[House Report 114-523]
[From the U.S. Government Publishing Office]


114th Congress    }                                     {       Report
                        HOUSE OF REPRESENTATIVES
 2d Session       }                                     {      114-523

======================================================================



 
                  INVESTOR CLARITY AND BANK PARITY ACT

                                _______
                                

 April 26, 2016.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Hensarling, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 4096]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 4096) to amend the Volcker Rule to permit 
certain investment advisers to share a similar name with a 
private equity fund, subject to certain restrictions, and for 
other purposes, having considered the same, report favorably 
thereon without amendment and recommend that the bill do pass.

                          Purpose and Summary

    Introduced by Representatives Capuano and Stivers on 
November 19, 2015, H.R. 4096, the Investor Clarity and Bank 
Parity Act, amends Section 619 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Pub. L. 111-203), also 
known as the Volcker Rule, to correct a statutory error that 
the five federal regulators charged with implementing the 
Volcker Rule (the Federal Reserve, the Securities and Exchange 
Commission, the Commodity Futures Trading Commission, the 
Office of the Comptroller of the Currency, and the Federal 
Deposit Insurance Corporation) cannot fix with their regulatory 
authority. When these five federal regulators adopted the 
Volcker Rule in December 2013, the final rule limited the 
ability of bank holding companies and their affiliates, which 
would include investment advisers, to sponsor hedge funds and 
private equity funds (also known as covered funds). 
Consequently, a covered fund cannot use the name of a sponsor. 
H.R. 4096 eliminates this prohibition and simply allows an 
investment adviser to share a similar name with a covered fund.

                  Background and Need for Legislation

    The Volcker Rule prohibits bank holding companies and their 
affiliates from sharing the same name or variation of the name 
for corporate, marketing, or promotional purposes with a hedge 
fund or private equity fund. However, when the five federal 
regulators adopted the final rule to implement the Volcker 
Rule, they expanded upon the ``name-sharing prohibition.'' 
Specifically, the final rule provides that the covered fund may 
not share the same name with the banking entity (or an 
affiliate or subsidiary thereof), nor can the covered fund use 
the word ``bank'' in the name. For example, if XYZ Investment 
Adviser is an affiliate of XYZ Bank and sponsors a real estate 
fund, that real estate fund could not be named XYZ Real Estate 
Fund.
    On February 14, 2016, Jeffrey Plunkett, Executive Vice 
President and General Counsel of Natixis Global Asset 
Management, testified before the Subcommittee on Capital 
Markets and Government Sponsored Enterprises in support of H.R. 
4096 and noted that the implementation of the Volcker Rule is 
``at odds with both industry practice and with the goal of 
providing clarity to investors about who is managing a covered 
fund.''
    H.R. 4096 makes a modest amendment to the Volcker Rule. As 
noted by Mr. Plunkett at the February 14, 2016 hearing, H.R. 
4096 is a ``technical amendment that would seek to clarify, and 
narrow to its apparent original intent, the scope of the 
Volcker Rule's overly broad name-sharing prohibition.''
    The Chamber of Commerce's Center for Capital Markets 
Competitiveness also noted in a letter to the Financial 
Services Committee that H.R. 4096 would rectify this naming 
issue and ``provide bank-affiliated investment managers the 
flexibility to name their funds freely without creating any 
additional risks to an investor or affiliated bank.''

                                Hearings

    The Committee on Financial Services' Subcommittee on 
Capital Markets and Government Sponsored Enterprises held a 
hearing examining matters relating to H.R. 4096 on February 24, 
2016.

                        Committee Consideration

    The Committee on Financial Services met in open session on 
March 2, 2016, and ordered H.R. 4096 to be reported favorably 
to the House without amendment by voice vote, a quorum being 
present.

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. 
There were no record votes in Committee. A motion by Chairman 
Hensarling to report the bill favorably to the House without 
amendment was agreed to by a voice vote, a quorum being 
present.

                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the findings and recommendations of 
the Committee based on oversight activities under clause 
2(b)(1) of rule X of the Rules of the House of Representatives, 
are incorporated in the descriptive portions of this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that H.R. 4096 
will clarify the Volcker Rule to permit a covered fund to have 
the same name or variation of the same name as an investment 
adviser affiliated with a bank holding company under certain 
conditions.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                        Committee Cost Estimate

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                 Congressional Budget Office Estimates

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, March 24, 2016.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 4096, the Investor 
Clarity and Bank Parity Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Sarah Puro.
            Sincerely,
                                                Keith Hall.
    Enclosure.

H.R. 4096--Investor Clarity and Bank Parity Act

    H.R. 4096 would amend current law, known as the ``Volker 
Rule,'' to allow certain types of financial firms--hedge funds 
and private equity funds (known as ``covered funds'' under the 
rule)--to have the same name as an insured depository 
institution or its affiliate. As a result, the federal banking 
regulators--the Federal Deposit Insurance Corporation (FDIC), 
the Office of the Comptroller of the Currency (OCC), and the 
Federal Reserve--along with the Securities and Exchange 
Commission (SEC) and the Commodity Futures Trading Commission 
(CFTC)--would be required to revise current regulations 
concerning allowable naming conventions.

Direct spending and revenues

    Costs incurred by the FDIC and the OCC are recorded in the 
budget as an increase in direct spending. Those two agencies 
are authorized to collect premiums and fees from insured 
depository institutions to cover administrative expenses. CBO 
expects that they would do so to recover any costs associated 
with amending current regulations under the bill. Costs to the 
Federal Reserve System are reflected on the federal budget as a 
reduction in remittances to the Treasury (which are recorded in 
the budget as revenues). CBO estimates that any additional 
administrative costs to the Federal Reserve under the bill 
would be insignificant.
    Because enacting H.R. 4096 would affect direct spending and 
revenues, pay-as-you-go procedures apply. However, CBO 
estimates that the net effects would be insignificant for each 
year.
    CBO estimates that enacting H.R. 4096 would not increase 
net direct spending or on-budget deficits in any of the four 
consecutive 10-year periods beginning in 2027.

Discretionary costs

    Costs incurred by the SEC and the CFTC are recorded in the 
budget as discretionary and are subject to future 
appropriations action. Based on the cost of similar activities, 
CBO estimates that each agency would need one or two full-time 
staff people to complete the rule-making. CBO estimates that 
the costs to those agencies would not be significant and 
subject to the availability of appropriated funds.
    Intergovernmental and private-sector impact: H.R. 4096 
contains no intergovernmental mandates as defined in the 
Unfunded Mandates Reform Act (UMRA) and would not affect the 
budgets of state, local, or tribal governments.
    If any of the financial regulators increase premiums or 
fees to offset the costs of implementing the bill, H.R. 4096 
would increase the cost of an existing mandate on private 
entities required to pay those assessments. Based on 
information from the agencies, CBO estimates that the 
incremental cost of the mandate would be small and would fall 
well below the annual threshold for private-sector mandates 
established in UMRA ($154 million in 2016, adjusted annually 
for inflation).
    The CBO staff contacts for this estimate are Sarah Puro 
(for the FDIC), Nathaniel Frentz (for the Federal Reserve) and 
Logan Smith (for private-sector mandates). The estimate was 
approved by Theresa Gullo, Assistant Director for Budget 
Analysis.

                       Federal Mandates Statement

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of the section 
102(b)(3) of the Congressional Accountability Act.

                         Earmark Identification

    H.R. 4096 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9 of rule XXI.

                    Duplication of Federal Programs

    Pursuant to section 3(g) of H. Res. 5, 114th Cong. (2015), 
the Committee states that no provision of H.R. 4096 establishes 
or reauthorizes a program of the Federal Government known to be 
duplicative of another Federal program, a program that was 
included in any report from the Government Accountability 
Office to Congress pursuant to section 21 of Public Law 111-
139, or a program related to a program identified in the most 
recent Catalog of Federal Domestic Assistance.

                   Disclosure of Directed Rulemaking

    Pursuant to section 3(i) of H. Res. 5, 114th Cong. (2015), 
the Committee states that H.R. 4096 contains no directed 
rulemaking.

             Section-by-Section Analysis of the Legislation


Section 1: Short title

    This section cites H.R. 4096 as the ``Investor Clarity and 
Bank Parity Act''.

Section 2: Naming restrictions

    This section amends Sections 13 of the Bank Holding Company 
Act of 1956 to permit a covered fund to have the same name as a 
bank-affiliated investment advisor if the investment advisor 
(1) is not, and does not control, an insured depository 
institution and is not treated as a bank holding company as 
defined by the International Banking Act of 1978; (2) does not 
share the same name as: an insured depository institution; a 
company that controls an insured depository institution; or a 
company that is treated as a bank holding company; and (3) does 
not have a name that contains the word ``bank''.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (new matter is 
printed in italic and existing law in which no change is 
proposed is shown in roman):

                    BANK HOLDING COMPANY ACT OF 1956



           *       *       *       *       *       *       *
SEC. 13. PROHIBITIONS ON PROPRIETARY TRADING AND CERTAIN RELATIONSHIPS 
                    WITH HEDGE FUNDS AND PRIVATE EQUITY FUNDS.

  (a) In General.--
          (1) Prohibition.--Unless otherwise provided in this 
        section, a banking entity shall not--
                  (A) engage in proprietary trading; or
                  (B) acquire or retain any equity, 
                partnership, or other ownership interest in or 
                sponsor a hedge fund or a private equity fund.
          (2) Nonbank financial companies supervised by the 
        board.--Any nonbank financial company supervised by the 
        Board that engages in proprietary trading or takes or 
        retains any equity, partnership, or other ownership 
        interest in or sponsors a hedge fund or a private 
        equity fund shall be subject, by rule, as provided in 
        subsection (b)(2), to additional capital requirements 
        for and additional quantitative limits with regards to 
        such proprietary trading and taking or retaining any 
        equity, partnership, or other ownership interest in or 
        sponsorship of a hedge fund or a private equity fund, 
        except that permitted activities as described in 
        subsection (d) shall not be subject to the additional 
        capital and additional quantitative limits except as 
        provided in subsection (d)(3), as if the nonbank 
        financial company supervised by the Board were a 
        banking entity.
  (b) Study and Rulemaking.--
          (1) Study.--Not later than 6 months after the date of 
        enactment of this section, the Financial Stability 
        Oversight Council shall study and make recommendations 
        on implementing the provisions of this section so as 
        to--
                  (A) promote and enhance the safety and 
                soundness of banking entities;
                  (B) protect taxpayers and consumers and 
                enhance financial stability by minimizing the 
                risk that insured depository institutions and 
                the affiliates of insured depository 
                institutions will engage in unsafe and unsound 
                activities;
                  (C) limit the inappropriate transfer of 
                Federal subsidies from institutions that 
                benefit from deposit insurance and liquidity 
                facilities of the Federal Government to 
                unregulated entities;
                  (D) reduce conflicts of interest between the 
                self-interest of banking entities and nonbank 
                financial companies supervised by the Board, 
                and the interests of the customers of such 
                entities and companies;
                  (E) limit activities that have caused undue 
                risk or loss in banking entities and nonbank 
                financial companies supervised by the Board, or 
                that might reasonably be expected to create 
                undue risk or loss in such banking entities and 
                nonbank financial companies supervised by the 
                Board;
                  (F) appropriately accommodate the business of 
                insurance within an insurance company, subject 
                to regulation in accordance with the relevant 
                insurance company investment laws, while 
                protecting the safety and soundness of any 
                banking entity with which such insurance 
                company is affiliated and of the United States 
                financial system; and
                  (G) appropriately time the divestiture of 
                illiquid assets that are affected by the 
                implementation of the prohibitions under 
                subsection (a).
          (2) Rulemaking.--
                  (A) In general.--Unless otherwise provided in 
                this section, not later than 9 months after the 
                completion of the study under paragraph (1), 
                the appropriate Federal banking agencies, the 
                Securities and Exchange Commission, and the 
                Commodity Futures Trading Commission, shall 
                consider the findings of the study under 
                paragraph (1) and adopt rules to carry out this 
                section, as provided in subparagraph (B).
                  (B) Coordinated rulemaking.--
                          (i) Regulatory authority.--The 
                        regulations issued under this paragraph 
                        shall be issued by--
                                  (I) the appropriate Federal 
                                banking agencies, jointly, with 
                                respect to insured depository 
                                institutions;
                                  (II) the Board, with respect 
                                to any company that controls an 
                                insured depository institution, 
                                or that is treated as a bank 
                                holding company for purposes of 
                                section 8 of the International 
                                Banking Act, any nonbank 
                                financial company supervised by 
                                the Board, and any subsidiary 
                                of any of the foregoing (other 
                                than a subsidiary for which an 
                                agency described in subclause 
                                (I), (III), or (IV) is the 
                                primary financial regulatory 
                                agency);
                                  (III) the Commodity Futures 
                                Trading Commission, with 
                                respect to any entity for which 
                                the Commodity Futures Trading 
                                Commission is the primary 
                                financial regulatory agency, as 
                                defined in section 2 of the 
                                Dodd-Frank Wall Street Reform 
                                and Consumer Protection Act; 
                                and
                                  (IV) the Securities and 
                                Exchange Commission, with 
                                respect to any entity for which 
                                the Securities and Exchange 
                                Commission is the primary 
                                financial regulatory agency, as 
                                defined in section 2 of the 
                                Dodd-Frank Wall Street Reform 
                                and Consumer Protection Act.
                          (ii) Coordination, consistency, and 
                        comparability.--In developing and 
                        issuing regulations pursuant to this 
                        section, the appropriate Federal 
                        banking agencies, the Securities and 
                        Exchange Commission, and the Commodity 
                        Futures Trading Commission shall 
                        consult and coordinate with each other, 
                        as appropriate, for the purposes of 
                        assuring, to the extent possible, that 
                        such regulations are comparable and 
                        provide for consistent application and 
                        implementation of the applicable 
                        provisions of this section to avoid 
                        providing advantages or imposing 
                        disadvantages to the companies affected 
                        by this subsection and to protect the 
                        safety and soundness of banking 
                        entities and nonbank financial 
                        companies supervised by the Board.
                          (iii) Council role.--The Chairperson 
                        of the Financial Stability Oversight 
                        Council shall be responsible for 
                        coordination of the regulations issued 
                        under this section.
  (c) Effective Date.--
          (1) In general.--Except as provided in paragraphs (2) 
        and (3), this section shall take effect on the earlier 
        of--
                  (A) 12 months after the date of the issuance 
                of final rules under subsection (b); or
                  (B) 2 years after the date of enactment of 
                this section.
          (2) Conformance period for divestiture.--A banking 
        entity or nonbank financial company supervised by the 
        Board shall bring its activities and investments into 
        compliance with the requirements of this section not 
        later than 2 years after the date on which the 
        requirements become effective pursuant to this section 
        or 2 years after the date on which the entity or 
        company becomes a nonbank financial company supervised 
        by the Board. The Board may, by rule or order, extend 
        this two-year period for not more than one year at a 
        time, if, in the judgment of the Board, such an 
        extension is consistent with the purposes of this 
        section and would not be detrimental to the public 
        interest. The extensions made by the Board under the 
        preceding sentence may not exceed an aggregate of 3 
        years.
          (3) Extended transition for illiquid funds.--
                  (A) Application.--The Board may, upon the 
                application of a banking entity, extend the 
                period during which the banking entity, to the 
                extent necessary to fulfill a contractual 
                obligation that was in effect on May 1, 2010, 
                may take or retain its equity, partnership, or 
                other ownership interest in, or otherwise 
                provide additional capital to, an illiquid 
                fund.
                  (B) Time limit on approval.--The Board may 
                grant 1 extension under subparagraph (A), which 
                may not exceed 5 years.
          (4) Divestiture required.--Except as otherwise 
        provided in subsection (d)(1)(G), a banking entity may 
        not engage in any activity prohibited under subsection 
        (a)(1)(B) after the earlier of--
                  (A) the date on which the contractual 
                obligation to invest in the illiquid fund 
                terminates; and
                  (B) the date on which any extensions granted 
                by the Board under paragraph (3) expire.
          (5) Additional capital during transition period.--
        Notwithstanding paragraph (2), on the date on which the 
        rules are issued under subsection (b)(2), the 
        appropriate Federal banking agencies, the Securities 
        and Exchange Commission, and the Commodity Futures 
        Trading Commission shall issue rules, as provided in 
        subsection (b)(2), to impose additional capital 
        requirements, and any other restrictions, as 
        appropriate, on any equity, partnership, or ownership 
        interest in or sponsorship of a hedge fund or private 
        equity fund by a banking entity.
          (6) Special rulemaking.--Not later than 6 months 
        after the date of enactment of this section, the Board 
        shall issues rules to implement paragraphs (2) and (3).
  (d) Permitted Activities.--
          (1) In general.--Notwithstanding the restrictions 
        under subsection (a), to the extent permitted by any 
        other provision of Federal or State law, and subject to 
        the limitations under paragraph (2) and any 
        restrictions or limitations that the appropriate 
        Federal banking agencies, the Securities and Exchange 
        Commission, and the Commodity Futures Trading 
        Commission, may determine, the following activities (in 
        this section referred to as ``permitted activities'') 
        are permitted:
                  (A) The purchase, sale, acquisition, or 
                disposition of obligations of the United States 
                or any agency thereof, obligations, 
                participations, or other instruments of or 
                issued by the Government National Mortgage 
                Association, the Federal National Mortgage 
                Association, the Federal Home Loan Mortgage 
                Corporation, a Federal Home Loan Bank, the 
                Federal Agricultural Mortgage Corporation, or a 
                Farm Credit System institution chartered under 
                and subject to the provisions of the Farm 
                Credit Act of 1971 (12 U.S.C. 2001 et seq.), 
                and obligations of any State or of any 
                political subdivision thereof.
                  (B) The purchase, sale, acquisition, or 
                disposition of securities and other instruments 
                described in subsection (h)(4) in connection 
                with underwriting or market-making-related 
                activities, to the extent that any such 
                activities permitted by this subparagraph are 
                designed not to exceed the reasonably expected 
                near term demands of clients, customers, or 
                counterparties.
                  (C) Risk-mitigating hedging activities in 
                connection with and related to individual or 
                aggregated positions, contracts, or other 
                holdings of a banking entity that are designed 
                to reduce the specific risks to the banking 
                entity in connection with and related to such 
                positions, contracts, or other holdings.
                  (D) The purchase, sale, acquisition, or 
                disposition of securities and other instruments 
                described in subsection (h)(4) on behalf of 
                customers.
                  (E) Investments in one or more small business 
                investment companies, as defined in section 102 
                of the Small Business Investment Act of 1958 
                (15 U.S.C. 662), investments 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), or investments that are 
                qualified rehabilitation expenditures with 
                respect to a qualified rehabilitated building 
                or certified historic structure, as such terms 
                are defined in section 47 of the Internal 
                Revenue Code of 1986 or a similar State 
                historic tax credit program.
                  (F) The purchase, sale, acquisition, or 
                disposition of securities and other instruments 
                described in subsection (h)(4) by a regulated 
                insurance company directly engaged in the 
                business of insurance for the general account 
                of the company and by any affiliate of such 
                regulated insurance company, provided that such 
                activities by any affiliate are solely for the 
                general account of the regulated insurance 
                company, if--
                          (i) the purchase, sale, acquisition, 
                        or disposition is conducted in 
                        compliance with, and subject to, the 
                        insurance company investment laws, 
                        regulations, and written guidance of 
                        the State or jurisdiction in which each 
                        such insurance company is domiciled; 
                        and
                          (ii) the appropriate Federal banking 
                        agencies, after consultation with the 
                        Financial Stability Oversight Council 
                        and the relevant insurance 
                        commissioners of the States and 
                        territories of the United States, have 
                        not jointly determined, after notice 
                        and comment, that a particular law, 
                        regulation, or written guidance 
                        described in clause (i) is insufficient 
                        to protect the safety and soundness of 
                        the banking entity, or of the financial 
                        stability of the United States.
                  (G) Organizing and offering a private equity 
                or hedge fund, including serving as a general 
                partner, managing member, or trustee of the 
                fund and in any manner selecting or controlling 
                (or having employees, officers, directors, or 
                agents who constitute) a majority of the 
                directors, trustees, or management of the fund, 
                including any necessary expenses for the 
                foregoing, only if--
                          (i) the banking entity provides bona 
                        fide trust, fiduciary, or investment 
                        advisory services;
                          (ii) the fund is organized and 
                        offered only in connection with the 
                        provision of bona fide trust, 
                        fiduciary, or investment advisory 
                        services and only to persons that are 
                        customers of such services of the 
                        banking entity;
                          (iii) the banking entity does not 
                        acquire or retain an equity interest, 
                        partnership interest, or other 
                        ownership interest in the funds except 
                        for a de minimis investment subject to 
                        and in compliance with paragraph (4);
                          (iv) the banking entity complies with 
                        the restrictions under paragraphs (1) 
                        and (2) of subparagraph (f);
                          (v) the banking entity does not, 
                        directly or indirectly, guarantee, 
                        assume, or otherwise insure the 
                        obligations or performance of the hedge 
                        fund or private equity fund or of any 
                        hedge fund or private equity fund in 
                        which such hedge fund or private equity 
                        fund invests;
                          (vi) the banking entity does not 
                        share with the hedge fund or private 
                        equity fund, for corporate, marketing, 
                        promotional, or other purposes, the 
                        same name or a variation of the same 
                        name, except that the hedge fund or 
                        private equity fund may share the same 
                        name or a variation of the same name as 
                        a banking entity that is an investment 
                        adviser to the hedge fund or private 
                        equity find, if--
                                  (I) such investment adviser 
                                is not an insured depository 
                                institution, a company that 
                                controls an insured depository 
                                institution, or a company that 
                                is treated as a bank holding 
                                company for purposes of section 
                                8 of the International Banking 
                                Act of 1978;
                                  (II) such investment adviser 
                                does not share the same name or 
                                a variation of the same name as 
                                an insured depository 
                                institution, any company that 
                                controls an insured depository 
                                institution, or any company 
                                that is treated as a bank 
                                holding company for purposes of 
                                section 8 of the International 
                                Banking Act of 1978; and
                                  (III) such name does not 
                                contain the word ``bank'';
                          (vii) no director or employee of the 
                        banking entity takes or retains an 
                        equity interest, partnership interest, 
                        or other ownership interest in the 
                        hedge fund or private equity fund, 
                        except for any director or employee of 
                        the banking entity who is directly 
                        engaged in providing investment 
                        advisory or other services to the hedge 
                        fund or private equity fund; and
                          (viii) the banking entity discloses 
                        to prospective and actual investors in 
                        the fund, in writing, that any losses 
                        in such hedge fund or private equity 
                        fund are borne solely by investors in 
                        the fund and not by the banking entity, 
                        and otherwise complies with any 
                        additional rules of the appropriate 
                        Federal banking agencies, the 
                        Securities and Exchange Commission, or 
                        the Commodity Futures Trading 
                        Commission, as provided in subsection 
                        (b)(2), designed to ensure that losses 
                        in such hedge fund or private equity 
                        fund are borne solely by investors in 
                        the fund and not by the banking entity.
                  (H) Proprietary trading conducted by a 
                banking entity pursuant to paragraph (9) or 
                (13) of section 4(c), provided that the trading 
                occurs solely outside of the United States and 
                that the banking entity is not directly or 
                indirectly controlled by a banking entity that 
                is organized under the laws of the United 
                States or of one or more States.
                  (I) The acquisition or retention of any 
                equity, partnership, or other ownership 
                interest in, or the sponsorship of, a hedge 
                fund or a private equity fund by a banking 
                entity pursuant to paragraph (9) or (13) of 
                section 4(c) solely outside of the United 
                States, provided that no ownership interest in 
                such hedge fund or private equity fund is 
                offered for sale or sold to a resident of the 
                United States and that the banking entity is 
                not directly or indirectly controlled by a 
                banking entity that is organized under the laws 
                of the United States or of one or more States.
                  (J) Such other activity as the appropriate 
                Federal banking agencies, the Securities and 
                Exchange Commission, and the Commodity Futures 
                Trading Commission determine, by rule, as 
                provided in subsection (b)(2), would promote 
                and protect the safety and soundness of the 
                banking entity and the financial stability of 
                the United States.
          (2) Limitation on permitted activities.--
                  (A) In general.--No transaction, class of 
                transactions, or activity may be deemed a 
                permitted activity under paragraph (1) if the 
                transaction, class of transactions, or 
                activity--
                          (i) would involve or result in a 
                        material conflict of interest (as such 
                        term shall be defined by rule as 
                        provided in subsection (b)(2)) between 
                        the banking entity and its clients, 
                        customers, or counterparties;
                          (ii) would result, directly or 
                        indirectly, in a material exposure by 
                        the banking entity to high-risk assets 
                        or high-risk trading strategies (as 
                        such terms shall be defined by rule as 
                        provided in subsection (b)(2));
                          (iii) would pose a threat to the 
                        safety and soundness of such banking 
                        entity; or
                          (iv) would pose a threat to the 
                        financial stability of the United 
                        States.
                  (B) Rulemaking.--The appropriate Federal 
                banking agencies, the Securities and Exchange 
                Commission, and the Commodity Futures Trading 
                Commission shall issue regulations to implement 
                subparagraph (A), as part of the regulations 
                issued under subsection (b)(2).
          (3) Capital and quantitative limitations.--The 
        appropriate Federal banking agencies, the Securities 
        and Exchange Commission, and the Commodity Futures 
        Trading Commission shall, as provided in subsection 
        (b)(2), adopt rules imposing additional capital 
        requirements and quantitative limitations, including 
        diversification requirements, regarding the activities 
        permitted under this section if the appropriate Federal 
        banking agencies, the Securities and Exchange 
        Commission, and the Commodity Futures Trading 
        Commission determine that additional capital and 
        quantitative limitations are appropriate to protect the 
        safety and soundness of banking entities engaged in 
        such activities.
          (4) De minimis investment.--
                  (A) In general.--A banking entity may make 
                and retain an investment in a hedge fund or 
                private equity fund that the banking entity 
                organizes and offers, subject to the 
                limitations and restrictions in subparagraph 
                (B) for the purposes of--
                          (i) establishing the fund and 
                        providing the fund with sufficient 
                        initial equity for investment to permit 
                        the fund to attract unaffiliated 
                        investors; or
                          (ii) making a de minimis investment.
                  (B) Limitations and restrictions on 
                investments.--
                          (i) Requirement to seek other 
                        investors.--A banking entity shall 
                        actively seek unaffiliated investors to 
                        reduce or dilute the investment of the 
                        banking entity to the amount permitted 
                        under clause (ii).
                          (ii) Limitations on size of 
                        investments.--Notwithstanding any other 
                        provision of law, investments by a 
                        banking entity in a hedge fund or 
                        private equity fund shall--
                                  (I) not later than 1 year 
                                after the date of establishment 
                                of the fund, be reduced through 
                                redemption, sale, or dilution 
                                to an amount that is not more 
                                than 3 percent of the total 
                                ownership interests of the 
                                fund;
                                  (II) be immaterial to the 
                                banking entity, as defined, by 
                                rule, pursuant to subsection 
                                (b)(2), but in no case may the 
                                aggregate of all of the 
                                interests of the banking entity 
                                in all such funds exceed 3 
                                percent of the Tier 1 capital 
                                of the banking entity.
                          (iii) Capital.--For purposes of 
                        determining compliance with applicable 
                        capital standards under paragraph (3), 
                        the aggregate amount of the outstanding 
                        investments by a banking entity under 
                        this paragraph, including retained 
                        earnings, shall be deducted from the 
                        assets and tangible equity of the 
                        banking entity, and the amount of the 
                        deduction shall increase commensurate 
                        with the leverage of the hedge fund or 
                        private equity fund.
                  (C) Extension.--Upon an application by a 
                banking entity, the Board may extend the period 
                of time to meet the requirements under 
                subparagraph (B)(ii)(I) for 2 additional years, 
                if the Board finds that an extension would be 
                consistent with safety and soundness and in the 
                public interest.
  (e) Anti-evasion.--
          (1) Rulemaking.--The appropriate Federal banking 
        agencies, the Securities and Exchange Commission, and 
        the Commodity Futures Trading Commission shall issue 
        regulations, as part of the rulemaking provided for in 
        subsection (b)(2), regarding internal controls and 
        recordkeeping, in order to insure compliance with this 
        section.
          (2) Termination of activities or investment.--
        Notwithstanding any other provision of law, whenever an 
        appropriate Federal banking agency, the Securities and 
        Exchange Commission, or the Commodity Futures Trading 
        Commission, as appropriate, has reasonable cause to 
        believe that a banking entity or nonbank financial 
        company supervised by the Board under the respective 
        agency's jurisdiction has made an investment or engaged 
        in an activity in a manner that functions as an evasion 
        of the requirements of this section (including through 
        an abuse of any permitted activity) or otherwise 
        violates the restrictions under this section, the 
        appropriate Federal banking agency, the Securities and 
        Exchange Commission, or the Commodity Futures Trading 
        Commission, as appropriate, shall order, after due 
        notice and opportunity for hearing, the banking entity 
        or nonbank financial company supervised by the Board to 
        terminate the activity and, as relevant, dispose of the 
        investment. Nothing in this paragraph shall be 
        construed to limit the inherent authority of any 
        Federal agency or State regulatory authority to further 
        restrict any investments or activities under otherwise 
        applicable provisions of law.
  (f) Limitations on Relationships With Hedge Funds and Private 
Equity Funds.--
          (1) In general.--No banking entity that serves, 
        directly or indirectly, as the investment manager, 
        investment adviser, or sponsor to a hedge fund or 
        private equity fund, or that organizes and offers a 
        hedge fund or private equity fund pursuant to paragraph 
        (d)(1)(G), and no affiliate of such entity, may enter 
        into a transaction with the fund, or with any other 
        hedge fund or private equity fund that is controlled by 
        such fund, that would be a covered transaction, as 
        defined in section 23A of the Federal Reserve Act (12 
        U.S.C. 371c), with the hedge fund or private equity 
        fund, as if such banking entity and the affiliate 
        thereof were a member bank and the hedge fund or 
        private equity fund were an affiliate thereof.
          (2) Treatment as member bank.--A banking entity that 
        serves, directly or indirectly, as the investment 
        manager, investment adviser, or sponsor to a hedge fund 
        or private equity fund, or that organizes and offers a 
        hedge fund or private equity fund pursuant to paragraph 
        (d)(1)(G), shall be subject to section 23B of the 
        Federal Reserve Act (12 U.S.C. 371c-1), as if such 
        banking entity were a member bank and such hedge fund 
        or private equity fund were an affiliate thereof.
          (3) Permitted services.--
                  (A) In general.--Notwithstanding paragraph 
                (1), the Board may permit a banking entity to 
                enter into any prime brokerage transaction with 
                any hedge fund or private equity fund in which 
                a hedge fund or private equity fund managed, 
                sponsored, or advised by such banking entity 
                has taken an equity, partnership, or other 
                ownership interest, if--
                          (i) the banking entity is in 
                        compliance with each of the limitations 
                        set forth in subsection (d)(1)(G) with 
                        regard to a hedge fund or private 
                        equity fund organized and offered by 
                        such banking entity;
                          (ii) the chief executive officer (or 
                        equivalent officer) of the banking 
                        entity certifies in writing annually 
                        (with a duty to update the 
                        certification if the information in the 
                        certification materially changes) that 
                        the conditions specified in subsection 
                        (d)(1)(g)(v) are satisfied; and
                          (iii) the Board has determined that 
                        such transaction is consistent with the 
                        safe and sound operation and condition 
                        of the banking entity.
                  (B) Treatment of prime brokerage 
                transactions.--For purposes of subparagraph 
                (A), a prime brokerage transaction described in 
                subparagraph (A) 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.
          (4) Application to nonbank financial companies 
        supervised by the board.--The appropriate Federal 
        banking agencies, the Securities and Exchange 
        Commission, and the Commodity Futures Trading 
        Commission shall adopt rules, as provided in subsection 
        (b)(2), imposing additional capital charges or other 
        restrictions for nonbank financial companies supervised 
        by the Board to address the risks to and conflicts of 
        interest of banking entities described in paragraphs 
        (1), (2), and (3) of this subsection.
  (g) Rules of Construction.--
          (1) Limitation on contrary authority.--Except as 
        provided in this section, notwithstanding any other 
        provision of law, the prohibitions and restrictions 
        under this section shall apply to activities of a 
        banking entity or nonbank financial company supervised 
        by the Board, even if such activities are authorized 
        for a banking entity or nonbank financial company 
        supervised by the Board.
          (2) Sale or securitization of loans.--Nothing in this 
        section shall be construed to limit or restrict the 
        ability of a banking entity or nonbank financial 
        company supervised by the Board to sell or securitize 
        loans in a manner otherwise permitted by law.
          (3) Authority of federal agencies and state 
        regulatory authorities.--Nothing in this section shall 
        be construed to limit the inherent authority of any 
        Federal agency or State regulatory authority under 
        otherwise applicable provisions of law.
  (h) Definitions.--In this section, the following definitions 
shall apply:
          (1) Banking entity.--The term ``banking entity'' 
        means any insured depository institution (as defined in 
        section 3 of the Federal Deposit Insurance Act (12 
        U.S.C. 1813)), any company that controls an insured 
        depository institution, or that is treated as a bank 
        holding company for purposes of section 8 of the 
        International Banking Act of 1978, and any affiliate or 
        subsidiary of any such entity. For purposes of this 
        paragraph, the term ``insured depository institution'' 
        does not include an institution that functions solely 
        in a trust or fiduciary capacity, if--
                  (A) all or substantially all of the deposits 
                of such institution are in trust funds and are 
                received in a bona fide fiduciary capacity;
                  (B) no deposits of such institution which are 
                insured by the Federal Deposit Insurance 
                Corporation are offered or marketed by or 
                through an affiliate of such institution;
                  (C) such institution does not accept demand 
                deposits or deposits that the depositor may 
                withdraw by check or similar means for payment 
                to third parties or others or make commercial 
                loans; and
                  (D) such institution does not--
                          (i) obtain payment or payment related 
                        services from any Federal Reserve bank, 
                        including any service referred to in 
                        section 11A of the Federal Reserve Act 
                        (12 U.S.C. 248a); or
                          (ii) exercise discount or borrowing 
                        privileges pursuant to section 19(b)(7) 
                        of the Federal Reserve Act (12 U.S.C. 
                        461(b)(7)).
          (2) Hedge fund; private equity fund.--The terms 
        ``hedge fund'' and ``private equity fund'' mean an 
        issuer that would be an investment company, as defined 
        in the Investment Company Act of 1940 (15 U.S.C. 80a-1 
        et seq.), but for section 3(c)(1) or 3(c)(7) of that 
        Act, or such similar funds as the appropriate Federal 
        banking agencies, the Securities and Exchange 
        Commission, and the Commodity Futures Trading 
        Commission may, by rule, as provided in subsection 
        (b)(2), determine.
          (3) Nonbank financial company supervised by the 
        board.--The term ``nonbank financial company supervised 
        by the Board'' means a nonbank financial company 
        supervised by the Board of Governors, as defined in 
        section 102 of the Financial Stability Act of 2010.
          (4) Proprietary trading.--The term ``proprietary 
        trading'', when used with respect to a banking entity 
        or nonbank financial company supervised by the Board, 
        means engaging as a principal for the trading account 
        of the banking entity or nonbank financial company 
        supervised by the Board in any transaction to purchase 
        or sell, or otherwise acquire or dispose of, any 
        security, any derivative, any contract of sale of a 
        commodity for future delivery, any option on any such 
        security, derivative, or contract, or any other 
        security or financial instrument that the appropriate 
        Federal banking agencies, the Securities and Exchange 
        Commission, and the Commodity Futures Trading 
        Commission may, by rule as provided in subsection 
        (b)(2), determine.
          (5) Sponsor.--The term to ``sponsor'' a fund means--
                  (A) to serve as a general partner, managing 
                member, or trustee of a fund;
                  (B) in any manner to select or to control (or 
                to have employees, officers, or directors, or 
                agents who constitute) a majority of the 
                directors, trustees, or management of a fund; 
                or
                  (C) to share with a fund, for corporate, 
                marketing, promotional, or other purposes, the 
                same name or a variation of the same name, 
                except as permitted under subsection 
                (d)(1)(G)(vi).
          (6) Trading account.--The term ``trading account'' 
        means any account used for acquiring or taking 
        positions in the securities and instruments described 
        in paragraph (4) principally for the purpose of selling 
        in the near term (or otherwise with the intent to 
        resell in order to profit from short-term price 
        movements), and any such other accounts as the 
        appropriate Federal banking agencies, the Securities 
        and Exchange Commission, and the Commodity Futures 
        Trading Commission may, by rule as provided in 
        subsection (b)(2), determine.
          (7) Illiquid fund.--
                  (A) In general.--The term ``illiquid fund'' 
                means a hedge fund or private equity fund 
                that--
                          (i) as of May 1, 2010, was 
                        principally invested in, or was 
                        invested and contractually committed to 
                        principally invest in, illiquid assets, 
                        such as portfolio companies, real 
                        estate investments, and venture capital 
                        investments; and
                          (ii) makes all investments pursuant 
                        to, and consistent with, an investment 
                        strategy to principally invest in 
                        illiquid assets. In issuing rules 
                        regarding this subparagraph, the Board 
                        shall take into consideration the terms 
                        of investment for the hedge fund or 
                        private equity fund, including 
                        contractual obligations, the ability of 
                        the fund to divest of assets held by 
                        the fund, and any other factors that 
                        the Board determines are appropriate.
                  (B) Hedge fund.--For the purposes of this 
                paragraph, the term ``hedge fund'' means any 
                fund identified under subsection (h)(2), and 
                does not include a private equity fund, as such 
                term is used in section 203(m) of the 
                Investment Advisers Act of 1940 (15 U.S.C. 80b-
                3(m)).

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