This would include, for example, intraday 
extensions of credit. The proposal would also allow a banking entity to 
enter into short-term extensions of credit with, and purchase assets 
from, a related covered fund in connection with payment, clearing, and 
settlement activities. These proposed amendments would address certain 
concerns raised by regulated banking entities and commenters with 
respect to the impact of section 13(f)(1) on the practical ability of 
banking entities to organize and offer covered funds as permitted by 
section 13(d)(1)(G).
    Section 13(f)(1) of the BHC Act generally prohibits a banking 
entity from entering into a transaction with a related covered fund 
that would be a covered transaction as defined in section 23A of the 
Federal Reserve Act.\177\
---------------------------------------------------------------------------

    \177\ 12 U.S.C. 1851(f)(1); see 12 U.S.C. 371c. Section 13(f)(3) 
of the BHC Act also provides an exemption for prime brokerage 
transactions between a banking entity and a covered fund in which a 
covered fund managed, sponsored, or advised by that banking entity 
has taken an ownership interest. 12 U.S.C. 1851(f)(3). In addition, 
section 13(f)(2) subjects any transaction permitted under section 
13(f) (including a permitted prime brokerage transaction) between a 
banking entity and covered fund to section 23B of the Federal 
Reserve Act. 12 U.S.C. 1851(f)(2); see 12 U.S.C. 371c-1.
---------------------------------------------------------------------------

    Section 23A of the Federal Reserve Act limits the aggregate amount 
of covered transactions by a member bank to no more than (1) 10 percent 
of the capital stock and surplus of the member bank in the case of any 
one affiliate, and (2) 20 percent of the capital stock and surplus of 
the member bank in the aggregate with respect to all affiliates.\178\ 
By contrast, section 13(f)(1) of the BHC Act generally prohibits 
covered transactions between a banking entity and a related covered 
fund, with no minimum amount of permissible covered transactions.\179\ 
Despite this general prohibition, another part of section 13 authorizes 
a banking entity to own an interest in a related covered fund, which 
would be a ``covered transaction'' for purposes of section 23A of the 
Federal Reserve Act.\180\ In addition to this apparent conflict between 
paragraphs 13(d) and (f) with respect to covered fund ownership, there 
are other elements of these paragraphs that introduce ambiguity about 
the interpretation of the term ``covered transaction'' as used in 
section 13(f) of the BHC Act. The statute prohibits a banking entity 
that organizes or offers a hedge fund or private equity fund from 
directly or indirectly guaranteeing, assuming, or otherwise insuring 
the obligations or performance of the fund (or of any hedge fund or 
private equity fund in which such hedge fund or private equity fund 
invests).\181\ To the extent that section 13(f) prohibits all covered 
transactions between a banking entity and a related covered fund, 
however, the independent prohibition on guarantees in section 
13(d)(1)(G)(v) would seem to be unnecessary and redundant.\182\
---------------------------------------------------------------------------

    \178\ 12 U.S.C. 371c. The term ``covered transaction'' is 
defined in section 23A of the Federal Reserve Act to mean, with 
respect to an affiliate of a member bank, (1) a loan or extension of 
credit to the affiliate, including a purchase of assets subject to 
an agreement to repurchase; (2) a purchase of or an investment in 
securities issued by the affiliate; (3) a purchase of assets from 
the affiliate, except such purchase of real and personal property as 
may be specifically exempted by the Board by order or regulation; 
(4) the acceptance of securities or other debt obligations issued by 
the affiliate as collateral security for a loan or extension of 
credit to any person or company; (5) the issuance of a guarantee, 
acceptance, or letter of credit, including an endorsement or standby 
letter of credit, on behalf of an affiliate; (6) a transaction with 
an affiliate that involves the borrowing or lending of securities, 
to the extent that the transaction causes a member bank or a 
subsidiary to have credit exposure to the affiliate; or (7) a 
derivative transaction, as defined in paragraph (3) of section 
5200(b) of the Revised Statutes of the United States (12 U.S.C. 
84(b)), with an affiliate, to the extent that the transaction causes 
a member bank or a subsidiary to have credit exposure to the 
affiliate. See 12 U.S.C. 371c(b)(7), as amended by Public Law 
111.203, section 608 (July 21, 2010). Section 13(f) of the BHC Act 
does not alter the applicability of section 23A of the Federal 
Reserve Act and the Board's Regulation W to covered transactions 
between insured depository institutions and their affiliates.
    \179\ 12 U.S.C. 1851(f)(1).
    \180\ 12 U.S.C. 1851(d)(1)(G); (d)(4).
    \181\ 12 U.S.C. 1851(d)(1)(G)(v).
    \182\ See 12 U.S.C. 371c(b)(7)(E); 12 CFR 223.3(h)(4).
---------------------------------------------------------------------------

    The agencies addressed the apparent conflict between section 
13(f)(1) and particular provisions in section 13(d)(1) of the BHC Act 
in the 2013 rule by interpreting the statutory language to permit a 
banking entity ``to acquire or retain an ownership interest in a 
covered fund in accordance with the requirements of section 13.'' \183\ 
In doing so, the agencies noted that a contrary interpretation would 
make the specific language that permits covered transactions between a 
banking entity and a related covered fund ``mere surplusage.'' \184\
---------------------------------------------------------------------------

    \183\ 79 FR 5746.
    \184\ 79 FR 5746.
---------------------------------------------------------------------------

    In adopting the regulations to reconcile the conflict between 
paragraphs (d) and (f) of section 13 of the BHC Act, the agencies did 
not use their rulemaking authority pursuant to section (d)(1)(J).\185\ 
Instead, the agencies used their general rulemaking authority to 
interpret section 13 of the BHC Act. Although the agencies previously 
expressed doubt about their ability to permit banking entities to enter 
into covered transactions with related covered funds pursuant to their 
authority under section 13(d)(1)(J) of the BHC Act,\186\ the activities 
permitted pursuant to paragraph (d) specifically contemplate allowing a 
banking entity to enter into certain covered transactions with related 
funds.\187\ The exceptions in section 13(f)(1) are also expressly 
incorporated into the statutory list of permitted activities, 
specifically in section 13(d)(1)(G)(iv).\188\ By virtue of the conflict 
between paragraphs (d) and (f) of section 13, and the inclusion of 
specific covered transactions within the permitted activities in 
paragraph (d) of section 13, the agencies believe that the authority 
granted pursuant to paragraph (d)(1)(J) to determine that other 
activities are not prohibited by the statute authorizes the agencies to 
exercise rulemaking authority to determine that banking entities may 
enter into covered transactions with related covered funds that would 
otherwise be prohibited by section 13(f)(1) of the BHC Act, provided 
that the rulemaking complies with applicable statutory 
requirements.\189\
---------------------------------------------------------------------------

    \185\ Id.
    \186\ See 76 FR 68912 n.313.
    \187\ 12 U.S.C. 1851(d)(1)(G); (d)(4).
    \188\ 12 U.S.C. 1851(d)(1)(G)(iv).
    \189\ 12 U.S.C. 1851(b)(2), (d)(1)(J), (d)(2).
---------------------------------------------------------------------------

    In the 2018 proposal, the agencies invited comment from the public 
on the agencies' 2013 interpretation of section 13(f)(1) of the BHC 
Act,\190\ and whether

[[Page 12144]]

that interpretation should be amended.\191\ Among other things, the 
agencies invited comment on whether to incorporate some or all of the 
exemptions or quantitative limits in section 23A of the Federal Reserve 
Act and the Board's Regulation W, and if so, whether these transactions 
should be subject to any additional limitations.\192\ However, the 
agencies did not propose specific amendments addressing the 
interpretation of section 13(f)(1) of the BHC Act.\193\
---------------------------------------------------------------------------

    \190\ In the preamble to the 2013 rule, the agencies noted that 
``[s]ection 13(f) of the BHC Act does not incorporate or reference 
the exemptions contained in section 23A of the FR Act or the Board's 
Regulation W.'' 79 FR 5746.
    \191\ 83 FR 33486-487.
    \192\ Id. at 33487.
    \193\ On March 29, 2017, the CFTC's Division of Swap Dealer and 
Intermediary Oversight (DSIO) issued a letter to a futures 
commission merchant (FCM) stating that the DSIO would not recommend 
that an enforcement action against the FCM be initiated in 
connection with Sec.  _.14(a) of the 2013 rule. Although no specific 
amendments were provided in the 2018 proposal, the proposal would 
permit FCMs that are banking entities to enter into certain covered 
transactions with covered funds in connection with futures, options 
and swaps clearing services to covered funds pursuant to Sec.  
_.14(a).
---------------------------------------------------------------------------

    Several commenters addressed the interpretation of section 13(f)(1) 
of the BHC Act, and the specific questions asked by the agencies. 
Several commenters recommended that the agencies interpret section 
13(f)(1) to include the exemptions provided under section 23A of the 
Federal Reserve Act.\194\ Some commenters also encouraged the agencies 
to permit banking entities to engage in a quantitatively limited amount 
of covered transactions with related covered funds.\195\ Conversely, 
one commenter opposed revising the regulations to incorporate the 
Federal Reserve Act's section 23A exemptions or quantitative 
limits.\196\
---------------------------------------------------------------------------

    \194\ See, e.g., ABA; BPI; and FSF.
    \195\ See, e.g., BPI and FSF.
    \196\ See Public Citizen.
---------------------------------------------------------------------------

    Banking entities that sponsor or serve as the investment adviser to 
covered funds and groups representing such banking entities have argued 
that the inability to engage in any covered transactions with such 
funds, particularly those types of transactions that are expressly 
exempted under section 23A of the Federal Reserve Act and the Board's 
Regulation W, has limited the services that they or their affiliates 
can provide.\197\ Some of these commenters have argued that amending 
the regulations to permit limited covered transactions with related 
covered funds would not create any new incentives for the banking 
entity to financially support the related covered fund in times of 
stress and would not otherwise permit the banking entity to indirectly 
engage in proprietary trading through the related covered fund.\198\ 
For example, when a banking entity that sponsors or advises a covered 
fund also serves as a broker-dealer to the covered fund, the 
prohibition on covered transactions between the banking entity (and its 
affiliates) and the covered fund may limit the ability of the banking 
entity and its affiliates to provide other services, such as trade 
settlement services, to the covered fund. A broker-dealer providing 
trade settlement services may extend intraday credit to the fund, or 
purchase assets from the fund, in connection with trading activities in 
the ordinary course of business. One group representing banking 
entities also noted that extensions of credit in connection with 
payment, clearing, and settlement services that were intended to be 
intraday may become overnight extensions of credit, for example due to 
time zone differences in local settlement markets.\199\ Under the 
interpretation provided in the preamble to the 2013 rule,\200\ both 
intraday extensions of credit and overnight extensions of credit are 
``covered transactions'' for purposes of section 13(f)(1) of the BHC 
Act, and therefore would be impermissible for a banking entity with 
respect to a related covered fund.
---------------------------------------------------------------------------

    \197\ See, e.g., BPI; CS; and IAA.
    \198\ Id.
    \199\ See, e.g., SIFMA.
    \200\ See 79 FR 5746.
---------------------------------------------------------------------------

    The agencies believe that, under certain circumstances, it would be 
appropriate to permit banking entities to enter into certain covered 
transactions with related covered funds, and therefore are proposing to 
amend Sec.  _.14 of the implementing regulations as described below. 
The proposed amendments would not modify the definition of ``covered 
transaction'' but instead would authorize banking entities to engage in 
limited activities with related covered funds. Any transactions or 
activities permitted by these revisions would be required to comply 
with certain conflict of interest, high-risk, and safety and soundness 
restrictions.
Exempt Transactions Under Section 23A and the Board's Regulation W
    The proposal would permit a banking entity to engage in covered 
transactions with a related covered fund that would be exempt from the 
quantitative limits, collateral requirements, and low-quality asset 
prohibition under section 23A of the Federal Reserve Act, including 
transactions that would be exempt pursuant to section 223.42 of the 
Board's Regulation W.\201\ Section 23A of the Federal Reserve Act is 
designed to protect against a depository institution suffering losses 
in transactions with affiliates, and to limit the ability of a 
depository institution to transfer to its affiliates the ``subsidy'' 
arising from the depository institution's access to the Federal safety 
net.\202\
---------------------------------------------------------------------------

    \201\ See 12 U.S.C. 371c(d); 12 CFR 223.42.
    \202\ For a brief background on section 23A of the Federal 
Reserve Act, see Transactions Between Member Banks and Their 
Affiliates, 67 FR 76560-765561 (December 12, 2002).
---------------------------------------------------------------------------

    Notwithstanding the statutory objectives of section 23A of the 
Federal Reserve Act, however, a member bank may enter into certain 
``exempt'' covered transactions set forth in section 23A of the Federal 
Reserve Act and the Board's Regulation W, without regard to the 
quantitative limits, collateral requirements, and low-quality asset 
prohibition of section 23A and the Board's Regulation W.\203\ These 
exempt transactions do not raise the same concerns that they could 
cause the depository institution to suffer losses or transfer the 
subsidy arising from the depository institution's access to the Federal 
safety net. The agencies believe that the same rationales that support 
the exemptions in section 23A of the Federal Reserve Act and the 
Board's Regulation W also support exempting such transactions from the 
prohibition on covered transactions between a banking entity and 
related covered funds under section 13(f)(1) of the BHC Act. In 
particular, the agencies note that these exemptions generally do not 
present significant risks of loss, and serve important public policy 
objectives.\204\
---------------------------------------------------------------------------

    \203\ See 12 U.S.C. 371c(d); 12 CFR 223.42.
    \204\ For example, intraday extensions of credit are exempt 
covered transactions under section 23A of the Federal Reserve Act. 
The Board previously has noted that ``[i]ntraday overdrafts and 
other forms of intraday credit generally are not used as a means of 
funding or otherwise providing financial support for an affiliate. 
Rather, these credit extensions typically facilitate the settlement 
of transactions between an affiliate and its customers when there 
are mismatches between the timing of funds sent and received during 
the business day.'' 67 FR 76596.
---------------------------------------------------------------------------

Short-Term Extensions of Credit and Acquisitions of Assets in 
Connection With Payment, Clearing, and Settlement Services
    In addition, the proposal would permit a banking entity to provide 
short-term extensions of credit to and purchase assets from a related 
covered fund, subject to appropriate limits. First, each short-term 
extension of credit or purchase of assets would have to be made in the 
ordinary course of business

[[Page 12145]]

in connection with payment transactions; securities, derivatives, or 
futures clearing; or settlement services. Second, each extension of 
credit would be required to be repaid, sold, or terminated no later 
than five business days after it was originated. The provision of 
payment, clearing, and settlement services by a banking entity (or its 
affiliates) to an affiliated covered fund generally requires the 
ability to provide such short-term extensions of credit, and therefore 
is a necessary corollary to the exempt covered transactions that would 
allow banking entities to provide standard payment, clearing, and 
settlement services to related covered funds. Additionally, the 
proposed five business day criterion would be consistent with the 
Federal banking agencies' capital rule and would generally require 
banking entities to rely on transactions with normal settlement 
periods, which have lower risk of delayed settlement or failure, when 
providing short-term extensions of credit.\205\ Each short-term 
extension of credit must also meet the same requirements applicable to 
intraday extensions of credit under section 223.42(l)(1)(i) and (ii) of 
the Board's Regulation W (as if the extension of credit was an intraday 
extension of credit, regardless of the duration of the extension of 
credit). In addition, each extension of credit or purchase of assets 
permitted by these revisions would be required to comply with certain 
conflict of interest, high-risk, and safety and soundness restrictions.
---------------------------------------------------------------------------

    \205\ See 78 FR 62110 (October 11, 2013). While the Federal 
banking agencies require firms to track and monitor the credit risk 
exposure for transactions involving securities, foreign exchange 
instruments, and commodities that have a risk of delayed settlement, 
this requirement does not apply to other types of transactions which 
may be used in providing a short-term extension of credit (e.g., 
repo-style transactions). Additionally, banking entities typically 
monitor credit extensions by counterparty, and not by transaction 
type. Thus, the proposal would remain consistent with the approach 
taken in the Federal banking agencies' capital rule, without 
imposing an additional compliance burden without a corresponding 
benefit.
---------------------------------------------------------------------------

Impact of the Proposed Amendments on Safety and Soundness and U.S. 
Financial Stability
    The agencies expect that the proposed amendments described above 
would generally promote and protect the safety and soundness of banking 
entities and U.S. financial stability.
    First, allowing banking entities to engage in these limited covered 
transactions with related covered funds may allow banking entities to 
reduce operational risk. Currently, the restrictions under section 
13(f)(1) of the BHC Act substantially limit the ability of a banking 
entity to both (1) organize and offer a covered fund, or act as an 
investment adviser to the covered fund, and (2) provide custody or 
other services to the fund. As a result, a third party is required to 
provide other necessary services for the fund's operation, including 
payment, clearing, and settlement services that are generally provided 
by the fund's custodian. This increases the potential for problems at 
the third-party service provider (e.g., an operational failure or a 
disruption to normal functioning) to affect the banking entity or the 
fund, which were required to use the third-party service provider as a 
result of the restrictions under section 13(f)(1). Those problems may 
then spread among financial institutions or markets and thereby 
threaten the stability of the U.S. financial system. By amending Sec.  
_.14(a), therefore, the proposal may allow a banking entity to reduce 
both operational risk and interconnectedness to other financial 
institutions by directly providing a broader array of services to a 
fund it organizes and offers, or advises. The agencies believe that 
reducing these risks could promote and protect the safety and soundness 
of banking entities.\206\
---------------------------------------------------------------------------

    \206\ As noted above, the agencies also believe that the same 
rationales that support the exempt covered transactions in section 
23A of the Federal Reserve Act and the Board's Regulation W also 
support permitting a banking entity to engage in exempt covered 
transactions with a related covered fund.
---------------------------------------------------------------------------

    Second, the proposed amendments may promote and protect U.S. 
financial stability by reducing interconnectedness among firms. As 
described above, the authorized covered transactions would permit 
banking entities to provide a more comprehensive suite of services to 
related covered funds, reducing the need to rely on third parties to 
provide such services.
    This proposal would remain subject to additional limitations on 
transactions with related covered funds. As specified in the statute, 
such activities would be permissible only ``to the extent permitted by 
any other provision of Federal or state law, and subject to the 
limitations under section 13(d)(2) of the BHC Act and any restrictions 
or limitations that the appropriate Federal banking agencies, the 
Securities and Exchange Commission, and the Commodity Futures Trading 
Commission, may determine . . .'' \207\ Section 13(d)(2) of the BHC Act 
also imposes additional restrictions on any activities authorized 
pursuant to section (d)(1), including those activities authorized by 
rulemaking pursuant to section (d)(1)(J).\208\
---------------------------------------------------------------------------

    \207\ 12 U.S.C. 1851(d)(1).
    \208\ 12 U.S.C. 1851(d)(2); see also 2013 rule Sec. Sec.  _.7 
and _.15.
---------------------------------------------------------------------------

    Sections _.14(b) and _.14(c) of the regulations implementing 
section 13 of the BHC Act both generally require that a banking entity 
may enter into certain transactions specified in section 23B of the 
Federal Reserve Act (including ``covered transactions'' as defined in 
section 23A of the Federal Reserve Act) with related covered funds only 
on terms and under circumstances that are substantially the same (or at 
least as favorable) to the banking entity as those prevailing at the 
time for comparable transactions with or involving other nonaffiliated 
companies, or in the absence of comparable transactions, on terms and 
under circumstances that the banking entity in good faith would offer 
to, or would apply to, nonaffiliated companies.\209\
---------------------------------------------------------------------------

    \209\ 12 U.S.C. 1851(f)(2); see 12 U.S.C. 371c-1(a)(1).
---------------------------------------------------------------------------

    Question 71. What impacts would the proposed amendments to Sec.  
_.14 have on the safety and soundness of banking entities, and on the 
financial stability of the United States? Would the activities 
permitted under the proposed amendments to Sec.  _.14(a) of the 
implementing regulations promote and protect safety and soundness of 
the banking entity and U.S. financial stability, and if so, how?
    Question 72. Are there other services that a banking entity 
typically provides to sponsored funds or funds for which it acts as an 
investment adviser that would be prohibited under section 13(f)(1) of 
the BHC Act and Sec.  _.14 of the implementing regulations as proposed 
to be amended? What would be the impact on the safety and soundness of 
the banking entity, and the financial stability of the United States, 
of permitting a banking entity to engage in such transactions with a 
related covered fund?
    Question 73. Should the agencies amend Sec.  _.14 of the 
implementing regulations to permit banking entities to engage in 
additional covered transactions in connection with payment, clearing, 
and settlement services? Why or why not? What would be the impacts of 
permitting banking entities to engage in payment, clearing, and 
settlement services with related covered funds on the safety and 
soundness of the banking entity? What would be the impacts of such an 
approach on U.S. financial stability?
    Question 74. Should the agencies impose any additional or different 
qualitative or quantitative limits on the

[[Page 12146]]

covered transactions contemplated by the proposed amendments to Sec.  
_.14(a) of the implementing regulations? Why or why not? For example, 
should the agencies impose a quantitative limit of any kind on the 
covered transactions that would not be subject to the prohibition in 
section 13(f)(1) of the BHC Act? If the agencies were to impose a 
quantitative limit on such covered transactions, on what should such 
limits be based (e.g., based on the banking entity's tier 1 capital, 
the size of the fund, or some other measurement), and what limits would 
be appropriate?
    Question 75. Is the proposed approach to addressing transactions 
that are exempt under Section 23A and payment, clearing, and settlement 
activities effective? Why or why not? Is there a better approach to 
addressing these types of transactions?
    Question 76. The proposal would require that any payment, clearing, 
or settlement activity be settled within five business days. Is this 
length of time sufficient to effectuate the proposed permitted 
activities? Why or why not? Is another length of time, such as three 
days, more appropriate or consistent with current market practices? 
Should the agencies adopt a limit that adopts the shorter of five days 
or industry standard settlement time for a particular financial 
instrument?
    Question 77. Should the agencies, for the purposes of Sec.  
_.14(a)(2)(iv) of the proposed amendment, impose on the purchase of 
assets a requirement that the banking entity comply with the 
requirements of 12 CFR 223.15(a), as if such banking entity and its 
affiliates were a member bank and the covered fund were an affiliate 
thereof?

E. Ownership Interest

    The agencies are proposing changes to the definition of ``ownership 
interest'' to clarify that a debt relationship with a covered fund 
would typically not constitute an ownership interest under the 
regulations.\210\ In addition, the agencies are proposing amendments to 
the manner in which a banking entity must calculate its ownership 
interest for purposes of complying with the limits and conditions that 
apply to investments in covered funds organized and offered by a 
banking entity. Specifically, the proposed amendments are intended to 
better align the manner in which ownership limits are calculated for 
purposes of the quantitative limit on a banking entity's investment in 
a single fund (the per fund limit), the quantitative limit on a banking 
entity's investment in all covered funds (the aggregate fund limit), 
and the calculation of the applicable capital deductions for 
investments in covered funds (the covered fund deduction).\211\
---------------------------------------------------------------------------

    \210\ See 2013 rule Sec.  _.10(d)(6) (defining ``ownership 
interest'' for purposes of subpart C of the rule).
    \211\ See 12 U.S.C. 1851(d)(4)(B)(ii)(I)-(II); 2013 rule 
Sec. Sec.  _.10(d)(6); _.12(a)(2)(ii)-(iii), (b)-(d).
---------------------------------------------------------------------------

    The implementing regulations define an ``ownership interest'' in a 
covered fund to mean any equity, partnership, or other similar 
interest. Some banking entities have expressed concern about the 
inclusion of the term ``other similar interest'' in the definition of 
``ownership interest,'' and have indicated that the definition of this 
term could lead to the inclusion of debt instruments that have standard 
covenants in the measurement of an ownership interest. Under the 2013 
rule, ``other similar interest'' is defined as an interest that:
     Has the right to participate in the selection or removal 
of a general partner, managing member, member of the board of directors 
or trustees, investment manager, investment adviser, or commodity 
trading advisor of the covered fund (excluding the rights of a creditor 
to exercise remedies upon the occurrence of an event of default or an 
acceleration event);
     Has the right under the terms of the interest to receive a 
share of the income, gains or profits of the covered fund;
     Has the right to receive the underlying assets of the 
covered fund after all other interests have been redeemed and/or paid 
in full (excluding the rights of a creditor to exercise remedies upon 
the occurrence of an event of default or an acceleration event);
     Has the right to receive all or a portion of excess spread 
(the positive difference, if any, between the aggregate interest 
payments received from the underlying assets of the covered fund and 
the aggregate interest paid to the holders of other outstanding 
interests);
     Provides under the terms of the interest that the amounts 
payable by the covered fund with respect to the interest could be 
reduced based on losses arising from the underlying assets of the 
covered fund, such as allocation of losses, write-downs or charge-offs 
of the outstanding principal balance, or reductions in the amount of 
interest due and payable on the interest;
     Receives income on a pass-through basis from the covered 
fund, or has a rate of return that is determined by reference to the 
performance of the underlying assets of the covered fund; or
     Any synthetic right to have, receive, or be allocated any 
of the rights above.\212\
---------------------------------------------------------------------------

    \212\ 2013 rule Sec.  _.10(d)(6)(i).
---------------------------------------------------------------------------

    This definition focuses on the attributes of the interest and 
whether it provides a banking entity with economic exposure to the 
profits and losses of the covered fund, rather than its form. Under the 
2013 rule, a debt interest in a covered fund can be an ownership 
interest if it has the same characteristics as an equity or other 
ownership interest (e.g., provides the holder with voting rights; the 
right or ability to share in the covered fund's profits or losses; or 
the ability, directly or pursuant to a contract or synthetic interest, 
to earn a return based on the performance of the fund's underlying 
holdings or investments). The 2013 rule excludes carried interest 
(restricted profit interest) from the definition of ownership interest, 
although as discussed below, only for certain purposes.
    In the 2018 proposal the agencies requested comment on all aspects 
of the 2013 rule's application to securitization transactions, 
including the definition of ownership interest. Specifically, the 
agencies asked whether there were any modifications that should be made 
to the 2013 rule's definition of ownership interest.\213\ Among other 
things, the agencies requested comments on whether they should modify 
Sec.  _.6(i)(A) to provide that the ``rights of a creditor to exercise 
remedies upon the occurrence of an event of default or an acceleration 
event'' include the right to participate in the removal of an 
investment manager for cause, or to nominate or vote on a nominated 
replacement manager upon an investment manager's resignation or 
removal.\214\
---------------------------------------------------------------------------

    \213\ 83 FR 33481.
    \214\ Id.
---------------------------------------------------------------------------

    In response to the 2018 proposal, a number of commenters supported 
the agencies' suggestion to modify Sec.  _.6(i)(A) and to expressly 
permit creditors to participate in the removal of an investment manager 
for cause, or to nominate or vote on a nominated replacement manager 
upon an investment manager's resignation or removal without causing an 
interest to become an ownership interest.\215\ This notwithstanding, a 
few of these commenters noted that this modification would not address 
all issues with the condition as banks sometimes have contractual 
rights to participate in the selection or removal of a general partner, 
managing member or

[[Page 12147]]

member of the board of directors or trustees of a borrower that are not 
limited to the exercise of a remedy upon an event of default or other 
default event.\216\ Therefore, these commenters proposed eliminating 
the ``other similar interest'' clause from the definition altogether 
or, alternatively, replacing the definition of ownership interest with 
the definition of ``voting securities'' from the Board's Regulation Y.
---------------------------------------------------------------------------

    \215\ See, e.g., SFIG; JBA; LSTA; and IAA.
    \216\ See SFIG.
---------------------------------------------------------------------------

    A number of commenters argued that debt interests issued by covered 
funds and loans to third-party covered funds not advised or managed by 
a banking entity should be excluded from the definition of ownership 
interest.\217\ Other commenters suggested reducing the scope of the 
definition of ownership interest to apply only to equity and equity-
like interests that are commonly understood to indicate a bona fide 
ownership interest in a covered fund.\218\ One other commenter asked 
the agencies to clarify conditions under the ``other similar interest'' 
clause.\219\ Specifically, the commenter asked the agencies to clarify 
whether the right to receive all or a portion of the spread extends to 
using the spread to pay principal or the interest that is otherwise 
owed or to clarify that any debt repaid from collections on underlying 
assets of a special purpose entity, but is entitled to receive only 
principal and interest, is not an ownership interest. At least one 
commenter asked the agencies not to modify the definition of ownership 
interest as, the commenter argued, there is nothing under section 13 of 
the BHC Act that limits or restricts the ability of a banking entity or 
nonbank financial company to sell or securitize loans in a manner 
permitted by law.\220\
---------------------------------------------------------------------------

    \217\ See, e.g., Capital One et al. and BPI.
    \218\ See, e.g., ABA and CAE.
    \219\ See SFIG.
    \220\ See Data Boiler.
---------------------------------------------------------------------------

    In response to comments received and in order to provide clarity 
about the types of interests that would be considered within the scope 
of the definition of ownership interest, the agencies propose to amend 
the parenthetical in Sec.  _.6(i)(A) to specify that creditors' 
remedies upon the occurrence of an event of default or an acceleration 
event include the right to participate in the removal of an investment 
manager for cause or to nominate or vote on a nominated replacement 
manager upon an investment manager's resignation or removal. 
Accordingly, an interest that allows its holder to remove an investment 
manager for cause upon the occurrence of an event of default, for 
example, would not be considered an ownership interest for this reason 
alone.
    The proposed rule would also provide a safe harbor from the 
definition of ownership interest, as suggested by some commenters.\221\ 
The safe harbor should address commenters' concerns that some ordinary 
debt interests could be construed as an ownership interest. Any senior 
loan or other senior debt interest that meets all of the following 
characteristics would not be considered to be an ownership interest 
under the proposed rule:
---------------------------------------------------------------------------

    \221\ See SFIG.
---------------------------------------------------------------------------

    (1) The holders of such interest do not receive any profits of the 
covered fund but may only receive: (i) Interest payments which are not 
dependent on the performance of the covered fund; and (ii) fixed 
principal payments on or before a maturity date;
    (2) The entitlement to payments on the interest is absolute and may 
not be reduced because of the losses arising from the covered fund, 
such as allocation of losses, write-downs or charge-offs of the 
outstanding principal balance, or reductions in the principal and 
interest payable; and
    (3) The holders of the interest are not entitled to receive the 
underlying assets of the covered fund after all other interests have 
been redeemed and/or paid in full (excluding the rights of a creditor 
to exercise remedies upon the occurrence of an event of default or an 
acceleration event).
    The agencies believe that the proposed conditions for the safe 
harbor would provide more clarity and predictability to banking 
entities and enable them to determine more readily whether an interest 
would be an ownership interest under the regulations implementing 
section 13 of the BHC Act. The three conditions under the proposed safe 
harbor would ensure that debt interests that do not have equity-like 
characteristics are not considered ownership interests. At the same 
time, the agencies believe that the conditions are rigorous enough to 
prevent banking entities from evading the prohibition on acquiring or 
retaining an ownership interest in a covered fund.
    The proposal also would modify the implementing regulations to 
better align the manner in which a banking entity calculates the 
aggregate fund limit and covered fund deduction with the manner in 
which it calculates the per fund limit, as it relates to investments by 
employees of the banking entity. Specifically, consistent with how 
investments by employees and directors are treated generally under the 
existing rule of construction in Sec.  _.12(b)(1)(iv), the proposal 
would modify Sec. Sec.  _.12(c) and _.12(d) to require attribution of 
amounts paid by an employee or director to acquire a restricted profit 
interest only when the banking entity has financed the acquisition.
    The 2013 rule excludes from the definition of ownership interest 
certain restricted profit interests.\222\ As a threshold matter, the 
exclusion from the definition of ownership interest is limited to 
restricted profit interests held by an entity, employee, or former 
employee in a covered fund for which the entity or employee serves as 
investment manager, investment adviser, commodity trading advisor, or 
other service provider.\223\ To be excluded from the definition of 
ownership interest, the restricted profit interest must also meet 
various other conditions, including that any amounts invested in the 
covered fund--including amounts paid by the entity, an employee of the 
entity, or former employee of the entity--are within the applicable 
limits under Sec.  _.12 of the 2013 rule.\224\
---------------------------------------------------------------------------

    \222\ 2013 rule Sec.  _.10(d)(6)(ii). As noted in the preamble 
to the 2013 rule, the term ``restricted profit interest'' was used 
to avoid any confusion from using the term ``carried interest,'' 
which is used in other contexts. The proposed rule would focus on 
the treatment of restricted profit interests for purposes of 
calculating compliance with the aggregate fund limit and covered 
fund deduction, but would not address in any way the treatment of 
such profit interests under other laws, including under Federal 
income tax law. See 79 FR 5706, n. 2091.
    \223\ 2013 rule Sec.  _.10(d)(6)(ii).
    \224\ 2013 rule Sec.  _.10(d)(6)(ii)(C).
---------------------------------------------------------------------------

    Section _.12 of the 2013 rule provides different rules for purposes 
of calculating compliance with the per fund limit and for purposes of 
calculating compliance with the aggregate fund limit and covered fund 
deduction. Under the 2013 rule, for purposes of calculating the per 
fund limit and the aggregate fund limit, a banking entity is attributed 
ownership interests in a covered fund that are acquired by an employee 
or director if the banking entity, directly or indirectly, extends 
financing for the purpose of enabling the employee or director to 
acquire the ownership interest in the fund, and the financing is used 
to acquire such ownership interest.\225\ As noted in the preamble to 
the 2013 rule, the attribution to a banking entity of ownership 
interests acquired by an employee or director using financing provided 
by the banking entity ensures that funding provided by the banking 
entity to acquire ownership interests in the fund, whether provided

[[Page 12148]]

directly or indirectly, is counted against the per fund limit and 
aggregate fund limit.\226\
---------------------------------------------------------------------------

    \225\ 2013 rule Sec.  _.12(b)(1)(iv).
    \226\ See 79 FR 5733.
---------------------------------------------------------------------------

    For purposes of calculating the aggregate fund limit and the 
covered fund deduction, the 2013 rule includes a different calculation 
with respect to restricted profit interests in a covered fund organized 
or offered by a banking entity pursuant to paragraph (d)(1)(G).\227\ 
Specifically, for purposes of calculating a banking entity's compliance 
with the aggregate fund limit and the covered fund deduction, the 
banking entity must include any amounts paid by the banking entity or 
an employee in connection with obtaining a restricted profit interest 
in the covered fund.\228\ The agencies continue to believe that it is 
appropriate for a banking entity to count amounts invested by the 
banking entity (or its affiliates) to acquire restricted profit 
interests in a fund organized and offered by the banking entity for 
purposes of the aggregate fund limit and capital deduction. However, 
the agencies believe attribution of employee and director ownership of 
restricted profit interests to a banking entity may not be necessary in 
the circumstance when a banking entity does not finance, directly or 
indirectly, the employee or director's acquisition of a restricted 
profit interest in a covered fund organized or offered by the banking 
entity. Therefore, the proposal would limit the attribution of an 
employee or director's restricted profit interest in a covered fund 
organized or offered by the banking entity to only those circumstances 
when the banking entity has directly or indirectly financed the 
acquisition of the restricted profit interest. This proposed revision 
would not change the treatment of the banking entity's or its 
affiliates' ownership of a restricted profit interest under the 
implementing regulations. The agencies expect that the proposed change 
may simplify a banking entity's compliance with the aggregate fund 
limit and covered fund deduction provisions of the rule, and more fully 
recognize that employees and directors may use their own resources, not 
provided by the banking entity, to invest in ownership interests or 
restricted profit interests in a covered fund they advise (for example, 
to align their personal financial interests with those of other 
investors in the covered fund).
---------------------------------------------------------------------------

    \227\ 2013 rule Sec.  _.10(d)(6)(C); Sec.  _.12(c)(1), (d). See 
also 12 U.S.C. 1851(d)(1)(G).
    \228\ Id.
---------------------------------------------------------------------------

    Question 78. Under the proposal, the right to participate in the 
removal of an investment manager for cause, or to nominate or vote on a 
nominated replacement manager upon an investment manager's resignation 
or removal, would be limited to removal or replacement upon the 
occurrence of an event of default or an acceleration event. Commenters 
noted in comments on the 2018 proposal that loan securitizations may 
include additional ``for cause'' termination events (e.g., the 
insolvency of the investment manager; the breach by the investment 
manager of certain representations or warranties; or the occurrence of 
a ``key person'' event or a change in control with respect to the 
investment manager) that might not constitute an event of default. 
Should the proposal be expanded to include the right to participate in 
any removal of an investment manager for cause, or to nominate or vote 
on a nominated replacement manager upon an investment manager's 
resignation or removal, whether or not an event of default or an 
acceleration event has occurred? Why or why not?
    Question 79. Under the current rule, an interest that has the right 
to receive a share of the income, gains or profits of the covered fund 
is considered an ownership interest. Should the agencies modify this 
condition to clarify that only an interest which has the right to 
receive a share of the ``net'' income, gains or profits of the covered 
fund is an ownership interest? If so, why?
    Question 80. Is the proposed safe harbor appropriate? Why or why 
not? Do the proposed conditions under the safe harbor sufficiently 
alleviate concerns that a senior debt instrument would not be construed 
as an ownership interest? If not, what amendments should be made to the 
proposed conditions under the safe harbor or what additional conditions 
should be added and why? In particular, should the reference to ``fixed 
principal payments'' under the safe harbor condition in paragraph 
(d)(6)(ii)(B)(1)(ii) be replaced with ``contractually determined 
principal payments,'' ``repayment of a fixed principal amount,'' or any 
other similar wording that may be more representative of typical 
principal distributions under various types of debt instruments, 
including asset-backed securities?
    Question 81. Should the safe harbor be limited only to senior debt 
instruments, as proposed? Why or why not? If so, do the proposed 
conditions sufficiently distinguish between senior debt instruments and 
other debt instruments?
    Question 82. Should the agencies modify the methodology of 
calculating a banking entity's compliance with the aggregate fund limit 
and covered fund deduction in the manner proposed? Why or why not? 
Would the proposed revisions pose any risk that a banking entity could 
evade the aggregate fund limit and covered fund deduction, and if so, 
how? Would additional restrictions on the treatment of restricted 
profit interests be appropriate?

F. Parallel Investments

    The 2013 rule requires that a banking entity hold no more than 
three percent of the total ownership interests of a covered fund that 
the banking entity organizes and offers pursuant to Sec.  _.11 of the 
2013 rule.\229\ Section _.12(b)(1)(i) of the 2013 rule requires that, 
for purposes of this ownership limitation, ``the amount and value of a 
banking entity's permitted investment in any single covered fund shall 
include any ownership interest held under Sec.  _.12 directly by the 
banking entity, including any affiliate of the banking entity.'' \230\ 
Section _.12(b) also includes several other rules of construction that 
address circumstances under which an investment in a covered fund would 
be attributed to a banking entity.
---------------------------------------------------------------------------

    \229\ 2013 rule Sec.  _.12(a).
    \230\ 2013 rule Sec.  _.12(b)(1)(i).
---------------------------------------------------------------------------

    The 2011 notice of proposed rulemaking included a proposed 
provision that would have required attribution, under certain 
circumstances, of certain direct investments by a banking entity 
alongside, or otherwise in parallel with, a covered fund.\231\ When 
adopting the 2013 rule, the agencies declined to adopt the proposed 
provision governing parallel investments after considering the language 
of the statute and commenters' views on that provision. Commenters 
asserted that the provision was inconsistent with the statute, which 
limits investments in covered funds and not direct investments.\232\ In 
declining

[[Page 12149]]

to adopt this parallel investment provision, the agencies noted that 
banking entities rely on a number of investment authorities and 
structures to make investments and meet the needs of their 
clients.\233\
---------------------------------------------------------------------------

    \231\ See Prohibitions and Restrictions on Proprietary Trading 
and Certain Interests in, and Relationships With, Hedge Funds and 
Private Equity Funds, 76 FR 68846, 68951-52 (Nov. 7, 2011) (``To the 
extent that a covered banking entity is contractually obligated to 
directly invest in, or is found to be acting in concert through 
knowing participation in a joint activity or parallel action toward 
a common goal of investing in, one or more investments with a 
covered fund that is organized and offered by the covered banking 
entity, whether or not pursuant to an express agreement, such 
investments shall be included in any calculation required under 
paragraph (a)(2) of this section.'') (2011 proposed rule).
    \232\ ABA (arguing that there was no basis in the statute for 
any of the attribution rules proposed in the 2011 notice of proposed 
rulemaking, including the proposed provision regarding the treatment 
of an investment the banking entity is contractually obligated to 
invest in alongside a sponsored covered fund).
    \233\ 79 FR 5734.
---------------------------------------------------------------------------

    The 2013 rule restricts a banking entity's investment in a covered 
fund organized and offered pursuant to Sec.  _.11 to three percent of 
the total number or value of the outstanding ownership interests of the 
fund.\234\ That regulatory requirement is consistent with section 
13(d)(4) of the BHC Act, which limits the size of investments by a 
banking entity in a hedge fund or private equity fund.\235\ Neither 
section 13(d)(4) of the BHC Act nor the text of the 2013 rule require 
that a banking entity treat an otherwise permissible investment the 
banking entity makes alongside a covered fund as an investment in the 
covered fund. The text of the 2013 rule does not impose any 
quantitative limits on any investments by banking entities made 
alongside, or otherwise in parallel with, covered funds.\236\
---------------------------------------------------------------------------

    \234\ 2013 rule Sec.  _.12(a).
    \235\ 12 U.S.C. 1851(d)(4).
    \236\ Any investment by the banking entity would need to comply 
with the proprietary trading restrictions in Subpart B of the 
implementing regulations.
---------------------------------------------------------------------------

    However, in the preamble to the 2013 rule, the agencies went on to 
discuss the potential for evasion of the per fund limit and aggregate 
fund limit in the 2013 rule, and stated that ``if a banking entity 
makes investments side by side in substantially the same positions as 
the covered fund, then the value of such investments shall be included 
for purposes of determining the value of the banking entity's 
investment in the covered fund.'' \237\ The agencies also stated that 
``a banking entity that sponsors the covered fund should not itself 
make any additional side by side co-investment with the covered fund in 
a privately negotiated investment unless the value of such co-
investment is less than 3% of the value of the total amount co-invested 
by other investors in such investment.'' \238\
---------------------------------------------------------------------------

    \237\ 79 FR 5734 (emphasis added).
    \238\ See id. at 5734 Id.
---------------------------------------------------------------------------

    The agencies did not discuss the application of the per fund limit 
and aggregate fund limit in the context of a banking entity's 
investments alongside a covered fund in the 2018 proposal. Nonetheless, 
in response to the 2018 proposal, three commenters recommended that the 
rule should not impose a limit on parallel investments and noted that 
this restriction is not reflected in the 2013 rule text.\239\ These 
commenters argued that a restriction on parallel investments interferes 
with banking entities' ability to make otherwise permissible 
investments directly on their balance sheets. These commenters also 
contended that it is not necessary to restrict direct investments by a 
banking entity in this manner because these investments are subject to 
all the capital and safety and soundness requirements that apply to the 
banking entity.\240\ Further, two commenters asserted that such direct 
investments are also subject to the proprietary trading provisions of 
the 2013 rule.\241\
---------------------------------------------------------------------------

    \239\ FSF; Goldman; and SIFMA.
    \240\ FSF; Goldman; and SIFMA.
    \241\ FSF and SIFMA.
---------------------------------------------------------------------------

    In light of the comments received, the agencies are proposing to 
add a new rule of construction to Sec.  _.12(b) that would address 
investments made by banking entities alongside covered funds.\242\ As 
discussed in more detail below, these provisions would clarify in the 
rule text that banking entities are not required to treat these types 
of direct investments alongside a covered fund as an investment in the 
covered fund as long as certain conditions are met.
---------------------------------------------------------------------------

    \242\ Proposed rule Sec.  _.12(b)(5). These kinds of investments 
could be, for example, parallel investments or co-investments. For 
these purposes, ``parallel investments'' generally refers to a 
series of investments that are made side-by-side with a covered 
fund, and ``co-investments'' generally refers to a specific 
investment opportunity that is made available to third-parties when 
the general partner or investment manager for the covered fund 
determines that the covered fund does not have sufficient capital 
available to make the entire investment in the target portfolio 
company or determines that it would not be suitable for the covered 
fund to take the entire available investment.
---------------------------------------------------------------------------

    Specifically, proposed Sec.  _.12(b)(5) would provide that:

     A banking entity shall not be required to include in 
the calculation of the investment limits under Sec.  _.12(a)(2) any 
investment the banking entity makes alongside a covered fund as long 
as the investment is made in compliance with applicable laws and 
regulations, including applicable safety and soundness standards.
     A banking entity shall not be restricted under Sec.  
_.12 in the amount of any investment the banking entity makes 
alongside a covered fund as long as the investment is made in 
compliance with applicable laws and regulations, including 
applicable safety and soundness standards.

    As discussed in the preamble to the 2013 rule, the agencies 
recognize that banking entities rely on a number of investment 
authorities and structures to make investments and meet the needs of 
their clients and shareholders.\243\ The proposed rule of construction 
would provide clarity to banking entities that they may make such 
investments for the benefit of their clients and shareholders, provided 
that those investments comply with applicable laws and regulations. 
Accordingly, banking entities would not be permitted to engage in 
prohibited proprietary trading alongside a covered fund. Moreover, 
banking entities would need to have authority to make any investment 
alongside a covered fund under applicable banking and other laws and 
regulations, and would need to ensure that the investment complies with 
applicable safety and soundness standards. For example, national banks 
are restricted in their ability to make direct equity investments under 
12 U.S.C. 24(Seventh) and 12 CFR part 1. Banking entities that rely on 
the proposed rule of construction to invest alongside a covered fund 
that is organized and offered by the banking entity pursuant to Sec.  
_.11 would still be required to comply with all of the conditions under 
Sec.  _.11 with respect to the covered fund, which would, among other 
things, prohibit the banking entity from guaranteeing, assuming, or 
otherwise insuring the obligations or performance of the covered fund. 
As a result, the banking entity would not be permitted to make a direct 
investment alongside a covered fund that the banking entity organizes 
and offers for the purpose of artificially maintaining or increasing 
the value of the fund's positions. The banking entity would also need 
to ensure that any such direct investment alongside an organized and 
offered covered fund does not cause the sponsoring banking entity's 
permitted organizing and offering activities to violate the prudential 
backstops under Sec.  _.15.\244\ In particular, to the extent the 
investment would result in a material conflict of interest between the 
banking entity and its clients, for example because the banking entity 
may exit the position at a different time or on different terms than 
the covered fund, the banking entity would be required to provide 
timely and effective disclosure in accordance with Sec.  _.15(b) prior 
to making the investment.
---------------------------------------------------------------------------

    \243\ 79 FR 5734.
    \244\ The agencies note that the banking entity's direct 
investment would not itself be subject to Sec.  _.15.
---------------------------------------------------------------------------

    The 2013 rule imposes certain attribution rules and eligibility 
requirements for investments by directors and employees of a banking 
entity in covered funds organized and offered by the banking entity. 
Specifically, Sec.  _.12(b)(1)(iv) of the 2013 rule requires 
attribution of an investment by a director or employee of a banking 
entity who acquires an ownership interest in his or her personal 
capacity in a covered fund sponsored by the banking entity if the

[[Page 12150]]

banking entity, directly or indirectly, extends financing for the 
purpose of enabling the director or employee to acquire the ownership 
interest in the fund and the financing is used to acquire such 
ownership interest in the covered fund. Section _.11(a)(7) prohibits 
investments by any director or employee of the banking entity (or an 
affiliate thereof) in the covered fund, other than any director or 
employee who is directly engaged in providing investment advisory, 
commodity trading advisory, or other services to the covered fund at 
the time the director or employee makes the investment.
    The agencies recognize that directors and employees of banking 
entities may participate in investments alongside a covered fund, for 
example on an ad hoc basis or as part of a compensation arrangement. 
Consistent with the agencies' proposed rule of construction regarding 
direct investments by banking entities alongside a covered fund, the 
agencies would expect that any direct investments (whether a series of 
parallel investments or a co-investment) by a director or employee of a 
banking entity (or an affiliate thereof) made alongside a covered fund 
in compliance with applicable laws and regulations would not be treated 
as an investment by the director or employee in the covered fund. 
Accordingly, such a direct investment would not be attributed to the 
banking entity as an investment in the covered fund, regardless of 
whether the banking entity arranged the transaction on behalf of the 
director or employee or provided financing for the investment.\245\ 
Similarly, the requirements under Sec.  _.11(a)(7) limiting the 
directors and employees that are eligible to invest in a covered fund 
organized and offered by the banking entity to those that are directly 
engaged in providing specified services to the covered fund would not 
apply to any such direct investment.
---------------------------------------------------------------------------

    \245\ See proposed rule Sec.  _.12(b)(1)(iv) (requiring 
attribution of an investment by a director or employee in a covered 
fund where the banking entity, directly or indirectly, extends 
financing for the purpose of enabling the director or employee to 
acquire the ownership interest in the covered fund and the financing 
is used to acquire such ownership interest in the covered fund).
---------------------------------------------------------------------------

    The proposed rule of construction would not prohibit a banking 
entity from having investment policies, arrangements or agreements to 
invest alongside a covered fund in all or substantially all of the 
investments made by the covered fund or to fund all or any portion of 
the investment opportunities made available by the covered fund to 
other investors. Accordingly, a banking entity could market a covered 
fund it organizes and offers pursuant to Sec.  _.11 on the basis of the 
banking entity's expectation that it would invest in parallel with the 
covered fund in some or all of the same investments, or the expectation 
that the banking entity would fund one or more co-investment 
opportunities made available by the covered fund. The agencies would 
expect that any such investment policies, arrangements or agreements 
would ensure that the banking entity has the ability to evaluate each 
investment on a case-by-case basis to confirm that the banking entity 
does not make any investment unless the investment complies with 
applicable laws and regulations, including any applicable safety and 
soundness standards. The agencies believe that this would further 
ensure that the banking entity is not exposed to the types of risks 
that section 13 of the BHC Act was intended to address.
    The agencies recognize that the 2011 proposed rule would have 
required a banking entity to apply the per fund limit and aggregate 
fund limit to a direct investment alongside a covered fund when, among 
other things, a banking entity is contractually obligated to make such 
investment alongside a covered fund. The agencies do not believe such a 
prohibition is necessary given the agencies' expectation that a banking 
entity would retain the ability to evaluate each investment on a case-
by-case basis to confirm that the banking entity does not make any 
investment unless the investment complies with applicable laws and 
regulations, including any applicable safety and soundness standards.
    Question 83. Should the agencies adopt the proposed rule of 
construction in Sec.  _.12(b)(5) that would address direct investments 
made by banking entities alongside covered funds by clarifying in the 
rule text that banking entities are not required to treat such direct 
investments alongside a covered fund as an investment in the covered 
fund as long as the investment is made in compliance with applicable 
laws and regulations? Why or why not? What, if any, modifications to 
the scope of the proposed rule of construction should be made? Is the 
proposed condition on the proposed rule of construction appropriate? If 
not, how should the agencies modify the condition, and why? Should the 
agencies provide any additional guidance or requirements regarding the 
condition?
    Question 84. Do commenters believe that the proposed rule of 
construction will provide banking entities with clarity about how a 
banking entity should treat its otherwise permissible investments 
alongside a covered fund under the implementing regulations? Why or why 
not? If not, what additional modifications should be made?
    Question 85. Would the proposed rule of construction create any 
opportunities for evasion, for example, by allowing a banking entity to 
structure parallel investments and co-investments to evade the 
restrictions of section 13? Why or why not? If so, how could such 
concerns be addressed? Please explain.
    Question 86. Do commenters agree that investments made by a 
director or employee alongside a covered fund should not be treated as 
an investment in the covered fund? Why or why not? Do commenters agree 
that the requirements under Sec.  _.11(a)(7) that limit the directors 
and employees that are eligible to invest in a covered fund organized 
and offered by the banking entity to those who are directly engaged in 
providing investment advisory, commodity trading advisory, or other 
services to the covered fund should not apply to any such investment? 
Why or why not? Should the agencies provide additional rule text 
addressing director and employee investments alongside covered funds? 
Are there any additional conditions that the agencies should consider 
placing on director and employee investments made alongside a covered 
fund? Are there any modifications to the agencies' proposed treatment 
of director and employee investments or proposed rule of construction 
that commenters believe is necessary in order to accommodate director 
and employee investments alongside a covered fund that are made through 
employee securities companies or other types of employee compensation 
arrangements? If so, please explain what modifications would be 
necessary or appropriate and the rationale for such modifications.
    Question 87. The proposed rule of construction would not prohibit a 
banking entity from having investment policies, arrangements or 
agreements to invest alongside a covered fund in all or substantially 
all of the investments made by the covered fund or to fund all or any 
portion of the investment opportunities made available by the covered 
fund to other investors. Should the agencies impose any additional 
limitations on a banking entity's investment policies, arrangements or 
agreements to invest alongside a covered fund? Why or why not? If the 
agencies were to impose such limitations, should the agencies adopt the 
approach used to define

[[Page 12151]]

``contractual obligation'' in the Conformance Rule? \246\ Why or why 
not?
---------------------------------------------------------------------------

    \246\ See A Conformance Period for Entities Engaged in 
Prohibited Proprietary Trading or Private Equity Fund or Hedge Fund 
Activities, 76 FR 8265 (Feb. 14, 2011) (the Conformance Rule).
---------------------------------------------------------------------------

G. Technical Amendments

    The agencies are proposing five sets of clarifying technical edits 
to the implementing regulations. Specifically, the agencies are 
proposing to (1) amend Sec.  _.12(b)(1)(ii) to add a comma after the 
words ``SEC-regulated business development companies'' in both places 
where that phrase is used; (2) amend Sec.  _.12(b)(4)(i) to replace the 
phrase ``ownership interest of the master fund'' with the phrase 
``ownership interest in the master fund''; (3) amend Sec.  
_.12(b)(4)(ii) to replace the phrase ``ownership interest of the fund'' 
with the phrase ``ownership interest in the fund;'' (4) amend 
Sec. Sec.  _.10(c)(3)(i) and _.10(c)(10)(i) to replace the word 
``comprised'' with the word ``composed;'' and (5) amend Sec.  
_.10(c)(8)(iv)(A) to replace the word ``of'' in the phrase 
``contractual rights of other assets'' with the word ``or.''

IV. Administrative Law Matters

A. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act requires the Federal 
banking agencies to use plain language in all proposed and final rules 
published after January 1, 2000.\247\ The Federal banking agencies have 
sought to present the proposal in a simple and straightforward manner, 
and invite your comments on how to make this proposal easier to 
understand.
---------------------------------------------------------------------------

    \247\ Public Law 106-102, 113 Stat. 1338, 1471, 12 U.S.C. 4809.
---------------------------------------------------------------------------

    For example:
     Have the agencies organized the material to suit your 
needs? If not, how could this material be better organized?
     Are the requirements in the proposal clearly stated? If 
not, how could the proposal be more clearly stated?
     Does the proposal contain language or jargon that is not 
clear? If so, which language requires clarification?
     Would a different format (e.g., grouping and order of 
sections, use of headings, paragraphing) make the proposal easier to 
understand? If so, what changes to the format would make the proposal 
easier to understand?
     Would more, but shorter, sections be better? If so, which 
sections should be changed?
     What else could the agencies do to make the regulation 
easier to understand?

B. Paperwork Reduction Act Analysis Request for Comment on Proposed 
Information Collection

    Certain provisions of the proposed rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with 
the requirements of the PRA, the agencies may not conduct or sponsor, 
and a respondent is not required to respond to, an information 
collection unless it displays a currently valid Office of Management 
and Budget (OMB) control number. The agencies reviewed the proposed 
rule and determined that the proposed rule creates new recordkeeping 
requirements and revises certain disclosure requirements that have been 
previously cleared under various OMB control numbers. The agencies are 
proposing to extend for three years, with revision, these information 
collections. The information collection requirements contained in this 
joint notice of proposed rulemaking have been submitted by the OCC and 
FDIC to OMB for review and approval under section 3507(d) of the PRA 
(44 U.S.C. 3507(d)) and section 1320.11 of the OMB's implementing 
regulations (5 CFR 1320). The Board reviewed the proposed rule under 
the authority delegated to the Board by OMB. The Board will submit 
information collection burden estimates to OMB and the submission will 
include burden for Federal Reserve-supervised institutions, as well as 
burden or OCC-, FDIC-, SEC-, and CFTC-supervised institutions under a 
holding company. The OCC and the FDIC will take burden for banking 
entities that are not under a holding company.
    Comments are invited on:
    a. Whether the collections of information are necessary for the 
proper performance of the agencies' functions, including whether the 
information has practical utility;
    b. The accuracy of the estimates of the burden of the information 
collections, including the validity of the methodology and assumptions 
used;
    c. Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    d. Ways to minimize the burden of the information collections on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    e. Estimates of capital or startup costs and costs of operation, 
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record. Comments on 
aspects of this notice that may affect reporting, recordkeeping, or 
disclosure requirements and burden estimates should be sent to the 
addresses listed in the ADDRESSES section. A copy of the comments may 
also be submitted to the OMB desk officer for the agencies by mail to 
U.S. Office of Management and Budget, 725 17th Street NW, #10235, 
Washington, DC 20503, by facsimile to 202-395-5806, or by email to 
oira_submission@omb.eop.gov, Attention, Federal Banking Agency and 
Commission Desk Officer.
Abstract
    Section 13 of the BHC Act, which generally prohibits any banking 
entity from engaging in proprietary trading or from acquiring or 
retaining an ownership interest in, sponsoring, or having certain 
relationships with a covered fund, subject to certain exemptions. The 
exemptions allow certain types of permissible trading activities such 
as underwriting, market making, and risk-mitigating hedging, among 
others. The 2013 rule implementing section 13 became effective on April 
1, 2014. Section _.20(d) and Appendix A of the 2013 final rule require 
certain of the largest banking entities to report to the appropriate 
agency certain quantitative measurements.
Current Actions
    The proposed rule contains requirements subject to the PRA and the 
proposed changes relative to the current final rule are discussed 
herein. The new recordkeeping requirements are found in section 
_.10(c)(18)(ii)(B)(1) and the modified disclosure requirements are 
found in section _.11(a)(8)(i). The modified information collection 
requirements would implement section 13 of the BHC Act. The respondents 
are for-profit financial institutions, including small businesses. A 
covered entity must retain these records for a period that is no less 
than 5 years in a form that allows it to promptly produce such records 
to the relevant Agency on request.
Recordkeeping Requirements
    Section _.10(c)(18)(ii)(B)(1) would require a banking entity 
relying on the proposed exclusion from the covered fund definition for 
customer facilitation vehicles to maintain documentation outlining how 
the banking entity intends to facilitate the customer's exposure to a 
transaction, investment strategy, or service. The agencies estimate 
that the new recordkeeping requirement would be incurred once a

[[Page 12152]]

year with an average hour per response of 10 hours.
Disclosure Requirements
    Section _.11(a)(8)(i), which requires banking entities that 
organize and offer covered funds to make certain disclosures to 
investors in such funds, would be expanded to also apply to banking 
entities sponsoring credit funds, venture capital funds, family wealth 
management vehicles, or customer facilitation vehicles, in reliance on 
the proposed exclusions for such funds. The agencies estimate that the 
current average hours per response of 0.1 would increase to 0.5.
Proposed Revision, With Extension, of the Following Information 
Collections
    Estimated average hours per response:
Reporting
    Section _.4(c)(3)(i)--0.25 hours for an average of 20 times per 
year.
    Section _.12(e)--20 hours (Initial set-up 50 hours) for an average 
of 10 times per year.
    Section _.20(d)--41 hours (Initial set-up 125 hours) quarterly.
    Section _.20(i)--20 hours.
Recordkeeping
    Section _.3(d)(3)--1 hour (Initial set-up 3 hours).
    Section _.4(b)(3)(i)(A)--2 hours quarterly.
    Section _.4(c)(3)(i)--0.25 hours for an average of 40 times per 
year.
    Section _.5(c)--40 hours (Initial setup 80 hours).
    Section _.10(c)(18)(ii)(B)(1)--10 hours.
    Section _.11(a)(2)--10 hours.
    Section _.20(b)--265 hours (Initial set-up 795 hours).
    Section _.20(c)--100 hours (Initial set-up 300 hours).
    Section _.20(d)- 10 hours.
    Section _.20(e)--200 hours.
    Section _.20(f)(1)--8 hours.
    Section _.20(f)(2)--40 hours (Initial set-up 100 hours).
Disclosure
    Section _.11(a)(8)(i)--0.5 hours for an average of 26 times per 
year.
OCC
    Title of Information Collection: Reporting, Recordkeeping, and 
Disclosure Requirements Associated with Restrictions on Proprietary 
Trading and Certain Relationships with Hedge Funds and Private Equity 
Funds.
    Frequency: Annual, quarterly, and event driven.
    Affected Public: Businesses or other for-profit.
    Respondents: National banks, state member banks, state nonmember 
banks, and state and federal savings associations.
    OMB control number: 1557-0309.
    Estimated number of respondents: 39.
    Proposed revisions estimated annual burden: 302 hours.
    Estimated annual burden hours: 20,410 hours (3,681 hour for initial 
set-up and 16,729 hours for ongoing).
Board
    Title of Information Collection: Reporting, Recordkeeping, and 
Disclosure Requirements Associated with Regulation VV.
    Frequency: Annual, quarterly, and event driven.
    Affected Public: Businesses or other for-profit.
    Respondents: State member banks, bank holding companies, savings 
and loan holding companies, foreign banking organizations, U.S. State 
branches or agencies of foreign banks, and other holding companies that 
control an insured depository institution and any subsidiary of the 
foregoing other than a subsidiary for which the OCC, FDIC, CFTC, or SEC 
is the primary financial regulatory agency. The Board will take burden 
for all institutions under a holding company including:
     OCC-supervised institutions,
     FDIC-supervised institutions,
     Banking entities for which the CFTC is the primary 
financial regulatory agency, as defined in section 2(12)(C) of the 
Dodd-Frank Act, and
     Banking entities for which the SEC is the primary 
financial regulatory agency, as defined in section 2(12)(B) of the 
Dodd-Frank Act.
    Legal authorization and confidentiality: This information 
collection is authorized by section 13 of the BHC Act (12 U.S.C. 
1851(b)(2) and 12 U.S.C. 1851(e)(1)). The information collection is 
required in order for covered entities to obtain the benefit of 
engaging in certain types of proprietary trading or investing in, 
sponsoring, or having certain relationships with a hedge fund or 
private equity fund, under the restrictions set forth in section 13 and 
the final rule. If a respondent considers the information to be trade 
secrets and/or privileged such information could be withheld from the 
public under the authority of the Freedom of Information Act (5 U.S.C. 
552(b)(4)). Additionally, to the extent that such information may be 
contained in an examination report such information could also be 
withheld from the public (5 U.S.C. 552 (b)(8)).
    Agency form number: FR VV.
    OMB control number: 7100-0360.
    Estimated number of respondents: 255.
    Proposed revisions estimated annual burden: 7,880 hours.
    Estimated annual burden hours: 36,112 hours (4,381 hour for initial 
set-up and 31,731 hours for ongoing).
FDIC
    Title of Information Collection: Volcker Rule Restrictions on 
Proprietary Trading and Relationships with Hedge Funds and Private 
Equity Funds.
    Frequency: Annual, quarterly, and event driven.
    Affected Public: Businesses or other for-profit.
    Respondents: State nonmember banks, state savings associations, and 
certain subsidiaries of those entities.
    OMB control number: 3064-0184.
    Estimated number of respondents: 10.
    Proposed revisions estimated annual burden: 175 hours.
    Estimated annual burden hours: 3,288 hours (1,759 hours for initial 
set-up and 1,529 hours for ongoing).

C. Initial Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (``RFA'') \248\ requires an agency 
to either provide an initial regulatory flexibility analysis with a 
proposed rule or certify that the proposed rule will not have a 
significant economic impact on a substantial number of small entities. 
The U.S. Small Business Administration (``SBA'') establishes size 
standards that define which entities are small businesses for purposes 
of the RFA.\249\ Except as otherwise specified below, the size standard 
to be considered a small business for banking entities subject to the 
proposal is $600 million or less in consolidated assets.\250\
---------------------------------------------------------------------------

    \248\ 5 U.S.C. 601 et seq.
    \249\ U.S. SBA, Table of Small Business Size Standards Matched 
to North American Industry Classification System Codes, available at 
https://www.sba.gov/document/support-table-size-standards.
    \250\ See id. Pursuant to SBA regulations, the asset size of a 
concern includes the assets of the concern whose size is at issue 
and all of its domestic and foreign affiliates. 13 CFR 121.103(6).
---------------------------------------------------------------------------

Board
    The Board has considered the potential impact of the proposed rule 
on small entities in accordance with section 603 of the RFA. Based on 
the Board's analysis, and for the reasons stated below, the Board 
believes that this proposed rule will not have a significant economic 
impact on a substantial of number of small entities.
    The Board welcomes comment on all aspects of its analysis. In 
particular, the

[[Page 12153]]

Board requests that commenters describe the nature of any impact on 
small entities and provide empirical data to illustrate and support the 
extent of the impact.
    As discussed in the Supplementary Information, the agencies are 
proposing revisions to the regulations implementing section 13 of the 
BHC Act in order to improve and streamline the regulations by modifying 
and clarifying requirements related to the covered fund 
provisions.\251\ Certain of the proposed exclusions from the covered 
fund definition may contain recordkeeping and disclosure requirements 
that would apply to banking entities relying on the exclusion. For 
example, the proposed exclusion for customer facilitation vehicles 
would require a banking entity relying on the exclusion to maintain 
documentation outlining how the banking entity intends to facilitate 
the customer's exposure to a transaction, investment strategy, or 
service. The proposed changes are expected to reduce regulatory burden 
on banking entities, and the Board does not expect these proposed 
recordkeeping requirements to result in a significant economic impact.
---------------------------------------------------------------------------

    \251\ The agencies are explicitly authorized under section 
13(b)(2) of the BHC Act to adopt rules implementing section 13. 12 
U.S.C. 1851(b)(2).
---------------------------------------------------------------------------

    The Board's rule generally applies to state-chartered banks that 
are members of the Federal Reserve System, bank holding companies, and 
foreign banking organizations and nonbank financial companies 
supervised by the Board (collectively, ``Board-regulated entities''). 
However, section 203 of the Economic Growth, Regulatory Relief, and 
Consumer Protection Act (EGRRCPA),\252\ which was enacted on May 24, 
2018, amended section 13 of the BHC Act by narrowing the definition of 
banking entity to exclude certain community banks.\253\ The Board is 
not aware of any Board-regulated entities that meet the SBA's 
definition of ``small entity'' that are subject to section 13 of the 
BHC Act and its implementing regulations following the enactment of 
EGRRCPA. Furthermore, to the extent that any Board-regulated entities 
that meet the definition of ``small entity'' are or become subject to 
section 13 of the BHC Act and its implementing regulations, the Board 
does not expect the total number of such entities to be substantial. 
Accordingly, the Board's proposed rule is not expected to have a 
significant economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \252\ Public Law 115-174 (May 24, 2018).
    \253\ Under EGRRCPA, a community bank and its affiliates are 
generally excluded from the definition of banking entity, and thus 
section 13 of the BHC Act, if the bank and all companies that 
control the bank have total consolidated assets equal to $10 billion 
or less and trading assets and liabilities equal to 5 percent or 
less of total consolidated assets.
---------------------------------------------------------------------------

    The Board has not identified any federal statutes or regulations 
that would duplicate, overlap, or conflict with the proposed revisions, 
and the Board is not aware of any significant alternatives to the final 
rule that would reduce the economic impact on Board-regulated small 
entities.
OCC
    The OCC certifies that this regulation, if adopted, will not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, a Regulatory Flexibility Analysis is not required.
    The Regulatory Flexibility Act requires an agency, in connection 
with a proposed rule, to prepare an Initial Regulatory Flexibility 
Analysis describing the impact of the proposed rule on small entities, 
or to certify that the proposed rule would not have a significant 
economic impact on a substantial number of small entities. For purposes 
of the Regulatory Flexibility Act, the SBA includes as small entities 
those with $600 million or less in assets for commercial banks and 
savings institutions, and $41.5 million or less in assets for trust 
companies.
    The OCC currently supervises approximately 782 small entities.\254\
---------------------------------------------------------------------------

    \254\ The number of small entities supervised by the OCC is 
determined using the SBA's size thresholds for commercial banks and 
savings institutions, and trust companies, which are $600 million 
and $41.5 million, respectively. Consistent with the General 
Principles of Affiliation 13 CFR 121.103(a), we count the assets of 
affiliated financial institutions when determining if we should 
classify an OCC-supervised institution as a small entity. We use 
December 31, 2018, to determine size because a ``financial 
institution's assets are determined by averaging the assets reported 
on its four quarterly financial statements for the preceding year.'' 
See footnote 8 of the U.S. Small Business Administration's Table of 
Size Standards.
---------------------------------------------------------------------------

    Under the Economic Growth, Regulatory Relief, and Consumer 
Protection Act, banking entities with total consolidated assets of $10 
billion or less generally are not ``banking entities'' within the scope 
of section 13 of the BHC Act if their trading assets and trading 
liabilities do not exceed 5 percent of their total consolidated assets. 
In addition, certain trust-only banks are generally not banking 
entities within the scope of section 13 of the BHC Act. Because there 
are no OCC-supervised small entities that are banking entities within 
the scope of section 13 of the BHC Act, the proposal would not impact 
any OCC-supervised small entities. Therefore, the OCC certifies that 
the proposal, if implemented, would not have a significant economic 
impact on a substantial number of small entities.
FDIC
    The RFA generally requires that, in connection with a proposed 
rulemaking, an agency prepare and make available for public comment an 
initial regulatory flexibility analysis describing the impact of the 
proposed rule on small entities.\255\ However, a regulatory flexibility 
analysis is not required if the agency certifies that the proposed rule 
will not have a significant economic impact on a substantial number of 
small entities. The SBA--has defined ``small entities'' to include 
banking organizations with total assets of less than or equal to $600 
million that are independently owned and operated or owned by a holding 
company with less than or equal to $600 million in total assets.\256\ 
Generally, the FDIC considers a significant effect to be a quantified 
effect in excess of 5 percent of total annual salaries and benefits per 
institution, or 2.5 percent of total non-interest expenses. The FDIC 
believes that effects in excess of these thresholds typically represent 
significant effects for FDIC-supervised institutions. For the reasons 
described below and under section 605(b) of the RFA, the FDIC certifies 
that this rule will not have a significant economic impact on a 
substantial number of small entities.
---------------------------------------------------------------------------

    \255\ 5 U.S.C. 601 et seq.
    \256\ The SBA defines a small banking organization as having 
$600 million or less in assets, where an organization's ``assets are 
determined by averaging the assets reported on its four quarterly 
financial statements for the preceding year.'' See 13 CFR 121.201 
(as amended by 84 FR 34261, effective August 19, 2019). In its 
determination, the ``SBA counts the receipts, employees, or other 
measure of size of the concern whose size is at issue and all of its 
domestic and foreign affiliates.'' See 13 CFR 121.103. Following 
these regulations, the FDIC uses a covered entity's affiliated and 
acquired assets, averaged over the preceding four quarters, to 
determine whether the covered entity is ``small'' for the purposes 
of RFA.
---------------------------------------------------------------------------

    As of June 30, 2019, the FDIC supervised 3,424 depository 
institutions,\257\ of which 2,665 were considered small entities for 
the purposes of RFA. The Economic Growth, Regulatory Relief, and 
Consumer Protection Act exempted banking entities from the requirements 
of section 13 of the BHC Act if they have total assets below $10 
billion and trading assets and liabilities comprising less than five 
percent of total

[[Page 12154]]

consolidated assets.\258\ Only one small, FDIC-supervised institution 
is subject to Section 13, because its trading assets and liabilities 
exceed five percent of total consolidated assets.\259\
---------------------------------------------------------------------------

    \257\ FDIC-supervised institutions are set forth in 12 U.S.C. 
1813(q)(2).
    \258\ Public Law 115-174, May 24, 2018. https://www.congress.gov/bill/115th-congress/senate-bill/2155.
    \259\ Call Report data, June 2019.
---------------------------------------------------------------------------

    Section 13 of the BHC Act generally prohibits any banking entity 
from engaging in proprietary trading or from acquiring or retaining an 
ownership interest in, sponsoring, or having certain relationships with 
a covered fund. As previously discussed, the proposed rule would modify 
existing definitions and exclusions, as well as would introduce new 
exclusions to the implementing regulations. If adopted, the proposed 
rule would permit covered entities to engage in additional activities 
with respect to covered funds, including acquiring or retaining an 
ownership interest in, sponsoring, or having certain relationships with 
covered funds, subject to certain restrictions.
    This proposed rule would exclude certain types of institutions from 
the definition of a ``covered fund'' for the purposes of section 13 of 
the BHC Act. Investments in funds that are affected by this proposed 
rule could be reported as deductions from capital on Call Report 
schedule RCR Part 1 Lines 11 or 13 if the investments qualify as 
``investments in the capital of an unconsolidated financial 
institution'' or as additional deductions on Lines 17 or 24 of schedule 
RC-R otherwise.\260\ The one affected small, FDIC-supervised 
institution did not report any such deductions over the past five 
years.\261\
---------------------------------------------------------------------------

    \260\ See ``Supervisory Guidance on the Capital Treatment of 
Certain Investments in Covered Funds.'' FDIC FIL-50-2015: November 
6, 2015. https://www.fdic.gov/news/news/financial/2015/fil15050a.pdf.
    \261\ Call Report data, March 2014-June 2019.
---------------------------------------------------------------------------

    Based on this supporting information, the FDIC certifies that this 
rule will not have a significant economic impact on a substantial 
number of small entities.
SEC
    Pursuant to 5 U.S.C. 605(b), the SEC hereby certifies that the 
proposed rule would not, if adopted, have a significant economic impact 
on a substantial number of small entities.
    As discussed in the Supplementary Information, the proposed rule is 
intended to continue the agencies' efforts to improve and streamline 
the regulations implementing section 13 of the BHC Act by modifying and 
clarifying requirements related to the covered fund provisions. To 
minimize the costs associated with the 2013 rule in a manner consistent 
with section 13 of the BHC Act, the agencies are proposing to simplify 
and tailor the rule in a manner that would reduce compliance costs for 
banking entities subject to section 13 of the BHC Act and the 
implementing regulations.
    The proposed revisions would generally apply to banking entities, 
including certain SEC-registered entities. These entities include bank-
affiliated SEC-registered investment advisers, broker-dealers, and 
security-based swap dealers. Based on information in filings submitted 
by these entities, the SEC preliminarily believes that there are no 
banking entity registered investment advisers or broker-dealers that 
are small entities for purposes of the RFA. For this reason, the SEC 
believes that the proposed rule would not, if adopted, have a 
significant economic impact on a substantial number of small entities.
    The SEC encourages written comments regarding this certification. 
Specifically, the SEC solicits comment as to whether the proposed rule 
could have an impact on small entities that has not been considered. 
Commenters should describe the nature of any impact on small entities 
and provide empirical data to support the extent of such impact.
CFTC
    Pursuant to 5 U.S.C. 605(b), the CFTC hereby certifies that the 
proposed amendments to the 2013 final rule would not, if adopted, have 
a significant economic impact on a substantial number of small entities 
for which the CFTC is the primary financial regulatory agency.
    As discussed in this SUPPLEMENTARY INFORMATION, the agencies are 
proposing specific changes to the restrictions on covered fund 
investments and activities and other issues related to the treatment of 
investment funds in the implementing regulations. The proposed rule is 
intended to improve and streamline the covered fund provisions and 
facilitate banking entities' permissible activities and offering of 
financial services in a manner that is consistent with the requirements 
of section 13 of the BHC Act. The proposal would exempt the activities 
of certain qualifying foreign excluded funds from the restrictions of 
the implementing regulations, make modifications to several existing 
exclusions from the covered funds provisions and adopt several new 
exclusions, permit a banking entity to engage in a limited set of 
covered transactions with a related covered fund, and clarify certain 
aspects of the definition of ownership interest.
    The proposed revisions would generally apply to banking entities, 
including certain CFTC-registered entities. These entities include 
bank-affiliated CFTC-registered swap dealers, futures commission 
merchants, commodity trading advisors and commodity pool 
operators.\262\ The CFTC has previously determined that swap dealers, 
futures commission merchants and commodity pool operators are not small 
entities for purposes of the RFA and, therefore, the requirements of 
the RFA do not apply to those entities.\263\ As for commodity trading 
advisors, the CFTC has found it appropriate to consider whether such 
registrants should be deemed small entities for purposes of the RFA on 
a case-by-case basis, in the context of the particular regulation at 
issue.\264\
---------------------------------------------------------------------------

    \262\ The proposed revisions may also apply to other types of 
CFTC registrants that are banking entities, such as introducing 
brokers, but the CFTC believes it is unlikely that such other 
registrants will have significant activities that would implicate 
the proposed revisions. See 79 FR 5808, 5813 (Jan. 31, 2014) (CFTC 
version of 2013 final rule).
    \263\ See Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act, 
47 FR 18618 (Apr. 30, 1982) (futures commission merchants and 
commodity pool operators); Registration of Swap Dealers and Major 
Swap Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (swap dealers 
and major swap participants).
    \264\ See Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act, 
47 FR 18618, 18620 (Apr. 30, 1982).
---------------------------------------------------------------------------

    In the context of the proposed revisions to the implementing 
regulations, the CFTC believes it is unlikely that a substantial number 
of the commodity trading advisors that are potentially affected are 
small entities for purposes of the RFA. In this regard, the CFTC notes 
that only commodity trading advisors that are registered with the CFTC 
are covered by the implementing regulations, and generally those that 
are registered have larger businesses. Similarly, the implementing 
regulations apply to only those commodity trading advisors that are 
affiliated with banks, which the CFTC expects are larger businesses. 
The CFTC requests that commenters address in particular whether any of 
these commodity trading advisors, or other CFTC registrants covered by 
the proposed revisions to the implementing regulations, are small 
entities for purposes of the RFA.
    Because the CFTC believes that there are not a substantial number 
of registered, banking entity-affiliated commodity trading advisors 
that are small entities for purposes of the RFA,

[[Page 12155]]

and the other CFTC registrants that may be affected by the proposed 
revisions have been determined not to be small entities, the CFTC 
believes that the proposed revisions to the implementing regulations 
would not, if adopted, have a significant economic impact on a 
substantial number of small entities for which the CFTC is the primary 
financial regulatory agency.
    The CFTC encourages written comments regarding this certification. 
Specifically, the CFTC solicits comment as to whether the proposed 
amendments could have a direct impact on small entities that were not 
considered. Commenters should describe the nature of any impact on 
small entities and provide empirical data to support the extent of such 
impact.

D. Riegle Community Development and Regulatory Improvement Act

    Pursuant to section 302(a) of the Riegle Community Development and 
Regulatory Improvement Act of 1994 (RCDRIA), 12 U.S.C. 4802(a), in 
determining the effective date and administrative compliance 
requirements for new regulations that impose additional reporting, 
disclosure, or other requirements on insured depository institutions, 
each Federal banking agency must consider, consistent with the 
principles of safety and soundness and the public interest: (1) Any 
administrative burdens that the proposed rule would place on depository 
institutions, including small depository institutions and customers of 
depository institutions, and (2) the benefits of the proposed rule. In 
addition, section 302(b) of RCDRIA, 12 U.S.C. 4802(b), requires new 
regulations and amendments to regulations that impose additional 
reporting, disclosures, or other new requirements on insured depository 
institutions generally to take effect on the first day of a calendar 
quarter that begins on or after the date on which the regulations are 
published in final form. The Federal banking agencies invite any 
comment that would inform consideration under RCDRIA.

E. OCC Unfunded Mandates Reform Act

    The OCC has analyzed the proposed rule under the factors in the 
Unfunded Mandates Reform Act of 1995 (UMRA).\265\ Under this analysis, 
the OCC considered whether the proposed rule includes a Federal mandate 
that may result in the expenditure by state, local, and tribal 
governments, in the aggregate, or by the private sector, of $100 
million or more in any one year (adjusted annually for inflation). The 
UMRA does not apply to regulations that incorporate requirements 
specifically set forth in law.
---------------------------------------------------------------------------

    \265\ 2 U.S.C. 1531 et seq.
---------------------------------------------------------------------------

    The proposed rule does not impose new mandates. Therefore, the OCC 
finds that the proposed rule does not trigger the UMRA cost threshold. 
Accordingly, the OCC has not prepared the written statement described 
in section 202 of the UMRA.

F. SEC Economic Analysis

1. Broad Economic Considerations
a. Background
    Section 13 of the Bank Holding Company (BHC) Act generally 
prohibits banking entities from acquiring or retaining an ownership 
interest in, sponsoring, or having certain relationships with, a hedge 
fund or private equity fund (covered funds), subject to certain 
exemptions. Section 13(h)(1) of the BHC Act defines the term ``banking 
entity'' to include (i) any insured depository institution (as defined 
by statute), (ii) any company that controls an insured depository 
institution, (iii) any company that is treated as a bank holding 
company for purposes of section 8 of the International Banking Act of 
1978, and (iv) any affiliate or subsidiary of such an entity.\266\ In 
addition, the Economic Growth, Regulatory Relief, and Consumer 
Protection Act (EGRRCPA), enacted on May 24, 2018, amended section 13 
of the BHC Act to exclude from the definition of ``insured depository 
institution'' any institution that does not have and is not controlled 
by a company that has (1) more than $10 billion in total consolidated 
assets; and (2) total trading assets and trading liabilities, as 
reported on the most recent applicable regulatory filing filed by the 
institution, that are more than 5% of total consolidated assets.\267\
---------------------------------------------------------------------------

    \266\ See 12 U.S.C. 1851(h)(1).
    \267\ These and other aspects of the regulatory baseline against 
which the SEC is assessing the economic effects of the proposed 
amendments on SEC-regulated entities are discussed in the economic 
baseline. On July 22, 2019, the agencies adopted a final rule 
amending the definition of ``insured depository institution'' in a 
manner consistent with EGRRCPA. See Revisions to Prohibitions and 
Restrictions on Proprietary Trading and Certain Interests in, and 
Relationships with, Hedge Funds and Private Equity Funds, 84 FR 
35008 (July 22, 2019) (``EGRRCPA Conforming Amendments Adopting 
Release''). In November 2019, the agencies adopted final rules 
tailoring certain proprietary trading and covered fund restrictions 
of the 2013 rule. See Prohibitions and Restrictions on Proprietary 
Trading and Certain Interests in, and Relationships with, Hedge 
Funds and Private Equity Funds, 84 FR 61974 (Nov. 14, 2019) (``2019 
amendments'').
---------------------------------------------------------------------------

    Certain SEC-regulated entities, such as broker-dealers, security-
based swap dealers (SBSDs), and registered investment advisers (RIAs) 
affiliated with an insured depository institution, fall under the 
definition of ``banking entity'' and are subject to the prohibitions of 
section 13 of the BHC Act.\268\ This economic analysis is limited to 
areas within the scope of the SEC's function as the primary securities 
markets regulator in the United States. In particular, the SEC's 
economic analysis focuses primarily on the potential effects of the 
proposed rule on (1) SEC registrants, in their capacity as such, (2) 
the functioning and efficiency of the securities markets, (3) investor 
protection, and (4) capital formation. SEC registrants that may be 
affected by the proposed rule include SEC-registered broker-dealers, 
SBSDs, and RIAs. Thus, the below analysis does not consider the direct 
effects on broker-dealers, SBSDs, and investment advisers that are not 
banking entities, or banking entities that are not SEC registrants, in 
either case for purposes of section 13 of the BHC Act. Potential 
spillover effects on these and other entities are, on a general basis, 
reflected in the analysis of effects on efficiency, competition, 
investor protection, and capital formation in securities markets. This 
economic analysis also discusses the impacts of the proposal on private 
funds,\269\ to the degree that such

[[Page 12156]]

impacts may flow through to SEC registrants, such as RIAs, SEC-
registered broker-dealers and SBSDs, and securities markets and 
investors.
---------------------------------------------------------------------------

    \268\ Throughout this economic analysis, the terms ``banking 
entity'' and ``entity'' generally refer only to banking entities for 
which the SEC is the primary financial regulatory agency. While 
section 13 of the BHC Act and its associated rules apply to a 
broader set of banking entities, this economic analysis is limited 
to those banking entities for which the SEC is the primary financial 
regulatory agency as defined in section 2(12)(B) of the Dodd-Frank 
Act. See 12 U.S.C. 1851(b)(2), and 5301(12)(B).
    Compliance with SBSD registration requirements is not yet 
required and there are currently no registered SBSDs. However, the 
SEC has previously estimated that as many as 50 entities may 
potentially register as SBSDs and that as many as 16 of these 
entities may already be SEC-registered broker-dealers. See Capital, 
Margin, and Segregation Requirements for Security-Based Swap Dealers 
and Major Security-Based Swap Participants and Capital and 
Segregation Requirements for Broker-Dealers, 84 FR 43872 (Aug. 22, 
2019) (``Capital, Margin, and Segregation Adopting Release'').
    For the purposes of this economic analysis, the term ``dealer'' 
generally refers to SEC-registered broker-dealers and SBSDs.
    \269\ There is significant overlap between the definitions of 
``private fund'' and ``covered fund.'' For purposes of this economic 
analysis, ``private fund'' means an issuer that would be an 
investment company, as defined in section 3 of the Investment 
Company Act of 1940 (15 U.S.C. 80a-3(a)), but for section 3(c)(1) or 
section 3(c)(7) of that Act (15 U.S.C. 80a-3(c)(1) or (7)). 15 
U.S.C. 80b-2(a)(29). Section 13(h)(2) of the BHC Act defines ``hedge 
fund'' and ``private equity fund'' to mean an issuer that would be 
an investment company, but for section 3(c)(1) or 3(c)(7) of the 
Investment Company Act, or ``such similar funds'' as the agencies 
determine by rule (see 12 U.S.C. 1851(h)(2)). In the 2013 rule, the 
agencies combined the definitions of ``hedge fund'' and ``private 
equity fund'' into a single definition ``covered fund'' (as in the 
statute) and defined this term to include any issuer that would be 
an investment company as defined in the Investment Company Act but 
for section 3(c)(1) or 3(c)(7) of that Act with a number of express 
exclusions and additions as determined by the agencies (See 2013 
rule Sec.  _.10(c)).
---------------------------------------------------------------------------

    In this proposal, the SEC is soliciting comment on all aspects of 
the costs and benefits associated with the proposed amendments for SEC 
registrants, including spillover effects the proposed amendments may 
have on efficiency, competition, and capital formation in securities 
markets.
    In implementing section 13 of the BHC Act, the agencies sought to 
increase the safety and soundness of banking entities, promote 
financial stability, and reduce conflicts of interest between banking 
entities and their customers.\270\ The regulatory regime created by the 
2013 rule may have enhanced regulatory oversight and compliance with 
the substantive prohibitions of section 13 of the BHC Act, but could 
also have impacted capital formation and liquidity, as well as the 
provision by banking entities of a variety of financial services for 
customers.
---------------------------------------------------------------------------

    \270\ See, e.g., Prohibitions and Restrictions on Proprietary 
Trading and Certain Interests in, and Relationships With, Hedge 
Funds and Private Equity Funds, 79 FR 5536, 5541, 5574, 5659, 5666 
(Jan. 31, 2014) (``2013 rule adopting release''). An extensive body 
of research has examined moral hazard arising out of federal deposit 
insurance, implicit bailout guarantees, and systemic risk issues. 
See, e.g., Andrew G. Atkeson et al., Government Guarantees and the 
Valuation of American Banks, 33 NBER Macroeconomics Ann. 81 (2018). 
See also Javier Bianchi, Efficient Bailouts?, 106 Amer. Econ. Rev. 
3607 (2016); Bryan Kelly, Hanno Lustig, & Stijn Van Nieuwerburgh, 
Too-Systematic-to-Fail: What Option Markets Imply about Sector-Wide 
Government Guarantees, 106 Amer. Econ. Rev. 1278 (2016); Deniz 
Anginer, Asli Demirguc-Kunt, & Min Zhu, How Does Deposit Insurance 
Affect Bank Risk? Evidence from the Recent Crisis, 48 J. Banking & 
Fin. 312 (2014); Andrea Beltratti & Rene M. Stulz, The Credit Crisis 
Around the Globe: Why Did Some Banks Perform Better?, 105 J. Fin. 
Econ. 1 (2012); Pietro Veronesi & Luigi Zingales, Paulson's Gift, 97 
J. Fin. Econ. 339 (2010). For a literature review, see, e.g., 
Sylvain Benoit et al., Where the Risks Lie: A Survey on Systemic 
Risk, 21 Rev. Fin. 109 (2017).
---------------------------------------------------------------------------

    Section 13 of the BHC Act also provides a number of statutory 
exemptions to the general prohibitions on proprietary trading and 
covered funds activities. For example, the statute exempts certain 
covered funds activities, such as organizing and offering covered 
funds.\271\ The 2013 rule implemented these exemptions.\272\ Banking 
entities engaged in activities and investments covered by section 13 of 
the BHC Act and the 2013 rule are required to establish a compliance 
program reasonably designed to ensure and monitor compliance with the 
2013 rule.\273\
---------------------------------------------------------------------------

    \271\ See section 13(d)(1)(G) of the BHC Act.
    \272\ See 2013 rule Sec. Sec.  _.4, _.5, _.6, _.11, _.13.
    \273\ See 2013 rule Sec.  _.20. See also 2019 amendments at 
62021-25 which, among other things, modified these requirements for 
banking entities with limited trading assets and liabilities. 
Banking entities with limited trading assets and liabilities are 
presumed to be in compliance with the proposal and would have had no 
obligation to demonstrate compliance with subpart B and subpart C of 
the implementing regulations on an ongoing basis.
---------------------------------------------------------------------------

b. Broad Economic Effects
    Certain aspects of the implementing regulations may have resulted 
in a complex and costly compliance regime that is unduly restrictive 
and burdensome on some affected banking entities.\274\ Distinguishing 
between permissible and prohibited activities may be complex and 
costly, resulting in uncertain determinations for some entities. 
Moreover, the 2013 rule may have included in its scope some groups of 
market participants that do not necessarily engage in the activities or 
pose the risks that section 13 of the BHC Act intended to address. For 
example, the 2013 rule's definition of the term ``covered fund'' may 
include entities that do not engage in the activities contemplated by 
section 13 of the BHC Act or may include entities that do not pose the 
risks that section 13 is intended to mitigate.
---------------------------------------------------------------------------

    \274\ This SEC Economic Analysis follows earlier sections by 
referring to the regulations implementing section 13 of the BHC Act 
that are effective as of February 28, 2020 as the ``implementing 
regulations''. See supra note 8.
---------------------------------------------------------------------------

    The proposed amendments include amendments that reduce the scope of 
entities that may be treated as covered funds (e.g., credit funds, 
venture capital funds, family wealth management vehicles, and customer 
facilitation vehicles), those that modify existing covered fund 
exclusions under the 2013 rule (e.g., foreign public funds and small 
business investment companies),\275\ and those that affect the types of 
permitted activities between certain banking entities and certain 
covered funds (e.g., restrictions on relationships between banking 
entities and covered funds, definition of ``ownership interest,'' and 
treatment of loan securitizations). The proposed amendments would also 
reduce the burden on affected banking entities by addressing certain 
interpretations (e.g., the treatment as ``banking entities'' of certain 
foreign excluded funds and the attribution to a banking entity, in 
certain circumstances, of investments made by the banking entity 
alongside a covered fund).
---------------------------------------------------------------------------

    \275\ Although no amendment is currently proposed, the agencies 
are soliciting comment on modifying the covered fund exclusion for 
certain other types of entities (e.g., public welfare funds). See 
infra section IV.F.3.a.
---------------------------------------------------------------------------

    Broadly, to the extent that the proposed amendments directly change 
the scope of permissible covered fund activities, and indirectly reduce 
costs to banking entities and covered funds by reducing uncertainty 
regarding the scope of permissible activities, the proposed amendments 
may impact the economic effects of the 2013 rule as amended in 
2019.\276\ The SEC's economic analysis continues to recognize that the 
overall risk exposure of banking entities may generally arise out of a 
combination of activities, including proprietary trading, market 
making, traditional banking, asset management and investment 
activities, as well as the volume and structure in which banking 
entities engage in such activities, including the extent to which 
banking entities engage in hedging and other risk-mitigating 
activities. As discussed elsewhere,\277\ the SEC recognizes the complex 
baseline effects of section 13 of the BHC Act, as amended by sections 
203 and 204 of EGRRCPA, and the implementing regulations, on overall 
levels and structure of banking entity risk exposures.
---------------------------------------------------------------------------

    \276\ See, e.g., 2019 amendments at 62037-92.
    \277\ See id.
---------------------------------------------------------------------------

    The proposed amendments may benefit the functioning of the broader 
capital markets through, for example, increased ability and willingness 
of banking entities to facilitate capital formation through sponsorship 
and participation in certain types of funds and to transact with 
certain groups of counterparties.\278\ For example, exclusions from the 
``covered fund'' definition of specific types of entities may benefit 
banking entities by providing clarity and removing certain constraints 
around potentially profitable business opportunities and by reducing 
compliance costs, and may benefit excluded funds and their banking 
entity sponsors and advisers by increasing the spectrum of available 
counterparties and improving the quality or cost of financial services 
available to customers.
---------------------------------------------------------------------------

    \278\ See, e.g., U.S. Department of the Treasury, A Financial 
System That Creates Economic Opportunities: Banks and Credit Unions 
(June 2017) at 77.
---------------------------------------------------------------------------

    The proposed changes, however, may also facilitate risk-taking 
activities of banking entities. They also may change aspects of the 
relationships among banking entities and certain other

[[Page 12157]]

groups of market participants, including potentially introducing new 
conflicts of interest and increasing or reducing the potential effects 
of existing conflicts of interest. To the degree that some banking 
entities may react to the proposed amendments by restructuring 
activities involving covered funds to take advantage of the proposed 
exclusions, there may be shifts in the structure and levels of 
activities of banking entities involving risk. However, each of the 
proposed exclusions includes a number of conditions that are aimed at 
facilitating banking entity compliance while also allowing for customer 
oriented financial services provided on arms-length, market terms, and 
preventing evasion of the requirements of section 13.
    Moreover, many of the proposed exclusions, such as for credit funds 
and venture capital funds, would allow banking entities to engage 
indirectly through fund structures in the same activities in which they 
are currently permitted to engage directly (e.g., extensions of credit 
or direct ownership stakes). Other exclusions would permit banking 
entities to provide traditional banking and asset management services 
to customers through a legal entity structure, with conditions (e.g., 
limitation on ownership by the banking entity and prohibition on ``bail 
outs'') intended to ensure that the risks that section 13 of the BHC 
Act was intended to address are mitigated. Finally, nothing in the 
proposal removes or modifies prudential capital, margin, and liquidity 
requirements that are applicable to banking entities and that 
facilitate the safety and soundness of banking entities and the 
financial stability of the United States.
    The proposed amendments may also impact competition, allocative 
efficiency, and capital formation. To the extent that the implementing 
regulations are currently constraining banking entities in their 
covered fund activities, including providing traditional banking and 
asset management services to customers through a legal entity 
structure, the proposed exclusions from the definition of ``covered 
fund'' may increase competition between banking entities and other 
entities providing services to and otherwise transacting with those 
types of funds and other entities. Such competition may reduce costs or 
increase the quality of certain financial services provided to such 
funds and their counterparties.
    Finally, the magnitude of the proposal's costs, benefits, and 
effects on efficiency, competition, and capital formation is influenced 
by a variety of factors, including the prevailing macroeconomic 
conditions, the financial condition of firms seeking to raise capital 
and of funds seeking to transact with banking entities, competition 
between bank and non-bank providers of capital, and many others. 
Moreover, the relative efficiency between fund structures and the 
direct provision of capital is likely to vary widely among banking 
entities and funds. The SEC recognizes that the economic effects of the 
proposed amendments may be dampened or magnified in different phases of 
the macroeconomic cycle, depend on monetary and fiscal policy 
developments and other government actions, and vary across different 
types of banking entities.
    The SEC also considered the implications for investors of the 
proposed amendments. Broadly, the proposed amendments should increase 
the number of funds and other entities that will be excluded from the 
covered fund definition. This is likely to result in an increase in 
offerings of such funds or an increase in banking entities providing 
services to customers through entities such as client facilitation 
vehicles and family wealth management vehicles. The ability of 
investors to access public and private markets through funds and other 
entities may relax constraints on their portfolio optimization and, 
thus, enhance the efficiency of their portfolio allocations. The 
ability of additional investors to access these markets through funds 
and other entities may also benefit the issuers of the securities held 
by those funds and other entities by potentially increasing demand for 
those securities. Increased demand typically results in increased 
liquidity which can be important to investors as it may enable 
investors to exit (in a timely manner and at an acceptable price) from 
their positions in fund instruments, products, and portfolios.
    Moreover, investors that seek access to public markets or other 
markets through foreign public funds may benefit to the extent the 
proposed amendments would result in banking entities offering more 
foreign public funds or offering these funds at a lower cost. Further, 
investors that prefer to implement a trading or investing strategy 
through a legal entity structure may benefit from the proposed 
amendments, which would allow banking entities to implement or 
facilitate such trading or investing strategy while providing other 
banking and asset management services to the investor. At the same 
time, higher risk exposures of banking entities sponsoring or investing 
in more funds that would be excluded from the covered fund provisions 
by the proposed amendments could adversely affect markets through the 
impact on financial stability and, therefore, investors. Any such 
potential effects are expected to be mitigated by the various 
conditions of the proposed exclusions from the definition of covered 
fund. For example, the proposed amendments would permit the banking 
entity to sponsor or invest in certain excluded funds (e.g., credit 
funds or qualifying venture capital funds) only to the extent the 
banking entity ensures that the activities of the fund are consistent 
with safety and soundness standards that are substantially similar to 
those that would apply if the banking entity engaged in the activities 
directly. These and other conditions of the proposed exclusions are 
discussed in greater detail below.
c. Analytical Approach
    The SEC's economic analysis is informed by research \279\ on the 
effects of section 13 of the BHC Act and the 2013 rule, comments 
received by the agencies from a variety of interested parties, and 
experience administering the 2013 rule since its adoption. Throughout 
this economic analysis, the SEC discusses how different market 
participants \280\ may respond to various aspects of the proposed 
amendments. This analysis also considers the potential effects of the 
proposed amendments on activities by banking entities that involve 
risk, their willingness and ability to engage in client-facilitation 
activities, and competition, market quality, and capital formation.
---------------------------------------------------------------------------

    \279\ See 2019 amendments at 62044-54.
    \280\ The SEC's economic analysis is focused on the potential 
effects of the proposed rule on SEC registrants, the functioning and 
efficiency of the securities markets, investor protection, and 
capital formation. Thus, the below analysis does not consider 
broker-dealers or investment advisers that are not banking entities, 
or banking entities that are not SEC registrants, in either case for 
purposes of section 13 of the BHC Act, beyond the potential 
spillover effects on these entities and effects on efficiency, 
competition, investor protection, and capital formation in 
securities markets. See infra section IV.F.2.b.
---------------------------------------------------------------------------

    The proposed amendments would tailor, remove, or alter the scope of 
various covered fund requirements in the 2013 rule. Since section 13 of 
the BHC Act and the 2013 rule impose a number of different 
requirements, and, as discussed above, the type and level of risk 
exposure of a banking entity is the result of a combination of 
activities,\281\ it is difficult to attribute the observed effects to a 
specific

[[Page 12158]]

provision or subset of requirements. In addition, analysis of the 
effects of the implementation of the 2013 rule is confounded by 
macroeconomic factors, other policy interventions, and post-crisis 
changes to market participants' risk aversion and return expectations. 
Because of the extended timeline of implementation of section 13 of the 
BHC Act and the overlap of the period during which the 2013 rule was in 
effect with other post-crisis changes affecting the same group or 
certain sub-groups of SEC registrants, the SEC cannot rely on 
frequently utilized quantitative methods that might otherwise enable 
causal attribution and quantification of the effects of section 13 of 
the BHC Act and the 2013 rule on measures of capital formation, 
liquidity, competition, and informational or allocative efficiency. 
Moreover, empirical measures of capital formation or liquidity are 
substantially limited by the fact that they do not provide insight into 
security issuance and transaction activity that does not occur as a 
result of the 2013 rule. Accordingly, it is difficult to quantify the 
primary security issuance and secondary market liquidity that would 
have been observed following the financial crisis absent various 
provisions of section 13 of the BHC Act and the 2013 rule.
---------------------------------------------------------------------------

    \281\ See, e.g., 2013 rule adopting release at 5541.
---------------------------------------------------------------------------

    Importantly, the existing securities markets--including market 
participants, their business models, market structure, etc.--differ in 
significant ways from the securities markets that existed prior to 
enactment of section 13 of the BHC Act and the implementation of the 
2013 rule. For example, the role of dealers in intermediating trading 
activity has changed in important ways, including the following: (1) In 
recent years, on both an absolute and relative basis, bank dealers 
generally committed less capital to intermediation activities while 
non-bank dealers generally committed more, although not always in the 
same manner or on the same terms as bank dealers; (2) the volume and 
profitability of certain trading activities after the financial crisis 
may have decreased for bank dealers while it may have increased for 
other intermediaries, including non-bank entities that provide intraday 
liquidity, but generally not overnight liquidity, using sophisticated 
electronic trading algorithms and high speed access to data and trading 
venues; and (3) the introduction of alternative credit markets, 
including non-bank direct lending markets, may have contributed to 
liquidity fragmentation across markets while potentially increasing 
access to capital.\282\
---------------------------------------------------------------------------

    \282\ See U.S Sec. & Exch. Comm'n, Access to Capital and Market 
Liquidity (Aug. 2017) (``SEC Report 2017'').
---------------------------------------------------------------------------

    Where possible, the SEC has attempted to quantify the costs and 
benefits expected to result from the proposed amendments. In many 
cases, however, the SEC is unable to quantify these potential economic 
effects. Some of the primary economic effects, such as the effect on 
incentives that may give rise to conflicts of interest in various 
regulated entities and the degree to which the 2013 rule may be 
impeding activity of banking entities with respect to certain 
investment vehicles, are inherently difficult to quantify. Moreover, 
some of the benefits of the 2013 rule's definitions and prohibitions 
that the agencies propose to amend, such as the potential benefits for 
resilience during a crisis or periods of market stress, are less 
readily observable under strong economic conditions, particularly when 
markets are less volatile and are functioning well. Further, it is 
difficult to quantify the net economic effects of any individual 
proposed amendment because of overlapping implementation periods of 
various post-crisis regulations affecting the same group of SEC 
registrants, the long implementation timeline of the 2013 rule and the 
implementing regulations, and the fact that many market participants 
changed their behavior in anticipation of future changes in regulation.
    In some instances, the SEC lacks the information or data necessary 
to provide reasonable estimates for the economic effects of the 
proposed amendments. For example, the SEC lacks information and data on 
how market participants may choose to restructure their relationships 
with various types of entities in response to the proposed amendments; 
the amount of capital formation in covered funds that does not occur 
because of current covered fund provisions, including those concerning 
the definition of covered fund, restrictions on relationships with 
covered funds, the definition of ownership interest, and the exclusion 
for loan securitizations; the volume of loans, guarantees, securities 
lending, and derivatives activity dealers may wish to engage in with 
related covered funds; as well as the extent of risk reduction 
associated with the covered fund provision of the 2013 rule. Where the 
SEC cannot quantify the relevant economic effects, they are discussed 
in qualitative terms.
2. Economic Baseline
    In the context of this economic analysis, the economic costs and 
benefits, and the impact of the proposed amendments on efficiency, 
competition, and capital formation, are considered relative to a 
baseline that includes the 2013 rule; the 2019 amendments; legislative 
amendments in EGRRCPA \283\ and conforming amendments to the 
implementing regulations, as applicable; and current practices aimed at 
compliance with these regulations.
---------------------------------------------------------------------------

    \283\ See supra note 267.
---------------------------------------------------------------------------

a. Regulation
    The economic baseline against which the SEC is assessing the 
economic impact of the proposed amendments includes the legal and 
regulatory framework as it exists at the time of this release. Thus, 
the regulatory baseline for the SEC's economic analysis includes 
section 13 of the BHC Act as amended by EGRRCPA, and the 2013 rule. 
Further, the baseline accounts for the fact that since the adoption of 
the 2013 rule, the agencies have adopted the 2019 amendments, which, 
among other things, related to the ability of banking entities to 
engage in certain activities, including underwriting, market-making, 
and risk-mitigating hedging, with respect to ownership interests in 
covered funds, as well as amendments conforming the 2013 rule to 
Sections 203 and 204 of EGRRCPA. In addition, the staffs of the 
agencies have provided FAQ responses related to the regulatory 
obligations of banking entities, including SEC-regulated entities that 
are also banking entities under the 2013 rule, which likely influenced 
these entities' decisions about how to comply with the 2013 rule.\284\ 
The Federal banking agencies also issued policy statements in 2017 and 
2019 with respect to foreign excluded funds.\285\
---------------------------------------------------------------------------

    \284\ See id.
    \285\ See, e.g., Board of Governors of the Federal Reserve 
System, Statement regarding Treatment of Certain Foreign Funds under 
the Rules Implementing Section 13 of the Bank Holding Company Act 
(July 17, 2019), available at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20190717a1.pdf (``2019 Policy 
Statement'').
---------------------------------------------------------------------------

    Although the 2013 rule also included restrictions on proprietary 
trading and compliance requirements (as modified by the 2019 
amendments), the most relevant portion of the 2013 rule for 
establishing an economic baseline is that involving covered fund 
restrictions.\286\ The features of the regulatory framework under the 
2013 rule most relevant to the baseline include the definition of the 
term

[[Page 12159]]

``covered fund''; restrictions on a banking entity's relationships with 
covered funds; and restrictions on parallel investment, co-investment, 
and investments in the fund by banking entity employees.
---------------------------------------------------------------------------

    \286\ See 2019 amendments at 61974.
---------------------------------------------------------------------------

Scope of the Covered Fund Definition
    The definition of ``covered fund'' impacts the scope of the 
substantive prohibitions on banking entities acquiring or retaining an 
ownership interest in, sponsoring, and having certain relationships 
with, covered funds. The covered fund provisions of the 2013 rule may 
reduce the ability and incentives of banking entities to bail out 
affiliated funds to mitigate reputational risk, limit conflicts of 
interest with clients, customers, and counterparties, and reduce the 
ability of banking entities to engage in proprietary trading indirectly 
through funds. The 2013 rule defines covered funds, in part, as issuers 
that would be investment companies but for section 3(c)(1) or 3(c)(7) 
of the Investment Company Act and then excludes specific types of 
entities from the definition. The definition also includes certain 
commodity pools as well as certain foreign funds. Funds that rely on 
the exclusions in sections 3(c)(1) or 3(c)(7) of the Investment Company 
Act are covered funds unless an exclusion from the covered fund 
definition is available. Funds that rely on any exclusion or exemption 
from the definition of ``investment company'' under the Investment 
Company Act, other than the exclusion contained in section 3(c)(1) or 
3(c)(7), such as real estate and mortgage funds that rely on the 
exclusion in section 3(c)(5)(C), are not covered funds under the 2013 
rule.\287\
---------------------------------------------------------------------------

    \287\ See 2013 rule Sec.  _.10(c)(12)(ii).
---------------------------------------------------------------------------

    The broad definition of covered funds encompasses many different 
types of vehicles, and the 2013 rule excludes some of them from the 
definition of a covered fund.\288\ The excluded fund types relevant to 
the baseline are funds that are regulated by the SEC under the 
Investment Company Act: RICs and BDCs. Seeding vehicles for these funds 
are also excluded from the covered fund definition during their seeding 
period.\289\
---------------------------------------------------------------------------

    \288\ The exclusions from the covered fund definition are set 
forth in Sec.  _.10(c) of the 2013 rule.
    \289\ See 2013 rule Sec.  _.10(c)(12) (i) and Sec.  
_.10(c)(12)(iii).
---------------------------------------------------------------------------

Restrictions on Relationships Between Banking Entities and Covered 
Funds
    Under the baseline, banking entities are limited in the types of 
transactions in which they are able to engage with covered funds with 
which they have certain relationships. Banking entities that serve, 
directly or indirectly, as the investment manager, adviser, or sponsor 
to a covered fund are prohibited from engaging in a ``covered 
transaction,'' as defined in section 23A of the Federal Reserve Act, 
with the covered fund or with any other covered fund that is controlled 
by such covered fund.\290\ Similarly, a banking entity that organizes 
and offers a covered fund pursuant to Sec.  _.11 or that continues to 
hold an ownership interest in a covered fund in accordance with Sec.  
_.11(b) is prohibited from engaging in such a ``covered transaction.'' 
This prohibits all ``covered transactions'' that cause the banking 
entity to have credit exposure to the affiliated covered fund, 
including short-term extensions of credit, and various other 
transactions required for a banking entity to provide an affiliated 
covered fund payment, clearing, and settlement services.
---------------------------------------------------------------------------

    \290\ See 2013 rule Sec.  _.14(a).
---------------------------------------------------------------------------

Definition of ``Banking Entity''
    For foreign banking entities,\291\ certain funds organized under 
foreign law and offered to foreign investors (``foreign excluded 
funds'') are not ``covered funds'' under the 2013 rule, but may be 
subject to the 2013 rule as ``banking entities'' under certain 
circumstances. The banking agencies (in consultation with the staffs of 
the SEC and the CFTC) have provided temporary relief for qualifying 
foreign excluded funds that will expire in July 2021.\292\
---------------------------------------------------------------------------

    \291\ For purposes of this analysis, ``foreign banking entity'' 
has the same meaning as used in the 2019 Policy Statement, i.e., a 
banking entity that is not--and is not controlled directly or 
indirectly by a banking entity that is--located in or organized 
under the laws of the United States or any state.
    \292\ See 2019 Policy Statement. For purposes of the 2019 Policy 
Statement, a ``qualifying foreign excluded fund'' means, with 
respect to a foreign banking entity, a banking entity that (1) is 
organized or established outside the United States and the ownership 
interests of which are offered and sold solely outside the United 
States; (2) would be a covered fund were the entity organized or 
established in the United States, or is, or holds itself out as 
being, an entity or arrangement that raises money from investors 
primarily for the purpose of investing in financial instruments for 
resale or other disposition or otherwise trading in financial 
instruments; (3) would not otherwise be a banking entity except by 
virtue of the foreign banking entity's acquisition or retention of 
an ownership interest in, or sponsorship of, the entity; (4) is 
established and operated as part of a bona fide asset management 
business; and (5) is not operated in a manner that enables the 
foreign banking entity to evade the requirements of section 13 or 
implementing regulations.
---------------------------------------------------------------------------

Definition of ``Ownership Interest''
    The 2013 rule prohibits a banking entity, as principal, from 
directly or indirectly acquiring or retaining an ``ownership interest'' 
in a covered fund.\293\ The 2013 rule defines an ``ownership interest'' 
in a covered fund to mean any equity, partnership, or other similar 
interest. Under the 2013 rule, ``other similar interest'' is defined as 
an interest that:
---------------------------------------------------------------------------

    \293\ 2013 rule Sec.  _.10(a).
---------------------------------------------------------------------------

    (A) Has the right to participate in the selection or removal of a 
general partner, managing member, member of the board of directors or 
trustees, investment manager, investment adviser, or commodity trading 
advisor of the covered fund (excluding the rights of a creditor to 
exercise remedies upon the occurrence of an event of default or an 
acceleration event);
    (B) Has the right under the terms of the interest to receive a 
share of the income, gains or profits of the covered fund;
    (C) Has the right to receive the underlying assets of the covered 
fund after all other interests have been redeemed and/or paid in full 
(excluding the rights of a creditor to exercise remedies upon the 
occurrence of an event of default or an acceleration event);
    (D) Has the right to receive all or a portion of excess spread (the 
positive difference, if any, between the aggregate interest payments 
received from the underlying assets of the covered fund and the 
aggregate interest paid to the holders of other outstanding interests);
    (E) Provides under the terms of the interest that the amounts 
payable by the covered fund with respect to the interest could be 
reduced based on losses arising from the underlying assets of the 
covered fund, such as allocation of losses, write-downs or charge-offs 
of the outstanding principal balance, or reductions in the amount of 
interest due and payable on the interest;
    (F) Receives income on a pass-through basis from the covered fund, 
or has a rate of return that is determined by reference to the 
performance of the underlying assets of the covered fund; or
    (G) Any synthetic right to have, receive, or be allocated any of 
the rights above.\294\
---------------------------------------------------------------------------

    \294\ 2013 rule Sec.  _.10(d)(6)(i).
---------------------------------------------------------------------------

    The 2013 rule permits a banking entity to acquire and retain an 
ownership interest in a covered fund that the banking entity organizes 
and offers pursuant to section _.11, but limits such ownership 
interests to three percent of the total number or value of the 
outstanding ownership interests of such fund (the per-fund limit).\295\
---------------------------------------------------------------------------

    \295\ 2013 rule Sec.  _.12(a) (1)(ii) and Sec.  
_.12(a)(2)(ii)(A). The 2013 rule also requires that the aggregate 
value of all ownership interests of a banking entity and its 
affiliates in all covered funds acquired or retained under Sec.  
_.12 may not exceed three percent of the tier 1 capital of the 
banking entity. 2013 rule Sec.  _.12(a)(2)(iii) (the aggregate funds 
limit).

---------------------------------------------------------------------------

[[Page 12160]]

Loan Securitizations
    As discussed above, section 13 of the BHC Act provides a rule of 
construction that explicitly allows the sale and securitization of 
loans as otherwise permitted by law.\296\ Accordingly, the 2013 rule 
excludes from the covered fund definition entities that issue asset-
backed securities and meet specified conditions, including that they 
hold only loans, certain rights and assets, and a small set of other 
financial instruments (permissible assets).\297\ In addition, the 
baseline includes the FAQs issued by agencies' staff in June 2014 
regarding the servicing asset provision of the loan securitization 
exclusion, as discussed in section III.B.2 above.
---------------------------------------------------------------------------

    \296\ 13 U.S.C. 1851(g)(2). See supra section III.B.2.
    \297\ See 2013 rule Sec.  _.10(c)(8). Loan is further defined as 
any loan, lease, extension of credit, or secured or unsecured 
receivable that is not a security or derivative. Sec.  _.2(t).
---------------------------------------------------------------------------

Public Welfare and SBIC Exclusions
    Under the 2013 rule, issuers in the business of making investments 
that are designed primarily to promote the public welfare, of the type 
permitted under paragraph (11) of section 5136 of the Revised Statutes 
of the United States (12 U.S.C. 24),\298\ are excluded from the covered 
fund definition. Similarly, the 2013 rule excludes from the covered 
fund definition small business investment companies (SBICs) and issuers 
that have received notice from the Small Business Administration to 
proceed to qualify for a license as a SBIC and for which the notice or 
license has not been revoked.\299\
---------------------------------------------------------------------------

    \298\ See 2013 rule Sec.  _.10(c)(11)(ii).
    \299\ See 2013 rule Sec.  _.10(c)(11)(i).
---------------------------------------------------------------------------

Attribution of Certain Investments to a Banking Entity
    As discussed above, the 2013 rule includes a per fund limit and 
aggregate fund limit on a banking entity's ownership of covered funds 
that the banking entity organizes and offers.\300\ The preamble to the 
2013 rule stated, ``[I]f a banking entity makes investments side by 
side in substantially the same positions as a covered fund, then the 
value of such investments shall be included for purposes of determining 
the value of the banking entity's investment in the covered fund.'' 
\301\ The agencies also stated that a banking entity that sponsors a 
covered fund should not make any additional side-by-side co-investment 
with the covered fund in a privately negotiated investment unless the 
value of such co-investment is less than 3% of the value of the total 
amount co-invested by other investors in such investment.\302\ The 2019 
amendments eliminated the aggregate fund limit and capital deduction 
requirement under Sec.  _.12(d) for the value of ownership interests in 
third-party covered funds (e.g., covered funds that banking entities do 
not organize or offer), acquired or retained as a result of certain 
underwriting or market-making activities. However, the 2019 amendments 
did not change or amend the application of the per-fund limit or 
aggregate funds limit to co-investments alongside a covered fund.
---------------------------------------------------------------------------

    \300\ 2013 rule Sec.  _.12(a).
    \301\ 2013 rule adopting release at 5734.
    \302\ Id.
---------------------------------------------------------------------------

    For purposes of calculating the aggregate fund limit and capital 
deduction requirement, the 2013 rule requires attribution to a banking 
entity with respect to restricted profit interests in a covered fund 
for which the banking entity serves as investment manager, investment 
adviser, commodity trading advisor, or other service provider.\303\ 
Under the 2013 rule, for purposes of calculating a banking entity's 
compliance with the aggregate fund limit and the capital deduction 
requirement, a banking entity must include any amounts paid by the 
banking entity or an employee in connection with obtaining a restricted 
profit interest in the covered fund.\304\
---------------------------------------------------------------------------

    \303\ 2013 rule Sec.  _.10(d)(6)(ii); Sec.  _.12(c)(1), (d); See 
also 12 U.S.C. 1851(d)(1)(G).
    \304\ 2013 rule Sec.  _.12(c)(1), (d).
---------------------------------------------------------------------------

    The sections that follow discuss rule provisions currently in 
effect, how each proposed amendment would change those provisions, and 
the anticipated costs and benefits of the proposed amendments, subject 
to the caveat that not all anticipated costs and benefits can be 
meaningfully quantified.
b. Affected Participants
    The SEC-regulated entities directly affected by the proposed 
amendments include broker-dealers, security-based swap dealers, and 
investment advisers. The 2013 rule, as amended in 2019, imposed a range 
of restrictions and compliance obligations on banking entities with 
respect to their covered fund activities and investments. To the degree 
that the proposed amendments reduce or otherwise alter the scope of 
private funds subject to covered fund restrictions, SEC-registered 
banking entities, including broker-dealers, security-based swap 
dealers, and investment advisers may be affected by the proposal.
Broker-Dealers \305\
---------------------------------------------------------------------------

    \305\ These estimates differ from those in the EGRRCPA 
Conforming Amendments Adopting Release, as these estimates rely on 
more recent data and information about both U.S. and global trading 
assets and liabilities of bank holding companies. This analysis is 
based on data from Reporting Form FR Y-9C for domestic holding 
companies on a consolidated basis and Report of Condition and Income 
for banks regulated by the Board, FDIC, and OCC for the most recent 
available four-quarter average, as well as data from S&P Market 
Intelligence LLC on the estimated amount of global trading activity 
of U.S. and non-U.S. bank holding companies. Broker-dealer bank 
affiliations were obtained from the Federal Financial Institutions 
Examination Council's (FFIEC) National Information Center (NIC). 
Broker-dealer assets and holdings were obtained from FOCUS Report 
data for Q3 2019.
---------------------------------------------------------------------------

    Under the 2013 rule, some of the largest SEC-regulated broker-
dealers are banking entities. Table 1 reports the number, total assets, 
and holdings of broker-dealers affiliated with banks and broker-dealers 
that are not.
    While the 3,504 domestic broker-dealers that are not affiliated 
with banks greatly outnumber the 198 banking entity broker-dealers 
subject to the 2013 rule, banking entity broker-dealers dominate non-
banking entity broker-dealers in terms of total assets (73% of total 
broker-dealer assets) and aggregate holdings (68% of total broker-
dealer holdings).

                        Table 1--Broker-Dealer Count, Assets, and Holdings by Affiliation
----------------------------------------------------------------------------------------------------------------
                                                                                                    Holdings
      Broker-dealer affiliation             Number         Total assets,      Holdings, $mln     (alternative),
                                                             $mln \306\           \307\            $mln \308\
----------------------------------------------------------------------------------------------------------------
Affected bank broker-dealers \309\..                198          3,340,366            804,354            640,779
Non-bank broker-dealers \310\.......              3,504          1,242,246            385,137            218,777
                                     ---------------------------------------------------------------------------

[[Page 12161]]

 
    Total...........................              3,702          4,582,612          1,189,491            859,556
----------------------------------------------------------------------------------------------------------------

Security-Based Swap Dealers
    The proposed amendments may also affect bank-affiliated SBSDs. As 
compliance with SBSD registration requirements is not yet required, 
there are currently no registered SBSDs. However, the SEC has 
previously estimated that as many as 50 entities may potentially 
register with the SEC as security-based swap dealers and that as many 
as 16 may already be SEC-registered broker-dealers.\311\ Given the 
analysis of DTCC Derivatives Repository Limited Trade Information 
Warehouse (``TIW'') transaction and positions data on single-name 
credit-default swaps and consistent with other recent SEC rulemakings, 
the SEC preliminarily believes that 41 entities that may register with 
the SEC as SBSDs are bank-affiliated firms, including those that are 
SEC-registered broker-dealers. Therefore, the SEC preliminarily 
estimates that, in addition to the bank-affiliated SBSDs that are 
already registered as broker-dealers and included in the discussion 
above, as many as 25 other bank-affiliated SBSDs may be affected by the 
proposed amendments.\312\ Similarly, on the basis of the analysis of 
TIW data, the SEC estimates that none of the entities that may register 
with the SEC as Major Security-Based Swap Participants are affected by 
the final rule.
---------------------------------------------------------------------------

    \306\ Broker-dealer total assets are based on FOCUS report data 
for ``Total Assets.''
    \307\ Broker-dealer holdings are based on FOCUS report data for 
securities and spot commodities owned at market value, including 
bankers' acceptances, certificates of deposit and commercial paper, 
state and municipal government obligations, corporate obligations, 
stocks and warrants, options, arbitrage, other securities, U.S. and 
Canadian government obligations, and spot commodities.
    \308\ This alternative measure excludes U.S. and Canadian 
government obligations and spot commodities.
    \309\ This category includes all bank-affiliated broker-dealers 
except those exempted by section 203 of EGRRCPA.
    \310\ This category includes both bank affiliated broker-dealers 
subject to section 203 of EGRRCPA and broker-dealers that are not 
affiliated with banks or holding companies.
    \311\ See Recordkeeping and Reporting Requirements for Security-
Based Swap Dealers, Major Security-Based Swap Participants, and 
Broker-Dealers, 84 FR 68550, 68607 (Dec. 16, 2019) (``Recordkeeping 
and Reporting Adopting Release'').
    \312\ See id.
---------------------------------------------------------------------------

    Importantly, because registration is not yet required, compliance 
with capital and other substantive requirements for SBSDs under Title 
VII of the Dodd-Frank Act is also not yet required.\313\ The SEC 
recognizes that firms may choose to move security-based swap trading 
activity into (or out of) an affiliated bank or an affiliated broker-
dealer instead of registering as a standalone SBSD if bank or broker-
dealer capital and other regulatory requirements are less (or more) 
costly than those that may be imposed on SBSDs under Title VII. As a 
result, the above figures may overestimate or underestimate the number 
of SBSDs that are not broker-dealers and that may become SEC-registered 
entities affected by the proposed amendments.
---------------------------------------------------------------------------

    \313\ See Capital, Margin, Segregation Adopting Release at 
43954. See also Rule Amendments and Guidance Addressing Cross-Border 
Application of Certain Security-Based Swap Requirements, Exchange 
Act Release No. 34-87780 (Dec. 18, 2019) (``Cross Border Amendments 
Adopting Release'').
---------------------------------------------------------------------------

Private Funds and Private Fund Advisers \314\
---------------------------------------------------------------------------

    \314\ These estimates are calculated from Form ADV data as of 
September 30, 2019. An investment adviser is defined as a ``private 
fund adviser'' for the purposes of this economic analysis if it 
indicates that it is an adviser to any private fund on Form ADV Item 
7.B. An investment adviser is defined as a ``banking entity RIA'' if 
it indicates on Form ADV Item 6.A.(7) that it is actively engaged in 
business as a bank, or it indicates on Form ADV Item 7.A.(8) that it 
has a ``related person'' that is a banking or thrift institution. 
For purposes of Form ADV, a ``related person'' is any advisory 
affiliate and any person that is under common control with the 
adviser. The definition of ``control'' for purposes of Form ADV, 
which is used in identifying related persons on the form, differs 
from the definition of ``control'' under the BHC Act. In addition, 
this analysis does not exclude SEC-registered investment advisers 
affiliated with banks that have consolidated total assets less than 
or equal to $10 billion and trading assets and liabilities less than 
or equal to 5% of total assets. Those banks are no longer subject to 
the requirements of the 2013 rule following enactment of the 
EGRRCPA. Thus, these figures may overestimate or underestimate the 
number of banking entity RIAs.
---------------------------------------------------------------------------

    This section describes RIAs advising private funds that may be 
affected by the proposed amendments. Using Form ADV data, Table 2 
reports the number of RIAs advising private funds by fund type, as 
those types are defined in Form ADV.\315\ Private funds rely on either 
section 3(c)(1) or 3(c)(7) of the Investment Company Act and so meet 
the 2013 rule's definition of ``covered fund.'' Table 3 reports the 
number and gross assets of private funds advised by RIAs and separately 
reports these statistics for banking entity RIAs. As can be seen from 
Table 2, the two largest categories of private funds advised by RIAs 
are hedge funds and private equity funds.\316\
---------------------------------------------------------------------------

    \315\ RIAs may also advise foreign public funds that are 
excluded from the covered fund definition in the 2013 rule, are the 
subject of proposed amendments discussed below, and are not reported 
on Form ADV.
    \316\ For purposes of Form ADV, ``private equity fund'' is 
defined as ``any private fund that is not a hedge fund, liquidity 
fund, real estate fund, securitized asset fund, or venture capital 
fund and does not provide investors with redemption rights in the 
ordinary course.'' See Form ADV: Instructions for Part 1A, 
Instruction 6. For purposes of Form ADV, ``hedge fund'' is defined 
as ``any private fund (other than a securitized asset fund): (a) 
with respect to which one or more investment advisers (or related 
persons of investment advisers) may be paid a performance fee or 
allocation calculated by taking into account unrealized gains (other 
than a fee or allocation the calculation of which may take into 
account unrealized gains solely for the purpose of reducing such fee 
or allocation to reflect net unrealized losses); (b) that may borrow 
an amount in excess of one-half of its net asset value (including 
any committed capital) or may have gross notional exposure in excess 
of twice its net asset value (including any committed capital); or 
(c) that may sell securities or other assets short or enter into 
similar transactions (other than for the purpose of hedging currency 
exposure or managing duration).
---------------------------------------------------------------------------

    Banking entity RIAs advise a total of 4,274 private funds with 
approximately $1.97 trillion in gross assets. From Form ADV data, 
banking entity RIAs' gross private fund assets under management are 
concentrated in hedge funds and private equity funds. The SEC estimates 
on the basis of this data that banking entity RIAs advise 879 hedge 
funds with approximately $668 billion in gross assets and 1,430 private 
equity funds with approximately $397 billion in assets.
---------------------------------------------------------------------------

    \317\ This table includes only the advisers that list private 
funds on Section 7.B.(1) of Form ADV. The number of advisers in the 
``Any Private Fund'' row is not the sum of the rows that follow 
since an adviser may advise multiple types of private funds. Each 
listed private fund type (e.g., real estate funds and liquidity 
funds) is defined in Form ADV, and those definitions are the same 
for purposes of the SEC's Form PF.

[[Page 12162]]



  Table 2--SEC-Registered Investment Advisers Advising Private Funds by
                             Fund Type \317\
------------------------------------------------------------------------
                                                          Banking entity
                Fund type                     All RIA           RIA
------------------------------------------------------------------------
Hedge Funds.............................           2,695             149
Private Equity Funds....................           1,707              96
Real Estate Funds.......................             540              52
Securitized Asset Funds.................             226              44
Venture Capital Funds...................             207               8
Liquidity Funds.........................              47              15
Other Private Funds.....................           1,071             143
                                         -------------------------------
    Total Private Fund Advisers.........           4,854             285
------------------------------------------------------------------------


    Table 3--The Number and Gross Assets of Private Funds Advised by SEC-Registered Investment Advisers \318\
----------------------------------------------------------------------------------------------------------------
                                                      Number of private funds           Gross assets, $bln
                                                 ---------------------------------------------------------------
                    Fund type                                         Banking                         Banking
                                                      All RIA       entity RIA        All RIA       entity RIA
----------------------------------------------------------------------------------------------------------------
Hedge Funds.....................................          10,602             879           7,478             668
Private Equity Funds............................          15,144           1,430           3,541             397
Real Estate Funds...............................           3,546             321             656             100
Securitized Asset Funds.........................           1,836             355             674             131
Venture Capital Funds...........................           1,286              43             158               3
Liquidity Funds.................................              89              29           1,339             195
Other Private Funds.............................           4,505           1,218           1,386             478
                                                 ---------------------------------------------------------------
    Total Private Funds.........................          37,002           4,274          15,231           1,971
----------------------------------------------------------------------------------------------------------------

    In addition, the SEC's economic analysis is informed by private 
fund statistics submitted by certain RIAs of private funds through Form 
PF as summarized in quarterly ``Private Fund Statistics.'' \319\
---------------------------------------------------------------------------

    \318\ Gross assets include uncalled capital commitments on Form 
ADV.
    \319\ See U.S. Securities and Exchange Commission, Division of 
Investment Management Analytics Office, Private Fund Statistics, 
First Calendar Quarter 2019, (Oct. 25, 2019), available at https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2019-q1.pdf. Statistics for preceding quarters are 
available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml.
---------------------------------------------------------------------------

Registered Investment Companies and Business Development Companies
    The baseline also reflects the potential that a registered 
investment company (RIC) or a business development company (BDC) would 
be treated as a banking entity where the RIC or BDC's sponsor is a 
banking entity that holds 25% or more of the RIC or BDC's voting 
securities after a seeding period.\320\ On the basis of SEC filings and 
public data, the SEC estimates that, as of September 2019, there were 
approximately 15,500 RICs \321\ and 106 BDCs. Although RICs and BDCs 
are generally not themselves banking entities subject to the 2013 rule, 
they may be indirectly affected by the 2013 rule and the proposed 
amendments, for example, if their sponsors or advisers are banking 
entities. For instance, bank-affiliated RIAs or their affiliates may 
reduce their level of investment in the RICs or BDCs they advise, or 
potentially close those funds, to eliminate the risk of those funds 
becoming banking entities themselves.
---------------------------------------------------------------------------

    \320\ See, e.g., 2019 amendments at 61979.
    \321\ This estimate includes open-end companies, exchange-traded 
funds, closed-end funds, and non-insurance unit investment trusts 
and does not include fund of funds. The inclusion of fund of funds 
increases this estimate to approximately 17,000.
---------------------------------------------------------------------------

Small Business Investment Companies
    Small business investment companies (SBICs) are generally 
``privately owned and managed investment funds, licensed and regulated 
by the Small Business Administration (SBA), that use their own capital 
plus funds borrowed with an SBA guarantee to make equity and debt 
investments in qualifying small businesses.'' \322\ The proposed 
amendments would provide relief with respect to banking entity 
investments in SBICs during the wind-down process by excluding from the 
definition of ``covered fund'' those SBICs.\323\ While the SEC does not 
have data to quantify the number of SBICs undergoing wind-down, trends 
in the number of SBIC licenses can be indicative of the turnover in the 
total number of SBIC licensees. For example, according to SBA data, 
there were 302 SBIC licensees as of June 30, 2019 \324\ and 300 SBIC 
licensees as of September 30, 2019.\325\ By contrast, as of June 30, 
2017, there were 315 SBICs licensed by the SBA.\326\
---------------------------------------------------------------------------

    \322\ See U.S. Small Business Administration, SBIC Program 
Overview, available at https://www.sba.gov/content/sbic-program-overview.
    Pursuant to Advisers Act section 203(b)(7), an SBIC is (other 
than an entity that has elected to be regulated or is regulated as a 
business development company pursuant to section 54 of the 
Investment Company Act of 1940): (A) A small business investment 
company that is licensed under the Small Business Investment Act of 
1958 (``SBIA''), (B) an entity that has received from the Small 
Business Administration notice to proceed to qualify for a license 
as a small business investment company under the SBIA, which notice 
or license has not been revoked, or (C) an applicant that is 
affiliated with 1 or more licensed small business investment 
companies described in subparagraph (A) and that has applied for 
another license under the SBIA, which application remains pending.
    \323\ Specifically, the proposed amendments would exclude from 
the definition of ``covered fund'' any SBIC that has voluntarily 
surrendered its license to operate as an SBIC in accordance with 13 
CFR 107.1900 and does not make any new investments (with some 
exceptions) after such voluntary surrender. Proposed rule Sec.  
__.10(c)(11)(i).
    \324\ See U.S. Small Business Administration, SBIC Program 
Overview as of June 30, 2019, available at https://www.sba.gov/sites/default/files/2019-09/SBIC%20Quarterly%20Report%20as%20of%20June_30_2019.pdf.
    \325\ See U.S. Small Business Administration, SBIC Program 
Overview as of September 30, 2019, available at https://www.sba.gov/sites/default/files/2019-11/SBIC%20Quarterly%20Report%20as%20of%20September_30_2019.pdf.
    \326\ See U.S. Small Business Administration, SBIC Quarterly 
Report as of March, 31 2017, available at https://www.sba.gov/sites/default/files/files/Quarterly_Data_as_of_March_31_2017_0.pdf.

---------------------------------------------------------------------------

[[Page 12163]]

    The agencies are requesting comment on whether they should provide 
relief to rural business investment companies (``RBICs'') from the 2013 
rule that is similar to the relief provided to SBICs.\327\ As the SEC 
has discussed elsewhere,\328\ an RBIC is defined in Section 384A of the 
Consolidated Farm and Rural Development Act as a company that is 
approved by the Secretary of Agriculture and that has entered into a 
participation agreement with the Secretary.\329\ Because SBICs and 
RBICs share the common purpose of promoting capital formation in their 
respective sectors, advisers to SBICs and RBICs are treated similarly 
under the Advisers Act in that they have the opportunity to take 
advantage of expanded exemptions from investment adviser 
registration.\330\ As of August 2019, there were 5 RBICs who were 
licensed by the USDA managing approximately $352 million in 
assets.\331\
---------------------------------------------------------------------------

    \327\ Under the implementing regulations, an SBIC is excluded 
from the ``covered fund'' definition. See 2013 rule Sec.  
_.10(c)(11)(i).
    \328\ See Amending the ``Accredited Investor'' Definition, 85 FR 
2574 (Jan. 15, 2020) (``Accredited Investor Definition Proposing 
Release'').
    \329\ See the RBIC Advisers Relief Act of 2018, Public Law 115-
417 (2019) (the ``RBIC Advisers Relief Act''). To be eligible to 
participate as an RBIC, the company must be a newly formed for-
profit entity or a newly formed for-profit subsidiary of such an 
entity, have a management team with experience in community 
development financing or relevant venture capital financing, and 
invest in enterprises that will create wealth and job opportunities 
in rural areas, with an emphasis on smaller enterprises. See 7 
U.S.C. 2009cc-3(a).
    \330\ Following enactment of the RBIC Advisers Relief Act, 
advisers to solely RBICs and advisers to solely SBICs are exempt 
from investment adviser registration pursuant to Advisers Act 
Sections 203(b)(8) and 203(b)(7), respectively. The venture capital 
fund adviser exemption deems RBICs and SBICs to be venture capital 
funds for purposes of the registration exemption 15 U.S.C. 80b-3(l). 
Accordingly, the proposed exclusion for certain venture capital 
funds discussed below (see infra text accompanying notes 380 and 
381) which would require that a fund be a venture capital fund as 
defined in the SEC regulations implementing the registration 
exemption, could include RBICs and SBICs to the extent that they 
satisfy the other elements of the proposed exclusion.
    \331\ Rural Business Investment Company Applications filed with 
the USDA. To contact the USDA for data about Rural Business 
Investment Company Applications filed with the USDA see https://www.rd.usda.gov/programs-services/rural-business-investment-program.
---------------------------------------------------------------------------

    The Tax Cuts and Jobs Act established the ``opportunity zone'' 
program to provide tax incentives for long-term investing in designated 
economically distressed communities.\332\ The program allows taxpayers 
to defer and reduce taxes on capital gains by reinvesting gains in 
``qualified opportunity funds'' (QOFs) that are required to have at 
least 90 percent of their assets in designated low-income zones.\333\ 
In this regard, QOFs are similar to SBICs and public welfare companies. 
The agencies are requesting comment on whether they should provide 
relief to QOFs from the 2013 rule that is similar to the relief 
provided to SBICs.\334\ SEC staff are not aware of an official source 
for data regarding QOFs that are available for investment, but some 
private firms collect and report such data. One such firm reports that, 
as of January 2020, there were 292 QOFs that report raising $6.72 
billion in equity, and have a fundraising goal of $27.9 billion.\335\
---------------------------------------------------------------------------

    \332\ Tax Cuts and Jobs Act of 2017, Public Law 115-97, 131 
Stat. 2054 (2017).
    \333\ See U.S. Securities and Exchange Commission and NASAA, 
Staff Statement on Opportunity Zones: Federal and State Securities 
Laws Considerations, available at https://www.sec.gov/2019_Opportunity-Zones_FINAL_508v2.pdf (``Opportunity Zone 
Statement'').
    \334\ See supra note 328.
    \335\ As reported by Novogradac, a national professional 
services organization that collects and reports information on QOFs. 
See https://www.novoco.com/resource-centers/opportunity-zone-resource-center/opportunity-funds-listing.
---------------------------------------------------------------------------

3. Costs and Benefits
    Section 13 of the BHC Act generally prohibits banking entities from 
acquiring or retaining an ownership interest in, sponsoring, or having 
certain relationships with covered funds, subject to certain 
exemptions.\336\ The SEC's economic analysis concerns the potential 
costs, benefits, and effects on efficiency, competition, and capital 
formation of the proposed amendments for five groups of market 
participants. First, the proposed amendments may impact SEC-registered 
investment advisers that are banking entities, including those that 
sponsor or advise covered funds and those that do not, as well as SEC-
registered investment advisers that are not banking entities that 
sponsor or advise covered funds and compete with banking entity RIAs. 
Second, the proposed amendments would permit dealers greater 
flexibility in providing services to more types of funds since dealers 
could provide a broader array of services to funds that would be 
excluded from the covered fund definition. Third, banking entities that 
are broker-dealers or RIAs may enjoy reduced uncertainty and greater 
flexibility with respect to direct investments they make alongside 
covered funds. Fourth, the proposed amendments may impact private funds 
and other vehicles, including those entities scoped in or out of the 
covered fund provisions of the 2013 rule, as well as private funds 
competing with such funds. One such impact may be seen to the extent 
that the proposed amendments permit banking entities to provide a full 
range of traditional customer-facing banking and asset management 
services to certain entities, such as customer facilitation vehicles 
and family wealth management vehicles. Fifth, to the extent that the 
proposed amendments impact efficiency, competition, and capital 
formation in covered funds or underlying securities, investors in, and 
sponsors of, covered funds and underlying securities and issuers may be 
affected as well.
---------------------------------------------------------------------------

    \336\ See 12 U.S.C. 1851.
---------------------------------------------------------------------------

    As discussed below, careful consideration was given to the 
competing effects that could potentially result from the proposed 
amendments and alternatives. For example, the proposed amendments could 
result in enhanced competition among, and capital formation driven by, 
entities that would be treated as covered funds under the 2013 rule. 
The proposed amendments could also potentially increase (or decrease) 
moral hazard and other financial risks posed by investments in covered 
funds; however, the agencies have sought to mitigate the potential for 
increased risk and other concerns by imposing various conditions on the 
proposed exclusions designed to address such risks. To the extent that 
the current covered fund provisions limit fund formation, the proposed 
amendments and other amendments on which the agencies seek comment 
could provide greater ability for banking entities to organize funds 
and attract capital from third party investors, which could increase 
revenues for banking entities while reducing long-term compliance 
costs; increase the availability of venture, credit, and other 
financing, including for small businesses and start-ups; and, as a 
result, increase capital formation. The SEC is not currently aware of 
any information or data that would allow a quantification of the extent 
to which the covered fund provisions of the 2013 rule are inhibiting 
capital formation via funds. Therefore, the bulk of the analysis below 
is necessarily qualitative. To the extent that the current covered fund 
provisions limit alignment of interests between banking entities and 
their clients, customers, or counterparties, and to the extent the 
proposed amendments would alter the alignment of interests, the 
proposed amendments could have a positive or negative effect on 
conflict of interest concerns.
    The proposed amendments create new recordkeeping requirements and 
revise certain disclosure requirements. Specifically, a banking entity 
may only rely on the exclusion for customer

[[Page 12164]]

facilitation vehicles if the banking entity and its affiliates maintain 
documentation outlining how the banking entity intends to facilitate 
the customer's exposure to a transaction, investment strategy or 
service offered by the banking entity. As discussed in section IV.B 
\337\and below, these new recordkeeping burdens may impose an initial 
burden of $1,078,650 \338\ and an ongoing annual burden of 
$1,078,650.\339\ In addition, under certain circumstances, a banking 
entity must make certain disclosures with respect to an excluded credit 
fund, venture capital fund, family wealth vehicle, or customer 
facilitation vehicle, as if the entity were a covered fund. As 
discussed in section IV.B, these disclosure requirements may impose an 
initial burden of $53,933 \340\ and an ongoing burden of 
$1,402,245.\341\
---------------------------------------------------------------------------

    \337\ For the purposes of the burden estimates in this release, 
we are assuming the cost of $423 per hour for an attorney, from 
SIFMA's ``Management & Professional Earnings in the Securities 
Industry 2013,'' modified to account for an 1,800-hour work year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead, and adjusted for inflation.
    \338\ In the 2019 amendments, amendments that sought, among 
other things, to provide greater clarity and certainty about what 
activities are prohibited by the 2013 rule--in particular, under the 
prohibition on proprietary trading--and to better tailor the 
compliance requirements based off of the risk of a banking entity's 
activities, banking entity PRA-related burdens were apportioned to 
SEC-regulated entities on the basis of the average weight of broker-
dealer assets in holding company assets. See 2019 amendments at 
62074. SEC staff preliminarily believe that such an approach would 
be inappropriate for the PRA-related burdens associated with the 
proposed amendments because we do not have a comparable proxy for an 
investment adviser's significance within the holding company. Since 
we do not have sufficient information to determine the extent to 
which the costs associated with any of the new recordkeeping and 
disclosure requirements would be borne by SEC registrants 
specifically, we report the entire burden estimated based on 
information in section IV.B.
    Initial recordkeeping burdens: (10 hours) x (255 entities) x 
(Attorney at $423 per hour) = $1,078,650.
    \339\ Annual recordkeeping burdens: (10 hours) x (255 entities) 
x (Attorney at $423 per hour) = $1,078,650.
    \340\ Initial recordkeeping burdens: (0.5 hours) x (255 
entities) x (Attorney at $423 per hour) = $53,933.
    \341\ Annual recordkeeping burdens: (0.5 hours) x (255 entities) 
x (26 disclosures per year) x (Attorney at $423 per hour) = 
$1,402,245.
---------------------------------------------------------------------------

a. Amendments Related to Specific Types of Funds
    As discussed elsewhere in this SUPPLEMENTARY INFORMATION, the 
proposed amendments modify a number of the provisions of the 2013 rule 
related to the treatment of certain types of funds (e.g., credit funds, 
family wealth management vehicles, small business investment companies, 
venture capital funds, customer facilitation vehicles, foreign excluded 
funds, foreign public funds, and loan securitizations).
    Broadly, such modifications reduce the number and types of funds 
that are within the scope of the 2013 rule, impacting the economic 
effects of section 13 of the BHC Act and the 2013 rule.\342\
---------------------------------------------------------------------------

    \342\ See, e.g., 2019 amendments at 62037-92.
---------------------------------------------------------------------------

    Form ADV data is not sufficiently granular to allow the SEC to 
estimate the number of funds and fund advisers affected by the 
different proposed exclusions from the covered fund definition and 
other relief on which the agencies are seeking comment. However, Table 
2 and Table 3 in the economic baseline quantify the number and asset 
size of private funds advised by banking entity RIAs by the type of 
private fund they advise, as those fund types are defined in Form 
ADV.\343\
---------------------------------------------------------------------------

    \343\ These fund types include hedge funds, private equity 
funds, real estate funds, securitized asset funds, venture capital 
funds, liquidity, and other private funds. See supra note 317.
---------------------------------------------------------------------------

    Using Form ADV data, the SEC preliminarily estimates that 
approximately 149 banking entity RIAs advise hedge funds and 96 banking 
entity RIAs advise private equity funds (as those terms are defined in 
Form ADV).\344\ As can be seen from Table 2 in the economic baseline, 
44 banking entity RIAs advise securitized asset funds. Table 3 shows 
that banking entity RIAs advise 355 securitized asset funds with $131 
billion in gross assets. Another 52 banking entity RIAs advise real 
estate funds, and banking entity RIAs advise 321 real estate funds with 
$100 billion in gross assets. Venture capital funds are advised by only 
8 banking entity RIAs, and all 43 venture capital funds advised by 
banking entity RIAs have in aggregate approximately $3 billion in gross 
assets.
---------------------------------------------------------------------------

    \344\ As noted in the economic baseline, a single RIA may advise 
multiple types of funds. See supra note 318.
---------------------------------------------------------------------------

    As noted elsewhere in this SUPPLEMENTARY INFORMATION, the covered 
fund provisions of the 2013 rule may limit the ability of banking 
entities to use covered funds to circumvent the proprietary trading 
prohibition, reduce bank incentives to bail out their covered funds, 
and mitigate conflicts of interest between banking entities and their 
clients, customers, or counterparties. However, the covered fund 
definition is broad,\345\ and some commenters have stated that the 2013 
rule may limit the ability of banking entities to conduct traditional 
asset management activities and reduce the availability of capital to 
entrepreneurs and the market as a whole.\346\ The covered fund 
provisions of the 2013 rule, as currently in effect, may impose 
significant costs on some banking entities.\347\ The breadth of the 
covered fund definition requires market participants to review a large 
number of issuers to determine if they are covered funds as defined in 
the 2013 rule. For example, the SEC understands that this has included 
a review of hundreds of thousands of CUSIPs issued by common types of 
securitizations for covered fund status.\348\ The need to perform an 
in-depth analysis and make covered funds determinations across a large 
number of entities involves costs and may adversely affect the 
willingness of banking entities to acquire or retain ownership 
interests in, sponsor, and have relationships with entities that may be 
treated as covered funds under the 2013 rule. Moreover, the 2013 rule's 
limitations on banking entities' investment in covered funds may be 
more significant for covered funds that are typically small in size, 
with potentially more negative spillover effects on capital formation 
in underlying securities.\349\
---------------------------------------------------------------------------

    \345\ See, e.g., ABA; AAF; FSF; SIFMA; JBA.
    \346\ See, e.g., AAF; Credit Suisse; JBA; NVCA; Chamber.
    \347\ See, e.g., SIFMA; JBA; ACG; 10 Regional Banks; BPI; ICI; 
IIB; ABA; LTSA; SBIA; SFIG 2017.
    \348\ See comment letters responding to OCC Notice Seeking 
Public Input on the Volcker Rule (Aug. 2017), available at https://www.regulations.gov/docketBrowser?rpp=25&so=DESC&sb=commentDueDate&po=0&dct=PS&D=OCC-2017-0014. A summary of the comment letters is available at https://occ.gov/topics/capital-markets/financial-markets/trading-volcker-rule/volcker-notice-comment-summary.pdf.
    \349\ The median venture capital fund size in some locations is 
approximately $15 million. One fund may have lost as much as $50 
million dollars in investment because of the prohibitions of section 
13 of the BHC Act and implementing regulations. See NVCA.
---------------------------------------------------------------------------

    The proposed amendments could reduce the scope of funds that need 
to be analyzed for covered fund status or could simplify this analysis 
and enable banking entities to own, sponsor, and have relationships 
with the types of entities that the proposed amendments would exclude 
from the covered fund definition. Accordingly, the proposed amendments 
may reduce costs of banking entity ownership in, sponsorship of, and 
transactions with certain funds; may promote greater capital formation 
in, and competition among such funds; and may improve access to capital 
for issuers of underlying debt or equity that possibly will be 
purchased by those funds.
    The proposed amendments may also benefit banking entity dealers 
through higher profits or greater demand for derivatives, margin, 
payment, clearing, and settlement services. Reducing

[[Page 12165]]

restrictions on banking entities by further tailoring the covered fund 
definition may encourage more launches of funds that are excluded from 
the definition, capital formation and, possibly, competition in those 
types of funds. If competition increases the quality of funds available 
to investors or reduces the fees they are charged, investors in funds 
may benefit. Moreover, to the degree that the proposed amendments may 
increase the spectrum of funds available to investors, the proposal may 
relax constraints around investor portfolio optimization and increase 
the efficiency of capital allocation.
    The sections that follow further discuss these possible overarching 
economic costs, benefits, and effects of competition, efficiency, and 
capital formation with respect to specific types of funds and proposed 
amendments.
Foreign Excluded Funds
    Under the baseline, foreign excluded funds are excluded from the 
covered fund definition, but could be considered banking entities if a 
foreign banking entity controls the foreign fund in certain 
circumstances. As discussed above, the federal banking agencies 
released a policy statement on July 17, 2019, which provides that the 
federal banking agencies would not propose to take action during the 
two-year period ending on July 21, 2021 (i) against a foreign banking 
entity based on attribution of the activities and investments of a 
qualifying foreign excluded fund to the foreign banking entity \350\ or 
(ii) against a qualifying foreign excluded fund as a banking entity, in 
each case where the foreign banking entity's acquisition or retention 
of any ownership interest in, or sponsorship of, the qualifying foreign 
excluded fund would meet the requirements for permitted covered fund 
activities and investments solely outside the United States, as 
provided in section 13(d)(1)(I) of the BHC Act and Sec.  _.13(b) of the 
2013 rule, as if the qualifying foreign excluded fund were a covered 
fund.\351\ The proposed amendment would provide a permanent exemption 
from the proprietary trading and covered fund prohibitions for certain 
foreign excluded funds that is substantively similar to the temporary 
no-action relief currently provided to qualifying foreign excluded 
funds.\352\
---------------------------------------------------------------------------

    \350\ Foreign banking entity was defined for purposes of the 
policy statement to mean a banking entity that is not, and is not 
controlled directly or indirectly by, a banking entity that is 
located in or organized under the laws of the United States or any 
State.
    \351\ See 2019 Policy Statement. This policy statement continued 
the position of the Federal banking agencies that was released on 
July 21, 2017, and the position that the agencies expressed in the 
2018 proposal.
    \352\ See proposed rule Sec. Sec.  _.6(f) and _.13(d).
---------------------------------------------------------------------------

    The SEC recognizes that failing to exclude such funds from the 
definition of ``banking entity'' in the 2013 rule imposes proprietary 
trading restrictions, covered fund prohibitions, and compliance 
obligations on qualifying foreign excluded funds that may be more 
burdensome than the requirements that would apply under the 2013 rule 
to covered funds. The SEC has also received comment opposing carving 
out qualifying foreign excluded funds from the definition of banking 
entity.\353\ The SEC preliminarily believes that, absent the proposed 
amendments and upon expiry of the temporary relief, the 2013 rule may 
have significant adverse effects on the ability of foreign banking 
entities to organize and offer certain private funds for foreign 
investments, disrupting foreign asset management activities. The SEC 
recognizes that the exemption of qualifying foreign excluded funds from 
the proprietary trading and covered fund prohibitions that apply to 
``banking entities'' may result in increased activity by foreign 
banking entities in organizing and offering such funds, and that such 
activity may involve risk for those banking entities. At the same time, 
the SEC recognizes a statutory purpose of certain portions of section 
13 of the BHC Act is to limit the extraterritorial impact on foreign 
banking entities.\354\ Accordingly, the proposed amendments may benefit 
foreign banking entities and their foreign counterparties seeking to 
transact with and through such funds.
---------------------------------------------------------------------------

    \353\ See Data Boiler.
    \354\ See supra note 30 and the referencing paragraph.
---------------------------------------------------------------------------

    The proposed amendments may increase the incentive for some foreign 
banking entities seeking to organize and offer qualifying foreign 
excluded funds to reorganize their activities so that these funds' 
activities qualify for the proposed exemptions. The costs and 
feasibility of such reorganization will depend on the complexity and 
existing compliance structures for banking entities, the degree to 
which there is unmet demand for investment funds that may be organized 
as qualifying foreign excluded funds, and the profitability of such 
banking activities. Importantly, the principal risk of foreign banking 
entities' activities related to foreign excluded funds generally 
resides outside the United States and is unlikely to affect negatively 
the safety and soundness of U.S. banking entities or systemic risk to 
the U.S. financial system.
Foreign Public Funds
    The 2013 rule excludes from the covered fund definition any foreign 
public fund that satisfies three sets of conditions. First, the issuer 
must be organized or established outside of the United States, be 
authorized to offer and sell ownership interests to retail investors in 
the issuer's home jurisdiction (the ``home jurisdiction'' requirement), 
and sell ownership interests predominantly through one or more public 
offerings outside of the United States. Second, for funds that are 
sponsored by a U.S. banking entity, or by a banking entity controlled 
by a U.S. banking entity, the ownership interests in the issuer must be 
sold ``predominantly'' (the ``predominantly'' requirement) to persons 
other than the sponsoring banking entity, the issuer, their affiliates, 
directors of such entities, or employees of such entities (the employee 
sales limitation). Third, such public offerings must occur outside the 
United States, must comply with applicable jurisdictional requirements, 
may not restrict availability to investors having a minimum level of 
net worth or net investment assets, and must have publicly available 
offering disclosure documents filed or submitted with the relevant 
jurisdiction.
    The proposed amendments would make five changes to the foreign 
public fund exclusion. First, the proposal would remove the home 
jurisdiction requirement.\355\ Second, the proposal would make the 
exclusion available with respect to issuers authorized to offer and 
sell ownership interests through one or more public offerings, removing 
the requirement that the issuer sells ownership interests 
``predominantly'' through such public offerings.\356\ Third, the 
agencies are also proposing to modify the definition of ``public 
offering'' from the 2013 rule to add a new requirement that the 
distribution is subject to substantive disclosure and retail investor 
protection laws or regulations in one or more jurisdictions where 
ownership interests are sold.\357\ Fourth, the proposal would apply the 
condition that the distribution comply with all applicable requirements 
in the jurisdiction where it is made only to instances in which the 
banking entity serves as the investment manager, investment adviser, 
commodity trading advisor, commodity pool operator, or

[[Page 12166]]

sponsor.\358\ Finally, the proposal would narrow the employee sales 
limitation to senior executive officers as defined in section 225.71(c) 
of the Board's Regulation Y.\359\
---------------------------------------------------------------------------

    \355\ See proposed rule Sec.  _.10(c)(1)(i)(B).
    \356\ See proposed rule Sec.  _.10(c)(1)(i)(B).
    \357\ See proposed rule Sec.  _.10(c)(1)(iii)(A).
    \358\ See proposed rule Sec.  _.10(c)(1)(iii)(B).
    \359\ See proposed rule Sec.  _.10(c)(1)(ii)(D).
---------------------------------------------------------------------------

    The SEC has received comments indicating that the foreign public 
fund exclusion under the 2013 rule is impractical, overly narrow, and 
prescriptive, and results in competitive disparities between foreign 
public funds and RICs.\360\ The SEC has also received comment 
supporting the preservation of the existing conditions of the 
exclusion.\361\
---------------------------------------------------------------------------

    \360\ See, e.g., ABA; BPI; FSF; SIFMA; ICI; IIB; JPMAM.
    \361\ See, e.g., Data Boiler.
---------------------------------------------------------------------------

    The SEC has received comment that the home jurisdiction requirement 
under the 2013 rule is narrow and fails to recognize the prevalence of 
non-U.S. retail funds organized in one jurisdiction and authorized to 
sell interests in other jurisdictions.\362\ For example, the SEC 
received comment that a banking entity sponsor may choose the domicile 
of a foreign public fund based on tax treatment, investment strategy, 
or flexibility to distribute into multiple markets (for instance, in 
the European Union).\363\ The SEC recognizes that the home jurisdiction 
requirement may be impeding activity in foreign public funds that are 
organized and sold across different jurisdictions. While such offerings 
may not be subject to the laws and regulations of the foreign public 
fund's home jurisdiction, they are subject to the local laws and 
regulations of the jurisdictions in which the foreign public fund is 
authorized to sell ownership interests. The elimination of the home 
jurisdiction requirement may benefit such foreign public funds and may 
facilitate greater capital formation through such funds, with the 
potential to create more capital allocation choices for investors. To 
the degree that the 2013 rule may currently be disadvantaging foreign 
public funds relative to otherwise comparable RICs, the elimination of 
the home jurisdiction requirement may dampen such competitive 
disparities.
---------------------------------------------------------------------------

    \362\ See, e.g., ABA; BPI.
    \363\ See, e.g., FSF; SIFMA.
---------------------------------------------------------------------------

    The SEC has also received comment that the ``predominantly'' 
requirement has been burdensome and poses significant compliance 
burdens.\364\ For example, banking entities may not fully observe and 
predict both historical and potential future distributions of funds 
that are sponsored by third parties, listed on exchanges, or sold 
through third-party intermediaries or distributors.\365\ To the degree 
that some banking entities are currently unable to quantify the volumes 
of distributions through foreign public offerings relative to, for 
instance, foreign private placements, the proposed amendment may enable 
greater activity of banking entities relating to foreign public funds. 
Similar to the above discussion, this aspect of the proposed amendment 
also provides for a similar treatment of RICs (which are not required 
to monitor or assess distributions) and foreign public funds, with 
corresponding competitive effects.
---------------------------------------------------------------------------

    \364\ See, e.g., BPI.
    \365\ See id.
---------------------------------------------------------------------------

    The proposed amendments to the foreign public funds provisions 
tailor the scope of disclosure and compliance obligations for those 
jurisdictions where ownership interests are sold in recognition of the 
prevalence of foreign retail fund sales across jurisdictions. 
Similarly, the proposal would limit the compliance obligation to 
settings in which the banking entity serves as the investment manager, 
investment adviser, commodity trading advisor, commodity pool operator, 
or sponsor--settings that may involve greater conflicts of interest 
between banking entities and fund investors.
    The proposed amendments also would replace the employee sales 
limitation with a limitation on sales to senior officers.\366\ The SEC 
has received comment that banking entities may face significant costs 
and logistical and interpretive challenges monitoring investments by 
their employees, including those who transact in fund shares through 
unaffiliated brokers or through independent exchange trading.\367\ The 
SEC has also received comment that the employee sales limitation serves 
no discernible anti-evasion purpose.\368\ In addition, commenters noted 
that employee ownership interest can be a meaningful mechanism of 
promoting incentive alignment.\369\ The proposed amendments would 
replace the employee sales limitation with a corresponding sales 
limitation with respect only to senior officers. This change may reduce 
these reported compliance challenges and burdens while preserving in 
part the original anti-evasion purpose of the limitations on employee 
ownership.
---------------------------------------------------------------------------

    \366\ See proposed rule Sec.  _.10(c)(1)(ii)(D).
    \367\ See, e.g., SIFMA; JPMAM.
    \368\ See id.
    \369\ See BPI.
---------------------------------------------------------------------------

    The agencies could have proposed a variety of alternatives offering 
more or less relief with respect to foreign public funds. For example, 
the agencies could have proposed eliminating altogether the limit on 
sales to affiliated entities, directors and employees, which would have 
provided even greater alignment of treatment between foreign public 
funds and RICs.\370\ Alternatives providing greater relief with respect 
to foreign public funds may facilitate greater banking entity activity 
and intermediation of such funds on the one hand, but they may also 
strengthen the competitive positioning of foreign public funds relative 
to U.S. registered funds. Moreover, providing greater relief with 
respect to foreign public funds may allow banking entities greater 
flexibility in the formation and operation of foreign public funds, but 
may also increase the risk that banking entities are able to use 
foreign public funds to engage in activities that the restrictions on 
covered funds were intended to prohibit, thereby reducing the magnitude 
of the expected economic benefits of section 13 of the BHC Act and the 
2013 rule. Similarly, relative to the proposed amendments, alternatives 
providing less relief with respect to foreign public funds may 
strengthen the competitive positioning of U.S. RICs relative to foreign 
public funds and pose lower compliance or evasion risks, but may also 
reduce the benefits of the relief for capital formation in foreign 
public funds and their investors.
---------------------------------------------------------------------------

    \370\ See, e.g., FSF.
---------------------------------------------------------------------------

Credit Funds
    Under the baseline, funds that raise capital to engage in loan 
originations or extensions of credit or purchase and hold debt 
instruments that a banking entity would be permitted to acquire 
directly may be ``covered funds'' under the 2013 rule. As a result, 
banking entities currently face limitations on sponsoring or investing 
in credit funds that engage in traditional banking activities--
activities that banking entities are able to engage in directly outside 
of the fund structure. Banking entities may also be restricted in their 
relationships with credit funds that are related covered funds, as well 
as in their underwriting and market making activities relating to such 
funds. The proposal would create a separate exclusion from the covered 
fund definition for credit funds that meet certain conditions, 
including several conditions that are similar to certain conditions of 
the loan securitization exclusion, but that reflect the structure and 
operation of credit funds.
    Credit funds are likely to carry similar returns and risks as 
direct extensions of

[[Page 12167]]

credit and loan origination outside of the fund structure, including 
the possibility of losses or gains related to changes in interest 
rates, borrower default or delinquent payments, fluctuations in foreign 
currencies, and overall market conditions. While the presence of a fund 
structure may introduce risks, e.g., those related to governance of the 
fund and those related to relying on third-party investors providing 
capital to the fund, the SEC preliminarily believes those risks to 
banking entities to be limited. Moreover, fund structures may entail 
risk mitigating features (such as diversification across a larger 
number of borrowers) as well as significant cost efficiencies for 
banking entities. The SEC has received comment supporting an exclusion 
for credit funds. For example, some commenters suggested that a fund or 
partnership structure enables banking entities to engage in permissible 
activities more efficiently.\371\ Specifically, one commenter indicated 
that credit funds facilitate investments by third parties, leading to 
the creation of a broader and deeper pool of capital, which may allow 
for more diversification in lending portfolios, the pooling of 
expertise of groups of market participants, and otherwise reduce the 
risk for banking entities and the financial system.\372\ In addition, 
to the degree that credit funds require precommitments of capital, they 
may dampen cyclical fluctuations in loan originations and may 
facilitate ongoing extensions of credit during times of market 
stress.\373\
---------------------------------------------------------------------------

    \371\ See, e.g., ABA.
    \372\ See id.
    \373\ See id.
---------------------------------------------------------------------------

    Another commenter indicated that debt instruments are generally 
held for the purpose of generating income, which may come both from 
interest and price appreciation, whether held directly on a banking 
entity's balance sheet or indirectly through a fund structure.\374\
---------------------------------------------------------------------------

    \374\ See Credit Suisse.
---------------------------------------------------------------------------

    Further, commenters have stated that some RICs and BDCs may engage 
in similar investment activities as credit funds.\375\ The risks and 
returns of the core activities of credit funds may be similar to those 
of RICs and publicly offered business development companies that have 
an investment strategy to buy and hold debt instruments. The SEC has 
also received comment that, while some credit funds may be able to 
avail themselves of the existing exclusions for loan securitizations 
and joint ventures, those exclusions are not sufficient to accommodate 
the full range of credit funds and activities.\376\
---------------------------------------------------------------------------

    \375\ See id.
    \376\ See, e.g., FSF; GS.
---------------------------------------------------------------------------

    The SEC preliminarily believes that the proposed credit fund 
exclusion may allow banking entities to engage, indirectly, in more 
loan origination and traditional extension of credit relative to the 
current baseline. To the degree that banking entities are currently 
constrained in their ability to engage in extension of credit through 
credit funds because of the 2013 rule, the proposed exclusion may 
increase the volume of intermediation of credit by banking entities and 
make it more efficient and less costly. In addition, permitting banking 
entities to extend financing to businesses through credit funds could 
allow banking entities to compete more effectively with non-banking 
entities that are not subject to the same prudential regulation or 
supervision as banking entities subject to section 13 of the BHC Act 
and thereby likely result in an increase in lending activity in banking 
entity-sponsored credit funds without negatively affecting capital 
formation or the availability of financing. In this respect, the 
proposed amendments could result in greater competition between bank 
and non-bank provision of credit with both expected lower costs that 
typically result from increased competition and a larger volume of 
permissible banking and financial activities to occur in the regulated 
banking system. In addition, since cost reductions and increased 
efficiencies are commonly passed along to customers, the proposed 
exclusion may also benefit banking entities' borrowers and facilitate 
the extension of credit in the real economy.
    The SEC continues to recognize that banking entities already engage 
in a variety of permissible activities involving risk, including 
extensions of credit, underwriting, and market-making. To the degree 
that credit funds may enable greater formation of capital by banking 
entities through various debt instruments, this may influence the risks 
and returns of banking entities individually and of banking entities as 
a whole. However, the SEC recognizes that the activities of credit 
funds largely replicate permissible and traditional activities of 
banking entities. Moreover, banking entities subject to the 2013 rule 
may also be subject to multiple prudential, capital, margin, and 
liquidity requirements that facilitate the safety and soundness of 
banking entities and promote the financial stability of the United 
States. In addition, the proposed amendments include a set of 
conditions on the credit fund exclusion, including limitations on 
banking entities' guarantees, assumption or other insurance of the 
obligations or performance of the fund,\377\ and compliance with 
applicable safety and soundness standards.\378\
---------------------------------------------------------------------------

    \377\ See proposed rule Sec.  _.10(c)(15)(iv)(A).
    \378\ See proposed rule Sec.  _.10(c)(15)(v)(B).
---------------------------------------------------------------------------

    Importantly, extensions of credit and loan origination by banking 
entities, whether directly or indirectly, are influenced by a wide 
variety of factors, including the prevailing macroeconomic conditions, 
the creditworthiness of borrowers and potential borrowers, competition 
between bank and non-bank credit providers, and many others. Moreover, 
the efficiencies of credit funds relative to direct extensions of 
credit described above are likely to vary considerably among banking 
entities and funds. The SEC recognizes that the potential effects 
described above of the proposed credit fund exclusion may be dampened 
or magnified in different phases of the macroeconomic cycle and across 
various types of banking entities.
    As an alternative to the proposed amendment, the agencies could 
have proposed a credit fund exclusion that imposes additional 
restrictions. For example, as discussed above, the agencies could have 
imposed a quantitative limit on the amount of equity securities (or 
rights to acquire equity securities) that a credit fund may acquire in 
connection with its loans or debt instruments, rather than to require 
only that such securities and rights be received on customary terms. 
The SEC understands that in certain circumstances it is customary for 
lenders to receive a limited amount of warrants issued by the borrower 
or its affiliate in connection with certain extensions of credit, and 
that such a structure (e.g., a note with warrants attached) can 
facilitate the availability of financing for small businesses and early 
stage companies that may be provided through credit funds. The SEC 
believes that there may be practical challenges to imposing and 
calculating a quantitative limit (for example, upon issuance, warrants 
could be worth relative little but the value could grow substantially 
over time). To the degree that a quantitative limit may result in 
unintended consequences and may impede the ability of some credit funds 
to provide financing to certain borrowers, particularly small 
businesses and early stage companies, the proposed condition could 
provide greater relief with respect to credit funds and potential 
borrowers relative to the alternative. At the same time, the

[[Page 12168]]

alternative would impose greater restrictions on the credit fund 
exclusion, reducing the above benefits and potentially increasing costs 
for banking entities and borrowers.
Venture Capital Funds
    As discussed elsewhere in this SUPPLEMENTARY INFORMATION, the 
agencies are proposing to exclude certain venture capital funds from 
the definition of ``covered fund,'' which would allow banking entities 
to acquire or retain an ownership interest in, or sponsor, those 
venture capital funds to the extent the banking entity is otherwise 
permitted to engage in such activities under applicable law.\379\ The 
exclusion would be available with respect to qualifying venture capital 
funds, which would include an issuer that meets the definition of 
``venture capital fund'' in 17 CFR 275.203(l)-1 and that meets several 
additional criteria.\380\
---------------------------------------------------------------------------

    \379\ See proposed rule Sec.  _.10(c)(16).
    \380\ See supra section III.C.2.
---------------------------------------------------------------------------

    A qualifying venture capital fund would be an issuer that, among 
other criteria, is a venture capital fund as defined in 17 CFR 
275.203(l)-1.\381\ In the preamble to the regulations adopting this 
definition of venture capital fund, the SEC explained that the 
definition's criteria distinguish venture capital funds from other 
types of funds, including private equity funds and hedge funds.\382\ 
Moreover, the SEC explained that these criteria reflect the 
Congressional understanding that venture capital funds are less 
connected with the public markets and therefore may have less potential 
for systemic risk.\383\ The SEC further explained that its regulation's 
restriction on the amount of borrowing, debt obligations, guarantees or 
other incurrence of leverage was appropriate to differentiate venture 
capital funds from other types of private funds that may engage in 
trading strategies that use financial leverage and may contribute to 
systemic risk.\384\ The SEC preliminarily believes that this definition 
includes criteria reflecting the characteristics of venture capital 
funds that may pose less potential risk to a banking entity sponsoring 
or investing in venture capital funds and to the financial system--
specifically, the smaller role of leverage financing and a lesser 
degree of interconnectedness with public markets.
---------------------------------------------------------------------------

    \381\ See id for a discussion of the SEC's definition of 
``venture capital fund'' in 17 CFR 275.203(l)-1. Following enactment 
of the RBIC Advisers Relief Act, the SEC's definition of ``venture 
capital fund'' includes any RBIC and any SBIC. See 15 U.S.C. 80b-
3(l). The agencies are requesting comment on whether they should 
provide a separate, specific exclusion from the definition of 
``covered fund'' for RBICs. See supra note 328.
    \382\ See, e.g., Exemptions for Advisers to Venture Capital 
Funds, Private Fund Advisers With Less Than $150 Million in Assets 
Under Management, and Foreign Private Advisers, 76 FR 39645, 39656 
(July 6, 2011).
    \383\ See id. at 39648 (``[T]he proposed definition of venture 
capital fund was designed to . . . address concerns expressed by 
Congress regarding the potential for systemic risk.''); and at 39656 
(``Congressional testimony asserted that these funds may be less 
connected with the public markets and may involve less potential for 
systemic risk. This appears to be a key consideration by Congress 
that led to the enactment of the venture capital exemption. As we 
discussed in the Proposing Release, the rule we proposed sought to 
incorporate this Congressional understanding of the nature of 
investments of a venture capital fund, and these principles guided 
our consideration of the proposed venture capital fund 
definition.'').
    \384\ See id.at 39662. See also id. at 39657 (``We proposed 
these elements of the qualifying portfolio company definition 
because of the focus on leverage in the Dodd-Frank Act as a 
potential contributor to systemic risk as discussed by the Senate 
Committee report, and the testimony before Congress that stressed 
the lack of leverage in venture capital investing.'').
---------------------------------------------------------------------------

    A number of commenters supported an exclusion for venture capital 
funds and stated that venture capital funds do not commonly engage in 
short-term, high-risk activities, and that, by their nature, venture 
capital funds make long-term investments in private firms.\385\ 
Moreover, the SEC received comment that venture capital funds promote 
economic growth and competitiveness of the U.S. more effectively than 
investments in expressly permissible vehicles, such as small business 
investment companies.\386\ The SEC has also received comment that, by 
virtue of their investment strategy, long-term investment horizon, and 
intermediation between companies in need of capital and institutional 
investors seeking to deploy capital in efficient ways, venture capital 
funds may play a significant role in capital formation, economic 
growth, and efficient market function.\387\ The proposed venture 
capital fund exclusion may provide banking entities with greater 
flexibility in their investments in private firms and private firms 
with a broader range of financing sources.
---------------------------------------------------------------------------

    \385\ See, e.g., ABA; BPI; Federated; Hultgren.
    \386\ See id.
    \387\ See, e.g., BPI.
---------------------------------------------------------------------------

    In addition, it is widely noted that the availability of venture 
capital and other financing from funds is not uniform throughout the 
United States and is generally available on a competitive basis for 
companies with a significant presence in certain geographic regions 
(e.g., the New York metropolitan area, the Boston metropolitan area, 
and ``Silicon Valley'' and surrounding areas).\388\ In this respect, 
the proposal could allow banking entities with a presence in and 
knowledge of the areas where venture capital and other types of 
financing are less readily available to businesses to provide this type 
of financing in those areas, further promoting capital formation.
---------------------------------------------------------------------------

    \388\ See, supra note 152.
---------------------------------------------------------------------------

    The SEC remains cognizant of the fact that the overall level and 
structure of activities of banking entities that involve risk stems 
from a variety of permissible sources, including traditional capital 
provision, underwriting, and market-making. To the degree that 
qualifying venture capital funds may enable greater formation of 
capital by banking entities, this may influence the risks and returns 
of such entities individually and of banking entities as a whole. 
However, the proposed exclusion has a number of conditions, including a 
prohibition on direct or indirect guarantees by the banking entity, 
disclosures to investors, and compliance with applicable safety and 
soundness standards.
    The SEC has also received comment opposing any exclusion for 
venture capital funds.\389\ The SEC recognizes that venture capital 
funds commonly invest in illiquid private firms with few sources of 
market price information, with corresponding risks and returns. To the 
degree that the proposed exclusion for venture capital funds could 
facilitate banking entity activities related to venture capital funds, 
this proposed exclusion could increase the volume and alter the 
structure of banking entities' activities, affecting the risks 
associated with those activities. At the same time, as discussed 
elsewhere,\390\ many other traditional and permissible activities of 
banking entities involve risk, and the provision of capital to private 
firms is an important function of banking entities within the financial 
system and securities markets that benefits the real economy.
---------------------------------------------------------------------------

    \389\ See, e.g., Data Boiler.
    \390\ See 2019 amendments at 62037-92.
---------------------------------------------------------------------------

    As an alternative to the proposed amendment, the agencies are 
considering an additional restriction for which they are seeking 
specific comment. Under this additional restriction, and 
notwithstanding 17 CFR 275.203(1)-1(a)(2), the venture capital fund 
exclusion would be limited to funds that do not invest in companies 
that, at the time of the investment, have more than a limited dollar 
amount of total annual revenue. The agencies are considering what 
specific threshold would be appropriate to differentiate venture 
capital funds from other types of private funds. The potential benefit 
of including a revenue or other similar test is that it could be more 
difficult for

[[Page 12169]]

banking entities to use the exclusion for qualifying venture capital 
funds to make investments that the agencies may not have intended to be 
permitted by this exclusion. However, any such anti-evasion benefits of 
this alternative could be offset by the extent to which anti-evasion 
concerns are already addressed by the other conditions of the proposed 
exclusion for qualifying venture capital funds.
    Such an additional restriction as contemplated in the alternative 
would make it more difficult for banking entities to sponsor and invest 
in venture capital funds by limiting the pool of possible investments 
permitted for venture capital funds that qualify for the exclusion. 
This difficulty may be particularly pronounced for banking entities 
that would use the proposed venture capital fund exclusion to make 
investments in third-party venture capital funds, which may not be 
willing to restrict--and could be prohibited from restricting under 
other applicable laws--the fund's investments in companies that meet 
any such additional revenue or other similar test. As a result, such an 
additional condition could diminish the benefits discussed above, both 
by limiting the utility of the exclusion for banking entities to make 
permissible long-term investments and potentially reducing the 
availability of financing for businesses, including small businesses 
and start-ups in areas outside of certain major metropolitan areas.
Small Business Investment Companies
    The 2013 rule excludes from the covered fund definition small 
business investment companies (SBICs). The 2013 rule includes within 
the scope of the exclusion SBICs and issuers that have received notice 
to proceed to qualify for a license as an SBIC and which have not 
received a revocation of the notice or license. The proposal would 
expand the exclusion to incorporate SBICs that have voluntarily 
surrendered their licenses to operate and do not make new investments 
(other than investments in cash equivalents) after such voluntary 
surrender.\391\
---------------------------------------------------------------------------

    \391\ See proposed rule Sec.  __.10(c)(11)(i).
---------------------------------------------------------------------------

    Clarifying that SBICs that have voluntarily surrendered their 
licenses and are winding-down remain excluded from the covered fund 
definition would eliminate regulatory uncertainty for banking entities. 
Currently, because it is unclear whether an SBIC that has voluntarily 
surrendered its license is still excluded from the definition of 
``covered fund,'' banking entities must make a determination whether or 
not the SBIC that is winding-down is a covered fund. If the banking 
entity determines that when the SBIC that is winding-down and has 
voluntarily surrendered its license no longer qualifies for the 
exclusion from the covered fund definition, then the 2013 rule applies 
and the banking entity's existing investment in, and relationship with, 
the SBIC is prohibited. This potential result may discourage banking 
entities from making investments in SBICs.
    The SEC has received comment that the 2013 rule is limiting banking 
entity activities in SBICs that may spur economic growth, and that 
banking entities face significant regulatory burdens that are not 
commensurate with the risk of the underlying activities.\392\ Another 
commenter indicated that, in the ordinary course of business, SBIC fund 
managers often relinquish or voluntarily surrender a license during the 
wind-down of the fund while liquidating assets in the dissolution 
process (since the license is no longer necessary or an efficient use 
of partnership funds).\393\
---------------------------------------------------------------------------

    \392\ See, e.g., SBIA; Capital One.
    \393\ See, e.g., BB&T.
---------------------------------------------------------------------------

    SBICs are an important mechanism for capital allocation by banking 
entities and one important channel of capital raising for issuers. The 
proposed amendment would clarify that banking entities are able to 
continue to participate in SBIC-related activities during the 
dissolution of such funds, as long as certain conditions are met. To 
the degree that banking entities may currently be reluctant to invest 
in SBICs to avoid the risk of an SBIC being treated as a covered fund 
during SBIC dissolution, the proposal may increase the willingness of 
some banking entities to participate in SBICs. The proposed amendment 
would require that SBICs that have voluntarily surrendered their 
license may not make new investments during the wind-down process. This 
aspect of the proposed amendment seeks to address the possibility of 
banking entities becoming exposed to greater risk as part of their 
participation in SBICs during their wind-down process, even though such 
exposure may not be common in an SBIC's ordinary course of business. In 
any case, both the risks and the returns arising out of banking entity 
investments in SBICs at all stages of the vehicle's lifecycle are 
likely to flow through to banking entity shareholders. Moreover, 
banking entities participating in SBICs would remain subject to 
applicable safety and soundness regulations and requirements.
Public Welfare Funds
    Similarly, as discussed elsewhere in this Supplementary 
Information, the SEC has received comment that the 2013 rule's 
exclusion for public welfare funds may not capture community 
development investments made through investment vehicles and comment 
supporting an exclusion of investments that qualify for Community 
Reinvestment Act (CRA) credit, including direct and indirect 
investments in a community development fund, SBIC, or similar 
fund.\394\ The agencies are requesting comment on, among others, a 
separate exclusion from the covered fund definition for CRA-qualified 
investments or the incorporation of such an exclusion in the exclusion 
for public welfare investments. To the degree that some banking 
entities face uncertainty about their ability to make CRA-qualified 
investments and qualify for the exclusion, an explicit exclusion for 
such funds may increase the willingness of banking entities to 
intermediate such community development investments. At the same time, 
to the degree that banking entities currently finance community 
development projects eligible for the CRA through other fund structures 
and rely on corresponding exemptions, the economic effects of a 
potential exclusion for CRA-qualified investments may be limited to the 
difference in compliance burdens between such a new exclusion and 
existing covered fund exclusions.
---------------------------------------------------------------------------

    \394\ See ABA.
---------------------------------------------------------------------------

    The agencies are requesting comment on providing a separate 
specific exclusion for RBICs, similar to the separate, specific 
exclusion for SBICs. \395\ As the SEC discussed elsewhere,\396\ RBICs 
are intended to promote economic development and the creation of wealth 
and job opportunities in rural areas and among individuals living in 
such areas,\397\ and their purpose is similar to the purpose of SBICs 
and public welfare companies.\398\ Because SBICs and RBICs share the 
common purpose of promoting capital formation in their respective 
sectors, advisers to SBICs and RBICs are treated similarly

[[Page 12170]]

under the Advisers Act (in that they have the opportunity to take 
advantage of exemptions from investment adviser registration).\399\ 
This alternative would expand the economic effects of the proposed SBIC 
exclusion discussed above and may facilitate capital formation by 
banking entities in growth stage businesses.
---------------------------------------------------------------------------

    \395\ See supra note 328.
    \396\ See Accredited Investor Definition Proposing Release, at 
2586-7.
    \397\ See U.S. Department of Agriculture, Rural Business 
Investment Program Overview, available at http://www.rd.usda.gov/programs-services/rural-business-investment-program.
    \398\ SBICs are intended to increase access to capital for 
growth stage businesses. See U.S. Small Business Administration, 
SBIC Program Overview, available at https://www.sba.gov/partners/sbics.
    \399\ See supra note 331. The private fund adviser exemption 
excludes the assets of RBICs and SBICs from counting towards the 
$150 million threshold. 15 U.S.C. 80b-3(m).
---------------------------------------------------------------------------

    RBICs may already be excluded from the definition of covered fund 
under the 2013 rule.\400\ For example, RBICs may qualify for the public 
welfare exclusion under the 2013 rule or an exclusion or exemption from 
the definition of ``investment company'' under the Investment Company 
Act other than section 3(c)(1) or 3(c)(7). To the extent that RBICs may 
already be excluded from the definition of covered fund, an express 
exclusion for RBICs would provide clarity and certainty and reduce 
costs for banking entities, which may otherwise be required to conduct 
a case-by-case analysis of each RBIC to determine whether it qualifies 
for an exclusion or exemption under the 2013 rule.
---------------------------------------------------------------------------

    \400\ RBICs may be excluded under the proposed venture capital 
exclusion. See supra note 331.
---------------------------------------------------------------------------

    The agencies are also requesting comment on providing a specific 
exclusion for QOFs. As discussed above, the program allows taxpayers to 
defer and reduce taxes on capital gains by reinvesting gains in QOFs 
that are required to have at least 90 percent of their assets in 
designated low-income zones. In this regard, QOFs are similar to SBICs 
and public welfare companies. The alternative could expand the economic 
effects of the proposed amendments to the SBIC exclusion and public 
welfare exclusion discussed above, and may facilitate capital formation 
by banking entities.
    QOFs may already be excluded from the definition of covered fund 
under the 2013 rule. For example, QOFs may qualify for the public 
welfare exclusion under the 2013 rule or an exclusion or exemption from 
the definition of ``investment company'' under the Investment Company 
Act other than section 3(c)(1) or 3(c)(7), such as section 
3(c)(5)(C).\401\ In addition, depending on the facts and circumstances, 
an issuer that holds securities issued by a QOF may not meet the 
definition of ``investment company'' under Section 3(a)(1) of the 
Investment Company Act, may be excluded under Rule 3a-1 thereunder, or 
may qualify for the exclusion under Section 3(c)(6) of the Investment 
Company Act.\402\ To the extent that QOFs may already be excluded from 
the definition of covered fund, an express exclusion for QOFs would 
provide clarity and certainty and reduce costs for banking entities, 
which may otherwise be required to conduct a case-by-case analysis of 
each QOF to determine whether it qualifies for an exclusion or 
exemption under the 2013 rule.
---------------------------------------------------------------------------

    \401\ See Opportunity Zone Statement.
    \402\ See id.
---------------------------------------------------------------------------

Family Wealth Management Vehicles
    As discussed above, the proposed amendments would exclude from the 
covered fund definition certain family wealth management vehicles. 
Family wealth management vehicles commonly engage in asset management 
activities, as well as estate planning and other related 
activities.\403\ The SEC understands that some banking entities may 
currently be constrained in providing traditional banking and asset 
management services, including, for example, investment advice, 
brokerage execution, financing, clearing, and settlement services, to 
family wealth management vehicles due to the 2013 rule.\404\ In 
addition, the SEC understands that certain family wealth management 
vehicles that are structured as trusts may prefer to appoint banking 
entities as trustees acting in a fiduciary capacity.\405\ By 
specifically excluding family wealth management vehicles, the proposal 
may benefit such banking entities by permitting them to offer services 
to and engage in transactions with family wealth management vehicle 
customers. Importantly, the proposed amendment may benefit family 
wealth management vehicles and their investment advisers by increasing 
the spectrum of banking entity counterparties willing to provide 
traditional client-oriented financial and asset management services. 
Thus, the proposed amendment may enhance competition among banking and 
non-banking entities providing financial services to family wealth 
management vehicles and may lead to more efficient capital allocation 
of family wealth management vehicles' funds. To the degree banking 
entities pass compliance costs on to customers, family wealth vehicles 
may experience costs savings from the proposed amendment as well.
---------------------------------------------------------------------------

    \403\ See e.g., IAI; SIFMA.
    \404\ See e.g., BPI; IAI; SIFMA.
    \405\ See SIFMA.
---------------------------------------------------------------------------

    The SEC recognizes that some banking entities may respond to the 
proposed exclusion by seeking to structure other entities as family 
wealth management vehicles. However, as discussed in detail above, the 
proposed exclusion would only be available under a number of 
conditions. Specifically, if the entity is a trust, the grantor(s) of 
the entity must all be family customers; if the entity is not a trust, 
a majority of the voting interests in the entity must be owned by 
family customers, and the entity must be owned only by family customers 
and up to 3 closely related persons of the family customers.\406\ In 
addition, banking entities may rely on this exclusion only if they: 
provide bona fide trust, fiduciary, investment advisory, or commodity 
trading advisory services to the entity; \407\ do not, directly or 
indirectly, guarantee, assume, or otherwise insure the obligations or 
performance of such entity; \408\ comply with the disclosure 
obligations under Sec.  _.11(a)(8), as if such entity were a covered 
fund; \409\ do not acquire or retain, as principal, an ownership 
interest in the entity, other than up to 0.5 percent of the entity's 
outstanding ownership interests that may be held by the banking entity 
and its affiliates for the purpose of and to the extent necessary for 
establishing corporate separateness or addressing bankruptcy, 
insolvency, or similar concerns; \410\ comply with the requirements of 
Sec. Sec.  _.14(b) and _.15, as if such entity were a covered fund; 
\411\ and comply with the requirements of 12 CFR 223.15(a), as if such 
banking entity and its affiliates were a member bank and the issuer 
were an affiliate thereof.\412\
---------------------------------------------------------------------------

    \406\ See proposed rule Sec.  _.10(c)(17)(i).
    \407\ See proposed rule Sec.  _.10(c)(17)(ii)(A).
    \408\ See proposed rule Sec.  _.10(c)(17)(ii)(B).
    \409\ See proposed rule Sec.  _.10(c)(17)(ii)(C).
    \410\ See proposed rule Sec.  _.10(c)(17)(ii)(D).
    \411\ See proposed rule Sec.  _.10(c)(17)(ii)(E).
    \412\ See proposed rule Sec.  _.10(c)(17)(ii)(F).
---------------------------------------------------------------------------

    The proposed definition of ``family customer'' would include any 
``family client'' as defined in Rule 202(a)(11)(G)-1(d)(4) of the 
Investment Advisers Act of 1940, and any natural person who is a 
father-in-law, mother-in-law, brother-in-law, sister-in-law, son-in-law 
or daughter-in-law of a family client, or a spouse or a spousal 
equivalent of any of the foregoing.\413\ The SEC believes that the 
conditions for the proposed exclusion and the proposed definition of 
``family customer'' would require family wealth management vehicles to 
be used on arms-length, market terms for customer-oriented financial 
services, and the SEC preliminarily believes that this will reduce the 
risk that banking entities' involvement in these vehicles will give 
rise to the types of risks that

[[Page 12171]]

the covered funds provisions are meant to mitigate.
---------------------------------------------------------------------------

    \413\ See proposed rule Sec.  _.10(c)(17)(iii).
---------------------------------------------------------------------------

    Alternative forms of relief with respect to family wealth 
management vehicles--for example, alternatives that define ``family 
customers'' more broadly or narrowly, or alternatives removing some of 
the proposed conditions for the exclusion--would increase or reduce the 
availability of the exclusion relative to the proposal. Alternatively, 
the agencies could have proposed amending the limitations on 
relationships with a covered fund to permit banking entity transactions 
with family wealth management vehicles that would otherwise be 
considered covered transactions (e.g., ordinary extensions of credit) 
without subjecting them to 12 CFR 223.15(a) or section 23B of the 
Federal Reserve Act, as if such banking entity were a member bank and 
such family wealth management fund were an affiliate thereof. Broader 
(narrower) alternative forms of relief may increase (decrease) the 
magnitude of the economic benefits for capital formation, allocative 
efficiency, and the ability of banking entities to provide traditional 
customer oriented services to family wealth management vehicles. At the 
same time, such broader relief may increase the risk that some banking 
entities may respond to the relief by attempting to evade the intent of 
the rule, increasing the volume of their activities with family wealth 
management vehicles. Nevertheless, such risks of the alternatives 
relative to the proposed exclusion may be mitigated by the fact that 
banking entities would remain subject to the full scope of broker-
dealer and prudential capital, margin, and other rules aimed at 
facilitating safety and soundness. Moreover, as discussed above, the 
SEC preliminarily believes that traditional banking and asset 
management services involving family wealth management vehicles do not 
involve the types of risks that section 13 of the BHC Act was designed 
to address.
Customer Facilitation Vehicles
    The proposal would also exclude from the covered fund definition 
issuers acting as customer facilitation vehicles. The SEC understands 
that banking entities commonly use special purpose vehicles to 
accommodate exposure to securities, transactions, and services of a 
client or group of affiliated clients.\414\ The SEC has received 
comment that, because of the 2013 rule's covered fund restrictions, 
some banking entities have been unable to engage in traditional banking 
and asset management services with respect to vehicles provided for 
customers, even though banking entities are otherwise able to provide 
such exposures and services to customers directly (outside of the fund 
structure).\415\ The SEC has also received comment that some clients, 
particularly clients in markets such as Brazil, Germany, Hong Kong, and 
Japan, prefer to transact with or through such vehicles rather than 
banking entities directly because of a variety of legal, counterparty 
risk management, and accounting factors.\416\ Moreover, the SEC is 
aware that limitations of the 2013 rule on the activities of such 
vehicles may be disrupting client relationships, reducing the 
efficiency of customer-facing financial services, and raising 
compliance costs of banking entities.\417\ The proposed exclusion may 
eliminate these baseline costs and inefficiencies by allowing banking 
entities to provide customer-oriented financial services through 
vehicles, the purpose of which is providing such customers with 
exposure to a transaction, investment strategy, or other service. As a 
result, banking entities may become better able to engage in the full 
range of customer facilitation activities through special purpose 
vehicles and fund structures, which may benefit banking entities, their 
customers, and securities markets more broadly.
---------------------------------------------------------------------------

    \414\ See, e.g., ABA.
    \415\ See, e.g., SIFMA; FSF; ABA.
    \416\ See, e.g., ABA; BPI.
    \417\ See, e.g., ABA; FSF.
---------------------------------------------------------------------------

    At the same time, financial services related to customer 
facilitation vehicles may involve market risk, and the proposed 
exclusion may enable banking entities to provide a greater array of 
financial services to, and otherwise transact with, such vehicles. The 
SEC preliminarily believes that such risks may be mitigated by at least 
two of the proposed conditions of the proposed exclusion. First, a 
banking entity and its affiliates can hold only a de minimis (up to 
0.5%) interest in the customer facilitation vehicle for the purpose of 
and to the extent necessary for establishing corporate separateness or 
addressing bankruptcy, insolvency, or similar concerns.\418\ Second, a 
banking entity and its affiliates may not directly or indirectly 
guarantee, assume, or otherwise insure the obligations or performance 
of the vehicle.\419\ These proposed conditions, among the other 
conditions in the proposal, may mitigate risks that may be borne by 
individual banking entities and by banking entities as a whole as a 
result of the proposed exclusion, and may facilitate banking entities' 
ongoing compliance with section 13 of the BHC Act and the implementing 
regulations. Moreover, the SEC continues to believe that the provision 
of customer-oriented financial services by banking entities may benefit 
customers, counterparties, and securities markets.
---------------------------------------------------------------------------

    \418\ See proposed rule Sec.  _.10(c)(18)(ii)(B)(4).
    \419\ See proposed rule Sec.  _.10(c)(18)(ii)(B)(2).
---------------------------------------------------------------------------

    The proposed amendments create new recordkeeping requirements for a 
banking entity that relies on the exclusion for customer facilitation 
vehicles.\420\ The banking entity may only rely on the exclusion if it 
and its affiliates maintain documentation outlining how the banking 
entity intends to facilitate the customer's exposure to a transaction, 
investment strategy or service offered by the banking entity. As 
discussed in section IV.B \421\ and above, these recordkeeping burdens 
may impose a total initial burden of $1,078,650 \422\ and a total 
ongoing annual burden of $1,078,650.\423\
---------------------------------------------------------------------------

    \420\ See proposed rule Sec.  _.10(c)(18)(ii)(B)(1).
    \421\ See supra note 338.
    \422\ See supra note 339.
    \423\ See supra note 340.
---------------------------------------------------------------------------

    The agencies could have proposed alternative forms of relief with 
respect to customer facilitation vehicles. For example, the agencies 
could have proposed a higher banking entity ownership limit (of, for 
example, 5% or 10%). Alternatively, the agencies could have proposed a 
0.5% ownership interest limit, but without specifying a list of 
purposes for which such interest may be held, leading to banking 
entities accumulating greater ownership interests in such vehicles. As 
another example, the agencies could have proposed an exclusion for 
customer facilitation vehicles without subjecting the banking entity 
relying on the exclusion to 12 CFR 223.15(a) or section 23B of the 
Federal Reserve Act, as if such banking entity were a member bank and 
such customer facilitation vehicles were an affiliate thereof. Such 
alternatives would remove or loosen the conditions for the availability 
of the exclusion, which may increase the risk that customer 
facilitation vehicles could be used for evasion purposes or expose 
banking entities to additional risk, but could also further reduce 
compliance burdens and provide greater flexibility to banking entities 
and their customers.
b. Restrictions on Relationships Between Banking Entities and Covered 
Funds
    As discussed above, under the 2013 rule, banking entities that 
either: (1) Serve as a sponsor, adviser, or manager of a covered fund; 
(2) organize and offer

[[Page 12172]]

a covered fund under _.11; or (3) hold an ownership interest under 
_.11(b) are unable to engage in any covered transactions with such 
funds.\424\ This prohibition may be limiting the services that such 
banking entities and their affiliates are able to provide to certain 
entities that are covered funds under the 2013 rule. For example, as 
noted above, banking entities are significantly limited in their 
ability to both organize and offer a covered fund, as well as to 
provide custody services to the fund. The proposed amendments would 
authorize banking entities to engage in certain transactions, such as 
extensions of intraday credit, payment, clearing, and settlement 
services, with covered funds--activities that could otherwise be 
covered transactions.\425\
---------------------------------------------------------------------------

    \424\ See 12 U.S.C. 1851(f)(1).
    \425\ See proposed rule Sec.  _.14(a)(2)(iii) and proposed rule 
Sec.  _.14(a)(2)(iv).
---------------------------------------------------------------------------

    The SEC has received comments suggesting that section 13(f)(1) of 
the BHC Act should be interpreted to include the exemptions provided 
under section 23A of the Federal Reserve Act, and that banking entities 
should be permitted to engage in a limited amount of covered 
transactions with related covered funds.\426\ The SEC recognizes that 
outsourcing such activities to third parties may be adversely affecting 
customer relationships, increasing costs, and decreasing operational 
efficiency for banking entities and covered funds. The proposed 
amendments would provide banking entities greater flexibility to 
provide these and other services directly to covered funds. If being 
able to provide custody, clearing, and other services to related 
covered funds reduces the costs of these services and risks of 
operational failure of fund custodians, then fund advisers and, 
indirectly, fund investors, may benefit from the proposed amendments. 
Many direct benefits are likely to accrue to banking entity advisers to 
covered funds that are currently relying on third-party service 
providers as a result of the requirements of the 2013 rule.
---------------------------------------------------------------------------

    \426\ See, e.g., BPI; FSF.
---------------------------------------------------------------------------

    The proposed amendments may increase banking entities' ability to 
engage in custody, clearing, and other transactions with related 
covered funds and benefit banking entities that are currently unable to 
engage in otherwise profitable or efficient activities with related 
covered funds. Moreover, this may enhance operational efficiency and 
reduce operational risks and costs incurred by covered funds, which are 
currently unable to rely on banking entities with which they have 
certain relationships for custody, clearing, and other transactions.
    The SEC has also received a comment opposing incorporating the 
Federal Reserve Act section 23A exemptions or quantitative limits.\427\ 
To the extent that the proposed approach may increase transactions 
between banking entities and related covered funds, banking entities 
could incur risks associated with these transactions. However, as 
discussed above, the proposed amendments impose a number of conditions 
aimed at reducing overall risks to banking entities, the ability of 
banking entities to lever up related covered funds, and the incentive 
of banking entities to bail out related covered funds, while enhancing 
their ability to provide ordinary-course banking, custody, and asset 
management services, and facilitate capital formation in covered funds.
---------------------------------------------------------------------------

    \427\ See Public Citizen.
---------------------------------------------------------------------------

    The agencies could have proposed broader or narrower forms of 
relief. For example, in addition to the proposed relief, the agencies 
could have proposed permitting banking entities to engage in additional 
covered transactions in connection with payment, clearing, and 
settlement services beyond extensions of credit and purchases of 
assets. Further, under the proposal, each extension of credit would be 
required to be repaid, sold, or terminated by the end of 5 business 
days.\428\ As another alternative, the agencies could have proposed 
allowing extensions of credit in connection with payment transactions, 
clearing, or settlement services for periods that are longer than 5 
business days. However, the proposed 5 business day criteria is 
consistent with the federal banking agencies' capital rule and would 
generally require banking entities to rely on transactions with normal 
settlement periods, which have lower risk of delayed settlement or 
failure, when providing short-term extensions of credit.\429\ In 
addition, the agencies could have imposed quantitative limits on the 
newly permitted covered transactions tied to bank capital or fund size. 
Relative to the proposed amendments, alternatives providing greater 
relief with respect to covered transactions with covered funds could 
magnify the cost savings and operational risk benefits described above, 
but may also increase risk to banking entities or the incentives for 
banking entities to bail out related covered funds. Similarly, narrower 
alternative forms of relief may dampen the economic effects of the 
proposed amendments discussed above.
---------------------------------------------------------------------------

    \428\ See proposed rule Sec.  _.14(a)(2)(iv)(B).
    \429\ See supra note 205.
---------------------------------------------------------------------------

c. Definition of Ownership Interest
    As discussed above, the 2013 rule defines ``ownership interest'' in 
a covered fund to mean any equity, partnership, or ``other similar 
interest,'' which is an interest that exhibits any of several 
characteristics.\430\ This definition focuses on the attributes of the 
interest and whether it provides a banking entity with voting rights or 
economic exposure to the profits and losses of the covered fund. The 
agencies are proposing to amend the definition of ownership interest in 
two ways. First, the proposed amendment would specify that certain 
creditors' rights are excluded from the prong of the definition that 
defines an ownership interest to mean an interest that has the right to 
participate in the selection or removal of a general partner, 
investment adviser, or other service provider to the covered fund. 
Specifically, the proposed amendment would provide that an excluded 
creditors' right upon the occurrence of an event of default or an 
acceleration event can include the right to participate in the removal 
of an investment manager for cause or to nominate or vote on a 
nominated replacement manager upon an investment manager's resignation 
or removal.\431\ Accordingly, having this right would be recognized as 
a creditors' right that is excluded from the definition of ownership 
interest.
---------------------------------------------------------------------------

    \430\ See 2013 rule Sec.  _.10(d)(6). See also, supra, section 
III.E.
    \431\ Proposed rule Sec.  _.10(d)(6)(i)(A).
---------------------------------------------------------------------------

    Second, the proposed amendment would add to the list of interests 
that are excluded from the definition of ownership interest. 
Specifically, the proposed amendment would provide that any senior loan 
or senior debt interest would not be an ownership interest, if such 
senior loan or senior debt interest had specific characteristics.\432\ 
Those characteristics would be: (1) Under the terms of the interest, 
the holders do not have the right to receive a share of the income, 
gains, or profits of the covered fund, but are entitled to receive only 
certain interest and fees, and fixed principal payments on or before a 
maturity date; (2) the right to payments are absolute and cannot be 
reduced because of the losses arising from the covered fund's 
underlying assets; and (3) the holders of the interest do not have the 
right to receive the underlying assets of the covered fund after all 
other interests have been redeemed or paid in full

[[Page 12173]]

(excluding the rights of a creditor to exercise remedies upon the 
occurrence of an event of default or an acceleration event).\433\
---------------------------------------------------------------------------

    \432\ Proposed rule Sec.  _.10(d)(6)(ii)(B).
    \433\ See supra note 431.
---------------------------------------------------------------------------

    The SEC has received comment that the 2013 rule's definition of 
ownership interest captures instruments that do not have equity-like 
features and constrains banking entity investments in debt 
securitizations and client facilitation services.\434\ For example, one 
commenter indicated that analyzing the ownership interest definition in 
the context of securitizations has resulted in added time and costs of 
executing transactions, as well as impeded securitization 
transactions.\435\ Moreover, the commenter indicated that the ``other 
similar interest'' prong of the definition precludes some banking 
entities from investing in collateralized loan obligation (CLO) senior 
debt instruments, which affects lending to CLOs, and that banking 
entities with pre-existing CLO exposures had to waive credit-enhancing 
remedies to avoid triggering the ownership interest restrictions.\436\ 
In addition, the SEC received comment that the ownership interest 
definition in the 2013 rule may require an extensive legal analysis and 
documentation review and that, as a result, some banking entities may 
default to treating interests without controlling positions or equity-
like features as ownership interests.\437\
---------------------------------------------------------------------------

    \434\ See, e.g., BPI; SIFMA; ABA; Center for American 
Entrepreneurship; LSTA.
    \435\ See, e.g., SFIG.
    \436\ See id.
    \437\ See, e.g., SIFMA.
---------------------------------------------------------------------------

    The SEC recognizes that banking entities may have contractual 
rights to participate in the selection or removal of a general partner, 
managing member, or member of the board of directors or trustees of 
their borrower that are not limited to the exercise of a remedy upon an 
event of default or other default event.\438\ The proposed amendments 
may provide greater clarity and predictability to banking entities and 
enable them to determine whether they have an ownership interest under 
section 13 of the BHC Act and the implementing regulations. Moreover, 
to the degree that banking entities may have responded to the ownership 
interest definition in the 2013 rule by reducing their investments in 
certain debt instruments, the proposed amendments may result in greater 
banking entity investments in covered funds and greater ability of 
covered funds to allocate capital to the underlying assets.
---------------------------------------------------------------------------

    \438\ See, e.g., SFIG.
---------------------------------------------------------------------------

    The SEC recognizes that such debt instrument investments carry 
risk,\439\ and that the risks and returns of such investments flow 
through to banking entities' shareholders. While the proposed 
amendments to the ownership interest definition may permit banking 
entities to increase exposures related to certain debt instrument 
transactions, three key considerations may mitigate the risks 
associated with such activities. First, the proposed amendments would 
not change any of the applicable prudential capital, margin, or 
liquidity requirements intended to ensure safety and soundness of 
banking entities. Second, to the degree that the ownership interest 
definition has actually discouraged banking entities from obtaining 
credit enhancements to avoid triggering the ownership interest 
restrictions, the proposed amendments may result in banking entities 
receiving stronger credit enhancements. Finally, the proposed 
amendments would include a number of conditions and restrictions aimed 
at reducing the risk to banking entities while facilitating traditional 
lending activity.
---------------------------------------------------------------------------

    \439\ See, e.g., Occupy the SEC.
---------------------------------------------------------------------------

    The agencies could have proposed broader relief by limiting the 
particular forms of a banking entity's interest (e.g., equity or 
partnership shares) that would qualify as an ownership interest or by 
limiting the definition of ownership interest to ``voting securities'' 
as defined by the Board's Regulation Y. By providing broader relief 
relative to the proposed amendments, such an alternative may produce 
greater reductions in uncertainty and compliance burdens, and a greater 
willingness of banking entities to become involved in certain debt 
transactions. However, such greater involvement in certain debt 
transactions may also give rise to greater risks being borne by banking 
entities. The proposed amendments are intended to provide sufficient 
safeguards to prevent banking entities from acquiring interests in 
covered funds that run counter to the intentions of the 2013 rule and 
limit a banking entity's exposure to the economic risks of covered 
funds and their underlying assets, while reducing compliance 
uncertainty and increasing the willingness of banking entities to 
participate in covered funds.
d. Loan Securitizations
    As discussed above, the 2013 rule excludes from the definition of 
covered fund any loan securitization that issues asset-backed 
securities, holds only loans, certain rights and assets, and a small 
set of other financial instruments (permissible assets), and meets 
other criteria.\440\ The SEC has received comment that, as a result of 
the 2013 rule, some banking entities may have divested or restructured 
their interests in loan securitizations due to the narrowly-drawn 
conditions of the exclusion, and that a limited holding of non-loan 
assets may enable banking entities to provide traditional 
securitization products and services demanded by customers, clients, 
and counterparties.\441\ Moreover, commenters indicated that the 
ability to hold non-loan assets may allow loan securitizations to 
increase diversification and enable asset managers to be more 
responsive to changing market demand for the underlying debt 
products.\442\ Another commenter acknowledged the strong statutory and 
public policy arguments in favor of excluding credit 
securitizations.\443\ Yet another commenter suggested that expanding 
permitted bank activities adds to the complexity of the 2013 rule, and 
that securitizations and asset-backed vehicles were involved directly 
in the 2008 financial crisis.\444\
---------------------------------------------------------------------------

    \440\ See 2013 rule Sec.  _.10(c)(8). Loan is further defined as 
any loan, lease, extension of credit, or secured or unsecured 
receivable that is not a security or derivative. See also 2013 rule 
Sec.  _.2(t).
    \441\ See, e.g., ABA; BPI.
    \442\ See, e.g., IAA; LTSA.
    \443\ See Federated.
    \444\ See AFR.
---------------------------------------------------------------------------

    The staffs of the agencies released a frequently asked question 
addressing the servicing asset provision of the loan securitization 
exclusion in June 2014.\445\ The agencies are proposing to codify the 
staff-level approach to the loan securitization exclusion in the Loan 
Securitization Servicing FAQ.\446\ To the degree that market 
participants may have restructured their activities consistent with the 
Loan Securitization Servicing FAQ, an effect of the proposed amendments 
may be to reduce uncertainty. However, the economic effects of the 
proposed amendments on enabling greater capital formation through loan 
securitizations on the one hand, and potential risks related to such 
activities on the other, may be limited.
---------------------------------------------------------------------------

    \445\ U.S. Securities and Exchange Commission, Responses to 
Frequently Asked Questions Regarding the Commission's Rule under 
Section 13 of the Bank Holding Company Act (the ``Volcker Rule'') 
(June 10, 2014), available at https://www.sec.gov/divisions/marketreg/faq-volcker-rule-section13.htm (``Loan Securitization 
Servicing FAQ''). See also, supra, section III.B.2.
    \446\ Proposed rule Sec.  _.10(c)(8)(i)(B).
---------------------------------------------------------------------------

    The agencies are also proposing to allow loan securitizations to 
hold up to five percent of the entity's assets in non-

[[Page 12174]]

loan assets.\447\ Several commenters on the 2018 proposal supported 
expanding the range of permissible assets that could be held by an 
excluded loan securitization.\448\ Many commenters recommended allowing 
loan securitizations to hold up to five or ten percent of non-loan 
assets.\449\ Commenters argued that banking entities would use such 
authority to incorporate into securitizations corporate bonds, 
interests in letters of credit, cash and short-term highly liquid 
investments, derivatives, and senior secured bonds that do not 
significantly change the nature and risk profile of the 
securitization.\450\ Authorizing loan securitizations to hold small 
amounts of non-loan assets could, consistent with the statute, permit 
loan securitizations to respond to market demand and reduce compliance 
costs associated with the securitization process without significantly 
increasing risk to banking entities and the financial system. The 
proposed limits on the amount of non-loan assets also would reduce the 
potential risk that allowing certain non-loan assets could lead to 
evasion, indirect proprietary trading, and other impermissible 
activities. Moreover, loan securitizations provide an important avenue 
for banking entities to fund lending programs, and allowing loan 
securitizations to hold a small amount of non-loan assets in response 
to customer and market demand may increase a banking entity's capacity 
to provide financing and lending.
---------------------------------------------------------------------------

    \447\ Proposed rule Sec.  _.10(c)(8)(i)(E).
    \448\ See e.g., IAA; LSTA; ABA; SFIG; GS; BPI; JBA; SIFMA.
    \449\ See e.g., LSTA; JBA.
    \450\ See id.
---------------------------------------------------------------------------

    The agencies could have proposed expanding the types of permissible 
assets beyond what is described in the 2013 rule and the Loan 
Securitization Servicing FAQ. For example, the agencies could have 
proposed expanding the range of permissible assets in an excluded loan 
securitization. Such alternatives could potentially allow banking 
entities to incorporate into securitizations corporate bonds, interests 
in letters of credit, cash and short-term highly liquid investments, 
derivatives, and senior secured bonds that do not significantly change 
the nature and risk profile of the securitization.
    However, the SEC recognizes that the loan securitization industry 
may have evolved since the issuance of the 2013 rule. As a result, the 
SEC preliminarily believes that, even if the scope of non-loan assets 
permitted to be held were expanded, loan securitization issuers may 
continue to exclude non-loan assets from securitizations. Further, such 
an alternative would not affect the applicable prudential requirements 
aimed at safety and soundness of banking entities. Banking entities 
currently take on a variety of risks arising out of a broad range of 
permissible activities, including the core traditional banking activity 
related to the extension of credit and direct and indirect extension of 
credit by banking entities flows through to the real economy in the 
form of greater access to capital.
e. Parallel Investments
    As discussed above, the preamble to the 2013 rule stated that if a 
banking entity makes investments side by side in substantially the same 
positions as a covered fund, then the value of such investments would 
be included for the purposes of determining the value of the banking 
entity's investment in the covered fund.\451\ The agencies also stated 
that a banking entity that sponsors a covered fund should not make any 
additional side-by-side co-investment with the covered fund in a 
privately negotiated investment unless the value of such co-investment 
is less than three percent of the value of the total amount co-invested 
by other investors in such investment.\452\
---------------------------------------------------------------------------

    \451\ See supra section III.F and references therein.
    \452\ See id.
---------------------------------------------------------------------------

    In response to the 2018 proposal, the agencies received comments 
that argued the implementing regulations should not impose a limit on 
parallel investments and noted that such a restriction is not reflected 
in the text of the 2013 rule.\453\ The agencies are proposing a rule of 
construction that (1) a banking entity will not be required to include 
in the calculation of the investment limits under Sec.  _.12(a)(2) any 
investment the banking entity makes alongside a covered fund, as long 
as the investment is made in compliance with applicable laws and 
regulations, and (2) a banking entity shall not be restricted in the 
amount of any investment the banking entity makes alongside a covered 
fund as long as the investment is made in compliance with applicable 
laws and regulations, including applicable safety and soundness 
standards.\454\
---------------------------------------------------------------------------

    \453\ See FSF; Goldman; SIFMA.
    \454\ Proposed rule Sec.  _.12(b)(5)(i).
---------------------------------------------------------------------------

    The SEC recognizes that the proposed approach may increase the risk 
that some banking entities may seek to use parallel investments for the 
purpose of artificially maintaining or increasing the value of the 
assets of a fund that is organized and offered by the banking entity. 
Supporting a fund in such a manner would increase these banking 
entities' exposures to the fund's assets and would generally be 
inconsistent with the 2013 rule's restriction on a banking entity 
guaranteeing, assuming, or otherwise insuring the obligations or 
performance of such a covered fund.\455\
---------------------------------------------------------------------------

    \455\ See 2013 rule Sec.  _.11(a)(5).
---------------------------------------------------------------------------

    Further, as stated above, the agencies would expect that any 
investments made alongside a covered fund by a director or employee of 
a banking entity or its affiliate, if made in compliance with 
applicable laws and regulations, would not be treated as an investment 
by the director or employee in the covered fund.
    The SEC recognizes, however, that a restriction on investments made 
alongside a covered fund may interfere with banking entities' ability 
to make otherwise permissible investments directly on their balance 
sheets.\456\ In particular, as noted by commenters, including the value 
of parallel investments within the ownership limits imposed on a 
banking entity or otherwise restricting a co-investment could prevent 
the banking entity from making investments that would otherwise be 
permissible under applicable laws and regulations.\457\ In addition to 
removing impediments for banking entities' otherwise permissible 
investments, the proposed rule of construction may enable banking 
entities to make investments alongside a covered fund that will signal 
the quality of the investment(s) to the banking entities' clients and 
investors in the fund, and may also help align the incentives of 
banking entities, and their directors and employees, with those of the 
covered funds and their investors.
---------------------------------------------------------------------------

    \456\ See supra note 454.
    \457\ See id.
---------------------------------------------------------------------------

4. Efficiency, Competition, and Capital Formation
    As discussed above, the proposed amendments would exclude certain 
groups of private funds and other entities from the scope of the 
covered fund definition and modify other covered fund restrictions 
applicable to banking entities subject to the implementing regulations. 
Moreover, the proposed amendments would reduce compliance obligations 
of banking entities subject to the implementing regulations. The SEC 
preliminarily believes that the proposed amendments may impact 
competition, capital formation, and allocative efficiency.

[[Page 12175]]

    The proposed amendments may have three groups of competitive 
effects. First, the proposed amendments may make it easier for bank 
affiliated broker-dealers, SBSDs, and RIAs to compete with bank 
unaffiliated broker-dealers, SBSDs, and RIAs in their activities with 
certain groups of private funds and other entities. Second, the 
proposal may reduce competitive disparities between banking entities 
subject to the implementing regulations and affected by the proposed 
amendments, and banking entities that are not. Third, certain aspects 
of the proposed amendments (such as the amendments related to foreign 
excluded funds and foreign public funds) may reduce competitive 
disparities between U.S. banking entities and foreign banking entities 
in their covered fund activities. Because competition may reduce costs 
or increase quality, and because some affected banking entities may 
face economies of scale or scope in the provision of services to 
certain private funds, these competitive effects may flow through to 
customers, clients, and investors in the form of reduced transaction 
costs and greater quality of private fund and other offerings and 
related financial services.
    The proposed amendments may also impact capital formation. For 
example, by reducing the scope of application of covered fund 
restrictions in the implementing regulations, the proposal relaxes 
restrictions related to banking entity underwriting and market-making 
of certain private funds. Moreover, the proposal would amend certain 
restrictions related to banking entity relationships with certain 
covered funds. Further, as discussed above, many of the proposed 
amendments would enable banking entities to engage indirectly (through 
a fund structure) in certain of the same activities that they are 
currently able to engage in directly (extending credit or direct 
ownership stakes). To the degree that the implementing regulations 
impede or otherwise constrain banking entity activities in such funds, 
the proposed amendments may result in a greater number of such private 
funds being launched by banking entities, increasing capital formation 
via private funds. The effects of the proposed amendments on capital 
formation are likely to flow through to investors (in the form of 
greater availability or variety or private funds available for 
investors) as well as to firms seeking to raise capital or obtain 
financing from private funds.\458\
---------------------------------------------------------------------------

    \458\ For example, the proposed amendments could result in 
additional venture capital being available in geographic areas where 
it is relatively less available. See supra, section IV.F.3.a 
(Venture Capital Funds).
---------------------------------------------------------------------------

    The possible effects of the proposed amendments on allocative 
efficiency are related to the proposal's likely impacts on capital 
formation. Specifically, as discussed above, the SEC preliminarily 
believes that the proposed amendments may result in a greater number 
and variety of private funds launched by banking entities. To the 
degree that banking entities may be able to provide superior private 
funds due to their expertise or economies of scale or scope, and to the 
degree that fund structures may be more efficient than direct 
investments (due to, e.g., superior risk sharing and pooling of 
expertise across fund investors), the proposed amendments may enhance 
the ability of market participants, investors, and issuers to allocate 
their capital efficiently.
    The SEC recognizes that the proposed amendments may increase the 
ability of banking entities to engage in certain types of activities 
involving risk, and that increases in risk exposures of large groups of 
banking entities may negatively impact capital formation, securities 
markets, and the real economy, particularly during adverse economic 
conditions. Moreover, losses on investment portfolios may discourage 
capital market participation by various groups of investors. Three 
important considerations may mitigate these potential risks. First, as 
discussed throughout this economic analysis, banking entities already 
engage in a variety of permissible activities involving risk, including 
extensions of credit, underwriting, and market-making, and the 
activities of many types of private funds that would be excluded under 
the proposal largely replicate permissible and traditional activities 
of banking entities. Second, banking entities subject to the 
implementing regulations may also be subject to multiple prudential 
capital, margin, and liquidity requirements that facilitate the safety 
and soundness of banking entities and promote financial stability. 
Third, the proposed exclusions from the definition of covered fund each 
would include a number of conditions aimed at preventing evasion of 
section 13 of the BHC Act and the implementing regulations, promoting 
safety and soundness, and/or allowing for customer oriented financial 
services provided on arms-length, market terms.
    Under the implementing regulations, a banking entity is not 
prohibited from acquiring or retaining an ownership interest in, or 
acting as sponsor to, a covered fund if the banking entity organizes or 
offers the covered fund and satisfies other requirements. One such 
requirement is that the banking entity provide specified disclosures to 
prospective and actual investors in the covered fund.\459\ Under the 
proposed amendments, the disclosures specified by Sec.  _.11(a)(8) 
would be required to satisfy the exclusions for credit funds and 
venture capital funds if the banking entity is a sponsor, investment 
adviser, or commodity trading advisor of the fund, and for family 
wealth vehicles and customer facilitation vehicles under all 
circumstances. To the extent that the proposed amendments lead banking 
entities to establish or provide services to more of these vehicles, 
the volume of information available to market participants could 
increase. Specifically, if banking entities respond to the proposed 
amendments by establishing or providing services to more of these 
vehicles because they are excluded from the definition of ``covered 
fund,'' then the amount of such disclosures would increase accordingly. 
However, the SEC preliminarily believes that the change in volume and 
type of information available to market participants is unlikely to 
have a significant impact on informational efficiency.
---------------------------------------------------------------------------

    \459\ 2013 rule Sec.  _.11(a)(8).
---------------------------------------------------------------------------

    Importantly, the magnitude of the above effects on competition, 
capital formation, and allocative efficiency would be influenced by a 
large number of factors, such as prevailing macroeconomic conditions, 
the financial condition of firms seeking to raise capital, and of funds 
seeking to transact with banking entities, market saturation, and 
search for higher yields by investors during low interest rate 
environments. Moreover, the relative efficiency between fund structures 
and the direct provision of capital is likely to vary widely among 
banking entities and funds. The SEC recognizes that such economic 
effects may be dampened or magnified in different phases of the 
macroeconomic cycle and across various types of banking entities.
    The SEC is unable to observe the amount of capital formation in 
different types of covered funds or underlying equity and debt 
securities that did not occur because of the 2013 rule. Because of the 
prolonged and overlapping implementation timeline of various post-
crisis reforms, and because market participants restructured their 
trading and covered funds activities in anticipation of the 2013 rule 
being effective, the SEC cannot measure the counterfactual levels of 
capital formation and liquidity that would have

[[Page 12176]]

been observed after the financial crisis, absent the covered fund 
restrictions currently in place. Similarly, the SEC cannot quantify the 
degree to which competition in covered funds is adversely affected by 
the covered fund definition currently in effect. The SEC solicits any 
information, particularly quantitative data that would allow us to 
estimate the magnitudes of the potential costs and benefits of the 
proposed amendments on banking entity-affiliated broker-dealers and on 
banking entity-affiliated investment advisers advising the different 
types of funds discussed above. The SEC also solicits any information 
that would allow it to estimate any effects on efficiency, competition, 
and capital formation in different types of funds and their underlying 
securities.
5. Request for Comment
    The SEC is requesting comment regarding all aspects of the economic 
analysis set forth here. To the extent possible, the SEC requests that 
market participants and other commenters provide supporting data and 
analysis with respect to the benefits, costs, and effects on 
competition, efficiency, and capital formation of adopting the proposed 
amendments or any reasonable alternatives. In addition, the SEC asks 
commenters to consider the following questions:
    Question SEC-1. What additional qualitative or quantitative 
information should the SEC consider as part of the baseline for its 
economic analysis of the proposed amendments?
    Question SEC-2. What additional considerations can the SEC use to 
estimate the costs and benefits of implementing the proposed amendments 
for SEC-regulated banking entities?
    Question SEC-3. Is it likely that certain potential benefits or 
costs associated with the proposed amendments will not be recognized by 
SEC-regulated banking entities because of the nature of their 
activities or because of new conditions or restrictions the proposal 
would impose on these activities? Why or why not? Are there other 
benefits or costs associated with the proposed amendments that will 
impact SEC-regulated banking entities differently than other types of 
banking entities?
    Question SEC-4. Has the SEC considered all relevant aspects of the 
proposed amendments? Have we accurately described the costs and 
benefits of the proposed amendments? Why or why not? Please identify 
any other benefits associated with the proposed amendments in detail. 
Please identify any costs associated with the proposed amendments that 
we have not identified. If possible, please provide quantification or 
data that would enable a quantification of such effects.
    Question SEC-5. What are the economic effects of the discussed 
reasonable alternatives? Are there any additional reasonable 
alternatives that the SEC should consider? If so, please identify such 
alternatives and any economic effects associated with such 
alternatives. If possible, please provide quantification or data that 
would enable a quantification of such effects.
    Question SEC-6. Would permitting banking entities to invest in or 
sponsor a qualifying venture capital fund be likely to result in 
additional venture capital becoming available to start-ups and young, 
growing firms in geographic regions of the United States where such 
capital is relatively less available?

G. SEC Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \460\ the SEC requests comment on the 
potential effect of the proposed rule on the U.S. economy on an annual 
basis; any potential increase in costs or prices for consumers or 
individual industries; and any potential effect on competition, 
investment or innovation. Commenters are requested to provide empirical 
data and other factual support for their views to the extent possible.
---------------------------------------------------------------------------

    \460\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

List of Subjects

12 CFR Part 44

    Banks, Banking, Compensation, Credit, Derivatives, Government 
securities, Insurance, Investments, National banks, Penalties, 
Reporting and recordkeeping requirements, Risk, Risk retention, 
Securities, Trusts and trustees.

12 CFR Part 248

    Administrative practice and procedure, Banks, banking, Conflict of 
interests, Credit, Foreign banking, Government securities, Holding 
companies, Insurance, Insurance companies, Investments, Penalties, 
Reporting and recordkeeping requirements, Securities, State nonmember 
banks, State savings associations, Trusts and trustees.

12 CFR Part 351

    Banks, banking, Capital, Compensation, Conflicts of interest, 
Credit, Derivatives, Government securities, Insurance, Insurance 
companies, Investments, Penalties, Reporting and recordkeeping 
requirements, Risk, Risk retention, Securities, Trusts and trustees.

17 CFR Part 75

    Banks, Banking, Compensation, Credit, Derivatives, Federal branches 
and agencies, Federal savings associations, Government securities, 
Hedge funds, Insurance, Investments, National banks, Penalties, 
Proprietary trading, Reporting and recordkeeping requirements, Risk, 
Risk retention, Securities, Swap dealers, Trusts and trustees, Volcker 
rule.

17 CFR Part 255

    Banks, Brokers, Dealers, Investment advisers, Recordkeeping, 
Reporting, Securities.

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

    For the reasons stated in the Common Preamble, the Office of the 
Comptroller of the Currency proposes to amend chapter I of Title 12, 
Code of Federal Regulations as follows:

PART 44--PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND 
RELATIONSHIPS WITH COVERED FUNDS

0
1. The authority citation for part 44 continues to read as follows:

    Authority:  7 U.S.C. 27 et seq., 12 U.S.C. 1, 24, 92a, 93a, 161, 
1461, 1462a, 1463, 1464, 1467a, 1813(q), 1818, 1851, 3101, 3102, 
3108, 5412.

Subpart B--Proprietary Trading

0
2. Amend Sec.  44.6 by adding paragraph (f) to read as follows:


Sec.  44.6   Other permitted proprietary trading activities.

* * * * *
    (f) Permitted trading activities of qualifying foreign excluded 
funds. The prohibition contained in Sec.  44.3(a) does not apply to the 
purchase or sale of a financial instrument by a qualifying foreign 
excluded fund. For purposes of this paragraph (f), a qualifying foreign 
excluded fund means a banking entity that:
    (1) Is organized or established outside the United States, and the 
ownership interests of which are offered and sold solely outside the 
United States;

[[Page 12177]]

    (2)(i) Would be a covered fund if the entity were organized or 
established in the United States, or
    (ii) Is, or holds itself out as being, an entity or arrangement 
that raises money from investors primarily for the purpose of investing 
in financial instruments for resale or other disposition or otherwise 
trading in financial instruments;
    (3) Would not otherwise be a banking entity except by virtue of the 
acquisition or retention of an ownership interest in, sponsorship of, 
or relationship with the entity, by another banking entity that meets 
the following:
    (i) The banking entity is not organized, or directly or indirectly 
controlled by a banking entity that is organized, under the laws of the 
United States or of any State; and
    (ii) The banking entity's acquisition or retention of an ownership 
interest in or sponsorship of the fund meets the requirements for 
permitted covered fund activities and investments solely outside the 
United States, as provided in Sec.  44.13(b);
    (4) Is established and operated as part of a bona fide asset 
management business; and
    (5) Is not operated in a manner that enables any other banking 
entity to evade the requirements of section 13 of the BHC Act or this 
part.

Subpart C--Covered Funds Activities and Investments

0
3. Amend Sec.  44.10 by:
0
a. Revising paragraph (c)(1);
0
b. Revising paragraph (c)(3)(i);
0
c. Revising paragraph (c)(8);
0
d. Revising paragraph (c)(10)(i);
0
e. Revising paragraph (c)(11)(i);
0
f. Adding paragraphs (c)(15), (16), (17), and (18); and
0
g. Revising paragraph (d)(6).
    The revisions and additions read as follows:


Sec.  44.10   Prohibition on acquiring or retaining an ownership 
interest in and having certain relationships with a covered fund.

* * * * *
    (c) * * *
    (1) Foreign public funds. (i) Subject to paragraphs (c)(1)(ii) and 
(iii) of this section, an issuer that:
    (A) Is organized or established outside of the United States; and
    (B) Is authorized to offer and sell ownership interests, and such 
interests are offered and sold, through one or more public offerings.
    (ii) With respect to a banking entity that is, or is controlled 
directly or indirectly by a banking entity that is, located in or 
organized under the laws of the United States or of any State and any 
issuer for which such banking entity acts as sponsor, the sponsoring 
banking entity may not rely on the exemption in paragraph (c)(1)(i) of 
this section for such issuer unless ownership interests in the issuer 
are sold predominantly to persons other than:
    (A) Such sponsoring banking entity;
    (B) Such issuer;
    (C) Affiliates of such sponsoring banking entity or such issuer; 
and
    (D) Directors and senior executive officers as defined in section 
225.71(c) of the Board's Regulation Y (12 CFR 225.71(c)) of such 
entities.
    (iii) For purposes of paragraph (c)(1)(i)(B) of this section, the 
term ``public offering'' means a distribution (as defined in Sec.  
44.4(a)(3)) of securities in any jurisdiction outside the United States 
to investors, including retail investors, provided that:
    (A) The distribution is subject to substantive disclosure and 
retail investor protection laws or regulations;
    (B) With respect to an issuer for which the banking entity serves 
as the investment manager, investment adviser, commodity trading 
advisor, commodity pool operator, or sponsor, the distribution complies 
with all applicable requirements in the jurisdiction in which such 
distribution is being made;
    (C) The distribution does not restrict availability to investors 
having a minimum level of net worth or net investment assets; and
    (D) The issuer has filed or submitted, with the appropriate 
regulatory authority in such jurisdiction, offering disclosure 
documents that are publicly available.
* * * * *
    (3) * * *
    (i) Is composed of no more than 10 unaffiliated co-venturers;
* * * * *
    (8) Loan securitizations--(i) Scope. An issuing entity for asset-
backed securities that satisfies all the conditions of this paragraph 
(c)(8) and the assets or holdings of which are composed solely of:
    (A) Loans as defined in Sec.  44.2(t);
    (B) Rights or other assets designed to assure the servicing or 
timely distribution of proceeds to holders of such securities and 
rights or other assets that are related or incidental to purchasing or 
otherwise acquiring and holding the loans, provided that each asset 
that is a security (other than special units of beneficial interest and 
collateral certificates meeting the requirements of paragraph (c)(8)(v) 
of this section) meets the requirements of paragraph (c)(8)(iii) of 
this section;
    (C) Interest rate or foreign exchange derivatives that meet the 
requirements of paragraph (c)(8)(iv) of this section; and
    (D) Special units of beneficial interest and collateral 
certificates that meet the requirements of paragraph (c)(8)(v) of this 
section.
    (E) Any other assets, provided that the aggregate value of any such 
other assets that do not meet the criteria specified in paragraphs 
(c)(8)(i)(A) through (c)(8)(i)(D) of this section do not exceed five 
percent of the aggregate value of the issuing entity's assets.
    (ii) Impermissible assets. For purposes of this paragraph (c)(8), 
except as permitted under paragraph (c)(8)(i)(E) of this section, the 
assets or holdings of the issuing entity shall not include any of the 
following:
    (A) A security, including an asset-backed security, or an interest 
in an equity or debt security other than as permitted in paragraphs 
(c)(8)(iii), (iv), or (v) of this section;
    (B) A derivative, other than a derivative that meets the 
requirements of paragraph (c)(8)(iv) of this section; or
    (C) A commodity forward contract.
    (iii) Permitted securities. Notwithstanding paragraph (c)(8)(ii)(A) 
of this section, the issuing entity may hold securities if those 
securities are:
    (A) Cash equivalents--which, for the purposes of this paragraph, 
means high quality, highly liquid investments whose maturity 
corresponds to the securitization's expected or potential need for 
funds and whose currency corresponds to either the underlying loans or 
the asset-backed securities--for purposes of the rights and assets in 
paragraph (c)(8)(i)(B) of this section; or
    (B) Securities received in lieu of debts previously contracted with 
respect to the loans supporting the asset-backed securities.
    (iv) Derivatives. The holdings of derivatives by the issuing entity 
shall be limited to interest rate or foreign exchange derivatives that 
satisfy all of the following conditions:
    (A) The written terms of the derivatives directly relate to the 
loans, the asset-backed securities, or the contractual rights or other 
assets described in paragraph (c)(8)(i)(B) of this section; and
    (B) The derivatives reduce the interest rate and/or foreign 
exchange risks related to the loans, the asset-backed securities, or 
the contractual rights or other assets described in paragraph 
(c)(8)(i)(B) of this section.
    (v) Special units of beneficial interest and collateral 
certificates. The assets or holdings of the issuing entity may include 
collateral certificates and

[[Page 12178]]

special units of beneficial interest issued by a special purpose 
vehicle, provided that:
    (A) The special purpose vehicle that issues the special unit of 
beneficial interest or collateral certificate meets the requirements in 
this paragraph (c)(8);
    (B) The special unit of beneficial interest or collateral 
certificate is used for the sole purpose of transferring to the issuing 
entity for the loan securitization the economic risks and benefits of 
the assets that are permissible for loan securitizations under this 
paragraph (c)(8) and does not directly or indirectly transfer any 
interest in any other economic or financial exposure;
    (C) The special unit of beneficial interest or collateral 
certificate is created solely to satisfy legal requirements or 
otherwise facilitate the structuring of the loan securitization; and
    (D) The special purpose vehicle that issues the special unit of 
beneficial interest or collateral certificate and the issuing entity 
are established under the direction of the same entity that initiated 
the loan securitization.
* * * * *
    (10) Qualifying covered bonds--(i) Scope. An entity owning or 
holding a dynamic or fixed pool of loans or other assets as provided in 
paragraph (c)(8) of this section for the benefit of the holders of 
covered bonds, provided that the assets in the pool are composed solely 
of assets that meet the conditions in paragraph (c)(8)(i) of this 
section.
* * * * *
    (11) * * *
    (i) That is a small business investment company, as defined in 
section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 
662), or that has received from the Small Business Administration 
notice to proceed to qualify for a license as a small business 
investment company, which notice or license has not been revoked, or 
that has voluntarily surrendered its license to operate as a small 
business investment company in accordance with 13 CFR 107.1900 and does 
not make any new investments (other than investments in cash 
equivalents, which, for the purposes of this paragraph, means high 
quality, highly liquid investments whose maturity corresponds to the 
issuer's expected or potential need for funds and whose currency 
corresponds to the issuer's assets) after such voluntary surrender; or
* * * * *
    (15) Credit funds. Subject to paragraphs (c)(15)(iii), (iv), and 
(v) of this section, an issuer that satisfies the asset and activity 
requirements of paragraphs (c)(15)(i) and (ii) of this section.
    (i) Asset requirements. The issuer's assets must be composed solely 
of:
    (A) Loans as defined in Sec.  44.2(t);
    (B) Debt instruments, subject to paragraph (c)(15)(iv) of this 
section;
    (C) Rights and other assets that are related or incidental to 
acquiring, holding, servicing, or selling such loans or debt 
instruments, provided that:
    (1) Each right or asset that is a security is either:
    (i) A cash equivalent (which, for the purposes of this paragraph, 
means high quality, highly liquid investments whose maturity 
corresponds to the issuer's expected or potential need for funds and 
whose currency corresponds to either the underlying loans or the debt 
instruments);
    (ii) A security received in lieu of debts previously contracted 
with respect to such loans or debt instruments; or
    (iii) An equity security (or right to acquire an equity security) 
received on customary terms in connection with such loans or debt 
instruments; and
    (2) Rights or other assets held under this paragraph (c)(15)(i)(C) 
of this section may not include commodity forward contracts; and
    (D) Interest rate or foreign exchange derivatives, if:
    (1) The written terms of the derivative directly relate to the 
loans, debt instruments, or other rights or assets described in 
paragraph (c)(15)(i)(C) of this section; and
    (2) The derivative reduces the interest rate and/or foreign 
exchange risks related to the loans, debt instruments, or other rights 
or assets described in paragraph (c)(15)(i)(C) of this section.
    (ii) Activity requirements. To be eligible for the exclusion of 
paragraph (c)(15) of this section, an issuer must:
    (A) Not engage in any activity that would constitute proprietary 
trading under Sec.  44.3(b)(l)(i) of subpart A of this part, as if the 
issuer were a banking entity; and
    (B) Not issue asset-backed securities.
    (iii) Requirements for a sponsor, investment adviser, or commodity 
trading advisor. A banking entity that acts as a sponsor, investment 
adviser, or commodity trading advisor to an issuer that meets the 
conditions in paragraphs (c)(15)(i) and (ii) of this section may not 
rely on this exclusion unless the banking entity:
    (A) Provides in writing to any prospective and actual investor in 
the issuer the disclosures required under Sec.  44.11(a)(8), as if the 
issuer were a covered fund; and
    (B) Ensures that the activities of the issuer are consistent with 
safety and soundness standards that are substantially similar to those 
that would apply if the banking entity engaged in the activities 
directly.
    (iv) Additional Banking Entity Requirements. A banking entity may 
not rely on this exclusion with respect to an issuer that meets the 
conditions in paragraphs (c)(15)(i) and (ii) of this section unless:
    (A) The banking entity does not, directly or indirectly, guarantee, 
assume, or otherwise insure the obligations or performance of the 
issuer or of any entity to which such issuer extends credit or in which 
such issuer invests; and
    (B) Any assets the issuer holds pursuant to paragraphs 
(c)(15)(i)(B) or (c)(15)(i)(C)(1)(iii) of this section would be 
permissible for the banking entity to acquire and hold directly.
    (v) Investment and Relationship Limits. A banking entity's 
investment in, and relationship with, the issuer must:
    (A) Comply with the limitations imposed in Sec. Sec.  44.14 (except 
the banking entity may acquire and retain any ownership interest in the 
issuer) and 44.15, as if the issuer were a covered fund; and
    (B) Be conducted in compliance with, and subject to, applicable 
banking laws and regulations, including applicable safety and soundness 
standards.
    (16) Qualifying venture capital funds. (i) Subject to paragraphs 
(c)(16)(ii) through (iv) of this section, an issuer that:
    (A) Is a venture capital fund as defined in 17 CFR 275.203(l)-1; 
and
    (B) Does not engage in any activity that would constitute 
proprietary trading under Sec.  44.3(b)(1)(i), as if the issuer were a 
banking entity.
    (ii) A banking entity that acts as a sponsor, investment adviser, 
or commodity trading advisor to an issuer that meets the conditions in 
paragraph (c)(16)(i) of this section may not rely on this exclusion 
unless the banking entity:
    (A) Provides in writing to any prospective and actual investor in 
the issuer the disclosures required under Sec.  44.11 (a)(8), as if the 
issuer were a covered fund; and
    (B) Ensures that the activities of the issuer are consistent with 
safety and soundness standards that are substantially similar to those 
that would apply if the banking entity engaged in the activities 
directly.
    (iii) The banking entity must not, directly or indirectly, 
guarantee, assume, or otherwise insure the obligations or performance 
of the issuer.

[[Page 12179]]

    (iv) A banking entity's ownership interest in or relationship with 
the issuer must:
    (A) Comply with the limitations imposed in Sec. Sec.  44.14 (except 
the banking entity may acquire and retain any ownership interest in the 
issuer) and 44.15, as if the issuer were a covered fund; and
    (B) Be conducted in compliance with, and subject to, applicable 
banking laws and regulations, including applicable safety and soundness 
standards.
    (17) Family wealth management vehicles. (i) Subject to paragraph 
(c)(17)(ii) of this section, any entity that is not, and does not hold 
itself out as being, an entity or arrangement that raises money from 
investors primarily for the purpose of investing in securities for 
resale or other disposition or otherwise trading in securities, and:
    (A) If the entity is a trust, the grantor(s) of the entity are all 
family customers; and
    (B) If the entity is not a trust:
    (1) A majority of the voting interests in the entity are owned 
(directly or indirectly) by family customers; and
    (2) The entity is owned only by family customers and up to 3 
closely related persons of the family customers.
    (ii) A banking entity may rely on the exclusion in paragraph 
(c)(17)(i) of this section with respect to an entity provided that the 
banking entity (or an affiliate):
    (A) Provides bona fide trust, fiduciary, investment advisory, or 
commodity trading advisory services to the entity;
    (B) Does not, directly or indirectly, guarantee, assume, or 
otherwise insure the obligations or performance of such entity;
    (C) Complies with the disclosure obligations under Sec.  
44.11(a)(8), as if such entity were a covered fund;
    (D) Does not acquire or retain, as principal, an ownership interest 
in the entity, other than up to 0.5 percent of the entity's outstanding 
ownership interests that may be held by the banking entity and its 
affiliates for the purpose of and to the extent necessary for 
establishing corporate separateness or addressing bankruptcy, 
insolvency, or similar concerns;
    (E) Complies with the requirements of Sec. Sec.  44.14(b) and 
44.15, as if such entity were a covered fund; and
    (F) Complies with the requirements of 12 CFR 223.15(a), as if such 
banking entity and its affiliates were a member bank and the issuer 
were an affiliate thereof.
    (iii) For purposes of paragraph (c)(17) of this section, the 
following definitions apply:
    (A) ``Closely related person'' means a natural person (including 
the estate and estate planning vehicles of such person) who has 
longstanding business or personal relationships with any family 
customer.
    (B) ``Family customer'' means:
    (1) A family client, as defined in Rule 202(a)(11)(G)-1(d)(4) of 
the Investment Advisers Act of 1940 (17 CFR 275.202(a)(11)(G)-1(d)(4)); 
or
    (2) Any natural person who is a father-in-law, mother-in-law, 
brother-in-law, sister-in-law, son-in-law or daughter-in-law of a 
family client, or a spouse or a spousal equivalent of any of the 
foregoing.
    (18) Customer facilitation vehicles. (i) Subject to paragraph 
(c)(18)(ii) of this section, an issuer that is formed by or at the 
request of a customer of the banking entity for the purpose of 
providing such customer (which may include one or more affiliates of 
such customer) with exposure to a transaction, investment strategy, or 
other service provided by the banking entity.
    (ii) A banking entity may rely on the exclusion in paragraph 
(c)(18)(i) of this section with respect to an issuer provided that:
    (A) All of the ownership interests of the issuer are owned by the 
customer (which may include one or more of its affiliates) for whom the 
issuer was created, subject to paragraph (c)(18)(ii)(B)(4) of this 
section; and
    (B) The banking entity and its affiliates:
    (1) Maintain documentation outlining how the banking entity intends 
to facilitate the customer's exposure to such transaction, investment 
strategy, or service;
    (2) Do not, directly or indirectly, guarantee, assume, or otherwise 
insure the obligations or performance of such issuer;
    (3) Comply with the disclosure obligations under Sec.  44.11(a)(8), 
as if such issuer were a covered fund;
    (4) Do not acquire or retain, as principal, an ownership interest 
in the issuer, other than up to 0.5 percent of the issuer's outstanding 
ownership interests that may be held by the banking entity and its 
affiliates for the purpose of and to the extent necessary for 
establishing corporate separateness or addressing bankruptcy, 
insolvency, or similar concerns;
    (5) Comply with the requirements of Sec. Sec.  44.14(b) and 44.15, 
as if such issuer were a covered fund; and
    (6) Comply with the requirements of 12 CFR 223.15(a), as if such 
banking entity and its affiliates were a member bank and the issuer 
were an affiliate thereof.
    (d) * * *
    (6) Ownership interest--(i) Ownership interest means any equity, 
partnership, or other similar interest. An ``other similar interest'' 
means an interest that:
    (A) Has the right to participate in the selection or removal of a 
general partner, managing member, member of the board of directors or 
trustees, investment manager, investment adviser, or commodity trading 
advisor of the covered fund (excluding the rights of a creditor to 
exercise remedies upon the occurrence of an event of default or an 
acceleration event, which includes the right to participate in the 
removal of an investment manager for cause or to nominate or vote on a 
nominated replacement manager upon an investment manager's resignation 
or removal);
    (B) Has the right under the terms of the interest to receive a 
share of the income, gains or profits of the covered fund;
    (C) Has the right to receive the underlying assets of the covered 
fund after all other interests have been redeemed and/or paid in full 
(excluding the rights of a creditor to exercise remedies upon the 
occurrence of an event of default or an acceleration event);
    (D) Has the right to receive all or a portion of excess spread (the 
positive difference, if any, between the aggregate interest payments 
received from the underlying assets of the covered fund and the 
aggregate interest paid to the holders of other outstanding interests);
    (E) Provides under the terms of the interest that the amounts 
payable by the covered fund with respect to the interest could be 
reduced based on losses arising from the underlying assets of the 
covered fund, such as allocation of losses, write-downs or charge-offs 
of the outstanding principal balance, or reductions in the amount of 
interest due and payable on the interest;
    (F) Receives income on a pass-through basis from the covered fund, 
or has a rate of return that is determined by reference to the 
performance of the underlying assets of the covered fund; or
    (G) Any synthetic right to have, receive, or be allocated any of 
the rights in paragraphs (d)(6)(i)(A) through (F) of this section.
    (ii) Ownership interest does not include:
    (A) Restricted profit interest which is an interest held by an 
entity (or an employee or former employee thereof) in a covered fund 
for which the entity (or employee thereof) serves as investment 
manager, investment adviser, commodity trading advisor, or other 
service provider, so long as:

[[Page 12180]]

    (1) The sole purpose and effect of the interest is to allow the 
entity (or employee or former employee thereof) to share in the profits 
of the covered fund as performance compensation for the investment 
management, investment advisory, commodity trading advisory, or other 
services provided to the covered fund by the entity (or employee or 
former employee thereof), provided that the entity (or employee or 
former employee thereof) may be obligated under the terms of such 
interest to return profits previously received;
    (2) All such profit, once allocated, is distributed to the entity 
(or employee or former employee thereof) promptly after being earned 
or, if not so distributed, is retained by the covered fund for the sole 
purpose of establishing a reserve amount to satisfy contractual 
obligations with respect to subsequent losses of the covered fund and 
such undistributed profit of the entity (or employee or former employee 
thereof) does not share in the subsequent investment gains of the 
covered fund;
    (3) Any amounts invested in the covered fund, including any amounts 
paid by the entity in connection with obtaining the restricted profit 
interest, are within the limits of Sec.  44.12 of this subpart; and
    (4) The interest is not transferable by the entity (or employee or 
former employee thereof) except to an affiliate thereof (or an employee 
of the banking entity or affiliate), to immediate family members, or 
through the intestacy, of the employee or former employee, or in 
connection with a sale of the business that gave rise to the restricted 
profit interest by the entity (or employee or former employee thereof) 
to an unaffiliated party that provides investment management, 
investment advisory, commodity trading advisory, or other services to 
the fund.
    (B) Any senior loan or senior debt interest that has the following 
characteristics:
    (1) Under the terms of the interest the holders of such interest do 
not have the right to receive a share of the income, gains, or profits 
of the covered fund, but are entitled to receive only:
    (i) Interest at a stated interest rate, as well as commitment fees 
or other fees, which are not determined by reference to the performance 
of the underlying assets of the covered fund; and
    (ii) Fixed principal payments on or before a maturity date (which 
may include prepayment premiums intended solely to reflect, and 
compensate holders of the interest for, foregone income resulting from 
an early prepayment);
    (2) The entitlement to payments under the terms of the interest are 
absolute and could not be reduced based on losses arising from the 
underlying assets of the covered fund, such as allocation of losses, 
write-downs or charge-offs of the outstanding principal balance, or 
reductions in the amount of interest due and payable on the interest; 
and
    (3) The holders of the interest are not entitled to receive the 
underlying assets of the covered fund after all other interests have 
been redeemed or paid in full (excluding the rights of a creditor to 
exercise remedies upon the occurrence of an event of default or an 
acceleration event).
0
4. Amend Sec.  44.12 by:
0
a. Revising paragraph (b)(1)(ii);
0
b. Revising paragraph (b)(4);
0
c. Adding paragraph (b)(5);
0
d. Revising paragraph (c)(1); and
0
e. Revising paragraphs (d) and (e).
    The revisions and addition read as follows:


Sec.  44.12   Permitted investment in a covered fund.

* * * * *
    (b) * * *
    (1) * * *
    (ii) Treatment of registered investment companies, SEC-regulated 
business development companies, and foreign public funds. For purposes 
of paragraph (b)(1)(i) of this section, a registered investment 
company, SEC-regulated business development companies, or foreign 
public fund as described in Sec.  44.10(c)(1) of this subpart will not 
be considered to be an affiliate of the banking entity so long as the 
banking entity:
    (A) Does not own, control, or hold with the power to vote 25 
percent or more of the voting shares of the company or fund; and
    (B) Provides investment advisory, commodity trading advisory, 
administrative, and other services to the company or fund in compliance 
with the limitations under applicable regulation, order, or other 
authority.
* * * * *
    (4) Multi-tier fund investments--(i) Master-feeder fund 
investments. If the principal investment strategy of a covered fund 
(the ``feeder fund'') is to invest substantially all of its assets in 
another single covered fund (the ``master fund''), then for purposes of 
the investment limitations in paragraphs (a)(2)(i)(B) and (a)(2)(ii) of 
this section, the banking entity's permitted investment in such funds 
shall be measured only by reference to the value of the master fund. 
The banking entity's permitted investment in the master fund shall 
include any investment by the banking entity in the master fund, as 
well as the banking entity's pro-rata share of any ownership interest 
in the master fund that is held through the feeder fund; and
    (ii) Fund-of-funds investments. If a banking entity organizes and 
offers a covered fund pursuant to Sec.  44.11 of this subpart for the 
purpose of investing in other covered funds (a ``fund of funds'') and 
that fund of funds itself invests in another covered fund that the 
banking entity is permitted to own, then the banking entity's permitted 
investment in that other fund shall include any investment by the 
banking entity in that other fund, as well as the banking entity's pro-
rata share of any ownership interest in the fund that is held through 
the fund of funds. The investment of the banking entity may not 
represent more than 3 percent of the amount or value of any single 
covered fund.
    (5) Parallel Investments and Co-Investments--(i) A banking entity 
shall not be required to include in the calculation of the investment 
limits under paragraph (a)(2) of this section any investment the 
banking entity makes alongside a covered fund as long as the investment 
is made in compliance with applicable laws and regulations, including 
applicable safety and soundness standards.
    (ii) A banking entity shall not be restricted under this section in 
the amount of any investment the banking entity makes alongside a 
covered fund as long as the investment is made in compliance with 
applicable laws and regulations, including applicable safety and 
soundness standards.
    (c) * * *
    (1)(i) For purposes of paragraph (a)(2)(iii) of this section, the 
aggregate value of all ownership interests held by a banking entity 
shall be the sum of all amounts paid or contributed by the banking 
entity in connection with acquiring or retaining an ownership interest 
in covered funds (together with any amounts paid by the entity in 
connection with obtaining a restricted profit interest under Sec.  
44.10(d)(6)(ii)), on a historical cost basis;
    (ii) Treatment of employee and director restricted profit interests 
financed by the banking entity. For purposes of paragraph (c)(1)(i) of 
this section, an investment by a director or employee of a banking 
entity who acquires a restricted profit interest in their personal 
capacity in a covered fund sponsored by the banking entity will be 
attributed to the banking entity if the banking entity, directly or 
indirectly, extends financing for the purpose of enabling the director 
or

[[Page 12181]]

employee to acquire the restricted profit interest in the fund and the 
financing is used to acquire such ownership interest in the covered 
fund.
* * * * *
    (d) Capital treatment for a permitted investment in a covered fund. 
For purposes of calculating compliance with the applicable regulatory 
capital requirements, a banking entity shall deduct from the banking 
entity's tier 1 capital (as determined under paragraph (c)(2) of this 
section) the greater of:
    (1)(i) The sum of all amounts paid or contributed by the banking 
entity in connection with acquiring or retaining an ownership interest 
(together with any amounts paid by the entity in connection with 
obtaining a restricted profit interest under Sec.  44.10(d)(6)(ii)), on 
a historical cost basis, plus any earnings received; and
    (ii) The fair market value of the banking entity's ownership 
interests in the covered fund as determined under paragraph (b)(2)(ii) 
or (b)(3) of this section (together with any amounts paid by the entity 
in connection with obtaining a restricted profit interest under Sec.  
44.10(d)(6)(ii)), if the banking entity accounts for the profits (or 
losses) of the fund investment in its financial statements.
    (2) Treatment of employee and director restricted profit interests 
financed by the banking entity. For purposes of paragraph (d)(1) of 
this section, an investment by a director or employee of a banking 
entity who acquires a restricted profit interest in his or her personal 
capacity in a covered fund sponsored by the banking entity will be 
attributed to the banking entity if the banking entity, directly or 
indirectly, extends financing for the purpose of enabling the director 
or employee to acquire the restricted profit interest in the fund and 
the financing is used to acquire such ownership interest in the covered 
fund.
    (e) Extension of time to divest an ownership interest. (1) 
Extension Period. Upon application by a banking entity, the Board may 
extend the period under paragraph (a)(2)(i) of this section for up to 2 
additional years if the Board finds that an extension would be 
consistent with safety and soundness and not detrimental to the public 
interest.
    (2) Application Requirements. An application for extension must:
    (i) Be submitted to the Board at least 90 days prior to the 
expiration of the applicable time period;
    (ii) Provide the reasons for application, including information 
that addresses the factors in paragraph (e)(3) of this section; and
    (iii) Explain the banking entity's plan for reducing the permitted 
investment in a covered fund through redemption, sale, dilution or 
other methods as required in paragraph (a)(2) of this section.
    (3) Factors governing the Board determinations. In reviewing any 
application under paragraph (e)(1) of this section, the Board may 
consider all the facts and circumstances related to the permitted 
investment in a covered fund, including:
    (i) Whether the investment would result, directly or indirectly, in 
a material exposure by the banking entity to high-risk assets or high-
risk trading strategies;
    (ii) The contractual terms governing the banking entity's interest 
in the covered fund;
    (iii) The date on which the covered fund is expected to have 
attracted sufficient investments from investors unaffiliated with the 
banking entity to enable the banking entity to comply with the 
limitations in paragraph (a)(2)(i) of this section;
    (iv) The total exposure of the covered banking entity to the 
investment and the risks that disposing of, or maintaining, the 
investment in the covered fund may pose to the banking entity and the 
financial stability of the United States;
    (v) The cost to the banking entity of divesting or disposing of the 
investment within the applicable period;
    (vi) Whether the investment or the divestiture or conformance of 
the investment would involve or result in a material conflict of 
interest between the banking entity and unaffiliated parties, including 
clients, customers, or counterparties to which it owes a duty;
    (vii) The banking entity's prior efforts to reduce through 
redemption, sale, dilution, or other methods its ownership interests in 
the covered fund, including activities related to the marketing of 
interests in such covered fund;
    (viii) Market conditions; and
    (ix) Any other factor that the Board believes appropriate.
    (4) Authority to impose restrictions on activities or investment 
during any extension period. The Board may impose such conditions on 
any extension approved under paragraph (e)(1) of this section as the 
Board determines are necessary or appropriate to protect the safety and 
soundness of the banking entity or the financial stability of the 
United States, address material conflicts of interest or other unsound 
banking practices, or otherwise further the purposes of section 13 of 
the BHC Act and this part.
    (5) Consultation. In the case of a banking entity that is primarily 
regulated by another Federal banking agency, the SEC, or the CFTC, the 
Board will consult with such agency prior to acting on an application 
by the banking entity for an extension under paragraph (e)(1) of this 
section.
0
5. Amend Sec.  44.13 by adding paragraph (d) to read as follows:


Sec.  44.13   Other permitted covered fund activities and investments.

* * * * *
    (d) Permitted covered fund activities and investments of qualifying 
foreign excluded funds. (1) The prohibition contained in Sec.  44.10(a) 
does not apply to a qualifying foreign excluded fund.
    (2) For purposes of this paragraph (d), a qualifying foreign 
excluded fund means a banking entity that:
    (i) Is organized or established outside the United States, and the 
ownership interests of which are offered and sold solely outside the 
United States;
    (ii)(A) Would be a covered fund if the entity were organized or 
established in the United States, or
    (B) Is, or holds itself out as being, an entity or arrangement that 
raises money from investors primarily for the purpose of investing in 
financial instruments for resale or other disposition or otherwise 
trading in financial instruments;
    (iii) Would not otherwise be a banking entity except by virtue of 
the acquisition or retention of an ownership interest in, sponsorship 
of, or relationship with the entity, by another banking entity that 
meets the following:
    (A) The banking entity is not organized, or directly or indirectly 
controlled by a banking entity that is organized, under the laws of the 
United States or of any State; and
    (B) The banking entity's acquisition of an ownership interest in or 
sponsorship of the fund by the foreign banking entity meets the 
requirements for permitted covered fund activities and investments 
solely outside the United States, as provided in Sec.  44.13(b);
    (iv) Is established and operated as part of a bona fide asset 
management business; and
    (v) Is not operated in a manner that enables any other banking 
entity to evade the requirements of section 13 of the BHC Act or this 
part.
0
6. Amend Sec.  44.14 by:
0
a. Revising paragraph (a)(2)(i);
0
b. Revising paragraph (a)(2)(ii)(C);
0
c. Adding paragraphs (a)(2)(iii), (a)(2)(iv); and (a)(3); and
0
d. Revising paragraph (c).
    The revisions and additions read as follows:


Sec.  44.14   Limitations on relationships with a covered fund.

    (a) * * *

[[Page 12182]]

    (2) * * *
    (i) Acquire and retain any ownership interest in a covered fund in 
accordance with the requirements of Sec. Sec.  44.11, 44.12, or 44.13;
    (ii) * * *
    (C) The Board has not determined that such transaction is 
inconsistent with the safe and sound operation and condition of the 
banking entity; and
    (iii) Enter into a transaction with a covered fund that would be an 
exempt covered transaction under 12 U.S.C. 371c(d) or Sec.  223.42 of 
the Board's Regulation W (12 CFR 223.42); and
    (iv) Extend credit to or purchase assets from a covered fund, 
provided:
    (A) Each extension of credit or purchase of assets is in the 
ordinary course of business in connection with payment transactions; 
settlement services; or futures, derivatives, and securities clearing;
    (B) Each extension of credit is repaid, sold, or terminated by the 
end of five business days; and
    (C) The banking entity making each extension of credit meets the 
requirements of Sec.  223.42(l)(1)(i) and (ii) of the Board's 
Regulation W (12 CFR 223.42(l)(1)(i) and(ii)), as if the extension of 
credit was an intraday extension of credit, regardless of the duration 
of the extension of credit.
    (3) Any transaction or activity permitted under paragraphs 
(a)(2)(iii) or (iv) must comply with the limitations in Sec.  44.15.
* * * * *
    (c) Restrictions on other permitted transactions. Any transaction 
permitted under paragraphs (a)(2)(ii), (a)(2)(iii), or (a)(2)(iv) of 
this section shall be subject to section 23B of the Federal Reserve Act 
(12 U.S.C. 371c-1) as if the counterparty were an affiliate of the 
banking entity.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE

12 CFR Chapter II

Authority and Issuance

    For the reasons stated in the Common Preamble, the Board proposes 
to amend chapter I of Title 12, Code of Federal Regulations as follows:

PART 248--PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND 
RELATIONSHIPS WITH COVERED FUNDS (Regulation VV)

0
7. The authority citation for part 248 continues to read as follows:

    Authority:  12 U.S.C. 1851, 12 U.S.C. 221 et seq., 12 U.S.C. 
1818, 12 U.S.C. 1841 et seq., and 12 U.S.C. 3103 et seq.

Subpart B--Proprietary Trading

0
8. Amend Sec.  248.6 by adding paragraph (f) to read as follows:


Sec.  248.6   Other permitted proprietary trading activities.

* * * * *
    (f) Permitted trading activities of qualifying foreign excluded 
funds. The prohibition contained in Sec.  248.3(a) does not apply to 
the purchase or sale of a financial instrument by a qualifying foreign 
excluded fund. For purposes of this paragraph (f), a qualifying foreign 
excluded fund means a banking entity that:
    (1) Is organized or established outside the United States, and the 
ownership interests of which are offered and sold solely outside the 
United States;
    (2)(i) Would be a covered fund if the entity were organized or 
established in the United States, or
    (ii) Is, or holds itself out as being, an entity or arrangement 
that raises money from investors primarily for the purpose of investing 
in financial instruments for resale or other disposition or otherwise 
trading in financial instruments;
    (3) Would not otherwise be a banking entity except by virtue of the 
acquisition or retention of an ownership interest in, sponsorship of, 
or relationship with the entity, by another banking entity that meets 
the following:
    (i) The banking entity is not organized, or directly or indirectly 
controlled by a banking entity that is organized, under the laws of the 
United States or of any State; and
    (ii) The banking entity's acquisition or retention of an ownership 
interest in or sponsorship of the fund meets the requirements for 
permitted covered fund activities and investments solely outside the 
United States, as provided in Sec.  248.13(b);
    (4) Is established and operated as part of a bona fide asset 
management business; and
    (5) Is not operated in a manner that enables any other banking 
entity to evade the requirements of section 13 of the BHC Act or this 
part.

Subpart C--Covered Funds Activities and Investments

0
9. Amend Sec.  248.10 is amended by:
0
a. Revising paragraph (c)(1);
0
b. Revising paragraph (c)(3)(i);
0
c. Revising paragraph (c)(8);
0
d. Revising paragraph (c)(10)(i);
0
e. Revising paragraph (c)(11)(i);
0
f. Adding paragraphs (c)(15), (16), (17), and (18); and
0
g. Revising paragraph (d)(6).
    The revisions and additions read as follows:


Sec.  248.10   Prohibition on acquiring or retaining an ownership 
interest in and having certain relationships with a covered fund.

* * * * *
    (c) * * *
    (1) Foreign public funds. (i) Subject to paragraphs (c)(1)(ii) and 
(iii) of this section, an issuer that:
    (A) Is organized or established outside of the United States; and
    (B) Is authorized to offer and sell ownership interests, and such 
interests are offered and sold, through one or more public offerings.
    (ii) With respect to a banking entity that is, or is controlled 
directly or indirectly by a banking entity that is, located in or 
organized under the laws of the United States or of any State and any 
issuer for which such banking entity acts as sponsor, the sponsoring 
banking entity may not rely on the exemption in paragraph (c)(1)(i) of 
this section for such issuer unless ownership interests in the issuer 
are sold predominantly to persons other than:
    (A) Such sponsoring banking entity;
    (B) Such issuer;
    (C) Affiliates of such sponsoring banking entity or such issuer; 
and
    (D) Directors and senior executive officers as defined in Sec.  
225.71(c) of the Board's Regulation Y (12 CFR 225.71(c)) of such 
entities.
    (iii) For purposes of paragraph (c)(1)(i)(B) of this section, the 
term ``public offering'' means a distribution (as defined in Sec.  
248.4(a)(3)) of securities in any jurisdiction outside the United 
States to investors, including retail investors, provided that:
    (A) The distribution is subject to substantive disclosure and 
retail investor protection laws or regulations;
    (B) With respect to an issuer for which the banking entity serves 
as the investment manager, investment adviser, commodity trading 
advisor, commodity pool operator, or sponsor, the distribution complies 
with all applicable requirements in the jurisdiction in which such 
distribution is being made;
    (C) The distribution does not restrict availability to investors 
having a minimum level of net worth or net investment assets; and
    (D) The issuer has filed or submitted, with the appropriate 
regulatory authority in such jurisdiction, offering disclosure 
documents that are publicly available.
* * * * *
    (3) * * *
    (i) Is composed of no more than 10 unaffiliated co-venturers;
* * * * *

[[Page 12183]]

    (8) Loan securitizations--(i) Scope. An issuing entity for asset-
backed securities that satisfies all the conditions of this paragraph 
(c)(8) and the assets or holdings of which are composed solely of:
    (A) Loans as defined in Sec.  248.2(t);
    (B) Rights or other assets designed to assure the servicing or 
timely distribution of proceeds to holders of such securities and 
rights or other assets that are related or incidental to purchasing or 
otherwise acquiring and holding the loans, provided that each asset 
that is a security (other than special units of beneficial interest and 
collateral certificates meeting the requirements of paragraph (c)(8)(v) 
of this section) meets the requirements of paragraph (c)(8)(iii) of 
this section;
    (C) Interest rate or foreign exchange derivatives that meet the 
requirements of paragraph (c)(8)(iv) of this section; and
    (D) Special units of beneficial interest and collateral 
certificates that meet the requirements of paragraph (c)(8)(v) of this 
section.
    (E) Any other assets, provided that the aggregate value of any such 
other assets that do not meet the criteria specified in paragraphs 
(c)(8)(i)(A) through (c)(8)(i)(D) of this section do not exceed five 
percent of the aggregate value of the issuing entity's assets.
    (ii) Impermissible assets. For purposes of this paragraph (c)(8), 
except as permitted under paragraph (c)(8)(i)(E) of this section, the 
assets or holdings of the issuing entity shall not include any of the 
following:
    (A) A security, including an asset-backed security, or an interest 
in an equity or debt security other than as permitted in paragraphs 
(c)(8)(iii), (iv), or (v) of this section;
    (B) A derivative, other than a derivative that meets the 
requirements of paragraph (c)(8)(iv) of this section; or
    (C) A commodity forward contract.
    (iii) Permitted securities. Notwithstanding paragraph (c)(8)(ii)(A) 
of this section, the issuing entity may hold securities if those 
securities are:
    (A) Cash equivalents--which, for the purposes of this paragraph, 
means high quality, highly liquid investments whose maturity 
corresponds to the securitization's expected or potential need for 
funds and whose currency corresponds to either the underlying loans or 
the asset-backed securities--for purposes of the rights and assets in 
paragraph (c)(8)(i)(B) of this section; or
    (B) Securities received in lieu of debts previously contracted with 
respect to the loans supporting the asset-backed securities.
    (iv) Derivatives. The holdings of derivatives by the issuing entity 
shall be limited to interest rate or foreign exchange derivatives that 
satisfy all of the following conditions:
    (A) The written terms of the derivatives directly relate to the 
loans, the asset-backed securities, or the contractual rights or other 
assets described in paragraph (c)(8)(i)(B) of this section; and
    (B) The derivatives reduce the interest rate and/or foreign 
exchange risks related to the loans, the asset-backed securities, or 
the contractual rights or other assets described in paragraph 
(c)(8)(i)(B) of this section.
    (v) Special units of beneficial interest and collateral 
certificates. The assets or holdings of the issuing entity may include 
collateral certificates and special units of beneficial interest issued 
by a special purpose vehicle, provided that:
    (A) The special purpose vehicle that issues the special unit of 
beneficial interest or collateral certificate meets the requirements in 
this paragraph (c)(8);
    (B) The special unit of beneficial interest or collateral 
certificate is used for the sole purpose of transferring to the issuing 
entity for the loan securitization the economic risks and benefits of 
the assets that are permissible for loan securitizations under this 
paragraph (c)(8) and does not directly or indirectly transfer any 
interest in any other economic or financial exposure;
    (C) The special unit of beneficial interest or collateral 
certificate is created solely to satisfy legal requirements or 
otherwise facilitate the structuring of the loan securitization; and
    (D) The special purpose vehicle that issues the special unit of 
beneficial interest or collateral certificate and the issuing entity 
are established under the direction of the same entity that initiated 
the loan securitization.
* * * * *
    (10) Qualifying covered bonds--(i) Scope. An entity owning or 
holding a dynamic or fixed pool of loans or other assets as provided in 
paragraph (c)(8) of this section for the benefit of the holders of 
covered bonds, provided that the assets in the pool are composed solely 
of assets that meet the conditions in paragraph (c)(8)(i) of this 
section.
* * * * *
    (11) * * *
    (i) That is a small business investment company, as defined in 
section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 
662), or that has received from the Small Business Administration 
notice to proceed to qualify for a license as a small business 
investment company, which notice or license has not been revoked, or 
that has voluntarily surrendered its license to operate as a small 
business investment company in accordance with 13 CFR 107.1900 and does 
not make any new investments (other than investments in cash 
equivalents, which, for the purposes of this paragraph, means high 
quality, highly liquid investments whose maturity corresponds to the 
issuer's expected or potential need for funds and whose currency 
corresponds to the issuer's assets) after such voluntary surrender; or
* * * * *
    (15) Credit funds. Subject to paragraphs (c)(15)(iii), (iv), and 
(v) of this section, an issuer that satisfies the asset and activity 
requirements of paragraphs (c)(15)(i) and (ii) of this section.
    (i) Asset requirements. The issuer's assets must be composed solely 
of:
    (A) Loans as defined in Sec.  248.2(t);
    (B) Debt instruments, subject to paragraph (c)(15)(iv) of this 
section;
    (C) Rights and other assets that are related or incidental to 
acquiring, holding, servicing, or selling such loans or debt 
instruments, provided that:
    (1) Each right or asset that is a security is either:
    (i) A cash equivalent (which, for the purposes of this paragraph, 
means high quality, highly liquid investments whose maturity 
corresponds to the issuer's expected or potential need for funds and 
whose currency corresponds to either the underlying loans or the debt 
instruments);
    (ii) A security received in lieu of debts previously contracted 
with respect to such loans or debt instruments; or
    (iii) An equity security (or right to acquire an equity security) 
received on customary terms in connection with such loans or debt 
instruments; and
    (2) Rights or other assets held under this paragraph (c)(15)(i)(C) 
of this section may not include commodity forward contracts; and
    (D) Interest rate or foreign exchange derivatives, if:
    (1) The written terms of the derivative directly relate to the 
loans, debt instruments, or other rights or assets described in 
paragraph (c)(15)(i)(C) of this section; and
    (2) The derivative reduces the interest rate and/or foreign 
exchange risks related to the loans, debt instruments, or other rights 
or assets described in paragraph (c)(15)(i)(C) of this section.

[[Page 12184]]

    (ii) Activity requirements. To be eligible for the exclusion of 
paragraph (c)(15) of this section, an issuer must:
    (A) Not engage in any activity that would constitute proprietary 
trading under Sec.  248.3(b)(l)(i), as if the issuer were a banking 
entity; and
    (B) Not issue asset-backed securities.
    (iii) Requirements for a sponsor, investment adviser, or commodity 
trading advisor. A banking entity that acts as a sponsor, investment 
adviser, or commodity trading advisor to an issuer that meets the 
conditions in paragraphs (c)(15)(i) and (ii) of this section may not 
rely on this exclusion unless the banking entity:
    (A) Provides in writing to any prospective and actual investor in 
the issuer the disclosures required under Sec.  248.11(a)(8) of this 
subpart, as if the issuer were a covered fund; and
    (B) Ensures that the activities of the issuer are consistent with 
safety and soundness standards that are substantially similar to those 
that would apply if the banking entity engaged in the activities 
directly.
    (iv) Additional Banking Entity Requirements. A banking entity may 
not rely on this exclusion with respect to an issuer that meets the 
conditions in paragraphs (c)(15)(i) and (ii) of this section unless:
    (A) The banking entity does not, directly or indirectly, guarantee, 
assume, or otherwise insure the obligations or performance of the 
issuer or of any entity to which such issuer extends credit or in which 
such issuer invests; and
    (B) Any assets the issuer holds pursuant to paragraphs 
(c)(15)(i)(B) or (i)(C)(1)(iii) of this section would be permissible 
for the banking entity to acquire and hold directly.
    (v) Investment and Relationship Limits. A banking entity's 
investment in, and relationship with, the issuer must:
    (A) Comply with the limitations imposed in Sec. Sec.  248.14 
(except the banking entity may acquire and retain any ownership 
interest in the issuer) and 248.15, as if the issuer were a covered 
fund; and
    (B) Be conducted in compliance with, and subject to, applicable 
banking laws and regulations, including applicable safety and soundness 
standards.
    (16) Qualifying venture capital funds.(i) Subject to paragraphs 
(c)(16)(ii) through (iv) of this section, an issuer that:
    (A) Is a venture capital fund as defined in 17 CFR 275.203(l)-1; 
and
    (B) Does not engage in any activity that would constitute 
proprietary trading under Sec.  248.3(b)(1)(i), as if the issuer were a 
banking entity.
    (ii) A banking entity that acts as a sponsor, investment adviser, 
or commodity trading advisor to an issuer that meets the conditions in 
paragraph (c)(16)(i) of this section may not rely on this exclusion 
unless the banking entity:
    (A) Provides in writing to any prospective and actual investor in 
the issuer the disclosures required under Sec.  248.11 (a)(8), as if 
the issuer were a covered fund; and
    (B) Ensures that the activities of the issuer are consistent with 
safety and soundness standards that are substantially similar to those 
that would apply if the banking entity engaged in the activities 
directly.
    (iii) The banking entity must not, directly or indirectly, 
guarantee, assume, or otherwise insure the obligations or performance 
of the issuer.
    (iv) A banking entity's ownership interest in or relationship with 
the issuer must:
    (A) Comply with the limitations imposed in Sec. Sec.  248.14 
(except the banking entity may acquire and retain any ownership 
interest in the issuer) and 248.15, as if the issuer were a covered 
fund; and
    (B) Be conducted in compliance with, and subject to, applicable 
banking laws and regulations, including applicable safety and soundness 
standards.
    (17) Family wealth management vehicles. (i) Subject to paragraph 
(c)(17)(ii) of this section, any entity that is not, and does not hold 
itself out as being, an entity or arrangement that raises money from 
investors primarily for the purpose of investing in securities for 
resale or other disposition or otherwise trading in securities, and:
    (A) If the entity is a trust, the grantor(s) of the entity are all 
family customers; and
    (B) If the entity is not a trust:
    (1) A majority of the voting interests in the entity are owned 
(directly or indirectly) by family customers; and
    (2) The entity is owned only by family customers and up to 3 
closely related persons of the family customers.
    (ii) A banking entity may rely on the exclusion in paragraph 
(c)(17)(i) of this section with respect to an entity provided that the 
banking entity (or an affiliate):
    (A) Provides bona fide trust, fiduciary, investment advisory, or 
commodity trading advisory services to the entity;
    (B) Does not, directly or indirectly, guarantee, assume, or 
otherwise insure the obligations or performance of such entity;
    (C) Complies with the disclosure obligations under Sec.  
248.11(a)(8), as if such entity were a covered fund;
    (D) Does not acquire or retain, as principal, an ownership interest 
in the entity, other than up to 0.5 percent of the entity's outstanding 
ownership interests that may be held by the banking entity and its 
affiliates for the purpose of and to the extent necessary for 
establishing corporate separateness or addressing bankruptcy, 
insolvency, or similar concerns;
    (E) Complies with the requirements of Sec. Sec.  248.14(b) and 
248.15, as if such entity were a covered fund; and
    (F) Complies with the requirements of 12 CFR 223.15(a), as if such 
banking entity and its affiliates were a member bank and the issuer 
were an affiliate thereof.
    (iii) For purposes of paragraph (c)(17) of this section, the 
following definitions apply:
    (A) ``Closely related person'' means a natural person (including 
the estate and estate planning vehicles of such person) who has 
longstanding business or personal relationships with any family 
customer.
    (B) ``Family customer'' means:
    (1) A family client, as defined in Rule 202(a)(11)(G)-1(d)(4) of 
the Investment Advisers Act of 1940 (17 CFR 275.202(a)(11)(G)-1(d)(4)); 
or
    (2) Any natural person who is a father-in-law, mother-in-law, 
brother-in-law, sister-in-law, son-in-law or daughter-in-law of a 
family client, or a spouse or a spousal equivalent of any of the 
foregoing.
    (18) Customer facilitation vehicles. (i) Subject to paragraph 
(c)(18)(ii) of this section, an issuer that is formed by or at the 
request of a customer of the banking entity for the purpose of 
providing such customer (which may include one or more affiliates of 
such customer) with exposure to a transaction, investment strategy, or 
other service provided by the banking entity.
    (ii) A banking entity may rely on the exclusion in paragraph 
(c)(18)(i) of this section with respect to an issuer provided that:
    (A) All of the ownership interests of the issuer are owned by the 
customer (which may include one or more of its affiliates) for whom the 
issuer was created, subject to paragraph (c)(18)(ii)(B)(4) of this 
section; and
    (B) The banking entity and its affiliates:
    (1) Maintain documentation outlining how the banking entity intends 
to facilitate the customer's exposure to such transaction, investment 
strategy, or service;
    (2) Do not, directly or indirectly, guarantee, assume, or otherwise 
insure the obligations or performance of such issuer;

[[Page 12185]]

    (3) Comply with the disclosure obligations under Sec.  
248.11(a)(8), as if such issuer were a covered fund;
    (4) Do not acquire or retain, as principal, an ownership interest 
in the issuer, other than up to 0.5 percent of the issuer's outstanding 
ownership interests that may be held by the banking entity and its 
affiliates for the purpose of and to the extent necessary for 
establishing corporate separateness or addressing bankruptcy, 
insolvency, or similar concerns;
    (5) Comply with the requirements of Sec. Sec.  248.14(b) and 
248.15, as if such issuer were a covered fund; and
    (6) Comply with the requirements of 12 CFR 223.15(a), as if such 
banking entity and its affiliates were a member bank and the issuer 
were an affiliate thereof.
* * * * *
    (d) * * *
    (6) Ownership interest--(i) Ownership interest means any equity, 
partnership, or other similar interest. An ``other similar interest'' 
means an interest that:
    (A) Has the right to participate in the selection or removal of a 
general partner, managing member, member of the board of directors or 
trustees, investment manager, investment adviser, or commodity trading 
advisor of the covered fund (excluding the rights of a creditor to 
exercise remedies upon the occurrence of an event of default or an 
acceleration event, which includes the right to participate in the 
removal of an investment manager for cause or to nominate or vote on a 
nominated replacement manager upon an investment manager's resignation 
or removal);
    (B) Has the right under the terms of the interest to receive a 
share of the income, gains or profits of the covered fund;
    (C) Has the right to receive the underlying assets of the covered 
fund after all other interests have been redeemed and/or paid in full 
(excluding the rights of a creditor to exercise remedies upon the 
occurrence of an event of default or an acceleration event);
    (D) Has the right to receive all or a portion of excess spread (the 
positive difference, if any, between the aggregate interest payments 
received from the underlying assets of the covered fund and the 
aggregate interest paid to the holders of other outstanding interests);
    (E) Provides under the terms of the interest that the amounts 
payable by the covered fund with respect to the interest could be 
reduced based on losses arising from the underlying assets of the 
covered fund, such as allocation of losses, write-downs or charge-offs 
of the outstanding principal balance, or reductions in the amount of 
interest due and payable on the interest;
    (F) Receives income on a pass-through basis from the covered fund, 
or has a rate of return that is determined by reference to the 
performance of the underlying assets of the covered fund; or
    (G) Any synthetic right to have, receive, or be allocated any of 
the rights in paragraphs (d)(6)(i)(A) through (F) of this section.
    (ii) Ownership interest does not include:
    (A) Restricted profit interest which is an interest held by an 
entity (or an employee or former employee thereof) in a covered fund 
for which the entity (or employee thereof) serves as investment 
manager, investment adviser, commodity trading advisor, or other 
service provider, so long as:
    (1) The sole purpose and effect of the interest is to allow the 
entity (or employee or former employee thereof) to share in the profits 
of the covered fund as performance compensation for the investment 
management, investment advisory, commodity trading advisory, or other 
services provided to the covered fund by the entity (or employee or 
former employee thereof), provided that the entity (or employee or 
former employee thereof) may be obligated under the terms of such 
interest to return profits previously received;
    (2) All such profit, once allocated, is distributed to the entity 
(or employee or former employee thereof) promptly after being earned 
or, if not so distributed, is retained by the covered fund for the sole 
purpose of establishing a reserve amount to satisfy contractual 
obligations with respect to subsequent losses of the covered fund and 
such undistributed profit of the entity (or employee or former employee 
thereof) does not share in the subsequent investment gains of the 
covered fund;
    (3) Any amounts invested in the covered fund, including any amounts 
paid by the entity in connection with obtaining the restricted profit 
interest, are within the limits of Sec.  248.12 of this subpart; and
    (4) The interest is not transferable by the entity (or employee or 
former employee thereof) except to an affiliate thereof (or an employee 
of the banking entity or affiliate), to immediate family members, or 
through the intestacy, of the employee or former employee, or in 
connection with a sale of the business that gave rise to the restricted 
profit interest by the entity (or employee or former employee thereof) 
to an unaffiliated party that provides investment management, 
investment advisory, commodity trading advisory, or other services to 
the fund.
    (B) Any senior loan or senior debt interest that has the following 
characteristics:
    (1) Under the terms of the interest the holders of such interest do 
not have the right to receive a share of the income, gains, or profits 
of the covered fund, but are entitled to receive only:
    (i) Interest at a stated interest rate, as well as commitment fees 
or other fees, which are not determined by reference to the performance 
of the underlying assets of the covered fund; and
    (ii) Fixed principal payments on or before a maturity date (which 
may include prepayment premiums intended solely to reflect, and 
compensate holders of the interest for, foregone income resulting from 
an early prepayment);
    (2) The entitlement to payments under the terms of the interest are 
absolute and could not be reduced based on losses arising from the 
underlying assets of the covered fund, such as allocation of losses, 
write-downs or charge-offs of the outstanding principal balance, or 
reductions in the amount of interest due and payable on the interest; 
and
    (3) The holders of the interest are not entitled to receive the 
underlying assets of the covered fund after all other interests have 
been redeemed or paid in full (excluding the rights of a creditor to 
exercise remedies upon the occurrence of an event of default or an 
acceleration event).
0
10. Amend Sec.  248.12 by:
0
a. Revising paragraph (b)(1)(ii);
0
b. Revising paragraph (b)(4);
0
c. Adding paragraph (b)(5);
0
d. Revising paragraph (c)(1); and
0
e. Revising paragraphs (d) and (e).
    The revisions and addition read as follows:


Sec.  248.12   Permitted investment in a covered fund.

* * * * *
    (b) * * *
    (1) * * *
    (ii) Treatment of registered investment companies, SEC-regulated 
business development companies, and foreign public funds. For purposes 
of paragraph (b)(1)(i) of this section, a registered investment 
company, SEC-regulated business development companies, or foreign 
public fund as described in Sec.  248.10(c)(1) will not be considered 
to be an affiliate of the banking entity so long as the banking entity:
    (A) Does not own, control, or hold with the power to vote 25 
percent or more of the voting shares of the company or fund; and

[[Page 12186]]

    (B) Provides investment advisory, commodity trading advisory, 
administrative, and other services to the company or fund in compliance 
with the limitations under applicable regulation, order, or other 
authority.
* * * * *
    (4) Multi-tier fund investments--(i) Master-feeder fund 
investments. If the principal investment strategy of a covered fund 
(the ``feeder fund'') is to invest substantially all of its assets in 
another single covered fund (the ``master fund''), then for purposes of 
the investment limitations in paragraphs (a)(2)(i)(B) and (a)(2)(ii) of 
this section, the banking entity's permitted investment in such funds 
shall be measured only by reference to the value of the master fund. 
The banking entity's permitted investment in the master fund shall 
include any investment by the banking entity in the master fund, as 
well as the banking entity's pro-rata share of any ownership interest 
in the master fund that is held through the feeder fund; and
    (ii) Fund-of-funds investments. If a banking entity organizes and 
offers a covered fund pursuant to Sec.  248.11 for the purpose of 
investing in other covered funds (a ``fund of funds'') and that fund of 
funds itself invests in another covered fund that the banking entity is 
permitted to own, then the banking entity's permitted investment in 
that other fund shall include any investment by the banking entity in 
that other fund, as well as the banking entity's pro-rata share of any 
ownership interest in the fund that is held through the fund of funds. 
The investment of the banking entity may not represent more than 3 
percent of the amount or value of any single covered fund.
    (5) Parallel Investments and Co-Investments--(i) A banking entity 
shall not be required to include in the calculation of the investment 
limits under paragraph (a)(2) of this section any investment the 
banking entity makes alongside a covered fund as long as the investment 
is made in compliance with applicable laws and regulations, including 
applicable safety and soundness standards.
    (ii) A banking entity shall not be restricted under this section in 
the amount of any investment the banking entity makes alongside a 
covered fund as long as the investment is made in compliance with 
applicable laws and regulations, including applicable safety and 
soundness standards.
    (c) * * *
    (1)(i) For purposes of paragraph (a)(2)(iii) of this section, the 
aggregate value of all ownership interests held by a banking entity 
shall be the sum of all amounts paid or contributed by the banking 
entity in connection with acquiring or retaining an ownership interest 
in covered funds (together with any amounts paid by the entity in 
connection with obtaining a restricted profit interest under Sec.  
248.10(d)(6)(ii)), on a historical cost basis;
    (ii) Treatment of employee and director restricted profit interests 
financed by the banking entity. For purposes of paragraph (c)(1)(i) of 
this section, an investment by a director or employee of a banking 
entity who acquires a restricted profit interest in their personal 
capacity in a covered fund sponsored by the banking entity will be 
attributed to the banking entity if the banking entity, directly or 
indirectly, extends financing for the purpose of enabling the director 
or employee to acquire the restricted profit interest in the fund and 
the financing is used to acquire such ownership interest in the covered 
fund.
* * * * *
    (d) Capital treatment for a permitted investment in a covered fund. 
For purposes of calculating compliance with the applicable regulatory 
capital requirements, a banking entity shall deduct from the banking 
entity's tier 1 capital (as determined under paragraph (c)(2) of this 
section) the greater of:
    (1)(i) The sum of all amounts paid or contributed by the banking 
entity in connection with acquiring or retaining an ownership interest 
(together with any amounts paid by the entity in connection with 
obtaining a restricted profit interest under Sec.  248.10(d)(6)(ii) of 
subpart C of this part), on a historical cost basis, plus any earnings 
received; and
    (ii) The fair market value of the banking entity's ownership 
interests in the covered fund as determined under paragraph (b)(2)(ii) 
or (b)(3) of this section (together with any amounts paid by the entity 
in connection with obtaining a restricted profit interest under Sec.  
248.10(d)(6)(ii) of subpart C of this part), if the banking entity 
accounts for the profits (or losses) of the fund investment in its 
financial statements.
    (2) Treatment of employee and director restricted profit interests 
financed by the banking entity. For purposes of paragraph (d)(1) of 
this section, an investment by a director or employee of a banking 
entity who acquires a restricted profit interest in his or her personal 
capacity in a covered fund sponsored by the banking entity will be 
attributed to the banking entity if the banking entity, directly or 
indirectly, extends financing for the purpose of enabling the director 
or employee to acquire the restricted profit interest in the fund and 
the financing is used to acquire such ownership interest in the covered 
fund.
    (e) Extension of time to divest an ownership interest. (1) 
Extension Period. Upon application by a banking entity, the Board may 
extend the period under paragraph (a)(2)(i) of this section for up to 2 
additional years if the Board finds that an extension would be 
consistent with safety and soundness and not detrimental to the public 
interest.
    (2) Application Requirements. An application for extension must:
    (i) Be submitted to the Board at least 90 days prior to the 
expiration of the applicable time period;
    (ii) Provide the reasons for application, including information 
that addresses the factors in paragraph (e)(3) of this section; and
    (iii) Explain the banking entity's plan for reducing the permitted 
investment in a covered fund through redemption, sale, dilution or 
other methods as required in paragraph (a)(2) of this section.
    (3) Factors governing the Board determinations. In reviewing any 
application under paragraph (e)(1) of this section, the Board may 
consider all the facts and circumstances related to the permitted 
investment in a covered fund, including:
    (i) Whether the investment would result, directly or indirectly, in 
a material exposure by the banking entity to high-risk assets or high-
risk trading strategies;
    (ii) The contractual terms governing the banking entity's interest 
in the covered fund;
    (iii) The date on which the covered fund is expected to have 
attracted sufficient investments from investors unaffiliated with the 
banking entity to enable the banking entity to comply with the 
limitations in paragraph (a)(2)(i) of this section;
    (iv) The total exposure of the covered banking entity to the 
investment and the risks that disposing of, or maintaining, the 
investment in the covered fund may pose to the banking entity and the 
financial stability of the United States;
    (v) The cost to the banking entity of divesting or disposing of the 
investment within the applicable period;
    (vi) Whether the investment or the divestiture or conformance of 
the investment would involve or result in a material conflict of 
interest between the banking entity and unaffiliated parties, including 
clients, customers, or counterparties to which it owes a duty;
    (vii) The banking entity's prior efforts to reduce through 
redemption, sale,

[[Page 12187]]

dilution, or other methods its ownership interests in the covered fund, 
including activities related to the marketing of interests in such 
covered fund;
    (viii) Market conditions; and
    (ix) Any other factor that the Board believes appropriate.
    (4) Authority to impose restrictions on activities or investment 
during any extension period. The Board may impose such conditions on 
any extension approved under paragraph (e)(1) of this section as the 
Board determines are necessary or appropriate to protect the safety and 
soundness of the banking entity or the financial stability of the 
United States, address material conflicts of interest or other unsound 
banking practices, or otherwise further the purposes of section 13 of 
the BHC Act and this part.
    (5) Consultation. In the case of a banking entity that is primarily 
regulated by another Federal banking agency, the SEC, or the CFTC, the 
Board will consult with such agency prior to acting on an application 
by the banking entity for an extension under paragraph (e)(1) of this 
section.
0
11. Amend Sec.  248.13 by adding paragraph (d) to read as follows:


Sec.  248.13   Other permitted covered fund activities and investments.

* * * * *
    (d) Permitted covered fund activities and investments of qualifying 
foreign excluded funds. (1) The prohibition contained in Sec.  
248.10(a) does not apply to a qualifying foreign excluded fund.
    (2) For purposes of this paragraph (d), a qualifying foreign 
excluded fund means a banking entity that:
    (i) Is organized or established outside the United States, and the 
ownership interests of which are offered and sold solely outside the 
United States;
    (ii)(A) Would be a covered fund if the entity were organized or 
established in the United States, or
    (B) Is, or holds itself out as being, an entity or arrangement that 
raises money from investors primarily for the purpose of investing in 
financial instruments for resale or other disposition or otherwise 
trading in financial instruments;
    (iii) Would not otherwise be a banking entity except by virtue of 
the acquisition or retention of an ownership interest in, sponsorship 
of, or relationship with the entity, by another banking entity that 
meets the following:
    (A) The banking entity is not organized, or directly or indirectly 
controlled by a banking entity that is organized, under the laws of the 
United States or of any State; and
    (B) The banking entity's acquisition of an ownership interest in or 
sponsorship of the fund by the foreign banking entity meets the 
requirements for permitted covered fund activities and investments 
solely outside the United States, as provided in Sec.  248.13(b);
    (iv) Is established and operated as part of a bona fide asset 
management business; and
    (v) Is not operated in a manner that enables any other banking 
entity to evade the requirements of section 13 of the BHC Act or this 
part.
0
12. Amend Sec.  248.14 by:
0
a. Revising paragraph (a)(2)(i);
0
b. Revising paragraph (a)(2)(ii)(C);
0
c. Adding paragraphs (a)(2)(iii), (a)(2)(iv); and (a)(3); and
0
d. Revising paragraph (c).
    The revisions and additions read as follows:


Sec.  248.14   Limitations on relationships with a covered fund.

    (a) * * *
    (2) * * *
    (i) Acquire and retain any ownership interest in a covered fund in 
accordance with the requirements of Sec. Sec.  248.11, 248.12, or 
248.13;
    (ii) * * *
    (C) The Board has not determined that such transaction is 
inconsistent with the safe and sound operation and condition of the 
banking entity; and
    (iii) Enter into a transaction with a covered fund that would be an 
exempt covered transaction under 12 U.S.C. 371c(d) or Sec.  223.42 of 
the Board's Regulation W (12 CFR 223.42); and
    (iv) Extend credit to or purchase assets from a covered fund, 
provided:
    (A) Each extension of credit or purchase of assets is in the 
ordinary course of business in connection with payment transactions; 
settlement services; or futures, derivatives, and securities clearing;
    (B) Each extension of credit is repaid, sold, or terminated by the 
end of five business days; and
    (C) The banking entity making each extension of credit meets the 
requirements of Sec.  223.42(l)(1)(i) and (ii) of the Board's 
Regulation W (12 CFR 223.42(l)(1)(i) and(ii)), as if the extension of 
credit was an intraday extension of credit, regardless of the duration 
of the extension of credit.
    (3) Any transaction or activity permitted under paragraphs 
(a)(2)(iii) or (iv) must comply with the limitations in Sec.  248.15.
* * * * *
    (c) Restrictions on other permitted transactions. Any transaction 
permitted under paragraphs (a)(2)(ii), (a)(2)(iii), or (a)(2)(iv) of 
this section shall be subject to section 23B of the Federal Reserve Act 
(12 U.S.C. 371c-1) as if the counterparty were an affiliate of the 
banking entity.

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 351

Authority and Issuance

    For the reasons set forth in the Common Preamble, the Federal 
Deposit Insurance Corporation proposes to amend chapter III of Title 
12, Code of Federal Regulations as follows:

PART 351--PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND 
RELATIONSHIPS WITH COVERED FUNDS

0
13. The authority citation for part 351 continues to read as follows:

    Authority:  12 U.S.C. 1851; 1811 et seq.; 3101 et seq.; and 
5412.

Subpart B--Proprietary Trading

0
14. Amend Sec.  351.6 by adding paragraph (f) to read as follows:


Sec.  351.6   Other permitted proprietary trading activities.

* * * * *
    (f) Permitted trading activities of qualifying foreign excluded 
funds. The prohibition contained in Sec.  351.3(a) does not apply to 
the purchase or sale of a financial instrument by a qualifying foreign 
excluded fund. For purposes of this paragraph (f), a qualifying foreign 
excluded fund means a banking entity that:
    (1) Is organized or established outside the United States, and the 
ownership interests of which are offered and sold solely outside the 
United States;
    (2)(i) Would be a covered fund if the entity were organized or 
established in the United States, or
    (ii) Is, or holds itself out as being, an entity or arrangement 
that raises money from investors primarily for the purpose of investing 
in financial instruments for resale or other disposition or otherwise 
trading in financial instruments;
    (3) Would not otherwise be a banking entity except by virtue of the 
acquisition or retention of an ownership interest in, sponsorship of, 
or relationship with the entity, by another banking entity that meets 
the following:
    (i) The banking entity is not organized, or directly or indirectly 
controlled by a banking entity that is organized, under the laws of the 
United States or of any State; and
    (ii) The banking entity's acquisition or retention of an ownership 
interest in or sponsorship of the fund meets the requirements for 
permitted covered fund activities and investments solely

[[Page 12188]]

outside the United States, as provided in Sec.  351.13(b);
    (4) Is established and operated as part of a bona fide asset 
management business; and
    (5) Is not operated in a manner that enables any other banking 
entity to evade the requirements of section 13 of the BHC Act or this 
part.

Subpart C--Covered Funds Activities and Investments

0
15. Amend Sec.  351.10 by:
0
a. Revising paragraph (c)(1);
0
b. Revising paragraph (c)(3)(i);
0
c. Revising paragraph (c)(8);
0
d. Revising paragraph (c)(10)(i);
0
e. Revising paragraph (c)(11)(i);
0
f. Adding paragraphs (c)(15), (16), (17), and (18); and
0
g. Revising paragraph (d)(6).
    The revisions and additions read as follows:


Sec.  351.10   Prohibition on acquiring or retaining an ownership 
interest in and having certain relationships with a covered fund.

* * * * *
    (c) * * *
    (1) Foreign public funds. (i) Subject to paragraphs (c)(1)(ii) and 
(iii) of this section, an issuer that:
    (A) Is organized or established outside of the United States; and
    (B) Is authorized to offer and sell ownership interests, and such 
interests are offered and sold, through one or more public offerings.
    (ii) With respect to a banking entity that is, or is controlled 
directly or indirectly by a banking entity that is, located in or 
organized under the laws of the United States or of any State and any 
issuer for which such banking entity acts as sponsor, the sponsoring 
banking entity may not rely on the exemption in paragraph (c)(1)(i) of 
this section for such issuer unless ownership interests in the issuer 
are sold predominantly to persons other than:
    (A) Such sponsoring banking entity;
    (B) Such issuer;
    (C) Affiliates of such sponsoring banking entity or such issuer; 
and
    (D) Directors and senior executive officers as defined in Sec.  
225.71(c) of the Board's Regulation Y (12 CFR 225.71(c)) of such 
entities.
    (iii) For purposes of paragraph (c)(1)(i)(B) of this section, the 
term ``public offering'' means a distribution (as defined in Sec.  
351.4(a)(3)) of securities in any jurisdiction outside the United 
States to investors, including retail investors, provided that:
    (A) The distribution is subject to substantive disclosure and 
retail investor protection laws or regulations;
    (B) With respect to an issuer for which the banking entity serves 
as the investment manager, investment adviser, commodity trading 
advisor, commodity pool operator, or sponsor, the distribution complies 
with all applicable requirements in the jurisdiction in which such 
distribution is being made;
    (C) The distribution does not restrict availability to investors 
having a minimum level of net worth or net investment assets; and
    (D) The issuer has filed or submitted, with the appropriate 
regulatory authority in such jurisdiction, offering disclosure 
documents that are publicly available.
* * * * *
    (3) * * *
    (i) Is composed of no more than 10 unaffiliated co-venturers;
* * * * *
    (8) Loan securitizations--(i) Scope. An issuing entity for asset-
backed securities that satisfies all the conditions of this paragraph 
(c)(8) and the assets or holdings of which are composed solely of:
    (A) Loans as defined in Sec.  351.2(t);
    (B) Rights or other assets designed to assure the servicing or 
timely distribution of proceeds to holders of such securities and 
rights or other assets that are related or incidental to purchasing or 
otherwise acquiring and holding the loans, provided that each asset 
that is a security (other than special units of beneficial interest and 
collateral certificates meeting the requirements of paragraph (c)(8)(v) 
of this section) meets the requirements of paragraph (c)(8)(iii) of 
this section;
    (C) Interest rate or foreign exchange derivatives that meet the 
requirements of paragraph (c)(8)(iv) of this section; and
    (D) Special units of beneficial interest and collateral 
certificates that meet the requirements of paragraph (c)(8)(v) of this 
section.
    (E) Any other assets, provided that the aggregate value of any such 
other assets that do not meet the criteria specified in paragraphs 
(c)(8)(i)(A) through (c)(8)(i)(D) of this section do not exceed five 
percent of the aggregate value of the issuing entity's assets.
    (ii) Impermissible assets. For purposes of this paragraph (c)(8), 
except as permitted under paragraph (c)(8)(i)(E) of this section, the 
assets or holdings of the issuing entity shall not include any of the 
following:
    (A) A security, including an asset-backed security, or an interest 
in an equity or debt security other than as permitted in paragraphs 
(c)(8)(iii), (iv), or (v) of this section;
    (B) A derivative, other than a derivative that meets the 
requirements of paragraph (c)(8)(iv) of this section; or
    (C) A commodity forward contract.
    (iii) Permitted securities. Notwithstanding paragraph (c)(8)(ii)(A) 
of this section, the issuing entity may hold securities if those 
securities are:
    (A) Cash equivalents--which, for the purposes of this paragraph, 
means high quality, highly liquid investments whose maturity 
corresponds to the securitization's expected or potential need for 
funds and whose currency corresponds to either the underlying loans or 
the asset-backed securities--for purposes of the rights and assets in 
paragraph (c)(8)(i)(B) of this section; or
    (B) Securities received in lieu of debts previously contracted with 
respect to the loans supporting the asset-backed securities.
    (iv) Derivatives. The holdings of derivatives by the issuing entity 
shall be limited to interest rate or foreign exchange derivatives that 
satisfy all of the following conditions:
    (A) The written terms of the derivatives directly relate to the 
loans, the asset-backed securities, or the contractual rights or other 
assets described in paragraph (c)(8)(i)(B) of this section; and
    (B) The derivatives reduce the interest rate and/or foreign 
exchange risks related to the loans, the asset-backed securities, or 
the contractual rights or other assets described in paragraph 
(c)(8)(i)(B) of this section.
    (v) Special units of beneficial interest and collateral 
certificates. The assets or holdings of the issuing entity may include 
collateral certificates and special units of beneficial interest issued 
by a special purpose vehicle, provided that:
    (A) The special purpose vehicle that issues the special unit of 
beneficial interest or collateral certificate meets the requirements in 
this paragraph (c)(8);
    (B) The special unit of beneficial interest or collateral 
certificate is used for the sole purpose of transferring to the issuing 
entity for the loan securitization the economic risks and benefits of 
the assets that are permissible for loan securitizations under this 
paragraph (c)(8) and does not directly or indirectly transfer any 
interest in any other economic or financial exposure;
    (C) The special unit of beneficial interest or collateral 
certificate is created solely to satisfy legal requirements or 
otherwise facilitate the structuring of the loan securitization; and

[[Page 12189]]

    (D) The special purpose vehicle that issues the special unit of 
beneficial interest or collateral certificate and the issuing entity 
are established under the direction of the same entity that initiated 
the loan securitization.
* * * * *
    (10) Qualifying covered bonds--(i) Scope. An entity owning or 
holding a dynamic or fixed pool of loans or other assets as provided in 
paragraph (c)(8) of this section for the benefit of the holders of 
covered bonds, provided that the assets in the pool are composed solely 
of assets that meet the conditions in paragraph (c)(8)(i) of this 
section.
* * * * *
    (11) * * *
    (i) That is a small business investment company, as defined in 
section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 
662), or that has received from the Small Business Administration 
notice to proceed to qualify for a license as a small business 
investment company, which notice or license has not been revoked, or 
that has voluntarily surrendered its license to operate as a small 
business investment company in accordance with 13 CFR 107.1900 and does 
not make any new investments (other than investments in cash 
equivalents, which, for the purposes of this paragraph, means high 
quality, highly liquid investments whose maturity corresponds to the 
issuer's expected or potential need for funds and whose currency 
corresponds to the issuer's assets) after such voluntary surrender; or
* * * * *
    (15) Credit funds. Subject to paragraphs (c)(15)(iii), (iv), and 
(v) of this section, an issuer that satisfies the asset and activity 
requirements of paragraphs (c)(15)(i) and (ii) of this section.
    (i) Asset requirements. The issuer's assets must be composed solely 
of:
    (A) Loans as defined in Sec.  351.2(t);
    (B) Debt instruments, subject to paragraph (c)(15)(iv) of this 
section;
    (C) Rights and other assets that are related or incidental to 
acquiring, holding, servicing, or selling such loans or debt 
instruments, provided that:
    (1) Each right or asset that is a security is either:
    (i) A cash equivalent (which, for the purposes of this paragraph, 
means high quality, highly liquid investments whose maturity 
corresponds to the issuer's expected or potential need for funds and 
whose currency corresponds to either the underlying loans or the debt 
instruments);
    (ii) A security received in lieu of debts previously contracted 
with respect to such loans or debt instruments; or
    (iii) An equity security (or right to acquire an equity security) 
received on customary terms in connection with such loans or debt 
instruments; and
    (2) Rights or other assets held under this paragraph (c)(15)(i)(C) 
of this section may not include commodity forward contracts; and
    (D) Interest rate or foreign exchange derivatives, if:
    (1) The written terms of the derivative directly relate to the 
loans, debt instruments, or other rights or assets described in 
paragraph (c)(15)(i)(C) of this section; and
    (2) The derivative reduces the interest rate and/or foreign 
exchange risks related to the loans, debt instruments, or other rights 
or assets described in paragraph (c)(15)(i)(C) of this section.
    (ii) Activity requirements. To be eligible for the exclusion of 
paragraph (c)(15) of this section, an issuer must:
    (A) Not engage in any activity that would constitute proprietary 
trading under Sec.  351.3(b)(l)(i) of subpart A of this part, as if the 
issuer were a banking entity; and
    (B) Not issue asset-backed securities.
    (iii) Requirements for a sponsor, investment adviser, or commodity 
trading advisor. A banking entity that acts as a sponsor, investment 
adviser, or commodity trading advisor to an issuer that meets the 
conditions in paragraphs (c)(15)(i) and (ii) of this section may not 
rely on this exclusion unless the banking entity:
    (A) Provides in writing to any prospective and actual investor in 
the issuer the disclosures required under Sec.  351.11(a)(8), as if the 
issuer were a covered fund; and
    (B) Ensures that the activities of the issuer are consistent with 
safety and soundness standards that are substantially similar to those 
that would apply if the banking entity engaged in the activities 
directly.
    (iv) Additional Banking Entity Requirements. A banking entity may 
not rely on this exclusion with respect to an issuer that meets the 
conditions in paragraphs (c)(15)(i) and (ii) of this section unless:
    (A) The banking entity does not, directly or indirectly, guarantee, 
assume, or otherwise insure the obligations or performance of the 
issuer or of any entity to which such issuer extends credit or in which 
such issuer invests; and
    (B) Any assets the issuer holds pursuant to paragraphs 
(c)(15)(i)(B) or (i)(C)(1)(iii) of this section would be permissible 
for the banking entity to acquire and hold directly.
    (v) Investment and Relationship Limits. A banking entity's 
investment in, and relationship with, the issuer must:
    (A) Comply with the limitations imposed in Sec. Sec.  351.14 
(except the banking entity may acquire and retain any ownership 
interest in the issuer) and 351.15, as if the issuer were a covered 
fund; and
    (B) Be conducted in compliance with, and subject to, applicable 
banking laws and regulations, including applicable safety and soundness 
standards.
    (16) Qualifying venture capital funds. (i) Subject to paragraphs 
(c)(16)(ii) through (iv) of this section, an issuer that:
    (A) Is a venture capital fund as defined in 17 CFR 275.203(l)-1; 
and
    (B) Does not engage in any activity that would constitute 
proprietary trading under Sec.  351.3(b)(1)(i), as if the issuer were a 
banking entity.
    (ii) A banking entity that acts as a sponsor, investment adviser, 
or commodity trading advisor to an issuer that meets the conditions in 
paragraph (c)(16)(i) of this section may not rely on this exclusion 
unless the banking entity:
    (A) Provides in writing to any prospective and actual investor in 
the issuer the disclosures required under Sec.  351.11(a)(8), as if the 
issuer were a covered fund; and
    (B) Ensures that the activities of the issuer are consistent with 
safety and soundness standards that are substantially similar to those 
that would apply if the banking entity engaged in the activities 
directly.
    (iii) The banking entity must not, directly or indirectly, 
guarantee, assume, or otherwise insure the obligations or performance 
of the issuer.
    (iv) A banking entity's ownership interest in or relationship with 
the issuer must:
    (A) Comply with the limitations imposed in Sec. Sec.  351.14 
(except the banking entity may acquire and retain any ownership 
interest in the issuer) and 351.15, as if the issuer were a covered 
fund; and
    (B) Be conducted in compliance with, and subject to, applicable 
banking laws and regulations, including applicable safety and soundness 
standards.
    (17) Family wealth management vehicles. (i) Subject to paragraph 
(c)(17)(ii) of this section, any entity that is not, and does not hold 
itself out as being, an entity or arrangement that raises money from 
investors primarily for the purpose of investing in securities for 
resale or other disposition or otherwise trading in securities, and:
    (A) If the entity is a trust, the grantor(s) of the entity are all 
family customers; and

[[Page 12190]]

    (B) If the entity is not a trust:
    (1) A majority of the voting interests in the entity are owned 
(directly or indirectly) by family customers; and
    (2) The entity is owned only by family customers and up to 3 
closely related persons of the family customers.
    (ii) A banking entity may rely on the exclusion in paragraph 
(c)(17)(i) of this section with respect to an entity provided that the 
banking entity (or an affiliate):
    (A) Provides bona fide trust, fiduciary, investment advisory, or 
commodity trading advisory services to the entity;
    (B) Does not, directly or indirectly, guarantee, assume, or 
otherwise insure the obligations or performance of such entity;
    (C) Complies with the disclosure obligations under Sec.  
351.11(a)(8), as if such entity were a covered fund;
    (D) Does not acquire or retain, as principal, an ownership interest 
in the entity, other than up to 0.5 percent of the entity's outstanding 
ownership interests that may be held by the banking entity and its 
affiliates for the purpose of and to the extent necessary for 
establishing corporate separateness or addressing bankruptcy, 
insolvency, or similar concerns;
    (E) Complies with the requirements of Sec. Sec.  351.14(b) and 
351.15, as if such entity were a covered fund; and
    (F) Complies with the requirements of 12 CFR 223.15(a), as if such 
banking entity and its affiliates were a member bank and the issuer 
were an affiliate thereof.
    (iii) For purposes of paragraph (c)(17) of this section, the 
following definitions apply:
    (A) ``Closely related person'' means a natural person (including 
the estate and estate planning vehicles of such person) who has 
longstanding business or personal relationships with any family 
customer.
    (B) ``Family customer'' means:
    (1) A family client, as defined in Rule 202(a)(11)(G)-1(d)(4) of 
the Investment Advisers Act of 1940 (17 CFR 275.202(a)(11)(G)-1(d)(4)); 
or
    (2) Any natural person who is a father-in-law, mother-in-law, 
brother-in-law, sister-in-law, son-in-law or daughter-in-law of a 
family client, or a spouse or a spousal equivalent of any of the 
foregoing.
    (18) Customer facilitation vehicles. (i) Subject to paragraph 
(c)(18)(ii) of this section, an issuer that is formed by or at the 
request of a customer of the banking entity for the purpose of 
providing such customer (which may include one or more affiliates of 
such customer) with exposure to a transaction, investment strategy, or 
other service provided by the banking entity.
    (ii) A banking entity may rely on the exclusion in paragraph 
(c)(18)(i) of this section with respect to an issuer provided that:
    (A) All of the ownership interests of the issuer are owned by the 
customer (which may include one or more of its affiliates) for whom the 
issuer was created, subject to paragraph (c)(18)(ii)(B)(4) of this 
section; and
    (B) The banking entity and its affiliates:
    (1) Maintain documentation outlining how the banking entity intends 
to facilitate the customer's exposure to such transaction, investment 
strategy, or service;
    (2) Do not, directly or indirectly, guarantee, assume, or otherwise 
insure the obligations or performance of such issuer;
    (3) Comply with the disclosure obligations under Sec.  
351.11(a)(8), as if such issuer were a covered fund;
    (4) Do not acquire or retain, as principal, an ownership interest 
in the issuer, other than up to 0.5 percent of the issuer's outstanding 
ownership interests that may be held by the banking entity and its 
affiliates for the purpose of and to the extent necessary for 
establishing corporate separateness or addressing bankruptcy, 
insolvency, or similar concerns;
    (5) Comply with the requirements of Sec. Sec.  351.14(b) and 
351.15, as if such issuer were a covered fund; and
    (6) Comply with the requirements of 12 CFR 223.15(a), as if such 
banking entity and its affiliates were a member bank and the issuer 
were an affiliate thereof.
* * * * *
    (d) * * *
    (6) Ownership interest--(i) Ownership interest means any equity, 
partnership, or other similar interest. An ``other similar interest'' 
means an interest that:
    (A) Has the right to participate in the selection or removal of a 
general partner, managing member, member of the board of directors or 
trustees, investment manager, investment adviser, or commodity trading 
advisor of the covered fund (excluding the rights of a creditor to 
exercise remedies upon the occurrence of an event of default or an 
acceleration event, which includes the right to participate in the 
removal of an investment manager for cause or to nominate or vote on a 
nominated replacement manager upon an investment manager's resignation 
or removal);
    (B) Has the right under the terms of the interest to receive a 
share of the income, gains or profits of the covered fund;
    (C) Has the right to receive the underlying assets of the covered 
fund after all other interests have been redeemed and/or paid in full 
(excluding the rights of a creditor to exercise remedies upon the 
occurrence of an event of default or an acceleration event);
    (D) Has the right to receive all or a portion of excess spread (the 
positive difference, if any, between the aggregate interest payments 
received from the underlying assets of the covered fund and the 
aggregate interest paid to the holders of other outstanding interests);
    (E) Provides under the terms of the interest that the amounts 
payable by the covered fund with respect to the interest could be 
reduced based on losses arising from the underlying assets of the 
covered fund, such as allocation of losses, write-downs or charge-offs 
of the outstanding principal balance, or reductions in the amount of 
interest due and payable on the interest;
    (F) Receives income on a pass-through basis from the covered fund, 
or has a rate of return that is determined by reference to the 
performance of the underlying assets of the covered fund; or
    (G) Any synthetic right to have, receive, or be allocated any of 
the rights in paragraphs (d)(6)(i)(A) through (F) of this section.
    (ii) Ownership interest does not include:
    (A) Restricted profit interest which is an interest held by an 
entity (or an employee or former employee thereof) in a covered fund 
for which the entity (or employee thereof) serves as investment 
manager, investment adviser, commodity trading advisor, or other 
service provider, so long as:
    (1) The sole purpose and effect of the interest is to allow the 
entity (or employee or former employee thereof) to share in the profits 
of the covered fund as performance compensation for the investment 
management, investment advisory, commodity trading advisory, or other 
services provided to the covered fund by the entity (or employee or 
former employee thereof), provided that the entity (or employee or 
former employee thereof) may be obligated under the terms of such 
interest to return profits previously received;
    (2) All such profit, once allocated, is distributed to the entity 
(or employee or former employee thereof) promptly after being earned 
or, if not so distributed, is retained by the covered fund for the sole 
purpose of establishing a reserve amount to satisfy contractual 
obligations with respect to subsequent losses of the

[[Page 12191]]

covered fund and such undistributed profit of the entity (or employee 
or former employee thereof) does not share in the subsequent investment 
gains of the covered fund;
    (3) Any amounts invested in the covered fund, including any amounts 
paid by the entity in connection with obtaining the restricted profit 
interest, are within the limits of Sec.  351.12 of this subpart; and
    (4) The interest is not transferable by the entity (or employee or 
former employee thereof) except to an affiliate thereof (or an employee 
of the banking entity or affiliate), to immediate family members, or 
through the intestacy, of the employee or former employee, or in 
connection with a sale of the business that gave rise to the restricted 
profit interest by the entity (or employee or former employee thereof) 
to an unaffiliated party that provides investment management, 
investment advisory, commodity trading advisory, or other services to 
the fund.
    (B) Any senior loan or senior debt interest that has the following 
characteristics:
    (1) Under the terms of the interest the holders of such interest do 
not have the right to receive a share of the income, gains, or profits 
of the covered fund, but are entitled to receive only:
    (i) Interest at a stated interest rate, as well as commitment fees 
or other fees, which are not determined by reference to the performance 
of the underlying assets of the covered fund; and
    (ii) Fixed principal payments on or before a maturity date (which 
may include prepayment premiums intended solely to reflect, and 
compensate holders of the interest for, foregone income resulting from 
an early prepayment);
    (2) The entitlement to payments under the terms of the interest are 
absolute and could not be reduced based on losses arising from the 
underlying assets of the covered fund, such as allocation of losses, 
write-downs or charge-offs of the outstanding principal balance, or 
reductions in the amount of interest due and payable on the interest; 
and
    (3) The holders of the interest are not entitled to receive the 
underlying assets of the covered fund after all other interests have 
been redeemed or paid in full (excluding the rights of a creditor to 
exercise remedies upon the occurrence of an event of default or an 
acceleration event).
0
16. Amend Sec.  351.12 by:
0
a. Revising paragraph (b)(1)(ii);
0
b. Revising paragraph (b)(4);
0
c. Adding paragraph (b)(5);
0
d. Revising paragraph (c)(1); and
0
e. Revising paragraphs (d) and (e).
    The revisions and addition read as follows:


Sec.  351.12   Permitted investment in a covered fund.

* * * * *
    (b) * * *
    (1) * * *
    (ii) Treatment of registered investment companies, SEC-regulated 
business development companies, and foreign public funds. For purposes 
of paragraph (b)(1)(i) of this section, a registered investment 
company, SEC-regulated business development companies, or foreign 
public fund as described in Sec.  351.10(c)(1) will not be considered 
to be an affiliate of the banking entity so long as the banking entity:
    (A) Does not own, control, or hold with the power to vote 25 
percent or more of the voting shares of the company or fund; and
    (B) Provides investment advisory, commodity trading advisory, 
administrative, and other services to the company or fund in compliance 
with the limitations under applicable regulation, order, or other 
authority.
* * * * *
    (4) Multi-tier fund investments--(i) Master-feeder fund 
investments. If the principal investment strategy of a covered fund 
(the ``feeder fund'') is to invest substantially all of its assets in 
another single covered fund (the ``master fund''), then for purposes of 
the investment limitations in paragraphs (a)(2)(i)(B) and (a)(2)(ii) of 
this section, the banking entity's permitted investment in such funds 
shall be measured only by reference to the value of the master fund. 
The banking entity's permitted investment in the master fund shall 
include any investment by the banking entity in the master fund, as 
well as the banking entity's pro-rata share of any ownership interest 
in the master fund that is held through the feeder fund; and
    (ii) Fund-of-funds investments. If a banking entity organizes and 
offers a covered fund pursuant to Sec.  351.11 for the purpose of 
investing in other covered funds (a ``fund of funds'') and that fund of 
funds itself invests in another covered fund that the banking entity is 
permitted to own, then the banking entity's permitted investment in 
that other fund shall include any investment by the banking entity in 
that other fund, as well as the banking entity's pro-rata share of any 
ownership interest in the fund that is held through the fund of funds. 
The investment of the banking entity may not represent more than 3 
percent of the amount or value of any single covered fund.
    (5) Parallel Investments and Co-Investments--(i) A banking entity 
shall not be required to include in the calculation of the investment 
limits under paragraph (a)(2) of this section any investment the 
banking entity makes alongside a covered fund as long as the investment 
is made in compliance with applicable laws and regulations, including 
applicable safety and soundness standards.
    (ii) A banking entity shall not be restricted under this section in 
the amount of any investment the banking entity makes alongside a 
covered fund as long as the investment is made in compliance with 
applicable laws and regulations, including applicable safety and 
soundness standards.
    (c) * * *
    (1)(i) For purposes of paragraph (a)(2)(iii) of this section, the 
aggregate value of all ownership interests held by a banking entity 
shall be the sum of all amounts paid or contributed by the banking 
entity in connection with acquiring or retaining an ownership interest 
in covered funds (together with any amounts paid by the entity in 
connection with obtaining a restricted profit interest under Sec.  
351.10(d)(6)(ii)), on a historical cost basis;
    (ii) Treatment of employee and director restricted profit interests 
financed by the banking entity. For purposes of paragraph (c)(1)(i) of 
this section, an investment by a director or employee of a banking 
entity who acquires a restricted profit interest in their personal 
capacity in a covered fund sponsored by the banking entity will be 
attributed to the banking entity if the banking entity, directly or 
indirectly, extends financing for the purpose of enabling the director 
or employee to acquire the restricted profit interest in the fund and 
the financing is used to acquire such ownership interest in the covered 
fund.
* * * * *
    (d) Capital treatment for a permitted investment in a covered fund. 
For purposes of calculating compliance with the applicable regulatory 
capital requirements, a banking entity shall deduct from the banking 
entity's tier 1 capital (as determined under paragraph (c)(2) of this 
section) the greater of:
    (1)(i) The sum of all amounts paid or contributed by the banking 
entity in connection with acquiring or retaining an ownership interest 
(together with any amounts paid by the entity in connection with 
obtaining a restricted profit interest under Sec.  351.10(d)(6)(ii)), 
on a historical cost basis, plus any earnings received; and
    (ii) The fair market value of the banking entity's ownership 
interests in

[[Page 12192]]

the covered fund as determined under paragraph (b)(2)(ii) or (b)(3) of 
this section (together with any amounts paid by the entity in 
connection with obtaining a restricted profit interest under Sec.  
351.10(d)(6)(ii)), if the banking entity accounts for the profits (or 
losses) of the fund investment in its financial statements.
    (2) Treatment of employee and director restricted profit interests 
financed by the banking entity. For purposes of paragraph (d)(1) of 
this section, an investment by a director or employee of a banking 
entity who acquires a restricted profit interest in his or her personal 
capacity in a covered fund sponsored by the banking entity will be 
attributed to the banking entity if the banking entity, directly or 
indirectly, extends financing for the purpose of enabling the director 
or employee to acquire the restricted profit interest in the fund and 
the financing is used to acquire such ownership interest in the covered 
fund.
    (e) Extension of time to divest an ownership interest. (1) 
Extension Period. Upon application by a banking entity, the Board may 
extend the period under paragraph (a)(2)(i) of this section for up to 2 
additional years if the Board finds that an extension would be 
consistent with safety and soundness and not detrimental to the public 
interest.
    (2) Application Requirements. An application for extension must:
    (i) Be submitted to the Board at least 90 days prior to the 
expiration of the applicable time period;
    (ii) Provide the reasons for application, including information 
that addresses the factors in paragraph (e)(3) of this section; and
    (iii) Explain the banking entity's plan for reducing the permitted 
investment in a covered fund through redemption, sale, dilution or 
other methods as required in paragraph (a)(2) of this section.
    (3) Factors governing the Board determinations. In reviewing any 
application under paragraph (e)(1) of this section, the Board may 
consider all the facts and circumstances related to the permitted 
investment in a covered fund, including:
    (i) Whether the investment would result, directly or indirectly, in 
a material exposure by the banking entity to high-risk assets or high-
risk trading strategies;
    (ii) The contractual terms governing the banking entity's interest 
in the covered fund;
    (iii) The date on which the covered fund is expected to have 
attracted sufficient investments from investors unaffiliated with the 
banking entity to enable the banking entity to comply with the 
limitations in paragraph (a)(2)(i) of this section;
    (iv) The total exposure of the covered banking entity to the 
investment and the risks that disposing of, or maintaining, the 
investment in the covered fund may pose to the banking entity and the 
financial stability of the United States;
    (v) The cost to the banking entity of divesting or disposing of the 
investment within the applicable period;
    (vi) Whether the investment or the divestiture or conformance of 
the investment would involve or result in a material conflict of 
interest between the banking entity and unaffiliated parties, including 
clients, customers, or counterparties to which it owes a duty;
    (vii) The banking entity's prior efforts to reduce through 
redemption, sale, dilution, or other methods its ownership interests in 
the covered fund, including activities related to the marketing of 
interests in such covered fund;
    (viii) Market conditions; and
    (ix) Any other factor that the Board believes appropriate.
    (4) Authority to impose restrictions on activities or investment 
during any extension period. The Board may impose such conditions on 
any extension approved under paragraph (e)(1) of this section as the 
Board determines are necessary or appropriate to protect the safety and 
soundness of the banking entity or the financial stability of the 
United States, address material conflicts of interest or other unsound 
banking practices, or otherwise further the purposes of section 13 of 
the BHC Act and this part.
    (5) Consultation. In the case of a banking entity that is primarily 
regulated by another Federal banking agency, the SEC, or the CFTC, the 
Board will consult with such agency prior to acting on an application 
by the banking entity for an extension under paragraph (e)(1) of this 
section.
0
17. Amend Sec.  351.13 by adding paragraph (d) to read as follows:


Sec.  351.13  Other permitted covered fund activities and investments.

* * * * *
    (d) Permitted covered fund activities and investments of qualifying 
foreign excluded funds. (1) The prohibition contained in Sec.  
351.10(a) does not apply to a qualifying foreign excluded fund.
    (2) For purposes of this paragraph (d), a qualifying foreign 
excluded fund means a banking entity that:
    (i) Is organized or established outside the United States, and the 
ownership interests of which are offered and sold solely outside the 
United States;
    (ii)(A) Would be a covered fund if the entity were organized or 
established in the United States, or
    (B) Is, or holds itself out as being, an entity or arrangement that 
raises money from investors primarily for the purpose of investing in 
financial instruments for resale or other disposition or otherwise 
trading in financial instruments;
    (iii) Would not otherwise be a banking entity except by virtue of 
the acquisition or retention of an ownership interest in, sponsorship 
of, or relationship with the entity, by another banking entity that 
meets the following:
    (A) The banking entity is not organized, or directly or indirectly 
controlled by a banking entity that is organized, under the laws of the 
United States or of any State; and
    (B) The banking entity's acquisition of an ownership interest in or 
sponsorship of the fund by the foreign banking entity meets the 
requirements for permitted covered fund activities and investments 
solely outside the United States, as provided in Sec.  351.13(b);
    (iv) Is established and operated as part of a bona fide asset 
management business; and
    (v) Is not operated in a manner that enables any other banking 
entity to evade the requirements of section 13 of the BHC Act or this 
part.
0
18. Amend Sec.  351.14 by:
0
a. Revising paragraph (a)(2)(i);
0
b. Revising paragraph (a)(2)(ii)(C);
0
c. Adding paragraphs (a)(2)(iii), (a)(2)(iv); and (a)(3); and
0
d. Revising paragraph (c).
    The revisions and additions read as follows:


Sec.  351.14  Limitations on relationships with a covered fund.

    (a) * * *
    (2) * * *
    (i) Acquire and retain any ownership interest in a covered fund in 
accordance with the requirements of Sec. Sec.  351.11, 351.12, or 
351.13;
    (ii) * * *
    (C) The Board has not determined that such transaction is 
inconsistent with the safe and sound operation and condition of the 
banking entity; and
    (iii) Enter into a transaction with a covered fund that would be an 
exempt covered transaction under 12 U.S.C. 371c(d) or Sec.  223.42 of 
the Board's Regulation W (12 CFR 223.42); and
    (iv) Extend credit to or purchase assets from a covered fund, 
provided:
    (A) Each extension of credit or purchase of assets is in the 
ordinary course of business in connection with payment transactions; 
settlement services; or futures, derivatives, and securities clearing;

[[Page 12193]]

    (B) Each extension of credit is repaid, sold, or terminated by the 
end of five business days; and
    (C) The banking entity making each extension of credit meets the 
requirements of section 223.42(l)(1)(i) and (ii) of the Board's 
Regulation W (12 CFR 223.42(l)(1)(i) and (ii)), as if the extension of 
credit was an intraday extension of credit, regardless of the duration 
of the extension of credit.
    (3) Any transaction or activity permitted under paragraphs 
(a)(2)(iii) or (iv) must comply with the limitations in Sec.  351.15 of 
this section.
* * * * *
    (c) Restrictions on other permitted transactions. Any transaction 
permitted under paragraphs (a)(2)(ii), (a)(2)(iii), or (a)(2)(iv) of 
this section shall be subject to section 23B of the Federal Reserve Act 
(12 U.S.C. 371c-1) as if the counterparty were an affiliate of the 
banking entity.

COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I

Authority and Issuance

    For the reasons set forth in the Common Preamble, the Commodity 
Futures Trading Commission proposes to amend part 75 to chapter I of 
Title 17 of the Code of Federal Regulations as follows:

PART 75--PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND 
RELATIONSHIPS WITH COVERED FUNDS

0
19. The authority citation for part 75 continues to read as follows:

    Authority: 12 U.S.C. 1851.

Subpart B--Proprietary Trading

0
20. Amend Sec.  75.6 by adding paragraph (f) to read as follows:


Sec.  75.6  Other permitted proprietary trading activities.

* * * * *
    (f) Permitted trading activities of qualifying foreign excluded 
funds. The prohibition contained in Sec.  75.3(a) does not apply to the 
purchase or sale of a financial instrument by a qualifying foreign 
excluded fund. For purposes of this paragraph (f), a qualifying foreign 
excluded fund means a banking entity that:
    (1) Is organized or established outside the United States, and the 
ownership interests of which are offered and sold solely outside the 
United States;
    (2)(i) Would be a covered fund if the entity were organized or 
established in the United States, or
    (ii) Is, or holds itself out as being, an entity or arrangement 
that raises money from investors primarily for the purpose of investing 
in financial instruments for resale or other disposition or otherwise 
trading in financial instruments;
    (3) Would not otherwise be a banking entity except by virtue of the 
acquisition or retention of an ownership interest in, sponsorship of, 
or relationship with the entity, by another banking entity that meets 
the following:
    (i) The banking entity is not organized, or directly or indirectly 
controlled by a banking entity that is organized, under the laws of the 
United States or of any State; and
    (ii) The banking entity's acquisition or retention of an ownership 
interest in or sponsorship of the fund meets the requirements for 
permitted covered fund activities and investments solely outside the 
United States, as provided in Sec.  75.13(b);
    (4) Is established and operated as part of a bona fide asset 
management business; and
    (5) Is not operated in a manner that enables any other banking 
entity to evade the requirements of section 13 of the BHC Act or this 
part.

Subpart C--Covered Funds Activities and Investments

0
21. Amend Sec.  75.10 by:
0
a. Revising paragraph (c)(1);
0
b. Revising paragraph (c)(3)(i);
0
c. Revising paragraph (c)(8);
0
d. Revising paragraph (c)(10)(i);
0
e. Revising paragraph (c)(11)(i);
0
f. Adding paragraphs (c)(15), (16), (17), and (18); and
0
g. Revising paragraph (d)(6).
    The revisions and additions read as follows:


Sec.  75.10  Prohibition on acquiring or retaining an ownership 
interest in and having certain relationships with a covered fund.

* * * * *
    (c) * * *
    (1) Foreign public funds. (i) Subject to paragraphs (c)(1)(ii) and 
(iii) of this section, an issuer that:
    (A) Is organized or established outside of the United States; and
    (B) Is authorized to offer and sell ownership interests, and such 
interests are offered and sold, through one or more public offerings.
    (ii) With respect to a banking entity that is, or is controlled 
directly or indirectly by a banking entity that is, located in or 
organized under the laws of the United States or of any State and any 
issuer for which such banking entity acts as sponsor, the sponsoring 
banking entity may not rely on the exemption in paragraph (c)(1)(i) of 
this section for such issuer unless ownership interests in the issuer 
are sold predominantly to persons other than:
    (A) Such sponsoring banking entity;
    (B) Such issuer;
    (C) Affiliates of such sponsoring banking entity or such issuer; 
and
    (D) Directors and senior executive officers as defined in Sec.  
225.71(c) of the Board's Regulation Y (12 CFR 225.71(c)) of such 
entities.
    (iii) For purposes of paragraph (c)(1)(i)(B) of this section, the 
term ``public offering'' means a distribution (as defined in Sec.  
75.4(a)(3)) of securities in any jurisdiction outside the United States 
to investors, including retail investors, provided that:
    (A) The distribution is subject to substantive disclosure and 
retail investor protection laws or regulations;
    (B) With respect to an issuer for which the banking entity serves 
as the investment manager, investment adviser, commodity trading 
advisor, commodity pool operator, or sponsor, the distribution complies 
with all applicable requirements in the jurisdiction in which such 
distribution is being made;
    (C) The distribution does not restrict availability to investors 
having a minimum level of net worth or net investment assets; and
    (D) The issuer has filed or submitted, with the appropriate 
regulatory authority in such jurisdiction, offering disclosure 
documents that are publicly available.
* * * * *
    (3) * * *
    (i) Is composed of no more than 10 unaffiliated co-venturers;
* * * * *
    (8) Loan securitizations--(i) Scope. An issuing entity for asset-
backed securities that satisfies all the conditions of this paragraph 
(c)(8) and the assets or holdings of which are composed solely of:
    (A) Loans as defined in Sec.  75.2(t);
    (B) Rights or other assets designed to assure the servicing or 
timely distribution of proceeds to holders of such securities and 
rights or other assets that are related or incidental to purchasing or 
otherwise acquiring and holding the loans, provided that each asset 
that is a security (other than special units of beneficial interest and 
collateral certificates meeting the requirements of paragraph (c)(8)(v) 
of this section) meets the requirements of paragraph (c)(8)(iii) of 
this section;
    (C) Interest rate or foreign exchange derivatives that meet the 
requirements of paragraph (c)(8)(iv) of this section; and

[[Page 12194]]

    (D) Special units of beneficial interest and collateral 
certificates that meet the requirements of paragraph (c)(8)(v) of this 
section.
    (E) Any other assets, provided that the aggregate value of any such 
other assets that do not meet the criteria specified in paragraphs 
(c)(8)(i)(A) through (c)(8)(i)(D) of this section do not exceed five 
percent of the aggregate value of the issuing entity's assets.
    (ii) Impermissible assets. For purposes of this paragraph (c)(8), 
except as permitted under paragraph (c)(8)(i)(E) of this section, the 
assets or holdings of the issuing entity shall not include any of the 
following:
    (A) A security, including an asset-backed security, or an interest 
in an equity or debt security other than as permitted in paragraphs 
(c)(8)(iii), (iv), or (v) of this section;
    (B) A derivative, other than a derivative that meets the 
requirements of paragraph (c)(8)(iv) of this section; or
    (C) A commodity forward contract.
    (iii) Permitted securities. Notwithstanding paragraph (c)(8)(ii)(A) 
of this section, the issuing entity may hold securities if those 
securities are:
    (A) Cash equivalents--which, for the purposes of this paragraph, 
means high quality, highly liquid investments whose maturity 
corresponds to the securitization's expected or potential need for 
funds and whose currency corresponds to either the underlying loans or 
the asset-backed securities--for purposes of the rights and assets in 
paragraph (c)(8)(i)(B) of this section; or
    (B) Securities received in lieu of debts previously contracted with 
respect to the loans supporting the asset-backed securities.
    (iv) Derivatives. The holdings of derivatives by the issuing entity 
shall be limited to interest rate or foreign exchange derivatives that 
satisfy all of the following conditions:
    (A) The written terms of the derivatives directly relate to the 
loans, the asset-backed securities, or the contractual rights or other 
assets described in paragraph (c)(8)(i)(B) of this section; and
    (B) The derivatives reduce the interest rate and/or foreign 
exchange risks related to the loans, the asset-backed securities, or 
the contractual rights or other assets described in paragraph 
(c)(8)(i)(B) of this section.
    (v) Special units of beneficial interest and collateral 
certificates. The assets or holdings of the issuing entity may include 
collateral certificates and special units of beneficial interest issued 
by a special purpose vehicle, provided that:
    (A) The special purpose vehicle that issues the special unit of 
beneficial interest or collateral certificate meets the requirements in 
this paragraph (c)(8);
    (B) The special unit of beneficial interest or collateral 
certificate is used for the sole purpose of transferring to the issuing 
entity for the loan securitization the economic risks and benefits of 
the assets that are permissible for loan securitizations under this 
paragraph (c)(8) and does not directly or indirectly transfer any 
interest in any other economic or financial exposure;
    (C) The special unit of beneficial interest or collateral 
certificate is created solely to satisfy legal requirements or 
otherwise facilitate the structuring of the loan securitization; and
    (D) The special purpose vehicle that issues the special unit of 
beneficial interest or collateral certificate and the issuing entity 
are established under the direction of the same entity that initiated 
the loan securitization.
* * * * *
    (10) Qualifying covered bonds--(i) Scope. An entity owning or 
holding a dynamic or fixed pool of loans or other assets as provided in 
paragraph (c)(8) of this section for the benefit of the holders of 
covered bonds, provided that the assets in the pool are composed solely 
of assets that meet the conditions in paragraph (c)(8)(i) of this 
section.
* * * * *
    (11) * * *
    (i) That is a small business investment company, as defined in 
section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 
662), or that has received from the Small Business Administration 
notice to proceed to qualify for a license as a small business 
investment company, which notice or license has not been revoked, or 
that has voluntarily surrendered its license to operate as a small 
business investment company in accordance with 13 CFR 107.1900 and does 
not make any new investments (other than investments in cash 
equivalents, which, for the purposes of this paragraph, means high 
quality, highly liquid investments whose maturity corresponds to the 
issuer's expected or potential need for funds and whose currency 
corresponds to the issuer's assets) after such voluntary surrender; or
* * * * *
    (15) Credit funds. Subject to paragraphs (c)(15)(iii), (iv), and 
(v) of this section, an issuer that satisfies the asset and activity 
requirements of paragraphs (c)(15)(i) and (ii) of this section.
    (i) Asset requirements. The issuer's assets must be composed solely 
of:
    (A) Loans as defined in Sec.  75.2(t);
    (B) Debt instruments, subject to paragraph (c)(15)(iv) of this 
section;
    (C) Rights and other assets that are related or incidental to 
acquiring, holding, servicing, or selling such loans or debt 
instruments, provided that:
    (1) Each right or asset that is a security is either:
    (i) A cash equivalent (which, for the purposes of this paragraph, 
means high quality, highly liquid investments whose maturity 
corresponds to the issuer's expected or potential need for funds and 
whose currency corresponds to either the underlying loans or the debt 
instruments);
    (ii) A security received in lieu of debts previously contracted 
with respect to such loans or debt instruments; or
    (iii) An equity security (or right to acquire an equity security) 
received on customary terms in connection with such loans or debt 
instruments; and
    (2) Rights or other assets held under this paragraph (c)(15)(i)(C) 
of this section may not include commodity forward contracts; and
    (D) Interest rate or foreign exchange derivatives, if:
    (1) The written terms of the derivative directly relate to the 
loans, debt instruments, or other rights or assets described in 
paragraph (c)(15)(i)(C) of this section; and
    (2) The derivative reduces the interest rate and/or foreign 
exchange risks related to the loans, debt instruments, or other rights 
or assets described in paragraph (c)(15)(i)(C) of this section.
    (ii) Activity requirements. To be eligible for the exclusion of 
paragraph (c)(15) of this section, an issuer must:
    (A) Not engage in any activity that would constitute proprietary 
trading under Sec.  75.3(b)(l)(i), as if the issuer were a banking 
entity; and
    (B) Not issue asset-backed securities.
    (iii) Requirements for a sponsor, investment adviser, or commodity 
trading advisor. A banking entity that acts as a sponsor, investment 
adviser, or commodity trading advisor to an issuer that meets the 
conditions in paragraphs (c)(15)(i) and (ii) of this section may not 
rely on this exclusion unless the banking entity:
    (A) Provides in writing to any prospective and actual investor in 
the issuer the disclosures required under Sec.  75.11(a)(8), as if the 
issuer were a covered fund; and
    (B) Ensures that the activities of the issuer are consistent with 
safety and soundness standards that are

[[Page 12195]]

substantially similar to those that would apply if the banking entity 
engaged in the activities directly.
    (iv) Additional Banking Entity Requirements. A banking entity may 
not rely on this exclusion with respect to an issuer that meets the 
conditions in paragraphs (c)(15)(i) and (ii) of this section unless:
    (A) The banking entity does not, directly or indirectly, guarantee, 
assume, or otherwise insure the obligations or performance of the 
issuer or of any entity to which such issuer extends credit or in which 
such issuer invests; and
    (B) Any assets the issuer holds pursuant to paragraphs 
(c)(15)(i)(B) or (i)(C)(1)(iii) of this section would be permissible 
for the banking entity to acquire and hold directly.
    (v) Investment and Relationship Limits. A banking entity's 
investment in, and relationship with, the issuer must:
    (A) Comply with the limitations imposed in Sec. Sec.  75.14 (except 
the banking entity may acquire and retain any ownership interest in the 
issuer) and 75.15, as if the issuer were a covered fund; and
    (B) Be conducted in compliance with, and subject to, applicable 
banking laws and regulations, including applicable safety and soundness 
standards.
    (16) Qualifying venture capital funds. (i) Subject to paragraphs 
(c)(16)(ii) through (iv) of this section, an issuer that:
    (A) Is a venture capital fund as defined in 17 CFR 275.203(l)-1; 
and
    (B) Does not engage in any activity that would constitute 
proprietary trading under Sec.  75.3(b)(1)(i), as if the issuer were a 
banking entity.
    (ii) A banking entity that acts as a sponsor, investment adviser, 
or commodity trading advisor to an issuer that meets the conditions in 
paragraph (c)(16)(i) of this section may not rely on this exclusion 
unless the banking entity:
    (A) Provides in writing to any prospective and actual investor in 
the issuer the disclosures required under Sec.  75.11 (a)(8), as if the 
issuer were a covered fund; and
    (B) Ensures that the activities of the issuer are consistent with 
safety and soundness standards that are substantially similar to those 
that would apply if the banking entity engaged in the activities 
directly.
    (iii) The banking entity must not, directly or indirectly, 
guarantee, assume, or otherwise insure the obligations or performance 
of the issuer.
    (iv) A banking entity's ownership interest in or relationship with 
the issuer must:
    (A) Comply with the limitations imposed in Sec. Sec.  75.14 (except 
the banking entity may acquire and retain any ownership interest in the 
issuer) and 75.15, as if the issuer were a covered fund; and
    (B) Be conducted in compliance with, and subject to, applicable 
banking laws and regulations, including applicable safety and soundness 
standards.
    (17) Family wealth management vehicles. (i) Subject to paragraph 
(c)(17)(ii) of this section, any entity that is not, and does not hold 
itself out as being, an entity or arrangement that raises money from 
investors primarily for the purpose of investing in securities for 
resale or other disposition or otherwise trading in securities, and:
    (A) If the entity is a trust, the grantor(s) of the entity are all 
family customers; and
    (B) If the entity is not a trust:
    (1) A majority of the voting interests in the entity are owned 
(directly or indirectly) by family customers; and
    (2) The entity is owned only by family customers and up to 3 
closely related persons of the family customers.
    (ii) A banking entity may rely on the exclusion in paragraph 
(c)(17)(i) of this section with respect to an entity provided that the 
banking entity (or an affiliate):
    (A) Provides bona fide trust, fiduciary, investment advisory, or 
commodity trading advisory services to the entity;
    (B) Does not, directly or indirectly, guarantee, assume, or 
otherwise insure the obligations or performance of such entity;
    (C) Complies with the disclosure obligations under Sec.  
75.11(a)(8), as if such entity were a covered fund;
    (D) Does not acquire or retain, as principal, an ownership interest 
in the entity, other than up to 0.5 percent of the entity's outstanding 
ownership interests that may be held by the banking entity and its 
affiliates for the purpose of and to the extent necessary for 
establishing corporate separateness or addressing bankruptcy, 
insolvency, or similar concerns;
    (E) Complies with the requirements of Sec. Sec.  75.14(b) and 
75.15, as if such entity were a covered fund; and
    (F) Complies with the requirements of 12 CFR 223.15(a), as if such 
banking entity and its affiliates were a member bank and the issuer 
were an affiliate thereof.
    (iii) For purposes of paragraph (c)(17) of this section, the 
following definitions apply:
    (A) ``Closely related person'' means a natural person (including 
the estate and estate planning vehicles of such person) who has 
longstanding business or personal relationships with any family 
customer.
    (B) ``Family customer'' means:
    (1) A family client, as defined in Rule 202(a)(11)(G)-1(d)(4) of 
the Investment Advisers Act of 1940 (17 CFR 275.202(a)(11)(G)-1(d)(4)); 
or
    (2) Any natural person who is a father-in-law, mother-in-law, 
brother-in-law, sister-in-law, son-in-law or daughter-in-law of a 
family client, or a spouse or a spousal equivalent of any of the 
foregoing.
    (18) Customer facilitation vehicles. (i) Subject to paragraph 
(c)(18)(ii) of this section, an issuer that is formed by or at the 
request of a customer of the banking entity for the purpose of 
providing such customer (which may include one or more affiliates of 
such customer) with exposure to a transaction, investment strategy, or 
other service provided by the banking entity.
    (ii) A banking entity may rely on the exclusion in paragraph 
(c)(18)(i) of this section with respect to an issuer provided that:
    (A) All of the ownership interests of the issuer are owned by the 
customer (which may include one or more of its affiliates) for whom the 
issuer was created, subject to paragraph (c)(18)(ii)(B)(4) of this 
section; and
    (B) The banking entity and its affiliates:
    (1) Maintain documentation outlining how the banking entity intends 
to facilitate the customer's exposure to such transaction, investment 
strategy, or service;
    (2) Do not, directly or indirectly, guarantee, assume, or otherwise 
insure the obligations or performance of such issuer;
    (3) Comply with the disclosure obligations under Sec.  75.11(a)(8), 
as if such issuer were a covered fund;
    (4) Do not acquire or retain, as principal, an ownership interest 
in the issuer, other than up to 0.5 percent of the issuer's outstanding 
ownership interests that may be held by the banking entity and its 
affiliates for the purpose of and to the extent necessary for 
establishing corporate separateness or addressing bankruptcy, 
insolvency, or similar concerns;
    (5) Comply with the requirements of Sec. Sec.  75.14(b) and 75.15, 
as if such issuer were a covered fund; and
    (6) Comply with the requirements of 12 CFR 223.15(a), as if such 
banking entity and its affiliates were a member bank and the issuer 
were an affiliate thereof.
* * * * *
    (d) * * *

[[Page 12196]]

    (6) Ownership interest--(i) Ownership interest means any equity, 
partnership, or other similar interest. An ``other similar interest'' 
means an interest that:
    (A) Has the right to participate in the selection or removal of a 
general partner, managing member, member of the board of directors or 
trustees, investment manager, investment adviser, or commodity trading 
advisor of the covered fund (excluding the rights of a creditor to 
exercise remedies upon the occurrence of an event of default or an 
acceleration event, which includes the right to participate in the 
removal of an investment manager for cause or to nominate or vote on a 
nominated replacement manager upon an investment manager's resignation 
or removal);
    (B) Has the right under the terms of the interest to receive a 
share of the income, gains or profits of the covered fund;
    (C) Has the right to receive the underlying assets of the covered 
fund after all other interests have been redeemed and/or paid in full 
(excluding the rights of a creditor to exercise remedies upon the 
occurrence of an event of default or an acceleration event);
    (D) Has the right to receive all or a portion of excess spread (the 
positive difference, if any, between the aggregate interest payments 
received from the underlying assets of the covered fund and the 
aggregate interest paid to the holders of other outstanding interests);
    (E) Provides under the terms of the interest that the amounts 
payable by the covered fund with respect to the interest could be 
reduced based on losses arising from the underlying assets of the 
covered fund, such as allocation of losses, write-downs or charge-offs 
of the outstanding principal balance, or reductions in the amount of 
interest due and payable on the interest;
    (F) Receives income on a pass-through basis from the covered fund, 
or has a rate of return that is determined by reference to the 
performance of the underlying assets of the covered fund; or
    (G) Any synthetic right to have, receive, or be allocated any of 
the rights in paragraphs (d)(6)(i)(A) through (F) of this section.
    (ii) Ownership interest does not include:
    (A) Restricted profit interest which is an interest held by an 
entity (or an employee or former employee thereof) in a covered fund 
for which the entity (or employee thereof) serves as investment 
manager, investment adviser, commodity trading advisor, or other 
service provider, so long as:
    (1) The sole purpose and effect of the interest is to allow the 
entity (or employee or former employee thereof) to share in the profits 
of the covered fund as performance compensation for the investment 
management, investment advisory, commodity trading advisory, or other 
services provided to the covered fund by the entity (or employee or 
former employee thereof), provided that the entity (or employee or 
former employee thereof) may be obligated under the terms of such 
interest to return profits previously received;
    (2) All such profit, once allocated, is distributed to the entity 
(or employee or former employee thereof) promptly after being earned 
or, if not so distributed, is retained by the covered fund for the sole 
purpose of establishing a reserve amount to satisfy contractual 
obligations with respect to subsequent losses of the covered fund and 
such undistributed profit of the entity (or employee or former employee 
thereof) does not share in the subsequent investment gains of the 
covered fund;
    (3) Any amounts invested in the covered fund, including any amounts 
paid by the entity in connection with obtaining the restricted profit 
interest, are within the limits of Sec.  75.12 of this subpart; and
    (4) The interest is not transferable by the entity (or employee or 
former employee thereof) except to an affiliate thereof (or an employee 
of the banking entity or affiliate), to immediate family members, or 
through the intestacy, of the employee or former employee, or in 
connection with a sale of the business that gave rise to the restricted 
profit interest by the entity (or employee or former employee thereof) 
to an unaffiliated party that provides investment management, 
investment advisory, commodity trading advisory, or other services to 
the fund.
    (B) Any senior loan or senior debt interest that has the following 
characteristics:
    (1) Under the terms of the interest the holders of such interest do 
not have the right to receive a share of the income, gains, or profits 
of the covered fund, but are entitled to receive only:
    (i) Interest at a stated interest rate, as well as commitment fees 
or other fees, which are not determined by reference to the performance 
of the underlying assets of the covered fund; and
    (ii) Fixed principal payments on or before a maturity date (which 
may include prepayment premiums intended solely to reflect, and 
compensate holders of the interest for, foregone income resulting from 
an early prepayment);
    (2) The entitlement to payments under the terms of the interest are 
absolute and could not be reduced based on losses arising from the 
underlying assets of the covered fund, such as allocation of losses, 
write-downs or charge-offs of the outstanding principal balance, or 
reductions in the amount of interest due and payable on the interest; 
and
    (3) The holders of the interest are not entitled to receive the 
underlying assets of the covered fund after all other interests have 
been redeemed or paid in full (excluding the rights of a creditor to 
exercise remedies upon the occurrence of an event of default or an 
acceleration event).
0
22. Amend Sec.  75.12 is amended by:
0
a. Revising paragraph (b)(1)(ii);
0
b. Revising paragraph (b)(4);
0
c. Adding paragraph (b)(5);
0
d. Revising paragraph (c)(1); and
0
e. Revising paragraph (d) and (e).
    The revisions and addition read as follows:


Sec.  75.12   Permitted investment in a covered fund.

* * * * *
    (b) * * *
    (1) * * *
    (ii) Treatment of registered investment companies, SEC-regulated 
business development companies, and foreign public funds. For purposes 
of paragraph (b)(1)(i) of this section, a registered investment 
company, SEC-regulated business development companies, or foreign 
public fund as described in Sec.  75.10(c)(1) of this subpart will not 
be considered to be an affiliate of the banking entity so long as the 
banking entity:
    (A) Does not own, control, or hold with the power to vote 25 
percent or more of the voting shares of the company or fund; and
    (B) Provides investment advisory, commodity trading advisory, 
administrative, and other services to the company or fund in compliance 
with the limitations under applicable regulation, order, or other 
authority.
* * * * *
    (4) Multi-tier fund investments--(i) Master-feeder fund 
investments. If the principal investment strategy of a covered fund 
(the ``feeder fund'') is to invest substantially all of its assets in 
another single covered fund (the ``master fund''), then for purposes of 
the investment limitations in paragraphs (a)(2)(i)(B) and (a)(2)(ii) of 
this section, the banking entity's permitted investment in such funds 
shall be measured only by reference to the value of the master fund. 
The banking entity's permitted investment in the master fund

[[Page 12197]]

shall include any investment by the banking entity in the master fund, 
as well as the banking entity's pro-rata share of any ownership 
interest in the master fund that is held through the feeder fund; and
    (ii) Fund-of-funds investments. If a banking entity organizes and 
offers a covered fund pursuant to Sec.  75.11 of this subpart for the 
purpose of investing in other covered funds (a ``fund of funds'') and 
that fund of funds itself invests in another covered fund that the 
banking entity is permitted to own, then the banking entity's permitted 
investment in that other fund shall include any investment by the 
banking entity in that other fund, as well as the banking entity's pro-
rata share of any ownership interest in the fund that is held through 
the fund of funds. The investment of the banking entity may not 
represent more than 3 percent of the amount or value of any single 
covered fund.
    (5) Parallel Investments and Co-Investments--(i) A banking entity 
shall not be required to include in the calculation of the investment 
limits under paragraph (a)(2) of this section any investment the 
banking entity makes alongside a covered fund as long as the investment 
is made in compliance with applicable laws and regulations, including 
applicable safety and soundness standards.
    (ii) A banking entity shall not be restricted under this section in 
the amount of any investment the banking entity makes alongside a 
covered fund as long as the investment is made in compliance with 
applicable laws and regulations, including applicable safety and 
soundness standards.
    (c) * * *
    (1)(i) For purposes of paragraph (a)(2)(iii) of this section, the 
aggregate value of all ownership interests held by a banking entity 
shall be the sum of all amounts paid or contributed by the banking 
entity in connection with acquiring or retaining an ownership interest 
in covered funds (together with any amounts paid by the entity in 
connection with obtaining a restricted profit interest under Sec.  
75.10(d)(6)(ii) of this subpart), on a historical cost basis;
    (ii) Treatment of employee and director restricted profit interests 
financed by the banking entity. For purposes of paragraph (c)(1)(i) of 
this section, an investment by a director or employee of a banking 
entity who acquires a restricted profit interest in their personal 
capacity in a covered fund sponsored by the banking entity will be 
attributed to the banking entity if the banking entity, directly or 
indirectly, extends financing for the purpose of enabling the director 
or employee to acquire the restricted profit interest in the fund and 
the financing is used to acquire such ownership interest in the covered 
fund.
* * * * *
    (d) Capital treatment for a permitted investment in a covered fund. 
For purposes of calculating compliance with the applicable regulatory 
capital requirements, a banking entity shall deduct from the banking 
entity's tier 1 capital (as determined under paragraph (c)(2) of this 
section) the greater of:
    (1)(i) The sum of all amounts paid or contributed by the banking 
entity in connection with acquiring or retaining an ownership interest 
(together with any amounts paid by the entity in connection with 
obtaining a restricted profit interest under Sec.  75.10(d)(6)(ii)), on 
a historical cost basis, plus any earnings received; and
    (ii) The fair market value of the banking entity's ownership 
interests in the covered fund as determined under paragraph (b)(2)(ii) 
or (b)(3) of this section (together with any amounts paid by the entity 
in connection with obtaining a restricted profit interest under Sec.  
75.10(d)(6)(ii)), if the banking entity accounts for the profits (or 
losses) of the fund investment in its financial statements.
    (2) Treatment of employee and director restricted profit interests 
financed by the banking entity. For purposes of paragraph (d)(1) of 
this section, an investment by a director or employee of a banking 
entity who acquires a restricted profit interest in his or her personal 
capacity in a covered fund sponsored by the banking entity will be 
attributed to the banking entity if the banking entity, directly or 
indirectly, extends financing for the purpose of enabling the director 
or employee to acquire the restricted profit interest in the fund and 
the financing is used to acquire such ownership interest in the covered 
fund.
    (e) Extension of time to divest an ownership interest. (1) 
Extension Period. Upon application by a banking entity, the Board may 
extend the period under paragraph (a)(2)(i) of this section for up to 2 
additional years if the Board finds that an extension would be 
consistent with safety and soundness and not detrimental to the public 
interest.
    (2) Application Requirements. An application for extension must:
    (i) Be submitted to the Board at least 90 days prior to the 
expiration of the applicable time period;
    (ii) Provide the reasons for application, including information 
that addresses the factors in paragraph (e)(3) of this section; and
    (iii) Explain the banking entity's plan for reducing the permitted 
investment in a covered fund through redemption, sale, dilution or 
other methods as required in paragraph (a)(2) of this section.
    (3) Factors governing the Board determinations. In reviewing any 
application under paragraph (e)(1) of this section, the Board may 
consider all the facts and circumstances related to the permitted 
investment in a covered fund, including:
    (i) Whether the investment would result, directly or indirectly, in 
a material exposure by the banking entity to high-risk assets or high-
risk trading strategies;
    (ii) The contractual terms governing the banking entity's interest 
in the covered fund;
    (iii) The date on which the covered fund is expected to have 
attracted sufficient investments from investors unaffiliated with the 
banking entity to enable the banking entity to comply with the 
limitations in paragraph (a)(2)(i) of this section;
    (iv) The total exposure of the covered banking entity to the 
investment and the risks that disposing of, or maintaining, the 
investment in the covered fund may pose to the banking entity and the 
financial stability of the United States;
    (v) The cost to the banking entity of divesting or disposing of the 
investment within the applicable period;
    (vi) Whether the investment or the divestiture or conformance of 
the investment would involve or result in a material conflict of 
interest between the banking entity and unaffiliated parties, including 
clients, customers, or counterparties to which it owes a duty;
    (vii) The banking entity's prior efforts to reduce through 
redemption, sale, dilution, or other methods its ownership interests in 
the covered fund, including activities related to the marketing of 
interests in such covered fund;
    (viii) Market conditions; and
    (ix) Any other factor that the Board believes appropriate.
    (4) Authority to impose restrictions on activities or investment 
during any extension period. The Board may impose such conditions on 
any extension approved under paragraph (e)(1) of this section as the 
Board determines are necessary or appropriate to protect the safety and 
soundness of the banking entity or the financial stability of the 
United States, address material conflicts of interest or other unsound 
banking practices, or otherwise further the purposes of section 13 of 
the BHC Act and this part.
    (5) Consultation. In the case of a banking entity that is primarily

[[Page 12198]]

regulated by another Federal banking agency, the SEC, or the CFTC, the 
Board will consult with such agency prior to acting on an application 
by the banking entity for an extension under paragraph (e)(1) of this 
section.
0
23. In subpart C, section 75.13 is amended by adding paragraph (d) to 
read as follows:


Sec.  75.13   Other permitted covered fund activities and investments.

* * * * *
    (d) Permitted covered fund activities and investments of qualifying 
foreign excluded funds.
    (1) The prohibition contained in Sec.  75.10(a) does not apply to a 
qualifying foreign excluded fund.
    (2) For purposes of this paragraph (d), a qualifying foreign 
excluded fund means a banking entity that:
    (i) Is organized or established outside the United States, and the 
ownership interests of which are offered and sold solely outside the 
United States;
    (ii)(A) Would be a covered fund if the entity were organized or 
established in the United States, or
    (B) Is, or holds itself out as being, an entity or arrangement that 
raises money from investors primarily for the purpose of investing in 
financial instruments for resale or other disposition or otherwise 
trading in financial instruments;
    (iii) Would not otherwise be a banking entity except by virtue of 
the acquisition or retention of an ownership interest in, sponsorship 
of, or relationship with the entity, by another banking entity that 
meets the following:
    (A) The banking entity is not organized, or directly or indirectly 
controlled by a banking entity that is organized, under the laws of the 
United States or of any State; and
    (B) The banking entity's acquisition of an ownership interest in or 
sponsorship of the fund by the foreign banking entity meets the 
requirements for permitted covered fund activities and investments 
solely outside the United States, as provided in Sec.  75.13(b);
    (iv) Is established and operated as part of a bona fide asset 
management business; and
    (v) Is not operated in a manner that enables any other banking 
entity to evade the requirements of section 13 of the BHC Act or this 
part.
0
24. Amend Sec.  75.14 by:
0
a. Revising paragraph (a)(2)(i);
0
b. Revising paragraph (a)(2)(ii)(C);
0
c. Adding paragraphs (a)(2)(iii), (a)(2)(iv); and (a)(3); and
0
d. Revising paragraph (c).
    The revisions and additions read as follows:


Sec.  75.14   Limitations on relationships with a covered fund.

    (a) * * *
    (2) * * *
    (i) Acquire and retain any ownership interest in a covered fund in 
accordance with the requirements of Sec. Sec.  75.11, 75.12, or 75.13;
    (ii) * * *
    (C) The Board has not determined that such transaction is 
inconsistent with the safe and sound operation and condition of the 
banking entity; and
    (iii) Enter into a transaction with a covered fund that would be an 
exempt covered transaction under 12 U.S.C. 371c(d) or Sec.  223.42 of 
the Board's Regulation W (12 CFR 223.42); and
    (iv) Extend credit to or purchase assets from a covered fund, 
provided:
    (A) Each extension of credit or purchase of assets is in the 
ordinary course of business in connection with payment transactions; 
settlement services; or futures, derivatives, and securities clearing;
    (B) Each extension of credit is repaid, sold, or terminated by the 
end of five business days; and
    (C) The banking entity making each extension of credit meets the 
requirements of section 223.42(l)(1)(i) and (ii) of the Board's 
Regulation W (12 CFR 223.42(l)(1)(i) and(ii)), as if the extension of 
credit was an intraday extension of credit, regardless of the duration 
of the extension of credit.
    (3) Any transaction or activity permitted under paragraphs 
(a)(2)(iii) or (iv) must comply with the limitations in Sec.  75.15.
* * * * *
    (c) Restrictions on other permitted transactions. Any transaction 
permitted under paragraphs (a)(2)(ii), (a)(2)(iii), or (a)(2)(iv) of 
this section shall be subject to section 23B of the Federal Reserve Act 
(12 U.S.C. 371c-1) as if the counterparty were an affiliate of the 
banking entity.

SECURITIES AND EXCHANGE COMMISSION

17 CFR Chapter II

Authority and Issuance

    For the reasons set forth in the Common Preamble, the Securities 
and Exchange Commission proposes to amend part 255 to chapter II of 
Title 17 of the Code of Federal Regulations as follows:

PART 255--PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND 
RELATIONSHIPS WITH COVERED FUNDS

0
25. The authority citation for part 255 continues to read as follows:

    Authority:  12 U.S.C. 1851.

Subpart B--Proprietary Trading

0
26. Amend Sec.  255.6 by adding paragraph (f) to read as follows:


Sec.  255.6   Other permitted proprietary trading activities.

* * * * *
    (f) Permitted trading activities of qualifying foreign excluded 
funds. The prohibition contained in Sec.  255.3(a) does not apply to 
the purchase or sale of a financial instrument by a qualifying foreign 
excluded fund. For purposes of this paragraph (f), a qualifying foreign 
excluded fund means a banking entity that:
    (1) Is organized or established outside the United States, and the 
ownership interests of which are offered and sold solely outside the 
United States;
    (2)(i) Would be a covered fund if the entity were organized or 
established in the United States, or
    (ii) Is, or holds itself out as being, an entity or arrangement 
that raises money from investors primarily for the purpose of investing 
in financial instruments for resale or other disposition or otherwise 
trading in financial instruments;
    (3) Would not otherwise be a banking entity except by virtue of the 
acquisition or retention of an ownership interest in, sponsorship of, 
or relationship with the entity, by another banking entity that meets 
the following:
    (i) The banking entity is not organized, or directly or indirectly 
controlled by a banking entity that is organized, under the laws of the 
United States or of any State; and
    (ii) The banking entity's acquisition or retention of an ownership 
interest in or sponsorship of the fund meets the requirements for 
permitted covered fund activities and investments solely outside the 
United States, as provided in Sec.  255.13(b);
    (4) Is established and operated as part of a bona fide asset 
management business; and
    (5) Is not operated in a manner that enables any other banking 
entity to evade the requirements of section 13 of the BHC Act or this 
part.

Subpart C--Covered Funds Activities and Investments

0
27. Amend Sec.  255.10 by:
0
a. Revising paragraph (c)(1);
0
b. Revising paragraph (c)(3)(i);
0
c. Revising paragraph (c)(8);
0
d. Revising paragraph (c)(10)(i);
0
e. Revising paragraph (c)(11)(i);
0
f. Adding paragraphs (c)(15), (16), (17), and (18); and
0
g. Revising paragraph (d)(6).

[[Page 12199]]

    The revisions and additions read as follows:


Sec.  255.10   Prohibition on acquiring or retaining an ownership 
interest in and having certain relationships with a covered fund.

* * * * *
    (c) * * *
    (1) Foreign public funds. (i) Subject to paragraphs (c)(1)(ii) and 
(iii) of this section, an issuer that:
    (A) Is organized or established outside of the United States; and
    (B) Is authorized to offer and sell ownership interests, and such 
interests are offered and sold, through one or more public offerings.
    (ii) With respect to a banking entity that is, or is controlled 
directly or indirectly by a banking entity that is, located in or 
organized under the laws of the United States or of any State and any 
issuer for which such banking entity acts as sponsor, the sponsoring 
banking entity may not rely on the exemption in paragraph (c)(1)(i) of 
this section for such issuer unless ownership interests in the issuer 
are sold predominantly to persons other than:
    (A) Such sponsoring banking entity;
    (B) Such issuer;
    (C) Affiliates of such sponsoring banking entity or such issuer; 
and
    (D) Directors and senior executive officers as defined in section 
225.71(c) of the Board's Regulation Y (12 CFR 225.71(c)) of such 
entities.
    (iii) For purposes of paragraph (c)(1)(i)(B) of this section, the 
term ``public offering'' means a distribution (as defined in Sec.  
255.4(a)(3)) of securities in any jurisdiction outside the United 
States to investors, including retail investors, provided that:
    (A) The distribution is subject to substantive disclosure and 
retail investor protection laws or regulations;
    (B) With respect to an issuer for which the banking entity serves 
as the investment manager, investment adviser, commodity trading 
advisor, commodity pool operator, or sponsor, the distribution complies 
with all applicable requirements in the jurisdiction in which such 
distribution is being made;
    (C) The distribution does not restrict availability to investors 
having a minimum level of net worth or net investment assets; and
    (D) The issuer has filed or submitted, with the appropriate 
regulatory authority in such jurisdiction, offering disclosure 
documents that are publicly available.
* * * * *
    (3) * * *
    (i) Is composed of no more than 10 unaffiliated co-venturers;
* * * * *
    (8) Loan securitizations--(i) Scope. An issuing entity for asset-
backed securities that satisfies all the conditions of this paragraph 
(c)(8) and the assets or holdings of which are composed solely of:
    (A) Loans as defined in Sec.  255.2(t);
    (B) Rights or other assets designed to assure the servicing or 
timely distribution of proceeds to holders of such securities and 
rights or other assets that are related or incidental to purchasing or 
otherwise acquiring and holding the loans, provided that each asset 
that is a security (other than special units of beneficial interest and 
collateral certificates meeting the requirements of paragraph (c)(8)(v) 
of this section) meets the requirements of paragraph (c)(8)(iii) of 
this section;
    (C) Interest rate or foreign exchange derivatives that meet the 
requirements of paragraph (c)(8)(iv) of this section; and
    (D) Special units of beneficial interest and collateral 
certificates that meet the requirements of paragraph (c)(8)(v) of this 
section.
    (E) Any other assets, provided that the aggregate value of any such 
other assets that do not meet the criteria specified in paragraphs 
(c)(8)(i)(A) through (c)(8)(i)(D) of this section do not exceed five 
percent of the aggregate value of the issuing entity's assets.
    (ii) Impermissible assets. For purposes of this paragraph (c)(8), 
except as permitted under paragraph (c)(8)(i)(E) of this section, the 
assets or holdings of the issuing entity shall not include any of the 
following:
    (A) A security, including an asset-backed security, or an interest 
in an equity or debt security other than as permitted in paragraphs 
(c)(8)(iii), (iv), or (v) of this section;
    (B) A derivative, other than a derivative that meets the 
requirements of paragraph (c)(8)(iv) of this section; or
    (C) A commodity forward contract.
    (iii) Permitted securities. Notwithstanding paragraph (c)(8)(ii)(A) 
of this section, the issuing entity may hold securities if those 
securities are:
    (A) Cash equivalents--which, for the purposes of this paragraph, 
means high quality, highly liquid investments whose maturity 
corresponds to the securitization's expected or potential need for 
funds and whose currency corresponds to either the underlying loans or 
the asset-backed securities--for purposes of the rights and assets in 
paragraph (c)(8)(i)(B) of this section; or
    (B) Securities received in lieu of debts previously contracted with 
respect to the loans supporting the asset-backed securities.
    (iv) Derivatives. The holdings of derivatives by the issuing entity 
shall be limited to interest rate or foreign exchange derivatives that 
satisfy all of the following conditions:
    (A) The written terms of the derivatives directly relate to the 
loans, the asset-backed securities, or the contractual rights or other 
assets described in paragraph (c)(8)(i)(B) of this section; and
    (B) The derivatives reduce the interest rate and/or foreign 
exchange risks related to the loans, the asset-backed securities, or 
the contractual rights or other assets described in paragraph 
(c)(8)(i)(B) of this section.
    (v) Special units of beneficial interest and collateral 
certificates. The assets or holdings of the issuing entity may include 
collateral certificates and special units of beneficial interest issued 
by a special purpose vehicle, provided that:
    (A) The special purpose vehicle that issues the special unit of 
beneficial interest or collateral certificate meets the requirements in 
this paragraph (c)(8);
    (B) The special unit of beneficial interest or collateral 
certificate is used for the sole purpose of transferring to the issuing 
entity for the loan securitization the economic risks and benefits of 
the assets that are permissible for loan securitizations under this 
paragraph (c)(8) and does not directly or indirectly transfer any 
interest in any other economic or financial exposure;
    (C) The special unit of beneficial interest or collateral 
certificate is created solely to satisfy legal requirements or 
otherwise facilitate the structuring of the loan securitization; and
    (D) The special purpose vehicle that issues the special unit of 
beneficial interest or collateral certificate and the issuing entity 
are established under the direction of the same entity that initiated 
the loan securitization.
* * * * *
    (10) Qualifying covered bonds--(i) Scope. An entity owning or 
holding a dynamic or fixed pool of loans or other assets as provided in 
paragraph (c)(8) of this section for the benefit of the holders of 
covered bonds, provided that the assets in the pool are composed solely 
of assets that meet the conditions in paragraph (c)(8)(i) of this 
section.
* * * * *
    (11) * * *
    (i) That is a small business investment company, as defined in 
section 103(3) of

[[Page 12200]]

the Small Business Investment Act of 1958 (15 U.S.C. 662), or that has 
received from the Small Business Administration notice to proceed to 
qualify for a license as a small business investment company, which 
notice or license has not been revoked, or that has voluntarily 
surrendered its license to operate as a small business investment 
company in accordance with 13 CFR 107.1900 and does not make any new 
investments (other than investments in cash equivalents, which, for the 
purposes of this paragraph, means high quality, highly liquid 
investments whose maturity corresponds to the issuer's expected or 
potential need for funds and whose currency corresponds to the issuer's 
assets) after such voluntary surrender; or
* * * * *
    (15) Credit funds. Subject to paragraphs (c)(15)(iii), (iv), and 
(v) of this section, an issuer that satisfies the asset and activity 
requirements of paragraphs (c)(15)(i) and (ii) of this section.
    (i) Asset requirements. The issuer's assets must be composed solely 
of:
    (A) Loans as defined in Sec.  255.2(t);
    (B) Debt instruments, subject to paragraph (c)(15)(iv) of this 
section;
    (C) Rights and other assets that are related or incidental to 
acquiring, holding, servicing, or selling such loans or debt 
instruments, provided that:
    (1) Each right or asset that is a security is either:
    (i) A cash equivalent (which, for the purposes of this paragraph, 
means high quality, highly liquid investments whose maturity 
corresponds to the issuer's expected or potential need for funds and 
whose currency corresponds to either the underlying loans or the debt 
instruments);
    (ii) A security received in lieu of debts previously contracted 
with respect to such loans or debt instruments; or
    (iii) An equity security (or right to acquire an equity security) 
received on customary terms in connection with such loans or debt 
instruments; and
    (2) Rights or other assets held under this paragraph (c)(15)(i)(C) 
of this section may not include commodity forward contracts; and
    (D) Interest rate or foreign exchange derivatives, if:
    (1) The written terms of the derivative directly relate to the 
loans, debt instruments, or other rights or assets described in 
paragraph (c)(15)(i)(C) of this section; and
    (2) The derivative reduces the interest rate and/or foreign 
exchange risks related to the loans, debt instruments, or other rights 
or assets described in paragraph (c)(15)(i)(C) of this section.
    (ii) Activity requirements. To be eligible for the exclusion of 
paragraph (c)(15) of this section, an issuer must:
    (A) Not engage in any activity that would constitute proprietary 
trading under Sec.  255.3(b)(l)(i) of subpart A of this part, as if the 
issuer were a banking entity; and
    (B) Not issue asset-backed securities.
    (iii) Requirements for a sponsor, investment adviser, or commodity 
trading advisor. A banking entity that acts as a sponsor, investment 
adviser, or commodity trading advisor to an issuer that meets the 
conditions in paragraphs (c)(15)(i) and (ii) of this section may not 
rely on this exclusion unless the banking entity:
    (A) Provides in writing to any prospective and actual investor in 
the issuer the disclosures required under Sec.  255.11(a)(8) of this 
subpart, as if the issuer were a covered fund; and
    (B) Ensures that the activities of the issuer are consistent with 
safety and soundness standards that are substantially similar to those 
that would apply if the banking entity engaged in the activities 
directly.
    (iv) Additional Banking Entity Requirements. A banking entity may 
not rely on this exclusion with respect to an issuer that meets the 
conditions in paragraphs (c)(15)(i) and (ii) of this section unless:
    (A) The banking entity does not, directly or indirectly, guarantee, 
assume, or otherwise insure the obligations or performance of the 
issuer or of any entity to which such issuer extends credit or in which 
such issuer invests; and
    (B) Any assets the issuer holds pursuant to paragraphs 
(c)(15)(i)(B) or (i)(C)(1)(iii) of this section would be permissible 
for the banking entity to acquire and hold directly.
    (v) Investment and Relationship Limits. A banking entity's 
investment in, and relationship with, the issuer must:
    (A) Comply with the limitations imposed in Sec. Sec.  255.14 
(except the banking entity may acquire and retain any ownership 
interest in the issuer) and 255.15, as if the issuer were a covered 
fund; and
    (B) Be conducted in compliance with, and subject to, applicable 
banking laws and regulations, including applicable safety and soundness 
standards.
    (16) Qualifying venture capital funds. (i) Subject to paragraphs 
(c)(16)(ii) through (iv) of this section, an issuer that:
    (A) Is a venture capital fund as defined in 17 CFR 275.203(l)-1; 
and
    (B) Does not engage in any activity that would constitute 
proprietary trading under Sec.  255.3(b)(1)(i), as if the issuer were a 
banking entity.
    (ii) A banking entity that acts as a sponsor, investment adviser, 
or commodity trading advisor to an issuer that meets the conditions in 
paragraph (c)(16)(i) of this section may not rely on this exclusion 
unless the banking entity:
    (A) Provides in writing to any prospective and actual investor in 
the issuer the disclosures required under Sec.  255.11(a)(8), as if the 
issuer were a covered fund; and
    (B) Ensures that the activities of the issuer are consistent with 
safety and soundness standards that are substantially similar to those 
that would apply if the banking entity engaged in the activities 
directly.
    (iii) The banking entity must not, directly or indirectly, 
guarantee, assume, or otherwise insure the obligations or performance 
of the issuer.
    (iv) A banking entity's ownership interest in or relationship with 
the issuer must:
    (A) Comply with the limitations imposed in Sec. Sec.  255.14 
(except the banking entity may acquire and retain any ownership 
interest in the issuer) and 255.15, as if the issuer were a covered 
fund; and
    (B) Be conducted in compliance with, and subject to, applicable 
banking laws and regulations, including applicable safety and soundness 
standards.
    (17) Family wealth management vehicles. (i) Subject to paragraph 
(c)(17)(ii) of this section, any entity that is not, and does not hold 
itself out as being, an entity or arrangement that raises money from 
investors primarily for the purpose of investing in securities for 
resale or other disposition or otherwise trading in securities, and:
    (A) If the entity is a trust, the grantor(s) of the entity are all 
family customers; and
    (B) If the entity is not a trust:
    (1) A majority of the voting interests in the entity are owned 
(directly or indirectly) by family customers; and
    (2) The entity is owned only by family customers and up to 3 
closely related persons of the family customers.
    (ii) A banking entity may rely on the exclusion in paragraph 
(c)(17)(i) of this section with respect to an entity provided that the 
banking entity (or an affiliate):
    (A) Provides bona fide trust, fiduciary, investment advisory, or 
commodity trading advisory services to the entity;
    (B) Does not, directly or indirectly, guarantee, assume, or 
otherwise insure the obligations or performance of such entity;
    (C) Complies with the disclosure obligations under Sec.  
255.11(a)(8), as if such entity were a covered fund;

[[Page 12201]]

    (D) Does not acquire or retain, as principal, an ownership interest 
in the entity, other than up to 0.5 percent of the entity's outstanding 
ownership interests that may be held by the banking entity and its 
affiliates for the purpose of and to the extent necessary for 
establishing corporate separateness or addressing bankruptcy, 
insolvency, or similar concerns;
    (E) Complies with the requirements of Sec. Sec.  255.14(b) and 
255.15, as if such entity were a covered fund; and
    (F) Complies with the requirements of 12 CFR 223.15(a), as if such 
banking entity and its affiliates were a member bank and the issuer 
were an affiliate thereof.
    (iii) For purposes of paragraph (c)(17) of this section, the 
following definitions apply:
    (A) ``Closely related person'' means a natural person (including 
the estate and estate planning vehicles of such person) who has 
longstanding business or personal relationships with any family 
customer.
    (B) ``Family customer'' means:
    (1) A family client, as defined in Rule 202(a)(11)(G) 1(d)(4) of 
the Investment Advisers Act of 1940 (17 CFR 275.202(a)(11)(G)-1(d)(4)); 
or
    (2) Any natural person who is a father-in-law, mother-in-law, 
brother-in-law, sister-in-law, son-in-law or daughter-in-law of a 
family client, or a spouse or a spousal equivalent of any of the 
foregoing.
    (18) Customer facilitation vehicles. (i) Subject to paragraph 
(c)(18)(ii) of this section, an issuer that is formed by or at the 
request of a customer of the banking entity for the purpose of 
providing such customer (which may include one or more affiliates of 
such customer) with exposure to a transaction, investment strategy, or 
other service provided by the banking entity.
    (ii) A banking entity may rely on the exclusion in paragraph 
(c)(18)(i) of this section with respect to an issuer provided that:
    (A) All of the ownership interests of the issuer are owned by the 
customer (which may include one or more of its affiliates) for whom the 
issuer was created, subject to paragraph (c)(18)(ii)(B)(4) of this 
section; and
    (B) The banking entity and its affiliates:
    (1) Maintain documentation outlining how the banking entity intends 
to facilitate the customer's exposure to such transaction, investment 
strategy, or service;
    (2) Do not, directly or indirectly, guarantee, assume, or otherwise 
insure the obligations or performance of such issuer;
    (3) Comply with the disclosure obligations under Sec.  
255.11(a)(8), as if such issuer were a covered fund;
    (4) Do not acquire or retain, as principal, an ownership interest 
in the issuer, other than up to 0.5 percent of the issuer's outstanding 
ownership interests that may be held by the banking entity and its 
affiliates for the purpose of and to the extent necessary for 
establishing corporate separateness or addressing bankruptcy, 
insolvency, or similar concerns;
    (5) Comply with the requirements of Sec. Sec.  255.14(b) and 
255.15, as if such issuer were a covered fund; and
    (6) Comply with the requirements of 12 CFR 223.15(a), as if such 
banking entity and its affiliates were a member bank and the issuer 
were an affiliate thereof.
* * * * *
    (d) * * *
    (6) Ownership interest--(i) Ownership interest means any equity, 
partnership, or other similar interest. An ``other similar interest'' 
means an interest that:
    (A) Has the right to participate in the selection or removal of a 
general partner, managing member, member of the board of directors or 
trustees, investment manager, investment adviser, or commodity trading 
advisor of the covered fund (excluding the rights of a creditor to 
exercise remedies upon the occurrence of an event of default or an 
acceleration event, which includes the right to participate in the 
removal of an investment manager for cause or to nominate or vote on a 
nominated replacement manager upon an investment manager's resignation 
or removal);
    (B) Has the right under the terms of the interest to receive a 
share of the income, gains or profits of the covered fund;
    (C) Has the right to receive the underlying assets of the covered 
fund after all other interests have been redeemed and/or paid in full 
(excluding the rights of a creditor to exercise remedies upon the 
occurrence of an event of default or an acceleration event);
    (D) Has the right to receive all or a portion of excess spread (the 
positive difference, if any, between the aggregate interest payments 
received from the underlying assets of the covered fund and the 
aggregate interest paid to the holders of other outstanding interests);
    (E) Provides under the terms of the interest that the amounts 
payable by the covered fund with respect to the interest could be 
reduced based on losses arising from the underlying assets of the 
covered fund, such as allocation of losses, write-downs or charge-offs 
of the outstanding principal balance, or reductions in the amount of 
interest due and payable on the interest;
    (F) Receives income on a pass-through basis from the covered fund, 
or has a rate of return that is determined by reference to the 
performance of the underlying assets of the covered fund; or
    (G) Any synthetic right to have, receive, or be allocated any of 
the rights in paragraphs (d)(6)(i)(A) through (F) of this section.
    (ii) Ownership interest does not include:
    (A) Restricted profit interest which is an interest held by an 
entity (or an employee or former employee thereof) in a covered fund 
for which the entity (or employee thereof) serves as investment 
manager, investment adviser, commodity trading advisor, or other 
service provider, so long as:
    (1) The sole purpose and effect of the interest is to allow the 
entity (or employee or former employee thereof) to share in the profits 
of the covered fund as performance compensation for the investment 
management, investment advisory, commodity trading advisory, or other 
services provided to the covered fund by the entity (or employee or 
former employee thereof), provided that the entity (or employee or 
former employee thereof) may be obligated under the terms of such 
interest to return profits previously received;
    (2) All such profit, once allocated, is distributed to the entity 
(or employee or former employee thereof) promptly after being earned 
or, if not so distributed, is retained by the covered fund for the sole 
purpose of establishing a reserve amount to satisfy contractual 
obligations with respect to subsequent losses of the covered fund and 
such undistributed profit of the entity (or employee or former employee 
thereof) does not share in the subsequent investment gains of the 
covered fund;
    (3) Any amounts invested in the covered fund, including any amounts 
paid by the entity in connection with obtaining the restricted profit 
interest, are within the limits of Sec.  255.12 of this subpart; and
    (4) The interest is not transferable by the entity (or employee or 
former employee thereof) except to an affiliate thereof (or an employee 
of the banking entity or affiliate), to immediate family members, or 
through the intestacy, of the employee or former employee, or in 
connection with a sale of the business that gave rise to the restricted 
profit interest by the entity (or employee or

[[Page 12202]]

former employee thereof) to an unaffiliated party that provides 
investment management, investment advisory, commodity trading advisory, 
or other services to the fund.
    (B) Any senior loan or senior debt interest that has the following 
characteristics:
    (1) Under the terms of the interest the holders of such interest do 
not have the right to receive a share of the income, gains, or profits 
of the covered fund, but are entitled to receive only:
    (i) Interest at a stated interest rate, as well as commitment fees 
or other fees, which are not determined by reference to the performance 
of the underlying assets of the covered fund; and
    (ii) Fixed principal payments on or before a maturity date (which 
may include prepayment premiums intended solely to reflect, and 
compensate holders of the interest for, foregone income resulting from 
an early prepayment);
    (2) The entitlement to payments under the terms of the interest are 
absolute and could not be reduced based on losses arising from the 
underlying assets of the covered fund, such as allocation of losses, 
write-downs or charge-offs of the outstanding principal balance, or 
reductions in the amount of interest due and payable on the interest; 
and
    (3) The holders of the interest are not entitled to receive the 
underlying assets of the covered fund after all other interests have 
been redeemed or paid in full (excluding the rights of a creditor to 
exercise remedies upon the occurrence of an event of default or an 
acceleration event).
0
28. Amend Sec.  255.12 by:
0
a. Revising paragraph (b)(1)(ii);
0
b. Revising paragraph (b)(4);
0
c. Adding paragraph (b)(5);
0
d. Revising paragraph (c)(1); and
0
e. Revising paragraphs (d) and (e).
    The revisions and addition read as follows:


Sec.  255.12   Permitted investment in a covered fund.

* * * * *
    (b) * * *
    (1) * * *
    (ii) Treatment of registered investment companies, SEC-regulated 
business development companies, and foreign public funds. For purposes 
of paragraph (b)(1)(i) of this section, a registered investment 
company, SEC-regulated business development companies, or foreign 
public fund as described in Sec.  255.10(c)(1) of this subpart will not 
be considered to be an affiliate of the banking entity so long as the 
banking entity:
    (A) Does not own, control, or hold with the power to vote 25 
percent or more of the voting shares of the company or fund; and
    (B) Provides investment advisory, commodity trading advisory, 
administrative, and other services to the company or fund in compliance 
with the limitations under applicable regulation, order, or other 
authority.
* * * * *
    (4) Multi-tier fund investments--(i) Master-feeder fund 
investments. If the principal investment strategy of a covered fund 
(the ``feeder fund'') is to invest substantially all of its assets in 
another single covered fund (the ``master fund''), then for purposes of 
the investment limitations in paragraphs (a)(2)(i)(B) and (a)(2)(ii) of 
this section, the banking entity's permitted investment in such funds 
shall be measured only by reference to the value of the master fund. 
The banking entity's permitted investment in the master fund shall 
include any investment by the banking entity in the master fund, as 
well as the banking entity's pro-rata share of any ownership interest 
in the master fund that is held through the feeder fund; and
    (ii) Fund-of-funds investments. If a banking entity organizes and 
offers a covered fund pursuant to Sec.  255.11 of this subpart for the 
purpose of investing in other covered funds (a ``fund of funds'') and 
that fund of funds itself invests in another covered fund that the 
banking entity is permitted to own, then the banking entity's permitted 
investment in that other fund shall include any investment by the 
banking entity in that other fund, as well as the banking entity's pro-
rata share of any ownership interest in the fund that is held through 
the fund of funds. The investment of the banking entity may not 
represent more than 3 percent of the amount or value of any single 
covered fund.
    (5) Parallel Investments and Co-Investments--(i) A banking entity 
shall not be required to include in the calculation of the investment 
limits under paragraph (a)(2) of this section any investment the 
banking entity makes alongside a covered fund as long as the investment 
is made in compliance with applicable laws and regulations, including 
applicable safety and soundness standards.
    (ii) A banking entity shall not be restricted under this section in 
the amount of any investment the banking entity makes alongside a 
covered fund as long as the investment is made in compliance with 
applicable laws and regulations, including applicable safety and 
soundness standards.
    (c) * * *
    (1)(i) For purposes of paragraph (a)(2)(iii) of this section, the 
aggregate value of all ownership interests held by a banking entity 
shall be the sum of all amounts paid or contributed by the banking 
entity in connection with acquiring or retaining an ownership interest 
in covered funds (together with any amounts paid by the entity in 
connection with obtaining a restricted profit interest under Sec.  
255.10(d)(6)(ii)), on a historical cost basis;
    (ii) Treatment of employee and director restricted profit interests 
financed by the banking entity. For purposes of paragraph (c)(1)(i) of 
this section, an investment by a director or employee of a banking 
entity who acquires a restricted profit interest in their personal 
capacity in a covered fund sponsored by the banking entity will be 
attributed to the banking entity if the banking entity, directly or 
indirectly, extends financing for the purpose of enabling the director 
or employee to acquire the restricted profit interest in the fund and 
the financing is used to acquire such ownership interest in the covered 
fund.
* * * * *
    (d) Capital treatment for a permitted investment in a covered fund. 
For purposes of calculating compliance with the applicable regulatory 
capital requirements, a banking entity shall deduct from the banking 
entity's tier 1 capital (as determined under paragraph (c)(2) of this 
section) the greater of:
    (1)(i) The sum of all amounts paid or contributed by the banking 
entity in connection with acquiring or retaining an ownership interest 
(together with any amounts paid by the entity in connection with 
obtaining a restricted profit interest under Sec.  255.10(d)(6)(ii)), 
on a historical cost basis, plus any earnings received; and
    (ii) The fair market value of the banking entity's ownership 
interests in the covered fund as determined under paragraph (b)(2)(ii) 
or (b)(3) of this section (together with any amounts paid by the entity 
in connection with obtaining a restricted profit interest under Sec.  
255.10(d)(6)(ii) of subpart C of this part), if the banking entity 
accounts for the profits (or losses) of the fund investment in its 
financial statements.
    (2) Treatment of employee and director restricted profit interests 
financed by the banking entity. For purposes of paragraph (d)(1) of 
this section, an investment by a director or employee of a banking 
entity who acquires a restricted profit interest in his or her personal 
capacity in a covered fund sponsored by the banking entity

[[Page 12203]]

will be attributed to the banking entity if the banking entity, 
directly or indirectly, extends financing for the purpose of enabling 
the director or employee to acquire the restricted profit interest in 
the fund and the financing is used to acquire such ownership interest 
in the covered fund.
    (e) Extension of time to divest an ownership interest. (1) 
Extension Period. Upon application by a banking entity, the Board may 
extend the period under paragraph (a)(2)(i) of this section for up to 2 
additional years if the Board finds that an extension would be 
consistent with safety and soundness and not detrimental to the public 
interest.
    (2) Application Requirements. An application for extension must:
    (i) Be submitted to the Board at least 90 days prior to the 
expiration of the applicable time period;
    (ii) Provide the reasons for application, including information 
that addresses the factors in paragraph (e)(3) of this section; and
    (iii) Explain the banking entity's plan for reducing the permitted 
investment in a covered fund through redemption, sale, dilution or 
other methods as required in paragraph (a)(2) of this section.
    (3) Factors governing the Board determinations. In reviewing any 
application under paragraph (e)(1) of this section, the Board may 
consider all the facts and circumstances related to the permitted 
investment in a covered fund, including:
    (i) Whether the investment would result, directly or indirectly, in 
a material exposure by the banking entity to high-risk assets or high-
risk trading strategies;
    (ii) The contractual terms governing the banking entity's interest 
in the covered fund;
    (iii) The date on which the covered fund is expected to have 
attracted sufficient investments from investors unaffiliated with the 
banking entity to enable the banking entity to comply with the 
limitations in paragraph (a)(2)(i) of this section;
    (iv) The total exposure of the covered banking entity to the 
investment and the risks that disposing of, or maintaining, the 
investment in the covered fund may pose to the banking entity and the 
financial stability of the United States;
    (v) The cost to the banking entity of divesting or disposing of the 
investment within the applicable period;
    (vi) Whether the investment or the divestiture or conformance of 
the investment would involve or result in a material conflict of 
interest between the banking entity and unaffiliated parties, including 
clients, customers, or counterparties to which it owes a duty;
    (vii) The banking entity's prior efforts to reduce through 
redemption, sale, dilution, or other methods its ownership interests in 
the covered fund, including activities related to the marketing of 
interests in such covered fund;
    (viii) Market conditions; and
    (ix) Any other factor that the Board believes appropriate.
    (4) Authority to impose restrictions on activities or investment 
during any extension period. The Board may impose such conditions on 
any extension approved under paragraph (e)(1) of this section as the 
Board determines are necessary or appropriate to protect the safety and 
soundness of the banking entity or the financial stability of the 
United States, address material conflicts of interest or other unsound 
banking practices, or otherwise further the purposes of section 13 of 
the BHC Act and this part.
    (5) Consultation. In the case of a banking entity that is primarily 
regulated by another Federal banking agency, the SEC, or the CFTC, the 
Board will consult with such agency prior to acting on an application 
by the banking entity for an extension under paragraph (e)(1) of this 
section.
0
29. Amend Sec.  255.13 by adding paragraph (d) to read as follows:


Sec.  255.13   Other permitted covered fund activities and investments.

* * * * *
    (d) Permitted covered fund activities and investments of qualifying 
foreign excluded funds. (1) The prohibition contained in Sec.  
255.10(a) does not apply to a qualifying foreign excluded fund.
    (2) For purposes of this paragraph (d), a qualifying foreign 
excluded fund means a banking entity that:
    (i) Is organized or established outside the United States, and the 
ownership interests of which are offered and sold solely outside the 
United States;
    (ii)(A) Would be a covered fund if the entity were organized or 
established in the United States, or
    (B) Is, or holds itself out as being, an entity or arrangement that 
raises money from investors primarily for the purpose of investing in 
financial instruments for resale or other disposition or otherwise 
trading in financial instruments;
    (iii) Would not otherwise be a banking entity except by virtue of 
the acquisition or retention of an ownership interest in, sponsorship 
of, or relationship with the entity, by another banking entity that 
meets the following:
    (A) The banking entity is not organized, or directly or indirectly 
controlled by a banking entity that is organized, under the laws of the 
United States or of any State; and
    (B) The banking entity's acquisition of an ownership interest in or 
sponsorship of the fund by the foreign banking entity meets the 
requirements for permitted covered fund activities and investments 
solely outside the United States, as provided in Sec.  255.13(b);
    (iv) Is established and operated as part of a bona fide asset 
management business; and
    (v) Is not operated in a manner that enables any other banking 
entity to evade the requirements of section 13 of the BHC Act or this 
part.
0
30. Amend Sec.  255.14 by:
0
a. Revising paragraph (a)(2)(i);
0
b. Revising paragraph (a)(2)(ii)(C);
0
c. Adding paragraphs (a)(2)(iii), (a)(2)(iv); and (a)(3); and
0
d. Revising paragraph (c).
    The revisions and additions read as follows:


Sec.  255.14   Limitations on relationships with a covered fund.

    (a) * * *
    (2) * * *
    (i) Acquire and retain any ownership interest in a covered fund in 
accordance with the requirements of Sec. Sec.  255.11, 255.12, or 
255.13;
    (ii) * * *
    (C) The Board has not determined that such transaction is 
inconsistent with the safe and sound operation and condition of the 
banking entity; and
    (iii) Enter into a transaction with a covered fund that would be an 
exempt covered transaction under 12 U.S.C. 371c(d) or Sec.  223.42 of 
the Board's Regulation W (12 CFR 223.42); and
    (iv) Extend credit to or purchase assets from a covered fund, 
provided:
    (A) Each extension of credit or purchase of assets is in the 
ordinary course of business in connection with payment transactions; 
settlement services; or futures, derivatives, and securities clearing;
    (B) Each extension of credit is repaid, sold, or terminated by the 
end of five business days; and
    (C) The banking entity making each extension of credit meets the 
requirements of section 223.42(l)(1)(i) and (ii) of the Board's 
Regulation W (12 CFR 223.42(l)(1)(i) and(ii)), as if the extension of 
credit was an intraday extension of credit, regardless of the duration 
of the extension of credit.
    (3) Any transaction or activity permitted under paragraphs 
(a)(2)(iii) or (iv) must comply with the limitations in Sec.  255.15 of 
this section.
* * * * *
    (c) Restrictions on other permitted transactions. Any transaction 
permitted

[[Page 12204]]

under paragraphs (a)(2)(ii), (a)(2)(iii), or (a)(2)(iv) of this section 
shall be subject to section 23B of the Federal Reserve Act (12 U.S.C. 
371c-1) as if the counterparty were an affiliate of the banking entity.

    Dated: January 29, 2020.
Joseph M. Otting,
Comptroller of the Currency.

    By order of the Board of Governors of the Federal Reserve 
System, January 30, 2020.

Ann E. Misback,
Secretary of the Board.

Federal Deposit Insurance Corporation.

    By order of the Board of Directors.

    Dated at Washington, DC, on January 30, 2020.
Annmarie H. Boyd,
Assistant Executive Secretary.

    Issued in Washington, DC, on February 3, 2020 by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

    By the Securities and Exchange Commission.

    Dated: January 30, 2020.
Eduardo A. Aleman,
Deputy Secretary.

    Note:  The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Prohibitions and Restrictions on Proprietary Trading and 
Certain Interests in, and Relationships With, Hedge Funds and Private 
Equity Funds--CFTC Voting Summary and CFTC Commissioners' Statements

Appendix 1--CFTC Voting Summary

    On this matter, Chairman Tarbert and Commissioners Quintenz and 
Stump voted in the affirmative. Commissioners Behnam and Berkovitz 
voted in the negative. The document submitted to the CFTC 
Commissioners for a vote did not include Section IV.F. SEC Economic 
Analysis.

Appendix 2--Dissenting Statement of CFTC Commissioner Rostin Behnam

    I respectfully dissent as to the Commission's decision to 
propose more revisions to the Volcker Rule. The Volcker Rule, in 
simple terms, contains two basic prohibitions for banking entities: 
(1) They may not engage in proprietary trading; and (2) they cannot 
have an ownership interest in, sponsor, or have certain 
relationships with a covered fund. Last September, the Commission, 
along with other Federal agencies,\1\ approved changes that 
significantly weakened the prohibition on propriety trading by 
narrowing the scope of financial instruments subject to the Volcker 
Rule.\2\ Today, the Commission and the other agencies take aim at 
the second prohibition, and propose to significantly weaken the 
prohibition on ownership of covered funds. When the agencies 
approved the changes on proprietary trading in September, the late 
Paul Volcker himself sent a letter to the Chairman of the Federal 
Reserve stating that the amended rule ``amplifies risk in the 
financial system, increases moral hazard and erodes protections 
against conflicts of interest that were so glaringly on display 
during the last crisis.'' \3\ I can imagine that he would say 
something very similar about the further changes that we propose 
today, particularly the erosion of the existing protections 
regarding conflicts of interest. I fear that, if we continue to roll 
back the Volcker Rule, we will soon reach a stage where, sadly, 
there is nothing left.
---------------------------------------------------------------------------

    \1\ The Office of the Comptroller of the Currency, Treasury; the 
Board of Governors of the Federal Reserve System; the Federal 
Deposit Insurance Corporation; and the Securities and Exchange 
Commission.
    \2\ Prohibitions and Restrictions on Proprietary Trading and 
Certain Interests in, and Relationships With, Hedge Funds and 
Private Equity Funds, 84 FR 61974 (Nov. 14, 2019).
    \3\ Jesse Hamilton and Yalman Onaran, ``Vocker the Man Blasts 
Volcker the Rule in Letter to Fed Chair,'' Bloomberg (Sep. 10, 
2019), https://www.bloomberg.com/news/articles/2019-09-10/volcker-the-man-blasts-volcker-the-rule-in-letter-to-fed-chair.
---------------------------------------------------------------------------

Appendix 3--Dissenting Statement of CFTC Commissioner Dan M. Berkovitz

    Let's start by calling the Volcker Covered Fund Proposal 
(``Proposal'') what it is: A regulatory rollback.\4\ Virtually every 
change in the Proposal creates a new exclusion from the rules, or 
eliminates or reduces existing requirements. The changes to the 
regulations run counter to the statutory purpose of prohibiting 
banks from owning hedge funds and private equity funds. The Proposal 
fails to analyze or discuss the risks inherent in the banking 
activities it would permit. It presents a thin veneer of a rationale 
for many of the changes that were precipitated by complaints from 
the banking industry. The agencies should be making reasoned 
decisions to improve the effectiveness of the regulations for the 
purposes mandated by Congress, not implementing industry-driven 
rollbacks. I therefore dissent.
---------------------------------------------------------------------------

    \4\ ``Rollback'' is defined as ``reduc[ing] (something, such as 
a commodity price) to or toward a previous level on a national 
scale.'' https://www.merriam-webster.com/dictionary/rollback.
---------------------------------------------------------------------------

    The general purpose of the Volcker Rule is to eliminate 
excessive risk taking by banks that enjoy the benefits of U.S. 
taxpayer support while still preserving their ability to undertake 
banking activities that serve the public interest.\5\ The covered 
fund provisions are intended to prevent banking entities from 
circumventing the proprietary trading prohibition in the Volcker 
rule through covered fund investments and limit bank involvement in 
covered funds so that the banks are not expected to bail out the 
funds if they lose money.\6\
---------------------------------------------------------------------------

    \5\ See Statement of Sen. Dodd, 156 Cong. Rec. S6242 (July 26, 
2010) (``The purpose of the Volcker rule is to eliminate excessive 
risk taking activities by banks and their affiliates while at the 
same time preserving safe, sound investment activities that serve 
the public interest.'').
    \6\ The classic example of this risk is the collapse of two Bear 
Stearns-sponsored hedge funds in 2007. Bear Stearns provided loans 
intended to shore up two Cayman Islands hedge funds established by 
Bear Stearns. Bear Stearns was not legally obligated to back the 
funds financially, but as a business matter, it felt compelled to 
support them because of its sponsorship of the funds. Those actions 
were part of a chain of events that eventually led to the fire sale 
of Bear Stearns to J.P. Morgan in March 2008. To entice J.P. Morgan 
to buy a distressed Bear Stearns, the Federal Reserve System 
provided financial support for the purchase. See Reuters, Timeline: 
A dozen key dates in the demise of Bear Stearns (Mar. 17, 2008), 
available at https://www.reuters.com/article/us-bearstearns-chronology/timeline-a-dozen-key-dates-in-the-demise-of-bear-stearns-idUSN1724031920080317.
---------------------------------------------------------------------------

    While a few of the proposed changes are consistent with this 
statutory purpose because they correct unintended consequences from 
the original regulation, the Proposal goes much further than 
reasonably necessary and appears to create substantial loopholes 
without effectively analyzing the potential risks. There is no 
quantitative analysis of those risks. The rationales provided to 
support these rollbacks are qualitative, legalistic, and summary in 
nature. They purport to provide ``clarity,'' allow banks to 
``diversify'' investments, or improve bank competitiveness--none of 
which advance the goals articulated by Congress.
    I am concerned that the proposed changes, along with the other 
regulatory reductions implemented in the proprietary trading 
provisions of the Volcker regulations in November 2019,\7\ may 
together substantially reduce the safety measures instituted in the 
Dodd-Frank Act. Are the large banks that are subject to Volcker 
profitable? Definitely. Are the banks less competitive as compared 
to their international competitors? No.\8\ Do we need to give them 
more rein to take on more risk? A case for that has not been made. I 
fear that we are putting the United States taxpayer at risk of once 
again bailing out the banks when we as regulators fail to take a 
reasoned, thoughtful approach; one that seeks to reach an 
appropriate balance of free markets with regulatory guard rails for 
risk-taking. After all, the banks that are subject to the Volcker 
regulations are insured by the FDIC and/or have access to Federal 
Reserve Bank support. We should have a say in the risks they take 
when the U.S. taxpayer is standing behind them.
---------------------------------------------------------------------------

    \7\ Prohibitions and Restrictions on Proprietary Trading and 
Certain Interests in, and Relationships with, Hedge Funds and 
Private Equity Funds, 84 FR 61974 (Nov. 14, 2019).
    \8\ U.S. banks are the strongest in the world. The recent Global 
League Tables ranking global banks by amount of banking business 
activity shows that three or four U.S. banks are in the top five 
banks in almost every category, including for banking business in 
foreign markets. See GlobalCapital.com, Global League Tables, 
available at https://www.globalcapital.com/data/all-league-tables.
---------------------------------------------------------------------------

Specific Changes of Concern

    Much of the Proposal addresses regulations that will not impact, 
or will have only indirect impacts on, the CFTC's core mandate to 
regulate the derivatives markets.

[[Page 12205]]

Nonetheless, I cannot vote in favor of proposed regulations that are 
presented to this agency for review that broadly fail to follow 
congressional intent--limiting risky behavior by banks connected 
with hedge funds and private equity funds.
    The Proposal states: ``The proposed rule is intended to improve 
and streamline the covered fund provisions and provide clarity to 
banking entities so that they can offer financial services and 
engage in other permissible activities in a manner that is 
consistent with the requirements of section 13 of the BHC Act.'' \9\ 
This benign fa[ccedil]ade masks the true purpose and effect of the 
Proposal, which is a regulatory rollback. It adds five new, 
substantive exclusions from covered funds regulation; \10\ expands 
three existing and significant exclusions; reduces what constitutes 
``ownership'' in a covered fund in numerous ways; and significantly 
reduces limitations on banking relationships with covered funds.
---------------------------------------------------------------------------

    \9\ Proposal, section II.
    \10\ While the Proposal lists four exclusions, the parallel 
investments permission is, in effect, an exclusion from regulation.
---------------------------------------------------------------------------

    The Volcker covered fund provisions could benefit from tailored 
revisions to fix some unintended consequences. The so called ``super 
23A'' provisions restrict regular bank clearing activities for 
certain covered funds for which an affiliate provides services, such 
as investment management. Clearing services are not risk-taking 
activities. As another example, the existing regulations 
inadvertently convert some foreign covered funds into banking 
entities subject to the entire rule set when the statute intended to 
exclude those activities if they take place outside the United 
States. The Proposal would properly address these issues. 
Unfortunately, it also goes much further in proposing regulatory 
reductions without careful consideration of the risks involved.
    I will discuss three particular provisions to illustrate my 
concerns. First, the Proposal would exclude ``venture capital 
funds'' from the covered funds definition with some minor 
limitations that are not based on the risks involved. The Proposal 
acknowledges that, as stated in the final release for the current 
Volcker regulations, venture capital funds are private equity funds. 
The Proposal states that the venture capital fund exclusion is based 
in part on several statements by members of Congress regarding 
venture capital funds. However, a close reading of the four 
statements cited in the Proposal shows that three of the four do not 
call for a complete exclusion of venture capital funds. Congress 
could have excluded venture capital funds if that were the intent. 
It did not.
    The justification for the broad venture capital fund exclusion 
is flimsy. The Proposal asserts the exclusion could ``promote and 
protect the safety and soundness of banking entities and the 
financial stability of the United States'' by allowing banks to 
``diversify their permissible investment activities.'' \11\ 
Unfortunately, virtually no analysis or information is provided as 
to whether such ``diversification'' is in fact a good thing. 
Allowing banks to invest in anything and everything would greatly 
increase diversification, but that absurd approach would not likely 
protect the safety and soundness of banks or our financial system.
---------------------------------------------------------------------------

    \11\ Proposal, section III.C.2.
---------------------------------------------------------------------------

    A simple Google search reveals data indicating that venture 
capital investments historically have been high risk. One study 
found that about 75% of venture capital-backed firms in the United 
States did not return capital to investors.\12\ A 2013 article in 
the Harvard Business Review noted that ``VC funds haven't 
significantly outperformed the public markets since the late 1990s, 
and since 1997 less cash has been returned to VC investors than they 
have invested.'' \13\ The author goes on to note that ``[v]enture 
capital investments are generally perceived as high-risk and high-
reward. The data in our report reveal that although investors in VC 
take on high fees, illiquidity, and risk, they rarely reap the 
reward of high returns.'' Although venture capital performs an 
important function in providing capital to new technologies, and has 
been critical in boosting our economy and global competitiveness, I 
do not think we should be permitting such investments by banks 
backed by U.S. taxpayers without analyzing the risks involved.
---------------------------------------------------------------------------

    \12\ Deborah Gage, The Venture Capital Secret: 3 out of 4 Start-
Ups Fail, Wall Street Journal (Sept. 20, 2012), (citing research by 
Shikhar Ghosh, a senior lecturer at Harvard Business School), 
available at https://www.wsj.com/articles/SB10000872396390443720204578004980476429190.
    \13\ Diane Mulcahy, Six Myths About Venture Capitalists, Harvard 
Business Review (May 2013), available at https://hbr.org/2013/05/six-myths-about-venture-capitalists.
---------------------------------------------------------------------------

    The Proposal would add another new exclusion from covered fund 
regulation for ``customer facilitation vehicles.'' This exclusion is 
concerning because it is not well defined and could potentially 
become an end run around the Volcker rule. In effect, a bank could 
be the counterparty for the instruments in the vehicle sold to 
customers and thereby take on substantial risks permitted as a 
result of the exclusion. These risks are not addressed in the 
Proposal.
    The Proposal states that such funds or ``vehicles'' would be 
used to facilitate customer needs. The brief example given is of 
accommodating a bank customer that wants to purchase structured 
notes issued through a vehicle, not the bank, ``for certain legal, 
counterparty risk management, or accounting reasons specific to the 
customer.'' \14\ However, unlike the ``credit fund exclusion,'' 
which limits the assets that may be held in such funds, the Proposal 
has no restrictions as to what instruments can be in the vehicle and 
whether the banking entity can be the counterparty for those 
instruments. A portfolio of complex derivatives or synthetic 
``investments'' could be placed in the vehicle with the bank taking 
the other side of the trades.
---------------------------------------------------------------------------

    \14\ Proposal, section III.C.4.
---------------------------------------------------------------------------

    Furthermore, the Proposal acknowledges that the so called 
``customer facilitation'' vehicles can in fact be ginned up by the 
banks themselves and that ``marketing'' the vehicles to the 
customers is not restricted. In effect, a bank could now create a 
fund of investments that it wants to hold, put the underlying 
instruments into a ``vehicle'' and then market the other side of the 
investments to customers in the form of security ownership in the 
vehicle. This exclusion has the potential to create a large loophole 
for creative bankers to exploit.
    Finally, there is a special exclusion created for billionaires: 
The new ``Family Wealth Management Vehicles'' exclusion. This 
provision would exclude so called ``family offices'' from Volcker 
covered funds regulation. Unlike the prior two examples, this 
exclusion is not likely to materially increase undesirable risk 
taking by banks.\15\ Rather, it is concerning because it allows 
banks and wealth vehicles to avoid Volcker compliance. In my view, 
wealth vehicles for ultra-wealthy individuals do not need special 
regulatory relief.
---------------------------------------------------------------------------

    \15\ The Proposal would only allow a de minimis investment in 
such vehicles by banking entities.
---------------------------------------------------------------------------

    As I noted recently in a statement opposing family office 
exemptions from several CFTC rules, family offices are not used by 
ordinary families who may have a modest degree of wealth. Rather, 
the extraordinarily wealthy--including hedge fund operators, 
bankers, and super wealthy entrepreneurs--create these organizations 
to preserve, grow, and pass on their wealth to their 
descendants.\16\ According to the Global Family Office Report 2019, 
``[t]he average family wealth of those surveyed for this report 
stands at USD 1.2 billion, while the average family office has USD 
917 million in [assets under management].'' \17\ The aggregate 
amount of wealth managed by family offices is staggering. By one 
estimate, the total assets under management by family offices is 
over $4 trillion, and the number of family offices has grown ten-
fold in the last decade.\18\ A recent Forbes article noted that 
``[f]amily offices are now capable of making transactions that were 
traditionally reserved for big companies or private-equity firms and 
therefore are becoming a disruptive force in the market-place.'' 
\19\
---------------------------------------------------------------------------

    \16\ Registration and Compliance Requirements for Commodity Pool 
Operators (CPOs) and Commodity Trading Advisors: Family Offices and 
Exempt CPOs, 84 FR 67355, 67369 (Dec. 10, 2019). According to one 
guide to family offices:
    [T]he modern concept of the family office developed in the 19th 
century. In 1838, the family of financier and art collector J.P. 
Morgan founded the House of Morgan to manage the family assets. In 
1882, the Rockefellers founded their own family office, which is 
still in existence and provides services to other families.
    EY Family Office Guide, Pathway to successful family and wealth 
management, at 4, available at https://www.ey.com/en_us/tax/family-office-advisory-services.
    \17\ Campden Research and UBS, The Global Family Office Report 
2019, at 10, available at https://www.ey.com/en_us/tax/family-office-advisory-services.
    \18\ Francois Botha, The Rise of the Family Office: Where Do 
They Go Beyond 2019?, Forbes (Dec. 17, 2018), available at https://www.forbes.com/sites/francoisbotha/2018/12/17/the-rise-of-the-family-office-where-do-they-go-beyond-2019/#426044f55795.
    \19\ Id (emphasis added).
---------------------------------------------------------------------------

    Furthermore, there are indications that family offices for U.S. 
persons may be located

[[Page 12206]]

in offshore tax havens to avoid paying U.S. taxes.\20\ Financial 
regulators should not provide special and favorable regulatory 
treatment to benefit those who seek to avoid paying their fair share 
of U.S. taxes.
---------------------------------------------------------------------------

    \20\ Kirby Rosplock, The Complete Family Office Handbook, A 
Guide for Affluent Families and the Advisors Who Serve Them, at 5 
(Bloomberg Press 2014).
---------------------------------------------------------------------------

Conclusion

    The Volcker Rule and related regulations are complicated. The 
regulations deserve careful, reasoned reassessment to maintain their 
effectiveness. Unfortunately, the Proposal is neither reasoned nor 
careful. It ignores the risk-reducing public policy for the Volcker 
rule and effectively acknowledges the fact that this rollback is 
driven by complaints from the very banks the rule is intended to 
make safer. No effort is made to assess the risks that the Proposal 
will now allow banks to assume. I cannot support the proposed 
changes to the Volcker rule because they do not conform to the 
statutory mandate for the rule and the Proposal does not carefully 
analyze the effect of the changes on the safety and soundness of our 
financial system. I therefore dissent.

[FR Doc. 2020-02707 Filed 2-27-20; 8:45 am]
 BILLING CODE P


