[Federal Register Volume 85, Number 148 (Friday, July 31, 2020)]
[Rules and Regulations]
[Pages 46422-46530]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-15525]



[[Page 46421]]

Vol. 85

Friday,

No. 148

July 31, 2020

Part IV





 Department of the Treasury





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 Office of the Comptroller of the Currency





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 Federal Reserve System





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 Federal Deposit Insurance Corporation





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 Commodity Futures Trading Commission





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 Securities and Exchange Commission





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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; Final Rule

  Federal Register / Vol. 85, No. 148 / Friday, July 31, 2020 / Rules 
and Regulations  

[[Page 46422]]


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DEPARTMENT OF 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-9; 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: Final rule.

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SUMMARY: The OCC, Board, FDIC, SEC, and CFTC (together, the agencies) 
are adopting amendments to 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 (covered funds). These final amendments are 
intended to improve and streamline the regulations implementing section 
13 of the BHC Act by modifying and clarifying requirements related to 
the covered fund provisions of the rules.

DATES: Effective date: The final rule is effective October 1, 2020.

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 MacDonald, Manager, (202) 475-6316, Cecily Boggs, 
Senior Financial Institution Policy Analyst, (202) 530-6209, Brendan 
Rowan, Senior Financial Institution Policy Analyst, (202) 475-6685, 
Christopher Powell, Senior Financial Institution Policy Analyst, (202) 
452-3442, Nathaniel Grant, Lead Financial Institution Policy Analyst, 
(202) 452-3105, David McArthur, Senior Economist, (202) 452-2985, 
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], 
Benjamin J. Klein, Counsel, [email protected], or Annmarie H. Boyd, 
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], 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: Juliet M. Han, Senior Counsel, William Miller, Senior Counsel, 
Benjamin A. Tecmire, Senior Counsel, or Jennifer Songer, Branch Chief 
at (202) 551-6787 or [email protected], Investment Adviser Regulation 
Office, Division of Investment Management, and Katherine Hsu, Office 
Chief, or Benjamin Meeks, Special Counsel at (202) 551-3850, Office of 
Structured Finance, Division of Corporation Finance, U.S. Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. Notice of Proposed Rulemaking
III. Overview of the Final Rule
IV. Summary of the Final Rule
    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. Additional Covered Fund Exclusions
    1. Credit Funds
    2. Venture Capital Funds
    3. Family Wealth Management Vehicles
    4. Customer Facilitation Vehicles
    D. Limitations on Relationships With a Covered Fund
    E. Ownership Interest
    F. Parallel Investments
    G. Technical Amendments
V. Administrative Law Matters
    A. Use of Plain Language
    B. Paperwork Reduction Act
    C. Regulatory Flexibility Act Analysis
    D. Riegle Community Development and Regulatory Improvement Act
    E. OCC Unfunded Mandates Reform Act
    F. SEC Economic Analysis
    G. Congressional Review Act

I. Background

    Section 13 of the 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:
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    \1\ 12 U.S.C. 1851.
    \2\ Id.
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     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\
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    \3\ 12 U.S.C. 1851(d)(1).
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    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

[[Page 46423]]

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\
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    \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.
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    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\
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    \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).
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    The agencies published a notice of proposed rulemaking in July 2018 
(the 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 trading activities. The agencies issued a final rule 
implementing amendments to the 2013 rule in November 2019 (the 2019 
amendments), and those provisions became effective in January 2020.\8\
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    \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 regulations 
implementing section 13 of the BHC Act, as amended through June 1, 
2020, are referred throughout as the ``implementing regulations.''
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    As part of the 2018 proposal, the agencies proposed 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.\10\ The agencies indicated they would issue a 
separate proposal addressing and requesting comment on the covered fund 
provisions of the rule and other fund-related issues, and, in February 
2020, the agencies issued a separate notice of proposed rulemaking that 
specifically addressed those areas (the 2020 proposal).\11\
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    \9\ 83 FR 33471-87.
    \10\ In response to the 2018 proposal, the agencies received 
numerous comments related to covered fund issues for which no 
specific rule text was proposed. However, in the preamble to the 
2019 amendments, the agencies generally deferred public 
consideration of such comments to a future proposed rulemaking. 84 
FR 62016.
    \11\ Prohibitions and Restrictions on Proprietary Trading and 
Certain Interests in, and Relationships With, Hedge Funds and 
Private Equity Funds, 85 FR 12120 (Feb. 28, 2020).
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II. Notice of Proposed Rulemaking

    In the 2020 proposal, the agencies proposed revisions to a number 
of the provisions regarding covered fund investments and activities as 
well as to other provisions of the implementing regulations related to 
the treatment of funds. The proposed changes, which were based on 
comments received in response to the agencies' questions in the 2018 
proposal and the agencies' experience with the implementing 
regulations, were intended to reduce the extraterritorial impact of the 
implementing regulations, improve and streamline the covered fund 
provisions, and provide clarity to banking entities regarding the 
provision of financial services and the conduct of 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 2020 proposal would have exempted 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. Under the 2013 rule, 
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 U.S. covered funds, even though the 
foreign funds have limited nexus to the United States. Accordingly, the 
2020 proposal would have codified an existing policy statement by the 
Federal banking agencies (the OCC, Board, and FDIC) that addresses the 
potential issues related to a foreign banking entity controlling 
qualifying foreign excluded funds.
    The 2020 proposal also would have made 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 2020 proposal would have revised 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 2020 proposal would have 
permitted loan securitizations excluded from the definition of covered 
fund to hold a small amount of non-loan assets, consistent with past 
industry practice, and would have codified existing staff-level 
guidance regarding this exclusion. In addition, the 2020 proposal would 
have revised the exclusion for small business investment companies to 
account for the life cycle of those companies and requested comment on 
whether to clarify the scope of the exclusion for public welfare and 
other investments to include rural business investment companies and 
qualified opportunity funds. Finally, the 2020 proposal would have 
addressed 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 also included in the 2020 proposal several new 
exclusions from the covered fund definition in order to more directly 
align the regulation with the purpose of the statute. For example, the 
agencies recognized that the implementing regulations have inhibited 
banking entities' ability to extend credit by restricting their 
relationships with credit funds, and the 2020 proposal would have 
created a new exclusion for such funds. Under the 2020 proposal, 
banking entities would have been 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 2020 proposal would have established an exclusion from 
the definition of covered fund for venture capital funds. This 
provision was intended to facilitate banking entities' abilities to 
engage in this important type of development and investment activity, 
which may facilitate capital formation and provide important financing 
for small

[[Page 46424]]

businesses, particularly in areas where such financing may not be 
readily available. In addition, the agencies believed that excluding 
such activities would be consistent with the purpose of the statute, as 
it would exclude fund activities that do not present the risks that 
section 13 of the BHC Act was intended to address.
    The 2020 proposal also would have allowed a banking entity to 
provide certain traditional financial services to its customers via a 
fund structure, subject to certain safeguards and limitations. First, 
the 2020 proposal would have excluded from the definition of covered 
fund an entity created and used to facilitate customer exposures to a 
transaction, investment strategy, or other service. Second, the 2020 
proposal would have excluded from the covered fund definition wealth 
management vehicles that manage the investment portfolio of a family 
and certain other closely related persons. Both of these provisions 
were intended to allow a banking entity to provide such services in the 
manner best suited to its customers.
    In addition, the 2020 proposal would have permitted a banking 
entity to engage in a limited set of covered transactions with a 
covered fund that 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, in the 2020 proposal, recognized 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.
    Lastly, the 2020 proposal would have clarified 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 ownership interests. The 2020 proposal 
included a safe harbor for bona fide senior loans or senior debt 
instruments to make clear that an ``ownership interest'' in a fund 
would not include such credit interests in the fund. In addition, the 
2020 proposal would have clarified the types of creditor rights that 
may attach to an interest without necessarily causing such an interest 
to fall within the scope of the definition of ownership interest. 
Finally, the 2020 proposal would have simplified compliance efforts by 
tailoring the calculation of a banking entity's compliance with the 
implementing regulations' aggregate fund limit and covered fund 
deduction and provided clarity to banking entities regarding their 
permissible investments made alongside covered funds.\12\
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    \12\ Separately, the agencies proposed various technical edits 
to the implementing regulations. See infra Section IV.G (Technical 
Amendments).
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    The agencies invited comment on all aspects of the 2020 proposal, 
including specific proposed revisions and questions posed by the 
agencies. The agencies received approximately 40 unique comments from 
banking entities and industry groups, public interest groups, and other 
organizations and individuals. In addition, the agencies received six 
letters related to the subject matter considered in the 2020 proposal 
prior to the formal comment period. The agencies are now finalizing the 
2020 proposal, with certain changes based on public comments, as 
described in detail below.\13\
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    \13\ Comments are generally discussed in the relevant sections, 
infra. The agencies also received several miscellaneous comments. 
One commenter suggested revising Sec.  __.21 (Termination of 
activities or investments; penalties for violations) of the 
implementing regulations to provide for mandatory prison time for 
violations of the implementing regulations. Anonymous. The agencies 
believe that this comment is beyond the scope of the current 
rulemaking. Another commenter encouraged the agencies to exempt from 
the implementing regulations international banks with a small 
presence in the United States. Institute of International Bankers 
(IIB). The agencies believe that this comment is beyond the scope of 
the current rulemaking. A third commenter claimed that the 2020 
proposal improperly assumed that the implementing regulations have 
certain burdens and that it did not adequately assess the costs and 
benefits of the proposed revisions to the implementing regulations. 
Occupy the SEC (Occupy). Contrary to the commenter's suggestions, 
the Federal Register notice for the 2020 proposal contained 
extensive discussion of the costs and benefits of the 2020 proposal. 
See 85 FR 12151-76. This final rule contains similar analyses. See 
infra, Section IV (Administrative Law Matters). Several commenters 
expressed support for the comment letters submitted by other 
organizations. E.g., IIB; European Banking Federation (EBF); Goldman 
Sachs Group, Inc. (Goldman Sachs); and Canadian Bankers Association 
(CBA). Finally, one comment was not relevant. See Charity Colleen 
Crouse.
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III. Overview of the Final Rule

    Similar to the 2020 proposal, the final rule clarifies and 
simplifies compliance with the implementing regulations, refines the 
extraterritorial application of section 13 of the BHC Act, and permits 
additional fund activities that do not present the risks that section 
13 was intended to address. The agencies received comments from a 
diverse set of commenters: Comments from banking entities and financial 
services industry trade groups were generally supportive of the 2020 
proposal and recommended additional modifications, while several 
organizations and individuals were generally opposed to the 2020 
proposal. As described further below, the agencies have adopted many of 
the proposed changes to the implementing regulations, with certain 
targeted adjustments.
    To reduce the extraterritorial impact of the implementing 
regulations, the final rule, similar to the 2020 proposal, exempts the 
activities of certain funds that are organized outside of the United 
States and offered to foreign investors (qualifying foreign excluded 
funds) from certain restrictions of the implementing regulations. 
Specifically, the final rule codifies an existing policy statement by 
the Federal banking agencies that addresses the potential issues 
related to a foreign banking entity controlling a qualifying foreign 
excluded fund. The final rule contains some modifications to the 
proposed exemption--the anti-evasion provision and compliance program 
requirements--to address comments that the proposed exemption would 
have unintentionally continued to subject qualifying foreign excluded 
funds to these requirements.
    The final rule also revises, as proposed, but with some 
modifications, several existing exclusions from the covered fund 
provisions, to provide clarity and simplify compliance with the 
requirements of the implementing regulations. First, the final rule 
revises 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 final rule 
permits loan securitizations excluded from the definition of covered 
fund to hold a small amount of debt securities, consistent with past 
industry practice, and codifies existing staff-level guidance regarding 
this exclusion. In addition, the final rule revises the exclusion for 
small business investment companies to account for the life cycle of 
those companies and clarifies the scope of the exclusion for public 
welfare and other investments to include rural business investment 
companies and qualified opportunity funds. Finally, the final rule 
clarifies the calculation of ownership interests in covered funds that 
are attributed to a banking entity.
    The final rule adopts--as proposed, with some modifications--
several new exclusions from the covered fund definition to more closely 
align the regulation with the purpose of the statute. First, the final 
rule establishes a new exclusion for funds that extend credit to permit 
the same credit-related activities that banking entities can engage in 
directly. In addition, the final rule creates an exclusion for venture 
capital funds to help ensure that banking entities can indirectly 
facilitate

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this important type of development and investment activity to the same 
degree that banking entities can do so directly. Finally, the final 
rule adopts two exclusions for family wealth management and customer 
facilitation vehicles to provide banking entities flexibility to 
provide advisory and other traditional banking services to customers 
through a fund structure.
    In an effort to clarify and simplify compliance with the 
implementing regulations, the final rule adopts revisions to the 
provisions that govern the relationship between a banking entity and a 
fund and the definition of ownership interest. Specifically, the final 
rule permits established, codified categories of limited low-risk 
transactions between a banking entity and a related fund, including 
riskless principal transactions, and allows a banking entity to engage 
in certain transactions with a related fund in connection with payment, 
clearing, and settlement activities. In addition, the final rule would 
provide an express safe harbor for senior loans and senior debt and 
provide clarity about the types of creditor rights that would be 
considered within the scope of the definition of ownership interest. 
Finally, the agencies are adopting revisions, as proposed, to provide 
clarity regarding a banking entity's permissible investments in the 
same investments as a covered fund organized or offered by such banking 
entity.

Frequently Asked Questions

    The staffs of the agencies have addressed several questions 
concerning the implementing regulations through a series of staff 
Frequently Asked Questions (FAQs).\14\ In the 2020 proposal, the 
agencies indicated that the proposed rule would not modify or revoke 
any previously issued staff FAQs, unless otherwise specified.\15\ 
Several commenters recommended codifying specific FAQs and making 
explicit that other FAQs would continue to be in effect, 
unmodified.\16\ Consistent with the 2020 proposal and commenters' 
suggestions, the final rule does not modify or revoke any previously 
issued staff FAQs, unless otherwise specified.\17\
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    \14\ 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).
    \15\ 85 FR 12122-23.
    \16\ E.g., Securities Industry and Financial Markets Association 
(SIFMA); Financial Services Forum (FSF); and IIB.
    \17\ 85 FR 12122-23.
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Comment Period

    Since the issuance of the 2020 proposal, the COVID-19 global 
pandemic has substantially disrupted activity in the United States and 
in other countries. The effects of the COVID-19 disruptions have 
created many challenges for households and businesses, and the agencies 
received comments requesting that the agencies extend the comment 
period for the 2020 proposal or delay the rulemaking more 
generally.\18\ In contrast, one commenter expressed support for the 
rapid approval of the 2020 proposal, to provide banking entities 
regulatory relief during a period of financial stress.\19\ The agencies 
announced on April 2, 2020, that they would consider comments submitted 
before May 1, 2020.\20\ The agencies, however, do not believe that 
further delay of the rule is warranted, given the volume, depth, and 
diversity of comments submitted. The agencies believe, as well, that 
the final rule may provide clarity to banking entities that will enable 
banking entities to engage in financial services and other permissible 
activities in a manner that both is consistent with the requirements of 
section 13 of the BHC Act and will facilitate capital formation and 
economic activity.
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    \18\ E.g., Better Markets, Inc. (Better Markets) and Kathy 
Bowman.
    \19\ American Bankers Association (ABA).
    \20\ https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200402a.htm.
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Effective and Compliance Dates

    The Federal Register notice accompanying the finalization of the 
2019 amendments provided for a rolling compliance system.\21\ The 
effective date of the amendments was January 1, 2020, and firms are 
required to comply with the revisions by January 1, 2021. Until the 
mandatory compliance date, banking entities are required to comply with 
the 2013 rule, or alternatively, a banking entity may voluntarily 
comply, in whole or in part, with the 2019 amendments prior to the 
compliance date.
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    \21\ 84 FR 61974.
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    Several commenters on the 2020 proposal suggested that the agencies 
provide for voluntary early compliance with the final rule.\22\ One 
commenter also suggested establishing a transition period of at least 
one year.\23\
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    \22\ E.g., SIFMA; FSF; Japanese Bankers Association (JBA); and 
ABA.
    \23\ JBA.
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    The effective date for the final rule will be October 1, 2020, to 
accommodate the requirements of the Riegle Community Development and 
Regulatory Improvement Act.\24\ The agencies do not believe an extended 
compliance or transition period is necessary because the final rule 
largely tailors the regulations implementing section 13 of the BHC Act 
rather than increases compliance burdens.
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    \24\ See infra, Section V.D (Riegle Community Development and 
Regulatory Improvement Act).
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IV. Summary of the Final Rule

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 concerns 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).\25\ 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 
the foreign banking entity otherwise controls the fund for purposes of 
section 13 of the BHC Act. 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.
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    \25\ The implementing regulations generally exclude 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.
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    The Federal banking agencies released a policy statement on July 
21, 2017 (the policy statement), to address concerns about the possible 
unintended consequences and extraterritorial impact of section 13 and 
the implementing regulations for foreign excluded funds.\26\ The policy 
statement noted that the Federal banking agencies would not take action 
against a foreign banking entity \27\ based on attribution of

[[Page 46426]]

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, for a period of one year while staffs of the 
agencies considered alternative ways in which the implementing 
regulations could be amended, or other appropriate action could be 
taken, to address the issue. The policy statement has since been 
extended and is currently scheduled to expire on July 21, 2021.\28\
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    \26\ 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.
    \27\ ``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. Id.
    \28\ 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.
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    For purposes of the policy statement, a ``qualifying foreign 
excluded fund'' means, 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 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 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 implementing regulations, as if the qualifying 
foreign excluded fund were a covered fund. To provide greater clarity 
and certainty to banking entities and qualifying foreign excluded 
funds, and to limit the extraterritoriality of the rule, the 2020 
proposal included a permanent exemption from the section 13 
restrictions on proprietary trading and investing in or sponsoring 
covered funds for the activities of qualifying foreign excluded funds. 
The proposed exemption generally included the same eligibility criteria 
from the policy statement, although it included a modified version of 
the anti-evasion provision such that, in order to qualify, a fund could 
not be operated in a manner that enables ``any other banking entity'' 
(rather than ``the foreign banking entity'') to evade the requirements 
of section 13 or the implementing regulations.
    The agencies requested comment on all aspects of this exemption. 
Commenters were generally supportive of the 2020 proposal to exempt 
qualifying foreign excluded funds from certain requirements of the 
implementing regulations.\29\ Two commenters expressed opposition to 
the proposed exemption.\30\
---------------------------------------------------------------------------

    \29\ SIFMA; Bank Policy Institute (BPI); Bundesverband 
Investment und Asset Management e.V. (BVI); American Investment 
Council (AIC); ABA; European Fund and Asset Management Association 
(EFAMA); Shareholder Advocacy Forum (SAF); IIB; JBA; CBA; and Credit 
Suisse.
    \30\ Occupy and Data Boiler Technologies LLC (Data Boiler).
---------------------------------------------------------------------------

    Some commenters requested that qualifying foreign excluded funds be 
excluded from the definition of banking entity.\31\ One commenter 
expressed concern that the 2020 proposal would require qualifying 
foreign excluded funds to establish section 13 of the BHC Act 
compliance programs, imposing costs on qualifying foreign excluded 
funds.\32\ This commenter noted that there may be situations under 
section 13 of the BHC Act where a foreign banking entity controls a 
qualifying foreign excluded fund, but under foreign law does not have 
the necessary authority to require it to adopt a section 13 compliance 
program. As such, this commenter advocated for either excluding this 
type of fund from the definition of banking entity or exempting this 
type of fund from the compliance program requirements under the 
rule.\33\ One commenter expressed concern that a qualifying foreign 
excluded fund would still need to comply with various restrictions 
under section 13, including the provisions of Sec.  __.14 of the 
implementing regulations (i.e., Super 23A) and the compliance program 
requirements.\34\
---------------------------------------------------------------------------

    \31\ IIB; JBA; CBA; Credit Suisse; and EBF.
    \32\ JBA.
    \33\ JBA.
    \34\ Credit Suisse.
---------------------------------------------------------------------------

    Some commenters requested that the agencies change the anti-evasion 
provision of the qualifying foreign excluded funds definition so that 
it would only apply to the specific foreign banking entity, in a manner 
consistent with the policy statement.\35\ One of these commenters 
suggested, as an alternative, revising the provision so that it would 
only apply to ``any affiliated banking entities.'' \36\
---------------------------------------------------------------------------

    \35\ IIB; JBA; Credit Suisse; and EBF.
    \36\ Credit Suisse.
---------------------------------------------------------------------------

    One commenter requested an anti-evasion safe harbor and changes to 
allow a fund to be a qualifying foreign excluded fund when a non-U.S. 
banking entity serves as a management company to the fund and is 
approved to provide fund management in accordance with local law.\37\ 
This commenter also requested that the agencies limit the requirements 
in the proposed qualifying foreign excluded funds definition to only 
those set forth in Sec.  __.13(b) of the rule for covered fund 
activities conducted by foreign banking entities solely outside the 
United States, and treat as qualifying foreign excluded funds those 
funds for which the foreign banking entity cannot exercise voting 
rights.
---------------------------------------------------------------------------

    \37\ JBA.
---------------------------------------------------------------------------

    Pursuant to their authority under section 13(d)(1)(J) of the BHC 
Act, the agencies are adopting the exemption for the activities of 
qualifying foreign excluded funds substantially as proposed, but with 
modifications to the anti-evasion provision and compliance program 
requirements. Specifically, the agencies are exempting the activities 
of qualified foreign excluded funds from the restrictions on 
proprietary trading and investing in or sponsoring covered funds, if 
the acquisition or retention of the 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 conducted solely outside the United States, 
as provided in Sec.  __.13(b) of the rule.\38\ Under the final rule, a 
qualifying foreign excluded fund has the same meaning as in the policy 
statement as described above and in the 2020 proposal, except for the 
modification to the anti-evasion provision, as described below.
---------------------------------------------------------------------------

    \38\ See final rule Sec.  __.13(b).
---------------------------------------------------------------------------

    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

[[Page 46427]]

United States.\39\ For the reasons described below, the agencies have 
determined that exempting the activities of qualifying foreign excluded 
funds promotes and protects the safety and soundness of banking 
entities and U.S. financial stability.
---------------------------------------------------------------------------

    \39\ 12 U.S.C. 1851(d)(1)(J).
---------------------------------------------------------------------------

    This relief is expected to promote and protect the safety and 
soundness of such funds and their foreign banking entity sponsors by 
putting them on a level playing field with their foreign competitors 
that are not subject to the implementing regulations. If the activities 
of these foreign funds were subject to the restrictions applicable to 
banking entities, their asset management activities could be 
significantly disrupted, and their foreign banking entity sponsors 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 allows 
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 Sec.  __.13(b) of the 
implementing regulations. Thus, the exemption is expected to 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 
sections 13(d)(1)(H) and (I) of the BHC Act.
    The exemption is also expected to promote and protect U.S. 
financial stability. While qualifying foreign excluded funds have a 
very limited nexus to the U.S. financial system, the exemption would 
promote U.S. financial stability by providing additional capital and 
liquidity to U.S. capital markets without a concomitant increase in 
risk borne by U.S. entities. Because the exemption requires that the 
foreign banking entity's acquisition of an ownership interest in or 
sponsorship of the fund meets the requirements in Sec.  __.13(b) of the 
final rule, the exemption will help ensure that the risks of 
investments made by these foreign funds will be booked at foreign 
entities in foreign jurisdictions, thus promoting and protecting U.S. 
financial stability. Additionally, subjecting such funds to the 
requirements of the implementing regulations could precipitate 
disruptions in foreign capital markets, which could generate spillover 
effects in the U.S. financial system.
    In response to comments regarding the anti-evasion provision, the 
final rule specifies that the qualifying foreign excluded fund must not 
be operated in a manner that enables the banking entity that sponsors 
or controls the qualifying foreign excluded fund, or any other 
affiliated banking entity (other than a qualifying foreign excluded 
fund), to evade the requirements of section 13 of the BHC Act or the 
final rule. This change is meant to clarify the scope of the anti-
evasion provision and provide certainty for banking entities that 
sponsor or control the qualifying foreign excluded fund.
    Consistent with feedback from several commenters, the agencies also 
have modified compliance requirements with respect to qualifying 
foreign excluded funds. While, under the final rule, the activities of 
a qualifying foreign excluded fund are exempted from the proprietary 
trading restrictions of Sec.  __.3(a) and the covered fund restrictions 
of Sec.  __.10(a) of the final rule, the qualifying foreign excluded 
fund is still a banking entity. Absent any additional changes, the 
qualifying foreign excluded fund could become subject to the compliance 
requirements of Sec.  __.20. However, since these qualifying foreign 
excluded funds are exempted from the proprietary trading requirements 
of Sec.  __.3(a) and covered fund restrictions of Sec.  __.10(a) of the 
final rule, the agencies believe that requiring a compliance program 
for the fund itself is overly burdensome and unnecessary. The 
requirements in Sec.  __.20 are intended to ensure and monitor 
compliance with the proprietary trading and covered fund provisions, 
and there would be no benefit to applying these requirements to an 
entity that is exempt from those provisions. Therefore, under the final 
rule, qualifying foreign excluded funds are not required to have 
compliance programs or comply with the reporting and additional 
documentation requirements under Sec.  __.20. However, any banking 
entity that owns or sponsors a qualifying foreign excluded fund will 
still be required to have in place appropriate compliance programs for 
itself and its other subsidiaries and provide reports and additional 
documentation as required by Sec.  __.20.
    The final rule does not amend the definition of ``banking entity'' 
as requested by several commenters. Because ``banking entity'' is 
specifically defined in section 13 of the BHC Act, the agencies find it 
appropriate to address concerns related to foreign excluded funds 
through their exemptive rulemaking authority.
    The agencies are not making any change regarding the applicability 
of Sec.  __.14 of the implementing regulations, which imposes 
limitations on relationships with covered funds, with respect to 
qualifying foreign excluded funds. The agencies believe it is 
appropriate to retain the application of Sec.  __.14 to qualifying 
foreign excluded funds to limit risks that may be borne by banking 
entities located in the United States through transactions with such 
funds.\40\ Further, given the limited set of circumstances in which 
Sec.  __.14 would apply (i.e., a transaction between a foreign excluded 
fund and a covered fund that is sponsored or advised by the same 
banking entity), the agencies do not believe that it is overly 
burdensome for a banking entity that sponsors or controls a qualifying 
foreign excluded fund to ensure that it is not in violation of Sec.  
__.14.
---------------------------------------------------------------------------

    \40\ A U.S. banking entity's exposure to a fund that would be a 
qualifying foreign excluded fund with respect to a foreign banking 
entity may still be a covered fund with respect to a U.S. banking 
entity under Sec.  __.10(b)(1)(iii) of the implementing regulations. 
A U.S. banking entity's investment in and relationship with such a 
fund could therefore be subject to the entirety of the applicable 
prohibitions and restrictions of Subpart C of the implementing 
regulations.
---------------------------------------------------------------------------

B. Modifications To Existing Covered Fund Exclusions

    In the preamble to the 2013 rule, the agencies acknowledged that 
the covered fund definition was expansive.\41\ To effectively tailor 
the covered fund provisions to the types of entities that section 13 of 
the BHC Act was intended to cover, the 2013 rule excluded various types 
of entities from the covered fund definition.\42\ In response to 
comments received on the 2020 proposal, and based on experience 
implementing the rule, the agencies are modifying certain of the 
existing exclusions, as described below, to make them more 
appropriately structured to effectuate the intent of the statute and 
its implementing regulations.
---------------------------------------------------------------------------

    \41\ See 79 FR 5677.
    \42\ See id.
---------------------------------------------------------------------------

1. Foreign Public Funds

2013 Rule

    To provide consistent treatment for U.S. registered investment 
companies and their foreign equivalents, the implementing regulations 
exclude foreign public funds from the definition of covered fund.\43\ A 
foreign public fund

[[Page 46428]]

is generally defined under the 2013 rule 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.\44\ 
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.\45\ 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 only investors with 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.\46\
---------------------------------------------------------------------------

    \43\ 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. 79 FR 5678.
    \44\ 2013 rule Sec.  __.10(c)(1); see also 79 FR 5678.
    \45\ 79 FR 5678.
    \46\ 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.\47\ 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.\48\ 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.\49\
---------------------------------------------------------------------------

    \47\ 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'').
    \48\ See 2013 rule Sec.  __.10(c)(1)(ii).
    \49\ 79 FR 5678.
---------------------------------------------------------------------------

2020 Proposal

    In the 2020 proposal, the agencies acknowledged that some of the 
conditions of the 2013 rule's foreign public fund exclusion may not be 
necessary to ensure consistent treatment of foreign public funds and 
U.S. 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.
    To address these concerns, the 2020 proposal would have made 
certain modifications to the foreign public fund exclusion. First, the 
agencies proposed to replace the requirement that the fund be 
authorized to be offered and sold to retail investors in the issuer's 
home jurisdiction (the home jurisdiction requirement) and the 
requirement that the fund interests be sold predominantly through one 
or more public offerings outside of the United States, 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 outside of the United States. This change would have 
permitted foreign funds to qualify for the exclusion if they are 
organized in one jurisdiction but only authorized to be sold to retail 
investors in another jurisdiction, as this is a fairly common way for 
foreign retail funds to be organized. Also, no longer requiring a fund 
to be sold predominantly through one or more public offerings was 
intended to reduce the difficulty that banking entities have described 
in determining and monitoring the distribution history and patterns of 
a third-party sponsored fund or a sponsored fund whose interests are 
sold through third-party distributors.
    The agencies also proposed modifying the definition of ``public 
offering'' from the implementing regulations to add a new requirement 
that the distribution be subject to substantive disclosure and retail 
investor protection laws or regulations, to help ensure that foreign 
funds qualifying for this exclusion are sufficiently similar to U.S. 
registered investment companies. Additionally, the 2020 proposal would 
have only applied 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 proposed change was 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.
    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 2020 proposal would have eliminated 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 was intended 
to help 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 2020 proposal would 
have continued to limit the sale of ownership interests to directors or 
senior executive officers of the sponsoring banking entity or the 
issuer (or their affiliates), as the agencies believed that such a 
requirement would be simpler for a banking entity to track.
    Finally, the 2020 proposal requested comment on the appropriateness 
of the expectation stated in the preamble to the 2013 rule that, for a 
U.S. banking entity-sponsored 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, at least 85 percent of the ownership interests in the fund 
should be sold to such other persons.

Discussion of Comments and the Final Rule

    The agencies are adopting all of the proposed changes and are 
making certain adjustments in response to comments received, as 
discussed below.
    Commenters on the 2020 proposal generally supported the proposed 
changes to the foreign public funds

[[Page 46429]]

exclusion.\50\ Specifically, commenters supported the elimination of 
the home jurisdiction requirement and the requirement that the fund be 
sold predominantly through one or more public offerings.\51\ Commenters 
supported the proposed change to the ``public offering'' definition to 
include a requirement that a distribution be subject to substantive 
disclosure and retail investor protection laws or regulations,\52\ but 
did not recommend further specifying what substantive disclosure and 
investor protection requirements should apply because they generally 
viewed it as unnecessary and overly prescriptive.\53\ Commenters also 
supported eliminating the restriction on share ownership by employees 
(other than senior executives and directors) of the U.S. banking entity 
that sponsors the foreign public fund.\54\ In response to a specific 
question in the 2020 proposal, one commenter indicated that the 
proposed changes to the foreign public funds exclusion would not 
increase the risk of evasion of the requirements of section 13 and the 
implementing regulations, and thus no additional anti-evasion measures 
were necessary.\55\ Another commenter stated that the proposed changes 
were less than ideal but were acceptable after balancing compliance 
costs and benefits.\56\
---------------------------------------------------------------------------

    \50\ IIB; SIFMA; BPI; ABA; EBF; EFAMA; FSF; Investment Company 
Institute (ICI); BVI; CBA; Committee on Capital Markets Regulation 
(CCMR); Data Boiler; Goldman Sachs; Investment Adviser Association 
(IAA); JBA; SAF; and U.S. Chamber of Commerce Center for Capital 
Markets Competitiveness (CCMC).
    \51\ IIB; SIFMA; BPI; ABA; EBF; EFAMA; FSF; ICI; BVI; and CBA.
    \52\ IIB; EFAMA; FSF; ICI; and BVI.
    \53\ IIB; ICI; and CBA. One commenter supported this assertion 
by stating that 95 percent of the world's securities markets, 
including all major emerging markets, have substantive disclosure 
and retail investor protection rules that are guided by the 
International Organization of Securities Commissions' common 
principles for retail funds and the detailed policy work that 
informs those principles. ICI.
    \54\ FSF.
    \55\ SIFMA.
    \56\ Data Boiler.
---------------------------------------------------------------------------

    Commenters also recommended additional changes to further align the 
treatment of foreign public funds with that of U.S. registered 
investment companies or to prevent evasion of the rule.\57\ 
Specifically, some commenters recommended eliminating the requirement 
that a fund actually be sold through a public offering and, instead, 
only require that a fund be authorized to be sold through a public 
offering.\58\ These commenters generally viewed this requirement as 
burdensome and difficult to administer and noted that U.S. registered 
investment companies are not required to be sold in public 
distributions. The agencies do not consider the fact that there is no 
requirement for U.S. registered investment companies to be actually 
sold through public offerings as a sufficient rationale for removing 
this requirement from the foreign public fund exclusion. Requiring 
foreign public funds to be sold through one or more public offerings is 
intended to ensure that such funds are in fact public funds and thus 
sufficiently similar to U.S. registered investment companies. While 
there may be certain limited scenarios where a U.S. registered 
investment company is not sold to retail investors, the agencies 
believe that the vast majority of U.S. registered investment companies 
are sold to retail investors. Furthermore, U.S. registered investment 
companies are subject to robust registration, reporting, and other 
requirements that are familiar to the agencies, whereas foreign public 
funds are subject to a differing array of requirements depending on the 
jurisdiction where they are authorized to be sold. These other 
jurisdictions may have less developed requirements for retail funds, 
which may increase the likelihood of a fund seeking authorization for 
public distribution in certain foreign jurisdictions solely as a means 
of avoiding the covered fund prohibition. The agencies believe that 
eliminating this requirement would increase the risk of evasion by 
permitting foreign funds that may be authorized for sale to retail 
investors in a foreign jurisdiction--but are only sold through private 
offerings where no substantive disclosure or retail investor 
protections exist--to qualify for the exclusion. Such funds would not 
be comparable to U.S. registered investment companies and would not be 
the type of fund that foreign public fund exclusion was intended to 
address. Accordingly, the agencies are not adopting this suggested 
modification.
---------------------------------------------------------------------------

    \57\ One commenter recommended that the agencies create an 
exclusion from the ``proprietary trading'' definition for the 
activities of regulated funds, including foreign public funds, under 
certain circumstances. ICI. The agencies note that such a change is 
not within the scope of this rulemaking.
    \58\ IIB; SIFMA; and EBF.
---------------------------------------------------------------------------

    One trade association commenter suggested eliminating a provision 
in the ``public offering'' requirement that prohibits a distribution 
from being limited to investors with a minimum net worth or net 
investment assets because some of its members distribute funds, 
including mutual funds, in offerings that do not meet this requirement 
but that are nonetheless subject to substantive disclosure and retail 
investor protection requirements. Similar to the reasons for retaining 
the requirement that a foreign public fund actually be sold through one 
or more public offerings, the agencies believe that retaining this 
requirement is necessary to ensure that funds qualifying for this 
exclusion are sufficiently similar to U.S. registered investment 
companies. In fact, one of the identifying characteristics of a covered 
fund is that its offerings are limited to investors with minimum net 
worth or net investment assets.\59\ The agencies therefore believe that 
foreign funds that limit their offerings to investors with a minimum 
net worth or net investment assets are generally not sufficiently 
similar to U.S. registered investment companies, and thus the agencies 
are not adopting this suggested change to the ``public offering'' 
definition.
---------------------------------------------------------------------------

    \59\ Under the Investment Company Act, certain funds whose 
offerings are limited to investors with minimum net worth or net 
investment assets are exempt from registration as investment 
companies. See 15 U.S.C. 80a-3(c)(7). These funds are generally 
treated as covered funds under section 13 of the BHC Act and the 
implementing regulations. See 12 U.S.C. 1851(h)(2); implementing 
regulations Sec.  __.10(b)(1)(i).
---------------------------------------------------------------------------

    One commenter opposed the proposed elimination of the requirement 
in the ``public offering'' definition that a distribution comply with 
all applicable requirements in the jurisdiction in which such 
distribution is being made for a banking entity that does not serve as 
the fund's investment manager, investment adviser, commodity trading 
advisor, commodity pool operator, or sponsor.\60\ The final rule adopts 
this modification as proposed, because the agencies believe the other 
eligibility criteria for a fund to qualify under the foreign public 
fund exclusion are sufficient to appropriately identify these funds. In 
addition, the agencies recognize that it may be difficult or impossible 
for a banking entity that invests in a third-party fund to know whether 
the fund's distribution complied with all applicable requirements in 
the jurisdiction where it was distributed.
---------------------------------------------------------------------------

    \60\ Data Boiler.
---------------------------------------------------------------------------

    One commenter recommended that the agencies require 85 percent of a 
foreign public fund's ownership interests be sold to and owned by 
``bona fide'' retail investors in the fund's home jurisdiction.\61\ 
However, for the same reasons that the agencies are eliminating the 
home jurisdiction requirement and the requirement that a fund be sold 
predominantly through public offerings,

[[Page 46430]]

the agencies are not adopting this requirement.
---------------------------------------------------------------------------

    \61\ Oleh Zadorestskyy. This commenter also suggested that the 
agencies require proof that the investors were non-U.S. persons.
---------------------------------------------------------------------------

    Some commenters suggested that the agencies identify common foreign 
fund types that are presumed to qualify for the exclusion for foreign 
public funds for the purpose of improving efficiency and simplifying 
compliance with the rule.\62\ Other commenters recommended that issuers 
listed on an internationally-recognized exchange and available in 
retail-level denominations should automatically qualify for the 
exclusion for similar reasons.\63\ Although the agencies expect many 
such funds will qualify for the exclusion, the agencies decline to 
adopt either of these suggested changes, as both would require the 
agencies' review and on-going monitoring of foreign laws and 
regulations to ensure that the types of funds that would qualify under 
these provisions are sufficiently similar to U.S. registered investment 
companies and that their exclusion as foreign public funds would 
continue to be appropriate.
---------------------------------------------------------------------------

    \62\ IIB and EBF.
    \63\ IIB; SIFMA; BPI; ABA; FSF; and CBA.
---------------------------------------------------------------------------

    Some commenters recommended that the agencies entirely eliminate 
the restrictions on share ownership by parties affiliated with a U.S. 
banking entity sponsor of a foreign public fund.\64\ Other commenters 
suggested that, if the restrictions on share ownership by banking 
entities affiliated with the sponsor were retained, the restrictions on 
share ownership by senior executives and directors should be 
removed.\65\ The commenters generally viewed these requirements as 
unnecessary and burdensome to track and monitor. As discussed in the 
preamble to the 2013 rule, these requirements are intended to prevent 
evasion of section 13 of the BHC Act.\66\ Additionally, the agencies 
note that U.S. banking entity sponsors of foreign public funds would 
need to track the ownership of such funds by their affiliates and 
management officials even if the requirements were eliminated in order 
to determine whether they control such funds for BHC Act purposes.\67\ 
Thus, for a U.S. banking entity relying on this exclusion with respect 
to a fund that it sponsors, the agencies are retaining the requirement 
that the fund be sold predominantly to persons other than the U.S. 
banking entity sponsor, the fund, affiliates of such sponsoring banking 
entity or fund, and the directors and senior executive officers of such 
entities (collectively, ``U.S. banking entity sponsor and associated 
parties'').
---------------------------------------------------------------------------

    \64\ SIFMA and FSF.
    \65\ SIFMA; BPI; ICI; and CCMC.
    \66\ 79 FR 5678-79.
    \67\ See 12 CFR 225.2(e); 12 CFR 225.31(d)(2)(ii). If a foreign 
public fund is controlled by a banking entity for BHC Act purposes, 
such fund could also be being treated as a banking entity under 
section 13. See implementing regulations Sec.  __.2(c); FAQ 14.
---------------------------------------------------------------------------

    Relatedly, some commenters recommended that the agencies modify 
their expectation of the level of ownership of a foreign public fund 
that would satisfy the requirement that a fund be ``predominantly'' 
sold to persons other than its U.S. banking entity sponsor and 
associated parties,\68\ which, in the preamble to the 2013 rule, the 
agencies stated was 85 percent or more (which would permit the U.S. 
banking entity sponsor and associated parties to own the remaining 15 
percent). These commenters asserted that the relevant ownership 
threshold for U.S. registered investment companies is 25 percent, and 
that, for foreign public funds, the threshold should be the same. The 
agencies agree that the permitted ownership level of a foreign public 
fund by a U.S. banking entity sponsor and associated parties should be 
aligned with the functionally equivalent threshold for banking entity 
investments in U.S. registered investment companies, which is 24.9 
percent.\69\ Accordingly, the agencies have amended this provision in 
the final rule to require that more than 75 percent of the fund's 
interests be sold to persons other than the U.S. banking entity sponsor 
and associated parties.\70\
---------------------------------------------------------------------------

    \68\ BPI; FSF; ICI; and CCMC.
    \69\ Although the implementing regulations do not explicitly 
prohibit a banking entity from acquiring 25 percent or more of a 
U.S. registered investment company, a U.S. registered investment 
company would become a banking entity if it is affiliated with 
another banking entity (other than as described in Sec.  
__.12(b)(1)(ii) of the implementing regulations). See 79 FR 5732 
(``[F]or purposes of section 13 of the BHC Act and the final rule, a 
registered investment company . . . will not be considered to be an 
affiliate of the banking entity if the banking entity owns, 
controls, or holds with the power to vote less than 25 percent of 
the voting shares of the company or fund, and provides investment 
advisory, commodity trading advisory, administrative, and other 
services to the company or fund only in a manner that complies with 
other limitations under applicable regulation, order, or other 
authority.'').
    \70\ For a U.S. banking entity that sponsors a foreign public 
fund, crossing the 24.9 percent ownership threshold (other than 
during a permitted seeding period) would cause the fund to be a 
covered fund (if no other exclusion applied), in which case the 
banking entity would be in violation of the 3 percent per-fund 
investment limit. See implementing regulations Sec.  
__.12(a)(2)(ii)(A). The agencies believe that such a strict 
prohibition against a U.S. banking entity acquiring 25 percent or 
more of a foreign public fund that it sponsors is appropriate 
because of the elevated risk of evasion by the sponsoring banking 
entity, which may be able to control the investments made by the 
fund.
---------------------------------------------------------------------------

    One commenter recommended that, with respect to foreign public 
funds sponsored by U.S. affiliates of foreign banking entities, the 
agencies exclude the sponsoring U.S. banking entity's non-U.S. 
affiliates and their directors and employees from the restrictions on 
share ownership, provided that such non-U.S. affiliates are not 
controlled by a U.S. banking entity.\71\ This commenter asserted that 
there is no U.S. financial stability or safety and soundness benefit to 
applying this restriction to such non-U.S. affiliates and their 
directors and employees, as the risks of any such investments are borne 
solely outside the United States. However, with the change described 
above, which permits a U.S. banking entity sponsor and associated 
parties to hold less than 25 percent of a foreign public fund, the 
agencies do not believe that this change is necessary. Even if the 
requirement were modified as the commenter suggested, the banking 
entity and its affiliates would still be limited to owning less than 25 
percent of the fund without the fund becoming a banking entity.
---------------------------------------------------------------------------

    \71\ IIB.
---------------------------------------------------------------------------

    One commenter requested that the agencies modify Sec.  __.12(b)(1) 
of the implementing regulations, which governs attribution of ownership 
interests in covered funds to banking entities, to clarify that the 
banking entity ``or an affiliate'' can provide the advisory, 
administrative, or other services required in Sec.  __.12(b)(1)(ii)(B) 
for the non-attribution rule to apply. The commenter requested this 
clarification because Sec.  __.12(b)(1)(ii)(B) is cross-referenced by 
FAQ 14, which, as discussed above, states that a foreign public fund 
will not be treated as a banking entity if it complies with the test in 
Sec.  __.12(b)(1)(ii) (i.e., the banking entity holds less than 25 
percent of the voting shares in the foreign public fund and provides 
advisory, administrative, or other services to the fund). The agencies 
confirm that the requested interpretation is correct and, accordingly, 
have amended Sec.  __.12(b)(1)(ii) of the implementing regulations to 
clarify that the ownership limit applies to the banking entity and its 
affiliates, in the aggregate, and the requirement that the banking 
entity provide advisory or other services can be satisfied by the 
banking entity or its affiliates.
    One commenter noted that FAQ 16, which relates to the seeding 
period for foreign public funds, uses 3 years as an example of the 
duration of such a seeding period, and requested that the agencies 
confirm that a foreign public fund's seeding period can be longer than

[[Page 46431]]

3 years.\72\ Another commenter requested that the agencies codify the 
3-year seeding period in the implementing regulations.\73\ The agencies 
believe that, depending on the facts and circumstances of a particular 
foreign public fund, the appropriate duration of its seeding period may 
vary and, under certain facts and circumstances, may exceed three 
years. The agencies believe that this flexibility is appropriate and 
thus decline to further specify such a limit. Another commenter 
requested that the agencies codify the foreign public fund seeding 
FAQ,\74\ FAQ 14, and FAQ 16, both described above, in the implementing 
regulations.\75\ The agencies decline to codify these FAQs at this time 
but note that the final rule does not modify or revoke any previously 
issued staff FAQs, unless otherwise specified.
---------------------------------------------------------------------------

    \72\ IAA.
    \73\ CCMC.
    \74\ The foreign public fund seeding FAQ states that staffs of 
the agencies would not advise that a seeding vehicle that is 
operated pursuant to a written plan to become a foreign public fund 
and that meets certain conditions be treated as a covered fund 
during such seeding period.
    \75\ IIB.
---------------------------------------------------------------------------

    In the final rule, the agencies are adopting the amendments to the 
foreign public funds exclusion as proposed, with the additional 
modifications described above. The agencies believe the revised 
requirements will make the foreign public fund exclusion more effective 
by expanding its availability, providing clarity, and simplifying 
compliance with its requirements, while continuing to ensure that the 
funds that qualify are sufficiently similar to U.S. registered 
investment companies.
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.'' \76\ To effectuate this statutory mandate, the 2013 rule 
excluded from the definition of covered fund loan securitizations that 
issue asset-backed securities and hold only loans, certain rights and 
assets that arise from the structure of the loan securitization or from 
the loans supporting a loan securitization, and a small set of other 
financial instruments (permissible assets).\77\
---------------------------------------------------------------------------

    \76\ 12 U.S.C. 1851(g)(2).
    \77\ 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).
---------------------------------------------------------------------------

    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. In 
the 2018 proposal, the agencies asked several questions regarding the 
efficacy and scope of the exclusion and the Loan Securitization 
Servicing FAQ.\78\ Comments focused on permitting small amounts of non-
loan assets and clarifying the treatment of leases and related assets.
---------------------------------------------------------------------------

    \78\ 83 FR 33480-81.
---------------------------------------------------------------------------

    In response to these concerns, the 2020 proposal would have 
codified the Loan Securitization Servicing FAQ and permitted loan 
securitizations to hold a small amount of non-loan assets. The agencies 
requested comment on all aspects of the proposed changes to the loan 
securitization exclusion, and comments were generally supportive of the 
proposed revisions.\79\ Several commenters also suggested revisions to 
the 2020 proposal.\80\ Comments are discussed in detail below.\81\
---------------------------------------------------------------------------

    \79\ E.g., SIFMA; BPI; Managed Funds Association (MFA); PNC 
Financial Services Group, Inc. (PNC); Goldman Sachs; Loan 
Syndications and Trading Association (LSTA); and Structured Finance 
Association (SFA).
    \80\ E.g., SIFMA; CCMC; BPI; and IIB.
    \81\ One commenter suggested that some jurisdictions' risk 
retention rules may vary from the regulations implementing section 
15G of the Exchange Act (15 U.S.C. 78o-11), which requires a banking 
entity to retain and maintain a certain minimum interest in certain 
asset-backed securities. See IIB. This commenter recommended 
allowing banking entities to hold certain investments in compliance 
with certain foreign laws (e.g., European risk retention rules). The 
agencies understand that rules for risk retention vary across 
jurisdictions. However, the agencies believe that the requested 
action is outside the scope of the current rulemaking. In addition, 
another commenter requested that the agencies clarify the definition 
of asset-backed securities as used in the loan securitization 
exclusions. See Arnold & Porter Kaye Scholer LLP (Arnold & Porter). 
The agencies discuss the definition of asset-backed securities in 
Section IV.C.1.iii (Credit Funds), infra.
---------------------------------------------------------------------------

Servicing Assets
    The implementing regulations permit 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.\82\ Rights or other servicing assets are assets 
designed to facilitate the servicing of the underlying loans or the 
distribution of proceeds from those loans to holders of the asset-
backed securities.\83\ In response to confusion regarding the scope of 
the provisions permitting servicing assets and a separate provision 
limiting the types of permitted securities, the staffs of the agencies 
released the Loan Securitization Servicing FAQ. The FAQ clarified that 
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.
---------------------------------------------------------------------------

    \82\ Sec. Sec.  __.2(t); __.10(c)(8)(i)(D); __.10(c)(8)(v).
    \83\ See, e.g., FASB Statement No. 156: Accounting for Servicing 
of Financial Assets, ] 61 (FAS 156).
---------------------------------------------------------------------------

    The 2020 proposal would have codified the Loan Securitization 
Servicing FAQ in the implementing regulations to clarify the scope of 
the servicing asset provision.\84\ Commenters generally supported the 
codification of the Loan Securitization Servicing FAQ, indicating that 
such a codification would promote transparency and ensure continued use 
of the loan securitization exclusion.\85\ For the above reasons, the 
final rule adopts the codification of the Loan Securitization Servicing 
FAQ as proposed.
---------------------------------------------------------------------------

    \84\ The 2020 proposal also clarified 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. See 2020 proposal Sec.  __.10(c)(8)(i)(B). The 
agencies are adopting this revision, as proposed.
    \85\ E.g., SIFMA; PNC; and SFA. One commenter indicated that the 
current Loan Securitization Servicing FAQ was sufficient and that 
codifying the FAQ was not necessary; however, the commenter did not 
elaborate on or justify this position. Data Boiler.
---------------------------------------------------------------------------

Cash Equivalents
    The loan securitization exclusion permits issuers relying on the 
exclusion to hold certain types of contractual rights or assets related 
to the loans underlying the securitization, including cash equivalents. 
In response to questions about the scope of the cash equivalents 
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.\86\ To promote transparency and 
clarity, the 2020 proposal would have codified this additional language 
in the Loan Securitization Servicing FAQ regarding the meaning of 
``cash equivalents.'' \87\ The agencies did not propose requiring 
``cash equivalents'' to be ``short term,'' because the agencies 
recognized 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. Commenters generally supported 
the codification of the definition of ``cash equivalents'' in the loan 
securitization

[[Page 46432]]

exclusion.\88\ The final rule adopts the codification of ``cash 
equivalents'' as proposed.
---------------------------------------------------------------------------

    \86\ See supra, n.14.
    \87\ 2020 proposed rule Sec.  __.10(c)(8)(iii)(A).
    \88\ E.g., LSTA; PNC; and SIFMA. One commenter expressed 
opposition to this codification but did not elaborate or justify 
this position. See Data Boiler.
---------------------------------------------------------------------------

Limited Holdings of Certain Debt Securities
    In the preamble to the 2013 rule, the agencies declined to permit 
loan securitizations to hold a certain amount of non-loan assets.\89\ 
The agencies supported a narrow scope of permissible assets in loan 
securitizations, suggesting that such an approach would be consistent 
with the purpose of section 13 of the BHC Act.\90\
---------------------------------------------------------------------------

    \89\ 79 FR 5687-88.
    \90\ 79 FR 5687.
---------------------------------------------------------------------------

    Several commenters on the 2018 proposal disagreed with the 
agencies' views and supported expanding the range of permissible assets 
in an excluded loan securitization. After considering the comments 
received on the 2018 proposal, the 2020 proposal would have allowed a 
loan securitization vehicle to hold up to five percent of the fund's 
total assets in non-loan assets. The agencies indicated that 
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 investor demand and reduce compliance 
costs associated with the securitization process without significantly 
increasing risk to banking entities and the financial system.\91\ The 
agencies requested comment on, among other things, the maximum amount 
of permitted non-loan assets, the methodology for calculating the cap 
on non-loan assets, and whether the agencies should limit the type of 
assets that could be held under the non-loan asset provision. 
Specifically, the agencies requested comment on whether the non-loan 
asset provision should be limited to debt securities or should exclude 
certain financial instruments such as derivatives and collateralized 
debt obligations.
---------------------------------------------------------------------------

    \91\ 85 FR 12128-29.
---------------------------------------------------------------------------

    Commenters were generally supportive of allowing loan 
securitizations to hold a limited amount of non-loan assets.\92\ These 
commenters indicated that the requirements for the current loan 
securitization exclusion are too restrictive and excessively limit use 
of the exclusion and prevent issuers from responding to investor 
demand, and suggested that a limited bucket of non-loan assets would 
not fundamentally alter the characteristics and risks of 
securitizations or otherwise increase risks in banking entities or the 
financial system.\93\
---------------------------------------------------------------------------

    \92\ E.g., SIFMA; CCMC; ABA; Credit Suisse; MFA; Goldman Sachs; 
LSTA; BPI; and SFA.
    \93\ E.g., LSTA and Goldman Sachs.
---------------------------------------------------------------------------

    Several commenters recommended against limiting the type of assets 
that could be held per the non-loan asset provision.\94\ For example, 
one commenter stated that allowing excluded loan securitizations to 
invest in any class of asset would allow those vehicles to achieve 
investment goals during periods of constrained loan supply, while 
another commenter indicated that such a restriction would be 
unnecessary given that the low limit on non-loan assets would constrain 
risks.\95\ In contrast, one commenter suggested limiting the type of 
permissible assets to securities with risk characteristics similar to 
loans.\96\
---------------------------------------------------------------------------

    \94\ E.g., MFA; LSTA; and SFA. One commenter also requested that 
the agencies make clear that the non-loan assets would not be 
subject to the other provisions of the loan securitization 
exclusion. LSTA.
    \95\ SFA and LSTA.
    \96\ JBA.
---------------------------------------------------------------------------

    Numerous commenters suggested raising the cap on non-loan assets 
from five percent of assets to ten percent of assets,\97\ while one 
commenter indicated that a five percent cap would be sufficient.\98\ 
Commenters that supported an elevated limit on non-loan assets 
generally argued that a ten percent limit would further reduce 
compliance burdens while not materially increasing risk.\99\
---------------------------------------------------------------------------

    \97\ SIFMA; CCMC; ABA; Credit Suisse; MFA; Goldman Sachs; LSTA; 
and SFA.
    \98\ PNC. Another commenter who generally supported the proposed 
modifications to the loan securitization exclusion did not urge the 
agencies to raise the cap on non-loan assets. See BPI.
    \99\ E.g., LSTA; SIFMA; and Goldman Sachs.
---------------------------------------------------------------------------

    Several commenters also suggested a method for calculating the cap 
on non-loan assets: The par value of assets on the day they are 
acquired.\100\ These commenters suggested that relying on par value is 
accepted practice in the loan securitization industry and would obviate 
concerns related to tracking amortization or prepayment of loans in a 
securitization portfolio.\101\ One of these commenters further 
specified that the limit should be calculated (1) according to the par 
value of the acquired assets on the date of investment over the 
securitization's total collateral pool and (2) only at the time of 
investment.\102\ Another commenter indicated that the cap should be 
calculated as the lower of the purchase price and par value of the non-
qualifying assets over the issuer's aggregate capital commitments plus 
its subscription based credit facility.\103\ A third commenter 
suggested having a separate valuation mechanism for equity securities, 
which the commenter suggested should be market value upon 
acquisition.\104\
---------------------------------------------------------------------------

    \100\ SIFMA; BPI; ABA; and LSTA.
    \101\ SIFMA and BPI.
    \102\ BPI.
    \103\ Goldman Sachs.
    \104\ SFA.
---------------------------------------------------------------------------

    Finally, two commenters opposed allowing excluded loan 
securitizations to hold non-loan assets and suggested that such a 
change would be contrary to the purpose of section 13 of the BHC Act or 
would result in loan securitizations with differing risk 
characteristics, potentially increasing monitoring costs on 
investors.\105\ In addition, a commenter claimed that the 2020 proposal 
to allow excluded loan securitizations to hold non-loan assets would be 
contrary to section 13 of the BHC Act.\106\ Specifically, this 
commenter suggested that the rule of construction in 12 U.S.C. 
1851(g)(2) only permits the securitization or sale of loans and that 
legislative history supports this reading of the statute.
---------------------------------------------------------------------------

    \105\ JBA and Data Boiler.
    \106\ Occupy.
---------------------------------------------------------------------------

    The agencies previously concluded and continue to believe they have 
legal authority to adopt the proposed allowance for a limited amount of 
non-loan assets.\107\ Section 13(g)(2) of the BHC Act states, 
``[n]othing 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.'' \108\ This rule of construction is permissive--it allows the 
agencies to design the regulations implementing section 13 in a way 
that accommodates and does not unduly ``limit or restrict'' the ability 
of banking entities to sell or securitize loans. Contrary to the 
commenter's argument, this provision does not mandate that any loan 
securitization exclusion only relate to loans. As discussed in this 
section and the preamble to the 2020 proposal,\109\ the agencies 
believe that allowing excluded loan securitizations to hold limited 
amounts of non-loan assets would, in fact, promote the ability of

[[Page 46433]]

banking entities to sell or securitize loans.
---------------------------------------------------------------------------

    \107\ See 79 FR 5688-92 (stating, for example, that ``[t]he 
[a]gencies also do not believe that they lack the statutory 
authority to permit a loan securitization relying on the loan 
securitization exclusion to use derivative[s,] as suggested by 
[Occupy]'' and that, more broadly, the agencies have the authority 
to allow excluded loan securitizations to hold non-loan assets).
    \108\ 12 U.S.C. 1851(g)(2).
    \109\ 85 FR 12128-29.
---------------------------------------------------------------------------

    After considering the foregoing comments, the agencies are revising 
the loan securitization exclusion to permit a loan securitization to 
hold a limited amount of debt securities. Loan securitizations provide 
an important mechanism for banking entities to fund lending programs. 
Allowing loan securitizations to hold a small amount of debt securities 
in response to customer and market demand may increase a banking 
entity's capacity to provide financing and lending. To minimize the 
potential for banking entities to use this exclusion to engage in 
impermissible activities or take on excessive risk, the final rule 
permits a loan securitization to hold debt securities (excluding asset-
backed securities and convertible securities), as opposed to any non-
loan assets, as the 2020 proposal would have allowed.\110\
---------------------------------------------------------------------------

    \110\ Final rule Sec.  __.10(c)(8)(i)(E).
---------------------------------------------------------------------------

    Although several commenters supported allowing a loan 
securitization to hold any non-loan asset to provide flexibility and 
allow the issuer's investment manager to respond to changing market 
demands, the agencies believe that limiting the assets to debt 
securities is more consistent with the activities of an issuer focused 
on securitizing loans, rather than engaging in other activities. The 
agencies have determined, consistent with the views of another 
commenter, that non-loan assets with materially different risk 
characteristics from loans could change the character and complexity of 
an issuer and raise the type of concerns that section 13 of the BHC Act 
was intended to address. Moreover, as described further below, limiting 
the assets to those with risk characteristics that are similar to loans 
will allow for a simpler and more transparent calculation of the five 
percent limit, which will facilitate banking entities' compliance with 
the exclusion. For the same reasons, the final rule does not permit a 
loan securitization to hold asset-backed securities or convertible 
securities as part of its five percent allowance for debt securities. 
This helps to ensure that a loan securitization will not be exposed to 
complex financial instruments and will retain the general 
characteristic of a loan securitization issuer.
    Similarly, to reduce potential risk-taking and to ensure that the 
fund is composed almost entirely of loans with minimal non-loan assets, 
the final rule retains the 2020 proposal's five percent limit on non-
loan assets. Commenters differed on whether raising the limit on non-
loan assets was appropriate or necessary to ensure flexibility, and it 
is not clear what benefit would accrue to issuers who could hold debt 
securities of, for example, seven or ten percent versus five percent. 
The amount of non-loan assets held by a fund should not be so 
significant that it fundamentally changes the character of the fund 
from one that is engaged in securitizing loans to one that is engaged 
in investing in other types of assets.
    The agencies are also clarifying the methodology for calculating 
the five percent limit on non-convertible debt securities.\111\ The 
2020 proposal only provided that ``the aggregate value of any such 
other assets must not exceed five percent of the aggregate value of the 
issuing entity's assets'' and requested comment about how the agencies 
should calculate this limit.\112\ As suggested by several commenters, 
the final rule specifies that the limit on non-convertible debt 
securities must be calculated at the most recent time of acquisition of 
such assets. Specifically, the aggregate value of debt securities held 
under Sec.  __.10(c)(8)(i)(E) of the final rule may not exceed five 
percent of the aggregate value of loans held under Sec.  
__.10(c)(8)(i)(A), cash and cash equivalents held under Sec.  
__.10(c)(8)(iii)(A), and debt securities held under Sec.  
__.10(c)(8)(i)(E), where the value of the loans, cash and cash 
equivalents, and debt securities is calculated at par value at the time 
any such debt security is purchased.\113\
---------------------------------------------------------------------------

    \111\ Final rule Sec.  __.10(c)(8)(i)(E)(1)-(2).
    \112\ 2020 proposal Sec.  __.10(c)(8)(i)(E); 85 FR 12129.
    \113\ Final rule Sec.  __.10(c)(8)(i)(E)(1)-(2).
---------------------------------------------------------------------------

    The agencies have chosen the most recent time of acquisition of 
non-convertible debt securities as the moment of calculation to 
simplify the manner in which the 5 percent cap applies. This would 
permit an issuer that, at some point in its life, held debt securities 
in excess of five percent of its assets to qualify for the exclusion if 
it came into compliance with the five percent limit prior to a banking 
entity relying on the exclusion with respect to such issuer. The 
agencies believe that a continuous monitoring obligation could impose 
significant burdens on excluded issuers and could cause an issuer to be 
disqualified from the loan securitization exclusion based on market 
events not under its control. It is also unnecessary to require this 
calculation at other intervals because limiting permissible assets to 
those that have similar characteristics as loans addresses the 
potential for evasion of the five percent limit that could arise if the 
issuer held more volatile assets.\114\
---------------------------------------------------------------------------

    \114\ The agencies also have authority to address acts that 
function as an evasion of the requirements of the exclusion. See 
implementing regulations Sec.  __.21.
---------------------------------------------------------------------------

    In the final rule, this measurement is based only on the value of 
the loans and debt securities held under Sec. Sec.  __.10(c)(8)(i)(A) 
and (E) and the cash and cash equivalents held under Sec.  
__.10(c)(8)(iii)(A) rather than the aggregate value of all of the 
issuing entity's assets. The purpose of the five percent limit is to 
ensure the investment pool of a loan securitization is composed of 
loans. Therefore, the calculation takes into account the assets that 
should make up the issuing entity's investment pool and excludes the 
value of other rights or incidental assets, as well as derivatives held 
for risk management. This further simplifies the calculation 
methodology by excluding assets that may be more complex to value and 
that are ancillary to the loan securitization's investment activities. 
This straightforward calculation methodology will ensure that the loan 
securitization exclusion remains easy to use and will facilitate 
banking entities' compliance with the exclusion.
    The agencies recognize that a loan securitization's transaction 
agreements may require that some categories of loans, cash equivalents, 
or debt securities be valued at fair market value for certain purposes. 
To accommodate such situations, the exclusion provides that the value 
of any loan, cash equivalent, or permissible debt security may be based 
on its fair market value if (1) the issuing entity is required to use 
the fair market value of such loan or debt security for purposes of 
calculating compliance with concentration limitations or other similar 
calculations under its transaction agreements and (2) the issuing 
entity's valuation methodology values similarly situated assets, for 
example non-performing loans, consistently. This provision is intended 
to provide issuers with the flexibility to leverage existing 
calculation methodologies while preventing issuers from using 
inconsistent methodologies in a manner to evade the requirements of the 
exclusion.
Leases
    A commenter on the 2018 proposal suggested that the loan 
securitization exclusion be expanded to cover leases and related 
assets, including operating or capital leases.\115\ In response, in the 
2020 proposal the agencies stated that they were ``not proposing to 
separately

[[Page 46434]]

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.'' \116\ That same 
commenter made a comment on the 2020 proposal urging the agencies to 
reconsider explicitly including operating leases and leased properties 
in the loan securitization exclusion.\117\ This commenter asserted that 
unless the agencies specifically revise the definition of ``rights or 
other assets'' to explicitly include leased property, then 
securitization vehicles with operating leases that rely on the residual 
property value after expiration of the lease to support their asset-
backed securities would not be able to qualify under the loan 
securitization exemption, despite the 2013 rule's provisions for 
special units of beneficial interest and collateral certificates.
---------------------------------------------------------------------------

    \115\ See 85 FR 12128.
    \116\ Id.
    \117\ SFA.
---------------------------------------------------------------------------

    Consistent with the 2020 proposal, the agencies are not separately 
listing 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. The agencies are 
also not modifying the definition of ``rights or other assets'' to 
explicitly include leased property, as any residual value of such 
leased property upon expiration of an operating lease should meet the 
requirements to constitute an asset that is related or incidental to 
purchasing or otherwise acquiring and holding loans.
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).\118\ Consistent with the statute, the implementing 
regulations exclude 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), including the 
welfare of low- and moderate-income communities or families (such as 
providing housing, services, or jobs) (the public welfare investment 
exclusion).\119\
---------------------------------------------------------------------------

    \118\ See 12 U.S.C. 1851(d)(1)(E).
    \119\ Implementing regulations Sec.  __.10(c)(11)(ii)(A).
---------------------------------------------------------------------------

    The 2020 proposal noted that 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 
Community Reinvestment Act (CRA) are public welfare investments for 
national banks.\120\ The 2020 proposal requested 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.\121\ The 2020 proposal specifically asked 
whether investments that would receive consideration as qualified 
investments under the CRA should be excluded from the definition of 
covered fund, either by incorporating these investments into the public 
welfare investment exclusion or by establishing a new exclusion for 
CRA-qualifying investments.\122\
---------------------------------------------------------------------------

    \120\ See 85 FR 12130; 12 CFR 24.3.
    \121\ See 85 FR 12130 (noting that such a change could provide 
additional certainty regarding community development investments 
made through fund structures).
    \122\ See id.
---------------------------------------------------------------------------

    In addition, the 2020 proposal requested comment on whether Rural 
Business Investment Companies (RBICs) are typically excluded from the 
definition of ``covered fund'' because of the public welfare investment 
exclusion or another exclusion and on whether the agencies should 
expressly exclude RBICs from the definition of covered fund.\123\ RBICs 
are licensed under a program 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.\124\
---------------------------------------------------------------------------

    \123\ See id.
    \124\ See id.
---------------------------------------------------------------------------

    The Tax Cuts and Jobs Act established the ``opportunity zone'' 
program to provide tax incentives for long-term investing in designated 
economically distressed communities.\125\ The program allows taxpayers 
to defer and reduce taxes on capital gains by reinvesting gains in 
``qualified opportunity funds'' (QOF) that are required to have at 
least 90 percent of their assets in designated low-income zones.\126\ 
The 2020 proposal requested comment on whether many or all QOFs would 
meet the terms of the public welfare investment exclusion and on 
whether the agencies should expressly exclude QOFs from the definition 
of covered fund.\127\
---------------------------------------------------------------------------

    \125\ See id.
    \126\ See id.
    \127\ See id.
---------------------------------------------------------------------------

    Commenters generally supported clarifying that funds that make 
investments that qualify for consideration under the CRA qualify for 
the public welfare investment exclusion.\128\ Commenters noted that 
this clarification would be consistent with the OCC's regulations 
concerning public welfare investments and the CRA, provide greater 
certainty, and avoid unnecessarily chilling public welfare investment 
activities.\129\ One commenter stated that some banking entities have 
been reluctant to invest in certain community development funds due to 
uncertainty as to whether these funds were covered funds.\130\ This 
commenter stated that explicitly excluding funds that qualify for 
consideration under the CRA from the definition of covered fund would 
eliminate this uncertainty and would help support the type of community 
development efforts that the public welfare investment exclusion was 
designed to promote.\131\ In addition, some commenters recommended 
excluding funds that qualify for the public welfare investment 
exclusion from the definition of ``banking entity.'' \132\
---------------------------------------------------------------------------

    \128\ See SIFMA; FSF; BPI; ABA; PNC; Community Development 
Venture Capital Alliance (CDVCA); IIB; and Data Boiler (stating that 
incorporating the CRA public welfare exemption may ease some 
challenges faced by communities during the current COVID pandemic, 
but all PWI should not be excluded).
    \129\ See SIFMA; FSF; and CDVCA.
    \130\ See CDVCA.
    \131\ See id.
    \132\ See SIFMA; BPI; ABA; and IIB.
---------------------------------------------------------------------------

    Commenters also generally favored explicitly excluding RBICs and 
QOFs from the definition of ``covered fund,'' either by adopting new 
exclusions, or by clarifying the scope of the public welfare investment 
exclusion.\133\ Commenters stated that explicitly excluding these funds 
from the definition of ``covered fund'' would be consistent with the 
statutory provision permitting public welfare investments. Commenters 
stated that RBICs and QOFs must make investments that are clearly 
designed primarily to promote the public welfare because they are 
required to invest primarily in ways that promote job creation in rural 
communities (which may have significant low- and moderate-income 
populations or be economically disadvantaged and in need of 
revitalization or stabilization) and in economically distressed 
communities, respectively.\134\ Commenters stated that

[[Page 46435]]

certain RBICs and QOFs qualify for the public welfare investment 
exclusion, but providing an express exclusion for these funds would 
reduce uncertainty and associated compliance burdens and would 
encourage banking entities to provide capital to projects that promote 
economic development in rural and low-income communities.\135\ One 
commenter stated that RBICs and QOFs engage in investments that are 
substantively similar or identical to those of public welfare 
investment funds that are already excluded from the definition of 
covered fund and of the type that Congress recognized that section 13 
of the BHC Act was not designed to prohibit.\136\ Another commenter 
stated that explicitly excluding RBICs would result in the provision of 
valuable expertise and services to RBICs and provide funding and 
assistance to small businesses and low- and moderate-income 
communities.\137\ One commenter expressed skepticism about providing a 
new exclusion for RBICs and QOFs but suggested that certain of these 
funds may currently qualify for the public welfare investment 
exclusion.\138\ Another commenter stated that it is not necessary to 
expressly exclude QOFs from the definition of covered fund, noting that 
these funds should be of the type primarily intended to promote the 
public welfare of low- and moderate-income areas and should therefore 
qualify for the current public welfare investment exclusion.\139\
---------------------------------------------------------------------------

    \133\ See SIFMA; FSF; ABA (addressing QOFs); and Small Business 
Investor Alliance (SBIA) (addressing RBICs).
    \134\ See SIFMA and FSF.
    \135\ See SIFMA and FSF.
    \136\ See SIFMA.
    \137\ See SBIA.
    \138\ See Data Boiler.
    \139\ See PNC.
---------------------------------------------------------------------------

    After carefully considering the comments received, the agencies are 
revising the public welfare investment exclusion to explicitly 
incorporate funds, the business of which is to make investments that 
qualify for consideration under the Federal banking agencies' 
regulations implementing the CRA.\140\ Explicitly excluding these types 
of investments from the definition of covered fund clarifies and gives 
full effect to the statutory exemption for public welfare 
investments.\141\ In addition, this clarification will reduce 
uncertainty and will facilitate public welfare investments by banking 
entities.
---------------------------------------------------------------------------

    \140\ Final rule Sec.  __.10(c)(11)(ii)(A).
    \141\ See 12 U.S.C. 1851(d)(1)(E). 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.
---------------------------------------------------------------------------

    The agencies are also adopting explicit exclusions from the 
definition of covered fund for RBICs and QOFs in Sec.  __.10(c)(11) of 
the final rule. These types of funds were created by Congress to 
promote development in rural and low-income communities, and, due to 
their similarity to SBICs and public welfare investments, the agencies 
believe that section 13 of the BHC Act was not intended to restrict the 
types of funds that engage in those activities. RBICs are companies 
licensed under the Rural Business Investment Program, a program 
designed to promote economic development and the creation of wealth and 
job opportunities among individuals living in rural areas and to help 
meet the equity capital investment needs primarily of smaller 
enterprises located in such areas.\142\ Likewise, QOFs were developed 
as part of a program to promote long-term investing in designated 
economically distressed communities and are required to have at least 
90 percent of their assets in designated low-income zones.\143\ 
Congress created RBICs and QOFs to encourage investment in rural areas, 
small enterprises, and low-income areas. Providing an explicit 
exclusion for these funds in the implementing regulations gives effect 
to section 13 of the BHC Act's provision permitting public welfare 
investments and avoids chilling the activities of funds that were not 
the target of section 13 of the BHC Act.\144\ Although many of these 
funds may already qualify for the public welfare investment exclusion, 
the agencies are explicitly excluding these funds from the definition 
of covered fund to reduce uncertainty and compliance burden. Thus, 
under the final rule, a covered fund does not include an issuer that 
has elected to be regulated or is regulated as a RBIC, as described in 
15 U.S.C. 80b-3(b)(8)(A) or (B), or that has terminated its 
participation as a RBIC in accordance with 7 CFR 4290.1900 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 termination.\145\ Likewise, under the final 
rule, a covered fund does not include an issuer that is a QOF, as 
defined in 26 U.S.C. 1400Z-2(d).\146\
---------------------------------------------------------------------------

    \142\ See, e.g., Rural Business Investment Company (RBIC) 
Program, 85 FR 16519, 16520 (Mar. 24, 2020).
    \143\ See 26 U.S.C. 1400Z-2(d).
    \144\ See 12 U.S.C. 1851(d)(1)(E); 156 Cong. Rec. S5896 (daily 
ed. July 15, 2010) (Statement of Sen. Merkley) (noting that Section 
13(d)(1)(E) permits investments ``of the type'' permitted under 12 
U.S.C. 24 (Eleventh), including ``a range of low-income community 
development and other projects,'' but ``is flexible enough to permit 
the [agencies] to include other similar low-risk investments with a 
public welfare purpose'').
    \145\ Final rule Sec.  __.10(c)(11)(iii). As with SBICs, 
discussed below, the final rule contemplates that an issuer that 
ceases to be a RBIC during wind-down may continue to qualify for the 
exclusion from the definition of ``covered fund'' for RBICs if the 
issuer satisfies certain conditions designed to prevent abuse.
    \146\ Final rule Sec.  __.10(c)(11)(iv). As with other types of 
issuers excluded from the covered fund definition, a banking entity 
must have independent authority to invest in a QOF.
---------------------------------------------------------------------------

    The final rule does not exclude funds that qualify for the public 
welfare investment exclusion from the definition of ``banking entity'' 
as requested by some commenters.\147\ The term ``banking entity'' is 
specifically defined in section 13 of the BHC Act.\148\ In addition, 
the agencies do not believe that applying the definition of banking 
entity places an undue burden on banking entities' public welfare 
investments. The agencies believe that banking entities are able to 
design their permissible public welfare investments so as not to cause 
the investment fund to become a banking entity. For public welfare 
investment funds that are banking entities, the agencies believe that 
the burden-reducing amendments adopted in this final rule and the 2019 
amendments should mitigate concerns about compliance burdens.
---------------------------------------------------------------------------

    \147\ See SIFMA and BPI.
    \148\ 12 U.S.C. 1851(h)(1).
---------------------------------------------------------------------------

ii. Small Business Investment Companies
    Consistent with section 13 of the BHC Act,\149\ the implementing 
regulations exclude from the definition of ``covered fund'' SBICs and 
issuers that have received notice from the Small Business 
Administration to proceed to qualify for a license as an SBIC, which 
notice or license has not been revoked.\150\ The agencies proposed 
revising the exclusion for SBICs to clarify how the exclusion would 
apply to SBICs that surrender their licenses during wind-down 
phases.\151\ Specifically, the agencies proposed revising the exclusion 
for SBICs to apply explicitly to an issuer that has voluntarily 
surrendered its license to operate as an SBIC in accordance with 13 CFR 
107.1900 and does not make new investments (other than investments in 
cash equivalents) after such voluntary

[[Page 46436]]

surrender.\152\ The agencies explained that applying the exclusion to 
an issuer that has surrendered its SBIC license is appropriate because 
of the statutory exemption for investments in SBICs and because banking 
entities may otherwise become discouraged from investing in SBICs due 
to concerns that an SBIC may become a covered fund during its wind-down 
phase.\153\ The agencies further noted that the proposed revisions 
included a number of requirements designed to ensure that the exclusion 
would not be abused.\154\ In particular, the exclusion would apply only 
to an issuer that voluntarily surrenders its license in accordance with 
13 CFR 107.1900 and that does not make any new investments (other than 
investments in cash equivalents).\155\
---------------------------------------------------------------------------

    \149\ See 12 U.S.C. 1851(d)(1)(E) (permitting investments in 
SBICs).
    \150\ See implementing regulations Sec.  __.10(c)(11)(i).
    \151\ See 85 FR 12131.
    \152\ See id.
    \153\ See id.; 12 U.S.C 1851(d)(1)(E).
    \154\ See 85 FR 12131.
    \155\ See id.
---------------------------------------------------------------------------

    Most commenters that directly addressed the 2020 proposal's 
revisions concerning SBICs supported the proposed revisions, stating 
that the proposed revisions would provide greater certainty to banking 
entities wishing to invest in SBICs and would increase investment in 
small businesses.\156\ One commenter stated that revising the exclusion 
for SBICs would prevent a banking entity from being forced to sell an 
interest in an SBIC that became a covered fund for reasons outside of 
the banking entity's control.\157\ Commenters further noted that the 
proposed revisions included sufficient safeguards against evasion and 
did not present safety or soundness concerns.\158\ One commenter 
recommended against revising the exclusion from the definition of 
covered fund for SBICs. This commenter expressed concern about frequent 
buying and selling of SBICs and noted that section 13 of the BHC Act 
and its implementing regulations do not prohibit a banking entity from 
lending to small businesses.\159\ The commenter further expressed 
concern that an SBIC that surrenders its license may be doing so 
because it has failed or no longer wishes to comply with the Small 
Business Administration's regulations.\160\
---------------------------------------------------------------------------

    \156\ See SIFMA; BPI; ABA; PNC; and SBIA.
    \157\ See SBIA.
    \158\ See SIFMA; BPI; and SBIA.
    \159\ See SIFMA; BPI; and SBIA.
    \160\ See Data Boiler.
---------------------------------------------------------------------------

    After carefully considering the comments received, the agencies are 
adopting the revisions to the exclusion from the definition of covered 
fund for SBICs, as proposed.\161\ The revisions will provide greater 
certainty to banking entities, give full effect to the provision of 
section 13 of the BHC Act that permits investments in SBICs, and 
support capital formation for small businesses. In response to one 
commenter's concerns regarding the exclusion for SBICs,\162\ the 
agencies note that a banking entity's investment in an SBIC must comply 
with all applicable laws and regulations, including the prohibition 
against proprietary trading under section 13 of the BHC Act and its 
implementing regulations. Furthermore, as noted above, the revised 
exclusion for SBICs includes safeguards designed to prevent abuse or 
evasion. In particular, the exclusion would only apply to an issuer 
that has voluntarily surrendered its license to operate as an SBIC in 
accordance with 13 CFR 107.1900 and that does not make new investments 
(other than investments in cash equivalents) after such voluntary 
surrender.
---------------------------------------------------------------------------

    \161\ See final rule Sec.  __10(c)(11)(i).
    \162\ See Data Boiler.
---------------------------------------------------------------------------

C. Additional Covered Fund Exclusions

    In addition to modifying certain existing exclusions, the agencies 
are creating four new exclusions from the definition of ``covered 
fund'' to better tailor the provision to the types of entities that 
section 13 was intended to cover. These exclusions are for credit 
funds, venture capital funds, family wealth management vehicles, and 
customer facilitation vehicles.
General Comments
    Many commenters were broadly supportive of the proposed new 
exclusions from the definition of ``covered fund.'' \163\ Some 
commenters recommended adopting additional exclusions for an array of 
fund types and situations, including for tender bond vehicles,\164\ 
ownership interests erroneously acquired or retained,\165\ certain real 
estate funds,\166\ and funds in their seeding period.\167\ The agencies 
are declining to adopt these suggested exclusions because the requested 
actions are outside the scope of the current rulemaking. In addition, 
one commenter urged the agencies to redefine the definition of 
``covered fund,'' to rely on a characteristics-based approach.\168\ The 
agencies decline to revise the definition of ``covered fund'' for the 
reasons articulated in the preamble to the 2013 rule.\169\
---------------------------------------------------------------------------

    \163\ E.g., SIFMA; JBA; Credit Suisse; and SAF.
    \164\ SIFMA.
    \165\ SIFMA and BPI.
    \166\ IAA.
    \167\ ABA.
    \168\ JBA.
    \169\ See 79 FR 5671.
---------------------------------------------------------------------------

1. Credit Funds
i. Background and 2020 Proposal
    In the preamble to the 2013 rule, the agencies declined to 
establish an exclusion from the definition of covered fund for funds 
that make loans, invest in debt, or otherwise extend the type of credit 
that banking entities may provide directly under applicable banking law 
(credit funds).\170\ The agencies cited concerns about whether credit 
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.\171\
---------------------------------------------------------------------------

    \170\ See 79 FR 5705.
    \171\ Id.
---------------------------------------------------------------------------

    However, commenters on the 2018 proposal noted that many credit 
funds have not been able to utilize the joint venture and loan 
securitization exclusions. In response, the agencies included in the 
2020 proposal a specific exclusion for credit funds. Under the 2020 
proposal, a credit fund would have been an issuer whose assets consist 
solely of:
     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.\172\
---------------------------------------------------------------------------

    \172\ 2020 proposal Sec.  __.10(c)(15)(i).
---------------------------------------------------------------------------

    The proposed exclusion would have been subject to certain 
additional requirements to reduce evasion concerns and help ensure that 
banking entities invest in, sponsor, or advise credit funds in a safe 
and sound manner. For example, the proposed exclusion would have 
imposed (1) certain activity requirements on the credit fund, including 
a prohibition on proprietary trading; \173\ (2) disclosure and safety 
and soundness requirements on banking entities that sponsor or serve as 
an advisor for a credit fund; \174\ (3) safety and soundness 
requirements on all banking entities that invest in or have certain 
relationships with a credit

[[Page 46437]]

fund; \175\ and (4) restrictions on the banking entity's investment in, 
and relationship with, a credit fund.\176\ The proposed exclusion also 
would have permitted a credit fund to receive and hold a limited amount 
of equity securities (or rights to acquire equity securities) that were 
received on customary terms in connection with the credit fund's loans 
or debt instruments.\177\
---------------------------------------------------------------------------

    \173\ 2020 proposal Sec.  __.10(c)(15)(ii).
    \174\ 2020 proposal Sec.  __.10(c)(15)(iii).
    \175\ 2020 proposal Sec.  __.10(c)(15)(iv).
    \176\ 2020 proposal Sec.  __.10(c)(15)(v).
    \177\ 2020 proposal Sec.  __.10(c)(15)(i)(C)(1)(iii).
---------------------------------------------------------------------------

ii. Comments
    The agencies requested comment on all aspects of the proposed 
credit fund exclusion. In addition, the agencies solicited comment on 
specific provisions of the proposed exclusion, including the 
permissibility of certain assets and requirements related to the 
activities of the credit fund and the relationship between a banking 
entity and a credit fund.\178\
---------------------------------------------------------------------------

    \178\ See 85 FR 12133.
---------------------------------------------------------------------------

General
    Commenters were generally supportive of adopting an exclusion for 
credit funds, and several commenters suggested specific revisions to 
the proposed exclusion.\179\ Several commenters supportive of the 2020 
proposal urged the agencies not to adopt any further limitations on the 
proposed exclusion and indicated that the proposed exclusion would not 
increase the risk of evasion of the requirements of section 13 of the 
BHC Act.\180\ Two commenters expressed general opposition to or concern 
about the proposed credit fund exclusion.\181\
---------------------------------------------------------------------------

    \179\ E.g., CCMC; AIC; SIFMA; FSF; ABA; Arnold & Porter; and 
Goldman Sachs.
    \180\ E.g., SIFMA; Credit Suisse; Goldman Sachs; and Arnold & 
Porter.
    \181\ Better Markets and Data Boiler. One of these commenters 
suggested that banking entities should instead rely on the 
exclusions for joint ventures and loan securitizations. Data Boiler.
---------------------------------------------------------------------------

Asset Requirements
    Commenters were generally supportive of allowing a credit fund to 
invest broadly in loans and debt instruments, certain related assets, 
and certain derivatives.\182\ One commenter recommended against 
delineating between permissible and non-permissible types of loans and 
debt instruments, arguing that credit funds should be able to extend 
credit to the same degree as would be permitted for the banking entity 
to extend directly.\183\ Another commenter encouraged the agencies to 
clarify and expand the definition of debt instrument and derivatives, 
to include all tranches of debt, collateralized loan and collateralized 
debt obligations, and any derivatives related to hedging credit risk, 
such as credit default swaps and total return swaps.\184\ In addition, 
a commenter suggested clarifying that no specific credit standard 
applies to loans held by a credit fund.\185\ One commenter also urged 
the agencies to establish a safe harbor to the permissible asset 
restrictions for banking entities that rely, in good faith, on a 
representation by the credit fund that the credit fund only invests in 
permissible assets.\186\
---------------------------------------------------------------------------

    \182\ E.g., SIFMA; Arnold & Porter; and ABA. One commenter also 
noted that the permissible holding period for debt previously 
contracted varies depending on applicable regulations and suggested 
that the agencies specify the holding period for debt previously 
contracted assets owned by a credit fund and provide for an 
extension process. Arnold & Porter.
    \183\ SIFMA. The same commenter also urged the agencies to 
permit credit funds to hold commodity forward contracts, which the 
commenter argued may be an appropriate hedge for extensions of 
credit to agricultural businesses. SIFMA.
    \184\ Credit Suisse. See also Arnold & Porter (recommending 
expanding the types of permissible derivatives, to allow for more 
effective hedging and easier disposal of portfolio assets).
    \185\ ABA.
    \186\ Arnold & Porter.
---------------------------------------------------------------------------

    Two commenters recommended limiting permissible assets to only 
loans or debt instruments, and not equity.\187\ In contrast, a range of 
commenters argued that allowing a credit fund to receive certain 
assets, like equity, related to an extension of credit would promote 
the sale of loans and extensions of credit.\188\ Some of these 
commenters suggested that taking equity as partial consideration for 
extending credit is commonplace in the debt and loan markets and that 
such a provision could ensure that credit funds are able to facilitate 
loan and debt workouts and restructurings, a critical financial 
intermediation function.\189\ Most commenters supportive of the 2020 
proposal were generally opposed to a quantitative limit on the amount 
of equity securities (or rights to acquire an equity security) received 
on customary terms in connection with such loans or debt instruments 
that could be held by a credit fund, citing compliance costs and 
diminished flexibility,\190\ but some commenters indicated that a 
limitation of 20 or 25 percent of total assets could be acceptable if 
the agencies were to impose a limit.\191\
---------------------------------------------------------------------------

    \187\ Data Boiler and Better Markets. One of these commenters 
argued that the inclusion of non-loan instruments would be contrary 
to the purpose of section 13 of the BHC Act. Data Boiler. As 
indicated by the agencies in the preamble to the 2020 proposal, 
taking limited amounts of non-loan or debt assets as consideration 
for an extension of credit is common and is a permitted practice for 
insured depository institutions. Therefore, the agencies believe it 
would not be inconsistent with section 13 of the BHC Act to 
facilitate the sale of loans by establishing a credit fund exclusion 
that allows a credit fund to hold a limited amount of certain equity 
instruments related to extensions of credit. See also the discussion 
about permitting excluded loan securitizations to hold a small 
amount of non-loan assets, supra Section IV.B.2 (Loan 
Securitizations).
    \188\ E.g., SIFMA; Credit Suisse; ABA; and Arnold & Porter.
    \189\ E.g., SIFMA; Credit Suisse; and Arnold & Porter.
    \190\ SIFMA; FSF; CCMC; AIC; ABA; and Goldman Sachs.
    \191\ SIFMA and CCMC.
---------------------------------------------------------------------------

    Commenters supportive of allowing credit funds to hold certain 
related assets, such as equity, in connection with an extension of 
credit suggested that the provision would not raise significant safety 
and soundness or evasion concerns. For example, one commenter claimed 
that such a provision would not raise the risk of evasion, in part, 
because equity options received as consideration generally expire 
unexercised.\192\ Other commenters argued that the activity 
requirements of the exclusion would prevent a credit fund from becoming 
actively involved in the purchase and sale of equity instruments.\193\ 
Another commenter suggested that the agencies could impose a 
requirement that non-loan or non-debt assets be acquired on arms-length 
terms and adhere to bank safety and soundness standards.\194\
---------------------------------------------------------------------------

    \192\ Arnold & Porter.
    \193\ Goldman Sachs and FSF.
    \194\ ABA.
---------------------------------------------------------------------------

    Separately, several commenters recommended allowing excluded credit 
funds to hold any type of asset, up to a certain percentage of 
aggregate assets, either 20 or 25 percent of a credit fund's total 
assets.\195\ These commenters asserted that permitting a credit fund to 
own equity securities and other assets would help the fund more 
effectively provide credit, without altering the character of the 
credit fund, and would reduce compliance burdens associated with 
launching and operating a credit fund.\196\ In addition, these 
commenters claimed that a limited bucket for non-loan and non-debt 
assets would be consistent with the ability of banking entities and 
some business development companies to invest in equity.\197\
---------------------------------------------------------------------------

    \195\ SIFMA; FSF; Credit Suisse; ABA; and Goldman Sachs. One 
commenter also suggested a formula for determining the cap. Goldman 
Sachs.
    \196\ E.g., SIFMA and Goldman Sachs.
    \197\ Id.
---------------------------------------------------------------------------

Banking Entity and Issuer Requirements
    Generally, commenters either agreed that certain restrictions to 
ensure that a credit fund is actually engaged in prudently providing 
credit and credit

[[Page 46438]]

intermediation and is not operated for the purpose of evading the 
provisions of section 13 of the BHC Act were appropriate or did not 
object to the inclusion of these requirements.\198\ Several commenters, 
however, offered revisions to the activities, sponsor or advisor, 
banking entity, or investment and relationship limit requirements. For 
example, several commenters requested clarification on the prohibition 
on proprietary trading by an excluded credit fund contained in Sec.  
__.10(c)(15)(ii)(A) of the 2020 proposal. One commenter suggested that 
the definition of proprietary trading for a credit fund should depend 
on the definition used by the banking entity.\199\ Another commenter 
encouraged the agencies to incorporate the exclusions and exemptions 
from the prohibition on proprietary trading into the credit fund 
exclusion's prohibition on proprietary trading.\200\ A third commenter 
recommended making explicit that exercising rights for certain related 
assets, such as an equity warrant, is not proprietary trading.\201\
---------------------------------------------------------------------------

    \198\ E.g., SIFMA; Better Markets; FSF; and Goldman Sachs. One 
commenter also indicated that the disclosure requirement for banking 
entities that sponsor or advise funds is appropriate. Arnold & 
Porter.
    \199\ SIFMA. For example, the commenter suggested that a credit 
fund sponsored by a banking entity subject to the market risk rule 
should be permitted to use the definitions of proprietary trading 
and trading account in Sec.  __.3(b)(1)(ii).
    \200\ FSF.
    \201\ Arnold & Porter.
---------------------------------------------------------------------------

    Commenters also requested revisions to and clarification about the 
limits on a banking entity's investment in, and relationship with, a 
credit fund. One commenter argued that the imposition of Sec.  __.14 of 
the implementing regulations (which imposes limitations on the 
relationship between a banking entity and a fund it sponsors or 
advises) would be duplicative of (1) the requirement that the banking 
entity not, directly or indirectly, guarantee, assume, or otherwise 
insure the obligations or performance of the credit fund and (2) 
certain conflict of interest, high-risk, and safety and soundness 
restrictions.\202\ Another commenter claimed that there was little 
benefit to imposing the requirements of Sec.  __.14 (described above) 
and Sec.  __.15 (which imposes certain material conflicts of interest, 
high-risk investments, and safety and soundness and financial stability 
requirements on permitted covered fund activities) of the implementing 
regulations in the context of credit funds and suggested that the 
partial application of Sec.  __.14, in particular, could lead to 
unexpected and inappropriate outcomes, such as allowing a banking 
entity to invest in the equity of a credit fund, but not the debt 
instruments issued by that same credit fund.\203\ That same commenter 
also recommended eliminating Sec.  __.10(c)(15)(v)(B) of the 2020 
proposal--which would have required that the banking entity's 
investment in, and relationship with, the credit fund be conducted in 
compliance with, and subject to, applicable banking laws and 
regulations--because applicable banking laws and regulations apply 
regardless of the banking entity's use of the credit fund 
exclusion.\204\
---------------------------------------------------------------------------

    \202\ SIFMA.
    \203\ Arnold & Porter.
    \204\ Arnold & Porter.
---------------------------------------------------------------------------

    In addition, a commenter argued that banking entities that serve as 
investment advisers or commodity trading advisors to credit funds 
should not be subject to the disclosure and safety and soundness 
requirements of Sec.  __.10(c)(15)(iii) of the 2020 proposal since 
investment advisers and commodity trading advisors who do not otherwise 
sponsor or invest in a fund are generally not subject to section 13 of 
the BHC Act. The commenter argued that Sec.  __.10(c)(15)(iii) of the 
2020 proposal would impose differing requirements on a credit fund 
depending on whether the investment adviser or commodity trading 
advisor was an insured depository institution or a bank holding 
company. That commenter also claimed that the portfolio requirements in 
Sec.  __.10(c)(15)(iv)(B) of the 2020 proposal could require banking 
entities to establish complex compliance programs to assess credit fund 
compliance with state and foreign laws and that the agencies should 
limit the scope of the provision to only federal banking laws and 
regulations.\205\
---------------------------------------------------------------------------

    \205\ Id.
---------------------------------------------------------------------------

    Finally, one commenter contended that the application of certain 
requirements in the exclusion is contingent on the type of banking 
entity that invests in or sponsors a credit fund and urged the agencies 
to make explicit that only the identity of the sponsor of the credit 
fund, and not its affiliates or third-party investors, determines which 
portfolio quality and safety and soundness requirements apply to the 
credit fund.\206\ More generally, this commenter asked the agencies to 
make explicit in the preamble to the final rule that the actions of 
unaffiliated, third-party banking entities do not affect whether a 
banking entity may invest in a fund.\207\
---------------------------------------------------------------------------

    \206\ Id.
    \207\ Id.
---------------------------------------------------------------------------

Other Comments
    Commenters also submitted several miscellaneous comments about the 
proposed exclusion for credit funds. One commenter requested that the 
agencies clarify the definition of asset-backed securities as used in 
the proposed credit fund exclusion and the current loan securitization 
exclusion.\208\ That same commenter also urged the agencies to revise 
the proposed credit fund exclusion to allow banking entities with more 
stringent credit requirements, such as insured depository institutions, 
to invest in credit funds that hold distressed debt.\209\
---------------------------------------------------------------------------

    \208\ Id.
    \209\ Id.
---------------------------------------------------------------------------

    Finally, the 2020 proposal requested comment on whether to combine 
the proposed credit fund exclusion with the loan securitization 
exclusion. Commenters were generally opposed to combining the two 
exclusions, citing different classes of assets in which the two types 
of issuers invest and a fundamental difference in structure (loan 
securitizations issue asset-backed securities, while credit funds do 
not).\210\ In addition, one commenter argued that while combining the 
two exclusions would increase the simplicity of the rule, such an 
amalgamated exclusion could result in increased compliance burdens for 
issuers who are accustomed to the lack of credit requirements in the 
current loan securitization exclusion.\211\
---------------------------------------------------------------------------

    \210\ SIFMA; FSF; CCMC; Credit Suisse; and Data Boiler.
    \211\ Arnold & Porter.
---------------------------------------------------------------------------

iii. Final Exclusion
    After consideration of the comments, the agencies are adopting the 
credit fund exclusion as proposed, with certain modifications. The 
agencies believe that the credit fund exclusion in the final rule (1) 
addresses the application of the covered fund provisions to credit-
related activities that certain banking entities are permitted to 
engage in directly and (2) is consistent with Congress's intent that 
section 13 of the BHC Act limit banking entities' investment in and 
relationships with hedge funds and private equity funds, but not limit 
or restrict banking entities' ability to extend credit.\212\ The 
agencies also believe that the credit fund exclusion in the final rule, 
with the eligibility criteria described below, will address concerns 
the agencies expressed in the preamble to the 2013

[[Page 46439]]

rule about the ability to administer an exclusion for credit funds and 
the potential evasion of section 13 of the BHC Act.\213\ 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 
allows 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.
---------------------------------------------------------------------------

    \212\ See 12 U.S.C. 1851(g)(2), (h)(2). Paragraph (g)(2) of 
section 13 of the BHC Act makes clear that the Volcker rule is not 
intended to impede banking entities' ability to extend credit by, 
for example, selling loans or securitize loans. See 12 U.S.C. 
1851(g)(2).
    \213\ See 79 FR 5705.
---------------------------------------------------------------------------

    The credit fund exclusion limits the universe of potential funds 
that can rely on the exclusion by clearly specifying the types of 
activities in which those funds may engage. Excluded credit funds can 
transact in or hold only loans; debt instruments that would be 
permissible for the banking entity relying on the exclusion to hold 
directly; certain rights or assets that are related or incidental to 
the loans or debt instruments, including equity securities (or rights 
to acquire an equity security) received on customary terms in 
connection with such loans or debt instruments; and certain interest 
rate and foreign exchange derivatives. The credit fund exclusion, with 
these eligibility criteria, should not raise evasion concerns. 
Similarly, the agencies' expectations regarding the amount of 
permissible equity securities (or rights to acquire an equity security) 
held and the requirement that the credit fund not engage in activities 
that would constitute proprietary trading should help to ensure that 
the extensions of credit, whether directly originated or acquired from 
a third party, are held by the credit fund for the purpose of 
facilitating lending 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 criteria for the 
credit fund exclusion will prevent a banking entity from 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.
    Consistent with commenters' suggestions, the agencies are keeping 
separate the credit fund exclusion and the loan securitization 
exclusion because the structures and purposes of those two types of 
issuers differ sufficiently to warrant different requirements. For 
example, loan securitizations and credit funds have different asset 
composition and different financing and legal structures. Therefore, 
the agencies are finalizing a credit fund exclusion separate from the 
loan securitization exclusion.
Asset Requirements
    Under the final rule, a credit fund, for the purposes of the credit 
fund exclusion, is an issuer whose assets consist solely of:
     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.\214\
---------------------------------------------------------------------------

    \214\ Final rule Sec.  __.10(c)(15)(i).
---------------------------------------------------------------------------

    Several provisions of the exclusion are similar to and modeled on 
conditions in the loan securitization exclusion to ease compliance 
burdens. For example, 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.\215\ In addition, 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 credit fund exclusion, equity 
securities (or rights to acquire equity securities) received on 
customary terms in connection with the credit fund's loans or debt 
instruments.\216\
---------------------------------------------------------------------------

    \215\ Final rule Sec.  __.10(c)(15)(i)(D).
    \216\ Final rule Sec.  __.10(c)(15)(i)(C). In a minor change 
from the 2020 proposal, the agencies are making clear that rights or 
other assets held under paragraph (c)(15)(i)(C) of that section may 
not include any derivative, other than a derivative that meets the 
requirements of paragraph (c)(15)(i)(D) of that section.
---------------------------------------------------------------------------

    In the 2020 proposal, the agencies requested comment on whether to 
impose a limit on the amount of equity securities (or rights to acquire 
equity securities) that may be held by an excluded credit fund.\217\ 
After a review of the comments and further deliberation, the agencies 
are not adopting a quantitative limit on the amount of equity 
securities (or rights to acquire equity securities) that may be held by 
an excluded credit fund. Any such equity securities or rights are 
limited by the requirements that they be (a) received on customary 
terms in connection with the fund's loans or debt instruments and (b) 
related or incidental to acquiring, holding, servicing, or selling 
those loans or debt instruments. The agencies generally expect that the 
equity securities or rights satisfying those criteria in connection 
with an investment in loans or debt instruments of a borrower (or 
affiliated borrowers) would not exceed five percent of the value of the 
fund's total investment in the borrower (or affiliated borrowers) at 
the time the investment is made. The agencies understand that the value 
of those equity securities or other rights may change over time for a 
variety of reasons, including as a result of market conditions and 
business performance, as well as more fundamental changes in the 
business and the credit fund's corresponding management of the 
investment (e.g., exchanges of debt instruments for equity in 
connection with mergers and restructurings or a disposition of all 
portion of the credit investment without a corresponding disposition of 
the equity securities or rights due to differences in market conditions 
or other factors). Accordingly, the agencies can foresee various 
circumstances where the relative value of such equity securities or 
rights in a borrower (or affiliated borrowers) would over the life of 
the investment exceed five percent on a basis consistent with the 
requirements. Nonetheless, the agencies expect that the fund's exposure 
to equity securities (or other rights), individually and collectively 
and when viewed over time, would be managed on a basis consistent with 
the fund's overall purpose.
---------------------------------------------------------------------------

    \217\ 85 FR 12133.
---------------------------------------------------------------------------

    The agencies are also not imposing additional restrictions on the 
types of equity securities (or rights to acquire an equity security) 
that a credit fund may hold. The final rule prevents a banking entity 
from relying on the credit fund exclusion unless any debt instruments 
and equity securities (or rights to acquire an equity security) held by 
the credit fund and received on customary terms in connection with the 
credit fund's loans or debt instruments are permissible for the banking 
entity to acquire and hold directly and a sponsor of a credit fund must 
ensure that the credit fund complies with certain safety and soundness 
standards.\218\ Combined with the prohibition on proprietary trading by 
a credit fund,\219\ these limitations are expected to prevent evasion 
of section 13 of the BHC Act and should be sufficient to prevent

[[Page 46440]]

banking entities from investing in or sponsoring credit funds that hold 
excessively risky equity securities (or rights to acquire an equity 
security).\220\
---------------------------------------------------------------------------

    \218\ Final rule Sec.  __.10(c)(15)(iv)(B), (iii)(B).
    \219\ Final rule Sec.  __.10(c)(15)(ii)(A).
    \220\ One commenter suggested requiring that equity securities 
(or rights to acquire an equity security) be acquired via arms-
length market transactions and adhere to bank safety and soundness 
standards. See ABA. Under the final rule, a banking entity may not 
rely on the credit fund exclusion unless any equity securities (or 
rights to acquire an equity security) held by the credit fund are 
permissible for the banking entity to acquire and hold directly 
under applicable federal banking laws and regulations. Final rule 
Sec.  __.10(c)(15)(iv)(B). In addition, the final rule requires that 
equity securities (or rights to acquire an equity security) related 
or incidental to acquiring, holding, servicing, or selling such 
loans or debt instruments must be received on customary terms in 
connection with such loans or debt instruments. Final rule Sec.  
__.10(c)(15)(i)(C)(1)(iii). Finally, a banking entity's investment 
in, and relationship with, the issuer must comply with the 
limitations imposed in Sec.  __.15, as if the issuer were a covered 
fund. Final rule Sec.  __.10(c)(15)(v)(A).
---------------------------------------------------------------------------

    The agencies are, however, clarifying that the provision allowing 
related rights and other assets does not separately permit the holding 
of derivatives. The preamble to the 2020 proposal made clear that ``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.'' \221\ The agencies suggested then and currently believe 
that allowing a credit fund issuer to hold derivatives not related to 
interest rate or foreign exchange hedging would not be necessary to 
facilitate the indirect extension of credit by banking entities and may 
pose the very risks that section 13 of the BHC Act was intended to 
reach. To ensure that the credit fund exclusions does not inadvertently 
allow the holding of certain derivatives unrelated to interest rate 
and/or foreign exchange risks, the final rule explicitly excludes 
derivatives from permissible related right and other assets.\222\
---------------------------------------------------------------------------

    \221\ 85 FR 12132.
    \222\ Final rule Sec.  __.10(c)(15)(i)(C)(2).
---------------------------------------------------------------------------

    The agencies are not adopting a broad expansion of permissible 
assets, as recommended by several commenters. Contrary to commenters' 
suggestions, allowing credit funds to hold unlimited amounts of non-
debt instruments or derivatives, such as credit default or total return 
swaps, could present evasion concerns and is not necessary for 
effectuating the rule of construction.\223\ The agencies believe that 
only those instruments that facilitate the extension of credit and 
directly-related hedging activities should be permitted under the 
exclusion. For example, allowing the unlimited holding of credit 
default swaps by a majority owned or sponsored credit fund could raise 
the risks that section 13 of the BHC Act was intended to address. 
Moreover, permitting excluded credit funds to invest up to 25 percent 
of total assets in any type of asset could turn the exclusion for 
credit funds into an exclusion for the type of funds that section 13 of 
the BHC Act was intended to address. Such a result would be contrary to 
section 13 of the BHC Act.
---------------------------------------------------------------------------

    \223\ The agencies' rationale, in the preamble to the 2013 rule, 
for limiting the permissible assets for the loan securitization 
exclusion is particularly relevant. See 79 FR 5691 (``Under the 
final rule as adopted, an excluded loan securitization would not be 
able to hold derivatives that would relate to risks to 
counterparties or issuers of the underlying assets referenced by 
these derivatives because the operation of derivatives, such as 
these, that expand potential exposures beyond the loans and other 
assets, would not in the Agencies' view be consistent with the 
limited exclusion contained in the rule of construction under 
section 13(g)(2) of the BHC Act, and could be used to circumvent the 
restrictions on proprietary trading and prohibitions in section 
13(f) of the BHC Act. The Agencies believe that the use of 
derivatives by an issuing entity for asset-backed securities that is 
excluded from the definition of covered fund under the loan 
securitization exclusion should be narrowly tailored to hedging 
activities that reduce the interest rate and/or foreign exchange 
risks directly related to the asset-backed securities or the loans 
supporting the asset-backed securities because the use of 
derivatives for purposes other than reducing interest rate risk and 
foreign exchange risks would introduce credit risk without 
necessarily relating to or involving a reduction of interest rate 
risk or foreign exchange risk.'').
---------------------------------------------------------------------------

    There are several additional changes recommended by commenters that 
the agencies are not including in the final rule. Specifically, the 
final rule does not:
     Allow excluded credit funds to hold commodity forward 
contracts. Although these contracts have legitimate value as hedging 
instruments, the agencies do not believe this type of hedging activity 
is consistent with the purpose of the exclusion for credit funds, which 
is to allow banking entities to share the risks of their permissible 
lending activities or to engage in permissible lending activities 
indirectly through a fund structure.
     Permit banking entities that are insured depository 
institutions or their operating subsidiaries to invest in credit funds 
through a contribution to a credit fund of troubled loans and debt 
previously contracted assets from the banking entity's portfolio. The 
conditions in the final rule are intended to ensure that a credit fund 
generally engages in activities that the banking entity may engage in 
directly and that the banking entity's investment in and relationship 
with the fund are conducted in a safe and sound manner. The agencies 
decline to deviate from these standards for any particular type of 
credit fund because doing so could permit activities that raise the 
type of concerns that section 13 of the BHC Act was intended to 
address.
     Further specify the holding period for securities held in 
lieu of debts previously contracted held by a credit fund. Generally, a 
banking entity may not rely on this exclusion unless any debt 
instruments and equity securities (or rights to acquire equity 
securities) held by the fund would be permissible for the banking 
entity to acquire and hold directly under applicable federal banking 
laws and regulations. However, the requirement that a banking entity be 
able to hold a given asset directly does not apply to securities held 
in lieu of debts previously contracted under the final regulations. 
Because a banking entity's ability to invest in or sponsor an excluded 
credit fund is not contingent on how long the credit fund holds 
securities held in lieu of debts previously contracted, the agencies do 
not believe it is necessary to amend the regulations to impose a 
specific holding period on securities held by a credit fund in lieu of 
debts previously contracted.\224\
---------------------------------------------------------------------------

    \224\ The agencies note that banking entities must otherwise 
comply with applicable law. See infra, Additional Banking Entity 
Requirements.
---------------------------------------------------------------------------

     Revise or expand on the definition of debt instrument. The 
agencies believe that the term debt instrument already has a general 
meaning that is used in the marketplace and by regulators and that a 
new definition is unnecessary given this widely understood meaning and 
could cause confusion.
     Adopt a safe harbor for banking entities that rely, in 
good faith, on a representation by the credit fund that it only invests 
in permissible assets. It is the responsibility of the banking entity 
to ensure that it complies with section 13 of the BHC Act and the 
implementing regulations, and such responsibility cannot be substituted 
solely with a representation from a credit fund.
Activity Requirements
    The agencies are adopting the activity requirements for issuers in 
the 2020 proposal without revision. Under the final rule, a credit fund 
is not a covered fund, provided that:
     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; \225\ and
---------------------------------------------------------------------------

    \225\ Final rule Sec.  __.10(c)(15)(ii)(A).

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

[[Page 46441]]

     The fund does not issue asset-backed securities.\226\
---------------------------------------------------------------------------

    \226\ Final rule Sec.  __.10(c)(15)(ii)(B).
---------------------------------------------------------------------------

    The agencies decline to adopt changes recommended by commenters 
because the agencies believe the activity requirements are clear and 
appropriate. The first provision explicitly references the prohibition 
on proprietary trading by a banking entity in Sec.  __.3 of the 
implementing regulations and, in particular, the short-term intent 
prong contained in Sec.  __.3(b)(1)(i). For the avoidance of doubt, a 
credit fund would not be able to elect a different definition of 
proprietary trading or trading account. Varying the definition of 
proprietary trading depending on the type of banking entity that 
sponsors or invests in the credit fund, as suggested by a commenter, 
could result in conflicting requirements for credit funds with multiple 
banking entity investors and generally increase compliance burdens on 
credit funds. The agencies also note that activities permitted under 
Sec.  __.10(c)(15) generally would not be considered proprietary 
trading, provided that an excluded credit fund does not purchase or 
sell one or more financial instruments principally for the purpose of 
short-term resale, benefit from actual or expected short-term price 
movements, realize short-term arbitrage profits, or hedge one or more 
of the positions resulting from the purchases or sales of financial 
instruments.
    The agencies are not expressly incorporating the permitted 
activities in Sec. Sec.  __.4, __.5, and __.6 of the implementing 
regulations into the text of the final credit fund exclusion. The 
exclusion for credit funds is intended to allow banking entities to 
share the risks of otherwise permissible lending activities. 
Accordingly, the agencies would not expect that a credit fund would be 
formed for the purpose of engaging, or in the ordinary course would be 
engaged, in the activities permitted under Sec. Sec.  __.4, __.5, and 
__.6 of the implementing regulations. Nevertheless, to the extent that 
a credit fund seeks to engage in any of those activities as an 
exemption from the prohibition on engaging in proprietary trading, as 
defined in Sec.  __.3(b)(1)(i) of the final rule, and does so in 
compliance with the requirements and conditions of the applicable 
exemption, then the final rule would not preclude such activities.\227\ 
Similarly, with respect to the exclusions from the definition of 
proprietary trading contained in Sec.  __.3(d) of the implementing 
regulations, the agencies note that the trading activities identified 
in Sec.  __.3(d) are by definition not deemed to be proprietary 
trading, such that the performance by an excluded credit fund of those 
activities would not be inconsistent with the final credit fund 
exclusion.\228\
---------------------------------------------------------------------------

    \227\ The agencies recognize, however, that compliance with 
certain requirements and conditions in Sec. Sec.  __.4, __.5, and 
__.6 of the implementing regulations may be inapt and/or highly 
impractical in the context of a credit fund, particularly given the 
asset and activity restrictions contained in Sec.  __.10(c)(15). For 
example, the exemptions for underwriting and market making-related 
activities in Sec.  __.4 require that a banking entity relying on 
such exemptions, among other things, be licensed or registered to 
engage in the applicable activity in accordance with applicable law. 
Moreover, to the extent that a credit fund is a banking entity with 
significant trading assets and liabilities (i.e., because it, 
together with its affiliates and subsidiaries, has trading assets 
and liabilities that equal or exceed $20 billion over the four 
previous calendar quarters), it also would be required to maintain a 
separate compliance program specific to those exemptions.
    \228\ Similarly, trading activity that satisfies the 60-day 
rebuttable presumption in Sec.  __.3(b)(4) would be presumed not to 
be proprietary trading for these purposes.
---------------------------------------------------------------------------

    Finally, the agencies are not revising the definition of ``asset-
backed security'' in the implementing regulations. The definition of 
``asset-backed security'' in the implementing regulations specifically 
refers to the meaning specified in section 3(a)(79) of the Exchange Act 
(15 U.S.C. 78c(a)(79)).\229\ This definition is used elsewhere in 
banking law,\230\ and banking entities and others in the loan 
securitization industry have adapted their operations in reliance of 
the definition contained in the Exchange Act. Moreover, the 2013 rule 
included the requirement that the fund issue asset backed securities as 
part of the loan securitization criteria, and banking entities have 
become familiar with this definition, as they have implemented and 
utilized the exclusion.
---------------------------------------------------------------------------

    \229\ Implementing regulations Sec.  __.10(d)(2).
    \230\ See 12 CFR 244 (Credit Risk Retention).
---------------------------------------------------------------------------

Requirements for a Sponsor, Investment Adviser, or Commodity Trading 
Advisor

    The agencies are adopting the proposed requirements for a sponsor, 
investment adviser, or commodity trading advisor to an excluded credit 
fund with one modification.
    Investors in a credit fund that a banking entity sponsors or for 
which the banking entity serves as an investment adviser or commodity 
trading advisor may have expectations related to the performance of the 
credit fund that raise bailout concerns. To ensure that these investors 
are adequately informed of the banking entity's role in the credit 
fund, the final rule requires a banking entity that acts as a sponsor, 
investment adviser, or commodity trading advisor to an excluded credit 
fund to provide prospective and actual investors the disclosures 
specified in Sec.  __.11(a)(8) of the implementing regulations.\231\
---------------------------------------------------------------------------

    \231\ Final rule Sec.  __.10(c)(15)(iii)(A). These disclosures 
include, among other things, that losses are borne solely by 
investors and not the banking entity, that investors should examine 
fund documents, and that ownership interests are not insured by the 
FDIC or guaranteed. Final rule Sec.  __.11(a)(8).
---------------------------------------------------------------------------

    Second, a banking entity that acts as a sponsor, investment 
adviser, or commodity trading advisor must 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.\232\ The agencies note, 
contrary to the suggestion of a commenter, that this provision does not 
apply to any investment adviser or commodity trading advisor to a 
credit fund who does not also sponsor or acquire an ownership interest 
in the credit fund. Rather, the requirements in Sec.  __.10(c)(15) 
apply only to a sponsor, investment adviser, or commodity trading 
adviser that relies on the exclusion to sponsor or acquire an ownership 
interest in the credit fund. The covered fund provisions in Sec.  __.10 
of the implementing regulations only affect the operations of banking 
entities that, as principal, directly or indirectly, acquire or retain 
any ownership interest in or sponsor a covered fund.\233\ Thus, the 
safety and soundness provision only applies to banking entities that 
sponsor an excluded credit fund or that have an ownership interest in 
an excluded credit fund and also serve as an investment adviser or 
commodity trading advisor to the fund.
---------------------------------------------------------------------------

    \232\ Final rule Sec.  __.10(c)(15)(iii)(B).
    \233\ Implementing regulations Sec.  __.10(a)(1).
---------------------------------------------------------------------------

    More generally, to clarify an issue raised by some commenters, the 
agencies note that whether a specific banking entity may use the credit 
fund exclusion to make or have an otherwise impermissible investment in 
or relationship with a credit fund is contingent on the permissible 
activities of the banking entity. That is, the same fund may be a 
covered fund with respect to one banking entity and an excluded credit 
fund with respect to a different banking entity. A banking entity 
continues to be responsible for ensuring that its particular 
investment, sponsorship, or adviser activities comply with section 13 
of the BHC Act and its implementing regulations. This principle applies 
to paragraphs (iii), (iv), and (v) of the credit fund exclusion.

[[Page 46442]]

    The final rule moves the requirement that the banking entity must 
comply with Sec.  __.14 of the implementing regulations to Sec.  
__.10(c)(15)(iii). This organizational change is in response to 
commenters that requested the agencies confirm that that the Sec.  
__.14 limitations do not apply to a banking entity that merely invests 
in a credit fund, as opposed to a banking entity that sponsors or 
advises the fund. The agencies believe this change is appropriate 
because the limitations on banking entities' relationships with a 
covered fund in Sec.  __.14 only apply when a banking entity serves, 
directly or indirectly, as the investment manager, investment adviser, 
commodity trading advisor, or sponsor to a covered fund.\234\ In 
addition, the agencies appreciate that mere investment by a banking 
entity in a credit fund does not raise the type of concerns Super 23A 
was intended to address, and thus the agencies are applying Sec.  __.14 
only when a banking entity acts as a sponsor, investment adviser, or 
commodity trading advisor to a credit fund, in each case as though the 
credit fund were a covered fund.\235\ The limitations in Sec.  __.15 of 
the implementing regulations regarding material conflicts of interest, 
high-risk investments, and safety and soundness and financial stability 
remain applicable to banking entities' investment in, and relationship 
with, excluded credit funds.
---------------------------------------------------------------------------

    \234\ Final rule Sec.  __.14(a)(1).
    \235\ Final rule Sec.  __.10(c)(15)(iii)(C).
---------------------------------------------------------------------------

Additional Banking Entity Requirements

    As provided in the 2020 proposal, a banking entity may not rely on 
the credit fund exclusion if it guarantees the performance of the 
fund.\236\ In a revision to the 2020 proposal, under the final rule a 
banking entity may not rely on the credit fund exclusion if the fund 
holds any debt instruments or equities (or rights to acquire an equity 
security) received on customary terms in connection with loans or debt 
instruments held by the credit fund that the banking entity is not 
permitted to acquire and hold directly under applicable federal banking 
laws and regulations.\237\ This change is to clarify, as suggested by a 
commenter, that this requirement is specific only to federal banking 
laws and regulations. Whether a credit fund's holdings are permissible 
for a banking entity to hold under state or foreign laws is not 
relevant to compliance with section 13 of the BHC Act. That said, the 
agencies note that banking entities must comply with the laws of the 
jurisdiction applicable to its activities and operations and should be 
cognizant of whether a credit fund it sponsors or in which it invests 
complies with the laws of the jurisdictions in which the credit fund 
operates.\238\
---------------------------------------------------------------------------

    \236\ Final rule Sec.  __.10(c)(15)(iv).
    \237\ Final rule Sec.  __.10(c)(15)(iv)(B).
    \238\ For example, banking entities that are organized under 
state or foreign laws may, depending on the nature of the 
organization, need to comply with other laws.
---------------------------------------------------------------------------

Investment and Relationship Limits

    Finally, the agencies are adopting the proposed provisions related 
to a banking entity's investment in and relationship with a credit fund 
with one revision. Under the final rule, a banking entity's investment 
in, and relationship with, the issuer must comply with the limitations 
in Sec.  __.15 of the implementing regulations 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.\239\
---------------------------------------------------------------------------

    \239\ Final rule Sec.  __.10(c)(15)(v)(A).
---------------------------------------------------------------------------

    In addition, a banking entity's investment in, and relationship 
with, a credit fund must be conducted in compliance with, and subject 
to, applicable banking laws and regulations, including the safety and 
soundness standards applicable to the banking entity.\240\ The agencies 
believe it is important to highlight that the requirements applicable 
to the banking entity also govern the ability of the banking entity to 
invest in a fund that relies on the credit fund exclusion as well as 
the types of transactions that a banking entity may conduct with such 
funds.\241\ This means, for example, that a banking entity that invests 
in or has a relationship with a credit fund is subject to capital 
charges and other requirements under applicable banking law.\242\
---------------------------------------------------------------------------

    \240\ Final rule Sec.  __.10(c)(15)(v)(B).
    \241\ The agencies also note that Sec.  __.10(c)(15)(v)(B) does 
not impose any additional burdens and should not generate confusion.
    \242\ 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.
---------------------------------------------------------------------------

2. Venture Capital Funds
i. Venture Capital Funds

2020 Proposal

    The 2020 proposal included an exclusion for ``qualifying venture 
capital funds.'' \243\ As described in the 2020 proposal, venture 
capital funds that provide capital to small and start-up businesses are 
covered funds unless they can rely on an exclusion other than section 
3(c)(1) or 3(c)(7) to avoid registration under the Investment Company 
Act of 1940 (Investment Company Act) or qualify for an exclusion under 
the implementing regulations.
---------------------------------------------------------------------------

    \243\ 2020 proposal Sec.  __.10(c)(16).
---------------------------------------------------------------------------

    Under the 2020 proposal, the exclusion would have been available to 
``qualifying venture capital funds,'' which the 2020 proposal defined 
as an issuer that meets the definition in 17 CFR 275.203(l)-1 (Rule 
203(l)-1), as well as several additional criteria. Specifically, the 
agencies proposed to exclude from the definition of covered fund an 
issuer that:
     Is a venture capital fund as defined in Rule 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 sponsor, investment 
adviser, or commodity trading advisor to the issuer, and that relies on 
the exclusion to sponsor or acquire an ownership interest in the 
qualifying venture capital fund, the banking entity would have been 
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 the 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 relied on the exclusion would 
not have been permitted, directly or indirectly, to guarantee, assume, 
or otherwise insure the obligations or performance of the issuer. 
Finally, the 2020 proposal would have required 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.

[[Page 46443]]

Comments

    Several commenters supported an exclusion for venture capital 
funds.\244\ Some of these commenters argued the Volcker Rule has 
severely impacted investment in venture funds and businesses and that 
venture capital is a critical financing source for innovative 
businesses.\245\ These commenters described their view of the positive 
economic impact of venture capital investment.\246\ For example, these 
commenters said companies funded with venture capital promote research 
and development and job creation.\247\ Similarly, several commenters 
argued that venture capital investments by banking entities can 
contribute to economic growth, innovation, and job creation.\248\ At 
least one commenter said increased venture capital investment may 
increase employment by small employers.\249\
---------------------------------------------------------------------------

    \244\ Representatives Gonzalez, Steil, Stivers, Barr, Hill, 
Riggleman, Zeldin, Davidson, Budd, Gooden, Rose, Emmer, Timmons, 
Posey, Kustoff, and Loudermilk (Gonzalez et al.); Crapo; FSF; SIFMA; 
CCMC; IIB; Goldman Sachs; Credit Suisse; AIC; National Venture 
Capital Association (NVCA); ABA; and SAF.
    \245\ E.g., Gonzalez et al. and NVCA.
    \246\ Gonzalez et al.; NVCA; and CCMC.
    \247\ Id.
    \248\ E.g., FSF; SIFMA; and Goldman Sachs.
    \249\ SAF.
---------------------------------------------------------------------------

    Several commenters said an exclusion for venture capital funds 
would benefit underserved regions where venture capital funding is not 
readily available currently.\250\ One commenter said venture capital 
fund sizes are often too small for institutional investors, and banks 
have historically served an important source of investment for small 
and regional venture capital funds.\251\ This commenter said the loss 
of banking entities as limited partners in venture capital funds has 
had a disproportionate impact on cities and regions with emerging 
entrepreneurial ecosystems areas outside of Silicon Valley and other 
traditional technology centers.\252\ Two commenters noted that an 
exclusion for venture capital funds would promote investments in and 
financing to small businesses and start-ups in a broad range of 
geographic areas, industries, and sectors.\253\
---------------------------------------------------------------------------

    \250\ FSF; SIFMA; CCMC; and NVCA.
    \251\ NVCA.
    \252\ Id.
    \253\ FSF and SIFMA.
---------------------------------------------------------------------------

    Commenters said that an exclusion for venture capital funds would 
promote the safety and soundness of banking entities.\254\ One 
commenter said the exclusion would allow banks to diversify and to 
compete with non-banking entities.\255\ Commenters also said that the 
proposed exclusion allows banking entities to make investments 
indirectly through a fund structure that they could make directly \256\ 
and incorporates criteria and activity restrictions that address any 
concerns about safety and soundness or evasion.\257\
---------------------------------------------------------------------------

    \254\ FSF; SIFMA; and Goldman Sachs.
    \255\ SIFMA.
    \256\ NVCA.
    \257\ FSF and SIFMA.
---------------------------------------------------------------------------

    Several commenters supported defining a qualifying venture capital 
fund by reference to Rule 203(l)-1 as proposed.\258\ These commenters 
also said the rule should not incorporate additional criteria as 
discussed in the preamble to the 2020 proposal, such as additional 
limitations on revenues or qualifying investments.\259\ These 
commenters said additional criteria are unnecessary to ensure that the 
fund is a bona fide venture capital fund and could unnecessarily limit 
the scope of qualifying venture capital funds.\260\ On the other hand, 
one commenter said the rule should include additional criteria to 
ensure qualifying venture capital funds serve the public interest and 
do not cause the harms at which section 13 of the Bank Holding Company 
Act was directed.\261\ One commenter argued defining venture capital 
fund by reference to Rule 203(l)-1 would be too narrow because it would 
exclude shares of emerging growth companies (EGCs) from being 
classified as qualifying investments and would not reflect certain 
companies that operate as venture investors and are exempt from having 
to register as an investment company but may not meet the technical 
definition of a venture capital fund under Rule 203(l)-1 (e.g., startup 
incubators).\262\
---------------------------------------------------------------------------

    \258\ SIFMA; NVCA; FSF; and ABA.
    \259\ SIFMA; NVCA; FSF; and ABA.
    \260\ Id.
    \261\ Better Markets.
    \262\ CCMC.
---------------------------------------------------------------------------

    While supporting an exclusion for qualifying venture capital funds 
generally, a few commenters recommended revisions to the proposed 
exclusion.\263\ Some commenters proposed changes to the requirement 
that the fund not engage in any activity that would constitute 
proprietary trading, under Sec.  __.3(b)(1)(i), as if it were a banking 
entity.\264\ One of these commenters said qualifying venture capital 
funds should be permitted to engage in permitted proprietary trading 
consistent with Sec. Sec.  __.4, __.5, and __.6 of the implementing 
regulations.\265\ Another commenter said the definition of proprietary 
trading for funds should be the same as the definition that applies to 
the banking entity and that having two definitions is not reasonable or 
cost-effective.\266\
---------------------------------------------------------------------------

    \263\ FSF and SIFMA.
    \264\ FSF and SIFMA.
    \265\ FSF.
    \266\ SIFMA.
---------------------------------------------------------------------------

    Commenters also supported changes to the requirement that the 
banking entity's investment in and relationship with qualifying venture 
capital funds must comply with Sec.  __.14 of the implementing 
regulations. One commenter recommended eliminating the requirement that 
would apply Sec.  __.14 to a banking entity's relationship with a 
venture capital fund.\267\ This commenter said that other proposed 
conditions adequately address bailout and safety and soundness 
concerns.\268\ Other commenters said the agencies should clarify that 
Sec.  __.14 does not apply to a banking entity that simply invests in a 
qualifying venture capital fund (as opposed to a banking entity that 
sponsors or advises the fund).\269\
---------------------------------------------------------------------------

    \267\ SIFMA.
    \268\ Id.
    \269\ NVCA and ABA.
---------------------------------------------------------------------------

    Other commenters did not support the proposed exclusion for 
qualifying venture capital funds.\270\ One of these commenters said if 
the agencies do adopt an exclusion for qualifying venture capital 
funds, the exclusion must include additional requirements to ensure 
that excluded venture capital funds serve the public interest and do 
not cause the harms at which section 619 of the Dodd-Frank Act was 
directed. Specifically, this commenter said the rule should: (1) 
Restrict all fund investments to ``qualifying investments'' or at least 
very significantly restrict investments in non-qualifying investments 
(e.g., limit them to no more than five percent of the fund's aggregate 
capital), (2) impose a minimum securities holding period and portfolio 
company revenue limitation of $35 million (or a similarly appropriate 
and low figure) to ensure the fund is truly focused on medium-to-long 
term venture (as opposed to growth stage) investments, and (3) 
quantitatively limit the use of leverage as a key means for 
distinguishing excluded venture capital funds from statutorily 
prohibited activities involving private equity funds.\271\
---------------------------------------------------------------------------

    \270\ Better Markets and Data Boiler. Another commenter said an 
exemption for venture capital funds was not supported by the 2020 
proposal and not permitted under the law. Occupy.
    \271\ Better Markets.

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

[[Page 46444]]

Final Exclusion

    The final rule adopts the proposed exclusion for qualifying venture 
capital funds with one clarifying change. The exclusion for qualifying 
venture capital funds will be available to an issuer that:
     Is a venture capital fund as defined in Rule 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. \272\
---------------------------------------------------------------------------

    \272\ Final rule Sec.  __.10(c)(16)(i).
---------------------------------------------------------------------------

    With respect to any banking entity that acts as sponsor, investment 
adviser, or commodity trading advisor to the issuer, and that relies on 
the exclusion to sponsor or acquire an ownership interest in the 
qualifying venture capital fund, the banking entity will 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;
     Ensure that the activities of the issuer are consistent 
with the safety and soundness standards that are substantially similar 
to those that would apply if the banking entity engaged in the 
activities directly; and
     Comply with the restrictions imposed in Sec.  __.14 
(except the banking entity may acquire and retain any ownership 
interest in the issuer), as if the issuer were a covered fund.\273\
---------------------------------------------------------------------------

    \273\ Final rule Sec.  __.10(c)(16)(ii).
---------------------------------------------------------------------------

    Like the 2020 proposal, a banking entity that relies on the 
exclusion may not, directly or indirectly, guarantee, assume, or 
otherwise insure the obligations or performance of the issuer.\274\
---------------------------------------------------------------------------

    \274\ Final rule Sec.  __.10(c)(16)(iii).
---------------------------------------------------------------------------

    Finally, like the 2020 proposal, the final rule requires a banking 
entity's ownership interest in or relationship with a qualifying 
venture capital fund to:
     Comply with the limitations imposed in 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.\275\
---------------------------------------------------------------------------

    \275\ Final rule Sec.  __.10(c)(16)(iv).
---------------------------------------------------------------------------

    The agencies believe the exclusion for qualifying venture capital 
funds will support capital formation, job creation, and economic 
growth, particularly with respect to small businesses and start-up 
companies. These banking entity investments in qualifying venture 
capital funds can benefit the broader financial system by improving the 
flow of financing to small businesses and start-ups. The agencies 
expect that the new exclusion for qualifying venture capital funds will 
provide banking entities with an additional avenue for providing 
funding to smaller businesses, which can help to support job creation 
and economic growth.
    As described further below, the requirements of the exclusion, 
including the SEC's definition of venture capital fund in Rule 203(l)-
1, address the concerns the agencies expressed in the preamble to the 
2013 rule that the activities and risk profiles of 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 
determined these requirements will 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.
    An exclusion for qualifying venture capital funds is permitted by 
the statutory language of section 13 of the BHC Act. As the agencies 
discussed in the preamble to the 2013 final rule, the language, 
structure, and purpose of section 13 of the BHC Act authorize the 
agencies to adopt a tailored definition of ``covered fund'' that 
focuses on vehicles used for purposes that were the target of the funds 
prohibition.\276\ The agencies do not believe the fact that Congress 
expressly distinguished venture capital funds from other types of 
private funds in other contexts is dispositive. In this context, the 
agencies 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 exclusion. Rather, the text of section 619 and the Dodd-
Frank Act as a whole indicate that venture capital funds were not the 
intended target of the funds prohibition. The plain language of the 
statutory prohibition applies to hedge funds and private equity 
funds.\277\ This language is silent with respect to venture capital 
funds. In Title IV of the Dodd-Frank Act, Congress mandated specific 
treatment for venture capital funds for purposes of the registration 
requirements under the Investment Advisers Act of 1940 (``Advisers 
Act'').\278\ This provision suggests that Congress knew how to accord 
specific treatment for venture capital funds. Yet, Congress did not 
list venture capital funds among the types of funds that were 
restricted under section 13.\279\ That Congress did not intend to 
prohibit venture capital fund investments is further supported by the 
legislative history of section 13, in which several Members of Congress 
specifically addressed venture capital funds in the context of the 
funds prohibition.\280\
---------------------------------------------------------------------------

    \276\ 79 FR 5671.
    \277\ 12 U.S.C. 1851(a)(1)(B).
    \278\ 15 U.S.C. 80b-3(l).
    \279\ In the preamble to the 2013 final rule, the agencies cited 
to Congressional reports related to Title IV that characterized 
venture capital funds as ``a subset of private investment funds 
specializing in long-term equity investment in small or start-up 
businesses.'' 79 FR 5704 (quoting S. Rep. No. 111-176 (2010)). 
However, there is no indication in the statutory text itself that 
Congress intended to treat venture capital funds identically to 
private equity funds. Moreover, 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''). The difference between these two 
terms--specifically, the broader term ``private funds'' used in 
Title IV--may indicate why Congress found it necessary to exclude 
venture capital explicitly in section 407 but not in section 619.
    \280\ 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. 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) . . .''); and 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.'').
---------------------------------------------------------------------------

    Like the 2020 proposal, the final rule incorporates the definition 
of venture capital fund from Rule 203(l)-1. Most commenters accepted or 
supported the proposed approach to incorporate the definition of 
venture capital fund in Rule 203(l)-1.\281\ For the reasons discussed 
in the 2020 proposal,\282\ the agencies believe this definition

[[Page 46445]]

accurately identifies venture capital funds and addresses the concerns 
the agencies identified in declining to adopt an exclusion for venture 
capital funds in the 2013 rule.
---------------------------------------------------------------------------

    \281\ SIFMA; NVCA; FSF; ABA; and Goldman Sachs.
    \282\ 85 FR 12135-12136.
---------------------------------------------------------------------------

    The SEC has defined ``venture capital fund'' as any private fund 
\283\ that:
---------------------------------------------------------------------------

    \283\ 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, 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, and has not elected to be treated as a business 
development company pursuant to section 54 of that Act.\284\
---------------------------------------------------------------------------

    \284\ 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).\285\
---------------------------------------------------------------------------

    \285\ 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.\286\ 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 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.\287\
---------------------------------------------------------------------------

    \286\ 17 CFR 275.203(l)-1(c)(4).
    \287\ 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 regulation 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.\288\ 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.\289\ 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.\290\
---------------------------------------------------------------------------

    \288\ 76 FR 39656.
    \289\ 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'').
    \290\ 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.'').
---------------------------------------------------------------------------

    This definition of venture capital fund 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. Further, 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 the public markets.\291\ These 
characteristics 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.
---------------------------------------------------------------------------

    \291\ 76 FR 39662.
---------------------------------------------------------------------------

    One commenter said requiring that a fund satisfy the requirements 
of Rule 203(l)-1 would have the effect of making the exclusion too 
narrow. This commenter said the exclusion for qualifying venture 
capital funds should permit investments in EGCs and, more generally, 
should ``reflect the evolving nature of the venture capital industry 
and not rely solely on the existing SEC definition.'' \292\ The final 
rule does not modify the requirement that a qualifying venture capital 
fund must satisfy the requirements of Rule 203(l)-1. These requirements 
focus the exclusion on the types of less mature and start-up portfolio 
companies that characterize traditional venture capital activities. At 
the same time, the definition of qualifying venture capital fund does 
not preclude investments in EGCs because a qualifying venture capital 
fund could make investments in EGCs within the 20 percent limit for 
non-qualifying investments. Because the requirement that a qualifying 
venture capital fund

[[Page 46446]]

must satisfy the requirements of Rule 203(l)-1 does not preclude 
investments in EGCs and helps to distinguish qualifying venture capital 
funds from the type of funds that section 13 of the BHC Act was 
intended to restrict, the agencies have determined to adopt the 
requirement that a qualifying venture capital fund must be a venture 
capital fund as defined in Rule 203(l)-1.
---------------------------------------------------------------------------

    \292\ CCMC.
---------------------------------------------------------------------------

    The final rule adopts the requirement that a qualifying venture 
capital fund may not engage in any activity that would constitute 
proprietary trading under Sec.  __.3(b)(1)(i), as if the issuer were a 
banking entity.\293\ As described in the 2020 proposal, this 
requirement helps to promote the specific purposes of section 13 of the 
BHC Act.\294\ The agencies are not adopting any changes to this 
requirement, as recommended by some commenters. The agencies are not 
expressly incorporating the permitted activities in Sec. Sec.  __.4, 
__.5, and __.6 of the implementing regulations into the text of the 
qualifying venture capital fund exclusion. The exclusion for qualifying 
venture capital funds is intended to allow banking entities to share 
the risks of otherwise permissible long-term venture capital 
activities. Accordingly, the agencies would not expect that a 
qualifying venture capital fund would be formed for the purpose of 
engaging, or in the ordinary course would be engaged, in the activities 
permitted under Sec. Sec.  __.4, __.5, and __.6 of the implementing 
regulations. Moreover, such activities could reflect a purpose other 
than making long-term venture capital investments. Nevertheless, to the 
extent that a qualifying venture capital fund seeks to engage in any of 
those activities as an exemption from the prohibition on engaging in 
proprietary trading, as defined in Sec.  __.3(b)(1)(i) of the final 
rule, and does so in compliance with the requirements and conditions of 
those permitted activities, then the final rule would not preclude such 
activities.\295\ Similarly, with respect to the exclusions from the 
definition of proprietary trading in Sec.  __.3(d) of the implementing 
regulations, the agencies note that that the trading activities 
identified in Sec.  __.3(d) are by definition not deemed to be 
proprietary trading, such that the performance by an qualifying fund of 
those activities would not be inconsistent with the final qualifying 
venture capital fund exclusion.\296\
---------------------------------------------------------------------------

    \293\ Final rule Sec.  __.10(c)(16)(i)(B).
    \294\ 85 FR 12136.
    \295\ As the agencies noted in the discussion of the final 
credit fund exclusion, compliance with certain requirements and 
conditions in __.4, __.5, and __.6 of the implementing regulations 
may be inapt and/or highly impractical in the context of a 
qualifying venture capital fund, particularly given the activity 
restrictions contained in Sec.  __.10(c)(16). For example, the 
exemptions for underwriting and market making-related activities in 
__.4 require that a banking entity relying on such exemptions, among 
other things, be licensed or registered to engage in the applicable 
activity in accordance with applicable law. Moreover, to the extent 
that a qualifying venture capital fund is a banking entity with 
significant trading assets and liabilities (i.e., because it, 
together with its affiliates and subsidiaries, has trading assets 
and liabilities that equal or exceeds $20 billion over the four 
previous calendar quarters), it also would be required to maintain a 
separate compliance program specific to those exemptions.
    \296\ Similarly, and consistent with the discussion of the final 
credit fund exclusion, trading activity that satisfies the 60-day 
rebuttable presumption in Sec.  __.3(b)(4) would be presumed not to 
be proprietary trading for these purposes.
---------------------------------------------------------------------------

    The final rule does not define proprietary trading by reference to 
the prong of paragraph __.3(b)(1) that would apply to the banking 
entity, as recommended by some commenters, because the agencies do not 
believe this change would be effective or simplify the exclusion. 
Unlike some banking entities, venture capital funds (that are not 
themselves banking entities) are not subject to the market risk capital 
rule, and thus there is generally no need to evaluate a venture capital 
fund's investments under the market risk capital framework. Moreover, 
applying the prong that would apply to the relevant banking entity 
could result in one venture capital fund becoming subject to both 
prongs. The agencies believe this would complicate evaluation of a 
qualifying venture capital fund's eligibility for the exclusion, both 
for banking entities and the agencies. The agencies do not agree with 
one commenter's argument that requiring funds sponsored by banking 
entities that are subject to the market risk capital rule test to apply 
the short-term intent test for purposes of the covered funds provisions 
would introduce unnecessary complexity and compliance costs for these 
banking entities. As the agencies described in the preamble to the 2019 
final rule, the Federal banking agencies' market risk capital rule 
\297\ incorporates the same short-term intent standard as the short-
term intent test in Sec.  __.3(b)(1)(i).\298\ Therefore, market risk 
capital rule covered banking entities continue to apply the short-term 
intent standard as part of their compliance with the market risk 
capital rule. Similar processes may be employed to apply the short-term 
intent standard to qualifying venture capital funds.
---------------------------------------------------------------------------

    \297\ See 12 CFR part 3, subpart F; part 217, subpart F; part 
324, subpart F.
    \298\ 84 FR 61986.
---------------------------------------------------------------------------

    The final rule adopts the requirement that a banking entity that 
serves as a sponsor, investment adviser, or commodity trading advisor 
to a qualifying venture capital fund may not rely on the exclusion for 
qualifying venture capital funds unless it provides the disclosures 
required under Sec.  __.11(a)(8) to prospective and actual investors in 
the fund. This requirement promotes one of the purposes of section 13 
of the BHC Act, which is to prevent banking entities from bailing out 
funds that they sponsor or advise. The final rule also adopts the 
requirement that a banking entity that serves as a sponsor, investment 
adviser, or commodity trading advisor to a qualifying venture capital 
fund must ensure the activities of the qualifying venture capital fund 
are consistent with safety and soundness standards that are 
substantially similar to those that would apply if the banking entity 
engaged in the activity directly. Therefore, a banking entity may not 
rely on this exclusion to sponsor or invest in 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.
    In the final rule, the requirement that the banking entity must 
comply with Sec.  __.14 of the implementing regulations is moved to 
Sec.  __.10(c)(16)(ii). This change clarifies that this requirement 
applies to a banking entity that acts as sponsor, investment adviser, 
or commodity trading adviser to the qualifying venture capital fund and 
does not apply to a banking entity that merely invests in a qualifying 
venture capital fund.
    The final rule does not eliminate the requirement that a banking 
entity's investment in or relationship with a qualifying venture 
capital fund must comply with Sec.  __.14 of the implementing 
regulations, as recommended by one commenter. The agencies do not agree 
that applying the requirements of Sec.  __.14 is duplicative of the 
requirement that the banking entity not directly or indirectly 
guarantee, assume, or otherwise insure the obligations or performance 
of the issuer. In addition to prohibiting guarantees, Sec.  __.14 also 
prohibits other types of transactions that function as extensions of 
credit or that could raise the type of bail-out concerns that section 
13 of the BHC Act was intended to address. The agencies also do not 
agree that applying the requirements of Sec.  __.14 is duplicative of 
the requirement that the banking entity's investment in and 
relationships with

[[Page 46447]]

the qualifying venture capital fund must comply with the backstop 
provisions in Sec.  __.15. The backstop provisions in Sec.  __.15 
address high-risk assets and high-risk trading strategies, and material 
conflicts of interest, but do not address extensions of credit that may 
not entail a ``substantial financial loss'' to the banking entity. The 
agencies do not expect that applying Sec.  __.14 to a banking entity 
that sponsors or advises a qualifying venture capital fund will unduly 
interfere with the effectiveness of the exclusion. The final rule 
incorporates revisions to Sec.  __.14 that will improve banking 
entities' ability to enter into certain ordinary course transactions 
with sponsored and advised funds.\299\ The agencies expect these 
changes will mitigate concerns that applying the requirements of Sec.  
__.14 to qualifying venture capital funds will limit the exclusion's 
utility.\300\
---------------------------------------------------------------------------

    \299\ See infra, Section IV.D (Limitations on Relationships with 
a Covered Fund).
    \300\ The commenter that recommended eliminating the requirement 
that the banking entity's investment in or relationship with a 
qualifying venture capital fund said that doing so would ``limit the 
utility and related benefits of the qualifying venture capital fund 
exclusion, regardless of the proposed new exceptions to Super 23A.'' 
SIFMA. However, the commenter did not provide any examples or 
further explain how the utility of the exclusion would be impacted.
---------------------------------------------------------------------------

    The final rule adopts the requirement that the banking entity must 
not guarantee, assume, or otherwise insure the obligations or 
performance of a qualifying venture capital fund.\301\ The final rule 
also adopts the requirements that a banking entity's ownership in or 
relationship with a qualifying venture capital fund must comply with 
the limitations in 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.\302\ These requirements 
promote several of the purposes of section 13 of the BHC Act. The 
requirement that the banking entity not guarantee, assume, or otherwise 
ensure the obligations or performance of a qualifying venture capital 
fund promotes the purpose of preventing banking entities from bailing 
out the fund. The requirements that a banking entity's ownership in or 
relationship with a qualifying venture capital fund must comply with 
the limitations in 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, prevent a qualifying venture 
capital fund from being used to expose a 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. To 
the extent a fund would expose a banking entity to a high-risk assets 
or a high-risk trading strategy, 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.
---------------------------------------------------------------------------

    \301\ Final rule Sec.  __.10(c)(16)(iii).
    \302\ Final rule Sec.  __.10(c)(16)(iv).
---------------------------------------------------------------------------

    The agencies do not believe that any additional conditions to the 
exclusion for qualifying venture capital funds are necessary. One 
commenter said that the exclusion should (1) restrict all fund 
investments to ``qualifying investments'' or at least very 
significantly restrict investments in non-qualifying investments (e.g., 
limit them to no more than five percent of the fund's aggregate 
capital), (2) impose a minimum securities holding period and portfolio 
company revenue limitation of $35 million (or a similarly appropriate 
and low figure) to ensure the fund is truly focused on medium-to-long 
term venture (as opposed to growth stage) investments, and (3) 
quantitatively limit the use of leverage as a key means for 
distinguishing excluded venture capital funds from statutorily 
prohibited activities involving private equity funds.\303\ The agencies 
have determined not to impose any additional criteria for the reasons 
discussed below.
---------------------------------------------------------------------------

    \303\ Better Markets.
---------------------------------------------------------------------------

    First, the agencies decline to limit a qualifying venture capital 
fund's non-qualifying investments to five percent or less of total 
assets. The agencies agree with commenters that it is necessary to 
provide some amount of flexibility for a venture capital fund to make 
investments that deviate from the typical form of venture capital 
investment activity. For example, the agencies understand that certain 
common venture capital fund activities, such as secondary acquisition 
of portfolio company shares from founders, are not qualifying 
investments under Rule 203(l)-1. The agencies agree with commenters, as 
well as with the rationale the SEC provided in the 2011 adopting 
release, that said providing flexibility for this type of non-
qualifying investment is consistent with the overall goal of 
identifying funds engaged in a venture capital strategy. In making this 
determination, the agencies find it significant that the SEC considered 
this issue as part of its 2011 rulemaking and concluded that a 20 
percent bucket for non-qualifying investments was appropriate.\304\ 
Moreover, all activities of a qualifying venture capital fund, 
including any investments that would be non-qualifying investments 
under Rule 203(l)-1, will be subject to the other requirements in Sec.  
__.10(c)(16), including the requirement that the fund not engage in 
proprietary trading and not result in a material exposure by the 
banking entity to a high-risk asset or high-risk trading strategy.
---------------------------------------------------------------------------

    \304\ 76 FR 39683.
---------------------------------------------------------------------------

    The agencies also decline to impose additional requirements, such 
as a minimum securities holding period or a portfolio company revenue 
limitation. The agencies believe a minimum securities holding period is 
unnecessary in light of the requirements that the fund (1) represent to 
investors and potential investors that it pursues a venture capital 
strategy \305\ and (2) not engage in any activity that would constitute 
proprietary trading under Sec.  __.3(b)(1)(i), as if it were a banking 
entity.\306\
---------------------------------------------------------------------------

    \305\ 17 CFR 275.203(l)-(1)(a)(1).
    \306\ Final rule Sec.  __.10(c)(16)(i)(B).
---------------------------------------------------------------------------

    The agencies also considered whether to include a portfolio company 
revenue limitation, as discussed in the preamble to the 2020 proposal. 
Most commenters did not support imposing a revenue limitation, while 
one commenter supported imposing a limitation of $35 million. After 
considering all comments received, the agencies determined that a 
revenue limit could unnecessarily disadvantage certain companies 
because the revenues of startups can vary greatly based on industry and 
geography. The agencies determined it would be unnecessarily 
restrictive to create a revenue limit that could limit funding to 
otherwise eligible portfolio companies. Again, the agencies found it 
significant that the SEC expressly considered this issue as part of the 
2011 rulemaking and determined that any ``single factor test could 
ignore the complexities of doing business in different industries or 
regions'' and ``could inadvertently restrict venture capital funds from 
funding otherwise promising young small companies.'' \307\ In addition, 
the definition of ``qualifying portfolio company'' in the SEC's rule

[[Page 46448]]

incorporates appropriate standards that distinguish newer ventures from 
more established companies. In particular, a ``qualifying portfolio 
company'' may not be ``reporting or foreign traded'' and may not 
control, be controlled by or under common control with another company 
that is reporting or foreign traded.\308\ A ``reporting or foreign 
traded'' company for these purposes means a company that is subject to 
the reporting requirements under section 13 or 15(d) of the Securities 
Exchange Act of 1934 or having a security listed or traded on any 
exchange or organized market operating in a foreign jurisdiction.\309\ 
In addition to publicly offered companies, this definition excludes 
issuers if they have more than $10 million in total assets and a class 
of equity securities, such as common stock, that is held of record by 
either 2,000 or more persons or 500 or more persons who are not 
accredited investors.\310\ In adopting the ``reporting or foreign 
traded'' requirement of Rule 203(l)-1, the SEC explained that it found 
``a key consideration by Congress'' was that venture capital funds 
``are less connected with the public markets and may involve less 
potential systemic risk.'' \311\ This condition that qualifying 
portfolio companies not be capitalized by the public markets serves to 
limit the type of companies in which a qualifying venture capital fund 
may invest.
---------------------------------------------------------------------------

    \307\ 76 FR 39649.
    \308\ 17 CFR 275.203(l)-1(c)(4).
    \309\ 17 CFR 275.203(l)-1(c)(5).
    \310\ 15 U.S.C. 78l(g).
    \311\ 76 FR 39656.
---------------------------------------------------------------------------

    Finally, the agencies determined it is unnecessary to include an 
additional quantitative limit on the use of leverage because the 
exclusion incorporates a leverage limit. Specifically, Rule 203(l)-1 
provides that a venture capital fund may not borrow or otherwise incur 
leverage in excess of 15 percent of the fund's aggregate capital 
contributions and uncalled capital commitments, and then only on a 
short-term basis. Because the exclusion already incorporates a limit on 
leverage for a qualifying venture capital fund, it is not necessary for 
the final rule to incorporate an additional limit on leverage.
ii. Long-Term Investment Funds
    In the preamble to the 2020 proposal, the agencies asked whether 
the final rule should include an exclusion for long-term investment 
funds. In the preamble, the agencies asked if an exclusion should be 
provided 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 Rule 203(l)-1.
    Several commenters supported an exclusion for long-term investment 
funds.\312\ Many of these commenters said an exclusion for qualifying 
long-term investment funds would help to close gaps in the availability 
of financing that exist under the implementing regulations while 
promoting and protecting the safety and soundness of the banking entity 
and the financial stability of the U.S.\313\ These commenters said the 
exclusion would allow banking entities to diversify their assets and 
income streams, thereby reducing the overall risk of their assets and 
operations and increasing their resiliency against failure.\314\ 
Several of these commenters supported an exclusion for long-term 
investment funds because they said it would allow banking entities to 
do indirectly through a fund structure the same activities they may 
conduct directly.\315\ Some commenters said long-term investment 
vehicles do not engage in short-term proprietary trading or the high-
risk activities that section 619's backstop provisions are intended to 
address.\316\
---------------------------------------------------------------------------

    \312\ Gonzalez et al.; Crapo; FSF; SIFMA; CCMC; CCMR; IIB; 
Goldman Sachs; AIC; and ABA. One commenter said the final rule 
should exclude an issuer with the following characteristics: (1) Its 
investment strategy or business purpose is to invest in assets in 
which a financial holding company would be permitted to invest 
directly; (2) it holds itself out to investors as acquiring and 
holding long-term assets for at least two years; (3) it does not 
engage in activities that would constitute impermissible proprietary 
trading (as defined in the implementing regulations) if conducted 
directly by a banking entity; and (4) if it is sponsored by a 
banking entity, (A) the sponsoring banking entity and its affiliates 
cannot, directly or indirectly, guarantee, assume or otherwise 
insure its obligations, (B) it must comply with the disclosure 
obligations under Sec.  __.11(a)(8) of the rule and (C) the 
sponsoring banking entity must comply with the limitations imposed 
by Sec.  __.14 (except that the banking entity may acquire and 
retain any ownership interest in the issuer) and Sec.  __.15, as if 
the vehicle were a covered fund. The commenter said these conditions 
would adequately address concerns regarding evasion, promote long-
term capital formation, and exclude certain entities that are 
inadvertently captured by the definition of ``covered fund'' such as 
certain incubators. Goldman Sachs.
    \313\ SIFMA; AIC; and CCMR. One commenter said an exclusion for 
long-term investment funds is necessary because the proposed 
exclusion for qualifying venture capital funds would not address 
incubators and other issuers that do not hold themselves out as 
pursuing a venture capital strategy. Goldman Sachs. Two commenters 
said excluding long-term investment funds would provide certainty 
for banking entities that hold interests in ``inadvertent'' or 
``accidental'' investment companies. SIFMA and Goldman Sachs.
    \314\ Id.
    \315\ FSF; CCMR; AIC; CCMC; and SIFMA.
    \316\ ABA and CCMC.
---------------------------------------------------------------------------

    One commenter said the rule should not establish an exclusion for 
long-term investment vehicles because section 619 of the Dodd-Frank Act 
was put in place to reorient banks away from risky speculative 
activities and toward responsible lending to businesses and 
households.\317\
---------------------------------------------------------------------------

    \317\ Robert Rutowski.
---------------------------------------------------------------------------

    The final rule does not include an exclusion for long-term 
investment funds. After reviewing all comments received, the agencies 
determined that it remains difficult to distinguish effectively such 
funds from the type of funds that section 13 of the BHC Act was 
designed to restrict. A general exclusion for long-term investment 
funds would be too broad of an approach for addressing specific types 
of issuers, such as inadvertent investment companies and incubators 
that do not hold themselves out as engaging in a venture capital 
strategy, as described by some commenters. An exclusion based primarily 
on the length of time that an issuer holds its investments could be 
overbroad because it could also permit funds that are engaged in the 
type of investment activity that section 13 of the BHC Act was designed 
to restrict. Moreover, the agencies believe the exclusions for credit 
funds and qualifying venture capital funds will improve banking 
entities' ability to provide long-term financing through certain fund 
structures in a manner that is consistent with the statute.
3. Family Wealth Management Vehicles
    The agencies are adopting an exclusion from the definition of 
``covered fund'' under Sec.  __.10(b) of the rule for any entity that 
acts as a ``family wealth management vehicle.'' This exclusion is 
available to an 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. For family wealth 
management vehicles that are trusts, the grantor(s) must be family 
customers.\318\ For non-trust family

[[Page 46449]]

wealth management vehicles, family customers must own a majority of the 
voting interests (directly or indirectly) as well as a majority of 
interests in the entity. Ownership of non-trust family wealth 
management vehicles is generally limited to family customers and up to 
five closely related persons of the family customers.\319\ However, 
there is a de minimis ownership allowance that permits one or more 
entities, including a banking entity, that are not family customers or 
closely related persons, to acquire or retain, as principal, up to an 
aggregate 0.5 percent of the family wealth management vehicle's 
outstanding ownership interests for the purpose of and to the extent 
necessary for establishing corporate separateness or addressing 
bankruptcy, insolvency, or similar concerns.\320\
---------------------------------------------------------------------------

    \318\ Under Sec.  __.10(c)(17)(iii)(B) of the final rule, a 
``family customer'' is 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, or a spouse or spousal equivalent of any of the 
foregoing. 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 family 
wealth management vehicle exclusion.
    \319\ Under Sec.  __.10(c)(17)(iii)(A) of the final rule, 
``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.''
    \320\ This 0.5 percent ownership interest represents the 
aggregate amount of a family wealth management vehicle's ownership 
interests that may be acquired or retained by all entities that are 
neither a family customer nor a closely related person.
---------------------------------------------------------------------------

    In addition, a banking entity may rely on the exclusion only if the 
banking entity: (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, provided that the content may be modified to 
prevent the disclosure from being misleading and the manner of 
disclosure may be modified to accommodate the specific circumstances of 
the entity; (4) does not acquire or retain, as principal, an ownership 
interest in the entity, other than up to an aggregate 0.5 percent of 
the family wealth management vehicle's outstanding ownership interests 
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 entity were a covered fund; and (6) except for 
riskless principal transactions as defined in Sec.  __.10(d)(11),\321\ 
complies with the requirements of 12 CFR 223.15(a), as if such banking 
entity and its affiliates were a member bank and the entity were an 
affiliate thereof.\322\
---------------------------------------------------------------------------

    \321\ ``Riskless principal transaction'' means a transaction in 
which a banking entity, after receiving an order to buy (or sell) a 
security from a customer, purchases (or sells) the security in the 
secondary market for its own account to offset a contemporaneous 
sale to (or purchase from) the customer. Final rule Sec.  
__.10(d)(11). The allowance for riskless principal transactions in 
the final rule does not affect the independent application of the 
Board's Regulation W (12 CFR part 223).
    \322\ Final rule Sec.  __.10(c)(17)(ii).
---------------------------------------------------------------------------

    In the 2020 proposal, the agencies requested comment on whether to 
exclude family wealth management vehicles from the definition of 
``covered fund.'' \323\ Several commenters supported this exclusion 
stating, generally, that it would reduce uncertainty for banking 
entities about the permissibility of providing traditional banking, 
investment management, and trust and estate planning services to family 
wealth management vehicle clients.\324\ As discussed below, other 
commenters opposed the exclusion or recommended revisions to it.\325\
---------------------------------------------------------------------------

    \323\ 85 FR 12120.
    \324\ See, e.g., Goldman Sachs; FSF; CCMR; IAA; ABA; BPI; PNC; 
and SIFMA.
    \325\ See, e.g., Better Markets, Data Boiler; SIFMA; BPI; ABA.
---------------------------------------------------------------------------

    The agencies believe that the exclusion for family wealth 
management vehicles will 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.\326\ 
The agencies believe the exclusion for family wealth management 
vehicles will 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 of the BHC Act was designed to address. As the agencies 
noted in the preamble to the 2013 rule, section 13 and the implementing 
regulations were designed in part to permit banking entities to 
continue to provide client-oriented financial services, including asset 
management services.\327\ Furthermore, the agencies believe that the 
provisions of the exclusion will work together to sufficiently reduce 
the likelihood that these vehicles could be used to evade the 
requirements of section 13 or the implementing regulations.
---------------------------------------------------------------------------

    \326\ Several commenters supported the exclusion, with two 
stating that many family wealth management vehicles do not rely on 
the exclusions in 3(c)(1) and (c)(7) of the Investment Company Act 
and are not covered funds under the implementing regulations. See 
ABA and PNC. Banking entities that sponsor or invest in family 
wealth management vehicles that are not subject to the covered funds 
provisions under section 13 of the BHC Act or the implementing 
regulations would not need to rely on this exclusion.
    \327\ 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.'').
---------------------------------------------------------------------------

    One of the commenters that opposed the exclusion expressed concern 
with the agencies adding an exclusion from the definition of ``covered 
fund'' that they believed would only benefit a few wealthy 
families.\328\ Banking entities may provide asset management services 
to families through a trust structure. The agencies believe that 
banking entities should have flexibility to offer such asset management 
services to families through a fund structure subject to appropriate 
limits. As noted above, the agencies believe the exclusion for family 
wealth management vehicles will 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.
---------------------------------------------------------------------------

    \328\ See Better Markets.
---------------------------------------------------------------------------

    The agencies continue to believe that the 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.\329\ The exclusion will 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.
---------------------------------------------------------------------------

    \329\ 12 U.S.C. 1851(d)(1)(D).
---------------------------------------------------------------------------

    Another commenter suggested that, rather than providing an 
exclusion for family wealth management vehicles through a rulemaking, 
the agencies should instead provide no-action relief on a case-by-case 
basis.\330\ The agencies do not believe that a case-by case approach 
would further the aims of section 13 or the implementing regulations. 
The agencies believe that a case-by-case approach would be

[[Page 46450]]

unnecessarily burdensome and difficult to administer. This approach 
would also unnecessarily deviate from the agencies' treatment of other 
excluded entities under the implementing regulations and hinder 
transparency and consistency.
---------------------------------------------------------------------------

    \330\ Data Boiler.
---------------------------------------------------------------------------

    The agencies believe that the adopted exclusion for a family wealth 
management vehicle will appropriately distinguish it from the type of 
entity that the covered funds provisions of section 13 of the BHC Act 
were intended to capture. The exclusion requires 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 exclusion will help 
to differentiate family wealth management vehicles from covered funds, 
which raise money from investors for this purpose.
    In addition, the family wealth management vehicle exclusion 
contains ownership limits designed to ensure that the vehicle is used 
to manage the wealth and other assets of customers and their families. 
One such limit is the definition of ``family customer.'' As proposed, 
the definition of ``family customer'' is based on the definition of 
``family client'' in rule 202(a)(11)(G)-1(d)(4) under the Advisers Act 
(the family office rule), and also incorporates certain in-laws and 
their spouses and spousal equivalents. Several commenters supported 
this approach,\331\ however, one commenter suggested that the agencies 
exclude in-laws, their spouses and their spousal equivalents from the 
definition of ``family customer.'' \332\ The agencies believe that in-
laws, their spouses and spousal equivalents share the same close 
familial relations as others included in the definition of ``family 
client.'' Furthermore, the agencies believe that the final rule's 
definition of ``family customer'' reflects the types of relationships 
typically present in family wealth management vehicles.\333\ Reflecting 
those relationships prevents unnecessary constraints on the utility of 
the exclusion and will allow banking entities to provide traditional 
banking services to these clients.
---------------------------------------------------------------------------

    \331\ See, e.g., SIFMA; BPI; and ABA.
    \332\ See Better Markets.
    \333\ See, e.g., SIFMA; BPI; and ABA.
---------------------------------------------------------------------------

    Another ownership limit designed to ensure that a family wealth 
management vehicle is used to manage the wealth and other assets of 
customers and their families is the requirement that a majority of the 
interests in the entity are owned by family customers.\334\ The 
inclusion of this limit in the final rule is a modification from the 
2020 proposal which only required family customers to own a majority of 
the voting interests (directly or indirectly) in the entity. One 
commenter suggested this modification to ensure that the exclusion is 
not used to evade the intent of section 13 and the implementing 
regulations.\335\ The agencies believe this modification is an 
appropriate means of ensuring that the exclusion is used by banking 
entities that are providing services to family wealth management 
vehicles, rather than to hedge funds or private equity funds.
---------------------------------------------------------------------------

    \334\ Final rule Sec.  __.10(c)(17)(i)(B)(2).
    \335\ See ABA.
---------------------------------------------------------------------------

    Another commenter suggested additional ownership limits for family 
wealth management vehicles, including limits on the vehicle's ability 
to restructure, to prevent evasion of the prohibitions of section 13 
and the implementing regulations.\336\ However, as discussed above, the 
agencies believe that the requirements of the exclusion, along with the 
conditions a banking entity must meet in order to rely on it, will help 
to ensure that banking entities will not be able to use family wealth 
management vehicles as a means to evade section 13 and the implementing 
regulations.
---------------------------------------------------------------------------

    \336\ See Data Boiler.
---------------------------------------------------------------------------

    Another ownership limit designed to ensure that a family wealth 
management vehicle is used to manage the wealth and other assets of 
customers and their families is the requirement that only up to five 
closely related persons of family customers may hold ownership 
interests in the vehicle.\337\ The agencies proposed to permit three 
closely related persons to hold ownership interests. Several commenters 
supported allowing a finite number of closely related persons of family 
customers to hold ownership interests.\338\ However, some commenters 
suggested that the proposed limit of three closely related persons did 
not reflect the typical manner in which family wealth management 
vehicles are constituted and would unnecessarily constrain the 
availability of the exclusion.\339\ These commenters recommended that 
the agencies modify the proposed rule to allow for up to ten closely 
related persons to invest in family wealth management vehicles.\340\ 
One of these commenters stated that increasing the number of closely 
related persons would allow banking entities to provide traditional 
wealth management and estate planning services to family wealth 
management vehicles and that the other conditions imposed by the 
proposed rule would keep such vehicles from evading the covered fund 
provisions of the implementing regulations.\341\ The commenter further 
noted that a limit of ten closely related persons would align the 
exclusion with the numerical limitation of unaffiliated owners provided 
for in the joint venture exclusion.\342\
---------------------------------------------------------------------------

    \337\ Final rule Sec.  __.10(c)(17)(i)(B)(3).
    \338\ See, e.g., BPI; SIFMA; PNC; and ABA.
    \339\ See, e.g., BPI; SIFMA; ABA; and PNC.
    \340\ See, e.g., SIFMA; BPI; ABA; and PNC.
    \341\ See SIFMA.
    \342\ See SIFMA.
---------------------------------------------------------------------------

    The final rule will allow up to five closely related persons to 
hold ownership interests in a family wealth management vehicle. 
Commenters indicated that many family wealth management vehicles 
currently include more than three closely related persons.\343\ The 
agencies believe that the final rule will more closely align the 
exclusion with the current composition of family wealth management 
vehicles, thereby increasing the utility of the exclusion without 
allowing such a large number of non-family customer owners to suggest 
the entity is in reality a hedge fund or private equity fund. 
Additionally, the agencies believe that requiring family customers to 
own a majority of the interests in the family wealth management vehicle 
will serve as an additional safeguard against evasion of the provisions 
of section 13 of the BHC Act.
---------------------------------------------------------------------------

    \343\ See, e.g., BPI; ABA; and PNC.
---------------------------------------------------------------------------

    As proposed, the final rule's definition of ``closely related 
person'' is ``a natural person (including the estate and estate 
planning vehicles of such person) who has longstanding business or 
personal relationships with any family customer.'' \344\ One commenter 
suggested that the definition of ``closely related person'' should 
include only persons with personal relationships with family customers 
and not also business relationships.\345\ The agencies believe that it 
is not practical or worthwhile to exclude business relationships from 
the definition of ``closely related person'' because it would require 
banking entities to engage in an assessment of relationships that are 
likely to include elements common in both personal and business 
relationships. The agencies also believe that requiring these 
relationships to be ``longstanding'' will help ensure that they are 
bona fide established relationships and not simply related to the 
planned investment activities through the family wealth management 
vehicle.
---------------------------------------------------------------------------

    \344\ Final rule Sec.  __.10(c)(17)(iii)(A).
    \345\ See, e.g., Better Markets.

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

[[Page 46451]]

    In a change to the 2020 proposal, the final rule permits any 
entity, or entities--not only banking entities--to acquire or retain, 
as principal, up to an aggregate 0.5 percent of the entity's 
outstanding ownership interests, for the purpose of and to the extent 
necessary for establishing corporate separateness or addressing 
bankruptcy, insolvency, or similar concerns.\346\ Some commenters 
requested that the agencies include this modification because often, 
family wealth management vehicles use unaffiliated third parties--such 
as third-party trustees or similar service providers--when structuring 
family wealth management vehicles.\347\ The agencies believe that 
permitting de minimis ownership by non-banking entity third parties is 
appropriate and in some cases necessary to reflect the typical 
structure of family wealth management vehicles. The de minimis 
ownership provision recognizes that ownership by an entity other than a 
family customer or closely related person may be necessary under 
certain circumstances--such as establishing corporate separateness or 
addressing bankruptcy, insolvency, or similar matters. Whether the 
entity that owns a de minimis amount is a banking entity or some other 
third party does not raise any concerns that are not sufficiently 
addressed by the aggregate ownership limit and the narrow circumstances 
in which such entities may take an ownership interest. The agencies 
recognize that without this modification, family wealth management 
vehicles may be forced to engage in less effective and/or efficient 
means of structuring and organization because the exclusion would limit 
the vehicle's access to some customary service providers that have 
traditionally taken small ownership interests for structuring purposes. 
The agencies are therefore expanding the types of entities that may 
acquire or retain the de minimis ownership interest to include any 
third party. However, the aggregate de minimis amount and the purpose 
for which it may be owned is unchanged from the 2020 proposal.
---------------------------------------------------------------------------

    \346\ Final rule Sec.  __.10(c)(17)(i)(C).
    \347\ See, e.g., SIFMA and BPI.
---------------------------------------------------------------------------

    As stated above, under the final rule, a banking entity may only 
rely on the exclusion with respect to a family wealth management 
vehicle if the banking entity meets certain conditions.\348\ The 
agencies believe that, collectively, the conditions of the exclusion 
will help to ensure that family wealth management vehicles are used for 
client-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 conditions 
are based on existing conditions in other provisions of the 
implementing regulations,\349\ which the agencies believe will 
facilitate banking entities' compliance with the exclusion.
---------------------------------------------------------------------------

    \348\ Final rule Sec.  __.10(c)(17)(ii).
    \349\ See implementing regulations Sec. 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); __.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); 
__.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 __.14(b) (subjecting certain 
transactions with covered funds to section 23B of the Federal 
Reserve Act).
---------------------------------------------------------------------------

    As proposed, the agencies are not applying Sec.  __.14(a), which 
applies section 23A of the Federal Reserve Act to banking entities' 
relationships with covered funds, to family wealth management vehicles 
because the agencies understand that the application of Sec.  __.14(a) 
to family wealth management vehicles could prohibit banking entities 
from providing the full range of banking and asset management services 
to customers using these vehicles.\350\ The agencies are, however, 
applying Sec. Sec.  __.14(b) and __.15 to family wealth management 
vehicles, as proposed, because the agencies continue to believe that it 
will help ensure that banking entities and their affiliates' exposure 
to risk remains appropriately limited.
---------------------------------------------------------------------------

    \350\ See SIFMA (stating that it agreed with the agencies' 
approach of not applying Sec.  __.14 to relationships between 
banking entities and family wealth management vehicles because doing 
so would prevent banking entities from making ordinary extensions of 
credit and entering into a number of other transactions with family 
wealth management vehicles that are critical to the banking entity 
providing traditional asset management and estate planning 
services).
---------------------------------------------------------------------------

    The agencies are also adopting a prohibition, with modifications 
described below, on banking entity purchases of low-quality assets from 
family wealth management vehicles that would be prohibited under 
Regulation W concerning transactions with affiliates (12 CFR 
223.15(a))--as if such banking entity were a member bank and the entity 
were an affiliate thereof--to prevent banking entities from ``bailing 
out'' family wealth management vehicles.\351\ Regulation W (12 CFR 
223.15(a)) provides that a member bank may not purchase a low-quality 
asset from an affiliate unless, pursuant to an independent credit 
evaluation, the member bank had committed itself to purchase the asset 
before the time the asset was acquired by the affiliate.\352\ Several 
commenters requested clarification that the exclusion permits banking 
entities to engage in riskless principal transactions to purchase 
assets--including low quality assets for purposes of section 223.15 of 
the Board's Regulation W--from family wealth management vehicles.\353\ 
Commenters stated that the need for such asset purchases may arise as a 
result of a family customer's preferences and that permitting the 
banking entities to engage in such purchases may facilitate the family 
customer's sale of the asset.\354\ Commenters stated that allowing 
these transactions would pose minimal market or credit risk to a 
banking entity because the banking entity would purchase and sell the 
same asset contemporaneously.\355\ Furthermore, one commenter stated 
that without clarity on the permissiveness of riskless principal 
transactions, family wealth management vehicles would be forced to 
obtain the services of a third-party service provider to sell low 
quality assets, which would increase costs and operational complexity 
of the family wealth management vehicles without furthering the aims of 
section 13 of the BHC Act or the implementing regulations.\356\
---------------------------------------------------------------------------

    \351\ Final rule Sec.  __.10(c)(17)(ii)(F).
    \352\ 12 CFR 223.15(a).
    \353\ See, e.g., BPI and SIFMA.
    \354\ See, e.g., BPI and SIFMA.
    \355\ See, e.g., SIFMA and BPI.
    \356\ See SIFMA.
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    The agencies believe that permitting a banking entity to engage in 
riskless principal transactions that involve the purchase of low-
quality assets from a family wealth management vehicle is unlikely to 
pose a substantive risk of evading section 13 of the BHC Act. In a 
riskless principal transaction, the riskless principal (the banking 
entity) buys and sells the same security contemporaneously, and the 
asset risk passes promptly from the customer (family wealth management 
vehicle, in this context) through the riskless principal to a third-
party.\357\ The agencies are adopting the condition that banking 
entities and their affiliates comply with the requirements of 12 CFR 
223.15(a), as if such banking entity and its affiliates were a member 
bank and the entity were an affiliate. However, in a change from the 
2020 proposal and in response to the concerns raised by

[[Page 46452]]

commenters, the condition will explicitly exclude from those 
requirements transactions that meet the definition of riskless 
principal transactions as defined in Sec.  __.10(d)(11). The definition 
of riskless principal transactions adopted in Sec.  __.10(d)(11) is 
similar to the definition adopted in the Board's Regulation W, as this 
definition is appropriately narrow and generally familiar to banking 
entities.\358\ The agencies expect that, together, the adopted criteria 
for the family wealth management vehicle exclusion will prevent a 
banking entity from being able to bail out such entities 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.
---------------------------------------------------------------------------

    \357\ See 67 FR 76597.
    \358\ 12 CFR 223.3(ee).
---------------------------------------------------------------------------

    Several commenters requested that the agencies remove the condition 
that banking entities and their affiliates comply with the disclosure 
obligations under Sec.  __.11(a)(8) of the final rule, as if the 
vehicle were a covered fund, because such disclosures would not apply 
to a vehicle that a banking entity was not organizing and offering 
pursuant to Sec.  __.11(a) of the final rule and therefore would be 
confusing.\359\ In particular, these commenters stated that the 
required disclosure under Sec.  __.11(a)(8) concerning the banking 
entity's ``ownership interests'' in the fund and referencing the fund's 
``offering documents'' may create confusion in circumstances where the 
banking entity does not own an interest in the family wealth management 
vehicle, or where such vehicles do not have offering documents. Also, 
commenters requested confirmation from the agencies that banking 
entities would be permitted to (i) modify the required disclosures to 
reflect the specific circumstances of their relationship with, and the 
particular structure of, their family wealth management vehicle 
clients; and (ii) satisfy the written disclosure requirement by means 
other than including such disclosures in the governing document(s) of 
the family wealth management vehicle(s).\360\
---------------------------------------------------------------------------

    \359\ See, e.g., ABA and PNC.
    \360\ See, e.g., BPI.
---------------------------------------------------------------------------

    The agencies are adopting the condition that banking entities and 
their affiliates comply with the disclosure obligations under Sec.  
__.11(a)(8) of the final rule with respect to family wealth management 
vehicles. However, in a change from the 2020 proposal and in response 
to the concerns raised by commenters, the condition will explicitly 
permit banking entities and their affiliates to modify the content of 
such disclosures to prevent the disclosure from being misleading and 
also permit banking entities to modify the manner of disclosure to 
accommodate the specific circumstances of the entity.\361\ The 
obligations under Sec.  __.11(a)(8) of the final rule 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, however, understand that many 
family wealth management vehicles may not have offering documents. The 
agencies have an interest in providing family wealth management vehicle 
customers with the substance of the disclosure, rather than a concern 
with the specific wording of the disclosure or with the document in 
which the disclosure is provided. Accordingly, the agencies have 
provided that the content of the disclosure may be modified to prevent 
the disclosure from being misleading and the manner of disclosure may 
be modified to accommodate the specific circumstances of the family 
wealth management vehicle.
---------------------------------------------------------------------------

    \361\ In the 2020 proposal, the agencies had indicated that for 
purposes of the proposed exclusion, a banking entity could satisfy 
these written disclosure obligations in a number of ways and could 
modify the specific wording of the disclosures in Sec.  __.11(a)(8) 
to accurately reflect the specific circumstances of the family 
wealth management vehicle.
---------------------------------------------------------------------------

    For example, Sec.  __.11(a)(8) requires disclosure that an investor 
``should read the fund offering documents before investing in the 
covered fund.'' In order to accurately reflect the specific 
circumstances of a family wealth management vehicle for which there are 
no offering documents, the modified provision will allow the banking 
entity to revise this disclosure to reference the appropriate 
disclosure documents, if any, provided in connection with the vehicle. 
Similarly, the agencies understand the specific wording of the 
disclosures in Sec.  __.11(a)(8) of the rule may need to be modified to 
accurately reflect the specific circumstances of the banking entity's 
relationship with the family wealth management vehicle. For example, a 
banking entity that holds no ownership interest in the family wealth 
management vehicle may modify the disclosure required in Sec.  
__.11(a)(8)(i)(A) to reflect its lack of ownership. Moreover, Sec.  
__.11(a)(8) requires that the banking entity provide these disclosures, 
``such as through disclosure in the . . . offering documents.'' The 
agencies expect that a banking entity could satisfy these disclosure 
delivery obligations in a number of ways, such as by including them in 
the family wealth management vehicle's governing documents, in account 
opening materials or in supplementary materials (e.g., a separate 
disclosure document provided by the banking entity solely for purposes 
of complying with this exclusion and providing the required 
disclosures).
4. Customer Facilitation Vehicles
    The agencies are adopting an exclusion from the definition of 
``covered fund'' under Sec.  __.10(b) of the rule for any issuer that 
acts as a ``customer facilitation vehicle.'' The customer facilitation 
vehicle exclusion will, as proposed, 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.\362\
---------------------------------------------------------------------------

    \362\ Final rule Sec.  __.10(c)(18)(i).
---------------------------------------------------------------------------

    A banking entity may only rely on the exclusion with respect to an 
issuer provided that: (1) 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; \363\ and (2) the banking 
entity and its affiliates: (i) Maintain documentation outlining how the 
banking entity intends to facilitate the customer's exposure to such 
transaction, investment strategy, or service; (ii) do not, directly or 
indirectly, guarantee, assume, or otherwise insure the obligations or 
performance of such issuer; (iii) comply with the disclosure 
obligations under Sec.  __.11(a)(8), as if such issuer were a covered 
fund, provided that the content may be modified to prevent the 
disclosure from being misleading and the manner of disclosure may be 
modified to accommodate the specific circumstances of the issuer; (iv) 
do not acquire or retain, as principal, an ownership interest in the 
issuer, other than up to an aggregate 0.5 percent of the issuer's 
outstanding ownership interests for the purpose of and to the extent 
necessary for establishing corporate separateness or addressing 
bankruptcy, insolvency, or similar concerns; (v) comply with the

[[Page 46453]]

requirements of Sec. Sec.  __.14(b) and __.15, as if such issuer were a 
covered fund; and (vi) except for riskless principal transactions as 
defined in Sec.  __.10(d)(11), comply with the requirements of 12 CFR 
223.15(a), as if such banking entity and its affiliates were a member 
bank and the entity were an affiliate thereof.\364\
---------------------------------------------------------------------------

    \363\ Notwithstanding this condition, up to an aggregate 0.5 
percent of the issuer's outstanding ownership interests may be 
acquired or retained by one or more entities that are not customers 
if the ownership interest is acquired or retained by such parties 
for the purpose of and to the extent necessary for establishing 
corporate separateness or addressing bankruptcy, insolvency, or 
similar concerns. Final rule Sec.  __.10(c)(18)(ii)(B).
    \364\ Final rule Sec.  __.10(c)(18)(ii).
---------------------------------------------------------------------------

    The agencies continue to believe that this exclusion will 
appropriately allow banking entities to structure certain 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 final rule. Most commenters that addressed 
this exclusion were supportive,\365\ stating that it would provide 
banking entities with greater flexibility to meet client needs and 
objectives.\366\ Some commenters found the exclusion's conditions to be 
reasonable and sufficient.\367\ However, two commenters recommended 
that the agencies impose additional limitations on the exclusion.\368\ 
One of these commenters argued that the exclusion would permit, and 
possibly encourage, banking entities to increase their risk exposures 
through the use of customer facilitation vehicles, and the agencies 
should minimize such risk exposures and promote risk monitoring and 
management.\369\
---------------------------------------------------------------------------

    \365\ See, e.g., SIFMA; BPI; ABA; Credit Suisse; FSF; Goldman 
Sachs; and IAA.
    \366\ See, e.g., SIFMA; BPI; ABA; and Goldman Sachs.
    \367\ See, e.g., SIFMA; FSF; and SAF.
    \368\ See Better Markets and Data Boiler.
    \369\ See Better Markets.
---------------------------------------------------------------------------

    The agencies continue to believe that these vehicles do not expose 
banking entities to the types of risks that section 13 of the BHC Act 
was intended to restrict, and that this exclusion is consistent with 
section 13(d)(1)(D), which permits banking entities to engage in 
transactions on behalf of customers, when such 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.\370\ This exclusion will 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.\371\ As stated in the 2020 proposal, the 
agencies do not believe that section 13 of the BHC Act 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.\372\ Some 
commenters agreed, stating that customer facilitation vehicles would 
not expose banking entities to the types of risks that section 13 was 
intended to prohibit or limit, particularly given that such vehicles 
will be subject to a number of conditions, as discussed below.\373\
---------------------------------------------------------------------------

    \370\ 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).
    \371\ This exclusion does not require that the customer 
relationship be pre-existing. In other words, the exclusion will 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.
    \372\ 85 FR 12120.
    \373\ See SIFMA and ABA.
---------------------------------------------------------------------------

    The exclusion will, as proposed, require that the vehicle be formed 
by or at the request of the customer.\374\ One commenter suggested that 
the agencies remove this requirement, arguing that it would inhibit a 
banking entity's ability to provide customers with services in a timely 
manner.\375\ However, the agencies continue to believe that this 
requirement is an important component of the exclusion because it helps 
differentiate customer facilitation vehicles from covered funds that 
are organized and offered by the banking entity. As stated in the 2020 
proposal, the requirement will not preclude a banking entity from 
marketing its customer facilitation vehicle services or discussing with 
its customers prior to the formation of such vehicles the potential 
benefits of structuring such services through a vehicle.\376\
---------------------------------------------------------------------------

    \374\ Final rule Sec.  __.10(c)(18)(i).
    \375\ SIFMA (stating that requiring a banking entity to wait for 
a customer to request formation would delay the banking entity's 
ability to provide services to the customer without any 
corresponding regulatory benefit).
    \376\ 85 FR 12120.
---------------------------------------------------------------------------

    As in the 2020 proposal, the agencies are not specifying the types 
of transaction, investment strategy or other service that a customer 
facilitation vehicle may be formed to facilitate.\377\ One commenter 
recommended specifying that the exclusion only allow vehicles to be 
formed for extensions of intraday credit, and payment, clearing, and 
settlement services, and only for purposes of operational 
efficiency.\378\ Another commenter argued that attempting to specify 
may prevent banking entities from being able to appropriately respond 
to a customer's requests.\379\ The agencies continue to believe that 
providing flexibility enhances the utility of this exclusion. 
Specifically, the agencies note that the purpose of this exclusion is 
to allow banking entities to provide customer-oriented financial 
services through vehicles, providing customers with exposure to a 
transaction, investment strategy, or other service that the banking 
entity may provide to such customers directly. Limiting the type of 
transaction, investment strategy, or service for which the customer 
facilitation vehicle may be formed would interfere with this purpose. 
Accordingly, the agencies are adopting this requirement as proposed.
---------------------------------------------------------------------------

    \377\ Final rule Sec.  __.10(c)(18)(i).
    \378\ See Data Boiler.
    \379\ See SIFMA.
---------------------------------------------------------------------------

    Under the final rule, similar to the 2020 proposal, a banking 
entity will be able to rely on the customer facilitation vehicle 
exclusion only under certain conditions, as stated above.\380\ 
Commenters supported most of the conditions, stating that the exclusion 
imposes reasonable conditions that provide safeguards.\381\ Commenters 
also suggested modifications to certain conditions, as discussed 
below.\382\ The agencies are adopting the conditions, largely as 
proposed. However, the agencies are modifying the conditions that 
relate to de minimis ownership of the vehicle, the requirements of 12 
CFR 223.15(a), and the disclosure obligations under Sec.  __.11(a)(8), 
as discussed below.
---------------------------------------------------------------------------

    \380\ Final rule Sec.  __.10(c)(18)(ii).
    \381\ See, e.g., SIFMA; FSF; and SAF.
    \382\ See, e.g., SIFMA; BPI; and FSF.
---------------------------------------------------------------------------

    As proposed, the exclusion would have permitted banking entities 
and their affiliates to acquire or retain, as principal, an ownership 
interest in the issuer up to 0.5 percent of the issuer's outstanding 
ownership interests, for the purpose of and to the extent necessary

[[Page 46454]]

for establishing corporate separateness or addressing bankruptcy, 
insolvency, or similar concerns.\383\ Similar to their request for 
family wealth management vehicles, commenters suggested that the 
agencies specifically allow any party that is unaffiliated with the 
customer, rather than only the banking entities and their affiliates, 
to own this de minimis interest.\384\ For the same reasons as discussed 
above with respect to family wealth management vehicles, the agencies 
are modifying the de minimis ownership provision such that up to an 
aggregate 0.5 percent of the issuer's outstanding ownership interests 
may be acquired or retained by one or more entities that are not 
customers if the ownership interest is acquired or retained by such 
parties for the purpose of and to the extent necessary for establishing 
corporate separateness or addressing bankruptcy, insolvency, or similar 
concerns.\385\
---------------------------------------------------------------------------

    \383\ See 2020 proposed rule Sec.  __.10(c)(18)(ii)(B)(4).
    \384\ See SIFMA; BPI; and FSF.
    \385\ Final rule Sec.  __.10(c)(18)(ii)(B).
---------------------------------------------------------------------------

    The agencies are adopting, with modifications, the condition for a 
banking entity to comply with the requirements of 12 CFR 223.15(a), as 
if such banking entity were a member bank and the issuer were an 
affiliate thereof.\386\ As discussed above, several commenters 
recommended that the agencies clarify that the family wealth management 
vehicle exclusion permits banking entities to engage in riskless 
principal transactions to purchase assets--including low quality assets 
for purposes of section 223.15 of the Board's Regulation W--from family 
wealth management vehicles.\387\ One such commenter also suggested 
that, for purposes of consistency, the agencies should similarly 
clarify that banking entities are permitted to engage in such riskless 
principal transactions with customer facilitation vehicles.\388\
---------------------------------------------------------------------------

    \386\ Final rule Sec.  __.10(c)(18)(ii)(C)(6). 12 CFR 223.15(a) 
provides that a member bank may not purchase a low-quality asset 
from an affiliate unless, pursuant to an independent credit 
evaluation, the member bank had committed itself to purchase the 
asset before the time the asset was acquired by the affiliate. 12 
CFR 223.15(a).
    \387\ See, e.g., BPI and SIFMA. See supra, Section IV.C.3 
(Family Wealth Management Vehicles).
    \388\ See BPI.
---------------------------------------------------------------------------

    The purpose of the proposed requirement that a customer 
facilitation vehicle must comply with 12 CFR 223.15(a) was the same for 
both the family wealth management vehicle and the customer facilitation 
vehicle exclusions--to help ensure that the exclusions do not allow 
banking entities to ``bail out'' either vehicle.\389\ For the same 
reasons discussed above with respect to family wealth management 
vehicles, the agencies have modified the requirement to exclude from 
the requirements of 12 CFR 223.15(a) transactions that meet the 
definition of riskless principal transactions as defined in Sec.  
__.10(d)(11).\390\ Similar to the agencies' approach with respect to 
family wealth management vehicles, the agencies expect that, together, 
the adopted criteria for this exclusion will prevent a banking entity 
from being able to bail out customer facilitation vehicles in periods 
of financial stress or otherwise expose the banking entity to the types 
of risks that the covered fund provisions of section 13 of the BHC Act 
were intended to address.
---------------------------------------------------------------------------

    \389\ See 85 FR 12120.
    \390\ Final rule Sec.  __.10(c)(18)(ii)(C)(6).
---------------------------------------------------------------------------

    The agencies are modifying the condition that the banking entity 
and its affiliates comply with the disclosure obligations under Sec.  
__.11(a)(8), as if such issuer were a covered fund, to provide 
clarification that the content of the disclosure may be modified to 
prevent the disclosure from being misleading and the manner of 
disclosure may be modified to accommodate the specific circumstances of 
the issuer.\391\ Commenters requested that the agencies provide such 
clarification in the context of family wealth management vehicles.\392\ 
Although the agencies did not receive any comments with respect to this 
condition in the context of this exclusion, the agencies are similarly 
modifying this condition under this exclusion. The agencies believe 
that these disclosures will provide important information to the 
customers for whom these vehicles will be used to provide services--
whether they are family customers under the family wealth management 
vehicle exclusion or other customers under this exclusion. The 
agencies' treatment of this condition for family wealth management 
vehicles, as described above, will similarly apply to this condition 
for customer facilitation vehicles.\393\
---------------------------------------------------------------------------

    \391\ Final rule Sec.  __.10(c)(18)(ii)(C)(3).
    \392\ See supra, Section IV.C.3 (Family Wealth Management 
Vehicles).
    \393\ Id.
---------------------------------------------------------------------------

    The agencies are adopting, as proposed, the condition 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 others, as discussed above).\394\ The agencies continue to believe 
that this condition is appropriate to prevent banking entities from 
using this exclusion for customer facilitation vehicles to evade the 
restrictions of section 13 of the BHC Act. To help track compliance, a 
banking entity and its affiliates will, as proposed, have to maintain 
documentation outlining how the banking entity intends to facilitate 
the customer's exposure to a transaction, investment strategy, or 
service.\395\
---------------------------------------------------------------------------

    \394\ Final rule Sec. Sec.  __.10(c)(18)(ii)(A)-(B).
    \395\ Final rule Sec.  __.10(c)(18)(ii)(C)(1).
---------------------------------------------------------------------------

    The agencies are also adopting, as proposed, the condition that the 
banking entity and its affiliates do not, directly or indirectly, 
guarantee, assume, or otherwise insure the obligations or performance 
of such issuer.\396\ The agencies continue to believe that this 
condition is appropriate and consistent with the goal of preventing 
banking entities from bailing out their customer facilitation vehicles. 
Commenters generally agreed, supporting the condition as one that is 
reasonable and appropriate in addressing the agencies' potential 
evasion concerns.\397\
---------------------------------------------------------------------------

    \396\ Final rule Sec.  __.10(c)(18)(ii)(C)(2).
    \397\ See, e.g., SIFMA; FSF; and Data Boiler.
---------------------------------------------------------------------------

    Finally, the agencies are adopting, as proposed, the condition that 
the banking entity and its affiliates comply with the requirements of 
Sec. Sec.  __.14(b) and __.15, as if such issuer were a covered 
fund.\398\ The agencies requested comment in the 2020 proposal whether 
this exclusion should also require that the banking entity and its 
affiliates comply with the requirements of all of Sec.  __.14. One 
commenter argued that requiring compliance with the requirements of all 
of Sec.  __.14 would eliminate the utility of this exclusion.\399\ The 
same commenter supported the condition, as proposed, stating that 
requiring compliance with only Sec.  __.14(b), which would apply the 
requirements in section 23B of the Federal Reserve Act, and the 
application of the prudential backstops under Sec.  __.15 would serve 
as adequate safeguards to avoid the risk of bailout or other evasion 
concerns.\400\ The agencies continue to believe that this condition 
will help ensure that banking entities and their affiliates' exposure 
to risk remains appropriately limited.
---------------------------------------------------------------------------

    \398\ Final rule Sec.  __.10(c)(18)(ii)(C)(5).
    \399\ See FSF (stating that if banking entities were required to 
comply with all of Sec.  __.14, they would not be able to enter into 
swaps and other covered transactions with the customer facilitation 
vehicle for their clients, many of whom seek such transactions 
through the use of such vehicles).
    \400\ See FSF.
---------------------------------------------------------------------------

    The agencies continue to believe that, collectively, the conditions 
on the exclusion will help to ensure that

[[Page 46455]]

customer facilitation 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 final rule. 
The agencies also continue to believe that the adopted conditions will 
be consistent with the purposes of section 13.
    As in the 2020 proposal, the agencies will not apply Sec.  __.14(a) 
to customer facilitation vehicles because the agencies understand that 
this would prohibit banking entities from providing the full range of 
banking and asset management services to customers using these 
vehicles. Commenters generally supported this approach,\401\ and one 
noted that applying Sec.  __.14(a) to these vehicles would undo any 
practical utility of the exclusion.\402\
---------------------------------------------------------------------------

    \401\ See, e.g., SIFMA and BPI.
    \402\ See SIFMA.
---------------------------------------------------------------------------

D. Limitations on Relationships With a Covered Fund

    In the 2020 proposal, the agencies proposed to amend 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).\403\
---------------------------------------------------------------------------

    \403\ See 2020 proposal Sec.  __.14(a)(2), (3); 85 FR 12143-
12146.
---------------------------------------------------------------------------

    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 as if the banking entity was a member bank and the 
covered fund was an affiliate.\404\ The 2020 proposal would have 
amended the application of section 13(f)(1) of the BHC Act in limited 
circumstances, by allowing a banking entity to enter into certain 
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. In addition, 
the 2020 proposal would have allowed 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. The agencies invited comment on the past 
interpretation of section 13(f)(1) of the BHC Act,\405\ and the 
proposed amendments to the regulations implementing section 
13(f)(1).\406\
---------------------------------------------------------------------------

    \404\ 12 U.S.C. 1851(f)(1); see also 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.
    \405\ 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.
    \406\ 85 FR 12145-46.
---------------------------------------------------------------------------

    As described in the 2020 proposal, the agencies believe the 
statutory rulemaking authority under paragraph (d)(1)(J) of section 13 
of the BHC Act permits the agencies 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.\407\ This interpretation of the agencies' rulemaking 
authority is supported both by the inclusion of other covered 
transactions within the permitted activities listed in paragraph (d)(1) 
of section 13 and by the manner in which section 13(f)(1) of the BHC 
Act is incorporated in the list of permitted activities in paragraph 
(d)(1), as described below.
---------------------------------------------------------------------------

    \407\ 12 U.S.C. 1851(b)(2), (d)(1)(J), (d)(2).
---------------------------------------------------------------------------

    Section 23A of the Federal Reserve Act limits the aggregate amount 
of covered transactions between a member bank and its affiliates, while 
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.\408\ Despite the 
general prohibition on certain covered transactions in section 
13(f)(1), section 13 also 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.\409\ 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. For example, despite the general prohibition on 
covered funds, another part of section 13 permits a bank entity ``to 
acquire or retain an ownership interest in a covered fund in accordance 
with the requirements of section 13.'' \410\ In the preamble to the 
2013 rule, the agencies specifically interpreted section 13 to allow 
such investments noting that a contrary interpretation would make the 
specific language that permits covered transactions between a banking 
entity and a related covered fund ``mere surplusage.'' \411\ The 
statute also 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).\412\ 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.\413\
---------------------------------------------------------------------------

    \408\ 12 U.S.C. 371c, 12 U.S.C. 1851(f)(1). 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 Pub. L. 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.
    \409\ 12 U.S.C. 1851(d)(1)(G); (d)(4).
    \410\ 79 FR 5746.
    \411\ Id.
    \412\ 12 U.S.C. 1851(d)(1)(G)(v).
    \413\ See 12 U.S.C. 371c(b)(7)(E); 12 CFR 223.3(h)(4).
---------------------------------------------------------------------------

    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,\414\ the activities permitted pursuant to 
paragraph (d) specifically contemplate allowing a banking entity to 
enter into certain covered

[[Page 46456]]

transactions with related funds.\415\ 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).\416\ 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 continue to 
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.\417\
---------------------------------------------------------------------------

    \414\ See 76 FR 68912 n.313.
    \415\ 12 U.S.C. 1851(d)(1)(G); (d)(4).
    \416\ 12 U.S.C. 1851(d)(1)(G)(iv).
    \417\ 12 U.S.C. 1851(b)(2), (d)(1)(J), (d)(2).
---------------------------------------------------------------------------

    Several commenters expressed support for the proposed amendments to 
the regulations implementing section 13(f)(1) of the BHC Act that would 
have permitted a banking entity to engage in a limited set of covered 
transactions with a related covered fund.\418\ Some commenters 
recommended that the agencies clarify whether a banking entity may 
enter into exempt transactions with a related covered fund in the 
circumstance where such transactions would be exempt from section 23A 
of the Federal Reserve Act only if a bank entered into such 
transactions with a securities affiliate.\419\ A few commenters also 
recommended that the agencies adopt a new exclusion allowing a banking 
entity to offer other types of extensions of credit to a related 
covered fund, including extensions of credit in the ordinary course of 
business.\420\ Other commenters recommended that the agencies clarify 
that section 13(f)(1) does not apply outside of the United States.\421\ 
The commenters noted that such an approach would limit the 
extraterritorial effect of section 13(f)(1), and would better align 
section 13(f)(1) with the manner in which section 23A of the Federal 
Reserve Act applies outside of the United States.
---------------------------------------------------------------------------

    \418\ See, e.g., ABA; BPI; CBA; Data Boiler; EBF; FSF; IIB; PNC; 
and SIFMA.
    \419\ ABA; BPI; FSF; and SIFMA.
    \420\ BPI and PNC.
    \421\ CBA; EBF; and IIB.
---------------------------------------------------------------------------

    As discussed below, the final rule adopts the proposed amendments 
from the 2020 proposal with minor modifications. The agencies believe 
that, under certain circumstances, it is appropriate to permit banking 
entities to enter into certain covered transactions with related 
covered funds, in the manner described in the amendments to Sec.  __.14 
of the implementing regulations. Consistent with the 2020 proposal, 
these amendments do not modify the definition of ``covered 
transaction'' but instead authorize banking entities to engage in 
limited transactions with related covered funds. Any transactions 
permitted by these revisions must still meet the eligibility 
requirements for the particular transaction, and the banking entity 
must also comply with certain conflict of interest, high-risk, and 
safety and soundness restrictions with respect to such transactions. 
The agencies are also expressly providing that a banking entity may 
enter into certain riskless principal transactions with a related 
covered fund, as described below.
Exempt Transactions Under Section 23A and the Board's Regulation W; 
Riskless Principal Transactions
    The final rule adopts the amendments to the regulations 
implementing section 13(f)(1) of the BHC Act to permit banking entities 
to enter into exempt transactions permitted under section 23A and the 
Board's Regulation W. Specifically, the final rule permits a banking 
entity to engage in certain 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 certain transactions that would be 
exempt pursuant to section 223.42 of the Board's Regulation W.\422\
---------------------------------------------------------------------------

    \422\ See 12 U.S.C. 371c(d); 12 CFR 223.42.
---------------------------------------------------------------------------

    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.\423\ Nevertheless, 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, provided such transactions meet the criteria 
specified in Regulation W.\424\
---------------------------------------------------------------------------

    \423\ 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).
    \424\ See 12 U.S.C. 371c(d); 12 CFR 223.42.
---------------------------------------------------------------------------

    Under the Board's Regulation W, a member bank may enter into 
certain exempt covered transactions only with a securities affiliate. 
Specifically, under these exempt covered transactions, a member bank 
may enter into transactions to purchase marketable securities, to 
purchase municipal securities, and to enter into riskless principal 
transactions only with a securities affiliate.\425\ In permitting such 
transactions under Regulation W, the Board previously concluded that 
the condition that such transactions were permissible only with a 
securities affiliate was an important consideration that helped justify 
the exemption, noting that securities affiliates generally must be 
registered as broker-dealers, and are therefore subject to SEC 
supervision and examination, and are required to keep detailed records 
concerning each securities transaction.\426\
---------------------------------------------------------------------------

    \425\ 12 CFR 223.42(f), (g), (m).
    \426\ 67 FR 76591 (December 12, 2002); see 67 FR 76593, 76597.
---------------------------------------------------------------------------

    The exempt transactions specified in section 23A of the Federal 
Reserve Act and Regulation W are structured in a manner so as not to 
present the same concerns about a depository institution suffering 
losses or transferring the subsidy arising from the depository 
institution's access to the Federal safety net. The agencies believe 
that the same rationale that supports the exemptions in section 23A of 
the Federal Reserve Act and the Board's Regulation W also supports 
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, provided that such transactions are 
subject to the same requirements and conditions specified in Regulation 
W. In particular, the agencies note that these exemptions generally do 
not present significant risks of loss and serve important public policy 
objectives.\427\
---------------------------------------------------------------------------

    \427\ 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.
---------------------------------------------------------------------------

    Several commenters recommended that the agencies clarify whether a 
banking entity may enter into certain transactions with a related 
covered fund that would be permissible under the Board's Regulation W 
if entered into between a bank and a securities affiliate,

[[Page 46457]]

even if the covered fund would not meet the eligibility criteria to be 
a ``securities affiliate'' under the Board's Regulation W.\428\ As 
noted above, Regulation W imposes various conditions and requirements 
on transactions that a bank enters into with its affiliates, and 
permits a bank to enter into transactions involving the purchase of 
marketable securities, the purchase of municipal securities, and 
riskless principal transactions only with an affiliate that is a 
``securities affiliate'' as defined in Regulation W. With respect to 
purchases of marketable securities and municipal securities, the final 
rule follows the approach adopted in Regulation W, and permits a 
banking entity to enter into such covered transactions with a related 
covered fund only if those transactions would meet all of the 
eligibility criteria to qualify as exempt transactions under Regulation 
W, including the requirement that the related covered fund meets the 
requirements to be a securities affiliate.\429\ As noted above, the 
exempt transactions specified in Regulation W include various limits 
and conditions that both limit the risks of such transactions and allow 
the Federal banking agencies to monitor compliance. Generally, the 
final rule retains the eligibility criteria for exempt covered 
transactions defined in Regulation W. The agencies believe that these 
conditions serve important policies, and appropriately limit the scope 
of the exempt transactions permissible under the implementing 
regulations.
---------------------------------------------------------------------------

    \428\ ABA; BPI; FSF; and SIFMA. Under the Board's Regulation W, 
a ``securities affiliate'' is defined as ``[a]n affiliate of the 
member bank that is registered with the Securities and Exchange 
Commission as a broker or dealer; or . . . [a]ny other securities 
broker or dealer affiliate of a member bank that is approved by the 
Board.'' 12 CFR 223.3(gg).
    \429\ In addition to requiring that an affiliate be a securities 
affiliate, the exemptions under Regulation W permitting a bank to 
purchase marketable securities or municipal securities in certain 
circumstances require the bank to retain records about the 
underlying transaction. See 12 CFR 223.42(f)(6), (g)(3)(iii)(B).
---------------------------------------------------------------------------

    The final rule permits banking entities to enter into riskless 
principal transactions with a related covered fund, including in 
circumstances where the covered fund is not a ``securities affiliate.'' 
\430\ In a riskless principal transaction, the riskless principal (the 
banking entity) buys and sells the same security contemporaneously, and 
the asset risk passes promptly from the affiliate (the related covered 
fund) through the riskless principal to a third party.\431\ In 
permitting such transactions under Regulation W, the Board previously 
found that there was no regulatory benefit to subjecting riskless 
principal transactions to section 23A of the Federal Reserve Act, 
because such transactions closely resemble securities brokerage 
transactions, and these transactions do not allow the affiliate to 
transfer risk to the affiliate acting as a riskless principal.\432\
---------------------------------------------------------------------------

    \430\ Cf. 12 CFR 223.42(m).
    \431\ See 67 FR 76597.
    \432\ Id.
---------------------------------------------------------------------------

    Although the 2020 proposal would have permitted a banking entity to 
enter into a riskless principal transaction with a covered fund 
provided it met the criteria in Regulation W, the final rule adopts a 
standalone exception to differentiate riskless principal transactions 
specifically from other transactions that would be exempt transactions 
under the Board's Regulation W.\433\ In connection with permitting 
banking entities to enter into riskless principal transactions with 
related covered funds in a separate exception from Super 23A, the 
agencies are defining riskless principal transactions in Sec.  __.10 of 
the regulations. The definition of riskless principal transactions 
adopted in the final rule is similar to the definition adopted in the 
Board's Regulation W, as this definition is appropriately narrow and 
generally familiar to banking entities.\434\
---------------------------------------------------------------------------

    \433\ 12 CFR 223.42.
    \434\ See 12 CFR 223.3(ee).
---------------------------------------------------------------------------

    In addition, and as discussed in more detail below, banking 
entities may separately rely on the independent exception for 
acquisitions of assets in connection with payment, clearing, and 
settlement services. The agencies expect that in many instances, 
subject to other applicable laws and regulations, a banking entity may 
be able to engage in acquisitions of assets in connection with payment, 
clearing, and settlement services, without relying on the exception 
permitting banking entities to enter into covered transactions with 
their related covered funds that would be exempt under Regulation W.
Short-Term Extensions of Credit and Acquisitions of Assets in 
Connection With Payment, Clearing, and Settlement Services
    The final rule adopts the proposed amendments in the 2020 proposal 
that would have permitted a banking entity to provide short-term 
extensions of credit to, and purchase assets from, a related covered 
fund, subject to appropriate limits. Under the final rule, each short-
term extension of credit or purchase of assets must be made in the 
ordinary course of business in connection with payment transactions; 
securities, derivatives, or futures clearing; or settlement services. 
In addition, each extension of credit must be required to be repaid, 
sold, or terminated no later than five business days after it was 
originated. Additionally, the proposed five business day criterion is 
consistent with the Federal banking agencies' capital rules and would 
generally limit banking entities to transactions with normal settlement 
periods, which have lower risk of delayed settlement or failure, when 
providing short-term extensions of credit.\435\ 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). Under these requirements, the banking entity making a short-
term extension would have to meet the same requirements as it would to 
engage in an intraday extension of credit under Regulation W (and as 
incorporated in the implementing regulations). Specifically, the 
banking entity would need to have policies and procedures to manage the 
credit exposure and must have no reason to believe that the related 
covered fund will have difficulty repaying the extension of credit in 
accordance with its terms. Finally, each extension of credit or 
purchase of assets permitted by these revisions must also comply with 
certain conflict of interest, high-risk, and safety and soundness 
restrictions, and must otherwise be permissible for the banking entity 
to enter into with the fund.\436\
---------------------------------------------------------------------------

    \435\ 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 final rule is consistent with the approach taken in 
the Federal banking agencies' capital rule, without imposing an 
additional compliance burden without a corresponding benefit. See, 
e.g., 12 CFR 3.2; 217.2; 324.2 (defining derivative contract to 
include unsettled securities with a contractual settlement or 
delivery lag that is longer than the lesser of the market standard 
for the particular instrument or five business days); 12 CFR 
3.38(d); 217.38(d); 324.38(d) (noting that an institution must hold 
risk-based capital against any delivery-versus-payment or payment-
versus-payment transaction with a normal settlement period if the 
counterparty has not made delivery within five business days after 
settlement).
    \436\ For example, an investment fund with respect to which a 
member bank or its affiliate is an investment adviser may be subject 
to additional restrictions under Section 23A of the Federal Reserve 
Act. See 12 U.S.C. 371c(b)(1)(D).

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

[[Page 46458]]

    The agencies do not believe it would be appropriate to permit 
banking entities to enter into other covered transactions with a 
related covered fund, outside of the exceptions noted above. Although 
some commenters recommended expanding this exception to allow banking 
entities to enter into limited amounts of covered transactions with 
related covered funds, the agencies believe that permitting banking 
entities to engage in other covered transactions with related covered 
funds would potentially raise the concerns that paragraph 13(f)(1) was 
intended to address.
    The agencies also do not believe that it would be appropriate to 
limit the application of section 13(f)(1) to the United States as some 
commenters recommended, at this time. The agencies note that other 
amendments in the final rule (for example, amendments to the treatment 
of foreign excluded funds and foreign public funds) may help address 
some of the commenters' concerns about the extraterritorial application 
of section 13(f)(1).
Impact of the Amendments on Safety and Soundness and U.S. Financial 
Stability
    The agencies expect that the amendments in the final rule described 
above would generally promote and protect the safety and soundness of 
banking entities and U.S. financial stability. In comments previously 
submitted to the agencies, banking entities that sponsor or serve as 
the investment adviser to covered funds 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. The 
commenters said 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.\437\ For example, when a banking entity sponsors 
or advises a 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.
---------------------------------------------------------------------------

    \437\ See 85 FR 12144.
---------------------------------------------------------------------------

    As discussed below, the agencies believe that the exceptions in the 
final rule would generally promote and protect the safety and soundness 
of banking entities and U.S. financial stability by allowing 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, even when the banking entity sponsor of the fund typically 
provides those services to other funds it sponsors. This is the case 
even when the third party may not offer the same quality of services 
available through an affiliate, or where the third party may charge 
more for the same services that could be provided by an affiliate. 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 final rule allows 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 will promote and protect the safety and soundness of 
banking entities.\438\
---------------------------------------------------------------------------

    \438\ The agencies believe that the same rationales that 
supported exempting certain 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 those exempt covered 
transactions with a related covered fund, subject to the same terms 
and conditions as applicable under section 23A and Regulation W.
---------------------------------------------------------------------------

    The final rule also would promote and protect U.S. financial 
stability by reducing interconnectedness among firms. The provision of 
custodial services among depository institutions in the United States 
is highly concentrated, with the four largest providers, all of which 
remain subject to the Volcker Rule, holding more than 85 percent of 
custodial assets. Requiring a banking entity that organizes and offers 
a covered fund to use a third party to provide these services could 
increase the interconnections between these firms and the risk that 
distress at one banking entity would be spread to the others. The 
authorized covered transactions would permit banking entities to 
provide a more comprehensive suite of services to related covered 
funds, reducing interconnectedness by reducing the need to rely on 
third parties to provide such services.
    The final rule also retains important limits on the transactions 
that a banking entity may enter into with a related covered fund, 
including limitations that apply to transactions within the new 
exceptions in the regulations implementing Sec.  __.14(a). As specified 
in the statute, such activities are 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 . . .'' \439\ 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).\440\
---------------------------------------------------------------------------

    \439\ 12 U.S.C. 1851(d)(1).
    \440\ 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) as 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.\441\
---------------------------------------------------------------------------

    \441\ 12 U.S.C. 1851(f)(2); see 12 U.S.C. 371c-1(a)(1).

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

[[Page 46459]]

    The agencies therefore have determined that the amendments to Sec.  
__.14(a) of the final rule, in the manner described above, would 
promote and protect both the safety and soundness of banking entities, 
and U.S. financial stability.

E. Ownership Interest

1. Definition of ``Ownership Interest''
    The 2013 rule defines 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 within the 
definition of 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.\442\
---------------------------------------------------------------------------

    \442\ 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 certain 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).
    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.\443\ Among other 
things, the agencies requested comments on whether they should modify 
Sec.  __.10(d)(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.\444\
---------------------------------------------------------------------------

    \443\ 83 FR 33481.
    \444\ Id.
---------------------------------------------------------------------------

    A number of comments received on the 2018 proposal supported the 
agencies' suggestion to modify Sec.  __.10(d)(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.\445\ However, a few of these 
commenters on the 2018 proposal 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 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.\446\ 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.
---------------------------------------------------------------------------

    \445\ See, e.g., SFIG; JBA; LSTA; and IAA.
    \446\ See SFIG.
---------------------------------------------------------------------------

    A number of commenters on the 2018 proposal 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.\447\ 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.\448\ One other commenter asked the agencies to clarify conditions 
under the ``other similar interest'' clause.\449\ Specifically, the 
commenter asked the agencies to clarify whether the right to receive 
all or a portion of the spread extends to using the excess spread or 
any debt repaid from collections on underlying assets of a special 
purpose entity to pay principal or interest that is otherwise owed is 
not an ownership interest. Another 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.\450\
---------------------------------------------------------------------------

    \447\ See, e.g., Capital One et al. and BPI.
    \448\ See, e.g., ABA and CAE.
    \449\ See SFIG.
    \450\ See Data Boiler.
---------------------------------------------------------------------------

    In response to comments received on the 2018 proposal 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 2020 proposal would have amended the parenthetical in Sec.  
__.10(d)(6)(i)(A) to specify that creditors' remedies upon the 
occurrence of an event of default or an acceleration event, which 
include, for example, 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 occurrence of an event of default, would 
not be considered an ownership interest for this reason alone.\451\ The 
2020 proposal also sought comment on whether it would be appropriate to

[[Page 46460]]

further allow for an interest to confer 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, without that interest being deemed an ownership interest. 
Such additional ``for cause'' termination events may include 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.
---------------------------------------------------------------------------

    \451\ The definition of ``ownership interest'' in the 
implementing regulations is independent from the definition of 
``voting securities'' in the Board's Regulation Y.
---------------------------------------------------------------------------

    Commenters on the 2020 proposal generally supported the proposed 
amendment to the definition of ownership interest 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 occurrence of an event of default. In the 
view of these commenters, the proposed clarification would 
appropriately recognize that the ability of a holder to vote on removal 
or appointment of managers for cause is not a right limited to equity 
holders. However, many of these commenters asserted that creditors' 
rights are also provided to debt holders in circumstances other than an 
event of default or acceleration. These commenters therefore 
recommended the proposed amendments be expanded to include additional 
for cause events that are independent of an event of default or 
acceleration, such as the insolvency of the investment manager or 
breach of the investment management or collateral management 
agreement.\452\
---------------------------------------------------------------------------

    \452\ See, e.g., SIFMA.
---------------------------------------------------------------------------

    In light of comments received on the 2020 proposal, the agencies 
recognize that it is customary for debt holders to hold certain rights 
to participate in the removal or replacement of an investment manager 
for cause that may be triggered by events other than default or 
acceleration events. The agencies believe that debt interests that 
include the rights of a creditor to participate in the for-cause 
removal or replacement of an investment manager under certain 
circumstances do not necessarily constitute the type of interest 
Section 13 of the BHC Act is intended to capture as an ownership 
interest. The agencies are therefore finalizing, with certain 
modifications, the amendments to Sec.  __.10(d)(6)(i)(A) in order to 
provide clarity about the types of creditor rights that may attach to 
an interest without that interest being deemed an ownership interest. 
The agencies have modified the scope of the definition of ownership 
interest in the final rule to allow for certain additional rights of 
creditors that are not triggered exclusively by an event of default or 
acceleration to attach to a debt interest without such interests being 
deemed ownership interests. In addition to such rights arising under 
events of default or acceleration, under the final rule, the definition 
of ownership interest does not include rights of a creditor to 
participate in the removal or replacement of an investment manager for 
cause in connection with:
    (1) The bankruptcy, insolvency, conservatorship or receivership of 
the investment manager;
    (2) the breach by the investment manager of any material provision 
of the covered fund's transaction agreements applicable to the 
investment manager;
    (3) the breach by the investment manager of material 
representations or warranties;
    (4) the occurrence of an act that constitutes fraud or criminal 
activity in the performance of the investment manager's obligations 
under the covered fund's transaction agreements;
    (5) the indictment of the investment manager for a criminal 
offense, or the indictment of any officer, member, partner or other 
principal of the investment manager for a criminal offense materially 
related to his or her investment management activities;
    (6) a change in control with respect to the investment manager;
    (7) the loss, separation or incapacitation of an individual 
critical to the operation of the investment manager or primarily 
responsible for the management of the covered fund's assets; or
    (8) other similar events that constitute ``cause'' for removal of 
an investment manager, provided that such events are not solely related 
to the performance of the covered fund or to the investment manager's 
exercise of investment discretion under the covered fund's transaction 
agreements.
    The 2020 proposal also would have provided a safe harbor from the 
definition of ownership interest, as suggested by some commenters to 
the 2018 proposal.\453\ The safe harbor was intended to address 
concerns of commenters to the 2018 proposal that some ordinary debt 
interests could be construed as an ownership interest. The 2020 
proposal, therefore, would have provided that any senior loan or other 
senior debt interest that meets all of the following characteristics 
would not be considered to be an ownership interest:
---------------------------------------------------------------------------

    \453\ 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 (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 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).
    Commenters on the 2020 proposal generally supported the proposed 
safe harbor from the definition of ownership interest for certain 
senior loans or senior debt interests that do not have 
equity[hyphen]like characteristics.\454\ However, certain commenters 
also requested that the agencies clarify that the safe harbor is 
available to senior loans and senior debt interests where repayment of 
principal may vary as a result of acceleration or amortization 
provisions.\455\ Additionally, certain commenters also requested that 
the agencies clarify that the reference to senior loans or senior debt 
interests in the proposed safe harbor includes all exposures that would 
meet the definition of ``investment grade'' found in 12 CFR part 1 and 
implementing guidelines, as long as such exposures comply with the 
proposed conditions.\456\
---------------------------------------------------------------------------

    \454\ See, e.g., SIFMA; BPI; LSTA; Mortgage Bankers Association; 
and PNC.
    \455\ See SIFMA.
    \456\ See, e.g., LSTA and SFA.
---------------------------------------------------------------------------

    The agencies intended for the proposed conditions of the safe 
harbor to provide clarity and predictability to banking entities by 
enabling them to determine more readily whether an interest would be an 
ownership interest under the regulations implementing section 13 of the 
BHC Act. After considering comments received, the

[[Page 46461]]

agencies have included the conditions from the 2020 proposal for the 
safe harbor with a modification to Sec.  __.10(d)(6)(ii)(B)(1)(ii). The 
modification requires that the senior loan or senior debt interest 
involves, among other things, repayment of a fixed principal amount, on 
or before a maturity date, in a contractually-determined manner (which 
may include prepayment premiums intended solely to reflect, and 
compensate holders of the interest for, forgone income resulting from 
an early prepayment). The agencies believe this modification will 
provide additional clarity that the safe harbor is available to senior 
loan and senior debt interests where contractual principal payments 
vary over the life of a senior loan or senior debt interest for reasons 
such as amortization and acceleration provided that the total amount of 
principal required to be repaid over the life of the instrument does 
not change. The agencies believe this modification to the safe harbor 
under the final rule will ensure that debt interests that do not have 
equity-like characteristics are not considered ownership interests. 
Additionally, 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.
    Further, in response to certain commenters' request that the 
agencies clarify that the reference to senior loans or senior debt 
interests in the proposed safe harbor includes all exposures that would 
meet the definition of ``investment grade'' found in 12 CFR part 1 and 
implementing guidelines, the agencies have determined that such a 
provision would be inappropriate for purposes of the safe harbor 
conditions in the final rule. Unlike the safe harbor provisions in the 
final rule regarding ownership interests, such a provision would not 
ensure that debt interests that have equity-like characteristics are 
treated as ownership interests for purposes of subpart C of the final 
rule.
    In response to the 2020 proposal, one commenter requested that the 
agencies modify the condition in Sec.  __.10(d)(6)(i)(B) of the 
implementing regulations and Sec.  __.10(d)(6)(ii)(B)(1) of the 2020 
proposal, which states that 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, to clarify that the condition would not include 
amounts payable to securitization noteholders in accordance with a 
contractual priority of payments, commonly referred to as a 
``waterfall,'' so long as such amounts are limited to fixed principal 
and interest determined on a fixed or typical index floating rate 
basis.\457\ Specifically, the commenter suggested a modification to 
this condition to clarify that the term ``profit'' is intended to mean 
``net profits'' out of concern for the potential ambiguity of how the 
condition would apply to amounts received by securitization noteholders 
in accordance with the securitization's waterfall of payment. Another 
commenter disagreed with any revision to the 2020 proposed rule that 
would only cover as an ownership interest an interest which has the 
right to receive a share of the ``net'' income, gains or profits of the 
covered fund.\458\ The final rule does not modify Sec.  
__.10(d)(6)(i)(B) of the implementing regulations or Sec.  
__.10(d)(6)(ii)(B)(1) of the 2020 proposal. However, the agencies 
clarify that a debt interest in a covered fund would not be considered 
an ownership interest solely because the interest is entitled to 
receive an allocation of collections from the covered fund's underlying 
financial assets in accordance with a contractual priority of payments.
---------------------------------------------------------------------------

    \457\ See SFA.
    \458\ See Data Boiler.
---------------------------------------------------------------------------

2. Fund Limits and Covered Fund Deduction
    The 2020 proposal included amendments to 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 2020 proposal would have modified 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.\459\ 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.\460\
---------------------------------------------------------------------------

    \459\ 2013 rule Sec.  __.10(d)(6)(ii). Under the 2013 rule, 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. 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.
    \460\ 2013 rule Sec.  __.10(d)(6)(ii)(C).
---------------------------------------------------------------------------

    Under Sec.  __.12 of the 2013 rule, different calculation 
methodologies apply for purposes of calculating compliance with the per 
fund limit, the aggregate fund limit, and the covered fund 
deduction.\461\ 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.\462\
---------------------------------------------------------------------------

    \461\ 2013 rule Sec.  __.12(b)(1)(iv). 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 directly or indirectly, is counted against the per fund 
limit and aggregate fund limit. See 79 FR 5733.
    \462\ 2013 rule Sec.  __.10(d)(6)(C); Sec. Sec.  __.12(c)(1), 
(d). See also 12 U.S.C. 1851(d)(1)(G).
---------------------------------------------------------------------------

    The agencies did not receive comments on the proposed change in the 
treatment of restricted profit interests. Several commenters 
recommended that the agencies eliminate the per fund limit, the 
aggregate fund limit, and the covered fund deduction with respect to 
any ownership interest held by a banking entity in any covered fund, if 
that interest is held pursuant to underwriting and market making 
activities.\463\
---------------------------------------------------------------------------

    \463\ BPI; FSF; IIB; and SIFMA.
---------------------------------------------------------------------------

    With respect to the proposed change in the treatment of restricted 
profit interests, 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 covered fund 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

[[Page 46462]]

or indirectly, the employee's or director's acquisition of a restricted 
profit interest in a covered fund organized or offered by the banking 
entity. The final rule amends the implementing regulations to limit the 
attribution of an employee's or director's restricted profit interest 
in a covered fund organized or offered by the banking entity to only 
those circumstances in which the banking entity has directly or 
indirectly financed the acquisition of the restricted profit interest. 
The agencies expect that this amendment will 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).
    The final rule does not adopt the recommendation from commenters 
that the agencies should eliminate the per fund limit, aggregate fund 
limit, or covered fund deduction requirements. The 2019 amendments 
adopted several changes to simplify the covered fund compliance 
requirements for banking entities that engage in market making or 
underwriting with respect to a third-party covered fund. Specifically, 
the 2019 amendments eliminated the aggregate fund limit and capital 
deduction requirements for the value of ownership interests in third-
party funds acquired or retained in connection with permissible market 
making or underwriting activities (i.e., covered funds that the banking 
entity does not advise or organize and offer pursuant to Sec.  __.11(a) 
or (b) of the implementing regulations). In discussing this change in 
the preamble to the 2019 amendments, the agencies noted that the 
amendments to the treatment of ownership interests in third-party funds 
were intended to better align the compliance requirements for 
underwriting and market making involving covered funds with the risks 
that those activities entail.\464\ The compliance challenges associated 
with underwriting and market making in ownership interests in covered 
funds is particularly acute with respect to third-party covered funds. 
As discussed in the preamble to the 2019 amendments, ``a banking entity 
can more readily determine whether a fund is a covered fund if the 
banking entity advises or organizes and offers the fund.'' \465\ While 
section 13 of the BHC Act provides the agencies greater flexibility to 
adopt changes in the treatment of ownership interests in third-party 
funds, it prescribes specific requirements that apply to funds that the 
banking entity advises, or organizes and offers. Specifically, section 
13 provides that a banking entity must not acquire or retain an 
ownership interest in a fund organized and offered by the banking 
entity except for a de minimis investment subject to and in compliance 
with paragraph (d)(4) of section 13 of the BHC Act.\466\ Therefore, the 
final rule does not adopt the change recommended by commenters to 
modify the treatment of ownership interests in related covered funds 
that are held by a banking entity in connection with market making and 
underwriting activities.
---------------------------------------------------------------------------

    \464\ See 84 FR 62017.
    \465\ Id.
    \466\ 12 U.S.C. 1851(d)(1)(G)(iii).
---------------------------------------------------------------------------

F. Parallel Investments

    The 2020 proposal included a new rule of construction in Sec.  
__.12(b) clarifying that banking entities are not required to treat 
investments alongside covered funds as investments in covered funds if 
certain conditions are met.\467\ As explained in the 2020 proposal, 
this rule of construction was meant to provide clarity in light of a 
discrepancy between the preamble to the 2013 rule and the text of the 
implementing regulations.
---------------------------------------------------------------------------

    \467\ See 85 FR 12149.
---------------------------------------------------------------------------

    The implementing regulations require 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.\468\ Section __.12(b)(1)(i) of the implementing regulations 
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.'' \469\ 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.
---------------------------------------------------------------------------

    \468\ See id. at 12148; implementing regulations Sec.  __.12.
    \469\ See implementing regulations Sec.  __.12(b)(1)(i).
---------------------------------------------------------------------------

    The 2011 notice of proposed rulemaking included a proposed 
provision that would have required attribution of certain direct 
investments by a banking entity alongside, or otherwise in parallel 
with, a covered fund.\470\ The agencies declined to adopt this 
provision in the 2013 rule after considering the language of the 
statute as well as commenters' views on that provision.\471\
---------------------------------------------------------------------------

    \470\ 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).
    \471\ In declining 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. 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. 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.\472\ Neither section 
13(d)(4) of the BHC Act nor the text of the implementing regulations 
requires a banking entity to 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.\473\ However, 
in the preamble to the 2013 rule, the agencies discussed the potential 
for evasion of the per fund limit and aggregate fund limit 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.'' \474\ 
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.'' 
\475\
---------------------------------------------------------------------------

    \472\ 12 U.S.C. 1851(d)(4).
    \473\ Any investment by the banking entity would need to comply 
with the proprietary trading restrictions in Subpart B of the 
implementing regulations.
    \474\ 79 FR 5734.
    \475\ See id.
---------------------------------------------------------------------------

    The 2020 proposal included a new rule of construction to address 
investments made by banking entities alongside covered funds. This 
proposed rule of construction was intended to clarify in the rule text 
that banking

[[Page 46463]]

entities are not required to treat a direct investment by a banking 
entity alongside a covered fund as an investment in the covered fund if 
certain conditions are met. Specifically, proposed Sec.  __.12(b)(5) 
provided that:
    (1) 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.
    (2) 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.\476\
---------------------------------------------------------------------------

    \476\ See 85 FR 12149.
---------------------------------------------------------------------------

    In the preamble to the 2020 proposal, the agencies recognized that 
banking entities rely on a number of investment authorities and 
structures to make investments and meet the needs of their clients and 
shareholders.\477\ The agencies indicated that the proposed rule of 
construction would provide clarity to banking entities so that they may 
make such investments for the benefit of their clients and 
shareholders, provided that those investments comply with applicable 
laws and regulations.\478\ The preamble to the 2020 proposal went on to 
note several restrictions that may apply to a banking entity's 
investment alongside a covered fund. For example, a banking entity may 
not engage in prohibited proprietary trading alongside a covered fund. 
Likewise, a banking entity must have authority to make any investment 
alongside a covered fund under applicable banking and other laws and 
regulations and must 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. In addition, a banking entity 
that invests alongside a covered fund that the banking entity organizes 
and offers under the asset management exemption in Sec.  __.11 would 
need to comply with all the conditions of that exemption, which, among 
other things, prohibits the banking entity from guaranteeing, assuming, 
or otherwise insuring the obligations or performance of the covered 
fund. Thus, a 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. Likewise, the banking entity would 
also need to ensure that any 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.\479\
---------------------------------------------------------------------------

    \477\ Id. See also 79 FR 5734.
    \478\ 85 FR 12149.
    \479\ See id. 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 investments. Id.
---------------------------------------------------------------------------

    Most commenters that addressed the proposed rule of construction 
supported adopting the proposed revision.\480\ Commenters stated that 
the rule of construction was consistent with section 13 of the BHC Act, 
would not increase the types of risks that section 13 of the BHC Act 
was meant to address, and would not raise concerns about evading 
section 13 of the BHC Act.\481\ Commenters noted that banking entities 
would need to hold their investments in a manner consistent with 
relevant authorities and the associated risk management and other 
prudential and regulatory limits and controls, including stringent 
capital requirements, for these types of investments.\482\ Some 
commenters also requested that the agencies permit employees and 
directors of a banking entity that sponsors a covered fund to invest 
directly in that covered fund, regardless of whether the employees or 
directors provide services to the covered fund on behalf of their 
banking entity employer.\483\ The agencies received one comment 
opposing the proposed rule of construction.\484\ This commenter 
characterized the proposed rule of construction as permitting 
proprietary trading at arm's length but without a limit on the 
ownership interest that a banking entity may hold and stated that 
parallel investments should be subject to the limitations that would 
apply to direct investments in covered funds.\485\
---------------------------------------------------------------------------

    \480\ See FSF; SIFMA; BPI; IIB; Goldman Sachs; PNC; and ABA.
    \481\ See FSF; SIFMA; and BPI.
    \482\ See FSF; SIFMA; and BPI.
    \483\ See ABA and PNC.
    \484\ See Data Boiler.
    \485\ See id.
---------------------------------------------------------------------------

    After carefully considering the comments received, the agencies are 
adopting the rule of construction in Sec.  __.12(b)(5), as 
proposed.\486\ As described above and in the 2020 proposal, this rule 
of construction is consistent with the text of section 13 of the BHC 
Act, which does not prohibit a banking entity from making otherwise 
permissible investments directly when doing so alongside a covered 
fund. This rule of construction will also reduce compliance burden by 
clarifying that a banking entity is not required under Sec.  __.12 of 
the final rule to attribute to the banking entity direct investments 
made alongside a covered fund for purposes of the de minimis investment 
limitation. In response to the commenter who opposed the rule of 
construction,\487\ the agencies note that the rule of construction is 
consistent with section 13 of the BHC Act and each investment by a 
banking entity must comply with laws and regulations, including any 
applicable safety and soundness standards.
---------------------------------------------------------------------------

    \486\ Final 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.
    \487\ See Data Boiler.
---------------------------------------------------------------------------

    As discussed in the preamble to the 2020 proposal, the rule of 
construction will 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. However, as discussed in the preamble to 
the 2020 proposal, 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

[[Page 46464]]

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.
    As discussed earlier and in the preamble to the 2020 proposal, 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 continue to believe that such a 
prohibition is not 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.
    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 
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.
    As discussed in the preamble to the 2020 proposal, 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' 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.\488\ 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.\489\
---------------------------------------------------------------------------

    \488\ See 2013 rule Sec.  __.12(b)(1)(iv) (requiring attribution 
of an investment by a director or employee in a covered fund 
organized and offered by the banking entity, 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) (emphasis added).
    \489\ See 2013 rule Sec.  __.11(a)(7) (prohibiting investments 
by any director or employee of the banking entity (or an affiliate 
thereof) in a covered fund organized and offered by the banking 
entity, 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) (emphasis added).
---------------------------------------------------------------------------

    With respect to investments in a covered fund, the agencies decline 
to permit an employee or director of a banking entity that organizes 
and offers a covered fund to make investments in that covered fund if 
the director or employee does not provide services to the covered fund 
on behalf of the banking entity, as requested by some commenters.\490\ 
The restriction on these types of director and employee investments is 
required by the statute.\491\
---------------------------------------------------------------------------

    \490\ See ABA and PNC.
    \491\ See 12 U.S.C. 1851(d)(1)(G)(vii).
---------------------------------------------------------------------------

G. Technical Amendments

    The agencies proposed five sets of clarifying technical edits to 
the implementing regulations. Specifically, the agencies proposed 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.''
    The agencies did not receive comment on these provisions and are 
adopting the technical amendments as proposed.

V. Administrative Law Matters

A. Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act \492\ requires the 
Federal banking agencies to use plain language in all proposed and 
final rules published after January 1, 2000. The Federal banking 
agencies sought to present the proposed rule in a simple and 
straightforward manner and did not receive any comments on plain 
language.
---------------------------------------------------------------------------

    \492\ Public Law 106-102, section 722, 113 Stat. 1338, 1471 
(1999).
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    Certain provisions of the final 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 final rule 
and determined that the final rule creates new recordkeeping 
requirements and revises certain disclosure requirements that have been 
previously cleared under various OMB control numbers. The agencies did 
not receive any specific comments on the PRA. The agencies are 
extending for three years, with revision, these information 
collections. The information collection requirements contained in this 
final rule 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 final 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 for OCC-, FDIC-, 
SEC-, and CFTC-supervised institutions under a holding company. The OCC 
and the

[[Page 46465]]

FDIC will take burden for banking entities that are not under a holding 
company.

Abstract

    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, subject to certain exemptions. The exemptions allow 
certain types of permissible trading and asset management activities.

Current Actions

    The final rule contains requirements subject to the PRA, and the 
changes relative to the implementing regulations are discussed herein. 
The new recordkeeping requirements are found in section 
__.10(c)(18)(ii)(C)(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)(C)(1) requires a banking entity relying on 
the 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 will be incurred once a 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, is being expanded to also apply to banking 
entities relying on exclusions for credit funds, venture capital funds, 
family wealth management vehicles, or customer facilitation vehicles. 
The agencies estimate that the current average hours per response of 
0.1 will increase to 0.5.
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)(C)(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.
    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.
    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.

[[Page 46466]]

    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. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA) \493\ requires an agency to 
either provide a regulatory flexibility analysis with a final rule or 
certify that the final 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.\494\ Except as 
otherwise specified below, the size standard to be considered a small 
business for banking entities subject to the final rule is $600 million 
or less in consolidated assets.\495\
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    \493\ 5 U.S.C. 601 et seq.
    \494\ 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.
    \495\ 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 final 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 certifies 
that the final rule will not have a significant economic impact on a 
substantial of number of small entities.
    The Board invited comment on all aspects of its analysis related to 
the requirements of the RFA in connection with the 2020 proposal. In 
particular, the Board requested that commenters describe the nature of 
any impact on small entities and provide empirical data to illustrate 
and support the extent of the impact. The Board did not receive any 
comments related to this issue.
    As discussed in the Supplementary Information, the agencies are 
adopting 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.\496\ Certain of the exclusions from the covered fund 
definition included in the final rule contain recordkeeping and 
disclosure requirements that would apply to banking entities relying on 
the exclusion. For example, the exclusion for customer facilitation 
vehicles requires 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 final rule is expected to reduce regulatory burden on 
banking entities, and the Board does not expect these recordkeeping 
requirements to result in a significant economic impact.
---------------------------------------------------------------------------

    \496\ 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),\497\ 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.\498\ 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 final rule is not expected to have a 
significant economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \497\ Public Law 115-174 (May 24, 2018).
    \498\ 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 five percent or 
less of total consolidated assets.
---------------------------------------------------------------------------

OCC
    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., 
requires an agency, in connection with a final rule, to prepare a Final 
Regulatory Flexibility Analysis describing the impact of the rule on 
small entities (defined by the Small Business Administration (SBA) for 
purposes of the RFA to include commercial banks and savings 
institutions with total assets of $600 million or less and trust 
companies with total assets of $41.5 million or less) or to certify 
that the final rule would not have a significant economic impact on a 
substantial number of small entities. The OCC currently supervises 
approximately 745 small entities.\499\ Under the EGRRCPA, 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 five percent of their total consolidated assets. In addition, 
section 13 of the BHC Act generally excludes certain institutions that 
function only in a trust or fiduciary capacity from the definition of 
``banking entity. As a result, no OCC-supervised small entities are 
subject to section 13 of the BHC Act. Thus, the final rule will not 
impact any OCC-supervised small entities. Therefore, the OCC certifies 
that the final rule will not have a significant impact on a substantial 
number of OCC-supervised small entities.
---------------------------------------------------------------------------

    \499\ The OCC bases its estimate of the number of small entities 
on 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), the OCC counts the assets of 
affiliated financial institutions when determining if the OCC should 
classify an OCC-supervised institution as a small entity. The OCC 
uses December 31, 2019, 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 SBA's Table of Size Standards.
---------------------------------------------------------------------------

FDIC
    The RFA generally requires that, in connection with a final 
rulemaking, an agency prepare and make available for public comment a 
final regulatory flexibility analysis describing the impact of the 
final rule on small entities.\500\ However, a regulatory flexibility 
analysis is not required if the agency certifies that the final 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.\501\ 
Generally, the FDIC considers

[[Page 46467]]

a significant effect to be a quantified effect in excess of five 
percent of total annual salaries and benefits per institution, or 2.5 
percent of total noninterest 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 final 
rule will not have a significant economic impact on a substantial 
number of small entities.
---------------------------------------------------------------------------

    \500\ 5 U.S.C. 601 et seq.
    \501\ 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 December 31, 2019, the FDIC supervised 3,344 depository 
institutions,\502\ of which 2,581 were considered small entities for 
the purposes of RFA.\503\ The Economic Growth, Regulatory Relief, and 
Consumer Protection Act excluded entities from the requirements of 
section 13 of the BHC Act that do not have and are not controlled by a 
company that has total assets of more than $10 billion or trading 
assets and liabilities comprising more than five percent of total 
consolidated assets.\504\ Only one small, FDIC-supervised institution 
is subject to section 13 of the BHC Act, because its trading assets and 
liabilities exceed five percent of total consolidated assets.\505\
---------------------------------------------------------------------------

    \502\ FDIC-supervised institutions are set forth in 12 U.S.C. 
1813(q)(2).
    \503\ FDIC Call Report data, December 31, 2019.
    \504\ Public Law 115-174, May 24, 2018. https://www.congress.gov/bill/115th-congress/senate-bill/ 2155.
    \505\ FDIC Call Report data, December 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 final rule modifies 
existing definitions and exclusions and introduces new exclusions to 
the implementing regulations. The final rule permits 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 final rule excludes certain types of investment funds 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 final rule 
could be reported as deductions from capital on Call Report schedule 
RC-R 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.\506\ The one affected small, FDIC-supervised institution did 
not report any such deductions over the past five years.\507\
---------------------------------------------------------------------------

    \506\ 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.
    \507\ FDIC Call Report data, March 2015-December 2019.
---------------------------------------------------------------------------

    Based on this supporting information, the FDIC certifies that this 
final rule will not have a significant economic impact on a substantial 
number of small entities.
SEC
    In the 2020 proposal, the SEC certified that, pursuant to 5 U.S.C. 
605(b), the 2020 proposal would not, if adopted, have a significant 
economic impact on a substantial number of small entities. Although the 
SEC solicited written comments regarding this certification, no 
commenters responded to this request.
    As discussed in the SUPPLEMENTARY INFORMATION, the amendments 
clarify and simplify compliance with the implementing regulations, 
refine the extraterritorial application of the section 13 of the BHC 
Act, and permit additional fund activities that do not present the 
risks that section 13 was intended to address.
    The amendments will 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 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 certifies that the 
amendments will not have a significant economic impact on a substantial 
number of small entities.
CFTC
    Pursuant to 5 U.S.C. 605(b), the CFTC hereby certifies that the 
final rule will not 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 final rule 
clarifies and simplifies compliance with the implementing regulations, 
refines the extraterritorial application of section 13 of the BHC Act, 
and permits additional fund activities that do not present the risks 
that section 13 was intended to address. To reduce the extraterritorial 
impact of the implementing regulations, the final rule exempts the 
activities of certain funds that are organized outside of the United 
States and offered to foreign investors from certain restrictions of 
the implementing regulations. The final rule also revises several 
existing exclusions from the covered fund provisions, to provide 
clarity and simplify compliance with the requirements of the 
implementing regulations. The final rule adopts several new exclusions 
from the covered fund definition in order to more closely align the 
regulation with the purpose of the statute. Last, the final rule adopts 
revisions to the provisions that govern the relationship between a 
banking entity and a fund and the definition of ownership interest.
    The final rule will 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.\508\ 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.\509\ 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.\510\
---------------------------------------------------------------------------

    \508\ The final rule 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 final 
rule. See 79 FR 5808, 5813 (Jan. 31, 2014) (CFTC version of 2013 
final rule).
    \509\ 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).
    \510\ 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 final rule, 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.

[[Page 46468]]

Similarly, the final rule applies to only those commodity trading 
advisors that are affiliated with banks, which the CFTC expects are 
larger businesses.
    The CFTC requested that commenters address in particular whether 
any of these commodity trading advisors, or other CFTC registrants 
covered by the proposed revisions, are small entities for purposes of 
the RFA. The CFTC did not receive any public comments on this or any 
other aspect of the RFA as it relates to the rule.
    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, 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 final 
rule will not have a significant economic impact on a substantial 
number of small entities for which the CFTC is the primary financial 
regulatory agency.

D. Riegle Community Development and Regulatory Improvement Act

    Section 302(a) of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (RCDRIA) \511\ requires that each Federal 
banking agency, in determining the effective date and administrative 
compliance requirements for new regulations that impose additional 
reporting, disclosure, or other requirements on insured depository 
institutions, consider, consistent with principles of safety and 
soundness and the public interest, any administrative burdens that such 
regulations would place on depository institutions, including small 
depository institutions, and customers of depository institutions, as 
well as the benefits of such regulations. The agencies have considered 
comment on these matters in other parts of this SUPPLEMENTARY 
INFORMATION.
---------------------------------------------------------------------------

    \511\ 12 U.S.C. 4802(a).
---------------------------------------------------------------------------

    In addition, under section 302(b) of the RCDRIA, new regulations 
that impose additional reporting, disclosures, or other new 
requirements on insured depository institutions generally must 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.\512\ 
Therefore, the effective date for the Federal banking agencies is 
October 1, 2020, the first day of the calendar quarter.\513\
---------------------------------------------------------------------------

    \512\ 12 U.S.C. 4802(b).
    \513\ Additionally, the Administrative Procedure Act generally 
requires that the effective date of a rule be no less than 30 days 
after publication in the Federal Register. 5 U.S.C. 553(d)(1). The 
effective date, October 1, 2020, will be more than 30 days after 
publication in the Federal Register.
---------------------------------------------------------------------------

E. OCC Unfunded Mandates Reform Act

    The OCC has analyzed the final rule under the factors in the 
Unfunded Mandates Reform Act of 1995 (UMRA). Under this analysis, the 
OCC considered whether the final 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.
    The final rule does not impose new mandates. Therefore, the OCC 
finds that the final 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
i. Background
    As discussed above, 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 (1) any insured depository institution 
(as defined by statute), (2) any company that controls an insured 
depository institution, (3) any company that is treated as a bank 
holding company for purposes of section 8 of the International Banking 
Act of 1978, and (4) any affiliate or subsidiary of such an 
entity.\514\ In addition, the Economic Growth, Regulatory Relief, and 
Consumer Protection Act (EGRRCPA),\515\ 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.\516\
---------------------------------------------------------------------------

    \514\ See 12 U.S.C. 1851(h)(1).
    \515\ See supra note 504.
    \516\ These and other aspects of the regulatory baseline against 
which the SEC is assessing the economic effects of the final rule 
being adopted here 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). In November 2019, the agencies adopted the 
2019 amendments, which tailored certain proprietary trading and 
covered fund restrictions of the 2013 rule. See supra note 8.
---------------------------------------------------------------------------

    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.\517\ The SEC's 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 rule amendments being adopted here (the ``final 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 final 
rule include SEC-registered broker-dealers, SBSDs, and RIAs. Thus, the 
analysis below does not consider the direct effects of the final rule 
on broker-dealers, SBSDs, and registered investment advisers that are 
not banking entities, or banking entities that are not SEC registrants. 
In addition, potential spillover effects on these and other entities 
are reflected in the SEC's analysis of effects on efficiency,

[[Page 46469]]

competition, investor protection, and capital formation in securities 
markets. This economic analysis also discusses the impact of the final 
rule on private funds,\518\ to the degree that it may flow through to 
SEC registrants, such as RIAs, SEC-registered broker-dealers and SBSDs, 
and securities markets and investors.
---------------------------------------------------------------------------

    \517\ 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), 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.
    \518\ 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 (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. 80-3(c)(1) or (7)). See also 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 term ``covered fund'' 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. Implementing regulations 
Sec.  __.10(b) and (c).
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    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.\519\ 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.
---------------------------------------------------------------------------

    \519\ See, e.g., 79 FR 5536, 5541, 5574, 5659, 5666. 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.\520\ The 2013 rule implemented these exemptions.\521\ Banking 
entities engaged in activities and investments covered by section 13 of 
the BHC Act and the implementing regulations are required to establish 
a compliance program reasonably designed to ensure and monitor 
compliance with the implementing regulations.\522\
---------------------------------------------------------------------------

    \520\ See 12 U.S.C. 1851(d)(1)(G).
    \521\ See 2013 rule Sec. Sec.  __.4, __.5, __.6, __.11, and 
__.13.
    \522\ See 2013 rule Sec.  __.20. See also 2019 amendments, 84 FR 
62021-25, which, among other things, modified these requirements for 
banking entities with limited trading assets and liabilities. This 
SEC Economic Analysis follows earlier sections by referring to the 
regulations implementing section 13 of the BHC Act, as amended 
through June 1, 2020 as the ``implementing regulations.'' See supra 
note 8.
---------------------------------------------------------------------------

    In the 2020 proposal, the SEC solicited 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. The SEC has considered these comments, as discussed in greater 
detail in the sections that follow.
ii. 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. Distinguishing 
between permissible and prohibited activities may be complex and 
costly, resulting in uncertain determinations for some entities. 
Moreover, the implementing regulations may include in their 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, 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.
    The final rule includes amendments that (1) 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), (2) modify existing covered fund exclusions 
under the implementing regulations (e.g., foreign public funds, public 
welfare funds, and small business investment companies), and (3) 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 final rule also 
reduces the burden on affected banking entities by codifying an 
existing policy statement by the Federal banking agencies that 
addresses the potential issues related to a foreign banking entity 
controlling a qualifying foreign excluded fund and adopting a rule of 
construction to provide clarity regarding a banking entity's 
permissible investments alongside a covered fund.
    Broadly, to the extent that the final rule directly changes the 
scope of permissible covered fund activities, and indirectly reduces 
costs to banking entities and covered funds by reducing uncertainty 
regarding the scope of permissible activities, the final rule may 
enhance the beneficial economic effects of the implementing 
regulations.\523\ The SEC's economic analysis continues to recognize 
that the overall risk exposure of banking entities generally reflects a 
combination of activities, including proprietary trading, market 
making, traditional banking, asset management, investment activities, 
and the extent to which banking entities engage in hedging and other 
risk-mitigating activities. The overall risk exposure is also a 
function of the magnitude, structure, and manner in which banking 
entities engage in such activities, both within such activities 
individually and across all of these activities collectively. As 
discussed elsewhere,\524\ 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 (including those made 
with respect to sections 203 and 204 of EGRRCPA) on overall levels and 
structure of banking entity risk exposures.
---------------------------------------------------------------------------

    \523\ See, e.g., 2019 amendments, 84 FR 62037-92.
    \524\ See id.
---------------------------------------------------------------------------

    The final rule may promote the ability of the capital markets to 
intermediate between suppliers and users of capital through, for 
example, increased ability and willingness of banking entities and 
investors in ``covered funds'' to facilitate capital formation through 
sponsorship and participation in certain types of funds and to transact 
with certain groups of counterparties.\525\ For

[[Page 46470]]

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.
---------------------------------------------------------------------------

    \525\ See, e.g., U.S. Dep't of the Treasury, A Financial System 
That Creates Economic Opportunities: Banks and Credit Unions (June 
2017), at 77, available at https://www.treasury.gov/press-center/press-releases/Documents/A%20Financial%20System.pdf.
---------------------------------------------------------------------------

    The final rule, however, may also facilitate risk mitigation as 
well as risk-taking activities of banking entities. The final rule also 
may change aspects of the relationships among banking entities and 
certain other groups of market participants, including potentially 
introducing new conflicts of interest, and increasing or reducing the 
potential effects of conflicts of interest. To the degree that some 
banking entities react to the final rule by restructuring activities 
involving covered funds to take advantage of the exclusions contained 
in the final rule, there may be shifts in the structure and levels of 
activities of banking entities that would, in turn, decrease or 
increase risk exposure. Recognizing these various potential effects, 
each of the exclusions includes a number of conditions 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.
    In evaluating these various potential effects, it is important to 
acknowledge that the exclusions made available by the final rule, such 
as for credit funds and qualifying venture capital funds, 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). Thus, the type 
of exposure permitted by engaging in those activities directly, and 
indirectly through covered funds, is the same and the banking entities 
may use fund structures to diversify or otherwise mitigate their risk 
exposure. Other exclusions 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 final rule 
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 final rule may also impact competition, allocative efficiency, 
and capital formation. To the extent that the implementing regulations 
have constrained banking entities in their covered fund activities, 
including providing traditional banking and asset management services 
to customers through a legal entity structure, the exclusions from the 
definition of ``covered fund'' made available by the final rule 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 final rule's costs, benefits, and effects on 
efficiency, competition, and capital formation will be 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, these effects 
are likely to vary widely among banking entities and funds. The SEC 
recognizes that the economic effects of the final rule may be dampened 
or magnified in different phases of the macroeconomic cycle, depend on 
monetary and fiscal policy developments and other government actions, 
and may vary across different types of banking entities.
    The SEC also considered the implications of the final rule for 
investors. Broadly, the final rule 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 the number of banking entities providing 
services to customers through entities such as customer facilitation 
vehicles and family wealth management vehicles. If the final rule 
increases the ability of investors to access public and private markets 
through funds and other entities, the final rule may result in the 
relaxing of constraints on investors' portfolio optimization and, thus, 
enhance the efficiency of portfolio allocations. The ability of 
additional investors to access these markets through funds and other 
entities may, in addition to providing those investors with greater 
choice, 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 
benefit investors because it may enable them to enter or exit their 
positions in fund instruments, products, and portfolios in a more 
timely manner and at a more attractive price.
    Moreover, investors who seek access to public capital markets 
investments or other investments through foreign public funds may 
benefit to the extent the final rule results 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 final rule, which allows banking entities to implement or 
facilitate such a trading or investing strategy while providing other 
banking and asset management services to the investor.\526\ At the same 
time, it is possible that, as a result of banking entities sponsoring 
or investing in more funds that are excluded from the definition of 
covered fund by the final rule, general market risk could increase and 
that risk could adversely affect markets generally, including through 
the impact on financial stability. However, due to the mitigation 
effects of the various conditions of the exclusions from the definition 
of covered fund contained in the final rule as well as expectations 
regarding the relative size and mix of the investments in the 
aggregate, the SEC believes this risk to be small. For example, the 
final rule permits a banking entity to act as a sponsor, investment 
adviser, or commodity trading advisor to certain excluded funds (e.g., 
credit funds and qualifying venture capital funds) only to the extent 
the banking entity ensures that the activities of the funds 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.
---------------------------------------------------------------------------

    \526\ See supra Section IV.B.1. (Foreign Public Funds).
---------------------------------------------------------------------------

iii. Analytical Approach
    The SEC's economic analysis is informed by research \527\ 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 implementing regulations. Throughout this 
economic analysis, the SEC discusses how different market

[[Page 46471]]

participants \528\ may respond to various aspects of the final rule. 
This analysis also considers the potential effects of the final rule 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.
---------------------------------------------------------------------------

    \527\ See 2019 amendments, 84 FR 62044-54.
    \528\ As discussed above, supra Section V.F.1.i. (Background), 
the SEC's economic analysis is focused on the potential effects of 
the final rule on (1) SEC registrants, (2) the functioning and 
efficiency of the securities markets, (3) investor protection, and 
(4) capital formation. Thus, the below analysis does not consider 
the direct effects of the final rule on broker-dealers, SBSDs, 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 V.F.2.i. (Affected Participants).
---------------------------------------------------------------------------

    The final rule tailors, removes, or alters the scope of various 
covered fund requirements in the implementing regulations. Since 
section 13 of the BHC Act and the implementing regulations 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,\529\ it is difficult to attribute the 
observed effects to a specific 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.\530\ 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 quantitative methods that might 
otherwise provide insight into 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 (or occurs in a sector of the market for which data 
is not readily available) as a result of the implementing regulations. 
Accordingly, it is difficult to quantify the primary security issuance 
and secondary market liquidity that would have been observed since the 
financial crisis absent various provisions of section 13 of the BHC Act 
and the implementing regulations.
---------------------------------------------------------------------------

    \529\ See, e.g., 2013 rule at 5541.
    \530\ With respect to the 2019 amendments, supra note 8, 
analysis of the effects is difficult because of the relatively short 
time that has passed since they became effective.
---------------------------------------------------------------------------

    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, including in some 
sectors of the market through the use of 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.\531\
---------------------------------------------------------------------------

    \531\ See U.S. Sec. & Exch. Comm'n, Access to Capital and Market 
Liquidity (Aug. 2017), available at https://www.sec.gov/files/access-to-capital-and-market-liquidity-study-dera-2017.pdf.
---------------------------------------------------------------------------

    Where possible, the SEC has attempted to quantify the costs and 
benefits it expects to result from the final rule. 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 implementing regulations 
may be impeding activity of banking entities with respect to certain 
investment vehicles, are inherently difficult to quantify. Moreover, 
some of the intended benefits of the implementing regulations' 
definitions and prohibitions that the agencies are amending include the 
potential for more resilient markets during a financial crisis or 
during periods of severe market stress. These intended benefits are 
less readily observable under periods of strong economic conditions, 
periods of significant government credit accommodation, and when 
markets have significant liquidity and are less volatile. Even 
following an economic shock, identification of these intended benefits 
requires a sufficient amount of data covering a relevant sample period. 
Moreover, identifying these benefits following an economic shock could 
prove difficult if the effects of past regulation are confounded by 
other interventions aimed at mitigating the impact of the shock on 
financial markets, including regulation, credit accommodation, and 
fiscal stimulus. Finally, it is difficult to quantify the net economic 
effects of any individual amendment because of overlapping 
implementation periods of various post-crisis regulations. Further, it 
is difficult to quantify the net economic effects of any individual 
amendment because of 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 final 
rule. 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 final rule; 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 final rule on efficiency, competition, 
and capital formation, are considered relative to a baseline that 
includes the implementing regulations (including the 2013 rule and the 
2019 amendments), legislative amendments in EGRRCPA, and current 
practices aimed at compliance with these regulations.
i. Regulation
    The SEC is assessing the economic impact of the final rule against 
a baseline that includes the legal and regulatory framework as it 
exists at the

[[Page 46472]]

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, relate 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 agencies' staffs 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 and may influence these entities' decisions about how to 
comply with the 2019 amendments.\532\ The Federal banking agencies also 
issued the policy statement in 2017 with respect to foreign excluded 
funds, and has since extended the policy statement to 2021.\533\
---------------------------------------------------------------------------

    \532\ See supra note 14.
    \533\ See supra Section VI.A. (Qualifying Foreign Excluded 
Funds) and notes 26 and 28 (discussion of ``the 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.\534\ The features of the regulatory framework under the 
2013 rule most relevant to the baseline include the definition of the 
term ``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.
---------------------------------------------------------------------------

    \534\ See 84 FR 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 implementing regulations define 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 
implementing regulations. The covered fund provisions of the 
implementing regulations 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 broad definition of covered funds encompasses many different 
types of vehicles, and the implementing regulations exclude some of 
them from the definition of a covered fund.\535\ The excluded fund 
types relevant to the baseline are funds that are regulated by the SEC 
under the Investment Company Act: Registered investment companies 
(RICs) and business development companies (BDCs). Seeding vehicles for 
these funds are also excluded from the covered fund definition during 
their seeding period.\536\
---------------------------------------------------------------------------

    \535\ The exclusions from the covered fund definition are set 
forth in Sec.  __.10(c) of the implementing regulations.
    \536\ See implementing regulations Sec. Sec.  __.10(c)(12)(i) 
and __.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.\537\ 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.
---------------------------------------------------------------------------

    \537\ See implementing regulations Sec.  __.14(a).
---------------------------------------------------------------------------

Definition of ``Banking Entity''
    For foreign banking entities,\538\ certain funds organized under 
foreign law and offered to foreign investors (``foreign excluded 
funds'') are not ``covered funds'' under the implementing regulations, 
but may be subject to the implementing regulations as ``banking 
entities'' under certain circumstances. Through the policy statement, 
the Federal banking agencies (in consultation with the staffs of the 
SEC and the CFTC) have provided temporary relief, that is currently 
scheduled to expire on July 21, 2021, for qualifying foreign excluded 
funds that may otherwise be subject to the implementing regulations as 
banking entities.\539\
---------------------------------------------------------------------------

    \538\ For purposes of this analysis, ``foreign banking entity'' 
has the same meaning as used in the policy statement, supra note 27, 
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.
    \539\ See supra note 26 and 28. For purposes of the policy 
statement, a ``qualifying foreign excluded fund'' means, 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.
---------------------------------------------------------------------------

Definition of ``Ownership Interest''
    The implementing regulations prohibit a banking entity, as 
principal, from directly or indirectly acquiring or retaining an 
``ownership interest'' in a covered fund.\540\ The implementing 
regulations define an ``ownership interest'' in a covered fund to mean 
any equity, partnership, or other similar interest. Under the 
implementing regulations, ``other similar interest'' is defined as an 
interest that:
---------------------------------------------------------------------------

    \540\ Implementing regulations 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,

[[Page 46473]]

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.\541\
---------------------------------------------------------------------------

    \541\ Implementing regulations Sec.  __.10(d)(6)(i).
---------------------------------------------------------------------------

    The implementing regulations permit a banking entity to acquire and 
retain an ownership interest in a covered fund that the banking entity 
organizes and offers pursuant to Sec.  __.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).\542\
---------------------------------------------------------------------------

    \542\ Implementing regulations Sec. Sec.  __.12(a)(1)(ii) and 
__.12(a)(2)(ii)(A). The implementing regulations also require 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. Implementing regulations Sec.  __.12(a)(2)(iii) 
(the aggregate funds limit).
---------------------------------------------------------------------------

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.\543\ Accordingly, the implementing 
regulations exclude from the covered fund definition entities that 
issue asset-backed securities if they meet specified conditions, 
including that they hold only loans, certain rights and assets, and a 
small set of other financial instruments (permissible assets).\544\ In 
addition, the baseline includes the FAQs issued by agencies' staff in 
June 2014 regarding the servicing asset provision of the loan 
securitization exclusion.\545\
---------------------------------------------------------------------------

    \543\ 13 U.S.C. 1851(g)(2). See also supra Section IV.B.2 (Loan 
Securitizations).
    \544\ See implementing regulations 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 rule Sec.  __.2(t).
    \545\ See supra Section IV.B.2 (Loan Securitizations, discussion 
of servicing assets).
---------------------------------------------------------------------------

Public Welfare and SBIC Exclusions
    Under the implementing regulations, 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),\546\ are 
excluded from the covered fund definition. Similarly, the implementing 
regulations exclude 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.\547\
---------------------------------------------------------------------------

    \546\ See implementing regulations Sec.  __.10(c)(11)(ii).
    \547\ See implementing regulations Sec.  __.10(c)(11)(i).
---------------------------------------------------------------------------

Attribution of Certain Investments to a Banking Entity
    As discussed above, the implementing regulations include a per-fund 
limit and aggregate fund limit on a banking entity's ownership of 
covered funds that the banking entity organizes and offers.\548\ The 
preamble to the 2013 rule stated, ``if 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.'' \549\ 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.\550\ The 2019 amendments eliminated the aggregate 
fund limit and capital deduction requirement under Sec.  __.12(d) for 
the value of ownership interests held by banking entities in third-
party covered funds (e.g., covered funds that those 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.
---------------------------------------------------------------------------

    \548\ See implementing regulations Sec.  __.12(a). See also 
supra Section IV.E.2. (Ownership Interest--Fund Limits and Covered 
Fund Deduction).
    \549\ 79 FR 5734.
    \550\ See id.
---------------------------------------------------------------------------

    For purposes of calculating the aggregate fund limit and the 
capital deduction requirement, the implementing regulations require 
attribution to a banking entity of restricted profit interests in a 
covered fund as ownership interests in the covered fund for which the 
banking entity serves as investment manager, investment adviser, 
commodity trading advisor, or other service provider.\551\ Under the 
implementing regulations, 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.\552\
---------------------------------------------------------------------------

    \551\ Implementing regulations Sec. Sec.  __.10(d)(6)(ii) and 
__.12(c)(1), (d). See also 12 U.S.C. 1851(d)(1)(G).
    \552\ Implementing regulations Sec. Sec.  __.12(c)(1), (d).
---------------------------------------------------------------------------

ii. Affected Participants
    The SEC-regulated entities directly affected by the final rule 
include broker-dealers, security-based swap dealers, and investment 
advisers. The implementing regulations impose a range of restrictions 
and compliance obligations on banking entities with respect to their 
covered fund activities and investments. To the degree that the final 
rule reduces or otherwise alters 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.
Broker-Dealers \553\
---------------------------------------------------------------------------

    \553\ 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 National Information 
Center. Broker-dealer assets and holdings were obtained from FOCUS 
Report data for Q4 2019.
---------------------------------------------------------------------------

    Under the implementing regulations, some of the largest SEC-
regulated

[[Page 46474]]

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 3,487 domestic broker-dealers that are not affiliated 
with banks greatly outnumber the 202 banking entity broker-dealers 
subject to the implementing regulations, banking entity broker-dealers 
dominate non-banking entity broker-dealers in terms of total assets 
(72% of total broker-dealer assets) and aggregate holdings (66% 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 \554\         \555\        $mln \556\
----------------------------------------------------------------------------------------------------------------
Affected bank broker-dealers \557\..............             202       3,240,045         777,192         607,086
Non-bank broker-dealers \558\...................           3,487       1,258,510         404,754         255,380
                                                 ---------------------------------------------------------------
    Total.......................................           3,689       4,498,556       1,181,946         862,466
----------------------------------------------------------------------------------------------------------------

Security-Based Swap Dealers
    The final rule 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.\559\ 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 final rule.\560\ Similarly, the 
SEC's analysis of TIW data suggests that none of the entities that may 
register with the SEC as Major Security-Based Swap Participants are 
affected by the final rule.
---------------------------------------------------------------------------

    \554\ Broker-dealer total assets are based on FOCUS report data 
for ``Total Assets.''
    \555\ 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.
    \556\ This alternative measure excludes U.S. and Canadian 
government obligations and spot commodities.
    \557\ This category includes all bank-affiliated broker-dealers 
except those exempted by section 203 of EGRRCPA.
    \558\ 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.
    \559\ 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).
    \560\ See id.
---------------------------------------------------------------------------

    October 6, 2021 is the compliance date for the SEC's registration 
rules for SBSDs, as well as several rules applicable to those entities, 
including segregation requirements and non-bank capital and margin 
requirements, recordkeeping and reporting requirements, business 
conduct standards, and risk mitigation techniques.\561\ Accordingly, 
the SEC recognizes that in anticipation of the compliance date for 
registration, firms may choose to restructure their 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 final rule.
---------------------------------------------------------------------------

    \561\ See Capital, Margin, and Segregation Adopting Release, 
supra note 517, at 43954. See also Rule Amendments and Guidance 
Addressing Cross-Border Application of Certain Security-Based Swap 
Requirements, 85 FR 6270, 6345-49 (Feb. 4, 2020).
---------------------------------------------------------------------------

Private Funds and Private Fund Advisers \562\
---------------------------------------------------------------------------

    \562\ These estimates are calculated from Form ADV data as of 
December 31, 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 final rule. Using Form ADV data, Table 2 reports the 
number of RIAs advising private funds by fund type as defined in Form 
ADV.\563\ Private funds rely on either section 3(c)(1) or 3(c)(7) of 
the Investment Company Act and so meet the implementing regulations' 
definition of ``covered fund.'' Table 3
---------------------------------------------------------------------------

    \563\ RIAs may also advise foreign public funds that are 
excluded from the covered fund definition in the implementing 
regulations, are the subject of the final rule discussed below, and 
are not reported on Form ADV.

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

[[Page 46475]]

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.\564\
    Banking entity RIAs advise a total of 4,387 private funds with 
approximately $2.089 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 890 hedge 
funds with approximately $606 billion in gross assets and 1,518 private 
equity funds with approximately $466 billion in assets.

  Table 2--SEC-Registered Investment Advisers Advising Private Funds by
                             Fund Type \565\
------------------------------------------------------------------------
                                                          Banking entity
                Fund type                     All RIA           RIA
------------------------------------------------------------------------
Hedge Funds.............................           2,620             151
Private Equity Funds....................           1,738              96
Real Estate Funds.......................             551              51
Securitized Asset Funds.................             233              44
Venture Capital Funds...................             223               8
Liquidity Funds.........................              44              16
Other Private Funds.....................           1,060             140
                                         -------------------------------
    Total Private Fund Advisers.........           4,781             282
------------------------------------------------------------------------


    Table 3--The Number and Gross Assets of Private Funds Advised by SEC-Registered Investment Advisers \566\
----------------------------------------------------------------------------------------------------------------
                                                      Number of private funds           Gross assets, $bln
                                                 ---------------------------------------------------------------
                    Fund type                                     Banking entity                  Banking entity
                                                      All RIA           RIA           All RIA           RIA
----------------------------------------------------------------------------------------------------------------
Hedge Funds.....................................          10,445             890           8,048             606
Private Equity Funds............................          16,217           1,518           4,119             466
Real Estate Funds...............................           3,699             320             732              94
Securitized Asset Funds.........................           2,000             380             767             145
Venture Capital Funds...........................           1,387              44             174               3
Liquidity Funds.................................              76              30             304             231
Other Private Funds.............................           4,757           1,206           1,543             542
                                                 ---------------------------------------------------------------
    Total Private Funds.........................          38,581           4,387          15,685           2,089
----------------------------------------------------------------------------------------------------------------

    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.'' \567\
---------------------------------------------------------------------------

    \564\ 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).
    \565\ This table includes only the advisers that list private 
funds on section 7.B.(1) of Form ADV. The number of advisers in the 
``Total Private Fund Advisers'' row is not the sum of the rows that 
precede it 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.
    \566\ Gross assets include uncalled capital commitments on Form 
ADV. The large decrease in Gross assets for Liquidity Funds from 
that reported in the proposing release is due, in part, to the 
removal of certain Form ADV data from one filer that contained an 
erroneous value for gross assets.
    \567\ See U.S. Sec. and Exchange Comm'n, Div. of Inv. Mgmt. 
Analytics Office, Private Fund Statistics, Third Calendar Quarter 
2019 (May 14, 2020), available at https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2019-q3-accessible.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 RIC or a 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.\568\ On the basis of SEC filings and 
public data, the SEC estimates that, as of December 2019, there were 
approximately 15,300 RICs \569\ and 101 BDCs. Although RICs and BDCs 
are generally not themselves banking entities subject to the 
implementing regulations, they may be indirectly affected by the 
implementing regulations and the final rule, 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.
---------------------------------------------------------------------------

    \568\ See, e.g., 2019 amendments, 84 FR 61979.
    \569\ 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 16,800.
---------------------------------------------------------------------------

Small Business Investment Companies
    Small business investment companies 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

[[Page 46476]]

an SBA guarantee to make equity and debt investments in qualifying 
small businesses.'' \570\ The final rule provides relief with respect 
to banking entity investments in SBICs during the wind-down process by 
excluding from the definition of ``covered fund'' those SBICs.\571\ 
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 295 SBIC licensees as of 
March 31, 2020 \572\ and 299 SBIC licensees as of December 31, 
2019.\573\ By contrast, as of September 30, 2017, there were 315 SBICs 
licensed by the SBA.\574\
---------------------------------------------------------------------------

    \570\ See U.S. Small Bus. Admin., SBIC Program Overview, 
available at https://www.sba.gov/content/sbic-program-overview.
    For purposes of the Advisers Act, 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, (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 Small Business Investment Act 
of 1958, 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 Small Business Investment Act 
of 1958, which application remains pending. 15 U.S.C. 80b-3(b)(7).
    \571\ Specifically, the final rule excludes 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. See Sec.  __.10(c)(11)(i).
    \572\ See U.S. Small Bus. Admin., SBIC Program Overview as of 
March 31, 2020, available at: https://www.sba.gov/sites/default/files/2020-05/SBIC%20Quarterly%20Report%20as%20of% 
20March_31_2020%20Amended%205.14.2020.pdf.
    \573\ See U.S. Small Bus. Admin., SBIC Program Overview as of 
December 31, 2019, available at https://www.sba.gov/sites/default/files/2020-02/SBIC%20Quarterly%20Report%20as%20of%20December_31_2019.pdf.
    \574\ See id.
---------------------------------------------------------------------------

    The final rule includes an exclusion for rural business investment 
companies (RBICs) from the implementing regulations similar to that 
provided to SBICs.\575\ As the SEC has discussed elsewhere,\576\ 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.\577\ 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.\578\ As of August 2019, there were 5 
RBICs who were licensed by the USDA managing approximately $352 million 
in assets.\579\
---------------------------------------------------------------------------

    \575\ Under the implementing regulations, an SBIC is excluded 
from the ``covered fund'' definition. See implementing regulations 
Sec.  __.10(c)(11)(i).
    \576\ See Exemptions from Investment Adviser Registration for 
Advisers to Certain Rural Business Investment Companies, 85 FR 13734 
(Mar. 10, 2020) (``RBIC Investment Adviser Adopting Release'').
    \577\ See the RBIC Advisers Relief Act of 2018, Public Law 115-
417, 132 Stat. 5438 (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).
    \578\ Following enactment of the RBIC Advisers Relief Act, supra 
note 577, 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 exclusion for certain venture capital funds 
discussed below (see infra text accompanying notes 672 and 673) 
which 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 exclusion.
    \579\ See RBIC Investment Adviser Adopting Release, supra note 
576.
---------------------------------------------------------------------------

    The Tax Cuts and Jobs Act established the ``opportunity zone'' 
program to provide tax incentives for long-term investing in designated 
economically distressed communities.\580\ 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.\581\ 
In this regard, QOFs are similar to SBICs and public welfare companies. 
The final rule provides relief to QOFs from the implementing 
regulations that is similar to the relief provided to SBICs.\582\ SEC 
staff is 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 April 2020, there were 406 
QOFs that report raising $10.09 billion in equity, and have a 
fundraising goal of $31.89 billion.\583\
---------------------------------------------------------------------------

    \580\ Tax Cuts and Jobs Act of 2017, Public Law 115-97, 131 
Stat. 2054 (2017).
    \581\ See U.S. Sec. and Exchange Comm'n & 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'').
    \582\ See supra note 575.
    \583\ 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.\584\ The SEC's economic analysis concerns the potential 
costs, benefits, and effects on efficiency, competition, and capital 
formation of the final rule for five groups of market participants. 
First, the final rule 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 
final rule permits dealers greater flexibility in providing services to 
more types of funds since dealers can 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 in making direct 
investments alongside covered funds. Fourth, the final rule may impact 
private funds and other vehicles, including those entities scoped in or 
out of the covered fund provisions of the implementing regulations, as 
well as private funds competing with such funds. One such impact may be 
seen to the extent that the final rule permits 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 final rule impacts 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.
---------------------------------------------------------------------------

    \584\ See 12 U.S.C. 1851.
---------------------------------------------------------------------------

    As discussed below, the agencies carefully considered the competing 
effects that could potentially result from the final rule and 
alternatives. For example, the final rule could result in enhanced 
competition among, and capital formation driven by, entities that would 
be treated as covered funds under the implementing regulations.

[[Page 46477]]

The final rule could also potentially increase (or decrease) financial 
and other risks posed by the ability to make investments in covered 
funds in addition to or in lieu of direct investments; however, the 
agencies have sought to mitigate the potential for increased risk and 
other concerns by imposing various conditions on the exclusions 
designed to address such risks.
    In addition, to the extent that the covered fund provisions of the 
implementing regulations limit fund formation, the final rule could 
provide a greater ability for banking entities to organize funds and 
attract capital from third party investors. This 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 implementing regulations 
are inhibiting capital formation via funds. Therefore, the bulk of the 
analysis below is necessarily qualitative. To the extent that the 
covered fund provisions of the implementing regulations limit alignment 
of interests between banking entities and their clients, customers, or 
counterparties, and to the extent the final rule alters the alignment 
of interests, the final rule could have a positive or negative effect 
on conflict of interest concerns.
    The final rule creates new recordkeeping requirements and revise 
certain disclosure requirements. Specifically, a banking entity may 
only rely on the exclusion for customer 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 provided by the banking 
entity. As discussed above in Section V.B. (Paperwork Reduction Act) 
\585\ and discussed further below, these new recordkeeping burdens may 
impose an initial burden of $1,078,650 \586\ and an ongoing annual 
burden of $1,078,650.\587\ 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 above in Section V.B, these disclosure requirements may 
impose an initial burden of $53,933 \588\ and an ongoing burden of 
$1,402,245.\589\
---------------------------------------------------------------------------

    \585\ 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 and Professional Earnings in the Securities 
Industry 2013 (available at https://www.sifma.org/resources/research/management-and-professional-earnings-in-the-securities-industry-2013/), modified to account for an 1800-hour work year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead, and adjusted for inflation.
    \586\ In the 2019 amendments, amendments that sought, among 
other things, to provide greater clarity and certainty about what 
activities were prohibited by the 2013 rule--in particular, under 
the prohibition on proprietary trading--and to better tailor the 
compliance requirements to 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, 84 FR 
62074. The SEC believes that such an approach would be inappropriate 
for the PRA-related burdens associated with the final rule 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 supra 
Section V.B (Paperwork Reduction Act).
    Initial recordkeeping burdens: (10 hours) x (255 entities) x 
(Attorney at $423 per hour) = $1,078,650.
    \587\ Annual recordkeeping burdens: (10 hours) x (255 entities) 
x (Attorney at $423 per hour) = $1,078,650.
    \588\ Initial recordkeeping burdens: (0.5 hours) x (255 
entities) x (Attorney at $423 per hour) = $53,933.
    \589\ Annual recordkeeping burdens: (0.5 hours) x (255 entities) 
x (26 disclosures per year) x (Attorney at $423 per hour) = 
$1,402,245.
---------------------------------------------------------------------------

    The sections that follow discuss how each of the amendments in the 
final rule change the implementing regulations, and the anticipated 
costs and benefits of the amendments, subject to the caveat that not 
all anticipated costs and benefits can be meaningfully quantified.\590\
---------------------------------------------------------------------------

    \590\ See supra Section V.F.1.iii. (SEC Economic Analysis--
Analytical Approach).
---------------------------------------------------------------------------

i. Amendments Related to Specific Types of Funds
    As discussed above, the final rule modifies a number of the 
provisions of the implementing regulations related to the treatment of 
certain types of funds (e.g., credit funds, family wealth management 
vehicles, small business investment companies, qualifying venture 
capital funds, customer facilitation vehicles, foreign excluded funds, 
foreign public funds, and loan securitizations).\591\
---------------------------------------------------------------------------

    \591\ See supra Section IV. (Summary of the Final Rule).
---------------------------------------------------------------------------

    Broadly, such modifications reduce the number and types of funds 
that are within the scope of the implementing regulations, impacting 
the economic effects of section 13 of the BHC Act and the implementing 
regulations.\592\
---------------------------------------------------------------------------

    \592\ See, e.g., 2019 amendments, 84 FR 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 
exclusions from the covered fund definition added or modified by the 
final rule and other relief addressed by the final rule. 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.\593\
---------------------------------------------------------------------------

    \593\ 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 564.
---------------------------------------------------------------------------

    Using Form ADV data, the SEC estimates that approximately 151 
banking entity RIAs advise hedge funds and 96 banking entity RIAs 
advise private equity funds (as those terms are defined in Form 
ADV).\594\ 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 380 securitized asset funds with $145 
billion in gross assets. Another 51 banking entity RIAs advise real 
estate funds, and banking entity RIAs advise 320 real estate funds with 
$94 billion in gross assets. Venture capital funds are advised by only 
8 banking entity RIAs, and all 44 venture capital funds advised by 
banking entity RIAs have in aggregate approximately $3 billion in gross 
assets.
---------------------------------------------------------------------------

    \594\ As noted in the economic baseline, a single RIA may advise 
multiple types of funds. See supra note 565.
---------------------------------------------------------------------------

    As noted elsewhere, the covered fund provisions of the implementing 
regulations 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. As discussed in the 2020 proposal, the implementing 
regulations may limit the ability of banking entities to conduct 
traditional asset management activities and reduce the availability of 
capital by imposing significant costs on some banking entities without 
providing commensurate benefits.\595\ Moreover, the 2013 rule's 
limitations on banking entities' investment in covered funds may be 
more significant for certain covered funds that are typically small in 
size such as many venture capital funds, with potentially more negative 
spillover

[[Page 46478]]

effects on capital formation in the types of underlying securities in 
which these types of funds invest.\596\
---------------------------------------------------------------------------

    \595\ See 85 FR 12164.
    \596\ See id.
---------------------------------------------------------------------------

    The final rule 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 final rule excludes from the covered 
fund definition. Accordingly, the final rule 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 the underlying debt or equity that those funds may purchase.
    The final rule may also benefit banking entity dealers through 
higher profits or greater demand for derivatives, margin, payment, 
clearing, and settlement services. Reducing 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 funds charge, investors in funds may benefit. 
Moreover, to the degree that the final rule may increase the spectrum 
of funds available to investors, the final rule may relax constraints 
around investor portfolio optimization and increase the efficiency of 
capital allocation.
    The SEC received comments from a diverse set of commenters. 
Comments from banking entities and financial services industry trade 
groups were generally supportive of the proposal, although many 
recommended additional modifications.\597\ There were also several 
organizations and individuals that were generally opposed to the 2020 
proposal.\598\ The sections that follow further discuss the economic 
costs, benefits, and effects on competition, efficiency, and capital 
formation with respect to specific types of funds and specific 
amendments in the final rule.
---------------------------------------------------------------------------

    \597\ See supra Section IV. (Summary of the Final Rule) for 
discussion of comments and recommendations for each of the proposed 
amendments.
    \598\ See id.
---------------------------------------------------------------------------

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.\599\ As discussed above, the policy statement released 
by Federal banking agencies provides that the Federal banking agencies 
would not propose to take action (1) against a foreign banking entity 
based on attribution of the activities and investments of a qualifying 
foreign excluded fund to the foreign banking entity \600\ or (2) 
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 implementing regulations, as if the qualifying foreign excluded 
fund were a covered fund.\601\ As in the 2020 proposal, the final rule 
provides a permanent exemption from the proprietary trading and covered 
fund prohibitions for certain foreign excluded funds that is 
substantively similar to the relief currently provided to qualifying 
foreign excluded funds by the policy statement.\602\
---------------------------------------------------------------------------

    \599\ See supra Section IV.A. (Qualifying Foreign Excluded 
Funds).
    \600\ 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.
    \601\ See supra note 26. The policy statement was subsequently 
extended for a two-year period ending on July 21, 2021. See also 
supra Section IV.A. (Qualifying Foreign Excluded Funds) and note 28.
    \602\ See final rule Sec. Sec.  __.6(f) and __.13(d).
---------------------------------------------------------------------------

    Commenters were generally supportive of the proposal to exempt 
qualifying foreign excluded funds from certain requirements of the 
rule.\603\ Two commenters expressed opposition to the proposed 
exemption.\604\
---------------------------------------------------------------------------

    \603\ SIFMA; BPI; BVI; AIC; ABA; EFAMA; SAF; IIB; JBA; CBA; and 
Credit Suisse. See also supra Section IV.A. (Qualifying Foreign 
Excluded Funds) for a discussion of individual comments.
    \604\ See Occupy and Data Boiler.
---------------------------------------------------------------------------

    The SEC recognizes that failing to exclude such funds from the 
definition of ``banking entity'' in the implementing regulations 
imposed 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 
implementing regulations to covered funds.
    The SEC believes that, absent the qualifying foreign excluded fund 
exemption and upon expiry of the policy statement, the implementing 
regulations may have significant adverse effects on foreign banking 
entities' ability 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.\605\ Accordingly, the final rule may benefit 
foreign banking entities and their foreign counterparties seeking to 
transact with and through such funds.
---------------------------------------------------------------------------

    \605\ See 85 FR 12123-26.
---------------------------------------------------------------------------

    The agencies received comments on the 2020 proposal that expressed 
concern that although qualifying foreign excluded funds would be 
exempted from the proprietary trading and covered funds restrictions of 
the implementing regulations, these funds would still be required to 
put in place compliance programs.\606\ However, since these qualifying 
foreign excluded funds are exempted from the proprietary trading 
requirements of Sec.  __.3(a) and covered fund restrictions of Sec.  
__.10(a), the agencies believe that requiring compliance programs to be 
established for the qualifying foreign excluded fund itself would be 
overly burdensome and unnecessary. Therefore, under the final rule, in 
addition to the proposed exemptions from the proprietary trading and 
covered fund prohibitions, qualifying foreign excluded funds will also 
not be required to have compliance programs under Sec.  __.20. However, 
any banking entity that owns or sponsors a qualifying foreign excluded 
fund will still be required to have in place the appropriate compliance 
programs as required by Sec.  __.20.
---------------------------------------------------------------------------

    \606\ See IIB; JBA; CBA; EBF; and Credit Suisse.
---------------------------------------------------------------------------

    The exemption is also expected to promote capital formation in the 
United States. While qualifying foreign excluded funds have a limited 
nexus to the United States, such funds are permitted to invest in U.S. 
companies. Therefore, to the extent that these funds have any direct 
impact on capital formation and U.S. financial stability, the exemption 
would promote U.S. financial stability by providing additional capital 
and liquidity to U.S. capital markets without a concomitant increase in 
risk borne by U.S. banking entities.

[[Page 46479]]

    The final rule 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 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. As discussed above,\607\ because the exemption requires that 
the foreign banking entity's acquisition of an ownership interest in or 
sponsorship of the fund meets the requirements in Sec.  __.13(b) of the 
final rule, the exemption will help to ensure that the risks of the 
investments made by these foreign funds would be booked to foreign 
entities in foreign jurisdictions. The agencies believe that exempting 
the activities of qualifying foreign excluded funds promotes and 
protects the safety and soundness of banking entities and U.S. 
financial stability,\608\ and relatedly the SEC believes the exemption 
is unlikely to impact negatively SEC registrants.
---------------------------------------------------------------------------

    \607\ See supra Section IV.A. (Qualifying Foreign Excluded 
Funds).
    \608\ See id.
---------------------------------------------------------------------------

Foreign Public Funds
    The implementing regulations exclude 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. 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.\609\ 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'' to 
persons other than the sponsoring banking entity, the issuer, their 
affiliates, directors of such entities, or employees of such entities 
(the sales limitation). 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.\610\ 
Third, such public offerings must occur outside the United States, must 
comply with applicable jurisdictional requirements (the compliance 
obligation), 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.
---------------------------------------------------------------------------

    \609\ 79 FR 5678.
    \610\ Id.
---------------------------------------------------------------------------

    The final rule makes several changes to the foreign public fund 
exclusion. First, the final rule removes the home jurisdiction 
requirement.\611\ Second, the final rule makes 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.\612\ Third, the agencies are also 
modifying 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 in one or more jurisdictions where ownership interests are 
sold.\613\ Fourth, the final rule applies the compliance obligation 
only in instances in which the banking entity serves as the investment 
manager, investment adviser, commodity trading advisor, commodity pool 
operator, or sponsor.\614\ Finally, the final rule narrows the sales 
limitation to the sponsoring banking entity, the issuer, affiliates, 
and directors and senior executive officers of such entities, and 
requires more than 75 percent of the fund's interest to be sold to such 
entities and persons.\615\
---------------------------------------------------------------------------

    \611\ See final rule Sec.  __.10(c)(1)(i)(B).
    \612\ See final rule Sec.  __.10(c)(1)(i)(B).
    \613\ See final rule Sec.  __.10(c)(1)(iii)(A).
    \614\ See final rule Sec.  __.10(c)(1)(iii)(B).
    \615\ See final rule Sec.  __.10(c)(1)(ii).
---------------------------------------------------------------------------

    As discussed in the 2020 proposal, the SEC has received comments 
indicating that the foreign public fund exclusion under the 
implementing regulations is impractical, overly narrow, and 
prescriptive, and results in competitive disparities between foreign 
public funds and RICs.\616\ The SEC also received comment that the home 
jurisdiction requirement under the implementing regulations 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.\617\
---------------------------------------------------------------------------

    \616\ See 85 FR 12166.
    \617\ Such funds could be organized in a particular jurisdiction 
for reasons including tax treatment, investment strategy, or 
flexibility to distribute into multiple markets (for instance, in 
the European Union), even though such funds are authorized to sell 
interests in other jurisdictions. See also id.
---------------------------------------------------------------------------

    As adopted in the final rule, 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 implementing regulations have disadvantaged foreign 
public funds relative to otherwise comparable RICs, the elimination of 
the home jurisdiction requirement may dampen such competitive 
disparities.
    As also discussed in the 2020 proposal, the SEC has received 
comment that the requirement that ownership interests be sold 
``predominantly'' through one or more public offerings outside of the 
United States has been burdensome and poses significant compliance 
burdens.\618\ 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.\619\ In response to 
the 2020 proposal, commenters supported the elimination of the home 
jurisdiction requirement and the requirement that the fund be sold 
predominantly through one or more public offerings.\620\
---------------------------------------------------------------------------

    \618\ See 85 FR 12166.
    \619\ See id.
    \620\ IIB; SIFMA; BPI; ABA; EBF; EFAMA; FSF; ICI; BVI; and CBA. 
See also supra Section IV.B.1. (Foreign Public Funds).
---------------------------------------------------------------------------

    To the degree that some banking entities restrict their activities 
because they are unable to quantify the volumes of distributions 
through foreign public offerings relative to, for instance, foreign 
private placements, the final rule may enable greater activity by 
banking entities relating to foreign public funds. Similar to the above 
discussion, this aspect of the final rule also treats foreign public 
funds in a manner more similar to RICs (which are not required to

[[Page 46480]]

monitor or assess distributions), with corresponding competitive 
effects.
    Commenters on the 2020 proposal also supported the proposed change 
to the ``public offering'' definition to include a requirement that the 
distribution be subject to substantive disclosure and retail investor 
protection laws or regulations.\621\ The final rule adopts that change, 
as proposed. Accordingly, the final rule tailors 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 final 
rule limits 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 than when the banking entity is only an investor in the fund.
---------------------------------------------------------------------------

    \621\ IIB; EFAMA; FSF; ICI; and BVI.
---------------------------------------------------------------------------

    The final rule also replaces the employee sales limitation with a 
limitation on sales to senior executive officers.\622\ As discussed in 
the 2020 proposal, 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.\623\ The SEC has also received comment that the 
employee sales limitation serves no discernible anti-evasion 
purpose.\624\ In addition, commenters noted that employee ownership 
interest can be a meaningful mechanism of promoting incentive 
alignment.\625\ The final rule replaces the employee sales limitation 
with a corresponding sales limitation with respect only to senior 
executive 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.
---------------------------------------------------------------------------

    \622\ Final rule Sec.  __.10(c)(1)(ii)(D).
    \623\ See 85 FR 12166.
    \624\ See id.
    \625\ See id.
---------------------------------------------------------------------------

    The SEC received comments to the 2020 proposal that recommended the 
agencies modify their expectation of the level of ownership of a 
foreign public fund that would satisfy the requirement that a fund be 
``predominantly'' sold to persons other than its U.S. banking entity 
sponsor and associated parties,\626\ which the preamble to the 2013 
rule stated was 85 percent or more (which would permit the U.S. banking 
entity sponsor and associated parties to own the remaining 15 percent). 
These commenters asserted that the relevant ownership threshold for 
U.S. registered investment companies is 25 percent, and that, for 
foreign public funds, the threshold should be the same. The agencies 
agree that the permitted ownership level of a foreign public fund by a 
U.S. banking entity sponsor and associated parties should be aligned 
with the functionally equivalent threshold for banking entity 
investments in U.S. registered investment companies, which is 24.9 
percent.\627\ Accordingly, the agencies have amended this provision in 
the final rule to require that more than 75 percent of a foreign public 
fund's interests must be sold to persons other than the U.S. banking 
entity sponsor and associated parties.\628\
---------------------------------------------------------------------------

    \626\ BPI; FSF; ICI; and CCMC. See also supra Section IV.B.1. 
(Foreign Public Funds).
    \627\ Although the implementing regulations do not explicitly 
prohibit a banking entity from acquiring 25 percent or more of a 
U.S. registered investment company, a U.S. registered investment 
company would become a banking entity if it is affiliated with 
another banking entity (other than as described in Sec.  
__.12(b)(1)(ii) of the implementing regulations). See 79 FR 5732 
(``[F]or purposes of section 13 of the BHC Act and the final rule, a 
registered investment company . . . will not be considered to be an 
affiliate of the banking entity if the banking entity owns, 
controls, or holds with the power to vote less than 25 percent of 
the voting shares of the company or fund, and provides investment 
advisory, commodity trading advisory, administrative, and other 
services to the company or fund only in a manner that complies with 
other limitations under applicable regulation, order, or other 
authority.'').
    \628\ See supra note 69.
---------------------------------------------------------------------------

    Commenters on the 2020 proposal generally supported the proposed 
changes to the foreign public funds exclusion; \629\ however, as 
discussed in this section and above, the agencies are making certain 
targeted adjustments in response to comments received.\630\ One 
commenter stated that the proposed changes were less than ideal for 
maximum control but acceptable from a practical implementation 
standpoint to balance compliance costs and benefits.\631\
---------------------------------------------------------------------------

    \629\ IIB; SIFMA; BPI; ABA; EBF; EFAMA; FSF; ICI; BVI; CBA; 
CCMR; Data Boiler; GS; IAA; JBA; SAF; and CCMC.
    \630\ See supra Section IV.B.1. (Foreign Public Funds).
    \631\ See Data Boiler.
---------------------------------------------------------------------------

    As discussed above, the SEC believes that the foreign public fund 
provisions of the final rule may facilitate greater capital formation 
through such funds, with the potential to create more capital 
allocation choices for investors. In particular, to the degree that 
some banking entities restrict their activities relating to foreign 
public funds because they are unable to quantify the distributions 
through public offerings or determine the holdings of their employees, 
the final rule may enable greater activity by banking entities relating 
to foreign public funds. The final rule also limits 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 than 
when the banking entity is only an investor in the fund.
    The agencies could have adopted a variety of alternatives offering 
more or less relief with respect to foreign public funds. For example, 
the agencies could have eliminated altogether the limit on sales to 
affiliated entities, directors and employees, which would have provided 
an even greater alignment of treatment between foreign public funds and 
RICs.\632\ Alternatives providing greater relief with respect to 
foreign public funds may have facilitated greater banking entity 
activity and intermediation of such funds on the one hand, but they may 
also have strengthened the competitive positioning of foreign public 
funds relative to U.S. registered funds. Moreover, providing greater 
relief with respect to foreign public funds may have allowed banking 
entities greater flexibility in the formation and operation of foreign 
public funds, but may also have increased the risk that banking 
entities would be 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 implementing regulations. 
Similarly, relative to the final rule, alternatives providing less 
relief with respect to foreign public funds may have strengthened the 
competitive positioning of U.S. RICs relative to foreign public funds 
and posed lower compliance or evasion risks, but may also have reduced 
the benefits of the relief for capital formation in foreign public 
funds and their investors.
---------------------------------------------------------------------------

    \632\ See 2020 proposal at 12166.
---------------------------------------------------------------------------

Loan Securitizations
    The 2013 rule excludes from the definition of covered fund any loan 
securitization that issues asset-backed securities, holds only loans, 
certain

[[Page 46481]]

rights and assets that arise from the structure of the loan 
securitization or from the loans supporting a loan securitization, and 
a small set of other financial instruments (permissible assets), and 
meets other criteria.\633\ As discussed in the 2020 proposal, the SEC 
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.\634\
---------------------------------------------------------------------------

    \633\ 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).
    \634\ See 85 FR 12173.
---------------------------------------------------------------------------

    The implementing regulations permit 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.\635\ In response to questions regarding the scope of 
the provisions permitting servicing assets and a separate provision 
limiting the types of permitted securities, the staffs of the agencies 
released the Loan Securitization Servicing FAQ.\636\ The final rule 
codifies the staff-level approach to the loan securitization exclusion 
in the Loan Securitization Servicing FAQ.\637\ To the degree that 
market participants may have restructured their activities consistent 
with the Loan Securitization Servicing FAQ, an effect of the final rule 
may be to reduce uncertainty. However, the economic effects of the 
codification of the Loan Securitization Servicing FAQ with respect to 
enabling greater capital formation through loan securitizations on the 
one hand, and increasing potential risks related to such activities on 
the other, may be limited.
---------------------------------------------------------------------------

    \635\ Implementing regulations Sec. Sec.  __.2(s); 
__.10(c)(8)(i)(D), (v).
    \636\ See supra note 14 (links to the staff-level FAQs) and 78 
and referencing paragraph (discussion of Loan Securitization 
Servicing FAQ).
    \637\ Sec.  __.10(c)(8)(i)(B).
---------------------------------------------------------------------------

    In the preamble to the 2013 rule, the agencies declined to permit 
loan securitizations to hold a certain amount of non-loan assets.\638\ 
Several commenters on the 2018 proposal disagreed with the agencies' 
views and supported expanding the range of permissible assets in an 
excluded loan securitization.\639\ The 2020 proposal would have allowed 
a loan securitization vehicle to hold up to five percent of the fund's 
total assets in any non-loan assets.
---------------------------------------------------------------------------

    \638\ 2013 rule at 5687-88.
    \639\ See 85 FR 12129.
---------------------------------------------------------------------------

    Commenters were generally supportive of allowing loan 
securitizations to hold a limited amount of non-loan assets.\640\ These 
commenters indicated that the requirements under the implementing 
regulations for the loan securitization exclusion have been too 
restrictive, excessively limited use of the exclusion, and prevented 
issuers from responding to investor demand. Further, commenters 
suggested that a limited bucket of non-loan assets would not 
fundamentally alter the characteristics and risks of securitizations or 
otherwise increase risks in banking entities or the financial 
system.\641\
---------------------------------------------------------------------------

    \640\ See, e.g., SIFMA; CCMC; ABA; Credit Suisse; MFA; Goldman 
Sachs; LSTA; BPI; and SFA.
    \641\ See, e.g., LSTA and Goldman Sachs.
---------------------------------------------------------------------------

    In the final rule, the agencies are revising the loan 
securitization exclusion to permit a loan securitization to hold a 
limited amount of debt securities.\642\ To minimize the potential for 
banking entities to use this exclusion to engage in impermissible 
activities or take on excessive risk, the final rule permits a loan 
securitization to hold debt securities (excluding asset-backed 
securities and convertible securities), as opposed to any non-loan 
asset, as the 2020 proposal would have allowed.\643\
---------------------------------------------------------------------------

    \642\ Final rule Sec.  __.10(c)(8)(i)(E).
    \643\ The implementing regulations also allow an excluded loan 
securitization to hold certain interest rate and foreign exchange 
derivatives for risk management purposes. The final rule makes no 
change to this provision.
---------------------------------------------------------------------------

    The SEC believes that non-loan assets with materially different 
risk characteristics from loans could change the character and 
complexity of an issuer and raise the type of concerns that section 13 
of the BHC Act was intended to address. Moreover, as described further 
below, limiting the assets to those with risk characteristics that are 
similar to loans may allow for a simpler and more transparent 
calculation of the five percent limit than would have been necessary if 
loan securitizations could invest in any non-loan asset, which will 
facilitate banking entities' compliance with the exclusion.
    Alternatively, the agencies could have expanded the range of 
permissible assets in an excluded loan securitization to include any 
non-loan asset with or without limitations (e.g., the holding of asset-
backed securities could have been permitted). Permitting loan 
securitizations to hold small amounts of non-loan assets may have 
enabled loan securitizations to respond to investor demand and may have 
reduced compliance costs associated with ensuring that a loan 
securitization holds only assets permitted under the exclusion. 
However, permitting excluded loan securitizations to hold a broader 
range of non-loan assets could have increased the risk that the 
character and complexity of excluded loan securitizations would have 
changed in a manner that raised the type of concerns that section 13 of 
the BHC Act was intended to address.
    However, the SEC recognizes that the loan securitization industry 
may have evolved since the issuance of the 2013 rule. As a result, the 
SEC believes that, even if the scope of non-loan assets permitted to be 
held were expanded beyond debt securities, loan securitizations may 
continue to have excluded non-loan assets. Further, permitting loan 
securitizations to hold a small amount of debt securities will not 
affect the applicable prudential requirements aimed at the 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.
    In the 2020 proposal, the agencies also requested comment on the 
methodology for calculating the limit on non-loan assets. Several 
commenters suggested using as a method for calculating the limit on 
non-loan assets: The par value of assets on the day they are 
acquired.\644\ These commenters suggested that relying on par value is 
accepted practice in the loan securitization industry and would obviate 
concerns related to tracking amortization or prepayment of loans in a 
securitization portfolio.\645\ Another commenter indicated that the 
limit should be calculated as the lower of the purchase price and par 
value of the non-qualifying assets over the issuer's aggregate capital 
commitments plus its subscription based credit facility.\646\
---------------------------------------------------------------------------

    \644\ SIFMA; BPI; ABA; and LSTA.
    \645\ SIFMA and BPI.
    \646\ Goldman Sachs.
---------------------------------------------------------------------------

    In response to these comments, the agencies are clarifying the 
methodology for calculating the five percent limit on non-loan 
assets.\647\ As suggested by several commenters, the final rule 
specifies that the limit on debt securities must be calculated at the 
most recent

[[Page 46482]]

time of acquisition of such assets.\648\ Specifically, the aggregate 
value of debt securities may not exceed five percent of the aggregate 
value of loans, cash and cash equivalents, and debt securities, where 
the value of the loans, cash and cash equivalents, and debt securities 
is calculated using par value at the most recent time any such debt 
security is purchased.\649\
---------------------------------------------------------------------------

    \647\ Final rule Sec.  __.10(c)(8)(i)(E).
    \648\ This limit applies to the debt securities that a loan 
securitization may hold pursuant to final rule Sec.  
__.10(c)(8)(i)(E).
    \649\ Id.
---------------------------------------------------------------------------

    The agencies have determined a calculation methodology that is 
intended to reduce compliance costs while ensuring that the investment 
pool of a loan securitization is composed of loans. The agencies have 
chosen the most recent time any such debt security is acquired as the 
moment of calculation to simplify the manner in which the five percent 
limit applies. This would permit an issuer that, at some point in its 
life, held debt securities in excess of five percent of its assets to 
continue to qualify for the exclusion if it came into compliance with 
the five percent limit prior to the next acquisition of a debt security 
that is subject to the five percent limit. The SEC believes that this 
approach balances the cost of calculation with the benefits of 
addressing the potential for evasion. The SEC believes that the 
alternative of a continuous monitoring obligation (i.e., requiring an 
excluded loan securitization to ensure that it held debt securities 
below or at the five percent limit at all times, regardless of any 
change in value of the securitization's assets) would have imposed 
significant burdens on banking entities and could have caused an issuer 
to be disqualified from the loan securitization exclusion based on 
market events not under its control.
    In the final rule, this calculation is based only on the value of 
the loans and debt securities held under Sec. Sec.  __.10(c)(8)(i)(A) 
and (E) and the cash and cash equivalents held under Sec.  
__.10(c)(8)(iii)(A) rather than the aggregate value of all of the 
issuing entity's assets. The purpose of the five percent limit is to 
ensure the investment pool of a loan securitization is composed of 
loans. Therefore, the calculation takes into account the assets that 
should make up the issuing entity's investment pool and excludes the 
value of other rights or incidental assets, as well as derivatives held 
for risk management. This further simplifies the calculation 
methodology by excluding assets that may be more complex to value and 
that are ancillary to the loan securitization's investment activities. 
This straightforward calculation methodology will ensure that the loan 
securitization exclusion remains easy to use and will facilitate 
banking entities' compliance with the exclusion.
    The agencies recognize that a loan securitization's transaction 
agreements may require that some categories of loans, cash equivalents, 
or debt securities be valued at fair market value for certain purposes. 
To accommodate such situations, the exclusion provides that the value 
of any loan, cash equivalent, or permissible debt security may be based 
on its fair market value if (1) the issuing entity is required to use 
the fair market value of such loan or debt security for purposes of 
calculating compliance with concentration limitations or other similar 
calculations under its transaction agreements and (2) the issuing 
entity's valuation methodology values similarly situated assets, for 
example non-performing loans, consistently. This provision is intended 
to provide issuers with the flexibility to leverage existing 
calculation methodologies while preventing issuers from using 
inconsistent methodologies in a manner to evade the requirements of the 
exclusion.
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 implementing regulations. 
As a result, prior to the final rule, banking entities faced 
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. The SEC 
received several comments to the 2018 proposal 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.\650\ 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 banking entities' lending portfolios, the 
pooling of expertise of groups of market participants, and otherwise 
reduce the risk for banking entities and the financial system.\651\ In 
addition, some commenters stated that to the degree that credit funds 
require pre-commitments of capital, they may dampen cyclical 
fluctuations in loan originations and may facilitate ongoing extensions 
of credit during times of market stress.\652\
---------------------------------------------------------------------------

    \650\ See 85 FR 12167.
    \651\ See id.
    \652\ See id.
---------------------------------------------------------------------------

    The agencies included in the 2020 proposal a specific exclusion for 
credit funds. Under the 2020 proposal, a credit fund would have been an 
issuer whose assets consist solely of: 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.\653\ The proposed 
exclusion would have been subject to certain additional requirements to 
reduce evasion concerns and ensure that banking entities invest in, 
sponsor, or advise credit funds in a safe and sound manner. For 
example, the proposed exclusion would have imposed (1) certain activity 
requirements on the credit fund, including a prohibition on proprietary 
trading; \654\ (2) disclosure and safety and soundness requirements on 
banking entities that sponsor or serve as an advisor for a credit fund; 
\655\ (3) safety and soundness requirements on all banking entities 
that invest in or have certain relationships with a credit fund; \656\ 
and (4) restrictions on the banking entity's investment in, and 
relationship with, a credit fund.\657\ The proposed exclusion also 
would have permitted a credit fund to receive and hold a limited amount 
of equity securities (or rights to acquire equity securities) that were 
received on customary terms in connection with the credit fund's loans 
or debt instruments.\658\
---------------------------------------------------------------------------

    \653\ 2020 proposal Sec.  __.10(c)(15)(i).
    \654\ 2020 proposal Sec.  __.10(c)(15)(ii).
    \655\ 2020 proposal Sec.  __.10(c)(15)(iii).
    \656\ 2020 proposal Sec.  __.10(c)(15)(iv).
    \657\ 2020 proposal Sec.  __.10(c)(15)(v).
    \658\ 2020 proposal Sec.  __.10(c)(15)(i)(C)(1)(iii).
---------------------------------------------------------------------------

    Commenters on the 2020 proposal were generally supportive of 
adopting an exclusion for credit funds.\659\ After consideration of the 
comments, the agencies are adopting the credit fund exclusion largely 
as proposed. The final rule creates 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

[[Page 46483]]

the structure and operation of credit funds.
---------------------------------------------------------------------------

    \659\ See, e.g., CCMC; AIC; SIFMA; FSF; ABA; Arnold & Porter; 
and Goldman Sachs. See also supra Section IV.C.1.ii. (Credit Funds--
Comments) for a more detailed discussion of comments received.
---------------------------------------------------------------------------

    The final rule permits banking entities to extend credit through a 
fund structure but also contains provisions to prevent a banking entity 
from taking the types of risks that the covered fund provisions of 
section 13 were meant to address. First, the credit fund exclusion 
specifies the types of activities in which these funds may engage. 
Excluded credit funds can transact in or hold only loans, debt 
instruments that would be permissible for the banking entity relying on 
the exception to hold directly, certain rights or assets that are 
related or incidental to the loans or debt instruments, and certain 
interest rate and foreign exchange derivatives. The final rule requires 
that the credit fund not engage in activities that would constitute 
proprietary trading. 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.
    Credit funds are likely to carry similar returns and risks as 
direct extensions of 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 certain common 
risks associated with pooled investments, 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 believes those risks 
to banking entities to be limited. Moreover, fund structures also 
entail certain common risk mitigating features (such as diversification 
across a larger number of borrowers) as well as significant cost 
efficiencies for banking entities.
    The SEC believes that the 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 extensions of credit through credit funds because 
of the implementing regulations, the exclusion may increase the volume 
of intermediation of credit by banking entities and make intermediation 
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 final 
rule 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 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 and undertaking similar activities largely results in 
the same risk exposures. Moreover, 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 the financial stability 
of the United States. These requirements would necessarily limit the 
risk that banks could take on by lending through a credit fund 
structure in a similar manner that would apply if the banking entity 
were to undertake similar lending activities directly. In addition, the 
final rule includes 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,\660\ and 
compliance with applicable safety and soundness standards.\661\
---------------------------------------------------------------------------

    \660\ Final rule Sec.  __.10(c)(15)(iv)(A).
    \661\ Final rule Sec.  __.10(c)(15)(v)(B).
---------------------------------------------------------------------------

    Several provisions of the exclusion are similar to and modeled on 
conditions in the existing loan securitization exclusion to ease 
compliance burdens. For example, 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.\662\ In addition, 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 or debt instruments held or, unique to the credit 
fund exclusion, equity securities (or rights to acquire equity 
securities) received on customary terms in connection with the credit 
fund's loans or debt instruments.\663\ Establishing an exclusion for 
credit funds based on the framework provided by the loan securitization 
exclusion will 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.
---------------------------------------------------------------------------

    \662\ Final rule Sec.  __.10(c)(15)(i)(D).
    \663\ Final rule Sec.  __.10(c)(15)(i)(C).
---------------------------------------------------------------------------

    In the 2020 proposal, the agencies requested comment on whether to 
impose a limit on the amount of equity securities (or rights to acquire 
equity securities) that may be held by an excluded credit fund.\664\ 
After a review of the comments and further deliberation, the agencies 
are not adopting a quantitative limit on the amount of equity 
securities (or rights to acquire equity securities) that may be held by 
an excluded credit fund. Any such equity securities or rights are 
limited by the requirements that they be (1) received on customary 
terms in connection with the fund's loans or debt instruments and (2) 
related or incidental to acquiring, holding, servicing, or selling 
those loans or debt instruments. The agencies generally expect that the 
equity securities or rights satisfying those criteria in connection 
with an investment in loans or debt instruments of a borrower (or 
affiliated borrowers) would not exceed five percent of the value of the 
fund's total investment in the borrower (or affiliated borrowers) at 
the time the investment is made.
---------------------------------------------------------------------------

    \664\ 85 FR 12133.
---------------------------------------------------------------------------

    The agencies could have imposed a quantitative limit on the amount 
of equity securities (or rights to acquire equity securities) held by 
the fund. However, the value of those equity securities or other rights 
may change over time for a variety of reasons, including as a result of 
market

[[Page 46484]]

conditions and business performance, as well as more fundamental 
changes in the business and the credit fund's corresponding management 
of the investment (e.g., exchanges of debt instruments for equity in 
connection with mergers and restructurings or a disposition of all 
portion of the credit investment without a corresponding disposition of 
the equity securities or rights due to differences in market conditions 
or other factors). Accordingly, the agencies can foresee various 
circumstances where the relative value of such equity securities or 
rights in a borrower (or affiliated borrowers) would over the life of 
the investment exceed five percent on a basis consistent with the 
requirements. Therefore, a quantitative limit on the amount of equity 
securities held by the fund could have imposed compliance, opportunity, 
and performance costs on a fund without a substantial reduction in risk 
to the fund. Nonetheless, the agencies expect that the fund's exposure 
to equity securities (or other rights), individually and collectively 
and when viewed over time, would be managed on a basis consistent with 
the fund's overall purpose.
    The credit fund exclusion prevents a banking entity from relying on 
the exclusion unless any debt instruments and equity securities (or 
rights to acquire an equity security) held by the credit fund and 
received on customary terms in connection with the credit fund's loans 
or debt instruments are permissible for the banking entity to acquire 
and hold directly. A banking entity that acts as sponsor, investment 
adviser or commodity trading advisor of a credit fund must ensure that 
the activities of the credit fund are consistent with certain safety 
and soundness standards.\665\ In addition, a banking entity's 
investment in, and relationship with, a credit fund must be conducted 
in compliance with, and subject to, applicable banking laws and 
regulations, including applicable safety and soundness standards.\666\ 
Combined with the prohibition on proprietary trading by a credit 
fund,\667\ these limitations are expected to prevent evasion of section 
13 of the BHC Act.
---------------------------------------------------------------------------

    \665\ Final rule Sec. Sec.  __.10(c)(15)(iv)(B), (iii)(B).
    \666\ Final rule Sec. Sec.  __.10(c)(15)(v)(B).
    \667\ Final rule Sec.  __.10(c)(15)(ii)(A).
---------------------------------------------------------------------------

    The final rule does not separately permit credit funds to hold 
derivatives under the provision allowing related rights and other 
assets. The preamble to the 2020 proposal made clear that ``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.'' \668\ The agencies suggested then and currently believe 
that allowing a credit fund to hold derivatives not related to interest 
rate or foreign exchange hedging would not be necessary to facilitate 
the indirect extensions of credit by banking entities that are the goal 
of the exclusion and may pose the very risks that section 13 of the BHC 
Act was intended to reach. To help ensure that the credit fund 
exclusion does not inadvertently allow the holding of certain 
derivatives unrelated to hedging interest rate and/or foreign exchange 
risks, the final rule explicitly excludes derivatives from permissible 
related rights and other assets.\669\
---------------------------------------------------------------------------

    \668\ See 85 FR 12132.
    \669\ Final rule Sec.  __.10(c)(15)(i)(C)(2).
---------------------------------------------------------------------------

    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 credit fund exclusion may be dampened or 
magnified in different phases of the macroeconomic cycle and across 
various types of banking entities.
    Investors in a credit fund that a banking entity sponsors or for 
which the banking entity serves as an investment adviser or commodity 
trading advisor may have expectations related to the performance of the 
credit fund that raise bailout concerns. To ensure that these investors 
are adequately informed of the banking entity's role in the credit 
fund, the final rule requires a banking entity that acts as a sponsor, 
investment adviser, or commodity trading advisor to an excluded credit 
fund to provide prospective and actual investors the disclosures 
specified in Sec.  __.11(a)(8) of the implementing regulations as if 
the credit fund were a covered fund.\670\ In addition, a banking entity 
that acts as a sponsor, investment adviser, or commodity trading 
advisor must 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.\671\
---------------------------------------------------------------------------

    \670\ Final rule Sec.  __.10(c)(15)(iii)(A).
    \671\ Final rule Sec.  __.10(c)(15)(iii)(B).
---------------------------------------------------------------------------

    As an alternative, the agencies could have adopted a credit fund 
exclusion that restricted permissible assets to only loans or debt 
instruments and not equity. The SEC recognizes that many banking 
entities are permitted to take as consideration for a loan to a 
borrower a warrant or option issued by the borrower that may result in 
an equity holding. The SEC recognizes that if banking entities are to 
be allowed to provide credit through a fund structure that they would 
otherwise be allowed to provide outside of a fund structure, an 
allowance for equity holdings is necessary. However, allowing a credit 
fund to hold an unlimited amount of equity in connection with an 
extension of credit could turn the exclusion for credit funds into an 
exclusion for the type of funds that section 13 of the BHC Act was 
intended to address. Accordingly, the agencies indicate above that they 
generally expect that the equity securities or other rights acquired by 
a credit fund would not exceed five percent of the value of the fund's 
total investment in a borrower at the time the investment is made.
Venture Capital Funds
    As discussed above, the agencies are adopting amendments in the 
final rule to exclude certain venture capital funds from the definition 
of ``covered fund,'' which 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.\672\ The exclusion is available with 
respect to qualifying venture capital funds, which includes an issuer 
that meets the definition of ``venture capital fund'' in 17 CFR 
275.203(l)-1 and that meets several additional criteria.\673\
---------------------------------------------------------------------------

    \672\ Final rule Sec.  __.10(c)(16).
    \673\ See supra Section IV.C.2. (Venture Capital Funds).
---------------------------------------------------------------------------

    A qualifying venture capital fund is an issuer that, among other 
criteria, is a venture capital fund as defined in 17 CFR 275.203(l)-
1.\674\ 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

[[Page 46485]]

equity funds and hedge funds.\675\ 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.\676\ The SEC further 
explained that the restriction on the amount of borrowing, debt 
obligations, guarantees or other incurrence of leverage are 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.\677\ The SEC believes that its 
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.
---------------------------------------------------------------------------

    \674\ 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, supra note 577, the SEC's 
definition of ``venture capital fund'' includes any RBIC and any 
SBIC. See 15 U.S.C. 80b-3(l).
    \675\ 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, 39652 
(July 6, 2011).
    \676\ 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.'').
    \677\ See id. at 39661-62. 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.'').
---------------------------------------------------------------------------

    As discussed in the 2020 proposal, the SEC has received comments 
supporting an exclusion for venture capital funds and stating 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.\678\ Moreover, the SEC received 
comment that venture capital funds promote economic growth and 
competitiveness of the United States more effectively than investments 
in expressly permissible vehicles, such as small business investment 
companies.\679\ 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.\680\
---------------------------------------------------------------------------

    \678\ See 85 FR 12168.
    \679\ See id.
    \680\ See id.
---------------------------------------------------------------------------

    In response to the 2020 proposal, the agencies received comments 
supporting the proposed definition of ``qualifying venture capital 
fund.'' \681\ At the same time, two commenters expressed opposition to 
the 2020 proposal.\682\
---------------------------------------------------------------------------

    \681\ See supra note 244.
    \682\ See supra note 270.
---------------------------------------------------------------------------

    The final rule largely adopts the exclusion as proposed.\683\ As 
adopted, the exclusion for qualifying venture capital funds is 
available to 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.\684\ With respect to any banking entity that 
acts as sponsor, investment adviser, or commodity trading advisor to 
the issuer, the banking entity is required (1) 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, (2) to ensure 
that the activities of the issuer are consistent with the safety and 
soundness standards that are substantially similar to those that would 
apply if the banking entity engaged in the activities directly, and (3) 
to comply with the restrictions in Sec.  __.14 (except the banking 
entity may acquire and retain any ownership interest in the issuer), as 
if the issuer were a covered fund.\685\
---------------------------------------------------------------------------

    \683\ The one change from the proposal is moving the requirement 
that the banking entity must comply with Sec. Sec.  __.14 to 
__.10(c)(16)(ii). This change clarifies that this requirement 
applies to a banking entity that acts as sponsor, investment 
adviser, or commodity trading advisor to the qualifying venture 
capital fund and does not apply to a banking entity that merely 
invests in a qualifying venture capital fund.
    \684\ Final rule Sec.  __.10(c)(16)(i).
    \685\ Final rule Sec.  __.10(c)(16)(ii).
---------------------------------------------------------------------------

    As in the 2020 proposal, a banking entity that relies on the 
exclusion may not, directly or indirectly, guarantee, assume, or 
otherwise insure the obligations or performance of the issuer.\686\ 
Finally, the banking entity's ownership interest in or relationship 
with a qualifying venture capital fund must comply with the limitations 
imposed in Sec.  __.15 of the implementing regulations (regarding, 
among other subjects, material conflicts of interest and high-risk 
investments), as if the issuer were a covered fund; and must be 
conducted in compliance with and subject to, applicable banking laws 
and regulations, including applicable safety and soundness 
standards.\687\
---------------------------------------------------------------------------

    \686\ Final rule Sec.  __.10(c)(16)(iii).
    \687\ Final rule Sec.  __.10(c)(16)(iv).
---------------------------------------------------------------------------

    The qualifying venture capital fund exclusion being adopted may 
provide banking entities with greater flexibility in their investments 
in private firms generally and in private firms with a broader range of 
financing sources, in each case to the extent that those investments 
are made through a fund structure. 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).\688\ This view was shared by several commenters on the 2020 
proposal, who indicated that an exclusion for venture capital funds 
would benefit underserved regions where venture capital funding is not 
readily available currently.\689\ In this respect, the qualifying 
venture capital fund exclusion 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.
---------------------------------------------------------------------------

    \688\ 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.
    \689\ See FSF; SIFMA; CCMC; and NVCA.
---------------------------------------------------------------------------

    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 funds individually and of banking entities as a whole. However, 
the 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 recognizes that venture capital funds commonly invest in

[[Page 46486]]

illiquid private firms with few sources of market price information, 
with corresponding risks and returns. To the degree that the exclusion 
for qualifying venture capital funds facilitates banking entity 
activities related to venture capital funds, this 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,\690\ 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.
---------------------------------------------------------------------------

    \690\ See 2019 amendments, 84 FR 62037-92.
---------------------------------------------------------------------------

    As an alternative, the agencies considered an additional 
restriction for which they are requested specific comment as part of 
the 2020 proposal. 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 considered several 
alternative thresholds that could have been appropriate in this regard 
to further differentiate qualifying venture capital funds from other 
types of private funds. The potential benefit of including a revenue or 
other similar test is that it could have been more difficult for 
banking entities to use the exclusion to make investments through the 
fund that the agencies may not have intended to be permissible. 
However, any such anti-evasion benefits of this alternative could have 
been offset by the extent to which anti-evasion concerns are already 
addressed by the other conditions of the exclusion. In addition, such a 
revenue test or other similar test could have facilitated the indirect 
investment by banking entities in smaller companies that may have been 
particularly risky or would have required qualifying venture capital 
funds to pass up investment opportunities that would otherwise be 
considered typical venture capital-type investments.
    Such an additional restriction as contemplated in the alternative 
would have made it more difficult for banking entities to sponsor and 
invest in qualifying venture capital funds by limiting the pool of 
possible investments in which those funds could invest. This difficulty 
may have been particularly pronounced for banking entities that would 
use the qualifying venture capital fund exclusion to make investments 
in third-party funds, which may not have been willing to restrict--and 
could have been prohibited from restricting under other applicable 
laws--the fund's investments in companies that met any such revenue or 
other similar test. As a result, such an additional condition could 
have diminished the benefits discussed above, both by limiting the 
utility of the exclusion for banking entities to make permissible 
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 implementing regulations exclude from the covered fund 
definition small business investment companies. The implementing 
regulations include 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 final rule expands 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.\691\
---------------------------------------------------------------------------

    \691\ Final 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 reduces regulatory uncertainty for banking entities. Under 
the implementing regulations, 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 
implementing regulations apply 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 2020 proposal discussed comments the SEC had received 
indicating that the 2013 rule had limited banking entity activities in 
SBICs that may spur economic growth, and that banking entities faced 
significant regulatory burdens that are not commensurate with the risk 
of the underlying activities.\692\ 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).\693\
---------------------------------------------------------------------------

    \692\ See 85 FR 12169.
    \693\ See id.
---------------------------------------------------------------------------

    The agencies proposed revising the exclusion for SBICs to clarify 
how the exclusion would apply to SBICs that voluntarily surrender their 
licenses during wind-down phases.\694\ Specifically, the agencies 
proposed revising the exclusion for SBICs to apply explicitly to an 
issuer that has voluntarily surrendered its license to operate as an 
SBIC and does not make new investments (other than investments in cash 
equivalents) after such voluntary surrender.\695\
---------------------------------------------------------------------------

    \694\ See 85 FR 12131.
    \695\ See id.
---------------------------------------------------------------------------

    Most commenters that directly addressed the 2020 proposal's 
revisions concerning SBICs supported the proposed revisions, stating 
that the proposed revisions would provide greater certainty to banking 
entities wishing to invest in SBICs and would increase investment in 
small businesses.\696\ The final rule adopts the 2020 proposal's 
revisions concerning SBICs without modification.
---------------------------------------------------------------------------

    \696\ See SIFMA; BPI; ABA; PNC; and SBIA.
---------------------------------------------------------------------------

    SBICs are an important mechanism for capital allocation by banking 
entities and one important channel of capital raising for issuers. The 
final rule clarifies 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 have been reluctant to invest in SBICs to avoid the 
risk of an SBIC being treated as a covered fund during SBIC 
dissolution, the final rule may increase the willingness of some 
banking entities to participate in SBICs. The final rule requires that 
SBICs that have voluntarily surrendered their license may not make new 
investments during the wind-down process. This aspect of the final rule 
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 a banking entity's investment in a SBIC at all 
stages of its lifecycle are

[[Page 46487]]

likely to flow through to the banking entity's shareholders. Moreover, 
banking entities participating in SBICs remain subject to applicable 
safety and soundness regulations and requirements.
Public Welfare Funds
    The implementing regulations exclude 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), including the welfare of low- and moderate-
income communities or families (such as providing housing, services, or 
jobs) (public welfare investment exclusion).\697\
---------------------------------------------------------------------------

    \697\ Implementing regulations Sec.  __.10(c)(11)(ii)(A).
---------------------------------------------------------------------------

    As discussed in the 2020 proposal, the SEC has received comment 
that the implementing regulations' 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.\698\
---------------------------------------------------------------------------

    \698\ See 85 FR 12169.
---------------------------------------------------------------------------

    The 2020 proposal posed a number of questions related to the scope 
of the public welfare investment exclusion. For example, the 2020 
proposal asked whether investments that would receive consideration as 
qualified investments under the regulations implementing the CRA should 
be excluded from the definition of covered fund, either by 
incorporating these investments into the public welfare investment 
exclusion or by establishing a new exclusion for CRA-qualifying 
investments.\699\ In addition, the 2020 proposal requested comment on 
whether RBICs are typically excluded from the definition of ``covered 
fund'' because of the public welfare investment exclusion or another 
exclusion and on whether the agencies should expressly exclude RBICs 
from the definition of covered fund.\700\ Finally, the 2020 proposal 
requested comment on whether many or all QOFs would meet the terms of 
the public welfare investment exclusion and on whether the agencies 
should expressly exclude QOFs from the definition of covered fund.\701\
---------------------------------------------------------------------------

    \699\ See id.
    \700\ See id.
    \701\ See id.
---------------------------------------------------------------------------

    The final rule revises the public welfare investment exclusion of 
the implementing regulations to incorporate issuers explicitly, the 
business of which is to make investments that qualify for consideration 
under the regulations implementing the CRA.\702\
---------------------------------------------------------------------------

    \702\ See Final rule Sec.  __.10(c)(11)(ii)(A).
---------------------------------------------------------------------------

    To the degree that some banking entities have faced uncertainty 
about their ability to make CRA-qualified investments and qualify for 
the exclusion, the 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 have financed community development projects eligible for the 
CRA through other fund structures and have relied on corresponding 
exemptions, the economic effects of the explicit exclusion for CRA-
qualified investments may be limited to the difference in compliance 
burdens between the new explicit exclusion and any existing covered 
fund exclusions.
    Commenters on the 2020 proposal generally favored explicitly 
excluding RBICs from the definition of ``covered fund,'' either by 
adopting a new exclusion, or by further clarifying the scope of the 
public welfare investment exclusion.\703\ The final rule provides a 
separate specific exclusion for RBICs, similar to the separate, 
specific exclusion for SBICs.\704\ As discussed elsewhere,\705\ 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,\706\ and their purpose is similar to the purpose of SBICs 
and public welfare companies.\707\ 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 
exemptions from investment adviser registration).\708\ The final rule's 
specific exclusion for RBICs should expand the economic effects of the 
SBIC exclusion discussed above and may facilitate capital formation by 
banking entities in growth stage businesses.
---------------------------------------------------------------------------

    \703\ See SIFMA; FSF; and SBIA.
    \704\ See supra note 575.
    \705\ See supra note 576.
    \706\ See U.S. Dep't of Agriculture, Rural Business Investment 
Program Overview, available at http://www.rd.usda.gov/programs-services/rural-business-investment-program.
    \707\ SBICs are intended to increase access to capital for 
growth stage businesses. See U.S. Small Bus. Admin., SBIC Program 
Overview, available at https://www.sba.gov/partners/sbics.
    \708\ See supra note 578. 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).
---------------------------------------------------------------------------

    The SEC understands that RBICs may already have been excluded from 
the definition of covered fund under the implementing regulations.\709\ 
For example, RBICs may qualify for the public welfare exclusion under 
the implementing regulations or may not be a covered fund by virtue of 
relying on an exclusion from the definition of ``investment company'' 
under the Investment Company Act other than section 3(c)(1) or 3(c)(7). 
An express exclusion for RBICs nevertheless should reduce compliance 
costs for banking entities, which may otherwise have been required to 
conduct a case-by-case analysis of each RBIC to determine whether it 
qualifies for an exclusion or exemption under the implementing 
regulations.
---------------------------------------------------------------------------

    \709\ In addition, RBICs may be excluded from the definition of 
``covered fund'' under the qualifying venture capital fund exclusion 
in the final rule. See supra note 578.
---------------------------------------------------------------------------

    In response to a request for comment in the 2020 proposal, 
commenters generally favored explicitly excluding QOFs from the 
definition of ``covered fund.'' \710\ The final rule provides a 
specific exclusion for QOFs similar to that provided to RBICs.\711\ As 
discussed above, the QOF 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 QOF exclusion should expand the economic effects of the 
SBIC exclusion and public welfare exclusion discussed above, and may 
facilitate capital formation by banking entities.
---------------------------------------------------------------------------

    \710\ See SIFMA; FSF; and ABA.
    \711\ Final rule Sec.  __.10(c)(11)(iv).
---------------------------------------------------------------------------

    QOFs already may have been excluded from the definition of covered 
fund under the implementing regulations. For example, QOFs may qualify 
for the public welfare exclusion under the implementing regulations or 
may not be covered funds by virtue of relying on an exclusion 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).\712\ 
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

[[Page 46488]]

section 3(c)(6) of the Investment Company Act.\713\ The express 
exclusion for QOFs, similar to the express exclusion for RBICs, should 
reduce compliance 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 
implementing regulations.
---------------------------------------------------------------------------

    \712\ See Opportunity Zone Statement, supra note 581.
    \713\ See id.
---------------------------------------------------------------------------

Family Wealth Management Vehicles
    As discussed in the 2020 proposal, family wealth management 
vehicles commonly engage in asset management activities, as well as 
estate planning and other related activities.\714\ The SEC understands 
that some banking entities may have been 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 implementing regulations.\715\ 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.\716\
---------------------------------------------------------------------------

    \714\ See 85 FR 12170.
    \715\ See id.
    \716\ See id.
---------------------------------------------------------------------------

    In the 2020 proposal, the agencies requested comment on whether to 
exclude family wealth management vehicles from the definition of 
``covered fund.'' \717\ Several commenters supported this exclusion, 
stating generally that it would reduce uncertainty for banking entities 
about the permissibility of providing traditional banking, investment 
management, and trust and estate planning services to family wealth 
management vehicle clients.\718\
---------------------------------------------------------------------------

    \717\ See 85 FR 12170.
    \718\ See, e.g., Goldman Sachs; FSF; CCMR; IAA; ABA; BPI; PNC; 
and SIFMA.
---------------------------------------------------------------------------

    As discussed above, the agencies are adopting an exclusion from the 
definition of ``covered fund'' for any entity that acts as a ``family 
wealth management vehicle.'' By specifically excluding family wealth 
management vehicles, the final rule may benefit such banking entities 
and their family customers by permitting the banking entities to offer 
services to and engage in transactions with family wealth management 
vehicle customers.
    Importantly, the final rule may benefit family wealth management 
vehicles and their investment advisers by increasing the number of 
banking entity counterparties willing to provide traditional client-
oriented financial and asset management services. Thus, the final rule 
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 final rule as well.
    Some commenters on the 2020 proposal opposed the exclusion for 
family wealth management vehicles. One commenter stated that rather 
than providing an exclusion for family wealth management vehicles 
through an agency rulemaking, the agencies should instead provide no-
action relief to such vehicles on a case-by-case basis.\719\ The SEC 
believes that such an approach would be unnecessarily burdensome and 
difficult to administer. The compliance costs of such an approach could 
impact the willingness of banking entities to provide traditional 
client-oriented financial and asset management services to their family 
customers. This approach would also unnecessarily deviate from the 
agencies' treatment of other excluded entities under the implementing 
regulations and hinder transparency and consistency.
---------------------------------------------------------------------------

    \719\ See Data Boiler.
---------------------------------------------------------------------------

    The SEC recognizes that some banking entities may respond to the 
exclusion by seeking to structure other entities as family wealth 
management vehicles. However, as discussed in detail above, the 
exclusion is only available under a number of conditions.\720\ 
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 (directly or 
indirectly) by family customers, a majority of the interests in the 
entity must be owned by family customers, and the entity must be owned 
only by family customers and up to five closely related persons of the 
family customers.\721\ Moreover, up to an aggregate 0.5 percent of the 
family wealth management vehicle's outstanding ownership interests may 
be acquired or retained by one or more entities that are not family 
customers or closely related persons for the purpose of and to the 
extent necessary for establishing corporate separateness or addressing 
bankruptcy, insolvency, or similar concerns.\722\ In addition, banking 
entities may rely on this exclusion only if they: (1) Provide bona fide 
trust, fiduciary, investment advisory, or commodity trading advisory 
services to the entity; \723\ (2) do not, directly or indirectly, 
guarantee, assume, or otherwise insure the obligations or performance 
of such entity; \724\ (3) comply with the disclosure obligations under 
Sec.  __.11(a)(8), as if such entity were a covered fund, provided that 
the content may be modified to prevent the disclosure from being 
misleading and the manner of disclosure may be modified to accommodate 
the specific circumstances of the entity; \725\ (4) comply with the 
requirements of Sec. Sec.  __.14(b) and __.15, as if such entity were a 
covered fund; \726\ and (5) except for riskless principal transactions 
as defined in Sec.  __.10(d)(11), comply with the requirements of 12 
CFR 223.15(a), as if such banking entity and its affiliates were a 
member bank and the entity were an affiliate thereof.\727\
---------------------------------------------------------------------------

    \720\ See supra Section IV.C.3. (Family Wealth Management 
Vehicles).
    \721\ See final rule Sec.  __.10(c)(17)(i).
    \722\ See final rule Sec.  __.10(c)(17)(i)(C).
    \723\ See final rule Sec.  __.10(c)(17)(ii)(A).
    \724\ See final rule Sec.  __.10(c)(17)(ii)(B).
    \725\ The disclosure content may be modified to prevent the 
disclosure from being misleading, and the manner of disclosure may 
be modified to accommodate the specific circumstances of the entity. 
See final rule Sec.  __.10(c)(17)(ii)(C).
    \726\ See final rule Sec.  __.10(c)(17)(ii)(E).
    \727\ See final rule Sec.  __.10(c)(17)(ii)(F).
---------------------------------------------------------------------------

    The definition of ``family customer'' includes 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.\728\ The SEC believes that the conditions for the 
exclusion and the definition of ``family customer'' will result in 
family wealth management vehicles being used as vehicles for providing 
customer-oriented financial services on arms-length, market terms, 
which the SEC believes will reduce the risk that banking entities' 
involvement in these vehicles will give rise to the types of risks that 
the covered funds provisions are meant to mitigate.
---------------------------------------------------------------------------

    \728\ See final rule Sec.  __.10(c)(17)(iii)(B).
---------------------------------------------------------------------------

    In the 2020 proposal, the agencies proposed to permit up to three 
closely related persons to hold ownership interests in a family wealth 
management vehicle. Several commenters supported allowing a finite 
number of closely related persons to hold ownership interests, but 
suggested that the proposed limit of three did not reflect the typical 
manner in which family

[[Page 46489]]

wealth management vehicles are constituted and would unnecessarily 
constrain the availability of the exclusion.\729\
---------------------------------------------------------------------------

    \729\ See, e.g., BPI; SIFMA; ABA; and PNC.
---------------------------------------------------------------------------

    The final rule allows for five closely related persons to hold 
ownership interests in a family wealth management vehicle. The agencies 
understand that many family wealth management vehicles currently 
include more than three closely related persons.\730\ The agencies 
believe that the final rule will more closely align the exclusion with 
the current composition of family wealth management vehicles, thereby 
increasing the utility of the exclusion without allowing such a large 
number of non-family customer owners to suggest the entity is in 
reality a hedge fund or private equity fund.
---------------------------------------------------------------------------

    \730\ See, e.g., BPI; ABA; and PNC.
---------------------------------------------------------------------------

    In the 2020 proposal, a banking entity could rely on the family 
wealth management vehicle exclusion only if the banking entity and its 
affiliates did 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. In addition, such de minimis interest 
could be held only for the purpose of and to the extent necessary for 
establishing corporate separateness or addressing bankruptcy, 
insolvency, or similar concerns.\731\ Some commenters requested that 
unaffiliated third parties--such as third-party trustees or similar 
service providers--be permitted to hold the de minimis interest.\732\
---------------------------------------------------------------------------

    \731\ See 85 FR 12139.
    \732\ See, e.g., SIFMA and BPI.
---------------------------------------------------------------------------

    As adopted, the final rule allows up to an aggregate 0.5 percent of 
the vehicle's outstanding ownership interests to be acquired or 
retained by third parties (that is, entities other than family 
customers or closely related persons). The SEC believes that permitting 
de minimis ownership by these third parties reflects a common structure 
of family wealth management vehicles. The SEC recognizes that without 
this modification, family wealth management vehicles may be forced to 
engage in less effective and/or efficient means of structuring and 
organization because the exclusion could limit the vehicle's access to 
some customary service providers that have traditionally taken small 
ownership interests for structuring purposes. To the extent that a 
family customer prefers a particular person or entity to act as a 
service provider, allowing third-party service providers to acquire the 
de minimis ownership interest may enable the family customer to choose 
to establish a family wealth management vehicle. Whether the de minimis 
amount is held by a banking entity or some other third party is not 
likely to raise any concerns that are not sufficiently addressed by the 
aggregate ownership limit and the narrow circumstances in which such de 
minimis ownership interest may be held. At the same time, when 
circumstances require that a de minimis ownership interest be held 
(e.g., for establishing corporate separateness), if the de minimis 
ownership interest is held by a third party and not a banking entity, 
then no banking entity will be exposed to any risk associated with 
holding the interest, however minimal that risk may be.
    In the 2020 proposal, banking entities could rely on the family 
wealth management vehicle exclusion only if the banking entity complied 
with the disclosure obligations under Sec.  __.11(a)(8), as if such 
vehicle were a covered fund. Commenters on the 2020 proposal requested 
that the agencies clarify that the disclosures could be modified (1) to 
reflect the specific circumstances of the banking entity's relationship 
with, and the particular structure of, its family wealth management 
vehicle clients; and (2) to allow the banking entity to satisfy the 
written disclosure requirement by means other than including such 
disclosures in the governing document(s) of the family wealth 
management vehicle(s).
    The final rule provides such clarity and change the disclosure 
requirement to permit banking entities and their affiliates (1) to 
modify the content of such disclosures to prevent them from being 
misleading and (2) to modify the manner of disclosure to accommodate 
the specific circumstances of the vehicle. The SEC believes that these 
disclosures will provide important information to the customers for 
whom these vehicles will be established. Because the final rule permits 
modification of the disclosures for certain reasons, the SEC expects 
that the disclosures provided to any particular family customer will be 
more accurate and better tailored to the particular circumstances of 
the family wealth management vehicle than the disclosures might have 
been under the 2020 proposal. These disclosures may result in the 
family customers being better able to understand the information 
included in these disclosures and being better able to weigh that 
information in determining whether to establish a family wealth 
management vehicle. To the extent that these tailored disclosures 
assist family customers in determining whether or how to structure a 
family wealth management vehicle, they may assist family customers in 
deciding how best to receive services from or otherwise interact with 
banking entities. The SEC expects that these benefits will justify any 
costs incurred by banking entities in tailoring the disclosures of 
Sec.  __.11(a)(8) or in providing them to customers (either by 
including them in existing documents or preparing a new disclosure 
document).
    The agencies are adopting, with modifications, the condition 
requiring a banking entity relying on the exclusion for family wealth 
management vehicles to comply with the requirements of 12 CFR 
223.15(a), as if such banking entity were a member bank and the vehicle 
were an affiliate thereof.\733\ This condition prohibits banking entity 
purchases of low-quality assets from these vehicles and is intended to 
prevent banking entities from ``bailing out'' family wealth management 
vehicles. Several commenters on the 2020 proposal stated that the 
agencies should clarify that the exclusion permits banking entities to 
engage in riskless principal transactions to purchase assets--including 
low quality assets for purposes of section 223.15 of Regulation W--from 
family wealth management vehicles.\734\ According to these commenters, 
allowing a banking entity to engage in such riskless principal 
transactions would facilitate the family customer's sale of 
assets,\735\ while posing minimal market or credit risk to the banking 
entity because the banking entity would purchase and sell the same 
asset contemporaneously.\736\ Furthermore, commenters stated that 
absent clarity on the permissiveness of riskless principal 
transactions, a family wealth management vehicle would be forced to 
obtain the services of a third party service provider to sell low 
quality assets, which in turn would increase the vehicle's costs and 
operational complexity without providing a meaningful benefit to 
furthering the aims of section 13 of the BHC or the implementing 
regulations.\737\
---------------------------------------------------------------------------

    \733\ See final rule Sec.  __.10(c)(17)(ii)(F). 12 CFR 223.15(a) 
provides that a member bank may not purchase a low-quality asset 
from an affiliate unless, pursuant to an independent credit 
evaluation, the member bank had committed itself to purchase the 
asset before the time the asset was acquired by the affiliate. 12 
CFR 223.15(a).
    \734\ See, e.g., BPI and SIFMA.
    \735\ See, e.g., SIFMA.
    \736\ See, e.g., SIFMA and BPI.
    \737\ See, e.g., SIFMA.
---------------------------------------------------------------------------

    The SEC believes that permitting a banking entity to engage in 
riskless principal transactions that involve the purchase of low-
quality assets from a

[[Page 46490]]

family wealth management vehicle is unlikely to pose a substantive risk 
of evading section 13 of the BHC Act. Accordingly, in a change from the 
2020 proposal and in response to the concerns raised by commenters, the 
condition will explicitly exclude from the requirements of 12 CFR 
223.15(a) transactions that meet the definition of riskless principal 
transactions as defined in Sec.  __.10(d)(11). The SEC expects that, 
together, the adopted criteria for the family wealth management vehicle 
exclusion will prevent a banking entity from being able to bail out 
such vehicles 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.
    Alternative forms of relief with respect to family wealth 
management vehicles--for example, alternatives that define ``family 
customers'' more broadly or narrowly, or that remove some of the 
conditions for the exclusion--would have increased or reduced the 
availability of the exclusion relative to the final rule. 
Alternatively, the agencies could have amended 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 vehicle were an affiliate thereof.
    Broader (narrower) alternative forms of relief may have increased 
(decreased) 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 have 
increased the risk that some banking entities would have responded to 
such relief by attempting to evade the intent of the rule, increasing 
the volume of their activities with family wealth management vehicles. 
Such risks of the alternatives, as compared to the exclusion contained 
in the final rule, may have been mitigated by the fact that banking 
entities would have remained subject to the full scope of broker-dealer 
and prudential capital, margin, and other rules aimed at facilitating 
safety and soundness. Nonetheless, by providing relief that is narrower 
than the broader alternative, the final rule should reduce those 
possible risks even further. Moreover, as discussed above, the SEC 
believes that traditional banking and asset management services 
involving family wealth management vehicles in general do not involve 
the types of risks that section 13 of the BHC Act was designed to 
address.\738\ Accordingly, any narrower relief than that provided by 
the final rule with respect to family wealth management vehicles may 
have constrained the economic benefits of the final rule (including 
with respect to capital formation and allocative efficiency) 
unnecessarily.
---------------------------------------------------------------------------

    \738\ See supra Section IV.C.3. (Customer Facilitation 
Vehicles).
---------------------------------------------------------------------------

Customer Facilitation Vehicles
    As discussed in the 2020 proposal, the SEC has received comments 
that, because of the implementing regulations' 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).\739\ 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.\740\ Moreover, the SEC is aware that limitations of the 
implementing regulations on the activities of such vehicles may have 
disrupted client relationships, reducing the efficiency of customer-
facing financial services, and raising compliance costs of banking 
entities.\741\
---------------------------------------------------------------------------

    \739\ See 85 FR 12171.
    \740\ See id.
    \741\ See id.
---------------------------------------------------------------------------

    The final rule establishes an exclusion from the definition of 
``covered fund'' for any issuer that acts as a ``customer facilitation 
vehicle.'' The customer facilitation vehicle exclusion will, as 
proposed, 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.\742\
---------------------------------------------------------------------------

    \742\ See final rule Sec.  __.10(c)(18)(i).
---------------------------------------------------------------------------

    A banking entity may only rely on the exclusion with respect to an 
issuer provided that: (1) 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; \743\ and (2) the banking 
entity and its affiliates: (i) Maintain documentation outlining how the 
banking entity intends to facilitate the customer's exposure to such 
transaction, investment strategy, or service; (ii) do not, directly or 
indirectly, guarantee, assume, or otherwise insure the obligations or 
performance of such issuer; (iii) comply with the disclosure 
obligations under Sec.  __.11(a)(8), as if such issuer were a covered 
fund, provided that the content may be modified to prevent the 
disclosure from being misleading and the manner of disclosure may be 
modified to accommodate the specific circumstances of the issuer; (iv) 
do not acquire or retain, as principal, an ownership interest in the 
issuer, other than up to an aggregate 0.5 percent of the issuer's 
outstanding ownership interests for the purpose of and to the extent 
necessary for establishing corporate separateness or addressing 
bankruptcy, insolvency, or similar concerns; (v) comply with the 
requirements of Sec. Sec.  __.14(b) and __.15, as if such issuer were a 
covered fund; and (vi) except for riskless principal transactions as 
defined in Sec.  __.10(d)(11), comply with the requirements of 12 CFR 
223.15(a), as if such banking entity and its affiliates were a member 
bank and the entity were an affiliate thereof.
---------------------------------------------------------------------------

    \743\ Notwithstanding this condition, up to an aggregate 0.5 
percent of the issuer's outstanding ownership interests may be 
acquired or retained by one or more entities that are not customers 
if the ownership interest is acquired or retained by such parties 
for the purpose of and to the extent necessary for establishing 
corporate separateness or addressing bankruptcy, insolvency, or 
similar concerns. See Sec.  __.10(c)(18)(ii)(B).
---------------------------------------------------------------------------

    The exclusion in the final rule should reduce or eliminate the 
costs imposed by the implementing regulations that limit the services 
that banking entities can provide to customer facilitation vehicles, 
which in turn may limit the activities of these vehicles. These costs 
include those associated with the disruption of client relationships 
and the reduction in the efficiency of customer-facing financial 
services. The final rule should reduce these baseline costs and 
inefficiencies by allowing banking entities to provide customer-
oriented financial services through vehicles, the purpose of which is 
to provide 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

[[Page 46491]]

purpose vehicles and fund structures, which could benefit banking 
entities, their customers, and securities markets more broadly.
    Most commenters on the 2020 proposal that addressed this exclusion 
were supportive,\744\ stating that it would provide banking entities 
with greater flexibility to meet client needs and objectives.\745\ Some 
commenters found the exclusion's conditions to be reasonable and 
sufficient.\746\ However, two commenters recommended that the agencies 
impose additional limitations on the exclusion.\747\ One of these 
commenters argued that the exclusion would permit, and possibly 
encourage, banking entities to increase their risk exposures through 
the use of customer facilitation vehicles, and the agencies should 
minimize such risk exposures and promote risk monitoring and 
management.\748\
---------------------------------------------------------------------------

    \744\ See, e.g., SIFMA; BPI; ABA; Credit Suisse; FSF; Goldman 
Sachs; and IAA.
    \745\ See, e.g., SIFMA; BPI; ABA; and Goldman Sachs.
    \746\ See, e.g., SIFMA; FSF; and SAF.
    \747\ See Better Markets and Data Boiler.
    \748\ See Better Markets.
---------------------------------------------------------------------------

    In the 2020 proposal, banking entities could rely on the customer 
facilitation vehicle exclusion only if the banking entity complied with 
the disclosure obligations under Sec.  __.11(a)(8), as if such vehicle 
were a covered fund. Commenters on the 2020 proposal requested that the 
agencies provide clarification in the context of family wealth 
management vehicles that the content of the disclosure may be modified 
to prevent the disclosure from being misleading and the manner of 
disclosure may be modified to accommodate the specific circumstances of 
the issuer.
    As with family wealth management vehicles, the final rule includes 
a modification to the proposed exclusion clarifying that the content of 
the disclosure may be modified to accommodate the specific 
circumstances of the issuer.\749\ The SEC believes that these 
disclosures will provide important information to the customers for 
whom these vehicles will be used to provide services--whether they are 
family customers under the family wealth management vehicle exclusion 
or other customers under this exclusion. As discussed above with 
respect to family wealth management vehicles, the SEC believes that the 
clarification in the final rule regarding permissible modifications of 
the disclosures required by Sec.  __.11(a)(8) will provide benefits 
that will justify any costs from tailoring and providing the 
disclosures.
---------------------------------------------------------------------------

    \749\ See final rule Sec.  __.10(c)(18)(ii)(C)(3).
---------------------------------------------------------------------------

    In the 2020 proposal, as with family wealth management vehicles, a 
banking entity could rely on the customer facilitation vehicle 
exclusion only if the banking entity and its affiliates did 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. 
In addition, such de minimis interest could be held only for the 
purpose of and to the extent necessary for establishing corporate 
separateness or addressing bankruptcy, insolvency, or similar 
concerns.\750\ As with family wealth management vehicles, commenters 
suggested that the agencies specifically allow any party that is 
unaffiliated with the customer, rather than only the banking entity and 
its affiliates, to own this de minimis interest.\751\
---------------------------------------------------------------------------

    \750\ See 85 FR 12139.
    \751\ See SIFMA; BPI; and FSF.
---------------------------------------------------------------------------

    As adopted, the final rule allows up to an aggregate 0.5 percent of 
the vehicle's outstanding ownership interests to be acquired or 
retained by third parties (that is, entities other than the customer) 
if the ownership interest is acquired or retained by such parties for 
the purpose of and to the extent necessary for establishing corporate 
separateness or addressing bankruptcy, insolvency, or similar 
concerns.\752\ The SEC recognize that without this modification, 
customer facilitation vehicles may be forced to engage in less 
effective and/or efficient means of structuring and organization 
because the exclusion could limit the vehicle's access to some 
customary service providers that have traditionally taken or may 
otherwise take small ownership interests for structuring purposes. To 
the extent that a customer prefers a particular person or entity to act 
as a service provider, allowing third-party service providers to 
acquire the de minimis ownership interest may make the customer more 
willing to establish a customer facilitation vehicle. Whether the de 
minimis amount is held by a banking entity or some other third party is 
not likely to raise any concerns that are not sufficiently addressed by 
the aggregate ownership limit and the narrow circumstances in which the 
de minimis ownership interest may be held.
---------------------------------------------------------------------------

    \752\ See final rule Sec.  __.10(c)(18)(ii)(B).
---------------------------------------------------------------------------

    The SEC recognizes that the provision of financial services related 
to customer facilitation vehicles may involve market risk, and the 
exclusion in the final rule may enable banking entities to provide a 
greater array of financial services to, and otherwise transact with, 
such vehicles. The SEC believes that such risks may be mitigated by at 
least two of the conditions of the exclusion. First, similar to the 
family wealth management vehicle discussed above, other than the de 
minimis ownership interest, a banking entity and its affiliates may not 
acquire or retain, as principal, any ownership in interest in the 
issuer.\753\ Second, a banking entity and its affiliates may not 
directly or indirectly guarantee, assume, or otherwise insure the 
obligations or performance of the vehicle.\754\ These conditions, among 
the other conditions of the exclusion, may mitigate risks that may be 
borne by individual banking entities and by banking entities as a whole 
as a result of the exclusion, and may facilitate banking entities' 
ongoing compliance with section 13 of the BHC Act and the final rule. 
Moreover, the SEC continues to believe that the provision of customer-
oriented financial services by banking entities may benefit customers, 
counterparties, and securities markets.
---------------------------------------------------------------------------

    \753\ Final rule Sec.  __.10(c)(18)(ii)(B)(4).
    \754\ Final rule Sec.  __.10(c)(18)(ii)(B)(2).
---------------------------------------------------------------------------

    The final rule creates new recordkeeping requirements for a banking 
entity that relies on the exclusion for customer facilitation 
vehicles.\755\ Specifically, the banking entity and its affiliates must 
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 V.B \756\ and above, these recordkeeping burdens may impose a 
total initial burden of $1,078,650 \757\ and a total ongoing annual 
burden of 1,0798,650.\758\
---------------------------------------------------------------------------

    \755\ Final rule Sec.  __.10(c)(18)(ii)(B)(1).
    \756\ See supra note 585.
    \757\ See supra note 586.
    \758\ See supra note 587.
---------------------------------------------------------------------------

    The agencies are adopting, with modifications, the condition 
requiring a banking entity relying on the exclusion for customer 
facilitation vehicles to comply with the requirements of 12 CFR 
223.15(a), as if such banking entity were a member bank and the vehicle 
were an affiliate thereof.\759\ The purpose of the proposed requirement 
that a customer facilitation vehicle must comply with 12 CFR 223.15(a) 
was the same for both the family wealth management vehicle and the 
customer facilitation vehicle

[[Page 46492]]

exclusions--to help ensure that the exclusions do not allow banking 
entities to ``bail out'' either vehicle.\760\ For the same reasons 
discussed above with respect to family wealth management vehicles, the 
agencies have modified the requirement to exclude from the requirements 
of 12 CFR 223.15(a) any transactions that meet the definition of 
riskless principal transactions as defined in Sec.  __.10(d)(11).
---------------------------------------------------------------------------

    \759\ See final rule Sec.  __.10(c)(18)(ii)(C)(6). 12 CFR 
223.15(a) provides that a member bank may not purchase a low-quality 
asset from an affiliate unless, pursuant to an independent credit 
evaluation, the member bank had committed itself to purchase the 
asset before the time the asset was acquired by the affiliate. 12 
CFR 223.15(a).
    \760\ See 85 FR 12140.
---------------------------------------------------------------------------

    As with the discussion of family wealth management vehicles above, 
the SEC believes that the ability of a banking entity to engage in 
riskless principal transactions with a customer facilitation vehicle 
will lower costs for the vehicle by allowing it to avoid finding a 
third party to intermediate trades for low quality assets. At the same 
time, allowing these riskless principal transactions should not pose 
the type of risk to the banking entity that section 13 of the BHC Act 
was intended to prevent. The SEC expects that the conditions for the 
customer facilitation vehicle exclusion will prevent a banking entity 
from being able to bail out such vehicles 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 considered alternative forms of relief with respect to 
customer facilitation vehicles. For example, the agencies could have 
adopted a higher third party ownership limit (of, for example, 5% or 
10%). Alternatively, the agencies could have adopted 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 adopted 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 have 
removed or loosened the conditions of the exclusion, which may have 
increased the risk that customer facilitation vehicles could be used 
for evasion purposes or could have exposed banking entities to 
additional risk, but could also have further reduced compliance burdens 
and provided greater flexibility to banking entities and their 
customers.
ii. Limitations on Relationships Between Banking Entities and Covered 
Funds
    As discussed above, under the implementing regulations, banking 
entities that either: (1) Serve, directly or indirectly, as a sponsor, 
investment adviser, commodity trading advisor, or investment manager to 
a covered fund; (2) organize and offer a covered fund under Sec.  
__.11; or (3) hold an ownership interest under Sec.  __.11(b) have been 
unable to engage in any covered transactions with such funds.\761\ This 
prohibition may have limited the services that such banking entities 
and their affiliates have been able to provide to certain entities that 
are covered funds under the implementing regulations. For example, as 
noted above, banking entities have been significantly limited in their 
ability to both organize and offer a covered fund, as well as to 
provide custody or other services to the fund.
---------------------------------------------------------------------------

    \761\ See 12 U.S.C. 1851(f)(1).
---------------------------------------------------------------------------

    The final rule permits a banking entity to engage in certain 
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 certain transactions that would be exempt pursuant to section 
223.42 of the Board's Regulation W.\762\ In addition, the final rule 
authorizes banking entities to engage in certain transactions, such as 
extensions of intraday credit for purchases of assets from covered 
funds in connection with payment, clearing, and settlement 
services.\763\ Finally, in a modification from the 2020 proposal, the 
final rule expressly permits banking entities to enter into certain 
riskless principal transactions with a related covered fund, including 
in circumstances where the covered fund is not a ``securities 
affiliate.'' \764\
---------------------------------------------------------------------------

    \762\ See final rule Sec.  __.14(a)(2)(iii).
    \763\ See final rule Sec.  __.14(a)(2)(v).
    \764\ See final rule Sec.  __.14(a)(2)(iv).
---------------------------------------------------------------------------

    As discussed in the 2020 proposal, the SEC received comment 
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.\765\ The SEC recognizes that outsourcing such activities to 
third parties may have adversely affected customer relationships, 
increasing costs and decreasing operational efficiency for banking 
entities and covered funds. The final rule provides 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 final rule. Many 
direct benefits are likely to accrue to banking entity advisers to 
covered funds that have been relying on third-party service providers 
as a result of the requirements of the implementing regulations.
---------------------------------------------------------------------------

    \765\ See 85 FR 12144.
---------------------------------------------------------------------------

    The final rule includes a standalone provision that permits banking 
entities to enter into riskless principal transactions with a related 
covered fund, including in circumstances where the covered fund is not 
a ``securities affiliate.'' The 2020 proposal would have permitted a 
banking entity to enter into a riskless principal transaction with a 
covered fund provided it met the criteria in Regulation W. The SEC 
believes that providing a standalone exception will provide clarity and 
certainty to banking entities about the extent to which they are able 
to enter into riskless principal transactions with related covered 
funds. In addition, by permitting more riskless principal transactions 
than would have been the case under the 2020 proposal (i.e., those that 
do not or may not meet the criteria of Regulation W), the final rule 
may facilitate banking entities entering into more of these 
transactions than they would have, reducing the likelihood that the 
covered fund would incur additional costs in buying or selling 
securities.\766\ As described above, in a riskless principal 
transaction, the riskless principal (the banking entity) buys and sells 
the same security contemporaneously, and the asset risk passes promptly 
from the affiliate (the related covered fund) through the riskless 
principal to a third party. Accordingly, the SEC does not believe that 
an increase in riskless principal transactions overall will increase 
the risks borne by any particular banking entity or banking entities in 
general.
---------------------------------------------------------------------------

    \766\ As discussed above, the final rule includes a definition 
of riskless principal transaction that is similar to the definition 
adopted in Regulation W. To the extent these definitions are 
sufficiently similar, the SEC expects that compliance costs will be 
low for banking entities seeking to enter into riskless principal 
transactions with related covered funds.
---------------------------------------------------------------------------

    The final rule increases banking entities' ability to engage in 
custody, clearing, and other transactions with related covered funds 
and will benefit banking entities that have been unable

[[Page 46493]]

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 
have been unable to rely on banking entities with which they have 
certain relationships for custody, clearing, and other transactions. As 
discussed above, reducing operational risk as well as the 
interconnectedness between financial firms that would result from such 
services being provided by the banking entities and their affiliates, 
would promote the financial stability of the U.S. financial 
system.\767\
---------------------------------------------------------------------------

    \767\ See supra Section IV.D. (Limitations on Relationships with 
a Covered Fund).
---------------------------------------------------------------------------

    In the 2020 proposal, the SEC discussed a prior comment that 
opposed incorporating the Federal Reserve Act section 23A exemptions or 
quantitative limits.\768\ To the extent that the final rule may 
increase transactions between banking entities and related covered 
funds, banking entities could incur risks associated with these 
transactions. However, as discussed above, the final rule imposes 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 to facilitate 
capital formation in covered funds.
---------------------------------------------------------------------------

    \768\ See 85 FR 12172.
---------------------------------------------------------------------------

    The agencies could have adopted broader or narrower forms of 
relief. For example, in addition to the relief under the final rule, 
the agencies could have permitted 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 final rule, each extension of credit must be 
repaid, sold, or terminated by the end of five business days.\769\ As 
another alternative, the agencies could have allowed extensions of 
credit in connection with payment transactions, clearing, or settlement 
services for periods that are longer than five business days. However, 
the five business day criteria is consistent with the federal banking 
agencies' capital rule and generally requires 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.\770\ 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 final rule, alternatives 
providing greater relief with respect to covered transactions with 
covered funds could have magnified the cost savings and operational 
risk benefits described above, but may also have increased risk to 
banking entities or the incentives for banking entities to bail out 
related covered funds. Similarly, narrower alternative forms of relief 
may have dampened the economic effects of the final rule discussed 
above.
---------------------------------------------------------------------------

    \769\ See final rule Sec.  __.14(a)(2)(iv)(B).
    \770\ See supra note 435.
---------------------------------------------------------------------------

iii. Definition of Ownership Interest
    As discussed above, the implementing regulations define ``ownership 
interest'' in a covered fund to mean any equity, partnership, or 
``other similar interest.'' 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, rather than its form. ``Other similar interest'' is defined, in 
part, 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).'' \771\
---------------------------------------------------------------------------

    \771\ See implementing regulations Sec.  __.10(d)(6)(i)(A). See 
also supra Section IV.E.1. (Ownership Interest).

    As discussed in the 2020 proposal, the SEC has received comment 
that the implementing regulations' definition of ownership interest has 
captured instruments that do not have equity-like features and 
constrained banking entity investments in debt securitizations and 
client facilitation services.\772\ For example, one commenter indicated 
that analyzing the ownership interest definition in the context of 
securitizations had resulted in added time and costs of executing 
transactions, as well as impeded securitization transactions.\773\ 
Moreover, the commenter indicated that the ``other similar interest'' 
prong of the definition precluded 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 have had to waive credit-enhancing remedies to avoid 
triggering the ownership interest restrictions.\774\ In addition, the 
SEC received comment that the ownership interest definition in the 
implementing regulations may have required an extensive legal analysis 
and documentation review and that, as a result, some banking entities 
may have defaulted to treating interests without controlling positions 
or equity-like features as ownership interests.\775\
---------------------------------------------------------------------------

    \772\ See 85 FR 12173.
    \773\ See id.
    \774\ See id.
    \775\ See id.
---------------------------------------------------------------------------

    The final rule modifies the definition of ownership interest in 
several ways. First, the final rule moves the existing exclusion from 
the definition of ``other similar interest'' in Sec.  __.10(d)(6)(A) 
(``for the rights of a creditor to exercise remedies upon the 
occurrence of an event of default or an acceleration event'') from the 
parenthetical to its own provision.\776\ The final rule also creates a 
new exclusion, for ``the right to participate in the removal of an 
investment manager for ''cause'' or participate in the selection of a 
replacement manager upon an investment manager's resignation or 
removal.'' \777\
---------------------------------------------------------------------------

    \776\ See final rule Sec.  __.10(d)(6)(i)(A)(1).
    \777\ See final rule Sec.  __.10(d)(6)(i)(A)(2).
---------------------------------------------------------------------------

    Commenters on the 2020 proposal asserted that creditors' rights are 
also provided to debt holders in circumstances other than an event of 
default or acceleration. These commenters therefore recommended the 
proposed exclusion be expanded to include additional for cause events 
that are independent of an event of default or acceleration, such as 
the insolvency of the investment manager or breach of the investment 
management or collateral management agreement.\778\ The final rule 
reflects those comments and provide clarity about the types of creditor 
rights that may attach to an interest without that interest being 
deemed an ownership interest. In particular, under Sec.  
__.10(d)(6)(A)(2), the definition of ownership interest does not 
include rights of an interest that allows a creditor to participate in 
the removal of an investment manager for ``cause.'' The final rule 
defines ``cause'' for removal to mean one or more of the following 
events:
---------------------------------------------------------------------------

    \778\ See SIFMA.
---------------------------------------------------------------------------

    (1) The bankruptcy, insolvency, conservatorship or receivership of 
the investment manager;
    (2) The breach by the investment manager of any material provision 
of the covered fund's transaction agreements applicable to the 
investment manager;
    (3) The breach by the investment manager of material 
representations or warranties;

[[Page 46494]]

    (4) The occurrence of an act that constitutes fraud or criminal 
activity in the performance of the investment manager's obligations 
under the covered fund's transaction agreements;
    (5) The indictment of the investment manager for a criminal 
offense, or the indictment of any officer, member, partner or other 
principal of the investment manager for a criminal offense materially 
related to his or her investment management activities;
    (6) A change in control with respect to the investment manager;
    (7) The loss, separation or incapacitation of an individual 
critical to the operation of the investment manager or primarily 
responsible for the management of the covered fund's assets; or
    (8) Other similar events that constitute ``cause'' for removal of 
an investment manager, provided that such events are not solely related 
to the performance of the covered fund or to the investment manager's 
exercise of investment discretion under the covered fund's transaction 
agreements.
    The final rule also modifies the definition of ownership interest 
to add to the list of interests that are excluded from the definition 
of ownership interest. Specifically, the final rule provides a safe 
harbor excluding any senior loan or senior debt interest that has 
specific characteristics.\779\ Those characteristics are: (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 repayment of a 
fixed principal amount on or before a maturity date in a contractually-
determined manner (which may include prepayment premiums intended 
solely to reflect, and compensate holders of the interest for, forgone 
income resulting from an early prepayment); (2) the entitlement to 
payments is absolute and cannot be reduced because of the losses 
arising from the covered fund's underlying assets; 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).\780\
---------------------------------------------------------------------------

    \779\ See final rule Sec.  __.10(d)(6)(ii)(B).
    \780\ See id. See also, supra Section IV.E.1. (Ownership 
Interest).
---------------------------------------------------------------------------

    The final rule should simplify the analysis banking entities must 
perform to determine whether they have an ownership interest under 
section 13 of the BHC Act and the final rule. Moreover, to the degree 
that banking entities may have responded to the ownership interest 
definition in the implementing regulations by reducing their 
investments in certain debt instruments, the final rule may result in 
greater banking entity investments in covered funds and a greater 
ability of covered funds to allocate capital to the underlying assets.
    The SEC recognizes that such debt instrument investments carry 
risk,\781\ and that the risks and returns of such investments flow 
through to banking entities' shareholders. While the final rule's 
ownership interest definition may permit banking entities to increase 
exposures to certain debt instruments, three key considerations may 
mitigate the risks associated with such activities. First, the final 
rule does 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 final rule may result in banking entities receiving 
credit enhancements that reduce the risk of the debt instrument or loan 
and are therefore stronger than what banking entities may have received 
in the absence of the final rule. Finally, the final rule includes a 
number of conditions and restrictions aimed at reducing the risk to 
banking entities while facilitating traditional lending activity.
---------------------------------------------------------------------------

    \781\ See Occupy.
---------------------------------------------------------------------------

    The agencies could have adopted 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 final rule, such an alternative may have produced 
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 have given rise to greater risks being borne by 
banking entities. The final rule is intended to provide sufficient 
safeguards and limitations to prevent banking entities from acquiring 
interests in covered funds that run counter to the intentions of the 
implementing regulations 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.
iv. 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.\782\ 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.\783\
---------------------------------------------------------------------------

    \782\ See supra Section IV.F. (Parallel Investments) and 
references therein.
    \783\ See id.
---------------------------------------------------------------------------

    As discussed in the 2020 proposal, the SEC has received comment 
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.\784\ The final rule includes 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.\785\
---------------------------------------------------------------------------

    \784\ See 85 FR 12174.
    \785\ See final rule Sec.  __.12(b)(5)(i).
---------------------------------------------------------------------------

    The SEC recognizes that this rule of construction may increase the 
incentive for banking entities to make parallel investments alongside a 
covered fund that is organized and offered by the banking entity for 
the purposes of artificially maintaining or increasing the value of the 
fund's positions. Supporting a fund with a direct investment in such a 
manner would increase these banking entities' exposures to the covered 
fund's assets and, as discussed above, could be inconsistent with the 
final rule's restriction on a banking entity guaranteeing, assuming, or 
otherwise

[[Page 46495]]

insuring the obligations or performance of such covered fund.\786\
---------------------------------------------------------------------------

    \786\ Id.
---------------------------------------------------------------------------

    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. Accordingly, such an 
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.
    The SEC recognizes that the rule of construction may remove a 
restriction on investments made alongside a covered fund that may have 
interfered with banking entities' ability to make otherwise permissible 
investments directly on their balance sheets.\787\ In particular, the 
rule of construction may allow banking entities to make parallel 
investments alongside their covered funds without including the value 
of those parallel investments within the ownership limits imposed on a 
banking entity. Similarly, the rule of construction may provide clarity 
to banking entities such that they will not be prevented from making 
investments alongside their covered funds, as long as those investments 
are otherwise permissible under applicable laws and regulations.\788\ 
In addition to removing impediments for banking entities' otherwise 
permissible investments, the rule of construction in the final rule may 
enable banking entities to make investments alongside a covered fund 
that will credibly signal the banking entity's view of the quality of 
the investment(s) to 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.
---------------------------------------------------------------------------

    \787\ See supra note 784.
    \788\ See id.
---------------------------------------------------------------------------

4. Efficiency, Competition, and Capital Formation
    As discussed above, the final rule excludes certain groups of 
private funds and other entities from the scope of the covered fund 
definition and modifies other covered fund restrictions applicable to 
banking entities subject to the final rule. Moreover, the final rule 
reduces compliance obligations of banking entities subject to the final 
rule. The SEC believes that the final rule may impact competition, 
capital formation, and allocative efficiency.
    The final rule may have three groups of competitive effects. First, 
the final rule 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 final rule may reduce competitive 
disparities between banking entities subject to the final rule and 
affected by the final rule, and banking entities that are not. Third, 
certain aspects of the final rule (such as those 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 final rule may also impact capital formation. For example, by 
reducing the scope of application of covered fund restrictions in the 
final rule, the final rule relaxes restrictions related to banking 
entity underwriting and market-making of certain private funds. 
Moreover, the final rule modifies certain restrictions related to 
banking entity relationships with certain covered funds. Further, as 
discussed above, the final rule enables 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 final rule 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 final rule 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 an increase in the supply of capital available to 
firms seeking to raise capital or obtain financing from private 
funds.\789\
---------------------------------------------------------------------------

    \789\ For example, the final rule could result in additional 
venture capital being available in geographic areas where it has 
been relatively less available. See supra Section V.F.3.i. (Venture 
Capital Funds).
---------------------------------------------------------------------------

    The possible effects of the final rule on allocative efficiency are 
related to the final rule's likely impact on capital formation. 
Specifically, as discussed above, the SEC believes that the final rule 
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 final rule may 
enhance the ability of market participants, investors, and issuers to 
allocate their capital efficiently.
    The SEC recognizes that the final rule 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 times of 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 are excluded under the 
final rule largely replicate permissible and traditional activities of 
banking entities. Second, banking entities subject to the final rule 
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 additional 
exclusions from the definition of covered fund each include a number of 
conditions aimed at preventing evasion of section 13 of the BHC Act and 
the final rule, promoting safety and soundness, and/or allowing for 
customer oriented financial services provided on arms-length, market 
terms.
    Under the final rule, 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

[[Page 46496]]

investors in the covered fund.\790\ Under the final rule, banking 
entities must provide the disclosures specified by Sec.  __.11(a)(8) to 
satisfy the exclusions for family wealth management vehicles and 
customer facilitation vehicles and 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. To the 
extent that the final rule leads 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 final rule 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.
---------------------------------------------------------------------------

    \790\ Implementing regulations Sec.  __.11(a)(8).
---------------------------------------------------------------------------

    Importantly, the magnitude of all of the above effects on 
competition, capital formation, and allocative efficiency will 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.

G. Congressional Review Act

    For the OCC, Board, FDIC, SEC, and CFTC, the Office of Information 
and Regulatory Affairs, pursuant to the Congressional Review Act, has 
designated this rule as a ``major rule'' as defined by 5 U.S.C. 804(2).

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 amends 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;
    (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 the banking entity 
that sponsors or controls the qualifying foreign excluded fund, or any 
of its affiliates, 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 the heading of paragraph (c)(10) and revising paragraph 
(c)(10)(i);
0
e. Revising paragraph (c)(11);
0
f. Adding paragraphs (c)(15), (16), (17), and (18);
0
g. Revising paragraph (d)(6); and
0
h. Adding paragraph (d)(11).
    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:

[[Page 46497]]

    (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 more than 75 percent of the 
ownership interests in the issuer are sold 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.  
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;
    (D) Special units of beneficial interest and collateral 
certificates that meet the requirements of paragraph (c)(8)(v) of this 
section; and
    (E) Debt securities, other than asset-backed securities and 
convertible securities, provided that:
    (1) The aggregate value of such debt securities does not exceed 
five percent of the aggregate value of loans held under paragraph 
(c)(8)(i)(A) of this section, cash and cash equivalents held under 
paragraph (c)(8)(iii)(A) of this section, and debt securities held 
under this paragraph (c)(8)(i)(E); and
    (2) The aggregate value of the loans, cash and cash equivalents, 
and debt securities for purposes of this paragraph is calculated at par 
value at the most recent time any such debt security is acquired, 
except that the issuing entity may instead determine the value of any 
such loan, cash equivalent, or debt security based on its fair market 
value if:
    (i) The issuing entity is required to use the fair market value of 
such assets for purposes of calculating compliance with concentration 
limitations or other similar calculations under its transaction 
agreements, and
    (ii) The issuing entity's valuation methodology values similarly 
situated assets consistently.
    (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, other than 
debt securities permitted under paragraph (c)(8)(i)(E) of this section, 
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, the contractual rights or other 
assets described in paragraph (c)(8)(i)(B) of this section, or the debt 
securities described in paragraph (c)(8)(i)(E) of this section; and
    (B) The derivatives reduce the interest rate and/or foreign 
exchange risks related to the loans, the asset-backed securities, the 
contractual rights or other assets described in paragraph (c)(8)(i)(B) 
of this section, or the debt securities described in paragraph 
(c)(8)(i)(E) 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

[[Page 46498]]

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) SBICs and public welfare investment funds. An issuer:
    (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;
    (ii) The business of which is to make investments that are:
    (A) 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), including the welfare of low- and 
moderate-income communities or families (such as providing housing, 
services, or jobs) and including investments that qualify for 
consideration under the regulations implementing the Community 
Reinvestment Act (12 U.S.C. 2901 et seq.); or
    (B) 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;
    (iii) That has elected to be regulated or is regulated as a rural 
business investment company, as described in 15 U.S.C. 80b-3(b)(8)(A) 
or (B), or that has terminated its participation as a rural business 
investment company in accordance with 7 CFR 4290.1900 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 termination; or
    (iv) That is a qualified opportunity fund, as defined in 26 U.S.C. 
1400Z-2(d).
* * * * *
    (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 held under this paragraph (c)(15)(i)(C) 
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 or any 
derivative; 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), 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) of this 
subpart, as if the issuer were a covered fund;
    (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; and
    (C) Complies with the limitations imposed in Sec.  44.14, as if the 
issuer were a covered fund, except the banking entity may acquire and 
retain any ownership interest in the issuer.
    (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 under applicable 
federal banking laws and regulations.
    (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.  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

[[Page 46499]]

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;
    (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; and
    (C) Complies with the restrictions in Sec.  44.14 as if the issuer 
were a covered fund (except the banking entity may acquire and retain 
any ownership interest in the issuer).
    (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.  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;
    (2) A majority of the interests in the entity are owned (directly 
or indirectly) by family customers;
    (3) The entity is owned only by family customers and up to 5 
closely related persons of the family customers; and
    (C) Notwithstanding paragraph (c)(17)(i)(A) and (B) of this 
section, up to an aggregate 0.5 percent of the entity's outstanding 
ownership interests may be acquired or retained by one or more entities 
that are not family customers or closely related persons if the 
ownership interest is acquired or retained by such parties for the 
purpose of and to the extent necessary for establishing corporate 
separateness or addressing bankruptcy, insolvency, or similar concerns.
    (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, provided that the 
content may be modified to prevent the disclosure from being misleading 
and the manner of disclosure may be modified to accommodate the 
specific circumstances of the entity;
    (D) Does not acquire or retain, as principal, an ownership interest 
in the entity, other than as described in paragraph (c)(17)(i)(C) of 
this section;
    (E) Complies with the requirements of Sec. Sec.  44.14(b) and 
44.15, as if such entity were a covered fund; and
    (F) Except for riskless principal transactions as defined in 
paragraph (d)(11) of this section, complies with the requirements of 12 
CFR 223.15(a), as if such banking entity and its affiliates were a 
member bank and the entity 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;
    (B) Notwithstanding paragraph (c)(18)(ii)(A) of this section, up to 
an aggregate 0.5 percent of the issuer's outstanding ownership 
interests may be acquired or retained by one or more entities that are 
not customers if the ownership interest is acquired or retained by such 
parties for the purpose of and to the extent necessary for establishing 
corporate separateness or addressing bankruptcy, insolvency, or similar 
concerns; and
    (C) 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, provided that the content may be 
modified to prevent the disclosure from being misleading and the manner 
of disclosure may be modified to accommodate the specific circumstances 
of the issuer;
    (4) Do not acquire or retain, as principal, an ownership interest 
in the issuer, other than as described in paragraph (c)(18)(ii)(B) of 
this section;
    (5) Comply with the requirements of Sec. Sec.  44.14(b) and 44.15, 
as if such issuer were a covered fund; and
    (6) Except for riskless principal transactions as defined in 
paragraph (d)(11) of this section, 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:
    (1) The rights of a creditor to exercise remedies upon the 
occurrence of an

[[Page 46500]]

event of default or an acceleration event; and
    (2) The right to participate in the removal of an investment 
manager for ``cause'' or participate in the selection of a replacement 
manager upon an investment manager's resignation or removal. For 
purposes of this paragraph (d)(6)(i)(A)(2), ``cause'' for removal of an 
investment manager means one or more of the following events:
    (i) The bankruptcy, insolvency, conservatorship or receivership of 
the investment manager;
    (ii) The breach by the investment manager of any material provision 
of the covered fund's transaction agreements applicable to the 
investment manager;
    (iii) The breach by the investment manager of material 
representations or warranties;
    (iv) The occurrence of an act that constitutes fraud or criminal 
activity in the performance of the investment manager's obligations 
under the covered fund's transaction agreements;
    (v) The indictment of the investment manager for a criminal 
offense, or the indictment of any officer, member, partner or other 
principal of the investment manager for a criminal offense materially 
related to his or her investment management activities;
    (vi) A change in control with respect to the investment manager;
    (vii) The loss, separation or incapacitation of an individual 
critical to the operation of the investment manager or primarily 
responsible for the management of the covered fund's assets; or
    (viii) Other similar events that constitute ``cause'' for removal 
of an investment manager, provided that such events are not solely 
related to the performance of the covered fund or the investment 
manager's exercise of investment discretion under the covered fund's 
transaction agreements;
    (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.  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) Repayment of a fixed principal amount, on or before a maturity 
date, in a contractually-determined manner (which may include 
prepayment premiums intended solely to reflect, and compensate holders 
of the interest for, forgone 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).
* * * * *
    (11) Riskless principal transaction. Riskless principal transaction 
means a transaction in which a banking entity, after receiving an order 
from a customer to buy (or sell) a security, purchases (or sells) the 
security in the secondary market for its own account to offset a 
contemporaneous sale to (or purchase from) the customer.

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:

[[Page 46501]]

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) will not be considered to 
be an affiliate of the banking entity so long as:
    (A) The banking entity, together with its affiliates, 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) The banking entity, or an affiliate of the banking entity, 
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 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 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.
* * * * *
    (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) 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.  
44.10(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

[[Page 46502]]

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 the banking entity 
that sponsors or controls the qualifying foreign excluded fund, or any 
of its affiliates, 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), (iv), (v), and (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) * * *
    (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) subject to the limitations 
specified under 12 U.S.C. 371c(d) or Sec.  223.42 of the Board's 
Regulation W (12 CFR 223.42), as applicable,
    (iv) Enter into a riskless principal transaction with a covered 
fund; and
    (v) 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), (iv) or (v) of this section must comply with the 
limitations in Sec.  44.15.
* * * * *
    (c) Restrictions on other permitted transactions. Any transaction 
permitted under paragraphs (a)(2)(ii), (iii), or (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 
under section 23B.

Subpart D--Compliance Program Requirements; Violations

0
7. Amend Sec.  44.20 by:
0
a. Revising paragraph (a);
0
b. Revising the heading of paragraph (d) and revising paragraph (d)(1); 
and
0
c. Revising the introductory text of paragraph (e).
    The revisions and addition read as follows:


Sec.  44.20  Program for compliance; reporting.

    (a) Program requirement. Each banking entity (other than a banking 
entity with limited trading assets and liabilities or a qualifying 
foreign excluded fund under section 44.6(f) or 44.13(d)) shall develop 
and provide for the continued administration of a compliance program 
reasonably designed to ensure and monitor compliance with the 
prohibitions and restrictions on proprietary trading and covered fund 
activities and investments set forth in section 13 of the BHC Act and 
this part. The terms, scope, and detail of the compliance program shall 
be appropriate for the types, size, scope, and complexity of activities 
and business structure of the banking entity.
* * * * *
    (d) Reporting requirements under appendix A to this part. (1) A 
banking

[[Page 46503]]

entity (other than a qualifying foreign excluded fund under section 
44.6(f) or 44.13(d)) engaged in proprietary trading activity permitted 
under subpart B shall comply with the reporting requirements described 
in appendix A to this part, if:
* * * * *
    (e) Additional documentation for covered funds. A banking entity 
with significant trading assets and liabilities (other than a 
qualifying foreign excluded fund under section 44.6(f) or 44.13(d)) 
shall maintain records that include:
* * * * *

BOARD OF GOVERNORS OF THE FEDERAL RESERVE

12 CFR Chapter II

Authority and Issuance

    For the reasons stated in the Common Preamble, the Board amends 
chapter II 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
8. 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
9. 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 the banking entity 
that sponsors or controls the qualifying foreign excluded fund, or any 
of its affiliates, to evade the requirements of section 13 of the BHC 
Act or this part.

Subpart C--Covered Funds Activities and Investments

0
10. Amend Sec.  248.10 by:
0
a. Revising paragraph (c)(1);
0
b. Revising paragraph (c)(3)(i);
0
c. Revising paragraph (c)(8);
0
d. Revising the heading of paragraph (c)(10) and revising paragraph 
(c)(10)(i);
0
e. Revising paragraph (c)(11);
0
f. Adding paragraphs (c)(15), (16), (17), and (18);
0
g. Revising paragraph (d)(6); and
0
h. Adding paragraph (d)(11).

    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 more than 75 percent of the 
ownership interests in the issuer are sold 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;
* * * * *
    (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;
    (D) Special units of beneficial interest and collateral 
certificates that meet the requirements of paragraph (c)(8)(v) of this 
section; and

[[Page 46504]]

    (E) Debt securities, other than asset-backed securities and 
convertible securities, provided that:
    (1) The aggregate value of such debt securities does not exceed 
five percent of the aggregate value of loans held under paragraph 
(c)(8)(i)(A) of this section, cash and cash equivalents held under 
paragraph (c)(8)(iii)(A) of this section, and debt securities held 
under this paragraph (c)(8)(i)(E); and
    (2) The aggregate value of the loans, cash and cash equivalents, 
and debt securities for purposes of this paragraph is calculated at par 
value at the most recent time any such debt security is acquired, 
except that the issuing entity may instead determine the value of any 
such loan, cash equivalent, or debt security based on its fair market 
value if:
    (i) The issuing entity is required to use the fair market value of 
such assets for purposes of calculating compliance with concentration 
limitations or other similar calculations under its transaction 
agreements, and
    (ii) The issuing entity's valuation methodology values similarly 
situated assets consistently.
    (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, other than 
debt securities permitted under paragraph (c)(8)(i)(E) of this section, 
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, the contractual rights or other 
assets described in paragraph (c)(8)(i)(B) of this section, or the debt 
securities described in paragraph (c)(8)(i)(E) of this section; and
    (B) The derivatives reduce the interest rate and/or foreign 
exchange risks related to the loans, the asset-backed securities, the 
contractual rights or other assets described in paragraph (c)(8)(i)(B) 
of this section, or the debt securities described in paragraph 
(c)(8)(i)(E) 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) SBICs and public welfare investment funds. An issuer:
    (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;
    (ii) The business of which is to make investments that are:
    (A) 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), including the welfare of low- and 
moderate-income communities or families (such as providing housing, 
services, or jobs) and including investments that qualify for 
consideration under the regulations implementing the Community 
Reinvestment Act (12 U.S.C. 2901 et seq.); or
    (B) 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;
    (iii) That has elected to be regulated or is regulated as a rural 
business investment company, as described in 15 U.S.C. 80b-3(b)(8)(A) 
or (B), or that has terminated its participation as a rural business 
investment company in accordance with 7 CFR 4290.1900 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 termination; or
    (iv) That is a qualified opportunity fund, as defined in 26 U.S.C. 
1400Z-2(d).
* * * * *
    (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.

[[Page 46505]]

    (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 held under this paragraph (c)(15)(i)(C) 
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 or any 
derivative; 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.  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;
    (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; and
    (C) Complies with the limitations imposed in Sec.  248.14, as if 
the issuer were a covered fund, except the banking entity may acquire 
and retain any ownership interest in the issuer.
    (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 under applicable 
federal banking laws and regulations.
    (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.  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;
    (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; and
    (C) Complies with the restrictions in Sec.  248.14 as if the issuer 
were a covered fund (except the banking entity may acquire and retain 
any ownership interest in the issuer).
    (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.  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;
    (2) A majority of the interests in the entity are owned (directly 
or indirectly) by family customers;
    (3) The entity is owned only by family customers and up to 5 
closely related persons of the family customers; and
    (C) Notwithstanding paragraph (c)(17)(i)(A) and (B) of this 
section, up to an aggregate 0.5 percent of the entity's outstanding 
ownership interests may be acquired or retained by one or more entities 
that are not family customers or closely related persons if the 
ownership interest is acquired or retained by such parties for the 
purpose of and to the extent necessary for establishing corporate 
separateness or addressing bankruptcy, insolvency, or similar concerns.
    (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, provided that the 
content may be modified to prevent the disclosure from being misleading 
and the manner of disclosure may be modified to

[[Page 46506]]

accommodate the specific circumstances of the entity;
    (D) Does not acquire or retain, as principal, an ownership interest 
in the entity, other than as described in paragraph (c)(17)(i)(C) of 
this section;
    (E) Complies with the requirements of Sec. Sec.  248.14(b) and 
248.15, as if such entity were a covered fund; and
    (F) Except for riskless principal transactions as defined in 
paragraph (d)(11) of this section, complies with the requirements of 12 
CFR 223.15(a), as if such banking entity and its affiliates were a 
member bank and the entity 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;
    (B) Notwithstanding paragraph (c)(18)(ii)(A) of this section, up to 
an aggregate 0.5 percent of the issuer's outstanding ownership 
interests may be acquired or retained by one or more entities that are 
not customers if the ownership interest is acquired or retained by such 
parties for the purpose of and to the extent necessary for establishing 
corporate separateness or addressing bankruptcy, insolvency, or similar 
concerns; and
    (C) 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.  
248.11(a)(8), as if such issuer were a covered fund, provided that the 
content may be modified to prevent the disclosure from being misleading 
and the manner of disclosure may be modified to accommodate the 
specific circumstances of the issuer;
    (4) Do not acquire or retain, as principal, an ownership interest 
in the issuer, other than as described in paragraph (c)(18)(ii)(B) of 
this section;
    (5) Comply with the requirements of Sec. Sec.  248.14(b) and 
248.15, as if such issuer were a covered fund; and
    (6) Except for riskless principal transactions as defined in 
paragraph (d)(11) of this section, 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:
    (1) The rights of a creditor to exercise remedies upon the 
occurrence of an event of default or an acceleration event; and
    (2) The right to participate in the removal of an investment 
manager for ``cause'' or participate in the selection of a replacement 
manager upon an investment manager's resignation or removal. For 
purposes of this paragraph (d)(6)(i)(A)(2), ``cause'' for removal of an 
investment manager means one or more of the following events:
    (i) The bankruptcy, insolvency, conservatorship or receivership of 
the investment manager;
    (ii) The breach by the investment manager of any material provision 
of the covered fund's transaction agreements applicable to the 
investment manager;
    (iii) The breach by the investment manager of material 
representations or warranties;
    (iv) The occurrence of an act that constitutes fraud or criminal 
activity in the performance of the investment manager's obligations 
under the covered fund's transaction agreements;
    (v) The indictment of the investment manager for a criminal 
offense, or the indictment of any officer, member, partner or other 
principal of the investment manager for a criminal offense materially 
related to his or her investment management activities;
    (vi) A change in control with respect to the investment manager;
    (vii) The loss, separation or incapacitation of an individual 
critical to the operation of the investment manager or primarily 
responsible for the management of the covered fund's assets; or
    (viii) Other similar events that constitute ``cause'' for removal 
of an investment manager, provided that such events are not solely 
related to the performance of the covered fund or the investment 
manager's exercise of investment discretion under the covered fund's 
transaction agreements;
    (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

[[Page 46507]]

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) Repayment of a fixed principal amount, on or before a maturity 
date, in a contractually-determined manner (which may include 
prepayment premiums intended solely to reflect, and compensate holders 
of the interest for, forgone 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).
* * * * *
    (11) Riskless principal transaction. Riskless principal transaction 
means a transaction in which a banking entity, after receiving an order 
from a customer to buy (or sell) a security, purchases (or sells) the 
security in the secondary market for its own account to offset a 
contemporaneous sale to (or purchase from) the customer.

0
11. 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:
    (A) The banking entity, together with its affiliates, 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) The banking entity, or an affiliate of the banking entity, 
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.

[[Page 46508]]

    (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 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.
* * * * *
    (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, 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
12. 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

[[Page 46509]]

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 the banking entity 
that sponsors or controls the qualifying foreign excluded fund, or any 
of its affiliates, to evade the requirements of section 13 of the BHC 
Act or this part.

0
13. 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), (iv), (v), and (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) subject to the limitations 
specified under 12 U.S.C. 371c(d) or Sec.  223.42 of the Board's 
Regulation W (12 CFR 223.42), as applicable,
    (iv) Enter into a riskless principal transaction with a covered 
fund; and
    (v) 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), (iv) or (v) must comply with the limitations in Sec.  
248.15.
* * * * *
    (c) Restrictions on other permitted transactions. Any transaction 
permitted under paragraphs (a)(2)(ii), (iii), or (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 
under section 23B.

Subpart D--Compliance Program Requirements; Violations

0
14. Amend Sec.  248.20 by:
0
a. Revising paragraph (a);
0
b. Revising the heading of paragraph (d) and revising paragraph (d)(1) 
; and
0
c. Revising the introductory text of paragraph (e).
    The revisions and addition read as follows:


Sec.  248.20   Program for compliance; reporting.

    (a) Program requirement. Each banking entity (other than a banking 
entity with limited trading assets and liabilities or a qualifying 
foreign excluded fund under Sec. Sec.  248.6(f) or 248.13(d)) shall 
develop and provide for the continued administration of a compliance 
program reasonably designed to ensure and monitor compliance with the 
prohibitions and restrictions on proprietary trading and covered fund 
activities and investments set forth in section 13 of the BHC Act and 
this part. The terms, scope, and detail of the compliance program shall 
be appropriate for the types, size, scope, and complexity of activities 
and business structure of the banking entity.
* * * * *
    (d) Reporting requirements under appendix A to this part. (1) A 
banking entity (other than a qualifying foreign excluded fund under 
section 248.6(f) or 248.13(d)) engaged in proprietary trading activity 
permitted under subpart B shall comply with the reporting requirements 
described in appendix A to this part, if:
* * * * *
    (e) Additional documentation for covered funds. A banking entity 
with significant trading assets and liabilities (other than a 
qualifying foreign excluded fund under section 248.6(f) or 248.13(d)) 
shall maintain records that include:
* * * * *

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Chapter III

Authority and Issuance

    For the reasons set forth in the Common Preamble, the Federal 
Deposit Insurance Corporation amends 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
15. 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
16. 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 outside the 
United States, as provided in Sec.  351.13(b);

[[Page 46510]]

    (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 banking entity 
that sponsors or controls the qualifying foreign excluded fund, or any 
of its affiliates, to evade the requirements of section 13 of the BHC 
Act or this part.

Subpart C--Covered Funds Activities and Investments

0
17. 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 the heading of paragraph (c)(10) and revising paragraph 
(c)(10)(i);
0
e. Revising paragraph (c)(11);
0
f. Adding paragraphs (c)(15), (16), (17), and (18);
0
g. Revising paragraph (d)(6); and
0
h. Adding paragraph (d)(11).
    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 more than 75 percent of the 
ownership interests in the issuer are sold 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;
    (D) Special units of beneficial interest and collateral 
certificates that meet the requirements of paragraph (c)(8)(v) of this 
section; and
    (E) Debt securities, other than asset-backed securities and 
convertible securities, provided that:
    (1) The aggregate value of such debt securities does not exceed 
five percent of the aggregate value of loans held under paragraph 
(c)(8)(i)(A) of this section, cash and cash equivalents held under 
paragraph (c)(8)(iii)(A) of this section, and debt securities held 
under this paragraph (c)(8)(i)(E); and
    (2) The aggregate value of the loans, cash and cash equivalents, 
and debt securities for purposes of this paragraph is calculated at par 
value at the most recent time any such debt security is acquired, 
except that the issuing entity may instead determine the value of any 
such loan, cash equivalent, or debt security based on its fair market 
value if:
    (i) The issuing entity is required to use the fair market value of 
such assets for purposes of calculating compliance with concentration 
limitations or other similar calculations under its transaction 
agreements, and
    (ii) The issuing entity's valuation methodology values similarly 
situated assets consistently.
    (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, other than 
debt securities permitted under paragraph (c)(8)(i)(E) of this section, 
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, the contractual rights or other 
assets described in paragraph (c)(8)(i)(B) of this section, or the debt 
securities described in paragraph (c)(8)(i)(E) of this section; and
    (B) The derivatives reduce the interest rate and/or foreign 
exchange risks related to the loans, the asset-backed securities, the 
contractual rights or other assets described in paragraph (c)(8)(i)(B)

[[Page 46511]]

of this section, or the debt securities described in paragraph 
(c)(8)(i)(E) 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) SBICs and public welfare investment funds. An issuer:
    (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;
    (ii) The business of which is to make investments that are:
    (A) 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), including the welfare of low- and 
moderate-income communities or families (such as providing housing, 
services, or jobs) and including investments that qualify for 
consideration under the regulations implementing the Community 
Reinvestment Act (12 U.S.C. 2901 et seq.); or
    (B) 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;
    (iii) That has elected to be regulated or is regulated as a rural 
business investment company, as described in 15 U.S.C. 80b-3(b)(8)(A) 
or (B), or that has terminated its participation as a rural business 
investment company in accordance with 7 CFR 4290.1900 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 termination; or
    (iv) That is a qualified opportunity fund, as defined in 26 U.S.C. 
1400Z-2(d).
* * * * *
    (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 held under this paragraph (c)(15)(i)(C) 
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 or any 
derivative; 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), 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) of this 
subpart, as if the issuer were a covered fund;
    (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; and
    (C) Complies with the limitations imposed in Sec.  351.14, as if 
the issuer were a covered fund, except the banking entity may acquire 
and retain any ownership interest in the issuer.
    (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,

[[Page 46512]]

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 under applicable 
federal banking laws and regulations.
    (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.  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;
    (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; and
    (C) Complies with the restrictions in Sec.  351.14 as if the issuer 
were a covered fund (except the banking entity may acquire and retain 
any ownership interest in the issuer).
    (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.  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
    (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;
    (2) A majority of the interests in the entity are owned (directly 
or indirectly) by family customers;
    (3) The entity is owned only by family customers and up to 5 
closely related persons of the family customers; and
    (C) Notwithstanding paragraph (c)(17)(i)(A) and (B) of this 
section, up to an aggregate 0.5 percent of the entity's outstanding 
ownership interests may be acquired or retained by one or more entities 
that are not family customers or closely related persons if the 
ownership interest is acquired or retained by such parties for the 
purpose of and to the extent necessary for establishing corporate 
separateness or addressing bankruptcy, insolvency, or similar concerns.
    (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, provided that the 
content may be modified to prevent the disclosure from being misleading 
and the manner of disclosure may be modified to accommodate the 
specific circumstances of the entity;
    (D) Does not acquire or retain, as principal, an ownership interest 
in the entity, other than as described in paragraph (c)(17)(i)(C) of 
this section;
    (E) Complies with the requirements of Sec. Sec.  351.14(b) and 
351.15, as if such entity were a covered fund; and
    (F) Except for riskless principal transactions as defined in 
paragraph (d)(11) of this section, complies with the requirements of 12 
CFR 223.15(a), as if such banking entity and its affiliates were a 
member bank and the entity 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;
    (B) Notwithstanding paragraph (c)(18)(ii)(A) of this section, up to 
an aggregate 0.5 percent of the issuer's outstanding ownership 
interests may be acquired or retained by one or more entities that are 
not customers if the ownership interest is acquired or retained by such 
parties for the purpose of and to the extent necessary for establishing 
corporate separateness or addressing bankruptcy, insolvency, or similar 
concerns; and
    (C) 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, provided that the 
content may be modified to prevent the disclosure from being misleading 
and the manner of

[[Page 46513]]

disclosure may be modified to accommodate the specific circumstances of 
the issuer;
    (4) Do not acquire or retain, as principal, an ownership interest 
in the issuer, other than as described in paragraph (c)(18)(ii)(B) of 
this section;
    (5) Comply with the requirements of Sec. Sec.  351.14(b) and 
351.15, as if such issuer were a covered fund; and
    (6) Except for riskless principal transactions as defined in 
paragraph (d)(11) of this section, 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:
    (1) The rights of a creditor to exercise remedies upon the 
occurrence of an event of default or an acceleration event; and
    (2) The right to participate in the removal of an investment 
manager for ``cause'' or participate in the selection of a replacement 
manager upon an investment manager's resignation or removal. For 
purposes of this paragraph (d)(6)(i)(A)(2), ``cause'' for removal of an 
investment manager means one or more of the following events: (i) The 
bankruptcy, insolvency, conservatorship or receivership of the 
investment manager;
    (ii) The breach by the investment manager of any material provision 
of the covered fund's transaction agreements applicable to the 
investment manager;
    (iii) The breach by the investment manager of material 
representations or warranties;
    (iv) The occurrence of an act that constitutes fraud or criminal 
activity in the performance of the investment manager's obligations 
under the covered fund's transaction agreements;
    (v) The indictment of the investment manager for a criminal 
offense, or the indictment of any officer, member, partner or other 
principal of the investment manager for a criminal offense materially 
related to his or her investment management activities;
    (vi) A change in control with respect to the investment manager;
    (vii) The loss, separation or incapacitation of an individual 
critical to the operation of the investment manager or primarily 
responsible for the management of the covered fund's assets; or
    (viii) Other similar events that constitute ``cause'' for removal 
of an investment manager, provided that such events are not solely 
related to the performance of the covered fund or the investment 
manager's exercise of investment discretion under the covered fund's 
transaction agreements;
    (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.  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) Repayment of a fixed principal amount, on or before a maturity 
date, in a contractually-determined manner (which may include 
prepayment premiums intended solely to reflect, and compensate holders 
of the interest for, forgone 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

[[Page 46514]]

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).
* * * * *
    (11) Riskless principal transaction. Riskless principal transaction 
means a transaction in which a banking entity, after receiving an order 
from a customer to buy (or sell) a security, purchases (or sells) the 
security in the secondary market for its own account to offset a 
contemporaneous sale to (or purchase from) the customer.

0
18. 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:
    (A) The banking entity, together with its affiliates, 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) The banking entity, or an affiliate of the banking entity, 
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 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.
* * * * *
    (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) 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.  
351.10(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:

[[Page 46515]]

    (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
19. 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 the banking entity 
that sponsors or controls the qualifying foreign excluded fund, or any 
of its affiliates, to evade the requirements of section 13 of the BHC 
Act or this part.

0
20. 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), (iv), (v), and (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) subject to the limitations 
specified under 12 U.S.C. 371c(d) or Sec.  223.42 of the Board's 
Regulation W (12 CFR 223.42), as applicable,
    (iv) Enter into a riskless principal transaction with a covered 
fund; and
    (v) 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), (iv) or (v) must comply with the limitations in Sec.  
351.15.
* * * * *
    (c) Restrictions on other permitted transactions. Any transaction 
permitted under paragraphs (a)(2)(ii), (iii), or (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 
under section 23B.

Subpart D--Compliance Program Requirements; Violations

0
21. Amend Sec.  351.20 by:
0
a. Revising paragraph (a);

[[Page 46516]]

0
b. Revising the heading of paragraph (d) and revising paragraph (d)(1); 
and
0
c. Revising the introductory text of paragraph (e).
    The revisions and addition read as follows:


Sec.  351.20  Program for compliance; reporting.

    (a) Program requirement. Each banking entity (other than a banking 
entity with limited trading assets and liabilities or a qualifying 
foreign excluded fund under section 351.6(f) or 351.13(d)) shall 
develop and provide for the continued administration of a compliance 
program reasonably designed to ensure and monitor compliance with the 
prohibitions and restrictions on proprietary trading and covered fund 
activities and investments set forth in section 13 of the BHC Act and 
this part. The terms, scope, and detail of the compliance program shall 
be appropriate for the types, size, scope, and complexity of activities 
and business structure of the banking entity.
* * * * *
    (d) Reporting requirements under appendix A to this part. (1) A 
banking entity (other than a qualifying foreign excluded fund under 
section 351.6(f) or 351.13(d)) engaged in proprietary trading activity 
permitted under subpart B shall comply with the reporting requirements 
described in appendix A to this part, if:
* * * * *
    (e) Additional documentation for covered funds. A banking entity 
with significant trading assets and liabilities (other than a 
qualifying foreign excluded fund under section 351.6(f) or 351.13(d)) 
shall maintain records that include:
* * * * *

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 amends 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
22. The authority citation for part 75 continues to read as follows:

    Authority:  12 U.S.C. 1851.

Subpart B--Proprietary Trading

0
23. 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 the banking entity 
that sponsors or controls the qualifying foreign excluded fund, or any 
of its affiliates, to evade the requirements of section 13 of the BHC 
Act or this part.

Subpart C--Covered Funds Activities and Investments

0
24. 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 the heading of paragraph (c)(10) and revising paragraph 
(c)(10)(i);
0
e. Revising paragraph (c)(11);
0
f. Adding paragraphs (c)(15), (16), (17), and (18);
0
g. Revising paragraph (d)(6); and
0
h. Adding paragraph (d)(11).
    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 more than 75 percent of the 
ownership interests in the issuer are sold 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.
* * * * *

[[Page 46517]]

    (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;
    (D) Special units of beneficial interest and collateral 
certificates that meet the requirements of paragraph (c)(8)(v) of this 
section; and
    (E) Debt securities, other than asset-backed securities and 
convertible securities, provided that:
    (1) The aggregate value of such debt securities does not exceed 
five percent of the aggregate value of loans held under paragraph 
(c)(8)(i)(A) of this section, cash and cash equivalents held under 
paragraph (c)(8)(iii)(A) of this section, and debt securities held 
under this paragraph (c)(8)(i)(E); and
    (2) The aggregate value of the loans, cash and cash equivalents, 
and debt securities for purposes of this paragraph is calculated at par 
value at the most recent time any such debt security is acquired, 
except that the issuing entity may instead determine the value of any 
such loan, cash equivalent, or debt security based on its fair market 
value if:
    (i) The issuing entity is required to use the fair market value of 
such assets for purposes of calculating compliance with concentration 
limitations or other similar calculations under its transaction 
agreements, and
    (ii) The issuing entity's valuation methodology values similarly 
situated assets consistently.
    (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, other than 
debt securities permitted under paragraph (c)(8)(i)(E) of this section, 
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, the contractual rights or other 
assets described in paragraph (c)(8)(i)(B) of this section, or the debt 
securities described in paragraph (c)(8)(i)(E) of this section; and
    (B) The derivatives reduce the interest rate and/or foreign 
exchange risks related to the loans, the asset-backed securities, the 
contractual rights or other assets described in paragraph (c)(8)(i)(B) 
of this section, or the debt securities described in paragraph 
(c)(8)(i)(E) 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;
    (ii) The business of which is to make investments that are:
    (A) 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), including the welfare of low- and 
moderate-income communities or families (such as providing housing, 
services, or jobs) and including investments that qualify for 
consideration under the regulations implementing the Community 
Reinvestment Act (12 U.S.C. 2901 et seq.); or
    (B) Qualified rehabilitation expenditures with respect to a 
qualified rehabilitated building or certified historic structure, as 
such terms are

[[Page 46518]]

defined in section 47 of the Internal Revenue Code of 1986 or a similar 
State historic tax credit program;
    (iii) That has elected to be regulated or is regulated as a rural 
business investment company, as described in 15 U.S.C. 80b-3(b)(8)(A) 
or (B), or that has terminated its participation as a rural business 
investment company in accordance with 7 CFR 4290.1900 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 termination; or
    (iv) That is a qualified opportunity fund, as defined in 26 U.S.C. 
1400Z-2(d).
* * * * *
    (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 held under this paragraph (c)(15)(i)(C) 
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 or any 
derivative; 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) of this 
subpart, as if the issuer were a covered fund;
    (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; and
    (C) Complies with the limitations imposed in Sec.  75.14, as if the 
issuer were a covered fund, except the banking entity may acquire and 
retain any ownership interest in the issuer.
    (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)(l)(iii) of this section would be permissible 
for the banking entity to acquire and hold directly under applicable 
federal banking laws and regulations.
    (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.  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;
    (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; and
    (C) Complies with the restrictions in Sec.  75.14 as if the issuer 
were a covered fund (except the banking entity may acquire and retain 
any ownership interest in the issuer).
    (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.  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;
    (2) A majority of the interests in the entity are owned (directly 
or indirectly) by family customers;
    (3) The entity is owned only by family customers and up to 5 
closely related persons of the family customers; and
    (C) Notwithstanding paragraph (c)(17)(i)(A) and (B) of this 
section, up to an aggregate 0.5 percent of the

[[Page 46519]]

entity's outstanding ownership interests may be acquired or retained by 
one or more entities that are not family customers or closely related 
persons if the ownership interest is acquired or retained by such 
parties for the purpose of and to the extent necessary for establishing 
corporate separateness or addressing bankruptcy, insolvency, or similar 
concerns.
    (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, provided that the 
content may be modified to prevent the disclosure from being misleading 
and the manner of disclosure may be modified to accommodate the 
specific circumstances of the entity;
    (D) Does not acquire or retain, as principal, an ownership interest 
in the entity, other than as described in paragraph (c)(17)(i)(C) of 
this section;
    (E) Complies with the requirements of Sec. Sec.  75.14(b) and 
75.15, as if such entity were a covered fund; and
    (F) Except for riskless principal transactions as defined in 
paragraph (d)(11) of this section, complies with the requirements of 12 
CFR 223.15(a), as if such banking entity and its affiliates were a 
member bank and the entity 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;
    (B) Notwithstanding paragraph (c)(18)(ii)(A) of this section, up to 
an aggregate 0.5 percent of the issuer's outstanding ownership 
interests may be acquired or retained by one or more entities that are 
not customers if the ownership interest is acquired or retained by such 
parties for the purpose of and to the extent necessary for establishing 
corporate separateness or addressing bankruptcy, insolvency, or similar 
concerns; and
    (C) 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, provided that the content may be 
modified to prevent the disclosure from being misleading and the manner 
of disclosure may be modified to accommodate the specific circumstances 
of the issuer;
    (4) Do not acquire or retain, as principal, an ownership interest 
in the issuer, other than as described in paragraph (c)(18)(ii)(B) of 
this section;
    (5) Comply with the requirements of Sec. Sec.  75.14(b) and 75.15, 
as if such issuer were a covered fund; and
    (6) Except for riskless principal transactions as defined in 
paragraph (d)(11) of this section, 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:
    (1) The rights of a creditor to exercise remedies upon the 
occurrence of an event of default or an acceleration event; and
    (2) The right to participate in the removal of an investment 
manager for ``cause'' or participate in the selection of a replacement 
manager upon an investment manager's resignation or removal. For 
purposes of this paragraph (d)(6)(i)(A)(2), ``cause'' for removal of an 
investment manager means one or more of the following events:
    (i) The bankruptcy, insolvency, conservatorship or receivership of 
the investment manager;
    (ii) The breach by the investment manager of any material provision 
of the covered fund's transaction agreements applicable to the 
investment manager;
    (iii) The breach by the investment manager of material 
representations or warranties;
    (iv) The occurrence of an act that constitutes fraud or criminal 
activity in the performance of the investment manager's obligations 
under the covered fund's transaction agreements;
    (v) The indictment of the investment manager for a criminal 
offense, or the indictment of any officer, member, partner or other 
principal of the investment manager for a criminal offense materially 
related to his or her investment management activities;
    (vi) A change in control with respect to the investment manager;
    (vii) The loss, separation or incapacitation of an individual 
critical to the operation of the investment manager or primarily 
responsible for the management of the covered fund's assets; or
    (viii) Other similar events that constitute ``cause'' for removal 
of an investment manager, provided that such events are not solely 
related to the performance of the covered fund or the investment 
manager's exercise of investment discretion under the covered fund's 
transaction agreements;
    (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

[[Page 46520]]

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) Repayment of a fixed principal amount, on or before a maturity 
date, in a contractually-determined manner (which may include 
prepayment premiums intended solely to reflect, and compensate holders 
of the interest for, forgone 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).
* * * * *
    (11) Riskless principal transaction. Riskless principal transaction 
means a transaction in which a banking entity, after receiving an order 
from a customer to buy (or sell) a security, purchases (or sells) the 
security in the secondary market for its own account to offset a 
contemporaneous sale to (or purchase from) the customer.

0
26. Amend Sec.  75.12 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.  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) will not be considered to 
be an affiliate of the banking entity so long as:
    (A) The banking entity, together with its affiliates, 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) The banking entity, or an affiliate of the banking entity, 
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.  75.11 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,

[[Page 46521]]

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)), 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 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.
* * * * *
    (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) 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.  
75.10(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, 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
26. Amend Sec.  75.13 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

[[Page 46522]]

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 the banking entity 
that sponsors or controls the qualifying foreign excluded fund, or any 
of its affiliates, to evade the requirements of section 13 of the BHC 
Act or this part.

0
27. 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), (iv), (v), and (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) subject to the limitations 
specified under 12 U.S.C. 371c(d) or Sec.  223.42 of the Board's 
Regulation W (12 CFR 223.42), as applicable,
    (iv) Enter into a riskless principal transaction with a covered 
fund; and
    (v) 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), (iv) or (v) must comply with the limitations in Sec.  
75.15.
* * * * *
    (c) Restrictions on other permitted transactions. Any transaction 
permitted under paragraphs (a)(2)(ii), (iii), or (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 
under section 23B.

Subpart D--Compliance Program Requirements; Violations

0
28. Amend Sec.  75.20 by:
0
a. Revising paragraph (a);
0
b. Revising the heading of paragraph (d) and revising paragraph (d)(1); 
and
0
c. Revising the introductory text of paragraph (e).
    The revisions and addition read as follows:


Sec.  75.20   Program for compliance; reporting.

    (a) Program requirement. Each banking entity (other than a banking 
entity with limited trading assets and liabilities or a qualifying 
foreign excluded fund under section 75.6(f) or 75.13(d)) shall develop 
and provide for the continued administration of a compliance program 
reasonably designed to ensure and monitor compliance with the 
prohibitions and restrictions on proprietary trading and covered fund 
activities and investments set forth in section 13 of the BHC Act and 
this part. The terms, scope, and detail of the compliance program shall 
be appropriate for the types, size, scope, and complexity of activities 
and business structure of the banking entity.
* * * * *
    (d) Reporting requirements under appendix A to this part. (1) A 
banking entity (other than a qualifying foreign excluded fund under 
section 75.6(f) or 75.13(d)) engaged in proprietary trading activity 
permitted under subpart B shall comply with the reporting requirements 
described in appendix A to this part, if:
* * * * *
    (e) Additional documentation for covered funds. A banking entity 
with significant trading assets and liabilities (other than a 
qualifying foreign excluded fund under section 75.6(f) or 75.13(d)) 
shall maintain records that include:
* * * * *

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 amends 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
29. The authority citation for part 255 continues to read as follows:

    Authority:  12 U.S.C. 1851.

Subpart B--Proprietary Trading

0
30. 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

[[Page 46523]]

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 the banking entity 
that sponsors or controls the qualifying foreign excluded fund, or any 
of its affiliates, to evade the requirements of section 13 of the BHC 
Act or this part.

Subpart C--Covered Funds Activities and Investments

0
31. 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 the heading of paragraph (c)(10) and revising paragraph 
(c)(10)(i);
0
e. Revising paragraph (c)(11);
0
f. Adding paragraphs (c)(15), (16), (17), and (18);
0
g. Revising paragraph (d)(6); and
0
h. Adding paragraph (d)(11).
    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 more than 75 percent of the 
ownership interests in the issuer are sold 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.  
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;
    (D) Special units of beneficial interest and collateral 
certificates that meet the requirements of paragraph (c)(8)(v) of this 
section; and
    (E) Debt securities, other than asset-backed securities and 
convertible securities, provided that:
    (1) The aggregate value of such debt securities does not exceed 
five percent of the aggregate value of loans held under paragraph 
(c)(8)(i)(A) of this section, cash and cash equivalents held under 
paragraph (c)(8)(iii)(A) of this section, and debt securities held 
under this paragraph (c)(8)(i)(E); and
    (2) The aggregate value of the loans, cash and cash equivalents, 
and debt securities for purposes of this paragraph is calculated at par 
value at the most recent time any such debt security is acquired, 
except that the issuing entity may instead determine the value of any 
such loan, cash equivalent, or debt security based on its fair market 
value if:
    (i) The issuing entity is required to use the fair market value of 
such assets for purposes of calculating compliance with concentration 
limitations or other similar calculations under its transaction 
agreements, and
    (ii) The issuing entity's valuation methodology values similarly 
situated assets consistently.
    (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, other than 
debt securities permitted under paragraph (c)(8)(i)(E) of this section, 
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

[[Page 46524]]

    (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, the contractual rights or other 
assets described in paragraph (c)(8)(i)(B) of this section, or the debt 
securities described in paragraph (c)(8)(i)(E) of this section; and
    (B) The derivatives reduce the interest rate and/or foreign 
exchange risks related to the loans, the asset-backed securities, the 
contractual rights or other assets described in paragraph (c)(8)(i)(B) 
of this section, or the debt securities described in paragraph 
(c)(8)(i)(E) 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;
    (ii) The business of which is to make investments that are:
    (A) 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), including the welfare of low- and 
moderate-income communities or families (such as providing housing, 
services, or jobs) and including investments that qualify for 
consideration under the regulations implementing the Community 
Reinvestment Act (12 U.S.C. 2901 et seq.); or
    (B) 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;
    (iii) That has elected to be regulated or is regulated as a rural 
business investment company, as described in 15 U.S.C. 80b-3(b)(8)(A) 
or (B), or that has terminated its participation as a rural business 
investment company in accordance with 7 CFR 4290.1900 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 termination; or
    (iv) That is a qualified opportunity fund, as defined in 26 U.S.C. 
1400Z-2(d).
* * * * *
    (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 held under this paragraph (c)(15)(i)(C) 
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 or any 
derivative; 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), 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

[[Page 46525]]

Sec.  255.11(a)(8) of this subpart, as if the issuer were a covered 
fund;
    (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; and
    (C) Complies with the limitations imposed in Sec.  255.14, as if 
the issuer were a covered fund, except the banking entity may acquire 
and retain any ownership interest in the issuer.
    (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 under applicable 
federal banking laws and regulations.
    (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.  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;
    (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; and
    (C) Complies with the restrictions in Sec.  255.14 as if the issuer 
were a covered fund (except the banking entity may acquire and retain 
any ownership interest in the issuer).
    (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.  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;
    (2) A majority of the interests in the entity are owned (directly 
or indirectly) by family customers;
    (3) The entity is owned only by family customers and up to 5 
closely related persons of the family customers; and
    (C) Notwithstanding paragraph (c)(17)(i)(A) and (B) of this 
section, up to an aggregate 0.5 percent of the entity's outstanding 
ownership interests may be acquired or retained by one or more entities 
that are not family customers or closely related persons if the 
ownership interest is acquired or retained by such parties for the 
purpose of and to the extent necessary for establishing corporate 
separateness or addressing bankruptcy, insolvency, or similar concerns.
    (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, provided that the 
content may be modified to prevent the disclosure from being misleading 
and the manner of disclosure may be modified to accommodate the 
specific circumstances of the entity;
    (D) Does not acquire or retain, as principal, an ownership interest 
in the entity, other than as described in paragraph (c)(17)(i)(C) of 
this section;
    (E) Complies with the requirements of Sec. Sec.  255.14(b) and 
255.15, as if such entity were a covered fund; and
    (F) Except for riskless principal transactions as defined in 
paragraph (d)(11) of this section, complies with the requirements of 12 
CFR 223.15(a), as if such banking entity and its affiliates were a 
member bank and the entity 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;
    (B) Notwithstanding paragraph (c)(18)(ii)(A) of this section, up to 
an aggregate 0.5 percent of the issuer's outstanding ownership 
interests may be acquired or retained by one or more entities that are 
not customers if the ownership interest is acquired or retained by such 
parties for the purpose

[[Page 46526]]

of and to the extent necessary for establishing corporate separateness 
or addressing bankruptcy, insolvency, or similar concerns; and
    (C) 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, provided that the 
content may be modified to prevent the disclosure from being misleading 
and the manner of disclosure may be modified to accommodate the 
specific circumstances of the issuer;
    (4) Do not acquire or retain, as principal, an ownership interest 
in the issuer, other than as described in paragraph (c)(18)(ii)(B) of 
this section;
    (5) Comply with the requirements of Sec. Sec.  255.14(b) and 
255.15, as if such issuer were a covered fund; and
    (6) Except for riskless principal transactions as defined in 
paragraph (d)(11) of this section, 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:
    (1) The rights of a creditor to exercise remedies upon the 
occurrence of an event of default or an acceleration event; and
    (2) The right to participate in the removal of an investment 
manager for ``cause'' or participate in the selection of a replacement 
manager upon an investment manager's resignation or removal. For 
purposes of this paragraph (d)(6)(i)(A)(2), ``cause'' for removal of an 
investment manager means one or more of the following events:
    (i) The bankruptcy, insolvency, conservatorship or receivership of 
the investment manager;
    (ii) The breach by the investment manager of any material provision 
of the covered fund's transaction agreements applicable to the 
investment manager;
    (iii) The breach by the investment manager of material 
representations or warranties;
    (iv) The occurrence of an act that constitutes fraud or criminal 
activity in the performance of the investment manager's obligations 
under the covered fund's transaction agreements;
    (v) The indictment of the investment manager for a criminal 
offense, or the indictment of any officer, member, partner or other 
principal of the investment manager for a criminal offense materially 
related to his or her investment management activities;
    (vi) A change in control with respect to the investment manager;
    (vii) The loss, separation or incapacitation of an individual 
critical to the operation of the investment manager or primarily 
responsible for the management of the covered fund's assets; or
    (viii) Other similar events that constitute ``cause'' for removal 
of an investment manager, provided that such events are not solely 
related to the performance of the covered fund or the investment 
manager's exercise of investment discretion under the covered fund's 
transaction agreements;
    (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 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,

[[Page 46527]]

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) Repayment of a fixed principal amount, on or before a maturity 
date, in a contractually-determined manner (which may include 
prepayment premiums intended solely to reflect, and compensate holders 
of the interest for, forgone 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).
* * * * *
    (11) Riskless principal transaction. Riskless principal transaction 
means a transaction in which a banking entity, after receiving an order 
from a customer to buy (or sell) a security, purchases (or sells) the 
security in the secondary market for its own account to offset a 
contemporaneous sale to (or purchase from) the customer.

0
32. 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) will not be considered 
to be an affiliate of the banking entity so long as:
    (A) The banking entity, together with its affiliates, 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) The banking entity, or an affiliate of the banking entity, 
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 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 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.
* * * * *
    (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) 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.  
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

[[Page 46528]]

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
33. 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 the banking entity 
that sponsors or controls the qualifying foreign excluded fund, or any 
of its affiliates, to evade the requirements of section 13 of the BHC 
Act or this part.

0
34. 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), (iv), (v), and (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) subject to the limitations 
specified under 12 U.S.C. 371c(d) or Sec.  223.42 of the Board's 
Regulation W (12 CFR 223.42), as applicable,
    (iv) Enter into a riskless principal transaction with a covered 
fund; and
    (v) 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

[[Page 46529]]

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), (iv) or (v) must comply with the limitations in Sec.  
255.15.
* * * * *
    (c) Restrictions on other permitted transactions. Any transaction 
permitted under paragraphs (a)(2)(ii), (iii), or (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 
under section 23B.

Subpart D--Compliance Program Requirements; Violations

0
35. Amend Sec.  255.20 by:
0
a. Revising paragraph (a);
0
b. Revising the heading of paragraph (d) and revising paragraph (d)(1); 
and
0
c. Revising the introductory text of paragraph (e).
    The revisions and addition read as follows:


Sec.  255.20   Program for compliance; reporting.

    (a) Program requirement. Each banking entity (other than a banking 
entity with limited trading assets and liabilities or a qualifying 
foreign excluded fund under section 255.6(f) or 255.13(d)) shall 
develop and provide for the continued administration of a compliance 
program reasonably designed to ensure and monitor compliance with the 
prohibitions and restrictions on proprietary trading and covered fund 
activities and investments set forth in section 13 of the BHC Act and 
this part. The terms, scope, and detail of the compliance program shall 
be appropriate for the types, size, scope, and complexity of activities 
and business structure of the banking entity.
* * * * *
    (d) Reporting requirements under appendix A to this part. (1) A 
banking entity (other than a qualifying foreign excluded fund under 
section 255.6(f) or 255.13(d)) engaged in proprietary trading activity 
permitted under subpart B shall comply with the reporting requirements 
described in appendix A to this part, if:
* * * * *
    (e) Additional documentation for covered funds. A banking entity 
with significant trading assets and liabilities (other than a 
qualifying foreign excluded fund under section 255.6(f) or 255.13(d)) 
shall maintain records that include:
* * * * *

Brian P. Brooks,
Acting Comptroller of the Currency.

    By order of the Board of Governors of the Federal Reserve 
System.
Ann E. Misback,
Secretary of the Board.

Federal Deposit Insurance Corporation.

    By order of the Board of Directors.

    Dated at Washington, DC, on or about June 25, 2020.
James P. Sheesley,
Acting Assistant Executive Secretary.

    Issued in Washington, DC, on June 25, 2020 by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

    By the Securities and Exchange Commission.

Vanessa A. Countryman,
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, CFTC Chairman Tarbert and Commissioners Quintenz 
and Stump voted in the affirmative. CFTC Commissioners Behnam and 
Berkovitz voted in the negative. The document submitted to the CFTC 
Commissioners for a vote did not include Section V.F. SEC Economic 
Analysis.

Appendix 2--Supporting Statement of CFTC Chairman Heath P. Tarbert

    As I have previously remarked, the Volcker Rule is ``among the 
most well-intentioned but poorly designed regulations in the history 
of American finance.'' \1\ While today's final rule does not fix the 
fundamental flaws of the Volcker Rule \2\--only congressional action 
can do that--it at least represents a more accurate reading of the 
law Congress actually passed and brings us a step closer to a 
reasonable implementation of the rule.\3\
---------------------------------------------------------------------------

    \1\ See Statement of Chairman Heath P. Tarbert in Support of 
Revisions to the Volcker Rule (Sept. 16, 2019), https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement091619.
    \2\ See, e.g., Economic Growth, Regulatory Relief, and Consumer 
Protection Act, Public Law No: 115-174 (May 24, 2018) (amending 
section 13 of the Bank Holding Company Act by narrowing the 
definition of ``banking entity'' in the Volcker Rule to exclude 
certain community banks).
    \3\ See Statement of Chairman Heath P. Tarbert in Support of 
Further Revisions to the Volcker Rule (Jan. 30, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement013020b.
---------------------------------------------------------------------------

    Specifically, the Volcker Rule will now no longer be applied to 
investments Congress never intended to be included in the first 
place, such as credit funds, venture capital funds, customer 
facilitation vehicles, and family wealth management vehicles. The 
final rule also contains important modifications to several existing 
exclusions from the prohibition on activities related to private 
equity and hedge funds (the ``covered funds'' provisions)--for 
foreign public funds, loan securitizations, and small business 
investment companies. In these ways, the final rule begins to 
address the over-breadth of the covered funds definition and related 
requirements.
    I am therefore pleased to support adoption of the proposed 
revisions to the Volcker Rule's covered funds provisions. While only 
a modest step forward, these refinements will nonetheless enhance 
the regulatory experience and provide clarity for market 
participants who have struggled to comply with the Volcker Rule.

Appendix 3--Dissenting Statement of CFTC Commissioner Rostin Behnam

    I respectfully dissent as to the Commission's decision to 
finalize additional revisions to the Volcker Rule. As we approach 
the ten year anniversary of the Dodd-Frank Act,\1\ and cautiously 
begin mapping a path out of the current pandemic, I believe it is a 
good time to reflect on the lessons learned from the 2008 financial 
crisis, the efficacy of our responses, and whether our objectives 
have changed, or just our perspective. One of the many critically 
important provisions of the Dodd-Frank Act is the Volcker Rule. The 
Volcker Rule, in simple terms, contains two basic prohibitions: (1) 
Banking entities may not engage in proprietary trading; and (2) 
banking entities cannot have an ownership interest in, sponsor, or 
have certain relationships with a covered fund.
---------------------------------------------------------------------------

    \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
---------------------------------------------------------------------------

    Last September, the Commission, along with other Federal 
agencies (the ``Agencies''),\2\ approved changes that significantly 
weakened the prohibition on propriety trading by narrowing the scope 
of financial instruments subject to the Volcker Rule.\3\ I did not 
support those changes.\4\ Today, the Commission, again in tandem 
with the Agencies, completes the dismantling that began in 2018,\5\ 
and votes to significantly weaken the prohibition on ownership of

[[Page 46530]]

covered funds. Again, I cannot support these changes.
---------------------------------------------------------------------------

    \2\ 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.
    \3\ 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).
    \4\ Id. at 62275.
    \5\ See Prohibitions and Restrictions on Proprietary Trading and 
Certain Interests in, and Relationships With, Hedge Funds and 
Private Equity Funds, 83 FR 33432 (proposed July 17, 2018).
---------------------------------------------------------------------------

    I voted against the 2018 proposal, and earlier this year, voted 
against the proposal that strikes the final blow today.\6\ In voting 
against the 2020 proposal, I quoted the late Paul Volcker's letter 
to the Chairman of the Federal Reserve, which he penned last 
September, when the Agencies approved the changes breaking down the 
proprietary trading prohibition.\7\ Mr. Volcker warned 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.'' \8\ Mr. 
Volcker's words apply equally well to the changes that the 
Commission finalizes today regarding covered funds--particularly the 
erosion of the existing protections regarding conflicts of interest.
---------------------------------------------------------------------------

    \6\ Prohibitions and Restrictions on Proprietary Trading and 
Certain Interests in, and Relationships With, Hedge Funds and 
Private Equity Funds, 85 FR 12120, 12204 (proposed Feb. 28, 2020).
    \7\ Id.
    \8\ Jesse Hamilton and Yalman Onaran, ``Volcker 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.
---------------------------------------------------------------------------

    As the tenth anniversary of the Dodd-Frank Act sadly coincides 
with a different kind of crisis, I think it is critical to take a 
hard look at how far we have come in ten years, and how well markets 
have adapted to carefully crafted policy intended to create a more 
resilient financial system. Chipping away, particularly at a time of 
great uncertainty, risks a reversion to the past, when in fact, we 
should only be looking forward.

Appendix 4--Dissenting Statement of CFTC Commissioner Dan M. Berkovitz

    The Volcker covered funds final release (``Covered Funds Rule'') 
adopts with only minor changes the rule amendments as proposed by 
the agencies in January of this year (``the Proposal''). I voted 
against \1\ the Proposal because the agencies had only superficially 
considered the additional risks that banks would incur under the 
loosened regulations. Nothing in the Covered Funds Rule final 
release dispels this concern. Therefore I dissent from the final 
release.
---------------------------------------------------------------------------

    \1\ Dissenting Statement of Commissioner Dan M. Berkovitz 
Regarding Volcker Covered Funds Proposal (Jan. 30, 2020), available 
at: https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement013020.
---------------------------------------------------------------------------

    Congress enacted the original Volcker rule after the 2008 
financial crisis to protect American taxpayers from again having to 
bailout banks that are insured by the FDIC or have access to Federal 
Reserve Bank financial support. This goal was to be achieved by 
preventing the government-supported banks from undertaking risky 
proprietary trading activities and from owning hedge funds or 
private equity funds. The new Covered Funds Rule, together with the 
rollbacks in the Volcker proprietary trading regulations adopted in 
2019,\2\ will undermine many of the risk-reducing benefits of the 
original Volcker rule.
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    \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).
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    The original Volcker covered funds regulations were not perfect. 
The foreign public funds exception and the so called ``super 23A'' 
provisions governing activities banks can undertake with covered 
funds needed careful adjustments. However, the Covered Funds Rule 
goes much, much further. It creates broad new exclusions from the 
covered funds definition with inadequate analysis as to whether 
these activities were intended to be permitted under the statute or 
pose serious risk to the banks and the United States financial 
system.
    I addressed some of these new exclusions in more detail in my 
dissenting statement on the Proposal.\3\ Of these, the new ``venture 
capital funds'' exclusion perhaps best illustrates the extent to 
which the Covered Funds Rule undermines the very purpose of the 
Volcker rule. Venture capital serves an important function in our 
financial markets by providing needed capital to startup companies. 
But venture capital investing is very risky. One study found that 
about 75% of venture capital-backed firms in the United States did 
not return capital to investors.\4\ Another article on venture 
capital 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.'' \5\ This is 
exactly the type of risky private equity fund \6\ investing by 
government-supported banks that Congress intended the Volcker rule 
to curtail.
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    \3\ Supra footnote 1.
    \4\ 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.
    \5\ Diane Mulcahy, Six Myths About Venture Capitalists, Harvard 
Business Review (May 2013), available at https://hbr.org/2013/05/six-myths-about-venture-capitalists.
    \6\ Interestingly, while the Proposal acknowledged that venture 
capital funds are a subset of private equity funds for purposes of 
Volcker, in the preamble to the Covered Funds Rule, the agencies 
provide a tortured, speculative analysis of statutory construction 
trying to explain that Congress ``may'' have meant to exclude 
venture capital funds, despite no real evidence to that effect. To 
the contrary, three of the four statements from members of Congress 
in the legislative record cited in the Covered Funds Rule clearly 
show that they assumed that venture capital funds are private equity 
funds under the Volcker rule. See Covered Funds Rule, section 
IV.C.2.i.
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    In adopting the Covered Funds Rule, the agencies failed to 
analyze any data or other information that lays out the risks of 
venture capital investing. The agencies simply exclude venture 
capital funds from Volcker regulation. The Covered Funds Rule makes, 
at best, a weak case that venture capital investments promote and 
protect the safety and soundness of banking entities and the United 
States financial system by allowing banks to diversify investments. 
The weakness of that assertion is clear when one considers that 
allowing any investments in hedge funds and private equity funds 
would do the same, and yet that risk taking activity is precisely 
what Congress prohibited.
    The banking industry does not need to take on the additional 
risks permitted by the Covered Funds Rule to be successful. U.S. 
banks have performed well in recent years. Recent Global League 
Tables ranking global banks by amount of banking business activity 
shows that three or four U.S. banks are ranked among the top five 
banks in the world in almost every table, including the tables for 
foreign markets banking.\7\ While many factors impact banking 
success, the relative strength of U.S. banks internationally belies 
suggestions that the new laws and regulations adopted in the wake of 
the 2008 financial crisis are hurting the competitiveness of U.S. 
banks. We should recognize, rather than undermine, the success of 
U.S. banks since the 2008 financial crisis and adoption of the Dodd-
Frank Act in 2010.
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    \7\ See GlobalCapital.com, Global League Tables, available at 
https://www.globalcapital.com/data/all-league-tables.
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    To date, U.S. banks also have performed well during the Covid-19 
pandemic. But our financial system continues to face many 
extraordinary risks from the effects of the pandemic. In the middle 
of this latest shock to our financial system, we should not be 
rushing out a final rule that permits greater risk taking by banks. 
Rather, we should take stock of the data available to us, and make 
carefully reasoned, incremental changes that are consistent with the 
Congressional intent for the Volcker rule.

[FR Doc. 2020-15525 Filed 7-30-20; 8:45 am]
BILLING CODE 4810-33-P