Federal Register, Volume 85 Issue 40 (Friday, February 28, 2020) 
[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 [email protected].
     Email: [email protected].
     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 [email protected].
    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: [email protected]. 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: [email protected]. 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 [email protected]. 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, [email protected], Andrew D.
Carayiannis, Senior Policy Analyst, [email protected], or Brian
Cox, Senior Policy Analyst, [email protected], Capital Markets Branch,
(202) 898-6888; Michael B. Phillips, Counsel, [email protected], or
Benjamin J. Klein, Counsel, [email protected], Legal Division, Federal
Deposit Insurance Corporation, 550 17th Street NW, Washington, DC
20429.
    CFTC: Cantrell Dumas, Special Counsel, (202) 418-5043,
[email protected]; Jeffrey Hasterok, Data and Risk Analyst, (646) 746-
9736, [email protected], Division of Swap Dealer and Intermediary
Oversight; Mark Fajfar, Assistant General Counsel, (202) 418-6636,
[email protected], Office of the General Counsel; Stephen Kane, Research
Economist, (202) 418-5911, [email protected], 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
[email protected], 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
[email protected], 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
337and 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